-----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, L3Yu0fay/giWBcQLZlcvR5BKefqi3NnZNggj26ddpuUKAbe3UFdsJq1i9eNTAtvA wZ6VzU/7cnRM7TBWa5P1BA== 0000950114-98-000094.txt : 19980317 0000950114-98-000094.hdr.sgml : 19980317 ACCESSION NUMBER: 0000950114-98-000094 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980313 SROS: NYSE 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: 98564895 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 1997 FORM 10-K 1 ================================================================================ FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 ----------------- 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) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (314) 674-1000 -------------- 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 STOCK HELD BY NONAFFILIATES OF THE REGISTRANT: APPROXIMATELY $3.2 BILLION AS OF THE CLOSE OF BUSINESS ON FEBRUARY 28, 1998. INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: 117,024,896 SHARES OF COMMON STOCK, $.01 PAR VALUE, OUTSTANDING AT FEBRUARY 28, 1998. DOCUMENTS INCORPORATED BY REFERENCE (1) PORTIONS OF SOLUTIA INC.'S ANNUAL REPORT TO SECURITY HOLDERS FOR THE YEAR DECEMBER 31, 1997 (PART I, PART II, AND PART IV OF FORM 10-K). (2) PORTIONS OF SOLUTIA INC.'S NOTICE OF ANNUAL MEETING OF STOCKHOLDERS AND PROXY STATEMENT DATED MARCH 11, 1998 (PART III OF FORM 10-K). ================================================================================ 2 This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements regarding the expected future financial position, results of operations, cash flows, dividends, financing plans, business strategy, budgets, projected costs and capital expenditures, competitive positions, growth opportunities for existing products, benefits from new technology, plans and objectives of management for future operations, and markets for stock of Solutia Inc. (the "Company") are forward-looking statements. Although the Company believes its expectations reflected in such forward-looking statements are based on reasonable assumptions, no assurance can be given that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements herein include, among others, those set forth below or incorporated by reference herein as well as general economic and business and market conditions, customer acceptance of new products, efficacy of new technology and facilities, changes in U.S. and ex-U.S. laws and regulations, costs or difficulties relating to the establishment of the Company as an independent entity, shortages of raw materials and fuels and increased competitive and/or customer pressure. PART I ITEM 1. BUSINESS. Solutia Inc. and its subsidiaries produce and market a range of high performance chemical-based materials, including nylon and acrylic fibers and fiber intermediates, Saflex(R) plastic interlayer, phosphorus derivatives, and specialty chemicals. These materials are used by customers to make consumer, household, automotive, and industrial products. Unless otherwise indicated by the context, "Solutia" means Solutia Inc. and consolidated subsidiaries, and the "Company" means Solutia Inc. only. Solutia's strategic focus is built on four key technology strengths: polymer chemistry, phosphorus chemistry, fiber technology, and process engineering expertise. These technologies are used in various combinations to create value-added products in three operating segments: * CHEMICALS--comprised of the Intermediates, Phosphorus Derivatives and Industrial Products business units; * FIBERS--comprised of the Carpet Fibers, Nylon Industrial Fibers and Acrilan(R) Acrylic Fibers business units; and * POLYMERS & RESINS--comprised of the Saflex(R) Plastic Interlayer, Nylon Plastics & Polymers, Resins and Polymer Modifiers business units. To compete effectively in its markets, Solutia is implementing a strategy which emphasizes the following key elements: CORE PRODUCTS AND TECHNOLOGIES: Solutia is focusing on its core products and technologies throughout its ten business units. Solutia will continue to invest in manufacturing technology, product research and technical and marketing support in order to continually improve its cost and quality positions as well as its applications support and technical service. AGGRESSIVE COST CONTROLS AND FOCUS ON PROFITABILITY: Over the past several years, Solutia has restructured its product portfolio to exit underperforming businesses. Solutia believes that additional expense reductions can be achieved in manufacturing and administrative functions. SELECTED GROWTH INITIATIVES: Solutia intends to develop the growth potential of its core chemistries and technologies through targeted new product introductions, innovations in related fields and selective expansions of its presence in international markets. PERFORMANCE INCENTIVES: Solutia is providing incentives for employees to increase cash flow, earnings per share and stockholder value. The Company was incorporated in Delaware in April 1997 as a wholly-owned subsidiary of Monsanto Company ("Monsanto"). On or prior to September 1, 1997, the businesses that form Solutia, which previously 1 3 were wholly owned by Monsanto, were transferred to Solutia. On September 1, 1997 (the "Distribution Date"), Monsanto distributed all of the outstanding shares of common stock of the Company as a dividend to Monsanto stockholders (the "Spinoff"). The distribution resulted in the issuance of one share of Solutia common stock for every five shares of Monsanto common stock held of record as of August 20, 1997. As a result of the Spinoff, on September 1, 1997, Solutia became an independent publicly-held company listed on the New York Stock Exchange, and its operations ceased to be owned by Monsanto. Monsanto and Solutia entered into a number of agreements (the "Distribution Agreement") with respect to the separation of the companies and to provide mechanisms for an orderly transition following the Spinoff. DESCRIPTION OF PRINCIPAL PRODUCTS AND COMPETITIVE SITUATION Set forth below are descriptions of the products in each of Solutia's three segments: Chemicals, Fibers and Polymers & Resins. The tabular and narrative information contained in Note 18 of "Notes to Consolidated Financial Statements" appearing on pages 42 through 43 of the 1997 Annual Report is incorporated herein by reference. CHEMICALS SEGMENT INDUSTRIAL PRODUCTS Solutia is a leading manufacturer of specialty industrial fluids and lubricants. Its products are widely recognized in their market segments for high performance characteristics which result from proprietary formulations. Substantially all of the products in this business unit are trademarked, and include the following brands: Skydrol(R) hydraulic fluids for aviation; Therminol(R) heat transfer fluids; SkyKleen(TM) aviation solvent; Dequest(R) water treatment chemicals; and Glacier Metalworking Fluids.(TM) The Skydrol(R) product line includes fire-resistant hydraulic fluids which are used in more than half of the world's commercial aircraft. A new product, Skydrol(R) 5, was introduced in 1996. It offers a range of enhanced performance characteristics, such as improved thermal stability and reduced weight. The Skydrol(R) brand's major competitor is manufactured by Exxon Corporation ("Exxon"). Therminol(R) heat transfer fluids are leaders in the worldwide high temperature liquid phase market. These products, used in various types of capital equipment, are known for remaining thermally stable at high temperatures and for their low temperature pumping characteristics. Competitors include The Dow Chemical Company and Nippon Steel Chemical Co., Ltd. SkyKleen(TM) aviation solvents are used for their cleaning performance in the assembly of aircraft, original equipment manufacture and repair for both commercial and military markets. SkyKleen(TM) helps reduce volatile organic compound emissions in maintenance shops and parts cleaning operations where volatile solvents like methyl ethyl ketone currently are used. Additional characteristics of this clear liquid include biodegradability, low odor, non-ozone depletion and improved worker safety. Dequest(R) water treatment chemicals are used to solve problems in a number of heavy and light industrial applications. These products offer functional properties such as sequestration, scale inhibition and corrosion control. Competing products are marketed by Albright & Wilson plc ("Albright & Wilson") and Bayer Corporation ("Bayer"). Launched in 1996, Glacier Metalworking Fluids(TM) are the industry's first protein-based fluids designed for machining operations such as grinding, drilling and threading. The fluids are biodegradable and practically non-toxic. Solutia's specialty industrial fluids are sold throughout the world, with no single customer accounting for a significant level of sales. Industrial Products expects to develop new opportunities in its niche markets by continuing to develop and introduce new products such as Glacier Metalworking Fluids(TM) and by pursuing sales in additional geographic areas such as Asia and Latin America. A joint venture with Jiangsu Chemical Pesticide Group in Suzhou, China, manufactures Therminol(R) heat transfer fluids. 2 4 Industrial Products relies on a number of raw materials such as benzene and phenol, most of which are purchased from a number of suppliers. INTERMEDIATES Intermediates manufactures more than three dozen "building block" chemicals which are used by Solutia and other companies to make a wide variety of finished products. Intermediates' product lines include nylon intermediates, sold to a number of fibers and plastics manufacturers worldwide; chlorobenzenes, used in applications such as rubber chemicals, pigments, antioxidants, herbicides, solvents and resins; and other intermediates which are used to produce fertilizers, detergents and animal feed supplements. Intermediates relies on aggressive cost control, exceptional product quality, world-class manufacturing scale and proprietary manufacturing technology to drive its competitive success. Its strategy is to support the competitiveness of other Solutia products by achieving the low-cost position on their critical "building block" chemicals and to pursue profitable external sales of these products. Intermediates has achieved a leading position in nylon intermediates through a combination of proprietary technology and scale. Intermediates obtains its key raw materials, including natural gas, cyclohexane, propylene, benzene and chlorine, from a number of suppliers. To meet internal demand and address external sales opportunities, Intermediates is planning an expansion of its acrylonitrile manufacturing capacity, which is expected to reduce its manufacturing costs. See "Item 2. PROPERTIES." The majority of the production of Intermediates is used internally, with most of the external sales made to a limited number of customers. In some product lines, external sales are dependent on a major customer. However, in each of these cases, sales to internal customers account for the majority of the business unit's production capacity. Competitors vary by product line and by world region and include Asahi Chemical Industry Co., Ltd., E.I. du Pont de Nemours and Company ("DuPont"), BASF AG ("BASF") and Rhodia, the chemicals subsidiary of Rhone-Poulenc S.A. ("Rhodia"). PHOSPHORUS DERIVATIVES Solutia has developed an extensive franchise in phosphorus chemistry and is recognized as a world leader in developing and marketing applications for phosphorus chemistry. Solutia is a low-cost producer of phosphorus-based chemicals, and most of its product technologies are proprietary. It also has a joint venture in Brazil using purified wet acid technology to produce many of these products. Solutia manufactures products for a wide range of industries: FOOD AND BEVERAGE. Its phosphates are used in many food products to improve texture, appearance and flavor. Branded products include Levn-Lite(R), Pan-O-Lite(R) and Leverage(R) brand leavening agents, used in baking; Nutrifos(R) sodium tripolyphosphate, used in meat and poultry processing; and Katch(TM) phosphate, used to extend the shelf life of fish products. PERSONAL CARE PRODUCTS. Major toothpaste manufacturers around the world rely on Solutia's oral care phosphates to improve the performance of their products. Solutia has been a leader in the development of dentifrice agents which are used to control tartar and to polish and whiten teeth. SPECIALTY CHEMICALS. Solutia manufactures a number of phosphorus-based intermediates which serve as key ingredients in oil additives, pesticides and mining chemicals. Solutia also offers high-purity phosphoric acid, used as a building block in the manufacture of high-purity phosphate salts. INDUSTRIAL CLEANERS AND FIRE RETARDANTS. Solutia provides specialized cleaning ingredients for commercial laundries, restaurant and hospital dishwashing systems and vehicle wash facilities. Solutia also makes and sells Phos-Chek(R) fire fighting agent, used in aerial spraying to control forest fires and wildfires. ELEMENTAL PHOSPHORUS. Solutia also offers for sale elemental phosphorus sourced from the Company's P4 joint venture with Monsanto. 3 5 The primary competitors for Phosphorus Derivatives are FMC Corporation, Albright & Wilson and Rhodia. The business unit's primary raw material is elemental phosphorus, which is mined and processed in Soda Springs, Idaho, at facilities which are jointly owned by the Company and Monsanto through the P4 joint venture. See "Principal Equity Affiliates." FIBERS SEGMENT ACRILAN(R) ACRYLIC FIBERS Solutia is the largest producer of acrylic fiber in North America. It manufactures and markets a full line of commodity and specialty grades of this fiber, which is used to make finished products such as apparel, craft yarns, upholstery fabrics, and brake fibers. Solutia's Acrilan(R) trademark is widely recognized in the industry, as are the following brand names which are used to identify products made with Acrilan(R) acrylic fibers: Wear-Dated(R) upholstery; Duraspun(R) fibers; The Smart Yarns(R) fibers (for socks); and Wintuk(R), Sayelle(R) and Bounce-Back(R) fibers (for craft yarn). The principal competitor for acrylic fiber in North America is Sterling Chemicals, Inc. Competitors worldwide include MonteFibre S.p.A. (Italy), AKSA Akrilik Kimya Sanayii A.S. (Turkey), Courtalds plc (United Kingdom) and Mitsubishi Chemicals Corporation (Japan). Acrylic fiber also competes against other fibers such as cotton and polyester. The primary raw material for acrylic fiber is acrylonitrile, which is produced internally by Intermediates and supplemented with external purchases. There are a variety of differentiated Acrilan(R) brand products, including producer-colored fiber, pigmented UV resistant fibers, bi-component Bounce-Back(R) fibers, Duraspun(R) abrasion-resistant fibers and technical fibers used in friction applications, as well as precursor chemicals for carbon fibers. These products--and the opportunity to develop sales in other parts of the Western Hemisphere--represent the business unit's best opportunity for growth. In addition, Solutia generates significant income from the licensing of its proprietary wet spinning acrylic technology, primarily in Asian markets. CARPET FIBERS Solutia is the world's largest producer of nylon staple fiber and a major supplier of nylon bulk continuous filament ("BCF") to the carpet industry in North America. Its products are used by carpet mills in the residential market (new construction and replacement), the contract market (offices, hotels, restaurants, retail and institutions) and the rug market. Its product portfolio includes nylon 6,6 staple, BCF and acrylic staple fibers--offering carpet mills a wide range of performance and styling characteristics. Solutia's products are marketed under two of the industry's most respected brand names: Wear-Dated(R) carpets for the residential market and Ultron(R) VIP nylon for the contract or commercial market. The Wear-Dated(R) brand is widely recognized by consumers in North America for its guarantee of the finished carpet's outstanding quality and exceptional performance. Competitive success is determined by different factors in different segments of the market. Overall, Carpet Fibers benefits from vertical integration with Intermediates. In the residential segment, branded products compete based on technical advances and marketing programs, such as Solutia's warranty offered on Wear-Dated(R) carpets, retailer sales incentives and similar activities. In contract markets, the basis for competition is product performance and downstream marketing programs. The Ultron(R) VIP nylon brand offers carpet makers an innovative mix of fiber shapes and sizes that are specifically engineered for features such as soil-hiding ability and extra bulk and cover. Carpet Fibers works closely with the building design community to develop new products which address the contract market's needs. It also sells Ultron(R) SD Solution-Dyed nylon 6,6, which offers superior colorfastness and protection against harsh chemicals, bacterial growth and stains. 4 6 Solutia is introducing Dyenamix(TM) technology, a substantially improved fiber system which permits rich, deep colors and enhances the print clarity of carpets. This proprietary technology is environmentally friendly, while also allowing carpet mills to achieve higher efficiencies and lower dye costs. The principal competitors for nylon carpet fiber in the United States are DuPont, AlliedSignal Inc. ("AlliedSignal") and BASF. Solutia and AlliedSignal offer both nylon staple and BCF products, while DuPont and BASF are primarily BCF suppliers. Solutia owns and operates the world's largest integrated nylon manufacturing plant in Pensacola, Florida. A majority of Carpet Fibers' sales are generated by a few major customers in the carpet mill industry. Carpet Fibers receives almost all of its major raw materials from Intermediates. NYLON INDUSTRIAL FIBERS Solutia makes and supplies a complete line of industrial-strength nylon 6,6 fibers to a variety of manufacturing customers. Nylon Industrial Fibers' product line features continuous filament nylon 6,6 yarns in thickness ranging from 60 to 2000 deniers. Heavier yarns are used for applications such as bias tires for earth movers, NASA space shuttles, aircraft and trucks; mining conveyor belts; ropes; and cargo slings. Lighter weight yarns are used to make backpacks, ribbons, sewing threads and dental floss. Cost per unit of performance, service (including the ability to tailor the properties of yarns for use in specific applications) and breadth of product line are the major drivers of success in the industrial fibers market. Solutia has built a strong presence in the bias tire and other heavy-denier segments and in industrial sewing threads. Sales to five major tire companies account for about 50% of total Nylon Industrial Fibers volume. Solutia recently increased spinning capacity with enhanced spinning technology at its Greenwood, South Carolina plant. This project used proprietary technology (licensed from Toray Industries Inc. ("Toray")) to improve product quality, enhance yarn performance and tenacity and enable Solutia to achieve a low-cost position in key segments of the market, including automotive airbags and high performance tires. Nylon Industrial Fibers receives almost all of its major raw materials from Intermediates. Competitors in the United States include DuPont (the market leader) and AlliedSignal. POLYMERS & RESINS SEGMENT NYLON PLASTICS & POLYMERS Solutia manufactures and markets a line of Vydyne(R) nylon 6,6 molding resins and extrusion polymers and nylon 6,6 polymers for fiber applications. Vydyne(R) nylon gives plastics molders the ability to provide their products with enhanced performance characteristics, such as heat resistance, chemical resistance and toughness. Vydyne(R) nylon molding resins are used in under-the-hood automotive components, electrical connectors for telephone systems and computers, medical devices and similar applications. Product performance, technical service, vertical integration and breadth of product line are the major drivers of success in this market. Nylon Plastics & Polymers relies on nylon 6,6 salt as its primary raw material. This material is produced internally by Intermediates. The business unit's primary competitors are DuPont and the Hoechst Group. POLYMER MODIFIERS Solutia manufactures and markets a line of polymer modifiers and specialty plasticizers which are used to improve the performance of flooring products, sealants, caulks, adhesives and other goods. Unit brands include Santicizer(R) polymer modifiers and plasticizers, and Santotac MRS(R), a flooring additive. Polymer Modifiers is focused on specialty applications, in which technical expertise and processing knowledge can be used to help customers obtain valuable performance attributes in their products (such as flexibility, mar/scratch resistance, stain resistance, enhanced gloss and flame retardance). Competitors vary by product line and include Bayer and Akzo Nobel N.V. ("Akzo Nobel"). 5 7 Polymer Modifiers obtains its key raw materials from U.S. and European markets. New products (such as Santotac MRS(R) additives) and geographic expansion (particularly into central Europe and Asia) are expected to be the primary drivers of growth. RESINS This business unit manufactures and markets a line of specialty resins which are used in the manufacture of products such as thermoset paints and coatings, pressure sensitive adhesives, paper coatings and plastic products, among others. Brands include Resimene(R) amino crosslinkers, Gelva(R) pressure sensitive adhesives, Santosol(R) solvents, Scripset(R) resins for paper sizing, Butvar(R) specialty binders, Modaflow(R) flow and leveling agents, Clear Pass(R) spray control systems and other fabricated products. Resins provides technical expertise to help customers obtain value-added performance characteristics. Major competitors vary by product line and include Cytec Industries, Inc. (coatings and surface size); National Starch and Chemical Co. and Ashland Inc. (solution acrylic adhesives); Rohm and Haas Company and Air Products and Chemicals, Inc. (emulsion water-based adhesives); and DuPont (solvents which have improved environmental characteristics). Resins relies on a number of commodity chemicals as raw materials, all of which are readily available. New products (such as di-methyl esters, a solvent with improved environmental characteristics) and geographic expansion (particularly into Europe, Latin America and Asia) are expected to be the primary drivers of growth. SAFLEX(R) PLASTIC INTERLAYER Solutia is the world's largest producer of polyvinyl butyral ("PVB"), a plastic interlayer used in the manufacture of laminated glass for automotive and architectural applications. The business unit's product is marketed under the Saflex(R), Saflex SV(R) (superior value) and KeepSafe(R) (for residential security windows) trademarks. In 1997, Saflex(R) Plastic Interlayer began commercializing a patented, reformulated product which is designed to provide superior processing and application performance. Continued business development will be driven by the introduction of the reformulated PVB product, by increased penetration of geographic markets (especially Asia) and by the creation of new primary demand for PVB in laminated glass worldwide. A Saflex(R) interlayer finishing plant began operation in Singapore in early 1998. Six customers account for 65% to 70% of total sales of Saflex(R) products worldwide. Saflex(R) Plastic Interlayer relies on vinyl acetate monomer, polyvinyl alcohol and butanol as raw materials, all of which are readily available in the U.S. and European markets. Sales volumes are influenced by shifts in automotive production and commercial building construction, which are cyclical businesses. The principal competitor in the manufacture of PVB is DuPont. PRINCIPAL EQUITY AFFILIATES Solutia participates in a number of joint ventures in which it shares management control with other companies. Solutia's equity earnings from affiliates were $31 million, $21 million and $15 million in 1997, 1996 and 1995, respectively. Principal joint ventures include Flexsys, L.P. ("Flexsys"), Advanced Elastomer Systems, L.P. ("A.E.S.") and the P4 joint venture. The Flexsys joint venture, headquartered in Belgium, is the world's leading supplier of process chemicals to the rubber industry. Its product line includes a number of branded accelerators (Santocure(R), Thiofide(R), Thiotax(R)), pre-vulcanization inhibitors (Santogard(R)), antidegradants and antioxidants (Flectol(R), Santowhite(R)), and insoluble sulphur (Crystex(R)). Flexsys is a 50/50 joint venture between the Company and Akzo Nobel. A.E.S., headquartered in the United States, produces and sells thermoplastic elastomers--materials that combine the processability of thermoplastic and the functional performance of thermoset rubber products. The joint venture's product lines include Santoprene(R) thermoplastic rubber and Vistaflex(R) thermoplastic elastomer. A.E.S. is a 50/50 joint venture between Solutia and Exxon. The P4 joint venture was formed in conjunction with the Spinoff. Monsanto formed this venture for the mining of phosphate rock and the production of elemental phosphorus and contributed a 40% interest in the 6 8 venture to Solutia, retaining the remaining 60% interest, thereby forming the P4 joint venture. The elemental phosphorus production facilities are located at Soda Springs, Idaho, and are operated by Solutia under an operating agreement with the P4 joint venture. The elemental phosphorus produced by the P4 joint venture is sold to both Monsanto and Solutia generally at cost with certain adjustments to reflect ownership. Monsanto has priority for a certain percentage of the production volume. Monsanto uses the elemental phosphorus as a raw material in the manufacture of herbicides (including Monsanto's Roundup(R) brand). Solutia uses the elemental phosphorus as a raw material in the manufacture of phosphorus derivatives, which Solutia then sells, and it sells the elemental phosphorus to other users. In the event of a change of control of Solutia or the sale of the phosphorus derivative business (including Solutia's interest in the P4 joint venture), Monsanto has an option to acquire Solutia's interest in the P4 joint venture at the then book value. Monsanto is paying Solutia an annual fee in consideration of this option. SALE OF PRODUCTS Solutia's products are sold directly to end users in various industries, and to wholesalers, principally by Solutia's own sales force. Solutia's marketing and distribution practices do not result in unusual working capital requirements on a consolidated basis. Inventories of finished goods, goods in process and raw materials are maintained to meet customer requirements and Solutia's scheduled production. In general, Solutia does not manufacture its products against a backlog of firm orders; production is geared to the level of incoming orders and to projections of future demand. Solutia generally is not dependent upon one or a group of customers, and it has no material contracts with the government of the United States, or any U.S., state or local, or foreign government. In general, Solutia's sales are not subject to seasonality. RAW MATERIALS AND ENERGY RESOURCES Solutia is a significant purchaser of basic, commodity raw materials, including propylene, cyclohexane, benzene and natural gas. Major requirements for key raw materials and fuels are typically purchased pursuant to long-term contracts. Solutia is not dependent on any one supplier for a material amount of its raw materials or fuel requirements, but certain important raw materials are obtained from a few major suppliers. In general, where Solutia has limited sources of raw materials, it has developed contingency plans to minimize the effect of any interruption or reduction in supply. Information regarding specific raw materials is provided under "Description of Principal Products and Competitive Situation." While temporary shortages of raw materials and fuels may occasionally occur, these items are generally sufficiently available to cover current and projected requirements. However, their continuing availability and price are subject to unscheduled plant interruptions occurring during periods of high demand, or due to domestic and world market and political conditions, as well as to the direct or indirect effect of U.S. and other countries' government regulations. The impact of any future raw material and energy shortages on Solutia's business as a whole or in specific world areas cannot be accurately predicted. Operations and products may, at times, be adversely affected by legislation, shortages or international or domestic events. PATENTS AND TRADEMARKS Solutia owns a large number of patents which relate to a wide variety of products and processes, has pending a substantial number of patent applications, and is licensed under a small number of patents owned by others. Solutia owns a considerable number of established trademarks in many countries under which it markets its products. Such patents and trademarks in the aggregate are of material importance in the operations of Solutia and to each of its Chemicals, Fibers, and Polymers & Resins segments. COMPETITION Solutia encounters substantial competition with respect to each of its product lines. This competition, from other manufacturers of the same products and from manufacturers of different products designed for the same uses, is expected to continue in both U.S. and ex-U.S. markets. Depending on the product involved, various types of competition are encountered, including price, delivery, service, performance, product innovation, product recognition and quality. Overall, Solutia regards its principal product groups to be competitive with 7 9 many other products of other producers and believes that it is an important producer of many such product groups. For information regarding competition in specific markets, see "Description of Principal Products and Competitive Situation." RESEARCH AND DEVELOPMENT Research and development constitute an important part of Solutia's activities. In recent years, Solutia's research and development expenses amounted to approximately 2.4% of sales on average, or $60 million, $81 million and $77 million in 1997, 1996 and 1995, respectively. Solutia focuses its research and development expenditures on process improvements and select product development. Solutia actively pursues technologies from around the world that are expected to bring value to its business. Recent examples include new technology for converting benzene to phenol, which was licensed from Boreskov Institute of Catalysis in Russia, and which Solutia is actively seeking to license to third parties; and nylon industrial spinning technology, licensed from Toray in Japan. Solutia is actively licensing technologies to other firms, such as acrylic fiber spinning, acrylonitrile manufacturing and others. ENVIRONMENTAL MATTERS The narrative information appearing under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Environmental Matters" on pages 23 through 25 of the 1997 Annual Report is incorporated herein by reference. EMPLOYEE RELATIONS As of December 31, 1997, Solutia had approximately 8,800 employees worldwide. Satisfactory relations have prevailed between Solutia and its employees. Solutia uses self-directed work teams, incentive programs and other initiatives to keep employees actively involved in the success of the business. Substantially all of Solutia's employees have options to purchase Company Common Stock. Approximately 20% of Solutia's workforce is represented by various labor unions. INTERNATIONAL OPERATIONS Solutia and affiliated companies are engaged in manufacturing, sales and research and development in areas outside the United States, including Europe, Canada, Latin America and Asia. Approximately one-third of Solutia's overall 1997 sales were made into markets outside the United States. Operations outside the United States are potentially subject to a number of risks and limitations which are not present in domestic operations, including fluctuations in currency values, trade restrictions, investment regulations, governmental instability and other potentially detrimental governmental practices or policies affecting companies doing business abroad. Solutia's Chemicals and Polymers & Resins segments are particularly dependent upon their international operations. Approximately one-third and one-half of their 1997 sales, respectively, were made into markets outside of the United States. ITEM 2. PROPERTIES. The general offices of the Company are located in St. Louis County, Missouri in premises leased from Monsanto. Solutia also has research laboratories, research centers and manufacturing locations worldwide. In addition to the general offices, Solutia has the following principal facilities all of which are owned:
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 8 10 Plant Site Business Units Served - ---------- --------------------- Delaware River (Bridgeport, New Jersey).......................... Industrial Products, Intermediates, Polymer Modifiers Foley, Alabama..................... Carpet Fibers, Nylon Plastics & Polymers Ghent, Belgium..................... Resins, Saflex(R) Plastic Interlayer Greenwood, South Carolina.......... Carpet Fibers, Nylon Industrial Fibers, Intermediates, Nylon Plastics & Polymers Indian Orchard (Springfield, Massachusetts)................... Research Center, Resins, Saflex(R) Plastic Interlayer Krummrich (Sauget, Illinois)....... Intermediates, Phosphorus Derivatives LaSalle, Canada.................... Polymer Modifiers, Resins Newport, Wales (U.K.).............. Industrial Products, Polymer Modifiers, Resins Pensacola, Florida................. Carpet Fibers, Nylon Industrial Fibers, Intermediates, Nylon Plastics & Polymers, Research Center Queeny (St. Louis, Missouri)....... Industrial Products, Polymer Modifiers, Resins Trenton, Michigan.................. Phosphorus Derivatives, Resins, Saflex(R) Plastic Interlayer Westport (St. Louis, Missouri)..... Resins
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
Monsanto and Solutia have entered into certain operating agreements, including master operating agreements (the "Operating Agreements") with respect to each of the three facilities listed above and Chocolate Bayou in Alvin, Texas. Under these Operating Agreements, Solutia is the guest (the "Guest") and Monsanto is the operator (the "Operator") at all of the facilities except the Chocolate Bayou facility, at which Monsanto is the Guest and Solutia is the Operator. Pursuant to each of the Operating Agreements, the Operator, as an independent contractor, provides, or arranges for the provision of, such production, utility and certain ancillary services as are reasonably necessary or required for the Guest's production operations at the facility, and the Operator leases to the Guest the real property at the facility that is used in connection with the Guest's production operations. The Guest is required to pay all direct and indirect costs incurred by the Operator in the performance or supply of such services, plus an agreed upon return on the net capital employed in connection with the respective Operating Agreement. The Guest owns the production assets related to its operations at the facility. Unless terminated earlier by either party thereto in accordance with the terms of the Operating Agreements, the initial term of each of the Operating Agreements is 20 years. After the initial term, the Operating Agreements continue indefinitely unless and until terminated by either party upon at least 24 months' prior written notice. Each of the Operating Agreements also provides that, under certain circumstances, either the Operator or the Guest may terminate the Operating Agreement prior to the expiration of its initial term. The Operating Agreements contain provisions requiring the Guest to indemnify the Operator for all losses (other than environmental liabilities) arising out of the operation of the facility or the provision of services, except to the extent that such losses are caused by the Operator's willful misconduct or fraud. The Operating Agreements also apportion certain environmental liabilities. 9 11 Solutia operates several facilities for third parties in addition to Monsanto, principally within the Chocolate Bayou, Krummrich and Pensacola sites, under long-term lease and operating agreements. Solutia's principal plants are suitable and adequate for their use. Utilization of these facilities may vary with seasonal, economic and other business conditions, but none of the principal plants is substantially idle. The facilities generally have sufficient capacity for existing needs and expected near-term growth. Solutia plans to undertake four large construction projects during 1998 and 1999 for expansion in its Intermediates unit. These construction projects include a world-scale acrylonitrile production facility at Chocolate Bayou which employs Solutia's proprietary catalyst system and is expected to be capable of producing in excess of 500 million pounds annually. Solutia has agreements with customers who will participate in this project including Bayer, Novus International Inc., and a leading Japanese chemical company. The other projects include two projects at the Pensacola, Florida site to produce intermediates in the nylon manufacturing process, one a phenol production facility and the other a phenol processing facility; and an adiponitrile production facility at the Decatur, Alabama site. These projects will require the Company to manage more engineering and construction activity than it has had to supervise in recent years. Solutia is an active participant in the safety and health Voluntary Protection Program ("VPP") administered by OSHA for sites in the U.S., and implemented by Solutia for sites outside the U.S. Currently, 10 Solutia sites in the U.S. qualify for the VPP "Star" designation, a rating designating full compliance, and two European sites have achieved similar standards under comparable local programs. ITEM 3. LEGAL PROCEEDINGS. At the time of the Spinoff, the Company assumed from Monsanto, pursuant to the Distribution Agreement, liabilities related to specified legal proceedings. As a result, although Monsanto remains the named defendant, the Company will manage the litigation and indemnify Monsanto for costs, expenses and judgments arising from such litigation. Most of these proceedings have arisen in the ordinary course of business and involve claims for money damages. While the results of litigation cannot be predicted with certainty, Solutia does not believe these matters or their ultimate disposition will have a material adverse effect on Solutia's combined financial position, profitability or liquidity in any one year, as applicable. The following describes certain proceedings to which Monsanto is a party and for which the Company assumed any liabilities as of the Distribution Date pursuant to the Distribution Agreement. On April 12, 1985, Monsanto was named as a defendant in Alanis et al. v. Farm & Home Savings, et al., filed in the District Court in Harris County, Texas, the first of a number of lawsuits in which plaintiffs claim injuries resulting from alleged exposure to substances present at or emanating from the Brio Superfund site near Houston, Texas. Monsanto is one of a number of companies that has sold materials to the chemical reprocessor at that site. Currently pending are the following matters: (1) Monsanto is one of a number of defendants in five cases brought in Harris County District Court or the United States District Court for the Southern District of Texas on behalf of 131 plaintiffs who owned homes or lived in subdivisions near the Brio site, attended school near the site or used nearby recreational baseball fields. Plaintiffs claim to have suffered various personal injuries and fear future disease; they assert the need for medical monitoring, and, in the case of the homeowners, claim property damage. In addition to their claims of personal injury, four plaintiffs in one of these cases allege business losses. Plaintiffs seek compensatory and punitive damages in an unspecified amount. Plaintiffs in one additional case brought on behalf of 20 individuals who owned property along Clear Creek downstream from the Brio site have agreed to settle their claims against Monsanto for $150,000. (2) Monsanto is one of a number of defendants in two actions brought in Harris County District Court and one action brought in Galveston County District Court on behalf of 429 plaintiffs, who are former employees of the owners/operators of the Brio site, and members of the employees' families or persons who worked near the Brio site. Plaintiffs in one of these actions also owned homes or lived in subdivisions near the site, attended schools near the site or used nearby recreational ball fields. Plaintiffs claim physical and emotional injury and seek compensatory and punitive damages in an unspecified amount. The Company believes that there are meritorious defenses to all of these lawsuits including lack of proximate cause, lack of negligent or other improper conduct on the part of Monsanto, and negligence of plaintiffs (or their parents) and/or of builders and developers of the Southbend subdivision. These actions are being vigorously defended. On November 15, 1993, Monsanto was named as a defendant in Dyer et al. v. Monsanto Company, et al., filed in the Circuit Court in St. Clair County, Alabama, the first of a number of lawsuits in which plaintiffs claim 10 12 to have sustained personal injuries or property damage as a result of the discharge of hazardous substances, including polychlorinated biphenyls ("PCBs"), from its Anniston, Alabama, plant site. The following matters are currently pending: (1) Monsanto is a defendant in a case pending in Circuit Court in St. Clair County, Alabama which has been certified as a class action on behalf of all property owners in a specified area along waterways near the plant. Monsanto is a defendant in an additional action filed in Circuit Court in Shelby County, Alabama on behalf of a purported class of property owners farther downstream along this waterway. Plaintiffs in both actions claim loss in the value of their property. Plaintiffs in the Shelby County action additionally claim increased risk of illness, emotional distress and the need for medical monitoring. Plaintiffs seek compensatory and punitive damages in an unspecified amount. (2) Monsanto is a defendant in 12 additional cases brought in Circuit Court in Calhoun County, Circuit Court in St. Clair County, Circuit Court in Taladega County or in U.S. District Court in the Northern District of Alabama on behalf of 2,580 individual plaintiffs who own or rent homes or own or operate businesses near the plant or along waterways near the plant or who attend churches near the plant. An additional case has been filed in Circuit Court in Calhoun County by one of the churches near the plant. The individual plaintiffs claim to have suffered various personal injuries and fear future disease; they assert the need for medical monitoring and claim to have suffered loss in the value of their property or commercial injury. They seek compensatory and punitive damages of $3 million or in unspecified amounts for each individual, and $20 million for the church. (3) Monsanto was a defendant in an action brought in U.S. District Court in the Northern District of Alabama pursuant to the Resource Conservation and Recovery Act Section 7002(a) (1) (B) on behalf of four individuals who are plaintiffs in one of the suits pending in Circuit Court in Calhoun County. Plaintiffs sought an order enjoining Monsanto from continuing to handle improperly hazardous waste from the Anniston plant, directing Monsanto immediately to remove all PCBs released from the plant and granting plaintiffs their costs of suit, including attorney and expert witness fees. On February 13, 1998, the Court granted plaintiffs' motion to dismiss the case without prejudice to its refiling at a later date. The Company believes that there are meritorious defenses to all these matters, including lack of any physical injury or property damage to plaintiffs, lack of any imminent or substantial endangerment to health or the environment and lack of negligence or improper conduct on Monsanto's part. These actions are being vigorously defended. During the fourth quarter of 1997, the Florida Department of Environmental Protection ("FDEP") and the Company began discussions related to allegations of violations of state air pollution standards and air permits. The alleged violations related to operations at the Company's facility located in Pensacola, Florida. Without admitting the allegations, the Company negotiated an administrative consent order with the FDEP. The Company has agreed to pay an administrative penalty of $207,375 to the FDEP and to perform certain corrective actions at the facility. RISK MANAGEMENT Solutia has evaluated risk retention and insurance levels for product liability, property damage and other potential areas of risk. Solutia will continue to devote significant effort to maintaining and improving safety and internal control programs, which reduce its exposure to certain risks. Management decides the amount of insurance coverage to purchase from unaffiliated companies and the appropriate amount of risk to retain based on the cost and availability of insurance and the likelihood of a loss. Management believes that the levels of risk retention which it has implemented are consistent with those of other companies in the chemical industry. There can be no assurance that Solutia will not incur losses beyond the limits, or outside the coverage, of its insurance. Solutia's combined financial position, profitability and liquidity are not expected to be affected materially by the levels of risk retention that it accepts. Under the Distribution Agreement, Solutia is entitled to the benefit of liability insurance coverage under certain Monsanto policies, to the extent such coverage existed and coverage limits are not exhausted, for claims for which it is assuming responsibility. Such insurance coverage generally will be shared with Monsanto for other liabilities existing prior to the Distribution Date which Monsanto has retained, on an as available basis, without allocation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to the security holders during the fourth quarter of 1997. 11 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The narrative and tabular information regarding the market for the Company's common equity and related stockholder matters appearing under "Financial Summary" on page 45 and "Shareholder Information--Stock Listing" on the inside back cover of the 1997 Annual Report is incorporated herein by reference. As reported in the Company's Form 10-Q for the period ending September 30, 1997, the Company filed a Registration Statement on Form S-1, File No. 333-36355 (the "Registration Statement"), to register certain debt securities (the "Debt Securities"). The Securities and Exchange Commission declared the Registration Statement, as amended, effective on October 15, 1997. The Company estimates that its total expenses incurred in connection with the issuance and distribution of the Debt Securities were $5,368,338, of which $4,462,000 was for underwriting commissions and $906,338 was for other offering expenses, including legal, printing and filing fees. None of the expenses involved payments to directors or officers of the Company, persons owning more than 10 percent of any class of equity securities of the Company, or affiliates of the Company (collectively, "Affiliates"). Of the $906,338 in other expenses incurred, $511,838 were actual expenses and $394,500 are estimated expenses. All of the Company's net proceeds from the issuance of the Debt Securities, after deducting the actual and estimated expenses set forth above, were used to refinance existing debt. None of the proceeds were paid to Affiliates. ITEM 6. SELECTED FINANCIAL DATA. The tabular information under "Financial Summary" appearing on page 45 of the 1997 Annual Report, is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information appearing under "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 20 through 26 of the 1997 Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information appearing under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Derivative Financial Instruments" on page 26 of the 1997 Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements of Solutia appearing on pages 27 through 43; the Report of Independent Auditors' Opinion appearing on page 19; and the tabular and narrative information appearing under "Quarterly Data" on page 44 of the 1997 Annual Report are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 12 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding directors and executive officers appearing under "Election of Directors" on pages 3 through 6 of the Solutia Inc. Notice of Annual Meeting and Proxy Statement (the "1998 Proxy Statement") dated March 11, 1998, is incorporated herein by reference. The following information regarding Executive Officers of the Company on March 1, 1998, is included pursuant to Instruction 3 of Item 401(b) of Regulation S-K:
Year First Became an Present Position with Executive Name-Age Registrant Officer Other Business Experience since January 1, 1993 - ----------------------------------------------------------------------------------------------------------------------------------- Robert G. Potter, 58 Chairman, Chief Executive Officer 1997 Chief executive of chemical businesses of Monsanto and Director Company, 1986-1997. Executive Vice President of Monsanto, 1990-1997. Advisory Director of Monsanto, 1986-1997. Karl R. Barnickol, 56 Senior Vice President, General Counsel 1997 Associate General Counsel and Assistant Secretary of and Secretary Monsanto, 1985-1997. Rodney L. Bishop, 57 Vice President and Treasurer 1997 General Auditor of Monsanto, 1993-1997. Assistant Controller of Monsanto, 1982-1993. Dennis L. Cavner, 43 Vice President, Operations Excellence 1997 Director, Manufacturing, Saflex(R) Plastic Interlayer, of Monsanto, 1996-1997. Director, Manufacturing, Phosphorus and Derivatives, of Monsanto, 1995-1996. Plant Manager of Monsanto's Muscatine, Iowa facility, 1992-1995. Robert A. Clausen, 53 Senior Vice President and Chief 1997 President, Monsanto Business Services, 1994-1997. Financial Officer; Advisory Director Vice President, Asset Management of Monsanto, 1992-1994. Sheila B. Feldman, 43 Vice President, Human Resources 1997 Director, Human Resources, Monsanto Business Services and Stewardship, 1995-1997. Director, Human Resources, The Chemical Group of Monsanto, 1993-1995. Manager, Human Resources Planning, The Chemical Group of Monsanto, 1991-1993. G. Bruce Greer, Jr., 37 Vice President, Growth and Commercial 1997 Senior Director, Strategic Change, of Monsanto, Development 1996-1997. Associate Manager and Principal of Gemini Consulting, a management consulting firm, 1992-1996. Roger S. Hoard, 53 Vice President and Controller 1997 Senior Director, Finance, Monsanto Business Services, 1995-1997. Controller, Fibers Division, The Chemical Group of Monsanto, 1990-1995. 13 15 Year First Became an Present Position with Executive Name-Age Registrant Officer Other Business Experience since January 1, 1993 - ----------------------------------------------------------------------------------------------------------------------------------- John C. Hunter III, 51 President, Chief Operating Officer 1997 President, Fibers Business Unit of Monsanto, and Director 1995-1997. Vice President and General Manager, Fibers Division and Asia-Pacific, The Chemical Group of Monsanto, 1993-1995. Vice President and General Manager, Asia-Pacific, Monsanto Chemical Company, 1989-1993. Michael E. Miller, 56 Senior Vice President and Chief 1997 President, Specialty Products Business Unit of Administrative Officer; Advisory Monsanto, 1995-1997. Group Vice President, Industrial Director Products of Monsanto, 1993-1995. Senior Vice President, Operations, The Chemical Group of Monsanto, 1993-1995. Corporate Vice President, Administration of Monsanto, 1989-1993. O. Jerry Mullis, 55 Vice President, Growth and Commercial 1997 Director of Technology and MTS for Specialty Products Development and Chief Technical Officer Division, The Chemical Group of Monsanto, 1993-1997. Director of Technology, Fibers Division, The Chemical Group of Monsanto, 1991-1993.
The above listed individuals are elected to the offices set opposite their names to hold office until their successors are duly elected and have qualified, or until their earlier death, resignation or removal. ITEM 11. EXECUTIVE COMPENSATION. Information appearing under "Compensation of Directors" on pages 7 and 8 and under "Compensation of Executive Officers" on pages 14 through 18 of the 1998 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information appearing under "Ownership of Company Common Stock" on pages 8 and 9 of the 1998 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. 14 16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as part of this Report: 1. The financial statements set forth at pages 27 through 43 and the Report of Independent Auditors on page 19 of the 1997 Annual Report (See Exhibit 13 under Paragraph (a)3 of this Item 14) 2. Financial Statement Schedules The following supplemental schedule for the years ended December 31, 1997, 1996 and 1995: V--Valuation and Qualifying Accounts All other supplemental schedules are omitted because of the absence of the conditions under which they are required. 3. Exhibits--See the Exhibit Index beginning at page 20 of this Report. For a listing of all management contracts and compensatory plans or arrangements required to be filed as Exhibits to this Form 10-K, see the Exhibits listed under Exhibit Nos. 10(a), 10(b), 10(d), 10(e), 10(f), 10(h) and 10(i) on pages 20 and 21 of the Exhibit Index. The following Exhibits listed in the Exhibit Index are filed with this Report: 10(a) Financial Planning and Tax Preparation Services Program for the Executive Leadership Team 13 The Company's 1997 Annual Report to stockholders 18 Preferability Letter from Deloitte & Touche LLP, dated February 25, 1998 21 Subsidiaries of the registrant (see page 22) 23(a) Consent of Independent Auditors (see page 23) 23(b) Consent of Company Counsel (see page 23) 24(a) Powers of Attorney submitted by Robert G. Potter, John C. Hunter III, Robert A. Clausen, Roger S. Hoard, Robert T. Blakely, Joan T. Bok, Paul H. Hatfield, Robert H. Jenkins, Howard M. Love, Frank A. Metz, Jr., William D. Ruckelshaus and John B. Slaughter 24(b) Certified copy of Board resolution authorizing Form 10-K filing utilizing powers of attorney 27 Financial Data Schedule (part of electronic submission only) (b) Reports on Form 8-K during the quarter ended December 31, 1997: The Company did not file any Reports on Form 8-K during the quarter ended December 31, 1997. 15 17 REPORT OF INDEPENDENT AUDITORS Solutia Inc.: We have audited the statement of consolidated financial position of Solutia Inc. and Subsidiaries as of December 31, 1997 and 1996 and the related statements of consolidated income, stockholders' equity (deficit) and cash flow for each of the three years in the period ended December 31, 1997 and have issued our opinion thereon dated February 25, 1998 (which includes an explanatory paragraph as to a change in method of accounting); such financial statements and opinion are included in your 1997 Annual Report to stockholders and are incorporated herein by reference. Our audits also comprehended the schedule of Solutia Inc. and Subsidiaries, listed in Item 14(a)2. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /S/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Saint Louis, Missouri February 25, 1998 16 18 SCHEDULE V SOLUTIA INC. ------------ VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (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, 1997: Reserves deducted from related assets in the Statement of Consolidated Financial Position: Valuation accounts, principally for doubtful receivables and returns and allowances $ 9 $ 1 $3 $7 Year Ended December 31, 1996: Reserves deducted from related assets in the Statement of Consolidated Financial Position: Valuation accounts, principally for doubtful receivables and returns and allowances $ 7 $ 2 -- $9 Year Ended December 31, 1995: Reserves deducted from related assets in the Statement of Consolidated Financial Position: Valuation accounts, principally for doubtful receivables and returns and allowances $16 $(2) $7 $7
17 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. SOLUTIA INC. By: /S/ ROGER S. HOARD -------------------------------- Roger S. Hoard Vice President and Controller (Principal Accounting Officer) Date: March 13, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- Chairman, Chief Executive Officer and March 13, 1998 - -------------------------------------------------- Director (Principal Executive Officer) Robert G. Potter President and Director March 13, 1998 - -------------------------------------------------- John C. Hunter III Senior Vice President and Chief Financial March 13, 1998 - -------------------------------------------------- Officer (Principal Financial Officer) Robert A. Clausen /S/ ROGER S. HOARD Vice President and Controller (Principal March 13, 1998 - -------------------------------------------------- Accounting Officer) Roger S. Hoard Director March 13, 1998 - -------------------------------------------------- Robert T. Blakely Director March 13, 1998 - -------------------------------------------------- Joan T. Bok Director March 13, 1998 - -------------------------------------------------- Paul H. Hatfield Director March 13, 1998 - -------------------------------------------------- Robert H. Jenkins Director March 13, 1998 - -------------------------------------------------- Howard M. Love 18 20 SIGNATURE TITLE DATE --------- ----- ---- Director March 13, 1998 - -------------------------------------------------- Frank A. Metz, Jr. Director March 13, 1998 - -------------------------------------------------- William D. Ruckelshaus Director March 13, 1998 - -------------------------------------------------- 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 19 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 September 25, 1997) 3(a) Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3(a) of the Company's Registration Statement on Form S-1 (333-36355) filed September 25, 1997) 3(b) By-Laws of the Company (incorporated herein by reference to Exhibit 3(b) of the Company's Registration Statement on Form S-1 (333-36355) filed September 25, 1997) 4(a) Rights Agreement (incorporated herein by reference to Exhibit 4 of the Company's Registration Statement on Form 10 filed on August 7, 1997) 4(b) Indenture dated as of October 1, 1997, between Solutia Inc. and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 of the Company's Form 10-Q for the quarter ended September 30, 1997 filed on November 12, 1997) 4(c) 6.5% Notes due 2002 in the principal amount of $150,000,000 (incorporated herein by reference to Exhibit 4.2 of the Company's Form 10-Q for the quarter ended September 30, 1997 filed on November 12, 1997) 4(d) 7.375% Debentures due 2027 in the principal amount of $200,000,000 (incorporated herein by reference to Exhibit 4.3 of the Company's Form 10-Q for the quarter ended September 30, 1997 filed on November 12, 1997) 4(e) 7.375% Debentures due 2027 in the principal amount of $100,000,000 (incorporated herein by reference to Exhibit 4.4 of the Company's Form 10-Q for the quarter ended September 30, 1997 filed on November 12, 1997) 4(f) 6.72% Debentures due 2037 in the principal amount of $150,000,000 (incorporated herein by reference to Exhibit 4.5 of the Company's Form 10-Q for the quarter ended September 30, 1997 filed on November 12, 1997) 9 Omitted--Inapplicable 10(a) Financial Planning and Tax Preparation Services Program for the Executive Leadership Team 10(b) Employee Benefits Allocation Agreement (incorporated herein by reference to Exhibit 10(a) of the Company's Registration Statement on Form S-1 (333-36355) filed September 25, 1997) 10(c) Tax Sharing and Indemnification Agreement (incorporated herein by reference to Exhibit 10(b) of the Company's Registration Statement on Form S-1 (333-36355) filed September 25, 1997) 10(d) Solutia Inc. Management Incentive Replacement Plan (incorporated herein by reference to Exhibit 10(c) of the Company's Registration Statement on Form S-1 (333-36355) filed September 25, 1997) 20 22 EXHIBIT INDEX (CONT'D) Exhibit No. Description - ----------- ----------- 10(e) Solutia Inc. 1997 Stock-Based Incentive Plan (incorporated herein by reference to Exhibit 10(d) of the Company's Registration Statement on Form S-1 (333-36355) filed September 25, 1997) 10(f) Solutia Inc. Non-Employee Director Compensation Plan (incorporated herein by reference to Exhibit 10(e) of the Company's Registration Statement on Form S-1 (333-36355) filed September 25, 1997) 10(g) $800,000,000 Credit Agreement, dated as of August 14, 1997, among Solutia Inc., the initial lenders named therein, Bank of America National Trust and Savings Association and Citibank, N.A. (incorporated herein by reference to Exhibit 10(f) of the Company's Registration Statement on Form S-1 (333-36355) filed September 25, 1997) 10(h) Form of Employment Agreement with Named Executive Officers (incorpo- rated herein by reference to Exhibit 10(h) of the Company's Registration Statement on Form S-1 (333-36355) filed September 25, 1997) 10(i) Form of Employment Agreement with other executive officers (incorporated herein by reference to Exhibit 10(i) of the Company's Registration Statement on Form S-1 (333-36355) filed September 25, 1997) 11 Omitted--Inapplicable; see "Earnings per Share" on pages 40 through 41 of the 1997 Annual Report 12 Omitted--Inapplicable 13 The Company's 1997 Annual Report to stockholders. (The electronic submission includes only the financial report section of the Annual Report, consisting of pages 18 through 49 of that Report.) Only those portions expressly incorporated by reference into this Form 10-K are deemed "filed"; other portions are furnished only for the information of the Commission. 16 Omitted--Inapplicable 18 Preferability Letter from Deloitte & Touche LLP, dated February 25, 1998 21 Subsidiaries of the Registrant (see page 22) 22 Omitted--Inapplicable 23(a) Consent of Independent Auditors (see page 23) 23(b) Consent of Company Counsel (see page 23) 24(a) Powers of Attorney submitted by Robert G. Potter, John C. Hunter III, Robert A. Clausen, Roger S. Hoard, Robert T. Blakely, Joan T. Bok, Paul H. Hatfield, Robert H. Jenkins, Howard M. Love, Frank A. Metz, Jr., William D. Ruckelshaus and John B. Slaughter 24(b) Certified copy of Board resolution authorizing Form 10-K filing utilizing powers of attorney 27 Financial Data Schedule (part of electronic submission only) - -------- Only Exhibits Nos. 21, 23(a) and 23(b) have been included in the printed copy of this Report.
21 23 APPENDIX 1. On printed page 1, the bullets in the printed document are represented by asterisks in the EDGAR document. 2. In Exhibit 13 to the printed form 10-K, on page 49, three pie-charts appear and depict information as follows: "1997 Capital Expenditures by Operating Segment" depicting a percentage breakdown of Solutia's 1997 capital expenditures by operating segment; "1997 Capital Expenditures by World Area" depicting a percentage breakdown of Solutia's 1997 capital expenditures by world area; and "1997 Shareowner Composition" depicting a percentage breakdown of Solutia's 1997 shareowner composition. 3. Throughout the printed Form 10-K, trademarks are designated by the superscript letters "R" in a circle or "TM." The EDGAR copy indicates trademarks with an "R" or "TM" in parentheses. EX-10.(A) 2 FINANCIAL PLANNING AND TAX PREPARATION SERVICES PROGRAM 1 [LOGO] Exhibit 10(a) FINANCIAL PLANNING AND TAX PREPARATION SERVICES PROGRAM FOR THE EXECUTIVE LEADERSHIP TEAM PURPOSE: To provide Financial Planning Services to members of the Solutia Executive Leadership Team (ELT). ELIGIBILITY: Full-time employees who are designated members of the ELT. Participation in any part of this program is completely voluntary. PROGRAM SUMMARY: To provide reimbursement to members of the ELT for Financial Planning and related services. 1. Such services shall include: Tax preparation and planning, estate planning (including wills and trusts), retirement planning and other services of a similar type approved in advance by the Vice President of Human Resources. 2. Reimbursement of tax preparation services shall be made upon receipt of a paid bill for services from one of the APPROVED vendors (list attached), -------- by submitting that receipt to the Controller, or designee, who will issue the reimbursement check. 3. Reimbursement of financial planning services shall be made upon receipt of a paid bill for services by submitting that receipt to the Controller, or designee, who will issue the reimbursement check. A list of financial planners is available from Human Resources but there is no requirement -- to use any on the list. 4. For tax purposes, reimbursement for the cost of financial services are regarded as additional income and, therefore, are subject to withholding. Depending on the nature and cost of the financial services, fees charged may be allowable as itemized deductions on federal income tax returns. 5. The maximum reimbursement allowable per year for tax preparation and financial planning services will be: For the Chairman/CEO, COO, CAO, CFO, GC: $7,000 For other ELT members: $5,000 6. Monies not used in one year cannot be carried over to the following year. 7. Policy shall be effective for expenses incurred as of January 1, 1998. 2 VENDORS: TAX PREPARATION (one of these must be used to be eligible for reimbursement): If you work outside the St. Louis area, contact one of the individuals listed below and they will refer you to an office in your location. Joan Malloy Arthur Anderson 1010 Market Street St. Louis, MO 63101-2089 314-425-9228 (work) 314-621-1956 (fax) Don Poling Deloitte & Touche One City Place St. Louis, MO 63101-1819 314-342-4990 (work) 314-342-1100 (fax) Judy Ethell Price Waterhouse 800 Market Street St. Louis, MO 63101 314-206-8661 (work) 314-206-8510 (fax) Walter Knepper Private Client Services BDO Seidman, LLP 720 Olive Street, Suite 2300 St. Louis, MO 63101 314-231-7575 (work) EX-13 3 PORTIONS OF ANNUAL REPORT 1 SOLUTIA INC. - -------------------------------------------------------------------------------- MANAGEMENT REPORT Management is responsible for the preparation of Solutia Inc.'s consolidated financial statements and all of the related information appearing in this annual report in accordance with generally accepted accounting principles. Where necessary, this information reflects estimates that are based upon currently available information and management's judgments. Management is also responsible for maintaining a system of internal accounting controls with the objectives of providing reasonable assurance that Solutia's assets are safeguarded against material loss from unauthorized use or disposition and that authorized transactions are properly recorded to permit the preparation of accurate financial information. Cost/benefit judgments are an important consideration in this regard. The effectiveness of internal controls is maintained by personnel selection and training, division of responsibilities, establishment and communication of policies and ongoing internal review programs and audits. Management believes that Solutia's system of internal accounting controls as of December 31, 1997, was effective and adequate to accomplish the objectives described above. /s/ Robert G. Potter Robert G. Potter Chairman and Chief Executive Officer /s/ Robert A. Clausen Robert A. Clausen Senior Vice President and Chief Financial Officer February 25, 1998 AUDIT AND FINANCE COMMITTEE REPORT The Audit and Finance Committee, composed of three nonemployee members of the board of directors, met three times during 1997. The Committee reviews and monitors Solutia's internal accounting controls, financial reports, accounting practices and the scope and effectiveness of the audits performed by the independent auditors and internal auditors. The Committee also recommends to the full board of directors the appointment of Solutia's principal independent auditors, and it approves in advance all significant audit and nonaudit services provided by such auditors. Deloitte & Touche LLP was appointed independent auditor to examine, and to express an opinion as to the fair presentation of, the consolidated financial statements. This report follows. The Committee discusses audit and financial reporting matters with representatives of the company's financial management, its internal auditors, and Deloitte & Touche LLP. The internal auditors and Deloitte & Touche LLP meet with the Committee, with and without management representatives present, to discuss the results of their examinations, the adequacy of Solutia's internal accounting controls, and the quality of its financial reporting. The Committee encourages the internal auditors and Deloitte & Touche LLP to communicate directly with the Committee. The Audit and Finance Committee also reviews and monitors the company's financial policies, planning and structure so that they will conform to the company's requirements for growth and sound operation. The Audit and Finance Committee has reviewed the financial section of this annual report. Pursuant to the recommendation of the Committee, the board of directors has approved the financial section. /s/ Frank A. Metz Jr. Frank A. Metz Jr. Chairman, Audit and Finance Committee February 25, 1998 18 2 SOLUTIA INC. - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT AUDITORS TO THE STOCKHOLDERS OF SOLUTIA INC.: We have audited the accompanying statements of consolidated financial position of Solutia Inc. and subsidiaries as of December 31, 1997 and 1996, and the related statements of consolidated income, stockholders' equity (deficit) and cash flow for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Solutia Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. As discussed in Note 16 to the financial statements, the company changed its method of accounting for environmental obligations under the Resource Conservation and Recovery Act in 1997. /s/ Deloitte & Touche LLP Deloitte & Touche LLP St. Louis, Missouri February 25, 1998 19 3 SOLUTIA INC. - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Solutia Inc. is an international producer and marketer of a range of high performance chemical-based materials that are used by its customers to make consumer, household, automotive and industrial products. These products include nylon and acrylic fibers, intermediates, Saflex(R) plastic interlayer, phosphorus derivatives, and specialty chemicals. The company's strategic focus is built on four key technology strengths: polymer chemistry, phosphorus chemistry, fiber technology, and process engineering expertise. These technologies are used in various combinations to create value-added products in three operating segments: *CHEMICALS - comprised of the intermediates, phosphorus derivatives and industrial products business units; *FIBERS - comprised of carpet fibers, nylon industrial fibers and Acrilan(R) acrylic fibers business units, and; *POLYMERS & RESINS - comprised of Saflex(R) plastic interlayer, nylon plastics & polymers, resins and polymer modifier business units. In 1997, the Chemicals, Fibers and Polymers & Resins segments accounted for approximately 32 percent, 33 percent and 35 percent, respectively, of the company's consolidated net sales. Solutia reported all of these businesses as one segment prior to its adoption of Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective December 31, 1997. The discussion of the company's results that follows has been prepared on the basis of one segment. As permitted by this new standard, information for years prior to 1997 was not restated to conform to the new disclosure requirements because it was impracticable to do so. Prior to September 1, 1997, the businesses that form the company were wholly owned by Monsanto Company ("Monsanto"). On September 1, 1997, Monsanto distributed all of the outstanding shares of common stock of the company as a dividend to Monsanto stockholders (the "Spinoff"). The distribution resulted in the issuance of one share of the company's common stock for every five shares of Monsanto common stock held of record as of August 20, 1997. As a result of the Spinoff on September 1, 1997, the company became an independent publicly-held company listed on the New York Stock Exchange, and its operations ceased to be owned by Monsanto. Financial data included in the company's consolidated financial statements for periods prior to the Spinoff were prepared on a combined basis. They reflect an estimate of what the historical assets, liabilities and operations would have been if Solutia had been organized as a separate legal entity, owning certain net assets of Monsanto. Management believes that the assumptions underlying these financial statements are reasonable. These historical consolidated financial statements, however, may not necessarily reflect the results of operations, cash flows or financial position of the company in the future, or what the results of operations, cash flows or financial position would have been had the company been a separate stand-alone public entity. For periods subsequent to the Spinoff, Solutia's consolidated financial statements have been prepared on a basis that reflects the historical value of the assets, liabilities, and operations of the businesses that were contributed to Solutia by Monsanto. See Note 1 of the "Notes to Consolidated Financial Statements" for a detailed discussion of the basis of presentation used in the preparation of Solutia's consolidated financial statements. Solutia produced strong financial results in 1997 as it began its operations as an independent company. The improved operations were primarily attributed to significant cost reductions. The combination of improved operating results and improved working capital management resulted in very strong cash flow subsequent to the Spinoff. These factors allowed the company to reduce significantly the debt burden of $1.029 billion that it assumed in the Spinoff to $790 million at year end and to make significant progress 20 4 SOLUTIA INC. - -------------------------------------------------------------------------------- on its share repurchase program. The following section provides a detailed discussion of the company's results of operations in 1997. RESULTS OF OPERATIONS 1997 COMPARED WITH 1996 In 1997, the company's net sales of $2.97 billion were down slightly when compared with net sales of $2.98 billion in 1996. The decrease was principally attributed to the effects of unfavorable currency exchange rates, and was partially offset by approximately $12 million of higher sales volumes. The effect of higher average selling prices was minimal. Sales volumes increased for the nylon plastics & polymers and the Saflex(R) plastic interlayer business units. These increases were principally the result of higher demand. These sales increases were offset by the combination of unfavorable currency exchange rates and lower sales volumes of intermediates and carpet staple. The use of alternative floor coverings and competition from lower priced polyester staple had a negative effect on sales into the residential carpet market. Combined net sales of the other business units decreased slightly compared with net sales in 1996. While currency exchange rates had a negative effect on Solutia's net sales in 1997, the effect on company's 1997 operating income was minimal because ex-U.S. sales are sourced primarily from ex-U.S. operations. Solutia's operating income in 1997 increased significantly from operating income in 1996. However, operating income was affected by unusual items in both years. In 1997, operating income included a first quarter charge of $10 million ($6 million aftertax, or $0.05 per share) associated with the adoption of the American Institute of Certified Public Accountants' Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities," which is further discussed in Note 16 of the "Notes to Consolidated Financial Statements." Operating income in the second quarter of 1997 included a charge of $10 million ($6 million aftertax, or $0.05 per share) for environmental-related litigation associated with the Brio Superfund site near Houston, Texas. In addition, operating income in the second quarter of 1997 included $8 million ($5 million aftertax, or $0.04 per share) of reversals of excess restructuring reserves from prior years. The excess was primarily the result of lower exit costs associated with the sale and closure of nonstrategic facilities included in 1995 restructuring actions. Operating income in the fourth quarter of 1997 included charges of $72 million ($46 million aftertax, or $0.37 per share) associated with environmental remediation liability changes. These charges are discussed further in Note 16 of the "Notes to Consolidated Financial Statements." Operating income in 1996 included a net charge of $248 million ($156 million aftertax, or $1.30 per share) for restructuring and other actions, primarily for the costs of work force reductions, asset write-offs, and facility rationalizations. The increase in operating income in 1997 can be attributed primarily to the effect of cost reductions. The cost reductions were realized principally through the restructuring actions that were taken during 1997. Significant progress was made on this restructuring plan. During 1997, employment was reduced by approximately 600 people. The effect of these cost savings was the primary driver behind the reductions in the company's marketing and administrative expenses in 1997. In addition, Solutia's operations in 1997 received lower cost allocations from Monsanto. As further described in Note 1 of the "Notes to Consolidated Financial Statements," on April 1, 1997, Monsanto discontinued its allocations of corporate expenses for general and administrative services that it had previously been providing. Solutia's 1997 administrative expenses consisted of three months of Monsanto allocations and nine months of stand-alone staff expenses. If Solutia had operated as a stand-alone entity in 1996 and 1997, management estimates that general and administrative services would have been lower by approximately $39 million in 1996 and higher by $13 million in 1997 in order to reflect the cost of replacing the services represented by these allocations. The increase in "Earnings from equity affiliates" was driven by the Flexsys L.P. ("Flexsys") and Advanced Elastomer Systems L.P. ("AES") joint ventures. Solutia's share of the combined 1997 earnings for these ventures increased approximately 40 percent over the combined earnings from these ventures in 21 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- 1996. Solutia has a 50 percent ownership interest in each of these joint ventures. The company is affected by economic conditions, particularly as they relate to the housing industry in the United States and the automotive industry both in the United States and internationally, which are cyclical businesses. In addition, global competition and customer demands for efficiency will continue to make sustained price increases difficult. The prices of purchased raw materials used by the company fluctuate in the short term and are affected by factors such as plant outages, oil prices, and supply and demand. However, in the long term, the company believes that the addition of new worldwide capacity should exert downward pressure on purchased raw material costs. 1996 COMPARED WITH 1995 The company's net sales increased $13 million in 1996. However, as further discussed in Note 4 of the "Notes to Consolidated Financial Statements," prior year operations reflect four months of sales and operating income from the rubber chemicals business that was contributed in May 1995 to the formation of the Flexsys joint venture. Sales and operating results for the rubber chemicals business are no longer included in the company's consolidated totals. If the sales from this business were excluded in 1995, the company's sales would have increased $153 million, or 5 percent, in 1996. Approximately $204 million of the increase can be attributed to higher sales volumes and an improved sales mix. This increase was partially offset by the effect of lower average selling prices, which totaled approximately $51 million. Most of the sales growth was driven by increased sales for fibers products, primarily because of higher sales volumes of nylon and acrylic fibers. Nylon fiber sales were considerably higher than sales in 1995 because of higher demand in the carpet industry. Increased demand in U.S. markets and higher export sales, particularly into China, drove the sales volume growth for acrylic fibers. A decline in average selling prices partially offset the increase in nylon and acrylic fiber sales. Nylon polymer sales also contributed to the sales increase on the strength of higher sales volumes. Sales of intermediates and phosphorus and derivative products were essentially even with the prior year. Sales of industrial products in 1996 were up moderately from those in 1995, principally because of higher sales volumes, led by higher sales volumes for Therminol(R) heat transfer fluids. Higher sales volumes, partially offset by lower average selling prices, resulted in a modest increase in the net sales of Saflex(R) plastic interlayer in 1996. Polymer modifier sales declined slightly in 1996, primarily because of lower sales volumes. In 1996, operating income for the company decreased $225 million from operating income in 1995. However, profitability in both years was affected by unusual items. Operating income in 1996 included a net charge of $248 million ($156 million, or $1.30 per share) for restructuring and other actions, primarily for the costs of work force reductions, asset write-offs, and facility rationalizations. Operating income in 1995 was reduced by $46 million ($39 million aftertax, or $0.34 per share), principally as the result of restructuring charges for employment reductions and the costs to close several facilities. The positive effect of higher sales volumes and lower raw material costs on operating income was offset by lower average selling prices, by significantly higher administrative expenses, and by higher manufacturing costs. The manufacturing cost increase was principally associated with maintenance downtime and capacity expansion projects. Worldwide competitive pressures limited the company's pricing flexibility on most of its products. Future reductions or increases in average selling prices will continue to be contingent upon these demands and pressures. The 1996 increase in administrative expenses was principally due to higher costs associated with various employee incentive programs, as well as an increase in allocations related to Monsanto's business and organizational development initiatives. The increase in "Earnings from equity affiliates" was principally attributed to higher earnings for the Flexsys and AES joint ventures. Net of restructuring charges that are detailed in Note 4 of the "Notes to Consolidated Financial Statements," the increase in "Other income (expense) - net" resulted primarily from the combination of 22 6 SOLUTIA INC. - -------------------------------------------------------------------------------- lower expense allocations from Monsanto and higher gains on the sale of certain assets. The 1996 effective income tax rate of 3 percent compared with the federal statutory rate of 35 percent can be attributed primarily to the joint venture aftertax earnings included in "Earnings from equity affiliates" and benefits from the foreign sales corporation. It is expected that the effective income tax in future periods will be significantly higher and will approximate the U.S. federal statutory rate. LIQUIDITY AND CAPITAL RESOURCES Historically, the company has generated sufficient cash from its operations to fund its capital needs, including working capital. Capital expenditures were $165 million in 1997. These expenditures were used to fund various maintenance and capacity expansion projects. The company expects that its capital requirements will be in the range of $250 million to $350 million annually over the next few years, principally as a result of capacity expansion and cost reduction projects. A portion of these capital expenditures will be funded from up-front payments received from third parties participating in these projects. Environmental remediation expenditures were $39 million in 1997, and the company anticipates that these expenditures will approximate this amount annually over the next several years. Solutia's working capital as of December 31, 1997, decreased to $106 million from $121 million at December 31, 1996, primarily because of the increase in short-term debt, principally commercial paper, the proceeds of which Solutia used to repay debt assumed with the Spinoff. The decrease in working capital was partially offset by increases in cash, receivables and inventories. As of December 31, 1997, Solutia had negative equity of $131 million. This deficit position resulted primarily from the assumption of $1.029 billion of debt and $1.018 billion of postretirement liabilities from Monsanto in conjunction with the Spinoff. Effective with the Spinoff, Solutia assumed approximately $1.029 billion of debt from Monsanto, primarily assumable commercial paper. The assumable commercial paper was guaranteed by Monsanto until repaid or refinanced by Solutia at maturity, which was up to 30 days following the Spinoff. In October of 1997, the company consummated the sale of debt securities in the amount of $600 million having maturities of 5 to 40 years. The proceeds of the offering were used to refinance a portion of the company's commercial paper as it matured. In the four months following the Spinoff, the company has reduced its debt outstanding by approximately $240 million. Solutia's debt securities were rated "BBB/Baa2" by the major rating agencies. As of December 31, 1997, Solutia had a five-year revolving credit facility of $800 million with a syndicate of banks to support its commercial paper. The credit facility is also available for working capital and other general corporate purposes. No borrowings were outstanding under this credit facility as of December 31, 1997. This credit facility gives Solutia the financing flexibility to take advantage of investment opportunities that may arise and to satisfy future funding requirements. In September 1997, the company's board of directors authorized the purchase of up to 5 million shares of the company's common stock. During 1997, the company acquired approximately 1.4 million shares at a cost of approximately $32 million. The company expects to substantially complete these purchases over the next year. This repurchase program is in addition to the normal repurchase of shares for compensation and benefits programs. The company believes that its cash flow from operations, supplemented by periodic additional borrowings, provides it with sufficient resources to finance its operations and planned capital needs for the next 12 months. ENVIRONMENTAL MATTERS Solutia continues to make a strong commitment to comply with various laws and government regulations concerning environmental matters and employee safety and health in the United States and other countries. U.S. federal environmental legislation that has a particular impact on the company includes the Toxic Substances Control Act; the Resource Conservation and Recovery Act ("RCRA"); the Clean Air Act; the Clean Water Act; the Safe Drinking Water 23 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Act; and the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA," commonly known as "Superfund"), as amended by the Superfund Amendments and Reauthorization Act. The company is also subject to the Occupational Safety and Health Act and regulations of the Occupational Safety and Health Administration ("OSHA") concerning employee safety and health matters. The U.S. Environmental Protection Agency ("EPA"), OSHA, and other federal agencies have the authority to promulgate regulations that have an impact on the company's operations. In addition to these federal activities, various states have been delegated certain authority under the aforementioned federal statutes. Many state and local governments have adopted environmental and employee safety and health laws and regulations, some of which are similar to federal requirements. State and federal authorities may seek fines and penalties for violation of these laws and regulations. Solutia is dedicated to long-term environmental protection and compliance programs that reduce and monitor emissions of hazardous materials into the environment as well as to the remediation of identified existing environmental concerns. The company is among the leaders in the chemical industry's Responsible Care performance enhancement program. Expenditures in 1997 were approximately $10 million for environmental capital projects and approximately $75 million for the management of environmental programs, including the operation and maintenance of facilities for environmental control. The company estimates that a total of approximately $25 million will be spent during 1998 and 1999 on additional capital projects for environmental protection and that expenses for the management of environmental programs in 1998 and 1999 will continue at levels comparable to 1997. With respect to environmental remediation obligations, the company's policy is to accrue costs for remediation of contaminated sites in the accounting period in which the obligation is probable and the cost is reasonably estimable. Significant adjustments to these obligations included the 1997 fourth quarter charges of approximately $34 million ($22 million aftertax, or $0.18 per share) to increase the company's environmental reserves. This action was required in order to reflect revised estimates for changed circumstances relating to the ultimate outcome of previously known environmental matters. These revised estimates were based upon further discussions with environmental authorities and the availability of new information from recently completed environmental studies. These events and activities help to define better and to quantify the company's ultimate liability for these matters. In addition, effective January 1, 1997, Solutia adopted SOP 96-1 which establishes authoritative guidance regarding the recognition, measurement and disclosure of environmental remediation liabilities. A charge of approximately $10 million ($6 million aftertax, or $0.05 per share) was recorded in the first quarter of 1997 associated with the adoption of SOP 96-1. The timing of this charge was predicated upon an application of SOP 96-1 in which liabilities arising under RCRA should be recorded when a RCRA corrective measures study ("CMS") is completed. Subsequently, the company reassessed its application of SOP 96-1 and concluded that these liabilities would be recorded over a continuum of events leading up to and including a CMS. As a result, the company recorded in the fourth quarter of 1997, additional charges of approximately $38 million ($24 million aftertax, or $0.19 per share) associated with these RCRA environmental liabilities. Monsanto has intermittently received notices from the EPA alleging that it is a potentially responsible party ("PRP") with respect to Superfund at specific sites. In 1997, no such notices were received. With respect to many of the past notices, Monsanto has resolved disputes, entered partial and complete consent decrees, and executed administrative orders with the EPA settling a portion or all of Monsanto's liability at various sites. Remediation pursuant to such settlements is ongoing. At the time of the Spinoff, the company assumed from Monsanto, pursuant to a distribution agreement, liabilities related to specified Superfund proceedings. As a result, while Monsanto remains the named PRP or defendant for actions that occurred prior to September 1, 1997, the company 24 8 SOLUTIA INC. - -------------------------------------------------------------------------------- will manage proceedings and litigation indemnifying Monsanto for costs, expense and judgments arising from these assumed liabilities. The company's estimates of its liabilities for Superfund sites are based on evaluations of currently available facts with respect to each individual site and take into consideration factors such as existing technology, laws and agency policy, and prior experience in remediation of contaminated sites. As assessments and remediation activities progress at individual sites, these liabilities are reviewed periodically and adjusted to reflect additional technical, engineering and legal information that becomes available. The company has an accrued liability of $48 million as of December 31, 1997 for Superfund sites. Major Superfund sites in this category include the noncompany-owned sites at Brio and MOTCO in Texas, Fike/Artel in West Virginia and Woburn in Massachusetts, which account for $33 million of the accrued amount. The company spent approximately $12 million in 1997 for remediation of Superfund sites. Similar amounts can be expected in future years. The company had an accrued liability of $88 million as of December 31, 1997, for shut-down plants and third-party sites for which the company assumed responsibility pursuant to a distribution agreement entered into with Monsanto. The company's estimate of its liability related to these sites is based on evaluations of currently available facts with respect to each individual site and takes into consideration factors such as existing technology, laws and agency policy and prior experience in remediation of contaminated sites. The company spent $11 million in 1997 for remediation of these sites. Similar amounts can be expected in the future. The company had an accrued liability of $81 million as of December 31, 1997 for solid and hazardous waste remediation, and post-closure costs at the company's operating locations. The company recognizes certain post-closure costs over the estimated remaining useful life of the related facilities. The company spent $16 million in 1997 for remediation of these facilities. Uncertainties related to all of the company's environmental liabilities are evolving government regulations, the method and extent of remediation and future changes in technology. Because of these uncertainties, the company estimates that potential future expenses associated with these liabilities could be an additional $20 million to $30 million. Although the ultimate costs and results of remediation of contaminated sites cannot be predicted with certainty, they are not expected to result in a material adverse effect on Solutia's consolidated financial position, liquidity, or profitability in any one year. THE YEAR 2000 ISSUE The year 2000 ("Y2K") issue refers to the inability of a date-sensitive computer program to recognize a two-digit date field designated as "00" as the year 2000. Mistaking "00" for 1900 could result in a system failure or miscalculations causing disruptions to operations, including manufacturing, a temporary inability to process transactions, send invoices, or engage in other normal business activities. This is a significant issue for most, if not all companies, with far reaching implications, some of which cannot be anticipated or predicted with any degree of certainty. Solutia has completed an assessment of the magnitude of its Y2K issue and has determined that it will be required to modify or replace significant portions of its software so that its computer systems will be able to function properly beyond December 31, 1999. The majority of the company's Y2K issue will be addressed though its worldwide implementation of new software licensed from SAP AG which is Y2K compliant. Issues that are not covered by the SAP implementation will have to be addressed individually and may require software replacement, reprogramming or other remedial action. The company is communicating with its suppliers and customers to determine the extent of the company's vulnerability to the failure of third parties to remediate their own Y2K issue. In conjunction with this assessment, the company is finalizing its action plans to address the Y2K issue, including contingencies to address unforeseen problems. The company plans to use both internal and external resources to complete Y2K reprogramming, software replacement and testing. Preliminary plans anticipate completion of the SAP implementation and Y2K remedial work by mid-1999. To date, the company has 25 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- incurred approximately $3 million related to the Y2K remedial work. The total remaining cost of the Y2K remedial work is estimated to be $5 million and will be expensed as incurred over the next two years. The costs of Y2K remedial work exclude the cost of SAP implementation. The costs of the project and the date on which the company plans to complete the Y2K remediation work are based on management's best estimates, which were derived from numerous assumptions about future events, including the availability of certain resources, third-party modification plans, and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause material differences include, but are not limited to, the availability and cost of personnel trained in this area and the ability to identify and correct all relevant computer codes. DERIVATIVE FINANCIAL INSTRUMENTS The company is exposed to market risk, including changes in interest rates, currency exchange rates, and certain commodity prices. To manage the volatility relating to these exposures, the company enters into various derivative transactions pursuant to the company's policies. The company does not purchase or hold any derivative financial instruments for trading purposes. The tests discussed below for exposure to interest rate and currency rate exposures are based on a variance/covariance value at risk model using a one-year horizon and a 95 percent confidence level. The model assumes that financial returns are normally distributed. The value at risk model takes into account correlations and diversification across market factors, including currencies and interest rates. Estimates of volatility and correlations or market factors are drawn from the JP Morgan RiskMetrics(TM) dataset as of December 31, 1997. In cases where data is unavailable, a reasonable approximation is included. The effect of these estimates did not significantly change the total value at risk. FOREIGN CURRENCY EXCHANGE RATE RISK Currency forward contracts are used to manage currency exposures for financial instruments denominated in currencies other than the entity's functional currency. Gains and losses on contracts that are designated and effective as hedges are included in net income and offset the exchange gain or loss of the transaction being hedged. Corporate policy prescribes the range of allowable hedging activity and the instruments permitted for use. Because the counterparties to these contracts are major international financing institutions, credit risk arising from these contracts is not significant and Solutia does not anticipate any counterparty losses. This hedging activity is intended to protect the company from adverse fluctuations in foreign currency exchange rates. As of December 31, 1997, Solutia had currency forward contracts to purchase $22 million and to sell $22 million of other currencies with average maturities of 2 months, principally the Belgian franc and the British pound sterling. Net unrealized hedging losses as of December 31, 1997 were not material. Based on the company's overall currency rate exposure at December 31, 1997, including derivative and other foreign currency sensitive instruments, a near-term change in currency rates within a 95 percent confidence level based on historical currency rate movements, would not materially affect the consolidated financial position, results of operations, or cash flows of the company. INTEREST RATE RISK Interest rate risk is primarily related to the changes in fair value on fixed-rate, long-term debt and short-term, floating rate debt. Based on the company's overall interest rate exposure at December 31, 1997, a near-term change in interest rates, within a 95 percent confidence level based on historical interest rate movements, would not materially affect the consolidated financial position, results of operations, or cash flows of the company. COMMODITY PRICE RISK Certain raw materials are subject to price volatility caused by weather, petroleum prices, and other unpredictable factors. The company employs commodity price swaps to hedge this exposure. The commodity price risk is not material to the company's consolidated financial position, results of operations, or cash flow. 26 10 SOLUTIA INC. - -------------------------------------------------------------------------------- UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in millions, except per share) The following unaudited pro forma condensed consolidated statements of income for the years ended December 31, 1997 and 1996 give effect to the Spinoff and Solutia's 1997 debt offering as if the Spinoff and the offering had occurred as of the beginning of the periods presented. The pro forma information is presented for illustrative purposes only and may not be indicative of the results that would have been obtained had the transactions actually occurred on the date assumed, nor is it necessarily indicative of future consolidated results of operations. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the historical financial statements and the related notes thereto included elsewhere in this annual report.
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 =========================================================================== EARNINGS PER SHARE $ 1.63 $(0.30) $ 1.33 $ 0.28 $(0.13) $ 0.15 =========================================================================== EARNINGS PER SHARE, ASSUMING DILUTION $ 1.55 $(0.28) $ 1.27 $ 0.27 $(0.13) $ 0.14 =========================================================================== Weighted Average Shares - Basic 117.7 116.2 =========================================================================== Weighted Average Shares - Diluted 123.7 119.8 =========================================================================== 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.
27 11 SOLUTIA INC. - -------------------------------------------------------------------------------- STATEMENT OF CONSOLIDATED INCOME (Dollars in millions, except per share)
Year Ended December 31, ------------------------------------------ 1997 1996 1995 ------------------------------------------ NET SALES $2,969 $2,977 $2,964 Cost of goods sold 2,316 2,325 2,243 ------------------------------------------ GROSS PROFIT 653 652 721 Marketing expenses 143 172 179 Administrative expenses 133 167 136 Technological expenses 87 88 95 Restructuring expenses-net -- 192 53 ------------------------------------------ OPERATING INCOME 290 33 258 Equity earnings from affiliates 31 21 15 Interest expense (41) (36) (36) Other income (expense)-net 10 15 (6) ------------------------------------------ INCOME BEFORE INCOME TAXES 290 33 231 Income taxes 98 1 84 ------------------------------------------ NET INCOME $ 192 $ 32 $ 147 ========================================== EARNINGS PER SHARE $ 1.63 $ 0.28 $ 1.30 ========================================== EARNINGS PER SHARE, ASSUMING DILUTION $ 1.55 $ 0.27 $ 1.27 ========================================== See accompanying Notes to Consolidated Financial Statements.
KEY FINANCIAL STATISTICS (UNAUDITED)
AS A PERCENT OF NET SALES: 1997 1996 1995 ---------------------------------------- Gross profit 22% 22% 24% Marketing, administrative and technological expenses 12 14 14 Operating income 10 1 9 Net income 6 1 5 EFFECTIVE INCOME TAX RATE 34 3 36
28 12 SOLUTIA INC. - -------------------------------------------------------------------------------- STATEMENT OF CONSOLIDATED FINANCIAL POSITION (Dollars in millions, except per share)
As of December 31, ----------------------- 1997 1996 ------------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 24 $ -- Trade receivables, net of allowances of $6 in 1997 and $7 in 1996 425 412 Miscellaneous receivables and prepaid expenses 136 80 Deferred income tax benefit 91 108 Inventories 325 291 ------------------------ TOTAL CURRENT ASSETS 1,001 891 PROPERTY, PLANT AND EQUIPMENT: Land 17 18 Buildings 357 367 Machinery and equipment 2,707 2,622 Construction in progress 107 121 ------------------------ Total property, plant and equipment 3,188 3,128 Less accumulated depreciation 2,265 2,217 ------------------------ NET PROPERTY, PLANT AND EQUIPMENT 923 911 INVESTMENTS IN AFFILIATES 423 366 LONG-TERM DEFERRED INCOME TAX BENEFIT 300 194 OTHER ASSETS 121 121 ------------------------ TOTAL ASSETS $2,768 $2,483 ======================== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable $ 221 $ 223 Wages and benefits 106 156 Restructuring reserves 40 79 Miscellaneous accruals 335 312 Short-term debt 193 -- ------------------------ TOTAL CURRENT LIABILITIES 895 770 LONG-TERM DEBT 597 -- POSTRETIREMENT LIABILITIES 958 634 OTHER LIABILITIES 449 423 STOCKHOLDERS' EQUITY (DEFICIT): Monsanto Company Equity -- 656 Common stock (authorized, 600,000,000 shares par value $0.01) Issued: 118,400,635 shares in 1997 1 -- Additional contributed capital (119) -- Treasury stock, at cost (992,828 shares in 1997) (22) -- Minimum pension liability adjustment (7) -- Unearned ESOP shares (31) -- Accumulated currency adjustment 19 -- Reinvested earnings 28 -- ------------------------ TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (131) 656 ------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $2,768 $2,483 ======================== See accompanying Notes to Consolidated Financial Statements.
29 13 SOLUTIA INC. - -------------------------------------------------------------------------------- STATEMENT OF CONSOLIDATED CASH FLOW (Dollars in millions)
Year Ended December 31, ------------------------------------------ 1997 1996 1995 ------------------------------------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $ 192 $ 32 $ 147 Adjustments to reconcile to Cash Provided by Operations: Items that did not use (provide) cash: Deferred income taxes 32 (45) 25 Depreciation and amortization 142 166 162 Restructuring expenses - net -- 192 53 Other (39) 43 1 Working capital changes that provided (used) cash: Accounts receivable (9) (43) 64 Inventories (32) 20 (78) Accounts payable and accrued liabilities (115) (33) (61) Other (45) 24 (13) Other items 33 (20) 20 ------------------------------------------ TOTAL CASH PROVIDED BY OPERATIONS 159 336 320 ------------------------------------------ INVESTING ACTIVITIES: Capital expenditures (165) (192) (179) Acquisition and investment payments (2) (17) (51) Investment and property disposal proceeds 9 4 51 ------------------------------------------ CASH USED IN INVESTING ACTIVITIES (158) (205) (179) ------------------------------------------ FINANCING ACTIVITIES: Net transactions with Monsanto Company prior to Spinoff 292 (131) (141) Long-term debt proceeds 600 -- -- Repayment of debt obligations (840) -- -- Treasury stock purchases (35) -- -- Dividend payments (1) -- -- Common stock issued under employee stock plans 13 -- -- Other financing activities (6) -- -- ------------------------------------------ CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 23 (131) (141) ------------------------------------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24 -- -- CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR -- -- -- ------------------------------------------ END OF YEAR $ 24 $ -- $ -- ========================================== See accompanying Notes to Consolidated Financial Statements. The effect of exchange rate changes on cash and cash equivalents was not material. Cash payments for interest (net of amounts capitalized) were $3 million in 1997. Cash payments for income taxes were $30 million in 1997.
30 14 SOLUTIA INC. - -------------------------------------------------------------------------------- STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT) (Dollars in millions)
Year Ended December 31, ----------------------------------- 1997 1996 1995 ----------------------------------- MONSANTO COMPANY EQUITY: BALANCE, JAN. 1 $ 656 $ 755 $ 741 Net income 32 147 Translation adjustments -- 8 Net transactions with Monsanto Company prior to Spinoff (131) (141) 1997 activity to date of Spinoff: Net income 163 Translation adjustments 13 Net transactions with Monsanto Company 292 Elimination of Monsanto Company Equity at Spinoff (1,124) ----------------------------------- BALANCE, DEC. 31 $ -- $ 656 $ 755 ----------------------------------- COMMON STOCK: BALANCE, JAN. 1 $ -- $ -- $ -- Issuance of 118,371,280 shares at Spinoff 1 Issuance of 29,355 shares for stock option exercises -- ----------------------------------- BALANCE, DEC. 31 $ 1 $ -- $ -- ----------------------------------- ADDITIONAL CONTRIBUTED CAPITAL: BALANCE, JAN. 1 $ -- $ -- $ -- Net liability transfer to Solutia at Spinoff (101) Post-Spinoff adjustments (12) Employee stock plans and ESOP (6) ----------------------------------- BALANCE, DEC. 31 $ (119) $ -- $ -- ----------------------------------- TREASURY STOCK: BALANCE, JAN. 1 $ -- $ -- $ -- Shares purchased (1,569,800 shares in 1997) (35) Net shares issued under employee stock option plans (576,972 shares in 1997) 13 ----------------------------------- BALANCE, DEC. 31 $ (22) $ -- $ -- ----------------------------------- MINIMUM PENSION LIABILITY ADJUSTMENT: BALANCE, JAN. 1 $ -- $ -- $ -- Post-Spinoff adjustment (7) ----------------------------------- BALANCE, DEC. 31 $ (7) $ -- $ -- ----------------------------------- UNEARNED ESOP SHARES: BALANCE, JAN. 1 $ -- $ -- $ -- Transfer of ESOP reserve balance to Solutia at Spinoff (31) Amortization of ESOP balance -- ----------------------------------- BALANCE, DEC. 31 $ (31) $ -- $ -- ----------------------------------- ACCUMULATED CURRENCY ADJUSTMENT: BALANCE, JAN. 1 $ -- $ -- $ -- Balance transferred to Solutia at Spinoff 11 Translation adjustments 8 ----------------------------------- BALANCE, DEC. 31 $ 19 $ -- $ -- ----------------------------------- REINVESTED EARNINGS: BALANCE, JAN. 1 $ -- $ -- $ -- Net income from date of Spinoff through December 31, 1997 29 Dividends (1) ----------------------------------- BALANCE, DEC. 31 $ 28 $ -- $ -- ----------------------------------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) $ (131) $ 656 $ 755 =================================== See accompanying Notes to Consolidated Financial Statements.
31 15 SOLUTIA INC. - ------------------------------------------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per share) 1. BASIS OF PRESENTATION Solutia Inc. is an international producer and marketer of a range of high performance chemical-based materials that are used by its customers to make consumer, household, automotive and industrial products. Prior to September 1, 1997, the businesses that form the company were wholly owned by Monsanto Company ("Monsanto"). On September 1, 1997, Monsanto distributed all of the outstanding shares of common stock of the company as a dividend to Monsanto stockholders (the "Spinoff"). The distribution resulted in the issuance of one share of the company's common stock for every five shares of Monsanto common stock held of record as of August 20, 1997. As a result of the Spinoff on September 1, 1997, the company became an independent publicly-held company listed on the New York Stock Exchange and its operations ceased to be owned by Monsanto. Monsanto and Solutia have entered into a number of agreements with respect to the separation of the companies and to provide mechanisms for an orderly transition following the Spinoff. PRE-SPINOFF FINANCIAL INFORMATION Financial data included in the accompanying consolidated financial statements, for periods prior to the Spinoff, were prepared on a combined basis. They reflect an estimate of what the historical assets, liabilities and operations would have been if Solutia had been organized as a separate legal entity, owning certain net assets of Monsanto. Generally, only those assets and liabilities of the ongoing chemicals businesses that were expected to be transferred to Solutia prior to the Spinoff were included in the Statement of Consolidated Financial Position. The Spinoff was accomplished through a distribution agreement which defined the assets that were contributed to Solutia and the liabilities that were assumed by Solutia. Certain of those assets and liabilities were not included in the accompanying Statement of Consolidated Financial Position as of December 31, 1996. Those omitted assets and liabilities were principally comprised of a joint venture interest in Monsanto's elemental phosphorus business and a defined amount of cash and debt. Monsanto and Solutia also entered into an employee benefits and compensation allocation agreement that set forth the manner in which assets and liabilities under employee benefit plans and other employment-related liabilities were divided between them. Certain assets and liabilities related to the plans have not been included in the accompanying Statement of Consolidated Financial Position as of December 31, 1996. Items excluded were comprised principally of assets and liabilities for U.S. and ex-U.S. defined benefit pension plans as well as workers' compensation and additional obligations for health care and other postretirement benefits that Solutia retained for substantially all retired U.S. employees. The following unaudited pro forma amounts were estimated to give effect to the previously described assets and liabilities that were excluded from Solutia's December 31, 1996 Statement of Consolidated Financial Position, as well as certain other items. For the unaudited pro forma condensed Statement of Consolidated Financial Position, the amounts were estimated as if the Spinoff had occurred on December 31, 1996. The comparable audited amounts as of December 31, 1997 are included for informational purposes. For the unaudited pro forma condensed Statements of Consolidated Income, the amounts were estimated as if the Spinoff had occurred as of the beginning of the years presented. Condensed Statements of Consolidated Financial Position as of December 31:
Unaudited Pro Forma 1997 1996 -------------------------------- Total Assets $2,768 $2,660 Long-Term Debt 597 1,029 Postretirement Liabilities 958 876 Stockholders' Deficit (131) (439) Total Liabilities and Stockholders' Deficit $2,768 $2,660
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 Earnings per Share $1.33 $0.15 Earnings per Share, assuming dilution $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, $85 million and $72 million in 1997, 1996 and 1995, respectively. In preparation for the Spinoff, 32 16 SOLUTIA INC. - ------------------------------------------------------------------------------ Monsanto began a transition plan for the separation. As part of this plan, Monsanto discontinued its allocation of corporate expenses for these general and administrative services on April 1, 1997, as these expenses were specifically identified and segregated as part of Solutia's ongoing cost infrastructure. As a result of the Spinoff, Solutia is now required to perform these general and administrative functions using its own resources or purchased services and is responsible for the costs and expenses associated with the management of a public company. If Solutia had operated as a stand-alone entity in 1996 and 1997, management estimates that general and administrative services would have been lower by approximately $39 million in 1996 and higher by $13 million in 1997 in order to reflect the cost of replacing the services represented by these allocations. As described in Notes 10, 11 and 12, Solutia employees and retirees participated in various Monsanto pension, health care, savings and other benefit plans. The costs and certain obligations related to these plans were included in Solutia's consolidated financial statements generally based on the percentage of Solutia payroll costs to total Monsanto payroll costs. Certain assets and liabilities related to Solutia's operation had been managed and controlled by Monsanto on a centralized basis. Such assets and liabilities have been allocated to Solutia in the manner described in the preceding paragraphs for allocated general and administrative expenses and benefit plans. A portion of the following pre-Spinoff assets and liabilities have been determined in this manner: other assets, accounts payable, postretirement liabilities, miscellaneous accruals and other liabilities. Monsanto used a centralized approach to cash management and the financing of its operations. As a result, cash and cash equivalents and debt were not allocated to Solutia in the pre-Spinoff historical financial statements. Solutia generally has not had borrowings except amounts due to Monsanto. Interest expense was allocated to Solutia in the consolidated financial statements to reflect Solutia's pro rata share of the financing structure of Monsanto. This allocation in the consolidated financial statements is based on the percentage relationship between the net assets utilized in Solutia's operations and Monsanto's net assets. The allocation methodology followed in preparing the consolidated financial statements may not necessarily reflect the results of operations, cash flows, or financial position of Solutia in the future, or what the results of operations, cash flows, or financial position would have been had Solutia been a separate stand-alone entity. POST-SPINOFF FINANCIAL INFORMATION Financial data included in the accompanying consolidated financial statements, for periods subsequent to the Spinoff, have been prepared on a basis that reflects the historical value of the assets, liabilities, and operations of the businesses that were contributed to Solutia by Monsanto in accordance with the distribution and employee benefits and compensation allocation agreements described in the preceding paragraphs. Effective with the Spinoff on September 1, 1997, the assets contributed to Solutia and the liabilities assumed by Solutia included a joint venture interest in Monsanto's elemental phosphorus business, cash of $75 million, debt of $1.029 billion, accrued net pension liability for the U.S. and ex-U.S. defined benefit pension plans, and additional obligations for healthcare and other postretirement benefits. At the date of the Spinoff, the amount of postretirement liabilities assumed by Solutia totaled approximately $1.018 billion. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION Subsequent to the Spinoff, the consolidated financial statements include the accounts of Solutia and its majority owned subsidiaries. Other companies in which Solutia has a significant interest (20 to 50 percent) are included in "Investments in Affiliates" in the Statement of Consolidated Financial Position. Solutia's share of these companies' net earnings or losses is reflected in "Equity earnings from affiliates" in the Statement of Consolidated Income. Prior to the Spinoff, the consolidated financial statements included the accounts of Solutia as described in Note 1. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and temporary investments with maturities of three months or less when purchased. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and that affect revenues and expenses during the period reported. Estimates are adjusted when necessary to reflect actual experience. Significant estimates are used to account for the allocation between Monsanto and Solutia of financial statement amounts, restructuring reserves, environmental reserves, self-insurance reserves, employee benefit plans, asset impairments, and contingencies. CURRENCY TRANSLATION The financial statements for most of Solutia's ex-U.S. operations are translated into U.S. dollars at current exchange rates. Unrealized currency adjustments in the Statement of Consolidated Financial Position are accumulated in equity. The financial statements of ex-U.S. entities that operate in hyperinflationary economies are translated at either current or historical exchange rates, as appropriate. These currency adjustments are included in net income. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost. The cost of plant and equipment is depreciated over weighted average periods of 18 33 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ years for buildings and 10 years for machinery and equipment, by the straight-line method. IMPAIRMENT OF LONG-LIVED ASSETS Impairment tests of long-lived assets are made when conditions indicate a possible loss. Such impairment tests are based on a comparison of undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset value is written down to its fair value based upon discounted cash value, using an appropriate discount rate. INVENTORY VALUATION Inventories are stated at cost or market, whichever is less. Actual cost is used to value raw materials and supplies. Standard cost, which approximates actual cost, is used to value finished goods and goods in process. Standard cost includes direct labor and raw materials, and manufacturing overhead based on practical capacity. The cost of certain inventories (77 percent as of December 31, 1997) is determined by the last-in, first-out ("LIFO") method, which generally reflects the effects of inflation or deflation on cost of goods sold sooner than other inventory cost methods. The cost of other inventories generally is determined by the first-in, first-out ("FIFO") method. INCOME TAXES Subsequent to the Spinoff, Solutia became responsible for its income taxes and will file its own income tax returns. Prior to the Spinoff, the company did not file separate tax returns because its results were included in the income tax returns filed by Monsanto and its subsidiaries in various U. S. and ex-U. S. jurisdictions. The tax provisions reflected in the Statement of Consolidated Income, for periods prior to the Spinoff, have been computed as if Solutia was a separate company. The company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted rates. EARNINGS PER SHARE Effective December 31, 1997, Solutia adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." Under this new standard, the presentation of primary and fully diluted earnings per share required by current standards is replaced by basic and diluted earnings per share. Basic earnings per share measures operating performance assuming no dilution from securities or contracts to issue common stock. Diluted earnings per share measures operating performance giving effect to the dilution that would occur when securities or contracts to issue common stock are exercised or converted. This change and the amounts associated with it are more fully described in Note 14. For periods ended prior to the Spinoff, the number of weighted average shares outstanding and common share equivalents used in the earnings per share calculation was based upon the weighted average number of Monsanto shares outstanding and Monsanto common share equivalents for the applicable period, adjusted for the distribution ratio in the Spinoff of one share of the company's common stock for every five shares of Monsanto common stock. ENVIRONMENTAL REMEDIATION Costs for remediation of waste disposal sites are accrued in the accounting period in which the obligation is probable and when the cost is reasonably estimable. Postclosure costs for hazardous and other waste facilities at operating locations are accrued over the estimated life of the facility as part of its anticipated closure cost. Environmental liabilities are not discounted, and they have not been reduced for any claims for recoveries from insurance or third parties. In those cases where insurance carriers of third-party indemnitors have agreed to pay any amounts and management believes that collectibility of such amounts is probable, the amounts are reflected as receivables in the consolidated financial statements. Effective January 1, 1997, Solutia adopted the American Institute of Certified Public Accountants' Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities." SOP 96-1 establishes authoritative guidance regarding the recognition, measurement and disclosure of environmental remediation liabilities. The primary change in Solutia's accounting principles associated with the adoption of this SOP was an acceleration of the recognition of certain environmental remediation liabilities at operating facilities. This change and the amounts associated with it are more fully described in Note 16. DERIVATIVE FINANCIAL INSTRUMENTS Currency forward contracts are used to manage currency exposures for financial instruments denominated in currencies other than the entity's functional currency. Gains and losses on contracts that are designated and effective as hedges are included in net income and offset the exchange gain or loss of the transaction being hedged. Major currencies effecting the company's business are the U.S. dollar, the British pound sterling, the Belgian franc, and the German deutsche mark. Currency restrictions are not expected to have a significant effect on Solutia's cash flow, liquidity, or capital resources. 3. INTERCOMPANY TRANSACTIONS Transactions with Monsanto prior to the Spinoff, included in the Statement of Consolidated Income, are summarized as follows:
Year Ended December 31, ----------------------------------------- 1997 1996 1995 ----------------------------------------- Intercompany sales $42 $63 $75 General and administrative services 12 85 72 Interest expense 26 36 36
34 18 SOLUTIA INC. - ------------------------------------------------------------------------------ Intercompany sales were made at Monsanto's established transfer prices. In addition, the costs for certain general and administrative services were allocated to Solutia. As further discussed in Note 1, Monsanto discontinued its allocation of the cost of general and administrative expenses to Solutia, effective April 1, 1997, as part of its transition plan of separation. Such expenses were specifically identified and segregated as part of Solutia's ongoing cost infrastructure. Interest expense charged to Solutia represents an allocation from Monsanto of its total interest expense. 4. RESTRUCTURING AND OTHER ACTIONS Items that affected Solutia's results of operations in 1997 included a first quarter charge of $10 million ($6 million aftertax) associated with the adoption of the SOP 96-1 which is further discussed in Note 16. The second quarter of 1997 included a charge of $10 million ($6 million aftertax) for environmental-related litigation. This charge resulted from a settlement that Monsanto reached with 811 plaintiffs in six lawsuits related to the Brio Superfund site near Houston, Texas. The suits were among eleven suits brought in Harris County District Court or the United States District Court for the Southern District of Texas on behalf of 960 plaintiffs who claimed injuries resulting from alleged exposure to substances present at or emanating from the Brio site. In addition, the second quarter included $8 million ($5 million aftertax) of reversals of excess restructuring reserves from prior years. The excess was primarily the result of lower exit costs associated with the sale and closure of nonstrategic facilities included in 1995 restructuring actions. The fourth quarter of 1997 included charges of $72 million ($46 million aftertax) associated with changes in estimates for environmental remediation liabilities. These charges are discussed further in Note 16. In December 1996, Solutia recorded pretax restructuring charges totaling $256 million ($164 million aftertax) to cover the costs associated with the closure or sale of certain facilities, asset write-offs, and workforce reductions. Included in these charges were pretax amounts for asset impairments totaling $56 million. These write-offs were necessary primarily because of excess production capacity, coupled with insufficient demand for certain products. Asset values were written down to their discounted cash values, using appropriate discount rates. Significant progress was made on this plan in 1997, with employment being reduced by approximately 600 people. In December 1995, Monsanto's board of directors approved a restructuring plan. The pretax charge associated with these actions was $66 million ($57 million aftertax) and covered the costs of work force reductions, business consolidations, facility closures, and the exit from nonstrategic businesses and facilities. This plan was substantially completed by the end of 1996 and reduced employment by approximately 100 people. In December 1994, Monsanto and Akzo Nobel N.V. agreed to form a 50-50 joint venture by combining their respective rubber chemicals businesses. The venture partners agreed to bear the one-time costs required to integrate their respective rubber chemicals businesses into the joint venture. For Solutia, these integration costs, which totaled $40 million pretax ($25 million aftertax), were primarily for the cost of reducing the work force by approximately 120 people and for special termination benefits for approximately 300 people transferring from Solutia to the joint venture. The charge for these actions was recorded in the first quarter of 1995. On May 1, 1995, the joint venture, known as Flexsys, L.P. (" Flexsys"), began operation and is accounted for as an equity affiliate. Accordingly, Solutia's share of the earnings of Flexsys after that date has been reflected in "Equity earnings from affiliates" in the Statement of Consolidated Income. Solutia's results of operations for 1995 included net sales of $140 million from the rubber chemicals business. Operating income for this business during these periods was not significant. Other items that affected Solutia's results of operations in 1995 included the receipt in the first and third quarters of settlement payments from various insurers related to environmental and other insurance litigation. The combined effect of these settlements totaled $88 million pretax ($55 million aftertax). In addition, Monsanto settled a lawsuit related to a Comprehensive Environmental Response, Compensation and Liability site, commonly known as a "Superfund" site, in La Marque, Texas. The suit was brought by IT Corporation ("IT"), a subsidiary of International Technology Corp., and claimed, among other things, breach of a contract calling for IT to perform incineration and remediation work at the site. Monsanto settled the suit by paying $41 million pretax ($25 million aftertax), and Solutia recorded the payment in the third quarter of 1995. The components of the pretax expense (income) related to the restructuring programs and the other actions included in the accompanying Statement of Consolidated Income were:
1997 1996 1995 ----------------------------------------- Changes in estimates for environmental reserves and application of SOP 96-1 $82 Cost of employee reductions $157 $ 22 Shutdown and consolidation of various facilities and departments (8) 33 44 Asset impairments 56 Insurance-related settlement (income) (88) Litigation settlement 10 41 Joint venture integration costs 40 Other costs 10 ----------------------------------------- TOTAL $84 $256 $ 59 =========================================
35 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ Restructuring expenses are recorded based on estimates prepared at the time the restructuring actions are approved by the board of directors. The balance in restructuring reserves as of December 31, 1997, was $104 million. It is earmarked primarily for work force reduction costs and the costs associated with the consolidation of various facilities and departments. Management believes that the balance of these reserves as of December 31, 1997, is adequate for completion of those activities. Restructuring actions during the last three years have reduced these liabilities by approximately $350 million. Approximately 60 percent of these reductions were recorded for write-offs and expenditures related to the shutdown and consolidation of various facilities and departments. The remaining reductions were related primarily to the cost of work force reduction programs. As of December 31, 1997, substantially all of the restructuring reserves established in 1995 had been utilized. The pretax expenses (income) related to the restructuring programs and the other unusual items were recorded in the Statement of Consolidated Income in the following categories:
1997 1996 1995 ----------------------------------------- Cost of goods sold $84 $ 56 $(7) Restructuring expenses - net 192 53 ---------------------------------------- Decrease in operating income 84 248 46 Other expense 8 13 ----------------------------------------- TOTAL DECREASE IN INCOME BEFORE INCOME TAXES $84 $256 $59 ========================================= In 1996 and 1995, other expense includes Solutia's share of restructuring actions undertaken for the Flexsys joint venture.
Net income was decreased by $53 million, $164 million, and $52 million in 1997, 1996, and 1995, respectively, because of these restructurings and other actions. 5. INVESTMENTS IN AFFILIATES At December 31, 1997, Solutia's investments in affiliates consisted principally of its 50 percent interests in the Flexsys rubber chemicals joint venture and the Advanced Elastomers Systems, L.P. ("AES") joint venture for which Solutia uses the equity method of accounting. Summarized combined financial information for the Flexsys and AES joint ventures follows:
1997 1996 1995 ------------------------------------------ Results of operations: Net sales $865 $779 $628 Net income 78 64 3 Financial position: Total assets $899 $853 $854 Total liabilities 254 237 290
6. INVENTORY VALUATION The components of inventories were:
1997 1996 ----------------------- Finished goods $ 259 $ 258 Goods in process 60 47 Raw materials and supplies 148 126 ------------------------ Inventories, at FIFO cost 467 431 Excess of FIFO over LIFO cost (142) (140) ------------------------ TOTAL $ 325 $ 291 =======================
Inventories at FIFO approximate current cost. The effect of LIFO inventory liquidations was not material in 1997, increased pretax income by $5 million in 1996 and was not material in 1995. 7. INCOME TAXES The components of income before income taxes were:
1997 1996 1995 ------------------------------------------- United States $187 $11 $221 Outside United States 103 22 10 ------------------------------------------- TOTAL $290 $33 $231 ===========================================
The components of income tax expense charged to operations were:
1997 1996 1995 ---------------------------------------- Current: U.S. federal $36 $ 13 $39 U.S. state 7 2 7 Outside United States 23 31 13 ---------------------------------------- 66 46 59 ---------------------------------------- Deferred: U.S. federal 19 (21) 23 U.S. state 2 (1) 3 Outside United States 11 (23) (1) ---------------------------------------- 32 (45) 25 ---------------------------------------- TOTAL $98 $ 1 $84 ========================================
Factors causing Solutia's effective tax rate to differ from the U.S. federal statutory rate were:
1997 1996 1995 ---------------------------------------- U.S. federal statutory rate 35% 35% 35% U.S. state income taxes 2 1 3 Tax benefit of foreign sales corporation (2) (23) (4) Taxes related to foreign income, net of credits - 3 4 Income from equity affiliates recorded net of tax (3) (13) (1) Other 2 - (1) ---------------------------------------- EFFECTIVE INCOME TAX RATE 34% 3% 36% ========================================
36 20 SOLUTIA INC. - ------------------------------------------------------------------------------ Deferred income tax balances were related to:
1997 1996 ------------------------- Property $(177) $(176) Postretirement benefits 394 248 Restructuring reserves 51 92 Environmental liabilities 80 57 Inventory (2) 4 Other 41 77 ------------------------- NET ASSET $ 387 $ 302 =========================
Income taxes and remittance taxes have not been recorded on $33 million in undistributed earnings of subsidiaries, either because any taxes on dividends would be offset substantially by foreign tax credits or because Solutia intends to reinvest those earnings indefinitely. It is not practicable to estimate the tax effect of remitting these earnings to the U.S. 8. DEBT OBLIGATIONS DEBT MATURING IN ONE YEAR Debt maturing in one year consisted principally of commercial paper balances, which totaled $190 million as of December 31, 1997. The weighted average interest rate on this debt was 6.99 percent as of December 31, 1997. Interest expense on commercial paper balances, charged to income subsequent to the Spinoff was at a weighted average rate of 5.78 percent. As of December 31, 1997, Solutia had a five-year revolving credit facility of $800 million with a syndicate of banks to support its commercial paper. The credit facility is also available for working capital and other general corporate purposes. Interest on amounts borrowed under this credit facility is expected to approximate money market rates. The credit agreement contains various covenants that, among other things, restrict the ability of Solutia to merge with another entity and that require Solutia to meet certain leverage and interest coverage ratios. The company does not anticipate that future borrowings will be limited by the terms of this agreement. No borrowings were outstanding under this credit facility as of December 31, 1997. LONG-TERM DEBT Long-term debt consisted of the following:
1997 1996 ------------------------- 6.5% notes due 2002 $150 $ - 7.375% debentures due 2027 300 - 6.72% debentures due 2037 150 - Unamortized debt discount (3) - ------------------------- TOTAL $597 $ - =========================
The notes and debentures are unsecured obligations. Interest is payable semiannually, on April 15 and October 15 of each year, commencing April 15, 1998. The 2037 debentures may be repaid on October 15, 2004 at the option of the holder. The notes and debentures contain provisions that, among other things, restrict Solutia's ability to create liens against assets and its ability to enter into sale and leaseback transactions. 9. FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair value of Solutia's long-term debt as of December 31, 1997, was $605 million. This estimate compares with the recorded amount of $597 million. The recorded amounts of cash, trade receivables, third-party guarantees, accounts payable and short-term debt approximate their fair values. The estimated fair value of the company's foreign currency forward contracts approximates their notional amounts. Fair values are estimated by the use of quoted market prices, estimates obtained from brokers, and other appropriate valuation techniques based upon information available as of December 31, 1997. The fair-value estimates do not necessarily reflect the values Solutia could realize in the current market. 10. POSTRETIREMENT BENEFITS - PENSIONS Prior to the Spinoff, Solutia's employees participated in Monsanto's noncontributory pension plans. In conjunction with the Spinoff, Solutia assumed pension liabilities and received related assets from those plans for its active employees and for certain former employees who left Monsanto in earlier years. Solutia's plans are substantially identical to Monsanto's plans. Pension benefits are based on the employee's years of service and/or compensation level. The pension plans are funded in accordance with Solutia's long-range projections of the plans' financial conditions. These projections take into account benefits earned and expected to be earned, anticipated returns on pension plan assets, and income tax and other regulations. The company's net pension cost was $28 million in 1997. It consisted of $9 million of net pension costs incurred subsequent to the Spinoff and $19 million of cost allocations from Monsanto. Solutia's net pension cost allocations from Monsanto were $18 million and $1 million in 1996 and 1995, respectively. Separate calculations of the components of Solutia's net pension cost and the funded status of the plans prior to the Spinoff are not available. Subsequent to the 37 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ Spinoff, the company's net pension cost was $9 million and its components were as follows:
1997 ------ Service costs for benefits earned $ 11 Interest cost on benefit obligation 52 Assumed return on plan assets (53) Amortization of unrecognized net gain (1) ------ TOTAL $ 9 ====== Actual return on plan assets was $44 million for the four months ended December 31, 1997.
The funded status of Solutia's pension plans at year-end was:
1997 -------- PLAN ASSETS AT FAIR VALUE $1,834 -------- Actuarial present value of plan benefits: Vested $1,538 Nonvested 107 -------- Accumulated benefit obligation 1,645 Effect of projected future salary increases 179 -------- PROJECTED BENEFIT OBLIGATION $1,824 -------- Excess of plan assets over projected benefit obligation $ 10 Less: Unrecognized initial net gain 33 Unrecognized prior service costs (178) Additional liability 14 Unrecognized subsequent net gain 269 -------- ACCRUED NET PENSION LIABILITY $ 128 ======== Included $27 million in 1997 for unfunded plans. Included $22 million in 1997 for unfunded plans.
The accrued net pension liability was included in:
1997 ------ Postretirement liabilities $136 Less: Other assets 8 ------ ACCRUED NET PENSION LIABILITY $128 ======
Included in the preceding table are plan assets and projected benefit obligations for the principal U.S. plan of approximately $1.762 billion and $1.732 billion, respectively, as of December 31, 1997. Plan assets consist principally of common stocks and U.S. government and corporate obligations. Contributions to these plans were neither required nor made in 1997 because Solutia's principal pension plan is adequately funded, using assumed returns. The significant actuarial assumptions used to estimate the projected benefit obligation for the company's principal pension plan were as follows:
1997 ------- Discount rate 7.25% Assumed long-term rate of return on plan assets 9.50% Annual rates of salary increase (for plans that base benefits on final compensation level) 4.00%
11. POSTRETIREMENT BENEFITS - HEALTH CARE AND OTHER In connection with the Spinoff, Solutia assumed retiree medical liabilities for its active employees and for approximately two-thirds of the retired U.S. employees of Monsanto. Solutia's employees participate in benefit programs that provide certain health care and life insurance benefits for retired employees. Substantially all regular, full-time U.S. employees and certain employees in other countries may become eligible for these benefits if they reach retirement age while employed by Solutia. These postretirement benefits are unfunded and are generally based on the employee's years of service and/or compensation level. The costs of postretirement benefits are accrued by the date the employees become eligible for the benefits. Solutia's postretirement benefit costs in 1997 were $54 million, which consisted of $23 million of postretirement benefit costs incurred subsequent to the Spinoff and $31 million of cost allocations from Monsanto. Solutia's postretirement benefit cost allocations from Monsanto were $50 million in 1996 and $54 million in 1995. Because of the significant increase in postretirement liabilities assumed in the Spinoff, future postretirement benefit costs are likely to increase when compared to historical amounts. Separate calculations of the components of Solutia's total cost for postretirement benefits and the status of the plans prior to the Spinoff are not available. Subsequent to the Spinoff, the company's postretirement benefit cost was $23 million, and its components were as follows:
1997 ------ Service costs for benefits earned $ 4 Interest cost on benefit obligation 20 Amortization of unrecognized net gain (1) ------ TOTAL $23 ======
As of December 31, the status of Solutia's postretirement health care and life insurance benefit plans, and employee disability benefit plans was:
1997 ------ ACCUMULATED BENEFIT OBLIGATION: Retirees $762 Eligible active employees 32 Other active employees 124 ------ TOTAL $918 Unrecognized benefits from prior service 27 Unrecognized subsequent net loss (32) ------ ACCRUED LIABILITY $913 ======
The accrued liability was included in:
1997 ------ Miscellaneous accruals $ 91 Postretirement liabilities 822 ------ ACCRUED LIABILITY $913 ======
38 22 SOLUTIA INC. - ------------------------------------------------------------------------------ Postretirement benefit costs were determined using the following rate assumptions:
1997 ------ Discount rate 7.25% Initial trend rate for health care costs 5.00% Ultimate trend rate for health care costs 5.00%
A 1 percent increase in the assumed trend rate for health care costs would have increased the accumulated benefit obligation by $38 million as of December 31, 1997. 12. EMPLOYEE SAVINGS PLANS For some employee savings plans, employee contributions are matched in part by Solutia. The value of these contributions for Solutia was $10 million in 1997 and $11 million in 1996 and 1995. In connection with the Spinoff, Monsanto common stock held by the Monsanto Employee Stock Ownership Plan ("ESOP") and related Monsanto ESOP borrowings were allocated between Solutia and Monsanto. As a result of this allocation, Solutia received 2.4 million shares of Monsanto common stock and assumed $29 million of ESOP debt to third parties. Simultaneously, Solutia created its own ESOP, established a trust to hold the Monsanto shares and issued a $29 million loan to the trust. Proceeds of the loan were used by the trust to repay the assumed third-party debt. Subsequent to the Spinoff, the ESOP trust was required by government regulations to divest its holdings of Monsanto common shares and use the proceeds to acquire Solutia common shares. As of December 31, 1997, Solutia's ESOP trust held approximately 9.9 million shares of Solutia common stock and approximately $21 million of cash. A portion of the ESOP shares is allocated each year to employee savings accounts as matching contributions. In 1997, 232,674 shares were allocated to participants' accounts under the plan, leaving 3,700,792 unallocated shares as of December 31, 1997. Unallocated shares held by the ESOP are considered outstanding for earnings per share calculations. Compensation expense is equal to the cost of the shares allocated to participants, less dividends paid on the shares held by the ESOP. Information regarding the ESOP follows:
1997 1996 1995 ------------------------------------------ Total ESOP expense $ 5 $ 3 $ 5 Interest portion of total ESOP expense 3 2 3 Cash contributions - - - 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 to officers and employees of the company and its subsidiaries incentives directly linked to the price of Solutia's stock. The 1997 Plan is the company's current stock-based incentive plan for management. The 1997 Plan authorizes up to 7,800,000 shares of company common stock for grants of non-qualified and incentive stock options, stock appreciation rights, restricted stock awards, and bonus stock awards. Shares used may be either newly issued shares or treasury shares or both. Under the 1997 Plan, the exercise price of a stock option must be no less than the fair market value of the company common stock on the grant date. Additionally, the 1997 Plan provides that the term of any stock option granted under the plan may not exceed ten years. As of December 31, 1997, approximately 3,232,275 shares of company common stock remained available for grants under the 1997 Plan. During 1997, non-qualified stock options granted under the 1997 Plan were 1,046,000 to all current executive officers and other senior executives as a group and 3,519,500 shares to all other employees at an exercise price of $19.25 per share. The options granted in September 1997 to the company's executive officers and other senior executives are accelerated performance options. The options granted to the other management employees are time-based. They become exercisable in thirds, one-third on each of the first three anniversaries of the option grant date. Certain options granted under Monsanto's stock option plans ("Monsanto Options") to company employees in 1997 prior to the Spinoff were converted into Solutia options with adjustments to preserve their value. In addition, unexercised Monsanto Options granted to Solutia and Monsanto employees prior to 1997 were converted into two awards, one based on Monsanto common stock and one based on Solutia common stock, with the same overall value at the time of the Spinoff as the old award. Effective January 1, 1996, Solutia adopted Statement of Financial Accounting Standard ("SFAS") No.123, "Accounting for Stock-Based Compensation." As permitted by the standard, Solutia has elected to continue following the guidance of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," for measurement and recognition of stock-based transactions with employees. Accordingly, no compensation cost has been recognized for Solutia's option plans. Had the determination of compensation cost for these plans been based on the fair value at the grant dates for awards under these plans, consistent with the method of SFAS 39 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ No. 123, Solutia's net income would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 ------------------------------------------- NET INCOME: As reported $ 192 $ 32 $ 147 Pro forma 159 18 144 EARNINGS PER SHARE, ASSUMING DILUTION: As reported $1.55 $0.27 $1.27 Pro forma 1.29 0.15 1.24
The resulting compensation expense may not be representative of compensation expense to be incurred on a pro forma basis in future years. The fair value of each option grant is estimated on the date of grant by using the Black-Scholes option-pricing model. The following weighted-average assumptions were used to calculate the expense attributable to the company for Monsanto Options granted to company employees in 1997, 1996 and 1995:
1997 1996 1995 ------------------------------------------ Expected dividend yield 0.3% 1.5% 3.0% Expected volatility 27.0% 25.0% 20.0% Risk-free interest rates 6.3% 6.0% 7.1% Expected option lives (years) 4.0 4.0 4.5
The following weighted-average assumptions were used for grants of Solutia options in 1997:
1997 ------- Expected dividend yield 0.2% Expected volatility 25.0% Risk-free interest rates 5.9% Expected option lives (years) 4.0
The weighted-average fair values of options granted during 1997 and 1996 were $4.83 and $6.43, respectively. A summary of the status of the company's stock option plans for the period subsequent to the Spinoff through December 31, 1997 follows:
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 ======================================================
The following tables summarize information about stock options outstanding as of December 31, 1997: OPTIONS OUTSTANDING:
Weighted-Average Range of Remaining Weighted-Average Exercise Prices Shares Contractual Life Exercise Price - --------------------------------------------------------------------------------- $ 3 to 7 5,627,732 3.6 years $ 5.73 8 to 11 55,479 6.9 10.07 12 to 15 1,722,939 7.5 12.63 16 to 18 15,660,834 7.9 16.47 19 to 23 4,750,744 9.0 19.30 ---------------------------------------------------------- $ 3 to 23 27,817,728 7.2 $14.53 ==========================================================
OPTIONS EXERCISABLE:
Range of Weighted-Average Exercise Prices Shares Exercise Price - ------------------------------------------------------------- $ 3 to 7 5,623,032 $5.73 8 to 11 44,729 10.18 12 to 15 1,098,815 12.16 16 to 18 2,705,082 16.82 19 to 23 46,200 19.11 ---------------------------------- $ 3 to 23 9,517,858 $9.71 ==================================
14. EARNING PER SHARE Effective December 31, 1997, Solutia adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." Under this new standard, the presentation of primary and fully diluted earnings per share required by current standards is replaced by basic and diluted earnings per share. Basic earnings per share measures operating performance assuming no dilution from securities or contracts to issue common stock. Diluted earnings per share measures operating performance giving effect to the dilution that would occur when securities or contracts to issue common stock are exercised or converted. For periods ended prior to the Spinoff, the number of weighted average shares outstanding and common share equivalents used in the earnings per share calculation was based upon the weighted average number of Monsanto shares outstanding and Monsanto common share equivalents for the applicable period, adjusted for the distribution ratio in the Spinoff of one share of the company's common stock for every five shares of Monsanto common stock. 40 24 SOLUTIA INC. - ------------------------------------------------------------------------------ The computation of basic earnings per share is reconciled with diluted earnings per share as follows:
Per-share 1997 Income Shares Amount - ------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE: Net income $192 117.7 $1.63 ======== EFFECT OF DILUTIVE SECURITIES: Common share equivalents - common stock issuable upon exercise of outstanding stock options 6.0 ----------------------- DILUTED EARNINGS PER SHARE $192 123.7 $1.55 ============================================ Per-share 1996 Income Shares Amount - ------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE: Net income $ 32 116.2 $0.28 ======== EFFECT OF DILUTIVE SECURITIES: Common share equivalents - common stock issuable upon exercise of outstanding stock options 3.6 ----------------------- DILUTED EARNINGS PER SHARE $ 32 119.8 $0.27 ============================================ Per-share 1995 Income Shares Amount - ------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE: Net income $147 113.5 $1.30 ======== EFFECT OF DILUTIVE SECURITIES: Common share equivalents - common stock issuable upon exercise of outstanding stock options 2.6 ----------------------- DILUTED EARNINGS PER SHARE $147 116.1 $1.27 ============================================
15. CAPITAL STOCK The company's board of directors declared a dividend of one preferred stock purchase right on each share of the company's common stock issued in the distribution of shares by Monsanto to its stockholders on the effective date of the Spinoff. If a person or group acquires beneficial ownership of 20 percent or more, or announces a tender offer that would result in beneficial ownership of 20 percent or more, of the company's outstanding common stock, the rights become exercisable and for every right held, the owner will be entitled to purchase one one-hundredth of a share of a series of preferred stock for $125. If Solutia is acquired in a business combination transaction while the rights are outstanding, for every right held, the holder will be entitled to purchase, for $125, common shares of the acquiring company having a market value of $250. In addition, if a person or group acquires beneficial ownership of 20 percent or more of the company's outstanding common stock, for every right held, the holder (other than such person or members of such group) will be entitled to purchase, for $125, a number of shares of the company's common stock having a market value of $250. Furthermore, at any time after a person or group acquires beneficial ownership of 20 percent or more (but less than 50 percent) of the company's outstanding common stock, the board of directors may, at its option, exchange part or all of the rights (other than rights held by the acquiring person or group) for shares of the company's common stock on a one share-for-every-one-right basis. At any time prior to the acquisition of such a 20 percent position, the company can redeem each right for $0.01. The board of directors is also authorized to reduce the aforementioned 20 percent thresholds to not less than 10 percent. The rights expire in the year 2007. The company has 10 million shares of preferred stock, par value $0.01 per share, authorized. As of December 31, 1997, there were no preferred shares issued or outstanding. 16. COMMITMENTS AND CONTINGENCIES Commitments, principally in connection with uncompleted additions to property, were approximately $21 million as of December 31, 1997. Solutia was contingently liable as a guarantor for bank loans totaling approximately $12 million as of December 31, 1997. Monsanto was contingently liable as a guarantor for bank loans and discounted customers' receivables relating to Solutia totaling approximately $16 million as of December 31, 1996. Solutia's future minimum payments under noncancelable operating leases and unconditional purchase obligations are $23 million for 1998, $17 million for 1999, $12 million for 2000, $8 million for 2001, $41 million for 2002, and $15 million thereafter. Solutia has entered into agreements with customers to supply a guaranteed quantity of certain products annually at prices specified in the agreements. In return, the customers have advanced funds to Solutia to cover the costs of expanding capacity to provide the guaranteed supply. Solutia has recorded the advances as deferred credits and amortizes the amounts to income as the customers purchase the products. At December 31, 1997, the unamortized deferred credits were approximately $59 million. The more significant concentrations in Solutia's trade receivables at year-end were:
1997 1996 ------------------------ U.S. chemical industry $130 $129 U.S. carpet industry 73 79 European chemical industry 41 36
Management does not anticipate losses on its trade receivables in excess of established allowances. 41 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------- Solutia's Statement of Consolidated Financial Position included accrued liabilities of $217 million and $150 million as of December 31, 1997 and 1996, respectively, for the remediation of identified waste disposal sites. Expenditures related to remediation activities were $39 million in 1997, $59 million in 1996, and $68 million in 1995. Solutia recorded charges of approximately $34 million ($22 million aftertax) in the fourth quarter of 1997 to increase its environmental reserves. This action was required in order to reflect revised estimates for changed circumstances relating to the ultimate outcome of previously known environmental matters. These revised estimates were based upon further discussions with environmental authorities and the availability of new information from recently completed environmental studies. These events and activities help to define better and to quantify the company's ultimate liability for these matters. Effective January 1, 1997, Solutia adopted the American Institute of Certified Public Accountants' Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities." SOP 96-1 establishes authoritative guidance regarding the recognition, measurement and disclosure of environmental remediation liabilities. A charge of approximately $10 million ($6 million aftertax) was recorded in the first quarter of 1997 associated with the adoption of SOP 96-1. The timing of this charge was predicated upon an application of SOP 96-1 in which liabilities arising under the Resource Conservation and Recovery Act ("RCRA") should be recorded when a RCRA corrective measures study ("CMS") is completed. Subsequently, the company reassessed its application of SOP 96-1 and concluded that these liabilities would be recorded over a continuum of events leading up to and including a CMS. As a result, the company recorded in the fourth quarter of 1997 additional charges of approximately $38 million ($24 million aftertax) associated with these RCRA environmental liabilities. Uncertainties related to all of the company's environmental liabilities are evolving government regulations, the method and extent of remediation and future changes in technology. Because of these uncertainties, the company estimates that potential future expenses associated with these liabilities could be an additional $20 million to $30 million. Although the ultimate costs and results of remediation of contaminated sites cannot be predicted with certainty, they are not expected to result in a material adverse effect on Solutia's consolidated financial position, liquidity, or profitability in any one year. Monsanto is a party to a number of lawsuits and claims relating to Solutia, for which Solutia has assumed responsibility in the Spinoff and which Solutia intends to defend vigorously. Such matters arise out of the normal course of business and relate to product liability, government regulation, including environmental issues, and other issues. Certain of the lawsuits and claims seek damages in very large amounts. Although the results of litigation cannot be predicted with certainty, management's belief, based upon the advice of Solutia's counsel, is that the final outcome of such litigation will not have a material adverse effect on Solutia's consolidated financial position, profitability or liquidity in any one year, as applicable. 17. SUPPLEMENTAL DATA Supplemental income statement data were:
1997 1996 1995 -------------------------------------------- Raw material and energy costs $1,102 $1,059 $929 Employee compensation and benefits 746 715 794 Current income and other taxes 149 134 152 Rent expense 28 29 31 Technological expenses: Research and development 60 81 77 Engineering, commercial development and patent 27 7 18 -------------------------------------------- Total technological expenses 87 88 95 Interest expense: Total interest cost 49 41 42 Less capitalized interest 8 5 6 -------------------------------------------- Net interest expense 41 36 36 Currency losses including equity in affiliates' currency gains and losses 6 2 3
18. SEGMENT AND GEOGRAPHIC DATA Effective December 31, 1997, Solutia adopted Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information," which redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. The required disclosures follow. As permitted by the standard, information for years prior to 1997 was not restated to conform to the new disclosure requirements because it was impracticable to do so. Solutia reported one segment prior to the adoption of SFAS No. 131. Solutia has three reportable segments: Chemicals, Fibers, and Polymers & Resins. The Chemicals segment produces intermediate chemicals used in other finished products, phosphorus-based products used in food and beverages and personal care products, and specialty fluids and lubricants. The Fibers segment produces Acrilan(R) acrylic fibers used in apparel, cloth and brake fibers; nylon carpet fibers for residential and contract markets; and industrial-strength nylon fibers used in tire and other industrial applications. The Polymers & Resins segment produces Saflex(R) plastic interlayer used in automotive and architectural applications, specialty resins used in paints and adhesives, polymer modifiers and plasticizers used in flooring products, sealants, caulks, and adhesives, and Vydyne(R) for engineering thermoplastics and nylon 6,6 polymers for fiber applications. 42 26 SOLUTIA INC. - ------------------------------------------------------------------------------ Solutia's reportable segments are groupings of the company's ten business units, which are managed to focus on key technological strengths of polymer chemistry, phosphorus chemistry, fiber technology, and process engineering expertise. Business units sharing similar economic characteristics and similarities in the areas of products, production processes, types of customers, and methods of distribution were aggregated. Accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 2. However, segment profit only reflects the operating expenses that are directly attributable to the segment. Unallocated service costs are managed centrally and primarily include costs of technology, engineering and manufacturing services that are provided to the segments. These amounts also include corporate administration costs. The company accounts for intersegment sales at agreed upon transfer prices. Intersegment sales are eliminated in consolidation. Segment assets consist primarily of customer receivables, finished goods inventories, and fixed assets directly associated with the production processes of the segment ("direct fixed assets"). Segment depreciation and amortization is based upon direct fixed assets. Unallocated assets consist primarily of deferred taxes, certain investments in equity affiliates, and indirect fixed assets. Solutia's 1997 segment information follows:
Net Intersegment Depreciation SEGMENT: Sales Sales and Amortization --------------------------------------------------- Chemicals $ 965 $ 18 $ 37 Fibers 979 - 26 Polymers & Resins 1,041 5 41 --------------------------------------------------- SEGMENT TOTALS 2,985 23 104 RECONCILIATION TO CONSOLIDATED TOTALS: Elimination of intersegment sales (23) (23) Other revenues 7 Unallocated depreciation and amortization 38 --------------------------------------------------- CONSOLIDATED TOTALS $2,969 $ - $142 =================================================== Capital SEGMENT: Profit Assets Expenditures --------------------------------------------------- Chemicals $ 231 $ 601 $ 50 Fibers 161 400 33 Polymers & Resins 272 571 55 --------------------------------------------------- SEGMENT TOTALS 664 1,572 138 RECONCILIATION TO CONSOLIDATED TOTALS: Less unallocated service costs included in: Cost of goods sold (148) Marketing, administrative and technological expenses (226) Equity earnings from affiliates 31 Interest expense (41) Other income (expense) - net 10 --------- INCOME BEFORE INCOME TAXES $ 290 ========= Unallocated assets and capital expenditures 1,196 27 --------------------------------- CONSOLIDATED TOTALS $2,768 $165 =================================
Solutia's geographic information for 1997 follows:
Net Long-Lived SEGMENT: Sales Assets --------------------------------- U.S. $2,030 $803 Other countries 939 120 --------------------------------- CONSOLIDATED TOTALS $2,969 $923 =================================
43 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ 19. QUARTERLY DATA - UNAUDITED
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ----------------------------------------------------------------- Net Sales 1997 $ 719 $ 770 $ 749 $ 731 $2,969 1996 705 749 753 770 2,977 Gross Profit 1997 176 189 173 115 653 1996 160 175 200 117 652 Operating Income (Loss) 1997 95 97 88 10 290 1996 56 62 96 (181) 33 Net Income (Loss) 1997 65 62 56 9 192 1996 36 47 61 (112) 32 Earnings (Loss) per Share 1997 0.56 0.52 0.47 0.08 1.63 1996 0.31 0.41 0.52 (0.96) 0.28 Earnings (Loss) per Share, assuming dilution 1997 0.54 0.51 0.44 0.06 1.55 1996 0.30 0.39 0.51 (0.93) 0.27
In the first quarter of 1997, net income included an aftertax charge of $6 million associated with the adoption of SOP 96-1 for environmental reserves at operating locations. Net income in the second quarter of 1997 included an aftertax charge of $6 million for environmental-related litigation at the Brio Superfund site and $5 million of aftertax reversals of excess restructuring reserves from prior years. In the fourth quarter of 1997, net income included aftertax charges totaling $46 million related to changes in estimates for environmental remediation liabilities. Net income for the fourth quarter of 1996 included an aftertax charge of $164 million for restructuring and other actions. 44 28 SOLUTIA INC. - ------------------------------------------------------------------------------ FINANCIAL SUMMARY (Dollars in millions, except per share)
Unaudited Pro Forma Historical -------------------------- ------------------------------------------- OPERATING RESULTS: 1997 1996 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- NET SALES $2,960 $2,962 $2,969 $2,977 $2,964 $3,097 $3,028 GROSS PROFIT 647 649 653 652 721 729 699 As percent of net sales 22% 22% 22% 22% 24% 24% 23% MARKETING, ADMINISTRATIVE AND TECHNOLOGICAL EXPENSES 393 420 363 427 410 439 438 As percent of net sales 13% 14% 12% 14% 14% 14% 14% OPERATING INCOME 254 37 290 33 258 256 300 As percent of net sales 9% 1% 10% 1% 9% 8% 10% INCOME BEFORE INCOME TAXES 235 9 290 33 231 228 290 NET INCOME 157 17 192 32 147 149 192 As percent of net sales 5% <1% 6% 1% 5% 5% 6% SHARE DATA: - ---------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE $ 1.33 $ 0.15 $ 1.63 $ 0.28 $ 1.30 $ 1.30 $ 1.61 EARNINGS PER SHARE, ASSUMING DILUTION 1.27 0.14 1.55 0.27 1.27 1.27 1.59 DIVIDENDS PER SHARE 0.01 COMMON STOCK PRICE: HIGH - - 27 3/4 - - - - LOW - - 18 11/16 - - - - CLOSE - - 26 11/16 - - - - PRICE/EARNINGS RATIO ON YEAR-END STOCK PRICE - - 17 - - - - NUMBER OF REGISTERED STOCKHOLDERS - - 57,894 - - - - YEAR-END SHARES OUTSTANDING (IN THOUSANDS) - - 117,408 - - - - SHARES REPURCHASED (IN THOUSANDS) - - 1,570 - - - - AVERAGE DAILY TRADING VOLUME (IN THOUSANDS) - - 1,053 - - - - OTHER DATA: - ---------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE $ 60 $ 64 $ 41 $ 36 $ 36 $ 29 $ 19 INCOME TAXES 78 (8) 98 1 84 79 98 DEPRECIATION AND AMORTIZATION 142 166 142 166 162 219 224 TOTAL ASSETS - 2,660 2,768 2,483 2,462 2,435 2,491 CAPITAL EXPENDITURES - - 165 192 179 187 179 INTERCOMPANY CHARGES - - 12 85 72 69 61 LONG-TERM DEBT - - 597 0 0 0 0 EMPLOYEES (YEAR-END) - - 8,800 - - - - The unaudited pro forma financial information is presented for illustrative purposes only. It may not be indicative of the results that would have been obtained had the Spinoff and the company's 1997 debt offering actually occurred on the dates assumed, nor is it indicative of the future consolidated results of operations. Net sales for the company included $140 million in 1995, $400 million in 1994 and $407 million in 1993 for its rubber chemicals business. In May 1995, this business was contributed by Monsanto to the Flexsys L.P. joint venture. Operating income includes (charges) credits for restructuring and other actions of $(84) million in 1997, $(248) million in 1996, $(46) million in 1995, $(34) million in 1994 and $43 million in 1993. In addition, operating income in 1993 includes $25 million for the company's rubber chemicals business. Operating income for this business was not significant in 1994 and 1995. Net income includes (charges) credits for restructuring and other actions of $(53) million, or $(0.43) per share in 1997, $(164) million, or $(1.37) per share in 1996, $(52) million, or $(0.45) per share in 1995, $(21) million, or $(0.18) per share in 1994, and $26 million, or $0.22 in 1993. 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 which management believes to be reasonable.
45 EX-18 4 PREFERABILITY LETTER 1 EXHIBIT 18 PREFERABILITY LETTER February 25, 1998 Solutia Inc. 10300 Olive Boulevard P.O. Box 66760 St. Louis, Missouri 63166-6760 To the Board of Directors: We have audited the financial statements of Solutia Inc. as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, included in your Annual Report on Form 10-K to the Securities and Exchange Commission, and have issued our report thereon dated February 25, 1998. Note 16 to such financial statements contains a description of your modification of the application of Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities" during the year ended December 31, 1997. In our judgment, such change is to an alternative accounting principle that is preferable under the circumstances. Yours truly, /S/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP St. Louis, Missouri EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The following is a list of Solutia's subsidiaries as of December 31, 1997, except for unnamed subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary.
Percentage of Voting Power Owned by Solutia ----------- Monchem International, Inc............................................ 100 Solutia Europe N.V. / S.A............................................. 100
22 EX-23.(A) 6 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23(a) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Solutia's Registration Statements on Form S-8 (Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, and 333-35689) of our opinions dated February 25, 1998 (which includes an explanatory paragraph as to a change in method of accounting), appearing in and incorporated by reference in this annual report on Form 10-K of Solutia Inc. for the year ended December 31, 1997. /S/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Saint Louis, Missouri March 13, 1998 -------------------------- EX-23.(B) 7 CONSENT OF COMPANY COUNSEL 1 EXHIBIT 23(b) CONSENT OF COMPANY COUNSEL I hereby consent to the reference to Solutia Counsel in the "Commitments and Contingencies" note to the financial statements in the Company's 1997 Annual Report to stockholders and incorporated in the Company's Registration Statements on Form S-8 (Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, and 333-35689). In giving this consent I do not thereby admit that I am within the category of persons whose consent is required under Section 7 of the Securities Act of 1933. /S/ KARL R. BARNICKOL KARL R. BARNICKOL General Counsel Solutia Inc. Saint Louis, Missouri March 13, 1998 23 EX-24.(A) 8 POWER OF ATTORNEY 1 EXHIBIT 24(a) POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS: That I, Robert T. Blakely, of Greenwich, State of Connecticut, Director of Solutia Inc. (the "Company"), a Delaware corporation with its general offices in the County of St. Louis, Missouri, do by these presents make, constitute and appoint KARL R. BARNICKOL and KAREN L. KNOPF, both of St. Louis County, Missouri, or either of them acting alone, to be my true and lawful attorneys for me and in my name, place and stead, to execute and sign: (i) the Annual Report on Form 10-K and any Amendments thereto to be filed with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8 and any Amendments thereto to be filed with the Commission under the Securities Act of 1933, as amended (the "Act"), covering the registration of additional securities of the Company to be issued under the Solutia Inc. ERISA Parity Savings and Investment Plan; (iii) any Amendments to Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been filed with the Commission under the Act, covering the registration of securities of the Company, or any new Registration Statements on Form S-8 covering the registration of additional shares of Common Stock of the Company to be issued under the benefit and incentive plans registered on these aforementioned Registration Statements which have been previously filed with the Commission; and (iv) any Registration Statements on Form S-8 and any amendments thereto to be filed with the Commission under the Act, covering the registration of the Company's securities to be issued under new deferral plans; giving and granting unto said attorneys full power and authority to do and perform such actions as fully as I might have done or could do if personally present and executing any of said documents. Witness my hand this 16th day of January, 1998. /s/ Robert T. Blakely ----------------------------------- Robert T. Blakely STATE OF CONNECTICUT ) ) SS COUNTY OF FAIRFIELD ) On this 16th day of January, 1998, before me personally appeared Robert T. Blakely, to me known to be the person described in and who executed the foregoing instrument, and acknowledged that he executed the same as his free act and deed. /s/ Patricia A. Olin ----------------------------------- Notary Public My Commission Expires: Patricia A. Olin Notary Public, State of Connecticut No. 115196 Commission Expires April 30, 2002 2 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS: That I, Joan T. Bok, of Boston, Commonwealth of Massachusetts, Director of Solutia Inc. (the "Company"), a Delaware corporation with its general offices in the County of St. Louis, Missouri, do by these presents make, constitute and appoint KARL R. BARNICKOL and KAREN L. KNOPF, both of St. Louis County, Missouri, or either of them acting alone, to be my true and lawful attorneys for me and in my name, place and stead, to execute and sign: (i) the Annual Report on Form 10-K and any Amendments thereto to be filed with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8 and any Amendments thereto to be filed with the Commission under the Securities Act of 1933, as amended (the "Act"), covering the registration of additional securities of the Company to be issued under the Solutia Inc. ERISA Parity Savings and Investment Plan; (iii) any Amendments to Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been filed with the Commission under the Act, covering the registration of securities of the Company, or any new Registration Statements on Form S-8 covering the registration of additional shares of Common Stock of the Company to be issued under the benefit and incentive plans registered on these aforementioned Registration Statements which have been previously filed with the Commission; and (iv) any Registration Statements on Form S-8 and any amendments thereto to be filed with the Commission under the Act, covering the registration of the Company's securities to be issued under new deferral plans; giving and granting unto said attorneys full power and authority to do and perform such actions as fully as I might have done or could do if personally present and executing any of said documents. Witness my hand this 8th day of January, 1998. /s/ Joan T. Bok ----------------------------------- Joan T. Bok COMMONWEALTH OF MASSACHUSETTS ) ) SS COUNTY OF SUFFOLK ) On this 8th day of January, 1998, before me personally appeared Joan T. Bok, to me known to be the person described in and who executed the foregoing instrument, and acknowledged that she executed the same as her free act and deed. /s/ Michelle McGee Curran ----------------------------------- Notary Public My Commission Expires: February 27, 1998 3 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS: That I, Paul H. Hatfield of St. Louis County, State of Missouri, Director of Solutia Inc. (the "Company"), a Delaware corporation with its general offices in the County of St. Louis, Missouri, do by these presents make, constitute and appoint KARL R. BARNICKOL and KAREN L. KNOPF, both of St. Louis County, Missouri, or either of them acting alone, to be my true and lawful attorneys for me and in my name, place and stead, to execute and sign: (i) the Annual Report on Form 10-K and any Amendments thereto to be filed with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8 and any Amendments thereto to be filed with the Commission under the Securities Act of 1933, as amended (the "Act"), covering the registration of additional securities of the Company to be issued under the Solutia Inc. ERISA Parity Savings and Investment Plan; (iii) any Amendments to Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been filed with the Commission under the Act, covering the registration of securities of the Company, or any new Registration Statements on Form S-8 covering the registration of additional shares of Common Stock of the Company to be issued under the benefit and incentive plans registered on these aforementioned Registration Statements which have been previously filed with the Commission; and (iv) any Registration Statements on Form S-8 and any amendments thereto to be filed with the Commission under the Act, covering the registration of the Company's securities to be issued under new deferral plans; giving and granting unto said attorneys full power and authority to do and perform such actions as fully as I might have done or could do if personally present and executing any of said documents. Witness my hand this 7th day of January, 1998. /s/ Paul H. Hatfield ----------------------------------- Paul H. Hatfield STATE OF MISSOURI ) ) SS COUNTY OF ST. LOUIS ) On this 7th day of January, 1998, before me personally appeared Paul H. Hatfield, to me known to be the person described in and who executed the foregoing instrument, and acknowledged that he executed the same as his free act and deed. /s/ Lisa K. Crawford ----------------------------------- Notary Public My Commission Expires: Lisa K. Crawford Notary Public -- State of Missouri Jefferson County My Commission Expires May 21, 1999 4 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS: That I, John C. Hunter III of St. Louis County, State of Missouri, President, Chief Operating Officer and Director of Solutia Inc. (the "Company"), a Delaware corporation with its general offices in the County of St. Louis, Missouri, do by these presents make, constitute and appoint KARL R BARNICKOL and KAREN L KNOPF, both of St. Louis County, Missouri, or either of them acting alone, to be my true and lawful attorneys for me and in my name, place and stead, to execute and sign: (i) the Annual Report on Form 10-K and any Amendments thereto to be filed with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8 and any Amendments thereto to be filed with the Commission under the Securities Act of 1933, as amended (the "Act"), covering the registration of additional securities of the Company to be issued under the Solutia Inc. ERISA Parity Savings and Investment Plan; (iii) any Amendments to Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been filed with the Commission under the Act, covering the registration of securities of the Company, or any new Registration Statements on Form S-8 covering the registration of additional shares of Common Stock of the Company to be issued under the benefit and incentive plans registered on these aforementioned Registration Statements which have been previously filed with the Commission; and (iv) any Registration Statements on Form S-8 and any amendments thereto to be filed with the Commission under the Act, covering the registration of the Company's securities to be issued under new deferral plans; giving and granting unto said attorneys full power and authority to do and perform such actions as fully as I might have done or could do if personally present and executing any of said documents. Witness my hand this 14th day of January, 1998. /s/ John C. Hunter ----------------------------------- John C. Hunter III STATE OF MISSOURI ) ) SS COUNTY OF ST. LOUIS ) On this 14th day of January, 1998, before me personally appeared John C. Hunter III, to me known to be the person described in and who executed the foregoing instrument, and acknowledged that he executed the same as his free act and deed. /s/ Mary K. McBride ----------------------------------- Notary Public My Commission Expires: February 12, 1998 Mary K. McBride Notary Public, State of Missouri My Commission Expires Feb. 12, 1998 St. Louis County 5 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS: That I, Robert H. Jenkins of Rockford, State of Illinois, Director of Solutia Inc. (the "Company"), a Delaware corporation with its general offices in the County of St. Louis, Missouri, do by these presents make, constitute and appoint KARL R. BARNICKOL and KAREN L KNOPF, both of St. Louis County, Missouri, or either of them acting alone, to be my true and lawful attorneys for me and in my name, place and stead, to execute and sign: (i) the Annual Report on Form 10-K and any Amendments thereto to be filed with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8 and any Amendments thereto to be filed with the Commission under the Securities Act of 1933, as amended (the "Act"), covering the registration of additional securities of the Company to be issued under the Solutia Inc. ERISA Parity Savings and Investment Plan; (iii) any Amendments to Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been filed with the Commission under the Act, covering the registration of securities of the Company, or any new Registration Statements on Form S-8 covering the registration of additional shares of Common Stock of the Company to be issued under the benefit and incentive plans registered on these aforementioned Registration Statements which have been previously filed with the Commission; and (iv) any Registration Statements on Form S-8 and any amendments thereto to be filed with the Commission under the Act, covering the registration of the Company's securities to be issued under new deferral plans; giving and granting unto said attorneys full power and authority to do and perform such actions as fully as I might have done or could do if personally present and executing any of said documents. Witness my hand this 7th day of January, 1998. /s/ Robert H. Jenkins ----------------------------------- Robert H. Jenkins STATE OF ILLINOIS ) ) SS COUNTY OF WINNEBAGO ) On this 7th day of January, 1998, before me personally appeared Robert H. Jenkins, to me known to be the person described in and who executed the foregoing instrument, and acknowledged that he executed the same as his free act and deed. /s/ Carolyn J. Thomas ----------------------------------- Notary Public My Commission Expires: Jan. 18, 1999 "Official Seal" Carolyn J. Thomas Notary Public, State of Illinois My commission Expires 1/18/99 6 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS: That I, Howard M. Love of Pittsburgh, Commonwealth of Pennsylvania, Director of Solutia Inc. (the "Company"), a Delaware corporation with its general offices in the County of St. Louis, Missouri, do by these presents make, constitute and appoint KARL R. BARNICKOL and KAREN L KNOPF, both of St. Louis County, Missouri, or either of them acting alone, to be my true and lawful attorneys for me and in my name, place and stead, to execute and sign: (i) the Annual Report on Form 10-K and any Amendments thereto to be filed with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8 and any Amendments thereto to be filed with the Commission under the Securities Act of 1933, as amended (the "Act"), covering the registration of additional securities of the Company to be issued under the Solutia Inc. ERISA Parity Savings and Investment Plan; (iii) any Amendments to Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been filed with the Commission under the Act, covering the registration of securities of the Company, or any new Registration Statements on Form S-8 covering the registration of additional shares of Common Stock of the Company to be issued under the benefit and incentive plans registered on these aforementioned Registration Statements which have been previously filed with the Commission; and (iv) any Registration Statements on Form S-8 and any amendments thereto to be filed with the Commission under the Act, covering the registration of the Company's securities to be issued under new deferral plans; giving and granting unto said attorneys full power and authority to do and perform such actions as fully as I might have done or could do if personally present and executing any of said documents. Witness my hand this 13th day of January, 1998. /s/ H. M. Love ----------------------------------- Howard M. Love COMMONWEALTH OF PENNSYLVANIA ) ) SS COUNTY OF ALLEGHENY ) On this 13th day of January, 1998, before me personally appeared Howard M. Love, to me known to be the person described in and who executed the foregoing instrument, and acknowledged that he executed the same as his free act and deed. /s/ Joan M. Zakor ----------------------------------- Notary Public My Commission Expires: Notarial Seal Joan M. Zakor, Notary Public City of Pittsburgh, Allegeny Co. My Commission Expires April 14, 1999 7 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS: That I, Frank A. Metz, Jr. of Sloatsburg, State of New York, Director of Solutia Inc. (the "Company"), a Delaware corporation with its general offices in the County of St. Louis, Missouri, do by these presents make, constitute and appoint KARL R. BARNICKOL and KAREN L KNOPF, both of St. Louis County, Missouri, or either of them acting alone, to be my true and lawful attorneys for me and in my name, place and stead, to execute and sign: (i) the Annual Report on Form 10-K and any Amendments thereto to be filed with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8 and any Amendments thereto to be filed with the Commission under the Securities Act of 1933, as amended (the "Act"), covering the registration of additional securities of the Company to be issued under the Solutia Inc. ERISA Parity Savings and Investment Plan; (iii) any Amendments to Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been filed with the Commission under the Act, covering the registration of securities of the Company, or any new Registration Statements on Form S-8 covering the registration of additional shares of Common Stock of the Company to be issued under the benefit and incentive plans registered on these aforementioned Registration Statements which have been previously filed with the Commission; and (iv) any Registration Statements on Form S-8 and any amendments thereto to be filed with the Commission under the Act, covering the registration of the Company's securities to be issued under new deferral plans; giving and granting unto said attorneys full power and authority to do and perform such actions as fully as I might have done or could do if personally present and executing any of said documents. Witness my hand this 28th day of January, 1998. /s/ Frank A. Metz, Jr. ----------------------------------- Frank A. Metz, Jr. STATE OF MISSOURI ) ) SS COUNTY OF ST. LOUIS ) On this 28th day of January, 1998, before me personally appeared Frank A. Metz, Jr., to me known to be the person described in and who executed the foregoing instrument, and acknowledged that he executed the same as his free act and deed. /s/ Helen Joanne Bonney ----------------------------------- Notary Public My Commission Expires: Helen Joanne Bonney Notary Public State of Missouri St. Louis County My Commission Exp. July 1, 2001 8 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS: That I, Robert G. Potter of St. Louis County, State of Missouri, Chairman and Chief Executive Officer ("Principal Executive Officer") and Director of Solutia Inc. (the "Company"), a Delaware corporation with its general offices in the County of St. Louis, Missouri, do by these presents make, constitute and appoint KARL R. BARNICKOL and KAREN L. KNOPF, both of St. Louis County, Missouri, or either of them acting alone, to be my true and lawful attorneys for me and in my name, place and stead, to execute and sign: (i) the Annual Report on Form 10-K and any Amendments thereto to be filed with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8 and any Amendments thereto to be filed with the Commission under the Securities Act of 1933, as amended (the "Act"), covering the registration of additional securities of the Company to be issued under the Solutia Inc. ERISA Parity Savings and Investment Plan; (iii) any Amendments to Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been filed with the Commission under the Act, covering the registration of securities of the Company, or any new Registration Statements on Form S-8 covering the registration of additional shares of Common Stock of the Company to be issued under the benefit and incentive plans registered on these aforementioned Registration Statements which have been previously filed with the Commission; and (iv) any Registration Statements on Form S-8 and any amendments thereto to be filed with the Commission under the Act, covering the registration of the Company's securities to be issued under new deferral plans; giving and granting unto said attorneys full power and authority to do and perform such actions as fully as I might have done or could do if personally present and executing any of said documents. Witness my hand this 14th day of January, 1998. /s/ Robert G. Potter ----------------------------------- Robert G. Potter STATE OF MISSOURI ) ) SS COUNTY OF ST. LOUIS ) On this 14th day of January, 1998, before me personally appeared Robert G. Potter, to me known to be the person described in and who executed the foregoing instrument, and acknowledged that he executed the same as his free act and deed. /s/ Mary K. McBride ----------------------------------- Notary Public My Commission Expires: Feb. 12, 1998 Mary K. McBride Notary Public, State of Missouri My Commission Expires Feb. 12, 1998 St. Louis County 9 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS: That I, William D. Ruckelshaus of Medina, State of Washington, Director of Solutia Inc. (the "Company"), a Delaware corporation with its general offices in the County of St. Louis, Missouri, do by these presents make, constitute and appoint KARL R. BARNICKOL and KAREN L KNOPF, both of St. Louis County, Missouri, or either of them acting alone, to be my true and lawful attorneys for me and in my name, place and stead, to execute and sign: (i) the Annual Report on Form 10-K and any Amendments thereto to be filed with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8 and any Amendments thereto to be filed with the Commission under the Securities Act of 1933, as amended (the "Act"), covering the registration of additional securities of the Company to be issued under the Solutia Inc. ERISA Parity Savings and Investment Plan; (iii) any Amendments to Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been filed with the Commission under the Act, covering the registration of securities of the Company, or any new Registration Statements on Form S-8 covering the registration of additional shares of Common Stock of the Company to be issued under the benefit and incentive plans registered on these aforementioned Registration Statements which have been previously filed with the Commission; and (iv) any Registration Statements on Form S-8 and any amendments thereto to be filed with the Commission under the Act, covering the registration of the Company's securities to be issued under new deferral plans; giving and granting unto said attorneys full power and authority to do and perform such actions as fully as I might have done or could do if personally present and executing any of said documents. Witness my hand this 8th day of January, 1998. /s/ William Ruckelshaus ----------------------------------- William D. Ruckelshaus STATE OF WASHINGTON ) ) SS COUNTY OF KING ) On this 8th day of January, 1998, before me personally appeared William D. Ruckelshaus, to me known to be the person described in and who executed the foregoing instrument, and acknowledged that he executed the same as his free act and deed. /s/ Diane L. Hodgson ----------------------------------- Notary Public My Commission Expires: 11/12/2001 10 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS: That I, John B. Slaughter of Pasadena, State of California, Director of Solutia Inc. (the "Company"), a Delaware corporation with its general offices in the County of St. Louis, Missouri, do by these presents make, constitute and appoint KARL R. BARNICKOL and KAREN L KNOPF, both of St. Louis County, Missouri, or either of them acting alone, to be my true and lawful attorneys for me and in my name, place and stead, to execute and sign: (i) the Annual Report on Form 10-K and any Amendments thereto to be filed with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8 and any Amendments thereto to be filed with the Commission under the Securities Act of 1933, as amended (the "Act"), covering the registration of additional securities of the Company to be issued under the Solutia Inc. ERISA Parity Savings and Investment Plan; (iii) any Amendments to Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been filed with the Commission under the Act, covering the registration of securities of the Company, or any new Registration Statements on Form S-8 covering the registration of additional shares of Common Stock of the Company to be issued under the benefit and incentive plans registered on these aforementioned Registration Statements which have been previously filed with the Commission; and (iv) any Registration Statements on Form S-8 and any amendments thereto to be filed with the Commission under the Act, covering the registration of the Company's securities to be issued under new deferral plans; giving and granting unto said attorneys full power and authority to do and perform such actions as fully as I might have done or could do if personally present and executing any of said documents. Witness my hand this 12th day of January, 1998. /s/ John B. Slaughter ----------------------------------- John B. Slaughter STATE OF CALIFORNIA ) ) SS COUNTY OF LOS ANGELES ) On this 12th day of January, 1998, before me personally appeared John B. Slaughter, to me known to be the person described in and who executed the foregoing instrument, and acknowledged that he executed the same as his free act and deed. /s/ Kay Lynn Fujiwara ----------------------------------- Notary Public My Commission Expires: Kay Lynn Fujiwara Commission #1149223 Notary Public -- California Los Angeles County My Comm. Expires Jul 31, 2001 11 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS: That I, Robert A. Clausen of St. Louis County, State of Missouri, Senior Vice President and Chief Financial Officer ("Principal Financial Officer") of Solutia Inc. (the "Company"), a Delaware corporation with its general offices in the County of St. Louis, Missouri, do by these presents make, constitute and appoint KARL R. BARNICKOL and KAREN L KNOPF, both of St. Louis County, Missouri, or either of them acting alone, to be my true and lawful attorneys for me and in my name, place and stead, to execute and sign: (i) the Annual Report on Form 10-K and any Amendments thereto to be filed with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8 and any Amendments thereto to be filed with the Commission under the Securities Act of 1933, as amended (the "Act"), covering the registration of additional securities of the Company to be issued under the Solutia Inc. ERISA Parity Savings and Investment Plan; (iii) any Amendments to Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been filed with the Commission under the Act, covering the registration of securities of the Company, or any new Registration Statements on Form S-8 covering the registration of additional shares of Common Stock of the Company to be issued under the benefit and incentive plans registered on these aforementioned Registration Statements which have been previously filed with the Commission; and (iv) any Registration Statements on Form S-8 and any amendments thereto to be filed with the Commission under the Act, covering the registration of the Company's securities to be issued under new deferral plans; giving and granting unto said attorneys full power and authority to do and perform such actions as fully as I might have done or could do if personally present and executing any of said documents. Witness my hand this 12th day of January, 1998. /s/ Robert A. Clausen ----------------------------------- Robert A. Clausen STATE OF MISSOURI ) ) SS COUNTY OF ST. LOUIS ) On this 12th day of January, 1998, before me personally appeared Robert A. Clausen, to me known to be the person described in and who executed the foregoing instrument, and acknowledged that he executed the same as his free act and deed. /s/ Helen Joanne Bonney ----------------------------------- Notary Public My Commission Expires: Helen Joanne Bonney Notary Public State of Missouri St. Louis County My Commission Exp. July 1, 2001 12 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS: That I, Roger S. Hoard of St. Louis County, State of Missouri, Vice President and Controller ("Principal Accounting Officer") of Solutia Inc. (the "Company"), a Delaware corporation with its general offices in the County of St. Louis, Missouri, do by these presents make, constitute and appoint KARL R. BARNICKOL and KAREN L KNOPF, both of St. Louis County, Missouri, or either of them acting alone, to be my true and lawful attorneys for me and in my name, place and stead, to execute and sign: (i) the Annual Report on Form 10-K and any Amendments thereto to be filed with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934; (ii) the Registration Statement on Form S-8 and any Amendments thereto to be filed with the Commission under the Securities Act of 1933, as amended (the "Act"), covering the registration of additional securities of the Company to be issued under the Solutia Inc. ERISA Parity Savings and Investment Plan; (iii) any Amendments to Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, and 333-35689, all on Form S-8, which have previously been filed with the Commission under the Act, covering the registration of securities of the Company, or any new Registration Statements on Form S-8 covering the registration of additional shares of Common Stock of the Company to be issued under the benefit and incentive plans registered on these aforementioned Registration Statements which have been previously filed with the Commission; and (iv) any Registration Statements on Form S-8 and any amendments thereto to be filed with the Commission under the Act, covering the registration of the Company's securities to be issued under new deferral plans; giving and granting unto said attorneys full power and authority to do and perform such actions as fully as I might have done or could do if personally present and executing any of said documents. Witness my hand this 7th day of January, 1998. /s/ Roger S. Hoard ----------------------------------- Roger S. Hoard STATE OF MISSOURI ) ) SS COUNTY OF ST. LOUIS ) On this 7th day of January, 1998, before me personally appeared Roger S. Hoard, to me known to be the person described in and who executed the foregoing instrument, and acknowledged that he executed the same as his free act and deed. /s/ Helen Joanne Bonney ----------------------------------- Notary Public My Commission Expires: Helen Joanne Bonney Notary Public State of Missouri St. Louis County My Commission Exp. July 1, 2001 EX-24.(B) 9 CERTIFICATE AUTHORIZING FORM 10-K FILINGS 1 EXHIBIT 24(b) SOLUTIA INC. CERTIFICATE I, Karen L. Knopf, Assistant Secretary of Solutia Inc. (the "Company"), hereby certify that the following is a full, true and correct copy of a resolution adopted by the Board of Directors of the Company on February 25, 1998, at which meeting a quorum was present and acting throughout: RESOLVED, that each officer and director who may be required to sign and execute the 10-K or any document in connection therewith (whether for and on behalf of the Company, or as an officer or director of the Company, or otherwise), be and hereby is authorized to execute a power of attorney appointing Karl R. Barnickol and Karen L. Knopf, or either of them acting alone, his or her true and lawful attorney or attorneys to sign in his or her name, place and stead in any such capacity such Form 10-K and any and all amendments thereto and documents in connection therewith, and to file the same with the Commission or any other governmental body, each of said attorneys to have power to act with or without the others, and to have full power and authority to do and perform, in the name and on behalf of each of said officers and directors, every act whatsoever which such attorneys, or any one of them, may deem necessary, appropriate or desirable to be done in connection therewith as fully and to all intents and purposes as such officers or directors might or could do in person. IN WITNESS WHEREOF, I have hereunto set my hand in my official capacity and affixed the corporate seal of the Company this 2nd day of March, 1998. /s/Karen L. Knopf ------------------------------- Karen L. Knopf Assistant Secretary SEAL EX-27 10 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Statement of Consolidated Income of Solutia Inc. for the year ended December 31, 1997, and the Statement of Consolidated Financial Position as of December 31, 1997. Such information is qualified in its entirety by reference to such consolidated financial statements. 1,000,000 12-MOS DEC-31-1997 DEC-31-1997 24 0 431 6 325 1,001 3,188 2,265 2,768 895 0 1 0 0 (132) 2,768 2,969 2,969 2,316 2,316 0 1 41 290 98 192 0 0 0 192 1.63 1.55
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