-----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, MkfVHqzxYXeh6fb0WQEqDf+J0/xiM33kcMP+Am93KmWS/nDqVzutSziq0jN3C0DX YDZYRAhDarF6oTXdIha+4Q== 0001047469-02-003477.txt : 20021118 0001047469-02-003477.hdr.sgml : 20021118 20021118160139 ACCESSION NUMBER: 0001047469-02-003477 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021118 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20021118 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13255 FILM NUMBER: 02831445 BUSINESS ADDRESS: STREET 1: 575 MARYVILLE CENTRE DRIVE STREET 2: P O BOX 66760 CITY: ST. LOUIS STATE: MO ZIP: 63166-6760 BUSINESS PHONE: 3146741000 MAIL ADDRESS: STREET 1: 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 8-K 1 a2094003z8-k.htm 8-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):
November 18, 2002

SOLUTIA INC.
(Exact name of Registrant as specified in its charter)

Delaware (State of other jurisdiction of incorporation)		001-13255 (Commission File Number)		43-1781797 (IRS Employer Identification No.)
575 Maryville Centre Drive, P.O. Box 66760, St. Louis, Missouri (Address of principal executive offices)				63166-6760 (zip code)

(314) 674-1000
(Registrant's telephone number, including area code)

N/A
(Former name or former address, if changed since last report)

Item 5. Other Events

We are filing this report solely in order to incorporate the Consolidated Financial Statements and Report of Independent Auditors filed as an exhibit to this report into our future filings pursuant to the Securities Act of 1933. Certain of the notes included in these statements have been added to reflect events that have occurred subsequent to the filing of our Annual Report on Form 10-K for the year ended December 31, 2001. All of these events have been previously disclosed in our Quarterly Reports on Form 10-Q.

Item 7. Financial Statements, Pro Forma Financial Information and Exhibits

Exhibit No.		Description
10.1		Protocol Agreement, dated as of November 15, 2002 by and among Pharmacia Corporation, Solutia Inc. and Monsanto Company.
23.1		Consent of Deloitte & Touche LLP.
99.1		Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

		SOLUTIA INC., a Delaware corporation
November 18, 2002		By:	/s/ J. M. SULLIVAN James M. Sullivan Vice President and Controller

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Item 5. Other Events

Item 7. Financial Statements, Pro Forma Financial Information and Exhibits

SIGNATURES
EX-10.1 3 a2094003zex-10_1.htm EX-10.1

EXECUTION COPY

PROTOCOL AGREEMENT

THIS PROTOCOL AGREEMENT, dated as of November 15, 2002 (this "Protocol Agreement"), by and among Pharmacia Corporation, a Delaware corporation, Solutia Inc., a Delaware corporation ("Solutia"), and Monsanto Company, a Delaware corporation.

W I T N E S S E T H:

WHEREAS, Former Monsanto (as defined below) and Solutia are parties to that certain Distribution Agreement, dated as of September 1, 1997 (the "Distribution Agreement"), which was entered into in connection with the distribution of the common stock of Solutia to the stockholders of Former Monsanto (the "Solutia Distribution");

WHEREAS, pursuant to the Distribution Agreement, among other things, Former Monsanto assigned and transferred the Chemicals Assets (as defined in the Distribution Agreement) to Solutia and Solutia assumed all of the Chemicals Liabilities (as defined in the Distribution Agreement) of Former Monsanto;

WHEREAS, pursuant to that certain Agreement and Plan of Merger, dated as of December 19, 1999 (the "Merger Agreement"), by and among the former Monsanto Company (which is the Delaware corporation identified in the introductory paragraph of this Protocol Agreement as "Pharmacia Corporation" and which is referred to herein as either "Former Monsanto" or "Pharmacia," as the context requires), MP Sub, Incorporated ("Merger Sub") and Pharmacia & Upjohn, Inc. ("PNU"), the parties agreed that Merger Sub would be merged with and into PNU with PNU surviving as a wholly-owned subsidiary of Former Monsanto in the merger (the "Merger");

WHEREAS, on February 9, 2000, the new Monsanto Company (which is the Delaware corporation identified in the introductory paragraph of this Protocol Agreement as "Monsanto Company" and which is referred to herein as either "New Monsanto" or "Monsanto," as the context requires) was incorporated as a wholly owned subsidiary of Former Monsanto under the name "Monsanto Ag Company";

WHEREAS, on March 31, 2000, (i) the Merger was effective, (ii) Former Monsanto changed its name from "Monsanto Company" to "Pharmacia Corporation," and (iii) New Monsanto changed its name from "Monsanto Ag Company" to "Monsanto Company";

WHEREAS, on September 1, 2000, New Monsanto and Pharmacia entered into certain agreements, including that certain Separation Agreement, dated as of September 1, 2000 (the "Separation Agreement"), pursuant to which, among other things, Pharmacia assigned and transferred certain assets related to its agricultural products business and certain other assets to New Monsanto and New Monsanto assumed certain liabilities relating thereto and all liabilities that were assumed by Solutia or any of its subsidiaries in connection with the Solutia Distribution to the extent that Solutia fails to pay, perform or discharge such liabilities;

WHEREAS, on July 1, 2002, (i) the parties hereto entered into a certain Amendment to the Distribution Agreement (the "Distribution Agreement Amendment") pursuant to which the assignment from Pharmacia to New Monsanto of certain assets and liabilities contemplated pursuant to the Separation Agreement (including certain of Pharmacia's rights and obligations under the Distribution Agreement) was effectuated and the relationship among the parties was preserved as nearly as possible with the original intent and terms of the Distribution Agreement, (ii) the parties hereto entered into that certain Protocol Agreement (the "Anniston Protocol Agreement") related to Sabarina Abernathy, et al. v. Monsanto Company, et al., Case No. CV01832 (the "Anniston Litigation") and pursuant to which the parties agreed on certain matters pertaining to the posting of an appeal bond with respect to, and control of decisions regarding settlement of, the Anniston Litigation; and (iii) Pharmacia and Monsanto entered into that certain First Amendment to Separation Agreement (the Separation Agreement, as so amended, being referred to as the "Amended Separation Agreement") pursuant to which those parties

clarified their respective rights and obligations relating to Monsanto's indemnification obligations under the Separation Agreement;

WHEREAS, pursuant to the Distribution Agreement, as amended by the Distribution Agreement Amendment (the "Amended Distribution Agreement"), Solutia agreed, among other things, to indemnify, defend and hold harmless the Monsanto Group (as defined in the Amended Distribution Agreement) from and against all Chemicals Liabilities;

WHEREAS, on August 13, 2002, Pharmacia distributed its entire ownership interest in Monsanto to the stockholders of Pharmacia;

WHEREAS, pursuant to its obligations under the Amended Distribution Agreement, Solutia has agreed to and has been defending Pharmacia in connection with Commonwealth of Pennsylvania et al. v. United States Mineral Products et al., Nos. 284 M.D., 244 M.D. (Penn. Comm. Ct.) (the "Pennsylvania Litigation");

WHEREAS, a jury verdict has been returned in the Pennsylvania Litigation with respect to the liability of Solutia and Pharmacia and judgment in the Pennsylvania Litigation has been entered in the amount of $59.5 million (the "Judgment");

WHEREAS, under Pennsylvania law a bond in the amount of 120% of the Judgment, or approximately $71.4 million, must be posted in order to stay execution of the Judgment pending appeal of the Judgment (the "Appeal");

WHEREAS, pursuant to the Amended Distribution Agreement, Solutia is obligated, among other things, to post a bond in the Pennsylvania Litigation in order to stay execution of the Judgment pending appeal of the Judgment;

WHEREAS, Solutia has informed Pharmacia and Monsanto that Solutia has determined not to post a bond in order to stay execution of the Judgment pending the Appeal, but that Solutia is willing to contribute $20 million to assist in securing a bond; and

WHEREAS, Monsanto, pursuant to its obligations to Pharmacia under the Amended Separation Agreement, has agreed to post a bond sufficient to stay execution of the Judgment pending the Appeal upon the terms set forth herein.

NOW, THEREFORE, in order to avoid any dispute among the parties with respect to Solutia's rights and obligations to Pharmacia and Monsanto under the Amended Distribution Agreement and Monsanto's rights and obligations to Pharmacia under the Amended Separation Agreement, and in consideration of the premises and the mutual covenants herein contained and intending to be legally bound hereby, the parties hereto agree as follows:

Section 1. Defined Terms. Each capitalized term used in this Protocol Agreement and not otherwise defined herein shall have the meaning ascribed thereto in the Amended Distribution Agreement. The parties hereto affirm the factual accuracy of each of the recitals set forth above to the extent that they relate to such party.

Section 2. Effect of Protocol Agreement. This Protocol Agreement is a written, signed amendment and modification of (i) the Amended Distribution Agreement, in satisfaction of the requirements of Section 10.06 of the Amended Distribution Agreement, and (ii) solely with respect to Pharmacia and Monsanto, the Amended Separation Agreement, in satisfaction of the requirements of Section 11.07 of the Amended Separation Agreement.

Section 3. Monsanto's Commitment to Obtain Pennsylvania Litigation Appeal Bond. Monsanto shall obtain a bond sufficient to stay execution of the Judgment pending the Appeal (the "Pennsylvania Litigation Appeal Bond").

Section 4. Pennsylvania Litigation Protocol. In connection with Monsanto's commitment to obtain the Pennsylvania Litigation Appeal Bond pursuant to Section 3 above, the parties hereto agree that the following shall apply:

(a) Solutia's Obligation to Contribute Funds. Solutia shall provide to Monsanto, or to the surety or bonding company of Monsanto's choosing (the "Monsanto Surety"), on or before November 15, 2002, with a letter of credit in the form attached hereto as Exhibit C (the "Solutia LOC") as collateral necessary to secure the Pennsylvania Litigation Appeal Bond that has a present cash value of no less than $20 million (the "Solutia Funds").

(b) Solutia's Reimbursement Obligations. Solutia shall reimburse or pay directly, and in no event later than thirty (30) days after receipt of an invoice or bill, all of Monsanto's Expenses. "Expenses" means all of Monsanto's out-of-pocket expenses reasonably incurred in connection with obtaining the Pennsylvania Litigation Appeal Bond, including, without limitation: (i) the premium due on the Pennsylvania Litigation Appeal Bond, and /or the fees charged by the Monsanto Surety in connection therewith; (ii) the fees and expenses relating to any third-party credit enhancement related to the Pennsylvania Litigation Appeal Bond; (iii) all costs and expenses of securing Monsanto's obligations with respect to the Pennsylvania Litigation Appeal Bond; and (iv) fees and expenses of financial advisors and attorneys retained by Monsanto in connection with the foregoing.

(i) Monsanto Does Not Provide Collateral. If the Pennsylvania Appeal Bond is obtained by Monsanto pursuant to Section 3 above without Monsanto having to provide or post any cash, property, security, collateral or a third-party credit enhancement (the "Collateral"), then (A) Solutia and Monsanto shall have shared control over decisions to compromise or settle, on a commercially reasonable basis, any and all claims at issue, or arguably at issue, in the Appeal and/or the Pennsylvania Litigation; (B) Monsanto may utilize the Solutia Funds in accordance with the conditions and procedures contained in the Solutia LOC for drawing thereon; and (C) Solutia and Monsanto need not receive the consent or approval of Pharmacia to settle any or all of the claims at issue, or arguably at issue, in the Appeal and/or the Pennsylvania Litigation, provided that the settlement includes as a term thereof delivery by the claimant(s) or plaintiff(s) to Pharmacia and Monsanto of a written release of Pharmacia, Monsanto and Solutia from all liability with respect to the Pennsylvania Litigation once payment of the settlement and fulfillment of any other obligations of the settlement have been effectuated. To the extent that Solutia and Monsanto do not unanimously agree with respect to settlement strategies or decision to compromise or settle any claim, they shall consult with Pharmacia in an attempt to reach a unanimous decision. If a unanimous decision of Monsanto, Solutia and Pharmacia is not reached, the agreement of any two of the parties (Solutia, Monsanto and Pharmacia) shall be binding upon all parties hereto.

(ii) Monsanto Provides Collateral. If Monsanto provides or posts any Collateral in order to obtain the Pennsylvania Appeal Bond pursuant to Section 3, the parties hereto agree that (A) Monsanto shall have sole and exclusive right to compromise or settle, on a commercially reasonable basis, all claims at issue, or arguably at issue, in the Appeal and/or the Pennsylvania Litigation; (B) Monsanto may utilize the Solutia Funds in accordance with the conditions and procedures contained in the Solutia LOC for drawing thereon; (C) Monsanto need not receive the consent or approval of Pharmacia or Solutia to settle any or all claims at issue, or arguably at issue, in the Appeal and/or the Pennsylvania Litigation, provided that such settlement includes as a term thereof delivery by the claimant(s) or plaintiff(s) to Pharmacia, Monsanto and Solutia of a written release of Pharmacia, Monsanto and Solutia from all liability in respect to the Pennsylvania Litigation once payment of the settlement and fulfillment of any other obligations of the settlement have been effectuated; and (D) Monsanto shall nevertheless have a duty of prior

consultation with Solutia and Pharmacia concerning settlement strategies and decisions (subparts (A), (B), (C) and (D) of this Section 4(c)(ii) being referred to herein collectively as the "Settlement Control Rights").

(d) Solutia's Disposition of Assets. In the event that at anytime during the period during which Monsanto shall continue to have any obligation whatsoever with respect to the Pennsylvania Appeal Bond Solutia shall convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) any portion of its assets (whether now owned or hereafter acquired) having an aggregate value of $100 million or greater to any Person, or permit any subsidiary of Solutia to do so (a "Transaction"), Solutia shall have fifteen (15) business days following the consummation of a Transaction to obtain and deliver to Monsanto (i) the Monsanto Surety's complete and unconditional written release of Monsanto from all of its commitments and obligations with respect to the Pennsylvania Appeal Bond; and (ii) evidence satisfactory to Monsanto in its sole discretion that Solutia has either (A) secured a replacement bond that is sufficient to stay execution of the Judgment pending Appeal or (B) settled all of the claim(s) at issue, or arguably at issue, in the Appeal and/or the Pennsylvania Litigation, provided that the settlement includes as a term thereof delivery by the claimant(s) or plaintiff(s) to Pharmacia and Monsanto of a written release of Pharmacia, Monsanto and Solutia from all liability with respect to the Pennsylvania Litigation once payment of the settlement and fulfillment of any other obligations of the settlement have been effectuated (subparts (i) and (ii) of this Section 4(d) referred to collectively as the "Release Conditions"). If Solutia fails to satisfy the Release Conditions within the time period prescribed by this Section 4(d), then the Settlement Control Rights shall immediately vest in favor of Monsanto. "Person" means an individual, partnership, association, corporation, limited liability company, organization, government or governmental subdivision or agency, business trust, estate, trust, or any other legal or commercial entity.

Section 5. Obligation to Pay Settlement or Judgment Amounts.

(a) Solutia's Obligations. In the event that any claims at issue, or arguably at issue, in the Appeal and/or the Pennsylvania Litigation are settled, Solutia shall pay the full settlement amount and perform any obligations of Solutia, Pharmacia and any other members of the Monsanto Group set forth in the settlement agreement. In the event that any claims at issue are not settled and a final, non-appealable judgment is entered against Solutia, Pharmacia or any other member of the Monsanto Group, Solutia shall pay directly and otherwise fulfill all of Solutia's, Pharmacia's and all other Monsanto Group members' obligations pursuant to such judgment. To the extent that Solutia fails to promptly and fully meet such obligations with respect to the payment of any judgment or settlement or with respect to other obligations arising out of any settlement or judgment in the Appeal and/or the Pennsylvania Litigation, Solutia shall enter into a consent judgment in favor of Pharmacia and Monsanto against Solutia in an amount equal to the amount specified in the judgment or settlement minus any amount paid by Solutia in satisfaction of the judgment or settlement.

(b) Monsanto's Obligations. To the extent that Solutia fails to promptly and fully meet its obligations with respect to the payment of any judgment or settlement or with respect to other obligations arising out of any settlement or judgment in the Appeal and/or the Pennsylvania Litigation, Monsanto agrees to pay, perform or discharge such liabilities and obligations in accordance with its obligations under the Amended Separation Agreement. To the extent that Monsanto fails to promptly and fully meet its obligations under the Amended Separation Agreement with respect to the payment of any judgment or settlement or with respect to other obligations arising out of any settlement or judgment in the Appeal and/or the Pennsylvania Litigation, Monsanto shall enter into a consent judgment in favor of Pharmacia and against Monsanto in an amount equal to the amount specified in the judgment or settlement minus any aggregate amount paid by Solutia and Monsanto in satisfaction of the judgment or settlement.

Section 6. Powers of Attorney.

(a) Revocation and Replacement by Pharmacia.

(i) The power of attorney attached as Exhibit A to the Anniston Protocol Agreement is hereby revoked and is of no further force or effect and is replaced by the power of attorney attached hereto as Exhibit A (the "Pharmacia POA"), which shall be executed by Pharmacia. Pursuant to the Pharmacia POA and except as otherwise provided for in such power of attorney, the prosecution and defense of (A) the Pennsylvania Litigation and the Appeal, (B) the Anniston Litigation and any appeal of the Anniston Litigation ("Anniston Litigation Appeal"); and (C) any other Claims (as defined in the Pharmacia POA) shall be prosecuted and defended by Solutia at Solutia's expense. Solutia shall report to Monsanto and Pharmacia all material developments concerning the Pennsylvania Litigation, the Appeal, the Anniston Litigation and the Anniston Litigation Appeal and shall provide all information and documents with respect thereto reasonably requested by either Monsanto or Pharmacia (the "Solutia Reporting Obligations"). With respect to any Claims (as defined in the Pharmacia POA) other than the Pennsylvania Litigation, the Appeal, the Anniston Litigation and the Anniston Litigation Appeal, the Solutia Reporting Obligations will only arise in the event that Monsanto or Pharmacia requests Solutia to report any such information with respect to any such Claim. At their expense, Monsanto and Pharmacia may associate with and advise Solutia in the prosecution or defense of the Pennsylvania Litigation, the Appeal, the Anniston Litigation, the Anniston Litigation Appeal or any other Claim (as defined in the Pharmacia POA) and Solutia shall allow Pharmacia and Monsanto to consult with and advise Solutia in connection with any decision or strategy with respect thereto. Solutia shall also fully inform Pharmacia and Monsanto on an immediate basis and in writing of any settlement discussions regarding the Pennsylvania Litigation, the Appeal, the Anniston Litigation, the Anniston Litigation Appeal or any other Claim (as defined in the Pharmacia POA) and shall, subject to (X) Section 4(c) of this Protocol Agreement with respect to the Pennsylvania Litigation or the Appeal; (Y) Section 5(b) of the Anniston Protocol Agreement with respect to the Anniston Litigation and the Anniston Litigation Appeal; and (Z) Section 7 of this Protocol Agreement with respect to all other matters, consult fully with Pharmacia and Monsanto concerning any settlement strategies or decision.

(ii) Solutia hereby acknowledges and accepts the appointment as Pharmacia's agent and attorney as provided in the Pharmacia POA and agrees to undertake and perform in a commercially reasonable manner on behalf of Pharmacia and in Pharmacia's name, place and stead, for all purposes with respect to all Claims (as defined in the Pharmacia POA) and to fully enforce all of Pharmacia's rights, interests and remedies with respect thereto, in each case with the same duty of care and prudence that it applies to the management of Solutia's own affairs, in accordance with the terms of the Amended Distribution Agreement and the Pharmacia POA.

(iii) Monsanto hereby acknowledges and consents to Pharmacia's appointment of Solutia as Pharmacia's agent and attorney as provided in the Pharmacia POA.

(b) Revocation and Replacement of Distribution Agreement Amendment Power of Attorney.

(i) The power of attorney attached as Exhibit B to the Distribution Agreement Amendment is hereby revoked and is of no further force or effect and is replaced by the power of attorney attached hereto as Exhibit B (the "Monsanto POA"), which shall be executed by Monsanto. Pursuant to the Monsanto POA and except as otherwise provided for in such power of attorney, the prosecution and defense of (A) the Pennsylvania Litigation and the Appeal, (B) the Anniston Litigation and the Anniston Litigation Appeal; and (C) any other Claims (as defined in the Monsanto POA) shall be prosecuted and defended by Solutia at Solutia's expense. Solutia shall comply with the Solutia Reporting Obligations. With respect to any Claims (as defined in the Monsanto POA) other than the Pennsylvania Litigation, the Appeal, the Anniston Litigation and

the Anniston Litigation Appeal, the Solutia Reporting Obligations will only arise in the event that Monsanto or Pharmacia requests Solutia to report any such information with respect to any such Claim. At their expense, Monsanto and Pharmacia may associate with and advise Solutia in the prosecution or defense of the Pennsylvania Litigation, the Appeal, the Anniston Litigation, the Anniston Litigation Appeal or any other Claim (as defined in the Monsanto POA) and Solutia shall allow Pharmacia and Monsanto to consult with and advise Solutia in connection with any decision or strategy in respect thereto. Solutia shall also fully inform Pharmacia and Monsanto on an immediate basis and in writing of any settlement discussions regarding the Pennsylvania Litigation, the Appeal, the Anniston Litigation, the Anniston Litigation Appeal or any other Claim (as defined in the Monsanto POA) and shall, subject to (X) Section 4(c) of this Protocol Agreement with respect to the Pennsylvania Litigation or the Appeal; (Y) Section 5(b) of the Anniston Protocol Agreement with respect to the Anniston Litigation and the Anniston Litigation Appeal; and (Z) Section 7 of this Protocol Agreement with respect to all other matters, consult fully with Pharmacia and Monsanto concerning any settlement strategies or decision.

(ii) Solutia hereby acknowledges and accepts the appointment as Monsanto's agent and attorney as provided in the Monsanto POA and agrees to undertake and perform in a commercially reasonable manner on behalf of Monsanto and in Monsanto's name, place and stead, all of Monsanto's commitments, duties, liabilities and obligations with respect to all Claims (as defined in the Monsanto POA) and to fully enforce all of Monsanto's rights, interests and remedies under the Amended Distribution Agreement, in each case with the same duty of care and prudence that it applies to the management of Solutia's own affairs, in accordance with the terms of the Amended Distribution Agreement and the Monsanto POA.

(iii) Pharmacia hereby acknowledges and consents to Monsanto's appointment of Solutia as Monsanto's agent and attorney as provided in the Monsanto POA.

Section 7. Clarification of Amended Distribution Agreement. The parties hereby agree, for purposes of clarification, that in the event that Solutia breaches any of its commitments, duties or obligations under the Amended Distribution Agreement nothing contained in Article IV thereof shall be construed as providing Solutia with the right to consent to the compromise or settlement of any Third Party Claim (including, without limitation, the Pennsylvania Litigation and the Anniston Litigation) by either of Pharmacia or Monsanto. The parties agree that Solutia's right to consent to an Indemnitee's compromise or settlement of a Third Party Claim pursuant to Section 4.04(b) of the Amended Distribution Agreement shall only arise in the event that, pursuant to said Section 4.04(b), Solutia has the right to elect to defend a Third Party Claim and elects not to so defend.

Section 8. Conflicts with Existing Agreements. For purposes of the defense and prosecution of the Pennsylvania Litigation and the Appeal and of any Third Party Claims, to the extent the rights, duties, commitments and obligations set forth in this Protocol Agreement, the Pharmacia POA or the Monsanto POA differ from or conflict with the rights, duties, commitments and obligations of the parties as set forth in the Amended Distribution Agreement or in the Amended Separation Agreement, the rights, duties, commitments and obligations in this Protocol Agreement, the Pharmacia POA or the Monsanto POA shall supercede and take precedence over the rights, duties, commitments and obligations set forth in the Amended Distribution Agreement or the Amended Separation Agreement, as the case may be; provided, however, that parties hereto acknowledge and agree that for all purposes with respect to the Anniston Litigation and the Anniston Litigation Appeal, the rights, duties, commitments and obligations set forth in the Anniston Protocol Agreement shall control and shall not be superceded or replaced by the rights, duties, commitments and obligations set forth in this Protocol Agreement other than with respect to Pharmacia's revocation of the power of attorney attached as Exhibit A to the Anniston Protocol Agreement and replacement thereof with the Pharmacia POA as set forth in Section 6(a) of this Protocol Agreement.

Section 9. Bankruptcy. In the event that Solutia files or is subject to any voluntary or involuntary bankruptcy proceeding, Solutia's rights hereunder and Solutia's right to defend Pharmacia and/or Monsanto with respect to (i) the Pennsylvania Litigation and the Appeal, (ii) the Anniston Litigation and the Anniston Litigation Appeal; and (iii) any other Third Party Claims, as well as the Pharmacia POA and the Monsanto POA are automatically and immediately revoked. The parties further agree that consent from relief from any automatic stay under section 362 of the Untied States Bankruptcy Code is not necessary, but that should a court rule otherwise, Solutia hereby consents to the entry of an order granting relief from the stay in order to effectuate this paragraph and agrees to provide all necessary cooperation.

Section 10. Miscellaneous.

(a) No Waiver; Statute of Limitations.

(i) Amended Distribution Agreement and Anniston Protocol Agreement. Other than as specifically provided herein, none of Pharmacia, Monsanto or Solutia has waived or compromised any of their respective rights under the Amended Distribution Agreement or the Anniston Protocol Agreement. In addition, the running of any limitations on the time for Pharmacia, Monsanto or Solutia to assert any claims related to the Pennsylvania Litigation under the Amended Distribution Agreement is tolled until 120 days after final resolution of the Appeal.

(ii) Amended Separation Agreement. Other than as specifically provided herein, neither Pharmacia nor Monsanto has waived or compromised any of their respective rights under the Amended Separation Agreement. In addition, the running of any limitations on the time for Pharmacia or Monsanto to assert any claims related to the Pennsylvania Litigation under the Amended Separation Agreement is tolled until 120 days after final resolution of the Appeal. The parties acknowledge and agree that nothing contained in this Protocol Agreement makes Solutia a party to the Amended Separation Agreement nor gives it any rights thereunder.

(b) Commitments and Obligations Continue. Nothing herein is intended to nor shall be construed to waive or limit any of the commitments and obligations of Solutia to Pharmacia, Monsanto or the Monsanto Group (and each of their Representatives and Affiliates) set forth in the Amended Distribution Agreement or the Anniston Protocol Agreement, or to waive or limit any commitments and obligations of Monsanto to Pharmacia or the Pharmacia Group (and each of their Representatives and Affiliates) set forth in the Amended Separation Agreement.

(c) Expenses. Each party hereto will pay its own costs and expenses incident to its negotiation and preparation of this Protocol Agreement, including the fees, expenses and disbursement of its counsel.

(d) Governing Law. This Protocol Agreement shall be governed by and construed in accordance with the laws of the State of Delaware as to all matters, including matters of validity, construction, effect, performance and remedies (other than the laws regarding choice of laws and conflicts of laws).

(e) Amendments and Modifications. This Protocol Agreement may be amended, modified or supplemented only by a written agreement signed by all of the parties hereto.

(f) Binding Effect; Assignment. This Protocol Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their successors, but neither this Protocol Agreement nor any of the rights, interests and obligations hereunder shall be assigned by any party hereto.

(g) Agreement as to Solutia's Breach. Provided that Solutia promptly and fully complies with, as conditions precedent, the commitments, obligations and duties set forth in this Protocol Agreement, Pharmacia and Monsanto each agree that Solutia's determination not to post the Pennsylvania Litigation Appeal Bond will not be deemed to be a breach of Solutia's commitments and obligations to

Pharmacia or Monsanto under the Amended Distribution Agreement; provided, however, to the extent that such agreement by Pharmacia and Monsanto may be deemed to be a waiver of a breach by Solutia of the Amended Distribution Agreement, such waiver shall not operate or be construed as a waiver of any subsequent breach by Solutia.

(h) Counterparts. This Protocol Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

(i) Blue Penciling; Specific Performance. Any provision of this Protocol Agreement that is prohibited or unenforceable in any jurisdiction, shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Each party acknowledges that money damages would be an inadequate remedy for any breach of the provisions of this Protocol Agreement and agrees that the obligations of the parties hereunder shall be specifically enforceable.

(k) Acknowledgement as to Pharmacia's Attorney in Fact. Notwithstanding anything contained herein to the contrary, the parties acknowledge and agree that Monsanto has been appointed as Pharmacia's agent and attorney as provided in the power of attorney attached as Exhibit A to the Amended Distribution Agreement. The parties further acknowledge and agree that to the extent that such power of attorney has not been revoked by Pharmacia, in the event that Solutia is required pursuant to this Protocol Agreement to provide information, or otherwise report, to Pharmacia, Solutia's obligations with respect thereto shall be satisfied to the extent that Solutia provides such information, or otherwise reports, to Monsanto.

[SIGNATURE PAGE IS NEXT PAGE]

IN WITNESS WHEREOF, the parties hereto have caused this Protocol Agreement to be duly executed as of the date first above written.

		PHARMACIA CORPORATION, a Delaware corporation
		By:		/s/ RICHARD T. COLLIER Name: Richard T. Collier Title: Senior Vice President and General Counsel
		MONSANTO COMPANY, a Delaware corporation
		By:		/s/ TERRELL K. CREWS Name: Terrell K. Crews Title: Executive Vice President and Chief Financial Officer
		SOLUTIA INC., a Delaware corporation
		By:		/s/ ROBERT A. CLAUSEN Name: Robert A. Clausen Title: Chief Financial Officer

EXHIBIT A

FORM OF
POWER OF ATTORNEY: LITIGATION/CLAIMS

KNOW ALL MEN BY THESE PRESENTS:

That Pharmacia Corporation, a corporation organized and existing under the laws of the State of Delaware or the applicable member of the Monsanto Group ("Pharmacia") has made, constituted and appointed and by these presents does make, constitute and appoint, Solutia Inc., a corporation organized and existing under the laws of the State of Delaware or the applicable member of the Chemicals Group ("Solutia") its true and lawful agent and attorney, for Pharmacia and in Pharmacia's name, place and stead, for all purposes with respect to Third Party Claims (including, without limitation, the Pennsylvania Litigation and the Anniston Litigation) as to which Solutia has agreed to indemnify Pharmacia, and such claims against Third Parties which continue to be held by Pharmacia in trust for Solutia, such Third Party Claims and claims against Third Parties being collectively referred to herein as "Claims"; and its attorney shall have, subject to (i) the provisions of the Protocol Agreement, dated November 15, 2002 (the "Protocol Agreement"), to which this power of attorney is entered, and (ii) the Protocol Agreement dated as of July 1, 2002, by and among Pharmacia, Solutia and Monsanto Company (the "Anniston Protocol Agreement"), full power and authorization to take all action with respect to such Claims as Pharmacia can take and which said attorney, acting through its officers or their delegates, who in each case, acting alone, in his or her sole discretion, think best, including without limitation, (i) to represent Pharmacia with respect to such Claims for so long as such Claims are unresolved; (ii) to appear in Pharmacia's name and to execute, deliver and file all pleadings, motions and other filings, at trial, on appeal, or in a proceeding, through counsel retained by Solutia or by officers of Solutia or their delegates, acting alone, or otherwise; (iii) to assert or waive any or all rights with respect to such Claims; (iv) to engage in all phases of discovery with respect to such Claims, including without limitation, to take depositions, defend depositions and propound or respond to other discovery requests, such as interrogatories or requests for production of documents; (v) to direct and accept service of process with respect to such Claims; (vi) to execute and deliver affidavits as may be necessary or desirable with respect to such Claims; (vii) to agree to and to represent Pharmacia in alternative resolution proceedings, including arbitration or mediation of Claims; (viii) to discuss or negotiate settlement agreements and releases with Third Parties with respect to such Claims on such terms and conditions as Solutia thinks best; (ix) to execute, deliver and, if needed, file any and all settlement agreements, releases and other agreements, documents and instruments as may be required and any and all modifications thereof; and (x) to obtain and post bonds pending appeal; hereby giving and granting to Pharmacia's said attorney full power and authority to do and perform all and every act and thing whatsoever necessary to be done in the premises as fully to all intents and purposes as Pharmacia might or could do, hereby ratifying and confirming all that its said attorney may do pursuant to this power.

Subject to the Protocol Agreement and the Anniston Protocol Agreement, Pharmacia hereby gives and grants to its said attorney full power and authority to do and perform all and every act and thing whatsoever necessary to be done in the premises, in order fully to carry out and effectuate the authority herein granted, as fully to all intents and purposes as Pharmacia might or could do if acting through its own officers or delegates, and Pharmacia hereby ratifies and confirms all that its said attorney may do pursuant to this power.

Pharmacia hereby further authorizes and empowers its said attorney to substitute and appoint in the place and stead of its said attorney, or to employ agents or sub-agents as Solutia thinks best, one or more attorney or attorneys to exercise for Pharmacia as its attorney or attorneys any and all of the powers and authorities hereby conferred; and to revoke such appointment or appointments from time

to time, and to substitute or appoint any other or others in the place of such attorney or attorneys as Solutia shall from time to time think fit.

Unless specifically defined herein, capitalized terms shall have the meaning defined in the Amended Distribution Agreement.

The term "Amended Distribution Agreement" when used herein means that certain Distribution Agreement, dated as of September 1, 1997, between Solutia and Pharmacia Corporation as amended by that certain Amendment to the Distribution Agreement, dated as of July 1, 2002, among Solutia, Pharmacia and Monsanto.

The term "Anniston Litigation" when used herein means Sabarina Abernathy, et al. v. Monsanto Company, et al., Case No. CV01832 and any appeals taken in that matter.

The term "Distribution Date" when used herein means September 1, 1997.

The term "Governmental Authority" when used herein means any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, the NYSE, or other regulatory, administrative or governmental authority.

The term "Pennsylvania Litigation" when used herein means Commonwealth of Pennsylvania et al. v. United States Mineral Products et al., Nos. 284 M.D., 244 M.D. (Penn. Comm. Ct.) and any appeals taken in that matter.

The term "Third Party" when used herein means any individual, partnership, joint venture, corporation, trust, limited liability company, unincorporated organization or a government or any department or agency thereof other than Pharmacia or Solutia or their wholly owned direct or indirect subsidiaries or affiliates.

The term "Third Party Claims" when used herein means any claim, suit, arbitration, inquiry, proceeding or investigation by or before any court, any governmental or other regulatory or administrative agency or commission or any arbitration tribunal asserted by a Third Party.

All references in this document to "its attorney" or "its said attorney" or "its true and lawful attorney," or similar designations shall refer to Solutia Inc. and each and every person to whom Solutia delegates such power and also to each and every substitute or successor attorney-in-fact appointed under the terms of this instrument as herein provided.

All references in this document to "its attorney" or "its said attorney" or "its true and lawful attorney," or similar designations shall refer not only to Solutia or its delegates but also to each and every substitute or successor attorney-in-fact appointed under the terms of this instrument as herein provided.

Pharmacia hereby acknowledges that this power is coupled with an interest and hereby directs that, to the extent authorized or permitted by applicable law, this power or attorney shall not be affected by any merger, reverse merger, split off, spin or consolidation of Pharmacia or Solutia. It is Pharmacia's intent that the authority conferred hereby shall be exercisable notwithstanding such corporate changes and that this power of attorney shall, if permitted by applicable law or applicable contract, be irrevocable; provided, however, Pharmacia shall have the right, in its sole discretion, to revoke this Power of Attorney in whole or in part, by delivering written notice to Solutia in the event that Pharmacia posts a bond as contemplated in the Anniston Protocol Agreement or upon any breach by Solutia of its commitments, duties or obligations under either (i) this Power of Attorney or (ii) the Amended Distribution Agreement including, without limitation, any failure to post any appeal bond required thereunder and, provided further, that this power of attorney shall be automatically and immediately revoked in accordance with the provisions of Section 9 of the Protocol Agreement. In the event applicable law in effect at or any time after the execution of this instrument does not authorize

or permit the foregoing direction to be effective, and if at any later date, applicable law changes (whether by amendment, court decision, or otherwise), then Pharmacia directs that the foregoing provisions shall thereafter become applicable. Notwithstanding anything contained in this power of attorney to the contrary, (i) this power of attorney may be renewed for additional thirty (30) day periods at the written request of Pharmacia; and (ii) should this power of attorney be revoked in part by Pharmacia, Solutia's obligations hereunder to perform on behalf of Pharmacia and in Pharmacia's name, place and stead all of Pharmacia's commitments, duties, liabilities and obligations for all purposes with respect to all other Claims shall continue.

All persons dealing with Pharmacia's said attorney shall be protected in relying upon a copy of this instrument and shall be protected in relying upon the written certificate of Solutia as to the Claims which are the subject of this power of attorney, the identity and authority or its officers, their delegates and any substitute or successor appointed pursuant to the terms hereof, and/or as to whether any of the persons authorized to act hereunder is unavailable so to act, so as to authorize some other person to act hereunder, and Pharmacia hereby declares that as against it and all persons claiming under it everything which its attorney shall do or cause to be done pursuant hereto shall be valid and effectual in favor of any person claiming the benefit hereof who at the time of the doing thereof shall have relied upon any such certification made by Solutia. If required by applicable law or if Solutia desires for any reason to do so, an executed copy of this Power of Attorney shall be filed for record with the Governmental Authority wherein the Claim is pending or such other place as required by law or whether Solutia thinks best. Pharmacia authorizes Solutia to make all such filings.

This instrument may be executed in any number of counterparts, and all of said counterparts shall constitute but one and the same instrument.

[SIGNATURE AND NOTARY PAGE IS NEXT PAGE]

IN WITNESS WHEREOF, I have hereunto set my hand and seal this day of , 2002.

		PHARMACIA CORPORATION
		By: Title:
ATTEST:

STATE OF NEW JERSEY				)
				)
COUNTY OF				)

On this day of , 2002, before me the undersigned, a Notary Public, in and for the County and State aforesaid, personally appeared , to me known to be the person described in and who executed the foregoing instrument, and acknowledged that he/she executed the same as his/her free act and deed.

IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal in , the day and year last above written.

		Notary Public in and for said County and State
My Commission expires:

EXHIBIT B

MONSANTO COMPANY
POWER OF ATTORNEY: LITIGATION/CLAIMS

KNOW ALL MEN BY THESE PRESENTS:

That from and after the date hereof ("Effective Date"), Monsanto Company, a corporation organized and existing under the laws of the State of Delaware ("Monsanto") has made, constituted and appointed, and by these presents does make, constitute and appoint, Solutia Inc., a corporation organized and existing under the laws of the State of Delaware ("Solutia"), its true and lawful agent and attorney, for Monsanto and in Monsanto's name, place and stead, for all purposes with respect to Third Party Claims (including, without limitation, the Pennsylvania Litigation and the Anniston Litigation) as to which Solutia has agreed to indemnify Monsanto, and such claims against Third Parties which continue to be held by Monsanto in trust for Solutia, such Third Party Claims and claims against Third Parties being collectively referred to herein as "Claims"; and its attorney shall have, subject to (i) the provisions of the Protocol Agreement, dated November 15, 2002 (the "Protocol Agreement"), to which this power of attorney is entered, and (ii) the Protocol Agreement dated as of July 1, 2002, by and among Pharmacia, Solutia and Monsanto Company (the "Anniston Protocol Agreement"), full power and authorization to take all action with respect to such Claims as Monsanto can take and which said attorney, acting through its officers or their delegates, who in each case, acting alone, in his or her sole discretion, think best, including without limitation, (i) to represent Monsanto with respect to such Claims for so long as such Claims are unresolved; (ii) to appear in Monsanto's name and to execute, deliver and file all pleadings, motions and other filings, at trial, on appeal, or in a proceeding, through counsel retained by Solutia or by officers of Solutia or their delegates, acting alone, or otherwise; (iii) to assert or waive any or all rights with respect to such Claims; (iv) to engage in all phases of discovery with respect to such Claims, including without limitation, to take depositions, defend depositions and propound or respond to other discover requests, such as interrogatories or requests for production of documents; (v) to direct and accept service of process with respect to such claims; (vi) to execute and deliver affidavits as may be necessary or desirable with respect to such Claims; (vii) to agree to and to represent Monsanto in alternative resolution proceedings, including arbitration or mediation of Claims; (viii) to discuss or negotiate settlement agreements and releases with Third Parties with respect to such Claims on such terms and conditions as Solutia thinks best; (ix) to execute, deliver and if needed, file any and all settlement agreements, releases and other agreements, documents and instruments as may be required and any and all modifications thereto; and (x) to obtain and post bonds pending appeal; hereby giving and granting to Monsanto's said attorney full power and authority to do and perform all and every act and thing whatsoever necessary to be done in the premises as fully to all intents and purposes as Monsanto might or could do, hereby ratifying and confirming all that its said attorney may do pursuant to this power.

Subject to the Protocol Agreement and the Anniston Protocol Agreement, Monsanto hereby gives and grants to its said attorney from and after the Effective Date, full power and authority to do and perform all and every act and thing whatsoever necessary to be done in the premises, in order fully to carry out and effectuate the authority herein granted, as fully to all intents and purposes as Monsanto might or could do if acting through its own officers or delegates, and Monsanto hereby ratifies and confirms all that its said attorney may be pursuant to this power.

Monsanto hereby further authorizes and empowers its said attorney from and after Effective Date to substitute and appoint in the place and stead of its said attorney, or to employ agents or sub-agents as Solutia thinks best, one or more attorney or attorneys to exercise for Monsanto as its attorney or attorneys any or all of the powers and authorities hereby conferred; and to revoke such appointment or appointments from time to time, and to substitute or appoint any other or others in the place of such attorney or attorneys as Solutia shall from time to time think fit.

Unless specifically defined herein, capitalized terms shall have the meaning defined in the Amended Distribution Agreement.

The term "Anniston Litigation" when used herein means Sabarina Abernathy, et al. v. Monsanto Company, et al., Case No. CV01832 and any appeals taken in that matter.

The term "Governmental Authority" when used herein means any federal, state, local, foreign or international court, government department, commission, board, bureau, agency, the New York Stock Exchange, or other regulatory, administrative or governmental authority.

The term "Third Party" when used hereby means any individual, partnership, joint venture, corporation, trust, limited liability company, unincorporated organization or a Governmental Authority or any department or agency thereof other than Monsanto or Solutia and their respective wholly-owned direct or indirect subsidiaries.

All references in this documents to "its attorney" or "its said attorney" or "its true and lawful attorney," or similar designations shall refer not only to Solutia or its delegates but also to each and every substitute or successor attorney-in-fact appointed under the terms of this instrument as herein provided.

Monsanto hereby acknowledges that this power is coupled with an interest and hereby directs that, to the extent authorized or permitted by applicable law, this power or attorney shall not be affected by any merger, reverse merger, split off, spin or consolidation of Monsanto or Solutia. It is Monsanto's intent that the authority conferred hereby shall be exercisable notwithstanding such corporate changes and that this power of attorney shall, if permitted by applicable law or applicable contract, be irrevocable, provided, however, that Monsanto shall have the right, in its sole discretion, to revoke this Power of Attorney in whole or in part, by delivering written notice to Solutia upon any breach by Solutia of its commitments, duties or obligations under either (i) this Power of Attorney or (ii) the Amended Distribution Agreement including, without limitation, any failure to post any appeal bond required thereunder and, provided further, that this power of attorney shall be automatically and immediately revoked in accordance with the provisions of Section 9 of the Protocol Agreement. In the event applicable law in effect at or any time after the execution of this instrument does not authorize or permit the foregoing direction to be effective, and if at any later date, applicable law changes (whether by amendment, court decision, or otherwise), then Monsanto directs that the foregoing provisions shall thereafter become applicable. Notwithstanding anything contained in this power of attorney to the contrary, (i) this power of attorney may be renewed for additional thirty (30) day periods at the written request of Monsanto; and (ii) should this power of attorney be revoked in part

by Monsanto, Solutia's obligations hereunder to perform on behalf of Monsanto and in Monsanto's name, place and stead all of Monsanto's commitments, duties, liabilities and obligations for all purposes with respect to all other Claims shall continue.

All persons dealing with Monsanto's said attorney shall be protected in relying upon a copy of this instrument and shall be protected in relying upon the written certificate of Solutia as to the Claims which are the subject of this power of attorney, the identity and authority of its officers, their delegates and any substitute or successor appointed pursuant to the terms hereof, and/or as to whether any of the persons authorized to act hereunder is unavailable so to act, so as to authorize some other person to act hereunder, and Monsanto hereby declares that as against it and all persons claiming under it everything which its attorney shall do or cause to be done pursuant hereto shall be valid and effectual in favor of any person claiming the benefit hereof who at the time of the doing thereof shall have relied upon any such certification made by Solutia. If required by applicable law or if Solutia desires for any reason to do so, an executed copy of this Power of Attorney shall be filed for record with the Governmental Authority wherein the Claim is pending or such other place as required by law or whether Solutia thinks best. Monsanto authorizes Solutia to make all such filings.

This instrument may be executed in any number of counterparts, and all of said counterparts shall constitute but one and the same instrument.

[SIGNATURE AND NOTARY PAGE IS NEXT PAGE]

IN WITNESS WHEREOF, I have hereunto set my hand and seal as of this day of November 15, 2002.

	MONSANTO COMPANY

	By:	Terrell K. Crews
	Title:	Executive Vice President and Chief Financial Officer
ATTEST:

STATE OF MISSOURI		)
		)
COUNTY OF ST. LOUIS		)

On this 15th day of November, 2002, before me the undersigned, a Notary Public, in and for the County and State aforesaid, personally appeared Terrell K. Crews, to me known to be the person described in and who executed the foregoing instrument, and acknowledged that he/she executed the same as his/her free act and deed.

IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal in St. Louis, the day and year last above written.

		Notary Public in and for said County and State
My Commission expires:

EXHIBIT C

FORM OF
SOLUTIA LETTER OF CREDIT

IRREVOCABLE LETTER OF CREDIT NO.

DATE

Monsanto Company
Attn: General Counsel
800 North Lindbergh Boulevard
St. Louis, MO 63167

To Whom It May Concern:

At the request of Solutia, Inc. ("Solutia") we, (Name and Address of Bank), have opened an IRREVOCABLE LETTER OF CREDIT in your favor for $20,000,000.00 U.S. Dollars, available by your drafts at sight.

We warrant to you that all your drafts under this IRREVOCABLE LETTER OF CREDIT will be duly honored upon presentation of your draft on us at (Address of Bank) on or before the expiration date or on or before any automatically extended date as set forth below.

Any draft(s) drawn by you under this Letter of Credit shall be accompanied by your written certification that you have procured the execution of a bond in the amount of $71,433,900.00 at the request of Solutia and that any one or more of the following exists: (i) Claims have been made by SAFECO Insurance Company of America ("Safeco") against you with respect to the bond posted by Safeco ("Safeco Bond") in favor of Monsanto Company relating to the Commonwealth of Pennsylvania, Department of General Services et. al., v. United States Mineral Products et. al., No. 284 M.D. 244 M.D. (Pennsylvania Commonwealth Court) ("Pennsylvania Litigation"); (ii) Claims have been made by Safeco against any letter of credit or other collateral posted by you in order to secure your performance of the Safeco Bond; (iii) An agreement has been duly executed by the parties to the Pennsylvania Litigation settling any claims at issue, or arguably at issue, in the Pennsylvania Litigation and Solutia has not paid the required settlement amount within five (5) business days after such agreement has been fully executed; or (iv) A final, non-appealable judgment in the Pennsylvania Litigation has been entered by a court of competent jurisdiction against Solutia or Pharmacia Corporation (a/k/a Monsanto Company) and Solutia has not paid the required settlement amount within five (5) business days after such agreement has been fully executed.

Except as stated herein, this IRREVOCABLE LETTER OF CREDIT is effective November 15, 2002, and expires on August 1, 2004, but will be automatically extended without amendment for successive one-year periods from the current expiration date and any future expiration date unless at least 90 days prior to expiration date we notify you by registered letter that we elect not to renew for such additional one-year periods.

This credit is subject to the Uniform Customs and Practices for Documentary Credits (1993 Revision), International Chamber of Commerce, publication no. 500.

	Very truly yours,
	(Authorized Signature)
	(Title)

(To be prepared on Bank Letterhead)

EX-23.1 4 a2094003zex-23_1.htm EX-23.1
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Exhibit 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statements Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, 333-35689, 333-47911, 333-51081, 333-74463, 333-74465, 333-32112, and 333-39972 of Solutia Inc. on Form S-8, Registration Statements Nos. 333-75812, 333-89818 and 333-99705 of Solutia Inc. on Form S-3 and Registration Statement No. 333-99699 on Form S-4 of our opinion dated March 4, 2002 (June 4, 2002 as to Note 19, June 17, 2002 as to Note 20, October 16, 2002 as to Note 21 and November 15, 2002 as to Note 22) appearing in this Current Report on Form 8-K of Solutia Inc.

/s/ Deloitte & Touche LLP

Saint Louis, Missouri
November 15, 2002

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Exhibit 23.1

INDEPENDENT AUDITORS' CONSENT
EX-99.1 5 a2094003zex-99_1.htm EX-99.1
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Exhibit 99.1

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Audited Annual Financial Statements
Report of Independent Auditors		F-2
Statement of Consolidated Income (Loss) for the years ended December 2001, 2000 and 1999		F-3
Statement of Consolidated Comprehensive Income (Loss) for the years ended December 31, 2001, 2000 and 1999		F-3
Statement of Consolidated Financial Position as of December 2001 and 2000		F-4
Statement of Consolidated Cash Flow for the years ended December 31, 2001, 2000 and 1999		F-5
Statement of Consolidated Shareholders' Equity (Deficit) for the years ended December 31, 2001, 2000 and 1999		F-6
Notes to Consolidated Financial Statements		F-7

F-1

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of Solutia Inc.:

We have audited the accompanying statements of consolidated financial position of Solutia Inc. and subsidiaries (the Company) as of December 31, 2001 and 2000, and the related statements of consolidated income (loss), comprehensive income (loss), cash flow, and shareholders' equity (deficit) for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. 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 the Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

As discussed in the notes to the consolidated financial statements, the Company was required to adopt Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective January 1, 2001.

	/s/ DELOITTE & TOUCHE LLP Deloitte & Touche LLP
St. Louis, Missouri March 4, 2002 (June 4, 2002 as to Note 19, June 17, 2002 as to Note 20, October 16, 2002 as to Note 21 and November 15, 2002 as to Note 22)

F-2

SOLUTIA INC.

STATEMENT OF CONSOLIDATED INCOME (LOSS)

			Year Ended December 31,
			2001			2000			1999
			(Dollars in millions, except per share amounts)
Net Sales			$	2,817		$	3,185		$	2,830
Cost of goods sold				2,388			2,699			2,178

Gross Profit				429			486			652
Marketing expenses				175			165			153
Administrative expenses				160			173			122
Technological expenses				66			91			80
Amortization expense				34			33			3

Operating Income (Loss)				(6	)		24			294
Equity earnings (loss) from affiliates—net of tax				(13	)		35			36
Interest expense				(90	)		(83	)		(40	)
Gain on sale of Polymer Modifiers business				—			73			—
Other income (expense)—net				32			(8	)		13

Income (Loss) Before Income Taxes				(77	)		41			303
Income taxes (benefit)				(18	)		(8	)		97

Net Income (Loss)			$	(59	)	$	49		$	206

Basic Earnings (Loss) Per Share			$	(0.57	)	$	0.46		$	1.86

Diluted Earnings (Loss) Per Share			$	(0.57	)	$	0.46		$	1.80

	Weighted average equivalent shares (in millions):
	Basic			103.9			105.9			110.8
	Effect of dilutive securities:
		Common share equivalents—common stock issuable upon exercise of outstanding stock options		—			1.6			3.8

	Diluted			103.9			107.5			114.6

STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

	Year Ended December 31,
	2001			2000			1999
	(Dollars in millions)
Net Income (Loss)	$	(59	)	$	49		$	206
Other Comprehensive Income (Loss):
Currency translation adjustments		(37	)		(86	)		(44	)
Cumulative effect of accounting change, net of tax of $(1)		2			—			—
Net loss on derivative instruments, net of tax of $2		(3	)		—			—
Minimum pension liability adjustments, net of tax of $(2) in 2001, $(4) in 2000, and $2 in 1999		2			7			(4	)

Comprehensive Income (Loss)	$	(95	)	$	(30	)	$	158

See accompanying Notes to Consolidated Financial Statements.

F-3

SOLUTIA INC.

STATEMENT OF CONSOLIDATED FINANCIAL POSITION

		As of December 31,
		2001			2000
		(Dollars in millions, except per share amounts)
ASSETS
Current Assets:
Cash and cash equivalents		$	23		$	19
Trade receivables, net of allowances of $22 in 2001 and $12 in 2000			352			406
Miscellaneous receivables			105			109
Prepaid expenses			15			17
Deferred income tax benefit			123			107
Inventories			303			357

Total Current Assets			921			1,015
Property, Plant and Equipment:
Land			58			60
Buildings			425			421
Machinery and equipment			3,006			2,982
Construction in progress			51			62

Total property, plant and equipment			3,540			3,525
Less accumulated depreciation			2,397			2,320

Net Property, Plant and Equipment			1,143			1,205
Investments in Affiliates			313			351
Goodwill, net of accumulated amortization of $45 in 2001 and $24 in 2000			386			421
Identified Intangible Assets, net of accumulated amortization of $28 in 2001 and $16 in 2000			224			217
Long-Term Deferred Income Tax Benefit			254			190
Other Assets			167			182

Total Assets		$	3,408		$	3,581

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable		$	233		$	359
Wages and benefits			56			45
Postretirement liabilities			82			78
Miscellaneous accruals			362			373
Short-term debt			683			494

Total Current Liabilities			1,416			1,349
Long-Term Debt			627			784
Postretirement Liabilities			947			941
Other Liabilities			531			541
Shareholders' Equity (Deficit):
Common stock (authorized, 600,000,000 shares, par value $0.01)
	Issued: 118,400,635 shares in 2001 and 2000		1			1
	Net deficiency of assets at spinoff		(113	)		(113	)
	Treasury stock, at cost (13,921,604 and 15,484,194 shares in 2001 and 2000, respectively)		(257	)		(296	)
Unearned ESOP shares			(1	)		(9	)
Accumulated other comprehensive income (loss)			(144	)		(108	)
Reinvested earnings			401			491

Total Shareholders' Equity (Deficit)			(113	)		(34	)

Total Liabilities and Shareholders' Equity (Deficit)		$	3,408		$	3,581

See accompanying Notes to Consolidated Financial Statements.

F-4

SOLUTIA INC.

STATEMENT OF CONSOLIDATED CASH FLOW

				Year Ended December 31,
				2001			2000			1999
				(Dollars in millions)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss)				$	(59	)	$	49		$	206
Adjustments to reconcile to Cash From Operations:
	Items that did not use (provide) cash:
		Depreciation and amortization			184			191			151
		Amortization of deferred credits			(14	)		(12	)		(10	)
		Restructuring expenses and other unusual items			127			195			63
		Net pretax gains from asset disposals			(36	)		(79	)		(8	)
		Changes in assets and liabilities:
			Income and deferred taxes		(48	)		(11	)		64
			Trade receivables		47			69			(18	)
			Inventories		57			(18	)		42
			Accounts payable		(125	)		41			(20	)
			Other assets and liabilities		(89	)		(181	)		(106	)

Cash From Operations					44			244			364

INVESTING ACTIVITIES:
Property, plant and equipment purchases					(94	)		(221	)		(257	)
Acquisition and investment payments, net of cash acquired					(35	)		(110	)		(835	)
Property disposals and investment proceeds					43			220			30

Cash Used in Investing Activities					(86	)		(111	)		(1,062	)

FINANCING ACTIVITIES:
Net change in short-term debt obligations					41			(22	)		511
Net change in long-term debt obligations					—			(13	)		201
Treasury stock purchases					—			(106	)		(79	)
Dividend payments					(4	)		(4	)		(4	)
Common stock issued under employee stock plans					13			4			8
Other financing activities					(4	)		(1	)		—

Cash From (Used in) Financing Activities					46			(142	)		637

Increase (Decrease) in Cash and Cash Equivalents					4			(9	)		(61	)
CASH AND CASH EQUIVALENTS:
Beginning of year					19			28			89

End of year				$	23		$	19		$	28

The effect of exchange rate changes on cash and cash equivalents was not material. Cash payments for interest (net of amounts capitalized) were $90 million in 2001, $88 million in 2000, and $41 million in 1999. Cash payments for income taxes were $24 million in 2001, $17 million in 2000, and $43 million in 1999. Cash payments for the management of environmental programs which were charged against recorded environmental liabilities were $40 million in 2001, $29 million in 2000, and $22 million in 1999.

See accompanying Notes to Consolidated Financial Statements.

F-5

SOLUTIA INC.

STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIT)

		Year Ended December 31,
		2001			2000			1999
		(Dollars in millions)
COMMON STOCK:
Balance, January 1		$	1		$	1		$	1

Balance, December 31		$	1		$	1		$	1

NET DEFICIENCY OF ASSETS AT SPINOFF:
Balance, January 1		$	(113	)	$	(113	)	$	(113	)

Balance, December 31		$	(113	)	$	(113	)	$	(113	)

TREASURY STOCK:
Balance, January 1		$	(296	)	$	(209	)	$	(143	)
	Shares purchased (0 shares in 2001, 7,717,300 shares in 2000, 3,781,700 shares in 1999)		—			(106	)		(79	)
	Net shares issued under employee stock plans (1,562,590 shares in 2001, 1,092,870 shares in 2000, 551,613 shares in 1999)		39			19			13

Balance, December 31		$	(257	)	$	(296	)	$	(209	)

UNEARNED ESOP SHARES:
Balance, January 1		$	(9	)	$	(18	)	$	(25	)
	Amortization of ESOP balance		8			9			7

Balance, December 31		$	(1	)	$	(9	)	$	(18	)

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
	ACCUMULATED CURRENCY ADJUSTMENT:
	Balance, January 1		(101	)		(15	)		29
	Currency translation adjustments		(37	)		(86	)		(44	)

	Balance, December 31		(138	)		(101	)		(15	)

	MINIMUM PENSION LIABILITY:
	Balance, January 1		(7	)		(14	)		(10	)
	Minimum pension liability adjustments		2			7			(4	)

	Balance, December 31		(5	)		(7	)		(14	)

	DERIVATIVE INSTRUMENTS:
	Balance, January 1		—			—			—
	Cumulative effect of accounting change		2			—			—
	Net losses on derivative instruments		(3	)		—			—

	Balance, December 31		(1	)		—			—

Balance, December 31		$	(144	)	$	(108	)	$	(29	)

REINVESTED EARNINGS:
Balance, January 1		$	491		$	450		$	254
	Net income (loss)		(59	)		49			206
	Employee stock plans		(27	)		(4	)		(6	)
	Dividends		(4	)		(4	)		(4	)

Balance, December 31		$	401		$	491		$	450

TOTAL SHAREHOLDERS' EQUITY (DEFICIT)		$	(113	)	$	(34	)	$	82

See accompanying Notes to Consolidated Financial Statements.

F-6

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share amounts)

1. Significant Accounting Policies

Nature of Operations

Solutia Inc. and its subsidiaries make and sell a variety of high-performance chemical-based materials. Solutia is a world leader in performance films for laminated safety glass and after-market applications; resins and additives for high-value coatings; process development and scale-up services for pharmaceutical fine chemicals; specialties such as water treatment chemicals, heat transfer fluids and aviation hydraulic fluid and an integrated family of nylon products including high-performance polymers and fibers.

Prior to September 1, 1997, Solutia was a wholly-owned subsidiary of the former Monsanto Company (now known as Pharmacia Corporation). 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). 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. Net deficiency of assets of $113 million resulted from the spinoff.

Basis of Consolidation

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 (Loss) from Affiliates" in the Statement of Consolidated Income (Loss).

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 were used to account for restructuring reserves, environmental reserves, self-insurance reserves, employee benefit plans, asset impairments and contingencies.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and temporary investments with maturities of three months or less when purchased.

Inventory Valuation

Inventories are stated at cost or market, whichever is less. Actual cost is used to value raw materials and supplies. Standard cost, which approximates actual cost, is used to value finished goods and goods in process. Standard cost includes direct labor and raw materials, and manufacturing overhead based on practical capacity. The cost of certain inventories (62 percent as of December 31, 2001) is determined by the last-in, first-out (LIFO) method, which generally reflects the effects of

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inflation or deflation on cost of goods sold sooner than other inventory cost methods. The cost of other inventories generally is determined by the first-in, first-out (FIFO) method.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. The cost of plant and equipment is depreciated over weighted average periods of 20 years for buildings and 12 years for machinery and equipment, by the straight-line method.

Intangible Assets

The cost of intangible assets is amortized on a straight-line basis over the estimated periods benefited, generally 20 years for goodwill and periods ranging from 5 to 20 years for identified intangible assets.

Impairment of Long-Lived Assets

Impairment tests of long-lived assets are made when conditions indicate a possible loss. 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 market prices or, if not available, upon discounted cash value, at an appropriate discount rate.

Environmental Remediation

Costs for remediation of waste disposal sites are accrued in the accounting period in which the obligation is probable and when the cost is reasonably estimable. Postclosure costs for hazardous 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 or third-party indemnitors have agreed to pay any amounts and management believes that collectability of such amounts is probable, the amounts are reflected as receivables in the consolidated financial statements.

Self-Insurance

Solutia maintains self-insurance reserves to cover its estimated future legal costs and settlements related to workers' compensation, product, general, auto and operations liability claims that are less than policy deductible amounts or not covered by insurance. The Company also has purchased commercial insurance in order to reduce its exposure to such claims. Self-insured losses are accrued based upon estimates of the aggregate liability for uninsured claims incurred using certain actuarial assumptions followed in the insurance industry and the Company's historical experience.

Revenue Recognition

The Company's revenue-earning activities involve delivering or producing goods, and revenues are considered to be earned when the Company has completed the process by which it is entitled to such revenues. The following criteria are used for revenue recognition: persuasive evidence of an

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arrangement exists, delivery has occurred, selling price is fixed or determinable and collection is reasonably assured. In the case of the pharmaceutical services businesses, revenues are primarily recorded on a percentage of completion method.

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. Natural gas contracts are used to manage some of the exposure for the cost of natural gas. Gains and losses on contracts that are designated and effective as hedges are included in net income (loss) and offset the exchange gain or loss of the transaction being hedged.

Major currencies affecting the Company's business are the U.S. dollar, the British pound sterling, the euro, the Canadian dollar and the Brazilian real. Currency restrictions are not expected to have a significant effect on Solutia's cash flow, liquidity or capital resources.

Income Taxes

Solutia 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 at enacted rates.

Currency Translation

The local currency has been used as the functional currency for nearly all worldwide locations. The financial statements for most of Solutia's ex-U.S. operations are translated into U.S. dollars at current or average exchange rates. Unrealized currency translation adjustments in the Statement of Consolidated Financial Position are accumulated in equity.

Earnings (Loss) per Share

Basic earnings (loss) per share is a measure of operating performance that assumes no dilution from securities or contracts to issue common stock. Diluted earnings (loss) per share is a measure of operating performance by giving effect to the dilution that would occur if securities or contracts to issue common stock were exercised or converted. At December 31, 2001, 1.2 million common share equivalents were excluded because the effect would be antidilutive.

New Accounting Pronouncements

Effective January 1, 2002, Solutia adopted SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," which provide guidance related to accounting for business combinations and goodwill. The adoption of SFAS No. 141 did not have a material effect on Solutia's financial statements. Solutia has not completed its evaluation of SFAS No. 142 and, therefore, has not determined the final impact that the adoption of this standard will have on its financial position and results of operations. However, preliminary valuation work indicates that there is a potential goodwill impairment in the Company's Resins and Additives business. While the second step of the evaluation process is yet to be finalized, it is likely that a pretax impairment charge in the range of

F-9

$100 million to $200 million will be required. In addition, the Company expects annual amortization expense will be reduced by approximately $20 million to $25 million aftertax. See Footnote 19.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The statement addresses accounting and reporting requirements for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement obligations. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Solutia is evaluating SFAS No. 143 to determine the effects, if any, on its consolidated financial statements.

Effective January 1, 2002, Solutia adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses the accounting and reporting for the impairment or disposal of long-lived assets. The adoption of SFAS No. 144 did not have a material effect on Solutia's consolidated financial statements.

Reclassifications

Certain reclassifications to prior years' financial information have been made to conform to the 2001 presentation. These reclassifications included amounts related to employee stock plans which were previously classified as a reduction of net deficiency of assets at spinoff that have been reclassified to reinvested earnings.

2. Acquisitions and Divestitures

During the third quarter of 2000, Solutia completed the sale of its Polymer Modifiers business and related manufacturing facilities to Ferro Corporation for approximately $130 million. As a result of this transaction, Solutia recognized a $73 million pretax gain ($46 million aftertax). Solutia's results of operations included net sales of approximately $90 million in 2000 and $145 million in 1999 and operating income of approximately $16 million in 2000 and $36 million in 1999 from the Polymer Modifiers business.

During the second quarter of 2000, Solutia recognized a $15 million pretax gain ($9 million aftertax) on the sale of substantially all of its minority interest in P4 Production L.L.C., a phosphorus manufacturing venture. The results of operations from Solutia's minority interest in P4 Production L.L.C. were not material to Solutia's consolidated results of operations.

During the first quarter of 2000, Solutia completed two acquisitions in the Specialty Products segment, which provide custom process and technology services to the global pharmaceutical industry. In the first acquisition, which closed on February 10, Solutia acquired CarboGen Holdings AG. CarboGen is a leading process research and development firm. In the second acquisition, which closed on March 24, Solutia purchased AMCIS AG. AMCIS serves the global pharmaceutical industry by developing production processes and by manufacturing active ingredients for clinical trials and small-volume commercial drugs. The combined purchase price for these acquisitions was approximately $118 million, which was financed with commercial paper and the assumption of debt.

Both of the acquisitions have been accounted for using the purchase method. The allocations of the purchase price to the assets and liabilities acquired resulted in current assets of $17 million, non-current assets of $27 million, goodwill of $57 million, other intangible assets of $41 million, current

F-10

liabilities of $21 million and non-current liabilities of $3 million. Goodwill is being amortized over its estimated useful life of 20 years, and other intangible assets are being amortized over their estimated useful lives, which average 18 years.

Results of operations for CarboGen and AMCIS were included in Solutia's results of operations from the acquisition dates. The results of operations for the acquired businesses were not material to Solutia's consolidated results of operations for 2000.

On December 22, 1999, Solutia acquired Vianova Resins from Morgan Grenfell Private Equity Ltd. for approximately 1.2 billion deutsche marks (approximately $617 million), which was financed with commercial paper and the assumption of debt. Vianova Resins is a leading European producer of resins and additives for coatings and technical applications for the specialty, industrial and automotive sectors.

The acquisition has been accounted for using the purchase method. The allocation of the purchase price to the assets and liabilities acquired resulted in current assets of $192 million, non-current assets of $227 million, goodwill of $321 million, other intangible assets of approximately $163 million, current liabilities of $99 million and non-current liabilities of $187 million. Goodwill is being amortized over its estimated useful life of 20 years, and other intangible assets are being amortized over their estimated useful lives, which average 19 years.

On May 25, 1999, Solutia acquired CPFilms Inc. from Akzo Nobel N.V. for approximately $200 million, which was financed with commercial paper. CPFilms is a leading manufacturer and marketer of window film and other high-technology film products for automotive and architectural after-markets and a variety of other specialty film applications. The acquisition has been accounted for using the purchase method. The allocation of the purchase price to the identifiable assets and liabilities acquired resulted in goodwill of approximately $80 million. Goodwill and other intangible assets are being amortized over their estimated useful lives of 20 years. CPFilms' results of operations from May 25, 1999, through 31, 1999, were included in Solutia's Statement of Consolidated Income for the year ended December 31, 1999.

The following unaudited pro forma condensed information for the year ended December 31, 1999, gives effect to the acquisitions of CPFilms and Vianova Resins, and the associated debt financing, as if the acquisitions and the financing had occurred as of the beginning of the periods presented.

	For the Year Ended December 31, 1999
	(Unaudited)
Net sales	$	3,357
Net income		203
Basic earnings per share		1.83
Diluted earnings per share		1.77

3. Restructuring and Business Combination Reserves

During the fourth quarter of 2000, Solutia recorded restructuring charges of $53 million ($33 million aftertax) to cost of goods sold for costs associated with work force reductions and closure of certain non-strategic facilities. During 2001, Solutia reduced its workforce by approximately

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700 positions. Additionally, Solutia eliminated more than 750 contractor positions during 2001. Approximately 90 percent of the workforce reductions affected North American business and manufacturing operations, and approximately 10 percent affected European, Asian and Latin American operations and sales offices. Management positions represented approximately one-third of the workforce reductions. During the fourth quarter of 2001, Solutia determined that the original provision taken for its 2001 restructuring program was insufficient to cover its total costs. Actual costs to terminate certain European and North American management employees and certain employee benefit costs for involuntary terminations were higher than the original estimates. As a result, Solutia recorded additional restructuring charges of $9 million ($6 million aftertax) to cost of goods sold to cover these higher costs. The restructuring actions contemplated by this reserve were completed by the end of 2001. Certain severance payments owed to individuals terminated late in the fourth quarter of 2001 have been included in accrued liabilities and will be paid in their entirety during the first quarter of 2002. The closure of non-strategic facilities is not anticipated to have a significant impact on future operations.

The following table summarizes the 2000 restructuring charge and amounts utilized to carry out those plans:

		Employment Reductions			Shutdown of Facilities			Total
Balance at January 1, 2000		$	—		$	—		$	—
	Charges taken		50			3			53
	Amounts utilized		—			(3	)		(3	)

Balance at December 31, 2000		$	50		$	—		$	50

	Charges taken		9			—			9
	Amounts utilized		(59	)		—			(59	)

Balance at December 31, 2001		$	—		$	—		$	—

During the second quarter of 2000, Solutia completed plans to integrate Vianova Resins operations with Solutia's resins business and service organizations and recorded a liability of $11 million to accrue for costs of integration, in accordance with Emerging Issues Task Force Issue 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." The integration plans included employment reductions primarily from Vianova Resins service organizations located in more than 10 countries. In addition, the plans included amounts to shut down certain Vianova Resins sales offices. During the first half of 2001, Solutia completed the integration actions of shutting down certain Vianova Resins sales offices at a cost of approximately $1 million and reduced its workforce by approximately 130 positions at a cost of approximately $10 million.

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The following table summarizes the Vianova Resins integration costs and amounts utilized to carry out those plans:

		Employment Reductions			Shutdown of Facilities			Total
Balance at January 1, 2000		$	—		$	—		$	—
	Charges taken		10			1			11
	Amounts utilized		(2	)		—			(2	)

Balance at December 31, 2000		$	8		$	1		$	9

	Amounts utilized		(8	)		(1	)		(9	)

Balance at December 31, 2001		$	—		$	—		$	—

As part of the integration of Vianova Resins with Solutia's resins businesses, Solutia identified excess production capacity for certain Solutia resins products that will allow for the consolidation of production facilities. As a result, Solutia decided to exit its operations at the Port Plastics site in Addyston, Ohio. An $8 million ($5 million aftertax) charge to cost of goods sold was recorded in the second quarter of 2000 to carry out the exit plan. The charge included $2 million to write down plant assets to their fair value of approximately $1 million, $2 million of dismantling costs and $4 million of estimated costs for which Solutia is contractually obligated under an operating agreement. Fair value was determined by discounting future cash flows using an appropriate discount rate. Under the operating agreement, Solutia is required to provide 24 months notice of intent to exit and to pay contractually obligated costs for an additional 18 months thereafter to a third-party operator. The contractually obligated costs represent direct manufacturing, overhead, utilities and severance. The financial impact will not be material to Solutia as production will be shifted to other production facilities.

The following table summarizes the 2000 restructuring charge and amounts utilized to carry out those plans:

		Shutdown of Facilities		Asset Writedowns			Other Costs		Total
Balance at January 1, 2000		$	—	$	—		$	—	$	—
	Charges taken		2		2			4		8
	Amounts utilized		—		(2	)		—		(2	)

Balance at December 31, 2000		$	2	$	—		$	4	$	6
	Amounts utilized		—		—			—		—

Balance at December 31, 2001		$	2	$	—		$	4	$	6

In February 1999, Integrated Nylon's ammonia unit experienced the failure of certain equipment critical to the production process. Based on an analysis of the economics of purchased ammonia and the cost to repair the equipment, Solutia decided to exit the ammonia business. A $28 million ($18 million aftertax) charge to cost of goods sold was recorded in the first quarter of 1999 to implement the exit plan. The charge included $2 million to write down the assets to their fair value of approximately $4 million, $4 million of dismantling costs and $22 million of costs for which Solutia is

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contractually obligated under an operating agreement. During the first quarter of 2000, Solutia entered into an agreement for the dismantling of those assets by a third-party and as a result, transferred the liability for dismantling to the third-party. During the third quarter of 2000, Solutia reached an agreement with the plant operator for the final settlement of the contractually obligated costs. As a result, Solutia transferred the liability for the contractually obligated costs to accrued liabilities. Net sales for the ammonia business were $1 million for the year ended December 31, 1999. Operating income for that period was minimal.

The following table summarizes the 1999 restructuring charge and amounts utilized to carry out those plans:

		Shutdown of Facilities			Asset Writedowns			Other Costs			Total
Balance at January 1, 1999		$	—		$	—		$	—		$	—
	Charges taken		4			2			22			28
	Amounts utilized		—			(2	)		(6	)		(8	)

Balance at December 31, 1999		$	4		$	—		$	16		$	20

Amounts utilized			(4	)		—			(16	)		(20	)

Balance at December 31, 2000		$	—		$	—		$	—		$	—

4. Asset Impairments

During the fourth quarter of 2000, Solutia recorded a $76 million ($47 million aftertax) impairment charge to cost of goods sold primarily to write down certain non-performing and non-strategic fiber spinning, drawing and packaging equipment which supports several of Integrated Nylon's product lines. Solutia also recorded an impairment charge to cost of goods sold of $15 million ($10 million aftertax) to write down chlorobenzenes' production equipment in the Specialty Products segment. The impairments were indicated by 2000 operating losses and projections of continued losses primarily because of the noncompetitive cost positions these businesses have and the competitive market conditions that they face. The carrying values of the assets were written down as determined by discounting expected future cash flows, using an appropriate discount rate. The assumptions used in the cash flow projections were not materially different from the market conditions experienced in 2000. These conditions are not expected to improve significantly in the foreseeable future. The cash flow assumptions included a declining demand and market share combined with decreased operating margins. Lower operating margins reflect the non-competitive cost position of these businesses and the impact of lower selling prices associated with an extremely competitive operating environment.

During the second quarter of 2000, Solutia recorded a $6 million ($4 million aftertax) impairment charge to administrative expenses for the write down of capitalized software costs related to the formation of the Astaris joint venture. The software had previously been fully dedicated to Solutia's Phosphorus Derivatives business. Impairment was indicated by a significant change in the extent and manner in which Astaris was expected to utilize the asset under a transition services agreement. The carrying value of the asset was written down to its estimated fair value, as determined by discounting expected future cash flows, using an appropriate discount rate.

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An impairment charge of $6 million ($4 million aftertax) was recorded in the first quarter of 1999 to cost of goods sold primarily to write down a bulk continuous filament spinning machine as a result of management's decision to shut down the equipment due to a noncompetitive cost position. The adjusted carrying value of the machine was $0.5 million at the time of the write down. The charge was due to a review under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed Of," which indicated that the carrying amount of the assets exceeded the identifiable, undiscounted cash flows related to the assets. Fair value of the assets was determined based on estimates of market prices for the machinery. Operating income derived from the machinery was minimal in the year ended December 31, 1999.

5. Risk Management Activities

Effective January 1, 2001, Solutia adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The cumulative effect of adopting SFAS No. 133 as of January 1, 2001, resulted in a cumulative addition to other comprehensive income (loss) of $2 million aftertax, principally attributable to unrealized gains in commodity cash flow hedges.

Solutia's business operations give rise to market risk exposures that result from changes in currency exchange rates, interest rates and certain commodity prices. To manage the volatility relating to these exposures, Solutia enters into various hedging transactions that enable it to alleviate the adverse effects of financial market risk. Designation is performed on a specific exposure basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the fair value or cash flows of the underlying exposures being hedged. Solutia's hedging transactions are carried out under policies and procedures approved by the Audit and Finance Committee of the Board of Directors, which do not permit the purchase or holding of any derivative financial instruments for trading purposes.

Foreign Currency Exchange Rate Risk

Solutia manufactures and sells its products in a number of countries throughout the world and, as a result, is exposed to movements in foreign currency exchange rates. Solutia uses foreign currency hedging instruments to manage the volatility associated with foreign currency purchases of materials and other assets and liabilities created in the normal course of business. Solutia primarily uses forward exchange contracts and purchased options to hedge these risks with maturities of less than 18 months.

Solutia also enters into certain foreign currency derivative instruments primarily to protect against exposure related to intercompany financing transactions. Solutia has chosen not to designate these instruments as hedges and to allow the gains and losses that arise from marking the contracts to market to be recorded in other income (expense)—net in the period. The net impact of the related gains and losses was not material.

In addition, Solutia uses forward exchange contracts which are designated and qualify as cash flow hedges. These are intended to offset the effect of exchange rate fluctuations on certain forecasted equipment purchases. Gains and losses on these instruments to the extent that the hedge is effective

F-15

are deferred in other comprehensive income (loss) until the related depreciation of equipment purchased is recognized in earnings. The earnings impact is reported in cost of goods sold to match the classification of depreciation. At December 31, 2001, all hedges were determined to be effective.

No cash flow hedges were discontinued during the year due to changes in expectations on the original forecasted transactions. Foreign currency hedging activity is not material to Solutia's financial statements.

Interest Rate Risk

Interest rate risk is primarily related to the changes in fair value of fixed-rate long-term debt and short-term, floating rate debt. Solutia believes its current debt structure appropriately protects the Company from changes in interest rates and is not actively using any contracts to manage interest rate risk.

Commodity Price Risk

Certain raw materials and energy sources used by Solutia are subject to price volatility caused by weather, crude oil prices, supply conditions, political and economic variables and other unpredictable factors. Solutia periodically uses forward and option contracts to manage the volatility related to anticipated energy and raw material purchases with maturities up to 18 months. These market instruments are designated as cash flow hedges. The mark-to-market gain or loss on qualifying hedges is included in other comprehensive income (loss) to the extent effective, and reclassified into cost of goods sold in the period during which the hedged transaction affects earnings. The mark-to-market gains or losses on ineffective portions of hedges are recognized in cost of goods sold immediately. For the year ended December 31, 2001, the net impact on other comprehensive income (loss) included approximately $4 million aftertax for unrealized losses on cash flow hedges partially offset by reclassifications out of other comprehensive income (loss) of approximately $1 million aftertax for realized losses on cash flow hedges. Solutia estimates that approximately $2 million of existing net unrealized losses will be reclassified to cost of goods sold within 12 months.

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Credit Risk

Credit risk arising from the inability of a counterparty to meet the terms of Solutia's financial instrument contracts is generally limited to the amounts, if any, by which the counterparty's obligations exceed the obligations of the Company. It is Solutia's policy to enter into financial instruments with a diversity of creditworthy counterparties. Therefore, Solutia does not expect to incur material credit losses on its risk management or other financial statement instruments.

6. Investments in Affiliates

In January of 2002, Solutia signed an agreement to sell its 50 percent interest in the Advanced Elastomer Systems joint venture to ExxonMobil Chemical Company, a division of Exxon Mobil Corporation and Exxon Chemical Asset Management Partnership, a subsidiary of Exxon Mobil Corporation for approximately $100 million. The sale is expected to close during the first quarter of 2002 and result in a modest gain. Solutia will use the net sales proceeds to pay down debt.

In April 2000, Astaris LLC, a joint venture between Solutia and FMC Corporation, started operations to manufacture and market phosphorus chemicals. Solutia contributed its Phosphorus Derivatives business to the joint venture in exchange for a 50 percent ownership share. Net assets contributed to the venture totaled approximately $87 million. During the third quarter of 2000, Solutia received $85 million from Astaris representing a cash distribution and repayment of working capital loans. In connection with the external financing agreement for Astaris completed during the third quarter of 2000, Solutia contractually agreed to provide Astaris with funding in the event the joint venture fails to meet certain financial benchmarks. During 2001, Solutia contributed $31 million to Astaris under this agreement. Solutia anticipates a contribution of up to $25 million will be required in 2002.

At December 31, 2001, Solutia's investments in affiliates consisted principally of its 50 percent interests in the Flexsys, Advanced Elastomers Systems and Astaris joint ventures for which Solutia uses the equity method of accounting. Solutia received dividends from affiliates of approximately $30 million in 2001, $45 million in 2000 and $60 million in 1999. Summarized combined financial information for 100 percent of the Flexsys, AES and Astaris joint ventures is as follows:

		2001			2000		1999
Results of operations:
	Net sales	$	1,241		$	1,247	$	869
	Gross profit		226			327		267
	Operating income (loss)		(63	)		138		108
	Net income (loss)		(48	)		95		85
Financial position:
	Current assets	$	493		$	552
	Noncurrent assets		768			744
	Current liabilities		498			347
	Noncurrent liabilities		205			334

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7. Inventory Valuation

The components of inventories were:

	2001			2000
Finished goods	$	209		$	305
Goods in process		107			105
Raw materials and supplies		100			108

Inventories, at FIFO cost		416			518
Excess of FIFO over LIFO cost		(113	)		(161	)

Total	$	303		$	357

Inventories at FIFO approximate current cost. The effects of LIFO inventory liquidations were not significant.

8. Income Taxes

The components of income (loss) before income taxes were:

	2001			2000			1999
United States	$	(154	)	$	(23	)	$	224
Outside United States		77			64			79

Total	$	(77	)	$	41		$	303

The components of income tax expense (benefit) charged to operations were:

		2001			2000			1999
Current:
	U.S. federal	$	(30	)	$	(63	)	$	48
	U.S. state		—			(2	)		6
	Outside United States		46			34			20

			16			(31	)		74

Deferred:
	U.S. federal		(3	)		46			18
	U.S. state		(13	)		(7	)		—
	Outside United States		(18	)		(16	)		5

			(34	)		23			23

Total		$	(18	)	$	(8	)	$	97

During 2000, Germany reduced its corporate tax rate effective January 1, 2001. In accordance with SFAS No. 109, "Accounting for Income Taxes," Solutia recognized $7 million of income to record the net effect of the change on deferred income tax assets and liabilities. This adjustment is included as part of the deferred tax provision above.

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Factors causing Solutia's effective tax rate to differ from the U.S. federal statutory rate were:

	2001		2000		1999
U.S. federal statutory rate	(35	)%	35	%	35	%
U.S. state income taxes	(11	)	(15	)	2
Tax benefit of foreign sales corporation	(2	)	(13	)	(2	)
Taxes related to foreign income, net of credits	(11	)	(17	)	(1	)
Valuation allowances	25		32		—
Income from equity affiliates recorded net of tax	4		(37	)	(4	)
Other	7		(6	)	2

Effective Income Tax Rate	(23	)%	(21	)%	32	%

Deferred income tax balances were related to:

	2001			2000
Property	$	(200	)	$	(173	)
Postretirement benefits		369			377
Restructuring reserves		3			29
Environmental liabilities		67			64
Intangible assets		(59	)		(66	)
Inventory		17			—
Tax credit carryforward		54			—
Valuation allowances		(32	)		(13	)
Net operating losses		31			9
Other		32			(30	)

Net Deferred Tax Assets	$	282		$	197

At December 31, 2001, foreign tax credit carryforwards available to reduce possible future U.S. income taxes amounted to approximately $54 million, all of which will expire in 2004 through 2006. Valuation allowances have been provided for the foreign tax credit carryforwards that are not likely to be utilized. At December 31, 2001, various state and foreign net operating loss carryforwards are available to offset future taxable income. These net operating losses expire in years after 2004 or have an indefinite carryforward period. Income taxes and remittance taxes have not been recorded on $92 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 United States.

9. Debt Obligations

Solutia's debt obligations include borrowings against the $800 million, five-year revolving credit facility ($800 million facility) with a syndicate of commercial banks, notes and debentures. The weighted average interest rate on total debt outstanding at December 31, 2001, was 6.1 percent and was 6.7 percent at December 31, 2000.

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Debt Maturing in One Year

At December 31, 2001, debt maturing in one year consisted of borrowings of $533 million from the $800 million facility and $150 million of 6.5 percent notes due in October of 2002. Weighted average interest rates on borrowings from the $800 million facility were 4.5 percent during 2001. Weighted average interest rates on commercial paper balances were 6.6 percent during 2000 and 5.5 percent in 1999. The $800 million facility is available for working capital, commercial paper support and other general corporate purposes. The $800 million facility expires in August of 2002.

The $800 million facility contains various covenants that, among other things, restrict Solutia's ability to merge with another entity and require Solutia to meet certain leverage and interest coverage ratios. During the first quarter of 2001, Solutia completed an amendment of the $800 million facility that modified the financial covenants. A 60-day waiver of the financial covenants was received on September 17, 2001, for the third quarter of 2001. Without the waiver, Solutia would not have been in compliance with the leverage coverage ratio. In November 2001, Solutia completed an amendment of the $800 million facility that modified financial covenants and collateralized borrowings. Four domestic subsidiaries are guarantors of the amended facility. Borrowings under the amended facility are secured by liens on Solutia's inventory and receivables and those of its material domestic subsidiaries and one foreign subsidiary, pledges of 65 percent of the voting stock of two foreign subsidiaries and a lien on specified principal properties. The aggregate amount of Solutia's obligations entitled to the benefit of the lien on specified properties will not exceed $236 million. Solutia does not anticipate that future borrowings will be significantly limited by the terms of these amendments.

The $800 million credit facility expires in August of 2002 and $150 million of 6.5 percent notes mature in October of 2002. Solutia plans to refinance the $800 million facility with a combination of unsecured long-term notes, a secured term loan and a revolving credit facility. Interest rates will be commensurate with Solutia's credit rating. Proceeds of the refinancing will be used to repay outstanding borrowings under the $800 million facility and $150 million of 6.5 percent notes and for other general corporate purposes. The refinancing is expected to be completed in the first half of 2002. Inability to complete this refinancing or a similar financing vehicle prior to August 2002 would have a material adverse affect on Solutia's liquidity.

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Long-Term Debt

Long-term debt consisted of the following:

	2001			2000
6.5% notes due 2002	$	150		$	150
7.375% debentures due 2027		300			300
6.72% debentures due 2037		150			150
6.25% euro notes due 2005		177			186
Other		3			1
Unamortized debt discount		(3	)		(3	)

		777			784
Less: Current portion of long-term debt		(150	)		—

Total	$	627		$	784

The notes and debentures are unsecured obligations. Interest is payable semiannually, on April 15 and October 15 of each year. The holders of the 2037 debentures have the right to require repayment on October 15, 2004. The notes and debentures contain provisions that, among other things, restrict Solutia's ability to create liens on assets and its ability to enter into sale and leaseback transactions.

10. Fair Values of Financial Instruments

The estimated fair value of Solutia's long-term debt was $553 million as of December 31, 2001, and $685 million as of December 31, 2000. These estimates compare with the recorded amount of $627 million in 2001 and $784 million in 2000.

The recorded amounts of cash, trade receivables, third-party guarantees, accounts payable and short-term debt approximate their fair values at both December 31, 2001, and December 31, 2000. The estimated fair value of the Company's foreign currency forward contracts on intercompany financing transactions and natural gas contracts was approximately $5 million at December 31, 2001. Notional amounts for purchase contracts were $308 million at December 31, 2001, and $286 million at December 31, 2000, and for sell contracts the notional amounts were $301 million at December 31, 2001, and $265 million at December 31, 2000.

Fair values are estimated by the use of quoted market prices, estimates obtained from brokers and other appropriate valuation techniques and are based upon information available as of December 31, 2001, and December 31, 2000. The fair-value estimates do not necessarily reflect the values Solutia could realize in the current market.

11. Postretirement Benefits

Pension benefits are based on the employee's age, years of service and/or compensation level. The qualified pension plan is funded in accordance with Solutia's long-range projections of the plan's financial conditions. These projections take into account benefits earned and expected to be earned, anticipated returns on pension plan assets and income tax and other regulations. Prior to the spinoff, the majority of Solutia's employees participated in Monsanto's noncontributory pension plans. In

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conjunction with the spinoff, Solutia assumed pension liabilities and received related assets from those plans for its applicable active employees and for certain former employees who left Monsanto in earlier years.

The majority of Solutia's employees also 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 and have the required years of service. These postretirement benefits are unfunded and are generally based on the employee's age, years of service and/or compensation level. The costs of postretirement benefits are accrued by the date the employees become eligible for the benefits. In connection with the spinoff, Solutia assumed retiree medical liabilities for its applicable active employees and for approximately two-thirds of the retired U.S. employees of Monsanto.

For 2001, 2000, and 1999, Solutia's pension and healthcare and other benefit costs were as follows:

	Pension Benefits									Healthcare and Other Benefits
	2001			2000			1999			2001			2000			1999
Service costs for benefits earned	$	31		$	32		$	38		$	10		$	10		$	11
Interest cost on benefit obligation		123			131			132			53			53			49
Assumed return on plan assets		(145	)		(144	)		(153	)		—			—			—
Prior service costs		21			21			21			(15	)		(18	)		(18	)
Transition asset		(2	)		(10	)		(10	)		—			—			—
Recognized net (gain)/loss		(8	)		4			(3	)		10			7			6
Settlement		1			(23	)		—			—			—			—

Total	$	21		$	11		$	25		$	58		$	52		$	48

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Components of the changes in fair value of plan assets, changes in the benefit obligation and the funding status of Solutia's postretirement plans were as follows:

		Pension Benefits						Healthcare and Other Benefits
		2001			2000			2001			2000
*Changes in Fair Value of Plan Assets*
	Fair value of plan assets at January 1	$	1,724		$	1,973		$	—		$	—
	Actual return on plan assets		(81	)		92			—			—
	Employer contributions		6			22			—			—
	Settlements		—			(37	)		—			—
	Benefits paid		(265	)		(326	)		—			—

	Fair value of plan assets at December 31	$	1,384		$	1,724		$	—		$	—

*Changes in Benefit Obligation*
	Benefit obligation at January 1	$	1,746		$	1,833		$	732		$	720
	Service costs		31			32			10			10
	Interest cost		123			131			53			53
	Participant contributions		—			—			9			7
	Actuarial losses		69			111			79			51
	Settlements		—			(37	)		—			(17	)
	Benefits paid		(265	)		(326	)		(95	)		(92	)
	Plan amendments		2			2			19			—

	Benefit obligation at December 31	$	1,706		$	1,746		$	807		$	732

Plan assets consist principally of common stocks and U.S. government and corporate obligations. Contributions to the pension benefit plans were neither required nor made in 2001 and 2000 because Solutia's principal pension plan is adequately funded, using assumed returns.

The funded status of Solutia's postretirement benefit plans at December 31, 2001, and 2000 was as follows:

	Pension Benefits						Healthcare and Other Benefits
	2001			2000			2001			2000
Funded Status	$	(322	)	$	(22	)	$	(807	)	$	(732	)
Unrecognized actuarial (gain)/loss		8			(294	)		136			65
Unrecognized prior service costs		115			135			(107	)		(141	)
Additional liability		(39	)		(13	)		—			—
Unrecognized transition (gain)/loss		—			(5	)		—			—

Accrued net liability at December 31	$	(238	)	$	(199	)	$	(778	)	$	(808	)

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The accrued net liability was included in:

	Pension Benefits						Healthcare and Other Benefits
	2001			2000			2001			2000
Current postretirement liabilities	$	—		$	—		$	(82	)	$	(78	)
Long-term postretirement liabilities		(251	)		(211	)		(696	)		(730	)
Less: Other assets		13			12			—			—

Accrued net liability	$	(238	)	$	(199	)	$	(778	)	$	(808	)

Certain of Solutia's pension benefit plans are unfunded and therefore have accumulated benefit obligations in excess of plan assets. Information regarding these unfunded plans was as follows:

	2001		2000
Projected benefit obligation	$	24	$	25
Accumulated benefit obligation		22		23
Fair value of plan assets		—		—

The significant actuarial assumptions used to estimate the projected benefit obligation for the Company's principal pension, healthcare and other benefit plans were as follows:

	Pension Benefits				Healthcare and Other Benefits
	2001		2000		2001		2000
Discount rate	7.00	%	7.25	%	7.00	%	7.25	%
Assumed long-term rate of return on plan assets	9.50	%	9.50	%	—		—
Annual rates of salary increase (for plans that base benefits on final compensation level)	4.00	%	4.25	%	—		—
Assumed trend rate for healthcare costs	—		—		5.25	%	5.00	%
Ultimate trend rate for healthcare costs	—		—		5.25	%	5.00	%

A 1 percent change in the assumed health care cost trend rates would have the following effect as of December 31, 2001:

		1-Percentage- Point Increase			1-Percentage- Point Decrease
Effect on total service and interest cost components		$	1		$	(1	)
Effect on postretirement benefit obligation			9			(10	)

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12. Employee Savings Plans

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. The trust used the proceeds of the loan to repay the assumed third-party debt. Subsequent to the spinoff, the ESOP trust was required by government regulations to divest its holdings of Monsanto common stock and to use the proceeds to acquire Solutia common stock. The divestiture of Monsanto common stock and the purchase of Solutia common stock were completed in early 1998. At inception, the trust held 10,737,097 shares of Solutia common stock. As of December 31, 2001, there have been 10,303,561 shares allocated to participants.

Substantially all U.S. employees of Solutia are eligible to participate in the Solutia Inc. Savings and Investment Plan, a 401(k) plan. Shares held in the ESOP are used to make Solutia's matching contribution to eligible participants' accounts under this plan. The number of shares released is computed on each pay date based on a formula that considers the participant contribution, the Solutia matching rate, and Solutia's closing stock price. Shares allocated to participant accounts totaled 1,160,203 shares in 2001, 1,314,341 shares in 2000, and 979,439 shares in 1999, leaving 433,536 unallocated shares as of December 31, 2001. The value of these contributions was $15 million in 2001, $17 million in 2000, and $18 million in 1999. Solutia will fulfill future matching obligations with remaining unallocated shares in the ESOP and the use of treasury stock or open market purchases of the Company's stock. Unallocated shares held by the ESOP are considered outstanding for earnings (loss) 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:

	2001		2000		1999
Total ESOP expense	$	8	$	10	$	8
Interest portion of total ESOP expense		1		1		2
Cash contributions		7		10		10

13. Stock Option Plans

Solutia has two stock-based incentive plans under which awards are being granted to officers and employees, the Solutia Inc. 2000 Stock-Based Incentive Plan and the Solutia Inc. 1997 Stock-Based Incentive Plan. The 2000 plan authorizes up to 5,400,000, and the 1997 plan up to 7,800,000, shares of Solutia common stock for grants of non-qualified and incentive stock options, stock appreciation rights, restricted stock awards and bonus stock awards. The shares used may be newly issued shares, treasury shares or a combination. Under both plans, the exercise price of a stock option must be no less than the fair market value of Solutia's common stock on the option grant date. Additionally, the plans provide that the term of any stock option granted may not exceed 10 years. At December 31, 2001, approximately 3,101,380 shares from the 2000 plan and 139,731 shares from the 1997 plan remained available for grants.

During 2001, non-qualified options to purchase 468,000 shares of Solutia common stock were granted under the plans to current executive officers and other senior executives as a group, and

F-25

non-qualified stock options to purchase 1,269,250 shares were granted to other employees at an average exercise price of $13.68 per share. Total shares covered by options granted under the plans to current executive officers and other senior executives as a group totaled 2,567,000 and other employees totaled 7,900,518, through December 31, 2001. The options granted to Solutia's executive officers and other senior executives are primarily performance options that become exercisable upon the earlier of achievement of specified share price targets or the ninth anniversary of the option grant. The options granted to the other management employees are time-based. They generally become exercisable in thirds, one-third on each of the first three anniversaries of the option grant date.

The Solutia Inc. Non-Employee Director Compensation Plan provides incentives to non-employee members of Solutia's board of directors. This plan authorizes up to 400,000 shares for grants of non-qualified stock options and for grants of deferred shares in payment of all or a portion of the annual retainer for the non-employee directors. Only treasury shares may be used. Under this plan, the exercise price of a stock option must be no less than the fair market value of Solutia's common stock on the grant date and the term of any stock option granted under the plan may not exceed 10 years. At December 31, 2001, 236,551 shares of Solutia's common stock remained available for grants under the plan. Shares covered by options granted to non-employee directors totaled 25,167 in 2001, 25,167 in 2000, and 34,333 in 1999.

As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," Solutia has elected to continue following the guidance of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," for measurement and recognition of stock-based transactions with employees. Accordingly, no compensation cost has been recognized for Solutia's option plans. Had the determination of compensation cost for these plans been based on the fair value at the grant dates for awards under these plans, consistent with the method of SFAS No. 123, Solutia's net income (loss) would have been reduced to the pro forma amounts indicated below:

		2001			2000		1999
Net Income (loss):
	As reported	$	(59	)	$	49	$	206
	Pro forma		(67	)		42		187
Diluted earnings (loss) per share:
	As reported	$	(0.57	)	$	0.46	$	1.80
	Pro forma		(0.64	)		0.39		1.63

Compensation expense resulting from the fair value method of SFAS No. 123 may not be representative of compensation expense to be incurred on a pro forma basis in future years. The fair value of each option grant is estimated on the date of grant by use of the Black-Scholes option-pricing model.

F-26

The following weighted-average assumptions were used for grants of Solutia options in 2001, 2000 and 1999:

	2001	2000	1999
Expected dividend yield	0.2%	0.2%	0.2%
Expected volatility	40.0%	34.0%	34.0%
Risk-free interest rates	4.6%	5.8%	6.0%
Expected option lives (years)	5.0	5.0	5.0

The weighted-average fair values of options granted were $5.57 in 2001, $5.30 in 2000, and $8.05 in 1999.

A summary of the status of Solutia's stock option plans for years ended December 31, 2001, 2000 and 1999 follows:

			Outstanding
		Exercisable Shares	Shares		Weighted-Average Exercise Price
December 31, 1998		17,116,842	25,857,105		$	14.79

	Granted		2,054,658		$	20.61
	Exercised		(678,710	)		10.93
	Expired		(495,232	)		18.43

December 31, 1999		18,852,246	26,737,821		$	15.27

	Granted		1,912,043		$	13.98
	Exercised		(379,687	)		6.74
	Expired		(1,279,514	)		17.21

December 31, 2000		23,590,921	26,990,663		$	15.21

	Granted		1,762,417		$	13.68
	Exercised		(1,796,038	)		6.14
	Expired		(1,278,013	)		16.32

December 31, 2001		21,993,759	25,679,029		$	15.68

The following table summarizes information about stock options outstanding at December 31, 2001:

F-27

Options Outstanding:

Range of Exercise Prices		Shares	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price
$	3 to 7	2,650,148	1.8	$	5.97
	8 to 11	58,246	6.6		10.80
	12 to 15	4,425,852	7.9		13.52
	16 to 18	12,430,225	5.0		16.43
	19 to 22	5,888,303	6.3		19.69
	23 to 29	226,255	6.4		27.65

$	3 to 29	25,679,029	5.5	$	15.68

Options Exercisable:

Range of Exercise Prices		Shares	Weighted-Average Exercise Price
$	3 to 7	2,650,148	$	5.97
	8 to 11	33,967		10.11
	12 to 15	1,581,669		12.98
	16 to 18	12,430,225		16.43
	19 to 22	5,079,495		19.58
	23 to 29	218,255		27.61

$	3 to 29	21,993,759	$	15.75

14. Capital Stock

Solutia's board of directors declared a dividend of one preferred stock purchase right for each share of Solutia's common stock issued in the distribution of shares by Monsanto to its shareholders on the effective date of the spinoff and authorized the issuance of one right for each share of common stock issued after the effective date of the spinoff until the earlier of the date the rights become exercisable and the termination date of the rights plan. 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 Solutia's outstanding common stock, the rights become exercisable. Then, 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 Solutia'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 Solutia'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 Solutia's outstanding common stock, Solutia's 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 Solutia's

F-28

common stock on a one-share-for-every-one-right basis. At any time prior to the acquisition of such a 20 percent position, Solutia 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, 2001, there were no preferred shares issued or outstanding.

15. Commitments and Contingencies

Commitments, principally in connection with uncompleted additions to property, were approximately $8 million at December 31, 2001. Solutia was contingently liable as a guarantor principally in connection with bank loans totaling approximately $9 million at December 31, 2001. In addition, as of December 31, 2001, the Company was contingently liable under letters of credit, primarily related to environmental remediation, totaling $65 million. Solutia's future minimum payments under noncancelable operating leases and unconditional purchase obligations are $21 million for 2002, $22 million for 2003, $20 million for 2004, $18 million for 2005, $16 million for 2006, and $100 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. The unamortized deferred credits were approximately $175 million at December 31, 2001, and approximately $171 million at December 31, 2000.

In connection with the completion of the external financing agreement for Astaris which expires in September of 2005, Solutia contractually agreed to provide Astaris with funding in the event the joint venture fails to meet certain financial benchmarks. During 2001, Solutia contributed $31 million to the joint venture under this agreement. Solutia anticipates a contribution of up to $25 million will be required in 2002. Solutia believes that this obligation is not likely to have a significant impact on its consolidated financial position, liquidity or profitability.

In 1993, a co-generation facility was constructed at the Pensacola, Florida manufacturing site to provide the plant with electricity and steam. Solutia financed the construction by placing the co-generation facility in a trust that was funded by a syndicate of commercial banks. Solutia makes monthly operating lease payments and the lease term expires in August 2002. Solutia expects to exercise its option to purchase the co-generation facility from the trust for approximately $32 million with proceeds from the anticipated refinancing during 2002.

The more significant concentrations in Solutia's trade receivables at year-end were:

	2001		2000
U.S. chemical industry	$	53	$	51
U.S. carpet industry		33		42
European glass industry		39		38
European chemical industry		81		101

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Management does not anticipate losses on its trade receivables in excess of established allowances.

Solutia's Statement of Consolidated Financial Position included accrued liabilities of $173 million at December 31, 2001, and $181 million at December 31, 2000, for the remediation of identified waste disposal sites. Expenditures related to remediation activities were $40 million in 2001, $29 million in 2000 and $22 million in 1999. Solutia expects to incur expenditures in the range of $30 million to $40 million annually for remediation activities for the foreseeable future.

Uncertainties related to all of Solutia's environmental liabilities include evolving government policy and regulations, the method and extent of remediation and future changes in technology. Because of these uncertainties, Solutia estimates that potential future expenses associated with these liabilities could be an additional $20 million to $30 million. Although the ultimate costs and results of remediation of contaminated sites cannot be predicted with certainty, they are not expected to have a material, adverse effect on Solutia's consolidated financial position, liquidity or profitability in any one year.

On April 14, 2001, Solutia reached an agreement to settle the claims brought by 1,596 plaintiffs in one of the actions pending in the U.S. District Court for the Northern District of Alabama. The settlement agreement was approved by the court and did not have a material adverse effect on Solutia's consolidated financial position, liquidity or profitability.

A mechanics' lien in the amount of approximately $42 million was filed on the Chocolate Bayou plant in Alvin, Texas. This lien arises out of a dispute with the contractor, Fluor Daniel, over the construction of Solutia's new acrylonitrile plant. The contractor also alleges a constitutional lien on such property pursuant to the Texas Constitution.

On October 12, 2000, the printing ink resins unit and a small phenolics production unit at Wiesbaden, Germany were severely damaged by an explosion and fire. No fatalities, serious injuries or environmental damage resulted from the incident. During the first quarter of 2001, Solutia finalized insurance recoveries and, accordingly, recognized a $28 million gain ($17 million aftertax) in other income (expense)—net from the insurance settlements in excess of the net book value of the plant assets and associated losses.

During the first quarter of 1999, Solutia recorded a $29 million ($18 million aftertax) charge to cost of goods sold to increase reserves related to the anticipated settlement of two lawsuits brought against Monsanto, for which Solutia assumed responsibility in the 1997 spinoff from Monsanto, relating to the alleged discharge of polychlorinated biphenyls ("PCBs") from the Anniston, Alabama plant site, and to environmental remediation of the allegedly affected areas. During the third quarter of 2000, Solutia paid approximately $23 million for the settlement of these actions. The remainder of the reserve was established to cover costs associated with environmental remediation of the allegedly affected areas.

Because of the size and nature of its business, Solutia is a party to numerous legal proceedings. Most of these proceedings have arisen in the ordinary course of business and involve claims for money damages. In addition, at the time of the spinoff, Solutia assumed from Monsanto, under the Distribution Agreement, liabilities related to specified legal proceedings. As a result, although Monsanto remains the named defendant, Solutia is required to manage the litigation and indemnify

F-30

Monsanto for costs, expenses and judgments arising from the litigation. Such matters arise out of the normal course of business and relate to product liability; government regulation, including environmental issues; employee relations and other issues. Certain of the lawsuits and claims seek damages in very large amounts. Although the results of litigation cannot be predicted with certainty, management's belief is that the final outcome of such litigation, except as noted below, will not have a material adverse effect on Solutia's consolidated financial position, liquidity or profitability in any one year.

Monsanto manufactured PCBs at the Anniston, Alabama plant from 1935 to 1971. Solutia is defending a number of actions in state and federal court in Alabama relating to the alleged emission of PCBs and other allegedly hazardous materials from that plant. Plaintiffs claim to suffer from various personal injuries and are allegedly fearful of future illness. Some claim property damage. To date we have settled approximately 5,900 PCB claims relating to Anniston. Four cases originally filed on behalf of approximately 3,500 plaintiffs were consolidated and a trial of the claims of 16 individuals and one business from that group of plaintiffs is in progress. Plaintiffs in the current trial are claiming property damage and mental anguish and are seeking compensatory and punitive damages and injunctive relief. The jury in that case has returned a verdict finding Solutia liable to plaintiffs on theories of negligence, wantonness, suppression, nuisance, trespass and outrage. The issue of damages has not yet been submitted to the jury. The jury also determined that the circumstances in Anniston constitute a public nuisance. The Alabama Attorney General and the District Attorneys in four counties around Anniston intervened in this matter as plaintiffs for the public nuisance count. They seek an order compelling Solutia to pay for a study of the impact of PCBs in the area, and formulating a plan and setting a schedule for cleanup. In addition, the Alabama Department of Environmental Management intervened in this matter to assure that any decision reached has a sound scientific basis. Another Anniston case pending in federal court in Birmingham, Alabama, filed on behalf of 1,116 minor plaintiffs, now involves approximately 15,000 adult and minor plaintiffs. Those plaintiffs claim to suffer unspecified injuries and assert their right to medical monitoring and testing, and seek compensatory and punitive damages in unspecified amounts. The case is scheduled to go to trial in or after February 2003. Liability, if any, that may result from litigation against Solutia is not determinable. These cases are being vigorously defended. Management does not believe that the ultimate resolution of these cases will have a material adverse impact on its consolidated financial position or liquidity. However, it is possible that a resolution of these cases may have a material adverse impact on Solutia's net income in a given year, although it is impossible at this time to estimate the range or amount of any such liability.

F-31

16. Supplemental Data

Supplemental income statement data were:

		2001		2000		1999
Raw material and energy costs		$	1,216	$	1,300	$	984
Employee compensation and benefits			779		824		728
Taxes other than income			119		113		92
Rent expense			37		38		26
Provision for doubtful accounts			11		11		—
Technological expenses:
	Research and development		58		67		58
	Engineering, commercial development and patent		8		24		22

Total technological expenses			66		91		80
Interest expense:
	Total interest cost		92		101		53
	Less capitalized interest		2		18		13

Net interest expense			90		83		40

17. Segment and Geographic Data

Effective January 1, 2001, Solutia reorganized its management structure from a centralized organization to a decentralized organization. This change redefined segment profitability as the costs for certain functional services, which were previously managed centrally, are now reflected in the operating segments. In addition, certain product groups have been moved between operating segments in recognition of the new management structure and related product management responsibilities. Financial data for prior periods have been restated to conform to the current presentation.

Solutia's management is organized around four strategic business platforms: Performance Films, Resins and Additives, Specialties and Integrated Nylon. Resins and Additives and Specialties have been aggregated into the Specialty Products reportable segment because of their similar economic characteristics, as well as their similar products and services, production processes, types of customers and methods of distribution. Solutia's reportable segments and their major products are as follows:

Performance Films		Specialty Products		Integrated Nylon
SAFLEX® plastic interlayer KEEPSAFE®, SAFLEX INSIDE® (in Europe only) and KEEPSAFE MAXIMUM® glass for residential security and hurricane protection windows		Resins and additives, including ALFTALAT® polyester resins, RESIMENE® and MAPRENAL® crosslinkers, SYNTHACRYL® acrylic resins and GELVA® pressure-sensitive adhesives		Nylon intermediate "building block" chemicals

F-32

LLUMAR®, VISTA® and GILA® professional and after-market window films VANCEVA™ design enhanced security and sound attenuation films		Industrial products, including THERMINOL® heat transfer fluids, DEQUEST® water treatment chemicals, SKYDROL® hydraulic fluids and SKYKLEEN® cleaning fluids for aviation and chlorobenzenes		Merchant polymer and nylon extrusion polymers, including VYDYNE® and ASCEND® Carpet fibers, including the WEAR-DATED® and ULTRON® brands
Conductive and anti-reflective coated films and deep-dyed films		Pharmaceutical services, including process research, process development services, scale-up capabilities and small scale manufacturing for the pharmaceutical industry		Industrial nylon fibers ACRILAN® acrylic fibers for apparel, upholstery fabrics, craft yarns and other applications

Accounting policies of the segments are the same as those used in the preparation of Solutia's consolidated financial statements. Solutia evaluates the performance of its operating segments based on segment earnings before interest expense and income taxes (EBIT), which includes marketing, administrative, technological, and amortization expenses and other non-recurring charges such as restructuring and asset impairment charges that can be directly attributable to the operating segment. Certain expenses and other items that are managed outside of the segments are excluded. These unallocated items consist primarily of corporate expenses, equity earnings (loss) from affiliates, interest expense, other income—net and expense items, and certain non-recurring items such as gains and losses on asset dispositions and restructuring charges that are not directly attributable to the operating segment. Solutia accounts for intersegment sales at agreed upon transfer prices. Intersegment sales are eliminated in consolidation. Segment assets consist primarily of customer receivables, raw materials and finished goods inventories, fixed assets, goodwill and identified intangible assets directly associated with the production processes of the segment (direct fixed assets). Segment depreciation and amortization are based upon direct tangible and intangible assets. Unallocated assets consist primarily of deferred taxes, certain investments in equity affiliates and indirect fixed assets.

F-33

Solutia's 2001, 2000 and 1999 segment information follows:

		Year Ended December 31,
		2001							2000									1999
		Net Sales		Intersegment Sales		Profit			Net Sales			Intersegment Sales			Profit			Net Sales			Intersegment Sales			Profit
Segment:
	Performance Films	$	591	$	—	$	61		$	692		$	—		$	106		$	669		$	—		$	126
	Specialty Products		918		—		77			1,004			—			32			760			2			119
	Integrated Nylon		1,308		—		11			1,490			1			(29	)		1,407			4			161

Segment totals			2,817		—		149			3,186			1			109			2,836			6			406
Reconciliation to consolidated totals:
	Sales eliminations									(1	)		(1	)					(6	)		(6	)
	Corporate expenses						(121	)								(107	)								(111	)
	Equity earnings (loss) from affiliates						(13	)								37									38
	Interest expense						(90	)								(83	)								(40	)
	Gain on sale of Polymer Modifiers business						—									73									—
	Other income (expense)—net						(2	)								12									10

Consolidated totals:
Net sales		$	2,817	$	—				$	3,185		$	—					$	2,830		$	—

Income (loss) before income taxes						$	(77	)							$	41								$	303

		Year Ended December 31,
		2001						2000						1999
		Assets		Capital Expen- ditures		Depreciation and Amortization		Assets		Capital Expen- ditures		Depreciation and Amortization		Assets		Capital Expen- ditures		Depreciation and Amortization
Segment:
	Performance Films	$	561	$	39	$	38	$	565	$	28	$	44	$	663	$	21	$	42
	Specialty Products		1,076		35		59		1,144		31		61		1,274		20		29
	Integrated Nylon		901		20		83		1,102		159		83		1,089		210		79

Segment totals		$	2,538	$	94	$	180	$	2,811	$	218	$	188	$	3,026	$	251	$	150
Reconciliation to consolidated totals:
	Unallocated amounts		870		—		4		770		3		3		744		6		1

Consolidated totals		$	3,408	$	94	$	184	$	3,581	$	221	$	191	$	3,770	$	257	$	151

F-34

Solutia's geographic information for 2001, 2000 and 1999 follows:

	Net Sales						Long-Lived Assets
	2001		2000		1999		2001		2000
U.S.	$	1,618	$	1,939	$	1,992	$	846	$	899
Other countries		1,199		1,246		838		297		306

Consolidated totals	$	2,817	$	3,185	$	2,830	$	1,143	$	1,205

18. Quarterly Data—Unaudited

			First Quarter		Second Quarter		Third Quarter		Fourth Quarter			Total Year
Net Sales		2001 2000	$ $	747 846	$ $	737 834	$ $	690 774	$ $	643 731		$ $	2,817 3,185
Gross Profit (Loss)		2001 2000		128 199		128 158		129 143		44 (14	)		429 486
Operating Income (Loss)		2001 2000		21 79		22 37		24 35		(73 (127	) )		(6 24	)
Net Income (Loss)		2001 2000		22 51		13 4		7 78		(101 (84	) )		(59 49	)
Basic Earnings (Loss) per Share		2001 2000		0.21 0.47		0.13 0.04		0.07 0.75		(0.97 (0.82	) )		(0.57 0.46	)
Diluted Earnings (Loss) per Share		2001 2000		0.21 0.46		0.12 0.04		0.07 0.74		(0.97 (0.81	) )		(0.57 0.46	)
Common Stock Price:
	2001	High Low		14.85 12.06		15.07 12.03		14.14 11.25		14.28 11.71			15.07 11.25
	2000	High Low		17.19 11.63		15.56 11.25		15.69 10.38		13.00 10.88			17.19 10.38

Net income in the first quarter of 2001 includes an aftertax gain of $17 million from an insurance settlement associated with the explosion and fire that destroyed the Vianova printing inks and phenolics production facility in Wiesbaden, Germany. Net loss in the fourth quarter of 2001 includes aftertax charges of $96 million to cover Solutia's share of restructuring costs at its Astaris and Flexsys joint ventures, increases to environmental and self-insurance reserves, additional severance costs and the write down of certain non-performing assets.

Net income in the second quarter of 2000 includes special net aftertax charges of $31 million principally associated with the formation and start-up of the Astaris joint venture and Solutia's share of restructuring and asset impairment charges recorded by the Flexsys joint venture. Net income in the

F-35

third quarter of 2000 includes a $46 million aftertax gain on sale of the Polymer Modifiers business and income of $7 million recorded in income taxes related to changes in German income tax laws. Net loss in the fourth quarter of 2000 includes restructuring and asset impairment charges of $96 million aftertax.

Under SFAS No. 128, "Earnings per Share," the quarterly and total year calculations of basic and diluted earnings (loss) per share are based on weighted average shares outstanding for that quarterly or total year period, respectively. As a result, the sum of diluted earnings (loss) per share for the quarterly periods may not equal total year earnings (loss) per share.

19. Subsequent Event

Goodwill and Other Intangible Assets

Effective January 1, 2002, Solutia adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." In accordance with SFAS No. 142, Solutia discontinued the amortization of goodwill and identifiable intangible assets that have indefinite useful lives. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. Goodwill will be assessed annually for impairment. This statement also required certain intangible assets that did not meet the criteria for recognition apart from goodwill, to be subsumed into goodwill. During the quarter ended March 31, 2002, Solutia subsumed into goodwill $74 million of intangible assets net of related deferred tax liabilities representing assembled workforce and noncontractual customer relationships that did not meet the separability criteria under SFAS No. 141, "Business Combinations."

Fair value measurements of the reporting units were estimated by a third-party specialist utilizing both an income and market multiple approach. Based on this analysis, Solutia recorded an impairment loss of $167 million for the Resins and Additives business in the Specialty Products segment due to declining estimates of future results given current economic and market conditions. This goodwill is non-deductible for tax purposes.

F-36

Net income (loss) and earnings (loss) per share for the years ended December 31, 2001, 2000 and 1999 adjusted to exclude the non-amortization provisions of SFAS No. 142, net of tax, are as follows:

		2001			2000		1999
Net income (loss):
	Net income (loss)	$	(59	)	$	49	$	206
	Goodwill amortization		22			22		2
	Subsumed intangible assets amortization		7			6		—
	Trademark amortization		2			1		1
	Equity method goodwill amortization		2			3		2

Adjusted net income (loss)		$	(26	)	$	81	$	211

		2001			2000		1999
Basic earnings (loss) per share:
	Net income	$	(0.57	)	$	0.46	$	1.86
	Goodwill amortization		0.21			0.21		0.02
	Subsumed intangible assets amortization		0.07			0.05		—
	Trademark amortization		0.02			0.01		0.01
	Equity method goodwill amortization		0.02			0.03		0.01

Adjusted basic earnings (loss) per share		$	(0.25	)	$	0.76	$	1.90

		2001			2000		1999
Diluted earnings (loss) per share:
	Net income	$	(0.57	)	$	0.46	$	1.80
	Goodwill amortization		0.21			0.20		0.02
	Subsumed intangible assets amortization		0.07			0.05		—
	Trademark amortization		0.02			0.01		0.01
	Equity method goodwill amortization		0.02			0.03		0.01
Adjusted diluted earnings (loss) per share		$	(0.25	)	$	0.75	$	1.84

F-37

20. Subsequent Event

Consolidating Condensed Financial Statements

CP Films, Inc., Monchem, Inc., Monchem International, Inc., and Solutia Systems, Inc., wholly-owned subsidiaries of the Company, (Guarantors), will guarantee the senior secured notes to be issued in an anticipated offering. The Guarantors will fully and unconditionally guarantee the securities issued on a joint and several basis. The following consolidating condensed financial statements present, in separate columns, financial information for: Solutia Inc. on a parent only basis carrying its investment in subsidiaries under the equity method; Guarantors on a combined, or where appropriate, consolidated basis, carrying investments in subsidiaries who do not guarantee the debt (Non-Guarantors) under the equity method; Non-Guarantors on a combined, or where appropriate, consolidated basis; eliminating adjustments; and consolidated totals as of December 31, 2001 and 2000, and for the years ended December 31, 2001, 2000 and 1999. The eliminating adjustments primarily reflect intercompany transactions, such as interest income and expense, accounts receivable and payable, advances, short and long-term debt, royalties and profit in inventory eliminations. The Company has not presented separate financial statements and other disclosures concerning the Guarantors as management has determined that such information is not material to potential investors.

F-38

SOLUTIA INC.

CONSOLIDATING STATEMENT OF INCOME (LOSS)

Year Ended December 31, 2001

	Parent Only Solutia Inc.			Guarantors			Non- Guarantors			Eliminations			Consolidated Solutia Inc.
	(Dollars in millions)
Net Sales	$	1,898		$	144		$	1,256		$	(481	)	$	2,817
Cost of goods sold		1,783			62			1,038			(495	)		2,388

Gross Profit		115			82			218			14			429
Marketing expenses		123			17			35			—			175
Administrative expenses		94			7			59			—			160
Technological expenses		54			2			10			—			66
Amortization expense		—			6			28			—			34

Operating Income (Loss)		(156	)		50			86			14			(6	)
Equity earnings (loss) from affiliates—net of tax		165			54			(4	)		(228	)		(13	)
Interest expense		(152	)		(7	)		(140	)		209			(90	)
Other income (expense)—net		(19	)		126			149			(224	)		32

Income (Loss) Before Income Taxes		(162	)		223			91			(229	)		(77	)
Income taxes (benefit)		(103	)		54			31			—			(18	)

Net Income (Loss)	$	(59	)	$	169		$	60		$	(229	)	$	(59	)

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

Year Ended December 31, 2001

	Parent Only Solutia Inc.			Guarantors			Non- Guarantors			Eliminations			Consolidated Solutia Inc.
	(Dollars in millions)
Net Income (Loss)	$	(59	)	$	169		$	60		$	(229	)	$	(59	)
Other Comprehensive Income (Loss):
Currency translation adjustments		(37	)		(45	)		(12	)		57			(37	)
Cumulative effect of accounting change, net of tax		2			—			—			—			2
Net loss on derivative instruments, net of tax		(3	)		—			—			—			(3	)
Minimum pension liability adjustments, net of tax		2			—			—			—			2

Comprehensive Income (Loss)	$	(95	)	$	124		$	48		$	(172	)	$	(95	)

F-39

SOLUTIA INC.

CONSOLIDATING STATEMENT OF INCOME

Year Ended December 31, 2000

	Parent Only Solutia Inc.			Guarantors			Non- Guarantors			Eliminations			Consolidated Solutia Inc.
	(Dollars in millions)
Net Sales	$	2,235		$	143		$	1,292		$	(485	)	$	3,185
Cost of goods sold		2,085			52			1,062			(500	)		2,699

Gross Profit		150			91			230			15			486
Marketing expenses		139			15			12			(1	)		165
Administrative expenses		113			6			54			—			173
Technological expenses		71			2			18			—			91
Amortization expense		—			7			29			(3	)		33

Operating Income (Loss)		(173	)		61			117			19			24
Equity earnings (loss) from affiliates—net of tax		229			40			(9	)		(225	)		35
Interest expense		(141	)		(9	)		(141	)		208			(83	)
Other income—net		61			137			91			(224	)		65

Income (Loss) Before Income Taxes		(24	)		229			58			(222	)		41
Income taxes (benefit)		(73	)		45			21			(1	)		(8	)

Net Income	$	49		$	184		$	37		$	(221	)	$	49

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

Year Ended December 31, 2000

	Parent Only Solutia Inc.			Guarantors			Non- Guarantors			Eliminations			Consolidated Solutia Inc.
	(Dollars in millions)
Net Income	$	49		$	184		$	37		$	(221	)	$	49
Other Comprehensive Income (Loss):
Currency translation adjustments		(86	)		(76	)		(28	)		104			(86	)
Cumulative effect of accounting change, net of tax		—												—
Net loss on derivative instruments, net of tax		—			—			—			—			—
Minimum pension liability adjustments, net of tax		7			—			—			—			7

Comprehensive Income (Loss)	$	(30	)	$	108		$	9		$	(117	)	$	(30	)

F-40

SOLUTIA INC.

CONSOLIDATING STATEMENT OF INCOME

Year Ended December 31, 1999

	Parent Only Solutia Inc.			Guarantors			Non- Guarantors			Eliminations			Consolidated Solutia Inc.
	(Dollars in millions)
Net Sales	$	2,376		$	74		$	708		$	(328	)	$	2,830
Cost of goods sold		1,932			11			575			(340	)		2,178

Gross Profit		444			63			133			12			652
Marketing expenses		146			12			(6	)		1			153
Administrative expenses		88			4			30			—			122
Technological expenses		76			1			3			—			80
Amortization expense		1			(3	)		3			2			3

Operating Income		133			49			103			9			294
Equity earnings from affiliates— net of tax		178			71			2			(215	)		36
Interest expense		(103	)		(12	)		(21	)		96			(40	)
Other income—net		25			72			29			(113	)		13

Income Before Income Taxes		233			180			113			(223	)		303
Income taxes		27			38			34			(2	)		97

Net Income	$	206		$	142		$	79		$	(221	)	$	206

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

Year Ended December 31, 1999

	Parent Only Solutia Inc.			Guarantors			Non- Guarantors			Eliminations			Consolidated Solutia Inc.
	(Dollars in millions)
Net Income	$	206		$	142		$	79		$	(221	)	$	206
Other Comprehensive Income (Loss):
Currency translation adjustments		(44	)		(36	)		(11	)		47			(44	)
Cumulative effect of accounting change, net of tax		—			—			—			—			—
Net loss on derivative instruments, net of tax		—			—			—			—			—
Minimum pension liability adjustments, net of tax		(4	)		—			—			—			(4	)

Comprehensive Income	$	158		$	106		$	68		$	(174	)	$	158

F-41

SOLUTIA INC.

CONSOLIDATING BALANCE SHEET

December 31, 2001

		Parent Only Solutia Inc.			Guarantors		Non- Guarantors		Eliminations			Consolidated Solutia Inc.
		(Dollars in millions)
ASSETS
Current Assets:
Cash and cash equivalents		$	3		$	1	$	19	$	—		$	23
Trade receivables, net			(5	)		178		179		—			352
Intercompany receivables			2,899			3,354		133		(6,386	)		—
Miscellaneous receivables			77			—		28		—			105
Prepaid expenses			12			—		3		—			15
Deferred income tax benefit			95			—		21		7			123
Inventories			160			23		138		(18	)		303

Total current assets			3,241			3,556		521		(6,397	)		921
Property, Plant and Equipment:
Land			18			—		40		—			58
Buildings			274			22		129		—			425
Machinery and equipment			2,527			51		428		—			3,006
Construction in progress			18			20		13		—			51

Total property, plant and equipment			2,837			93		610		—			3,540
Less accumulated depreciation			2,070			14		313		—			2,397

Net property, Plant and Equipment			767			79		297		—			1,143
Investments in Affiliates			3,139			206		26		(3,058	)		313
Goodwill, net			2			72		312		—			386
Identified Intangible Assets, net			33			26		165		—			224
Long-Term Deferred Income Tax Benefit			242			—		12		—			254
Intercompany Advances			128			2,010		1,812		(3,950	)		—
Other Assets			136			—		31		—			167

	Total Assets	$	7,688		$	5,949	$	3,176	$	(13,405	)	$	3,408

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable		$	160		$	8	$	65	$	—		$	233
Intercompany payables			3,271			2,995		120		(6,386	)		—
Wages and benefits			26			—		30		—			56
Postretirement liabilities			81			—		1		—			82
Miscellaneous accruals			210			11		141		—			362
Short-term debt			683			—		—		—			683
Intercompany short-term debt			189			31		112		(332	)		—

Total Current Liabilities			4,620			3,045		469		(6,718	)		1,416
Long-Term Debt			448			—		179		—			627
Intercompany Long-Term Debt			1,494			45		2,080		(3,619	)		—
Postretirement Liabilities			921			—		26		—			947
Other Liabilities			318			6		207		—			531
Shareholders' Equity (Deficit):
Common stock			1			—		—		—			1
	Net deficiency (excess) of assets at spinoff and subsidiary capital		(113	)		2,853		215		(3,068	)		(113	)
	Treasury stock		(257	)		—		—		—			(257	)
Unearned ESOP shares			(1	)		—		—		—			(1	)
Accumulated other comprehensive loss			(144	)		—		—		—			(144	)
Reinvested earnings			401			—		—		—			401

Total Shareholders' Equity (Deficit)			(113	)		2,853		215		(3,068	)		(113	)

Total Liabilities and Shareholders' Equity (Deficit)		$	7,688		$	5,949	$	3,176	$	(13,405	)	$	3,408

F-42

SOLUTIA INC.

CONSOLIDATING BALANCE SHEET

December 31, 2000

		Parent Only Solutia Inc.			Guarantors		Non- Guarantors		Eliminations			Consolidated Solutia Inc.
		(Dollars in millions)
ASSETS
Current Assets:
Cash and cash equivalents		$	11		$	—	$	8	$	—		$	19
Trade receivables, net			4			213		189		—			406
Intercompany receivables			1,619			1,991		177		(3,787	)		—
Miscellaneous receivables			75			—		34		—			109
Prepaid expenses			16			—		1		—			17
Deferred income tax benefit			87			—		14		6			107
Inventories			218			23		133		(17	)		357

Total current assets			2,030			2,227		556		(3,798	)		1,015
Property, Plant and Equipment:
Land			18			—		42		—			60
Buildings			272			22		127		—			421
Machinery and equipment			2,515			49		418		—			2,982
Construction in progress			38			12		12		—			62

Total property, plant and equipment			2,843			83		599		—			3,525
Less accumulated depreciation			2,018			9		293		—			2,320

Net property, Plant and Equipment			825			74		306		—			1,205
Investments in Affiliates			3,041			188		37		(2,915	)		351
Goodwill, net			2			76		343		—			421
Identified Intangible Assets, net			5			28		184		—			217
Long-Term Deferred Income Tax Benefit			185			—		5		—			190
Intercompany Advances			134			1,978		1,421		(3,533	)		—
Other Assets			138			—		44		—			182

	Total Assets	$	6,360		$	4,571	$	2,896	$	(10,246	)	$	3,581

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable		$	255		$	11	$	93	$	—		$	359
Intercompany payables			1,947			1,712		128		(3,787	)		—
Wages and benefits			19			—		26		—			45
Postretirement liabilities			76			—		2		—			78
Miscellaneous accruals			201			10		162		—			373
Short-term debt			484			—		10		—			494
Intercompany short-term debt			197			27		179		(403	)		—

Total Current Liabilities			3,179			1,760		600		(4,190	)		1,349
Long-Term Debt			598			—		186		—			784
Intercompany Long-Term Debt			1,404			77		1,656		(3,137	)		—
Postretirement Liabilities			916			—		25		—			941
Other Liabilities			297			6		238		—			541
Shareholders' Equity (Deficit):
Common stock			1			—		—		—			1
	Net deficiency (excess) of assets at spinoff and subsidiary capital		(113	)		2,728		191		(2,919	)		(113	)
	Treasury stock		(296	)		—		—		—			(296	)
Unearned ESOP shares			(9	)		—		—		—			(9	)
Accumulated other comprehensive loss			(108	)		—		—		—			(108	)
Reinvested earnings			491			—		—		—			491

Total Shareholders' Equity (Deficit)			(34	)		2,728		191		(2,919	)		(34	)

Total Liabilities and Shareholders' Equity (Deficit)		$	6,360		$	4,571	$	2,896	$	(10,246	)	$	3,581

F-43

SOLUTIA INC.

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOW

Year Ended December 31, 2001

	Parent Only Solutia Inc.			Guarantors		Non- Guarantors		Eliminations		Consolidated Solutia Inc.
	(Dollars in millions)
Cash From (Used In) Operations		(130	)	159		16		(1	)		44

INVESTING ACTIVITIES:
Property, plant and equipment purchases		(41	)	(11	)	(42	)	—			(94	)
Acquisition and investment payments, net of cash acquired		(33	)	—		(2	)	—			(35	)
Property disposals and investment proceeds		8		—		35		—			43

Cash Used In Investing Activities		(66	)	(11	)	(9	)	—			(86	)

FINANCING ACTIVITIES:
Net change in short-term debt obligations		48		—		(7	)	—			41
Common stock issued under employee stock plans		13		—		—		—			13
Other financing activities		(9	)	—		1		—			(8	)
Changes in investments and advances from (to) affiliates		136		(147	)	10		1			—

Cash From (Used In) Financing Activities		188		(147	)	4		1			46

Increase (Decrease) in Cash and Cash Equivalents		(8	)	1		11		—			4
CASH AND CASH EQUIVALENTS:
Beginning of year		11		—		8		—			19

End of period	$	3		1		19		—		$	23

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SOLUTIA INC.

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOW

Year Ended December 31, 2000

	Parent Only Solutia Inc.			Guarantors		Non- Guarantors		Eliminations		Consolidated Solutia Inc.
	(Dollars in millions)
Cash From (Used In) Operations		(90	)	169		172		(7	)		244

INVESTING ACTIVITIES:
Property, plant and equipment purchases		(177	)	(11	)	(33	)	—			(221	)
Acquisition and investment payments, net of cash acquired		(4	)	—		(106	)	—			(110	)
Property disposals and investment proceeds		188		—		32		—			220

Cash From (Used In) Investing Activities		7		(11	)	(107	)	—			(111	)

FINANCING ACTIVITIES:
Net change in short-term debt obligations		(25	)	—		3		—			(22	)
Common stock issued under employee stock plans		4		—		—		—			4
Other financing activities		(313	)	—		189		—			(124	)
Changes in investments and advances from (to) affiliates		294		(36	)	(265	)	7			—

Cash Used In Financing Activities		(40	)	(36	)	(73	)	7			(142	)

Increase (Decrease) in Cash and Cash Equivalents		(123	)	122		(8	)	—			(9	)
CASH AND CASH EQUIVALENTS:
Beginning of year		134		(122	)	16		—			28

End of period	$	11		—		8		—		$	19

F-45

SOLUTIA INC.

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOW

Year Ended December 31, 1999

	Parent Only Solutia Inc.			Guarantors			Non- Guarantors			Eliminations			Consolidated Solutia Inc.
	(Dollars in millions)
Cash From (Used In) Operations	$	274		$	108		$	(15	)	$	(3	)		364

INVESTING ACTIVITIES:
Property, plant and equipment purchases		(240	)		(2	)		(15	)		—			(257	)
Acquisition and investment payments, net of cash acquired		(186	)		—			(649	)		—			(835	)
Property disposals and investment proceeds		18			—			12			—			30

Cash Used In Investing Activities		(408	)		(2	)		(652	)		—			(1,062	)

FINANCING ACTIVITIES:
Net change in short-term debt obligations		511			—			—			—			511
Common stock issued under employee stock plans		8			—			—			—			8
Other financing activities		118			—			—			—			118
Changes in investments and advances from (to) affiliates		(411	)		(228	)		636			3			—

Cash From (Used In) Financing Activities		226			(228	)		636			3			637

Increase (Decrease) in Cash and Cash Equivalents		92			(122	)		(31	)		—			(61	)
CASH AND CASH EQUIVALENTS:
Beginning of year		42			—			47			—			89

End of period	$	134			(122	)		16			—		$	28

21. Subsequent Event—Commitments and Contingencies

As discussed in Note 15, a mechanics' lien in the amount of $42 million was filed on the acrylonitrile manufacturing facility located at our Chocolate Bayou plant in Alvin, Texas by the contractor, Fluor Daniel Corporation (Fluor). This action related to a construction dispute between Solutia and Fluor for construction of the facility. A settlement was reached on October 11, 2002, with Solutia agreeing to pay Fluor $20 million over a three-year period, of which $15 million will be recognized as property, plant and equipment.

22. Subsequent Event—Legal Proceedings

The former Monsanto Company (now Pharmacia Corporation) is a defendant in Commonwealth of Pennsylvania Department of General Services, et al. v. United States Mineral Products Company, et al., a case pending in the Commonwealth Court of the Commonwealth of Pennsylvania. The Commonwealth is seeking recovery of costs it allegedly incurred for testing, monitoring, cleanup, demolition and relocation caused by alleged presence of low levels of polychlorinated biphenyls (PCB's) in the Transportation and Safety Building in Harrisburg, Pennsylvania as well as the cost of constructing a new

F-46

building on the site. On October 17, 2002, the trial judge entered orders denying Solutia's motions seeking entry of a verdict in Pharmacia's favor or a new trial and entered a monetary judgment of $59.5 million including prejudgment interest of $14.5 million. Solutia filed its Notice of Appeal from this judgment as a matter of right with the Pennsylvania Supreme Court. Solutia believes that the defenses in this case are meritorious and will continue to defend this action vigorously.

While posting a bond is not required to prosecute an appeal, under Pennsylvania law, a bond in the amount of 120% of the judgment, or $71.4 million in this case, must be posted in order to stay execution of the judgment against Pharmacia while an appeal is pending. Solutia informed Pharmacia and Monsanto Company that it would not post an appeal bond but agreed to provide to Monsanto collateral having a present cash value of $20 million to secure a portion of Monsanto's obligations with respect to the bond. In addition, Solutia agreed to reimburse or pay directly all of Monsanto's out-of-pocket expenses incurred in connection with obtaining the bond. Monsanto posted the bond and contributed the additional collateral required in order to secure the bond. As provided in the protocol agreement among Pharmacia, Monsanto, and Solutia pertaining to this case, because Monsanto provided the collateral required to secure the appeal bond, Monsanto will assume control of any settlement decisions.

While the outcome of litigation cannot be predicted with certainty, management does not believe that the final outcome of this matter will have a material adverse impact on Solutia's consolidated financial position or liquidity. However, it is possible that a resolution of this matter may have a material adverse impact on Solutia's net income in a given year, although it is impossible at this time to estimate the range or amount of any such impact.

* * * * *

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QuickLinks

Exhibit 99.1