-----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, AUM6CpDghG3LgOMwqMs9iTRg2nFNI3GdUgjfybhqpmcU+veI0JJNcyAk1uALnVeJ w0LhJqEStyaK6l6l6AM5qw== /in/edgar/work/20000728/0001068800-00-000299/0001068800-00-000299.txt : 20000921 0001068800-00-000299.hdr.sgml : 20000921 ACCESSION NUMBER: 0001068800-00-000299 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000728 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOLUTIA INC CENTRAL INDEX KEY: 0001043382 STANDARD INDUSTRIAL CLASSIFICATION: [2800 ] IRS NUMBER: 431781797 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13255 FILM NUMBER: 680451 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 10-Q 1 0001.txt SOLUTIA INC. FORM 10-Q ====================================================================== FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 001-13255 --------- SOLUTIA INC. ------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 43-1781797 -------- ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, - ------------------------------------------- ST. LOUIS, MISSOURI 63166-6760 ------------------- ---------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (314) 674-1000 -------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. OUTSTANDING AT CLASS JUNE 30, 2000 ----- ------------- COMMON STOCK, $0.01 PAR VALUE 106,501,595 SHARES - ----------------------------- ------------------ ====================================================================== PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SOLUTIA INC. STATEMENT OF CONSOLIDATED INCOME (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------- ------------------- 2000 1999 2000 1999 ----- ----- ------ ------ NET SALES................................................. $ 834 $ 711 $1,680 $1,363 Cost of goods sold........................................ 676 518 1,323 1,065 ----- ----- ------ ------ GROSS PROFIT.............................................. 158 193 357 298 Marketing expenses........................................ 40 39 85 70 Administrative expenses................................... 50 31 94 62 Technological expenses.................................... 23 20 47 37 Amortization expense...................................... 8 1 15 1 ----- ----- ------ ------ OPERATING INCOME.......................................... 37 102 116 128 Equity earnings (loss) from affiliates.................... (1) 11 8 21 Interest expense.......................................... (21) (10) (41) (19) Other income (expense)--net............................... (9) 3 (4) 9 ----- ----- ------ ------ INCOME BEFORE INCOME TAXES................................ 6 106 79 139 Income taxes.............................................. 2 35 24 45 ----- ----- ------ ------ NET INCOME................................................ $ 4 $ 71 $ 55 $ 94 ===== ===== ====== ====== BASIC EARNINGS PER SHARE.................................. $0.04 $0.64 $ 0.51 $ 0.84 ===== ===== ====== ====== DILUTED EARNINGS PER SHARE................................ $0.04 $0.61 $ 0.50 $ 0.81 ===== ===== ====== ====== Weighted average equivalent shares (in millions): Basic................................................. 107.4 111.3 108.3 111.6 Effect of dilutive securities: Common share equivalents--common shares issuable upon exercise of outstanding stock options...... 1.6 5.2 1.6 4.6 ----- ----- ------ ------ Diluted............................................... 109.0 116.5 109.9 116.2 ===== ===== ====== ====== STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (DOLLARS IN MILLIONS) THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------- ------------------- 2000 1999 2000 1999 ----- ----- ------ ------ NET INCOME................................................ $ 4 $ 71 $ 55 $ 94 OTHER COMPREHENSIVE INCOME: Currency translation adjustments.......................... (45) (9) (65) (26) ----- ----- ------ ------ COMPREHENSIVE INCOME (LOSS)............................... $ (41) $ 62 $ (10) $ 68 ===== ===== ====== ====== See accompanying Notes to Consolidated Financial Statements.
1 SOLUTIA INC. STATEMENT OF CONSOLIDATED FINANCIAL POSITION (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 2000 1999 -------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................... $ 21 $ 28 Trade receivables, net of allowance of $12 in 2000 and 1999....................................................... 504 483 Miscellaneous receivables and prepaid expenses.............. 140 131 Deferred income tax benefit................................. 104 101 Inventories................................................. 367 371 ------ ------ TOTAL CURRENT ASSETS........................................ 1,136 1,114 PROPERTY, PLANT AND EQUIPMENT: Land........................................................ 62 68 Buildings................................................... 416 436 Machinery and equipment..................................... 2,715 2,919 Construction in progress.................................... 354 272 ------ ------ Total property, plant and equipment......................... 3,547 3,695 Less accumulated depreciation............................... 2,247 2,379 ------ ------ NET PROPERTY, PLANT AND EQUIPMENT........................... 1,300 1,316 INVESTMENTS IN AFFILIATES................................... 415 377 NET GOODWILL................................................ 451 511 IDENTIFIED INTANGIBLE ASSETS................................ 225 33 LONG-TERM DEFERRED INCOME TAX BENEFIT....................... 216 232 OTHER ASSETS................................................ 175 187 ------ ------ TOTAL ASSETS................................................ $3,918 $3,770 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................................ $ 372 $ 312 Accrued liabilities......................................... 513 504 Short-term debt............................................. 642 511 ------ ------ TOTAL CURRENT LIABILITIES................................... 1,527 1,327 LONG-TERM DEBT.............................................. 790 802 POSTRETIREMENT LIABILITIES.................................. 984 998 OTHER LIABILITIES........................................... 582 561 SHAREHOLDERS' EQUITY: Common stock (authorized, 600,000,000 shares, par value $0.01) Issued: 118,400,635 shares in 2000 and 1999............... 1 1 Additional contributed capital............................ (140) (137) Treasury stock, at cost (11,899,040 shares in 2000 and 8,859,764 shares in 1999)............................... (247) (209) Unearned ESOP shares........................................ (14) (18) Accumulated other comprehensive income...................... (94) (29) Reinvested earnings......................................... 529 474 ------ ------ SHAREHOLDERS' EQUITY........................................ 35 82 ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $3,918 $3,770 ====== ====== See accompanying Notes to Consolidated Financial Statements.
2 SOLUTIA INC. STATEMENT OF CONSOLIDATED CASH FLOW (DOLLARS IN MILLIONS)
SIX MONTHS ENDED JUNE 30, ------------------ 2000 1999 ----- ---- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income.................................................. $ 55 $ 94 Adjustments to reconcile to Cash From Operations: Items that did not use (provide) cash: Deferred income taxes............................... 15 (8) Depreciation and amortization....................... 96 74 Amortization of deferred credits.................... (5) (4) Other............................................... 28 47 Working capital changes that provided (used) cash: Trade receivables................................... (21) (55) Inventories......................................... (13) (11) Accounts payable and accrued liabilities............ 21 (19) Other............................................... (18) 8 Other items............................................. (27) 14 ----- ---- CASH FROM OPERATIONS........................................ 131 140 ----- ---- INVESTING ACTIVITIES: Property, plant and equipment purchases..................... (123) (92) Acquisition and investment payments, net of cash acquired... (107) (203) Investment and property disposal proceeds................... 28 6 ----- ---- CASH FROM INVESTING ACTIVITIES.............................. (202) (289) ----- ---- FINANCING ACTIVITIES: Long-term debt proceeds..................................... 196 -- Net change in short-term debt............................... (80) 119 Treasury stock purchases.................................... (53) (50) Common stock issued under employee stock plans.............. 1 6 ----- ---- CASH FROM FINANCING ACTIVITIES.............................. 64 75 ----- ---- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (7) (74) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR........................................... 28 89 ----- ---- END OF PERIOD............................................... $ 21 $ 15 ===== ==== See accompanying Notes to Consolidated Financial Statements.
3 SOLUTIA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS) 1. BASIS OF PRESENTATION Solutia Inc. and its subsidiaries produce and market a variety of high-performance chemical-based materials. Solutia's strategic focus is built on key strengths, including complex manufacturing capabilities, process engineering expertise, polymer chemistry, fiber technology, technical service, and customer problem solving. These world-class skills are applied to create solutions and products for customers in the consumer, household, automotive, and industrial products industries. Solutia's products and services include Saflex(R) plastic interlayer; adhesives; window and industrial films; liquid, powder and waterborne resins; Vydyne(R) and Ascend(TM) nylon polymers; nylon fibers; and process research and technology services to the pharmaceutical industry. These financial statements should be read in conjunction with the audited financial statements and notes to consolidated financial statements included in Solutia's 1999 Annual Report to shareholders and incorporated by reference in Solutia's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 10, 2000. The accompanying unaudited consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the financial position, results of operations, comprehensive income, and cash flows for the interim periods reported. Such adjustments are of a normal, recurring nature. The results of operations for the three-month and six-month periods ended June 30, 2000, are not necessarily indicative of the results to be expected for the full year. 2. ACQUISITIONS 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 independent process research and development firm, serving the global pharmaceutical industry. 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 goodwill of approximately $57 million and other intangible assets of approximately $41 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. In addition to goodwill and other intangible assets, the major components of the purchase price allocations were current assets of $17 million, non-current assets of $27 million, current liabilities of $21 million, and non-current liabilities of $3 million. Results of operations for CarboGen and AMCIS are 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 the three-month and six-month periods ended June 30, 2000. On December 22, 1999, Solutia acquired Vianova Resins from Morgan Grenfell Private Equity Ltd. for approximately 1.2 billion deutsche marks (approximately $640 million), which was financed with commercial paper and the assumption of debt. Vianova Resins was 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 goodwill of approximately $344 million and other intangible assets of approximately $163 million. Goodwill is being amortized over its estimated useful life of 20 years and other 4 intangible assets are being amortized over their estimated useful lives, which average 19 years. In addition to goodwill and other intangible assets, the major components of the purchase price allocation were current assets of $192 million, non-current assets of $227 million, current liabilities of $99 million, and non-current liabilities of $187 million. This allocation is preliminary and is subject to change based on the completion of a contractual purchase price adjustment. Solutia anticipates completing the allocation of the purchase price by the end of the third quarter of 2000. 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 the costs of the integration, in accordance with Emerging Issues Task Force Issue 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." The integration plans include employment reductions of approximately 130 people, primarily from Vianova Resins' service organizations located in more than 10 countries. In addition, the plans include amounts to shut down certain Vianova Resins sales offices. The integration actions are expected to be carried out by the end of the second quarter of 2001. The following table summarizes the Vianova Resins integration costs and amounts utilized to carry out those plans:
EMPLOYMENT SHUTDOWN OF REDUCTIONS FACILITIES TOTAL ---------- ------------ ------ BALANCE ESTABLISHED AT JUNE 30, 2000.......... $ 10 $ 1 $ 11 ==== ==== ====
3. RESTRUCTURING 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 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 ASSET OTHER FACILITIES IMPAIRMENTS COSTS TOTAL ----------- ------------ ------ ------ Balance at April 1, 2000...................... $ -- $ -- $ -- $ -- Charges taken............................. 2 2 4 8 Amounts utilized.......................... -- (2) -- (2) ---- ---- ---- ---- BALANCE AT JUNE 30, 2000...................... $ 2 $ -- $ 4 $ 6 ==== ==== ==== ====
During February 1999, certain equipment critical to the ammonia production process failed. Based on an analysis of the economics of purchased ammonia versus 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 complete 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 estimated costs for which Solutia is contractually obligated under an operating agreement. The contractually obligated costs represent an estimate of the direct manufacturing, overhead, and utilities that Solutia is required to pay to a third-party operator during a 36-month termination period. During the first quarter of 2000, Solutia entered into an agreement for the dismantling of the ammonia assets by a third-party and as a result, transferred the liability for dismantling to the third-party. For the quarter ended March 31, 1999, net sales for the ammonia business were $1 million. Operating income for the same period in 1999 was minimal. 5 The following table summarizes the 1999 restructuring charge and amounts utilized to carry out those plans:
SHUTDOWN OF ASSET OTHER FACILITIES IMPAIRMENTS 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) -- (3) (7) ---- ---- ---- ---- Balance at March 31, 2000..................... -- -- 13 13 Amounts utilized.......................... -- -- (1) (1) ---- ---- ---- ---- BALANCE AT JUNE 30, 2000...................... $ -- $ -- $ 12 $ 12 ==== ==== ==== ====
4. INVESTMENT IN AFFILIATES 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. Solutia accounts for the joint venture using the equity-method of accounting. 5. ASSET IMPAIRMENT 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. As a result, Solutia performed a review under a Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," from which it determined that the asset was impaired. 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. 6. INVENTORY VALUATION The components of inventories as of June 30, 2000, and December 31, 1999, were as follows:
JUNE 30, DECEMBER 31, 2000 1999 -------- ------------ Finished goods................................. $ 246 $ 260 Goods in process............................... 112 121 Raw materials and supplies..................... 112 109 ----- ----- Inventories, at FIFO cost...................... 470 490 Excess of FIFO over LIFO cost.................. (103) (119) ----- ----- TOTAL.......................................... $ 367 $ 371 ===== =====
7. CONTINGENCIES Monsanto (now Pharmacia Corporation) is a party to a number of lawsuits and claims relating to Solutia, for which Solutia assumed responsibility in the spinoff. In addition, Solutia is a named party to a number of lawsuits and claims. Solutia intends to defend all suits and claims vigorously. Such matters arise out of the normal course of business and relate to product liability; government regulation, including environmental issues; employee relations; and other issues. Certain of the lawsuits and claims seek damages in very large amounts. Although the results of litigation cannot be predicted with certainty, management's belief is that the final outcome of such 6 litigation will not have a material adverse effect on Solutia's consolidated financial position, profitability or liquidity in any one year. 8. OTHER During June 2000, Solutia agreed to sell its Polymer Modifiers business to Ferro Corporation. The Polymer Modifiers business has annual sales of approximately $140 million. Closing is expected to occur during the third quarter of 2000. 9. SEGMENT DATA Segment data for the three months and the six months ended June 30, 2000, and 1999, were as follows:
THREE MONTHS ENDED JUNE 30, ------------------------------------------------------------------------------- 2000 1999 ----------------------------------- ----------------------------------- NET INTERSEGMENT NET INTERSEGMENT SALES SALES PROFIT SALES SALES PROFIT ----- ------------ ------ ----- ------------ ------ SEGMENT: Performance Films................... $208 $ -- $ 55 $175 $ -- $ 52 Specialty Products.................. 217 -- 47 152 -- 38 Integrated Nylon.................... 409 -- 43 385 1 87 ---- ---- ---- ---- ---- ---- SEGMENT TOTALS........................ 834 -- 145 712 1 177 RECONCILIATION TO CONSOLIDATED TOTALS: Sales eliminations.................. -- -- (1) (1) Less unallocated service costs: Cost of goods sold............ (25) (17) Marketing, administrative and technological expenses...... (75) (57) Amortization expense................ (8) (1) Equity earnings (loss) from affiliates..................... (1) 11 Interest expense.................... (21) (10) Other income (expense)--net..... (9) 3 CONSOLIDATED TOTALS: ---- ---- ---- ---- NET SALES........................... $834 $ -- $711 $ -- ==== ==== ---- ==== ==== ---- INCOME BEFORE INCOME TAXES.......... $ 6 $106 ==== ====
7
SIX MONTHS ENDED JUNE 30, --------------------------------------------------------------------------------- 2000 1999 ------------------------------------ ------------------------------------ NET INTERSEGMENT NET INTERSEGMENT SALES SALES PROFIT SALES SALES PROFIT ----- ------------ ------ ----- ------------ ------ SEGMENT: Performance Films................ $ 405 $ -- $ 107 $ 323 $ -- $ 94 Specialty Products............... 484 -- 106 301 -- 78 Integrated Nylon................. 792 1 100 742 3 159 ------ ---- ----- ------ ---- ----- SEGMENT TOTALS..................... 1,681 1 313 1,366 3 331 RECONCILIATION TO CONSOLIDATED TOTALS: Sales eliminations............... (1) (1) (3) (3) Less unallocated service costs: Cost of goods sold, ... (38) (93) Marketing, administrative and technological expenses... (144) (109) Amortization expense............. (15) (1) Equity earnings (loss) from affiliates.................. 8 21 Interest expense................. (41) (19) Other income (expense)--net.............. (4) 9 CONSOLIDATED TOTALS: ------ ---- ------ ---- NET SALES........................ $1,680 $ -- $1,363 $ -- ====== ==== ----- ====== ==== ----- INCOME BEFORE INCOME TAXES....... $ 79 $ 139 ===== ===== Segment profit includes only operating expenses directly attributable to the segment. Unallocated service costs are managed centrally and primarily include costs of administrative, technology, and engineering and manufacturing services that are provided to the segments. For the periods ended June 30, 2000, unallocated cost of goods sold includes restructuring charges related to exiting operations at the Port Plastics site in Addyston, Ohio ($8 million pretax, $5 million aftertax). See Note 3. For the periods ended June 30, 2000, unallocated marketing, administrative, and technological expenses includes a charge associated with the impairment of certain capitalized software costs ($6 million pretax, $4 million aftertax). See Note 5. For the periods ended June 30, 2000, equity earnings (loss) from affiliates includes Solutia's portion of charges recorded by its Flexsys and Astaris joint ventures ($15 million aftertax). For the periods ended June 30, 2000, other income (expense)--net includes charges related to the write down of two Asian investments based upon indicators that the loss in their values was other than temporary ($19 million pretax, $11 million aftertax), period costs related to the formation and startup of the Astaris joint venture ($8 million pretax, $5 million aftertax), and a gain on the sale of a minority interest in P4 Production L.L.C., a phosphorus manufacturing venture ($15 million pretax, $9 million aftertax). For the six months ended June 30, 1999, unallocated cost of goods includes special charges related to exiting Integrated Nylon's ammonia business ($28 million pretax, $18 million aftertax), the write down of an Integrated Nylon segment bulk continuous filament spinning machine ($6 million pretax, $4 million aftertax), and the anticipated settlement of certain pending property claims litigation related to the Anniston, Alabama plant site ($29 million pretax, $18 million aftertax).
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These include all statements regarding the expected future financial position, results of operations, profitability, cash flows, liquidity, and effect of changes in accounting due to recently issued accounting standards. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements herein include, among others, general economic, business and market conditions, customer acceptance of new products, raw material and energy pricing, currency fluctuations, and increased competitive and/or customer pressure. RESULTS OF OPERATIONS--THREE MONTHS ENDED JUNE 30, 2000, COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 1999 Net sales for the second quarter of 2000 increased by 17 percent as compared with the second quarter of 1999. Excluding the acquisitions of CPFilms Inc. in May 1999, Vianova Resins in December 1999, CarboGen Holdings AG in February 2000, and AMCIS AG in March 2000, and the contribution of the Phosphorus Derivatives business to the Astaris joint venture in April 2000, net sales for the second quarter 2000 were up 4 percent from the comparable period in 1999. Sales increases reflect increased average selling prices and volumes, partially offset by unfavorable currency exchange rate fluctuations. Performance Films Net sales for the second quarter of 2000 in the Performance Films segment increased by 19 percent over the same period of the prior year primarily as the result of higher sales volumes in CPFilms, which was acquired in the second quarter of 1999, and improved volumes in the Saflex(R) plastic interlayer business. The increase in sales of Saflex(R) plastic interlayer products was driven primarily by increased demand from European and U.S. automotive glass manufacturers. Also, to a lesser extent, businesses in this segment achieved higher average selling prices than those of the year-ago quarter. Partially offsetting the increases in sales volumes and average selling prices were unfavorable currency exchange rate fluctuations in the Saflex(R) plastic interlayer and Polymer Modifiers businesses due to the devaluation of the euro in relation to the U.S. dollar. Performance Films segment profit for the three-month period ended June 30, 2000, increased 6 percent over the three-month period ended June 30, 1999, because of higher net sales. Higher net sales in the segment were partially offset by increased raw material costs for Polymer Modifiers and Saflex(R) plastic interlayer products. Specialty Products Net sales in the Specialty Products segment for the second quarter of 2000 increased 43 percent over the comparable quarter of 1999 because of the acquisitions of Vianova, CarboGen, and AMCIS. Excluding the acquisitions and the contribution of the Phosphorus Derivatives business, net sales declined by 2 percent. The decrease primarily resulted from the loss of sales from the Scriptsets line of business, which was sold in August 1999, and to a lesser extent, unfavorable currency exchange movements due to the devaluation of the euro in relation to the U.S. dollar. Segment profit for the quarter ended June 30, 2000, increased 24 percent over the year-ago quarter primarily because of higher net sales in the segment, partially offset by unfavorable manufacturing variances for specialty chemicals products. Integrated Nylon The Integrated Nylon segment's net sales for the three-month period ended June 30, 2000, increased 6 percent from the comparable period of 1999. The increase in sales occurred in almost all businesses in this segment due to higher average selling prices and, to a lesser extent, increased sales volumes. Integrated Nylon's higher average selling prices were attributable to price increases for branded and commodity staple carpet fiber 9 and higher average selling prices of intermediates. Sales volume increases in carpet fiber and Acrilan(R) acrylic fiber products were partially offset by lower sales volumes of textile polymers. Segment profit for Integrated Nylon for the second quarter of 2000 was down 51 percent as compared to the second quarter of 1999. The decline resulted almost exclusively from higher raw material costs due to the dramatic increase in petrochemical costs over the last several quarters. The costs of propylene and cyclohexane, two major feedstocks used by the segment, have increased significantly. As compared to the second quarter of 1999, propylene costs have more than doubled and cyclohexane prices are up nearly 60 percent. While crude oil prices are anticipated to moderate somewhat due to increased production by OPEC members, elevated petrochemical costs will continue to adversely affect profitability for the remainder of the year. Additionally, the cost of natural gas has significantly increased during the second quarter of 2000 compared to the year-ago period, which has adversely affected the profitability of the segment. Solutia expects that higher natural gas costs will continue for the near term due to increased demand and limited supply. Operating Income Operating income for the second quarter of 2000 declined to $37 million as compared to $102 million for the second quarter of 1999 because of lower segment profit discussed above and special charges recorded during the quarter. Solutia recorded a restructuring charge of $8 million ($5 million aftertax) to cost of goods sold to exit operations at the Port Plastics site in Addyston, Ohio, as more fully described in Note 3. Additionally, Solutia recorded an asset impairment charge of $6 million ($4 million aftertax), to administrative expenses for the write down of capitalized software costs related to the formation of the Astaris joint venture, as more fully described in Note 5. Excluding the impact of special charges, overall lower segment profit was negatively impacted by higher marketing, administrative, technological, and amortization expenses. Higher marketing, administrative, technological, and amortization expenses were associated with the consolidation and integration of newly acquired companies and Solutia's growth programs. Equity Earnings (Loss) from Affiliates The equity loss from affiliates was $1 million in the second quarter of 2000 compared to $11 million of equity earnings in the comparable 1999 quarter. The decrease was due to special charges recorded by the Flexsys, L.P. and Astaris joint ventures. The Flexsys joint venture recorded charges associated with the closure and impairment of certain manufacturing operations in the United Kingdom. Solutia's share of these charges was $13 million ($13 million aftertax). In addition, the Astaris joint venture recorded charges related to the closure of certain of its production facilities. Solutia's share of these charges was approximately $2 million ($2 million aftertax). Excluding these special charges, equity earnings from affiliates increased because of the formation and start up of the Astaris joint venture in April 2000. Other Income (Expense)--Net Other expense for the quarter ended June 30, 2000, was $9 million compared to other income of $3 million for the same period in 1999. The significant increase in expense was principally attributable to a charge of $14 million ($8 million aftertax) for the write down of certain equity-method investments in Asia based upon indicators that the loss in their values was other than temporary, charges of $5 million ($3 million aftertax) to accrue for debt payments under certain loan guarantees associated with one of the Asian equity investments, and charges of $8 million ($5 million aftertax), associated with the startup and formation of the Astaris joint venture incurred during the period. Partially offsetting the special charges was a $15 million gain ($9 million aftertax) resulting from the sale of substantially all of Solutia's 40 percent interest in P4 Production L.L.C., a phosphorus manufacturing venture. RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 2000, COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999 Net sales for the six-month period ended June 30, 2000, increased by 23 percent as compared with the six-month period ended June 30, 1999. Excluding the acquisitions of CPFilms Inc., Vianova Resins, CarboGen Holdings AG, and AMCIS AG and the contribution of the Phosphorus Derivatives business to the Astaris joint 10 venture, net sales for the first six months of 2000 were up 4 percent from the comparable period in 1999. Sales increases reflect higher average selling prices and volumes, partially offset by unfavorable currency exchange rate fluctuations. Performance Films Performance Films' net sales for the first six months of 2000 increased 25 percent in comparison to the first six months of 1999 as the result of the acquisition of CPFilms and improved volumes in the Saflex(R) plastic interlayer business. Excluding CPFilms, net sales increased approximately 3 percent. The increase in the Saflex(R) plastic interlayer business was driven primarily from increased demand by European and U.S. automotive glass manufacturers. Also, to a lesser extent, businesses in this segment achieved higher average selling prices than those of the year-ago period. Partially offsetting the increases in sales volumes and average selling prices were unfavorable currency exchange rate fluctuations in Saflex(R) plastic interlayer and Polymer Modifiers businesses due to the devaluation of the euro in relation to the U.S. dollar. Performance Films' segment profit for the first half of 2000 increased 14 percent from the first half of 1999 due to higher net sales partially offset by increased raw material costs in the Polymer Modifiers and Saflex(R) plastic interlayer businesses. Specialty Products Net sales in the Specialty Products segment increased 61 percent for the six months ended June 30, 2000, over the comparable period of the prior year because of the acquisitions of Vianova, CarboGen, and AMCIS, partially offset by the contribution of the Phosphorus Derivatives business to the Astaris joint venture. Excluding the acquisitions and the contribution of the Phosphorus Derivatives business, net sales declined by 5 percent. Net sales decreased primarily due to the loss of sales from the Scriptsets line of business, which was sold in August 1999, and to a lesser extent, unfavorable currency exchange movements due to the devaluation of the euro in relation to the U.S. dollar. Segment profit for the six-month period ended June 30, 2000, increased 36 percent as compared to the six-month period ended June 30, 1999. The profit increase was due to higher net sales, partially offset by unfavorable manufacturing variances for specialty chemicals products. Integrated Nylon The Integrated Nylon segment's net sales for the six months ended June 30, 2000, increased 7 percent as compared with the six months ended June 30, 1999. Pricing and volume contributed equally to the increase. Solutia's carpet and Acrilan(R) acrylic fiber businesses were principally responsible for the year-over-year increases in sales volumes. Solutia's carpet, Acrilan(R) acrylic fiber, and intermediates businesses were principally responsible for the year-over-year increases in average selling prices. Integrated Nylon's segment profit for the first half of 2000 decreased 37 percent from the first half of 1999. The decline resulted almost exclusively from higher raw material costs due to the sharp increase in petrochemical costs over the last three quarters. The costs of propylene and cyclohexane, two major feedstocks used by the segment, were up over 100 percent and 40 percent, respectively, versus the comparable prior-year period. While crude oil prices are anticipated to moderate somewhat due to increased production by OPEC members, elevated petrochemical costs will continue to adversely affect profitability for the remainder of the year. Additionally, the cost of natural gas has significantly increased during the second quarter of 2000 compared to the year-ago period, which has adversely affected the profitability of the segment. Solutia expects that higher natural gas costs will continue for the near term due to increased demand and limited supply. Operating Income Operating income for the first six months of 2000 declined by 9 percent as compared to the first six months of 1999 due to lower segment profit discussed above and special charges affecting the 2000 and 1999 periods. These charges are discussed below. Excluding the impact of special charges, overall lower segment profit was negatively impacted by higher marketing, administrative, technological, and amortization expenses. Higher 11 spending in these areas was associated with the consolidation and integration of newly acquired companies and other growth programs. During the second quarter of 2000, Solutia recorded a restructuring charge of $8 million ($5 million aftertax) to cost of goods sold to exit operations at the Port Plastics site in Addyston, Ohio, as more fully described in Note 3. As more fully described in Note 5, Solutia recorded an asset impairment charge of $6 million ($4 million aftertax), to administrative expenses for the write down of capitalized software costs related to the formation of the Astaris joint venture. 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) special operations charge to cost of goods sold was recorded in the first quarter of 1999 to complete the exit plan. The charge included $2 million to write down the assets to fair value, $4 million of dismantling costs, and $22 million of costs for which Solutia is contractually obligated under an operating agreement. During the first quarter of 2000, Solutia entered into an agreement for the dismantling of the ammonia assets by a third-party and as a result, transferred the liability for dismantling to the third-party. For the three months ended March 31, 1999, net sales for the ammonia business was $1 million. Net income for that period was minimal. See Note 3 for additional information. A special operations charge of $6 million ($4 million aftertax) was recorded in the first quarter of 1999 to write down certain Integrated Nylon segment assets to their fair values. The charge was due to a review under Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed Of," (SFAS No. 121). The review stemmed from a historical trend of operating losses and a forecast that the trend would continue. The SFAS No. 121 review 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. Also during the 1999 first quarter, Solutia recorded a $29 million ($18 million aftertax) charge to cost of goods sold related to the anticipated settlement of two lawsuits brought against Monsanto Company relating to the alleged discharge of polychlorinated biphenyls ("PCBs") from the Anniston, Alabama plant site. The anticipated settlement of these cases provided information that allowed management to estimate more accurately Solutia's position with respect to such litigation. Equity Earnings (Loss) from Affiliates Equity earnings from affiliates decreased to $8 million in the first half of 2000 from $21 million in the comparable period of 1999. The decrease was due to special charges recorded by the Flexsys and Astaris joint ventures. The Flexsys joint venture recorded charges associated with the closure and impairment of certain manufacturing operations in the United Kingdom. Solutia's share of these charges was $13 million ($13 million aftertax). In addition, the Astaris joint venture recorded charges related to the closure of certain of its production facilities. Solutia's share of these charges was approximately $2 million ($2 million aftertax). Excluding these special charges, equity earnings from affiliates increased because of the formation and start up of the Astaris joint venture in April 2000. Other Income (Expense)--Net Other expense for the six months ended June 30, 2000, was $4 million compared to other income of $9 million for the same period in 1999. The significant increase in expense was principally attributable to a charge of $14 million ($8 million aftertax) for the write down of certain equity-method investments in Asia based upon indicators that the loss in their values was other than temporary, charges of $5 million ($3 million aftertax) to accrue for debt payments under certain loan guarantees associated with one of the Asian equity investments, and charges of $8 million ($5 million aftertax), associated with the startup and formation of the Astaris joint venture incurred during the period. Partially offsetting the special charges was a $15 million gain ($9 million aftertax) resulting from the sale of substantially all of Solutia's 40 percent interest in P4 Production L.L.C., a phosphorus manufacturing venture. 12 Summary of Special Charges Affecting Comparability Special charges recorded in the three and six-month periods ended June 30, 2000 and 1999, have been summarized in the table below (dollars in millions).
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, --------------------- --------------------------- 2000 1999 2000 1999 ---------- ---- ---------- ---------- Cost of goods sold..................... $ 8 $-- $ 8 $ 63 Marketing, administrative and technological expenses............... 6 -- 6 -- ---- ---- ---- ---- Operating income....................... (14) -- (14) (63) ---- ---- ---- ---- Equity earnings (loss) from affiliates. (2) -- (2) -- (13) (13) ---- ---- ---- ---- Other income (expense)--net............ (8) -- (8) -- 15 15 (14) (14) (5) (5) ---- ---- ---- ---- Income taxes........................... (10) -- (10) (23) ---- ---- ---- ---- Net income (loss)...................... $(31) $-- $(31) $(40) ==== ==== ==== ==== Solutia incurred restructuring charges related to exiting operations at the Port Plastics site in Addyston, Ohio ($8 million pretax, $5 million aftertax). Solutia incurred special operations charges related to the formation and startup of the Astaris joint venture ($16 million pretax, $11 million aftertax). Solutia incurred special operations charges associated with the impairment and closure of certain manufacturing operations in the United Kingdom for the Flexsys joint venture ($13 million aftertax). Solutia recognized a gain on the sale of a minority interest in P4 Production L.L.C., a phosphorus manufacturing venture ($15 million pretax, $9 million aftertax). Solutia recorded charges to write-down certain investments in Asia based upon indicators that the loss in their values was other than temporary ($14 million pretax, $8 million aftertax), and to accrue for payment of debt obligations associated with one of the investments ($5 million pretax, $3 million aftertax). Solutia recorded special charges related to exiting the Integrated Nylon's ammonia business, the write down of an Integrated Nylon segment bulk continuous filament spinning machine, and the anticipated settlement of certain pending property claims litigation related to the Anniston, Alabama plant site ($63 million pretax, $40 million aftertax).
LIQUIDITY AND CAPITAL RESOURCES Solutia's working capital at June 30, 2000, decreased to negative $391 million from negative $213 million at December 31, 1999. Working capital is negative primarily due to increases in short-term debt, which was used to finance recent acquisitions, treasury stock repurchases, and capital expenditures. The recent acquisitions include the February 2000 acquisition of CarboGen and the March 2000 purchase of AMCIS. At June 30, 2000, Solutia had short-term debt of $642 million. During February 2000, Solutia completed the issuance of EUR 200 million ($196 million) of notes, due February 2005. Proceeds from the notes were used primarily to refinance outstanding commercial paper, and also for general corporate purposes. 13 Solutia continued to reinvest in itself through share repurchases. Shares repurchased during 2000 totaled 3.9 million shares at a cost of $53 million. On April 26, 2000, the Board of Directors authorized the repurchase of up to 15 million additional shares of Solutia common stock. At June 30, 2000, this authorization combined with the unused portion of an earlier authorization, gives Solutia the authority to repurchase 15.9 million shares of its common stock. During June 2000, Solutia agreed to sell its Polymer Modifiers business to Ferro Corporation. The Polymer Modifiers business has annual sales of approximately $140 million. Closing is expected to occur during the third quarter of 2000. Solutia believes that its cash flow from operations and available borrowing capacity provide sufficient resources to finance its operations and planned capital needs for the next 12 months. Solutia has an $800 million, five-year revolving credit facility and a $300 million, 364-day multi-currency revolving credit agreement in place. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activity." SFAS No. 133 provides comprehensive and consistent standards for the recognition and measurement of derivative and hedging activities. It requires that derivatives be recorded on the Statement of Consolidated Financial Position at fair value and establishes criteria for hedges of changes in the fair value of assets, liabilities or firm commitments, hedges of variable cash flows of forecasted transactions, and hedges of foreign currency exposures of net investments in foreign operations. Changes in the fair value of derivatives that do not meet the criteria for hedges are to be recognized in the Statement of Consolidated Income. During June of 1999, FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133," to defer the effective date of SFAS No. 133 by one year. The standard will now be effective for Solutia beginning January 1, 2001. During June of 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities--an Amendment of FASB Statement No. 133." SFAS No. 138 amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and certain hedging activities. Solutia does not expect the adoption of SFAS No. 133, as amended by SFAS No. 138, to have a material effect on its consolidated financial statements. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB 101) which provides guidance related to revenue recognition. SAB 101 allows companies to report any changes in revenue recognition related to adopting its provisions as an accounting change at the time of implementation in accordance with APB Opinion No. 20, "Accounting Changes." Companies must adopt the new guidance no later than the fourth quarter of fiscal year 2000. Solutia does not expect the adoption of SAB 101 to have a material effect on its consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS There have been no material changes in market risk exposures during the first six months of 2000 that affect the disclosures in Item 7A of Solutia's Annual Report on Form 10-K for the year ended December 31, 1999. 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Monsanto (now Pharmacia Corporation) is a party to a number of lawsuits and claims relating to Solutia, for which Solutia assumed responsibility in the spinoff. Solutia's Annual Report on Form 10-K for the year ended December 31, 1999, described an action pending in Harris County (Texas) District Court on behalf of 412 plaintiffs who are former employees of owners/operators of the Brio site or members of the employees' families. On April 24, 2000, the Company reached a tentative agreement to settle this action for $6 million. Court approval of the settlement is required for those plaintiffs who are minors. Solutia's Form 10-K also described two cases pending in Circuit Court in St. Clair County, Alabama, which had been consolidated and certified as a class action on behalf of all property owners in a specified area along waterways near Solutia's Anniston plant. Proceedings in this case had been stayed by the Alabama Supreme Court following the filing of a petition for a writ of mandamus on behalf of a small group of class members opposed to a tentative settlement agreed to by the Company and class representatives in April, 1999. On June 16, 2000, the Alabama Supreme Court issued an order denying the writ of mandamus and lifted the stay of proceedings. On July 6, 2000, the trial court entered an order of final approval and final judgment, finding the settlement fair and reasonable and directing the parties to implement the provisions of the settlement agreement. In addition, Solutia's Form 10-K, described 12 cases brought in Circuit Court in Calhoun County, Circuit Court in St. Clair County, Circuit Court in Talladega County and in U. S. District Court for the Northern District of Alabama of behalf of 5,528 plaintiffs. On July 10, 2000, an application for injunctive relief was made in one case in Calhoun County brought on behalf of 787 plaintiffs. Plaintiffs seek an order prohibiting further PCB releases from the Company's property and directing the Company to remediate all PCB contamination in and around Anniston. The Company will vigorously oppose this application and has meritorious defenses, including lack of any physical injury or property damage to plaintiffs, lack of any immediate or substantial endangerment to health or the environment and the ongoing implementation of remedial action by the Company under the supervision of the Alabama Department of Environmental Management and the United States Environmental Protection Agency. Solutia's Form 10-K and Solutia's Report on Form 10-Q for the quarter ended March 31, 2000, described administrative and judicial proceedings arising out of alleged environmental violations at a coal coking facility in Rock Springs, Wyoming owned by P4 Production, L.L.C., and formerly operated by Solutia. On April 21, 2000, Solutia, Pharmacia Corporation, and P4 Production filed their memorandum supporting their motion for dismissal or summary judgment on the grounds of claim preclusion, including the doctrines of res judicata and release. The United States filed, on May 5, 2000, its memorandum in opposition to the companies' motion for summary judgment and its cross-motion for summary judgment against the companies. Oral argument on the merits of these motions occurred on June 7, 2000. On June 2, 2000, Pharmacia was served with a complaint naming Monsanto Company as the sole defendant in an action filed in United States District Court for the Northern District of Alabama on behalf of a purported class of "[a]ll persons who reside, or who at one time did reside, in the areas contaminated by the Defendant's Anniston, Alabama plant and were thereby directly or indirectly exposed to PCBs." Plaintiffs allege that as a result of this exposure, they are at an increased risk of suffering personal injuries, and seek an injunction mandating medical monitoring and funding of a study of the alleged adverse health effects of this exposure. On June 6, 2000, Pharmacia was served with a complaint naming Monsanto as a defendant in an action filed in Circuit Court for Calhoun County, Alabama on behalf of a corporate entity with a manufacturing facility located near the Anniston plant. Plaintiff alleges that PCBs and other allegedly harmful chemicals or pollutants were released from the Anniston plant onto the soil, waters and air on or adjacent to plaintiff's property, causing that property to become unusable and worthless. Plaintiff seeks compensatory and punitive damages of $2 million. On June 21, 2000, Pharmacia was served with a complaint naming it, Solutia and others as defendants in an action filed in Circuit Court for Calhoun County, Alabama on behalf of a purported class of owners of property 15 upon which soil contaminated with PCBs taken from the site of a nearby commercial development was deposited. Plaintiffs seek compensatory and punitive damages in an unspecified amount. Solutia is vigorously defending these actions, and believes that it has meritorious defenses, including lack of any physical injury or property damage to plaintiffs, lack of any imminent or substantial endangerment to health or the environment and lack of negligence or improper conduct on the part of Solutia or Monsanto. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At Solutia's annual meeting of shareholders on April 26, 2000, five matters were submitted to a vote of shareholders. 1. The following directors were elected to the following terms (or until their respective successors are elected and qualified, or until their earlier death, resignation, or removal):
VOTES VOTES "WITHHOLD NAME "FOR" AUTHORITY" ---- ----- ---------- For term expiring at the 2002 annual meeting: Paul H. Hatfield.......................................... 92,808,821 3,212,004 For term expiring at the 2003 annual meeting: Robert T. Blakely......................................... 92,817,565 3,203,260 Robert H. Jenkins......................................... 92,816,886 3,203,939 Frank A. Metz, Jr......................................... 92,799,083 3,221,742
The following directors are continuing terms expiring at the annual meeting of shareholders in 2001: John C. Hunter III, Michael E. Miller, William D. Ruckelshaus, and John B. Slaughter. The following directors are continuing terms expiring at the annual meeting of shareholders in 2002: J. Patrick Mulcahy and Robert G. Potter. 2. The Solutia Inc. 2000 Stock-Based Incentive Plan was approved by the stockholders. A total of 67,182,976 votes were cast in favor of the plan, 27,938,199 votes were cast against it, and 899,650 votes were counted as abstentions. 3. The Solutia Inc. Annual Incentive Plan was approved by the stockholders. A total of 87,956,602 votes were cast in favor of the plan, 7,056,556 votes were cast against it, and 1,007,667 votes were counted as abstentions. 4. The Solutia Inc. Long-Term Incentive Plan was approved by the stockholders. A total of 87,273,043 votes were cast in favor of the plan, 7,856,580 votes were cast against it, and 891,202 votes were counted as abstentions. 5. The appointment by the Board of Directors of Deloitte & Touche L.L.P. as principal independent auditors for the year 2000 was ratified by the shareholders. A total of 94,180,803 votes were cast in favor of ratification, 1,348,575 votes were cast against it, and 491,447 votes were counted as abstentions. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits--See the Exhibit Index at page 18 of this report. (b) A Form 8-K announcing the formation of Astaris LLC, a joint venture between Solutia Inc. and FMC Corp., was filed on April 27, 2000. 16 SIGNATURE 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. -------------------------- (Registrant) /s/ JAMES M. SULLIVAN -------------------------- (Vice President and Controller) (On behalf of the Registrant and as Principal Accounting Officer) Date: July 28, 2000 17 EXHIBIT INDEX These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2 Omitted--Inapplicable 3 Omitted--Inapplicable 4 Omitted--Inapplicable 10 1. Solutia Inc. 1997 Stock-Based Incentive Plan, as amended on April 26, 2000 2. Solutia Inc. 2000 Stock-Based Incentive Plan (incorporated by reference to Appendix A of the Solutia Inc. Notice of Annual Meeting and Proxy Statement dated March 9, 2000) 3. Solutia Inc. 2000 Annual Incentive Plan (incorporated by reference to Appendix B of the Solutia Inc. Notice of Annual Meeting and Proxy Statement dated March 9, 2000) 4. Solutia Inc. 2000 Long-Term Incentive Plan (incorporated by reference to Appendix C of the Solutia Inc. Notice of Annual Meeting and Proxy Statement dated March 9, 2000) 11 Omitted--Inapplicable; see "Statement of Consolidated Income" on page 1. 15 Omitted--Inapplicable 18 Omitted--Inapplicable 19 Omitted--Inapplicable 22 Omitted--Inapplicable 23 Omitted--Inapplicable 24 Omitted--Inapplicable 27 Financial Data Schedule 99 Omitted--Inapplicable 18 EX-10.1 2 0002.txt 1997 STOCK-BASED INCENTIVE PLAN SOLUTIA INC. 1997 STOCK-BASED INCENTIVE PLAN SECTION 1. PURPOSE; DEFINITIONS The purpose of the Plan is to give the Company a competitive advantage in attracting, retaining and motivating officers and employees and to provide the Company and its Subsidiaries and Associated Companies with a stock plan providing incentives directly linked to the profitability of the Company's businesses and increases in shareholder value. For purposes of the Plan, the following terms are defined as set forth below: a. "Associated Company" means any corporation (or partnership, joint venture, or other enterprise), of which the Company owns or controls, directly or indirectly, 10% or more, but less than 50% of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). b. "Award" means a Stock Appreciation Right, Stock Option, Restricted Stock, unrestricted share of Common Stock, dividend equivalent, interest equivalent or other award granted under this Plan. c. "Board" means the Board of Directors of the Company. d. "Change in Control" and "Change in Control Price" have the meanings set forth in Sections 9(b) and (c), respectively. e. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. f. "Commission" means the Securities and Exchange Commission or any successor agency. g. "Committee" means the Executive Compensation and Development Committee referred to in Section 2. h. "Common Stock" means common stock, par value $0.01 per share, of the Company. i. "Company" means Solutia Inc., a Delaware corporation. 1 j. "Compensation Committee" means one or more committees appointed by the Executive Compensation and Development Committee composed of one or more senior managers of the Company or a Subsidiary or Affiliated Company to whom the Executive Compensation and Development Committee may delegate its powers (or a portion thereof) to administer this Plan pursuant to Section 2. k. "Covered Employee" means a participant designated prior to the grant of shares of Restricted Stock by the Committee who is or may be a "covered employee" within the meaning of Section 162(m)(3) of the Code in the year in which Restricted Stock is expected to be taxable to such participant. l. "Disability" means permanent and total disability as determined by the Committee for purposes of the Plan. m. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. n. "Fair Market Value" means, as of any given date, the average of the highest and lowest sales prices of the Common Stock reported as the New York Stock Exchange-Composite Transactions for such day, or if the Common Stock was not traded on the New York Stock Exchange on such day, then on the next preceding day on which the Common Stock was traded, all as reported by The Wall Street Journal under the heading New York Stock Exchange-Composite Transactions or by such other source as the Committee may select. o. "Incentive Stock Option" means any Stock Option designated as, and qualified as, an "incentive stock option" within the meaning of Section 422 of the Code. p. "Non-Employee Director" means a member of the Board who qualifies as a Non-Employee Director as defined in Rule 16b-3(b)(3), as promulgated by the Commission under the Exchange Act, or any successor definition adopted by the Commission. q. "NonQualified Stock Option" means any Stock Option that is not an Incentive Stock Option. r. "Qualified Performance-Based Award" means an Award of Restricted Stock designated as such by the Committee at the time of grant, based upon a determination that (i) the recipient is or may be a "covered employee" within the meaning of Section 162(m)(3) of the Code in the year in which the Company would expect to be able to claim a tax deduction with respect to such 2 Restricted Stock and (ii) the Committee wishes such Award to qualify for the Section 162(m) Exemption. s. "Performance Goals" means the performance goals established by the Committee in connection with the grant of Restricted Stock. In the case of Qualified Performance-Based Awards, (i) such goals shall be based on the attainment of specified levels of one or more of the following measures: earnings per share, sales, net profit after tax, gross profit, operating profit, cash generation, economic value added, unit volume, return on equity, change in working capital, return on capital or shareholder return, and (ii) such Performance Goals shall be set by the Committee within the time period prescribed by Section 162(m) of the Code and related regulations. t. "Plan" means the Solutia Inc. 1997 Stock-Based Incentive Plan, as set forth herein and as hereinafter amended from time to time. u. "Restricted Stock" means an Award granted under Section 7. v. "Retirement" means retirement from employment with the Company, a Subsidiary or an Associated Company as determined by the Committee for purposes of an Award under the Plan. w. "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission under Section 16(b) of the Exchange Act, as amended from time to time. x. "Section 162(m) Exemption" means the exemption from the limitation on deductibility imposed by Section 162(m) of the Code that is set forth in Section 162(m)(4)(C) of the Code. y. "Stock Appreciation Right" means an Award granted under Section 6. z. "Stock Option" means an Award granted under Section 5. aa. "Subsidiary" means: (i) for the purpose of an Incentive Stock Option, any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Incentive Stock Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain; and (ii) for the purposes of a NonQualified Stock Option, a Stock Appreciation Right or Restricted Stock Award, any corporation (or partnership, joint venture, or other 3 enterprise) of which the Company owns or controls, directly or indirectly, 50% or more of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). bb. "Termination of Employment" means the termination of the participant's employment with the Company and any Subsidiary or Associated Company. A participant employed by a Subsidiary or an Associated Company shall also be deemed to incur a Termination of Employment if the Subsidiary or Associated Company ceases to be such a Subsidiary or Associated Company, as the case may be, and the participant does not immediately thereafter become an employee of the Company or another Subsidiary or Associated Company. Temporary absences from employment because of illness, vacation or leave of absence and transfers among the Company and its Subsidiaries, or, if the Committee so determines, among the group consisting of the Company, its Subsidiaries and Associated Companies, shall not be considered Terminations of Employment. In addition, certain other terms used herein have definitions given to them in the first place in which they are used. SECTION 2. ADMINISTRATION The Plan shall be administered by the Executive Compensation and Development Committee or such other committee of the Board as the Board may from time to time designate (the "Committee"), which shall be composed of not less than two Non-Employee Directors, each of whom shall be an "outside director" for purposes of Section 162(m)(4) of the Code, and shall be appointed by and serve at the pleasure of the Board. The Committee shall have plenary authority to grant Awards pursuant to the terms of the Plan or, in the Committee's discretion, in connection with awards under other bonus plans or programs of the Company, to officers and employees of the Company and its Subsidiaries and Associated Companies. Among other things, the Committee shall have the authority, subject to the terms of the Plan: (a) To select the officers and employees to whom Awards may from time to time be granted; (b) To determine whether and to what extent Incentive Stock Options, NonQualified Stock Options, Stock Appreciation 4 Rights and Restricted Stock, or any combination thereof, are to be granted hereunder; (c) To determine the number of shares of Common Stock to be covered by each Award granted hereunder; (d) To determine the terms and conditions of any Award granted hereunder (including, but not limited to, the option price (subject to Section 5(a)) or base price, as applicable, any vesting condition, restriction or limitation (which may be related to the performance of the participant, the Company or any Subsidiary or Associated Company) and any vesting acceleration or forfeiture waiver regarding any Award and the shares of Common Stock relating thereto, based on such factors as the Committee shall determine; (e) To modify, amend or adjust the terms and conditions of any Award, at any time or from time to time, including but not limited to Performance Goals; provided, however, that the Committee may not adjust upwards the amount payable with respect to a Qualified Performance-Based Award or waive or alter the Performance Goals associated therewith; (f) To determine under what circumstances an Award may be settled in cash or Common Stock under Sections 5(g) and 6(d)(ii); and (g) To determine under what circumstances dividends, dividend equivalents or interest equivalents with respect to an Award shall be paid. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall from time to time deem advisable, to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any award certificate relating thereto) and to otherwise supervise the administration of the Plan. The Committee may act only by a majority of its members then in office, except that the members thereof may delegate all or a portion of the administration of the Plan to one or more Compensation Committees and authorize further delegation by the Compensation Committees to senior managers of the Company or its Subsidiaries (provided that no such delegation may be made that would cause Awards or other transactions under the Plan to cease to be exempt from Section 16(b) of the Exchange Act or not to qualify for, or cease to qualify for, the Section 162(m) Exemption). 5 Any determination made by the Committee or pursuant to delegated authority pursuant to the provisions of the Plan with respect to any Award shall be made in the sole discretion of the Committee or such delegate at the time of the grant of the Award or, unless in contravention of any express term of the Plan, at any time thereafter. All decisions made by the Committee or any appropriate delegate pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. Any authority granted to the Committee may also be exercised by the full Board, except to the extent that the grant or exercise of such authority would cause any Award or transaction to become subject to (or lose an exemption under) the short-swing profit recovery provisions of Section 16 of the Exchange Act or cause an award designated as a Qualified Performance-Based Award not to qualify for, or to cease to qualify for, the Section 162(m) Exemption. To the extent that any permitted action taken by the Board conflicts with action taken by the Committee, the Board action shall control. SECTION 3. COMMON STOCK SUBJECT TO PLAN The total number of shares of Common Stock reserved and available for grant under the Plan shall not exceed 7,800,000. No participant may be granted Awards covering in excess of 500,000 shares of Common Stock in any calendar year. Shares subject to an Award under the Plan may be authorized and unissued shares or may be treasury shares, or both. If any shares of Restricted Stock are forfeited, or if any Stock Option or Stock Appreciation Right terminates without being exercised, or if any Stock Appreciation Right (whether granted alone or in conjunction with a Stock Option) is exercised for cash, shares subject to such Awards shall again be available for distribution in connection with Awards under the Plan. Any forfeited shares of Restricted Stock shall revert to the Company. In the event of any change in corporate capitalization, such as a stock split or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property (without regard to the payment of any cash dividends by the Company in the ordinary course) of the Company, any reorganization (whether or not such reorganization 6 comes within the definition of such term in Section 368 of the Code) or any partial or complete liquidation of the Company, the Committee or Board may make such substitution or adjustments in the aggregate number and kind of shares reserved for issuance under the Plan, in the maximum number of shares with respect to which any participant may be granted Awards in any calendar year, in the number, kind and option price or base price, as applicable, of shares subject to outstanding Stock Options and Stock Appreciation Rights, in the number and kind of shares subject to other outstanding Awards granted under the Plan and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion; provided, however, that the number of shares subject to any Award shall always be a whole number. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. SECTION 4. ELIGIBILITY Officers and employees of the Company, a Subsidiary or an Associated Company who are responsible for or contribute to the growth and profitability of the business of the Company, a Subsidiary or an Associated Company are eligible to be granted Awards under the Plan. SECTION 5. STOCK OPTIONS Stock Options may be granted alone or in addition to other Awards granted under the Plan and may be of two types: Incentive Stock Options and NonQualified Stock Options. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Committee shall have the authority to grant any optionee Incentive Stock Options, NonQualified Stock Options or both types of Stock Options (in each case with or without Stock Appreciation Rights); provided, however, that grants hereunder are subject to the aggregate limit on grants to individual participants set forth in Section 3. Incentive Stock Options may be granted only to employees of the Company and its subsidiaries (within the meaning of Section 424(f) of the Code). To the extent that any Stock Option is not designated as an Incentive Stock Option or, even if so designated, does not qualify as an Incentive Stock Option, it shall constitute a NonQualified Stock Option. 7 Stock Options shall be evidenced by option award certificates, the terms and provisions of which may differ. An option award certificate shall indicate on its face whether it is intended to be an award certificate for an Incentive Stock Option or a NonQualified Stock Option. The grant of a Stock Option shall occur on the date the Committee by resolution selects an individual to be a participant in any grant of a Stock Option, determines the number of shares of Common Stock to be subject to such Stock Option to be granted to such individual and specifies the terms and provisions of the Stock Option, or on such later date as is specified by the Committee. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered nor shall any discretion or authority granted under the Plan be exercised so as to disqualify the Plan under Section 422 of the Code or, without the consent of the optionee affected, to disqualify any Incentive Stock Option under such Section 422. Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions as the Committee shall deem desirable: (a) Option Price. The option price per share of Common Stock purchasable under a Stock Option shall be determined by the Committee and set forth in the option award certificate, and shall not be less than the Fair Market Value of the Common Stock subject to the Stock Option on the date of grant. The option price per share shall not be decreased thereafter except pursuant to Section 3 of this Plan. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than 10 years after the date the Stock Option is granted. (c) Exercisability. Except as otherwise provided herein, Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee. If the Committee provides that any Stock Option is exercisable only in installments, the Committee may at any time waive such installment exercise provisions, in whole or in part, based on such factors as the Committee may determine. In addition, the Committee may at any time accelerate the exercisability of any Stock Option. 8 (d) Method of Exercise. Subject to the provisions of this Section 5, Stock Options may be exercised, in whole or in part, at any time during the option term by giving written notice of exercise, or notice in accordance with such other procedures as may be established from time to time, to the Company or its designated agent specifying the number of shares of Common Stock subject to the Stock Option to be purchased. Such notice shall be accompanied by payment in full of the purchase price in cash or by certified or cashier's check or such other instrument as the Company may accept. If approved by the Committee, payment, in full or in part, may also be made in the form of unrestricted Common Stock already owned by the optionee of the same class as the Common Stock subject to the Stock Option (based on the Fair Market Value of the Common Stock on the date the Stock Option is exercised); provided, however, that, in the case of an Incentive Stock Option, the right to make a payment in the form of already owned shares of Common Stock of the same class as the Common Stock subject to the Stock Option may be authorized only at the time the Stock Option is granted and provided, further, that, in the case of either an Incentive Stock Option or a NonQualified Stock Option, such already owned shares have been held by the optionee for at least six months at the time of exercise. In the discretion of the Committee, payment for any shares subject to a Stock Option may also be made by delivering a properly executed exercise notice to the Company, together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds necessary to pay the purchase price, and, if requested, by the amount of any federal, state, local or foreign withholding taxes. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. In addition, in the discretion of the Committee, payment for any shares subject to a Stock Option may also be made by instructing the Company or its designated agent to withhold a number of such shares having a Fair Market Value on the date of exercise equal to the aggregate exercise price of such Stock Option. No shares of Common Stock shall be issued until full payment therefor has been made. An optionee shall have all of the rights of a shareholder of the Company holding the class or series of Common Stock that is subject to such Stock Option (including, if 9 applicable, the right to vote the shares and the right to receive dividends), when the optionee has given written notice of exercise, has paid in full for such shares and, if requested, has given the representation described in Section 12(a). (e) Nontransferability of Stock Options. No Stock Option shall be transferable by the optionee other than by will or by the laws of descent and distribution, or, in the Committee's discretion, pursuant to a written beneficiary designation. All Stock Options shall be exercisable, subject to the terms of this Plan, only by the optionee or guardian or legal representative or beneficiary of the optionee, it being understood that the terms "holder" and "optionee" include any such guardian, legal representative or beneficiary. (f) Termination of Employment. The Stock Option and its related Stock Appreciation Right, if any, may be exercised in full or in part from time to time within ten years from the date of the grant, or such shorter period as may be specified by the Committee in the award certificate, provided that in any event each shall lapse and cease to be exercisable upon or within such period following, Termination of Employment as shall have been determined by the Committee and as specified in the Stock Option or Stock Appreciation Right award certificate; provided, however, that such period following Termination of Employment shall not exceed twelve months unless employment shall have terminated: (i) as a result of Retirement, Disability, or involuntary termination without cause, in which event such period shall not exceed the original term of the Stock Option; or (ii) as a result of death, or death shall have occurred following Termination of Employment and while the Stock Option or Stock Appreciation Right was still exercisable, in which event such period shall not exceed the original term of the Stock Option or Stock Appreciation Right; and provided, further, that such period following Termination of Employment shall in no event exceed the original exercise period of the Stock Option or related Stock Appreciation Right, if any. (g) Cashing Out of Stock Option. On receipt of written notice of exercise, the Committee may elect to cash out all or part of the portion of the shares of Common Stock for which 10 a Stock Option is being exercised by paying the optionee an amount, in cash or Common Stock, equal to the excess of the Fair Market Value of the Common Stock over the option price times the number of shares of Common Stock for which the Option is being exercised on the effective date of such cash-out. (h) Change in Control Cash-Out. Notwithstanding any other provision of the Plan, during the 60-day period from and after a Change in Control (the "Exercise Period"), unless the Committee shall determine otherwise at the time of grant, an optionee shall have the right, whether or not the Stock Option is fully exercisable and in lieu of the payment of the exercise price for the shares of Common Stock being purchased under the Stock Option and by giving notice to the Company, to elect (within the Exercise Period) to surrender all or part of the Stock Option to the Company and to receive cash, within 30 days of such notice, in an amount equal to the amount by which the Change in Control Price per share of Common Stock on the date of such election shall exceed the exercise price per share of Common Stock under the Stock Option (the "Spread") multiplied by the number of shares of Common Stock granted under the Stock Option as to which the right granted under this Section 5(k) shall have been exercised. Notwithstanding the foregoing, if any right granted pursuant to this Section 5(k) would make a Change in Control transaction ineligible for pooling-of-interests accounting under APB No. 16 that but for the nature of such grant would otherwise be eligible for such accounting treatment, the Committee shall have the ability to substitute for the cash payable pursuant to such right Common Stock with a Fair Market Value equal to the cash that would otherwise be payable hereunder, or, in the case of Awards granted under the Plan on or after May 1, 2000, if necessary to preserve such accounting treatment, otherwise modify or eliminate such right. SECTION 6. STOCK APPRECIATION RIGHT (a) Grant and Exercise. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a NonQualified Stock Option, such rights may be granted either at or after the time of grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of grant of such Stock Option. In addition, Stock Appreciation Rights may be granted without relationship to a 11 Stock Option to employees residing in foreign jurisdictions, where the grant of a Stock Option is impossible or impracticable because of securities or tax laws or other governmental regulations. (b) Freestanding Stock Appreciation Rights. A Stock Appreciation Right granted without relationship to a Stock Option, pursuant to Section 6(a), shall be exercisable as determined by the Committee, but in no event after ten years from the date of grant. The base price of a Stock Appreciation Right granted without relationship to a Stock Option shall be the Fair Market Value of a share of Common Stock on the date of grant. A Stock Appreciation Right granted without relationship to a Stock Option shall entitle the holder, upon receipt of such right, to a cash payment determined by multiplying (i) the difference between the base price of the Stock Appreciation Right and the Fair Market Value of a share of Common Stock on the date of exercise of the Stock Appreciation Right, by (ii) the number of shares of Common Stock as to which Stock Appreciation Right shall have been exercised. A freestanding Stock Appreciation Right may be exercised by giving written notice of exercise to the Company or its designated agent specifying the number of shares of Common Stock as to which such Stock Appreciation Right is being exercised. (c) Tandem Stock Appreciation Rights. A Stock Appreciation Right granted in conjunction with a Stock Option may be exercised by an optionee in accordance with Section 6(d) by surrendering the applicable portion of the related Stock Option in accordance with procedures established by the Committee. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in Section 6(d). Stock Options which have been so surrendered shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. A Stock Appreciation Right shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option. (d) Terms and Conditions. Stock Appreciation Rights granted in conjunction with a Stock Option shall be subject to such terms and conditions as shall be determined by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate are exercisable in accordance with the provisions of Section 5 and this Section 6. 12 (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive an amount in cash, equal to the excess of the Fair Market Value of one share of Common Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised. (iii) Stock Appreciation Rights shall be transferable only to permitted transferees of the underlying Stock Option in accordance with Section 5(e). (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 on the number of shares of Common Stock to be issued under the Plan, but only to the extent of the number of shares covered by the Stock Appreciation Right at the time of exercise based on the value of the Stock Appreciation Right at such time. SECTION 7. BONUS SHARES AND RESTRICTED STOCK (a) Administration. Awards of shares of Common Stock or Restricted Stock may be made either alone or in addition to other Awards granted under the Plan. In addition, a participant may receive unrestricted shares of Common Stock or Restricted Stock in lieu of certain cash payments awarded under other plans or programs of the Company. The Committee shall determine the officers and employees to whom and the time or times at which grants of unrestricted shares of Common Stock and Restricted Stock will be awarded, the number of shares to be awarded to any participant (subject to the aggregate limit on grants to individual participants set forth in Section 3 in the case of Qualified Performance-Based Awards), the conditions for vesting, the time or times within which such Awards may be subject to forfeiture and any other terms and conditions of the Awards, in addition to those contained in Section 7(c). (b) Awards and Certificates. Awards of unrestricted shares of Common Stock and Restricted Stock shall be evidenced in such manner as the Committee may deem appropriate, including, 13 book-entry registration or delivery of one or more stock certificates to the participant, or, in the case of Restricted Stock, a custodian or escrow agent. Any stock certificate issued in respect of unrestricted shares or shares of Restricted Stock shall be registered in the name of such participant. The Committee may require that the stock certificates evidencing shares of Restricted Stock be held in custody or escrow by the Company or its designated agent until the restrictions thereon shall have lapsed and that, as a condition of any Award of Restricted Stock, the participant shall have delivered a stock power, endorsed in blank, relating to the Common Stock covered by such Award. (c) Terms and Conditions. Shares of Restricted Stock shall be subject to the following terms and conditions: (i) The Committee may, prior to or at the time of grant, designate an Award of Restricted Stock as a Qualified Performance- Based Award, in which event it shall condition the grant or vesting, as applicable, of such Restricted Stock upon the attainment of Performance Goals. If the Committee does not designate an Award of Restricted Stock as a Qualified Performance- Based Award, it may also condition the grant or vesting thereof upon the attainment of Performance Goals. Regardless of whether an Award of Restricted Stock is a Qualified Performance-Based Award, the Committee may also condition the grant or vesting thereof upon the continued service of the participant. The conditions for grant or vesting and the other provisions of Restricted Stock Awards (including without limitation any applicable Performance Goals) need not be the same with respect to each recipient. The Committee may at any time, in its sole discretion, accelerate or waive, in whole or in part, any of the foregoing restrictions; provided, however, that in the case of Restricted Stock that is a Qualified Performance-Based Award, the applicable Performance Goals have been satisfied. (ii) Subject to the provisions of the Plan and the terms of the Restricted Stock Award, during the period, if any, set by the Committee, commencing with the date of such Award for which such participant's continued service is required (the "Restriction Period"), and until the later of (A) the expiration of the Restriction Period and (B) the date the applicable Performance Goals (if any) are satisfied, the participant shall not be permitted to sell, assign, transfer, pledge or otherwise encumber shares of Restricted Stock; provided that the foregoing shall not prevent a 14 participant from pledging Restricted Stock as security for a loan, the sole purpose of which is to provide funds to pay the option price for Stock Options. (iii) Except as provided in this paragraph (iii) and Sections 7(c)(i) and 7(c)(ii) and the terms of the Restricted Stock Award, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Company holding the class or series of Common Stock that is the subject of the Restricted Stock, including, if applicable, the right to vote the shares and the right to receive any cash dividends. If so determined by the Committee under the applicable terms of the Restricted Stock Award and subject to Section 12(e) of the Plan, (A) cash dividends on the class or series of Common Stock that is the subject of the Restricted Stock Award shall be automatically deferred and reinvested in additional Restricted Stock, held subject to the vesting of the underlying Restricted Stock, or held subject to meeting Performance Goals applicable only to dividends, and (B) dividends payable in Common Stock shall be paid in the form of Restricted Stock of the same class as the Common Stock with which such dividend was paid, held subject to the vesting of the underlying Restricted Stock, or held subject to meeting Performance Goals applicable only to dividends. (iv) Except to the extent otherwise provided under the applicable terms of the Restricted Stock Award and Sections 7(c)(i), 7(c)(ii), 7(c)(v) and 9(a)(ii), upon a participant's Termination of Employment for any reason during the Restriction Period or before the applicable Performance Goals are satisfied, all shares still subject to restriction shall be forfeited by the participant. (v) Except to the extent otherwise provided in Section 9(a)(ii), in the event of a participant's Termination of Employment by reason of Retirement, the Committee shall have the discretion to waive, in whole or in part, any or all remaining restrictions (other than, in the case of Restricted Stock with respect to which a participant is a Covered Employee, satisfaction of the applicable Performance Goals unless the participant's employment is terminated by reason of death or Disability) with respect to any or all of such participant's shares of Restricted Stock. (vi) If and when any applicable Performance Goals are satisfied and the Restriction Period expires without a prior 15 forfeiture of the Restricted Stock, unlegended certificates for such shares shall be delivered to the participant upon surrender of the legended certificates, or the restrictions on such shares shall be removed from the book-entry registration. SECTION 8. DIVIDEND EQUIVALENTS AND INTEREST EQUIVALENTS (a) The Committee may provide that a participant to whom a Stock Option has been awarded, which is exercisable in whole or in part at a future time for shares of Common Stock (such shares, the "Option Shares") shall be entitled to receive an amount per Option Share, equal in value to the cash dividends, if any, paid per share of Common Stock on issued and outstanding shares, as of the dividend record dates occurring during the period between the date of the Award and the time each such Option Share is delivered pursuant to the exercise of such Stock Option. Such amounts (herein called "dividend equivalents") may, in the discretion of the Committee, be: (i) paid in cash or shares of Common Stock from time to time prior to or at the time of the delivery of such shares of Common Stock or upon expiration of the Stock Option if it shall not have been fully exercised (except that payment of the dividend equivalents on an Incentive Stock Option may not be made prior to exercise); or (ii) converted into contingently credited shares of Common Stock (with respect to which dividend equivalents shall accrue) in such manner, at such value, and deliverable at such time or times, as may be determined by the Committee. Such shares of Common Stock (whether delivered or contingently credited) shall be charged against the limitations set forth in Section 3. (b) The Committee, in its discretion, may authorize payment of interest equivalents on any portion of any Award payable at a future time in cash, and interest equivalents on dividend equivalents which are payable in cash at a future time. SECTION 9. CHANGE IN CONTROL PROVISIONS (a) Impact of Event. Notwithstanding any other provision of the Plan to the contrary, in the event of a Change in Control: 16 (i) Any Stock Options and Stock Appreciation Rights outstanding as of the date such Change in Control is determined to have occurred, and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant. (ii) The restrictions and deferral limitations applicable to any Restricted Stock shall lapse, and such Restricted Stock shall become free of all restrictions and become fully vested and transferable to the full extent of the original grant. (b) Definition of Change in Control. For purposes of Awards granted under the Plan prior to May 1, 2000, a "Change in Control" shall mean the happening of any of the following events: (i) The acquisition by any individual, entity or group (with the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (1) any acquisition directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (4) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 9; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for 17 this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets or stock of another entity (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the entity resulting from such Business Combination (including, without limitation, a entity which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such entity resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the entity resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such entity except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 18 (b)(1) Definition of Change in Control. For purposes of awards granted under the Plan on or after May 1, 2000, a "Change in Control" shall mean the happening of any of the following events: (i) The acquisition by any Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the Outstanding Company Common Stock or (B) the Outstanding Company Voting Securities; provided, however, that, for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (1) any acquisition directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (4) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 9; or (ii) Individuals who constitute the Incumbent Board cease for any reason to constitute a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual was a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Consummation of a Business Combination, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 66% of the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the entity resulting from such Business Combination (including, without limitation, an entity that as a result of such 19 transaction, owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such entity resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the entity resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such entity, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (c) Change in Control Price. For purposes of the Plan, "Change in Control Price" means the higher of (i) the highest reported sales price, regular way, of a share of Common Stock in any transaction reported on the New York Stock Exchange Composite Tape or other national exchange on which such shares are listed or on NASDAQ during the 60-day period prior to and including the date of a Change in Control or (ii) if the Change in Control is the result of a tender or exchange offer or a Corporate Transaction, the highest price per share of Common Stock paid in such tender or exchange offer or Corporate Transaction; provided, however, that in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, the Change in Control Price shall be in all cases the Fair Market Value of the Common Stock on the date such Incentive Stock Option or Stock Appreciation Right is exercised. To the extent that the consideration paid in any such transaction described above consists all or in part of securities or other noncash consideration, the value of such securities or other noncash consideration shall be determined in the sole discretion of the Board. 20 SECTION 10. AMENDMENT AND TERMINATION The Board may amend, alter, or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which would impair the rights of an optionee under any Award theretofore granted without the optionee's or recipient's consent, except, in the case of Awards granted before May 1, 2000, such an amendment made to cause the Plan to qualify for any exemption provided by Rule 16b-3, or in the case of Awards granted on or after May 1, 2000, such an amendment made to cause the Plan to comply with applicable law, stock exchange rules, or accounting rules. In addition, no such amendment shall be made without the approval of the Company's shareholders to the extent such approval is required by law or agreement. The Committee may amend the terms of any Stock Option or other Award theretofore granted, prospectively or retroactively, but no such amendment shall cause a Qualified Performance-Based Award to cease to qualify for the Section 162(m) Exemption or impair the rights of any holder without the holder's consent except such an amendment made to cause the Plan or Award to qualify for any exemption provided by Rule 16b-3. Subject to the above provisions, the Board shall have authority to amend the Plan to take into account changes in law and tax and accounting rules as well as other developments, and to grant Awards which qualify for beneficial treatment under such rules without stockholder approval. SECTION 11. UNFUNDED STATUS OF PLAN It is presently intended that the Plan constitute an "unfunded" plan for incentive and deferred compensation. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Common Stock or make payments; provided, however, that unless the Committee otherwise determines, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. SECTION 12. GENERAL PROVISIONS (a) The Committee may require each person purchasing or receiving shares pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to the distribution 21 thereof. The certificates for such shares may include any legend, or, in the case of book-entry registration any notation, which the Committee deems appropriate to reflect any restrictions on transfer. Notwithstanding any other provision of the Plan or certificates made pursuant thereto, the Company shall not be required to issue or deliver any stock certificate or certificates for shares of Common Stock, or account for such shares by book-entry registration, under the Plan prior to fulfillment of all of the following conditions: (1) Listing or approval for listing upon notice of issuance, of such shares on the New York Stock Exchange, Inc., or such other securities exchange as may at the time be the principal market for the Common Stock; (2) Any registration or other qualification of such shares of the Company under any state, federal or foreign law or regulation, or the maintaining in effect of any such registration or other qualification which the Committee shall, in its absolute discretion upon the advice of counsel, deem necessary or advisable; and (3) Obtaining any other consent, approval, or permit from any state or federal governmental agency or foreign governmental body which the Committee shall, in its absolute discretion after receiving the advice of counsel, determine to be necessary or advisable. (b) Nothing contained in the Plan shall prevent the Company or any Subsidiary or Associated Company from adopting other or additional compensation arrangements for its employees. (c) Adoption of the Plan shall not confer upon any employee any right to continued employment, nor shall it interfere in any way with the right of the Company or a Subsidiary or an Associated Company to terminate the employment of any employee at any time. (d) No later than the date as of which an amount first becomes includible in the gross income of the participant for federal income tax purposes with respect to any Award under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the 22 payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Company, the minimum withholding obligations may be settled with Common Stock, including Common Stock that is part of the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and its Subsidiaries or Associated Companies shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the participant. The Committee may establish such procedures as it deems appropriate, including making irrevocable elections, for the settlement of withholding obligations with Common Stock. (e) Reinvestment of dividends in additional Restricted Stock at the time of any dividend payment shall only be permissible if sufficient shares of Common Stock are available under Section 3 for such reinvestment (taking into account then outstanding Stock Options and other Awards). (f) The Committee, in its sole discretion, may establish such procedures as it deems appropriate for a participant to designate a beneficiary to whom any amounts payable in the event of the participant's death are to be paid or by whom any rights of the participant, after the participant's death, may be exercised. (g) In the case of a grant of an Award to any employee of a Subsidiary or Affiliated Company, the Company may, if the Committee so directs, issue or transfer the shares of Common Stock, if any, covered by the Award to the Subsidiary or Affiliated Company, for such lawful consideration as the Committee may specify, upon the condition or understanding that the Subsidiary or Affiliated Company will transfer the shares of Common Stock to the employee in accordance with the terms of the Award specified by the Committee pursuant to the provisions of the Plan. (h) The Plan and all Awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. SECTION 13. EFFECTIVE DATE OF PLAN The Plan shall be effective as of September 1, 1997. 23 SECTION 14. Notwithstanding any other provision of the Plan, the Committee shall have authority to determine for purposes of any Award that (a) is outstanding as of the date that the Company sells any business, or its interest in any business, to Monsanto Company and (b) is held by a participant who in connection with such sale becomes an employee of Monsanto Company (or a subsidiary or associated company of Monsanto Company) rather than an employee of the Company (or a Subsidiary or Associated Company of the Company), such change of employment shall not constitute a Termination of Employment. With respect to any such Award held by any such participant, Termination of Employment shall mean the termination of the participant's employment with Monsanto Company, a subsidiary of Monsanto Company, or an associated company of Monsanto Company other than as the result of a transfer among such companies. A participant employed by a subsidiary or an associated company of Monsanto Company shall also be deemed to incur a Termination of Employment if the subsidiary or associated company ceases to be such a subsidiary or associated company of Monsanto Company, as the case may be, and the participant does not immediately thereafter become an employee of Monsanto Company or another subsidiary or associated company of Monsanto Company. For purposes of this Section 14, a subsidiary of Monsanto Company means any corporation (or partnership, joint venture, or other enterprise) of which Monsanto Company owns or controls, directly or indirectly, 50% or more of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power), and an associated company of Monsanto Company means any corporation (or partnership, joint venture, or other enterprise), of which Monsanto Company owns or controls, directly or indirectly, 10% or more, but less than 50% of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). As amended 4/28/99 and 4/26/00 24 EX-27 3 0003.txt FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Statement of Consolidated Income of Solutia Inc. and Subsidiaries for the six months ended June 30, 2000, and the Statement of Consolidated Financial Position as of June 30, 2000. Such information is qualified in its entirety by reference to such combined financial statements. 1,000,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 21 0 516 12 367 1,136 3,547 2,247 3,918 1,527 790 1 0 0 34 3,918 1,680 1,680 1,323 1,323 0 0 41 79 24 55 0 0 0 55 0.51 0.50
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