-----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, PXyiZuMEhkAhSyEjm8YYpQWmpichNAwR01r63SrLYJ8f/qQM4NqErnLQisnjx/yl 9r8VwE/eh9sTyedP06KYag== 0001068800-02-000201.txt : 20020801 0001068800-02-000201.hdr.sgml : 20020801 20020801123506 ACCESSION NUMBER: 0001068800-02-000201 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020801 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOLUTIA INC CENTRAL INDEX KEY: 0001043382 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 431781797 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13255 FILM NUMBER: 02717051 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 soltenq.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, 2002 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, 2002 ----- -------------- COMMON STOCK, $0.01 PAR VALUE 104,803,534 SHARES - ----------------------------- ------------------ ==================================================================== PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SOLUTIA INC. STATEMENT OF CONSOLIDATED INCOME (LOSS) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------- --------------------- 2002 2001 2002 2001 ----- ----- ------ ------ NET SALES.......................................... $ 736 $ 737 $1,390 $1,484 Cost of goods sold................................. 599 609 1,131 1,228 ----- ----- ------ ------ GROSS PROFIT....................................... 137 128 259 256 Marketing expenses................................. 46 45 89 91 Administrative expenses............................ 35 38 71 74 Technological expenses............................. 16 15 31 32 Amortization expense............................... 1 8 2 16 ----- ----- ------ ------ OPERATING INCOME................................... 39 22 66 43 Equity earnings from affiliates--net of tax........ 4 8 12 12 Interest expense................................... (19) (22) (44) (44) Other income--net.................................. 2 6 9 37 ----- ----- ------ ------ INCOME BEFORE INCOME TAXES......................... 26 14 43 48 Income taxes....................................... 3 1 6 13 ----- ----- ------ ------ INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............................. 23 13 37 35 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE........................................ -- -- (167) -- ----- ----- ------ ------ NET INCOME (LOSS).................................. $ 23 $ 13 $ (130) $ 35 ===== ===== ====== ====== BASIC EARNINGS (LOSS) PER SHARE: INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............................. $0.22 $0.13 $ 0.35 $ 0.34 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE........................................ -- -- (1.59) -- ----- ----- ------ ------ BASIC EARNINGS (LOSS) PER SHARE.................... $0.22 $0.13 $(1.24) $ 0.34 ===== ===== ====== ====== DILUTED EARNINGS (LOSS) PER SHARE: INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............................. $0.22 $0.12 $ 0.35 $ 0.33 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE........................................ $ -- $ -- $(1.59) $ -- ----- ----- ------ ------ DILUTED EARNINGS (LOSS) PER SHARE.................. $0.22 $0.12 $(1.24) $ 0.33 ===== ===== ====== ====== Weighted average equivalent shares (in millions): Basic.......................................... 104.8 103.7 104.7 103.6 Effect of dilutive securities: Common share equivalents--common shares issuable upon exercise of outstanding stock options............................ 0.3 1.3 0.4 1.3 ----- ----- ------ ------ Diluted........................................ 105.1 105.0 105.1 104.9 ===== ===== ====== ====== STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (DOLLARS IN MILLIONS) THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------- --------------------- 2002 2001 2002 2001 ----- ----- ------ ------ NET INCOME (LOSS).................................. $ 23 $ 13 $ (130) $ 35 OTHER COMPREHENSIVE INCOME (LOSS): Currency translation adjustments................... 87 (24) 82 (60) Unrealized investment gain (loss), net of tax...... (1) -- -- -- Net unrealized loss on derivative instruments, net of tax....................................... -- (2) -- (2) Net realized (gain) loss on derivative instruments, net of tax....................................... -- -- 1 (2) ----- ----- ------ ------ COMPREHENSIVE INCOME (LOSS)........................ $ 109 $ (13) $ (47) $ (29) ===== ===== ====== ====== 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, 2002 2001 -------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................... $ 13 $ 23 Trade receivables, net of allowance of $18 in 2002 and $22 in 2001............................................... 439 352 Miscellaneous receivables................................... 115 105 Prepaid expenses............................................ 10 15 Deferred income tax benefit................................. 121 123 Inventories................................................. 327 303 ------ ------ TOTAL CURRENT ASSETS........................................ 1,025 921 PROPERTY, PLANT AND EQUIPMENT: Land........................................................ 62 58 Buildings................................................... 437 425 Machinery and equipment..................................... 3,056 3,006 Construction in progress.................................... 51 51 ------ ------ Total property, plant and equipment......................... 3,606 3,540 Less accumulated depreciation............................... 2,469 2,397 ------ ------ NET PROPERTY, PLANT AND EQUIPMENT........................... 1,137 1,143 INVESTMENTS IN AFFILIATES................................... 221 313 GOODWILL, net............................................... 324 386 IDENTIFIED INTANGIBLE ASSETS, net........................... 74 194 LONG-TERM DEFERRED INCOME TAX BENEFIT....................... 236 254 OTHER ASSETS................................................ 183 197 ------ ------ TOTAL ASSETS................................................ $3,200 $3,408 ====== ====== LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable............................................ $ 272 $ 233 Wages and benefits.......................................... 51 56 Postretirement liabilities.................................. 93 82 Miscellaneous accruals...................................... 343 362 Short-term debt............................................. 576 683 ------ ------ TOTAL CURRENT LIABILITIES................................... 1,335 1,416 LONG-TERM DEBT.............................................. 646 627 POSTRETIREMENT LIABILITIES.................................. 937 947 OTHER LIABILITIES........................................... 440 531 SHAREHOLDERS' DEFICIT: Common stock (authorized, 600,000,000 shares, par value $0.01) Issued: 118,400,635 shares in 2002 and 2001............... 1 1 Net deficiency of assets at spinoff....................... (113) (113) Treasury stock, at cost (13,597,101 shares in 2002 and 13,921,604 shares in 2001).............................. (250) (257) Unearned ESOP shares........................................ -- (1) Accumulated other comprehensive loss........................ (62) (144) Reinvested earnings......................................... 266 401 ------ ------ SHAREHOLDERS' DEFICIT....................................... (158) (113) ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT................. $3,200 $3,408 ====== ====== See accompanying Notes to Consolidated Financial Statements.
2 SOLUTIA INC. STATEMENT OF CONSOLIDATED CASH FLOW (DOLLARS IN MILLIONS)
SIX MONTHS ENDED JUNE 30, ------------------ 2002 2001 ----- ---- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income (loss)........................................... $(130) $ 35 Adjustments to reconcile to Cash From Operations: Cumulative effect of change in accounting principle..... 167 -- Depreciation and amortization........................... 76 90 Amortization of deferred credits........................ (7) (7) Net pretax gains from asset disposals................... (6) (31) Changes in assets and liabilities: Income and deferred taxes........................... 61 (7) Trade receivables................................... (87) (25) Inventories......................................... (24) 1 Accounts payable.................................... 41 (45) Other assets and liabilities........................ (42) (93) ----- ---- CASH FROM OPERATIONS........................................ 49 (82) ----- ---- INVESTING ACTIVITIES: Property, plant and equipment purchases..................... (31) (43) Acquisition and investment payments, net of cash acquired... (17) (18) Property disposals and investment proceeds.................. 100 32 ----- ---- CASH FROM INVESTING ACTIVITIES.............................. 52 (29) ----- ---- FINANCING ACTIVITIES: Net change in short-term debt obligations................... (109) 103 Common stock issued under employee stock plans.............. 2 8 Other financing activities.................................. (4) (2) ----- ---- CASH FROM FINANCING ACTIVITIES.............................. (111) 109 ----- ---- DECREASE IN CASH AND CASH EQUIVALENTS....................... (10) (2) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR........................................... 23 19 ----- ---- END OF PERIOD............................................... $ 13 $ 17 ===== ==== 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 make and sell a variety of high-performance chemical-based materials. Solutia is a world leader in performance films for laminated safety glass and after-market applications; resins and additives for high-value coatings; process development and scale-up services for pharmaceutical fine chemicals; specialties such as water treatment chemicals, heat transfer fluids and aviation hydraulic fluid and an integrated family of nylon products including high-performance polymers and fibers. These financial statements should be read in conjunction with the audited financial statements and notes to consolidated financial statements included in Solutia's 2001 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 7, 2002. A summary of our critical accounting policies is presented on page 13 of our most recent Form 10-K. There have been no material changes in the accounting policies followed by Solutia during fiscal year 2002 except for those changes described in Note 6. 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 (loss), 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, 2002, are not necessarily indicative of the results to be expected for the full year. Certain reclassifications to prior year's financial information have been made to conform to the 2002 presentation. 2. ACQUISITIONS On May 31, 2002, Solutia acquired Axio Research Corporation (Axio) for approximately $5 million, which was financed with cash from operations. Axio is a contract research organization providing clinical trial design and data management to a wide range of clients including pharmaceutical, biotechnology and medical device companies as well as academic and government research groups. Axio will complement the Pharmaceutical service offering within the Specialty Products segment. The allocation of the purchase price to assets and liabilities acquired resulted in current assets of $1 million, non-current assets of $1 million, goodwill of $4 million and current liabilities of $1 million. Axio's results of operations were included in Solutia's results of operations from the acquisition date and were not material to Solutia's consolidated results of operations for the six month period ended June 30, 2002. 3. RESTRUCTURING RESERVES As part of the integration of Vianova Resins with Solutia's resins businesses, Solutia identified excess production capacity for certain Solutia resins products that will allow for the consolidation of production facilities. As a result, Solutia decided to exit its operations at the Port Plastics site in Addyston, Ohio. An $8 million ($5 million aftertax) charge to cost of goods sold was recorded in the second quarter of 2000 to carry out the exit plan. The charge included $2 million to write down plant assets to their fair value of approximately $1 million, $2 million of dismantling costs and $4 million of estimated costs for which Solutia is contractually obligated under an operating agreement. Fair value was determined by discounting future cash flows using an appropriate discount rate based on the Company's cost of capital. Under the operating agreement, Solutia was 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. Solutia provided notice of intent to exit on June 30, 2000, and exited the site in June of 2002. 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. 4 The following table summarizes the 2000 restructuring charge and amounts utilized to carry out those plans:
SHUTDOWN OF ASSET WRITE- OTHER FACILITIES DOWNS COSTS TOTAL ----------- ------------ ----- ----- Balance at January 1, 2000.................... $-- $-- $-- $-- Charges taken............................. 2 2 4 8 Amounts utilized.......................... -- (2) -- (2) ---- ---- ---- ---- Balance at December 31, 2000.................. 2 -- 4 6 Amounts utilized.......................... -- -- -- -- ---- ---- ---- ---- Balance at December 31, 2001.................. 2 -- 4 6 Amounts utilized.......................... -- -- -- -- ---- ---- ---- ---- Balance at March 31, 2002..................... 2 -- 4 6 Amounts utilized.......................... -- -- -- -- ---- ---- ---- ---- BALANCE AT JUNE 30, 2002...................... $ 2 $-- $ 4 $ 6 ==== ==== ==== ====
4. INVENTORY VALUATION The components of inventories as of June 30, 2002, and December 31, 2001, were as follows:
JUNE 30, DECEMBER 31, 2002 2001 -------- ------------ Finished goods................................. $ 225 $ 209 Goods in process............................... 110 107 Raw materials and supplies..................... 103 100 ----- ----- Inventories, at FIFO cost...................... 438 416 Excess of FIFO over LIFO cost.................. (111) (113) ----- ----- TOTAL.......................................... $ 327 $ 303 ===== =====
5. CONTINGENCIES Because of the size and nature of its business, Solutia is a party to numerous legal proceedings. Most of these proceedings have arisen in the ordinary course of business and involve claims for money damages. In addition, at the time of the spinoff, Solutia assumed from the former Monsanto Company (now known as Pharmacia Corporation), under a distribution agreement, liabilities related to specified legal proceedings. As a result, although Pharmacia remains a defendant, Solutia is required to manage the litigation and indemnify Pharmacia for costs, expenses and judgments arising from the litigation. Such matters arise out of the normal course of business and relate to product liability; government regulation, including environmental issues; employee relations and other issues. Certain of the lawsuits and claims seek damages in significant amounts. Although the results of litigation cannot be predicted with certainty, management's belief is that the final outcome of such litigation, except as noted below, will not have a material adverse effect on Solutia's consolidated financial position, liquidity or profitability in any one year. Solutia's Annual Report on Form 10-K for the year ended December 31, 2001, describes four consolidated cases, sometimes referred to as Abernathy v. Monsanto or Bowie v. Monsanto, which have been in trial in Circuit Court for Etowah County, Alabama. The trial court departed from its announced schedule and did not submit the issue of compensatory damages for the 17 Phase I trial plaintiffs to the jury for determination. If damages are awarded against Solutia in these cases, it would appeal on all available grounds. Solutia believes that it has meritorious grounds for appeal; however, there can be no guarantee any such appeal would be successful. Also, in order to appeal any lower court judgment, Solutia would be required to post a surety bond. Such a bond is often required to be collateralized. Pharmacia is our co-defendant in the Abernathy or Bowie cases. Pharmacia has agreed to obtain a surety bond if it is able to do so on commercially reasonable terms if needed and if Solutia does not obtain the bond. If Pharmacia obtains an appeal bond without providing collateral, any decisions regarding management or settlement 5 of this litigation would be jointly controlled by Solutia, Pharmacia, and Monsanto (the new company which Pharmacia has announced plans to spin off on August 13, 2002) with each company having an equal vote. If such a bond is required to be secured by collateral, Solutia would have the right to provide the collateral and control any settlement decisions regarding these cases. If Solutia does not provide the required collateral, then Monsanto would have the option to provide the collateral and would then control any settlement decisions regarding these cases. If Monsanto does not provide the required collateral, then Pharmacia would provide the necessary collateral and would assume control of any settlement decisions in these cases. Management does not believe that the ultimate resolution of the matters related to Anniston, Alabama will have a material adverse impact on its consolidated financial position or liquidity. However, it is possible that a resolution of these cases may have a material adverse impact on Solutia's net income in a given year, although it is impossible at this time to estimate the range or amount of any such liability. In connection with the agreement described above relating to obtaining a surety bond in the Abernathy v. Monsanto litigation, if one is necessary, Solutia has agreed to an amendment, dated as of July 1, 2002, to the distribution agreement with Pharmacia. The amendment provides that Solutia accepts the substitution of Monsanto in place of Pharmacia as the entity that will, generally, in the first instance, perform many of the obligations of Pharmacia under the distribution agreement. Pharmacia, however, has agreed to remain primarily liable under the distribution agreement for the performance of those obligations. The amendment to the distribution agreement also provides that Solutia will indemnify Monsanto with respect to the liabilities assumed by Solutia under the distribution agreement. 6. GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, Solutia adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." In accordance with SFAS No. 142, Solutia discontinued the amortization of goodwill and identifiable intangible assets that have indefinite useful lives. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. Goodwill will be assessed annually for impairment. This statement also required certain intangible assets that did not meet the criteria for recognition apart from goodwill, to be subsumed into goodwill. During the quarter ended March 31, 2002, Solutia subsumed into goodwill $74 million of intangible assets net of related deferred tax liabilities representing assembled workforce and noncontractual customer relationships that did not meet the separability criteria under SFAS No. 141, "Business Combinations." Net income (loss) and earnings (loss) per share for the three and six months ended June 30, 2002 and 2001, adjusted to exclude the non-amortization provisions of SFAS No. 142, net of tax, are as follows:
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------- ------------------ 2002 2001 2002 2001 ---- ---- ---- ---- Net income (loss): Income before cumulative effect of change in accounting principle............................................ $ 23 $ 13 $ 37 $ 35 Goodwill amortization.................................. -- 5 -- 10 Subsumed intangible assets amortization................ -- 2 -- 3 Equity method goodwill amortization.................... -- 1 -- 1 Trademark amortization................................. -- -- -- 1 Cumulative effect of change in accounting principle.... -- -- (167) -- ----- ----- ------ ----- ADJUSTED NET INCOME (LOSS).................................. $ 23 $ 21 $ (130) $ 50 ===== ===== ====== =====
6
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------- ------------------ 2002 2001 2002 2001 ---- ---- ---- ---- Basic earnings (loss) per share: Income before cumulative effect of change in accounting principle............................................. $0.22 $0.13 $ 0.35 $0.34 Goodwill amortization................................... -- 0.05 -- 0.10 Subsumed intangible assets amortization................. -- 0.02 -- 0.03 Equity method goodwill amortization..................... -- 0.01 -- 0.01 Trademark amortization.................................. -- -- -- 0.01 Cumulative effect of change in accounting principle..... -- -- (1.59) -- ----- ----- ------ ----- ADJUSTED BASIC EARNINGS (LOSS) PER SHARE.................... $0.22 $0.21 $(1.24) $0.49 ===== ===== ====== ===== THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------- ------------------ 2002 2001 2002 2001 ----- ----- ------ ----- Diluted earnings (loss) per share: Income before cumulative effect of change in accounting principle............................................. $0.22 $0.12 $ 0.35 $0.33 Goodwill amortization................................... -- 0.05 -- 0.10 Subsumed intangible assets amortization................. -- 0.02 -- 0.03 Equity method goodwill amortization..................... -- 0.01 -- 0.01 Trademark amortization.................................. -- -- -- 0.01 Cumulative effect of change in accounting principle..... -- -- (1.59) -- ----- ----- ------ ----- ADJUSTED DILUTED EARNINGS (LOSS) PER SHARE.................. $0.22 $0.20 $(1.24) $0.48 ===== ===== ====== =====
Identified intangible assets are as follows:
GROSS JUNE 30, 2002 NET CARRYING ACCUMULATED CARRYING VALUE AMORTIZATION VALUE -------- ------------- -------- Amortized intangible assets: Contractual customer relationships............... $26 $ (4) $22 Patents.......................................... 7 (2) 5 Employment agreements............................ 5 (1) 4 Other............................................ 6 (4) 2 --- ---- --- TOTAL AMORTIZED INTANGIBLE ASSETS..................... $44 $(11) $33 --- ---- --- Unamortized intangible assets: Trademarks........................................ $47 $ (6) $41 --- ---- --- TOTAL UNAMORTIZED INTANGIBLE ASSETS................... $47 $ (6) $41 --- ---- --- TOTAL IDENTIFIED INTANGIBLE ASSETS.................... $91 $(17) $74 === ==== ===
7
GROSS DECEMBER 31, 2001 NET CARRYING ACCUMULATED CARRYING VALUE AMORTIZATION VALUE -------- ----------------- -------- Intangible assets: Customer relationships............................ $149 $(14) $135 Trademarks........................................ 45 (6) 39 Assembled workforce............................... 10 (2) 8 Patents........................................... 7 (2) 5 Employment agreements............................. 5 -- 5 Other............................................. 6 (4) 2 ---- ---- ---- TOTAL INTANGIBLE ASSETS............................... $222 $(28) $194 ==== ==== ====
The Company's second quarter acquisition of Axio (see Note 2), resulted in goodwill of approximately $4 million. Intangible asset amortization expense was $1 million for the quarter ended June 30, 2002, and $2 million for the six months ended June 30, 2002. As a result of adoption of SFAS No. 142, there have been no changes to amortizable lives or methods, except for trademarks, which have indefinite lives as defined under the new standard. Trademarks are associated with products and tradenames of the Company and are expected to provide benefits beyond the foreseeable future. Amortization expense for the net carrying amount of intangible assets is estimated to be $4 million in 2002, $4 million in 2003, $4 million in 2004, $4 million in 2005 and $4 million in 2006. Goodwill as allocated by reportable segment is as follows:
PERFORMANCE SPECIALTY INTEGRATED FILMS PRODUCTS NYLON TOTAL ----------- --------- ---------- ----- Gross goodwill, December 31, 2001................ $ 84 $ 347 $-- $ 431 Accumulated amortization......................... (11) (34) (45) ---- ----- ---- ----- Net goodwill, December 31, 2001.................. $ 73 $ 313 $-- $ 386 Intangible assets and related accounts subsumed: Noncontractual customer relationships........ -- 114 -- 114 Assembled workforce.......................... -- 8 -- 8 Deferred tax liabilities..................... -- (48) -- (48) Goodwill acquired................................ -- 4 -- 4 Impairment loss.................................. -- (167) -- (167) Translation...................................... -- 27 -- 27 ---- ----- ---- ----- Goodwill, June 30, 2002.......................... $ 73 $ 251 $-- $ 324 ==== ===== ==== =====
Fair value measurements of the reporting units were estimated by a third-party specialist utilizing both an income and market multiple approach. Based on this analysis, Solutia recorded an impairment loss of $167 million during the first quarter of 2002 for the Resins and Additives business in the Specialty Products segment due to declining estimates of future results given current economic and market conditions. This goodwill is non-deductible for tax purposes. The impairment charge is reflected as the cumulative effect of change in accounting principle in the accompanying statement of consolidated income (loss). 7. INVESTMENTS IN AFFILIATES During the first quarter of 2002, Solutia sold its 50 percent interest in the Advanced Elastomer Systems joint venture to ExxonMobil Chemical Company, a division of Exxon Mobil Corporation and Exxon Chemical Asset Management Partnership, a subsidiary of Exxon Mobil Corporation for approximately $102 million. The sale resulted in a gain of $5 million ($3 million aftertax). 8 8. SEGMENT DATA Solutia's management is organized around four strategic business platforms: Performance Films, Resins and Additives, Specialties and Integrated Nylon. Resins and Additives and Specialties have been aggregated into the Specialty Products reportable segment because of their similar economic characteristics, as well as their similar products and services, production processes, types of customers and methods of distribution. Solutia's reportable segments and their major products are as follows:
PERFORMANCE FILMS SPECIALTY PRODUCTS INTEGRATED NYLON ----------------- ------------------ ---------------- SAFLEX(R) plastic interlayer Resins and additives, Nylon intermediate "building including ALFTALAT(R) block" chemicals KEEPSAFE(R), SAFLEX polyester resins, INSIDE(R) (in Europe only) RESIMENE(R) and MAPRENAL(R) Merchant polymer and nylon and KEEPSAFE MAXIMUM(R) crosslinkers, SYNTHACRYL(R) extrusion polymers, glass for residential acrylic resins and GELVA(R) including VYDYNE(R) and security and hurricane pressure-sensitive adhesives ASCEND(R) protection windows LLUMAR(R), VISTA(R) and Industrial products, including Carpet fibers, including the GILA(R) professional and THERMINOL(R) heat transfer WEAR-DATED(R) and after-market window films fluids, DEQUEST(R) water ULTRON VIP(R) brands treatment chemicals, VANCEVA(TM) design, enhanced SKYDROL(R) hydraulic fluids Industrial nylon fibers security and sound and SKYKLEEN(R) cleaning attenuation films fluids for aviation and chlorobenzenes Conductive and anti-reflective Pharmaceutical services, ACRILAN(R) acrylic fibers for coated films and deep-dyed including process research, apparel, upholstery fabrics, films process development craft yarns and other services, scale-up applications capabilities and small scale manufacturing for the pharmaceutical industry
Accounting policies of the segments are the same as those used in the preparation of Solutia's consolidated financial statements. Solutia evaluates the performance of its operating segments based on segment earnings before interest expense and income taxes (EBIT), which includes marketing, administrative, technological, and amortization expenses and other non-recurring charges such as restructuring and asset impairment charges that can be directly attributable to the operating segment. Certain expenses and other items that are managed outside of the segments are excluded. These unallocated items consist primarily of corporate expenses, equity earnings from affiliates, interest expense, other income--net and expense items, and certain non-recurring items such as gains and losses on asset dispositions and restructuring charges that are not directly attributable to the operating segment. Solutia accounts for intersegment sales at agreed upon transfer prices. Intersegment sales are eliminated in consolidation. Segment assets consist primarily of customer receivables, raw materials and finished goods inventories, fixed assets, goodwill and identified intangible assets directly associated with the production processes of the segment (direct fixed assets). Segment depreciation and amortization are based upon direct tangible and intangible assets. Unallocated assets consist primarily of deferred taxes, certain investments in equity affiliates and indirect fixed assets. 9 Segment data for the three and six months ended June 30, 2002, and 2001, were as follows:
THREE MONTHS ENDED JUNE 30, --------------------------------------------------------------------------------- 2002 2001 ------------------------------------ ------------------------------------ NET INTERSEGMENT NET INTERSEGMENT SALES SALES PROFIT SALES SALES PROFIT ----- ------------ ------ ----- ------------ ------ SEGMENT: Performance Films................ $ 155 $-- $ 21 $ 159 $-- $ 20 Specialty Products............... 242 1 21 234 -- 14 Integrated Nylon................. 340 -- 12 344 -- 9 ------ ---- ---- ------ ---- ---- SEGMENT TOTALS..................... 737 1 54 737 -- 43 RECONCILIATION TO CONSOLIDATED TOTALS: Sales eliminations............... (1) (1) -- -- Corporate expenses............... (15) (16) Equity earnings from affiliates..................... 3 7 Interest expense................. (19) (22) Other income--net................ 3 2 CONSOLIDATED TOTALS: ------ ---- ------ ---- NET SALES........................ $ 736 $-- $ 737 $-- ====== ==== ---- ====== ==== ---- INCOME BEFORE INCOME TAXES....... $ 26 $ 14 ==== ==== SIX MONTHS ENDED JUNE 30, --------------------------------------------------------------------------------- 2002 2001 ------------------------------------ ------------------------------------ NET INTERSEGMENT NET INTERSEGMENT SALES SALES PROFIT SALES SALES PROFIT ----- ------------ ------ ----- ------------ ------ SEGMENT: Performance Films................ $ 297 $-- $ 40 $ 310 $-- $ 36 Specialty Products (a)........... 458 1 41 485 -- 63 Integrated Nylon................. 636 -- 19 689 -- 4 ------ ---- ---- ------ ---- ---- SEGMENT TOTALS..................... 1,391 1 100 1,484 -- 103 RECONCILIATION TO CONSOLIDATED TOTALS: Sales eliminations............... (1) (1) -- -- Corporate expenses............... (32) (26) Equity earnings from affiliates..................... 11 12 Interest expense................. (44) (44) Other income--net (b)............ 8 3 CONSOLIDATED TOTALS: ------ ---- ------ ---- NET SALES........................ $1,390 $-- $1,484 $-- ====== ==== ---- ====== ==== ---- INCOME BEFORE INCOME TAXES....... $ 43 $ 48 ==== ==== (a) Specialty Products profit for the six months ended June 30, 2001, includes a gain from an insurance settlement associated with the explosion and fire that destroyed the Vianova printing inks and phenolics production facility in Wiesbaden, Germany ($28 million pretax, $17 million aftertax). (b) Other income--net for the six months ended June 30, 2002, includes a gain from the sale of Solutia's 50 percent interest in the Advanced Elastomer Systems joint venture to ExxonMobil Chemical Company, a division of Exxon Mobil Corporation and Exxon Chemical Asset Management Partnership, a subsidiary of Exxon Mobil Corporation ($5 million pretax, $3 million aftertax).
9. SUBSEQUENT EVENTS Amended Credit Facility On July 25, 2002, Solutia and its bank syndicate amended Solutia's revolving credit facility. The amendment extends the maturity of the facility until August 2004. It also reduces the facility from $800 million to $600 million and separates the facility into a $300 million term loan and a $300 million revolving credit facility. The term loan has scheduled payment obligations as follows: $25 million at December 31, 2002; $50 million at December 31, 2003; $25 million at June 30, 2004; and the remainder at maturity. 10 Borrowings under the amended credit facility bear interest at a floating rate based on LIBOR, plus an applicable margin. The margin for LIBOR loans is 5.75 percent and will increase by 50 basis points in July 2003 and an additional 50 basis points in January 2004. A premium in the amount of 2 percent of the principal repaid on the term loan will apply until July 25, 2003, and a premium of 1 percent will apply to such principal payments thereafter. The amended credit facility is available for working capital and other general corporate purposes. Senior Secured Notes On July 9, 2002, SOI Funding Corp. ("SOI Funding"), a special purpose entity, offered 223,000 units (the "Units"), comprising $223 million aggregate principal amount of its 11.25 percent Senior Secured Notes (the "Notes") due 2009 and warrants to purchase a total of 5,533,522 shares of Solutia's common stock. The Units were offered and sold only to "Qualified Institutional Buyers" as defined under Rule 144A under the Securities Act of 1933 (the "Act"), and outside the United States in accordance with Regulation S under the Act. Cash proceeds from the sale of the Units net of estimated fees were approximately $193 million. These net offering proceeds were placed in escrow pending Solutia's amendment of its credit facilities, as described under "Amended Credit Facility" above, and assumption of SOI Funding's obligations under the Notes. Both of these events occurred on July 25, 2002, at which time the net offering proceeds were released to Solutia. Solutia deposited approximately $155 million of the proceeds with the trustee for the $150 million of 6.5 percent notes due October 15, 2002 to pay the principal and interest at maturity. The remaining proceeds were used to pay fees, expenses and other costs related to the amended credit facility, cash collateralize certain outstanding letters of credit and repay a portion of borrowings under Solutia's amended credit facility. Each warrant entitles the holder to purchase 24.814 shares of Solutia's common stock at an exercise price of $7.59 per share, subject to adjustment under certain circumstances. Solutia recorded the warrants at their estimated fair value of approximately $19 million on the date of issuance based on the application of the Black-Scholes option pricing model which incorporates current stock price, expected dividend yield, expected stock price volatility, expected interest rates and the expected holding period of the warrants. The warrants will be exercisable at any time after their separation from the Notes and before their expiration on July 15, 2009. Solutia's obligations and the obligations of its subsidiary borrowers under the amended credit facility and the senior secured notes are guaranteed by Solutia Inc., CPFilms Inc., Monchem International Inc., Monchem, Inc., Solutia Systems, Inc. and each of Solutia's subsequently acquired or organized domestic subsidiaries, subject to certain exceptions. The notes and the guarantees are secured by either first or second priority liens on all of the domestic collateral securing Solutia's bank obligations. 10. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS CPFilms, Inc., Monchem, Inc., Monchem International, Inc., and Solutia Systems, Inc., wholly-owned subsidiaries of the Company (the "Guarantors"), are guarantors of the amended credit facility and the Notes issued in a private placement offering (see Note 9). The Guarantors will fully and unconditionally guarantee the Notes on a joint and several basis. The following consolidating condensed financial statements present, in separate columns, financial information for: Solutia Inc. on a parent only basis carrying its investment in subsidiaries under the equity method; Guarantors on a combined, or where appropriate, consolidated basis, carrying investments in subsidiaries who do not guarantee the debt (the "Non-Guarantors") under the equity method; Non-Guarantors on a combined, or where appropriate, consolidated basis; eliminating adjustments; and consolidated totals as of June 30, 2002 and December 31, 2001, and for the three and six months ended June 30, 2002 and 2001. The eliminating adjustments primarily reflect intercompany transactions, such as interest income and expense, accounts receivable and payable, advances, short and long-term debt, royalties and profit in inventory eliminations. The Company has not presented separate financial statements and other disclosures concerning the Guarantors as management has determined that such information is not material to potential investors. 11 SOLUTIA INC. CONSOLIDATING STATEMENT OF INCOME THREE MONTHS ENDED JUNE 30, 2002 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES.................... $491 $ 47 $328 $(130) $736 Cost of goods sold........... 442 20 271 (134) 599 ---- ---- ---- ----- ---- GROSS PROFIT................. 49 27 57 4 137 Marketing expenses........... 29 5 12 -- 46 Administrative expenses...... 21 2 13 (1) 35 Technological expenses....... 13 -- 3 -- 16 Amortization expense......... -- -- 1 -- 1 ---- ---- ---- ----- ---- OPERATING INCOME (LOSS)...... (14) 20 28 5 39 Equity earnings from affiliates--net of tax..... 65 10 -- (71) 4 Interest expense............. (35) (1) (29) 46 (19) Other income--net............ 2 30 21 (51) 2 ---- ---- ---- ----- ---- INCOME BEFORE INCOME TAXES... 18 59 20 (71) 26 Income taxes (benefit)....... (5) -- 8 -- 3 ---- ---- ---- ----- ---- NET INCOME................... $ 23 $ 59 $ 12 $ (71) $ 23 ==== ==== ==== ===== ==== CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME THREE MONTHS ENDED JUNE 30, 2002 (DOLLARS IN MILLIONS) PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET INCOME................... $ 23 $ 59 $ 12 $ (71) $ 23 OTHER COMPREHENSIVE INCOME: Currency translation adjustments................ 87 88 13 (101) 87 Unrealized investment gains, net of tax................. (1) -- -- -- (1) ---- ---- ---- ----- ---- COMPREHENSIVE INCOME......... $109 $147 $ 25 $(172) $109 ==== ==== ==== ===== ====
12 SOLUTIA INC. CONSOLIDATING STATEMENT OF INCOME THREE MONTHS ENDED JUNE 30, 2001 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES.................... $497 $ 44 $324 $(128) $737 Cost of goods sold........... 452 19 270 (132) 609 ---- ---- ---- ----- ---- GROSS PROFIT................. 45 25 54 4 128 Marketing expenses........... 34 4 7 -- 45 Administrative expenses...... 27 2 9 -- 38 Technological expenses....... 13 1 1 -- 15 Amortization expense......... (6) 2 12 -- 8 ---- ---- ---- ----- ---- OPERATING INCOME (LOSS)...... (23) 16 25 4 22 Equity earnings from affiliates--net of tax..... 56 11 -- (59) 8 Interest expense............. (37) (2) (34) 51 (22) Other income--net............ 8 21 32 (55) 6 ---- ---- ---- ----- ---- INCOME BEFORE INCOME TAXES... 4 46 23 (59) 14 Income taxes (benefit)....... (9) -- 10 -- 1 ---- ---- ---- ----- ---- NET INCOME................... $ 13 $ 46 $ 13 $ (59) $ 13 ==== ==== ==== ===== ==== CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) THREE MONTHS ENDED JUNE 30, 2001 (DOLLARS IN MILLIONS) PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET INCOME................... $ 13 $ 46 $ 13 $ (59) $ 13 OTHER COMPREHENSIVE INCOME (LOSS): Currency translation adjustments................ (24) (24) (6) 30 (24) Net unrealized loss on derivative instruments, net of tax................. (2) -- -- -- (2) ---- ---- ---- ----- ---- COMPREHENSIVE INCOME (LOSS).. $(13) $ 22 $ 7 $ (29) $(13) ==== ==== ==== ===== ====
13 SOLUTIA INC. CONSOLIDATING STATEMENT OF LOSS SIX MONTHS ENDED JUNE 30, 2002 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES.................... $ 927 $ 83 $ 634 $(254) $1,390 Cost of goods sold........... 831 37 522 (259) 1,131 ----- ----- ----- ----- ------ GROSS PROFIT................. 96 46 112 5 259 Marketing expenses........... 57 9 23 -- 89 Administrative expenses...... 44 4 25 (2) 71 Technological expenses....... 25 1 5 -- 31 Amortization expense......... -- -- 2 -- 2 ----- ----- ----- ----- ------ OPERATING INCOME (LOSS)...... (30) 32 57 7 66 Equity earnings (loss) from affiliates--net of tax..... (45) (139) -- 196 12 Interest expense............. (75) (3) (57) 91 (44) Other income--net............ 14 52 44 (101) 9 ----- ----- ----- ----- ------ INCOME (LOSS) BEFORE INCOME TAXES...................... (136) (58) 44 193 43 Income taxes (benefit)....... (7) -- 14 (1) 6 ----- ----- ----- ----- ------ Income (Loss) Before Cumulative Effect of Change in Accounting Principle.... (129) (58) 30 194 37 Cumulative Effect of Change in Accounting Principle.... (1) -- (166) -- (167) ----- ----- ----- ----- ------ NET LOSS..................... $(130) $ (58) $(136) $ 194 $ (130) ===== ===== ===== ===== ====== CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) SIX MONTHS ENDED JUNE 30, 2002 (DOLLARS IN MILLIONS) PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET LOSS..................... $(130) $ (58) $(136) $ 194 $ (130) OTHER COMPREHENSIVE INCOME (LOSS): Currency translation adjustments................ 82 81 13 (94) 82 Unrealized investment gains, net of tax................. -- -- -- -- -- Net realized loss on derivative instruments, net of tax................. 1 -- -- -- 1 ----- ----- ----- ----- ------ COMPREHENSIVE INCOME (LOSS).. $ (47) $ 23 $(123) $ 100 $ (47) ===== ===== ===== ===== ======
14 SOLUTIA INC. CONSOLIDATING STATEMENT OF INCOME SIX MONTHS ENDED JUNE 30, 2001 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET SALES.................... $1,006 $ 80 $658 $(260) $1,484 Cost of goods sold........... 918 34 544 (268) 1,228 ------ ---- ---- ----- ------ GROSS PROFIT................. 88 46 114 8 256 Marketing expenses........... 73 9 9 -- 91 Administrative expenses...... 46 4 24 -- 74 Technological expenses....... 27 1 4 -- 32 Amortization expense......... (6) 3 19 -- 16 ------ ---- ---- ----- ------ OPERATING INCOME (LOSS)...... (52) 29 58 8 43 Equity earnings from affiliates--net of tax..... 156 47 -- (191) 12 Interest expense............. (74) (4) (69) 103 (44) Other income (expense)--net............. (10) 67 91 (111) 37 ------ ---- ---- ----- ------ INCOME BEFORE INCOME TAXES... 20 139 80 (191) 48 Income taxes (benefit)....... (15) -- 28 -- 13 ------ ---- ---- ----- ------ NET INCOME................... $ 35 $139 $ 52 $(191) $ 35 ====== ==== ==== ===== ====== CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) SIX MONTHS ENDED JUNE 30, 2001 (DOLLARS IN MILLIONS) PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET INCOME................... $ 35 $139 $ 52 $(191) $ 35 OTHER COMPREHENSIVE INCOME (LOSS): Currency translation adjustments................ (60) (62) (17) 79 (60) Net unrealized loss on derivative instruments, net of tax................. (2) -- -- -- (2) Net realized (gain) loss on derivative instruments, net of tax................. (2) -- -- -- (2) ------ ---- ---- ----- ------ COMPREHENSIVE INCOME (LOSS).. $ (29) $ 77 $ 35 $(112) $ (29) ====== ==== ==== ===== ======
15 SOLUTIA INC. CONSOLIDATING BALANCE SHEET JUNE 30, 2002 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................... $ 2 $ 1 $ 10 $ -- $ 13 Trade receivables, net...................... 15 202 222 -- 439 Intercompany receivables.................... (34) 532 146 (644) -- Miscellaneous receivables................... 83 -- 32 -- 115 Prepaid expenses............................ 4 1 5 -- 10 Deferred income tax benefit................. 94 -- 20 7 121 Inventories................................. 159 23 166 (21) 327 ------ ------ ------ ------- ------ TOTAL CURRENT ASSETS.................... 323 759 601 (658) 1,025 PROPERTY, PLANT AND EQUIPMENT: Land........................................ 17 -- 45 -- 62 Buildings................................... 272 23 142 -- 437 Machinery and equipment..................... 2,514 64 478 -- 3,056 Construction in progress.................... 25 10 16 -- 51 ------ ------ ------ ------- ------ Total property, plant and equipment......... 2,828 97 681 -- 3,606 Less accumulated depreciation............... 2,095 17 357 -- 2,469 ------ ------ ------ ------- ------ NET PROPERTY, PLANT AND EQUIPMENT........... 733 80 324 -- 1,137 INVESTMENTS IN AFFILIATES................... 3,073 77 29 (2,958) 221 GOODWILL.................................... -- 72 252 -- 324 IDENTIFIED INTANGIBLE ASSETS, NET........... 3 26 45 -- 74 LONG-TERM DEFERRED INCOME TAX BENEFIT....... 219 -- 17 -- 236 INTERCOMPANY ADVANCES....................... 128 2,085 1,445 (3,658) -- OTHER ASSETS................................ 150 -- 33 -- 183 ------ ------ ------ ------- ------ TOTAL ASSETS............................ $4,629 $3,099 $2,746 $(7,274) $3,200 ====== ====== ====== ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable............................ $ 178 $ 12 $ 82 $ -- $ 272 Intercompany payables....................... 364 134 146 (644) -- Wages and benefits.......................... 25 -- 26 -- 51 Postretirement liabilities.................. 92 -- 1 -- 93 Miscellaneous accruals...................... 180 12 151 -- 343 Short-term debt............................. 525 -- 51 -- 576 Intercompany short-term debt................ 285 27 347 (659) -- ------ ------ ------ ------- ------ TOTAL CURRENT LIABILITIES................... 1,649 185 804 (1,303) 1,335 LONG-TERM DEBT.............................. 448 -- 198 -- 646 INTERCOMPANY LONG-TERM DEBT................. 1,500 34 1,465 (2,999) -- POSTRETIREMENT LIABILITIES.................. 907 -- 30 -- 937 OTHER LIABILITIES........................... 283 4 153 -- 440 SHAREHOLDERS' EQUITY (DEFICIT): Common stock................................ 1 -- -- -- 1 Net (deficiency) excess of assets at spinoff and subsidiary capital........ (113) 2,876 96 (2,972) (113) Treasury stock.......................... (250) -- -- -- (250) Accumulated other comprehensive loss........ (62) -- -- -- (62) Reinvested earnings......................... 266 -- -- -- 266 ------ ------ ------ ------- ------ TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........ (158) 2,876 96 (2,972) (158) ------ ------ ------ ------- ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)................................. $4,629 $3,099 $2,746 $(7,274) $3,200 ====== ====== ====== ======= ======
16 SOLUTIA INC. CONSOLIDATING BALANCE SHEET DECEMBER 31, 2001 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................... $ 3 $ 1 $ 19 $ -- $ 23 Trade receivables, net...................... (5) 178 179 -- 352 Intercompany receivables.................... 2,899 3,354 133 (6,386) -- Miscellaneous receivables................... 77 -- 28 -- 105 Prepaid expenses............................ 12 -- 3 -- 15 Deferred income tax benefit................. 95 -- 21 7 123 Inventories................................. 160 23 138 (18) 303 ------ ------ ------ -------- ------ TOTAL CURRENT ASSETS.................... 3,241 3,556 521 (6,397) 921 PROPERTY, PLANT AND EQUIPMENT: Land........................................ 18 -- 40 -- 58 Buildings................................... 274 22 129 -- 425 Machinery and equipment..................... 2,527 51 428 -- 3,006 Construction in progress.................... 18 20 13 -- 51 ------ ------ ------ -------- ------ Total property, plant and equipment......... 2,837 93 610 -- 3,540 Less accumulated depreciation............... 2,070 14 313 -- 2,397 ------ ------ ------ -------- ------ NET PROPERTY, PLANT AND EQUIPMENT........... 767 79 297 -- 1,143 INVESTMENTS IN AFFILIATES................... 3,139 206 26 (3,058) 313 GOODWILL, NET............................... 2 72 312 -- 386 IDENTIFIED INTANGIBLE ASSETS, NET........... 3 26 165 -- 194 LONG-TERM DEFERRED INCOME TAX BENEFIT....... 242 -- 12 -- 254 INTERCOMPANY ADVANCES....................... 128 2,010 1,812 (3,950) -- OTHER ASSETS................................ 166 -- 31 -- 197 ------ ------ ------ -------- ------ TOTAL ASSETS............................ $7,688 $5,949 $3,176 $(13,405) $3,408 ====== ====== ====== ======== ====== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable............................ $ 160 $ 8 $ 65 $ -- $ 233 Intercompany payables....................... 3,271 2,995 120 (6,386) -- Wages and benefits.......................... 26 -- 30 -- 56 Postretirement liabilities.................. 81 -- 1 -- 82 Miscellaneous accruals...................... 210 11 141 -- 362 Short-term debt............................. 683 -- -- -- 683 Intercompany short-term debt................ 189 31 112 (332) -- ------ ------ ------ -------- ------ TOTAL CURRENT LIABILITIES................... 4,620 3,045 469 (6,718) 1,416 LONG-TERM DEBT.............................. 448 -- 179 -- 627 INTERCOMPANY LONG-TERM DEBT................. 1,494 45 2,080 (3,619) -- POSTRETIREMENT LIABILITIES.................. 921 -- 26 -- 947 OTHER LIABILITIES........................... 318 6 207 -- 531 SHAREHOLDERS' EQUITY (DEFICIT): Common stock................................ 1 -- -- -- 1 Net (deficiency) excess of assets at spinoff and subsidiary capital........ (113) 2,853 215 (3,068) (113) Treasury stock.......................... (257) -- -- -- (257) Unearned ESOP shares........................ (1) -- -- -- (1) Accumulated other comprehensive loss........ (144) -- -- -- (144) Reinvested earnings......................... 401 -- -- -- 401 ------ ------ ------ -------- ------ TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........ (113) 2,853 215 (3,068) (113) ------ ------ ------ -------- ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)................................. $7,688 $5,949 $3,176 $(13,405) $3,408 ====== ====== ====== ======== ======
17 SOLUTIA INC. CONSOLIDATING CONDENSED STATEMENT OF CASH FLOW SIX MONTHS ENDED JUNE 30, 2002 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ CASH FROM OPERATIONS.................... $(39) $ 63 $ 25 $-- $ 49 ---- ---- ---- ---- ----- INVESTING ACTIVITIES: Property, plant and equipment purchases............................. (15) (4) (12) -- (31) Acquisition and investment payments, net of cash acquired...................... (17) -- -- -- (17) Property disposals and investment proceeds.............................. 101 -- (1) -- 100 ---- ---- ---- ---- ----- CASH FROM INVESTING ACTIVITIES.......... 69 (4) (13) -- 52 ---- ---- ---- ---- ----- FINANCING ACTIVITIES: Net change in short-term debt obligations........................... (157) -- 48 -- (109) Common stock issued under employee stock plans................................. 2 -- -- -- 2 Other financing activities.............. (4) -- -- -- (4) Changes in investments and advances from (to) affiliates....................... 128 (59) (69) -- -- ---- ---- ---- ---- ----- CASH FROM FINANCING ACTIVITIES.......... (31) (59) (21) -- (111) ---- ---- ---- ---- ----- DECREASE IN CASH AND CASH EQUIVALENTS... (1) -- (9) -- (10) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR....................... 3 1 19 -- 23 ---- ---- ---- ---- ----- END OF PERIOD........................... $ 2 $ 1 $ 10 $-- $ 13 ==== ==== ==== ==== =====
18 SOLUTIA INC. CONSOLIDATING CONDENSED STATEMENT OF CASH FLOW SIX MONTHS ENDED JUNE 30, 2001 (DOLLARS IN MILLIONS)
PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ CASH FROM OPERATIONS.................... $(130) $ 78 $(29) $ (1) $(82) ----- ---- ---- ---- ---- INVESTING ACTIVITIES: Property, plant and equipment purchases............................. (16) (6) (21) -- (43) Acquisition and investment payments, net of cash acquired...................... (18) -- -- -- (18) Property disposals and investment proceeds.............................. (5) -- 37 -- 32 ----- ---- ---- ---- ---- CASH FROM INVESTING ACTIVITIES.......... (39) (6) 16 -- (29) ----- ---- ---- ---- ---- FINANCING ACTIVITIES: Net change in short-term debt obligations........................... 106 -- (3) -- 103 Common stock issued under employee stock plans................................. 8 -- -- -- 8 Other financing activities.............. (2) -- -- -- (2) Changes in investments and advances from (to) affiliates....................... 50 (72) 21 1 -- ----- ---- ---- ---- ---- CASH FROM FINANCING ACTIVITIES.......... 162 (72) 18 1 109 ----- ---- ---- ---- ---- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... (7) -- 5 -- (2) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR....................... 11 -- 8 -- 19 ----- ---- ---- ---- ---- END OF PERIOD........................... $ 4 $-- $ 13 $-- $ 17 ===== ==== ==== ==== ====
19 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 forward-looking statements include all statements regarding expected future financial position, results of operations, profitability, cash flows and liquidity. 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, interest rate fluctuations, increased competitive and/or customer pressure, ability to divest existing businesses, exposure to product liability and other litigation and cost of environmental remediation, changes in accounting principles generally accepted in the United States of America and ability to implement cost reduction initiatives in a timely manner. CRITICAL ACCOUNTING POLICIES A summary of our critical accounting policies is presented on page 13 of our 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7, 2002. RESULTS OF OPERATIONS--THREE MONTHS ENDED JUNE 30, 2002, COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2001 Net sales for the second quarter of 2002 were essentially even with the second quarter of 2001. Higher volumes and favorable currency exchange rate fluctuations were offset by lower average selling prices. Performance Films Net sales in the Performance Films segment for the second quarter of 2002 decreased by 3 percent from the same period of the prior year. Net sales decreased primarily because of lower average selling prices than those of the year-ago quarter due to competitive pricing pressures, partially offset by higher sales volumes and favorable currency exchange rate fluctuations. Higher CPFilms' window film sales were partially offset by decreased demand for SAFLEX(R) plastic interlayer products. Sales volumes for SAFLEX(R) plastic interlayer products were down primarily due to significantly lower sales to a large customer, partially offset by increased volumes in the Asia Pacific markets. Sales volumes will be negatively impacted by lower sales to this customer for the remainder of 2002. Also, to a lesser extent, net sales were positively affected by favorable currency exchange rate fluctuations primarily due to the strengthening euro and Japanese yen in relation to the U.S. dollar. Segment profit for the three-month period ended June 30, 2002, increased 5 percent over the three-month period ended June 30, 2001, primarily due to lower raw material costs, lower personnel expense associated with restructuring activities carried out during 2001, lower amortization expense due to the adoption of SFAS No. 142 and higher equity earnings. The impact of significantly lower sales volumes to the large Saflex customer on segment profitability is expected to be mostly offset by higher sales of SAFLEX(R) plastic interlayer products to other glass laminators, improved product mix and cost reductions. Specialty Products Net sales in the Specialty Products segment increased 3 percent for the second quarter 2002 over the comparable quarter of the prior year. The increase in net sales was primarily caused by higher sales volume in Resins and Additives because of increased demand by European customers. Also, to a lesser extent, businesses in this segment were favorably impacted by currency exchange rate fluctuations due to the strengthening euro in relation to the U.S. dollar. Partially offsetting the sales volumes increases and favorable currency exchange rate fluctuations were lower average selling prices primarily because of pricing pressures. Segment profit for the Specialty Products segment increased 50 percent for the quarter ended June 30, 2002, over the year-ago quarter. Profit increased primarily from the effects of higher net sales, lower amortization expense due to the adoption of SFAS No. 142, lower raw material costs, lower personnel expense associated with restructuring activities carried out during 2001 and favorable manufacturing variances associated with higher capacity utilization rates. 20 Integrated Nylon Net sales for the second quarter of 2002 in the Integrated Nylon segment decreased 1 percent from the second quarter of 2001. The change in sales occurred primarily because of declines in average selling prices in most businesses due to competitive pricing pressures. These declines more than offset price increases experienced in carpet fiber. Sales volumes were up slightly from the comparable prior-year period. Sales volume increases in carpet fiber, intermediate chemicals and nylon plastics and polymers were mostly offset by volume declines in nylon industrial products. Segment profit for the Integrated Nylon segment was $12 million for the quarter ended June 30, 2002, up 33 percent from the second quarter of 2001. The increase in segment profitability resulted primarily from lower personnel expense associated with restructuring activities carried out during 2001, lower raw material and energy prices and favorable manufacturing variances associated with higher capacity utilization rates. Segment profitability was negatively affected by approximately $6 million due to the temporary shutdown of the Chocolate Bayou Intermediates facility during the second quarter of 2002 because of a power outage. Operating Income Operating income for the second quarter of 2002 increased to $39 million from $22 million in the second quarter of 2001. Excluding the effects of amortization expense from operating results in the second quarter of 2001 associated with the adoption of SFAS No. 142 (see Note 6), operating income in the second quarter of 2002 increased $10 million from the prior year. The increase in operating income was primarily driven by the lower raw material and energy costs, higher volumes and lower personnel costs resulting from restructuring activities carried out during 2001, partially offset by impact of lower selling prices and the aforementioned manufacturing outage. Equity Earnings from Affiliates--net of tax Equity earnings from affiliates was $4 million in the second quarter of 2002 compared to $8 million in the comparable quarter in 2001. Excluding the loss of income from the sale of Solutia's 50 percent interest in the Advanced Elastomer Systems joint venture which occurred in the first quarter of 2002, equity earnings were essentially unchanged from prior year. RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 2002, COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2001 Net sales for the six-month period ended June 30, 2002, decreased by 6 percent as compared with the six-month period ended June 30, 2001. Sales decreases reflect lower average selling prices, and to a lesser extent, lower volumes. Performance Films Performance Films' net sales for the first six months of 2002 decreased 4 percent in comparison to the first six months of 2001. Net sales decreased primarily because of lower average selling prices than those of the year-ago period due to competitive pricing pressures, partially offset by higher sales volumes. Higher CPFilms' window film sales were partially offset by decreased demand for SAFLEX(R) plastic interlayer products due to significantly lower sales to a large customer and lower specialty films sales into the electronic display market. Sales volumes will be negatively impacted by lower sales to this customer for the remainder of 2002. Performance Films' segment profit for the first half of 2002 increased 11 percent from the first half of 2001 because of lower raw material costs, lower marketing, administrative and technological spending, lower personnel expense associated with restructuring activities carried out during 2001 and lower amortization expense due to the adoption of SFAS No. 142. The impact of significantly lower sales volumes to the large Saflex customer on segment profitability is expected to be mostly offset by higher sales of SAFLEX(R) plastic interlayer products to other glass laminators, improved product mix and cost reductions. 21 Specialty Products Net sales in the Specialty Products segment decreased 6 percent for the six months ended June 30, 2002, over the comparable period of the prior year. The decrease in net sales was primarily caused by lower average selling prices than those of the year-ago period because of pricing pressures. Also, to a lesser extent, net sales were negatively impacted by lower volumes in the Resins and Additives business and lower sales of chlorobenzenes. Partially offsetting the decreases in average selling prices and sales volumes were modest volume increases in Pharmaceutical Services. Segment profit for the six-month period ended June 30, 2002, decreased 35 percent as compared to the six-month period ended June 30, 2001. Excluding a gain of $28 million ($17 million aftertax) recorded in the first quarter of 2001 from an insurance settlement, segment profit increased 17 percent primarily due to lower amortization expense due to the adoption of SFAS No. 142, lower raw material costs and lower personnel expense associated with restructuring activities carried out during 2001. Integrated Nylon The Integrated Nylon segment's net sales for the six months ended June 30, 2002, decreased 8 percent as compared with the six months ended June 30, 2001 primarily due to declines in average selling prices in all businesses in this segment. Sales volumes were also down slightly from the comparable prior-year period. The effects of a weak U.S. economy continue to unfavorably impact average selling prices and volumes in comparison with 2001. Price decreases in all businesses were due to competitive pricing pressures. In addition, price decreases in intermediate chemicals also resulted from contracts with formula pricing tied to raw material costs. Carpet fiber sales experienced an unfavorable product mix, while achieving overall increases in volume. Integrated Nylon's segment profit for the first half of 2002 was $19 million, up $15 million from the $4 million experienced for the first half of 2001. The increase resulted primarily from lower raw material and energy prices, lower marketing, administrative, and technological spending, lower personnel expense associated with restructuring activities carried out during 2001and favorable manufacturing variances associated with higher capacity utilization rates. Segment profitability was negatively affected by approximately $6 million due to the temporary shutdown of the Chocolate Bayou Intermediates facility during the second quarter of 2002 because of a power outage. Operating Income Operating income for the first six months of 2002 increased to $66 million from $43 million in the first six months of 2001. Excluding the effects of amortization expense from operating results for the six months ended June 30, 2001, associated with the adoption of SFAS No. 142 (see Note 6), operating income for the six months ended June 30, 2002, increased $9 million from the prior year. The increase in operating income was primarily driven by the lower raw material and energy costs, lower personnel costs resulting from restructuring activities carried out during 2001 and lower marketing, administrative and technological expenses, partially offset by a year-over-year increase in corporate expenses of approximately $5 million due to protracted litigation in Anniston, Alabama. Equity Earnings from Affiliates--net of tax Equity earnings from affiliates was $12 million in the first half of 2002, even with the comparable period of 2001. Excluding the loss of income from the sale of Solutia's 50 percent interest in the Advanced Elastomer Systems joint venture during the first quarter of 2002, equity earnings increased by $4 million. The increase is primarily due to higher earnings from the Astaris joint venture. Other Income--Net Other income--net for the six months ended June 30, 2002, was $9 million compared to $37 million for the same period in 2001. The six months ended June 30, 2002, includes a $5 million ($3 million aftertax) gain from the sale of Solutia's 50 percent interest in the Advanced Elastomer Systems joint venture. The six months ended June 30, 2001, includes a $28 million gain ($17 million aftertax) from an insurance settlement. Excluding these gains from both periods, other income for the six months ended June 30, 2002, was $4 million compared to $9 million for the same period in 2001, which was due in part to a small gain from certain asset sales in 2001. 22 Cumulative Effect of Change in Accounting Principle Effective January 1, 2002, Solutia adopted SFAS No. 142, "Goodwill and Other Intangible Assets." In accordance with SFAS No. 142, Solutia discontinued the amortization of goodwill and identifiable intangible assets that have indefinite useful lives. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. Goodwill will be assessed annually for impairment. This statement also required certain intangible assets that did not meet the criteria for recognition apart from goodwill, to be subsumed into goodwill. During the quarter ended March 31, 2002, Solutia subsumed into goodwill $74 million of intangible assets net of related deferred tax liabilities representing assembled workforce and noncontractual customer relationships that did not meet the separability criteria under SFAS No. 141, "Business Combinations." Fair value measurements of the reporting units were estimated by a third-party specialist utilizing both an income and market multiple approach. Based on this analysis, Solutia recorded an impairment loss of $167 million for the Resins and Additives business in the Specialty Products segment due to declining estimates of future results given current economic and market conditions. This goodwill is non-deductible for tax purposes. The impairment charge is reflected as the cumulative effect of change in accounting principle in the accompanying statement of consolidated income (loss). FINANCIAL CONDITION AND LIQUIDITY Cash generated from operations was $49 million for the six months ended June 30, 2002, compared to cash used in operations of $82 million for the six months ended June 30, 2001. The improvement was primarily attributable to an income tax refund received during the first quarter of 2002, a $21 million dividend received during the second quarter of 2002 from the Flexsys joint venture, stronger operating earnings and lower severance payments. In March of 2002, the "Job Creation and Worker Assistance Act" was enacted which allowed for, among other things, a five-year carryback of net operating losses. As a result of this new law, Solutia received a $30 million income tax refund from the United States taxing authorities, in addition to its $30 million anticipated income tax refund during the first quarter of 2002. Solutia's working capital at June 30, 2002 increased to negative $310 million from negative $495 million at December 31, 2001. The increase in the working capital position primarily resulted from a reduction of short-term debt and an increase in accounts receivable, partially offset by an increase in accounts payable. LIQUIDITY On June 30, 2002, Solutia's debt obligations totaled $1,222 million, including borrowings under the existing $800 million credit facility with a syndicate of commercial banks, notes and debentures. The weighted average interest rate on Solutia's total debt outstanding at June 30, 2002, was approximately 5.7 percent. At June 30, 2002, debt maturing within one year consisted primarily of borrowings of $425 million from the $800 million facility due in August of 2002 and $150 million of 6.5 percent notes due in October of 2002. AMENDED CREDIT FACILITY On July 25, 2002, Solutia and its bank syndicate amended Solutia's revolving credit facility. The amendment extends the maturity of the facility until August 2004. It also reduces the facility from $800 million to $600 million and separates the facility into a $300 million term loan and a $300 million revolving credit facility. The term loan has scheduled payment obligations as follows: $25 million at December 31, 2002; $50 million at December 31, 2003; $25 million at June 30, 2004; and the remainder at maturity. The amended credit facility requires the Company to cash collateralize certain outstanding letters of credit. Fees, expenses and other costs associated with the amended credit facility and cash collateralization of letters of credit totaled approximately $50 million. The amended credit facility is available for working capital and other general corporate purposes. Guarantees Solutia's obligations and the obligations of its subsidiary borrowers under the amended credit facility are guaranteed by Solutia Inc., CPFilms Inc., Monchem International Inc., Monchem, Inc., Solutia Systems, Inc. (the "subsidiary guarantors") and each of Solutia's subsequently acquired or organized domestic subsidiaries, subject to certain exceptions. 23 Collateral Borrowings under the amended credit facility as well as the beneficiaries of the Astaris support agreement, the lessee under the co-generation facility at Pensacola, Florida and holders of certain designated letters of credit are secured by (1) liens on all of Solutia Inc.'s inventory and receivables and those of the subsidiary guarantors, (2) pledges of 100 percent of the stock of Monchem, Inc. and Solutia Systems, Inc. and 65 percent of the voting stock and 100 percent of all other stock of Monchem International, Inc., (3) liens on intercompany debt of and held by Monchem, Inc., Monchem International, Inc. and Solutia Systems, Inc., (4) pledges of 65 percent of the voting stock (and 100 percent of all other stock) of Solutia Europe, S.A./N.V. and Solutia U. K. Holdings Limited, (5) a lien on certain principal properties, (6) a lien on certain intellectual property; and (7) liens on property, plant and equipment, inventory, receivables and certain intellectual property of four European subsidiaries. The aggregate amount of Solutia's obligations entitled to the benefit of the lien on such principal properties is limited to 15 percent of its net tangible assets, as determined at the date that the lien was granted. In addition, borrowings under the amended credit facility are secured by liens shared equally and ratably with the holders of Solutia's outstanding publicly traded notes and senior secured notes described below. These include a lien on (1) certain other principal properties, (2) 100 percent of the stock of CPFilms Inc., and (3) pledges of intercompany debt of CPFilms Inc; and a second priority lien shared equally and ratably on the principal properties on which the banks have a first priority lien. The amended credit facility also contains customary representations and warranties and affirmative and negative covenants. Interest Borrowings under the amended credit facility bear interest at a floating rate based on LIBOR, plus an applicable margin. The margin for LIBOR loans is 5.75 percent and will increase by 50 basis points in July 2003 and an additional 50 basis points in January 2004. A premium in the amount of 2 percent of the principal repaid on the term loan will apply until July 25, 2003, and a premium of 1 percent will apply to such principal payments thereafter. Covenants The amended credit facility requires Solutia to meet certain financial tests, including, but not limited to, maximum leverage and minimum interest coverage ratios. In addition, the amended credit facility contains certain covenants which, among other things, limit the incurrence of additional debt, aggregate capital expenditures, guarantees, liens, investments, asset sales, dividends, restricted payments, acquisitions, mergers and consolidations, change of business, transactions with affiliates, prepayments of debt, repurchases of stock and redemptions of certain other indebtedness and other matters customarily restricted in such agreements. SENIOR SECURED NOTES On July 9, 2002, Solutia completed a private placement of 223,000 units consisting of $223 million of senior secured 7 year notes and warrants to purchase 5,533,522 shares of common stock at an exercise price of $7.59 per share. The 7 year notes were issued by SOI Funding Corp., a special purpose entity, and the offering resulted in cash proceeds, net of estimated fees, of $193 million which were placed in escrow pending amendment of Solutia's credit facility, as described under "Amended Credit Facility" above and assumption of SOI Funding Corp.'s obligations under the notes. Both of these events occurred on July 25, 2002, at which time the net offering proceeds were released from escrow. Solutia deposited approximately $155 million of the proceeds with the trustee for the $150 million of 6.5 percent notes due October 15, 2002 to pay the principal and interest at maturity. The remaining proceeds were used to pay fees, expenses and other costs related to the amended credit facility, cash collateralize certain outstanding letters of credit and repay a portion of borrowings under Solutia's amended credit facility. Guarantees All of the subsidiaries that guarantee the obligations under Solutia's amended credit facility will fully and unconditionally guarantee the notes on a senior joint and several basis. Certain of Solutia's future domestic subsidiaries will be required to execute similar guarantees. The subsidiary guarantees will each rank in right of payment equal to each subsidiary guarantor's existing and future senior debt. 24 Collateral The notes and guarantees will be secured by a first priority lien (shared with (A) holders of our bank obligations, (B) the beneficiaries of the Astaris support agreement, (C) the lessee under the co-generation facility at Pensacola, Florida and (D) holders of certain designated letters of credit) on the following assets: (1) certain principal properties, (2) pledges of 100 percent of the stock of CPFilms Inc., and (3) intercompany debt of CPFilms Inc.; and a second priority lien on the following assets: (1) 65 percent of the voting stock (100 percent of all other stock) of Monchem International, Inc. and 100 percent of the stock of the remaining subsidiary guarantors, Monchem, Inc. and Solutia Systems, Inc., (2) intercompany debt of and held by the subsidiary guarantors (other than CPFilms Inc.), (3) substantially all of Solutia's and the subsidiary guarantors' accounts receivable and inventory and certain intellectual property, (4) 65 percent of the voting stock (and 100 percent of all other stock) of two foreign subsidiaries, and (5) certain other production facilities. Interest expense, giving effect to the new facilities, is expected to be approximately $107 million for 2002. Assuming a constant debt level and current LIBOR rates, interest expense is expected to be approximately $125 million for 2003. Included in the 2003 estimate for interest expense is approximately $25 million of amortization of debt discount, warrants and issuance costs primarily for the amended credit facility and the senior secured notes. OTHER During the first quarter of 2002, Solutia sold its 50 percent interest in the Advanced Elastomer Systems joint venture to ExxonMobil Chemical Company, a division of Exxon Mobil Corporation and Exxon Chemical Asset Management Partnership, a subsidiary of Exxon Mobil Corporation for approximately $102 million. The sale resulted in a gain of $5 million ($3 million aftertax). In 1993, a co-generation facility was constructed at the Pensacola, Florida manufacturing site to provide the plant with electricity and steam. Solutia financed the construction by placing the co-generation facility in a trust that was funded by a syndicate of commercial banks. Solutia makes monthly operating lease payments and the lease term is co-terminous with the amended credit facility. In connection with the completion of the external financing agreement for Astaris which expires in September of 2005, Solutia contractually agreed to provide Astaris with funding in the event the joint venture fails to meet certain financial benchmarks. During the second quarter of 2002, Solutia contributed $12 million to the joint venture under this agreement. Solutia anticipates that an additional contribution of approximately $15 million will be required in the second half of 2002. Solutia believes that this obligation is not likely to have a significant impact on its consolidated financial position, liquidity or profitability. On June 18, 2002, Standard and Poor's downgraded Solutia's senior unsecured rating from BB+ to BB- and the secured bank loan from BB+ to BB. On June 13, 2002, Moody's downgraded Solutia's senior unsecured rating from Ba1 to Ba2 and the secured bank loan from Baa3 to Ba1. On May 10, 2002, Standard and Poor's downgraded Solutia's senior unsecured and secured bank loan rating from BBB- to BB+. Solutia believes that its cash flow from operations and available borrowing capacity under the amended credit facility provide sufficient resources to finance its operations and planned capital needs for the next 12 months. RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The statement addresses accounting and reporting requirements for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement obligations. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Solutia is evaluating SFAS No. 143 to determine the effects, if any, on its consolidated financial statements. 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 2002 that affect the disclosures presented in the information appearing under "Derivative Financial Instruments" on pages 26 and 27 of Solutia's Annual Report on Form 10-K for the year ended December 31, 2001. 25 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On July 9, 2002, SOI Funding Corp. offered 223,000 units (the "Units"), comprising $223 million aggregate principal amount of its 11.25 percent Senior Secured Notes (the "Notes") due 2009 and warrants to purchase a total of 5,533,522 shares of Solutia's common stock. Each warrant entitles the holder to purchase 24.814 shares of Solutia's common stock at an exercise price of $7.59 per share, subject to adjustment under certain circumstances. The warrants will be exercisable at any time after their separation from the Notes and before their expiration on July 15, 2009. The Units were offered and sold only to "Qualified Institutional Buyers" as defined under Rule 144A under the Securities Act of 1933 (the "Act"), and outside the United States in accordance with Regulation S under the Act. The Units were sold for an aggregate offering price of $200,682,160, with an aggregate discount to the initial purchasers of $5,575,000, resulting in net offering proceeds of $195,107,160. These net offering proceeds were placed in escrow pending Solutia's assumption of SOI Funding's obligations under the Notes. On July 25, 2002, Solutia assumed SOI Funding's obligations under the Notes, and the net offering proceeds were released to Solutia. Solutia used these proceeds (1) to make an irrevocable deposit with the trustee for Solutia's $150 million of outstanding 6.5 percent notes due October 15, 2002 to pay the principal and interest at their maturity date, (2) to pay fees, expenses and other costs associated with the amended credit facility, (3) to cash collateralize certain outstanding letters of credit, and (4) to repay a portion of borrowings under the amended credit facility. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At Solutia's annual meeting of stockholders on April 24, 2002, three matters were submitted to a vote of stockholders. 1. The stockholders elected the following directors for a three-year term that will expire at the annual meeting of stockholders in 2005 (or until their respective successors are elected and qualified, or until their earlier death, resignation or removal). Votes were cast as follows:
VOTES VOTES "WITHHOLD NAME "FOR" AUTHORITY" ---- ----- ---------- Paul H. Hatfield................................. 93,595,487 3,008,228 J. Patrick Mulcahy............................... 92,961,380 3,642,335 Sally G. Narodick................................ 93,389,995 3,213,720
The following directors are continuing terms expiring at the annual meeting of stockholders in 2003: Paul Donovan, Robert H. Jenkins and Frank A. Metz, Jr. The following directors are continuing terms expiring at the annual meeting of stockholders in 2004: John C. Hunter III, William D. Ruckelshaus and John B. Slaughter. 2. The Solutia Inc. 2002-2006 Long-Term Incentive Plan was approved by the stockholders. A total of 87,660,027 votes were cast in favor of the plan, 8,262,667 votes were cast against it, and 681,021 votes were counted as abstentions. 3. The appointment by the Board of Directors of Deloitte & Touche LLP as principal independent auditors for the year 2002 was ratified by the stockholders. A total of 92,430,215 votes were cast in favor of ratification, 3,773,980 votes were cast against it, and 399,520 votes were counted as abstentions. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits--See the Exhibit Index at page 28 of this report. (b) Reports on Form 8-K during the quarter ended June 30, 2002: On June 19, 2002, Solutia filed a Form 8-K, under Item 9, "Regulation FD Disclosure," describing the structure and certain terms of a proposed private placement of $250 million of senior secured notes. On June 18, 2002, Solutia filed a Form 8-K, containing a press release which announced that Solutia was pursuing a $250 million private placement of senior secured notes. 26 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: August 1, 2002 27 EXHIBIT INDEX These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2 Amendment to Distribution Agreement, dated as of July 1, 2002, by and among Pharmacia Corporation, Solutia Inc., and Monsanto Company 4 Warrant Agreement between Solutia Inc. and HSBC Bank USA as Warrant Agent, dated as of July 9, 2002 10(a) Solutia Inc. 2002-2006 Long-Term Incentive Plan (incorporated by reference to Appendix A of the Solutia Inc. Notice of Annual Meeting and Proxy Statement dated March 14, 2002) 10(b) Protocol Agreement, dated as of July 1, 2002, by and among Pharmacia Corporation, Solutia Inc., and Monsanto Company 10(c) Second Amended and Restated Credit Agreement, dated as of July 25, 2002, between Solutia Inc., as Borrower, the initial lenders named therein, Bank of America, N.A., as Syndication Agent and Citibank, N.A., as Administrative Agent 11 Omitted--Inapplicable; see "Statement of Consolidated Income (Loss)" on page 1 99(a) Computation of the Ratio of Earnings to Fixed Charges 99(b) Business Risk Factors as set forth in Offering Memorandum, dated July 2, 2002 28 EX-2 3 exh2.txt AMENDMENT TO DISTRIBUTION AGREEMENT Exhibit 2 --------- EXECUTION COPY AMENDMENT TO DISTRIBUTION AGREEMENT THIS AMENDMENT TO DISTRIBUTION AGREEMENT, dated as of July 1, 2002 (this "Amendment"), is made and entered into by and among --------- Pharmacia Corporation, a Delaware corporation, Solutia Inc., a Delaware corporation ("Solutia"), and Monsanto Company, a Delaware corporation. ------- W I T N E S S E T H: WHEREAS, Former Monsanto (as defined below) and Solutia are parties to that certain Distribution Agreement, dated as of September 1, 1997 (the "Distribution Agreement"), which was entered into in connection ---------------------- with the distribution of the common stock of Solutia to the stockholders of Former Monsanto (the "Solutia Distribution"); -------------------- WHEREAS, pursuant to the Distribution Agreement, among other things, Former Monsanto assigned and transferred the Chemical Assets (as defined in the Distribution Agreement) to Solutia and Solutia assumed all of the Chemical Liabilities (as defined in the Distribution Agreement) of Former Monsanto; WHEREAS, pursuant to that certain Agreement and Plan of Merger, dated as of December 19, 1999 (the "Merger Agreement"), by and among ---------------- the former Monsanto Company (which is the Delaware corporation identified in the introductory paragraph of this Amendment as "Pharmacia Corporation" and which is referred to herein as either "Former Monsanto" or "Pharmacia," as --------------- --------- the context requires), MP Sub, Incorporated ("Merger Sub") and Pharmacia & ---------- Upjohn, Inc. ("PNU"), the parties agreed that Merger Sub would be merged --- with and into PNU with PNU surviving as a wholly owned subsidiary of Former Monsanto in the merger (the "Merger"); ------ WHEREAS, on February 9, 2000, the new Monsanto Company (which is the Delaware corporation identified in the introductory paragraph of this Amendment as "Monsanto Company" and which is referred to herein as "New Monsanto") was incorporated as a wholly owned subsidiary of Former ------------ Monsanto under the name "Monsanto Ag Company;" WHEREAS, on March 31, 2000, (i) the Merger was effective, (ii) Former Monsanto changed its name from "Monsanto Company" to "Pharmacia Corporation," and (iii) New Monsanto changed its name from "Monsanto Ag Company" to "Monsanto Company;" WHEREAS, on September 1, 2000, New Monsanto and Pharmacia entered into certain agreements, including that certain Separation Agreement, dated as of September 1, 2000 (the "Separation Agreement"), pursuant to which, among other things, -------------------- Pharmacia assigned and transferred certain assets related to its chemicals and agricultural businesses and certain other assets to New Monsanto and New Monsanto assumed certain liabilities relating thereto and all liabilities that were assumed by Solutia or any of its subsidiaries in connection with the Solutia Distribution to the extent that Solutia fails to pay, perform or discharge such liabilities; WHEREAS, on or about October 23, 2000, New Monsanto completed an initial public offering of its common stock in which New Monsanto sold approximately 15% of its issued and outstanding shares of common stock to the public; WHEREAS, Pharmacia currently owns approximately 84% of the issued and outstanding shares of common stock of New Monsanto; WHEREAS, Pharmacia has announced its intention to distribute its entire ownership interest in New Monsanto to the stockholders of Pharmacia or could take some other action that will result in Pharmacia no longer controlling New Monsanto (a "Possible Disposition"); and -------------------- WHEREAS, in light of the Possible Disposition, the parties hereto desire to enter into this Amendment in order to effectuate the assignment to New Monsanto of certain assets and liabilities contemplated pursuant to the Separation Agreement (including the Distribution Agreement) and preserve the relationship among the parties as nearly as possible with the original intent and purpose of the Distribution Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained and intending to be legally bound hereby, the parties hereto agree as follows: Section 1. Each capitalized term used in this Amendment and not otherwise defined herein shall have the meaning ascribed thereto in the Distribution Agreement. Section 2. The parties hereto hereby agree that effective as of the date of this Amendment the Distribution Agreement is hereby amended in accordance with the requirements of Section 10.06 thereof as follows: (a) New Monsanto shall be deemed to be and shall be for all purposes a party to the Distribution Agreement as amended hereby. (b) All references to "party" or "parties" in the Distribution Agreement shall include New Monsanto and all such references to "party" or "parties" in the Distribution Agreement shall be read and construed in the context that New Monsanto is a party to the Distribution Agreement (e.g. "both parties" shall be deemed to mean and shall be read as "all parties"). (c) Subsection 63 of Section 1.01 of the Distribution Agreement is hereby amended to read in its entirety as follows: "63. MONSANTO GROUP: Collectively, (i) Pharmacia Corporation, a Delaware corporation ("Pharmacia"), and its 2 Subsidiaries of which Pharmacia directly owns 100% of the stock or other equity interests entitled to vote on the election of members to the board of directors or similar governing body, other than members of the Chemical Group, and (ii) Monsanto Company, a Delaware corporation incorporated February 9, 2000 ("New Monsanto"), and its Subsidiaries of which New Monsanto directly owns 100% of the stock or other equity interest entitled to vote on the election of members to the board of directors or similar governing body." (d) (i) The term "Monsanto" solely as used in Sections 4.03(a)(i), 4.03(b), 4.03(e), 5.01(c), 5.09, 6.01, 6.06, 6.07 and 7.02(a) shall mean: "Pharmacia and New Monsanto" or "Pharmacia or New Monsanto," as the context shall require. Without limiting the generality of the foregoing, but for purposes of example, with respect to those Sections specified in the preceding sentence "Monsanto" shall mean "Pharmacia and New Monsanto" in those contexts where "Monsanto" has a commitment, duty, liability or obligation and shall mean "Pharmacia or New Monsanto" in those contexts where "Monsanto" has a right or interest or where Chemicals, Chemicals Group or any of their respective Affiliates, Representatives or agents has a commitment, duty, liability or obligation. (ii) For purposes of clarity, the term "Monsanto" solely as used in Articles I, II, III, VIII and IX and Sections 4.03(a)(ii), 4.03(a)(iii), 5.01(b), 5.01(d), 5.01(e), 5.03, 5.04, 5.05, 5.10, 10.01, 10.03 and 10.12 shall not be affected by this Section 2(d) (i.e. shall continue to refer exclusively to Former Monsanto (now Pharmacia)). (iii) Nothing in this Section 2(d) is intended to limit or otherwise affect the provisions of Sections 2(a) or (b) of this Amendment. (e) Section 10.05 of the Distribution Agreement is hereby amended to read in its entirety as follows: "10.05 Notices. All notices, requests, claims, demands and other communications hereunder (collectively, "Notices") shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by cable, telegram, facsimile, electronic mail or other standard form of telecommunications (provided confirmation is delivered to the recipient the next Business day in the case of facsimile, electronic mail or other standard form of telecommunications) or by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to Pharmacia: Christopher Coughlin Executive Vice President and CFO Pharmacia Corporation 100 Route 206 North Peapack, New Jersey 07977 Telephone: 908-901-8826 Facsimile: 908-901-0000 3 with a copy to: General Counsel Pharmacia Corporation 100 Route 206 North Peapack, New Jersey 07977 Telephone: 908-901-8810 Facsimile: 908-901-1810 If to Chemicals: President Solutia Inc. P.O. Box 66760 St. Louis, MO 63166-6760 Telephone: 314-674-2210 Facsimile: 314-674-8425 with a copy to: General Counsel Solutia Inc. P.O. Box 66760 St. Louis, MO 63166-6760 Telephone: 314-674-3586 Facsimile: 314-674-2721 If to New Monsanto: Terrell K. Crews Executive Vice President and CFO 800 North Lindbergh Blvd. St. Louis, Missouri 63167 Telephone: 314-694-3770 Facsimile: 314-694-4772 with a copy to: Charles W. Burson Executive Vice President, Secretary and General Counsel 800 North Lindbergh Blvd. St. Louis, Missouri 63167 Telephone: 314-694-8418 Facsimile: 314-694-6399 or to such other address as any party hereto may have furnished to the other parties by a notice in writing in accordance with this Section 10.05." (f) Section 10.07 of the Distribution Agreement is hereby amended by inserting the following sentence immediately after the first sentence of Section 10.07: "Notwithstanding the immediately preceding sentence, (i) Pharmacia may assign this Agreement and any of its rights, interests and obligations hereunder without the consent of any other party hereto, provided that Pharmacia shall continue to be 4 and remain primarily liable for all of its obligations under this Agreement, and (ii) New Monsanto may assign this Agreement and any of its rights, interests and obligations hereunder without the consent of any other party hereto to any Person who is a successor to New Monsanto (by way of merger, consolidation or otherwise) or who assumes all of New Monsanto's obligations under that certain Separation Agreement, dated September 1, 2000, by and between Pharmacia and New Monsanto in accordance with the terms thereof, provided that New Monsanto shall continue to be and remain primarily liable for all of its obligations under this Agreement." Section 3. Pharmacia agrees to execute and deliver to New Monsanto contemporaneously herewith, the Power of Attorney attached hereto as Exhibit A (the "Monsanto Power of Attorney"). --------- -------------------------- Section 4. New Monsanto hereby acknowledges and accepts the appointment as Pharmacia's agent and attorney as provided in the Monsanto Power of Attorney and agrees to undertake and perform in a commercially reasonable manner on behalf of Pharmacia and in Pharmacia's name, place and stead, all of Pharmacia's commitments, duties, liabilities and obligations under the Distribution Agreement and to use its commercially reasonable efforts to fully enforce all of Pharmacia's rights, interests and remedies under the Distribution Agreement, in each case with the same duty of care and prudence that its applies to the management of New Monsanto's own affairs, in accordance with the terms of this Amendment and the Monsanto Power of Attorney. Section 5. Solutia hereby acknowledges and consents to Pharmacia's appointment of New Monsanto as Pharmacia's agent and attorney as provided in the Monsanto Power of Attorney for all purposes under the Distribution Agreement. Notwithstanding the foregoing, Pharmacia shall continue to be and remain primarily liable for all of its commitments, duties, liabilities and obligations under the Distribution Agreement. Section 6. New Monsanto agrees to execute and deliver to Solutia contemporaneously herewith, the Power of Attorney attached hereto as Exhibit B (the "Solutia Power of Attorney"). - --------- ------------------------- Section 7. Solutia hereby acknowledges and accepts the appointment as New Monsanto's agent and attorney as provided in the Solutia Power of Attorney. Section 8. Provided that Pharmacia shall continue to be and remain primarily liable for all of its obligations under the Assigned Agreements, Solutia hereby consents and agrees to the assignment by any Person in the Monsanto Group or any of their respective Subsidiaries (each, an "Assignor") to New Monsanto of any and all contracts, leases, licenses, -------- agreements or other instruments by, between or among any Assignor and any Person in the Chemicals Groups or any of their respective Subsidiaries (the "Assigned Agreements"), excluding only those contracts, leases, licenses, ------------------- agreements and other instruments set forth in Exhibit C attached hereto. In --------- addition, Solutia hereby consents and agrees to the further 5 assignment (and any subsequent assignment) of any Assigned Agreement to each and every subsequent New Monsanto Successor (as defined below), provided that New Monsanto and Pharmacia shall continue to be and remain primarily liable for all of its obligations under the Assigned Agreements. Furthermore, to the extent that any Assigned Agreement contains any provision requiring the consent or approval of Solutia to any change of control or ownership of the other party to the Assigned Agreement (or such party's successor or assign), Solutia hereby irrevocably grants such consent or approval for any such change of control or ownership, including in connection with the Possible Disposition or otherwise. For purposes of this Amendment, "New Monsanto Successor" means any Person who is a successor to ---------------------- New Monsanto (by way of merger, consolidation or otherwise) or who assumes all of New Monsanto's obligations under the Separation Agreement. Pharmacia and New Monsanto each hereby consents and agrees to the assignment (and any subsequent assignment) of any Assigned Agreement by Solutia to any Person who is a successor to Solutia (by way of merger, consolidation or otherwise) or who assumes all of Solutia's obligations under the Distribution Agreement, as amended by this Amendment to Distribution Agreement, provided that Solutia shall continue to be and remain primarily liable for all of its obligations under the Assigned Agreements. Section 9. Nothing in the Distribution Agreement, as amended by this Amendment, and no action taken by the parties pursuant to the Distribution Agreement, as amended by this Amendment, shall constitute, or be deemed to constitute, any of the parties to be a partnership, association, joint venture or other co-operative entity. Section 10. Except as expressly modified and amended hereby, the Distribution Agreement shall continue to be and shall remain in full force and effect in accordance with its terms. Section 11. Except as otherwise agreed to by any parties hereto, each party hereto will pay all costs and expenses incident to its negotiation and preparation of this Amendment, including the fees, expenses and disbursement of its counsel. Section 12. This Amendment shall be governed by and construed in accordance with the laws of the State of Delaware (other than the laws regarding choice of laws and conflicts of laws) as to all matters, including matters of validity, construction, effect, performance and remedies. Section 13. This Amendment may be amended, modified or supplemented only by a written agreement signed by all of the parties hereto. Section 14. This Amendment and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their successors and permitted assigns. Pharmacia may assign this Amendment and any of its rights, interests and obligations hereunder without the consent of any other party hereto, provided that Pharmacia shall continue to be and remain primarily liable for all of its obligations under this Amendment. New Monsanto may assign this Amendment and any of its rights, interests and obligations hereunder without the consent of any other party hereto to any New Monsanto Successor; provided, however, that any such successor or assignee shall be required to execute and deliver a power of attorney 6 substantially identical to the Monsanto Power of Attorney or Solutia Power of Attorney, as the case may be, and; provided further, that New Monsanto and Pharmacia shall continue to be and remain primarily liable for all of its obligations under this Amendment. Solutia may assign this Amendment and any of its rights, interests and obligations hereunder without the consent of any other party hereto, provided that Solutia shall continue to be and remain primarily liable for all of its obligations under this Amendment. Section 15. Each of the parties hereto agrees to use its reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things reasonably necessary, proper or advisable to consummate and make effective the transactions contemplated by and the intent and purposes of this Amendment, including, without limitation, the provisions of Section 7 and Section 13. Section 16. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 17. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Each party acknowledges that money damages would be an inadequate remedy for any breach of the provisions of this Amendment and agrees that the obligations of the parties hereunder shall be specifically enforceable. [SIGNATURE PAGE IS NEXT PAGE] 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. PHARMACIA CORPORATION, a Delaware corporation By: /s/ Richard T. Collier -------------------------------- Name: Richard T. Collier Title: SVP & General Counsel SOLUTIA INC., a Delaware corporation By: /s/ Robert A. Clausen -------------------------------- Name: Robert A. Clausen Title: Sr VP and Chief Financial Officer MONSANTO COMPANY, a Delaware corporation By: /s/ Hendrick A. Verfaillie -------------------------------- Name: Hendrick A. Verfaillie Title: Chairman and Chief Executive Officer 8 EXHIBIT A PHARMACIA CORPORATION POWER OF ATTORNEY: DISTRIBUTION AGREEMENT KNOW ALL MEN BY THESE PRESENTS: 1. Subject to paragraph 7 below: a. That Pharmacia Corporation, a corporation organized and existing under the laws of the State of Delaware ("Pharmacia"), has made, constituted and appointed and by these presents --------- does make, constitute and appoint, Monsanto Company, a corporation organized and existing under the laws of the State of Delaware ("New Monsanto"), its ------------ true and lawful agent and attorney, for Pharmacia and in Pharmacia's name, place and stead, for all purposes with respect to Pharmacia's rights, duties and obligations under the Distribution Agreement, dated as of September 1, 1997, between Pharmacia and Solutia Inc., as amended by that Amendment to Distribution Agreement of even date herewith among Pharmacia, Solutia and New Monsanto (collectively, the "Distribution Agreement"); and its attorney ---------------------- shall have full power and authorization to take all action with respect to the Distribution Agreement as Pharmacia can take and which said attorney, acting through its officers or their delegates, who in each case, acting alone, in his or her sole discretion, think best; hereby giving and granting to Pharmacia's said attorney full power and authority to do and perform all and every act and thing whatsoever necessary to be done in the premises as fully to all intents and purposes as Pharmacia might or could do, hereby ratifying and confirming all that its said attorney may do pursuant to this power. b. Pharmacia hereby gives and grants to its said attorney from and after the date hereof, full power and authority to do and perform all and every act and thing whatsoever necessary to be done in the premises, in order fully to carry out and effectuate the authority herein granted, as fully to all intents and purposes as Pharmacia might or could do if acting through its own officers or delegates, and Pharmacia hereby ratifies and confirms all that its said attorney may do pursuant to this power. c. Pharmacia hereby acknowledges that this power is coupled with an interest and hereby directs that, to the extent authorized or permitted by applicable law, this power of attorney shall not be affected by any merger, reverse merger, consolidation or Possible Disposition or other change in ownership of Pharmacia or New Monsanto. It is Pharmacia's intent that the authority conferred hereby shall be exercisable notwithstanding such corporate changes and that this power of attorney shall, if permitted by applicable law or applicable contract, be irrevocable. In the event applicable law in effect at or any time after the execution of this instrument does not authorize or permit the foregoing direction to be effective, and if at any later date, applicable law changes (whether by amendment, court decision, or otherwise), then Pharmacia directs that the foregoing provisions shall thereafter become applicable. 2. Notwithstanding paragraph 6 below, all persons dealing with Pharmacia's said attorney shall be protected in relying upon a copy of this instrument and shall be protected in relying upon the written certificate of New Monsanto as to the identity and authority of its officers and their delegates, and/or as to whether any of the persons authorized to act hereunder is unavailable so to act, so as to authorize some other person to act hereunder, and Pharmacia hereby declares that as against it and all persons claiming under it everything which its attorney shall do or cause to be done pursuant hereto shall be valid and effectual in favor of any person claiming the benefit hereof who at the time of the doing thereof shall have relied upon any such certification made by New Monsanto. If required by applicable law or if New Monsanto desires for any reason to do so, an executed copy of this Power of Attorney shall be filed for record with any Governmental Authority or such other place as required by law or where New Monsanto thinks best. Pharmacia authorizes New Monsanto to make all such filings. 3. Pharmacia hereby further authorizes and empowers its said attorney to substitute and appoint in the place and stead of its said attorney, or to employ agents or sub-agents as New Monsanto thinks best, one or more attorney or attorneys to exercise for Pharmacia as its attorney or attorneys any and all of the powers and authorities hereby conferred; and to revoke such appointment or appointments from time to time, and to substitute or appoint any other or others in the place of such attorney or attorneys as New Monsanto shall from time to time think fit. 4. All references in this document to "its attorney" ------------ or "its said attorney" or "its true and lawful attorney," or similar ----------------- ---------------------------- designations shall refer to New Monsanto and each and every person to whom New Monsanto delegates such power and also to each and every substitute or successor attorney-in-fact appointed under the terms of this instrument as herein provided. 5. All references in this document to "its attorney" ------------ or "its said attorney" or "its true and lawful attorney," or similar ----------------- ---------------------------- designations shall refer not only to New Monsanto or its delegates but also to each and every substitute or successor attorney-in-fact appointed under the terms of this instrument as herein provided. 6. All references in this document to "Governmental Authority" shall mean any federal, state, local, foreign or international court, government department, commission, board, bureau, agency, the New York Stock Exchange, or other regulatory, administrative or governmental authority. 7. Notwithstanding the appointment by Pharmacia of New Monsanto as Pharmacia's agent and attorney as provided in paragraph 1 above, Pharmacia and its said attorney agree as follows: a. Said attorney shall not take any action, or omit to take any action, pursuant to this instrument with respect to Pharmacia's rights, duties or obligations under Sections 2 4.03(a), 5.01(d), 5.01(e), 5.04, 5.05 or 5.10 or Article IX of the Distribution Agreement (the "Reserved Provisions"), except pursuant to the ------------------- prior written instructions of Pharmacia. b. In the event that said attorney believes that it is necessary, desirable or advisable that Pharmacia take any action under any of the Reserved Provisions, said attorney will notify Pharmacia thereof; provided, however, that said attorney shall have no responsibility or liability for any failure to give any such notice to Pharmacia. c. Pharmacia shall provide said attorney with such written instructions as soon as reasonably practicable and said attorney shall have no responsibility or liability (i) for not acting on behalf of Pharmacia unless and until so instructed by Pharmacia and (ii) for acting on behalf of Pharmacia in accordance with such written instructions. d. Pharmacia shall have the right, in its sole discretion, to revoke this Power of Attorney, by delivering written notice to New Monsanto upon any breach by New Monsanto of its commitments, duties or obligations under any of (i) this Power of Attorney, (ii) the Distribution Agreement, as amended by the Amendment to the Distribution Agreement, or (iii) the Separation Agreement, as amended from time to time. 8. This instrument may be executed in any number of counterparts, and all of said counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, I have hereunto set my hand and seal this day of , 2002. ----- ------------------- PHARMACIA CORPORATION -------------------------------- By: Title: ATTEST: - ------------------------------------ 3 STATE OF ) --------------- ) COUNTY OF ) -------------- On this day of , 2002, before me ----- ----------------- the undersigned, a Notary Public, in and for the County and State aforesaid, personally appeared , to me known to be the ------------------------------- person described in and who executed the foregoing instrument, and acknowledged that he/she executed the same as his/her free act and deed. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal in , the day and year last above ------------------ written. ---------------------------------------------- Notary Public in and for said County and State My Commission expires: - ----------------------------- 4 EXHIBIT B MONSANTO COMPANY POWER OF ATTORNEY: LITIGATION/CLAIMS KNOW ALL MEN BY THESE PRESENTS: That from and after the date hereof ("Effective Date"), -------------- Monsanto Company, a corporation organized and existing under the laws of the State of Delaware ("New Monsanto") has made, constituted and appointed, and ------------ by these presents does make, constitute and appoint, Solutia Inc., a corporation organized and existing under the laws of the State of Delaware ("Solutia"), its true and lawful agent and attorney, for New Monsanto and in ------- New Monsanto's name, place and stead, for all purposes with respect to Third Party Claims as to which Solutia has agreed to indemnify New Monsanto, and such claims against Third Parties which continue to be held by New Monsanto in trust for Solutia, such Third Party Claims and claims against Third Parties being collectively referred to herein as "Claims"; and its attorney ------ shall have full power and authorization to take all action with respect to such Claims as New Monsanto can take and which said attorney, acting through its officers or their delegates, who in each case, acting alone, in his or her sole discretion, think best, including without limitation, (i) to represent New Monsanto with respect to such Claims for so long as such Claims are unresolved; (ii) to appear in New Monsanto's name and to execute, deliver and file all pleadings, motions and other filings, at trial, on appeal, or in a proceeding, through counsel retained by Solutia or by officers of Solutia or their delegates, acting alone, or otherwise; (iii) to assert or waive any or all rights with respect to such Claims; (iv) to engage in all phases of discovery with respect to such Claims, including without limitation, to take depositions, defend depositions and propound or respond to other discover requests, such as interrogatories or requests for production of documents; (v) to direct and accept service of process with respect to such claims; (vi) to execute and deliver affidavits as may be necessary or desirable with respect to such Claims; (vii) to agree to and to represent New Monsanto in alternative resolution proceedings, including arbitration or mediation of Claims; (viii) to discuss or negotiate settlement agreements and releases with Third Parties with respect to such Claims on such terms and conditions as Solutia thinks best; (ix) to execute, deliver and if needed, file any and all settlement agreements, releases and other agreements, documents and instruments as may be required and any and all modifications thereto; and (x) to obtain and post bonds pending appeal; hereby giving and granting to New Monsanto's said attorney full power and authority to do and perform all and every act and thing whatsoever necessary to be done in the premises as fully to all intents and purposes as New Monsanto might or could do, hereby ratifying and confirming all that its said attorney may do pursuant to this power. New Monsanto hereby gives and grants to its said attorney from and after the Effective Date, full power and authority to do and perform all and every act and thing whatsoever necessary to be done in the premises, in order fully to carry out and effectuate the authority herein granted, as fully to all intents and purposes as New Monsanto might or could do if acting through its own officers or delegates, and New Monsanto hereby ratifies and confirms all that its said attorney may be pursuant to this power. New Monsanto hereby further authorizes and empowers its said attorney from and after Effective Date to substitute and appoint in the place and stead of its said attorney, or to employ agents or sub-agents as Solutia thinks best, one or more attorney or attorneys to exercise for New Monsanto as its attorney or attorneys any or all of the powers and authorities hereby conferred; and to revoke such appointment or appointments from time to time, and to substitute or appoint any other or others in the place of such attorney or attorneys as Solutia shall from time to time think fit. The term "Governmental Authority" when used herein means ---------------------- any federal, state, local, foreign or international court, government department, commission, board, bureau, agency, the New York Stock Exchange, or other regulatory, administrative or governmental authority. The term "Third Party" when used hereby means any ----------- individual, partnership, joint venture, corporation, trust, limited liability company, unincorporated organization or a Governmental Authority or any department or agency thereof other than New Monsanto or Solutia and their respective wholly-owned direct or indirect subsidiaries. The term "Third Party Claims" when used herein means any ------------------ claim, suit, arbitration, inquiry, proceeding or investigation by or before any court, any governmental or other regulatory or administrative agency or commission or any arbitration tribunal asserted by a Third Party. All references in this document to "its attorney" or ------------ "its said attorney" or "its true and lawful attorney," or similar designations ----------------- ---------------------------- shall refer to Solutia Inc. and each and every person to whom Solutia delegates such power and also to each and every substitute or successor attorney-in-fact appointed under the terms of this instrument as herein provided. All references in this documents to "its attorney" or ------------ "its said attorney" or "its true and lawful attorney," or similar designations ----------------- ---------------------------- shall refer not only to Solutia or its delegates but also to each and every substitute or successor attorney-in-fact appointed under the terms of this instrument as herein provided. New Monsanto hereby acknowledges that this power is coupled with an interest and hereby directs that, to the extent authorized or permitted by applicable law, this power of attorney shall not be affected by any merger, reverse merger, split off, spin or consolidation of New Monsanto or Solutia. It is New Monsanto's intent that the authority conferred hereby shall be exercisable notwithstanding such corporate changes and that this power of attorney shall, if permitted by applicable law or applicable contract, be irrevocable. New Monsanto shall have the right, in its sole discretion, to revoke this Power of Attorney, by delivering written notice to Solutia upon any breach by Solutia of its commitments, duties or obligations under either (i) this Power of Attorney or (ii) the Distribution Agreement, as amended by the Amendment to the Distribution Agreement. In the event applicable law in effect at or any time after the execution of this instrument does not authorize or permit the foregoing direction to be effective, and if at any later date, applicable law changes (whether by amendment, court decision, or otherwise), then New Monsanto directs that the foregoing provisions shall thereafter become applicable. 2 All persons dealing with New Monsanto's said attorney shall be protected in relying upon a copy of this instrument and shall be protected in relying upon the written certificate of Solutia as to the Claims which are the subject of this power of attorney, the identity and authority of its officers, their delegates and any substitute or successor appointed pursuant to the terms hereof, and/or as to whether any of the persons authorized to act hereunder is unavailable so to act, so as to authorize some other person to act hereunder, and New Monsanto hereby declares that as against it and all persons claiming under it everything which its attorney shall do or cause to be done pursuant hereto shall be valid and effectual in favor of any person claiming the benefit hereof who at the time of the doing thereof shall have relied upon any such certification made by Solutia. If required by applicable law or if Solutia desires for any reason to do so, an executed copy of this Power of Attorney shall be filed for record with the Governmental Authority wherein the Claim is pending or such other place as required by law or whether Solutia thinks best. New Monsanto authorizes Solutia to make all such filings. This instrument may be executed in any number of counterparts, and all of said counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, I have hereunto set my hand and seal as of this day of July 11, 2002. MONSANTO COMPANY /s/ Hendrick A. Verfaillie ------------------------------------- By: Hendrick A. Verfaillie Title: Chairman and Chief Executive Officer ATTEST: /s/ Michael D. Bryan - ------------------------------------ 3 STATE OF MISSOURI ) ) COUNTY OF ST. LOUIS ) On this 11th day of July, 2002, before me the undersigned, a Notary Public, in and for the County and State aforesaid, personally appeared Hendrick A. Verfaillie, to me known to be the person described in and who executed the foregoing instrument, and acknowledged that he/she executed the same as his/her free act and deed. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal in St. Louis, the day and year last above written. /s/ Mary Clare Bick ---------------------------------------------- Notary Public in and for said County and State My Commission Expires: September 15, 2005 - ----------------------------- 4 EXHIBIT C EXCLUDED AGREEMENTS 1. Tax Sharing and Indemnification Agreement by and between Monsanto Company and Solutia dated as of September 1, 1997. EX-4 4 exh4.txt WARRANT AGREEMENT Exhibit 4 --------- EXECUTION COPY ============================================================================== WARRANT AGREEMENT Between SOLUTIA INC. and HSBC BANK USA as Warrant Agent ---------------- Dated as of July 9, 2002 ============================================================================== TABLE OF CONTENTS ----------------- Page ---- SECTION 1. Appointment of Warrant Agent....................................4 SECTION 2. Warrant Certificates............................................4 SECTION 3. Execution of Warrant Certificates...............................5 SECTION 4. Registration and Countersignature...............................5 SECTION 5. Transfer and Exchange of Warrants...............................5 SECTION 6. Registration of Transfers and Exchanges.........................6 (a) Transfer and Exchange of Warrants........................6 (b) Restrictions on Transfer of a Definitive Warrant for a Beneficial Interest in a Global Warrant................7 (c) Transfer or Exchange of Global Warrants..................8 (d) Transfer or Exchange of a Beneficial Interest in a Global Warrant for a Definitive Warrant................8 (e) Restrictions on Transfer or Exchange of Global Warrants..9 (f) Countersignature of Definitive Warrants in Absence of Depositary.........................................10 (g) Cancellation or Adjustment of a Global Warrant..........10 (h) Legends.................................................10 (i) Obligations with Respect to Transfers and Exchanges of Definitive and Global Warrants.....................11 SECTION 7. Terms of Warrants; Exercise of Warrants........................11 SECTION 8. Payment of Taxes...............................................14 SECTION 9. Rules 144 and 144A.............................................14 SECTION 10. Mutilated or Missing Warrant Certificates......................14 SECTION 11. Reservation of Warrant Shares..................................14 SECTION 12. Obtaining Stock Exchange Listings..............................15 SECTION 13. Adjustment of Exercise Rate and Exercise Price.................15 (a) Adjustment for Change in Capital Stock..................15 -i- (b) Adjustment for Certain Sales of Common Stock Below Current Market Value..................................16 (c) Adjustment upon Certain Distributions...................18 (d) Notice of Adjustment....................................20 (e) Reorganization of Company; Fundamental Transaction......20 (f) Other Events............................................21 (g) Company Determination Final.............................21 (h) Warrant Agent's Adjustment Disclaimer...................21 (i) Specificity of Adjustment...............................21 (j) Voluntary Adjustment....................................21 (k) Multiple Adjustments....................................22 (l) When De Minimis Adjustment May Be Deferred..............22 (m) Amendments of the Certificate of Incorporation..........22 SECTION 14. Fractional Interests...........................................22 SECTION 15. Notice of Certain Distributions; Certain Rights................22 SECTION 16. Notices to the Company and Warrant Agent.......................23 SECTION 17. Supplements and Amendments.....................................23 SECTION 18. Concerning the Warrant Agent...................................24 SECTION 19. Change of Warrant Agent........................................26 SECTION 20. Identity of Transfer Agent.....................................27 SECTION 21. SEC Reports and Other Information..............................27 SECTION 22. Successors.....................................................28 SECTION 23. Termination....................................................28 SECTION 24. Governing Law..................................................28 SECTION 25. Benefits of This Agreement.....................................28 SECTION 26. Counterparts...................................................28 -ii- Exhibit A Common Stock Purchase Warrant of Solutia Inc. Exhibit B(1) Global Warrant Legend Exhibit B(2) Unit Legend Exhibit C Certificate to be Delivered upon Exchange or Registration of Transfer of Warrants Exhibit D Form of Transferee Letter of Representation in Connection with Transfers to Institutional Accredited Investors Exhibit E Form of Transferee Letter of Representation in Connection with Transfers Pursuant to Regulation S -iii- WARRANT AGREEMENT (the "Agreement"), dated as of July 9, --------- 2002, between SOLUTIA INC., a Delaware corporation (together with any successors and assigns, the "Company"), and HSBC BANK USA, a banking ------- corporation and trust company organized under the laws of the State of New York, as warrant agent (with any successor warrant agent, the "Warrant Agent"). ------------- A. Pursuant to a purchase agreement (the "Purchase -------- Agreement") dated July 2, 2002 among the Company, SOI Funding Corp., a - --------- Delaware Corporation ("Funding Corp.," and together with the Company, the ------------ "Unit Issuers"), the Guarantors named therein (the "Guarantors"), and ------------ ---------- Salomon Smith Barney Inc. and Banc of America Securities LLC, as representatives of the Initial Purchasers, the Unit Issuers have agreed to sell to the Initial Purchasers 223,000 units (the "Units"), each consisting ----- of (i) $1,000 face amount of 11.25% Senior Secured Notes due 2009 (the "Notes") of Funding Corp. and (ii) one warrant (collectively, the ----- "Warrants"), each Warrant initially entitling the holder thereof to purchase -------- 24.814 shares of Common Stock (as defined herein) of the Company at the Exercise Price (as defined herein). B. The Notes and the Warrants comprising the Units shall not be separately transferable before the Assumption Date (as defined herein) and thereafter only on such date as shall constitute the Separation Date (as defined herein). C. The holders of the Warrants are entitled to the benefits of a Warrant Registration Rights Agreement dated as of July 9, 2002 by and between the Company and the Initial Purchasers (the "Warrant ------- Registration Rights Agreement"). - ----------------------------- D. The Company desires the Warrant Agent as warrant agent to assist the Company in connection with the issuance, exchange, cancellation, replacement and exercise of the Warrants, and in this Agreement wishes to set forth, among other things, the terms and conditions on which the Warrants may be issued, exchanged, canceled, replaced and exercised. NOW, THEREFORE, in consideration of the premises and mutual agreements herein, the Company and the Warrant Agent hereby agree as follows: Defined terms used in this Agreement shall, unless the context otherwise requires, have the meanings specified below. Certain additional terms are set forth elsewhere in this Agreement. Any reference to any section of applicable law shall be deemed to include successor provisions thereto. "Affiliate" has the meaning given to it in the Indenture. --------- "Assumption Date" means the date of the consummation of --------------- the Solutia Assumption. "Business Day" means any day that is not a Saturday, ------------ Sunday or a day on which banking institutions in New York are authorized or required by law to be closed. "Capital Stock" means, with respect to any Person, any and ------------- all shares, interests, participations, rights in or other equivalents (however designated and whether voting or non-voting) of -2- such Person's capital stock, whether outstanding on the Issue Date or issued after the Issue Date, and any and all rights (other than any evidence of indebtedness), warrants or options exchangeable for or convertible into such capital stock. "class" means, when referring to any Capital Stock, any ----- class or series of such Capital Stock. "Clearstream" means Clearstream Banking, Societe Anonyme, ----------- Luxembourg. "Common Stock" means the Common Stock of the Company, par ------------ value $0.01 per share. "Convertible Security" means any securities convertible or -------------------- exercisable or exchangeable into Common Stock of the Company of the same class as Warrant Shares, whether outstanding on the Issue Date or thereafter issued. "Direct Participant" means, with respect to the Depositary ------------------ (as defined in Section 2), Euroclear or Clearstream, a Person who has an account with the Depositary, Euroclear or Clearstream, respectively (and, with respect to The Depository Trust Company, shall include Euroclear and Clearstream). "Escrow Agreement" means the escrow and pledge agreement ---------------- dated July 9, 2002 among Funding Corp., the Company, the Trustee and Citibank, N.A. as securities intermediary and escrow agent. "Escrow Funds" has the meaning given to it in the Escrow ------------ Agreement. "Euroclear" means Morgan Guaranty Trust Company of New ---------- York, Brussels office, as operator of the Euroclear System. "Exchange Act" means the Securities Exchange Act of 1934, ------------ as amended. "Exchange Offer Registration Statement" means the ------------------------------------- registration statement to be filed by the Company and the Guarantors under the Securities Act with respect to the exchange of the Notes for Exchange Securities (as defined in the Notes Registration Rights Agreement). "Guarantors" means Monchem International, Inc., Monchem, ---------- Inc., Solutia Systems, Inc., CPFilms Inc. and any other subsidiary of the Company that guarantees the Company's obligations under the Company's credit agreement that is to be amended, restated or entered into concurrently with the Solutia Assumption. "Indenture" means the indenture dated as of July 9, 2002 --------- between Funding Corp. and the Trustee, relating to the Notes. "Independent Financial Expert" means a nationally ---------------------------- recognized independent investment banking, appraisal or accounting firm. -3- "Indirect Participant" means a person who holds a -------------------- beneficial interest in a Global Warrant (as defined in Section 2) through a Direct Participant. "Initial Purchasers" means Salomon Smith Barney Inc., Banc ------------------ of America Securities LLC, J.P. Morgan Securities Inc., Banc One Capital Markets, Inc., HSBC Securities (USA), Inc., U.S. Bancorp Piper Jaffray Inc. and SG Cowen Securities Corporation. "Issue Date" means July 9, 2002, the date of the ---------- Indenture. "Notes Registration Rights Agreement" means the ----------------------------------- Registration Rights Agreement dated as of July 9, 2002 among the Company, the Guarantors and the Initial Purchasers relating to the registration of the Notes. "One Year Restricted Period" means the one year -------------------------- "distribution compliance period" as defined in rule 902(f) of Regulation S. "Person" means any individual, corporation, limited ------ liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "SEC" means the Securities and Exchange Commission. --- "Securities Act" means the Securities Act of 1933, as -------------- amended. "Separation Date" means the earliest to occur of: --------------- (1) 150 days after the Assumption Date; (2) the date on which a registration statement for a registered exchange offer with respect to the Notes is declared effective under the Securities Act; (3) the date a shelf registration statement with respect to the Notes or the Warrants is declared effective under the Securities Act; (4) such date on or after the Assumption Date as Salomon Smith Barney Inc. and Banc of America Securities LLC in their sole discretion shall determine; and (5) the date on which an Event of Default (as defined in the Indenture) has occurred or, in the event of a Change of Control (as defined in the Indenture), the date the Company mails the requisite notice to the Holders. "Solutia Assumption" has the meaning given to it in the ------------------ Indenture. "Time of Determination" means (i) in the case of any --------------------- distribution of securities or other property to existing shareholders to which Section 13(b) or 13(c) applies, the time and date of the determination of shareholders entitled to receive such securities or property or (ii) in the case of any other issuance and sale to which Section 13(b) or 13(c) applies, the time and date of such issuance or sale. "Trustee" means HSBC Bank USA, the trustee under the ------- Indenture. "Warrant Shares" means the shares of Common Stock issuable -------------- upon exercise of Warrants from time to time. -4- SECTION 1. Appointment of Warrant Agent. The Company ---------------------------- hereby appoints the Warrant Agent to act as agent for the Company in accordance with the instructions hereinafter set forth in this Agreement, and the Warrant Agent hereby accepts such appointment. SECTION 2. Warrant Certificates. (a) The certificates -------------------- representing the Warrants ("Warrant Certificates") will initially be issued -------------------- in the form of one or more registered global warrants (the "Global Warrants") substantially in the form of Exhibit A attached hereto, which --------- shall be deposited with the Warrant Agent, as custodian for the Depositary (as defined below), and registered in the name of DTC (as defined below) or the nominee of DTC for credit to the accounts of DTC's Direct and Indirect Participants. Any Global Warrants to be delivered pursuant to this Agreement shall bear the legend set forth in Exhibit B(1) attached hereto. The Global ------------ Warrants shall represent such of the outstanding Warrants as shall be specified therein, and each Global Warrant shall provide that it shall represent the aggregate amount of outstanding Warrants from time to time endorsed thereon and that the aggregate amount of outstanding Warrants represented thereby may from time to time be reduced or increased, as appropriate. Any endorsement of a Global Warrant to reflect the amount of any increase or decrease in the amount of outstanding Warrants represented thereby shall be made by the Warrant Agent and the Depositary in accordance with instructions given by the holder thereof. The Depository Trust Company ("DTC") shall act as the "Depositary" with respect to the Global Warrants --- ---------- until a successor shall be appointed by the Company and the Warrant Agent. Upon written request, a holder of Warrants may receive from the Warrant Agent or the Depositary definitive Warrant Certificates ("Definitive ---------- Warrants") as set forth in Section 6 hereof. - -------- (b) Warrants sold in offshore transactions in reliance on Regulation S will initially be represented by one or more temporary, registered, global book-entry Warrants (each, a "Regulation S Temporary ---------------------- Global Warrant") and shall bear a legend substantially to the effect set - -------------- forth in Exhibit A, which shall be deposited with the Warrant Agent, as --------- custodian for the Depositary, and registered in the name of a nominee of DTC for credit to the accounts of Indirect Participants participating in DTC through Euroclear and Clearstream. During the One Year Restricted Period commencing on the day after the later of the offering date and the original Issue Date of the Units in the case of transfers by an owner of a beneficial interest in a Regulation S Temporary Global Warrant, beneficial interests in the Regulation S Temporary Global Warrant may be held only through Euroclear or Clearstream, and, pursuant to DTC's procedures, Indirect Participants that hold a beneficial interest in the Regulation S Temporary Global Warrant will not be able to transfer such interest to a person that takes delivery thereof in the form of a beneficial interest in the Global Warrant. Within a reasonable time after the expiration of the One Year Restricted Period, the Regulation S Temporary Global Warrants will be exchanged for one or more permanent global securities (the "Regulation S Permanent Global Warrants"), -------------------------------------- upon delivery to DTC of certification of compliance with the transfer restrictions applicable to the Warrants and pursuant to Regulation S as provided in this Agreement. After the One Year Restricted Period, (i) beneficial interests in the Regulation S Permanent Global Warrants may be transferred to a person that takes delivery in the form of an interest in the Global Warrants and (ii) beneficial interests in the Global Warrants may be transferred to a person that takes delivery in the form of an interest in the Regulation S Permanent Global Warrants, provided, in each case, that the -------- certification requirements described in Section 6 hereof are complied with. -5- SECTION 3. Execution of Warrant Certificates. Warrant --------------------------------- Certificates shall be signed on behalf of the Company by its Chairman of the Board, President, Chief Executive Officer, a Vice President, Treasurer, an Assistant Treasurer or Chief Financial Officer and by a Vice President, its Secretary or an Assistant Secretary. Each such signature upon the Warrant Certificates may be in the form of a facsimile signature of any such present or future officer and may be imprinted or otherwise reproduced on the Warrant Certificates. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer before the Warrant Certificates so signed shall have been countersigned by the Warrant Agent, or disposed of by the Company, such Warrant Certificates nevertheless may be countersigned and delivered or disposed of as though such person had not ceased to be such officer of the Company; and any Warrant Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Warrant Certificate, shall be a proper officer of the Company to sign such Warrant Certificate, although at the date of the execution of this Warrant Agreement any such person was not such officer. Warrant Certificates shall be dated the date of countersignature by the Warrant Agent. SECTION 4. Registration and Countersignature. The Warrants --------------------------------- shall be numbered and shall be registered on the books of the Company maintained at the principal office of the Warrant Agent in the Borough of Manhattan, City of New York (the "Warrant Register") as they are issued. ---------------- Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. The Warrant Agent shall, upon written instructions of the Chairman of the Board, the President, Chief Executive Officer, a Vice President, the Treasurer, an Assistant Treasurer, Chief Financial Officer, Secretary or an Assistant Secretary of the Company, initially countersign and deliver Warrants entitling the holders thereof to purchase not more than the number of Warrant Shares referred to above in the first recital hereof and shall thereafter countersign and deliver Warrants as otherwise provided in this Agreement. The Company and the Warrant Agent may deem and treat the registered holders (the "Holders" or "Warrantholders") of the Warrant ------- -------------- Certificates as the absolute owners thereof (notwithstanding any notation of ownership or other writing thereon made by anyone) for all purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. SECTION 5. Transfer and Exchange of Warrants. The Warrant --------------------------------- Agent shall from time to time, subject to the limitations of Section 6, register the transfer of any outstanding Warrants upon the records to be maintained by it for that purpose, upon surrender thereof duly endorsed or accompanied (if so required by it) by a written instrument or instruments of transfer in form satisfactory to the Warrant Agent, duly executed by the registered Holder or Holders thereof or by the duly appointed legal representative thereof or by a duly authorized attorney. Subject to the terms of this Agreement, each Warrant Certificate may be exchanged for another certificate or certificates entitling the Holder thereof to purchase a like aggregate number of Warrant Shares as the certificate or certificates surrendered then entitle each Holder to purchase. Any Holder desiring to exchange a Warrant -6- Certificate or Certificates shall make such request in writing delivered to the Warrant Agent, and shall surrender, duly endorsed or accompanied (if so required by the Warrant Agent) by a written instrument or instruments of transfer in form satisfactory to the Warrant Agent, the Warrant Certificate or Certificates to be so exchanged. Upon registration of transfer, the Company shall execute and the Warrant Agent shall countersign and deliver by certified mail a new Warrant Certificate or Certificates to the persons entitled thereto. The Warrant Certificates may be exchanged at the option of the Holder thereof, when surrendered at the office or agency of the Company maintained for such purpose, which initially will be the corporate trust office of the Warrant Agent in New York, New York for another Warrant Certificate, or other Warrant Certificates of different denominations, of like tenor and representing in the aggregate the right to purchase a like number of Warrant Shares. No service charge shall be made for any exchange or registration of transfer of Warrant Certificates, but the Company may require payment of a sum sufficient to cover any stamp or other tax or other governmental charge that is imposed in connection with any such exchange or registration of transfer. SECTION 6. Registration of Transfers and Exchanges. --------------------------------------- (a) Transfer and Exchange of Warrants. When Warrants --------------------------------- are presented to the Warrant Agent with a request: (i) to register the transfer of the Warrants; or (ii) to exchange such Definitive Warrants for an equal number of Warrants of other authorized denominations, the Warrant Agent shall register the transfer or make the exchange as requested if (and may refuse to register any transfer or exchange unless) the requirements under this Agreement as set forth in this Section 6 for such transactions are met; provided, however, that the Warrants presented or -------- ------- surrendered for registration of transfer or exchange: (x) shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Company and the Warrant Agent, duly executed by the holder thereof or by his or her attorney, duly authorized in writing; and (y) in the case of Warrants the offer and sale of which have not been registered under the Securities Act, such Warrants shall be accompanied, in the sole discretion of the Company, by the following additional information and documents, as applicable, it being understood, however, ------- that the Warrant Agent need not determine which clause (A) through (F) below is applicable: -7- (A) if such Warrant is being delivered to the Warrant Agent by a holder for registration in the name of such holder, without transfer, a certification from such holder to that effect (in substantially the form of Exhibit C hereto); or --------- (B) if such Warrant is being transferred to a qualified institutional buyer (as defined in Rule 144A under the Securities Act ("Rule 144A")) --------- (a "QIB") in accordance with Rule 144A or pursuant --- to an exemption from registration in accordance with Rule 144 or Regulation S under the Securities Act, a certification to that effect (in substantially the form of Exhibit C hereto); --------- or (C) if such Warrant is being transferred to an institutional accredited investor within the meaning of subparagraph (a)(1), (a)(2), (a)(3) or (a)(7) of Rule 501 under the Securities Act (an "Institutional Accredited Investor"), delivery by --------------------------------- the transferor of a certification to that effect (in substantially the form of Exhibit C hereto), and --------- delivery of a Transferee Letter of Representation in connection with Transfers to Institutional Accredited Investors (in substantially the form of Exhibit D hereto) and an opinion of counsel and/or --------- other information reasonably acceptable to the Company to the effect that such transfer is in compliance with the Securities Act; or (D) if such Warrant is being transferred in reliance on Regulation S under the Securities Act, delivery by the transferor of a certification to that effect (in substantially the form of Exhibit C --------- hereto), and a Transferee Letter of Representation in connection with Transfers pursuant to Regulation S in the form of Exhibit E --------- hereto; or (E) if such Warrant is being transferred in reliance on Rule 144 under the Securities Act, delivery by the transferor of (i) a certification from the transferor to that effect (in substantially the form of Exhibit C hereto), and (ii) an opinion of --------- counsel reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act; or (F) if such Warrant is being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification to that effect from the transferee or transferor (in substantially the form of Exhibit C hereto), and an opinion of counsel from --------- the transferee or transferor reasonably acceptable to the Company to the effect that such transfer is in compliance with the Securities Act. (b) Restrictions on Transfer of a Definitive Warrant ------------------------------------------------ for a Beneficial Interest in a Global Warrant. A Definitive Warrant may not - --------------------------------------------- be transferred by a holder for a beneficial interest in a Global Warrant except upon satisfaction of the requirements set forth below. Upon receipt by the Warrant Agent of a Definitive Warrant, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Warrant Agent, together with: -8- (i) certification from such holder (in substantially the form of Exhibit C hereto) that such --------- Definitive Warrant is being transferred to a QIB in accordance with Rule 144A under the Securities Act; and (ii) written instructions directing the Warrant Agent to make, or to direct the Depositary to make, an endorsement on the Global Warrant to reflect an increase in the aggregate amount of the Warrants represented by the Global Warrant, then the Warrant Agent shall cancel such Definitive Warrant and cause, or direct the Depositary to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Warrant Agent, the number of Warrant Shares represented by the Global Warrant to be increased accordingly. If no Global Warrant is then outstanding, the Company shall issue and the Warrant Agent shall upon written instructions from the Company authenticate a new Global Warrant in the appropriate amount. (c) Transfer or Exchange of Global Warrants. The --------------------------------------- transfer or exchange of Global Warrants or beneficial interests therein shall be effected through the Depositary, in accordance with this Section 6, the Private Placement Legend set forth in Exhibit A, the other provisions of --------- this Agreement (including the restrictions on transfer set forth herein) and the procedures of the Depositary therefor. (d) Transfer or Exchange of a Beneficial Interest in ------------------------------------------------ a Global Warrant for a Definitive Warrant. - ----------------------------------------- (i) Any Person having a beneficial interest in a Global Warrant may transfer or exchange such beneficial interest for a Definitive Warrant upon receipt by the Warrant Agent of written instructions or such other form of instructions as is customary for the Depositary from the Depositary or its nominee on behalf of any Person having a beneficial interest in a Global Warrant, including a written order containing registration instructions and the following additional information and documents: (A) if such beneficial interest is being transferred to the Person designated by the Depositary as being the beneficial owner, a certification from such Person to that effect (in substantially the form of Exhibit C); or --------- (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A under the Securities Act, a certification from the transferor to that effect (in substantially the form of Exhibit C); or --------- (C) if such beneficial interest is being transferred to an Institutional Accredited Investor, delivery by the transferor of a certification to that effect (in substantially the form of Exhibit C --------- hereto), and delivery of a Transferee Letter of Representation in connection with Transfers to Institutional Accredited Investors to that effect (in substantially the form of Exhibit D) and an --------- opinion of -9- counsel and/or other information reasonably acceptable to the Company to the effect that such transfer is in compliance with the Securities Act; or (D) if such beneficial interest is being transferred in reliance on Regulation S under the Securities Act, delivery of (i) a certification to that effect (in substantially the form of Exhibit C --------- hereto) and (ii) a Transferee Letter of Representation in connection with Transfers pursuant to Regulation S in the form of Exhibit E --------- hereto; or (E) if such beneficial interest is being transferred in reliance on Rule 144 under the Securities Act, delivery by the transferor of (i) a certification to that effect (in substantially the form of Exhibit C hereto) and (ii) an opinion of counsel --------- reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act; or (F) if such beneficial interest is being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification to that effect from the transferee or transferor (in substantially the form of Exhibit C hereto) and --------- an opinion of counsel and/or other information reasonably acceptable to the Company to the effect that such transfer is in compliance with the Securities Act (if such transfer is made specifically pursuant to Regulation S, the transferor must also deliver a Letter of Representation in connection with Transfers pursuant to Regulation S in substantially the form of Exhibit E hereto), --------- then the Warrant Agent will cause, in accordance with the standing instructions and procedures existing between the Depositary and the Warrant Agent, the aggregate amount of the Global Warrant to be reduced and, following such reduction, the Company will execute and, upon receipt of a countersignature order in the form of an officers' certificate (a certificate signed by two officers of the Company, one of whom must be the principal executive officer, principal financial officer or principal accounting officer) (an "Officers' Certificate"), the Warrant Agent will --------------------- countersign and deliver to the transferee a Definitive Warrant. (ii) Definitive Warrants issued in exchange for a beneficial interest in a Global Warrant pursuant to this Section 6 shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its Direct or Indirect Participants or otherwise, shall instruct the Warrant Agent in writing. The Warrant Agent shall deliver such Definitive Warrants to the Persons in whose names such Warrants are so registered and adjust the Global Warrant pursuant to paragraph (g) of this Section 6. (e) Restrictions on Transfer or Exchange of Global ---------------------------------------------- Warrants. Notwithstanding any other provisions of this Agreement (other than - -------- the provisions set forth in subsection (f) of this Section 6), a Global Warrant may not be transferred or exchanged as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another -10- nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. (f) Countersignature of Definitive Warrants in Absence -------------------------------------------------- of Depositary. If at any time: - ------------- (i) the Depositary for the Global Warrants notifies the Company that the Depositary is unwilling or unable to continue as Depositary for the Global Warrants and a successor Depositary for the Global Warrant is not appointed by the Company within 90 days after delivery of such notice; or (ii) the Company, at its sole discretion, notifies the Warrant Agent in writing that it elects to cause the issuance of Definitive Warrants for all Global Warrants under this Agreement, then the Company will execute, and the Warrant Agent will, upon receipt of an Officers' Certificate requesting the countersignature and delivery of Definitive Warrants, countersign and deliver Definitive Warrants, in an aggregate number equal to the aggregate number of Warrants represented by the Global Warrant, in exchange for such Global Warrant. (g) Cancellation or Adjustment of a Global Warrant. ---------------------------------------------- At such time as all beneficial interests in a Global Warrant have either been exchanged for Definitive Warrants, redeemed, repurchased or canceled, such Global Warrant shall be returned to the Company or, upon written order to the Warrant Agent in the form of an Officers' Certificate from the Company, retained and canceled by the Warrant Agent. At any time prior to such cancellation, if any beneficial interest in a Global Warrant is exchanged for Definitive Warrants, redeemed, repurchased or canceled, the number of Warrants represented by such Global Warrant shall be reduced and an endorsement shall be made on such Global Warrant by the Warrant Agent to reflect such reduction. (h) Legends. ------- (i) Private Placement Legend. Except as permitted by ------------------------ the following sentence, each Warrant Certificate evidencing the Warrants (and all Warrants issued in exchange therefor or substitution thereof and, if the Company deems appropriate, Warrant Shares issuable upon exercise of the Warrants) shall bear a legend substantially to the effect set forth in Exhibit A. Upon any sale or transfer of a Warrant --------- or Warrant Share pursuant to Rule 144 under the Securities Act in accordance with this Section 6 or under an effective registration statement under the Securities Act, the Warrant Agent shall permit the holder of a Warrant to exchange such Warrant for a Definitive Warrant and the Company shall permit the holder of a Warrant Share to exchange such Warrant Share for a share of Common Stock, in each case, that does not bear the legend set forth in Exhibit A. --------- -11- (ii) Unit Legend. Each Warrant issued prior to the ----------- Separation Date shall bear a legend substantially to the effect set forth in Exhibit B(2). ------------ (i) Obligations with Respect to Transfers and ----------------------------------------- Exchanges of Definitive and Global Warrants. - ------------------------------------------- (i) To permit registrations of transfers and exchanges, the Company shall execute, at the Warrant Agent's request, and the Warrant Agent shall authenticate Definitive and Global Warrants. (ii) All Definitive and Global Warrants issued upon any registration, transfer or exchange of Definitive and Global Warrants shall be the valid obligations of the Company, entitled to the same benefits under this Agreement as the Definitive and Global Warrants surrendered upon the registration of transfer or exchange. (iii) Prior to due presentment for registration of transfer of any Warrant, the Warrant Agent and the Company may deem and treat the Person in whose name any Warrant is registered as the absolute owner of such Warrant, and neither the Warrant Agent nor the Company shall be affected by notice to the contrary. SECTION 7. Terms of Warrants; Exercise of Warrants. --------------------------------------- Subject to the terms of this Agreement each Warrantholder shall have the right, which may be exercised commencing on or after the Separation Date and until the earlier of (1) the Deadline (as defined in the Indenture) if the Solution Assumption has not been consummated on or before such date or (2) 5:00 p.m., New York City time, on July 15, 2009 (the "Expiration Date"), --------------- to receive from the Company upon the exercise of each Warrant the number of fully paid and nonassessable Warrant Shares which the holder may at the time be entitled to receive on exercise of such Warrants and payment of the Exercise Price (as defined) for such Warrant Shares. Each Warrant not exercised prior to the Expiration Date shall become void and all rights thereunder and all rights in respect thereof under this Agreement shall cease as of such time. No adjustments as to dividends will be made upon exercise of the Warrants. The price per share at which Warrant Shares shall be purchasable upon exercise of Warrants (the "Exercise Price") shall be equal -------------- to $7.59, subject to adjustment pursuant to Section 13. A Warrant may be exercised upon surrender at the office or agency of the Company maintained for such purpose, which initially will be at the principal office of the Company, of the Warrant Certificate or Certificates evidencing the Warrants to be exercised with the form of election to purchase on the reverse thereof (the "Election to Exercise") duly filled in and signed, which signature -------------------- shall be guaranteed in accordance with the provisions set forth in the Warrant Certificate. The "Exercise Date" for a Warrant shall be the date when ------------- all of the items referred to in the immediately preceding sentence and the next paragraph are received by the Warrant Agent at or prior to 9 a.m., New York City time, on a Business Day and the exercise of the Warrants will be effective as of such Exercise Date. If any items referred to in such sentence are received after 11 a.m., -12- New York City time, on a Business Day, the exercise of the Warrants to which such item relates will be effective on the next succeeding Business Day. Notwithstanding the foregoing, in the case of an exercise of Warrants on the Expiration Date, if all of the items referred to in such sentence are received by the Warrant Agent at or prior to 5 p.m., New York City time, on the Expiration Date, the exercise of the Warrants to which such items relate will be effective on the Expiration Date. The Warrants may be exercised by surrendering to the Company the Warrants to be exercised with the accompanying form of election to purchase properly completed and executed, together with payment of the Exercise Price. Payment of the Exercise Price may be made at the Holder's election (i) in cash in United States dollars by wire transfer or by certified or official bank check to the order of the Company or (ii) by the surrender of one or more Warrant Certificates (and without the payment of the Exercise Price in cash) in exchange for a number of shares of the Company's Common Stock equal to the product of (a) the number of shares of the Company's Common Stock for which such Warrant is exercisable as of the Exercise Date (if the Exercise Price were being paid in cash), and (b) the Cashless Exercise Ratio (the "Cashless Exercise"). The "Cashless Exercise ----------------- ----------------- Ratio" shall equal a fraction, the numerator of which is the excess of the - ----- Current Market Value per share of the Company's Common Stock on the Exercise Date over the Exercise Price per share as of the Exercise Date and the denominator of which is the Current Market Value per share of the Company's Common Stock on the Exercise Date. Upon surrender of a Warrant Certificate representing more than one Warrant, the number of shares of Common Stock deliverable upon a Cashless Exercise shall be equal to the product of the number of shares of the Company's Common Stock issuable in respect of those Warrants that the Holder specifies are to be exercised pursuant to a Cashless Exercise multiplied by the Cashless Exercise Ratio. All provisions of this Agreement are applicable with respect to an exercise of a Warrant Certificate pursuant to a Cashless Exercise for less than the full number of Warrants represented thereby. "Current Market Value" per share of any class of Common -------------------- Stock of the Company at any date shall mean: (1) if no class of Common Stock is then registered under the Exchange Act and traded on a national securities exchange or on the Nasdaq National Market System, (a) the value of such class of Common Stock, determined in good faith by the board of directors of the Company and certified in a board resolution, taking into account the most recently completed arms-length transaction between the Company and a Person other than an Affiliate of the Company and the closing of which occurs on such date or shall have occurred within the six-month period preceding such date, or (b) if no such transaction shall have occurred on such date or within such six-month period, the fair market value of the security as determined by a nationally recognized Independent Financial Expert; provided, -------- however, that, in the case of the calculation of Current ------- Market Value for determining the cash value of fractional shares, any such determination within six months that is, in the good faith judgment of the board of directors, a reasonable determination of value may be utilized, or -13- (2) (a) if any class of Common Stock is then registered under the Exchange Act and traded on a national securities exchange or on the Nasdaq National Market System, the average of the daily closing sales prices of such class of Common Stock for the 20 consecutive trading days immediately preceding such date, or (b) if such class of Common Stock has been registered under the Exchange Act and traded on a national securities exchange or on the Nasdaq National Market System for less than 20 consecutive trading days before such date, then the average of the daily closing sales prices for all of the trading days before such date for which closing sales prices are available, in the case of each of (2)(a) and (2)(b), as certified to the Warrant Agent by the Chief Executive Officer, the President, any Executive Vice President or the Chief Financial Officer or Treasurer of the Company. The closing sales price of each such trading day shall be the closing sales price, regular way, on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day. Subject to the provisions of Section 6 hereof, upon such surrender of Warrants, the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the Holder and in such name or names as the Warrantholder may designate a certificate or certificates for the number of Warrant Shares issuable upon the exercise of such Warrants. Such certificate or certificates shall be deemed to have been issued and any Person so designated to be named therein shall be deemed to have become a holder of record of such Warrant Shares as of the Exercise Date. At the election of the Company with the consent of the holder of record of the relevant Warrant Shares, Warrant Shares may initially be issued in global form (the "Global Shares"). Such Global Shares shall ------------- represent such of the outstanding Warrant Shares as shall be specified therein and each Global Share shall provide that it represents the aggregate amount of outstanding Warrant Shares from time to time endorsed thereon and that the aggregate amount of outstanding Warrant Shares represented thereby may from time to time be reduced or increased, as appropriate. Any endorsement of a Global Share to reflect any increase or decrease in the amount of outstanding Warrant Shares represented thereby shall be made by the registrar for the Warrant Shares and the Depositary (referred to below) in accordance with instructions given by the holder thereof. DTC shall (if possible) act as the Depositary with respect to the Global Shares until a successor shall be appointed by the Company and the registrar for the Warrant Shares. The Warrants shall be exercisable only in whole. In the event that a certificate evidencing Warrants is exercised in respect of fewer than all of the Warrants evidenced thereby at any time prior to the date of expiration of the Warrants, a new certificate evidencing the remaining Warrant or Warrants will be issued, and the Warrant Agent is irrevocably authorized to countersign and to deliver the required new Warrant Certificate or Certificates pursuant to this Agreement, and the Company, whenever required by the Warrant Agent, will promptly supply the Warrant Agent with Warrant Certificates duly executed on behalf of the Company for such purpose. Holders of Warrants will be able to exercise their Warrants only if a registration statement relating to the Warrant Shares underlying the Warrants is then in effect, or the exercise of such Warrants is exempt from the registration requirements of the Securities Act, and such securities are qualified for sale or exempt from qualification under the applicable securities laws of the states in which the various holders of Warrants or -14- other persons to whom it is proposed that Warrant Shares be issued on exercise of the Warrants reside. All Warrant Certificates surrendered upon exercise of Warrants shall be canceled by the Warrant Agent. Such canceled Warrant Certificates shall then be disposed of by the Warrant Agent in a manner consistent with the Warrant Agent's customary procedure for such disposal and in a manner reasonably satisfactory to the Company. The Warrant Agent shall account promptly to the Company with respect to Warrants exercised. The Warrant Agent shall keep copies of this Agreement and any notices given or received hereunder available for inspection by the Holders during normal business hours at its office. The Company shall supply the Warrant Agent from time to time with such numbers of copies of this Agreement as the Warrant Agent may request. SECTION 8. Payment of Taxes. The Company will pay all ---------------- documentary stamp taxes attributable to the initial issuance of Warrant Shares upon the exercise of Warrants; provided, however, that the Company -------- ------- shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issue of any Warrant Certificates or any certificates for Warrant Shares in a name other than that of the registered holder of a Warrant Certificate surrendered upon the exercise of a Warrant, and the Company shall not be required to issue or deliver such Warrant Certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. SECTION 9. Rules 144 and 144A. The Company covenants that ------------------ it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder in a timely manner in accordance with the requirements of the Securities Act and the Exchange Act and, if at any time the Company is not required to file such reports, it will, upon the request of any holder or beneficial owner of warrants, make available such information necessary to permit sales pursuant to Rule 144A under the Securities Act. SECTION 10. Mutilated or Missing Warrant Certificates. In ----------------------------------------- case any of the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company may at its discretion issue and the Warrant Agent may countersign, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent number of Warrants, but only upon receipt of evidence satisfactory to the Company and the Warrant Agent of such loss, theft or destruction of such Warrant Certificate and indemnity also satisfactory to them. SECTION 11. Reservation of Warrant Shares. The Company ----------------------------- will at all times authorize and reserve and keep available, free from preemptive rights and free from all taxes, liens, charges and security interests, out of the aggregate of its authorized but unissued Common Stock or its authorized and issued Common Stock held in its treasury, for the purpose of enabling it to satisfy its obligation to issue Warrant Shares upon exercise of Warrants, the maximum number of shares of Common Stock which may then be deliverable upon the exercise of all outstanding Warrants. -15- The Company or, if appointed, the transfer agent for the Common Stock (the "Transfer Agent") and every subsequent transfer agent for -------------- any shares of the Company's Capital Stock issuable upon the exercise of any of the rights of purchase aforesaid will be irrevocably authorized and directed at all times to reserve such number of authorized shares as shall be required for such purpose. The Company will keep a copy of this Agreement on file with the Transfer Agent and with every subsequent transfer agent for any shares of the Company's Capital Stock issuable upon the exercise of the rights of purchase represented by the Warrants. The Warrant Agent is hereby irrevocably authorized to (1) instruct such Transfer Agent to make the appropriate book entries and (2) requisition from time to time from such Transfer Agent the stock certificates, if any, required to honor outstanding Warrants upon exercise thereof, in each case in accordance with the terms of this Agreement. The Company will supply such Transfer Agent with duly executed certificates for such purposes, if necessary, and will provide or otherwise make available any cash which may be payable as provided in Section 14. The Company will furnish such Transfer Agent a copy of all notices of adjustments and certificates related thereto transmitted to each holder pursuant to Section 15 hereof. The Company covenants that all Warrant Shares which may be issued upon exercise of Warrants made in accordance with the terms of this Agreement will, upon issuance, be duly and validly authorized and issued, fully paid, nonassessable, free of preemptive rights and free from all taxes, liens, charges and security interests with respect to the issuance thereof. The Company will take no action to increase the par value of the Common Stock to an amount in excess of the Exercise Price, and the Company will not enter into any agreements inconsistent with the rights of Holders hereunder. The Company will use its reasonable best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Agreement. SECTION 12. Obtaining Stock Exchange Listings. The Company ---------------------------------- will from time to time take all action which may be necessary so that the Warrant Shares, immediately upon their issuance upon the exercise of Warrants, will be listed on the principal securities exchanges and markets within the United States of America (including the Nasdaq National Market System), if any, on which the Company's Common Stock is then listed. In the event that, at any time during the period in which the Warrants are exercisable, the Common Stock is not listed on any principal securities exchanges or markets within the United States of America, the Company will use its best efforts to permit the Warrant Shares to be designated Portal securities in accordance with the rules and regulations adopted by the National Association of Securities Dealers, Inc. relating to trading in The Portal Market. SECTION 13. Adjustment of Exercise Rate and Exercise ---------------------------------------- Price. The number of Warrant Shares purchasable upon the exercise of each - ----- Warrant (the "Exercise Rate") and the Exercise Price are subject to ------------- adjustment from time to time upon the occurrence of the events enumerated in this Section 13. The Exercise Rate shall initially be 24.814 to 1. (a) Adjustment for Change in Capital Stock. If, after -------------------------------------- the Issue Date, the Company: (i) pays a dividend or makes a distribution on shares of any class of its Common Stock payable in shares of its Common Stock or other Capital Stock of the Company (except -16- to the extent any such dividend results in the grant, issuance, sale or making of Distribution Rights or Distributions to holders of Warrants pursuant to Section 13(c)); (ii) subdivides or splits any of its outstanding shares of any class of Common Stock into a greater number of shares; (iii) combines any of its outstanding shares of Common Stock into a smaller number of shares; and (iv) issues by reclassification of any class of its Common Stock any shares of any of its Capital Stock, then the Exercise Rate in effect immediately prior to such action for each Warrant then outstanding shall be adjusted by multiplying the Exercise Rate in effect immediately prior to such action by a fraction (A) the numerator of which shall be the number of shares of Common Stock outstanding immediately after such action and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such action or the record date applicable to such action, if any (regardless of whether the Warrants then outstanding are then exercisable); and the Exercise Price for each Warrant shall be adjusted to a number determined by dividing the Exercise Price immediately prior to such event by such fraction. The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. In the event that such dividend or distribution is not so paid or made or such subdivision, combination or reclassification is not effected, the Exercise Rate and Exercise Price shall again be adjusted to be the Exercise Rate and Exercise Price which would then be in effect if such record date or effective date had not been so fixed. If after an adjustment a holder of a Warrant upon exercise of such Warrant may receive shares of two or more classes of Capital Stock of the Company, the Exercise Rate shall thereafter be subject to adjustment upon the occurrence of an action taken with respect to any such class of Capital Stock as is contemplated by this Section 13 with respect to the Common Stock, on terms comparable to those applicable to Common Stock in this Section 13. (b) Adjustment for Certain Sales of Common Stock -------------------------------------------- Below Current Market Value. If, after the Issue Date, the Company (i) grants - -------------------------- or sells to any Affiliate of the Company (other than a subsidiary of the Company) or (ii) grants, sells or offers to grant or sell to all holders of Common Stock, any shares of Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock or of rights, options or warrants entitling them to subscribe for the Company's Common Stock or securities convertible into, or exchangeable or exercisable for, the Company's Common Stock (other than (1) pursuant to the exercise of the Warrants, (2) pursuant to any security convertible into, or exchangeable or exercisable for, shares of Common Stock outstanding as of the Issue Date, (3) upon the conversion, exchange or exercise of any convertible, exchangeable or exercisable security as to which upon the issuance thereof an adjustment pursuant to this Section 13 has been made or (4) upon the conversion, exchange or exercise of convertible, exchangeable or exercisable securities of the Company outstanding on the Issue Date (to the extent in accordance with the terms of such securities as in effect on such date), at a price below the then Current Market Value, -17- then the Exercise Rate for each Warrant then outstanding shall be adjusted in accordance with the formula: E1 = E x (O+N) -------------- (O+(N x P/M)) and the Exercise Price shall be decreased (but not increased) in accordance with the following formula: EP1 = EP x E ------- E1 where: E1 = the adjusted Exercise Rate for each Warrant then outstanding; E = the then current Exercise Rate for each Warrant then outstanding; EP = the then current Exercise Price per share for each Warrant then outstanding; EP1 = the adjusted Exercise Price per share for each Warrant then outstanding; O = the number of shares of Common Stock outstanding immediately prior to the sale of such Common Stock or issuance of securities convertible, exchangeable or exercisable for Common Stock; N = the number of shares of Common Stock so sold or the maximum stated number of shares of Common Stock issuable upon the conversion, exchange or exercise of any such convertible, exchangeable or exercisable securities, as the case may be; P = the proceeds per share of Common Stock received by the Company, which (i) in the case of shares of Common Stock is the amount received by the Company in consideration for the sale and issuance of such shares; and (ii) in the case of securities convertible into or exchangeable or exercisable for shares of Common Stock is the amount received by the Company in consideration for the sale and issuance of such convertible or exchangeable or exercisable securities, plus the minimum aggregate amount of additional consideration, other than the surrender of such convertible or exchangeable securities, payable to the Company upon exercise, conversion or exchange thereof; and M = the Current Market Value as of the Time of Determination or at the time of sale, as the case may be, of a share of Common Stock. The adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive the rights, warrants or options to which this paragraph (b) applies or upon consummation of the sale of Common Stock, as the case may be. To the extent -18- that shares of Common Stock are not delivered after the expiration of such rights, warrants or options, the Exercise Rate and Exercise Price for each Warrant then outstanding shall be readjusted to the Exercise Rate and Exercise Price which would otherwise be in effect had the adjustment made upon the issuance of such rights, warrants or options been made on the basis of delivery of only the number of shares of Common Stock actually delivered. In the event that such rights, warrants or options are not so issued, the Exercise Rate and Exercise Price for each Warrant then outstanding shall again be adjusted to be the Exercise Rate and Exercise Price which would then be in effect if such date fixed for determination of shareholders entitled to receive such rights, warrants or options had not been so fixed. No adjustment shall be made under this paragraph (b) if the application of the formula stated above in this paragraph (a) would result in a value of E1 that is lower than the value of E. No adjustment shall be made under this paragraph (b) for any adjustment which is the subject of paragraphs (a) and (e) of this Section 13. Notwithstanding the foregoing, no adjustment in the Exercise Price or Exercise Rate will be required in respect of: (a) the grant of any stock option or other stock incentive award pursuant to any stock option or stock incentive plan or arrangement in effect on the Issue Date or as disclosed in the Final Memorandum, (b) the grant of any stock option or stock incentive award at an exercise price at least equal to the then Current Market Value, (c) the grant of any other stock option or stock incentive award to any officer, director or employee of the Company or any of its Subsidiaries pursuant to any compensatory plan or arrangement that has been approved by the Company's board of directors, or (d) the exercise of any such option or award. (c) Adjustment upon Certain Distributions. ------------------------------------- (i) If at any time after the Issue Date the Company grants, issues or sells options, any Convertible Security, or rights to purchase Capital Stock or other securities (other than Common Stock) pro --- rata to the record holders of a series of Common Stock ("Distribution - ---- ------------ Rights") or, without duplication, makes any distribution (other than a - ------ distribution pursuant to a plan of liquidation) (a "Distribution") on shares ------------ of Common Stock (whether in cash, property, evidences of indebtedness, or otherwise), then the Exercise Rate shall be adjusted in accordance with the formula: E1 = E x (M/(M-F)) and the Exercise Price shall be decreased (but not increased) in accordance with the following formula: EP1 = EP x E ------ E1 -19- where: E1 = the adjusted Exercise Rate for each Warrant then outstanding; E = the current Exercise Rate for each Warrant then outstanding; EP = the then current Exercise Price per share for each Warrant then outstanding; EP1 = the adjusted Exercise Price per share for each Warrant then outstanding; M = the Current Market Value per Warrant Share at the Time of Determination; F = the fair market value at the Time of Determination of such portion of the options, Convertible Securities, Capital Stock or other securities, cash, property or assets distributable pursuant to such Distribution Rights or Distribution per share of outstanding Common Stock. The adjustment shall become effective immediately after the Time of Determination with respect to the shareholders entitled to receive the options, Convertible Securities, warrants, cash, property, evidences of indebtedness or other securities or assets to which this paragraph (c)(i) applies. No adjustment shall be made under this paragraph (c) if the application of the formula stated above in this paragraph (c)(i) would result in a value of E1 that is lower than the value of E. This paragraph (c)(i) does not apply to any securities or distributions which result in an adjustment pursuant to paragraphs (a) or (b) of this Section 13. (ii) Notwithstanding the provisions of paragraph (c)(i) of this Section 13, cash dividends paid by the Company on its Common Stock in the ordinary course of business that would otherwise give rise to an adjustment pursuant to Section 13(c)(i) shall not give rise to such adjustment to the extent such dividends do not exceed the lower of (x) $10 million per calendar year and (y) $0.04 per share. (iii) Notwithstanding the provisions of paragraph (c)(i) of this Section 13, an event which would otherwise give rise to an adjustment pursuant to Section 13(c)(i) shall not give rise to such adjustment if the Company grants, issues or sells Distribution Rights to the Holders of Warrants or includes the holders of the Warrants in such Distribution, in each case on a pro rata basis, assuming for the purpose of this Section --- ---- 13(c)(ii) that (x) all outstanding shares of Common Stock are of one class and (y) the Warrants had been exercised. (iv) Notwithstanding anything to the contrary set forth in this Section 13(c), if, at any time, the Company makes any distribution pursuant to any plan of liquidation (a "Liquidating Distribution") on shares ------------------------ of Common Stock (whether in cash, property, evidences of indebtedness or otherwise), then, subject to applicable law, the Company shall make to each Holder of Warrants the aggregate Liquidating Distribution which such Holder would have acquired if such Holder had held the maximum number of shares of Common Stock acquirable upon the complete exercise of each Holder's Warrants (regardless of whether the Warrants are then exercisable) immediately before the Time of Determination of shareholders entitled to receive Liquidating Distributions. -20- (d) Notice of Adjustment. Whenever the Exercise Rate -------------------- and Exercise Price are adjusted, the Company shall promptly mail to holders of Warrants then outstanding at the addresses appearing on the Warrant Register a notice of the adjustments. The Company shall file with the Warrant Agent and any other registrar such notice, an Officers' Certificate and a certificate from the Company's independent public accountants briefly stating the facts requiring the adjustment and the manner of computing it. The certificates shall be conclusive evidence that the adjustment is correct, absent manifest error and the Warrant Agent may rely conclusively on anything contained in this certificate. Neither the Warrant Agent nor any such registrar shall be under any duty or responsibility with respect to any such certificate except to exhibit the same during normal business hours to any holder desiring inspection thereof. (e) Reorganization of Company; Fundamental Transaction. --------------------------------------------------- (i) If the Company, in a single transaction or through a series of related transactions, consolidates with or merges with or into any other person or sells, assigns, transfers, leases, conveys or otherwise disposes of all or substantially all of its properties and assets to another person or group of affiliated persons or is a party to a merger or binding share exchange which reclassifies or changes its outstanding Common Stock (a "Fundamental Transaction"), as a condition to consummating any such ----------------------- transaction the person formed by or surviving any such consolidation or merger if other than the Company or the person to whom such transfer has been made (the "Surviving Person") shall enter into a supplemental warrant ---------------- agreement. The supplemental warrant agreement shall provide (a) that the holder of a Warrant then outstanding may exercise the Warrant for the kind and amount of securities, cash or other assets which such holder would have received immediately after the Fundamental Transaction if such holder had exercised the Warrant immediately before the effective date of the transaction (regardless of whether the Warrants are then exercisable and without giving effect to the Cashless Exercise option), assuming (to the extent applicable) that such holder (i) was not a constituent person or an affiliate of a constituent person to such transaction, (ii) made no election with respect thereto, and (iii) was treated alike with the plurality of non-electing holders, and (b) that the Surviving Person shall succeed to and be substituted to every right and obligation of the Company in respect of this Agreement and the Warrants. The supplemental warrant agreement shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 13. The Surviving Person shall mail to holders of Warrants at the addresses appearing on the Warrant Register a notice briefly describing the supplemental warrant agreement. If the issuer of securities deliverable upon exercise of Warrants is an affiliate of the Surviving Person, that issuer shall join in the supplemental warrant agreement. (ii) Notwithstanding the foregoing, if the Company enters into a Fundamental Transaction with another Person (other than a subsidiary of the Company) and consideration is payable to holders of shares of Capital Stock (or other securities or property) issuable or deliverable upon exercise of the Warrants that are exercisable in exchange for such shares in connection with such Fundamental Transaction which consideration consists solely of cash assuming (to the extent applicable) that each such holder (i) was not a constituent person or an affiliate of a constituent person to such transaction, (ii) made no election with respect thereto, and (iii) was treated alike with the plurality of non-electing holders, then the holders of Warrants shall be entitled to receive distributions on the date of such event on an equal basis with holders of such shares (or other securities issuable upon -21- exercise of the Warrants) as if the Warrants had been exercised immediately prior to such event, less the aggregate Exercise Price therefor. Upon receipt of such payment, if any, the rights of a holder of such Warrant shall terminate and cease and such holder's Warrants shall expire. (iii) If this paragraph (e) applies, it shall supersede the application of paragraph (a) of this Section 13. (f) Other Events. If any event occurs as to which the ------------ provisions of this Section 13 are not strictly applicable or, if strictly applicable, would not, in the good faith judgment of the board of directors of the Company, fairly and adequately protect the rights of the Warrantholders in accordance with the essential intent and principles of such provisions, then such board of directors shall make such adjustments in the application of such provisions, in accordance with such essential intent and principles, as shall be reasonably necessary, in the good faith opinion of such board of directors, to protect such rights as aforesaid, but in no event shall any such adjustment have the effect of decreasing the Exercise Rate or decreasing the number of Warrant Shares issuable upon exercise of the Warrants. (g) Company Determination Final. Any determination --------------------------- that the Company or the board of directors of the Company must make pursuant to this Section 13 shall be conclusive, absent manifest error. (h) Warrant Agent's Adjustment Disclaimer. The ------------------------------------- Warrant Agent shall have no duty to determine when an adjustment under this Section 13 should be made, how it should be made or what it should be. The Warrant Agent shall have no duty to determine whether a supplemental warrant agreement under paragraph (e) need be entered into or whether any provisions of any supplemental warrant agreement are correct. The Warrant Agent shall not be accountable for and makes no representation as to the validity or value of any securities or assets issued upon exercise of Warrants. The Warrant Agent shall not be responsible for the Company's failure to comply with this Section 13. (i) Specificity of Adjustment. Regardless of any ------------------------- adjustment in the number or kind of shares purchasable upon the exercise of the Warrants, Warrant Certificates theretofore or thereafter issued may continue to express the same number and kind of Warrant Shares per Warrant as are stated on the Warrant Certificates initially issuable pursuant to this Agreement. (j) Voluntary Adjustment. The Company from time to -------------------- time may increase the Exercise Rate by any number and for any period of time; provided, however, that such period is not less than 20 Business Days. -------- ------- Whenever the Exercise Rate is so increased, the Company shall mail to holders at the addresses appearing on the Warrant Register and file with the Warrant Agent a notice of the increase. The Company shall give the notice at least 15 days before the date the increased Exercise Rate takes effect. The notice shall state the increased Exercise Rate and the period it will be in effect. A voluntary increase in the Exercise Rate shall not change or adjust the Exercise Rate otherwise in effect as determined by this Section 13. -22- (k) Multiple Adjustments. After an adjustment to the -------------------- Exercise Rate for outstanding Warrants under this Section 13, any subsequent event requiring an adjustment under this Section 13 shall cause an adjustment to the Exercise Rate for outstanding Warrants as so adjusted. (l) When De Minimis Adjustment May Be Deferred. No ------------------------------------------ adjustment in the Exercise Rate or Exercise Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such rate or price; provided, however, that any adjustments which by reason of -------- ------- the foregoing are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations shall be made by the Company and shall be rounded to the sixth decimal place. No adjustment need be made for a change in the par value of the Common Stock and no adjustment shall be deferred beyond the date on which a Warrant is exercised. (m) Amendments of the Certificate of Incorporation. ---------------------------------------------- The Company shall not amend its Certificate of Incorporation in a manner that adversely affects the holders of Warrants, without the prior consent of the holders of a majority of the Warrants outstanding (excluding Warrants held by the Company or any of its Affiliates), as determined in good faith by the Company's board of directors. SECTION 14. Fractional Interests. The Company shall not be -------------------- required to issue fractional Warrant Shares on the exercise of Warrants. If more than one Warrant shall be presented for exercise in full at the same time by the same holder, the number of full Warrant Shares which shall be issuable upon the exercise thereof shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of the Warrants so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 14, be issuable on the exercise of any Warrants (or specified portion thereof), the Company shall pay an amount in cash equal to the Current Market Value per Warrant Share on the day immediately preceding the date the Warrant is presented for exercise, multiplied by such fraction. SECTION 15. Notice of Certain Distributions; Certain ---------------------------------------- Rights. The Company shall give prompt written notice to the Warrant Agent - ------ and shall cause the Warrant Agent, on behalf of and at the expense of the Company to give to each Holder written notice of any determination to make a distribution to the holders of its Common Stock of any cash dividends, assets, debt securities, preferred stock, or any rights or warrants to purchase debt securities, preferred stock, assets or other securities (other than Common Stock, or rights, options, or warrants to purchase Common Stock) of the Company the effect of which would require any adjustment pursuant to Section 13 hereof, which notice shall state the nature and amount of such planned dividend or distribution and the record date therefor, and shall be received by the Holders at least 20 days prior to such record date therefor. Except as expressly provided in this Agreement or in any Warrant Certificate, the holders of unexercised Warrants shall have no right to vote, to consent, to exercise any preemptive rights or to receive notice as shareholders of the Company in respect of the meetings of shareholders or the election of directors of the Company or any other matter, or to exercise any rights whatsoever as shareholders of the Company. -23- SECTION 16. Notices to the Company and Warrant Agent. Any ---------------------------------------- notice or demand authorized by this Agreement to be given or made by the Warrant Agent or by any Holder to or on the Company shall be sufficiently given or made when received at the office of the Company expressly designated by the Company as its office for purposes of this Agreement (until the Warrant Agent is otherwise notified in accordance with this Section 16 by the Company), as follows: Solutia Inc. copies to: 575 Maryville Center Drive Winston & Strawn P.O. Box 66760 35 West Wacker Drive St. Louis, MO 63166-6760 Chicago, IL 60601-9903 (if by courier, 63141) Attn: R. Cabell Morris Attn: General Counsel Any notice pursuant to this Agreement to be given by the Company or by any Holder(s) to the Warrant Agent shall be sufficiently given when received by the Warrant Agent at the address appearing below (until the Company is otherwise notified in accordance with this Section by the Warrant Agent). Mailing Address: Delivery Address: HSBC Bank USA HSBC Bank USA Issuer Services Issuer Services 452 Fifth Avenue 10 East 40th Street,14th Floor New York, NY 10018 New York, New York 10016 Attn: Harriet Drandoff Attention: Harriet Drandoff Facsimile: (212) 525-1300 Facsimile (212) 525-1300 Any notice or communication to a holder shall be mailed by first class mail, postage prepaid, to its address shown on the register kept by the Warrant Agent. SECTION 17. Supplements and Amendments. (a) From time to -------------------------- time, the Company and the Warrant Agent, without the consent of the Holders of the Warrants, may amend or supplement this Agreement for certain purposes, including curing ambiguities, defects or inconsistencies or making any change that does not adversely affect the legal rights of any Holder. Any amendment or supplement to this Agreement that adversely affects the legal rights of the Holder of the Warrants will require the written consent of the Holders of a majority of the then outstanding Warrants (excluding Warrants held by the Company or any of its Affiliates). The consent of each Holder of the Warrants affected will be required for any amendment pursuant to which the Exercise Price would be increased or the number of Warrant Shares purchasable upon exercise of Warrants would be decreased (other than pursuant to adjustments provided in this Agreement) or any of the adjustment provisions in this Agreement would be changed in a manner that would have any such effect. (b) After an amendment or modification under this Section 17 becomes effective, the Company shall mail to the Holders affected thereby a notice briefly describing such amendment or -24- modification. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment or modification. In connection with any amendment or modification under this Section 17, the Company may offer, but shall not be obligated to offer, to any Holder who consents to such amendment or modification, consideration for such Holder's consent, so long as such consideration is offered to all Holders. (c) Executed or true and correct copies of any amendment or modification effected pursuant to the provisions of this Section 17 shall be delivered by the Company to each Holder of outstanding Warrants or Warrant Shares forthwith following the date on which the same shall have been executed and delivered by the Holder or Holders of the requisite percentage of outstanding Warrant Shares (but only to the extent the Company has been provided with the addresses for the Holders). (d) Notwithstanding anything contained in this Agreement to the contrary, the Warrant Agent may, but shall not be obligated to, enter into any supplement or amendment that affects the Warrant Agent's own rights, duties, obligations or immunities under this Agreement. SECTION 18. Concerning the Warrant Agent. The Warrant ---------------------------- Agent undertakes the duties and obligations expressly imposed by this Agreement (and no implied duties) upon the following terms and conditions, by all of which the Company and the Holders, by their acceptance of Warrants, shall be bound: (a) The statements contained herein and in the Warrant Certificate shall be taken as statements of the Company, and the Warrant Agent assumes no responsibility for the correctness of any of the same except such as describe the Warrant Agent or any action taken by it. The Warrant Agent assumes no responsibility with respect to the distribution of the Warrants except as herein otherwise provided. (b) The Warrant Agent shall be protected and shall not be responsible for and shall incur no liability to the Company or any Holder for any failure of the Company to comply with the covenants contained in this Agreement or in the Warrants to be complied with by the Company. (c) The Warrant Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself (through its employees) or by or through its attorneys or agents (which shall not include its employees) and shall not be responsible for the misconduct of any attorney or agent appointed by it without gross negligence or willful misconduct. (d) The Warrant Agent may consult at any time with legal counsel satisfactory to it (who may be counsel for the Company or an employee of the Warrant Agent), and the Warrant Agent shall incur no liability or responsibility to the Company or to any Holder in respect of any action taken, suffered or omitted by it hereunder in accordance with the opinion or the advice of such counsel. -25- (e) Whenever in the performance of its duties under this Agreement the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless such evidence in respect thereof be herein specifically prescribed) may be deemed conclusively to be proved and established by a certificate signed by the Chairman of the Board, the President, one of the Vice Presidents, the Treasurer or the Secretary of the Company and delivered to the Warrant Agent; and such certificate shall be full authorization to the Warrant Agent for any action taken or suffered by it under the provisions of this Agreement in reliance upon such certificate. (f) The Company agrees to pay the Warrant Agent such compensation for all services rendered by the Warrant Agent in the performance of its duties under this Agreement as may be separately agreed in writing, to reimburse the Warrant Agent for all expenses, taxes and governmental charges and other charges of any kind and nature incurred by the Warrant Agent in the performance of its duties under this Agreement (including, without limitation, reasonable fees and expenses of counsel), and to indemnify the Warrant Agent and its agents, employees, directors, officers and affiliates and save it and them harmless against any and all liabilities, losses and expenses, including, without limitation, judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the acceptance and performance of its duties under this Agreement, except as a result of the Warrant Agent's gross negligence or bad faith, including, without limitation, the costs and expenses of defending against any claim (whether asserted by the Company, a Holder or any other Person) of liability in the premises including reasonable attorneys' fees and expenses. The provisions of this paragraph shall survive the resignation or removal of the Warrant Agent and the termination of this Agreement. (g) The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action likely to involve expense unless the Company or one or more holders shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred, but this provision shall not affect the power of the Warrant Agent to take such action as the Warrant Agent may consider proper, whether with or without any such security or indemnity. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrants or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of judgment shall be for the ratable benefit of the holders, as their respective rights or interests may appear. (h) The Warrant Agent and any stockholder, director, officer or employee ("Related Parties") of the Warrant Agent may --------------- buy, sell or deal in any of the Warrants or other securities of the Company or become pecuniarily interested in any transactions in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Warrant Agent under this Agreement or such director, officer or employee. Nothing herein shall preclude the Warrant Agent or any Related Party from acting in any other capacity for the Company or for any other legal entity including, -26- without limitation, acting as Transfer Agent or as a lender to the Company or an affiliate thereof. (i) The Warrant Agent shall act hereunder solely as agent, and its duties shall be determined solely by the provisions thereof. The Warrant Agent shall not be liable for anything which it may do or refrain from doing in connection with this Agreement except for its own gross negligence or bad faith. No implied duties or obligations shall be read into this Agreement against the Warrant Agent. (j) The Warrant Agent will be protected and will not incur any liability or responsibility to the Company or to any holder for any action taken, suffered or omitted by it in reliance on any notice, resolution, waiver, consent, order, certificate, or other paper, document or instrument reasonably believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (k) The Warrant Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Chairman of the Board, the President, Chief Financial Officer, Treasurer, any Vice President or the Secretary of the Company, and to apply to such officers for advice or instructions in connection with its duties, and shall not be liable for any action taken or suffered to be taken by it without gross negligence or bad faith in accordance with instructions of any such officer or officers. (l) By countersigning Warrant Certificates or by any other act hereunder the Warrant Agent shall not be deemed to make any representations as to validity or authorization of the Warrants or the Warrant Certificates (except as to its countersignature thereon) or of any securities or other property delivered upon exercise or tender of any Warrant, or as to the accuracy of the computation of the Exercise Price or the number or kind or amount of stock or other securities or other property deliverable upon exercise of any Warrant or the correctness of the representations of the Company made in any certifications that the Warrant Agent receives. The Warrant Agent shall not have any duty to calculate or determine any adjustments with respect either to the Exercise Price or the kind and amount of shares or other securities or any property receivable by holders of Warrants upon the exercise or tender of Warrants required from time to time, and the Warrant Agent shall have no duty or responsibility in determining the accuracy or correctness of any such calculation. (m) No provision of this Agreement shall require the Warrant Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. SECTION 19. Change of Warrant Agent. The Warrant Agent may ----------------------- resign and be discharged from its duties under this Agreement by giving to the Company 30 days' notice in writing. The Warrant Agent may be removed by like notice to the Warrant Agent from the Company. If the Warrant Agent shall resign or be removed or shall otherwise become incapable of acting, the -27- Company shall appoint a successor to the Warrant Agent. If the Company shall fail to make such appointment within a period of 30 days after such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent or by any holder (who shall with such notice submit his Warrant for inspection by the Company), then any holder or the resigning or removed Warrant Agent may apply to any court of competent jurisdiction for the appointment of a successor to the Warrant Agent. Pending appointment of a successor to the Warrant Agent, either by the Company or by such court, the duties of the Warrant Agent shall be carried out by the Company. Any successor warrant agent, whether appointed by the Company or such a court, shall be a bank or trust company in good standing, incorporated under the laws of the United States of America or any State thereof or the District of Columbia and having at the time of its appointment as warrant agent a combined capital and surplus of at least $50,000,000. After appointment, the successor warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed; but the former Warrant Agent shall deliver and transfer to the successor warrant agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for such purpose. Failure to file any notice provided for in this Section 19, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of the successor warrant agent, as the case may be. In the event of such resignation or removal, the Company or the successor warrant agent shall mail by first class mail, postage prepaid, to each Holder, written notice of such removal or resignation and the name and address of such successor warrant agent. SECTION 20. Identity of Transfer Agent. Forthwith, the -------------------------- Transfer Agent for the Common Stock, or any other shares of the Company's Capital Stock issuable upon the exercise of the Warrants shall be Equiserve Trust Company, N.A. SECTION 21. SEC Reports and Other Information. Whether or --------------------------------- not the Company and the Subsidiary Guarantors (as defined in the Indenture) are then subject to Section 13(a) or 15(d) of the Exchange Act, from and after the Assumption Date, the Company and the Subsidiary Guarantors will electronically file with the SEC, so long as the Warrants are outstanding, the annual reports, quarterly reports and other periodic reports that the Company and the Subsidiary Guarantors would be required to file with the SEC pursuant to Section 13(a) or 15(d) if the Company and the Subsidiary Guarantors were so subject, and such documents will be filed with the SEC on or prior to the respective dates (the "Required Filing Dates") by which the --------------------- Company and the Subsidiary Guarantors would be required to file such documents if the Company and the Subsidiary Guarantors were so subject, unless, in any case, such files are not then permitted by the SEC. If such filings with the SEC are not then permitted by the SEC, or such filings are not generally available on the Internet free of charge, from and after the Assumption Date, the Company and the Subsidiary Guarantors will, without charge to the Holders, within 15 days of each Required Filing Date, transmit by mail to Holders, as their names and addresses appear in the note register, and file with the Warrant Agent copies of the annual reports, quarterly reports and other periodic reports that the Company and the Subsidiary Guarantors would be required to file with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act if the Company and the Subsidiary Guarantors were subject to such Section 13(a) or 15(d) and, promptly upon written request, supply copies of such documents to any prospective Holder or beneficial owner at the Company's cost. -28- In addition, from and after the Solutia Assumption, the Company and the Subsidiary Guarantors will, for so long as any Warrants remain outstanding, furnish to the Holders of the Warrants and to securities analysts and prospective investors, upon their request, the information, if any, required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. SECTION 22. Successors. All the covenants and provisions ---------- of this Agreement by or for the benefit of the Company, the Warrant Agent or any holder of Warrants shall bind and inure to the benefit of their respective successors and assigns hereunder. SECTION 23. Termination. This Agreement shall terminate on ----------- the Expiration Date. Notwithstanding the foregoing, this Agreement will terminate on any earlier date if all Warrants have been exercised or redeemed pursuant to this Agreement or the Company's Certificate of Incorporation. SECTION 24. Governing Law. This Agreement and each Warrant ------------- Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and shall be governed by and construed in accordance with the laws of said State, without regard to the conflict of law rules thereof. SECTION 25. Benefits of This Agreement. Nothing in this -------------------------- Agreement shall be construed to give to any person or corporation other than the Company, the Warrant Agent and the registered holders of the Warrant Certificates from time to time any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent and the registered holders of the Warrant Certificates. SECTION 26. Counterparts. This Agreement may be executed ------------ in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. [Signature Page Follows] S-1 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. SOLUTIA INC. By: ------------------------------------ Name: Title: HSBC BANK USA, as Warrant Agent By: ------------------------------------ Name: Title: Exhibit A THIS SECURITY (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE NEXT SENTENCE. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER: (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) (A "QIB"), (B) IT HAS ACQUIRED THIS SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT OR (C) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT (AN "IAI")), (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (B) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (C) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT, (D) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (E) TO AN IAI THAT, PRIOR TO SUCH TRANSFER, FURNISHES THE WARRANT AGENT A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE TRANSFER OF THE SECURITIES (THE FORM OF WHICH CAN BE OBTAINED FROM THE WARRANT AGENT) AND AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY), (F) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY) OR (G) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION, AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION" AND "UNITED STATES" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. A-1 No. [ ] CUSIP # [ ] FORM OF COMMON STOCK PURCHASE WARRANT OF SOLUTIA INC. THIS CERTIFIES THAT [ ], or its registered assigns, is the registered holder of Warrants (the "Warrants"). Each -------------- -------- Warrant entitles the holder thereof (the "Holder"), at its option at any ------ time on or after the Separation Date and subject to the provisions contained herein and in the Warrant Agreement referred to below, to purchase from Solutia Inc., a Delaware corporation (the "Company"), 24.814 shares of ------- Common Stock, par value $0.01 per share, of the Company at an exercise price per share equal to $7.59 (the "Exercise Price"). -------------- This Warrant Certificate shall terminate and become void as of the close of business on the earlier of (1) the Deadline if the Solutia Assumption does not occur on or before such date or (2) July 15, 2009 (the "Expiration Date") or, if earlier, upon the exercise hereof as to --------------- all the shares of Common Stock subject hereto. The number of shares issuable upon exercise of the Warrants shall be subject to adjustment from time to time as set forth in the Warrant Agreement (as defined). This Warrant Certificate is issued under and in accordance with a Warrant Agreement dated as of July 9, 2002 (the "Warrant Agreement"), ----------------- between the Company and HSBC Bank USA as Warrant Agent, and is subject to the terms and provisions contained in the Warrant Agreement, to all of which terms and provisions the Holder of this Warrant Certificate consents by acceptance hereof. The Warrant Agreement is hereby incorporated herein by reference and made a part hereof. Reference is hereby made to the Warrant Agreement for a full statement of the respective rights, limitations of rights, duties and obligations of the Company and the Warrantholders. Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Warrant Agreement. A copy of the Warrant Agreement may be obtained for inspection by the Holder hereof upon written request to the Company at Solutia Inc., 575 Maryville Center Drive, P.O. Box 66760, St. Louis, MO 63166-6760, Attn: General Counsel. Subject to the terms of the Warrant Agreement, the Warrants may be exercised upon surrender at the office or agency of the Company maintained for such purpose, which initially will be the issuer services office of the Warrant Agent in New York, New York, of the certificate or certificates evidencing the Warrants to be exercised with the form of election to purchase on the reverse thereof duly filled in and signed, and upon payment to the Warrant Agent for the account of the Company of the Exercise Price for the number of Warrant Shares in respect of which such Warrants are then exercised. The Exercise Price may be paid at the holder's election (i) in cash in United States dollars by wire transfer or by certified or official bank check to the order of the Company or (ii) by the surrender of one or more Warrant Certificates (and without the payment of the Exercise Price in cash) in exchange for a number of shares of the Company's Common Stock equal to the product of (a) the number of shares of the Company's Common Stock for which such Warrant is exercisable as of A-2 the Exercise Date (if the Exercise Price were being paid in cash), and (b) the Cashless Exercise Ratio. The "Cashless Exercise Ratio" shall equal a fraction, the numerator of which is the excess of the Current Market Value per share of the Company's Common Stock on the Exercise Date over the Exercise Price per share as of the Exercise Date and the denominator of which is the Current Market Value per share of the Company's Common Stock on the Exercise Date. Upon surrender of a Warrant Certificate representing more than one Warrant, the number of shares of the Company's Common Stock deliverable upon a Cashless Exercise shall be equal to the product of the number of shares of the Company's Common Stock issuable in respect of those Warrants that the holder specifies are to be exercised pursuant to a Cashless Exercise multiplied by the Cashless Exercise Ratio. All provisions of the Warrant Agreement shall be applicable with respect to an exercise of a Warrant Certificate pursuant to a Cashless Exercise for less than the full number of Warrants represented thereby. The Warrants shall be exercisable only in whole. In the event that a certificate evidencing Warrants is exercised in respect of fewer than all of the Warrants evidenced thereby at any time prior to the date of expiration of the Warrants, a new certificate evidencing the remaining Warrant or Warrants will be issued, and the Warrant Agent is irrevocably authorized to countersign and to deliver the required new Warrant Certificate or Certificates pursuant to the Warrant Agreement, and the Company, whenever required by the Warrant Agent, will promptly supply the Warrant Agent with Warrant Certificates duly executed on behalf of the Company for such purpose. This Warrant Certificate shall not be valid unless countersigned by the Warrant Agent as such term is used in the Warrant Agreement. As provided in the Warrant Agreement, the Exercise Rate and the Exercise Price are subject to adjustment upon the happening of certain events. The Company will pay all documentary stamp taxes attributable to the initial issuance of Warrant Shares upon the exercise of Warrants; provided, however, that the Company shall not be required to pay -------- ------- any tax or taxes which may be payable in respect of any transfer involved in the issue of any Warrant Certificates or any certificates for Warrant Shares in a name other than that of the registered holder of a Warrant Certificate surrendered upon the exercise of a Warrant, and the Company shall not be required to issue or deliver such Warrant Certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Company shall not be required to issue fractional Warrant Shares on the exercise of Warrants. If more than one Warrant shall be presented for exercise in full at the same time by the same holder, the number of full Warrant Shares which shall be issuable upon the exercise thereof shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of the Warrants so presented. If any fraction of a Warrant Share would be issuable on the exercise of any Warrants (or specified portion thereof), the Company shall pay an amount in cash equal to the Current Market Value per Warrant Share on the day immediately preceding the date the Warrant is presented for exercise, multiplied by such fraction. All Warrant Shares issuable by the Company upon the exercise of the Warrants shall, upon such issue, be duly and validly issued and fully paid and non-assessable. A-3 The Company and the Warrant Agent may deem and treat Holders of the Warrant Certificates as the absolute owners thereof (notwithstanding any notation of ownership or other writing thereon made by anyone) for all purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. A-4 The Warrants do not entitle any Holder hereof to any of the rights of a stockholder of the Company. SOLUTIA INC. By: ------------------------------------ Name: Title: By: ------------------------------------ Name: Title: DATED: COUNTERSIGNED: HSBC BANK USA, as Warrant Agent By: ------------------------------------ Authorized Signature A-5 FORM OF ELECTION TO PURCHASE WARRANT SHARES (to be executed only upon exercise of Warrants) SOLUTIA INC. The undersigned hereby irrevocably elects to exercise Warrants on the terms and conditions specified in the - ------------------ Warrant Certificate and the Warrant Agreement, surrenders this Warrant Certificate and all right, title and interest therein to Solutia Inc. and directs that the Warrant Shares deliverable upon the exercise of such Warrants be registered or placed in the name and at the address specified below and delivered thereto. Date: , ------------ ---- Your Signature. -------------------------------------------------------------- (Sign exactly as your name appears on the face of this Warrant Certificate) - ----------------------------------------------------------------------------- (Street Address) - ----------------------------------------------------------------------------- (City) (State) (Zip Code) Signature Guaranteed by: - ---------------------------------------------------------- Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. Securities and/or check to be issued to: Please insert social security or identifying number: Name: Street Address: City, State and Zip Code: -2- ASSIGNMENT FORM To assign this Warrant, fill in the form below: I or we assign and transfer this Warrant to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Warrant on the books of the Company. The agent may substitute another to act for him. - ------------------------------------------------------------------------------ Date: ------------------------ Your Signature: -------------------------------------------------------------- (Sign exactly as your name appears on the face of this Warrant Certificate) Signature Guaranteed by: - ------------------------------------------------ Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. Exhibit B(1) [GLOBAL WARRANT LEGEND] Any Global Warrant countersigned and delivered hereunder shall bear a legend in substantially the following form: THIS SECURITY IS A GLOBAL WARRANT WITHIN THE MEANING OF THE WARRANT AGREEMENT HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT AGREEMENT, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT AGREEMENT. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. B-1 Exhibit B(2) [UNIT LEGEND] Any Warrant issued on or after the Issue Date and prior to the Separation Date shall bear the legend set forth in the following paragraph: THE WARRANTS EVIDENCED BY THIS CERTIFICATE ARE INITIALLY ISSUED AS PART OF AN ISSUANCE OF UNITS, EACH OF WHICH CONSISTS OF $1,000 PRINCIPAL AMOUNT OF THE 11.25% SENIOR SECURED NOTES DUE 2009 OF SOI FUNDING CORP., (THE "NOTES") AND ONE WARRANT (EACH, A "WARRANT" AND COLLECTIVELY, THE "WARRANTS"), EACH WARRANT INITIALLY ENTITLING THE HOLDER THEREOF TO PURCHASE 24.814 SHARES OF COMMON STOCK, $0.01 PAR VALUE, OF SOLUTIA INC. (THE "COMMON STOCK"). PRIOR TO THE SEPARATION DATE, THE WARRANTS EVIDENCED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED OR EXCHANGED SEPARATELY FROM, AND MAY BE TRANSFERRED OR EXCHANGED ONLY TOGETHER WITH, THE NOTES. B-2 Exhibit C CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF WARRANTS Re: Warrants to Purchase Common Stock (the "Warrants") of Solutia Inc. -------- This Certificate relates to Warrants held by ---------- (the "Transferor"). - ---------------- ---------- The Transferor has requested the Warrant Agent by written order to exchange or register the transfer of a Warrant or Warrants. In connection with such request and in respect of each such Warrant, the Transferor hereby certifies that the Transferor is familiar with the Warrant Agreement dated as of July 9, 2002, between Solutia Inc., a Delaware corporation, and HSBC Bank USA, as warrant agent (the "Warrant Agreement"), relating to the above captioned Warrants and the ----------------- restrictions on transfers thereof as provided in Section 6 of such Warrant Agreement, and that the transfer of this Warrant does not require registration under the Securities Act of 1933, as amended (the "Act"), --- because*: / / Such Warrant is being acquired for the Transferor's own account, without transfer (in satisfaction of Section 6(a)(y)(A) of the Warrant Agreement). / / Such Warrant is being transferred to a qualified institutional buyer (as defined in Rule 144A under the Act) in reliance on Rule 144A or is being transferred in accordance with Regulation S under the Act. / / Such Warrant is being transferred in accordance with Rule 144 under the Act. / / Such Warrant is being transferred in reliance on and in compliance with an exemption from the registration requirements of the Act, other than Rule 144A or Rule 144 or Regulation S under the Act. An opinion of counsel to the effect that such transfer does not require registration under the Act accompanies this Certificate. C-1 --------------------------------- [INSERT NAME OF TRANSFEROR] By: ----------------------------- Date: ----------------------------- *Check applicable box. C-2 Exhibit D [Form of Transferee Letter of Representation in Connection with Transfers to Institutional Accredited Investors] HSBC Bank USA. 452 Fifth Avenue New York, NY 10018 Attn: Harriet Drandoff Ladies and Gentlemen: In connection with our proposed purchase of warrants to purchase Common Stock, par value $0.01 per share (the "Securities"), of ---------- Solutia Inc. (the "Company"), we confirm that: ------- 1. We understand that the Securities have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and, unless so registered, may not be offered, -------------- sold or otherwise transferred except as permitted in the following sentence. We agree on our own behalf and on behalf of any investor account for which we are purchasing Securities to offer, sell or otherwise transfer such Securities prior to the date which is two years after the later of the date of original issue and the last date on which the Company or any affiliate of the Company was the owner of such Securities (or any predecessor Securities) (the "Resale Restriction Termination Date") only (a) to the Company, ----------------------------------- (b) pursuant to a registration statement which has been declared effective under the Securities Act, (c) for so long as the Securities are eligible for resale pursuant to Rule 144A under the Securities Act, to a person we reasonably believe is a qualified institutional buyer as defined in Rule 144A (a "QIB") that --- purchases for its own account or for the account of a QIB and to whom notice is given that the transfer is being made in reliance on Rule 144A, (d) pursuant to offers and sales that occur outside the United States within the meaning of Regulation S under the Securities Act, (e) to an institutional "accredited investor" within the meaning of subparagraph (a)(1), (a)(2), (a)(3) or (a)(7) of Rule 501 under the Securities Act that is acquiring the Securities for its own account or for the account of such an institutional "accredited investor", for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act, or (f) pursuant to another available exemption from the registration requirements of the Securities Act, subject in each of the foregoing cases to any requirement of law that the disposition of our property or the property of such investor account or accounts be at all times within our or their control and to compliance with any applicable state securities laws. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. If any resale or other transfer of the Securities is proposed to be made pursuant to clause (e) above prior to the Resale Restriction Termination Date, the transferor shall deliver a letter from the transferee substantially in the form of this letter to the warrant agent under the Warrant Agreement pursuant to which the Securities were issued (the "Warrant Agent") which shall provide, among other ------------- things, that the transferee is an D-1 institutional "accredited investor" within the meaning of subparagraph (a)(1), (a)(2), (a)(3) or (a)(7) of Rule 501 under the Securities Act and that it is acquiring such Securities for investment purposes and not for distribution in violation of the Securities Act. The Warrant Agent and the Company reserve the right prior to any offer, sale or other transfer prior to the Resale Restriction Termination Date of the Securities pursuant to clause (c), (d), (e) or (f) above to require the delivery of a written opinion of counsel, certifications, and or other information satisfactory to the Company and the Warrant Agent. 2. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (a)(2), (a)(3) or (a)(7) of Regulation D under the Securities Act) purchasing for our own account or for the account of such an institutional "accredited investor", and we are acquiring the Securities for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act and we have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Securities, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment for an indefinite period. 3. We are acquiring the Securities purchased by us for our own account or for one or more accounts as to each of which we exercise sole investment discretion. D-2 4. You and your counsel are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, ---------------------------------- (Name of Purchaser) By: ------------------------------ Date: ---------------------------- Upon transfer the Securities would be registered in the name of the new beneficial owner as follows: Name: --------------------------------- Address: ------------------------------ Taxpayer ID Number: ------------------- D-3 Exhibit E [Form of Transferee Letter of Representation in Connection with Transfers Pursuant to Regulation S] HSBC Bank USA. 452 Fifth Avenue New York, NY 10018 Attn: Harriet Drandoff Ladies and Gentlemen: In connection with our proposed purchase of warrants (the "Securities") to purchase Common Stock, par value $0.01 per share, of ---------- Solutia Inc. (the "Company"), we confirm that such sale has been effected ------- pursuant to and in accordance with Regulation S under the Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent -------------- that: (1) The undersigned certifies that it is not a U.S. person and is not acquiring the Securities for the account or benefit of any U.S. person. (2) The undersigned agrees to resell the Securities only in accordance with the provisions of Regulation S, pursuant to registration under the Securities Act of 1933 or pursuant to an available exemption from registration. (3) The undersigned agrees not to engage in hedging transactions with regard to the Securities unless in compliance with the Securities Act. You and your counsel are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Defined terms used herein without definition have the respective meanings provided in Regulation S under the Securities Act. Very truly yours, (Name of Purchaser) By: ------------------------------------ E-1 Upon transfer the Securities would be registered in the name of the new beneficial owner as follows: Name: --------------------------------- Address: ------------------------------ Taxpayer ID Number: ------------------- E-2 EX-10.(B) 5 exh10pb.txt PROTOCOL AGREEMENT Exhibit 10(b) ------------- EXECUTION COPY PROTOCOL AGREEMENT THIS PROTOCOL AGREEMENT, dated as of July 1, 2002 (this "Protocol Agreement"), by and among Pharmacia Corporation, a Delaware ------------------ corporation, Solutia Inc., a Delaware corporation ("Solutia"), and Monsanto ------- Company, a Delaware corporation. W I T N E S S E T H: WHEREAS, Former Monsanto (as defined below) and Solutia are parties to that certain Distribution Agreement, dated as of September 1, 1997 (the "Distribution Agreement"), which was entered into in connection ---------------------- with the distribution of the common stock of Solutia to the stockholders of Former Monsanto (the "Solutia Distribution"); -------------------- WHEREAS, pursuant to the Distribution Agreement, among other things, Former Monsanto assigned and transferred the Chemical Assets (as defined in the Distribution Agreement) to Solutia and Solutia assumed all of the Chemical Liabilities (as defined in the Distribution Agreement) of Former Monsanto; WHEREAS, pursuant to that certain Agreement and Plan of Merger, dated as of December 19, 1999 (the "Merger Agreement"), by and among ---------------- the former Monsanto Company (which is the Delaware corporation identified in the introductory paragraph of this Protocol Agreement as "Pharmacia Corporation" and which is referred to herein as either "Former Monsanto" or --------------- "Pharmacia," as the context requires), MP Sub, Incorporated ("Merger Sub") --------- ---------- and Pharmacia & Upjohn, Inc. ("PNU"), the parties agreed that Merger Sub --- would be merged with and into PNU with PNU surviving as a wholly owned subsidiary of Former Monsanto in the merger (the "Merger"); ------ WHEREAS, on February 9, 2000, the new Monsanto Company (which is the Delaware corporation identified in the introductory paragraph of this Protocol Agreement as "Monsanto Company" and which is referred to herein as either "New Monsanto" or "Monsanto") was incorporated as a wholly ------------ -------- owned subsidiary of Former Monsanto under the name "Monsanto Ag Company;" WHEREAS, on March 31, 2000, (i) the Merger was effective, (ii) Former Monsanto changed its name from "Monsanto Company" to "Pharmacia Corporation," and (iii) New Monsanto changed its name from "Monsanto Ag Company" to "Monsanto Company;" WHEREAS, on September 1, 2000, New Monsanto and Pharmacia entered into certain agreements, including that certain Separation Agreement, dated as of September 1, 2000 (the "Separation Agreement"), -------------------- pursuant to which, among other things, Pharmacia assigned and transferred certain assets related to its chemicals and agricultural businesses and certain other assets to New Monsanto and New Monsanto assumed certain liabilities relating thereto and all liabilities that were assumed by Solutia or any of its subsidiaries in connection with the Solutia Distribution to the extent that Solutia fails to pay, perform or discharge such liabilities; WHEREAS, on or about October 23, 2000, New Monsanto completed an initial public offering of its common stock in which New Monsanto sold approximately 15% of its issued and outstanding shares of common stock to the public; WHEREAS, Pharmacia currently owns approximately 84% of the issued and outstanding shares of common stock of New Monsanto; WHEREAS, Pharmacia has announced its intention to distribute its entire ownership interest in New Monsanto to the stockholders of Pharmacia or could take some other action that will result in Pharmacia no longer controlling New Monsanto (a "Possible Disposition"); and -------------------- WHEREAS, simultaneously with the execution of this Protocol Agreement, (i) the parties hereto entered into a certain Amendment to the Distribution Agreement (the "Distribution Agreement Amendment") -------------------------------- pursuant to which the assignment from Pharmacia to New Monsanto of certain assets and liabilities contemplated pursuant to the Separation Agreement (including the Distribution Agreement) was effectuated and the relationship among the parties was preserved as nearly as possible with the original intent and terms of the Distribution Agreement and (ii) Pharmacia and New Monsanto entered into that certain First Amendment to the Separation Agreement (the "Separation Agreement Amendment") subject to New Monsanto ------------------------------ obtaining approval thereof from the Special Committee of its Board of Directors ("New Monsanto Special Committee"); ------------------------------ WHEREAS, pursuant to the Distribution Agreement, as amended by the Distribution Agreement Amendment (the "Amended Distribution -------------------- Agreement"), Solutia agreed, among other things, to indemnify, defend and - --------- hold harmless the Monsanto Group (as defined in the Amended Distribution Agreement) from and against all Chemical Liabilities; WHEREAS, pursuant to its obligations under the Amended Distribution Agreement, Solutia has agreed to and has been defending Pharmacia in connection with Sabrina Abernathy, et al. v. Monsanto Company, et al., Case No. CV01832 (the "Litigation"); ---------- WHEREAS, a jury verdict has been returned in the Litigation with respect to the liability of Solutia and Pharmacia with respect to certain claims at issue in the Litigation and proceedings have commenced to determine the jury's verdict of damages on account of such liability; WHEREAS, pursuant to the Amended Distribution Agreement, Solutia is obligated, among other things, to post a bond in the Litigation in order to stay execution of any judgment against Solutia and/or Pharmacia pending appeal of any judgment (each, an "Appeal"); ------ WHEREAS, Solutia has requested that Pharmacia commit to posting a bond required to stay execution of any judgment in the Litigation pending an Appeal; WHEREAS, Pharmacia is willing to use commercially reasonable efforts to post a bond sufficient to stay the execution of any judgment against Pharmacia and/or Solutia in the Litigation pending any Appeal, upon the terms and conditions set forth herein. 2 NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained and intending to be legally bound hereby, the parties hereto agree as follows: Section 1. Each capitalized term used in this Protocol Agreement and not otherwise defined herein shall have the meaning ascribed thereto in the Amended Distribution Agreement. Section 2. This Protocol Agreement is a written, signed amendment and modification of (i) the Amended Distribution Agreement, in satisfaction of the requirements of Section 10.06 of the Amended Distribution Agreement and (ii) only in the event that it is approved by the Monsanto Special Committee as contemplated in Section 7 below, the Amended Separation Agreement (as defined below), in satisfaction of the requirements of Section 11.07 of the Amended Separation Agreement. Section 3. In the event that Solutia does not, within 5 days of any judgment, post a bond sufficient to stay the execution of any judgment rendered in the Litigation pending any Appeal, Pharmacia shall post such bond, provided that Pharmacia is able to obtain a bond upon commercially reasonable terms for a company of Pharmacia's financial conditions and resources and provided further that, as conditions precedent: (i) Solutia and New Monsanto each promptly and fully perform all duties, fulfill all obligations and meet all requirements set forth herein; and (ii) Solutia successfully completes the issuance and sale of Senior Secured Notes (the "Senior Notes") contemplated in Solutia's Preliminary Offering ------------ Memorandum dated June 18, 2002 ("POM"); and (iii) Solutia completes its --- refinancing plan and the proceeds from the sale of the Senior Notes that will be held in escrow by SOI Funding Corp. shall have been released to Solutia (other than in connection with any redemption of the Senior Notes) as part of Solutia's refinancing plan all upon such terms and conditions substantially as described in the POM and in all material respects as described in the Final Offering Memorandum relating to the Senior Notes. Section 4. Solutia shall provide immediate notice of (and in no event more than three business days after) any judgment in the Litigation that may be appealed or that may give rise to a right by a party to the Litigation to enforce such judgment against Solutia, Pharmacia or any other person or to execute such judgment against any asset of Solutia, Pharmacia or any other person. Section 5. In the event Pharmacia posts a bond pursuant to Section 3 above, and subject to Section 7 below, the following shall apply: (a) Solutia shall reimburse or pay directly, and in no event later than thirty (30) days after receipt of an invoice or bill, Pharmacia's and/or New Monsanto's Expenses (as defined hereinafter). "Expenses" means all of Pharmacia's and/or new Monsanto's out-of-pocket -------- expenses in connection with obtaining any bond that are incurred no earlier than forty-five (45) days before the bond is posted, including, without limitation: (i) the premium due on the bond and/or the fees charged by the provider of any bond; (ii) the fees and expenses relating to any third-party credit enhancement related to the bond; (iii) all costs and expenses of securing Pharmacia's and/or New Monsanto's obligations with respect to the bond; and (iv) fees and expenses of financial advisors and attorneys retained by Pharmacia or New Monsanto in 3 connection with the foregoing. To the extent Solutia does not reimburse or pay directly Pharmacia's Expenses in accordance with this Section 5(a), New Monsanto shall reimburse or pay directly Pharmacia's Expenses within thirty (30) days after the written notice of Solutia's failure to reimburse or pay such expenses. (b) (i) If, pursuant to Section 3 above, Pharmacia is able to obtain a bond sufficient to stay the execution of any judgment rendered in the Litigation pending an Appeal without providing or posting any collateral or third-party credit enhancement ("Collateral"), then Solutia, New Monsanto and Pharmacia shall have shared control over decisions to compromise or settle any and all claims at issue, or arguably at issue, in any Appeal and/or the Litigation. If under this provision Solutia, New Monsanto and Pharmacia are unable to unanimously agree with respect to any decision concerning the compromise or settlement of any claim at issue, or arguably at issue, in any Appeal and/or the Litigation, then the agreement of any two of the three parties hereto shall be binding upon all parties hereto. If, pursuant to Section 3 above, Pharmacia is unable to obtain a bond sufficient to stay the execution of any judgment rendered in the Litigation pending an Appeal without providing Collateral, then control over decisions to compromise or settle any and all claims at issue, or arguably at issue, in any Appeal and/or the Litigation shall be determined pursuant to Sections 5(b)(ii)-(iv) below. (ii) If, pursuant to Section 3 above, Pharmacia is unable to obtain a bond sufficient to stay the execution of any judgment rendered in the Litigation pending an Appeal without providing Collateral, then Solutia shall have the first option to provide all Collateral necessary to obtain the bond as contemplated by Section 3 above. If Solutia exercises this option and provides all Collateral necessary for Pharmacia to post the bond, then Solutia shall have sole and exclusive right to compromise or settle on a commercially reasonable basis all claims at issue, or arguably at issue, in any Appeal and/or the Litigation and Solutia need not receive the consent or approval of Pharmacia or New Monsanto to settle all of the claims at issue, or arguably at issue, in any Appeal and/or the Litigation, provided that the settlement includes as a term thereof the delivery by the claimant(s) or plaintiff(s) to Pharmacia of a written release of Pharmacia, New Monsanto and Solutia from all liability in respect to the Litigation once payment of the settlement and fulfillment of any other obligations of the settlement have been effectuated. Solutia shall nevertheless have a duty of prior consultation with New Monsanto and Pharmacia concerning any settlement decision as set forth in Section 6 below. (iii) If, pursuant to Section 3 above, Pharmacia is unable to obtain a bond sufficient to stay the execution of any judgment rendered in the Litigation pending an Appeal without providing Collateral and Solutia does not exercise (or fails to exercise within five (5) business days after receiving a written request from Pharmacia) its first option as set forth in Section 5(b)(ii) above, then New Monsanto shall have the second option to provide all Collateral necessary to obtain the bond as contemplated by Section 3 above. If New Monsanto exercises this option and provides all Collateral necessary for Pharmacia to post the bond, then New Monsanto shall have sole and exclusive right to compromise or settle on a commercially reasonable basis all claims at issue, or arguably at issue, in any Appeal and/or the Litigation and New Monsanto need not receive the consent or approval of Pharmacia or Solutia to settle all of the claims at issue, or arguably at issue, in any Appeal and/or the Litigation, provided that the settlement includes as a term thereof the delivery by the claimant(s) or plaintiff(s) to Pharmacia and Solutia of a written release of Pharmacia, New Monsanto and Solutia from all liability in 4 respect to the Litigation once payment of the settlement and fulfillment of any other obligations of the settlement have been effectuated. New Monsanto shall nevertheless have a duty of prior consultation with Solutia and Pharmacia concerning any settlement strategies or decision as set forth in Section 6 below. (iv) If, pursuant to Section 3 above, Pharmacia is unable to obtain a bond sufficient to stay the execution of any judgment rendered in the Litigation pending an Appeal without providing Collateral and neither Solutia nor Monsanto exercises (or if both fail to exercise their respective options within five (5) business days after receiving a written request from Pharmacia) its option as set forth in Section 5(b)(ii) and (iii) above, then Pharmacia shall provide the Collateral necessary to obtain the bond as contemplated by Section 3 above. In such case, Pharmacia shall have sole and exclusive right to compromise or settle on a commercially reasonable basis any and all claims at issue, or arguably at issue, in any Appeal and/or the Litigation and need not receive the consent or approval of Solutia or New Monsanto to settle all or some of the claims at issue, or arguably at issue, in any Appeal and/or the Litigation, provided that the settlement includes as a term thereof delivery by the claimant(s) or plaintiff(s) to Solutia and New Monsanto of a written release of Pharmacia, New Monsanto and Solutia from all liability in respect to the Litigation once payment of the settlement and fulfillment of any other obligations of the settlement have been effectuated. Pharmacia shall nevertheless have a duty or prior consultation with New Monsanto and Solutia concerning any settlement strategies or decision. (c) In the event that any claims at issue, or arguably at issue, in any Appeal and/or the Litigation are settled, Solutia shall pay the full settlement amount and perform any obligations of Solutia and/or Pharmacia set forth in the settlement agreement. In the event that any claims at issue are not settled and a final, non-appealable judgment is entered against Solutia and/or Pharmacia, Solutia shall pay directly and otherwise fulfill all of Solutia's and Pharmacia's obligations pursuant to such judgment. To the extent that Solutia fails to promptly and fully meet its obligations with respect to the payment of any judgment or settlement or with respect to other obligations arising out of any settlement or judgment in any Appeal and/or the Litigation, Solutia shall enter into a consent judgment in favor of Pharmacia and New Monsanto against Solutia in the amount equal to the amount specified in the judgment or settlement minus any amount paid by Solutia in satisfaction of the judgment or settlement. To the extent that Solutia fails to promptly and fully meet its obligations with respect to the payment of any judgment or settlement or with respect to other obligations arising out of any settlement or judgment in any Appeal and/or the Litigation, New Monsanto agrees to pay, perform or discharge such liabilities and obligations when due and owing pursuant to the terms of the Separation Agreement, as amended by the Separation Agreement Amendment (the "Amended Separation Agreement"). To the extent that New Monsanto fails to ---------------------------- promptly and fully meet its obligations with respect to the payment of any judgment or settlement when due and owing or with respect to other obligations arising out of any settlement or judgment in any Appeal and/or the Litigation, New Monsanto shall enter into a consent judgment in favor of Pharmacia and against New Monsanto in the amount equal to the amount specified in the judgment or settlement minus any aggregate amount paid by Solutia and new Monsanto in satisfaction of the judgment or settlement. 5 (d) For purposes of any Appeal and settlement of any Appeal only, to the extent the rights, duties, commitments and obligations set forth in this Section 5 of the Protocol Agreement and the Power of Attorney attached hereto as Exhibit A differ from or conflict with the rights, duties, commitments and obligations of the parties as set forth in the Amended Distribution Agreement or in the Amended Separation Agreement, or any power of attorney granted in connection therewith, the rights, duties, commitments and obligations in this Section 5 shall supercede and take precedent over the rights, duties, commitments and obligations set forth in the Amended Distribution Agreement or the Amended Separation Agreement, or any power of attorney granted in connection therewith, as the case may be. (e) In the event that Solutia files or is subject to any voluntary or involuntary bankruptcy proceeding, Solutia's rights hereunder and Solutia's right to defend Pharmacia with respect to any Appeal and/or the Litigation and the power of attorney with respect thereto attached hereto as Exhibit A are automatically and immediately revoked. The parties further agree that consent from relief from any automatic stay under section 362 of the Untied States Bankruptcy Code is not necessary, but that should a court rule otherwise, Solutia hereby consents to the entry of an order granting relief from the stay in order to effectuate this paragraph and agrees to provide all necessary cooperation. The parties further agree that the Power of Attorney with respect to any Appeal and/or the Litigation shall be immediately revoked. Section 6. The power of attorney attached as Exhibit 4.03(e) to the Amended Distribution Agreement is hereby revoked and is of no further force or effect and is replaced by the power of attorney attached hereto as Exhibit A, which shall be executed by Pharmacia. Pursuant to the --------- power of attorney attached hereto as Exhibit A, the prosecution of any Appeal and continued defense of the Litigation shall be managed by Solutia at Solutia's expense. Solutia shall report to New Monsanto and Pharmacia all material developments concerning the Litigation and any Appeal and shall provide all information and documents reasonably requested by either New Monsanto or Pharmacia. At their expense, New Monsanto and Pharmacia may associate with and advise Solutia in the prosecution of any Appeal and continued defense of the Litigation and Solutia shall allow Pharmacia and New Monsanto to consult with and advise Solutia in connection with any decision or strategy in any Appeal and the Litigation. Solutia shall also fully inform Pharmacia and New Monsanto on an immediate basis and in writing of any settlement discussions regarding the Litigation and/or any Appeal and shall, subject to Section 5(b) above, consult fully with Pharmacia and New Monsanto concerning any settlement strategies or decision. Section 7. Solutia, Pharmacia and New Monsanto acknowledge and agree that this Protocol Agreement shall not be enforceable as to New Monsanto until the earlier of July 11, 2002 or the date upon which the New Monsanto Special Committee approves of the provisions of this Protocol Agreement and authorizes New Monsanto's execution of this Protocol Agreement. In the event that the New Monsanto Special Committee does not approve the provisions of, and does not authorize New Monsanto's execution of, this Protocol Agreement on or before July 11, 2002, then Solutia, Pharmacia and New Monsanto agree that New Monsanto will no longer be deemed to be a party under this Protocol Agreement and will have no rights or obligations hereunder, except that New Monsanto shall nevertheless retain the rights and obligations set forth in Section 5(b)(i) above. Furthermore, in said event, Solutia and Pharmacia 6 agree that, except with respect to Section 5(b)(i) above: (i) all references to New Monsanto in this Protocol Agreement (as well as any related text) shall be deemed deleted; (ii) Sections 5(b)(iii), 9 and 12 of this Protocol Agreement shall be deemed to be deleted in its entirety; (iv) Section 10 of this Protocol Agreement shall be deemed amended by deleting everything after the text that reads "including, without limitation, Article IV thereof". Section 8. Other than as provided herein, neither Pharmacia, New Monsanto nor Solutia has waived or compromised any of their respective rights under the Amended Distribution Agreement. In addition, the running of any limitations on the time for either Pharmacia, New Monsanto or Solutia to assert any claims related to the Litigation under the Amended Distribution Agreement is tolled until 120 days after final resolution of any Appeal. Section 9. Other than as provided herein, neither Pharmacia nor New Monsanto has waived or compromised any of their respective rights under the Amended Separation Agreement. In addition, the running of any limitations on the time for either Pharmacia or New Monsanto to assert any claims related to the Litigation under the Amended Separation Agreement is tolled until 120 days after final resolution of any Appeal. Section 10. Nothing herein is intended to nor shall be construed to waive or limit any of the commitments and obligations of Solutia to Pharmacia, New Monsanto or the Monsanto Group (and each of their Representatives and Affiliates) set forth in the Amended Distribution Agreement including, without limitation, Article IV thereof, or to waive or limit any commitments and obligations of New Monsanto to Pharmacia or the Pharmacia Group (and each of their Representatives and Affiliates) set forth in the Amended Separation Agreement including, without limitation, Article III thereof. Section 11. Provided that Solutia promptly and fully complies with, as conditions precedent, the commitments, obligations and duties set forth above, Pharmacia and New Monsanto each agree that Solutia's failure to post a bond pending an Appeal does not constitute a breach of Solutia's commitments and obligations to Pharmacia or New Monsanto under the Amended Distribution Agreement. Section 12. Provided that New Monsanto promptly and fully complies with, as conditions precedent, the commitments, obligations and duties set forth above, Pharmacia agrees that New Monsanto's failure to post a bond pending an Appeal does not constitute a breach of New Monsanto's commitments and obligations to Pharmacia under the Amended Separation Agreement. Section 13. Except as otherwise agreed between New Monsanto and Pharmacia, each party hereto will pay its own costs and expenses incident to its negotiation and preparation of this Protocol Agreement, including the fees, expenses and disbursement of its counsel. Section 14. This Protocol Agreement shall be governed by and construed in accordance with the laws of the State of Delaware (other than the laws regarding choice of laws and conflicts of laws) as to all matters, including matters of validity, construction, effect, performance and remedies. 7 Section 15. This Protocol Agreement may be amended, modified or supplemented only by a written agreement signed by all of the parties hereto. Section 16. This Protocol Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their successors, but neither this Protocol Agreement nor any of the rights, interests and obligations hereunder shall be assigned by any party hereto. Section 17. This Protocol Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 18. Any provision of this Protocol Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Each party acknowledges that money damages would be an inadequate remedy for any breach of the provisions of this Protocol Agreement and agrees that the obligations of the parties hereunder shall be specifically enforceable. [SIGNATURE PAGE IS NEXT PAGE] 8 IN WITNESS WHEREOF, the parties hereto have caused this Protocol Agreement to be duly executed as of the date first above written. PHARMACIA CORPORATION, a Delaware corporation By: /s/ Richard T. Collier ------------------------------------ Name: Richard T. Collier Title: SVP & General Counsel MONSANTO COMPANY, a Delaware corporation By: /s/ Hendrick A. Verfaillie ------------------------------------ Name: Hendrick A. Verfaillie Title: Chairman and Chief Executive Officer SOLUTIA INC., a Delaware corporation By: /s/ Robert A. Clausen ------------------------------------ Name: Robert A. Clausen Title: Sr VP and Chief Financial Officer 9 EXECUTION COPY EXHIBIT A FORM OF POWER OF ATTORNEY: LITIGATION KNOW ALL MEN BY THESE PRESENTS: That Pharmacia Corporation, a corporation organized and existing under the laws of the State of Delaware or the applicable member of the Monsanto Group ("Pharmacia") has made, constituted and appointed and by these presents does make, constitute and appoint, Solutia Inc., a corporation organized and existing under the laws of the State of Delaware or the applicable member of the Chemicals Group ("Solutia") its true and lawful agent and attorney, for Pharmacia and in Pharmacia's name, place and stead, for all purposed with respect to Third Party Claims as to which Solutia has agreed to indemnify Pharmacia, and such claims against Third parties which continue to be held by Pharmacia in trust for Solutia, such Third Party Claims and claims against Third Parties being collectively referred to herein as "Claims"; and its attorney shall have, subject to the provisions of the Protocol Agreement, dated July 1, 2002 (the "Protocol Agreement"), to which this power of attorney is entered, full power and authorization to take all action with respect to such Claims as Pharmacia can take and which said attorney, acting through its officers or their delegates, who in each case, acting alone, in his or her sole discretion, think best, including without limitation, (i) to represent Pharmacia with respect to such Claims for so long as such Claims are unresolved; (ii) to appear in Pharmacia's name and to execute, deliver and file all pleadings, motions and other filings, at trial, on appeal, or in a proceeding, through counsel retained by Solutia or by officers of Solutia or their delegates, acting alone, or otherwise; (iii) to assert or waive any or all rights with respect to such Claims; (iv) to engage in all phases of discovery with respect to such Claims, including without limitation, to take depositions, defend depositions and propound or respond to other discovery requests, such as interrogatories or requests for production of documents; (iv) to direct and accept service of process with respect to such Claims; (v) to execute and deliver affidavits as may be necessary or desirable with respect to such Claims; (vi) to agree to and to represent Pharmacia in alternative resolution proceedings, including arbitration or mediation of Claims; (viii) to discuss or negotiate settlement agreements and releases with Third Parties with respect to such Claims on such terms and conditions as Solutia thinks best; (ix) to execute, deliver and, if needed, file any and all settlement agreements, releases and other agreements, documents and instruments as may be required and any and all modifications thereof; and (x) to obtain and post bonds pending appeal; hereby giving and granting to Pharmacia's said attorney full power and authority to do and perform all and every act and thing whatsoever necessary to be done in the premises as fully to all intents and purposes as Pharmacia might or could do, hereby ratifying and confirming all that its said attorney may do pursuant to this power. Pharmacia hereby gives and grants to its said attorney full power and authority to do and perform all and every act and thing whatsoever necessary to be done in the premises, in order fully to carry out and effectuate the authority herein granted, as fully to all intents and purposes as Pharmacia might or could do if acting through its own officers or delegates, and Pharmacia hereby ratifies and confirms all that its said attorney may do pursuant to this power. Pharmacia hereby further authorizes and empowers its said attorney to substitute and appoint in the place and stead of its said attorney, or to employ agents or sub-agents as Solutia thinks best, one or more attorney or attorneys to exercise for Pharmacia as its attorney or attorneys any and all of the powers and authorities hereby conferred; and to revoke such appointment or appointments from time to time, and to substitute or appoint any other or others in the place of such attorney or attorneys as Solutia shall from time to time think fit. Unless specifically defined herein, capitalized terms shall have the meaning defined in the Distribution Agreement, as amended. The term "Distribution Date" when used herein means ----------------- September 1, 1997. The term "Governmental Authority" when used herein means ---------------------- any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, the NYSE, or other regulatory, administrative or governmental authority. The term "Third Party" when used herein means any ----------- individual, partnership, joint venture, corporation, trust, limited liability company, unincorporated organization or a government or any department or agency thereof other than Pharmacia or Solutia or their wholly owned direct or indirect subsidiaries or affiliates. The term "Third Party Claims" when used herein means any ------------------ claim, suit, arbitration, inquiry, proceeding or investigation by or before any court, any governmental or other regulatory or administrative agency or commission or any arbitration tribunal asserted by a Third Party. All references in this document to "its attorney" or ------------ "its said attorney" or "its true and lawful attorney," or similar designations ----------------- ---------------------------- shall refer to Solutia Inc. [or the appropriate member of the Chemicals Group] and each and every person to whom Solutia delegates such power and also to each and every substitute or successor attorney-in-fact appointed under the terms of this instrument as herein provided. All references in this document to "its attorney" or ------------ "its said attorney" or "its true and lawful attorney," or similar designations ----------------- ---------------------------- shall refer not only to Solutia or its delegates but also to each and every substitute or successor attorney-in-fact appointed under the terms of this instrument as herein provided. In the event that Pharmacia posts a bond as contemplated in the Protocol Agreement, this power of attorney shall automatically terminate without notice, provided, however, this power of attorney may be renewed for additional thirty (30) day periods at the written request of Pharmacia. All persons dealing with Pharmacia's said attorney shall be protected in relying upon a copy of this instrument and shall be protected in relying upon the written certificate of 11 Solutia as to the Claims which are the subject of this power of attorney, the identity and authority or its officers, their delegates and any substitute or successor appointed pursuant to the terms hereof, and/or as to whether any of the persons authorized to act hereunder is unavailable so to act, so as to authorize some other person to act hereunder, and Pharmacia hereby declares that as against it and all persons claiming under it everything which its attorney shall do or cause to be done pursuant hereto shall be valid and effectual in favor of any person claiming the benefit hereof who at the time of the doing thereof shall have relied upon any such certification made by Solutia. If required by applicable law or if Solutia desires for any reason to do so, an executed copy of this Power of Attorney shall be filed for record with the Governmental Authority wherein the Claim is pending or such other place as required by law or whether Solutia thinks best. Pharmacia authorizes Solutia to make all such filings. This instrument may be executed in any number of counterparts, and all of said counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, I have hereunto set my hand and seal this day of , 2002. ----- -------------------- PHARMACIA CORPORATION ----------------------------------- By: Title: ATTEST: - ------------------------------------ 12 STATE OF NEW JERSEY ) ) COUNTY OF ) ---------------- On this day of , 2002, before me ----- ----------------- the undersigned, a Notary Public, in and for the County and State aforesaid, personally appeared , to me known to be the ------------------------------- person described in and who executed the foregoing instrument, and acknowledged that he/she executed the same as his/her free act and deed. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal in , the day and year last above ------------------ written. ------------------------------------------------ Notary Public in and for said County and State My Commission expires: - ----------------------------- 13 EX-10.(C) 6 exh10pc.txt SECOND AMENDED AND RESTATED CREDIT AGREEMENT Exhibit 10(c) ------------- [Execution Copy] =============================================================================== SECOND AMENDED AND RESTATED CREDIT AGREEMENT Dated as of July 25, 2002 between SOLUTIA INC., as Borrower THE INITIAL LENDERS NAMED HEREIN, as Initial Lenders BANK OF AMERICA, N.A., as Syndication Agent CITIBANK, N.A., as Administrative Agent and SOLOMON SMITH BARNEY INC. AND BANC OF AMERICA SECURITIES LLC, as Co-Lead Arrangers and Co-Book Managers =============================================================================== T A B L E O F C O N T E N T S - - - - - - - - - - - - - - -
Page ---- ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms.....................................................................2 SECTION 1.02. Computation of Time Periods..............................................................28 SECTION 1.03. Accounting Terms and Determinations......................................................28 SECTION 1.04. Currencies; Currency Equivalents.........................................................28 SECTION 1.05. Terms Generally..........................................................................29 ARTICLE II AMOUNTS AND TERMS OF ADVANCES AND LETTERS OF CREDIT SECTION 2.01. The Advances.............................................................................29 SECTION 2.02. Making the Advances......................................................................30 SECTION 2.03. Terms of Revolving Credit Advances.......................................................32 SECTION 2.04. Fees.....................................................................................32 SECTION 2.05. Termination and Reduction of Commitments.................................................33 SECTION 2.06. Repayment of Advances; Evidence of Debt..................................................34 SECTION 2.07. Interest on Advances, Etc................................................................35 SECTION 2.08. Interest Rate Determination..............................................................36 SECTION 2.09. Optional Conversion of Advances..........................................................36 SECTION 2.10. Prepayments, Etc.........................................................................37 SECTION 2.11. Increased Costs..........................................................................41 SECTION 2.12. Illegality...............................................................................43 SECTION 2.13. Payments and Computations................................................................44 SECTION 2.14. Notations on the Notes...................................................................46 SECTION 2.15. Taxes....................................................................................46 SECTION 2.16. Sharing of Payments, Etc.................................................................49 SECTION 2.17. Borrowings by Designated Borrowers.......................................................49 SECTION 2.18. Letters of Credit........................................................................50 ARTICLE III GUARANTEE SECTION 3.01. The Guarantee............................................................................53 SECTION 3.02. Obligations Unconditional................................................................53 SECTION 3.03. Reinstatement............................................................................54 SECTION 3.04. Subrogation..............................................................................55 SECTION 3.05. Remedies.................................................................................55 -ii- SECTION 3.06. Instrument for the Payment of Money......................................................55 SECTION 3.07. Continuing Guarantee.....................................................................55 ARTICLE IV CONDITIONS TO EFFECTIVENESS AND LENDING SECTION 4.01. Conditions Precedent to Restatement......................................................55 SECTION 4.02. Conditions Precedent to Each Extension of Credit.........................................60 SECTION 4.03. Determinations Under Section 4.01........................................................61 ARTICLE V REPRESENTATIONS AND WARRANTIES SECTION 5.01. Representations and Warranties of the Company............................................61 SECTION 5.02. Representation and Warranty of the Lenders...............................................65 ARTICLE VI COVENANTS OF THE COMPANY SECTION 6.01. Affirmative Covenants....................................................................65 SECTION 6.02. Negative Covenants.......................................................................73 SECTION 6.03. Financial Covenants......................................................................82 ARTICLE VII EVENTS OF DEFAULT SECTION 7.01. Events of Default........................................................................83 ARTICLE VIII THE ADMINISTRATIVE AGENT SECTION 8.01. Authorization and Action.................................................................86 SECTION 8.02. Administrative Agent's Reliance, Etc.....................................................86 SECTION 8.03. Citibank and Affiliates..................................................................87 SECTION 8.04. Lender Credit Decision...................................................................87 SECTION 8.05. Indemnification..........................................................................87 SECTION 8.06. Successor Administrative Agent...........................................................87 SECTION 8.07. The Syndication Agent....................................................................88 -iii- ARTICLE IX MISCELLANEOUS SECTION 9.01. Amendments, Etc..........................................................................88 SECTION 9.02. Notices, Etc.............................................................................90 SECTION 9.03. No Waiver, Remedies......................................................................91 SECTION 9.04. Costs and Expenses; Indemnification, Etc.................................................91 SECTION 9.05. Right of Set-off.........................................................................92 SECTION 9.06. Binding Effect...........................................................................92 SECTION 9.07. Assignments and Participations, Register.................................................93 SECTION 9.08. Governing Law............................................................................96 SECTION 9.09. Execution in Counterparts................................................................96 SECTION 9.10. Jurisdiction, Etc........................................................................97 SECTION 9.11. Judgment Currency........................................................................97 SCHEDULES --------- Schedule 1 - Certain Existing Liens Schedule 2 - Adjusted EBITDA Charges Schedule 3 - Real Property Schedule 4 - Existing Debt Schedule 5 - Existing Restrictive Agreements Schedule 6 - Intellectual Property Schedule 7 - Designated Letters of Credit EXHIBITS -------- Exhibit A-1 - Form of Revolving Credit Note Exhibit A-2 - Form of Term Note Exhibit B - Form of Notice of Revolving Credit Borrowing Exhibit C - Form of Assignment and Acceptance Exhibit D-1 - Form of Opinion of Counsel for the Company Exhibit D-2 - Form of Opinion of Special New York Counsel to the Company Exhibit E - Form of Opinion of Special New York Counsel to the Administrative Agent Exhibit F - Form of Opinion of Local Counsel to the Obligors Exhibit G-1 - Form of Designation Letter Exhibit G-2 - Form of Termination Letter Exhibit H - Form of Non-Sharing Intercreditor Agreement Exhibit I - Form of Non-Sharing Security and Guarantee Agreement Exhibit J - Form of Guarantee and Assumption Agreement Exhibit K - Form of Sharing Intercreditor Agreement Exhibit L - Form of Sharing Security Agreement Exhibit M - Form of Junior Intercreditor Agreement Exhibit N - Form of Junior Security Agreement Exhibit O - Form of Terms of Subordination
-iv- SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of July 25, 2002 between SOLUTIA INC., a Delaware corporation (the "Company"), ------- the banks (each an "Initial Lender" and, collectively, the "Initial -------------- ------- Lenders") listed on the signature pages hereof, BANK OF AMERICA, N.A., as - ------- Syndication Agent (in such capacity, together with its successors in such capacity, the "Syndication Agent"), and CITIBANK, N.A. ("Citibank"), as ----------------- -------- administrative agent (in such capacity, together with its successors in such capacity, the "Administrative Agent"), as herein provided. -------------------- PRELIMINARY STATEMENTS Capitalized terms used in these Preliminary Statements and not otherwise defined have the meanings assigned to them in Section 1.01. The Company, the Initial Lenders, the Syndication Agent and the Administrative Agent are parties to an Amended and Restated Five Year Credit Agreement dated as of November 23, 1999 (as amended by Amendment No. 1 thereto dated as of November 21, 2000, Amendment No. 2 thereto dated as of February 1, 2001 and Amendment No. 3 thereto dated as of November 15, 2001, the "Existing Credit Agreement") providing, subject to the terms and ------------------------- conditions thereof, for the making of advances in an aggregate principal amount not exceeding $800,000,000 at any one time outstanding. The parties hereto now agree to restructure the Existing Credit Agreement in its entirety into a Second Amended and Restated Credit Agreement, among other things to extend the commitments thereunder, to convert a portion of the Advances outstanding thereunder into term advances hereunder of the Company and certain of its subsidiaries, to permit the continued extension of credit by means of loans and letters of credit in an aggregate principal or face amount (including such term advances) up to but not exceeding $600,000,000 at any one time outstanding to finance the working capital requirements (including intercompany loans) and other general corporate purposes (including capital expenditures) of the Company and its subsidiaries, to modify certain covenants and to make certain other changes to the Existing Credit Agreement, all on the terms and conditions set forth herein, it being the intention of the parties hereto that the Advances outstanding under the Existing Credit Agreement on the Restatement Date shall continue and remain outstanding and not be deemed to have been repaid on the Restatement Date. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto hereby agree that the Existing Credit Agreement shall (subject to the satisfaction of the conditions precedent specified in Section 4.01) be restructured and, accordingly, shall be amended and restated to read as set forth herein. Credit Agreement ---------------- - 2 - ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms. As used in this --------------------- Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Adjusted EBITDA" means, for any period, the sum, for the --------------- Company and its Consolidated Subsidiaries (determined on a Consolidated basis without duplication in accordance with GAAP), of the following: (a) net income (calculated before taxes, Interest Expense, extraordinary and unusual items and income or loss attributable to equity in Affiliates (other than Affiliates that are Specified Joint Ventures or Consolidated Subsidiaries)) for such period plus (b) depreciation and amortization (to the extent deducted in determining net income) for such period plus (c) impairments of goodwill (to the extent deducted in determining net income) for such period; provided that: (1) charges taken and reserves established by the Company, its Consolidated Subsidiaries and Specified Joint Ventures in connection with (a) restructuring of existing operations, (b) maintenance of reserves for self-insurance and environmental remediation, (c) asset impairments and (d) pension settlements (all on or before December 31, 2001), in each case in the respective amounts and categories set forth on Schedule 2 hereto shall be added back to net income for such period (to the extent such charges and reserves were deducted in determining net income for such period); (2) gains or losses in connection with the sales of the Astaris LLC joint venture and the Flexsys L. P. joint venture shall be deducted from or added back to net income for such period (to the extent such gains or losses were added or deducted in determining net income for such period); and (3) losses in connection with the anticipated pay-down of the Company's obligations under the Co-gen Participation Agreement and the Co-gen Lease shall be added back to net income for such period (to the extent such losses were deducted in determining net income for such period). "Administrative Agent" has the meaning specified in the -------------------- recital of parties to this Agreement. "Administrative Agent's Account" means, for each Currency, ------------------------------ an account, in respect of such Currency, designated by the Administrative Agent in a notice to the Company and the Lenders. "Administrative Questionnaire" means an administrative ---------------------------- questionnaire in a form supplied by the Administrative Agent. "Advance" means a Revolving Credit Advance or Term Advance. ------- Credit Agreement ---------------- - 3 - "Affected Borrower" has the meaning specified in Section ----------------- 2.10(d). "Affected Lender" has the meaning specified in Section --------------- 2.12(a). "Affiliate" means, as to any Person, any other Person --------- that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. For purposes of this definition, the term "control" ------- (including the terms "controlling", "controlled by" and "under ----------- ------------- ----- common control with") of a Person means the possession, direct or ------------------- indirect, of the power to vote 5% or more of the Voting Stock of such Person or to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Stock, by contract or otherwise. "Agent" has the meaning specified in Section 8.05. ----- "Applicable Lending Office" means, with respect to each ------------------------- Lender, such Lender's Domestic Lending Office in the case of a Base Rate Advance and such Lender's Eurocurrency Lending Office in the case of a Eurocurrency Rate Advance. "Applicable Margin" means, for any day, (a) with respect ----------------- to any Base Rate Advance, 4.75% per annum and (b) with respect to any Eurocurrency Rate Advance (whether denominated in Dollars or Euros), 5.75% per annum, provided that each of such margins (i.e. 4.75% and 5.75%) shall increase by .50% on the date 12 months after the Restatement Date and by an additional .50% (for a total increase of 1.00%) on the date 18 months after the Restatement Date. "Applicable Percentage" of any amount means, with respect --------------------- to any Revolving Credit Lender at any time, a fraction (expressed as a percentage) the numerator of which is the amount of such Lender's Revolving Credit Commitment as in effect at such time (or, if the Revolving Credit Commitments shall have expired or been terminated, as last in effect), and the denominator of which is the aggregate Revolving Credit Commitments as in effect at such time (or, if the Revolving Credit Commitments shall have expired or been terminated, as last in effect). "Assignment and Acceptance" means an assignment and ------------------------- acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, in substantially the form of Exhibit C hereto. "Astaris Administrative Agent" means Bank of America, ---------------------------- N.A., in its capacity, together with its successors in such capacity, as Administrative Agent under the Astaris Credit Agreement. "Astaris Credit Agreement" means the Five Year Credit ------------------------ Agreement dated as of September 14, 2000 among Astaris LLC, the lenders named therein and the Astaris Administrative Agent. References herein to the "Astaris Credit Agreement" shall, except as otherwise provided herein, be references to the same as modified and supplemented and in effect from time to time. Credit Agreement ---------------- - 4 - "Astaris Guaranty Agreement" means the Guaranty Agreement -------------------------- dated as of September 14, 2000 by the Company in favor of Astaris LLC and in favor of the lenders party to the Astaris Credit Agreement and the Astaris Administrative Agent. References herein to the "Astaris Guaranty Agreement" shall, except as otherwise provided herein, be references to the same as modified and supplemented and in effect from time to time. "Astaris Lenders" has the meaning specified in the --------------- Non-Sharing Intercreditor Agreement. "Available Amount" of any Letter of Credit means the ---------------- maximum amount available to be drawn under such Letter of Credit (assuming compliance with all conditions to drawing specified therein). "Bank of America" means Bank of America, N.A. --------------- "Base Rate" means a fluctuating interest rate per annum in --------- effect from time to time, which rate per annum shall at all times be equal to the highest of: (a) the rate of interest announced publicly by Citibank in New York, New York, from time to time, as Citibank's base rate; (b) the sum (adjusted to the nearest 1/16 of 1% or, if there is no nearest 1/16 of 1%, to the next higher 1/16 of 1%) of (i) 1/2 of 1% per annum, plus (ii) the rate obtained by dividing (A) the latest three-week moving average of secondary market morning offering rates in the United States of America for three-month certificates of deposit of major United States of America money market banks, such three-week moving average (adjusted to the basis of a year of 360 days) being determined weekly on each Monday (or, if such day is not a Business Day, on the next succeeding Business Day) for the three-week period ending on the previous Friday by Citibank on the basis of such rates reported by certificate of deposit dealers to and published by the Federal Reserve Bank of New York or, if such publication shall be suspended or terminated, on the basis of quotations for such rates received by Citibank from three New York certificate of deposit dealers of recognized standing selected by Citibank, by (B) a percentage equal to 100% minus the average of the daily percentages specified during such three-week period by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, but not limited to, any emergency, supplemental or other marginal reserve requirement) for Citibank with respect to liabilities consisting of or including (among other liabilities) three-month U.S. dollar non-personal time deposits in the United States of America, plus (iii) the average during such three-week period of the annual assessment rates estimated by Citibank for determining the then current annual assessment payable by Citibank to the Federal Deposit Insurance Corporation (or any successor) for insuring U.S. dollar deposits of Citibank in the United States of America; and (c) 1/2 of 1% per annum above the Federal Funds Rate. Credit Agreement ---------------- - 5 - "Base Rate Advance" means an Advance that bears interest ----------------- as provided in Section 2.07(a)(i). "Borrowers" means, at any time, collectively, the Company --------- (both as a Borrower and as guarantor under Article III of Advances made to the Designated Borrowers) and each Designated Borrower. "Borrowing" means a Revolving Credit Borrowing or a Term --------- Borrowing. "Business Combination" means any 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 corporation. "Business Day" means a day of the year on which banks are ------------ not required or authorized by law to close in New York City and, if the applicable Business Day relates to any Eurocurrency Rate Advances denominated in any Currency, on which dealings are carried on in the London interbank market for such Currency. "Capital Expenditures" means, for any period, expenditures -------------------- (including the aggregate amount of Capitalized Lease Obligations incurred during such period) made by the Company or any of its Subsidiaries to acquire or construct fixed assets, plant and equipment (including renewals, improvements and replacements, but excluding normal replacements and maintenance which are properly charged to current operations) during such period computed in accordance with GAAP. For the purposes hereof, (i) the acquisition of any capital asset by the Company or any of its Subsidiaries constituting a reinvestment of proceeds of any casualty event or condemnation, shall constitute a "Capital Expenditure" hereunder only to the extent of any consideration paid by the Company and its Subsidiaries in excess of such proceeds so reinvested and (ii) payments by the Company of principal in respect of the Co-gen Instruments shall not constitute "Capital Expenditures" hereunder. "Capitalized Lease Obligation" means, with respect to any ---------------------------- Person for any period, an obligation of such Person to pay rent or other amounts under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP; and the amount of such obligation shall be the capitalized amount shown on the balance sheet of such Person as determined in accordance with GAAP. "Capital Markets Transaction" means, collectively, (i) the --------------------------- incurrence by the Company or any of its Subsidiaries of any Debt after the Restatement Date, other than any such Debt permitted under clauses (i) through (viii) or clause (xi), of Section 6.02(f) and (ii) any Equity Issuance by the Company. "Capital Stock" means, with respect to any Person, any and ------------- all shares, interests, participations, rights in, or other equivalents (however designated and whether voting and/or non-voting) of, such Person's capital stock or other ownership interests (including, without limitation, partnership interests (whether general or limited) or limited liability company membership interests), whether outstanding on the Restatement Date or issued after the Restatement Date, and any and all rights (other than any evidence of Credit Agreement ---------------- - 6 - indebtedness), warrants or options exchangeable for or convertible into such capital stock or other ownership interests, as the case may be. "Casualty Event" means any "Event of Loss" under and as -------------- defined in any Mortgage. "Change of Control" means the occurrence of any one or ----------------- more of the following events: (a) the acquisition by any individual, entity or group (within the meanings of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person or Group") of beneficial --------------- ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (x) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (y) 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 that, for purposes of this ---------- paragraph (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition by the Company, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iii) any acquisition by any corporation pursuant to a transaction which complies with clauses (i) and (ii) of paragraph (c) below; or (b) individuals who, as of the date hereof, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at --------------- least a majority of the Board of Directors of the Company; provided 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 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 of Directors of the Company; or (c) without limiting the obligation of the Company to obtain the consent of the Majority Lenders to any such transaction not permitted under Section 6.02(b), consummation by the Company of a Business Combination, in each case unless following such Business Combination: (i) 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 50% 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 corporation resulting from such Business Combination (including a corporation which as a result of such transaction owns the Company or all or Credit Agreement ---------------- - 7 - 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, (ii) no Person or Group (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 30% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation 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 of Directors of the Company, providing for such Business Combination; or (d) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. "Citibank" has the meaning specified in the recital of -------- parties to this Agreement. "Co-gen Agent" means Citibank, N.A., in its capacity, ------------ together with its successors in such capacity, as Agent under the Co-gen Participation Agreement. "Co-gen Certificates" means the Trust Certificates issued ------------------- by State Street Bank and Trust Company, as trustee of the 1992 Pensacola Cogeneration Trust. "Co-gen Guaranty Agreement" means the Amended and Restated ------------------------- Instrument Guaranty dated as of April 24, 1998 by the Company in favor of State Street Bank and Trust Company and in favor of the purchasers party to the Co-gen Participation Agreement. References herein to the "Co-gen Guaranty Agreement" shall, except as otherwise provided herein, be references to the same as modified and supplemented and in effect from time to time. "Co-gen Instruments" means the Co-gen Participation ------------------ Agreement, the Co-gen Guaranty Agreement, the Co-gen Lease, the Co-gen Notes and the Co-gen Certificates. "Co-gen Lease" means the Amended and Restated Lease dated ------------ as of April 24, 1998 between the trustee referred to therein and the Company. References herein to the "Co-gen Lease" shall, except as otherwise provided herein, be references to the same as modified and supplemented and in effect from time to time. "Co-gen Notes" means the Series A Trust Notes and Series B ------------ Trust Notes issued by State Street Bank and Trust Company, as trustee of the 1992 Pensacola Cogeneration Trust. Credit Agreement ---------------- - 8 - "Co-gen Participation Agreement" means the Amended and ------------------------------ Restated Participation Agreement dated as of April 24, 1998 among the Company, State Street Bank and Trust Company, as trustee, certain financial institutions named as purchasers therein and the Co-gen Agent. References herein to the "Co-gen Participation Agreement" shall, except as otherwise provided herein, be references to the same as modified and supplemented and in effect from time to time. "Collateral Account" shall have the meaning specified in ------------------ the Non-Sharing Security and Guarantee Agreement. "Collateral Agent" means Citibank, N.A., in its capacity ---------------- as Collateral Agent under the Non-Sharing Intercreditor Agreement. "Collateral Trustee" means HSBC Bank USA, in its capacity ------------------ as Collateral Trustee under the Sharing Intercreditor Agreement. "Commitment" means a Revolving Credit Commitment or Term ---------- Commitment. "Commitment Fee" has the meaning specified in Section -------------- 2.04(a). "Consolidated" refers to the consolidation of the accounts ------------ of the Company and its Subsidiaries in accordance with generally accepted accounting principles, including principles of consolidation, consistent with those applied in the preparation of the financial statements referred to in Section 5.01(e)(i). "Consolidated Net Worth" means, at any time, the sum for ---------------------- the Company and its Consolidated Subsidiaries (determined on a Consolidated basis without duplication in accordance with GAAP), the amount of capital stock plus the amount of surplus and retained earnings (or, in the case of a surplus or retained earnings deficit, minus the amount of such deficit). "Consolidated Subsidiary" means a Subsidiary of the ----------------------- Company, the accounts of which in accordance with generally accepted accounting principles are consolidated with those of the Company. "Convert", "Conversion" and "Converted" each refers to a ------- ---------- --------- conversion of Advances of one Type denominated in Dollars into Advances of the other Type denominated in Dollars pursuant to Section 2.08 or 2.09. "Credit Agreement Obligations" means the principal and ---------------------------- interest on the Advances made by the Lenders to the Borrowers and all other amounts from time to time owing to the Lenders or the Administrative Agent by the Borrowers under the Loan Documents. "Currency" means Dollars or Euros. -------- "Current Disposition" has the meaning specified in Section ------------------- 2.10(e). Credit Agreement ---------------- - 9 - "Debt" of any Person means, without duplication: (a) ---- indebtedness of such Person for borrowed money, (b) obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) obligations of such Person to pay the deferred purchase price of property or services (other than trade accounts payable arising, and accrued expenses incurred, in the ordinary course of business so long as such trade accounts payable are payable on customary trade terms or on other trade terms that are more advantageous to the Company), (d) Capitalized Lease Obligations of such Person and (e) obligations of such Person under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (a) through (d) above. "Debt to Adjusted EBITDA Ratio" means, at any date, the ----------------------------- ratio of: (a) (i) Debt of the Company and its Consolidated Subsidiaries on a Consolidated basis as of such date minus (ii) the amount of cash cover on such date for Letters of Credit and Designated Letters of Credit pursuant to Section 2.10(h) or 2.10(i) to (b) Adjusted EBITDA for the Rolling Period ending on or most recently ended prior to such date. "Default" means any Event of Default or any event that ------- would constitute an Event of Default but for the requirement that notice be given or time elapse or both. "Designated Borrower" means any wholly owned Subsidiary of ------------------- the Company as to which a Designation Letter has been delivered to the Administrative Agent and as to which a Termination Letter has not been delivered to the Administrative Agent in accordance with Section 2.17. "Designated Letter of Credit Exposure" means, at any date, ------------------------------------ the sum of (i) the aggregate undrawn face amount of Designated Letters of Credit on such date plus (ii) the aggregate outstanding unpaid reimbursement obligations in respect of Designated Letters of Credit on such date. "Designated Letters of Credit" has the meaning specified ---------------------------- in the Non-Sharing Intercreditor Agreement. "Designated Letter of Credit Obligations" has the meaning --------------------------------------- specified in the Non-Sharing Security and Guarantee Agreement. "Designation Letter" has the meaning specified in Section ------------------ 2.17(a). "Disposition" means any sale, assignment, transfer or ----------- other disposition of any property (whether now owned or hereafter acquired) by the Company or any of its Subsidiaries to any other Person, excluding any sale, assignment, transfer or other disposition of any property (x) sold or disposed of in the ordinary course of business and on ordinary business terms or (y) in an amount not in excess of $1,000,000. Credit Agreement ---------------- - 10 - "Disqualified Stock" means any Capital Stock that, by its ------------------ terms (or by the terms of any security into which it is convertible, or for which it is exchangeable, in each case at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part, on or prior to August 13, 2004, provided that any Capital Stock which would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require the repurchase or redemption of such Capital Stock upon the occurrence of a sale, transfer or other disposition of assets or a change of control shall not constitute Disqualified Stock by reason of (a) an asset sale redemption requirement if such redemption is required only to the extent such sale proceeds are not used to prepay Debt or are not redeployed in the issuer's business or (b) any change of control redemption requirement if a Change of Control exists in respect of such change of control. "Dividend Payment" means any dividend or other ---------------- distribution (whether in cash, securities or other property) with respect to any shares of any class of capital stock of the Company or any of its Subsidiaries, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such shares of capital stock of the Company or any option, warrant or other right to acquire any such shares of capital stock of the Company. "Dollar Equivalent" means with respect to any Borrowing ----------------- denominated in Euros, the amount of Dollars that would be required to purchase the amount of Euros of such Borrowing on the date two Business Days prior to the date of such Borrowing (or, in the case of any determination made under Section 2.10(c) or redenomination under Section 2.13(e), on the date of determination or redenomination therein referred to), based upon the spot selling rate at which the Administrative Agent offers to sell Euros for Dollars in the London foreign exchange market at approximately 11:00 a.m. (London time) for delivery two Business Days later. "Dollars" or "$" refers to lawful money of the United ------- - States of America. "Domestic Lending Office" means, with respect to any ----------------------- Lender, the office of such Lender specified as its "Domestic Lending Office" in the Administrative Questionnaire of such Lender or in the Assignment and Acceptance pursuant to which it became a Lender, or such other office of such Lender as such Lender may from time to time specify to the Company and the Administrative Agent. "Domestic Subsidiary" means any Subsidiary of the Company ------------------- organized under the laws of a State of the United States of America. "Eligible Assignee" means (i) a Lender; (ii) an Affiliate ----------------- of a Lender; (iii) a commercial bank organized under the laws of the United States of America, or any State thereof, and having total assets in excess of $5,000,000,000; (iv) a savings and loan association or savings bank organized under the laws of the United States of America, or any State thereof, and having total assets in excess of $3,000,000,000; (v) a commercial Credit Agreement ---------------- - 11 - bank organized under the laws of any other country that is a member of the Organization for Economic Cooperation and Development or has concluded special lending arrangements with the International Monetary Fund associated with its General Arrangements to Borrow or of the Cayman Islands, or a political subdivision of any such country, and having total assets in excess of $5,000,000,000, so long as such bank is acting through a branch or agency located in the country in which it is organized or another country that is described in this clause (v); (vi) a finance company, insurance company or other financial institution or fund (whether a corporation, partnership, trust or other entity) that is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and having total assets in excess of $3,000,000,000; and (vii) any other Person approved by the Administrative Agent and the Company (provided that no approval -------- of the Company shall be required during the continuance of a Default or Event of Default), such approval not to be unreasonably withheld or delayed; provided that neither the Company nor an Affiliate of the Company shall qualify as an Eligible Assignee. "Entitled Person" has the meaning specified in Section --------------- 9.11. "Environmental Claim" means, with respect to any Person, ------------------- any written notice, claim, demand or other written communication (collectively, a "claim") by any other Person alleging or asserting ----- such Person's liability for investigatory costs, cleanup costs, governmental response costs, damages to natural resources or other property, personal injuries, fines or penalties arising out of, based on or resulting from (i) the presence, or Release into the environment, of any Regulated Material at any location, whether or not owned by such Person, or (ii) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. The term "Environmental Claim" shall include any claim by any governmental authority for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and any claim by any third party seeking damages (including punitive damages), contribution, indemnification, cost recovery, compensation or injunctive relief resulting from the presence of Regulated Materials or arising from alleged injury or threat of injury to health, safety or the environment. "Environmental Laws" means any and all applicable laws and ------------------ regulations relating to the protection of the environment, including laws relating to emissions, discharges, releases, spills and disposal of material into the environment (e.g., air, surface water, groundwater and the land). "Environmental Permit" means any permit, license or other -------------------- governmental approval required under any Environmental Laws. "Equity Issuance" means (a) any issuance or sale by the --------------- Company or any of its Subsidiaries after the Restatement Date of (i) any of its capital stock, (ii) any warrants or options exercisable in respect of its capital stock (other than any warrants or options issued to directors, officers or employees of the Company or any of its Subsidiaries pursuant to employee benefit plans established in the ordinary course of business and any capital stock of the Company or any of its Subsidiaries issued upon the exercise of such Credit Agreement ---------------- - 12 - warrants or options) or (iii) any other security or instrument representing an equity interest (or the right to obtain any equity interest) in the Company or any of its Subsidiaries or (b) the receipt by the Company or any of its Subsidiaries after the Restatement Date of any capital contribution (whether or not evidenced by any equity security issued by the recipient of such contribution); provided that Equity Issuance shall not include (x) any such issuance or sale by the Company or any of its Subsidiaries to the Company or any Wholly Owned Subsidiary of the Company, (y) any capital contribution by the Company or any Wholly Owned Subsidiary of the Company to the Company or any Subsidiary of the Company, or (z) any issuance of capital stock pursuant to "anti-dilution" provisions applicable to capital stock outstanding at the time of such issuance. "ERISA" means the Employee Retirement Income Security Act ----- of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA Affiliate" means any Person that for purposes of --------------- Title IV of ERISA is a member of the Company's controlled group, or under common control with the Company, within the meaning of Section 414 of the Internal Revenue Code. "ERISA Event" means (a) the occurrence of a reportable ----------- event, within the meaning of Section 4043 of ERISA, that would have a material adverse effect with respect to any Plan unless the 30-day notice requirement with respect to such event has been waived by the PBGC; (b) the application for a minimum funding waiver with respect to a Plan; (c) the provision by the administrator of any Plan of a notice of intent to terminate such Plan pursuant to Section 4041(c) of ERISA; (d) the cessation of operations at a facility of the Company or any of its ERISA Affiliates in the circumstances described in Section 4062(e) of ERISA; (e) the failure by the Company or any of its ERISA Affiliates to make a payment to a Plan if the conditions for the imposition of a lien under Section 302(f)(1) of ERISA are satisfied; (f) the adoption of an amendment to a Plan requiring the provision of security to such Plan, pursuant to Section 307 of ERISA; or (g) the institution by the PBGC of proceedings to terminate a Plan, pursuant to Section 4042 of ERISA, or the occurrence of any event or condition described in Section 4042 of ERISA that could constitute grounds for the termination of, or the appointment of a trustee to administer, a Plan. "Euro Equivalent" means with respect to any amount in --------------- Dollars, the amount of Euros that could be purchased with such amount of Dollars using the reciprocal of the foreign exchange rate(s) specified in the definition of "Dollar Equivalent", as determined by the Administrative Agent. "Eurocurrency Lending Office" means, with respect to any --------------------------- Lender, the office of such Lender specified as its "Eurocurrency Lending Office" in the Administrative Questionnaire of such Lender or in the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Company and the Administrative Agent. Credit Agreement ---------------- - 13 - "Eurocurrency Liabilities" has the meaning assigned to ------------------------ that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurocurrency Rate" means for any Interest Period for each ----------------- Eurocurrency Rate Advance comprising part of the same Borrowing denominated in any Currency, an interest rate per annum equal to the rate per annum obtained by dividing (i) the rate appearing on the Screen at approximately 11:00 a.m. (London time) two Business Days before the first day of such Interest Period, as the Eurocurrency Rate for deposits denominated in such Currency with a maturity compatible to such Interest Period, by (ii) a percentage equal to 100% minus the Eurocurrency Rate Reserve Percentage for such Interest Period. In the event that such rate is not available on the Screen at such time for any reason, then the Eurocurrency Rate for such Interest Period shall be the rate at which deposits in such Currency in the amount of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m. (London time) two Business Days before the first day of such Interest Period. "Eurocurrency Rate Advance" means an Advance that bears ------------------------- interest as provided in Section 2.07(a)(ii). "Eurocurrency Rate Reserve Percentage" for any Interest ------------------------------------ Period for all Eurocurrency Rate Advances comprising part of the same Borrowing means the reserve percentage applicable two Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on Eurocurrency Rate Advances is determined) having a term equal to such Interest Period. "Europe" means the countries of Austria, Benelux, Denmark, ------ Finland, France, Germany, Greece, Ireland, Italy, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. "European Borrower" means, collectively, Solutia Germany ----------------- and the Swiss Borrowers. "Euros" means the single currency of participating member ----- states of the European Union. "Events of Default" has the meaning specified in Section ----------------- 7.01. "Exchange Act" means the Securities Exchange Act of 1934, ------------ as amended. "Excess Funds" has the meaning specified in Section ------------ 6.01(n). Credit Agreement ---------------- - 14 - "Existing Credit Agreement" has the meaning specified in ------------------------- the Preliminary Statements to this Agreement. "Existing Mortgaged Facilities" means the facilities of ----------------------------- the Company located in or near Decatur, Alabama, Indian Orchard, Massachusetts, Trenton, Michigan, Greenwood, South Carolina and Alvin, Texas, each of which is subject to a Non-Sharing Mortgage in favor of the Collateral Agent as security for, inter alia, the obligations of the Company under the Existing Credit Agreement. "Existing Notes Indentures" means, collectively, the ------------------------- indenture and/or the fiscal agency agreement, as applicable, pursuant to which the following notes or debentures of the Company or Solutia Europe, as applicable, have been issued: the 2002 Notes, the 7.375% debentures due 2027, the 6.72% debentures due 2037 and the 6.25% euro notes due 2005, as in effect on the date hereof and without giving effect to any modifications or supplements after the date hereof. "Federal Funds Rate" means, for any period, a fluctuating ------------------ interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "GAAP" means the generally accepted accounting principles ---- in the United States of America. "German Security Documents" means, collectively, one or ------------------------- more assignments, security agreements and other instruments from time to time executed and delivered by Solutia Germany (in each case as the same shall be modified and supplemented and in effect from time to time) and creating Liens for the benefit of the Administrative Agent and the Lenders as security for the obligations of Solutia Germany hereunder covering all of its property, plant, equipment, inventory, receivables and all material patents of Solutia Germany used in connection with production at the facilities applied for or issued in the United States of America or Europe and included in such property, plant and equipment so pledged by Solutia Germany, and all material trademarks of Solutia Germany registered in the United States of America or Europe and, to the extent not requiring third-party consent, other intellectual property of Solutia Germany, in each case excluding those jurisdictions where obtaining such Liens is not practicable, or where the costs of obtaining such Liens outweigh the benefits of obtaining the Lien, in the determination of the Administrative Agent. "Guaranteed Obligations" has the meaning specified in ---------------------- Section 3.01. Credit Agreement ---------------- - 15 - "Hedging Agreement" means any interest rate protection ----------------- agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "Hedging Obligations" has the meaning specified in the ------------------- Non-Sharing Security and Guarantee Agreement. "Immaterial Subsidiary" means (a) Solutia Management --------------------- Company, Inc. (but only so long as it is not a Wholly Owned Subsidiary of the Company) and Solutia Investments LLC (but only so long as its sole assets consist of (x) claims against the Company and Solutia Europe, provided that such claim is subject to the terms of subordination attached as Exhibit O and (y) assets of insignificant value, including its name), and (b) any Domestic Subsidiary (including, if applicable, Solutia Management Company, Inc. and Solutia Investments LLC) whose aggregate assets (measured by book value), as a percentage of the total consolidated assets of the Company and its Subsidiaries, are less than 1%. "Indemnification Percentage" means, with respect to any -------------------------- Lender, the percentage of the total Revolving Credit Exposures, outstanding Term Advances and unused Commitments hereunder for all Lenders represented by the aggregate amount of such Lender's Revolving Credit Commitment and Term Advances. "Indemnified Party" has the meaning specified in Section ----------------- 9.04(b). "Information" has the meaning specified in Section ----------- 5.01(j)(i). "Intellectual Property Security Documents" means one or ---------------------------------------- more assignments, pledge agreements, applications, or other similar security documents executed by the Company or the applicable Subsidiary Guarantor in order to effect the pledges of the following intellectual property: (a) all material patents, if any, of the Company and the Subsidiary Guarantors used in connection with production at the Mortgaged Facilities applied for or issued in the United States of America or Europe, (b) all material trademarks of the Company and the Subsidiary Guarantors registered in the United States of America or Europe, including, but not limited to, (1) trademarks used in the CPFilms Inc. product line, (2) the Saflex, Keepsafe, Saflex Inside, Keepsafe Maximum, Llumar, Vista and Gila trademarks used in the performance films segment, (3) the Vydyne, Wear-Dated, Ascend, Ultron, ThermaSealed and Acrilan trademarks used in the integrated nylons segment and (4) the Resimene, Gelva, Skydrol, Therminol, Dequest and Skykleen trademarks used in the specialty products segment, in the case of each of the foregoing clauses (1) through (4) excluding those jurisdictions where the costs of obtaining such a lien outweigh the benefits of obtaining the lien in the determination of the Agent, (c) the Vanceva and Liquishield trademarks and (d) to the extent not requiring third-party consent, all material software and software licenses, rights, manuals, process formulae, production process diagrams and designs used in connection with production at the Mortgaged Facilities, as contemplated by the Non-Sharing Security and Guarantee Agreement. Credit Agreement ---------------- - 16 - "Interest Coverage Ratio" means, at any date, the ratio of ----------------------- (a) Adjusted EBITDA for the Rolling Period ending on or most recently ended prior to such date to (b) Interest Expense for such Rolling Period. "Interest Expense" means, for any period, the sum, for the ---------------- Company and its Consolidated Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), of all interest in respect of Debt (including the interest component of any payments in respect of Capitalized Lease Obligations) accrued or capitalized during such period (whether or not actually paid during such period). "Interest Period" means, for each Eurocurrency Rate --------------- Advance comprising part of the same Borrowing, the period commencing on the date of such Eurocurrency Rate Advance or the date of the Conversion of any Base Rate Advance into such Eurocurrency Rate Advance and ending on the last day of the period selected by the Company pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Company pursuant to the provisions below. The duration of each such Interest Period shall be one, two, three or six months (or, with respect to such portion of any Eurocurrency Rate Advance denominated in Euros that is scheduled to be repaid on the Revolving Credit Commitment Termination Date or Term Maturity Date, as applicable, a period of less than one month's duration) commencing on the date of such Advance and ending on the Revolving Credit Commitment Termination Date or Term Maturity Date, as applicable, as the Company (on its own behalf and on behalf of all other Borrowers) may, upon notice received by the Administrative Agent not later than 11:00 a.m. (New York City time) on the third Business Day prior to the first day of such Interest Period, select; provided that: (i) the Company may not select any Interest Period for any Revolving Credit Advance that ends after the Revolving Credit Commitment Termination Date, and may not select any Interest Period for any Term Advance that ends after the Term Maturity Date; (ii) Interest Periods commencing on the same date for Eurocurrency Rate Advances comprising part of the same Borrowing shall be of the same duration; (iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided that, if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; (iv) whenever the first day of any Interest Period, other than an Interest Period pertaining to a Eurocurrency Rate Advance denominated in Euros that ends on the Revolving Credit Commitment Termination Date or Term Maturity Date, as applicable, that is permitted to be of less than one month's duration as provided in this definition, occurs on a day of an initial calendar month for which Credit Agreement ---------------- - 17 - there is no numerically corresponding day in the calendar month that succeeds such initial calendar month by the number of months equal to the number of months in such Interest Period, such Interest Period shall end on the last Business Day of such succeeding calendar month; and (v) notwithstanding the foregoing, the Interest Periods for the initial Term Advances made by the Lenders to the Designated Borrowers pursuant to Section 2.01(b) shall have the durations specified in the last sentence of said Section. "Internal Revenue Code" means the Internal Revenue Code of --------------------- 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "Investment" means, for any Person: (a) the acquisition ---------- (whether for cash, property, services or securities or otherwise) of capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person or any agreement to make any such acquisition (including any "short sale" or any sale of any securities at a time when such securities are not owned by the Person entering into such sale); (b) the making of any deposit with, or advance, loan or other extension of credit to, any other Person (including the purchase of property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such property to such Person), but excluding any such advance, loan or extension of credit arising in connection with the sale of inventory or supplies by such Person in the ordinary course of business on customary terms; (c) the entering into of any guarantee of, or other contingent obligation with respect to, Debt or other liability of any other Person and (without duplication) any amount committed to be advanced, lent or extended to such Person; or (d) the entering into of any Hedging Agreement. "Junior Intercreditor Agreement" means the Junior ------------------------------ Intercreditor Agreement substantially in the form of Exhibit M hereto between the Company, each of the Subsidiary Guarantors, the Collateral Agent and HSBC Bank USA, as trustee under the 2009 Notes Indenture. "Junior Security Agreement" means the Junior Security ------------------------- Agreement substantially in the form of Exhibit N hereto between the Company, each of the Subsidiary Guarantors, the Collateral Agent and HSBC Bank USA, as trustee under the 2009 Notes Indenture. "Junior Security Documents" means, collectively, the ------------------------- Junior Intercreditor Agreement and the Junior Security Agreement. "L/C Issuer" means Citibank, together with its successors ---------- and assigns in the capacity of L/C Issuer. "L/C Related Documents" means this Agreement and each --------------------- other agreement or instrument relating to any Letter of Credit. References herein to the "L/C Related Documents" shall, except as otherwise provided herein, be references to the same as modified and supplemented and in effect from time to time. Credit Agreement ---------------- - 18 - "Lenders" means the Initial Lenders listed on the ------- signature pages hereof and each institution that shall become a party hereto pursuant to Section 9.07(a), (b) or (d). "Letter of Credit Exposure" means, at any time, the sum of ------------------------- (a) the aggregate Available Amount of all outstanding Letters of Credit at such time plus (b) the aggregate amount of all disbursements under Letters of Credit that have not yet been reimbursed by or on behalf of the Company at such time. The Letter of Credit Exposure of any Lender at any time shall be its Applicable Percentage of the total Letter of Credit Exposure at such time. "Letters of Credit" has the meaning specified in Section ----------------- 2.18(a). "Lien" means any lien, security interest or other charge ---- or encumbrance of any kind, or any other type of preferential arrangement, including the lien or retained security title of a conditional vendor and any easement, right of way or other encumbrance on title to real property. "Loan Documents" means, collectively, this Agreement, the -------------- L/C Related Documents, the Notes, each Designation Letter, the Junior Security Documents and the Security Documents. "Make-Whole Obligations" has the meaning specified in the ---------------------- Non-Sharing Security and Guarantee Agreement. "Majority Lenders" means at any time Lenders having ---------------- Revolving Credit Exposures, outstanding Term Advances and unused Commitments representing more than 66-2/3% of the sum of the total Revolving Credit Exposures, outstanding Term Advances and unused Commitments at such time. The "Majority Revolving Credit Lenders" --------------------------------- means Lenders having Revolving Credit Exposures and unused Revolving Credit Commitments representing more than 66-2/3% of the total Revolving Credit Exposures and unused Revolving Credit Commitments. The "Majority Term Lenders" means Lenders having Term --------------------- Advances representing more than 66-2/3% of the total Term Advances. "Margin Stock" has the meaning specified in Regulation U ------------ of the Board of Governors of the Federal Reserve System. "Martinsville Facility" means the production facility of --------------------- CPFilms Inc. located in or near Martinsville, Virginia. "Material Adverse Effect" means a material adverse effect ----------------------- on (a) the business, or the consolidated financial condition or results of operations, of the Company and its Subsidiaries, taken as a whole or (b) the legality, validity or enforceability of this Agreement, the other Loan Documents or any Note. "Material Contract" means any contractual, legal or other ----------------- obligation binding upon the Company or a Material Subsidiary under which a default in performance by the Company or such Material Subsidiary would have a Material Adverse Effect. Credit Agreement ---------------- - 19 - "Material Property" means any building, structure or other ----------------- facility, together with the land upon which it is erected and fixtures comprising a part thereof, used primarily for manufacturing, the gross book value of which on the date as of which such determination is being made exceeds 1% of the gross property, plant and equipment of the Company as shown in its Consolidated financial statements, provided that any property which, in the opinion of the Company, is not of material importance to the business of the Company and its Consolidated Subsidiaries, taken as a whole, shall not be deemed to be a Material Property. "Material Subsidiary" means, at any time: ------------------- (i) any Consolidated Subsidiary that, on a consolidated basis with its Subsidiaries, has: (a) at least 5% (in the case of Solutia Europe, Solutia UK or Monchem International, Inc.) or 10% (in the case of each other Consolidated Subsidiary) of the total Consolidated assets of the Company and its Consolidated Subsidiaries (determined as of the last day of the most recent fiscal quarter of the Company); or (b) at least 5% (in the case of Solutia Europe or Solutia UK or Monchem International, Inc.) or 10% (in the case of each other Consolidated Subsidiary) of the Consolidated net sales of the Company and its Consolidated Subsidiaries for the twelve-month period ending on the last day of the most recent fiscal quarter of the Company; and (ii) each European Borrower (but only for so long as such European Borrower is a Borrower hereunder). "Mortgaged Facilities" means the Existing Mortgaged -------------------- Facilities and the New Mortgaged Facilities. "Mortgages" means, collectively, the Non-Sharing Mortgages --------- and the Sharing Mortgages. "Multiemployer Plan" means a multiemployer plan, as ------------------ defined in Section 4001(a)(3) of ERISA, to which the Company or any of its ERISA Affiliates is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "Multiple Employer Plan" means a single employer plan, as ---------------------- defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the Company (or its predecessor's chemicals business) or any of its ERISA Affiliates and at least one Person other than the Company (or its predecessor's chemicals business) and its ERISA Affiliates or (b) was so maintained and in respect of which the Company (or its predecessor's chemicals business) or any of its ERISA Affiliates could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated. Credit Agreement ---------------- - 20 - "Net Cash Proceeds" means: ----------------- (i) in the case of any Disposition, the aggregate amount of all cash payments received by the Company and its Subsidiaries directly or indirectly in connection with such Disposition; provided that (a) Net Cash Proceeds shall be net of (i) the amount of any legal, title and recording tax expenses, commissions and other fees and expenses paid by the Company and its Subsidiaries in connection with such Disposition and (ii) any Federal, state and local income or other taxes estimated to be payable by the Company and its Subsidiaries as a result of such Disposition and (b) Net Cash Proceeds shall be net of any repayments by the Company or any of its Subsidiaries of Debt to the extent that (i) such Debt is secured by a Lien on the property that is the subject of such Disposition (other than a Lien that is junior to any Lien of the Lenders in such property) and (ii) the transferee of (or holder of a Lien on) such property requires that such Debt be repaid as a condition to the purchase of such property; (ii) in the case of any Capital Markets Transaction, the aggregate amount of all cash received by the Company and its Subsidiaries in respect of such Capital Markets Transaction (including any consideration allocable to the warrants issued in connection with the issuance of the Senior Secured Notes under the 2009 Notes Indenture) net of reasonable commissions, fees and expenses incurred by the Company and its Subsidiaries in connection therewith; and (iii) in the case of any Casualty Event, the "Loss Proceeds" under and as defined in the respective Mortgage or Mortgages covering the Mortgaged Facility affected by such Casualty Event. "New Mortgaged Facilities" means the Martinsville Facility ------------------------ and the Pensacola Facility. "New Notes Indenture" means any indenture pursuant to ------------------- which any senior debt securities of the Company are issued in connection with a Capital Markets Transaction permitted hereunder which, at the time of such issuance, is designated by the Company as a "New Notes Indenture" for purposes hereof pursuant to Section 6.01(o). The parties hereto acknowledge that the 2009 Notes Indenture is a "New Notes Indenture". "Non-Sharing Intercreditor Agreement" means the Restated ----------------------------------- Intercreditor and Collateral Agency Agreement substantially in the form of Exhibit H hereto between the Company, each of the Subsidiary Guarantors, the Administrative Agent, the Astaris Administrative Agent, the Co-gen Agent and the Collateral Agent. "Non-Sharing Mortgages" means, collectively, one or more --------------------- instruments of Mortgage, Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing executed by the Company or CPFilms Inc. in favor of the Collateral Agent for the benefit of the holders of the Non-Sharing Obligations (or in favor of a trustee for the benefit of the Collateral Agent and the holders of the Non-Sharing Obligations), covering the Existing Mortgaged Facilities and securing the Non-Sharing Obligations. Credit Agreement ---------------- - 21 - "Non-Sharing Obligations" means, collectively, the ----------------------- obligations of the Company (and of the Subsidiary Guarantors in respect of their Guarantee under the Non-Sharing Security and Guarantee Agreement) to each Lender (and, in respect of any Hedging Obligations, any affiliate of a Lender that shall have entered into the respective hedging agreement giving rise to such Hedging Obligations), each Astaris Lender and the Administrative Agent hereunder and the Astaris Administrative Agent and their respective successors and assigns in respect of the Credit Agreement Obligations, the Make-Whole Obligations, the Synthetic Lease Obligations, the Designated Letter of Credit Obligations, the Hedging Obligations and any Term Loan Facility Obligations. "Non-Sharing Security and Guarantee Agreement" means the -------------------------------------------- Restated Security and Guarantee Agreement substantially in the form of Exhibit I hereto between the Company, each of the Subsidiary Guarantors and the Collateral Agent. "Non-Sharing Security Documents" means, collectively, the ------------------------------ Non-Sharing Security and Guarantee Agreement, the Non-Sharing Mortgages, the Intellectual Property Security Documents, the German Security Documents, the Swiss Security Documents, the Non-Sharing Intercreditor Agreement and all Uniform Commercial Code financing statements required by this Agreement or any of the foregoing to be filed with respect to the security interests in personal property and fixtures created pursuant thereto, in each case as from time to time amended. "Non-U.S. Lender" has the meaning specified in Section --------------- 2.15(e). "Note" means a Revolving Credit Note or a Term Note. ---- "Notice of Issuance" has the meaning specified in Section ------------------ 2.18(b)(i). "Notice of Revolving Credit Borrowing" has the meaning ------------------------------------ specified in Section 2.02(a). "Obligors" means, collectively, the Borrowers and the -------- Subsidiary Guarantors. "Other Taxes" has the meaning specified in 2.15(b). ----------- "Ownership Interest" in (or of) any corporation, ------------------ partnership, joint venture, limited liability company, trust or estate means (a) issued and outstanding capital stock having ordinary voting power in the election of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) an interest in the capital or profits of such partnership, joint venture or limited liability company or (c) a beneficial interest in such trust or estate. "PBGC" means the Pension Benefit Guaranty Corporation. ---- "Penndot Proceeding" means the proceeding currently ------------------ pending in the Commonwealth Court of Pennsylvania styled as "Pennsylvania Department of General Services, et. al. v. United States Mineral Products Company, et. al." Credit Agreement ---------------- - 22 - "Pensacola Facility" means the manufacturing facility of ------------------ the Company located in or near Pensacola, Florida. "Permitted Investments" shall mean: (a) direct obligations --------------------- of the United States of America, or of any agency thereof, or obligations guaranteed as to principal and interest by the United States of America, or of any agency thereof, in either case maturing not more than 90 days from the date of acquisition thereof; (b) certificates of deposit or time deposits issued by any bank or trust company organized under the laws of the United States of America or any state thereof and having capital, surplus and undivided profits of at least $500,000,000, maturing not more than 90 days from the date of acquisition thereof; (c) fully collateralized repurchase agreements with a term of not more than 90 days for securities described in clause (a) of this definition and entered into with a financial institution satisfying the criteria described in clause (b) of this definition; and (d) commercial paper rated A-1 or better or P-1 by Standard & Poor's Ratings Services, a division of McGraw-Hill Companies, Inc., or Moody's Investors Services, Inc., respectively, maturing not more than 90 days from the date of acquisition thereof; in each case so long as the same (x) provide for the payment of principal and interest (and not principal alone or interest alone) and (y) are not subject to any contingency regarding the payment of principal or interest. "Person" means an individual, partnership, corporation ------ (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company or other entity, or a government or any political subdivision or agency thereof. "Plan" means a Single Employer Plan or a Multiple Employer ---- Plan. "Post-Restatement Date Information" has the meaning --------------------------------- specified in Section 5.01(j)(iv). "Principal Payment Dates" means (i) the Quarterly Dates ----------------------- falling on or nearest to December 31, 2002, December 31, 2003 and June 30, 2004 and (ii) the Term Maturity Date. "Quarterly Dates" means the last Business Day of March, --------------- June, September and December in each year, the first of which shall be the first such day after the date hereof. "Register" has the meaning specified in Section 9.07(c). -------- "Regulated Materials" means all explosive or radioactive ------------------- substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "Release" means any release, spill, emission, leaking, ------- pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment, including the movement of Regulated Materials through ambient air, soil, surface water, ground water, wetlands, land or subsurface strata. Credit Agreement ---------------- - 23 - "Relevant Date" means, with respect to any Non-Sharing ------------- Obligations and any applicable Senior Lien Limit, (i) in the case of the Senior Lien Limit in effect on the Restatement Date (i.e., $236,000,000), November 30, 2001 and (ii) in the case of the Senior Lien Limit as increased on any date after the date hereof, the date of such increase. "Relevant Prepayment Percentage" means, at any time, the ------------------------------ percentage corresponding to the fraction (a) the numerator of which shall be each of the following, respectively, (i) in the case of the Lenders, the sum of the then outstanding Revolving Credit Exposures, outstanding Term Advances and unused Commitments under this Agreement then outstanding, (ii) in the case of the lenders under the Astaris Credit Agreement, the Make-Whole Obligations then due and payable, (iii) in the case of the purchasers under the Co-gen Participation Agreement, the Synthetic Lease Obligations then due and payable, (iv) in the case of the issuers of the Designated Letters of Credit, Designated Letter of Credit Obligations having unreimbursed drawings, or obligations to provide cover for Designated Letter of Credit Obligations, then due and payable, (v) in the case of the holders of any Hedging Obligations, Hedging Obligations then due and payable or (vi) in the case of the Term Loan Facility Lenders, the Term Loan Facility Obligations then due and payable and (b) the denominator of which shall be the sum of (i) the sum of the then outstanding Revolving Credit Exposures, outstanding Term Advances and unused Commitments under this Agreement then outstanding, (ii) the Make-Whole Obligations then due and payable, (iii) the Synthetic Lease Obligations then due and payable, (iv) such Designated Letter of Credit Obligations having unreimbursed drawings, or obligations to provide cover for Designated Letter of Credit Obligations, then due and payable, (v) such Hedging Obligations then due and payable and (vi) such Term Loan Facility Obligations then due and payable. "Restatement Date" means the earliest date as of which the ---------------- conditions precedent to effectiveness set forth in Section 4.01 shall have been satisfied or waived. "Revolving Credit Advance" means a loan by a Lender to a ------------------------ Borrower as part of a Revolving Credit Borrowing and refers to a Base Rate Advance or a Eurocurrency Rate Advance, each of which shall be a "Type" of Revolving Credit Advance. ---- "Revolving Credit Borrowing" means a borrowing consisting -------------------------- of simultaneous Revolving Credit Advances of the same Type made by each of the Lenders pursuant to Section 2.01(a). "Revolving Credit Commitment" means, as to each Lender, --------------------------- the obligation of such Lender to make Revolving Credit Advances in an aggregate principal amount at any one time outstanding up to but not exceeding the amount set opposite the name of such Lender on the signature pages hereof under the caption "Revolving Credit Commitment" or, in the case of a Person that becomes a Lender pursuant to an assignment permitted under Section 9.07, as specified in the Register (as such Commitment may be reduced from time to time pursuant hereto). The original aggregate principal amount of the Revolving Credit Commitments is $300,000,000. Credit Agreement ---------------- - 24 - "Revolving Credit Commitment Termination Date" means -------------------------------------------- August 13, 2004; provided that if any such date is not a Business Day, the Revolving Credit Commitment Termination Date shall be the immediately preceding Business Day. "Revolving Credit Exposure" means, with respect to any ------------------------- Revolving Credit Lender at any time, the sum of the outstanding principal amount of such Revolving Credit Lender's Revolving Credit Advances and its Letter of Credit Exposure at such time. "Revolving Credit Lender" means a Lender with a Revolving ----------------------- Credit Commitment or, if the Revolving Credit Commitments have terminated or expired, a Lender with Revolving Credit Exposure. "Revolving Credit Note" means a promissory note of a --------------------- Borrower payable to the order of any Lender, in substantially the form of Exhibit A-1 hereto, evidencing the aggregate indebtedness of such Borrower to such Lender resulting from the Revolving Credit Advances made by such Lender to such Borrower. "Rolling Period" means, as at any date, the period of four -------------- consecutive calendar quarters ending on or most recently ended prior to such date. "Screen" means, for any Currency, the relevant display ------ page for Eurocurrency Rates for such Currency (as determined by the Administrative Agent) on the Telerate Service; provided that, if the Administrative Agent determines that there is no such relevant display page for Eurocurrency Rates for such Currency, "Screen" ------ shall mean the relevant display page for Eurocurrency Rates for such Currency (as determined by the Administrative Agent) on the Reuter Monitor Money Rates Service. "Second Currency" has the meaning specified in Section --------------- 9.11. "Secured Parties" means, collectively, the Collateral --------------- Agent, the Lenders and Administrative Agent hereunder, the lenders and the Astaris Administrative Agent under the Astaris Credit Agreement and the purchasers and the Co-gen Agent under the Co-gen Participation Agreement (and, in respect of any Hedging Obligations, any affiliate of a Lender that shall have entered into the respective hedging agreement giving rise to such Hedging Obligations). "Security Documents" means the Non-Sharing Security ------------------ Documents and the Sharing Security Documents. "Senior Lien Limit" means, as at any date, the lesser of ----------------- (i) $236,000,000, as the same may from time to time be increased pursuant to Section 6.01(m) and (ii) the sum of the aggregate amount of Term Advances, the Revolving Credit Exposure, the Synthetic Lease Obligations, the Term Loan Facility Obligations, the Designated Letter of Credit Obligations, the Hedging Obligations and the Make-Whole Obligations outstanding on such date. "Sharing Intercreditor Agreement" means the Intercreditor ------------------------------- and Collateral Trust Agreement substantially in the form of Exhibit K hereto between the Company, CPFilms Credit Agreement ---------------- - 25 - Inc., the Administrative Agent, the Astaris Administrative Agent, the Co-gen Agent and the Collateral Trustee. "Sharing Mortgages" means, collectively, one or more ----------------- instruments of Mortgage, Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing executed by the Company or CPFilms Inc. in favor of the Collateral Trustee for the benefit of the holders of the Sharing Obligations (or in favor of a trustee for the benefit of the Collateral Trustee and the holders of the Sharing Obligations), covering the Existing Mortgaged Facilities and the New Mortgaged Facilities and securing the Sharing Obligations. "Sharing Obligations" means, collectively, (i) the ------------------- Non-Sharing Obligations and (ii) the obligations of the Company (and of any Subsidiary Guarantor that shall have Guaranteed the securities issued) under the Existing Notes Indentures (and all notes and debentures issued thereunder) and, to the extent designated by the Company pursuant to Section 6.01(o) for purposes hereof, any New Notes Indenture. "Sharing Security Agreement" means the Sharing Security -------------------------- Agreement substantially in the form of Exhibit L hereto between the Company, CPFilms Inc., each of the other Subsidiaries of the Company from time to time party thereto and the Collateral Trustee. "Sharing Security Documents" means the Sharing -------------------------- Intercreditor Agreement, the Sharing Mortgages and the Sharing Security Agreement. "Single Employer Plan" means a single employer plan, as -------------------- defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the Company (or its predecessor's chemicals business) or any of its ERISA Affiliates and no Person other than the Company (or its predecessor's chemicals business) and its ERISA Affiliates or (b) was so maintained and in respect of which the Company (or its predecessor's chemicals business) or any of its ERISA Affiliates could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated. "Solutia Europe" means Solutia Europe S.A./N.V., a -------------- corporation organized under the laws of Belgium. "Solutia Germany" means Solutia Germany GmbH and Co. KG, a --------------- partnership organized under the laws of the Federal Republic of Germany. "Solutia UK" means Solutia UK Holdings Limited, a ---------- corporation organized under the laws of England and Wales. "Solvent" means, with respect to any Person on a ------- particular date, that on such date (a) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (b) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature and (c) such Person is not engaged in business or a transaction, and is not about to Credit Agreement ---------------- - 26 - engage in business or a transaction, for which such Person's property would be unreasonably small in relation to such business or such transaction. "Specified Currency" has the meaning specified in Section ------------------ 9.11. "Specified Joint Venture" means a joint venture or other ----------------------- Person (other than a Consolidated Subsidiary of the Company) of which (or in which) at least 50% of the Ownership Interests thereof is at the time directly or indirectly owned by the Company, by the Company and one or more of its Consolidated Subsidiaries or by one or more of the Company's Consolidated Subsidiaries, provided that the Company's joint venture partners in such joint venture or other Person do not, in the aggregate, control (or possess the ability to control) such joint venture or other Person. For purposes of this definition, a "joint venture partner" means a Person that owns any Ownership Interests in the related joint venture or other Person and that is not the Company or one of its Consolidated Subsidiaries. "Specified Lender" has the meaning specified in Section ---------------- 2.15(g). "Specified Place" has the meaning specified in Section --------------- 9.11. "Subsidiary" of any Person means any corporation, ---------- partnership, joint venture, limited liability company, trust or estate of which (or in which) more than 50% of the Ownership Interests thereof is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries. "Subsidiary Guarantors" means, collectively, (a) each of --------------------- the Subsidiaries of the Company contemplated to be signatories, as "Subsidiary Guarantors" to the Non-Sharing Security and Guarantee Agreement (as provided in the form thereof attached as Exhibit I hereto) and (b) each Domestic Subsidiary of the Company that holds any pledged shares of capital stock of Solutia Europe, Solutia UK or Monchem International, Inc. and (c) each other Domestic Subsidiary of the Company that becomes a party to the Non-Sharing Security and Guarantee Agreement as contemplated by Section 6.01(l). "Swiss Borrowers" means, any of AMCIS AG, Carbogen --------------- Laboratories (Aarau) AG and Carbogen Laboratories (Neuland) AG. "Swiss Security Documents" means, collectively, one or ------------------------ more assignments, security agreements and other instruments from time to time executed and delivered by any of the Swiss Borrowers (in each case as the same shall be modified and supplemented and in effect from time to time) and creating Liens for the benefit of the Administrative Agent and the Lenders as security for the obligations of each of the Swiss Borrowers hereunder covering all of their property, plant, equipment, inventory, receivables and all material patents of the Swiss Borrowers used in connection with production at the facilities applied for or issued in the United States of America or Europe and included in such property, plant and equipment so pledged by the Swiss Borrowers, and all material trademarks of the Swiss Borrowers registered in the United States of America or Europe and, to the extent not requiring third-party consent, other intellectual property of the Swiss Borrowers, in each case excluding those jurisdictions Credit Agreement ---------------- - 27 - where obtaining such Liens is not practicable, or where the costs of obtaining such Liens outweigh the benefits of obtaining the Lien, in the determination of the Administrative Agent. "Syndication Agent" has the meaning specified in the ----------------- recital of parties to this Agreement. "Synthetic Lease Obligations" has the meaning specified in --------------------------- the Non-Sharing Security and Guarantee Agreement. "Taxes" has the meaning specified in Section 2.15(a). ----- "Term Advance" means a loan by a Lender to a Borrower as ------------ part of a Term Borrowing and refers to a Base Rate Advance or a Eurocurrency Rate Advance, each of which shall be a "Type" of Term ---- Advance. "Term Borrowing" means a borrowing consisting of -------------- simultaneous Term Advances of the same Type made by each of the Lenders pursuant to Section 2.01(b). "Term Commitment" means, as to each Lender, the obligation --------------- of such Lender to make the Term Advances (or to have Advances outstanding under the Existing Credit Agreement designated as Term Advances) on the Restatement Date in an aggregate principal amount at any one time outstanding up to but not exceeding the amount set opposite the name of such Lender on the signature pages hereof under the caption "Term Commitment" or, in the case of a Person that becomes a Lender after the execution and delivery hereof but prior to the Restatement Date pursuant to an assignment permitted under Section 9.07, as specified in the Register (as such Commitment may be reduced from time to time pursuant hereto). The original aggregate principal amount of the Term Commitments is $300,000,000. "Term Lender" means a Lender with a Term Commitment or an ----------- outstanding Term Advance. "Term Loan Facility Lenders" has the meaning specified in -------------------------- the Non-Sharing Security and Guarantee Agreement. "Term Loan Facility Obligations" has the meaning specified ------------------------------ in the Non-Sharing Security and Guarantee Agreement. "Term Maturity Date" means August 13, 2004; provided that ------------------ if any such date is not a Business Day, the Term Maturity Date shall be the immediately preceding Business Day "Term Note" means a promissory note of a Borrower payable --------- to the order of any Lender, in substantially the form of Exhibit A-2 hereto, evidencing the indebtedness of such Borrower to such Lender resulting from a Term Advance made by such Lender to such Borrower. Credit Agreement ---------------- - 28 - "Termination Letter" has the meaning specified in Section ------------------ 2.17(b). "Title Companies" has the meaning specified in Section --------------- 6.01(k). "2002 Notes" means the 6.50% notes of the Company due in ---------- 2002. "2002 Notes Maturity Amount" means, as at the Restatement -------------------------- Date, an amount equal to the sum of (i) the aggregate outstanding principal amount of the 2002 Notes on the Restatement Date plus (ii) the aggregate amount of interest that will accrue on such principal amount from the Restatement Date through the maturity date of the 2002 Notes, provided that in no event shall the 2002 Notes Maturity Amount exceed $154,875,000. "2009 Notes Indenture" means the Indenture dated as of -------------------- July 9, 2002 between SOI Funding Corp., a Delaware corporation, and HSBC Bank USA, a New York banking corporation, as trustee, providing for the issuance by SOI Funding Corp. of its 11.25% Senior Secured Notes due 2009, as modified pursuant to a Supplemental Indenture providing for the assumption by the Company of all of the obligations of SOI Funding Corp. under such Indenture and in respect of such Senior Secured Notes. "Type" shall have the meaning specified in the definitions ---- of "Revolving Credit Advance" and "Term Advance" in this Section 1.01. "Voting Stock" means capital stock issued by a ------------ corporation, or equivalent interests in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such a contingency. "Wholly Owned Subsidiary" means, with respect to any ----------------------- Person, any corporation, partnership or other entity of which all of the equity securities or other ownership interests (other than directors' or similar qualifying shares) are directly or indirectly owned or controlled by such Person or one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person. "Withdrawal Liability" has the meaning specified in Part I -------------------- of Subtitle E of Title IV of ERISA. SECTION 1.02. Computation of Time Periods. In this --------------------------- Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding". SECTION 1.03. Accounting Terms and Determinations. Except ----------------------------------- as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP as in effect on December 31, 2001, applied on a basis consistent with the preparation of the financial statements as at December 31, 2001 referred to in Section 5.01(e). SECTION 1.04. Currencies; Currency Equivalents. At any -------------------------------- time, any reference in the definition of the term "Euros" or in any other provision of this Agreement to the currency of Credit Agreement ---------------- - 29 - the participating member states of the European Union means the lawful currency of such participating member states at such time whether the name of such currency is the same as it was on the date hereof. Except as provided in Section 2.10(c) and Section 2.13(e), for purposes of determining (i) whether the amount of any Borrowing, together with all other Borrowings then outstanding or to be borrowed at the same time as such Borrowing, would exceed the aggregate amount of the Commitments, (ii) the aggregate unutilized amount of the Commitments and (iii) the outstanding aggregate principal amount of Borrowings, the outstanding principal amount of any Borrowing that is denominated in Euros shall be deemed to be the Dollar Equivalent of the amount of Euros of such Borrowing determined as of the date of such Borrowing. Wherever in this Agreement in connection with a Borrowing or Advance an amount, such as a required minimum or multiple amount, is expressed in Dollars, but such Borrowing or Advance is denominated in Euros, such amount shall be the relevant Euro Equivalent of such Dollar amount (rounded to the nearest 1,000 units of Euros). SECTION 1.05. Terms Generally. The definitions of terms --------------- herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. ARTICLE II AMOUNTS AND TERMS OF ADVANCES AND LETTERS OF CREDIT SECTION 2.01. The Advances. ------------ (a) The Revolving Credit Advances. Each Revolving Credit ----------------------------- Lender severally agrees, on the terms and conditions hereinafter set forth, to make Revolving Credit Advances to the Company and any Designated Borrower (in Dollars or in Euros, at the election of the Company on its own behalf or on behalf of the applicable Borrower) from time to time on any Business Day during the period from and including the Restatement Date to but excluding the Revolving Credit Commitment Termination Date in an aggregate amount not to exceed at any time outstanding the amount of such Revolving Credit Lender's Revolving Credit Commitment; provided that in no event shall any Revolving Credit Advance be made by any Revolving Credit Lender if, after Credit Agreement ---------------- - 30 - giving effect thereto, such Revolving Credit Lender's Revolving Credit Exposure would exceed the amount of its Revolving Credit Commitment. On the Restatement Date all Advances of each Lender under the Existing Credit Agreement that are not designated as Term Advances hereunder pursuant to subsection (b) of this Section 2.01 shall automatically, without any action on the part of any Person, be deemed to be Revolving Credit Advances of the Company hereunder. (b) The Term Advances. On the Restatement Date (i) all ----------------- Advances outstanding by each Lender to Solutia Germany under the Existing Credit Agreement shall be designated as Term Advances to Solutia Germany hereunder and (ii) a portion of the Advances outstanding by each Lender to the Company under the Existing Credit Agreement that, when taken together with the Advances outstanding to Solutia Germany, shall total $300,000,000 shall be designated as Term Advances hereunder. In addition, immediately following such designation as Term Advances to the Company hereunder, the Lenders shall make Term Advances in Dollars to each European Borrower in the respective aggregate amounts set forth below, ratably in accordance with their respective Term Commitments, the proceeds of which will be immediately applied by each European Borrower to the making of intercompany loans to Monchem International, Inc. (in the case of Solutia Germany, such Advance and intercompany loan to be in addition to the Advance and intercompany loan previously made by the Lenders to Solutia Germany pursuant to the Existing Credit Agreement), the proceeds of which intercompany loans the Company shall cause Monchem International, Inc. to immediately dividend to it, which dividends shall then be immediately applied to the prepayment of Term Advances outstanding to the Company after giving effect to such designation. The aggregate amount of the Term Advances to be made to each European Borrower shall be equal to the respective amount set forth below opposite such the name of such Borrower: Borrower Amount -------- ------ Solutia Germany $50,000,000 AMCIS AG $12,000,000 Carbogen Laboratories (Aarau) AG $8,000,000 Carbogen Laboratories (Neuland) AG $5,000,000 The Term Advances to be made by each Lender to the European Borrowers will be allocated among such Borrowers, will be of the same Type and, if applicable and notwithstanding the definition of "Interest Period" in Section 1.01, will have Interest Periods of the same durations as the Interest Periods outstanding under the Existing Credit Agreement on the Restatement Date, so that no compensation will be required to be paid by the Company to the Lenders pursuant to Section 9.04(c) as a result of such Term Advances. SECTION 2.02. Making the Advances. ------------------- (a) Requests for Revolving Credit Borrowing. Each --------------------------------------- Revolving Credit Borrowing shall be made on notice, given not later than 11:00 a.m. (New York City time) on the third Business Day prior to the date of the proposed Revolving Credit Borrowing (in the case of a Revolving Credit Borrowing to consist of Eurocurrency Rate Advances), or by 11:00 a.m. (New York City time) on the day of the proposed Revolving Credit Borrowing (in the case of a Revolving Credit Credit Agreement ---------------- - 31 - Borrowing to consist of Base Rate Advances), by the Company (on its own behalf and on behalf of the other Borrowers) to the Administrative Agent, which shall give to each Lender prompt notice thereof. Each such notice of a Revolving Credit Borrowing (a "Notice of Revolving Credit Borrowing") shall ------------------------------------ be by telecopier or by telex, confirmed immediately in writing, in substantially the form of Exhibit B hereto, specifying therein (i) the date of such Revolving Credit Borrowing, (ii) the Type of Revolving Credit Advances comprising such Revolving Credit Borrowing, (iii) the aggregate amount of such Revolving Credit Borrowing and the Currency thereof (except that Base Rate Advances must be denominated in Dollars), (iv) in the case of a Revolving Credit Borrowing consisting of Eurocurrency Rate Advances, the initial Interest Period for each such Revolving Credit Advance and (v) the name of the Borrower of such Revolving Credit Advance (which shall be the Company or a Designated Borrower). Each Revolving Credit Lender shall on the date of such Revolving Credit Borrowing, before 11:00 a.m. (New York City time), in the case of a Revolving Credit Borrowing to consist of Eurocurrency Rate Advances, and before 1:00 p.m. (New York City time), in the case of a Revolving Credit Borrowing to consist of Base Rate Advances, make available for the account of its Applicable Lending Office to the Administrative Agent at its address referred to in Section 9.02, in the relevant Currency and in same day funds, such Revolving Credit Lender's ratable portion of such Revolving Credit Borrowing. After the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article IV, the Administrative Agent will make such funds available to the Company at the Administrative Agent's aforesaid address (or, in the case of a Revolving Credit Borrowing by a Designated Borrower, the Administrative Agent will make such funds available to the relevant Borrower in such manner as the Administrative Agent and the Company may agree). (b) Suspension of Certain Eurocurrency Borrowings. --------------------------------------------- Anything above to the contrary notwithstanding (1) no Borrower may select Eurocurrency Rate Advances for any Revolving Credit Borrowing if the obligation of the Revolving Credit Lenders to make Eurocurrency Rate Advances shall then be suspended pursuant to Section 2.08 or 2.12 (except as otherwise provided in Section 2.12(b)(ii)) and (2) Base Rate Advances shall be denominated solely in Dollars. (c) Requests Binding. Each Notice of Revolving Credit ---------------- Borrowing shall be binding on the Company and each Designated Borrower. In the case of any Borrowing that the related Notice of Revolving Credit Borrowing specifies is to consist of Eurocurrency Rate Advances, the Company (and, if a Designated Borrower is the borrower of the related Advances, such Designated Borrower) shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any revocation of such Notice of Revolving Credit Borrowing by the Company (or such Designated Borrower) or any failure to fulfill on or before the date specified in such Notice of Revolving Credit Borrowing for such Borrowing the applicable conditions set forth in Article IV, including any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Advance to be made by such Lender as part of such Borrowing when such Advance, as a result of such revocation or failure, is not made on such date. (d) Presumption by Administrative Agent. Unless the ----------------------------------- Administrative Agent shall have received notice from a Lender prior to the date of any Revolving Credit Borrowing (in the case of a Revolving Credit Borrowing to consist of Eurocurrency Rate Advances) and not later than 12:00 noon (New York City time) on the Business Day of the proposed Revolving Credit Credit Agreement ---------------- - 32 - Borrowing (in the case of a Revolving Credit Borrowing to consist of Base Rate Advances) that such Lender will not make available to the Administrative Agent such Lender's ratable portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with subsection (a) of this Section 2.02, and the Administrative Agent may, in reliance upon such assumption, make available to the relevant Borrower on such date a corresponding amount; provided that nothing in this subsection (d) shall be construed to relieve any Lender from any obligation hereunder to make available to the Administrative Agent its ratable portion of such Borrowing in accordance with said subsection (a). If and to the extent that such Lender shall not have so made such ratable portion available to the Administrative Agent, such Lender and the relevant Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the relevant Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of such Borrower, the interest rate applicable at such time to the Advances comprising such Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender's Advance as part of such Borrowing for purposes of this Agreement. (e) Obligations Several. The failure of any Lender to make ------------------- the Advance to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Advance on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on the date of any Borrowing. SECTION 2.03. Terms of Revolving Credit Advances. ---------------------------------- (a) Minimum Amounts. Each Revolving Credit Borrowing shall --------------- be in an aggregate amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof, or the aggregate amount of the unused portion of the Lenders' Revolving Credit Commitments; provided that any Borrowing in an aggregate amount less than $5,000,000 shall consist solely of Base Rate Advances. In addition, each Revolving Credit Borrowing shall consist of Advances of the same Type and having the same Interest Period made on the same day by the Lenders. (b) Advances Made Ratably. The Revolving Credit Advances --------------------- shall be made by the Revolving Credit Lenders ratably according to their respective Revolving Credit Commitments. (c) Borrowings and Repayments. Within the limits described ------------------------- in Sections 2.01(a) and (b), the Borrowers may borrow under Section 2.01 and/or obtain the issuance of Letters of Credit under Section 2.18, prepay pursuant to Section 2.10 and, with respect to Revolving Credit Borrowings, on or prior to the Revolving Credit Commitment Termination Date, reborrow under Section 2.01. SECTION 2.04. Fees. ---- (a) Commitment Fee. The Company agrees to pay to the -------------- Administrative Agent for the account of each Revolving Credit Lender a commitment fee (the "Commitment Fee") in Dollars at a rate of 1.00% per -------------- annum on the aggregate unused amount of such Revolving Credit Lender's Credit Agreement ---------------- - 33 - Revolving Credit Commitment from the Restatement Date (in the case of each Initial Lender) and the effective date specified in the Assignment and Acceptance pursuant to which it became a Revolving Credit Lender (in the case of each other Revolving Credit Lender), until the Revolving Credit Commitment Termination Date. The Commitment Fee shall be payable quarterly in arrears on each Quarterly Date and on the Revolving Credit Commitment Termination Date. (b) Letter of Credit Commission, Etc. The Company shall --------------------------------- pay to the Administrative Agent in Dollars (i) for the account of the L/C Issuer in respect of each Letter of Credit, a fronting fee in an amount separately agreed to between the Company and the L/C Issuer and (ii) for the account of each Revolving Credit Lender, a commission on such Lender's Applicable Percentage of the average daily aggregate Available Amount of all Letters of Credit outstanding from time to time at a rate per annum equal to the Applicable Margin for Eurocurrency Advances in effect from time to time. The fees described in this paragraph shall be payable in arrears on each Quarterly Date and on the Revolving Credit Commitment Termination Date and calculated, for any day, after giving effect to any payments made under such Letter of Credit on such day. (c) Letter of Credit Expenses. The Borrower shall pay to ------------------------- the L/C Issuer, for its own account, such issuance fees, transfer fees and other fees and charges in connection with the issuance or administration of the Letters of Credit as the L/C Issuer normally charges in respect of the issuance and administration of similar letters of credit. (d) Extension Fees. The Company agrees to pay to the -------------- Administrative Agent for the account of each Lender on the Restatement Date, an extension fee in Dollars equal to 3.00% of the aggregate amount of such Lender's outstanding Revolving Credit Exposures, outstanding Term Advances and unused Commitments on the Restatement Date immediately after giving effect hereto. SECTION 2.05. Termination and Reduction of Commitments. ---------------------------------------- (a) Mandatory. Unless previously terminated, (i) the Term --------- Commitments of each Term Lender shall be automatically reduced to zero at 5:00 p.m. (New York City time) on the Restatement Date and (ii) the Revolving Credit Commitment of each Revolving Credit Lender shall be automatically reduced to zero at 5:00 p.m. (New York City time) on the Revolving Credit Commitment Termination Date. In addition, the Revolving Credit Commitments shall automatically reduce on the dates and in the amounts provided in Section 2.18(a)(i)(y). (b) Optional. The Company (on its own behalf and on behalf -------- of the other Borrowers) shall have the right, upon at least three Business Days' notice to the Administrative Agent, to terminate in whole or reduce ratably in part the unused portions of the respective Revolving Credit Commitments, provided that (i) the aggregate amount of the Revolving Credit Commitments of the Revolving Credit Lenders shall not be reduced to an amount which is less than the aggregate principal amount of the Revolving Credit Exposure then outstanding; (ii) each partial reduction shall be in an aggregate amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof; and (iii) any such reductions shall be applied to the Revolving Credit Commitments of the Revolving Credit Lenders ratably in accordance with the respective amounts thereof. Credit Agreement ---------------- - 34 - (c) No Reinstatement. Commitments once terminated or ---------------- reduced may not be reinstated. SECTION 2.06. Repayment of Advances; Evidence of Debt. --------------------------------------- (a) Revolving Credit Advances. Each Borrower shall repay ------------------------- the principal amount of each Revolving Credit Advance made by each Revolving Credit Lender to such Borrower, in the Currency of such Advance, and each Advance made by such Revolving Credit Lender shall mature, on the Revolving Credit Commitment Termination Date. In addition, if following any reduction of Revolving Credit Commitments pursuant to Section 2.10, the total Revolving Credit Exposures shall exceed the Revolving Credit Commitments, the Company shall (and shall cause each of the other Borrowers to which any Revolving Credit Advances shall have been made to), first, prepay Revolving Credit Advances and, second, provide cover for Letter of Credit Exposures as specified in Section 2.10(i) in an aggregate amount equal to such excess. (b) Term Advances. The Company shall (and shall cause each ------------- of the other Borrowers to which any Term Advances shall have been made to) repay the principal amount of the Term Advances made by the Term Lenders to the Company (or to such respective Borrower) on the Principal Payment Dates (subject to adjustment pursuant to subsection (c) of this Section 2.06) as follows (the amounts set forth below representing the aggregate amount of such payment to be made as to all Borrowers): Principal Payment Date Amount of Installment ---------------------- --------------------- December 31, 2002 $25,000,000 December 31, 2003 $50,000,000 June 30, 2004 $25,000,000 August 13, 2004 balance All payments of Term Advances shall be applied first to Term Advances made to the Company and second to Term Advances made to the European Borrowers (in each case applied first, ratably to the Term Advances made to the Swiss Borrowers and second, to the Term Advances made to Solutia Germany) with a concurrent (i) recontribution by the Company to the equity of Monchem International, Inc. of an amount equal to the amount of dividends paid by Monchem International, Inc. to the Company referred to in Section 2.01(b), and (ii) repayment by Monchem International, Inc. in like amount of the respective intercompany loans referred to in Section 2.01(b) made by each European Borrower to Monchem International, Inc. (in each case to the extent that the funds used to repay the Term Advances of the European Borrowers originate with the Company or its Domestic Subsidiaries). Notwithstanding the foregoing, any Term Lender shall have the right to refuse all or any portion of any such payment allocable to its Term Advances (other than amounts payable at maturity) pursuant to this Section 2.06(b), and any amount so refused will be applied to the payment of Term Advances to the extent thereof of the other Term Lenders not so refusing such payment and any excess remaining thereafter being applied ratably to the remaining Term Advances. Credit Agreement ---------------- - 35 - (c) Adjustment of Amortization Schedule. Any prepayment ----------------------------------- (whether optional or mandatory) of a Term Advance pursuant to Section 2.10 shall be applied to reduce the subsequent scheduled repayments of the Term Advances to be made pursuant to this Section 2.06 in inverse order of maturity. To the extent not previously paid, all Term Advances shall be due and payable on the Term Maturity Date. (d) Note Option. Any Lender may request that any Revolving ----------- Credit or Term Advances made or to be made by it to a Borrower be evidenced by a Note, payable by such Borrower. In such event, the Company (on its own behalf and on behalf of the other Borrowers) shall prepare, have executed by the relevant Borrower and deliver to such Lender a Note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) in substantially the form of Exhibit A-1 (in the case of Revolving Credit Advances) or A-2 (in the case of Term Advances). If a Lender whose Advances are so evidenced by a Note thereafter assigns such Advances, such Advances will be evidenced by a Note only if the assignee so requests in accordance with this Section 2.06(d) and Section 9.07. SECTION 2.07. Interest on Advances, Etc. ------------------------- (a) Scheduled Interest. Each Borrower shall pay interest ------------------ on the unpaid principal amount of each Advance owing by such Borrower to each Lender, in the Currency in which such Advance is denominated, from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum: (i) Base Rate Advances. During such periods as such ------------------ Advance is a Base Rate Advance, a rate per annum equal at all times to the sum of (x) the Base Rate in effect from time to time plus (b) the Applicable Margin in effect from time to time, payable in arrears quarterly on each Quarterly Date during such periods and on the date such Base Rate Advance shall be Converted or paid in full. (ii) Eurocurrency Rate Advances. During such periods as -------------------------- such Advance is a Eurocurrency Rate Advance, a rate per annum equal at all times during each Interest Period for such Advance to the sum of (x) the Eurocurrency Rate for such Interest Period for such Advance plus (y) the Applicable Margin in effect from time to time, payable in arrears on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day that occurs during such Interest Period every three months from the first day of such Interest Period and on the date such Eurocurrency Rate Advance shall be Converted or paid in full. (b) Default Interest. Upon the occurrence and during the ---------------- continuance of any Event of Default, each Borrower shall pay interest on the unpaid principal amount of each Advance owing by such Borrower to each Lender, in the Currency in which such Advance is denominated, payable in arrears on the dates referred to in subsection (a)(i) or (a)(ii) of this Section 2.07, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid on such Advance pursuant to subsection (a)(i) or (a)(ii) of this Section 2.07. Credit Agreement ---------------- - 36 - (c) Payment Premium. Upon any payment of principal of the --------------- Term Advances after the Restatement Date (whether at stated maturity, optional or mandatory prepayment or otherwise), the Company shall pay to the Term Lenders a premium in the amount of 2% of the principal paid (for all amounts either due or paid on or before the date 12 months after the Restatement Date) and 1% of the principal paid (for all amounts paid after the date 12 months after the Restatement Date other than amounts as to which the 2% premium applies as described above). SECTION 2.08. Interest Rate Determination. --------------------------- (a) Rates Not Covering Costs. If, with respect to any ------------------------ Eurocurrency Rate Advances denominated in any Currency, the Majority Revolving Credit Lenders or Majority Term Lenders, as applicable, shall notify the Administrative Agent that the Eurocurrency Rate for any Interest Period for such Advances in such Currency will not adequately reflect the cost to such Lenders of making, funding or maintaining their respective Eurocurrency Rate Advances in such Currency for such Interest Period, the Administrative Agent shall forthwith so notify the Company and such Lenders, whereupon (i) if such Currency is Euros, the related Notice of Borrowing shall be ineffective, (ii) if such Currency is Dollars, such Eurocurrency Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance, and (iii) regardless of Currency, the obligation of the Lenders to make, or (in the case of Dollars) to Convert Advances into, Eurocurrency Rate Advances shall be suspended until the Administrative Agent shall notify the Company and the Lenders that the circumstances causing such suspension no longer exist. (b) Failure to Elect. If the Company shall fail to select ---------------- the duration of any Interest Period for any Eurocurrency Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01, the Administrative Agent will forthwith so notify the Company and the Lenders and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances. (c) Automatic Conversion into Base Rate Advances. On the -------------------------------------------- date on which the aggregate unpaid principal amount of Eurocurrency Rate Advances comprising any Borrowing shall be reduced, by payment or prepayment or otherwise, to less than $5,000,000, such Advances shall automatically Convert into Base Rate Advances and on and after such date the right of the Borrowers to Convert such Advances shall terminate. (d) Events of Default. Upon the occurrence and during the ----------------- continuance of any Event of Default, (i) each Eurocurrency Rate Advance denominated in Dollars will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and (ii) the obligation of the Lenders to make, or to Convert Advances denominated in Dollars into, Eurocurrency Rate Advances shall be suspended. SECTION 2.09. Optional Conversion of Advances. The Company ------------------------------- (on its own behalf and on behalf of the other Borrowers) may on any Business Day, upon notice given to the Administrative Agent not later than 11:00 a.m. (New York City time) on the third Business Day prior to the date of the proposed Conversion and subject to the provisions of Sections 2.08 and 2.12, Convert all Dollar-denominated Advances of one Type comprising the same Borrowing by a Borrower into Dollar-denominated Advances owing by such Borrower of the other Type; provided that any Conversion of Dollar- denominated Eurocurrency Rate Advances into Base Rate Advances Credit Agreement ---------------- - 37 - shall be made only on the last day of an Interest Period for such Eurocurrency Rate Advances. Each such notice of a Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the Advances to be Converted, and (iii) if such Conversion is into Eurocurrency Rate Advances, the duration of the initial Interest Period for each such Advance. Each notice of Conversion shall be irrevocable and binding on the Company and each other Borrower. SECTION 2.10. Prepayments, Etc. ----------------- (a) Optional Payments of Advances. Each Borrower may, upon ----------------------------- notice by the Company to the Administrative Agent stating the proposed date and aggregate principal amount of the prepayment, given to the Administrative Agent not later than 11:00 a.m. (New York City time) on the proposed date in the case of Base Rate Advances and at least three Business Days prior to the proposed date in the case of Eurocurrency Rate Advances and specifying whether such prepayment is to be made with respect to Revolving Credit Advances or Term Advances, and if such notice is given by the Company the applicable Borrower shall, prepay the outstanding principal amount of such Advances owing by such Borrower in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided that (1) (x) each partial prepayment shall be in an aggregate principal amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof and (y) in the event of any such prepayment of a Eurocurrency Rate Advance, the applicable Borrower and the Company shall be jointly and severally obligated to reimburse the Lenders in respect thereof pursuant to Section 9.04(c) and (2) anything herein to the contrary notwithstanding, no prepayments may be applied to the Term Advances made to the European Borrowers until all Advances made to the Company that are at the time outstanding have been paid in full or are concurrently paid in full. All optional prepayments of the Term Advances made to the European Borrowers shall be made first, ratably to the Term Advances made to the Swiss Borrowers and second, to the Term Advances made to Solutia Germany, with a concurrent (i) recontribution by the Company to the equity of Monchem International, Inc. of an amount equal to the amount of dividends paid by Monchem International, Inc. to the Company referred to in Section 2.01(b) and (ii) repayment by Monchem International, Inc. in like amount of the respective intercompany loans referred to in Section 2.01(b) made by each European Borrower to Monchem International, Inc. (in each case to the extent that the funds used to repay the Term Advances of the European Borrowers originate with the Company or its Domestic Subsidiaries). (b) Change of Control. If any Change of Control shall ----------------- occur, then, upon notice to the Company by the Administrative Agent (acting at the request, or with the consent, of the Majority Lenders) to such effect and stating that the same is a "Change of Control Prepayment Notice", the Commitments shall be automatically reduced to zero and each Borrower shall prepay the Advances made to such Borrower, and provide cover for Letters of Credit as specified in subsection (i) of this Section 2.10 issued for account of such Borrower, in full. (c) Changes in Dollar/Euro Exchange Rate. ------------------------------------ (i) Determination of Amount Outstanding. On each Quarterly ----------------------------------- Date and promptly upon the receipt by the Administrative Agent of a Currency Valuation Notice (as defined below), the Administrative Agent shall determine the aggregate outstanding principal amount of the Revolving Credit Advances. For the purpose of this determination, the outstanding principal amount of any Revolving Credit Advance that is denominated in Credit Agreement ---------------- - 38 - Euros shall be deemed to be the Dollar Equivalent of the amount in Euros of such Advance, determined as of such date or, in the case of a Currency Valuation Notice received by the Administrative Agent prior to 11:00 a.m. (New York City time) on a Business Day, on such Business Day or, in the case of a Currency Valuation Notice otherwise received, on the first Business Day after such Currency Valuation Notice is received. Upon making such determination, the Administrative Agent shall promptly notify the Lenders and the Company thereof. (ii) Prepayment. If, on the date of such determination the ---------- aggregate outstanding amount of the Revolving Credit Exposures exceeds 105% of the aggregate amount of the Revolving Credit Commitments as then in effect, the Company shall, if requested by the Majority Revolving Credit Lenders (through the Administrative Agent), cause the Borrowers to prepay the Revolving Credit Exposures in such amount as shall be necessary so that after giving effect thereto the aggregate outstanding amount of the Revolving Credit Exposures does not exceed the Revolving Credit Commitments. For purposes hereof, "Currency Valuation Notice" means a notice given by the ------------------------- Majority Revolving Credit Lenders to the Administrative Agent stating that such notice is a "Currency Valuation Notice" and requesting that the Administrative Agent determine the aggregate outstanding amount of the Revolving Credit Exposures. The Administrative Agent shall not be required to make more than one valuation determination pursuant to Currency Valuation Notices within any rolling three month period. (d) Guaranteed Obligations. If (i) the obligations of the ---------------------- Company under Article III with respect to any outstanding Guaranteed Obligations owing by any Designated Borrower (herein, the "Affected -------- Borrower") shall for any reason (x) be terminated, (y) cease to be in full - -------- force and effect or (z) not be the legal, valid and binding obligations of the Company enforceable against the Company in accordance with its terms, and (ii) such condition continues unremedied for 15 days after written notice thereof shall have been given to the Company by the Administrative Agent or any Lender, then the Affected Borrower shall, no later than the 15th day after the date of such notice, prepay (and the Company shall cause to be prepaid) the full principal of and interest on the Advances owing by, and the Notes payable by, such Affected Borrower and all other amounts whatsoever payable hereunder by such Affected Borrower (including all amounts payable under Section 9.04(c) as a result of such prepayment). (e) Sale of Assets. Without limiting any obligation of the -------------- Company to obtain the consent of the Majority Lenders pursuant to Section 9.01 to any Disposition not otherwise permitted hereunder, in the event that the Net Cash Proceeds of any Disposition (herein, the "Current ------- Disposition"), and of all Dispositions after the date hereof but prior to - ----------- the date of the Current Disposition as to which a prepayment has not yet been made under this paragraph, shall exceed $10,000,000 then, no later than two Business Days prior to the occurrence of the Current Disposition, the Company will deliver to the Lenders a statement, certified by a senior financial officer of the Company, in form and detail satisfactory to the Administrative Agent, of the estimated amount of the Net Cash Proceeds of the Current Disposition and of all such prior Dispositions and will, and will cause each other Borrower to, prepay the Advances (and provide cover for Letters of Credit as specified in subsection (i) of this Section 2.10), and the Commitments shall be subject to automatic reduction, in an aggregate amount equal to 100% of Credit Agreement ---------------- - 39 - the Net Cash Proceeds of the Current Disposition and such prior Dispositions, such prepayment to be applied in accordance with subsection (h) of this Section 2.10. (f) Casualty Event. If any Net Cash Proceeds are received -------------- by the Company or any of its Subsidiaries in respect of any Casualty Event and, pursuant to any Mortgage are required at any time to be applied to the "Solutia Credit Agreement Obligations" (as defined in the Non-Sharing Security and Guarantee Agreement) then the Company shall, or if applicable shall direct the Collateral Agent or Collateral Trustee, as applicable, to, apply such Net Cash Proceeds to prepay the Advances (and provide cover for Letters of Credit as specified in subsection (i) of this Section 2.10), and the Commitments shall be subject to automatic reduction, in an aggregate amount equal to 100% of such Net Cash Proceeds required to be so applied. Nothing in this paragraph shall be deemed to limit any obligation of the Company or any of its Subsidiaries pursuant to any of the Security Documents to remit to a collateral or similar account maintained by the Collateral Agent or Collateral Trustee pursuant to any of the Security Documents the proceeds of insurance, condemnation award or other compensation received in respect of any Casualty Event, such prepayment to be applied in accordance with subsection (h) of this Section 2.10. (g) Capital Markets Transactions. Upon any Capital Markets ---------------------------- Transaction, the Company will, and will cause each other Borrower to, prepay the Advances, and the Commitments shall be subject to automatic reduction, in an aggregate amount equal to 100% of the Net Cash Proceeds thereof, such prepayment to be applied in accordance with subsection (h) of this Section 2.10; provided that the Net Cash Proceeds received on the Restatement Date -------- in connection with the Company's assumption of SOI Funding Corp.'s 11.25% Senior Secured Notes described in Section 4.01(k) shall be applied as described therein and shall not be governed by this subsection (g). (h) Application. Prepayments and/or reductions of the ----------- Commitments described in subsections (e), (f) and (g) of this Section 2.10 shall be applied as follows: first, to the prepayment of the Term Advances and the Co-gen Instruments, and to the provision of cover for the Designated Letters of Credit as provided in Section 5.04 of the Non-Sharing Security and Guarantee Agreement, in each case ratably in accordance with the respective principal amounts thereof outstanding at the time of such prepayment (such outstanding amount, in the case of the Designated Letters of Credit, to be deemed to be equal to the Designated Letter of Credit Exposure at such time), and second, after the payment in full of the Term Advances and the Co-gen Instruments, and the provision of full cover for the Designated Letters of Credit in an aggregate amount equal to the Designated Letter of Credit Exposure at such time, to first, prepay Revolving Credit Advances and second, provide cover for Letter of Credit Exposure as specified in subsection (i) of this Section 2.10 and, to the extent such prepayments are being made pursuant to subsection (e) or (f) of this Section 2.10 and result from (x) a Disposition of any property constituting collateral security under any of the Security Documents or (y) a Casualty Event affecting any such collateral security, the Revolving Credit Commitments shall be automatically reduced by the amount of such prepayment. Credit Agreement ---------------- - 40 - No mandatory prepayments of the Term Advances may be applied to the Term Advances made to the European Borrowers until all Advances made to the Company that are at the time outstanding have been paid in full or are concurrently paid in full. All mandatory prepayments of the Term Advances made to the European Borrowers shall be made first, ratably to the Term Advances made to the Swiss Borrowers and second, to the Term Advances made to Solutia Germany, with a concurrent (i) recontribution by the Company to the equity of Monchem International, Inc. of an amount equal to the amount of dividends paid by Monchem International, Inc. to the Company referred to in Section 2.01(b) and (ii) repayment by Monchem International, Inc. in like amount of the respective intercompany loans referred to in Section 2.01(b) made by each European Borrower to Monchem International, Inc. Notwithstanding any other provision herein to the contrary, (1) if any amounts are due and payable under this Agreement, the Astaris Guaranty Agreement, the Co-gen Participation Agreement, the Co-gen Guaranty Agreement, the Co-gen Lease, any Hedging Agreements or any Term Loan Facility Obligations, or in respect of any Designated Letter of Credit, at the time of a Disposition or upon any Capital Markets Transaction then prepayments in accordance with subsections (e), (f) and (g) of this Section 2.10 are to be shared ratably by the Secured Parties in accordance with their respective Relevant Prepayment Percentages and the Commitments shall be reduced only by the amount of prepayments allocable to this Agreement and (2) any Net Cash Proceeds received pursuant to subsection (e) or (f) of this Section 2.10 which constitutes collateral under the Co-gen Participation Agreement or the Co-gen Lease shall be applied first to reduce the amounts outstanding under the Co-gen Instruments and thereafter to the repayment of the Advances as described above. (i) Cover for Letter of Credit Exposures. If either (i) an ------------------------------------ Event of Default shall occur and be continuing and the Company receives notice from the Administrative Agent at the request of the Majority Lenders (or, if the maturity of the Advances has been accelerated, at the request of Revolving Credit Lenders with Letter of Credit Exposure representing at least 66-2/3% of the total Letter of Credit Exposure) demanding the deposit of cash collateral pursuant to this paragraph, or (ii) the Company shall be required to provide cover for Letter of Credit Exposure pursuant to Section 2.06(a), this Section 2.10 or any other provision in this Agreement, the Company shall provide cover for all Letter of Credit Exposure by immediately depositing into the Collateral Account an amount in cash equal to, in the case of an Event of Default, the Letter of Credit Exposure as of such date plus any accrued and unpaid interest thereon and, in the case of cover pursuant to Section 2.06(a), this Section 2.10 or any other provision in this Agreement, the amount required under Section 2.06(a), this Section 2.10 or such other provision, as the case may be; provided that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to the Company described in Section 7.01(f). Such deposit shall be held by the Collateral Agent in the Collateral Account as collateral in the first instance for the Letter of Credit Exposure under this Agreement and thereafter for the payment of the "Secured Obligations" under and as defined in the Non-Sharing Security and Guarantee Agreement, and for these purposes the Company hereby grants a security interest to the Collateral Agent for the benefit of the Lenders in the Collateral Account and in any financial assets (as defined in the Uniform Commercial Code) or other property held therein. Any amounts that remain in the Collateral Account at the time that (i) all Letter of Credit Exposure has been paid in full and all Letters of Credit have expired or Credit Agreement ---------------- - 41 - terminated shall (x) if no Event of Default shall at the time be continuing, be applied to the prepayment and/or reduction of commitments as provided in subsection (h) of this Section 2.10 and (y) if an Event of Default shall at the time be continuing, be applied to the Secured Obligations in accordance with the applicable provisions of the Security Documents and (ii) all Advances and Letter of Credit Exposure have been paid in full, all Commitments have been terminated and all Letters of Credit have expired or terminated shall be paid to the Company. (j) Right of Term Lenders to Decline Prepayments. In the -------------------------------------------- event that at the time of any prepayment required to be applied to the Term Advances there shall be any Revolving Credit Advances outstanding, any Term Lender shall have the right to refuse all or any portion of any optional or mandatory prepayment pursuant to subsection (a), (b), (e), (f) or (g) of this Section 2.10, and any amount so refused will be applied to prepay the Revolving Credit Advances to the extent thereof, but in each case without reduction of any of the Revolving Credit Commitments. (k) Effect of Certain Other Indebtedness; Shared -------------------------------------------- Collateral. Anything in this Agreement to the contrary notwithstanding, to - ---------- the extent that any Net Cash Proceeds of any Shared Collateral (as defined in the Sharing Intercreditor Agreement) shall be received by the Company at a time when any Triggering Event (as so defined) shall have occurred and be continuing, such Net Cash Proceeds shall be retained by, or remitted to, the Collateral Trustee for application to the Secured Obligations (as so defined) in accordance with the requirements of Section 4.01 of the Sharing Intercreditor Agreement and shall not be applied to the Advances hereunder or the Co-gen Instruments, or as cover for Designated Letters of Credit, as would otherwise be required under subsection (h) of this Section 2.10. SECTION 2.11. Increased Costs. --------------- (a) Change in Law. If due to either (i) the introduction ------------- of or any change in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), in each case, after the date hereof, there shall be any increase in the cost to any Lender (other than an increase in taxes, imposts, deductions, charges or withholdings, as to which the provisions of Section 2.15 shall be applicable) of agreeing to make or making, funding or maintaining Eurocurrency Rate Advances or agreeing to issue or acquiring a participation in any Letter of Credit (or maintaining any Letter of Credit or participation therein), then such Lender may from time to time give notice of such circumstances to the Company (with a copy to the Administrative Agent); provided that each Lender agrees, before giving any such notice, to use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such a designation would avoid the need for, or reduce the amount of, such increased costs and would not be disadvantageous to such Lender. The amount sufficient to compensate such Lender in light of such increase in costs to such Lender or any corporation controlling such Lender shall be determined by such Lender in good faith on a basis that allocates the amounts sufficient to compensate such Lender in light of such increase ratably among all applicable Advances. A certificate specifying the event referred to in this Section 2.11(a), the amount sufficient to compensate such Lender and the basis of its computation (which shall be reasonable), submitted in good faith to the Company and the Administrative Agent by such Lender, shall be conclusive and binding for all purposes absent manifest error. Each Lender agrees to provide reasonably prompt Credit Agreement ---------------- - 42 - notice to the Company of the occurrence of any event referred to in the first sentence of this Section 2.11(a). (b) Capital Requirements. If any Lender determines that -------------------- compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) after the date hereof affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender and that the amount of such capital is increased by or based upon the existence of such Lender's Commitments or the issuance of the Letters of Credit (or similar contingent obligations) and other commitments of this type, then, such Lender may from time to time give notice of such circumstances to the Company (with a copy to the Administrative Agent); provided that each Lender agrees, before giving any such notice, to use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such a designation would avoid the need for, or reduce the amount of, the cost to the Lender of such increase in the amount of capital maintained by such Lender and would not be disadvantageous to such Lender. The amount sufficient to compensate such Lender in light of such increase in the amount of capital maintained by such Lender or any corporation controlling such Lender shall be determined by such Lender in good faith to the extent that such Lender reasonably determines such increase in capital to be allocable to the existence of such Lender's Commitments or to the issuance or maintenance of any Letters of Credit. A certificate specifying the event referred to in this Section 2.11(b), the amount sufficient to compensate such Lender and the basis of its computation (which shall be reasonable), submitted in good faith to the Company and the Administrative Agent by such Lender, shall be conclusive and binding for all purposes absent manifest error. Each Lender agrees to provide reasonably prompt notice to the Company of the occurrence of any event referred to in the first sentence of this Section 2.11(b). (c) Election by Company. The Company shall, within five ------------------- days of receiving a notice from any Lender pursuant to subsection (a) or (b) of this Section 2.11, elect (and shall notify such Lender and the Administrative Agent of such election) to: (i) pay to the Administrative Agent in Dollars for the account of such Lender, from time to time commencing on the date of notice by such Lender and as specified by such Lender, (A) the amount such Lender has set forth in the certificate which such Lender has delivered to the Company pursuant to subsection (a) of this Section 2.11 or (B) the amount such Lender has set forth in the certificate which such Lender has delivered to the Company pursuant to subsection (b) of this Section 2.11; or (ii) if no Default shall have occurred and be continuing, require that such Lender assign to the Company's designated assignee or assignees, in accordance with the terms of Section 9.07, all Advances then owing to such Lender and all rights and obligations of such Lender hereunder; provided that (A) each such assignment shall be either an assignment of all of the rights and obligations of the assigning Lender under this Agreement or an assignment of a portion of such rights and obligations made concurrently with another such assignment or assignments which together cover all of the rights and obligations of the assigning Lender under this Agreement, (B) no Lender shall be obligated to make any such assignment as a result of a demand by the Company pursuant to this Section 2.11(c) unless and until such Lender shall have received one or more payments from either the Company Credit Agreement ---------------- - 43 - or one or more assignees in an aggregate amount at least equal to the aggregate outstanding principal amount of the Advances owing to such Lender, together with accrued interest thereon to the date of payment of such principal amount, all Commitment Fees and other fees payable to such Lender and all other amounts payable to such Lender under this Agreement (including, but not limited to, any increased costs or other additional amounts (computed in accordance with this Section 2.11), and any Taxes, incurred by such Lender prior to the effective date of such assignment and amounts payable under Section 9.04(a)) and (C) each such assignment shall be made pursuant to an Assignment and Acceptance; provided that such assignment shall not be effective if, after giving effect to such assignment, the aggregate amount of the Revolving Credit Commitments and Term Advances so assigned or terminated under this Section 2.11, Section 2.12(b) and Section 2.15(g) during the term of this Agreement would exceed 25% of the aggregate amount of the Commitments as of the Restatement Date. Upon such payments and prepayments, the obligations of such Lender hereunder, by the provisions hereof, shall be released and discharged; provided that such Lender's rights under this Section 2.11, and Sections 2.15 and 9.04(b), and its obligations under Section 8.05, shall survive such release and discharge as to matters occurring prior to the date of termination of such Lender's Commitment. SECTION 2.12. Illegality. ---------- (a) Generally. Notwithstanding any other provision of this --------- Agreement, if any Lender (any such Lender being referred to herein as an "Affected Lender") shall notify the Administrative Agent that the --------------- introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for any Lender or its Eurocurrency Lending Office to perform its obligations hereunder to make Eurocurrency Rate Advances in any Currency or to fund or maintain Eurocurrency Rate Advances in any Currency hereunder, the obligation of the Lenders to make, or to Convert Advances into, Eurocurrency Rate Advances in such Currency shall be suspended until the Administrative Agent shall notify the Company and the Lenders that the circumstances causing such suspension no longer exist; provided that such suspension shall not become effective in the event the Company requires the assignment of the Affected Lender's Advances owing to it and its other rights and obligations hereunder pursuant to subsection (b)(ii) below. The Company's right to require an assignment in accordance with subsection (b)(ii) below shall not be effective to the extent that Lenders representing a majority of the Revolving Credit Commitments and Term Advances then outstanding shall be "Affected Lenders". (b) Election by Company. The Company shall, within five ------------------- days of receiving a notice from any Affected Lender pursuant to subsection (a) of this Section 2.12, elect (and shall notify such Affected Lender and the Administrative Agent of such election) to: (i) prepay in full all Eurocurrency Rate Advances in such Currency then outstanding, together with interest thereon, unless the Company, within five Business Days of notice from the Administrative Agent Converts all Eurocurrency Rate Advances of all Lenders then outstanding into Base Rate Advances in accordance with Section 2.09; or Credit Agreement ---------------- - 44 - (ii) if no Default shall have occurred and be continuing, require that such Affected Lender assign to the Company's designated assignee or assignees, in accordance with the terms of Section 9.07, all Advances then owing to such Affected Lender and all rights and obligations of such Affected Lender hereunder; provided that (A) each such assignment shall be either an assignment of all of the rights and obligations of the assigning Affected Lender under this Agreement or an assignment of a portion of such rights and obligations made concurrently with another such assignment or assignments which together cover all of the rights and obligations of the assigning Affected Lender under this Agreement, (B) no Affected Lender shall be obligated to make any such assignment as a result of a demand by the Company pursuant to this Section 2.12(b) unless and until such Affected Lender shall have received one or more payments from either the Borrowers or one or more assignees in an aggregate amount at least equal to the aggregate outstanding principal amount of the Advances owing to such Affected Lender, together with accrued interest thereon to the date of payment of such principal amount, all Commitment Fees and other fees payable to such Affected Lender and all other amounts payable to such Affected Lender under this Agreement (including, but not limited to, any increased costs or other additional amounts (computed in accordance with Section 2.11), and any Taxes, incurred by such Affected Lender prior to the effective date of such assignment and amounts payable under Section 9.04(a)) and (C) each such assignment shall be made pursuant to an Assignment and Acceptance; provided that such assignment shall not be effective if, after giving effect to such assignment, the aggregate amount of the Revolving Credit Commitments and Term Advances so assigned or terminated under this Section 2.12(b), Section 2.11 and Section 2.15(g) during the term of this Agreement would exceed 25% of the aggregate amount of the Commitments as of the Restatement Date. Upon such payments and prepayments, the obligations of such Affected Lender hereunder, by the provisions hereof, shall be released and discharged; provided that such Affected Lender's rights under this Section 2.12, and Sections 2.11 and 9.04(b), and its obligations under Section 8.05, shall survive such release and discharge as to matters occurring prior to the date of termination of such Affected Lender's Commitment. SECTION 2.13. Payments and Computations. ------------------------- (a) Payments. The Borrowers shall make each payment -------- hereunder and under the Notes not later than 12:00 noon (New York City time) on the day when due in the relevant Currency to the Administrative Agent at the Administrative Agent's Account for such Currency in same day funds. The Administrative Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or fees or commissions ratably (other than amounts payable pursuant to Section 2.11, 2.12, 2.15 or 9.04(c)) to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 9.07(c) from and after the effective date specified in such Assignment and Acceptance, the Administrative Agent shall make all payments hereunder and under the Notes in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. Credit Agreement ---------------- - 45 - (b) Computations. All computations of interest based on ------------ the Base Rate shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurocurrency Rate or the Federal Funds Rate and of fees or commissions shall be made by the Administrative Agent on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or fees or commissions are payable. Each determination by the Administrative Agent of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. (c) Payments Due on Non-Business Days. Whenever any --------------------------------- payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees or commissions, as the case may be; provided that, if such extension would cause payment of interest on or principal of Eurocurrency Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (d) Presumption by Administrative Agent. Unless the ----------------------------------- Administrative Agent shall have received notice from the Company prior to the date on which any payment is due to the Lenders hereunder that a Borrower will not make such payment in full, the Administrative Agent may assume that each Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent a Borrower shall not have so made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Rate. (e) Payments in Dollars; Redenomination of Euro Advances. ---------------------------------------------------- All amounts owing under this Agreement (including payments required under Section 2.11, and payments required under Section 9.04(c) relating to any Advance denominated in Dollars, but not including principal of, and interest on, any Advance denominated in Euros or payments relating to any such Advance required under Section 9.04(c), which are payable in Euros) are payable in Dollars. Notwithstanding the foregoing, if a Borrower shall fail to pay any principal of any Advance when due (whether at stated maturity, by acceleration, by mandatory prepayment or otherwise), the unpaid portion of such Advance shall, if such Advance is not denominated in Dollars, automatically be redenominated in Dollars on the due date thereof (or, if such due date is a day other than the last day of the Interest Period therefor, on the last day of such Interest Period) in an amount equal to the Dollar Equivalent thereof on the date of such redenomination and such principal shall be payable on demand; and if a Borrower shall fail to pay any interest on any Advance that is not denominated in Dollars, such interest shall automatically be redenominated in Dollars on the due date therefor (or, if such due date is a day other than the last day of the Interest Period therefor, on the last day of such Interest Period) in an amount equal to the Dollar Equivalent thereof on the date of such redenomination and such interest shall be payable on demand. Credit Agreement ---------------- - 46 - SECTION 2.14. Notations on the Notes. Each Borrower and ---------------------- each Lender whose Revolving Credit Advances or Term Advances are evidenced by a Note agree that (a) all Advances made by such Lender to such Borrower evidenced by such Note pursuant to this Agreement and all payments made on account of principal thereof shall be recorded by such Lender and, prior to any assignment by such Lender of such Note, all unpaid Advances evidenced by such Note shall be endorsed on the grid attached to such Note; provided that the failure of such Lender to make any such notations shall not limit or otherwise affect such Borrower's obligations to such Lender with respect to such Advances and (b) upon the payment in full of any Lender's Revolving Credit Advances or Term Advances then outstanding and the termination in full of such Lender's Commitment, such Lender shall cancel and return such Lender's Note evidencing such Advances to the Company (on its own behalf and on behalf of the other Borrowers) and be fully responsible for any claims or liabilities arising in connection with or resulting from any sale of participations therein. SECTION 2.15. Taxes. ----- (a) Payments Free of Taxes. Any and all payments by the ---------------------- Borrowers hereunder or under the Notes shall be made, in accordance with Section 2.13, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Administrative Agent, taxes imposed on its income, and franchise taxes imposed on it in lieu of income taxes, by the jurisdiction under the laws of which such Lender or the Administrative Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, taxes imposed on its income, and franchise taxes imposed on it in lieu of income taxes, by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If any Borrower shall ----- be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to any Lender or the Administrative Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.15) such Lender or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Borrower shall make such deductions and (iii) such Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) Other Taxes. In addition, the Company (on its own ----------- behalf and on behalf of the other Borrowers) agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or under the Notes or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or the Notes (hereinafter referred to as "Other Taxes"). ----------- (c) Indemnification by Borrowers. The Borrowers will ---------------------------- indemnify each Lender and the Administrative Agent for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.15) paid by such Lender or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be made Credit Agreement ---------------- - 47 - within 30 days from the date such Lender or the Administrative Agent (as the case may be) makes written demand therefor. (d) Evidence of Payments. Within 30 days after the date of -------------------- any payment of Taxes, the Company (on its own behalf and on behalf of the other Borrowers) will furnish to the Administrative Agent, at its address referred to in Section 9.02, the original or a certified copy of a receipt evidencing payment thereof. In the case of any payment hereunder or under the Notes by or on behalf of a Borrower through an account or branch outside the United States or on behalf of a Borrower by a payor that is not a United States person, if the Company determines that no Taxes are payable in respect thereof, the Company shall furnish, or shall cause such payor to furnish, to the Administrative Agent, at such address, an opinion of counsel acceptable to the Administrative Agent stating that such payment is exempt from Taxes. For purposes of this subsection (d) and subsection (e), the terms "United States" and "United States person" shall have the meanings ------------- -------------------- specified in Section 7701 of the Internal Revenue Code. (e) Lender Tax Forms. Any Lender that is entitled to an ---------------- exemption from or reduction of withholding tax under the law of the jurisdiction in which the Company or a Designated Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Designated Borrower (with a copy to the Administrative Agent and the Company), at the time or times reasonably requested by such Borrower, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate. Without limiting the generality of the foregoing, each Lender that is not a United States person ("Non-U.S. Lender") shall deliver to the Company and the Administrative --------------- Agent on or prior to the date on which such Non-U.S. Lender becomes a Lender under this Agreement (and from time to time thereafter upon the request of the Company or the Administrative Agent, but only if such Non-U.S. Lender is legally entitled to do so), whichever of the following is applicable: (i) two duly completed copies of Internal Revenue Service Form W-8BEN claiming eligibility for benefits of an income tax treaty to which the United States is a party, (ii) two duly completed copies of Internal Revenue Service Form W-8ECI, (iii) in the case of a Lender claiming the benefits of the exemption for portfolio interest under Section 881(c) of the Internal Revenue Code, (x) a certificate to the effect that such Non-U.S. Lender is not (A) a "bank" within the meaning of Section 881(c)(3)(A) of the Internal Revenue Code, (B) a "10 percent shareholder" of the Borrower within the meaning of Section 881(c)(3)(B) of the Internal Revenue Code or (C) a controlled foreign corporation described in Section 881(c)(3)(C) of the Internal Revenue Code and (y) two duly completed copies of Internal Revenue Service Form W-8BEN, or (iv) any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in United States Federal withholding tax duly completed together with such supplementary documentation as may be prescribed by applicable law to permit the Company to determine the withholding or deduction required to be made. If the form provided by a Lender under the second sentence of this subsection (e) at the time such Lender first becomes a party to this Agreement (or, in the case of a sale to a participant, the Internal Revenue Service Form W-8IMY provided at the time the participant acquired the interest under Section 9.07(e)) indicates a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from "Taxes" as defined in Section 2.15(a). If any form or document referred to in this subsection (e) requires the disclosure of information, other than information necessary to compute the tax payable and information required by the versions of Internal Revenue Service Form W-8BEN or W-8ECI in effect on the date hereof, that the Lender reasonably considers to be Credit Agreement ---------------- - 48 - confidential, the Lender shall give notice thereof to the Company and shall not be obligated to include in such form or document such confidential information. (f) Effect of Failure to Provide Forms. For any period ---------------------------------- with respect to which a Lender has failed to provide the Company or Designated Borrower with the appropriate form described in the second sentence of Section 2.15(e) above (other than if such failure is due to a change in law occurring subsequent to the date on which a form originally was required to be provided, or if such form otherwise is not required under subsection (e) above), such Lender shall not be entitled to indemnification under Section 2.15(a) with respect to Taxes imposed by the United States of America; provided that should a Lender become subject to Taxes because of its failure to deliver a form required hereunder, the Company shall take such steps as the Lender shall reasonably request to assist the Lender to recover such Taxes. (g) Election by Company. So long as no Default shall have ------------------- occurred and be continuing, if a Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to any Lender or shall be required to indemnify any Lender for any Taxes under Section 2.15(c) (each such Lender, a "Specified Lender"), the Company ---------------- may, within five days of receiving a notice from any Specified Lender pursuant to subsection (a) of this Section 2.15, elect (and shall notify such Specified Lender and the Administrative Agent of such election) to require that such Specified Lender assign to the Company's designated assignee or assignees, in accordance with the terms of Section 9.07, all Advances then owing to such Specified Lender and all rights and obligations of such Specified Lender hereunder; provided that (A) each such assignment shall be either an assignment of all of the rights and obligations of the assigning Specified Lender under this Agreement or an assignment of a portion of such rights and obligations made concurrently with another such assignment or assignments which together cover all of the rights and obligations of the assigning Specified Lender under this Agreement, (B) no Specified Lender shall be obligated to make any such assignment as a result of a demand by the Company pursuant to this Section 2.15(g) unless and until such Specified Lender shall have received one or more payments from either the Borrowers or one or more assignees in an aggregate amount at least equal to the aggregate outstanding principal amount of the Advances owing to such Specified Lender, together with accrued interest thereon to the date of payment of such principal amount, all fees payable to such Specified Lender and all other amounts payable to such Specified Lender under this Agreement (including, but not limited to, any increased costs or other additional amounts (computed in accordance with Section 2.11), and any Taxes, incurred by such Specified Lender prior to the effective date of such assignment and amounts payable under Section 9.04(a)) and (C) each such assignment shall be made pursuant to an Assignment and Acceptance; provided that such assignment shall not be effective if, after giving effect to such assignment, the aggregate amount of the Revolving Credit Commitments and Term Advances so assigned or terminated under this Section 2.15(g), Section 2.11 and Section 2.12 during the term of this Agreement would exceed 25% of the aggregate amount of the Commitments as of the Restatement Date. Upon such payments and prepayments, the obligations of such Specified Lender hereunder, by the provisions hereof, shall be released and discharged; provided that such Specified Lender's rights under this Section 2.15, and Sections 2.11, 2.12 and 9.04(b), and its obligations under Section 8.05, shall survive such release and discharge as to matters occurring prior to the date of termination of such Specified Lender's Commitment. Credit Agreement ---------------- - 49 - SECTION 2.16. Sharing of Payments, Etc. If any Lender ------------------------- shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Advances or Letter of Credit Exposure owing to it (other than pursuant to Section 2.11, 2.12, 2.15 or 9.04(c)) in excess of its ratable share of payments on account of the Advances and Letter of Credit Exposure obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participations in the Advances and Letter of Credit Exposure owing to them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and each such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. Each Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.16 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of such Borrower in the amount of such participation. The Lenders hereby acknowledge and consent to the special allocations provided for in Section 5.03 of the Non-Sharing Intercreditor Agreement. SECTION 2.17. Borrowings by Designated Borrowers. ---------------------------------- (a) Notice of Designation. The Company may, at any time or --------------------- from time to time, designate one or more wholly owned Subsidiaries of the Company as "Borrowers" hereunder by furnishing to the Administrative Agent a letter (a "Designation Letter") in duplicate, in substantially the form of ------------------ Exhibit G-1 hereto, duly completed and executed by the Company and such Subsidiary. Upon any such designation of a Subsidiary, such Subsidiary shall be a Designated Borrower and a Designated Borrower entitled to borrow Revolving Credit Advances or Term Advances on and subject to the terms and conditions of, and to the extent provided in, this Agreement. (b) Termination of Designated Borrower. So long as all ---------------------------------- principal of and interest on all Advances made to any Designated Borrower have been paid in full, the Company may terminate the status of such Designated Borrower as a Designated Borrower hereunder by furnishing to the Administrative Agent a letter (a "Termination Letter") in substantially the ------------------ form of Exhibit G-2 hereto, duly completed and executed by the Company and such Subsidiary. Any Termination Letter furnished hereunder shall be effective upon receipt by the Administrative Agent, which shall promptly notify the Lenders, whereupon the Lenders shall promptly deliver to the Company (through the Administrative Agent) the Notes, if any, of such former Designated Borrower. Notwithstanding the foregoing, the delivery of a Termination Letter with respect to any Designated Borrower shall not terminate (i) any obligation of such Designated Borrower that remains unpaid at the time of such delivery (including any obligation arising thereafter in respect of such Designated Borrower under Section 2.15 or 2.11) or (ii) the obligations of the Company under Article III with respect to any such unpaid obligations. Credit Agreement ---------------- - 50 - SECTION 2.18. Letters of Credit. ----------------- (a) Issuance of Letters of Credit, Etc. On and after the ----------------------------------- Restatement Date the Company may request the L/C Issuer to issue, on the terms and conditions hereinafter set forth and, upon such request, subject to such terms and conditions, the L/C Issuer shall issue, letters of credit (the "Letters of Credit") for the account of the Company or any one or more ----------------- of its Subsidiaries from time to time on any Business Day during the period from the Restatement Date until the date five Business Days prior to the Revolving Credit Commitment Termination Date; provided that: (i) the aggregate Available Amount of all Letters of Credit shall not exceed at any time $125,000,000, provided that (x) in no event shall any Letter of Credit be issued if, after giving effect thereto, the aggregate Revolving Credit Exposures of all of the Revolving Credit Lenders would exceed the aggregate amount of the Revolving Credit Commitments and (y) to the extent that either (A) the face amount of the Letter of Credit to be issued in connection with the Penndot Proceeding pursuant to Section 6.01(j) shall be less than $61,000,000 or (B) any portion of such Letter of Credit shall expire or terminate without being drawn, then the permitted Available Amount of all Letters of Credit (i.e. such $125,000,000 figure) and the Revolving Credit Commitments shall be reduced (up to a maximum aggregate reduction equal to $45,000,000) by (I) the amount (in integral multiples of $1,000,000, rounded downwards) by which such face amount is less than $61,000,000 and (II) the undrawn amount of such Letter of Credit upon such expiration or termination; and (ii) no Letter of Credit shall have an expiration date later than, or shall permit the account party or the beneficiary to request the renewal thereof to a date beyond, the earlier of (x) the date one year after the issuance thereof and (y) the date five Business Days prior to the Revolving Credit Commitment Termination Date, provided that any Letter of Credit with a one-year term may provide for the renewal thereof for additional one-year periods (which shall in no event extend beyond the date referred to in the foregoing subclause (y)). On each day during the period commencing with the issuance by the L/C Issuer of any Letter of Credit and until such Letter of Credit shall have been drawn in full or expired or been terminated, the Revolving Credit Commitment of each Revolving Credit Lender shall be deemed to be utilized for all purposes of this Agreement in an amount equal to such Revolving Credit Lender's Applicable Percentage of the then undrawn amount of such Letter of Credit. (b) Request for Issuance. -------------------- (i) Notices of Issuance. Each Letter of Credit shall be ------------------- issued upon notice, given not later than 1:00 p.m. (New York City time) three Business Days prior to the date of the proposed issuance of such Letter of Credit, by the Company to the L/C Issuer and the Administrative Agent, which shall give to each Revolving Credit Lender prompt notice thereof in writing. Each such notice of issuance of a Letter of Credit (a "Notice of Issuance") shall be ------------------ irrevocable and shall be made in writing, specifying therein (A) the requested date of such issuance (which shall be a Business Day), (B) the Available Credit Agreement ---------------- - 51 - Amount requested for such Letter of Credit, (C) the expiration date of such Letter of Credit, (D) the name and address of the beneficiary of such Letter of Credit, (E) the form of such Letter of Credit, together with a description of the nature of the transactions or obligations proposed to be supported thereby and (F) that no Event of Default described in Section 7.01(f) has occurred and is continuing. If the requested form of such Letter of Credit is acceptable to the Administrative Agent, in its discretion, the L/C Issuer will, upon fulfillment of the applicable conditions set forth in Article IV, make such Letter of Credit available to the Company at the office of the Administrative Agent referred to in Section 9.02 or as otherwise agreed with the Company in connection with such issuance. (ii) Reports by L/C Issuer. The L/C Issuer will advise the --------------------- Administrative Agent promptly (but in any event within one Business Day) following any issuance, expiration or termination of, or any drawing under, any Letter of Credit. (c) Drawing and Reimbursement. ------------------------- (i) Reimbursement Upon Drawings, Etc. The payment by the --------------------------------- L/C Issuer of a draft drawn under any Letter of Credit shall constitute for all purposes of this Agreement the making by the L/C Issuer of an advance to the Company in the amount of such payment, which the Company agrees to repay on the Business Day following such drawing, together with interest from the date of such drawing until such repayment in full at the rates provided for herein, provided that, unless the Company notifies the Administrative Agent otherwise, (A) if at the time of any such drawing the Revolving Credit Commitments have not been terminated, the Company shall be deemed to have requested Base Rate Advances from the Revolving Credit Lenders in an aggregate amount equal to such drawing (and each Revolving Credit Lender agrees to make a Revolving Credit Advance in an aggregate amount equal to the amount of such Revolving Credit Lender's Applicable Percentage of such amount), and such deemed Base Rate Advances shall bear interest as provided in Section 2.07(a)(i), and (B) if at the time of any such drawing the Revolving Credit Commitments have been terminated, or the Company notifies the Administrative Agent that it does not wish to borrow Base Rate Advances as provided above, then if the Company shall not make such payment on the Business Day following such drawing, such unpaid amount shall bear interest (payable on demand) from such Business Day until so paid in full at the rate applicable to overdue amounts under Section 2.07(b) (and each Revolving Credit Lender shall, if requested by the L/C Issuer pursuant to clause (ii) below, make available to the L/C Issuer its respective Applicable Percentage of such amount). (ii) Reimbursement From Revolving Credit Advances. Without -------------------------------------------- limiting the obligations of the Company hereunder, upon demand by the L/C Issuer through the Administrative Agent, each Revolving Credit Lender shall make Revolving Credit Advances in an aggregate amount (or, in the circumstances described in clause (i)(B) above, shall make available to the L/C Issuer an aggregate amount) equal to the amount of such Revolving Credit Lender's Applicable Percentage of such advance by the L/C Issuer by making available for the account of its Applicable Lending Office to the Administrative Agent for the account of the L/C Issuer, by deposit to the Administrative Agent's Account, in same day funds, an amount equal to the sum of (A) its Applicable Credit Agreement ---------------- - 52 - Percentage of the outstanding principal amount of such advance plus (B) interest accrued and unpaid to and as of such date on the outstanding principal amount of such advance. Each Revolving Credit Lender agrees to make such Revolving Credit Advances on the Business Day on which demand therefor is made by the L/C Issuer through the Administrative Agent (provided that notice of such demand is given not later than 12:00 noon (New York City time) on such Business Day) or (if notice of such demand is given after such time) the first Business Day next succeeding such demand. (iii) Interest Upon Failure to Make Revolving Credit ---------------------------------------------- Advances. If and to the extent that any Revolving Credit Lender -------- shall not have so made the amount of such Revolving Credit Advance available to the Administrative Agent for the account of the L/C Issuer, such Revolving Credit Lender agrees to pay to the Administrative Agent forthwith on demand such amount together with interest thereon, for each day from the date of demand by the L/C Issuer until the date such amount is paid to the Administrative Agent, at the rate of interest at which the Company is obligated to pay interest on such advance hereunder. (iv) Obligations of Revolving Credit Lenders Absolute. The ------------------------------------------------ Revolving Credit Advances provided for in this Section 2.18 shall be made by the Revolving Credit Lenders irrespective of whether there has occurred and is continuing any Default or Event of Default or whether any other condition precedent specified in Article IV has not been satisfied, and the obligation of each Revolving Credit Lender to make such Revolving Credit Advances is absolute and unconditional. (d) Obligations of the Company Absolute. The obligations ----------------------------------- of the Company under this Agreement and any other L/C Related Document shall, to the extent permitted by law, be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and the other L/C Related Documents under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the L/C Issuer under a Letter of Credit against presentation of a draft or other document that does not comply strictly with the terms of such Letter of Credit, and (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section 2.18, constitute a legal or equitable discharge of the Company's obligations hereunder. Neither the Administrative Agent nor the L/C Issuer shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the L/C Issuer; provided that nothing in this clause (d) shall be construed to excuse the L/C Issuer from liability to the Company to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Company to the Credit Agreement ---------------- - 53 - extent permitted by applicable law) suffered by the Company that are caused by the L/C Issuers gross negligence or willful misconduct in honoring or refusing to honor a draft under a Letter of Credit or in determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that: (i) the L/C Issuer may accept documents that appear on their face to be in substantial compliance with the terms of a Letter of Credit without responsibility for further investigation, regardless of any notice or information to the contrary, and may make payment upon presentation of documents that appear on their face to be in substantial compliance with the terms of such Letter of Credit; (ii) the L/C Issuer shall have the right, in its sole discretion, to decline to accept such documents and to make such payment if such documents are not in strict compliance with the terms of such Letter of Credit; and (iii) this sentence shall establish the standard of care to be exercised by the L/C Issuer when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof (and the parties hereto hereby waive, to the extent permitted by applicable law, any standard of care inconsistent with the foregoing). (e) No Responsibility to Third Parties. Neither the ---------------------------------- Administrative Agent nor any Revolving Credit Lender or the L/C Issuer shall have any responsibility as to the application or use of any Letter of Credit. ARTICLE III GUARANTEE SECTION 3.01. The Guarantee. The Company hereby guarantees ------------- to each Lender and the Administrative Agent and their respective successors and assigns the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the principal of and interest on the Advances and all reimbursement obligations in respect of Letters of Credit made by the Lenders to each Designated Borrower and all other amounts from time to time owing to the Lenders or the Administrative Agent by any Designated Borrower under this Agreement or any other Loan Document, in each case strictly in accordance with the terms thereof (such obligations being herein collectively called the "Guaranteed Obligations"). The Company hereby ---------------------- further agrees that if any Designated Borrower shall fail to pay in full when due (whether at stated maturity, by acceleration or otherwise) any of the Guaranteed Obligations owing by such Designated Borrower, the Company will promptly pay the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. SECTION 3.02. Obligations Unconditional. The obligations ------------------------- of the Company under Section 3.01 are irrevocable, absolute and unconditional irrespective of the value, Credit Agreement ---------------- - 54 - genuineness, validity, regularity or enforceability of the obligations of any of the Designated Borrowers under this Agreement, the other Loan Documents or any other agreement or instrument referred to herein or therein, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Article III that the obligations of the Company hereunder shall be absolute and unconditional under any and all circumstances. Without limiting the generality of the foregoing, it is agreed that the occurrence of any one or more of the following shall not alter or impair the liability of the Company hereunder, which shall remain absolute and unconditional as described above: (i) at any time or from time to time, without notice to the Company, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (ii) any of the acts mentioned in any of the provisions of this Agreement, the other Loan Documents or any other agreement or instrument referred to herein or therein shall be done or omitted; (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under this Agreement, the other Loan Documents or any other agreement or instrument referred to herein or therein shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; or (iv) any lien or security interest granted to, or in favor of, the Administrative Agent or any Lender or Lenders as security for any of the Guaranteed Obligations shall fail to be perfected. The Company hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that the Administrative Agent, the L/C Issuer or any Lender exhaust any right, power or remedy or proceed against any of the Designated Borrowers under this Agreement or any other agreement or instrument referred to herein, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. SECTION 3.03. Reinstatement. The obligations of the ------------- Company under this Article III shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any of the Designated Borrowers in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and the Company agrees that it will indemnify the Administrative Agent and each Lender on demand for all reasonable costs and expenses (including fees of counsel) incurred by the Administrative Agent or such Lender in connection with such rescission or restoration, including any such costs and expenses incurred in defending against any claim alleging that such payment constituted a Credit Agreement ---------------- - 55 - preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. SECTION 3.04. Subrogation. The Company hereby agrees that ----------- until the payment and satisfaction in full of all Guaranteed Obligations and the expiration and termination of the Letters of Credit and the Commitments of the Lenders under this Agreement it shall not exercise any right or remedy arising by reason of any performance by it of its guarantee in Section 3.01, whether by subrogation or otherwise, against any Designated Borrower or any other guarantor of any of the Guaranteed Obligations or any security for any of the Guaranteed Obligations. SECTION 3.05. Remedies. The Company agrees that, as -------- between the Company and the Lenders, the obligations of the Designated Borrowers under this Agreement may be declared to be forthwith due and payable as provided in Article VII (and shall be deemed to have become automatically due and payable in the circumstances provided in Article VII) for purposes of Section 3.01 notwithstanding any stay, injunction or other prohibition preventing such declaration (or such obligations from becoming automatically due and payable) as against any of the Designated Borrowers and that, in the event of such declaration (or such obligations being deemed to have become automatically due and payable), such obligations (whether or not due and payable by such Designated Borrower) shall forthwith become due and payable by the Company for purposes of Section 3.01. SECTION 3.06. Instrument for the Payment of Money. The ----------------------------------- Company hereby acknowledges that the guarantee in this Article III constitutes an instrument for the payment of money, and consents and agrees that any Lender or the Administrative Agent, at its sole option, in the event of a dispute by the Company in the payment of any moneys due hereunder, shall have the right to bring motion-action under New York CPLR Section 3213. SECTION 3.07. Continuing Guarantee. The guarantee in this -------------------- Article III is a continuing guarantee of payment (and not of collection), and shall apply to all Guaranteed Obligations whenever arising. ARTICLE IV CONDITIONS TO EFFECTIVENESS AND LENDING SECTION 4.01. Conditions Precedent to Restatement. The ----------------------------------- amendment and restatement of the Existing Credit Agreement provided for herein, and the obligation of each Lender and the L/C Issuer to make its initial extension of credit hereunder, is subject to the condition precedent that counterparts of this Agreement executed by each of the intended parties hereto shall have been delivered to the Administrative Agent, and that the Administrative Agent shall have received the following, each (unless otherwise specified below) dated the Restatement Date, in form and substance satisfactory to the Administrative Agent (and, to the extent specified below, each Lender and the L/C Issuer) and (except for the Notes and as otherwise may be agreed to by the Administrative Agent) in such number of copies as the Administrative Agent may request: Credit Agreement ---------------- - 56 - (a) Charter Documents, Etc. ----------------------- (1) Certified copies of (x) the charter and by-laws (or equivalent documents in the case of the European Borrowers) of each Obligor, (y) the resolutions of the Board of Directors of each Obligor authorizing and approving (or, in the case of the Company, providing for the authorization and approval of) this Agreement, the Notes and each of the other Loan Documents to which it is to be a party, and (z) all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement, the Notes and each of the other Loan Documents. (2) A certificate of the Secretary or an Assistant Secretary (or equivalent officer) of each Obligor certifying the names and true signatures of the officers of each Obligor authorized to sign this Agreement, the Notes and each of the other Loan Documents to which they are to be a party, and the other documents to be delivered hereunder. (3) A certificate from the respective jurisdiction of incorporation as to the good standing of and charter documents filed by the Company and each Subsidiary Guarantor. (b) Opinions. -------- (1) A favorable opinion of the General Counsel of the Company, substantially in the form of Exhibit D-1 hereto and covering such other matters as the Administrative Agent may reasonably request. (2) A favorable opinion of Milbank, Tweed, Hadley & McCloy LLP, special New York counsel for the Administrative Agent substantially in the form of Exhibit E hereto and covering such other matters as the Administrative Agent may reasonably request. (3) A favorable opinion of Winston & Strawn, special New York counsel for the Company substantially in the form of Exhibit D-2 hereto and covering such other matters as the Administrative Agent may reasonably request. The Company hereby instructs each of its counsel referred to in clauses (1) and (3) above to deliver the opinions referred to above to the Lenders, the Administrative Agent, the Collateral Agent and the Collateral Trustee). (c) Representations, Etc. A certificate signed by a duly --------------------- authorized officer of the Company stating that: (1) the representations and warranties contained in Section 5.01 are correct on and as of the Restatement Date, and (2) no event has occurred and is continuing that constitutes a Default. Credit Agreement ---------------- - 57 - (d) Security Documents. The Non-Sharing Intercreditor ------------------ Agreement, the Non-Sharing Security and Guarantee Agreement, the Sharing Intercreditor Agreement and the Sharing Security Agreement, each duly executed and delivered by the Company and each Subsidiary Guarantor, the Collateral Agent and each other Person contemplated to be a party thereto, and the Company and each Subsidiary Guarantor shall have executed and delivered such other documents and taken such other actions as shall have been reasonably requested by the Administrative Agent to perfect the Liens to be created pursuant to the Non-Sharing Security and Guarantee Agreement and the Sharing Security Agreement. In that connection, the Majority Lenders hereby authorize the Administrative Agent to execute on its behalf the Non-Sharing Intercreditor Agreement and Sharing Intercreditor Agreement, and to continue the appointment of Citibank, N.A., as Collateral Agent on its behalf, as contemplated in Section 2 of the Non-Sharing Intercreditor Agreement. (e) Existing Mortgaged Facilities. The following ----------------------------- documents, each of which shall be executed (and, where appropriate, acknowledged) by Persons satisfactory to the Administrative Agent and delivered to the Collateral Agent or the Collateral Trustee, as applicable: (i) one or more modifications or confirmations of the Non-Sharing Mortgages covering the Existing Mortgaged Facilities, in each case duly executed and delivered by the Company in recordable form in favor of the Collateral Agent for the benefit of the holders of the Non-Sharing Obligations (or in favor of a trustee for the benefit of the Collateral Agent and the holders of the Non-Sharing Obligations), in such number of copies as the Administrative Agent shall have reasonably requested, together with any Uniform Commercial Code financing statements covering fixtures, if applicable, in the appropriate county land office(s) in favor of the Collateral Agent, and evidence of payment by the Company of all recording and stamp taxes, and filing fees, payable in connection with the recording of such modifications and confirmations and financing statements; (ii) one or more Sharing Mortgages covering the Existing Mortgaged Facilities, junior in priority to the Non-Sharing Mortgages covering the Existing Mortgaged Facilities as modified and confirmed as provided above, in each case duly executed and delivered by the Company in recordable form in favor of the Collateral Trustee for the benefit of the holders of the Sharing Obligations (or in favor of a trustee for the benefit of the Collateral Trustee and the holders of the Sharing Obligations), in such number of copies as the Administrative Agent shall have reasonably requested, together with any Uniform Commercial Code financing statements covering fixtures, if applicable, in the appropriate county land office(s) in favor of the Collateral Trustee, and evidence of payment by the Company of all recording and stamp taxes, and filing fees, payable in connection with the recording of such Sharing Mortgages and financing statements; and (iii) to the extent requested by the Administrative Agent, an opinion of counsel in each jurisdiction in which any Existing Mortgaged Facility is located, substantially in the form of Exhibit F hereto and covering such other matters as Credit Agreement ---------------- - 58 - the Administrative Agent may reasonably request (and the Company hereby instructs such counsel to deliver such opinions to the Lenders, the Administrative Agent, the Collateral Agent and the Collateral Trustee). The Non-Sharing Mortgages as so modified and confirmed shall equally and ratably secure such of the Non-Sharing Obligations as are outstanding on the Relevant Date up to the Senior Lien Limit. Such Sharing Mortgages shall equally and ratably secure the Sharing Obligations. Anything herein or in any Non-Sharing Mortgage to the contrary notwithstanding, the aggregate amount of Non-Sharing Obligations that constitute "Debt" under the Existing Notes Indentures entitled to the benefits of the Non-Sharing Mortgages taken as a whole shall not exceed the Senior Lien Limit. (f) New Mortgaged Facilities. The following documents, ------------------------ each of which shall be executed (and, where appropriate, acknowledged) by Persons satisfactory to the Administrative Agent and delivered to the Collateral Trustee, with copies delivered to the Astaris Administrative Agent and Co-gen Agent: (i) Sharing Mortgages covering the Martinsville Facility and Pensacola Facility, in each case duly executed and delivered by CPFilms Inc. or the Company, as applicable, in recordable form in favor of the Collateral Trustee for the benefit of the holders of the Sharing Obligations (or in favor of a trustee for the benefit of the Collateral Trustee and the holders of the Sharing Obligations), in such number of copies as the Administrative Agent shall have reasonably requested, together with any Uniform Commercial Code financing statements covering fixtures, if applicable, in the appropriate county land office(s) in favor of the Collateral Trustee, and evidence of payment by CPFilms Inc. and the Company, as applicable, of all recording and stamp taxes, and filing fees, payable in connection with the recording of such Sharing Mortgages and financing statements (it being understood that the amount of Sharing Obligations entitled to the benefits of such Sharing Mortgage covering the Pensacola Facility shall be limited to $400,000,000, and such Sharing Mortgage shall so provide); and (ii) to the extent requested by the Administrative Agent, an opinion of counsel in each jurisdiction in which any New Mortgaged Facility is located, substantially in the form of Exhibit F hereto and covering such other matters as the Administrative Agent may reasonably request (and the Company hereby instructs such counsel to deliver such opinions to the Lenders, the Administrative Agent, the Collateral Agent and the Collateral Trustee). Each such Sharing Mortgage shall equally and ratably secure the Sharing Obligations and shall not be junior in priority to a Non-Sharing Mortgage covering the New Mortgaged Facilities (it being understood that no Non-Sharing Mortgage shall be executed covering the New Mortgaged Facilities). (g) Insurance. Certificates of insurance evidencing the --------- existence of all insurance required to be maintained by the Company pursuant to Section 6.01(h) and the designation of the Collateral Agent or Collateral Trustee as the loss payee or additional Credit Agreement ---------------- - 59 - named insured, as the case may be, thereunder to the extent required by Section 6.01(h), such certificates to be in such form and contain such information as is specified in Section 6.01(h). In addition, the Company shall have delivered a certificate of a senior financial officer of the Company setting forth the insurance obtained by it in accordance with the requirements of Section 6.01(h) and stating that such insurance is in full force and effect and that all premiums then due and payable thereon have been paid. (h) Astaris and Co-gen Consents. Evidence that the --------------------------- requisite lenders under the Astaris Credit Agreement shall have authorized the execution and delivery of the Non-Sharing Intercreditor Agreement and Sharing Intercreditor Agreement by the Astaris Administrative Agent and, to the extent necessary under the Astaris Guaranty Agreement, shall have executed and delivered a consent to the transactions contemplated hereby pursuant to an instrument in form and substance reasonably satisfactory to the Administrative Agent. In addition, the requisite purchasers under the Co-gen Participation Agreement shall have authorized the execution and delivery of the Non-Sharing Intercreditor Agreement and Sharing Intercreditor Agreement by the Co-gen Agent and, to the extent necessary under the Co-gen Guaranty Agreement and the Co-gen Lease, shall have consented to the transactions contemplated hereby pursuant to an instrument in form and substance reasonably satisfactory to the Administrative Agent (which instrument shall include the extension of the maturity thereof to August 13, 2004). (i) Designated Letter of Credit Obligations. Evidence that --------------------------------------- each issuer of any of the Designated Letters of Credit (other than, if requested by the Company, any issuer thereof that has letters of credit in an aggregate amount of less than $1,000,000 outstanding) shall have executed and delivered an agreement pursuant to which such issuer agrees to extend the expiry date of each Designated Letter of Credit issued by it to no earlier than August 13, 2004. (j) Designated Borrowers. Designation Letters pursuant to -------------------- which the Company shall have continued the designation of Solutia Germany as a Borrower hereunder and designated each of the Swiss Borrowers as Borrowers hereunder, each duly executed and delivered by the Company, Solutia Germany and each of the Swiss Borrowers, as applicable. In addition, as contemplated by Section 2.01(b), each European Borrower shall have substantially contemporaneously borrowed a Term Borrowing in the amount set forth therein, the proceeds of which shall have been applied by each such Designated Borrower to the making of an intercompany loan to Monchem International, Inc., the proceeds of which intercompany loans the Company shall cause Monchem International, Inc. to immediately dividend to it which dividends shall then be immediately applied to the prepayment of Term Advances outstanding to the Company. (k) 2009 Notes Indenture. Evidence that that the Company -------------------- shall, pursuant to a Supplemental Indenture, have assumed the obligations of SOI Funding Corp. under the 2009 Notes Indenture and shall have received not less than $195,000,000 of Net Cash Proceeds from the issuance of the 11.25% Senior Secured Notes by SOI Funding Corp. (and assumed by the Company pursuant to such Supplemental Indenture) all of which Net Cash Proceeds shall have been applied to the Advances outstanding under the Existing Credit Agreement and to provide cover for Designated Letters of Credit as Credit Agreement ---------------- - 60 - provided in Section 5.04 of the Non-Sharing Security and Guarantee Agreement (applied in a ratio of 800/850 to such Advances and 50/850 to such cover); provided that an amount of such Net Cash Proceeds equal to the 2002 Notes Maturity Amount that would otherwise be applied to the Advances outstanding under the Existing Credit Agreement pursuant to this subsection (k) shall in lieu thereof be deposited into escrow with the trustee for the 2002 Notes for application to the payment at maturity of the 2002 Notes and shall not be required to be applied to such Advances. (l) Intellectual Property Security Documents. The ---------------------------------------- documents, agreements and other instruments contemplated in the definition of the term "Intellectual Property Security Documents" in Section 1.01, covering the intellectual property listed on Schedule 6 hereto (other than in respect of intellectual property filed outside the United States of America, as to which the provisions of Section 6.01(p) shall be applicable), each of which shall have been executed (and, where appropriate, acknowledged) by Persons satisfactory to the Administrative Agent and, to the extent requested by the Administrative Agent, accompanied by one or more opinions of local counsel covering such matters as the Administrative Agent may reasonably request (and the Company hereby instructs such counsel to deliver such opinions to the Lenders and the Administrative Agent). (m) Foreign Security Documents. The documents, agreements -------------------------- and other instruments contemplated in the definition of the terms "German Security Documents" and "Swiss Security Documents", as applicable, in Section 1.01, covering, among other things, the patents, trademarks, software and software licenses, rights, manuals, process formulae, production process diagrams and designs used in connection with production at the facilities to be pledged to the Collateral Agent listed on Schedule 6 hereto, each of which shall have been executed (and, where appropriate, acknowledged) by Persons satisfactory to the Administrative Agent and, to the extent requested by the Administrative Agent, accompanied by one or more opinions of local counsel covering such matters as the Administrative Agent may reasonably request (and the Company hereby instructs such counsel to deliver such opinions to the Lenders and the Administrative Agent). (n) Interest Coverage Ratio. Evidence that the Interest ----------------------- Coverage Ratio as of June 30, 2002 was at least 2.50 to 1. (o) Other. Such other approvals, opinions and documents as ----- the Administrative Agent or any Lender may, through the Administrative Agent, reasonably request. SECTION 4.02. Conditions Precedent to Each Extension of ----------------------------------------- Credit. The obligation of each Lender to make an Advance on the occasion of - ------ each Borrowing and the obligation of the L/C Issuer to issue any Letter of Credit shall be subject to the conditions precedent that the Restatement Date shall have occurred and on the date of such Borrowing or issuance: (a) the following statements shall be true (and each of the giving of the applicable Notice of Borrowing or Notice of Issuance and the acceptance by the relevant Borrower of the proceeds of such Borrowing, or such issuance of Letter of Credit, shall constitute a Credit Agreement ---------------- - 61 - representation and warranty by the Company that on the date of such Borrowing or Letter of Credit issuance such statements are true): (i) the representations and warranties contained in Section 5.01 are correct on and as of the date of such Borrowing or issuance, before and after giving effect to such Borrowing or issuance and to the application of the proceeds therefrom, as though made on and as of such date; and (ii) no event has occurred and is continuing, or would result from such Borrowing or issuance or from the application of the proceeds therefrom, that constitutes a Default; and (b) in the case of the first Borrowing or request for issuance by a Designated Borrower, such Borrower shall have furnished to the Administrative Agent such corporate documents, resolutions and legal opinions relating to such Designated Borrower as the Administrative Agent may reasonably require. SECTION 4.03. Determinations Under Section 4.01. For --------------------------------- purposes of determining compliance with the conditions specified in Section 4.01, each Lender shall be deemed to have consented to, approved or accepted or to be satisfied with each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to the Lenders unless an officer of the Administrative Agent responsible for the transactions contemplated by this Agreement shall have received notice from such Lender prior to the Restatement Date (as notified by the Company or the Administrative Agent to the Lenders) specifying its objection thereto. ARTICLE V REPRESENTATIONS AND WARRANTIES SECTION 5.01. Representations and Warranties of the ------------------------------------- Company. The Company represents and warrants as follows: - ------- (a) Incorporation; Good Standing. The Company is a ---------------------------- corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. (b) Corporate Authority; No Breach. The execution, ------------------------------ delivery and performance by the Company of this Agreement and the other Loan Documents, and the other transactions contemplated hereby and thereby, are within the Company's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) the Company's charter or bylaws or (ii) law or any contractual restriction binding on or affecting the Company. (c) No Consents or Approvals. No authorization or approval ------------------------ or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for the due execution, delivery and performance by the Company of this Agreement or the other Loan Documents, other than those authorizations, approvals, notices, filings and actions that have been obtained, filed or taken on or before the date hereof by the Company. No authorization or approval or other action by, and no notice to or Credit Agreement ---------------- - 62 - filing with, any governmental authority or regulatory body or any other third party is required for the transactions contemplated thereby, except for (i) filings and recordings in respect of the Security Documents and (ii) the authorizations, approvals, actions, notices and filings (x) the failure to obtain would not have a Material Adverse Effect or (y) which have been (or, prior to the date hereof, will be) duly obtained, taken, given or made and are in full force and effect. (d) Enforceable Obligations, Etc. This Agreement has been, ----------------------------- and each of the other Loan Documents when delivered hereunder will have been, duly executed and delivered by the Company. This Agreement is, and each of the other Loan Documents when delivered hereunder will be, the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its respective terms. (e) Financial Statements, Etc. -------------------------- (i) The consolidated statement of financial position of the Company as at December 31, 2001 and the related consolidated statements of income and cash flows of the Company for the fiscal year then ended, accompanied by an opinion of Deloitte & Touche LLP, independent public accountants, and the unaudited consolidated statement of financial position of the Company as at March 31, 2002 and the related consolidated statements of income and cash flows of the Company for the three-month period then ended, copies of which have been made available to each Lender, present fairly, in all material respects the consolidated financial condition of the Company as at said dates and the consolidated results of the operations of the Company for the fiscal year and the three-month period ended on said dates (subject, in the case of such financial statements as at March 31, 2002, to normal year-end audit adjustments), all in accordance with generally accepted accounting principles applied on a consistent basis. Except as set forth in said financial statements, as of the date hereof, there are no material contingent liabilities, material liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated material losses from any unfavorable commitments of the Company or any of its Subsidiaries. (ii) Since December 31, 2001, there has been no material adverse change in the business, or consolidated financial condition or results of operations, of the Company and its Subsidiaries, taken as a whole. (f) No Litigation, Etc. Except as described in the ------------------- Company's Report on Form 10-K for the fiscal year ended December 31, 2001 or in the Company's Report on Form 10-Q for the fiscal quarter ended March 31, 2002, there is no pending or, to the best of the Company's knowledge, threatened action or proceeding affecting the Company or any of its Consolidated Subsidiaries before any court, or governmental agency or arbitrator which (i) would have a Material Adverse Effect or (ii) purports to affect, or would affect, the legality, validity or enforceability of this Agreement or any Note. (g) ERISA. No ERISA Event that would have a Material ----- Adverse Effect has occurred or is reasonably expected to occur with respect to any Plan. As of the Restatement Date, neither the Company nor any ERISA Affiliate participates in any Multiple Employer Plan or in any Multiemployer Plan with respect to which the Company or any ERISA Credit Agreement ---------------- - 63 - Affiliate has any Withdrawal Liability or other liability (other than the ordinary liability of a sponsor for contributions to or benefits under such Plan) that, in either case, would have a Material Adverse Effect. (h) Environmental Laws. The Company (i) is in substantial ------------------ compliance with any and all applicable Environmental Laws, (ii) has (to the best of its knowledge) received, applied for or been assigned all required Environmental Permits and (iii) is in substantial compliance with all terms and conditions of any such Environmental Permits, except where any such noncompliance with applicable Environmental Laws, failure to receive, apply for or be assigned an Environmental Permit, or failure to comply with the terms and conditions of an Environmental Permit, would not have a Material Adverse Effect. (i) Investment Company; Public Utility. Neither the ---------------------------------- Company nor any of its Material Subsidiaries is an "investment company", or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. Neither the Company nor any of its Material Subsidiaries is a "holding company", or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. (j) Accuracy of Information. ----------------------- (i) All written information, reports, financial statements, exhibits and schedules (except as to assumptions, statements, estimates and projections with respect to anticipated future performance or events) concerning the operations, business, financial condition, properties and prospects of the Company and its Subsidiaries ("Information") furnished by or on behalf of the ----------- Company to the Administrative Agent, the Syndication Agent, the L/C Issuer or any Lender on or prior to the Restatement Date in connection with the negotiation, preparation or delivery of this Agreement or included herein or delivered pursuant to Article IV, when taken as a whole, as of the date of such Information, does not contain any untrue statement of material fact or, to the best of the Company's knowledge, omit to state any material fact necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. (ii) All Post-Restatement Date Information furnished by or on behalf of the Company to the Administrative Agent, the L/C Issuer or any Lender after the Restatement Date, when taken as a whole, as of the date of such Post-Restatement Date Information, will not contain any untrue statement of material fact or, to the best of the Company's knowledge, omit to state any material fact necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. (iii) Financial projections and pro forma adjustments contained in the Information may be based on estimates and assumptions about circumstances and events that have not taken place at the time of delivery thereof; although such information reflects the Company's good faith projections and estimates as of the date thereof, based upon methods and data the Company believes to be reasonable and accurate, actual results during the Credit Agreement ---------------- - 64 - period covered by such projections and pro forma adjustments may differ materially from the projections and pro forma adjustments. (iv) For purposes of this Section 5.01(j), "Post- ----- Restatement Date Information" means: ---------------------------- (x) all Information furnished by the Company and its Subsidiaries after the date hereof under Sections 6.01(i)(i) through (ix), inclusive; and (y) all Information furnished by the Company and its Subsidiaries after the date hereof under Section 6.01(i)(x), provided that the request for such information is made in writing and delivered to the Company, at the address specified in Section 9.02, to the attention of the Company's Treasurer and stating that such request is being made in connection with this Agreement. (k) Margin Stock. Neither the Company nor any of its ------------ Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying Margin Stock, and no part of the proceeds of any extension of credit hereunder will be used to buy or carry any Margin Stock. (l) Property. Each of the Company and its Subsidiaries has -------- good title to, or valid leasehold interests in, all its real and personal property material to its business taken as a whole, subject only to Liens permitted by Section 6.02(a) and except for minor defects in title that do not materially interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes. (m) Taxes. Each of the Company and its Subsidiaries has ----- timely filed or caused to be filed all tax returns and reports required to have been filed and has paid or caused to be paid all taxes required to have been paid by it, except (a) taxes that are being contested in good faith and by appropriate proceedings or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. (n) Solvency. The Company (both individually and -------- collectively with its Consolidated Subsidiaries) is Solvent. (o) Intellectual Property. Schedule 6 sets forth under the --------------------- name of each Obligor a complete and correct list, as of the date hereof, of all material patents, material trademarks (including any registrations therefor), material software and software licenses used in connection with production at the facilities to be pledged to the Collateral Agent as contemplated hereby owned by such Obligor on the date hereof. Such Obligor owns and possesses the right to use (or, if such Obligor is not the owner, has the right to use) all such patents, trademarks (registered and unregistered), software and software licenses, rights, manuals, process formulae, production process diagrams and designs used in connection with production at such facilities, and all patents and trademark registrations listed in Schedule 6 are properly issued and in full force and effect. Credit Agreement ---------------- - 65 - (p) Real Property. Schedule 3 sets forth under the name of ------------- each Obligor a complete and correct list, as of the date hereof, of all of (i) all real property interests owned by such Obligor having a fair market value in excess of $1,000,000 and (ii) all real property interests leased by such Obligor with improvements thereon owned by such Obligor having a fair market value in excess of $1,000,000. SECTION 5.02. Representation and Warranty of the Lenders. ------------------------------------------ Each Lender represents and warrants that in good faith it has not relied, and will not rely, upon any Margin Stock as collateral in the making and maintaining of its Advances hereunder. ARTICLE VI COVENANTS OF THE COMPANY SECTION 6.01. Affirmative Covenants. So long as any --------------------- Advance shall remain unpaid, any Lender shall have any Commitment hereunder or any Letter of Credit is still outstanding, the Company agrees as follows: (a) Preservation of Corporate Existence, Etc. The Company ----------------------------------------- will (i) do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises, provided that the Company shall not be required to preserve any such right or franchise if it shall determine that the preservation thereof is no longer desirable in the conduct of its business and (ii) cause each Material Subsidiary of the Company to do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence, rights (charter and statutory) and franchises of such Material Subsidiary, except in each case if the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries, taken as a whole. (b) Compliance with Laws, Etc. The Company will comply, -------------------------- and cause each of its Consolidated Subsidiaries to comply, in all material respects, with all applicable laws, rules, regulations and orders, such compliance to include compliance with ERISA and all applicable Environmental Laws, except such noncompliance as would not have a Material Adverse Effect. (c) Payment of Taxes. The Company will duly pay and ---------------- discharge, and cause each of its Consolidated Subsidiaries to pay and discharge, all taxes, assessments and governmental charges whatsoever and by whomsoever imposed upon it or against its properties prior to the date on which penalties are attached thereto, unless and to the extent only that the same (i) shall be contested in good faith and by appropriate proceedings by the Company or (ii) are not of material importance to the business, financial condition or operating results of the Company and its Consolidated Subsidiaries. (d) Payment of Material Obligations, Etc. The Company will ------------------------------------- pay, and cause each of its Material Subsidiaries to pay, all obligations under Material Contracts, and perform, and cause each of its Material Subsidiaries to perform, each other obligation (other than obligations that the Company determines, in good faith and upon the advice of its counsel, Credit Agreement ---------------- - 66 - not to be binding on it) of the Company or such Material Subsidiary, as the case may be, under the Material Contracts except where the failure to so perform would not (either individually or in the aggregate) have a Material Adverse Effect. (e) Visitation. The Company will permit, and cause each of ---------- its Material Subsidiaries to permit, the Administrative Agent, the L/C Issuer or any of the Lenders or any agents or representatives thereof (at any reasonable time and as may be reasonably requested from time to time and, so long as no Default shall have occurred and is continuing, upon reasonable advance notice): (i) to visit the properties of the Company and any of its Material Subsidiaries in the presence of an appropriate officer or representative of the Company; (ii) if any Default shall have occurred and then be continuing, to examine and make copies of and abstracts from the records and books of account of the Company and any of its Material Subsidiaries (other than trade secrets and information and materials subject to confidentiality agreements with third parties, provided that the foregoing limitation shall not apply to the Administrative Agent or the Collateral Agent insofar as relating to collateral security under the Security Documents) in the presence of an appropriate officer or representative of the Company; and (iii) to discuss the affairs, finances and accounts of the Company and any of its Material Subsidiaries with any of their officers or directors and with their independent certified public accountants. (f) Keeping of Books. The Company will keep, and cause ---------------- each of its Consolidated Subsidiaries to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Company and each such Consolidated Subsidiary in accordance with generally accepted accounting standards in effect from time to time. (g) Properties. The Company will cause all Material ---------- Properties to be maintained and kept in good condition, repair and working order, and cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereto, in each case as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times, provided that nothing in this subsection (g) shall prevent the Company or any of its Subsidiaries from discontinuing the operation and maintenance of any such Material Properties or from omitting to make any repairs, renewals, replacements, betterments or improvements if such discontinuance or omission is, in the judgment of the Company, desirable in the conduct of the business of the Company and its Subsidiaries taken as a whole. (h) Maintenance of Insurance. From and after the ------------------------ Restatement Date, the Company will maintain insurance, and cause each of its Consolidated Subsidiaries to maintain insurance, with financially sound and reputable insurers, with respect to such of its Credit Agreement ---------------- - 67 - properties, against such risks, casualties and contingencies and in such types and amounts as are consistent with sound business practice, with any such insurance covering the Mortgaged Facilities to name the Collateral Agent or Collateral Trustee, as the case may be, as loss payee or as an additional named insured, as the case may be. On or before the date hereof, the Company will deliver to the Administrative Agent certificates of insurance reasonably satisfactory to the Administrative Agent evidencing the existence of all insurance required to be maintained by the Company pursuant to this Section 6.01(h) setting forth the respective coverages, limits of liability, carrier, policy number and period of coverage. It is understood that this subsection (h) shall not prevent the use of deductible or excess loss insurance and shall not prevent (i) the Company or any of its Subsidiaries from acting as a self-insurer or maintaining insurance with another Subsidiary or Subsidiaries of the Company so long as such action is consistent with sound business practice or (ii) the Company from obtaining and owning insurance policies covering activities of its Consolidated Subsidiaries. (i) Reporting Requirements. The Company will furnish to ---------------------- the Lenders: (i) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Company, Consolidated balance sheets of the Company and its Subsidiaries as of the end of such quarter and Consolidated statements of income and cash flows of the Company and its Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, duly certified (subject to year-end audit adjustments) by each of the Chief Executive Officer and the Chief Financial Officer of the Company as having been prepared in accordance with GAAP, together with (A) a certificate of the Chief Financial Officer, Treasurer, Controller, Assistant Controller or other authorized financial officer stating that no Default has occurred and is continuing or, if a Default has occurred and is continuing, a statement as to the nature thereof, and (B) a schedule in form and substance satisfactory to the Administrative Agent of the computations used by the Company in determining compliance with the covenants contained in Section 6.03; (ii) as soon as available and in any event within 95 days after the end of each fiscal year of the Company, a copy of the annual audit report for such year for the Company and its Subsidiaries, containing Consolidated balance sheets of the Company and its Subsidiaries as of the end of such fiscal year and Consolidated statements of income, shareowners' equity and cash flows of the Company and its Subsidiaries for such fiscal year, in each case accompanied by an opinion acceptable to the Majority Lenders (but in any event without a "going concern" or like qualification or exception and without any qualification or exception as to the scope of such audit) by Deloitte & Touche LLP or other independent public accountants of recognized national standing and certified by the Chief Executive Officer and Chief Financial Officer, together with (A) a certificate of the Chief Financial Officer, Treasurer, Controller, Assistant Controller Credit Agreement ---------------- - 68 - or other authorized financial officer of the Company stating that no Default has occurred and is continuing or, if a Default has occurred and is continuing, a statement as to the nature thereof, and (B) a schedule in form and substance satisfactory to the Administrative Agent of the computations used by the Company in determining compliance with the covenants contained in Section 6.03; (iii) as soon as possible and in any event within five Business Days after (x) the determination by the Company that a Default has occurred and is continuing on the date of such statement, a statement of the Chief Financial Officer, Treasurer, Controller, Assistant Controller or other authorized financial officer of the Company setting forth details of such Default and the action that the Company has taken and proposes to take with respect thereto, (y) an executive officer of the Company has actual knowledge of the filing or commencement of any action, suit or proceeding by or before any arbitrator or governmental authority (including the assertion of any Environmental Claim) against or affecting the Company or any of its Subsidiaries that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect, notice of such action, suit or proceeding and (z) an executive officer of the Company has actual knowledge of any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect, notice of such development; (iv) promptly and in any event within 30 days after the Company knows or has reason to know that any ERISA Event that would have a Material Adverse Effect has occurred, a statement of an authorized financial officer of the Company describing such ERISA Event and the action, if any, that the Company or such ERISA Affiliate has taken and proposes to take with respect thereto; (v) promptly and in any event within ten Business Days after receipt thereof by the Company or any of its ERISA Affiliates, copies of each notice from the PBGC stating its intention to terminate any Plan or to have a trustee appointed to administer any such Plan; (vi) promptly and in any event within 45 days after the receipt thereof by the Company or any of its ERISA Affiliates, a copy of the latest annual actuarial report for each Plan if the ratio of the fair market value of the assets of such Plan to its current liability (as defined in Section 412 of the Internal Revenue Code) is less than 80%; (vii) as soon as possible and in any event within three Business Day after the determination by the Company that a Change of Control has occurred, the Company shall deliver to the Administrative Agent (which shall forward a copy thereof to each Lender promptly) notice thereof, together with such other information as the Administrative Agent or any Lender (through the Administrative Agent) may reasonably request; Credit Agreement ---------------- - 69 - (viii) concurrently with the delivery of any financial statements as at the end of any fiscal period pursuant to clauses (i) or (ii) above of this Section 6.01(i), the Company shall deliver a calculation, which calculation shall be certified by a financial officer of the Company, of "Consolidated Net Tangible Assets" under each of the Existing Notes Indentures and each New Notes Indenture, setting forth the aggregate amount of Non-Sharing Obligations that may be secured by property of the Company and its Subsidiaries without requiring that such security be shared equally and ratably with the security issued under such Indentures; (ix) within 14 days of the first month end occurring after the Restatement Date, the Company shall deliver a calculation, which calculation shall be certified by a financial officer of the Company, of "Consolidated Net Tangible Assets" under each of the Existing Notes Indentures and the 2009 Notes Indenture as of such month end, setting forth the aggregate amount of Non-Sharing Obligations that may be secured by property of the Company and its Subsidiaries without requiring that such security be shared equally and ratably with the security issued under such Indentures; and (x) such other information (excluding trade secrets) respecting the financial condition and operations of the Company and its Subsidiaries as the Administrative Agent or any Lender may from time to time reasonably request (which information shall constitute "Post-Restatement Date Information" only to the extent provided in Section 5.01(j)). (j) Use of Proceeds. The Company will use the proceeds of --------------- the Advances made to the Borrowers (other than the European Borrowers) hereunder solely to finance the working capital needs and other general corporate purposes of such Borrowers (including to finance acquisitions and capital investments), in each case in compliance with all applicable legal and regulatory requirements and use the proceeds of the Advances made to the European Borrowers to make intercompany loans to Monchem International, Inc. the proceeds of which the Company shall cause Monchem International, Inc. to immediately dividend to it which will then be applied to prepay Term Advances to the Company as provided in Section 2.01(b); provided that (w) neither the Administrative Agent nor any Lender shall have any responsibility as to the use of any such proceeds, (x) none of the proceeds of any of the Advances shall be applied to the prepayment of principal of other Debt of the Company or any of its Subsidiaries (other than intercompany Debt or Debt owing under the Astaris Guaranty Agreement), to the extent that the aggregate amount of such prepayments after the date hereof would exceed $20,000,000, (y) the aggregate face amount of Letters of Credit issued hereunder to support an appeal by the Company in the Penndot Proceeding shall not exceed the amount required to enable the Company to appeal a $45,000,000 judgment (it being understood that in no event shall the amount of such Letters of Credit exceed $61,000,000) and (z) the aggregate amount of Letters of Credit issued hereunder to support any appeal in a court proceeding (excluding the Penndot Proceeding) shall not, without the consent of the Majority Revolving Credit Lenders, exceed $100,000,000. Credit Agreement ---------------- - 70 - (k) Surveys and Title Insurance. The Company will deliver --------------------------- to the Collateral Agent not later than August 30, 2002 (or such later date as shall be agreed to by the Administrative Agent, but in any event no later than November 29, 2002): (i) one or more mortgagee policies of title insurance on forms of and issued by one or more title companies reasonably satisfactory to the Administrative Agent (the "Title Companies"), insuring the validity and --------------- priority of the Liens created under the Mortgages in the amount of $10,000,000 per Mortgaged Facility, subject only to such exceptions to title as are reasonably satisfactory to the Administrative Agent (such exceptions to include a $55,000,000 mechanic's lien on the Company's facility located in Alvin, Texas); and (ii) surveys for each of the Mortgaged Facilities reasonably satisfactory to the Administrative Agent but in any event in such form as shall permit the Title Companies to remove the general survey exception, and to provide such additional title insurance coverages and endorsements (but not increases in the dollar amount of coverage in excess of that specified in clause (i) above) as the Administrative Agent may reasonably request, for the respective title policy for such Mortgaged Facility, and from a registered surveyor reasonably satisfactory to the Administrative Agent, in each case certified to the Administrative Agent, each Lender, the Collateral Agent, the Collateral Trustee and the Title Companies. In addition, within such time frame, the Company shall have paid to the Title Companies (x) all expenses and premiums of the Title Companies in connection with the issuance of such policies and (y) an amount equal to the recording and stamp taxes payable in connection with recording the Mortgages in the appropriate county land office(s). (l) Further Assurances. The Company will take, and cause ------------------ each of its Subsidiaries to take such action from time to time as shall reasonably be requested by the Administrative Agent to effectuate the purposes and objectives of this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, the Company will take such action, and will cause each of its Domestic Subsidiaries (other than Immaterial Subsidiaries, unless such Immaterial Subsidiary holds shares of stock of Solutia Europe, Solutia UK or Monchem International, Inc.) to: (1) Non-Sharing Security Documents. Take such ------------------------------ action, from time to time as shall be necessary to ensure that each Domestic Subsidiary (other than an Immaterial Subsidiary) is a "Subsidiary Guarantor" under the Non-Sharing Security and Guarantee Agreement. Accordingly, in the event that (x) any new Domestic Subsidiary (other than an Immaterial Subsidiary) is formed or acquired by the Company after the date hereof, or (y) any Subsidiary shall cease as of the end of any fiscal quarter to be an "Immaterial Subsidiary", the Company will cause such new Domestic Subsidiary (other than an Immaterial Subsidiary), or such Subsidiary that as of the end of any fiscal quarter ceases to be an "Immaterial Subsidiary", to become a "Subsidiary Guarantor" and a "Securing Party" under the Non-Sharing Intercreditor Agreement and Non-Sharing Security and Guarantee Agreement pursuant to a Guarantee Assumption Agreement in the Credit Agreement ---------------- - 71 - form of Exhibit J hereto, and to deliver such proof of corporate action, incumbency of officers, opinions of counsel and other documents as is consistent with those delivered by the Company pursuant to Section 4.01 hereof upon the Restatement Date or as the Administrative Agent shall have requested (and the Company hereby instructs such counsel to deliver such opinions to the Secured Parties). (2) Sharing Security Documents. Take such action, -------------------------- from time to time as shall be necessary to ensure that each such Domestic Subsidiary that is a Restricted Subsidiary (as defined in the Sharing Intercreditor Agreement) is a "Grantor" under the Sharing Security Agreement. Accordingly, the Company will cause such new Domestic Subsidiary to become a "Subsidiary Guarantor" and a "Grantor" under the Sharing Intercreditor Agreement and Sharing Security Agreement pursuant to a Guarantee Assumption Agreement in the form of Exhibit J hereto, and to deliver such proof of corporate action, incumbency of officers, opinions of counsel and other documents as is consistent with those delivered by the Company pursuant to Section 4.01 hereof upon the Restatement Date or as the Administrative Agent shall have requested (and the Company hereby instructs such counsel to deliver such opinions to the Secured Parties). (3) Perfection Actions. Take such action from ------------------ time to time (including filing appropriate Uniform Commercial Code financing statements and executing and delivering such assignments, security agreements and other instruments) as shall be reasonably requested by the Administrative Agent to create, in favor of the Collateral Agent for the benefit of the Secured Parties, perfected security interests and Liens in (i) all inventory and third-party accounts receivable of the Company and the Subsidiary Guarantors and (ii) 65% of the issued and outstanding voting stock and 100% of all other issued and outstanding stock of each of Solutia Europe, Solutia UK and Monchem International, Inc. (it being understood that, in the case of Solutia Europe, shares of treasury stock or stock of Solutia Europe held by Solutia Europe shall not be deemed to be outstanding); provided that any such security interest or Lien shall be subject to the relevant requirements of the Security Documents. In connection with the pledge of the shares of stock of Solutia Europe and Solutia UK, the Company will, and will cause each of its Subsidiaries to, execute and deliver such pledge agreements and other instruments, under the law of Belgium (in the case of Solutia Europe) and England and Wales (in the case of Solutia UK) to ensure that such pledge is valid, perfected and enforceable under such law, as applicable. (4) European Borrowers. Take such action from ------------------ time to time as shall be necessary for the Administrative Agent and the Lenders to have the benefit of Liens, securing the obligations, contemplated in the definition of the terms "German Security Documents" and "Swiss Security Documents", respectively, in Section 1.01; provided that any such security interest or Lien shall be subject to the relevant requirements of the German Security Documents and the Swiss Security Documents, as applicable. In connection with such Liens, the Company will cause each of the European Borrowers to execute and deliver such pledge Credit Agreement ---------------- - 72 - agreements, assignments, mortgages and other instruments, under the law of Germany (in the case of Solutia Germany) and Switzerland (in the case of the Swiss Borrowers), to ensure that such Liens are valid, perfected and enforceable under such law, as applicable (subject, in each case, to the respective limitations and exclusions set forth in the definitions of German Security Documents and Swiss Security Documents). (m) Increase of Senior Lien Limit. If following the ----------------------------- delivery by the Company of the calculation set forth in Section 6.01(i)(viii) following any fiscal period referred to therein, or the calculation set forth in Section 6.01(i)(ix), the aggregate amount of Non-Sharing Obligations that may be secured by the Existing Mortgaged Facilities without requiring that such security be shared equally and ratably with the notes and debentures issued under the Existing Notes Indentures and New Notes Indentures referred to therein shall exceed the then applicable Senior Lien Limit by $10,000,000 or more, the Senior Lien Limit shall be deemed to have been (and shall be) increased effective upon delivery of such calculation and the Company will, not later than 15 Business Days after such delivery (not later than two Business Days after such delivery pursuant to Section 6.01(i)(ix)), execute and deliver such supplements to the Non-Sharing Mortgages, and take such other actions, as shall be necessary to modify the Senior Lien Limit set forth in the Non-Sharing Mortgages so that the aggregate amount of Non-Sharing Obligations entitled to the benefits of the Non-Sharing Mortgages is at least equal to the Senior Lien Limit as so increased; provided that, notwithstanding the foregoing if, prior to the execution and delivery of such supplements by the Company, the Company shall have prepared a more recent balance sheet that would alter the increase in such Senior Lien Limit, then such altered increase shall be set forth in such supplements (except that, at the election of the Administrative Agent, such supplements need not be executed if such more recent balance sheet would result in an increase of less than $10,000,000 of the Senior Lien Limit, or in a reduction of the Senior Lien Limit). Each such supplement shall provide that the Non-Sharing Obligations entitled to the benefit of the Non-Sharing Mortgages as so supplemented shall be those Non-Sharing Obligations that are outstanding on the Relevant Date for the Senior Lien Limit as so increased. (n) Excess Cash. In the event that at any time the ----------- aggregate amount of cash, cash equivalents and other marketable securities held by the Company and its Subsidiaries in the United States of America shall exceed for three or more consecutive Business Days $25,000,000, or the aggregate amount of cash, cash equivalents and other marketable securities held by the Company and all of its Subsidiaries throughout the world shall, without duplication, exceed for three or more consecutive Business Days $65,000,000 (or the equivalent thereof in foreign currencies), then, to the extent of such excess in either of such events, the Company will prepay (without reduction of Commitments) Revolving Credit Advances (or, in the event all Revolving Credit Advances shall have been paid in full, shall provide cover for Letter of Credit Exposure as specified in Section 2.10(i)) an amount at least equal to such excess. Notwithstanding anything herein or in Section 2.10(i) to the contrary, if at any time (x) (i) cover for Letter of Credit Exposure has been provided pursuant to this Section 6.01(n) and is being held in the Collateral Account and (ii) any Revolving Credit Advances are outstanding, then at the request of the Company the Administrative Agent shall promptly Credit Agreement ---------------- - 73 - direct the Collateral Agent to release to the Administrative Agent from the Collateral Account funds up to an amount equal to the amount of such Revolving Credit Advances for prompt application thereto, (y) (i) cover for Letter of Credit Exposure has been provided pursuant to this Section 6.01(n) and is being held in the Collateral Account, (ii) no Default or Event of Default has occurred and is continuing and (iii) funds (the "Excess Funds") may be released from the Collateral Account to the Company or its Subsidiaries such that, after giving effect to such release of funds, the amount of cash, cash equivalents and other marketable securities held by the Company and its Subsidiaries would not exceed the thresholds specified above, then at the request of the Company the Administrative Agent shall promptly direct the Collateral Agent to release to the Administrative Agent from the Collateral Account up to the amount of Excess Funds for prompt payment of such amount to such account of the Company or any of its Subsidiaries as the Company may direct or (z) (i) cover for Letter of Credit Exposure has been provided pursuant to this Section 6.01(n) and is being held in the Collateral Account, (ii) no Default or Event of Default has occurred and is continuing, (iii) no Revolving Credit Advances are outstanding and (iv) the amount of cover held in the Collateral Account pursuant hereto exceeds the Letter of Credit Exposure then outstanding, then at the request of the Company the Administrative Agent shall promptly direct the Collateral Agent to release to the Administrative Agent from the Collateral Account up to the amount of such excess cover for prompt payment of such amount to such account of the Company or any of its Subsidiaries as the Company may direct. (o) Designation of New Notes Indentures. In the event that ----------------------------------- the Company issues any senior securities in connection with any Capital Markets Transaction permitted hereunder then, the Company may at its option designate such indenture as a "New Notes Indenture" for purposes hereof. For purposes hereof, the Company hereby designates the 2009 Notes Indenture as a "New Notes Indenture". (p) Foreign Intellectual Property Security Documents. The ------------------------------------------------ Company will take, and cause CPFilms Inc. to take, such action to deliver the documents, agreements and other instruments contemplated in the definition of the term "Intellectual Property Security Documents" in Section 1.01, covering the intellectual property listed on Schedule 6 hereto filed or registered in Europe, not later than 14 days after the Restatement Date, each of which shall have been executed (and, where appropriate, acknowledged) by Persons satisfactory to the Administrative Agent and, to the extent requested by the Administrative Agent, accompanied by one or more opinions of local counsel covering such matters as the Administrative Agent may reasonably request (and the Company hereby instructs such counsel to deliver such opinions to the Lenders and the Administrative Agent). SECTION 6.02. Negative Covenants. So long as any Advance ------------------ shall remain unpaid, any Lender shall have any Commitment hereunder or any Letter of Credit shall remain outstanding, the Company agrees as follows: (a) Liens, Etc. The Company will not create or suffer to ----------- exist, or permit any of its Consolidated Subsidiaries to create or suffer to exist, any Lien on or with respect to any of its properties (other than, in the case of the Company, the Company's treasury stock), Credit Agreement ---------------- - 74 - whether now owned or hereafter acquired, or assign, or permit any of its Subsidiaries to assign, any right to receive income in order to secure Debt or any other obligation, other than: (i) (A) Liens for taxes, assessments, governmental charges or levies or other amounts owed to governmental entities other than for borrowed money; (B) Liens imposed by law, such as materialmen's, mechanics', carriers', workmen's and repairmen's Liens and other similar Liens arising in the ordinary course of business securing obligations that are not overdue for a period of more than 30 days or that are being contested in good faith; (C) pledges or deposits to secure obligations under workers' compensation laws or similar legislation or to secure public or statutory obligations (or in either case to secure letters of credit securing such obligations); (D) easements, rights of way and other encumbrances on title to real property that do not render title to the property encumbered thereby unmarketable or materially adversely affect the use of such property for its present purposes; and (E) Liens in favor of a landlord arising in the ordinary course of business, (ii) purchase money Liens upon or in any property, assets or stock acquired or held by the Company or any Subsidiary in the ordinary course of business to secure the purchase price or construction cost of such property or to secure Debt incurred solely for the purpose of financing the acquisition or construction of such property whether incurred prior or subsequent to such acquisition or construction, or Liens existing on such property at the time of its acquisition (other than any such Lien created in contemplation of such acquisition) or extensions, renewals or replacements of any of the foregoing for the same or a lesser amount, provided that (x) no such Lien shall extend to or cover any property other than the property being acquired, and no such extension, renewal or replacement shall extend to or cover any property not theretofore subject to the Lien being extended, renewed or replaced and (y) the obligations secured by such Liens shall be Debt permitted under section 6.02(f)(vii), (iii) Liens securing Debt, judgments and ERISA claims existing on the date hereof and identified in Schedule 1 hereto, (iv) Liens created hereunder or under the Security Documents and the Junior Security Documents, (v) Liens existing by virtue of or arising out of the deposit of the 2002 Notes Maturity Amount as contemplated by Section 4.01(k), (vi) customary Liens for the fees, costs and expenses of trustees and escrow agents pursuant to any indenture, escrow agreement or similar agreement establishing a trust or escrow arrangement, Credit Agreement ---------------- - 75 - (vii) additional Liens, together with Liens incurred after November 15, 2001 and referred to in Schedule 1 hereto, securing obligations in an aggregate amount not exceeding $5,000,000 at any one time outstanding, and (viii) the replacement, extension or renewal of any Lien permitted by clauses (ii) and (iii) above upon or in the same property theretofore subject thereto or the replacement, extension or renewal (without increase in the amount or change in any direct or contingent obligor) of the amount secured thereby. (b) Mergers, Etc. ------------ (i) Mergers and Consolidations. The Company will -------------------------- not, and will not permit any of its Subsidiaries to, enter into any merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), provided that (A) any Subsidiary of the Company may merge with and into the Company or any other Subsidiary of the Company, so long as (x) after giving effect thereto no Default shall have occurred and be continuing, (y) in any such transaction involving a wholly owned Subsidiary, the continuing or surviving corporation shall be a wholly owned Subsidiary, and (z) if any such merger shall be between a Designated Borrower or Subsidiary Guarantor and a Subsidiary not a Designated Borrower or Subsidiary Guarantor, and such Designated Borrower or Subsidiary Guarantor is not the continuing or surviving corporation, then the continuing or surviving corporation shall have assumed all of the obligations of such Designated Borrower or Subsidiary Guarantor hereunder and under the other Loan Documents and (B) any foreign Subsidiary, other than a European Borrower, may be liquidated or dissolved to the extent that the Company shall determine that the preservation of such Subsidiary is no longer desirable in the conduct of its business. (ii) Acquisitions. The Company will not, and will ------------ not permit any of its Subsidiaries to, acquire any business or property from, or capital stock of, or be a party to any acquisition of, any Person except for purchases of inventory and other property to be sold or processed in the ordinary course of business, Investments permitted under Section 6.02(g), and Capital Expenditures, provided that (w) the Company and any Subsidiary may acquire a business or property and capital stock from any Subsidiary, subject to the requirements set forth in subclause (iii) below, (x) acquire other business or property and capital stock in one or more transactions not to exceed $15,000,000, (y) repurchase shares of Class B Preferred Stock of Solutia Management Company, Inc. in an aggregate amount not exceeding $1,500,000 from the holders of such shares and (z) CPFilms Inc. or any of its Subsidiaries may purchase shares of stock of CPFilms Vertriebs GmbH from certain minority shareholders thereof in an aggregate amount that, together with the aggregate amount of Dividend Payments made pursuant to Section 6.02(h)(z), does not exceed $1,000,000. (iii) Dispositions. The Company will not, and ------------ will not permit any of its Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of, in one Credit Agreement ---------------- - 76 - transaction or a series of transactions, any part of its business or property, whether now owned or hereafter acquired (including receivables and leasehold interests, but excluding: (u) lease of all or part of an approximately 10 acre site owned by the Company in Carson, California, (v) obsolete or worn-out property, tools or equipment no longer used or useful in its business, (w) any inventory, cash equivalents or other property sold or disposed of in the ordinary course of business and on ordinary business terms, including sales of delinquent receivables for collection purposes, (x) the sale by the Company and its Subsidiaries of any Subsidiary, business, property or Investment, so long as not less than 80% of the consideration to be received by the respective seller thereof is in the form of cash to be received at the time of the consummation of such sale, (y) the sublease of two floors of the Company's headquarters facility located at 575 Maryville Center Drive, St. Louis, Missouri 63141, and any other lease, transfer or other disposition of property that individually is not in excess of $2,500,000 for each particular piece of property the subject of any such other lease, transfer or other disposition, and (z) licensing arrangements entered into in the ordinary course of business, provided that any Subsidiary may sell, transfer, lease or otherwise dispose of its assets to the Company or to another Subsidiary, so long as (A) after giving effect thereto, no Default shall have occurred and be continuing, (B) no such disposition may be made by any wholly owned Subsidiary other than to the Company or another wholly owned Subsidiary and (C) if any such disposition is by a Designated Borrower or Subsidiary Guarantor to a Subsidiary of the Company not a Designated Borrower or Subsidiary Guarantor, then such Subsidiary shall have assumed all of the obligations of such Designated Borrower or Subsidiary Guarantor hereunder and under the other Loan Documents. Notwithstanding the foregoing, any disposition of assets sold out of the ordinary course of business and yielding gross proceeds of $750,000 or more must be sold for fair value and, upon any such sale with a fair value in excess of $750,000, the Company shall deliver a certification from a financial officer of the Company to the effect that such sale was for fair value which, to the extent that such fair value shall exceed $50,000,000, shall be supported by a resolution by the Board of Directors of the Company setting forth its determination in good faith of such fair value. Credit Agreement ---------------- - 77 - (c) Accounting Changes. The Company will not make or ------------------ permit, or permit any of its Subsidiaries to make or permit, any change in accounting policies or reporting practices, except as required or permitted by generally accepted accounting principles. (d) Change in Nature of Business. The Company will not ---------------------------- change the nature of the business of the Company and its Subsidiaries, taken as a whole, such that such business differs materially from the lines of business engaged in on the Restatement Date and lines of business related thereto; provided that the foregoing shall not prohibit the Company and its Subsidiaries from engaging in other lines of business (or investing in joint ventures engaged in other lines of business) so long as the aggregate book value of the assets of the Company and its Subsidiaries directly relating to such other lines of business does not exceed 10% of the aggregate book value of the Consolidated assets of the Company and its Consolidated Subsidiaries as at the last day of the fiscal quarter most recently ended prior to the date of determination. (e) Transactions with Affiliates. Other than the ---------------------------- transactions with Specified Joint Ventures, the Company will not enter into, or permit any of its Subsidiaries to enter into, any transaction with an Affiliate of the Company (other than the Company's Subsidiaries) that would be material in relation to the Company and its Subsidiaries, taken as a whole, even if otherwise permitted under this Agreement, except on terms determined by the Company to be fair and reasonable to the Company and its Subsidiaries and in the best interests of the Company (considered as a whole in conjunction with all other existing arrangements and relationships with such Affiliate). (f) Indebtedness and Letters of Credit. The Company will ---------------------------------- not create, incur, assume or permit to exist, or permit any Consolidated Subsidiary to create, incur, assume or permit to exist, any Debt, except: (i) Debt created hereunder and under the other Loan Documents; (ii) Debt existing on the date hereof and set forth in Schedule 4 hereto (including Debt, if any, in respect of Designated Letters of Credit, and drawn and undrawn amounts under agreements set forth on such Schedule 4), and extensions, renewals and replacements of any such Debt that do not increase the outstanding principal amount thereof; (iii) Debt of the Company to any Subsidiary and of any Subsidiary to the Company or any other Subsidiary; provided that Debt of any Obligor to a non-Obligor shall be subordinated on the terms set forth in Exhibit O hereto to the obligations of such Obligor under and in respect of the Loan Documents, the Make Whole Obligations, the Synthetic Lease Obligations, the Designated Letter of Credit Obligations and any term loan facility referred to in clause (x) below (except that Debt of any European Borrower to a non-Obligor shall be subordinated only to the obligations of such European Borrower under and in respect of the Loan Documents to which such European Borrower is a party); Credit Agreement ---------------- - 78 - (iv) (x) guarantees by the Company of Debt of any non-Domestic Subsidiary not exceeding $25,000,000 and (y) unsecured guarantees by the Company of up to 50% of the Debt under the Astaris Credit Agreement, the amount of Debt to be guaranteed pursuant to this subclause (iv)(y) not to in any event be in a principal amount greater than $137,500,000; (v) obligations under the Astaris Guaranty Agreement as in effect on the date hereof and without giving effect to any amendments or supplements made to the Astaris Guaranty Agreement after said date; (vi) obligations under the Co-gen Lease and the Co-gen Guarantee Agreement (as amended or replaced hereafter; provided that the maturity date of such obligations shall not be shortened by any such amendment or replacement) which in no event shall guarantee Debt in a principal amount greater than $33,000,000; (vii) Debt incurred after the date hereof and secured by any Lien permitted under Section 6.02(a)(ii), provided that the aggregate principal amount of Debt permitted by this subclause (vii) shall not exceed $25,000,000 at any time outstanding; (viii) Debt of the Company or any Subsidiary as an account party in respect of trade letters of credit; (ix) other Debt of the Company (other than Debt under a term loan facility referred to in clause (x) below) incurred in connection with any Capital Markets Transaction, the Net Cash Proceeds of which are applied to the prepayment of Advances or to provide cover for Letters of Credit as contemplated by Section 2.10(i), and (to the extent provided in Section 2.10(h)) prepayments of the Co-gen Instruments, provided that such Debt shall not be entitled to the benefits of any collateral security other than the Sharing Mortgages; (x) Debt of the Company under a term loan facility incurred in connection with any Capital Markets Transaction, the Net Cash Proceeds of which are applied (to the extent provided in Section 2.10(h)) to the prepayment of Advances or to provide cover for Letters of Credit as contemplated by Section 2.10(i) and (to the extent provided in Section 2.10(h)) prepayments of the Co-gen Instruments, so long as immediately after giving effect to such incurrence, the sum of the aggregate outstanding amount of such Debt, the Revolving Credit Exposures, outstanding Term Advances, unused Commitments, Designated Letters of Credit and amounts outstanding under the Co-gen Instruments shall not be greater than the sum of the aggregate outstanding amount of the Revolving Credit Exposures, outstanding Term Advances, unused Commitments, Designated Letters of Credit and amounts outstanding under the Co-gen Instruments immediately prior to such incurrence (i.e. $682,000,000), it being understood that at the time of such incurrence the Company may designate such Debt as a "Non-Sharing Obligation" hereunder in which event, upon the execution and delivery Credit Agreement ---------------- - 79 - by the Obligors of such supplements to the Security Documents as shall be reasonably requested by the Administrative Agent to effect the foregoing, such Debt shall be secured equally and ratably with the Non-Sharing Obligations (and, to the extent of any collateral security for the Sharing Obligations, equally and ratably with the Sharing Obligations under the Sharing Mortgages), and, in that connection, each Lender hereby authorizes the Administrative Agent to execute and deliver, and to authorize the Collateral Agent and Collateral Trustee to execute and deliver, the supplements to the Security Documents referred to above; (xi) Debt of the Company or any Subsidiary Guarantor in respect of the 11.25% Senior Secured Notes due 2009 issued pursuant to the 2009 Notes Indenture; and (xii) other unsecured Debt (other than any thereof incurred pursuant to a Capital Markets Transaction) in an aggregate principal amount not exceeding $30,000,000 at any time outstanding; provided that the aggregate principal amount of Debt of the Company's Subsidiaries permitted by this clause (xii) shall not exceed $10,000,000 at any time outstanding. In addition, except for Letters of Credit hereunder, Designated Letters of Credit and letters of credit existing on the date hereof and identified on Schedule 7 hereto (and any extensions or renewals of any such letters of credit identified on said Schedule 7), the Company will not, and will not permit any of its Consolidated Subsidiaries to, be obligated in respect of any letters of credit, letters of guarantee or any similar instrument issued for the account of the Company or any of its Consolidated Subsidiaries. (g) Investments. The Company will not, and will not permit ----------- any of its Subsidiaries to, make or permit to remain outstanding any Investments except: (i) Investments outstanding on the date hereof; (ii) operating deposit accounts with banks; (iii) cash and Permitted Investments; (iv) Investments by the Company and its Subsidiaries in the Company and its Subsidiaries; provided that no such Investments shall be made by any Obligor in any non-Obligor except in the ordinary course of business consistent with past practices (except that the aggregate amount of such Investments pursuant to this clause shall not exceed $40,000,000 at any time outstanding); (v) Hedging Agreements entered into by the Company or its Subsidiaries in the ordinary course of their business and not for speculative purposes; (vi) Investments consisting of security deposits with utilities and other like Persons made in the ordinary course of business; (vii) advances to employees in the ordinary course of business; Credit Agreement ---------------- - 80 - (viii) Investments received in connection with the bankruptcy or reorganization of suppliers, customers and other Persons having obligations in favor of the Company or any Subsidiary in settlement of delinquent obligations of, and other disputes with customers, suppliers and such other Persons arising in the ordinary course of business; (ix) Investments in Astaris (x) consisting of its obligations under the Astaris Guaranty Agreement or (y) consisting of payments made pursuant to the Astaris Guaranty Agreement, as the Astaris Guaranty Agreement is in effect on the date hereof and without giving affect to any amendments or supplements made to the Astaris Guaranty Agreement after said date; (x) Investments (x) consisting of its obligations under the Co-gen Guaranty Agreement and the Co-gen Lease or (y) consisting of payments made pursuant to the Co-gen Guaranty Agreement and the Co-gen Lease, as the Co-gen Guaranty Agreement and the Co-gen Lease are in effect on the date hereof and without giving effect to any amendments or supplements made to the Co-gen Guaranty Agreement or the Co-gen Lease after said date; (xi) Investments in a joint venture in China relating to the restructuring of the Suzhou China J.V. joint venture in an amount not in excess of $1,500,000; and (xii) additional Investments up to but not exceeding $5,000,000 in the aggregate. For purposes of clause (xii) of this Section, the aggregate amount of an Investment at any time shall be deemed to be equal to (A) the aggregate amount of cash, together with the aggregate fair market value of property, loaned, advanced, contributed, transferred or otherwise invested that gives rise to such Investment minus (B) the aggregate amount of dividends, distributions or other payments received in cash in respect of such Investment; the amount of an Investment shall not in any event be reduced by reason of any write-off of such Investment nor increased by any increase in the amount of earnings retained in the Person in which such Investment is made that have not been dividended, distributed or otherwise paid out. (h) Dividend Payments. The Company will not, and will not ----------------- permit any of its Subsidiaries to, declare or make, or agree to pay or make, directly or indirectly, any Dividend Payment, except that (v) the Company may declare and pay dividends with respect to its capital stock payable solely in additional shares of its common stock, (w) the Company may make Dividend Payments pursuant to and in accordance with stock option plans or other benefit plans for management or employees of the Company and its Subsidiaries, (x) so long as at the time thereof and after giving effect thereto no Default shall have occurred and be continuing, the Company may make Dividend Payments up to but not exceeding the greater of $.04 per common share and $6,000,000 during any fiscal year, (y) Solutia Management Company, Inc. may declare and pay annual dividends to holders of its Class B Preferred Stock in an aggregate amount not exceeding $25,000, in any fiscal year and (z) CPFilms Inc. (or any of its Subsidiaries) Credit Agreement ---------------- - 81 - and CPFilms Vertriebs GmbH may purchase shares of stock of CPFilms Vertriebs GmbH from certain minority shareholders thereof in an aggregate amount that, together with the aggregate amount of expenditures made pursuant to Section 6.02(b)(ii)(z), does not exceed $1,000,000. Nothing herein shall be deemed to prohibit the payment of pro rata dividends to its stockholders by any Subsidiary of the Company to the Company or to any other Subsidiary of the Company. (i) Restrictive Agreements. The Company will not, and will ---------------------- not permit any of its Subsidiaries to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (x) the ability of the Company or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets, or (y) the ability of any Subsidiary to pay dividends or other distributions with respect to any shares of its capital stock or to make or repay loans or advances to the Company or any other Subsidiary or to guarantee Indebtedness of the Company or any other Subsidiary; provided that: (A) the foregoing shall not apply to (I) restrictions and conditions imposed by law or by this Agreement, (II) restrictions and conditions existing on the date hereof and identified in Schedule 5 hereto (but shall apply to any extension or renewal of, or any amendment or modification expanding the scope of, any such restriction or condition), (III) customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder and (IV) restrictions or conditions no more restrictive than those set forth in the Existing Notes Indentures; and (B) clause (x) of the foregoing shall not apply to (I) restrictions or conditions imposed by any agreement relating to secured Debt permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Debt and (II) customary provisions in leases and other contracts restricting the assignment thereof. (j) Prepayment of Debt under Senior Notes. The Company ------------------------------------- will not, and will not permit any of its Subsidiaries to, purchase, redeem, retire or otherwise acquire for value, or set apart any money for a sinking, defeasance or other analogous fund for the purchase, redemption, retirement or other acquisition of, or make any voluntary payment or prepayment of the principal of or interest on, or any other amount owing in respect of, any Debt outstanding under the Existing Notes Indentures, or (after the issuance thereof) any New Notes Indenture, except for (i) regularly scheduled payments, prepayments or redemptions of principal and interest in respect thereof required pursuant to the instruments evidencing such Debt and (ii) the deposit of the 2002 Notes Maturity Amount as contemplated by Section 4.01(k). (k) Disqualified Stock. The Company will not, and will not ------------------ permit any of its Subsidiaries to, issue any Disqualified Stock. Credit Agreement ---------------- - 82 - SECTION 6.03. Financial Covenants. So long as any Advance ------------------- shall remain unpaid, any Lender shall have any Commitment or any Letter of Credit shall remain outstanding hereunder, the Company agrees as follows: (a) Debt to Adjusted EBITDA Ratio. The Company will not ----------------------------- permit the Debt to Adjusted EBITDA Ratio to exceed the following respective ratios at any time during the following respective periods: Period Ratio ------ ----- From the Restatement Date through December 30, 2002 5.00 to 1 From December 31, 2002 through March 30, 2003 4.50 to 1 From March 31, 2003 through June 29, 2003 4.25 to 1 From June 30, 2003 through September 29, 2003 4.00 to 1 From September 30, 2003 through December 30, 2003 3.75 to 1 From December 31, 2003 through March 30, 2004 3.50 to 1 From March 31, 2004 and at all times thereafter 3.25 to 1 (b) Interest Coverage Ratio. The Company will not permit ----------------------- the Interest Coverage Ratio to be less than the following respective ratios at any time during the following respective periods: Period Ratio ------ ----- From June 30, 2002 through September 29, 2003 2.50 to 1 From September 30, 2003 through March 30, 2004 2.75 to 1 From March 31, 2004 and at all times thereafter 3.00 to 1 Credit Agreement ---------------- - 83 - (c) Capital Expenditures. The Company will not permit the -------------------- aggregate amount of Capital Expenditures to exceed during any fiscal year the following respective amounts during the following fiscal years: Fiscal Year Amount ----------- ------ 2002 $74,000,000 2003 $132,000,000 2004 $147,000,000 If the aggregate amount of such Capital Expenditures for any fiscal year shall be less than the corresponding amount set forth above for such fiscal year, then the shortfall shall be added to the amount of such Capital Expenditures permitted for the immediately succeeding (but not any other) fiscal year and, for purposes hereof, the amount of Capital Expenditures made during any fiscal year shall be deemed to have been made first from the permitted amount for such fiscal year and last from the amount of any carryover from any previous fiscal year. ARTICLE VII EVENTS OF DEFAULT SECTION 7.01. Events of Default. If any of the following ----------------- events ("Events of Default") shall occur and be continuing: ----------------- (a) any Borrower shall fail to pay any principal of any Advance, or any reimbursement obligation in respect of any Letter of Credit, owing by such Borrower when the same becomes due and payable; or any Borrower shall fail to pay any interest on any Advance, or any reimbursement obligation in respect of any Letter of Credit, owing by such Borrower or make any other payment under this Agreement or any Note within three Business Days after the same becomes due and payable; or (b) any representation or warranty made or deemed to have been made by the Company or any other Obligor herein or in connection with this Agreement or any other Loan Document or any amendment to this Agreement or any other Loan Document shall prove to have been incorrect in any material respect when made; or (c) (i) the Company shall fail to perform or observe any term, covenant or agreement contained in Section 6.01(a), 6.01(i)(iii), 6.01(j), 6.01(k), 6.01(l), 6.01(m), 6.01(n), 6.02 or 6.03; (ii) the Obligors shall fail to perform or observe any term, covenant or agreement contained in Section 6.01 of the Non-Sharing Security and Guarantee Agreement; or (iii) any Obligor shall fail to perform or observe any other term, covenant or agreement contained in this Agreement or any other Loan Document on its part to be performed or observed if such failure shall remain unremedied for 30 days after written notice thereof shall have been given to the Company by the Administrative Agent or any Credit Agreement ---------------- - 84 - Lender (other than any failure of the Company to comply with the terms of Section 6.01(i)(iv), (v) or (vi) as to which such notice requirement shall not apply); or (d) the Company or any of its Material Subsidiaries shall fail to pay any principal of, premium or interest on or any other amount payable in respect of any Debt that is outstanding in a principal or notional amount of at least $25,000,000 (or such lower amount as provided for in the proviso to this clause (d)) in the aggregate (but excluding Debt outstanding hereunder) of the Company or such Material Subsidiary (as the case may be), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the applicable agreement; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt or otherwise to cause, or to permit the holder or holders (or an agent or trustee on its or their behalf) thereof to cause, such Debt to mature; or any such Debt shall be declared to be due and payable or required to be prepaid or redeemed (other than by a regularly scheduled required prepayment or redemption), purchased or defeased, or an offer to prepay, redeem, purchase or defease such Debt shall be required to be made, in each case prior to the stated maturity thereof; provided that if the Company in any agreement or instrument relating to any such Debt, shall have agreed to, or shall agree to, a lesser threshold of the kind specified this clause (d) with respect to itself or any of its Material Subsidiaries, then, in such event, the amount provided for above shall be reduced to such lesser amount(s) with respect to such entity; or (e) any judgment or order for the payment of money in excess of $25,000,000 shall be rendered against the Company or any of its Material Subsidiaries and not timely satisfied or discharged, and either (i) proceedings to attach or levy upon any assets of the Company or such Material Subsidiary shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; provided that if the Company in any agreement or instrument relating to any Debt in excess of $25,000,000, shall have agreed to, or shall agree to, a lesser threshold of the kind specified this clause (e) with respect to itself or any of its Material Subsidiaries, then, in such event, the amount provided for above shall be reduced to such lesser amount(s) with respect to such entity; or (f) the Company or any of its Material Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Company or any of its Material Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain Credit Agreement ---------------- - 85 - undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or the Company or any of its Material Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (e); (g) any ERISA Event that would result in a Lien in an amount in excess of $30,000,000 on the properties or assets of the Company or any of its Subsidiaries shall have occurred and shall not have been remedied within 90 days; (h) the Liens created by the Security Documents shall at any time not constitute a valid and perfected Lien on the collateral intended to be covered thereby (to the extent perfection by filing, registration, recordation or possession is required herein or therein) in favor of the Collateral Agent or, as applicable, the Collateral Trustee, free and clear of all other Liens (other than Liens permitted hereunder or under the respective Security Documents), excluding, however, collateral released pursuant to the terms thereof or collateral deemed by the Administrative Agent not to be material in relation to the collateral security provided as a whole by the Security Documents, or, except for expiration in accordance with its terms, any of the Security Documents shall for whatever reason be terminated or cease to be in full force and effect, or the enforceability thereof shall be contested by the respective Obligor party thereto; or (i) the guarantee by the Company in Section 3.01, or the guarantee by the Subsidiary Guarantors in Section 2.01 of the Non-Sharing Security and Guarantee Agreement, shall cease to be (or shall be asserted by any Obligor not to be) a legal, valid, binding and enforceable obligation of the Company or any Subsidiary Guarantor, as applicable; then, and in any such event, the Administrative Agent (i) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Company (on its own behalf and on behalf of the other Borrowers), declare the obligation of each Lender to make Advances to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Company, declare the Advances, the Notes, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Advances, the Notes, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Company and the other Borrowers; provided that in the event of an actual or deemed entry of an order for relief with respect to the Company under the Federal Bankruptcy Code, (A) the obligation of each Lender to make Advances shall automatically be terminated and (B) the Advances, the Notes, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Company and the other Borrowers. Notwithstanding anything to the contrary set forth in this Agreement, in the event of an entry of an order for relief with respect to a Designated Borrower under the Federal Bankruptcy Code (or under any analogous law applicable to such Designated Borrower, if such Designated Borrower is not organized under the laws of the United States of America or any Credit Agreement ---------------- - 86 - state thereof), (A) the obligation of each Lender to make Advances to such Designated Borrower shall automatically be terminated, (B) on the date that is three Business Days after the Company becomes aware of the entry of such order for relief, the Advances, the Notes, all interest and all other amounts owing by such Designated Borrower shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Company and such Designated Borrower and (C) such Designated Borrower shall cease to be a Designated Borrower hereunder. ARTICLE VIII THE ADMINISTRATIVE AGENT SECTION 8.01. Authorization and Action. Each Lender hereby ------------------------ appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement and the other Loan Documents as are delegated to the Administrative Agent by the terms hereof and thereof, together with such powers and discretion as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement or any of the other Loan Documents (including enforcement or collection of the Notes), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Lenders, and such instructions shall be binding upon all Lenders and all holders of Notes; provided that the Administrative Agent shall not be required to take any action that exposes the Administrative Agent to personal liability or that is contrary to this Agreement or applicable law. The Administrative Agent agrees to give to each Lender prompt notice of each notice given to it by the Company pursuant to the terms of this Agreement or any other Loan Document. SECTION 8.02. Administrative Agent's Reliance, Etc. ------------------------------------- Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement or any of the other Loan Documents, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Administrative Agent: (i) may treat the payee of any Note as the holder thereof until the Administrative Agent receives and accepts an Assignment and Acceptance entered into by the Lender that is the payee of such Note, as assignor, and an Eligible Assignee, as assignee, as provided in Section 9.07; (ii) may consult with legal counsel (including counsel for the Company), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement or any of the other Loan Documents; (iv) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or any of the other Loan Documents on the part of the Company or any of its Subsidiaries or to inspect the property (including the books and records) of the Company or any of its Subsidiaries; (v) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, this Agreement or any of the other Loan Credit Agreement ---------------- - 87 - Documents or any other instrument or document furnished pursuant hereto; and (vi) shall incur no liability under or in respect of this Agreement or any of the other Loan Documents by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram or telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 8.03. Citibank and Affiliates. With respect to its ----------------------- Commitments, the Advances made by it, Letter of Credit Exposure held by it and the Notes issued to it, Citibank shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the Administrative Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include Citibank in its individual capacity. Citibank and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, accept investment banking engagements from and generally engage in any kind of business with, the Company, any of its Subsidiaries and any Person who may do business with or own securities of the Company or any such Subsidiary, all as if Citibank were not the Administrative Agent and without any duty to account therefor to the Lenders. SECTION 8.04. Lender Credit Decision. Each Lender ---------------------- acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on the financial statements referred to in Section 5.01 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. SECTION 8.05. Indemnification. The Lenders agree to --------------- indemnify the Administrative Agent and the Syndication Agent (each, an "Agent"), in each case to the extent not reimbursed by the Company, ratably ----- in accordance with their respective Indemnification Percentages, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against such Agent in any way relating to or arising out of this Agreement or any action taken or omitted by such Agent under this Agreement and the other Loan Documents, provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Administrative Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including counsel fees) incurred by the Administrative Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that the Administrative Agent is not reimbursed for such expenses by the Company. SECTION 8.06. Successor Administrative Agent. The ------------------------------ Administrative Agent may resign at any time by giving five Business Days' written notice thereof to the Lenders, the L/C Issuer and the Company and may be removed at any time with or without cause (i) by the Majority Lenders with the Company's approval, which approval shall not unreasonably be withheld, or (ii) by the Company, subject to the approval of the Majority Lenders, which approval shall not Credit Agreement ---------------- - 88 - unreasonably be withheld. Upon any such resignation or removal, the Company shall have the right to appoint a successor Administrative Agent, subject to the Majority Lenders' approval, which approval shall not be unreasonably withheld; provided that upon and during the continuance of an Event of Default, the Majority Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. In connection with any such appointment of a successor Administrative Agent, the Company agrees to pay to such successor such fees at such levels as shall be consistent with fees generally charged by banks to perform the type of services required by the Administrative Agent hereunder. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, discretion, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement and the other Loan Documents. SECTION 8.07. The Syndication Agent. Except as expressly --------------------- provided herein, the Syndication Agent shall not have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Without limiting the foregoing, the Syndication Agent shall not have or be deemed to have any fiduciary relationship with any other Lender in connection herewith. Each Lender acknowledges that it has not relied, and will not rely, on the Syndication Agent in deciding to enter into this Agreement or in taking or not taking action hereunder. ARTICLE IX MISCELLANEOUS SECTION 9.01. Amendments, Etc. No amendment or waiver of ---------------- any provision of this Agreement or the Notes, nor consent to any departure by any Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided that: (a) no amendment, waiver or consent shall, unless in writing and signed by all the Lenders, do any of the following: (1) waive any of the conditions specified in Section 4.01; (2) subject the Lenders to any additional obligations; Credit Agreement ---------------- - 89 - (3) reduce the principal of, or interest on, the Advances or any fees or other amounts payable hereunder; (4) postpone any date fixed for any payment of principal of, or interest on, the Advances or any fees or other amounts payable hereunder; (5) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Advances, Revolving Credit Exposure or Letter of Credit Exposure, or the number of Lenders, that shall be required for the Lenders or any of them to take any action hereunder; (6) amend this Section 9.01; or (7) release the Company from any of its obligations under Article III; (b) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required above to take such action, affect the rights or duties of the Administrative Agent under this Agreement or any other Loan Document; (c) no amendment, waiver or consent shall, unless in writing and signed by the Syndication Agent in addition to the Lenders required above to take such action, affect the rights or duties of the Syndication Agent under this Agreement or any other Loan Document; and (d) no amendment, waiver or consent shall, unless in writing and signed by the L/C Issuer in addition to the Lenders required above to take such action, affect the rights or duties of the L/C Issuer under this Agreement. Anything in this Agreement to the contrary notwithstanding, no waiver or modification of any provision of this Agreement that has the effect (either immediately or at some later time) of enabling the Company to satisfy a condition precedent to the making of a Revolving Credit Advance, or the issuance of a Letter of Credit, shall be effective against the Revolving Credit Lenders unless the Majority Revolving Credit Lenders shall have concurred with such waiver or modification, and no waiver or modification of any provision of this Agreement or any other Loan Document that could reasonably be expected to adversely affect the Revolving Credit Lenders or Term Lenders in a manner that does not affect all Lenders equally shall be effective against the Revolving Credit Lenders or Term Lenders, as applicable, unless the Majority Revolving Credit Lenders or Majority Term Lenders, as applicable, shall have concurred with such waiver or modification. Credit Agreement ---------------- - 90 - SECTION 9.02. Notices, Etc. All notices and other ------------- communications provided for hereunder shall be in writing (including telecopier) and mailed, telecopied or delivered by hand: (a) If to the Company or any other Borrower: Solutia Inc. 575 Maryville Centre Drive St. Louis, Missouri 63141 Attention: Treasurer Telephone No.: (314) 674-8250 Telecopier No.: (314) 674-6755 (b) If to the Administrative Agent: Citibank, N.A. 2 Penns Way New Castle, Delaware 19720 Attention: Timothy Smith Telephone No.: (302) 894-6059 Telecopier No.: (302) 894-6120 (c) If to any Lender, at the Domestic Lending Office specified in the Administrative Questionnaire of such Lender, and (d) If to the L/C Issuer: Citibank, N.A. 2 Penns Way New Castle, Delaware 19720 Attention: Timothy Smith Telephone No.: (302) 894-6059 Telecopier No.: (302) 894-6120 or, as to the Company (or any other Borrower) or the Administrative Agent, at such other address as shall be designated by such party in a written notice to the other parties and, as to each other party, at such other address as shall be designated by such party in a written notice to the Company and the Administrative Agent. All such notices and communications shall be deemed to have been duly given or made (i) in the case of hand deliveries, when delivered by hand, (ii) in the case of mailed notices, when received, and (iii) in the case of telecopier notice, when transmitted and confirmed during normal business hours (or, if delivered after the close of normal business hours, at the beginning of business hours on the next Business Day), except that notices and communications to Credit Agreement ---------------- - 91 - the Administrative Agent pursuant to Article II or VIII shall not be effective until received by the Administrative Agent. SECTION 9.03. No Waiver, Remedies. No failure on the part ------------------- of any Lender or the Administrative Agent to exercise, and no delay in exercising, any right hereunder or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 9.04. Costs and Expenses; Indemnification, Etc. ---------------------------------------- (a) Costs and Expenses. The Company agrees to pay on ------------------ demand all out-of-pocket costs and expenses of the Administrative Agent in connection with the preparation, execution, delivery, modification and amendment of this Agreement, the other Loan Documents and the other documents to be delivered hereunder and thereunder, including the reasonable fees and expenses of counsel for the Administrative Agent with respect thereto and with respect to advising the Administrative Agent as to its rights and responsibilities under this Agreement and the other Loan Documents. The Company further agrees to pay on demand all costs and expenses of the Administrative Agent and the Lenders, if any (including the reasonable fees and expenses of counsel and third-party environmental, accounting or other consultants), in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the other Loan Documents and the other documents to be delivered hereunder and thereunder, including reasonable fees and expenses of counsel for the Administrative Agent and each Lender in connection with the enforcement of rights under this Section 9.04(a). (b) Indemnification. The Company agrees to indemnify and --------------- hold harmless the Administrative Agent, the Syndication Agent, the L/C Issuer and each Lender and each of their Affiliates and their officers, directors, employees, agents and advisors (each, an "Indemnified Party") ----------------- from and against any and all claims, damages, losses, liabilities and expenses (including reasonable fees and expenses of counsel) that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of, or in connection with the preparation for a defense of, any investigation, litigation or proceeding arising out of, related to or in connection with the actual or proposed use of the proceeds of the Advances or Letters of Credit, in each case whether or not such investigation, litigation or proceeding is brought by the Company, its directors, shareholders or creditors or an Indemnified Party or any other Person or any Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated hereby are consummated, except to the extent such claim, damage, loss, liability or expense is found by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. (c) Breakfunding. If any payment of principal of, or ------------ Conversion of, any Eurocurrency Rate Advance is made by any Borrower to or for the account of a Lender other than on the last day of the Interest Period for such Advance as a result of a prepayment or Conversion pursuant to Section 2.05(b), 2.06(b), 2.08(c) or (d), 2.10 or 2.12, acceleration of the maturity of the Advances pursuant to Section 7.01 or for any other reason, the Company and such Borrower jointly and severally agree, upon demand by such Lender (with a copy of such demand to the Administrative Agent), to pay to the Administrative Agent for the account of such Lender any Credit Agreement ---------------- - 92 - amounts required to compensate such Lender for any additional losses, costs or expenses that it may reasonably incur as a result of such payment or Conversion, including any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance or Letter of Credit. (d) Survival. Without prejudice to the survival of any -------- other agreement of the Company or the other Borrowers hereunder, the agreements and obligations of the Company and the other Borrowers contained in Sections 2.11, 2.15 and 9.04 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the Notes. (e) Reimbursement of L/C Issuer. To the extent that the --------------------------- Company fails to pay any amount required to be paid by it to the L/C Issuer under subsection (a) or (b) of this Section 9.04, each Revolving Credit Lender severally agrees to pay to the L/C Issuer such Revolving Credit Lender's Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the L/C Issuer in its capacity as such. (f) Waiver of Consequential Damages, Etc. To the fullest ------------------------------------- extent permitted by applicable law, the Company will not and will not permit any of its Subsidiaries to assert, and the Company (on behalf of itself and each such Subsidiary) hereby waives, any claim (other than any claim with respect to actual or contemplated assignments or participations under this Agreement, including, without limitation, claims relating to the disclosure of confidential information in connection therewith) against any Lender, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, the other Loan Documents or any agreement or instrument contemplated hereby or thereby, any Advance or Letter of Credit or the use of the proceeds thereof. SECTION 9.05. Right of Set-off. Nothing herein shall ---------------- derogate any Lender's right, if any, if and to the extent payment owed to such Lender is not made when due hereunder in respect of or under any Revolving Credit Advance or Term Advance held by such Lender, to set off from time to time against any or all of the Company's or the relevant Borrower's respective deposit (general or special, time or demand, provisional or final) accounts with such Lender any amount so due. Each Lender agrees promptly to notify the Company (on its own behalf and on behalf of the relevant Borrower, if applicable) after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section 9.05 are in addition to other rights and remedies which such Lender may have. SECTION 9.06. Binding Effect. This Agreement shall become -------------- effective when it shall have been executed by the Company and the Administrative Agent and when the Administrative Agent shall have been notified by each Initial Lender that such Initial Lender has executed it and thereafter shall be binding upon and inure to the benefit of the Company, the Administrative Agent and each Lender and their respective successors and assigns, except that no Credit Agreement ---------------- - 93 - Borrower shall have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders. SECTION 9.07. Assignments and Participations, Register. ---------------------------------------- (a) Assignments. Each Lender may (and shall, at the ----------- expense of the Company, if requested to do so by the Company pursuant to Section 2.11, Section 2.12 or 2.15) assign to one or more Persons all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitments, Advances and Letter of Credit Exposure owing to it and the Notes held by it); provided that: (i) other than in the case of an assignment to an Affiliate of such Lender or assignments of the type described in subsection (g) of this Section 9.07 or an assignment of Term Advances, such Lender shall have obtained the prior written consent of the Company, the Syndication Agent and the Administrative Agent, no such consent to be unreasonably withheld (except that no such consent of the Company shall be required during the continuance of any Default or Event of Default under Section 7.01); (ii) in the case of any assignment of a Revolving Credit Commitment, or participation interest in any Letter of Credit, such Lender shall have obtained the prior written consent of the L/C Issuer; (iii) each such assignment (x) of Revolving Credit Exposure or Revolving Credit Commitments shall be of a constant, and not a varying, percentage of all rights and obligations under this Agreement in respect of the Revolving Credit Exposure and Revolving Credit Commitments and (y) of Term Advances or Term Commitments shall be of a constant, and not a varying, percentage of all rights and obligations under this Agreement in respect of the Term Advances and Term Commitments; (iv) except in the case of an assignment to a Person that, immediately prior to such assignment, was a Lender, or an assignment by a Lender to an Affiliate of such Lender or an assignment of all of a Lender's rights and obligations under this Agreement, the amount of the Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $1,000,000 or an integral multiple of $500,000 in excess thereof; (v) each such assignment of Revolving Credit Commitments and Revolving Credit Advances shall be to an Eligible Assignee; and (vi) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any Note subject to such assignment and a processing and recordation fee of $2,000; provided that in the case of an -------- assignment (x) pursuant to subclause (i) of this Section 9.07(a), no processing and recordation fee shall be payable and (y) from one Lender to another Lender, the processing and recordation fee shall be $500. Credit Agreement ---------------- - 94 - Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution and delivery thereof to the Administrative Agent, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). (b) Agreements of Assignee. By executing and delivering an ---------------------- Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the other Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, the other Loan Documents or any other instrument or document furnished pursuant hereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or the other Borrowers or the performance or observance by the Company or the other Borrowers of any of their respective obligations under this Agreement, the other Loan Documents or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 5.01 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement or the other Loan Documents; (v) in the case of an assignment of Revolving Credit Commitments or Revolving Credit Exposure, such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement and the other Loan Documents as are delegated to the Administrative Agent by the terms hereof and thereof, together with such powers and discretion as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Lender. (c) Register. The Administrative Agent shall maintain at -------- its address referred to in Section 9.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitments of, and principal amount of the Advances and Letter of Credit Exposure, if applicable, held by each such Lender from time to time (the "Register"). The -------- entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and each Borrower, the Administrative Agent, the L/C Issuer and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection Credit Agreement ---------------- - 95 - by the Company or any Lender at any reasonable time and from time to time upon reasonable prior notice. (d) Acceptance of Assignments; Notes. Upon the -------------------------------- Administrative Agent's receipt of an Assignment and Acceptance (executed by an assigning Lender and an assignee representing (if required by Section 9.07(a)(v)) that it is an Eligible Assignee and accompanied by any Note subject to such assignment), the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit C hereto (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Company. Within five Business Days after its receipt of such notice, each Borrower, at its own expense, shall execute and deliver to the Administrative Agent: (x) in the case of an assignment where (1) Advances of the assigning Lender are evidenced by a Note and (2) the assigning Lender has retained a Revolving Credit Commitment or Term Advances hereunder, in exchange for the surrendered Note a new Note payable to the order of the assigning Lender in an amount equal to the Revolving Credit Commitment or Term Advances retained by it hereunder; (y) in the case of an assumption of a Revolving Credit Commitment hereunder, where the Eligible Assignee assuming the relevant Revolving Credit Commitment hereunder has requested that its Revolving Credit Advances be evidenced by a Note in accordance with Section 2.06(d), a new Note payable to the order of such Person in an amount equal to the Revolving Credit Commitment assumed by it pursuant to such Assignment and Acceptance; and (z) in the case of an assignment of Term Advances, where the Eligible Assignee has requested that its Term Advances be evidenced by a Note in accordance with Section 2.06(d), a Note payable to the order of such Eligible Assignee in an amount equal to the Term Advances purchased by it pursuant to such Assignment and Acceptance. The new Notes to be executed and delivered by a Borrower under clauses (x), (y) and (z) above shall be in an aggregate principal amount equal to the aggregate principal amount of the Note surrendered in connection with the related assignment, as applicable, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit A-1 or A-2 hereto, as applicable. (e) Participations. Each Lender may sell participations to -------------- one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitments, the Advances owing to it and the Letter of Credit Exposure and/or the Note or Notes held by it); provided that (i) such Lender's obligations under this Agreement and the other Loan Documents (including its Commitments hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Advances, Letter of Credit Exposure or Notes for all purposes of this Agreement, (iv) the Company, each other Borrower, the Administrative Agent, the L/C Issuer and the other Lenders shall continue to deal solely and directly Credit Agreement ---------------- - 96 - with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents, and (v) no participant under any such participation shall have any right to approve any amendment or waiver of any provision of any of the Loan Documents or any Note, or any consent to any departure by the Company or any other Borrower therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, the Advances or any fees or other amounts payable hereunder, in each case to the extent subject to such participation. Upon the sale of a participation pursuant to this Section 9.07(e), such Lender shall promptly provide notice to the Company of the sale of a participation (other than a sale of a participation pursuant to Section 2.16); provided that the failure by such Lender to provide such notice shall not invalidate the sale of such participation. If a Non-U.S. Lender sells a participating interest, such Lender shall at the time of the sale provide the Company and the Administrative Agent with revised forms required by Section 2.15(e), reflecting the portion of its Revolving Credit Commitments, Advances and Letter of Credit Exposure and/or Notes sold on an executed Internal Revenue Service Form W-8IMY (or replacement form) with any required attachments and the portion of its Revolving Credit Commitments, Advances and Letter of Credit Exposure and/or Notes retained on an Internal Revenue Service Form W-8BEN or W-8ECI (or replacement forms). (f) Disclosure to Assignees and Participants. Any Lender ---------------------------------------- may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 9.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Company or any of its Subsidiaries furnished to such Lender by or on behalf of the Company; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree in writing with the Company to preserve the confidentiality of any confidential information relating to the Company and its Subsidiaries received by it from such Lender. (g) Certain Security Interests. Notwithstanding any other -------------------------- provision set forth in this Agreement, any Lender may at any time create a security interest in all or any portion of its rights under this Agreement or any other Loan Document (including the Advances owing to it and the Letter of Credit Exposure and the Notes held by it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System. (h) No Assignments to the Company or Affiliates. Anything ------------------------------------------- in this Section 9.07 to the contrary notwithstanding, no Lender may assign or participate any interest in any Advance or Letter of Credit held by it hereunder to the Company or any of its Affiliates or Subsidiaries without the prior consent of each Lender. (i) Securities Laws. Each Lender agrees that it will not --------------- assign any Advance or sell any participation in any manner or under any circumstances that would require registration, qualification or filings under the securities laws of the United States of America, of any state or of any country. SECTION 9.08. Governing Law. This Agreement and the Notes ------------- shall be governed by, and construed in accordance with, the law of the State of New York. SECTION 9.09. Execution in Counterparts. This Agreement ------------------------- may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which Credit Agreement ---------------- - 97 - when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 9.10. Jurisdiction, Etc. ------------------ (a) Submission to Jurisdiction. Each of the parties hereto -------------------------- (and each Designated Borrower, by its acceptance of the proceeds of Advances made to it) hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto and each Designated Borrower hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the extent permitted by law, in any such federal court. Each of the parties hereto and each Designated Borrower agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or the Notes in the courts of any jurisdiction. (b) Waiver of Venue, Etc. Each of the parties hereto and --------------------- each Designated Borrower irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any other Loan Document or the Notes in any New York State or federal court. Each of the parties hereto and each Designated Borrower irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. SECTION 9.11. Judgment Currency. This is an international ----------------- loan transaction in which the specification of Dollars or Euros, as the case may be (the "Specified Currency"), and payment in New York City or the ------------------ country of the Specified Currency, as the case may be (the "Specified --------- Place"), is of the essence, and the Specified Currency shall be the currency - ----- of account in all events relating to Advances denominated in the Specified Currency. The payment obligations of the Company and the other Borrowers under this Agreement shall not be discharged or satisfied by an amount paid in another currency or in another place, whether pursuant to a judgment or otherwise, to the extent that the amount so paid on conversion to the Specified Currency and transfer to the Specified Place under normal banking procedures does not yield the amount of the Specified Currency at the Specified Place due hereunder. If for the purpose of obtaining judgment in any court it is necessary to convert a sum due hereunder in the Specified Currency into another currency (the "Second Currency"), the rate of exchange --------------- that shall be applied shall be the rate at which in accordance with normal banking procedures the Administrative Agent could purchase the Specified Currency with the Second Currency on the Business Day next preceding the day on which such judgment is rendered. The obligation of the Company and the other Borrowers in respect of any such sum due from it to the Administrative Agent or any Lender hereunder (in this Section called an "Entitled Person") --------------- shall, Credit Agreement ---------------- - 98 - notwithstanding the rate of exchange actually applied in rendering such judgment, be discharged only to the extent that on the Business Day following receipt by such Entitled Person of any sum adjudged to be due hereunder in the Second Currency such Entitled Person may in accordance with normal banking procedures purchase and transfer to the Specified Place the Specified Currency with the amount of the Second Currency so adjudged to be due; and the Company and the applicable Borrower hereby, as a separate obligation and notwithstanding any such judgment, jointly and severally agree to indemnify such Entitled Person against, and to pay such Entitled Person on demand, in the Specified Currency, the amount (if any) by which the sum originally due to such Entitled Person in the Specified Currency hereunder exceeds the amount of the Specified Currency so purchased and transferred. [remainder of page intentionally blank] Credit Agreement ---------------- - 99 - IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. SOLUTIA INC. By: /s/ Kevin Wilson ----------------------------------------- Name: Kevin Wilson Title: Vice President and Treasurer CITIBANK, N.A., as Administrative Agent By: /s/ James N. Simpson ----------------------------------------- Name: James N. Simpson Title: Managing Director BANK OF AMERICA, N.A., as Syndication Agent By: /s/ Henry Y. Yu ----------------------------------------- Name: Henry Y. Yu Title: Managing Director Credit Agreement ---------------- - 100 - INITIAL LENDERS --------------- Revolving Credit Commitment CITIBANK, N.A. - --------------------------- $29,375,000.00 Term Commitment By: /s/ James N. Simpson - --------------- -------------------------------- Name: James N. Simpson $29,375,000.00 Title: Managing Director Revolving Credit Commitment BANK OF AMERICA, N.A. - --------------------------- $46,875,000.00 Term Commitment By: /s/ Henry Y. Yu - --------------- -------------------------------- Name: Henry Y. Yu $46,875,000.00 Title: Managing Director Revolving Credit Commitment SPCP GROUP, L.L.C. - --------------------------- $36,625,000.00 Term Commitment By: - --------------- -------------------------------- Name: $36,625,000.00 Title: Revolving Credit Commitment JPMORGAN CHASE BANK - --------------------------- $35,000,000.00 Term Commitment By: /s/ Lawrence Palumbo, Jr. - --------------- -------------------------------- Name: Lawrence Palumbo, Jr. $35,000,000.00 Title: Vice President Revolving Credit Commitment THE NORTHERN TRUST COMPANY - --------------------------- $17,500,000.00 Term Commitment By: /s/ A. S. Bhagwat - --------------- -------------------------------- Name: A. S. Bhagwat $17,500,000.00 Title: Vice President Credit Agreement ---------------- - 101 - Revolving Credit Commitment KBC BANK N.V. - --------------------------- $17,500,000.00 Term Commitment By: /s/ Jean-Pierre Diels - --------------- -------------------------------- Name: Jean-Pierre Diels $17,500,000.00 Title: First Vice President By: /s/ Eric Raskin -------------------------------- Name: Eric Raskin Title: Vice President Revolving Credit Commitment ROYAL BANK OF CANADA - --------------------------- $17,500,000.00 Term Commitment By: /s/ Sheryl L. Greenberg - --------------- -------------------------------- Name: Sheryl L. Greenberg $17,500,000.00 Title: Senior Manager Credit Agreement ---------------- - 102 - Revolving Credit Commitment WACHOVIA BANK, N.A. - --------------------------- $13,375,000.00 Term Commitment By: /s/ Katherine A. Harkness - --------------- -------------------------------- Name: Katherine A. Harkness $13,375,000.00 Title: Director Revolving Credit Commitment BANK ONE, N.A., MAIN OFFICE CHICAGO - --------------------------- $11,250,000.00 Term Commitment By: /s/ Jacqueline P. Yardley - --------------- -------------------------------- Name: Jacqueline P. Yardley $11,250,000.00 Title: Senior Vice President Revolving Credit Commitment CREDIT AGRICOLE INDOSUEZ - --------------------------- $11,250,000.00 Term Commitment By: /s/ Larry Materi - --------------- -------------------------------- Name: Larry Materi $11,250,000.00 Title: Vice President By: /s/ Phillip J. Salter -------------------------------- Name: Phillip J. Salter Title: Vice President Sr. Relationship Manager Revolving Credit Commitment FLEET NATIONAL BANK - --------------------------- $11,250,000.00 Term Commitment By: /s/ Peggy Peckham - --------------- -------------------------------- Name: Peggy Peckham $11,250,000.00 Title: Senior Vice President By: -------------------------------- Name: Title: Credit Agreement ---------------- - 103 - Revolving Credit Commitment HSBC BANK USA - --------------------------- $11,250,000.00 Term Commitment By: /s/ Carol A. Kraus - --------------- -------------------------------- Name: Carol A. Kraus $11,250,000.00 Title: Vice President Revolving Credit Commitment SOCIETE GENERALE - --------------------------- $11,250,000.00 Term Commitment By: /s/ Eric E. O. Siebert Jr. - --------------- -------------------------------- Name: Eric E. O. Siebert Jr. $11,250,000.00 Title: Director Revolving Credit Commitment UFJ BANK LIMITED - --------------------------- $11,250,000.00 Term Commitment By: /s/ Lee E. Prewitt - --------------- -------------------------------- Name: Lee E. Prewitt $11,250,000.00 Title: Vice President Revolving Credit Commitment U.S. BANK NATIONAL ASSOCIATION - --------------------------- $11,250,000.00 Term Commitment By: /s/ Joseph L. Sooter, Jr. - --------------- -------------------------------- Name: Joseph L. Sooter, Jr. $11,250,000.00 Title: Vice President Revolving Credit Commitment MERRILL LYNCH, PIERCE, FENNER - --------------------------- & SMITH INCORPORATED $3,750,000.00 Term Commitment By: /s/ Barbara S. Scholl - --------------- -------------------------------- Name: Barbara S. Scholl $3,750,000.00 Title: Managing Director Credit Agreement ---------------- - 104 - Revolving Credit Commitment SUMITOMO MITSUI BANKING CORPORATION - --------------------------- $3,750,000.00 Term Commitment By: /s/ William M. Ginn - --------------- -------------------------------- Name: William M. Ginn $3,750,000.00 Title: General Manager Revolving Credit Commitment SPCP GROUP, L.L.C. - --------------------------- $19,312,500.00 Term Commitment By: /s/ Jeffrey A. Gelfand - --------------- -------------------------------- Name: Jeffrey A. Gelfand $19,312,500.00 Title: CFO Revolving Credit Commitment MARINER OPPORTUNITIES II, L.P. - --------------------------- $6,250,000.00 Term Commitment By: /s/ C. Howe - --------------- -------------------------------- Name: C. Howe $6,250,000.00 Title: Treasurer of I.M. Revolving Credit Commitment GOLDMAN SACHS CREDIT PARTNERS L.P. - --------------------------- $3,750,000.00 Term Commitment By: /s/ Mark DeNatale - --------------- -------------------------------- Name: Mark DeNatale $3,750,000.00 Title: Authorized Signatory Revolving Credit Commitment SPECIAL SITUATIONS INVESTING - --------------------------- GROUP, INC. $3,750,000.00 Term Commitment By: /s/ Stephen H. Golden - --------------- -------------------------------- Name: Stephen H. Golden $3,750,000.00 Title: President Credit Agreement ---------------- - 105 - Revolving Credit Commitment MORGAN STANLEY SENIOR FUNDING, INC. - --------------------------- $3,562,500.00 Term Commitment By: /s/ Dan Kuen - --------------- -------------------------------- Name: Dan Kuen $3,562,500.00 Title: Vice President Credit Agreement ---------------- EX-99.(A) 7 exh99pa.txt COMPUTATION OF THE RATIO OF EARNINGS EXHIBIT 99(a) SOLUTIA INC. COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN MILLIONS)
FOUR MONTHS SIX MONTHS ENDED ENDED DECEMBER 31, 1997(1) 1998 1999 2000 2001 JUNE 30, 2002 -------------------- ----- ----- ----- ----- ------------- Income (loss) from continuing operations, before income taxes and equity earnings (loss) from affiliates(2)....... $ 37 $ 350 $ 267 $ 6 $ (64) $ 31 Add: Fixed charges......... 22 58 62 114 104 51 Amortization of capitalized interest............ 2 7 7 7 7 4 Dividends from affiliated companies........... 14 37 60 45 30 21 Less: Interest capitalized........... (4) (6) (13) (18) (2) (1) ----- ----- ----- ----- ----- ----- Income as adjusted......... $ 71 $ 446 $ 383 $ 154 $ 75 $ 106 ===== ===== ===== ===== ===== ===== Fixed charges: Interest expensed and capitalized.......... 19 49 53 101 92 45 Estimate of interest within rental expense.............. 3 9 9 13 12 6 ----- ----- ----- ----- ----- ----- Fixed charges...... $ 22 $ 58 $ 62 $ 114 $ 104 $ 51 ===== ===== ===== ===== ===== ===== Ratio of Earnings to Fixed Charges(3)............... 3.23 7.69 6.18 1.35 0.72 2.08 ===== ===== ===== ===== ===== ===== - ------- (1) We have not calculated the ratio of earnings to fixed charges for the periods before September 1, 1997. Historical computation of earnings to fixed charges is not considered meaningful before that date because we were not an independent company and Monsanto Company did not allocate debt to us. (2) Includes restructuring and other items of $58 million for the year ended December 31, 2001, $107 million for the year ended December 31, 2000, $61 million for the year ended December 31, 1999, and $72 million for the four months ended December 31, 1997. (3) Earnings for the year ended December 31, 2001, would have to be $29 million higher in order to achieve a one-to-one ratio.
29 EX-99.(B) 8 exh99pb.txt BUSINESS RISK FACTORS Exhibit 99(b) ------------- RISKS RELATING TO OUR BUSINESS LEGAL PROCEEDINGS AND OTHER CLAIMS COULD IMPOSE SUBSTANTIAL COSTS ON US. As a manufacturer of chemical-based materials, we have lawsuits involving environmental and product liability claims filed against us from time to time. We are defending a number of legal proceedings primarily relating to former operations, including claims for personal injury and property damage arising out of releases of or alleged exposure to materials that are classified as hazardous substances under federal environmental law. Some of these proceedings have also been brought against our former parent, the former Monsanto Company (now known as Pharmacia Corporation), which we have agreed to indemnify for the claims. Before merging with Pharmacia, Monsanto conducted many of the businesses we now operate that are the subject of these lawsuits. The most significant claims involve allegations of personal injury and property damage associated with the former manufacture of polychlorinated biphenyls, which are known as "PCBs," and related releases of PCBs at our Anniston, Alabama facility. Four cases originally filed in Circuit Court for Calhoun County, Alabama on behalf of approximately 3,500 individuals living or working near the Anniston facility (the "Abernathy Plaintiffs") were consolidated for trial. In February 2002, a jury returned a verdict for the plaintiffs in the first phase of the trial relating to claims of property damage and exposure to PCBs made by 16 individuals and one business from the larger group of plaintiffs. The verdict found us liable with respect to all counts before the jury, including negligence, wantonness, trespass, nuisance, outrage and suppression of truth. The jury has yet to return a finding with respect to damages, but the verdict carries the possibility of both compensatory and punitive damages. In February 2002, the Attorney General of Alabama, the Alabama Department of Environmental Management and certain district attorneys intervened in the Abernathy case, seeking an order that directs the defendants to fund an investigation of the extent of the PCB contamination and the setting of a schedule and procedures for remediation. We believe that the filing of a partial consent decree ("PCD") in federal court has preempted the jurisdiction of the state court to prescribe any remedial action directed to PCB issues in Anniston. If damages are awarded against us, we would appeal on all available grounds. We believe that we have meritorious grounds for appeal; however, there can be no guarantee any such appeal would be successful. Also, in order to appeal any lower court judgment, we would be required to post a surety bond. Such a bond is often required to be collateralized. Pharmacia, our co-defendant in these cases, has agreed upon completion of the refinancing to obtain an appeal bond on commercially reasonable terms given its financial condition and resources if needed and if we do not obtain the bond. If Pharmacia obtains an appeal bond without providing collateral, any decisions regarding settlement of the litigation would be jointly controlled by us, Pharmacia, and Monsanto with each company having an equal vote. If such a bond is required to be secured by collateral, Solutia would have the right to provide the collateral and continue to control any settlement decisions. If Solutia does not provide the required collateral, then Pharmacia would provide the necessary collateral and would assume control of any settlement decisions. We estimate, under current conditions, that Pharmacia and our insurers could obtain an appeal bond in the range of $500 to $550 million without providing collateral and in a larger amount with collateral but no assurances can be given as to the amount of the bond Pharmacia can obtain on an unsecured basis. We have insurance coverage that we believe would be available to mitigate potential damages in these cases. However, there is no assurance that our available insurance will cover all claims, or that our insurers will not challenge coverage for certain claims, or that the final damage award will not exceed our available insurance coverage. Any of the foregoing may have a material adverse effect on our results from operations, financial position, liquidity, and our ability to satisfy our financial obligations. Another Anniston lawsuit, originally filed in federal court in Birmingham, Alabama, on behalf of 1,116 minor plaintiffs, now involves approximately 15,000 adult and minor plaintiffs. These plaintiffs claim to suffer unspecified injuries from exposure to PCBs and assert their right to medical monitoring and testing, and seek compensatory and punitive damages in unspecified amounts. This lawsuit is scheduled to go to trial in or after February 2003. There is little, if any, precedent available for use in predicting potential outcomes in the Anniston litigation and, at this stage of the proceedings, we cannot reasonably determine the extent of liability or the amount of any damages. We cannot predict the amount of damages we will have to pay, if any, or the timing of such payments with regard to these cases. The uncertain outcome of these cases could materially impact our ability to refinance our indebtedness as it comes due. We also manufactured PCBs at one of our facilities in Illinois. Remediation of PCBs found off the plant site is proceeding under the supervision of the EPA. Although there are no pending lawsuits from third parties in Illinois similar to those related to the Anniston plant, we can give no assurance that such lawsuits will not be filed against us. In addition to any damages that we may have to pay in connection with our PCB litigation, our business and proposed remedial actions may also be negatively affected by publicity relating to these lawsuits. Major newspapers, magazines and television networks have run or may run stories with respect to our role in the manufacture of PCBs and the effect such operations allegedly have had on the communities in which we operate or have operated. WE MANUFACTURE PRODUCTS FOR HIGHLY COMPETITIVE, CYCLICAL END MARKETS. We sell our products into cyclical end markets such as the domestic housing industry and global automotive industries. A general weakening of the economy in the United States and Europe in 2001 depressed consumer demand in these marketplaces, which negatively affected our sales for the year. As long as these conditions exist, they will continue to have a negative effect on our volumes and operating margins. The global markets in which our chemical businesses operate are highly competitive. Competition is based on a number of factors, such as price, product quality and service. In addition, some of our competitors may have greater financial, technological and other resources than ours, and may be better able to withstand changes in market conditions. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can. Consolidation of our competitors or customers may also have an adverse effect on us. In addition, global competition and customer demands for efficiency will continue to make price increases difficult. The occurrence of any of these events could adversely affect our financial condition and results of operations. OUR BUSINESS FLUCTUATES MATERIALLY DUE TO EXTERNAL FACTORS WHICH MAY NEGATIVELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. External factors beyond our control, such as general economic conditions described above, competitor actions, international events and governmental regulation in the United States and abroad, can cause fluctuations in demand for our products, fluctuations in prices and margins and volatility in the price of raw materials that we purchase. In particular, demand within the primary end-markets for our products is generally a function of regional economic conditions in geographic areas in which sales are generated. For example, in 2001, a decline in the U.S. economy reduced market demand in all business segments, which adversely affected our results of operations. These external factors can magnify the impact of industry cycles. As a result, our income and cash flow fluctuate significantly. As a result of demand, we may operate individual facilities below or above rated capacities, may idle individual facilities or may shut down and restart individual facilities in any period. During 2001, we reduced operating rates in all segments, thereby increasing our per unit cost of products sold. It is possible that lower demand in the future will cause us to reduce operating rates. INCREASED RAW MATERIAL AND ENERGY COSTS MAY REDUCE OUR INCOME. We purchase large amounts of commodity raw materials, including natural gas, propylene, cyclohexane and benzene. While temporary shortages of raw materials and energy may occasionally occur, these items are generally sufficiently available to cover current and projected requirements. We typically purchase major requirements for key raw materials under medium-term contracts. However, their prices fluctuate under these contracts as a result of unscheduled plant interruptions and domestic and world market conditions. For example, during 2000, the cost of many of our raw materials increased significantly as the price of crude oil increased above $30 a barrel. During the second half of 2000, natural gas escalated in price to nearly $10 per MMBtu. Given our competitive markets, it is often not possible to pass all of these increased costs on to our customers. While prices have now dropped, raw material and energy costs may increase significantly again. A return of high raw material and energy costs could significantly reduce our operating margins in the future. OPERATING PROBLEMS IN OUR BUSINESS MAY MATERIALLY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The occurrence of material operating problems at our facilities, including but not limited to the events described below, may have a material adverse effect on the productivity and profitability of a particular manufacturing facility, or on our operations as a whole, during and after the period of the operational difficulties. Our income is dependent on the continued operation of our various production facilities. Our manufacturing operations are subject to the usual hazards associated with chemical manufacturing and the related storage and transportation of raw materials, products and wastes, including pipeline leaks and ruptures, explosions, fires, inclement weather and natural disasters, mechanical failure, unscheduled downtime, labor difficulties and transportation interruptions. BECAUSE WE OPERATE WORLDWIDE, WE ARE AFFECTED BY RISKS OF DOING BUSINESS ABROAD. OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY CURRENCY RISK OR POLITICAL INSTABILITY. We generate revenue from export sales as well as from operations conducted outside the United States. Approximately 43% of our consolidated sales in 2001 were made into markets outside the United States including Europe, Canada, Latin America and Asia. Operations outside the United States are potentially subject to a number of risks and limitations that are not present in domestic operations, including fluctuations in currency values, trade restrictions, investment regulations, governmental instability and other potentially detrimental governmental practices or policies affecting companies doing business abroad. Our Performance Films and Specialty Products segments are particularly dependent on their international operations. Approximately half of the sales of the Performance Films segment and two-thirds of the sales of the Specialty Products segment were made into markets outside the United States. Identifiable assets of the non-United States operations represented approximately 26% of total identifiable assets at December 31, 2001, and approximately 26% of total identifiable assets at March 31, 2002. The functional currency of each of our non-United States operations is the local currency. Exchange rates between these currencies and U.S. dollars have fluctuated significantly in recent years and may do so in the future. Unfavorable currency exchange rates adversely affected our revenues and net income in 2000 and 2001. We cannot predict future events, which may significantly increase or decrease the risk of future movement in foreign currencies in which we conduct our business. We generate revenue from export sales and operations conducted outside the United States that may be denominated in currencies other than the relevant functional currency. It is possible that fluctuations in foreign exchange rates will have a negative effect on our results of operations. Additionally, we generate revenues from sales in countries that may experience greater degrees of economic and political uncertainty than those experienced by us in the United States. ENVIRONMENTAL AND REGULATORY COMPLIANCE IMPOSES SUBSTANTIAL COSTS ON US. In 2001 we spent approximately $7 million for environmental capital projects and approximately $122 million for the management of environmental programs, including the operation and maintenance of facilities for environmental control, of which $40 million was charged against recorded environmental liabilities. During 2002 and 2003, we estimate that we will spend a total of approximately $26 million on additional capital projects for environmental protection and that expenses for the management of environmental programs in 2002 and 2003 will decrease slightly from 2001 levels. With respect to environmental remediation obligations, our policy is to accrue costs for remediation of contaminated sites in the accounting period in which the obligation is probable and the cost is reasonably estimable. Significant adjustments to these obligations resulted in the 2001 fourth quarter charges of $34 million ($22 million aftertax) to increase our environmental reserves. This action was required in order to reflect revised estimates for changed circumstances relating to the ultimate outcome of previously known environmental matters. These revised estimates were based upon further discussions with environmental authorities and the availability of new information from recently completed environmental studies. These events and activities help to better define and quantify our ultimate liability for these matters. At the time of our spinoff from the former Monsanto Company (now Pharmacia Corporation), we assumed liabilities related to specified proceedings under federal and state environmental remediation laws including the federal Comprehensive Environmental Response, Compensation & Liability Act, which is known as "Superfund." As a result, while Monsanto remains the named potentially responsible party or defendant for actions that occurred before the September 1, 1997 spinoff, we manage these proceedings and litigation against Monsanto and indemnify it for any costs, expenses and judgments arising from these proceedings and from the PCD described below. Our estimates of our liabilities for Superfund sites are based on evaluations of currently available facts with respect to each individual site and take into consideration factors such as existing technology, laws and agency policy and prior experience in remediation of contaminated sites. As assessments and remediation activities progress at individual sites, we review these liabilities periodically and adjust them to reflect additional technical, engineering and legal information that becomes available. We had an accrued liability of $26 million as of March 31, 2002, for Superfund sites. Major Superfund sites in this category include the noncompany-owned sites at Brio and MOTCO in Texas and Fike/Artel in West Virginia, which account for $18 million of the accrued amount. We spent approximately $8 million in 2001 for remediation of Superfund sites. Similar Superfund remediation costs are likely in future years. We had an accrued liability of $59 million as of March 31, 2002, for plants no longer in operation and third-party sites for which we assumed responsibility from Monsanto. Our estimate of our liability related to these sites is based on evaluations of currently available facts with respect to each individual site. The estimate takes into consideration factors such as existing technology, laws and agency policy and prior experience in remediation of contaminated sites. We spent $16 million in 2001 for remediation of these sites. Similar remediation costs for these kinds of sites are likely in future years. We had an accrued liability of $83 million as of March 31, 2002, for solid and hazardous waste remediation, and for post-closure costs at our operating locations. We accrue these post-closure costs over the estimated remaining useful life of the related facilities. We spent $16 million in 2001 for remediation of these facilities. Similar remediation costs for these kinds of sites are likely in future years. Our largest known environmental exposure arises from the alleged release of PCBs from our facility in Anniston, Alabama. Environmental remediation issues related to this facility relate principally to: (1) remediation of the seventy-acre plant site; (2) investigation and remediation of soil contamination at properties in the Anniston area; and (3) investigation and remediation of sediments in waterways and soils in flood plains impacted by discharges from the plant. We have tested and continue to test soils at residential properties in the Anniston area for PCBs and are conducting clean-ups where action levels are exceeded and access can be obtained pursuant to an administrative order on consent agreed to with the federal EPA. On March 25, 2002, we and Pharmacia entered into a PCD with EPA pursuant to Superfund for the area designated by EPA as the Anniston PCB site. It was lodged with the U.S. District Court for the Northern District of Alabama; approval and entry by the Court is subject to a public comment period which ended June 3, 2002 and review by the Court of any objections. The PCD requires us and Pharmacia to conduct a remedial investigation and feasibility study, the results of which will be used by EPA to select a clean-up remedy for the Anniston PCB site, and to continue to address residential properties pursuant to the pre-existing removal order issued by EPA. Under the PCD, EPA has reserved the right to seek natural resource damages, if any, under Superfund allegedly caused by releases of PCBs, for example, in waterways used for recreational fishing. EPA has also reserved the right to seek remediation of alleged lead contamination in soil in the Anniston area. While we believe our operations did not contribute to any lead contamination, there can be no guarantee that significant costs will not be incurred to address it. Uncertainties related to all of our environmental liabilities include changing governmental policy and regulations, discovery of unknown conditions, the method and extent of remediation and future changes in technology. Because of these uncertainties, we estimate that potential future expenses associated with these liabilities could exceed the amounts reserved by an additional $20 million to $30 million. Although we cannot predict the ultimate costs and results of remediation of contaminated sites with certainty, we do not expect them to result in a material adverse effect on our consolidated financial position or liquidity, but they could have a material adverse effect on our net income in any one year. However, there can be no guarantee that the ultimate cost of remediation and related matters, including any natural resource damages, will not have a material adverse effect on our financial position. -----END PRIVACY-ENHANCED MESSAGE-----