-----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, TZ6CDhe6KYDb4lOV8/dahrsTdC+gNnP3xQHm5gVadCJSOn31BEjKT84fdWtRUIOE l5t49a7LuYWBAjdDHDePIg== 0001068800-99-000187.txt : 19990503 0001068800-99-000187.hdr.sgml : 19990503 ACCESSION NUMBER: 0001068800-99-000187 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990430 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: SEC FILE NUMBER: 001-13255 FILM NUMBER: 99605491 BUSINESS ADDRESS: STREET 1: 10300 OLIVE BLVD STREET 2: P O BOX 66760 CITY: ST LOUIS STATE: MO ZIP: 63166-6760 BUSINESS PHONE: 3146741000 MAIL ADDRESS: STREET 1: 10300 OLIVE BLVD STREET 2: P O BOX 66760 CITY: ST LOUIS STATE: MO ZIP: 63166-6760 FORMER COMPANY: FORMER CONFORMED NAME: QUEENY CHEMICAL CO DATE OF NAME CHANGE: 19970804 10-Q 1 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 MARCH 31, 1999 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) 10300 OLIVE BOULEVARD, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760 - ---------------------------------------------------------- ---------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (314) 674-1000 -------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) 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 MARCH 31, 1999 ----- -------------- COMMON STOCK, $0.01 PAR VALUE 111,723,640 SHARES ----------------------------- ------------------ ========================================================================= PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SOLUTIA INC. STATEMENT OF CONSOLIDATED INCOME (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, ----------------- 1999 1998 ----- ----- NET SALES................................................... $ 652 $ 720 Cost of goods sold.......................................... 547 533 ----- ----- GROSS PROFIT................................................ 105 187 Marketing expenses.......................................... 31 37 Administrative expenses..................................... 31 31 Technological expenses...................................... 17 20 ----- ----- OPERATING INCOME............................................ 26 99 Equity earnings from affiliates............................. 10 6 Interest expense............................................ (9) (12) Other income (expense)--net................................. 6 4 ----- ----- INCOME BEFORE INCOME TAXES.................................. 33 97 Income taxes................................................ 10 33 ----- ----- NET INCOME.................................................. $ 23 $ 64 ===== ===== BASIC EARNINGS PER SHARE.................................... $0.21 $0.55 ===== ===== DILUTED EARNINGS PER SHARE.................................. $0.20 $0.51 ===== ===== Weighted average equivalent shares (in millions): Basic................................................... 111.8 117.0 Effect of dilutive securities: Common share equivalents--common shares issuable upon exercise of outstanding stock options........ 4.2 7.9 ----- ----- Diluted................................................. 116.0 124.9 ===== ===== STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (DOLLARS IN MILLIONS) THREE MONTHS ENDED MARCH 31, ----------------- 1999 1998 ----- ----- NET INCOME.................................................. $ 23 $ 64 OTHER COMPREHENSIVE INCOME: Currency translation adjustments............................ (17) (8) ----- ----- COMPREHENSIVE INCOME........................................ $ 6 $ 56 ===== ===== See accompanying Notes to Consolidated Financial Statements.
1 SOLUTIA INC. STATEMENT OF CONSOLIDATED FINANCIAL POSITION (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................... $ 36 $ 89 Trade receivables, net of allowance of $7 in 1999 and 1998...................................................... 398 357 Miscellaneous receivables and prepaid expenses.............. 123 126 Deferred income tax benefit................................. 101 88 Inventories................................................. 343 331 ------ ------ TOTAL CURRENT ASSETS........................................ 1,001 991 PROPERTY, PLANT AND EQUIPMENT: Land........................................................ 16 17 Buildings................................................... 366 371 Machinery and equipment..................................... 2,773 2,786 Construction in progress.................................... 145 127 ------ ------ Total property, plant and equipment......................... 3,300 3,301 Less accumulated depreciation............................... 2,375 2,357 ------ ------ NET PROPERTY, PLANT AND EQUIPMENT........................... 925 944 INVESTMENTS IN AFFILIATES................................... 410 394 LONG-TERM DEFERRED INCOME TAX BENEFIT....................... 277 274 OTHER ASSETS................................................ 156 162 ------ ------ TOTAL ASSETS................................................ $2,769 $2,765 ====== ====== LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable............................................ $ 268 $ 278 Accrued liabilities......................................... 467 454 ------ ------ TOTAL CURRENT LIABILITIES................................... 735 732 LONG-TERM DEBT.............................................. 597 597 POSTRETIREMENT LIABILITIES.................................. 973 971 OTHER LIABILITIES........................................... 488 472 SHAREHOLDERS' DEFICIT: Common stock (authorized, 600,000,000 shares, par value $0.01) Issued: 118,400,635 shares in 1999 and 1998............... 1 1 Additional contributed capital............................ (134) (131) Treasury stock, at cost (6,676,995 shares in 1999 and 5,629,677 shares in 1998)............................... (165) (143) Unearned ESOP shares........................................ (23) (25) Accumulated other comprehensive income...................... 2 19 Reinvested earnings......................................... 295 272 ------ ------ SHAREHOLDERS' DEFICIT....................................... (24) (7) ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT................. $2,769 $2,765 ====== ====== See accompanying Notes to Consolidated Financial Statements.
2 SOLUTIA INC. STATEMENT OF CONSOLIDATED CASH FLOW (DOLLARS IN MILLIONS)
THREE MONTHS ENDED MARCH 31, ----------------- 1999 1998 ----- ----- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income.................................................. $ 23 $ 64 Adjustments to reconcile to Cash From Operations: Items that did not use (provide) cash: Deferred income taxes............................... (13) 4 Depreciation and amortization....................... 35 34 Other............................................... 49 (4) Working capital changes that provided (used) cash: Trade receivables................................... (41) (9) Inventories......................................... (12) (29) Accounts payable and accrued liabilities............ (59) 30 Other............................................... 12 13 Other items............................................. 5 4 ----- ----- CASH FROM OPERATIONS........................................ (1) 107 ----- ----- INVESTING ACTIVITIES: Property, plant and equipment purchases..................... (30) (18) Investment and property disposal proceeds................... 3 5 ----- ----- CASH FROM INVESTING ACTIVITIES.............................. (27) (13) ----- ----- FINANCING ACTIVITIES: Net repayment of debt obligations........................... -- (69) Treasury stock purchases.................................... (26) (41) Dividend payments........................................... -- (1) Common stock issued under employee stock plans.............. 1 9 ----- ----- CASH FROM FINANCING ACTIVITIES.............................. (25) (102) ----- ----- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (53) (8) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR........................................... 89 24 ----- ----- END OF PERIOD............................................... $ 36 $ 16 ===== ===== See accompanying Notes to Consolidated Financial Statements.
3 SOLUTIA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS) 1. BASIS OF PRESENTATION Solutia Inc. is an international producer and marketer of a range of high performance chemical-based materials, including nylon and acrylic fibers and fiber intermediates, Saflex(R) plastic interlayer, phosphorus derivatives and specialty chemicals. These materials are used by our customers to make consumer, household, automotive and industrial products. These financial statements should be read in conjunction with the audited financial statements and notes to consolidated financial statements included in Solutia's 1998 Annual Report to shareholders and incorporated by reference in the company's annual report on Form 10-K, filed with the Securities and Exchange Commission on March 16, 1999. The accompanying unaudited consolidated financial statements reflect all adjustments which in the opinion of management are necessary to present fairly the financial position, results of operations, comprehensive income, and cash flows for the interim periods reported. Such adjustments are of a normal, recurring nature. The results of operations for the three-month period ended March 31, 1999 are not necessarily indicative of the results to be expected for the full year. 2. INVENTORY VALUATION The components of inventories as of March 31, 1999 and December 31, 1998 were as follows:
MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ Finished goods...................... $ 271 $ 252 Goods in process.................... 110 87 Raw materials and supplies.......... 82 116 ----- ----- Inventories, at FIFO cost........... 463 455 Excess of FIFO over LIFO cost....... (120) (124) ----- ----- TOTAL............................... $ 343 $ 331 ===== =====
3. SPECIAL OPERATIONS CHARGES During the first quarter of 1999, Solutia recorded special operations charges of $34 million ($22 million aftertax) related to manufacturing operations in the Chemicals and Fibers segments. In February 1999, Chemicals' ammonia unit experienced the failure of certain equipment critical to the production process. Based on an analysis of the economics of purchased ammonia and the cost to repair the equipment, Solutia decided to exit the ammonia business. A $28 million ($18 million aftertax) charge to cost of goods sold was recorded in the first quarter to complete the exit plan. The charge included $2 million to write down the assets to fair value, $4 million of dismantling costs, and $22 million of costs for which Solutia is contractually obligated under an operating agreement. Excluding the contractually obligated costs, Solutia expects to complete the dismantling of the equipment and exit of the business by the end of 1999. The ammonia business' net sales for the three months ended March 31, 1999 and 1998, were $1 million and $8 million, respectively. Operating income for those periods was minimal. A special operations charge of $6 million ($4 million aftertax) was also recorded primarily to write down a Fibers' segment bulk continuous filament (BCF) spinning machine to fair value as a result of a noncompetitive cost position. The charge is due to a Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed Of," review which indicated that the carrying amount of the assets exceeded the identifiable undiscounted cash flows related to the assets. Fair value of the assets was 4 determined based on estimates of market prices. Operating income derived from the machinery was minimal in the three month periods ended March 31, 1999 and 1998. 4. CONTINGENCIES During the first quarter of 1999, Solutia recorded a $29 million ($18 million aftertax) charge to cost of goods sold to increase reserves related to the anticipated settlement of two lawsuits brought against Monsanto Company ("Monsanto"), for which Solutia assumed responsibility in the 1997 spin-off from Monsanto, relating to the alleged discharge of polychlorinated biphenyls ("PCBs"), from the Anniston, Alabama plant site, and to environmental remediation of the allegedly affected areas. The anticipated settlement of these cases provided information that allowed management to estimate more accurately the company's position with respect to such litigation. Monsanto is a party to a number of lawsuits and claims relating to Solutia, for which Solutia assumed responsibility in the Spinoff. In addition, Solutia is also a named party to a number of lawsuits and claims directly. Solutia intends to defend all suits and claims vigorously. Such matters arise out of the normal course of business and relate to product liability; government regulation, including environmental issues; employee relations; and other issues. Certain of the lawsuits and claims seek damages in very large amounts. Although the results of litigation cannot be predicted with certainty, management's belief is that the final outcome of such litigation will not have a material adverse effect on Solutia's consolidated financial position, profitability or liquidity in any one year, as applicable. 5. SUBSEQUENT EVENTS CPFilms Inc. Acquisition On April 19, 1999, Solutia announced it had reached an agreement to acquire CPFilms Inc. from Akzo Nobel N.V. for approximately $200 million. CPFilms is the world market leader in window film and other high technology film products for automotive and architectural after-markets, and a variety of other specialty film applications. CPFilms' annual net sales are approximately $130 million. The acquisition will be accounted for as a purchase, and includes CPFilms' manufacturing sites, located in the United States and the United Kingdom, and its international distribution network. Solutia expects to close the acquisition in late May 1999. Phosphorus Derivatives Joint Venture On April 30, 1999, the company announced it had entered into an agreement in principle with FMC Corporation to form a joint venture to manufacture and market phosphorus chemicals. Solutia will contribute its Phosphorus Derivatives business to this joint venture. The joint venture will have annual net sales of approximately $600 million. Solutia and FMC will each have a 50 percent ownership share. 5 6. SEGMENT DATA Segment data for the three months ended March 31, 1999 and 1998 were as follows:
THREE MONTHS ENDED MARCH 31, ----------------------------------------------------------------------------------- 1999 1998 ------------------------------------- ------------------------------------- NET INTERSEGMENT NET INTERSEGMENT SALES SALES PROFIT SALES SALES PROFIT ----- ------------ ------ ----- ------------ ------ SEGMENT: Chemicals.......................... $204 $ 2 $ 56 $225 $ 2 $ 56 Fibers............................. 210 -- 32 251 -- 58 Polymers & Resins.................. 240 -- 66 244 -- 64 ---- ---- ---- ---- ---- ---- SEGMENT TOTALS....................... 654 2 154 720 2 178 RECONCILIATION TO CONSOLIDATED TOTALS: Sales eliminations................. (2) (2) (2) (2) Other revenues..................... -- 2 Less unallocated service costs: Cost of goods sold........... (76) (23) Marketing, administrative and technological expenses......... (52) (56) Equity earnings from affiliates.... 10 6 Interest expense................... (9) (12) Other income (expense)--net........ 6 4 CONSOLIDATED TOTALS: ---- ---- ---- ---- NET SALES.......................... $652 $-- $720 $-- ==== ==== ---- ==== ==== ---- INCOME BEFORE INCOME TAXES......... $ 33 $ 97 ==== ==== Segment profit includes only operating expenses directly attributable to the segment. Unallocated service costs are managed centrally and primarily include costs of technology, engineering and manufacturing services that are provided to the segments. Unallocated cost of goods sold for the three months ended March 31, 1999, includes special charges related to exiting the ammonia business ($28 million pretax, $18 million aftertax), the write down of a Fibers' segment bulk continuous filament spinning machine ($6 million pretax, $4 million aftertax), and the anticipated settlement of certain pending property claims litigation relating to the Anniston, Alabama plant site ($29 million pretax, $18 million aftertax).
6 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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These include all statements regarding the expected future financial position, results of operations, cash flows, effect of changes in accounting due to recently issued accounting standards, benefits from new technology, the cost of remediating the year 2000 issue and the effect of any unremediated or undiscovered year 2000 issues on the Company's operations. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements herein include, among others, those set forth below as well as general economic, business and market conditions, customer acceptance of new products, raw material pricing, efficacy of new technology and facilities, and increased competitive and/or customer pressure. RESULTS OF OPERATIONS--FIRST QUARTER 1999 COMPARED WITH FIRST QUARTER 1998 Net sales for the first quarter of 1999 decreased by 9 percent as compared with the first quarter of 1998. Lower average selling prices and lower sales volume contributed equally to the decline. Chemicals Segment Net sales declines in the Chemicals segment occurred primarily as the result of volume declines, and to a lesser extent, downward pressure on pricing. The decline in sales volume was driven primarily by two intermediates products: ammonia and chlorobenzenes. The ammonia sales decline was caused by the failure of certain critical production equipment at the Luling, Louisiana facility. Because of the cost to repair the equipment and the availability of ammonia in the marketplace, Solutia has decided not to repair the equipment, and instead to exit the business. The exit of the ammonia business is further discussed below in Operating Income. The decrease in chlorobenzene volumes was anticipated and is primarily due to lower demand as the Flexsys, L.P. ("Flexsys") rubber chemicals joint venture sourced more raw material from its new PPD2 operation. Pricing declines experienced in the first quarter of 1999, as compared to the first quarter of 1998, were caused by acrylonitrile sales contracts which contain contracted price declines. In spite of the decline in net sales, segment profit for the three-month period ended March 31, 1999, was flat as compared to the three-month period ended March 31, 1998. Solutia's cost reduction efforts, including those related to personnel costs, and favorable manufacturing performance for phosphorus derivatives products were sufficient to offset the net sales declines. For the 1999 first quarter, segment profit as a percentage of net sales was 27 percent as compared with 25 percent for the first quarter of 1998. Fibers Segment The Fibers segment net sales for the first quarter of 1999 were down approximately 16 percent versus the first quarter of 1998. Pricing and volume contributed equally to the year-over-year decrease. Acrilan(R) acrylic fiber continued to show poor operating results, as compared to the prior year, due to the effect of the Asian financial crisis on the businesses' sales to that region, and its residual effect on the Americas. The impact of these events began early in the third quarter of 1998 and have continued into the first quarter of 1999. The carpet business experienced lower average sales prices in the first quarter of 1999 as compared to the same period of the prior year due to the consolidation of the carpet mill industry and a higher proportion of unbranded sales. Also affecting the comparison of the first quarter 1999 with the first quarter 1998 is the first quarter 1998 price increase which gradually eroded during 1998. Subsequent to the end of the first quarter, Solutia moved to match a competitor's sales price increase effective May 1, 1999. Segment profit for Fibers decreased $26 million due to the net sales decline and lower capacity utilization, but was partially offset by lower raw material costs and the effects of Solutia's cost reduction initiatives, including those related to personnel costs. 7 Polymers & Resins Segment Net sales for the first quarter of 1999 in the Polymers & Resins segment were down slightly from the first quarter of 1998. Businesses in this segment experienced average selling prices lower than those in the year-ago quarter due to the sharing of raw material price reductions with customers and pricing provisions of some long-term sales contracts. Offsetting the average selling price declines were improved volumes in the Saflex(R) plastic interlayer and resins businesses. Saflex(R) plastic interlayer volumes were a record for a first quarter. Resins volumes improved due to new product introductions in the GME adhesives family. Additionally, volumes for Vydyne(R) nylon plastics were a record for a first quarter, benefiting from Solutia's marketing alliance with Dow Plastics. However, overall nylon plastics and polymers volumes were down from the year-ago quarter due to lower merchant polymer volume. Polymers & Resins segment profit for the first quarter of 1999 was 3 percent higher than for the first quarter of 1998 due to the lower raw material costs, improved capacity utilization and Solutia's cost reduction efforts, including those related to personnel costs. These factors led segment profit as a percentage of segment net sales to increase to 28 percent in the 1999 first quarter from 26 percent in the 1998 first quarter. Operating Income Operating income for the first quarter of 1999 declined to $26 million as compared to $99 million for the first quarter of 1998 due to lower segment profit discussed above and special charges affecting the 1999 quarter. In February 1999, the Chemicals' ammonia unit experienced the failure of certain equipment critical to the production process. Based on an analysis of the economics of purchased ammonia and the cost to repair the equipment, Solutia decided to exit the ammonia business. A $28 million ($18 million aftertax) special operations charge to cost of goods sold was recorded in the first quarter of 1999 to complete the exit plan. The charge included $2 million to write down the assets to fair value, $4 million of dismantling costs, and $22 million of costs for which Solutia is contractually obligated under an operating agreement. Excluding the contractually obligated costs, Solutia expects to complete the dismantling of the equipment and exit of the business by the end of 1999. The ammonia business' net sales for the three months ended March 31, 1999 and 1998 were $1 million and $8 million, respectively. Operating income for those periods was minimal. A special operations charge of $6 million ($4 million aftertax) was recorded to write down certain Fibers segment assets to their fair values. The charge is due to a review under Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed Of," ("SFAS No. 121"). The review stemmed from a historical trend of operating losses and a forecast that the trend would continue. The SFAS No. 121 review indicated that the carrying amount of the assets exceeded the identifiable undiscounted cash flows related to the assets. Fair value of the assets was determined based on estimates of market prices. Operating income derived from the machinery was minimal in the three month periods ended March 31, 1999 and 1998. Also during the 1999 first quarter, Solutia recorded a $29 million ($18 million aftertax) charge to cost of goods sold related to the anticipated settlement of two lawsuits brought against Monsanto Company relating to the alleged discharge of polychlorinated biphenyls ("PCBs") from the Anniston, Alabama plant site. The anticipated settlement of these cases provided information that allowed management to estimate more accurately the company's position with respect to such litigation. Partially offsetting the decline in operating income, caused by the special charges and lower segment profit discussed above, were lower personnel and benefits costs associated with Solutia's on-going cost reduction efforts. Equity Earnings from Affiliates Equity Earnings from Affiliates increased to $10 million in the first quarter of 1999 from $6 million in the comparable 1998 quarter. The increase was driven by improved profitability at the Flexsys joint venture, which benefited from the PPD2 unit's good operating performance. LIQUIDITY AND CAPITAL RESOURCES Solutia's working capital at March 31, 1999, increased to $266 million from $259 million at December 31, 1998. The increase was primarily driven by higher accounts receivable, partially offset by lower cash balances. The 8 increase in accounts receivable is consistent with normal sales and collection trends. Cash balances declined primarily due to lower cash from operations. Solutia continued to reinvest in itself through share repurchases in the first quarter of 1999. Shares repurchased under the second 5 million share repurchase program totaled 1.2 million shares. The cost for shares repurchased during the quarter was approximately $26 million. The Company believes that its cash flow from operations, supplemented by periodic additional borrowings, provides it with sufficient resources to finance operations and planned capital needs. THE YEAR 2000 ISSUE Overview The year 2000 ("Y2K") issue refers to the inability of a date-sensitive computer program to recognize a two-digit date field designated "00" as the year 2000. Mistaking "00" for 1900 could result in a system failure or miscalculations causing disruptions to operations, including manufacturing, a temporary inability to process transactions, send invoices, or engage in other normal business activities. This is a significant issue for most, if not all companies, with far reaching implications, some of which cannot be anticipated or predicted with any degree of certainty. Solutia began addressing its Y2K issues in 1996. The planning phase of the process was completed during 1997. Effective December 31, 1998, Solutia adopted the Y2K Readiness Disclosure format of the Chemical Manufacturers Association ("CMA"), of which the company is a member. The CMA disclosure format uses four process categories and five functional areas. Solutia has conformed its Y2K reporting to the CMA disclosure format. The following sections contain a summary of Solutia's Y2K readiness and detailed discussions of Solutia's Y2K issues. Summary of Y2K Readiness The following table summarizes Solutia's Y2K readiness. The percentage in each column indicates the completion of each process step listed.
CONTINGENCY PLANNED INVENTORY/ PLANS IMPLEMENTATION ASSESSMENT REMEDIATION TESTING IMPLEMENTATION DEVELOPED DATE ---------- ----------- ------- -------------- ----------- -------------- Business Applications.......... 100% 80% 80% 80% See Mid-1999 Manufacturing and Warehousing Equipment........... 100% 75% 75% 75% Comments 2nd Qtr. 1999 Information Technology Technical Infrastructure...... 75% 50% 50% 50% Below 2nd Qtr. 1999 Environmental Operations Systems............. 100% 75% 75% 75% 2nd Qtr. 1999 Business Partners..... 80% -- -- -- 2nd Qtr. 1999
Business Applications Solutia inventoried and assessed its business applications during 1997. At that time, the company determined that significant portions of its software required modification or repair to function properly beyond December 31, 1999. Solutia is addressing the majority of these Y2K issues through the previously planned installation of software licensed from SAP AG which is Y2K compliant. The implementation of SAP involves a series of transitions, the first of which occurred in January 1997. Through December 31, 1998, all implementations were completed in accordance with the transition schedule. During the first quarter of 1999, the company decided to delay the transitions to SAP scheduled for January 31, 1999, and March 31, 1999, by 30 days each to perform additional testing, to complete personnel training, and to minimize problems with the transition. The first of the delayed transitions (rescheduled for February 28, 1999) was completed successfully and, as a result, approximately 85 percent of Solutia's businesses (based on net sales) have implemented SAP. The final transition to SAP is underway. Critical issues that are not 9 addressed by SAP are in the process of being remediated. The company expects to complete remediation of critical business applications by the end of April 1999, except for a limited number of applications that will be remediated just before Y2K integrated testing. Y2K integrated testing of SAP and non-SAP systems will occur during mid-1999. Manufacturing and Warehousing Equipment and Environmental Operations Systems The manufacturing and warehousing equipment and the environmental operations systems areas include primary process control systems and devices with embedded chips. Primary process control systems were inventoried and assessed during late 1997. Remediation and testing of these systems is continuing. The inventory and assessment of the company's devices with embedded chip systems was completed during December 1998. Remediation of the Y2K issues found is continuing. Some slippage from planned schedules occurred during 1998 as resources were temporarily redirected to other Y2K areas. However, substantial resources are being directed towards the remediation of Y2K issues detected and the testing and implementation of repaired systems. Solutia expects that work on the critical issues in these areas will be completed on schedule by the end of the second quarter of 1999, with the exception of a small portion of systems that will be repaired and tested during planned plant shutdowns in the second half of 1999. Information Technology Technical Infrastructure The information technology ("IT") technical infrastructure area is primarily comprised of host server systems, computer networking infrastructure, voice systems, and desktop computer workstations and software. The inventory and assessment of known long lead-time items is complete. Major projects were identified during 1998 and remediation is scheduled for completion during 1999. An exhaustive and comprehensive follow-up investigation of this area to assure that no critical components were overlooked is complete, except for network and mainframe/midrange software. The assessment, remediation and testing of the issues identified will be completed by the end of the second quarter 1999. However, remediation and testing of a small number of systems will occur in the second half of 1999 to coincide with scheduled system outages. Business Partners Solutia's business partners include its suppliers and service providers (supply chain), and its customers. Solutia has continued its process to identify and assess those business partners in the supply chain that provide materials, products or services critical to the company's operations. These continued reviews have led Solutia to survey additional business partners during the first quarter of 1999. Approximately two-thirds of Solutia's critical suppliers report that they have either completed their remediation efforts or have plans to complete their remediation by mid-1999. Investigation of the remaining Y2K issues with critical suppliers is continuing on schedule. Audits of selected suppliers to verify the status and/or completion of their remediation are planned for the first half of 1999. Solutia has been working with customers to address their Y2K concerns regarding Solutia's ability to operate. Plans to address the ability of our significant customers to accept our products after December 31, 1999, will be determined as contingency plans are developed. Integrated Testing The company intends to perform integrated Y2K testing of critical systems in all functional areas throughout 1999, with the majority of such testing occurring during the second and third quarters of 1999. Given the nature of Solutia's manufacturing and other operations, full-scale integrated testing may not be practical in some areas and, therefore, may be limited in scope to avoid significant disruption of the company's operations. Statements of compliance from vendors and other compliance evidence are expected to mitigate the risk of not performing integrated testing in those areas. Contingency Planning During the first quarter of 1999, Solutia completed the development of a contingency planning process for Y2K issues. The process engages the manufacturing sites in the evaluation of their existing contingency plans in light of possible Y2K effects, such as the loss of electrical and telephone utilities. Solutia expects that the Y2K contingency plans for all manufacturing sites will be in place by the beginning of the third quarter 1999. The contingency 10 planning process has been modified for use in non-manufacturing areas and development of those plans is underway. Contingency plans for non-manufacturing areas will be completed by the end of third quarter 1999. For both manufacturing and non-manufacturing areas, the plans will include procedures that attempt to minimize the impact of any unremediated and unresolved Y2K issues on Solutia's operations and financial position. Costs To date, the company has incurred approximately $8 million in costs related to Y2K work, excluding the cost of SAP implementation. Management currently estimates that additional costs to evaluate and remediate the remaining issues will be less than $5 million. These costs will be expensed as incurred during 1999. Risks Based on the status of the company's work to address its Y2K issues, including the implementation of SAP, management does not expect the Y2K issue to pose significant operational problems for the company. However, if the remediation of critical issues is not completed in a timely manner, Y2K could have a material adverse effect on the company, depending on the nature and extent of any remaining unremediated or unresolved issues. Furthermore, if the company's customers, suppliers, and service providers fail to rectify their Y2K issues in their own systems, the resultant effect on the company may be material. Management anticipates the most reasonably likely worst-case scenario would involve a temporary shutdown of certain units if, in management's judgment, the company cannot run certain processes safely from an environmental, safety and health standpoint because of the failure of the company or a supplier to resolve Y2K issues. Through the development of contingency plans, the company expects to mitigate the effect that any such temporary shutdowns would have on the company or third parties. The estimated costs and date of completion of Y2K remediation are based on management's best estimates, which were derived from numerous assumptions about future events. These assumptions include the availability of certain resources, third-party modification plans and other factors. There can be no guarantee that these estimates will be achieved and actual results could differ materially. Specific factors that might cause material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to identify and correct all relevant computer codes, and the cost and availability of replacements for devices with embedded chips. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activity." SFAS No. 133 provides comprehensive and consistent standards for the recognition and measurement of derivative and hedging activities. It requires that derivatives be recorded on the Statement of Consolidated Financial Position at fair value and establishes criteria for hedges of changes in the fair value of assets, liabilities or firm commitments, hedges of variable cash flows of forecasted transactions, and hedges of foreign currency exposures of net investments in foreign operations. Changes in the fair value of derivatives that do not meet the criteria for hedges would be recognized in the Statement of Consolidated Income. This statement will be effective for the Company beginning January 1, 2000. The Company does not expect the adoption of SFAS No. 133 to have a material effect on the consolidated financial statements. 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company's report on Form 10-K for the year ended December 31, 1998, described a number of lawsuits brought against Monsanto relating to the alleged discharge of polychlorinated biphenyls ("PCBs"), from the Anniston, Alabama plant site. The Company has arrived at an agreement in principle, subject to Court approval, to settle actions pending in Circuit Court in St. Clair County which had been consolidated and certified as a class action on behalf of property owners in a specified area along waterways near the plant (Dyer, et al v. Monsanto Company, et al.). Under the terms of the agreement, the Company will pay $23 million in cash to the property owners and has guaranteed that it will spend $18 million, in addition to the $3 million already expended, over a period of approximately 6 years on remediation activities directed to the waterways. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits--See the Exhibit index at page 14 of this report. (b) The Company did not file any reports on Form 8-K during the quarter ended March 31, 1999. 12 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) ROGER S. HOARD ------------------------------------- (Vice President and Controller) (On behalf of the Registrant and as Principal Accounting Officer) Date: April 30, 1999 13 EXHIBIT INDEX These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2 Omitted--Inapplicable 3 (i) Omitted--Inapplicable (ii) By-Laws of Solutia Inc., as amended April 28, 1999 4 Omitted--Inapplicable 10 Solutia Inc. Non-Employee Director Compensation Plan, as amended February 24, 1999 11 Omitted--Inapplicable; see "Statement of Consolidated Income" on page 1. 15 Omitted--Inapplicable 18 Omitted--Inapplicable 19 Omitted--Inapplicable 22 Omitted--Inapplicable 23 Omitted--Inapplicable 24 Omitted--Inapplicable 27 Financial Data Schedule 99 Omitted--Inapplicable 14 EX-3.2 2 AMENDED BY-LAWS BY-LAWS OF SOLUTIA INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AS AMENDED APRIL 28, 1999 ARTICLE I. OFFICES AND RECORDS SECTION 1.1. Delaware Office. The name of the registered agent of the Company is The Corporation Trust Company and the registered office of the Company shall be located in the City of Wilmington, County of New Castle, State of Delaware. SECTION 1.2. Other Offices. The Company may have such other offices, either within or without the State of Delaware, as the Board of Directors may designate or as the business of the Company may from time to time require. SECTION 1.3. Books and Records. The books and records of the Company may be kept outside the State of Delaware at such place or places as may from time to time be designated by the Board of Directors. ARTICLE II. STOCKHOLDERS SECTION 2.1. Annual Meeting. The annual meeting of the stockholders of the Company shall be held on such date and at such place and time as may be fixed by resolution of the Board of Directors. SECTION 2.2. Special Meeting. Subject to the rights of the holders of any series of stock having a preference over the Common Stock of the Company as to dividends or upon liquidation ("Preferred Stock") with respect to such series of Preferred Stock, special meetings of the stockholders may be called only by the Chairman of the Board or the President or by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors which the Company would have if there were no vacancies (the "Whole Board"). SECTION 2.3. Place of Meeting. The Board of Directors, the Chairman of the Board or the President, as the case may be, may des- ignate the place of meeting for any annual meeting or for any special meeting of the stockholders called by the Chairman of the Board, the President or the Board of Directors. If no designation is so made, the place of meeting shall be the principal office of the Company. SECTION 2.4. Notice of Meeting. Written or printed notice, stating the place, day and hour of the meeting and the purpose or purposes for which the meeting is called, shall be delivered by the Company not less than ten (10) days nor more than sixty (60) days before the date of the meeting, either personally or by mail, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, addressed to the stockholder at his address as it appears on the stock transfer books of the Company. Such further notice shall be given as may be required by law. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Company's notice of meeting. Meetings may be held without notice if all stockholders entitled to vote are present, or if notice is waived by those not present in accordance with Section 6.4 of these By-Laws. Any previously scheduled meeting of the stockholders may be postponed, and (unless the Restated Certificate of Incorporation, as it may be amended (the "Certificate of Incorporation") otherwise provides) any special meeting of the stockholders may be cancelled, by resolution of the Board of Directors upon public notice given on or prior to the date previously scheduled for such meeting of stockholders. SECTION 2.5. Quorum and Adjournment. Except as otherwise provided by law or by the Certificate of Incorporation, the holders of a majority of the outstanding shares of the Company entitled to vote generally in the election of directors (the "Voting Stock"), represented in person or by proxy, shall constitute a quorum at a meeting of stock- holders, except that when specified business is to be voted on by a class or series of stock voting as a class, the holders of a majority of the outstanding shares of such class or series shall constitute a quorum of such class or series for the transaction of such business. The Chairman of the meeting or a majority of the shares so represented may adjourn the meeting from time to time, whether or not there is such a quorum. No notice of the time and place of adjourned meetings need be given except as required by law. The stockholders present at a duly called meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. SECTION 2.6. Proxies. At all meetings of stockholders, a stockholder may vote by proxy executed in writing (or in such manner prescribed by the General Corporation Law of the State of Delaware) by the stockholder, or by his duly authorized attorney in fact. SECTION 2.7. Notice of Stockholder Business and Nominations. (A) Annual Meetings of Stockholders. (1) Nominations of persons for election to the Board of Directors of the Company and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders only (a) pursuant to the -2- Company's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the Company who was a stockholder of record at the time of giving of notice provided for in this By-Law, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this By-Law, the stockholder must have given timely notice thereof in writing to the Secretary of the Company and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Company not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Company. In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Company's books, and of such beneficial owner, (ii) the class and number of shares of the Company which are owned beneficially and of record by such stockholder and such beneficial owner, and (iii) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends, to (x) deliver a proxy statement and form of proxy to holders of at least the percentage of the Company's outstanding Voting Stock required to approve or adopt the proposal or elect the nominee and/or (y) otherwise solicit proxies from stockholders in support of such proposal or nomination. -3- (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this By-Law to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Company is increased and there is no public announcement by the Company naming all of the nominees for director or specifying the size of the increased Board of Directors at least 100 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Company not later than the close of business on the 10th day following the day on which such public announcement is first made by the Company. (B) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Company's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Company's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Company who is a stockholder of record at the time of giving of notice provided for in this By-Law, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. In the event the Company calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Company's notice of meeting, if the stockholder's notice required by paragraph (A)(2) of this By-Law shall be delivered to the Secretary at the principal executive offices of the Company not earlier than the close of business on the 120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment or postponement of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (C) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this By-Law shall be eligible to be elected at an annual or special meeting of stockholders of the Company to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-Law. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this By-Law and, if any proposed nomination or business is not in compliance with this By-Law, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this By-Law, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or -4- comparable national news service or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Company's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances. SECTION 2.8. Procedure for Election of Directors; Required Vote. Election of directors at all meetings of the stockholders at which directors are to be elected shall be by ballot, and, subject to the rights of the holders of any series of Preferred Stock to elect directors under specified circumstances, a plurality of the votes cast thereat shall elect directors. Except as otherwise provided by law, the Certificate of Incorporation, or these By-Laws, in all matters other than the election of directors, the affirmative vote of a majority of the shares present in person or represented by proxy at the meeting shall be the act of the stockholders. SECTION 2.9. Inspectors of Elections; Opening and Closing the Polls. The Board of Directors by resolution shall appoint one or more inspectors, which inspector or inspectors may include individuals who serve the Company in other capacities, including, without limitation, as officers, employees, agents or representatives, to act at the meetings of stockholders and make a written report thereof. One or more persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed to act or is able to act at a meeting of stockholders, the Chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall have the duties prescribed by law. The Chairman of the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at the meeting. SECTION 2.10. No Stockholder Action by Written Consent. Subject to the rights of the holders of any series of Preferred Stock with respect to such series of Preferred Stock, any action required or permitted to be taken by the stockholders of the Company must be effected at an annual or special meeting of stockholders of the Company and may not be effected by any consent in writing by such stockholders. -5- ARTICLE III. BOARD OF DIRECTORS SECTION 3.1. General Powers. The business and affairs of the Company shall be managed under the direction of its Board of Directors. In addition to the powers and authorities by these By-Laws expressly conferred upon it, the Board of Directors may exercise all powers of the Company and do all such lawful acts and things as are not by law or by the Certificate of Incorporation or by these By-Laws required to be exercised or done by the stockholders. SECTION 3.2. Number and Tenure. Subject to the rights of the holders of any series of Preferred Stock to elect directors under specified circumstances, the number of directors shall be fixed from time to time exclusively pursuant to a resolution adopted by a majority of the Whole Board. The directors, other than those who may be elected by the holders of any series of Preferred Stock under specified circumstances, shall be divided, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as is reasonably possible, with the term of office of the first class to expire at the 1998 annual meeting of stockholders, the term of office of the second class to expire at the 1999 annual meeting of stockholders and the term of office of the third class to expire at the 2000 annual meeting of stockholders, with each director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders, commencing with the 1998 annual meeting, (i) directors elected to succeed those directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified, and (ii) if authorized by a resolution of the Board of Directors, directors may be elected to fill any vacancy on the Board of Directors, regardless of how such vacancy shall have been created. SECTION 3.3. Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this By-Law on the same date, and at the same place as, the Annual Meeting of Stockholders. The Board of Directors may, by resolution, provide the time and place for the holding of additional regular meetings without other notice than such resolution. SECTION 3.4. Special Meetings. Special meetings of the Board of Directors shall be called at the request of the Chairman of the Board, the President or a majority of the Board of Directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix the place and time of the meetings. SECTION 3.5. Notice. Notice of any special meeting of directors shall be given to each director at his business or residence in writing by hand delivery, first class or overnight mail or other overnight or express delivery service, telegram or facsimile transmission, by electronic mail or orally by telephone. If mailed by first class mail, such notice shall be deemed adequately delivered when deposited in the United States mails so addressed, with postage -6- thereon prepaid, at least five (5) days before such meeting. If by telegram, overnight mail or courier service, such notice shall be deemed adequately delivered when the telegram is delivered to the telegraph company or the notice is delivered to the overnight mail or other over- night or express delivery service company at least twenty-four (24) hours before such meeting. If by facsimile transmission or electronic mail, such notice shall be deemed adequately delivered when the notice is transmitted at least twelve (12) hours before such meeting. If by telephone or by hand delivery, the notice shall be given at least twelve (12) hours prior to the time set for the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice of such meeting, except for amendments to these By-Laws, as provided under Section 9.1. A meeting may be held at any time without notice if all the directors are present or if those not present waive notice of the meeting in accordance with Section 6.4 of these By-Laws. SECTION 3.6. Action by Consent of Board of Directors. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. SECTION 3.7. Conference Telephone Meetings. Members of the Board of Directors, or any committee thereof, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. SECTION 3.8. Quorum. Subject to Section 3.9, one third of the whole number of directors, but not less than two, shall constitute a quorum for the transaction of business, but if at any meeting of the Board of Directors there shall be less than a quorum present, a majority of the directors present may adjourn the meeting from time to time without further notice. The act of the majority of the directors pres- ent at a meeting at which a quorum is present shall be the act of the Board of Directors. SECTION 3.9. Vacancies. Subject to applicable law and the rights of the holders of any series of Preferred Stock with respect to such series of Preferred Stock, and unless the Board of Directors otherwise determines, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, and not by stockholders. Directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Whole Board shall shorten the term of any incumbent director. -7- SECTION 3.10. Executive and Other Committees. The Board of Directors may, by resolution adopted by a majority of the Whole Board, designate an Executive Committee to exercise, subject to any limitations provided by law, all the powers of the Board in the management of the business and affairs of the Company when the Board is not in session, including without limitation the power to declare dividends, to authorize the issuance of the Company's capital stock and to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of the State of Delaware, and may, by resolution similarly adopted, designate one or more other committees. The Executive Committee and each such other committee shall consist of two or more directors of the Company. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, other than the Executive Committee (the powers of which are expressly provided for herein), may to the extent permitted by law exercise such powers and shall have such responsibilities as shall be specified in the designating resolution. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Each committee shall keep written minutes of its proceedings and shall report such proceedings to the Board when required; but failure to keep such minutes shall not affect the validity of any acts of the committee or committees. At any meeting of a committee, the presence of one third of its members, but not less than two, shall constitute a quorum for the transaction of business and the act of a majority of any committee may determine its action. Each committee may provide for the holding of regular meetings, make provision for the calling of special meetings and, except as otherwise provided in these By-Laws or by resolution of the Board of Directors, make rules for the conduct of its business. Notice of special meetings of committees shall be given to each member of the committee in the manner provided for in Section 3.5 of these By-Laws. The Board shall have power at any time to fill vacancies in, to change the membership of, or to dissolve any such committee. Nothing herein shall be deemed to prevent the Board from appointing one or more committees consisting in whole or in part of persons who are not directors of the Company; provided, however, that no such committee shall have or may exercise any authority of the Board. SECTION 3.11. Removal. Subject to the rights of the holders of any series of Preferred Stock with respect to such series of Preferred Stock, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80 percent of the voting power of all of the then-outstanding shares of Voting Stock, voting together as a single class. SECTION 3.12. Records. The Board of Directors shall cause to be kept a record containing the minutes of the proceedings of the meetings of the Board and of the stockholders, appropriate stock books and registers and such books of records and accounts as may be necessary for the proper conduct of the business of the Company. -8- ARTICLE IV. OFFICERS SECTION 4.1. Elected Officers. The elected officers of the Company shall be a Chairman of the Board and a President, one of whom shall be designated by the Board of Directors as the Chief Executive Officer, one or more Vice Chairmen, a Secretary, a Treasurer, a Controller, a number of Vice Presidents, and such other officers (including, without limitation, a Chief Financial Officer) as the Board of Directors from time to time may deem proper. The Chairman of the Board shall be chosen from among the directors. All officers elected by the Board of Directors shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article IV. Such officers shall also have such powers and duties as from time to time may be conferred by the Board of Directors or by any committee thereof. The Board may from time to time elect, or the Chairman of the Board or President may appoint, such other officers (including one or more Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers, and Assistant Controllers) and such agents, as may be necessary or desirable for the conduct of the business of the Company. Such other officers and agents shall have such duties and shall hold their offices for such terms as shall be provided in these By-Laws or as may be prescribed by the Board or by the Chairman of the Board or President, as the case may be. SECTION 4.2. Election and Term of Office. The elected officers of the Company shall be elected annually by the Board of Directors at the regular meeting of the Board of Directors held on the date of the annual meeting of the stockholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as convenient. Alternatively, at the last regular meeting of the Board of Directors prior to an annual meeting of stockholders, the Board of Directors may elect the officers of the Company, contingent upon the election of the persons nominated to be directors by the Board of Directors. Each officer shall hold office until his successor shall have been duly elected and shall have qualified or until his earlier death, resignation or removal. SECTION 4.3. Chairman of the Board. The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors. The Chairman of the Board shall act with respect to matters of strategy and policy for the Company and perform all duties incidental to his office which may be required by law and all such other duties as are assigned to the Chairman of the Board by these By-Laws, the Board of Directors or, if applicable, the Chief Executive Officer. SECTION 4.4. President. The President shall act in a general executive capacity. The President shall perform such other duties as may be assigned to him by these By-Laws, the Board of Directors, or, if applicable, the Chief Executive Officer. The President shall, in the absence or because of the inability to act of the Chairman of the Board, perform all duties of the Chairman of the Board and preside at all meetings of stockholders and of the Board of Directors. -9- SECTION 4.5. Chief Executive Officer. The Chief Executive Officer shall be responsible for the general management of the affairs of the Company. He shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall also perform such other duties as may be assigned to him by these By-Laws or the Board of Directors. The Chief Executive Officer shall designate who shall perform the duties of the Chief Executive Officer in his absence. SECTION 4.6. Vice Chairmen. The Vice Chairmen shall act in a general executive capacity with enterprise-wide responsibility as assigned by the Chairman of the Board or the President and shall have such powers and shall perform such duties as shall be assigned to him by the Board of Directors, the Chairman of the Board or the President. SECTION 4.7. Vice-Presidents. Each Vice President shall have such powers and shall perform such duties as shall be assigned to him by the Board of Directors, the Chairman of the Board or the President. SECTION 4.8. Chief Financial Officer. The Chief Financial Officer (if any) shall be a Vice President and act in an executive financial capacity. He shall assist the Chairman of the Board and the President in the general supervision of the Company's financial policies and affairs. SECTION 4.9. Treasurer. The Treasurer shall exercise general supervision over the receipt, custody and disbursement of corporate funds. The Treasurer shall cause the funds of the Company to be deposited in such banks as may be authorized by the Board of Directors, or in such banks as may be designated as depositaries in the manner provided by resolution of the Board of Directors. He shall have such further powers and duties and shall be subject to such directions as may be granted or imposed upon him from time to time by these By-Laws, the Board of Directors, the Chairman of the Board, the President or the Chief Financial Officer. SECTION 4.10. Secretary. The Secretary shall attend all meetings of the Board of Directors and of the stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors and, when appropriate, shall cause the corporate seal to be affixed to any instruments executed on behalf of the Company. The Secretary shall also perform all duties incident to the office of Secretary and such other duties as may be assigned to him by these By-Laws, the Board of Directors, the Chairman of the Board or the President. SECTION 4.11. Controller. The Controller shall serve as the principal accounting officer of the Company and shall keep full and accurate account of receipts and disbursements in books of the Company and render to the Board of Directors, the Chairman of the Board, the President or the Chief Financial Officer, whenever requested, an account of all his transactions as Controller and of the financial condition of the Company. The Controller shall also perform all duties incident to the office of Controller and such other duties as may be -10- assigned to him by these By-Laws, the Board of Directors, the Chairman of the Board, the President or the Chief Financial Officer. SECTION 4.12. Assistant Secretaries, Assistant Treasurers and Assistant Controllers. The Assistant Secretaries shall, during the absence of the Secretary, perform the duties and functions and exercise the powers of the Secretary. Each Assistant Secretary shall perform such other duties as may be assigned to such Assistant Secretary by the Board of Directors, the Chairman of the Board, the President or the Secretary. The Assistant Treasurers shall, during the absence of the Treasurer, perform the duties and functions and exercise the powers of the Treasurer. Each Assistant Treasurer shall perform such other duties as may be assigned to the Assistant Treasurer by the Board of Directors, the President, the Chief Financial Officer or the Treasurer. The Assistant Controllers shall, during the absence of the Controller, perform the duties and functions and exercise the powers of the Controller. Each Assistant Controller shall perform such other duties as may be assigned to such officer by the Board of Directors, the President, the Chief Financial Officer or the Controller. SECTION 4.13. Removal. Any officer or agent may be removed from office at any time by the affirmative vote of a majority of the Whole Board or, except in the case of an officer or agent elected by the Board, by the Chairman of the Board or the President. Such removal shall be without prejudice to the contractual rights, if any, of the person removed, provided that no elected officer shall have any contractual rights against the Company for compensation by virtue of his election as an officer beyond the date of the election of his successor, his death, his resignation or his removal, whichever event shall first occur, except as otherwise expressly provided in an employment contract or under an employee deferred compensation plan. SECTION 4.14. Vacancies. A newly created elected office and a vacancy in any elected office because of death, resignation, or removal may be filled by the Board of Directors for the unexpired portion of the term at any meeting of the Board of Directors. Any vacancy in an office appointed by the Chairman of the Board or the President because of death, resignation, or removal may be filled by the Chairman of the Board or the President. ARTICLE V. STOCK CERTIFICATES, BOOK-ENTRY ACCOUNTS AND TRANSFERS SECTION 5.1. Stock Certificates and Transfers. The interest of each stockholder of the Company shall be evidenced by certificates or by registration in book-entry accounts without certificates for shares of stock in such form as the appropriate officers of the Company may from time to time prescribe. The shares of the stock of the Company shall be transferred on the books of the Company by the holder thereof in person or by his attorney, upon surrender for cancellation of certificates for the same number of shares, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, with such proof of the authenticity of the -11- transfer and payment of any applicable transfer taxes as the Company or its agents may reasonably require or by appropriate book-entry pro- cedures. Certificates of stock shall be signed, countersigned and registered in such manner as the Board of Directors may by resolution prescribe, which resolution may permit all or any of the signatures on such certificates to be in facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Company with the same effect as if he were such officer, transfer agent or registrar at the date of issue. SECTION 5.2. Lost, Stolen or Destroyed Certificates. No certificate for shares of stock in the Company shall be issued in place of any certificate alleged to have been lost, destroyed or stolen, except on production of such evidence of such loss, destruction or theft and on delivery to the Company of a bond of indemnity in such amount, upon such terms and secured by such surety, as the Board of Directors or any officer may in its or his discretion require. ARTICLE VI. MISCELLANEOUS PROVISIONS SECTION 6.1. Fiscal Year. The fiscal year of the Company shall begin on the first day of January and end on the thirty-first day of December of each year. SECTION 6.2. Dividends. The Board of Directors may from time to time declare, and the Company may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and the Certificate of Incorporation. SECTION 6.3. Seal. The corporate seal shall have enscribed thereon the words "Corporate Seal," the year of incorporation and "Delaware" and around the margin thereof the name of the Company. SECTION 6.4. Waiver of Notice. Whenever any notice is required to be given to any stockholder or director of the Company under the provisions of the General Corporation Law of the State of Delaware or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at, nor the purpose of, any annual or special meeting of the stockholders or the Board of Directors or committee thereof need be specified in any waiver of notice of such meeting. SECTION 6.5. Audits. The accounts, books and records of the Company shall be audited upon the conclusion of each fiscal year by an independent certified public accountant selected by the Board of Directors, and it shall be the duty of the Board of Directors to cause such audit to be done annually. -12- SECTION 6.6. Resignations. Any director or any officer, whether elected or appointed, may resign at any time by giving written notice of such resignation to the Chairman of the Board, the President, or the Secretary, and such resignation shall be deemed to be effective as of the close of business on the date said notice is received by the Chairman of the Board, the President, or the Secretary, or at such later time as is specified therein. No formal action shall be required of the Board of Directors or the stockholders to make any such resignation effective. ARTICLE VII. INDEMNIFICATION; ADVANCE OF EXPENSES SECTION 7.1. Right of Indemnification Generally. (A) Directors, Officers and Employees. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit, or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative is or was a director, officer or employee of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, shall be indemnified and held harmless by the Company to the fullest extent authorized by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith; provided, however, that except as provided in Section 7.3 of this Article VII, the Company shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initi- ated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors. (B) Advance of Expenses; Undertaking. Each person referred to in Section 7.1(A) of this Article VII shall be paid by the Company the expenses incurred in connection with any proceeding described in Section 7.1(A) in advance of its final disposition, such advances to be paid by the Company within 30 days after the receipt by the Company of a state- ment or statements from the claimant requesting such advance or advances from time to time; provided, however, that, if the General Corporation Law of the State of Delaware requires, the advancement of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not, unless otherwise required by law, in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) prior to the final disposition of a proceeding, shall be made only upon delivery to the Company of an undertaking by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Article VII or otherwise. (C) Contract Right. The right to indemnification conferred in this Article VII and the right to be paid by the Company the expenses incurred in connection with any such pro- -13- ceeding in advance of its final disposition conferred in this Article VII each shall be a contract right. SECTION 7.2. Written Request; Determination of Entitlement. To obtain indemnification under this Article VII, a claimant shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to the claimant and is reasonably necessary to determine whether and to what extent the claimant is entitled to indemnification. Any determination regarding whether indemnification of any person is proper in the circumstances because such person has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware shall be made at the option of the person seeking indemnification, by the directors as set forth in the General Corporation Law of the State of Delaware or by independent legal counsel selected by such person with the consent of the Company (which consent shall not unreasonably be withheld). SECTION 7.3. Recovery of Unpaid Claim. If a claim under Section 7.1 of this Article VII is not paid in full by the Company within 30 days after a written claim pursuant to Section 7.2 of this Article VII has been received by the Company, the claimant may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than actions brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Company) that the claimant has not met the standard of conduct which makes it permissible under the General Corporation Law of the State of Delaware for the Company to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Company. Neither the failure of the Company (including its directors, independent legal counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Company (including its directors, independent legal counsel or stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. SECTION 7.4. Exclusivity; Subsequent Modification. The right to indemnification and the payment of expenses incurred in connection with a proceeding in advance of its final disposition conferred in this Article VII shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, By-Laws, agreement, vote of stockholders or Directors or otherwise. No repeal or modification of this Article VII shall in any way diminish or adversely affect the rights hereunder of any director, officer or employee or of any agent who has been expressly granted indemnification by the Company pursuant to Section 7.6 hereof in respect of any occurrence or matter arising prior to any such repeal or modification. -14- SECTION 7.5. Insurance. The Company may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Company or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Company would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. To the extent that the Company maintains any policy or policies providing such insurance, each such director, officer or employee, and each such agent to which rights to indemnification have been granted as provided in Section 7.6 of this Article VII shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage thereunder for any such director, officer, employee or agent. SECTION 7.6. Other Persons Granted Right of Indemnification. The Company may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and rights to be paid by the Company the expenses incurred in defending any proceeding in advance of its final disposition, to any agent of the Company to the fullest extent of the provisions of this Article VII with respect to the indemnification and advancement of expenses of directors, officers and employees of the Company. SECTION 7.7. Illegality; Unenforceability. If any provision or provisions of this Article VII shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (1) the validity, legality and enforceability of the remaining provisions of this Article VII (including, without limitation, each portion of any Section of this Article VII containing any such provision held to be invalid, illegal or unenforceable, that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (2) to the fullest extent possible, the provisions of this Article VII (including, without limitation, each such portion of any Section of this Article VII containing any such provision held to be invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. SECTION 7.8. Form and Delivery of Communications. Any notice, request or other communication required or permitted to be given to the Company under this Article VII shall be in writing and either delivered in person or sent by telecopy, telex, telegram, overnight mail or courier service, or certified or registered mail, postage prepaid, return receipt requested, to the Secretary of the Company. ARTICLE VIII. CONTRACTS, PROXIES, ETC. SECTION 8.1. Contracts. Except as otherwise required by law, the Certificate of Incorporation or these By-Laws, any contracts or other instruments may be executed and delivered in the name and on behalf of the Company by such officer or officers of the Company as the Board of Directors may from time to time direct. Such authority may be general or confined to specific instances as the Board may determine. The Chairman of the Board, the President, any Vice Chairman or any Vice President may execute bonds, contracts, deeds, leases -15- and other instruments to be made or executed for or on behalf of the Company. Subject to any restrictions imposed by the Board of Directors or the Chairman of the Board, the President, any Vice Chairman or any Vice President of the Company may delegate contractual powers to others under his jurisdiction, it being understood, however, that any such delegation of power shall not relieve such officer of responsibility with respect to the exercise of such delegated power. SECTION 8.2. Proxies. Unless otherwise provided by resolution adopted by the Board of Directors, the Chairman of the Board, the President, any Vice Chairman or any Vice President, the Secretary or any Assistant Secretary, may from time to time appoint an attorney or attorneys or agent or agents of the Company, in the name and on behalf of the Company, to cast the votes which the Company may be entitled to cast as the holder of stock or other securities in any other corporation, any of whose stock or other securities may be held by the Company, at meetings of the holders of the stock or other securities of such other corporation, or to consent in writing, in the name of the Company as such holder, to any action by such other corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed in the name and on behalf of the Company and under its corporate seal or otherwise, all such written proxies or other instruments as he may deem necessary or proper in the premises. ARTICLE IX. AMENDMENTS SECTION 9.1. Amendments. These By-Laws may be amended or repealed, or new By-Laws may be adopted, at any meeting of the Board of Directors or of the stockholders, provided notice of the proposed change was given in the notice of the meeting and, in the case of a meeting of the Board of Directors, in a notice given not less than twelve hours prior to the meeting; provided, however, that, in the case of amendment, repeal or adoption by stockholders, notwithstanding any other provisions of these By-Laws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any series of Preferred Stock required by law, the Certificate of Incorporation, any Preferred Stock designation, or these By-Laws, the affirmative vote of the holders of at least 80 percent of the voting power of all the then outstanding shares of the Voting Stock, voting together as a single class, shall be required for the stock- holders to adopt, amend or repeal any provision of these By-Laws. -16- EX-10 3 NON-EMPLOYEE DIRECTOR COMPENSATION PLAN SOLUTIA INC. NON-EMPLOYEE DIRECTOR COMPENSATION PLAN 1. NAME OF PLAN. This plan shall be known as the "Solutia Inc. Non- Employee Director Compensation Plan" and is hereinafter referred to as the "Plan." 2. PURPOSES OF PLAN. The purposes of the Plan are to increase the ownership interest in Solutia Inc., a Delaware corporation (the "Company"), by Non-Employee Directors whose services are considered essential to the Company's continued progress and to provide a further incentive to serve as directors of the Company. 3. EFFECTIVE DATE AND TERM. The Plan is effective as of September 3, 1997 (the "Effective Date"). The Plan shall remain in effect until terminated by action of the Board, or until no shares of Common Stock remain available under the Plan, if earlier. 4. DEFINITIONS. The following terms shall have the meanings set forth below: "Administrator" has the meaning set forth in Section 20(a). "Annual Meeting" means an annual meeting of the shareholders of the Company. "Annual Retainer" means the amount a Non-Employee Director will be entitled to receive for serving as a director in a Plan Year, on an annualized basis, as determined by and set forth in resolutions of the Board, but shall not include reimbursement for expenses, fees associated with service on any committee of the Board, the retainer payable for serving as the chairman of any committee of the Board, or fees with respect to any other services to be provided to the Company. "Board" means the Board of Directors of the Company. "Business Combination" has the meaning set forth in subparagraph (c) of the definition of "Change of Control." "Change of Control" means any of the following events: (a) The acquisition by any person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (a "Person"), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then SOLUTIA INC. NON-EMPLOYEE DIRECTOR COMPENSATION PLAN, PAGE 1 As amended 2/24/99 outstanding shares of Common Stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this definition; or (b) Individuals who, as of the date hereof, constitute the Board (as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the stockholders of the Company of a reorganization, merger, 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 (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 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (ii) no Person SOLUTIA INC. NON-EMPLOYEE DIRECTOR COMPENSATION PLAN, PAGE 2 As amended 2/24/99 (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, 20% 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, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. "Change of Control Consideration" means, for purposes of this Plan, (i) the amount of any cash, plus the value of any securities and other noncash consideration, constituting the most valuable consideration per share of Common Stock paid to any shareholder in the transaction or series of transactions that results in a Change of Control or (ii) if no consideration per share of Common Stock is paid to any shareholder in the transaction or series of transactions that results in a Change of Control, the highest reported sale price of a share of Common Stock on the New York Stock Exchange composite tape (or if the Common Stock is not listed on such exchange, on any other national securities exchange on which the Common Stock is listed or the NASDAQ Stock Market) during the 60-day period prior to and including the date of a Change of Control. To the extent that such consideration consists all or in part of securities or other noncash consideration, the value of such securities or other noncash consideration shall be determined by the Committee in good faith. "Change of Control Date" has the meaning set forth in Section 19(b). "Code" has the meaning set forth in Section 9. "Committee" means the committee that supervises the Plan, as more fully defined in Section 20(a). "Common Stock" means the Company's common stock, par value $.01 per share. "Company" has the meaning set forth in Section 2. SOLUTIA INC. NON-EMPLOYEE DIRECTOR COMPENSATION PLAN, PAGE 3 As amended 2/24/99 "Deferred Cash Account" means a bookkeeping account maintained by the Company for a Non-Employee Director representing the Elective Cash Amount, if any, credited to such account pursuant to Section 6. "Deferred Stock Account" means a bookkeeping account maintained by the Company for a Non-Employee Director representing the Non- Employee Director's interest in the Stock Amount and the Elective Stock Amount, if any, credited to such account pursuant to Section 6. "Delivery Date" has the meaning set forth in Section 7. "Discretionary Amount" means with respect to each Plan Year, the dollar amount equal to 50% of the Annual Retainer for such Plan Year, all or any portion (in percentage increments determined by the Administration) of which the Non-Employee Director may, but is not required to, elect to have credited to his or her Deferred Stock Account in the form of an Elective Stock Amount and/or his or her Deferred Cash Account in the form of an Elective Cash Amount. "Dividend Equivalent" for a given dividend or distribution means a number of shares of Common Stock having a Value, as of the date such Dividend Equivalent is credited to a Deferred Stock Account, equal to the amount of cash, plus the fair market value on the date of distribution of any property, that is distributed with respect to one share of Common Stock pursuant to such dividend or distribution; such fair market value to be determined by the Committee in good faith. "Effective Date" has the meaning set forth in Section 3. "Election Amount" for each Non-Employee Director who has made a Plan Year Deferral Election pursuant to Section 5 shall be, with respect to each Plan Year, (i) the percentage that is set forth in the Non-Employee Director's Plan Year Deferral Election Notice multiplied by (ii) the Discretionary Amount. "Elective Cash Amount" means that portion of the Election Amount which the Non-Employee Director designated in his or her Plan Year Deferral Election Notice to be credited to his or her Deferred Cash Account. "Elective Stock Amount" means that portion of the Election Amount which the Non-Employee Director designated in his or her Plan Year Deferral Election Notice to be credited to his or her Deferred Stock Account in the form of Common Stock. "Exchange Act" has the meaning set forth in subparagraph (a) of the definition of "Change of Control." SOLUTIA INC. NON-EMPLOYEE DIRECTOR COMPENSATION PLAN, PAGE 4 As amended 2/24/99 "Fraction," with respect to a person who is a Non-Employee Director during part, but not all, of a Plan Quarter, means the amount obtained by dividing (i) the number of calendar months during such Plan Quarter that such person was a Non-Employee Director by (ii) 3; provided, that for purposes of the foregoing, a partial calendar month shall be treated as a whole month. "Incumbent Board" has the meaning set forth in subparagraph (b) of the definition of "Change of Control." The "Interest Rate" means Moody's Baa Bond Index Rate, as in effect from time to time. "Non-Employee Director" means any director of the Company who is not an employee of the Company or any subsidiary thereof on the date of any award made or granted to such person hereunder. "Option" means an award to purchase Common Stock granted to a Non- Employee Director pursuant to the terms of Section 8. "Outstanding Company Common Stock" has the meaning set forth in subparagraph (a) of the definition of "Change of Control." "Outstanding Company Voting Securities" has the meaning set forth in subparagraph (a) of the definition of "Change of Control." "Partial Quarter Notice Period" has the meaning set forth in Section 5. "Partial Year Fraction," with respect to a person who is a Non- Employee Director during part, but not all of a Plan Year, means the amount obtained by dividing (i) the number of calendar months during such Plan Year that such person was a Non-Employee Director by (ii) 12; provided, that for the purposes of the foregoing, a partial calendar month shall be treated as a whole month. "Person" has the meaning set forth in subparagraph (a) of the definition of "Change of Control." "Plan" has the meaning set forth in Section 1. "Plan Quarter" means the 3 month period commencing on the first Trading Day in May, August, November or February, as applicable, during a Plan Year. SOLUTIA INC. NON-EMPLOYEE DIRECTOR COMPENSATION PLAN, PAGE 5 As amended 2/24/99 "Plan Year" means the year commencing on the date of an Annual Meeting and ending on the day before the next succeeding Annual Meeting; provided, that the first Plan Year shall begin on the Effective Date and end on the day before the first Annual Meeting and provided further, that the last Plan Year with respect to a Non-Employee Director who ceases to be a Non-Employee Director during a Plan Year, shall begin on the first day of such Plan Year and end on the day such Non-Employee Director ceases to be a Non- Employee Director. "Plan Year Deferral Election" means the irrevocable election to defer, for any Plan Year, all or any part (in percentage increments determined by the Administrator) of the Discretionary Amount for the next Plan Year such that the deferred portion becomes the Election Amount. Any Plan Year Deferral Election Notice shall remain in effect for that Plan Year and for all subsequent Plan Years unless and until such Non-Employee Director delivers to the Administrator, no later than the last business day prior to the commencement of the next succeeding Plan Year, a new Plan Year Deferral Election Notice setting forth a different Plan Year Deferral Election. "Plan Year Deferral Election Notice" means the notice of the Plan Year Deferral Election delivered to the Administrator. "Rule 16b-3" has the meaning set forth in Section 20(a). "Stock Amount" means with respect to each Plan Year, the dollar amount equal to 50% of the Annual Retainer for such Plan Year which will be automatically and mandatorily credited to the Non- Employee Director's Deferred Stock Account in the form of Common Stock determined in the manner set forth in Section 6(b). "Trading Day" means any day on which there are sales of Common Stock reported on the New York Stock Exchange composite tape, or if the Common Stock is not listed on such exchange, on any other national securities exchange on which the Common Stock is listed or the Nasdaq Stock Market. The "Value" of a share of Common Stock as of any given date (including the date a Deferred Stock Account is credited, or, in the case of Options, the date the Option is granted) means the average of the highest and lowest sales prices of a share of Common Stock reported on the New York Stock Exchange Composite Transactions for such day, or, if shares of Common Stock were not traded on the New York Stock Exchange on such date, then on the next preceding date on which such shares were traded, all as reported by The Wall Street Journal under the heading "New York Stock Exchange - Composite Transactions" or by such other source as the Committee may select. SOLUTIA INC. NON-EMPLOYEE DIRECTOR COMPENSATION PLAN, PAGE 6 As amended 2/24/99 5. ELECTION TO RECEIVE SHARES OR DEFER CASH IN LIEU OF CASH COMPENSATION. (a) In order to make a Plan Year Deferral Election pursuant to this Section 5, a Non-Employee Director who is a Non- Employee Director prior to the Effective Date must deliver to the Administrator, no later than September 30, 1997, his or her Plan Year Deferral Election Notice. (b) Except for the Plan Year Deferral Election due by September 30, 1997 as set forth in Section 5(a) and except for persons who first become Non-Employee Directors on a date other than an Annual Meeting Date (to which Section 5(c) applies), each Non-Employee Director (and each nominee for a position on the Board who would, if elected by the Company's shareholders at the next succeeding Annual Meeting, be a Non- Employee Director) may make a Plan Year Deferral Election for the next succeeding Plan Year by delivering to the Administrator, no later than the last business day prior to the commencement of the next succeeding Plan Year, a Plan Year Deferral Election Notice. (c) Except for the Plan Year Deferral Election due by September 30, 1997 as set forth in Section 5(a), each person who becomes a Non- Employee Director on a date other than the date of an Annual Meeting must deliver his or her Plan Year Deferral Election Notice within thirty days of the date he or she first becomes a Non-Employee Director (the "Partial Quarter Notice Period"). 6. ACCOUNTS; CREDIT OF SHARES AND CASH. (a) The Company shall maintain a Deferred Stock Account and a Deferred Cash Account for each Non-Employee Director. As part of the compensation payable to each Non- Employee Director for service on the Board, the Deferred Stock Account of each Non-Employee Director shall be credited with shares of Common Stock as set forth in this Section 6 and the Deferred Cash Account of each Non-Employee Director may, at the Non-Employee Director's election, be credited with cash as set forth in this Section 6. The shares credited to the Deferred Stock Account pursuant to this Section 6 may represent fractional as well as whole shares of Common Stock. (b) Except as set forth in Section 6(e), as of the first day of each Plan Quarter (or in the case of a Non-Employee Director who becomes a Non-Employee Director on a date other than on the date of an Annual Meeting, the first Trading Day in a Plan Quarter on which he or she becomes a Non-Employee Director), the Deferred Stock Account of each Non-Employee Director shall be credited with a number of shares of Common Stock having a Value equal to 25% of the Stock Amount, multiplied by the Fraction, if applicable. (c) Except as set forth in Section 6(e), as of the first day of each Plan Quarter (or in the case of a Non-Employee Director who first becomes a Non-Employee Director on a date other than on the date of an Annual Meeting, on the first Trading Day following the conclusion of the Partial Quarter Notice Period), the Deferred Stock Account of each Non- Employee SOLUTIA INC. NON-EMPLOYEE DIRECTOR COMPENSATION PLAN, PAGE 7 As amended 2/24/99 Director who has a Plan Year Deferral Election for Common Stock in effect on such date shall be credited with (i) a number of shares of Common Stock having a Value equal to 25% of the Elective Stock Amount, multiplied by the Fraction, if applicable. (d) Except as set forth in Section 6(f), as of the first day of each Plan Quarter (or in the case of a Non-Employee Director who first becomes a Non-Employee Director on a date other than on the date of an Annual Meeting, on the first Trading Day following the conclusion of the Partial Quarter Notice Period), the Deferred Cash Account of each Non- Employee Director who has a Plan Year Deferral Election for cash in effect on such date shall be credited with (i) an amount equal to 25% of the Elective Cash Amount, multiplied by the Fraction, if applicable. (e) On September 4, 1997, the Deferred Stock Account of each Non-Employee Director who becomes a Non-Employee Director prior to the Effective Date shall be credited with a number of shares of Common Stock having a Value equal to 25% of the Stock Amount, multiplied by the Fraction. In addition, the Deferred Stock Account of each Non-Employee Director who becomes a Non-Employee Director prior to the Effective Date and who has a Plan Year Deferral Election for Common Stock in effect on October 1, 1997, shall be credited with a number of shares of Common Stock having a Value equal to 25% of the Elective Stock Amount, multiplied by the Fraction. (f) On October 1, 1997, the Deferred Cash Account of each Non- Employee Director who becomes a Non-Employee Director prior to the Effective Date and who has a Plan Year Deferral Election for cash in effect on October 1, 1997, shall be credited with an amount equal to 25% of the Elective Cash Amount, multiplied by the Fraction. (g) Whenever a dividend is paid or other distribution made with respect to the Common Stock, each Deferred Stock Account shall be credited with a number of shares equal to (i) the number of shares of Common Stock in such Deferred Stock Account as of the record date for such dividend or other distribution, multiplied by (ii) the Dividend Equivalent for such dividend paid or other distribution made. (h) Each Deferred Cash Account shall accrue interest on the balance therein at the Interest Rate, such interest to be credited at least monthly. 7. DELIVERY OF SHARES AND DEFERRED CASH. The shares of Common Stock in a Non-Employee Director's Deferred Stock Account and the cash balance in a Non-Employee Director's Deferred Cash Account as of the date the Non-Employee Director ceases to be a Non-Employee Director for any reason (the "Delivery Date") shall begin to be delivered in accordance with this Section 7 as soon as practicable after the Delivery Date. The shares and cash balance shall be delivered in two equal installments with the first installment being delivered as soon as practicable after the Delivery Date and the second installment on the first anniversary of the SOLUTIA INC. NON-EMPLOYEE DIRECTOR COMPENSATION PLAN, PAGE 8 As amended 2/24/99 Delivery Date. If the number of shares to be delivered at one time includes a fractional share, such number shall be rounded to the nearest whole number of shares. If any such shares or cash are to be delivered after the Non-Employee Director has died or become legally incompetent, they shall be delivered to the Non-Employee Director's estate, legal guardian or beneficiary designated pursuant to Section 21(a), as the case may be, as soon as practicable. References to a Non-Employee Director in this Plan shall be deemed to refer to the Non-Employee Director's estate, legal guardian or beneficiary designated pursuant to Section 21(a), where appropriate. The Non-Employee Director shall become the holder of record of the shares of Common Stock upon delivery. 8. GRANT OF OPTIONS. (a) Except as set forth in Section 8(d), each Non-Employee Director shall receive, on the date such person becomes a Non-Employee Director, an initial Option to purchase 8,000 shares of Common Stock. (b) Each person who becomes a Non-Employee Director on the date of, or who remains a Non-Employee Director on the date of and immediately following each Annual Meeting held after the Effective Date hereof, shall receive, as of such date, an annual Option to purchase 2,000 shares of Common Stock. (c) Except as set forth in Section 8(d), each person who becomes a Non-Employee Director on a date other than on an Annual Meeting date, shall receive, as of such date, an Option to purchase that number of shares of Common Stock equal to 2,000 multiplied by the Partial Year Fraction. (d) Persons who become Non-Employee Directors prior to the Effective Date shall receive, on the same date as the Committee makes the first option grants to management personnel of the Company, an Option to purchase 9,334 shares of Common Stock, 8,000 of which constitute the initial grant that would have otherwise been granted pursuant to Section 8(a) but for this Section 8(d), and 1,334 of which constitute the prorated annual Option grant for the first Plan Year calculated in accordance with Section 8(c). 9. TYPE OF OPTIONS. All Options granted under the Plan shall be "nonqualified" stock options subject to the provisions of Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"). All Options granted under the Plan prior to February 24, 1999, shall be subject to the terms and conditions set forth in the certificate attached as Exhibit A hereto. All Options granted under the Plan on or after February 24, 1999, shall be subject to the terms and conditions set forth in the certificate attached as Exhibit B hereto. 10. EXERCISE PRICE. The exercise price per share of Common Stock purchasable under all Options granted pursuant to the Plan shall be the Value of a share of Common Stock on the Option Grant Date. SOLUTIA INC. NON-EMPLOYEE DIRECTOR COMPENSATION PLAN, PAGE 9 As amended 2/24/99 11. EXERCISE RIGHTS. Each Option granted hereunder prior to February 24, 1999, shall become exercisable, during the Option term set forth in Section 12, in three equal installments commencing on the first anniversary of the Option Grant Date, and annually thereafter, provided that the Non-Employee Director continues in the service of the Company as a director through such anniversaries. Each Option granted on or after February 24, 1999, shall become exercisable during the Option term set forth in Section 12, in three equal installments, on the dates of the first three Annual Meetings of Stockholders of the Company following the Option Grant Date, provided that the Non-Employee Director continues in the service of the Company as a director until such dates; provided, however, that the Option, if not already fully exercisable, shall become fully exercisable upon the Non-Employee Director's retirement from the Board at the mandatory retirement age set forth in the Charter for the Company's Board, or other applicable document. Each Option may be exercised in full share lots only. Notwithstanding the foregoing, the Committee shall have the authority to determine any vesting acceleration or forfeiture waiver regarding any Option granted under the Plan. 12. OPTION TERM. The Option term will expire at the end of the day next preceding ten years from the Option Grant Date, or at the end of the day next preceding two years from the date the Non-Employee Director ceases to be a director of the Company for any reason, whichever occurs first. 13. METHOD OF EXERCISE. The Option shall be exercised by (a) written notice or notice in such other form as may be prescribed from time to time, given to the Company or its designee (at the address specified by the Company from time to time) specifying the date the Option was granted and the number of shares of Common Stock as to which the Option is being exercised, plus (b) payment to the Company in full for the Shares so specified. Within a reasonable time after exercise of the Option, the Company shall deliver shares of Common Stock to the Non- Employee Director in respect of which the Option shall have been exercised and shall pay all stamp taxes in respect thereof, provided that upon or prior to the delivery of such shares, provision (as specified by the Company from time to time) shall be made by the Non- Employee Director for the payment to the Company of any and all taxes which it shall be required to withhold in connection with the exercise of the Option by any law or regulation of any government, whether federal, state or local, and whether domestic or foreign. The Non- Employee Director shall have the right to pay the Option exercise price by delivery of shares of Common Stock (or other evidence of ownership of shares satisfactory to the Company) already owned by the Non-Employee Director with a Value equal to the Option exercise price as payment, provided that such shares have been held by the Non-Employee Director for at least six months on the date of exercise. 14. DELIVERY OF SHARES, VOTING AND OTHER RIGHTS. The Non-Employee Director shall have no rights as a stockholder with respect to any Option shares or the shares of SOLUTIA INC. NON-EMPLOYEE DIRECTOR COMPENSATION PLAN, PAGE 10 As amended 2/24/99 Common Stock credited to his or her Deferred Stock Account unless and until the Non-Employee Director becomes the holder of record of such shares and, subject to the provisions of Sections 6 and 19 hereof, no adjustment shall be made for dividends, ordinary or extraordinary (whether in cash or securities or property), or other distributions, or other rights in respect of such shares as to which the record date is prior to the date upon which the Non-Employee Director shall have become the holder of record thereof. Shares delivered under the Plan shall be in book entry form unless the Non-Employee Director has requested in the written notice specified in Section 13 that they be issued in certificate form. 15. TAX WITHHOLDING. The Company shall have the right to require, prior to the delivery of any shares of Common Stock pursuant to the Plan, that a Non-Employee Director make arrangements satisfactory to the Company for the withholding of any taxes required by law to be withheld with respect to the delivery of such shares, including without limitation by the withholding of shares that would otherwise be so delivered, by withholding from any other payment due to the Non-Employee Director, or by a cash payment to the Company by the Non-Employee Director. 16. NO TRUST OR FUND CREATED. The Plan shall not create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any of its subsidiaries and a Non- Employee Director or any other person or entity. To the extent that any person acquires a right to receive payments from the Company or any of its affiliates pursuant to the Plan, such right shall be no greater than the right of any unsecured general creditor of the Company or any of its subsidiaries. 17. GENERAL RESTRICTIONS. (a) Notwithstanding any other provision of the Plan, the Company shall not be required to deliver any shares of Common Stock under the Plan prior to fulfillment of all of the following conditions: (i) Any registration or other qualification of such shares under any state, federal, or foreign law or regulation, or the maintaining in effect of any such registration or other qualification which the Administrator shall, in its absolute discretion upon the advice of counsel, deem necessary or advisable; and (ii) Obtaining any other consent, approval, or permit from any state or federal governmental agency which the Administrator shall, in its absolute discretion after receiving the advice of counsel, determine to be necessary or advisable. (b) Nothing contained in the Plan shall prevent the Company from adopting other or additional compensation arrangements for Non-Employee Directors. SOLUTIA INC. NON-EMPLOYEE DIRECTOR COMPENSATION PLAN, PAGE 11 As amended 2/24/99 18. SHARES AVAILABLE. Subject to Section 19 below, 400,000 shares of Common Stock may be delivered under the Plan. Shares of Common Stock deliverable under the Plan may be taken from treasury shares of the Company or purchased on the open market. 19. CHANGE IN CAPITAL STRUCTURE; CHANGE OF CONTROL. (a) In the event of any change in corporate capitalization, such as a stock split or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property (without regard to the payment of any cash dividends by the Company in the ordinary course) of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code) or any partial or complete liquidation of the Company, the Committee or Board may make such substitution or adjustments in the aggregate number and kind of shares to be delivered under the Plan, in the number, kind and Option exercise price of shares subject to outstanding Options, in the number and kind of shares held in the Deferred Stock Accounts or subject to Options and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion; provided, however, that the number of shares held in the Deferred Stock Accounts or subject to Options shall always be a whole number. (b) Without limiting the generality of the foregoing, and notwithstanding any other provision of this Plan, in the event of a Change of Control, the following shall occur on the date of the Change of Control (the "Change of Control Date"): (i) the last day of the then current Plan Year shall be deemed to occur on the Change of Control Date; (ii) the Company shall immediately pay to each Non-Employee Director in a lump sum the Change of Control Consideration multiplied by the number of shares of Common Stock held in each Non-Employee Director's Deferred Stock Account immediately before such Change of Control; (iii) the Company shall immediately pay to each Non-Employee Director in a lump sum the balance in his or her Deferred Cash Account; (iv) the Options shall become fully exercisable by the Non-Employee Director without regard to Section 11; and (v) the Plan shall be terminated. Notwithstanding the foregoing, if the payment of cash with respect to Deferred Stock Accounts pursuant to the preceding sentence would make a Change in Control transaction ineligible for pooling-of- interests accounting under APB No. 16 that but for the nature of such grant would otherwise be eligible for such accounting treatment, the Committee shall have the ability to substitute for such cash Common Stock or other equity securities with a Value equal to the amount of such cash. (c) If the shares of Common Stock credited to the Deferred Stock Accounts and subject to Options are converted pursuant to this Section 19 into another form of property, references in the Plan to the Common Stock shall be deemed, where appropriate, to refer to such other form of property, with such other modifications as may be required for the Plan to operate in accordance with its purposes. Without limiting the generality of the foregoing, references to the delivery of shares of Common Stock shall be deemed to refer to delivery of cash and the incidents of ownership of any other property held in the Deferred Stock Accounts and subject to Options. SOLUTIA INC. NON-EMPLOYEE DIRECTOR COMPENSATION PLAN, PAGE 12 As amended 2/24/99 20. ADMINISTRATION; AMENDMENT. (a) The Board shall have the power to amend or terminate the Plan. The Executive Compensation and Development Committee or any other committee of the Board (the "Committee") designated by the Board that will satisfy Rule 16b-3 of the Exchange Act, including any successor rule ("Rule 16b-3"), shall supervise the Plan. The Plan shall be administered by the Vice President - Human Resources, or such other person or persons designated by the Committee (the "Administrator"). The Committee shall consist solely of two or more "non-employee directors" of the Company who shall be appointed by the Board. A member of the Board shall be deemed to be a "non-employee director" for the purposes of this Section 20 only if he satisfies such requirements as the Securities and Exchange Commission may establish for "non-employee directors" under Rule 16b-3. Members of the Board receive no additional compensation for their services in connection with the administration of the Plan. (b) Any act that the Committee is authorized to perform hereunder may instead be performed by the Board at its discretion, and to the extent the Board so acts, references in the Plan to the Committee shall refer to the Board as so applicable. Anything to the contrary herein notwithstanding, to the extent that any permitted action taken by the Board conflicts with action taken by the Committee, the Board action shall control. (c) The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. All questions of interpretation of the Plan or of any shares delivered under it shall be determined by the Committee and such determination shall be final and binding upon all persons having an interest in the Plan. (d) Notwithstanding any other provision of the Plan, no amendment or termination of the Plan shall adversely affect the interest of any Non-Employee Director in Options granted to him or her, in shares previously credited to such Non-Employee Director's Deferred Stock Account, or in cash previously credited to such Non-Employee Director's Deferred Cash Account without that Non-Employee Director's express written consent. 21. TRANSFERABILITY. (a) In the event of a Non-Employee Director's death, all of such person's rights with respect to his or her Deferred Stock Account and Deferred Cash Account will transfer to the maximum extent permitted by law to such person's beneficiary. Each Non-Employee Director may name, from time to time, any beneficiary or beneficiaries (which may be named contingently or successively) as his or her beneficiary for receiving delivery of the shares of Common Stock from the Deferred Stock Account and the cash from the Deferred Cash Account under this Plan. Each designation shall be on a form prescribed by the Administrator, will be effective only when delivered to the Company and when effective will revoke all prior designations by the Non-Employee Director. If a Non-Employee Director dies with no such beneficiary designation in effect, such person's beneficiary shall be his or her estate and such SOLUTIA INC. NON-EMPLOYEE DIRECTOR COMPENSATION PLAN, PAGE 13 As amended 2/24/99 person's payments will be transferable by will or pursuant to laws of descent and distribution applicable to such person. (b) Each Option granted under the Plan by its terms shall not be transferable by the Non-Employee Director otherwise than by will, or by the laws of descent and distribution, and shall be exercised during the lifetime of the Non-Employee Director only by him or her. No Option or interest therein may be transferred, assigned, pledged or hypothecated by the Non-Employee Director during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process. 22. MISCELLANEOUS. Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any Non-Employee Director for reelection by the Company's shareholders or to limit the rights of the shareholders to remove any director. 23. GOVERNING LAW. The Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware. SOLUTIA INC. NON-EMPLOYEE DIRECTOR COMPENSATION PLAN, PAGE 14 As amended 2/24/99 EXHIBIT A FORM OF SOLUTIA INC. 1997 NON-QUALIFIED STOCK OPTION (NOT TRANSFERABLE) CERTIFICATE Grant to [insert Name of Optionee] (The "Optionee") to purchase from Solutia Inc. (the "Company") [insert Number of shares] shares of its common stock par value $0.01 per share (the "Optioned Shares") at the price of [insert Option Price] per share pursuant to and subject to the provisions of the Solutia Inc. Non-Employee Director Compensation Plan (the "Plan") and to the Terms and Conditions set forth on the reverse hereof Option Grant Date: [insert grant date] TERMS AND CONDITIONS OF NON-QUALIFIED STOCK OPTION DEFINITIONS. The terms "Administrator", "Value", and "Common Stock" when used herein, shall have the meanings set forth in the Plan. EXERCISE RIGHTS. The Option shall become exercisable, during the Option term set forth in the third paragraph hereof and subject to the other terms and conditions hereof, as to one-third of the Optioned Shares on the first anniversary of the Option Grant Date, as to an additional one-third of the Optioned shares on the second anniversary of the Option Grant Date, and as to any or all of the Optioned Shares on the third anniversary of the Option Grant Date, provided that the Optionee continues in the service of the Company as a director through such anniversaries. Notwithstanding the foregoing, but subject to the third paragraph hereof, an Option shall become fully and immediately exercisable upon the occurrence of a Change in Control as set forth in Section 19 of the Plan. The Option may be exercised in full share lots only. OPTION TERM. The Option term will expire at the end of the day next preceding ten years from the date the Option was granted, or at the end of the day next preceding two years from the date the Optionee ceases to be a director of the Company for any reason, whichever first occurs. METHOD OF EXERCISE. The Option shall be exercised by (a) written notice, or notice in such other form as may be prescribed from time to time, given to the Company or its designee (at the address specified by the Company from time to time) specifying the date the Option was granted and the number of shares of Common Stock as to which the Option is being exercised, plus (b) payment to the Company in full for the shares so specified. Within a reasonable time after exercise of the Option, the Company shall deliver shares of Common Stock to the Optionee in respect of which the Option shall have been exercised and shall pay all stamp taxes in respect thereof, provided that upon or prior to the delivery of such shares of Common Stock, provision (as specified by the Company from time to time) shall be made by the Optionee for the payment to the Company of any and all taxes which it shall be required to withhold in connection with exercise of the Option, by any law or regulation of any government, whether federal, state or local and whether domestic or foreign. Payment may be made by delivery of shares of Common Stock (or other evidence of ownership of shares of Common Stock satisfactory to the Company) with a Value equal to the Option exercise price, provided that such shares have been held by the Optionee for at least six months at the time of exercise. STOCKHOLDER STATUS. The Optionee shall have no rights as a stockholder with respect to any shares of Common Stock subject to an Option unless and until the Optionee shall have become the holder of record of such underlying shares of Common Stock and, subject to the provisions of the sixth paragraph hereof, no adjustment shall be made for dividends, ordinary or extraordinary (whether in cash or securities or other property), or other distributions, or other rights in respect of such shares of Common Stock as to which the record date is prior to the date upon which the Optionee shall have become the holder of record thereof. SHARE AND PRICE ADJUSTMENT. In the event of any adjustments in the outstanding shares of Common Stock, as provided for in Section 19 of the Plan, the Executive Compensation and Development Committee of the Board of Directors of the Company may make such substitution or adjustments in the aggregate number and kind of shares to be delivered under the Plan, in the number, kind and Option exercise price of shares subject to outstanding Options and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion. The Optionee shall be notified of any such adjustment and any adjustment, or failure to adjust, shall be final and binding upon the Company and the Optionee. SERVICE AS A DIRECTOR. The grant of this Option is a separate inducement in connection with the Optionee's service as a director of the Company. Neither the Option nor any provision hereof shall be deemed to create any obligation on the part of the Board of Directors of the Company to nominate any Optionee for reelection to the Company's Board of Directors by the Company's shareholders or to limit the rights of the shareholders to remove any director. OPTION SUBJECT TO LAWS AND REGULATION. Each exercise of the Option shall be subject to all requirements as to (a) any registration or other qualifications of such shares under any state, federal, or foreign law or regulation, or the maintaining in effect of any such registration or other qualification which the Administrator shall, in his or her absolute discretion upon the advice of counsel, deem necessary or advisable, and (b) obtaining any other consent, approval, or permit from any state or federal governmental agency which the Administrator shall, in his or her absolute discretion after receiving advice of counsel, determine to be necessary or advisable. Anything herein to the contrary notwithstanding, the Option may not be exercised, in whole or in part, unless and until the Company shall have been able to comply with all such requirements and regulations free of any conditions not acceptable to the Company. As a condition to the exercise of the Option, either in whole or in part, the Optionee shall execute such documents and take such action as the Company in its sole discretion deems necessary or advisable to assist the Company in compliance with any such requirements, and Optionee shall comply with all requirements of any regulatory authority having control or supervision. GENERAL PROVISIONS. The Option is not transferable by the Optionee otherwise than by will or by the laws of descent and distribution, and during the lifetime of the Optionee shall be exercisable only by the Optionee. The validity, interpretation, performance and enforcement of this Option shall be governed by the laws of the State of Delaware. Each and every provision of the Option shall be administered, construed and interpreted so that the Option shall in all respects conform to the provisions of the Plan, a copy of which has been delivered to the Optionee, and any provision that cannot be so administered shall be deemed appropriately modified, or, if necessary, disregarded. In no event shall this Option be deemed to be an Incentive Stock Option under Section 422 of the Internal Revenue Code of 1986, as amended. EXHIBIT B FORM OF SOLUTIA INC. [Year] NON-QUALIFIED STOCK OPTION (NOT TRANSFERABLE) CERTIFICATE Grant to [insert Name of Optionee] (The "Optionee") to purchase from Solutia Inc. (the "Company") [insert Number of shares] shares of its common stock par value $0.01 per share (the "Optioned Shares") at the price of [insert Option Price] per share pursuant to and subject to the provisions of the Solutia Inc. Non-Employee Director Compensation Plan (the "Plan") and to the Terms and Conditions set forth on the following pages Option Grant Date: [insert grant date] TERMS AND CONDITIONS OF NON-QUALIFIED STOCK OPTION DEFINITIONS. - ----------- The terms "Administrator", "Value", and "Common Stock" when used herein, shall have the meanings set forth in the Plan. EXERCISE RIGHTS. - --------------- The Option shall become exercisable, during the Option term set forth in the third paragraph hereof and subject to the other terms and conditions hereof, as to one-third of the Optioned Shares on the date of the first Annual Meeting of Stockholders of the Company following the Option Grant Date, as to an additional one-third of the Optioned shares on the date of the second Annual Meeting of Stockholders of the Company following the Option Grant Date, and as to any or all of the Optioned Shares on the date of the third Annual Meeting of Stockholders of the Company following the Option Grant Date, provided that the Optionee continues in the service of the Company as a director until the date of the applicable Annual Meetings of Stockholders. Notwithstanding the foregoing, but subject to the third paragraph hereof, an Option shall become fully and immediately exercisable upon the occurrence of a Change in Control as set forth in Section 19 of the Plan or upon the Optionee's retirement from the Board of Directors at the mandatory retirement age set forth in the Charter for the Company's Board of Directors, or other applicable document. The Option may be exercised in full share lots only. OPTION TERM. - ----------- The Option term will expire at the end of the day next preceding ten years from the date the Option was granted, or at the end of the day next preceding two years from the date the Optionee ceases to be a director of the Company for any reason, whichever first occurs. METHOD OF EXERCISE. - ------------------ The Option shall be exercised by (a) written notice, or notice in such other form as may be prescribed from time to time, given to the Company or its designee (at the address specified by the Company from time to time) specifying the date the Option was granted and the number of shares of Common Stock as to which the Option is being exercised, plus (b) payment to the Company in full for the shares so specified. Within a reasonable time after exercise of the Option, the Company shall deliver shares of Common Stock to the Optionee in respect of which the Option shall have been exercised and shall pay all stamp taxes in respect thereof, provided that upon or prior to the delivery of such shares of Common Stock, provision (as specified by the Company from time to time) shall be made by the Optionee for the payment to the Company of any and all taxes which it shall be required to withhold in connection with exercise of the Option, by any law or regulation of any government, whether federal, state or local and whether domestic 2 or foreign. Payment may be made by delivery of shares of Common Stock (or other evidence of ownership of shares of Common Stock satisfactory to the Company) with a Value equal to the Option exercise price, provided that such shares have been held by the Optionee for at least six months at the time of exercise. STOCKHOLDER STATUS. - ------------------ The Optionee shall have no rights as a stockholder with respect to any shares of Common Stock subject to an Option unless and until the Optionee shall have become the holder of record of such underlying shares of Common Stock and, subject to the provisions of the sixth paragraph hereof, no adjustment shall be made for dividends, ordinary or extraordinary (whether in cash or securities or other property), or other distributions, or other rights in respect of such shares of Common Stock as to which the record date is prior to the date upon which the Optionee shall have become the holder of record thereof. SHARE AND PRICE ADJUSTMENT. - -------------------------- In the event of any adjustments in the outstanding shares of Common Stock, as provided for in Section 19 of the Plan, the Executive Compensation and Development Committee of the Board of Directors of the Company may make such substitution or adjustments in the aggregate number and kind of shares to be delivered under the Plan, in the number, kind and Option exercise price of shares subject to outstanding Options and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion. The Optionee shall be notified of any such adjustment and any adjustment, or failure to adjust, shall be final and binding upon the Company and the Optionee. SERVICE AS A DIRECTOR. - --------------------- The grant of this Option is a separate inducement in connection with the Optionee's service as a director of the Company. Neither the Option nor any provision hereof shall be deemed to create any obligation on the part of the Board of Directors of the Company to nominate any Optionee for reelection to the Company's Board of Directors by the Company's shareholders or to limit the rights of the shareholders to remove any director. OPTION SUBJECT TO LAWS AND REGULATION. - ------------------------------------- Each exercise of the Option shall be subject to all requirements as to (a) any registration or other qualifications of such shares under any state, federal, or foreign law or regulation, or the maintaining in effect of any such registration or other qualification which the Administrator shall, in his or her absolute discretion upon the advice of counsel, deem necessary or advisable, and (b) obtaining any other consent, approval, or permit from any state or federal governmental agency 3 which the Administrator shall, in his or her absolute discretion after receiving advice of counsel, determine to be necessary or advisable. Anything herein to the contrary notwithstanding, the Option may not be exercised, in whole or in part, unless and until the Company shall have been able to comply with all such requirements and regulations free of any conditions not acceptable to the Company. As a condition to the exercise of the Option, either in whole or in part, the Optionee shall execute such documents and take such action as the Company in its sole discretion deems necessary or advisable to assist the Company in compliance with any such requirements, and Optionee shall comply with all requirements of any regulatory authority having control or supervision. GENERAL PROVISIONS. - ------------------ The Option is not transferable by the Optionee otherwise than by will or by the laws of descent and distribution, and during the lifetime of the Optionee shall be exercisable only by the Optionee. The validity, interpretation, performance and enforcement of this Option shall be governed by the laws of the State of Delaware. Each and every provision of the Option shall be administered, construed and interpreted so that the Option shall in all respects conform to the provisions of the Plan, a copy of which has been delivered to the Optionee, and any provision that cannot be so administered shall be deemed appropriately modified, or, if necessary, disregarded. In no event shall this Option be deemed to be an Incentive Stock Option under Section 422 of the Internal Revenue Code of 1986, as amended. EX-27 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Statement of Consolidated Income of Solutia Inc. and Subsidiaries for the three months ended March 31, 1999, and the Statement of Consolidated Financial Position as of March 31, 1999. Such information is qualified in its entirety by reference to such consolidated financial statements. 1,000,000 3-MOS DEC-31-1999 MAR-31-1999 36 0 405 7 343 1,001 3,300 2,375 2,769 735 597 1 0 0 (25) 2,769 652 652 547 547 0 0 9 33 10 23 0 0 0 23 0.21 0.20
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