-----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, OirILANytzP5tVxf99sRxgVr809iwF1ogBFzFxzpWoF5PpNFWUagUX7lYrYg9Ouk 5ml32NA8cH/UHWFlMcisYQ== 0001068800-99-000334.txt : 19990802 0001068800-99-000334.hdr.sgml : 19990802 ACCESSION NUMBER: 0001068800-99-000334 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990730 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: 99673496 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 JUNE 30, 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 JUNE 30, 1999 ----- ------------- COMMON STOCK, $0.01 PAR VALUE 110,977,109 SHARES ----------------------------- ------------------ =============================================================================== PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SOLUTIA INC. STATEMENT OF CONSOLIDATED INCOME (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------- ------------------- 1999 1998 1999 1998 ----- ----- ------ ------ NET SALES................................................. $ 711 $ 745 $1,363 $1,465 Cost of goods sold........................................ 518 539 1,065 1,072 ----- ----- ------ ------ GROSS PROFIT.............................................. 193 206 298 393 Marketing expenses........................................ 39 37 70 74 Administrative expenses................................... 31 34 62 65 Technological expenses.................................... 20 20 37 40 Amortization expense...................................... 1 -- 1 -- ----- ----- ------ ------ OPERATING INCOME.......................................... 102 115 128 214 Equity earnings from affiliates........................... 11 6 21 12 Interest expense.......................................... (10) (11) (19) (23) Other income (expense)--net............................... 3 (1) 9 3 ----- ----- ------ ------ INCOME BEFORE INCOME TAXES................................ 106 109 139 206 Income taxes.............................................. 35 37 45 70 ----- ----- ------ ------ NET INCOME................................................ $ 71 $ 72 $ 94 $ 136 ===== ===== ====== ====== BASIC EARNINGS PER SHARE.................................. $0.64 $0.62 $ 0.84 $ 1.17 ===== ===== ====== ====== DILUTED EARNINGS PER SHARE................................ $0.61 $0.58 $ 0.81 $ 1.09 ===== ===== ====== ====== Weighted average equivalent shares (in millions): Basic................................................. 111.3 116.2 111.6 116.6 Effect of dilutive securities: Common share equivalents--common shares issuable upon exercise of outstanding stock options...... 5.2 7.9 4.6 7.9 ----- ----- ----- ----- Diluted............................................... 116.5 124.1 116.2 124.5 ===== ===== ===== =====
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (DOLLARS IN MILLIONS)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------- ------------------- 1999 1998 1999 1998 ----- ----- ------ ------ NET INCOME................................................ $ 71 $ 72 $ 94 $ 136 OTHER COMPREHENSIVE INCOME: Currency translation adjustments.......................... (9) 4 (26) (4) ----- ----- ------ ------ COMPREHENSIVE INCOME...................................... $ 62 $ 76 $ 68 $ 132 ===== ===== ====== ====== See accompanying Notes to Consolidated Financial Statements.
1 SOLUTIA INC. STATEMENT OF CONSOLIDATED FINANCIAL POSITION (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 1999 1998 -------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................... $ 15 $ 89 Trade receivables, net of allowance of $7 in 1999 and 1998.. 436 357 Miscellaneous receivables and prepaid expenses.............. 127 126 Deferred income tax benefit................................. 104 88 Inventories................................................. 368 331 ------ ------ TOTAL CURRENT ASSETS........................................ 1,050 991 PROPERTY, PLANT AND EQUIPMENT: Land........................................................ 18 17 Buildings................................................... 377 371 Machinery and equipment..................................... 2,841 2,786 Construction in progress.................................... 190 127 ------ ------ Total property, plant and equipment......................... 3,426 3,301 Less accumulated depreciation............................... 2,390 2,357 ------ ------ NET PROPERTY, PLANT AND EQUIPMENT........................... 1,036 944 INVESTMENTS IN AFFILIATES................................... 413 394 LONG-TERM DEFERRED INCOME TAX BENEFIT....................... 259 274 OTHER ASSETS................................................ 266 162 ------ ------ TOTAL ASSETS................................................ $3,024 $2,765 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable............................................ $ 283 $ 278 Accrued liabilities......................................... 525 454 Short-term debt............................................. 119 -- ------ ------ TOTAL CURRENT LIABILITIES................................... 927 732 LONG-TERM DEBT.............................................. 597 597 POSTRETIREMENT LIABILITIES.................................. 970 971 OTHER LIABILITIES........................................... 510 472 SHAREHOLDERS' EQUITY (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............................ (135) (131) Treasury stock, at cost (7,423,526 shares in 1999 and 5,629,677 shares in 1998)............................... (183) (143) Unearned ESOP shares........................................ (22) (25) Accumulated other comprehensive income...................... (7) 19 Reinvested earnings......................................... 366 272 ------ ------ SHAREHOLDERS' EQUITY (DEFICIT).............................. 20 (7) ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)........ $3,024 $2,765 ====== ====== See accompanying Notes to Consolidated Financial Statements.
2 SOLUTIA INC. STATEMENT OF CONSOLIDATED CASH FLOW (DOLLARS IN MILLIONS)
SIX MONTHS ENDED JUNE 30, ----------------- 1999 1998 ----- ----- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income.................................................. $ 94 $ 136 Adjustments to reconcile to Cash From Operations: Items that did not use (provide) cash: Deferred income taxes............................... (8) 7 Depreciation and amortization....................... 71 69 Other............................................... 47 3 Working capital changes that provided (used) cash: Trade receivables................................... (55) (8) Inventories......................................... (11) (24) Accounts payable and accrued liabilities............ (19) 71 Other............................................... 8 2 Other items............................................. 13 3 ----- ----- CASH FROM OPERATIONS........................................ 140 259 ----- ----- INVESTING ACTIVITIES: Property, plant and equipment purchases..................... (92) (48) Acquisition and investment payments......................... (203) (1) Investment and property disposal proceeds................... 6 8 ----- ----- CASH FROM INVESTING ACTIVITIES.............................. (289) (41) ----- ----- FINANCING ACTIVITIES: Net change in short-term debt............................... 119 (175) Treasury stock purchases.................................... (50) (70) Dividend payments........................................... -- (2) Common stock issued under employee stock plans.............. 6 17 ----- ----- CASH FROM FINANCING ACTIVITIES.............................. 75 (230) ----- ----- DECREASE IN CASH AND CASH EQUIVALENTS....................... (74) (12) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR........................................... 89 24 ----- ----- END OF PERIOD............................................... $ 15 $ 12 ===== ===== 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, high technology polyester film products, specialty chemicals and phosphorus derivatives. 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 and six-month periods ended June 30, 1999, are not necessarily indicative of the results to be expected for the full year. 2. INVENTORY VALUATION The components of inventories as of June 30, 1999, and December 31, 1998, were as follows:
JUNE 30, DECEMBER 31, 1999 1998 -------- ------------ Finished goods................................. $ 280 $ 252 Goods in process............................... 105 87 Raw materials and supplies..................... 101 116 ----- ----- Inventories, at FIFO cost...................... 486 455 Excess of FIFO over LIFO cost.................. (118) (124) ----- ----- TOTAL.......................................... $ 368 $ 331 ===== =====
3. CPFILMS INC. ACQUISITION On May 25, 1999, Solutia acquired 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 has been accounted for using the purchase method, and the preliminary purchase price allocation resulted in goodwill of approximately $100 million. Goodwill will be amortized over an estimated useful life of 20 years. 4. 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 the exit of the business by the end of 1999. The ammonia business's net sales 4 for the three months ended June 30, 1999, and 1998, were $0 and $4 million, respectively, and for the six months ended June 30, 1999, and 1998, were $1 million and $12 million, respectively. Operating income for those periods was minimal. A special operations charge of $6 million ($4 million aftertax) was also recorded to cost of goods sold primarily to write down a Fibers segment bulk continuous filament spinning machine 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 determined based on estimates of market prices. Operating income derived from the machinery was minimal in the three month and six month periods ended June 30, 1999 and 1998. 5. 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 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 6. SEGMENT DATA Segment data for the three months and the six months ended June 30, 1999, and 1998, were as follows:
THREE MONTHS ENDED JUNE 30, ------------------------------------------------------------------------------- 1999 1998 ----------------------------------- ----------------------------------- NET INTERSEGMENT NET INTERSEGMENT SALES SALES PROFIT SALES SALES PROFIT ----- ------------ ------ ----- ------------ ------ SEGMENT: Chemicals........................... $215 $ 1 $ 61 $222 $ 2 $ 54 Fibers.............................. 219 -- 38 256 -- 62 Polymers & Resins................... 278 -- 78 269 -- 78 ---- ---- ---- ---- ---- ---- SEGMENT TOTALS........................ 712 1 177 747 2 194 RECONCILIATION TO CONSOLIDATED TOTALS: Sales eliminations.................. (1) (1) (2) (2) Less unallocated service costs: Cost of goods sold................ (17) (20) Marketing, administrative and technological expenses.......... (57) (59) Amortization expense................ (1) -- Equity earnings from affiliates..... 11 6 Interest expense.................... (10) (11) Other income (expense)--net......... 3 (1) CONSOLIDATED TOTALS: ---- ---- ---- ---- NET SALES........................... $711 $ -- $745 $ -- ==== ==== ---- ==== ==== ---- INCOME BEFORE INCOME TAXES.......... $106 $109 ==== ====
SIX MONTHS ENDED JUNE 30, --------------------------------------------------------------------------------- 1999 1998 ------------------------------------ ------------------------------------ NET INTERSEGMENT NET INTERSEGMENT SALES SALES PROFIT SALES SALES PROFIT ----- ------------ ------ ----- ------------ ------ SEGMENT: Chemicals........................ $ 419 $ 3 $ 117 $ 447 $ 4 $ 110 Fibers........................... 429 -- 70 507 -- 120 Polymers & Resins................ 518 -- 144 513 -- 142 ------ ---- ----- ------ ---- ----- SEGMENT TOTALS..................... 1,366 3 331 1,467 4 372 RECONCILIATION TO CONSOLIDATED TOTALS: Sales eliminations............... (3) (3) (4) (4) Other revenues................... -- 2 Less unallocated service costs: Cost of goods sold......... (93) (43) Marketing, administrative and technological expenses....... (109) (115) Amortization expense............. (1) -- Equity earnings from affiliates....................... 21 12 Interest expense................. (19) (23) Other income (expense)--net...... 9 3 CONSOLIDATED TOTALS: ------ ---- ------ ---- NET SALES........................ $1,363 $ -- $1,465 $ -- ====== ==== ----- ====== ==== ----- INCOME BEFORE INCOME TAXES....... $ 139 $ 206 ===== ===== 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 six months ended June 30, 1999, includes first quarter 1999 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 Solutia'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--THREE MONTHS ENDED JUNE 30, 1999, COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 1998 Net sales for the second quarter of 1999 decreased by 5 percent as compared with the second quarter of 1998 due to lower average selling prices in the Fibers and Polymers & Resins segments. Sales volume declines in the Chemicals and Fibers segments were entirely offset by volume increases in the Polymers & Resins segment. Chemicals Segment Net sales in the Chemicals segment for the second quarter of 1999 declined from the comparable 1998 quarter primarily as the result of lower volumes for ammonia and chlorobenzenes, partially offset by improved volumes of adipic acid and feed ingredients. In the first quarter of 1999, Solutia exited the ammonia business and, as a result, had no ammonia sales during the second quarter of 1999. See Note 4 to the Consolidated Financial Statements for additional information. This unfavorable comparison will continue through the remainder of 1999. Chlorobenzene volumes also continued their decline, as exhibited in the first quarter, due to lower demand from the Flexsys, L.P. rubber chemicals joint venture ("Flexsys"). This volume decline was expected and will continue as Flexsys utilizes its new PPD2 operations which do not require chlorobenzenes as a raw material. Average selling prices for those products with formula pricing continued to decline in the 1999 quarter. However, the declines were offset by a more favorable sales mix of other products. Segment profit for the quarter ended June 30, 1999, increased by 13 percent as compared to the quarter ended June 30, 1998. The Chemicals segment benefited from lower-priced purchased ammonia, favorable manufacturing performance, and Solutia's on-going cost reduction efforts, including those related to personnel costs. For the 1999 second quarter, segment profit as a percentage of net sales was 28 percent as compared with 24 percent for the comparable quarter of 1998. On April 30, 1999, Solutia announced an agreement with FMC Corporation to form a joint venture to manufacture and market phosphorus chemicals. Solutia will contribute its Phosphorus Derivatives business and will hold a 50 percent ownership share. The formation of the joint venture is currently being reviewed by the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Fibers Segment The Fibers segment's net sales for the three-month period ended June 30, 1999, declined approximately 14 percent versus the comparable period of 1998. Declines in both average selling prices and sales volumes contributed equally to the year-over-year change. All the segment volume declines, and almost half the average selling price declines, were attributable to the Acrilan(R) acrylic fiber business. This business showed poor operating results as compared to the prior year due to continuing weak market conditions in the Asia Pacific region and the residual effect of those conditions on markets in the Americas. The weak market conditions in Asia Pacific began early in the third quarter of 1998 and have continued through the second quarter of 1999. Solutia's carpet business continued to experience lower average selling prices in the second quarter of 1999 due to the consolidation of the carpet mill industry and inter-fiber competition. Carpet volumes, however, were up slightly from the year-ago levels. To address the lower pricing, Solutia recently announced price increases in both the Acrilan(R) acrylic fiber and carpet fiber businesses. 7 Segment profit for Fibers declined 39 percent 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. As a result, segment profit as a percentage of net sales was 17 percent for the second quarter of 1999 as compared with 24 percent for the comparable quarter of 1998. Polymers & Resins Segment Net sales for the second quarter of 1999 in the Polymers & Resins segment increased 3 percent as compared to the second quarter of 1998. Sales volume increases were responsible for the improvement, but were partially offset by lower average selling prices. The segment's sales volumes increased primarily due to the CPFilms Inc. acquisition, which occurred during the current quarter, and to lesser extents, by improved sales volumes of merchant polymer and Saflex(R) plastic interlayer. 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. See Note 3 to the Consolidated Financial Statements for additional information regarding the acquisition. Merchant polymer sales volumes increased as global customers began to recover from the effects of the Asian financial crisis and began refilling their manufacturing process pipelines. Saflex(R) plastic interlayer sales volumes set a record for a second quarter due to strong market environments in Europe and North America. However, Saflex(R) plastic interlayer's net sales growth was more than offset by contractual price declines. Polymers & Resins segment profit for the second quarter of 1999 was flat as compared to the second quarter of 1998. The slight increase in the segment's net sales was more than offset by higher manufacturing costs and increased marketing expenses associated with Saflex(R) plastic interlayer growth programs. This led segment profit as a percentage of segment net sales to decrease to 28 percent in the second quarter of the current year from 29 percent in the second quarter of last year. Operating Income Operating income for the second quarter of 1999 declined to $102 million as compared to $115 million for the second quarter of 1998 due to lower segment profit discussed above. Reduced administrative spending offset increases in marketing expenses and amortization of goodwill from the CPFilms acquisition. Equity Earnings from Affiliates Equity earnings from affiliates increased to $11 million in the second 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, and at the Advanced Elastomer Systems, L.P. ("AES") joint venture, which experienced higher sales volumes and good manufacturing performance. RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 1999, COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998 Net sales for the six-month period ended June 30, 1999, decreased by 7 percent as compared with the six-month period ended June 30, 1998. Lower average selling prices, and to a lesser extent, lower sales volume contributed to the decline in net sales. 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 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 during the first quarter of 1999. Because of the cost to repair the equipment and the availability of ammonia in the marketplace, Solutia decided not to repair the equipment, and instead to exit the business. The exit from the ammonia business is further discussed below in Operating Income. The decrease in chlorobenzene volumes was primarily due to lower demand as Flexsys uses its new PPD2 operations, which do not require chlorobenzenes as a raw material. Pricing declines experienced during the first half of 1999, as compared to the first half of 1998, were caused by contracts with negotiated price declines and contracts that contain formula pricing tied to the cost of the raw material components. During 1998 and into the second quarter of 1999, the prices of raw material feedstocks for certain products fell, resulting in lower selling prices. 8 In spite of the decline in net sales, segment profit for the six-month period ended June 30, 1999, increased 6 percent as compared to the six-month period ended June 30, 1998. The Chemicals segment benefited from lower-priced purchased ammonia, favorable manufacturing performance, and Solutia's on-going cost reduction efforts, including those related to personnel costs. For the first half of 1999, segment profit as a percentage of net sales was 28 percent as compared with 25 percent for the first half of 1998. On April 30, 1999, Solutia announced an agreement with FMC Corporation to form a joint venture to manufacture and market phosphorus chemicals. Solutia will contribute its Phosphorus Derivatives business and will hold a 50 percent ownership share. The formation of the joint venture is currently being reviewed by the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Fibers Segment The Fibers segment net sales for the six months ended June 30, 1999, were down approximately 15 percent as compared to the six months ended June 30, 1998. Pricing and volume contributed equally to the decrease. The Acrilan(R) acrylic fiber business was responsible for essentially all of the year-over-year decline in sales volumes and for over one-quarter of the year-over-year average selling price declines. These declines were caused by the weak market conditions in Asia Pacific that resulted from the financial crisis in that region. In addition, that region's lower demand caused a residual effect on markets in the Americas as producers sought alternative outlets for their products. The impact of these events began early in the third quarter of 1998 and have continued through the first half of 1999. Solutia's carpet business was responsible for the remainder of the average selling price decrease. Carpet has experienced lower average sales prices in the first half of 1999 as compared to the same period of the prior year due to the consolidation of the carpet mill industry. Also affecting the comparison of the six-month period ended June 30, 1999, with the same period of 1998 is the first quarter 1998 price increase which gradually eroded during 1998. Solutia was unable to obtain a similar price increase during the first quarter 1999, but did match, effective June 1, 1999, a competitor's earlier price increase. Segment profit for Fibers decreased 42 percent due to the net sales decline and higher manufacturing costs, but was partially offset by lower raw material costs and the effects of Solutia's cost reduction initiatives, including those related to personnel costs. Polymers & Resins Segment Polymers and Resins net sales for the first six months of 1999 were essentially flat as compared to the first six months of 1998. Sales volume improvements were almost entirely offset by lower average selling prices. Approximately one-half of the volume increase was attributable to the second quarter acquisition of CPFilms Inc. See Note 3 to the Consolidated Financial Statements for additional information regarding the acquisition. In addition, both Vydyne(R) nylon plastic and Saflex(R) plastic interlayer sales volumes improved during the first half of 1999 from their 1998 levels. These sales volumes gains were significantly offset by average selling prices that were lower in the 1999 period than those in the 1998 period due to the pricing provisions of some long-term Saflex(R) plastic interlayer sales contracts and a less favorable mix of sales. Polymers & Resins segment profit for the first half of 1999 was also essentially unchanged from the first half of 1998 due to the net sales trends discussed above and Solutia's cost reduction efforts, including those related to personnel costs. Segment profit was 28 percent in both the six-month period ended June 30, 1999, and the six-month period ended June 30, 1998. Operating Income Operating income for the first six months of 1999 declined by 40 percent as compared to the first six months of 1998 due to lower segment profit discussed above and special charges affecting the 1999 period. 9 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) 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 six months ended June 30, 1999, and 1998, were $1 million and $12 million, respectively. Operating income for those periods was minimal. A special operations charge of $6 million ($4 million aftertax) was recorded to cost of goods sold 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. Also during the first quarter of 1999, 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 ("Monsanto") 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 $21 million in the first half of 1999 from $12 million in the comparable period of 1998. The increase was driven by improved profitability at the Flexsys joint venture, which benefited from the PPD2 unit's good operating performance, and at the AES joint venture, which experienced higher sales volumes and good manufacturing performance. LIQUIDITY AND CAPITAL RESOURCES Solutia's working capital at June 30, 1999, decreased to $123 million from $259 million at December 31, 1998. The decrease was primarily due to higher short-term borrowings and accrued liabilities, and lower cash balances. During the first half of 1999, Solutia acquired CPFilms Inc. in an all-cash transaction that was funded with short-term borrowings. See Note 3 to the Consolidated Financial Statements for additional information. The increased accrued liability balance is due to the timing of income tax payments and other normal events. Cash balances declined primarily due to lower cash from operations, increased capital spending and the CPFilms acquisition, offset by the short-term borrowings previously discussed and advance payments from third parties of $56 million. Solutia continued to reinvest in itself through share repurchases. Shares repurchased during 1999 under the second 5 million share repurchase program total 2.1 million shares. The cost of shares repurchased during the first half of 1999 was approximately $50 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. 10 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 Solutia 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 INVENTORY/ PLANS IMPLEMENTATION ASSESSMENT REMEDIATION TESTING IMPLEMENTATION DEVELOPED DATE ---------- ----------- ------- -------------- ----------- -------------- Business Applications........ 100% 98% 91% 91% See Mid-1999 Manufacturing and Warehousing Equipment........... 100% 98% 98% 98% Comments 2nd Qtr. 1999 Information Technology Technical Infrastructure...... 100% 98% 98% 98% Below 2nd Qtr. 1999 Environmental Operations Systems............. 100% 98% 98% 98% 2nd Qtr. 1999 Business Partners..... 100% -- -- -- 2nd Qtr. 1999
Business Applications Solutia inventoried and assessed its business applications during 1997 and determined that significant portions of its software required modification or repair to function properly beyond December 31, 1999. Solutia has addressed the majority of these Y2K issues through the installation of software licensed from SAP AG which is Y2K compliant. The final transition to SAP was completed successfully in May 1999. Most critical issues that were not addressed by SAP have also been remediated. A limited number of applications will be remediated immediately preceding Y2K integrated testing of those applications. Y2K integrated testing of SAP and non-SAP systems began in late June 1999 and is continuing on schedule. Manufacturing and Warehousing Equipment and Environmental Operations Systems Solutia's manufacturing and warehousing equipment and its environmental operations systems include primary process control systems and devices with embedded chips. Both have been inventoried and assessed. Remediation and testing of primary process control systems is essentially complete. Remediation of Y2K issues identified in devices with embedded chips also is essentially complete. The remaining unremediated systems will be repaired and tested during planned plant shutdowns in the second half of 1999. Information Technology Technical Infrastructure Solutia's 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 11 inventory and assessment of the IT technical infrastructure area was completed in early 1999. The assessment, remediation and testing of the issues identified is essentially complete. 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 been involved in an on-going process to identify and assess those business partners in the supply chain that provide materials, products or services critical to the company's operations. As of June 30, 1999, approximately 80 percent of Solutia's critical suppliers reported that they had either completed their remediation efforts or planned to complete their remediation by mid-1999. Investigation of Y2K issues with critical suppliers who did not expect to complete their remediation efforts by mid-1999 is continuing on schedule. Audits of selected suppliers to verify the status and/or completion of their remediation will continue through the second 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, are being developed in conjunction with Solutia's contingency planning, as described below. Integrated Testing Solutia is performing integrated Y2K testing of critical systems and expects the tests to continue throughout 1999. The majority of the integrated testing began in late June and is continuing through July 1999. This testing includes three components: 1) a baseline test, 2) a year-end rollover test, and 3) a leap-year rollover test. To date, the baseline test and the year-end rollover test have been completed and no significant issues have been identified. However, 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 engaged the manufacturing sites in the evaluation of their existing contingency plans in light of possible Y2K effects. Solutia completed the Y2K contingency plans for all manufacturing sites by the end of the second quarter of 1999. These plans are being reviewed by management and implementation is expected to begin in the third quarter of 1999. The contingency planning process has been modified for use in non-manufacturing areas, and development of those plans is underway. Solutia expects to complete contingency plans for non-manufacturing areas by the end of the third quarter of 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, Solutia 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 Solutia's work to address its Y2K issues, including the performance of integrated testing, management does not expect the Y2K issue to pose significant operational problems for the company. However, if the company's customers, suppliers, and service providers fail to rectify their Y2K issues in their own systems or fail to implement appropriate contingency plans, the resultant effect on the company could 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 a supplier or service provider to resolve their Y2K issues. Through the 12 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 accuracy of information from vendors, suppliers, and other third parties regarding their Y2K preparedness, and the ability to identify and correct all relevant computer codes. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards 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. During June 1999, FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133," to defer the effective date of SFAS No. 133 by one year. The standard will now be effective for the Company beginning January 1, 2001. The Company does not expect the adoption of SFAS No. 133 to have a material effect on the consolidated financial statements. 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Solutia's annual 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. Monsanto was served with a new case on June 21, 1999, which was filed in Circuit Court for Calhoun County, Alabama on behalf of 788 individuals who allege that their persons or properties were exposed to PCBs. As a result of that alleged exposure, plaintiffs claim to have suffered personal injuries and fear future disease; they assert the need for medical monitoring and claim to have suffered damage to their properties. Plaintiffs seek compensatory and punitive damages in an unspecified amount. This action is being vigorously defended. On December 4, 1998, the U.S. Environmental Protection Agency ("EPA") issued a notice of violation to Solutia, Monsanto and P4 Production, L.L.C., alleging violations of the Wyoming Environmental Quality Act, the Wyoming Air Quality Standards & Regulations and a permit issued in 1994 by the Wyoming Department of Environmental Quality to Sweetwater Resources, Inc., a former subsidiary of Monsanto, for a coal coking facility in Rock Springs, Wyoming. This facility is currently owned by P4 Production, a joint venture formed in conjunction with the spinoff of Solutia by Monsanto on September 1, 1997. P4 Production is owned 40 percent by Solutia and 60 percent by Monsanto and is operated by Solutia under an operating agreement with P4 Production. The alleged violations arise out of the same facts that formed the basis of a consent order with Monsanto issued by the Wyoming Environmental Quality Council on March 6, 1997 (the "1997 Consent Order"). At that time neither the EPA nor the Wyoming Department of Environmental Quality sought to impose a penalty. As a result of the December 4, 1998 notice of violation, Solutia, Monsanto, and P4 Production began discussions with the EPA and the Wyoming Department of Environmental Quality. These discussions culminated in the negotiation of a judicial settlement with the Wyoming Department of Environmental Quality that incorporated the terms and conditions of the 1997 Consent Order and assessed a penalty in the amount of $200,000. A consent decree was entered in the First Judicial District Court in Laramie County, Wyoming on June 25, 1999. The penalty was paid by P4 Production. Approximately $120,000 of the amount of this penalty will be allocated to Solutia under the joint venture agreements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At Solutia's annual meeting of shareholders on April 28, 1999, two matters were submitted to a vote of shareholders. 1. The following directors were elected, each to hold office for a three-year term that will expire at the annual meeting of shareholders in 2002 (or until their respective successors are elected and qualified, or until their earlier death, resignation, or removal). Votes were cast as follows:
VOTES VOTES "WITHHOLD NAME "FOR" AUTHORITY" ---- ----- ---------- Joan T. Bok................................................. 91,691,155 1,642,003 Howard M. Love.............................................. 91,716,768 1,616,390 Robert G. Potter............................................ 91,748,550 1,584,608
The following directors are continuing current terms expiring at the annual meeting of shareholders in 2000: Robert T. Blakely, Paul H. Hatfield, Robert H. Jenkins, and Frank A. Metz, Jr. The following directors are continuing terms expiring at the annual meeting of shareholders in 2001: John C. Hunter III, William D. Ruckelshaus, and John B. Slaughter. 2. The appointment by the Board of Directors of Deloitte & Touche L.L.P. as principal independent auditors for the year 1999 was ratified by the shareholders. A total of 92,019,804 votes were cast in favor of ratification, 956,530 votes were cast against it, and 356,824 votes were counted as abstentions. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits--See the Exhibit index at page 16 of this report. (b) Solutia did not file any reports on Form 8-K during the quarter ended June 30, 1999. 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOLUTIA INC. ------------------------------------- (Registrant) /s/ ROGER S. HOARD ------------------------------------- (Vice President and Controller) (On behalf of the Registrant and as Principal Accounting Officer) Date: July 30, 1999 15 EXHIBIT INDEX These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2 Omitted--Inapplicable 3 Omitted--Inapplicable 4 Omitted--Inapplicable 10 1. Solutia Inc. 1997 Stock-Based Incentive Plan, as amended on April 28, 1999 2. Solutia Inc. Management Incentive Replacement Plan, as amended on April 28, 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 16 EX-10.1 2 MANAGEMENT INCENTIVE REPLACEMENT PLAN SOLUTIA INC. MANAGEMENT INCENTIVE REPLACEMENT PLAN I. Purpose of the Plan The purpose of the Solutia Inc. Management Incentive Replacement Plan (the "Plan") is to provide for the issuance and administration of certain awards relating to the common stock of Solutia Inc., a Delaware corporation, (the "Company") issued to certain employees and officers of Monsanto Company ("Monsanto"), the Company, Subsidiaries, and Associated Companies in connection with the distribution by Monsanto to its stockholders of all of the issued and outstanding common stock of the Company (the "Distribution"). II. Definitions Except where the context otherwise indicates, the following definitions apply: "Adjusted Monsanto Stock Option" means a Monsanto Stock Option which, as a result of the Distribution, has been adjusted by the Monsanto ECDC as to its exercise price and/or the number of shares of Monsanto Common Stock it covers. "Associated Company" means any corporation (or partnership, joint venture, or other enterprise) of which the Company owns or controls, directly or indirectly, 10% or more, but less than 50% of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). "Award" means any Stock Option, Restricted Shares, or other award granted under this Plan. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means the ECDC, or its permitted delegate. "Company Common Stock" means the common stock of the Company, $0.01 par value. "Company Ratio" means the amount obtained by dividing (i) the average of the daily high and low trading prices on the NYSE Composite Tape, as reported in The Wall Street Journal, for the Monsanto Common Stock with due bills on each of the five trading days prior to the Distribution Date by (ii) the average of the daily high and low trading prices on the NYSE Composite Tape, as reported in The Wall Street Journal, for the Company Common Stock on a when-issued basis on each of such five trading days. 2 "Company Stock Option" means a Stock Option granted pursuant to Section VI of this Plan. "Compensation Committee" means one or more committees appointed by the ECDC composed of one or more senior managers of the Company or a Subsidiary to whom the ECDC may delegate its powers (or a portion thereof) to administer this Plan pursuant to Section IV.A. of this Plan. "Distribution Date" means the effective date of the Distribution. "ECDC" means the Executive Compensation and Development Committee or such other committee consisting of two or more members of the Board as may be appointed by the Board to administer this plan pursuant to Section IV of this Plan. "Eligible Participant" means an officer or other salaried employee (including a director who is a salaried employee) of the Company, a Subsidiary, or an Associated Company, or an officer of other salaried employee (including a director who is a salaried employee) of Monsanto, who, on the Distribution Date, holds an outstanding Monsanto Stock Option or on the Record Date has issued and outstanding in his or her name Monsanto Restricted Stock. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. "Fair Market Value" means, with respect to any given day, the average of the high and low trading prices of a share of stock reported as the New York Stock Exchange-Composite Transactions for such day, or if the stock was not traded on the New York Stock Exchange on such day, then on the next preceding day on which the stock was traded, all as reported by The Wall Street Journal under the heading New York Stock Exchange-Composite Transactions or by such other source as the Committee may select. "Monsanto Common Stock" means the common stock of Monsanto, $2.00 par value. "Monsanto ECDC" means the Executive Compensation and Development Committee of the board of directors of Monsanto. "Monsanto Plan" means the Monsanto Management Incentive Plan of 1984, as amended; the Searle Monsanto Stock Option Plan of 1986, as amended; the Monsanto Management Incentive Plan of 1988/I, as amended; the Monsanto Management Incentive Plan of 1988/II, as amended; the NutraSweet/ Monsanto Stock Plan of 1991, as amended; the NutraSweet/Monsanto Stock Plan of 1994, as amended; the Monsanto Management Incentive Plan of 1994, as amended; the Searle/Monsanto Stock Plan of 1994, as amended; or the Monsanto Management Incentive Plan of 1996, as amended. 3 "Monsanto Restricted Stock" means a share of Monsanto Common Stock granted pursuant to a Monsanto Plan that is subject to restrictions under such plan on the Record Date. "Monsanto Stock Option" means a Stock Option to purchase Monsanto Common Stock granted under a Monsanto Plan which, on the Distribution Date, is outstanding and unexercised and held by an officer or salaried employee of Monsanto, the Company, a Subsidiary, or an Associated Company. "Participant" means an Eligible Participant who is granted an Award under the Plan. "Record Date" means August 20, 1997. "Reporting Person" means a person subject to the reporting requirements of Section 16(a) of the Exchange Act (or any law, rule, regulation or other provision that may replace such statute) with respect to Shares. "Restricted Shares" means Shares that were distributed as part of the Distribution that are subject to restrictions in accordance with Section VII of this Plan. "Rule 16b-3" means Rule 16b-3 promulgated by the SEC under the Exchange Act or any successor rule or regulation thereto as in effect from time to time. "SEC" means the Securities and Exchange Commission. "Shares" means shares of Company Common Stock and any shares of stock or other securities received as a result of a Share adjustment as the Committee may at any time designate. "Stock Option" or "Option" means a stock option which is not an incentive stock option under Section 422 of the Code. "Subsidiary" means any corporation (or partnership, joint venture, or other enterprise) of which the Company owns or controls, directly or indirectly, 50% or more of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). "Termination of Employment" means the discontinuance of employment of a Participant for any reason other than a Transfer or, with respect to a Participant employed by Monsanto, other than a Transfer or a transfer to the Company, its Subsidiary, or Associated Company in connection with the Distribution. "Transfer" means, (i) for the purpose of a Company Stock Option or Restricted Shares held by a Participant employed by the Company, a Subsidiary, or an Associated Company, a change of employment of a Participant within the group consisting of the 4 Company and its Subsidiaries, or, if the Committee so determines, a change of employment of a Participant within the group consisting of the Company, its Subsidiaries and Associated Companies and (ii) for the purpose of a Company Stock Option or Restricted Shares held by a Participant employed by Monsanto a change of employment as set forth in the associated Adjusted Monsanto Stock Option or Monsanto Plan. III. Effective Date and Duration This Plan shall become effective as of the Distribution Date. Subject to Section V.B., no Award shall be granted under the Plan except the Awards provided for in Sections VI and VII. Awards granted hereunder shall continue until their respective expiration dates. IV. Administration of the Plan A. The Plan shall be administered by the ECDC, except to the extent that the ECDC delegates administration pursuant to this section. The ECDC may delegate all or a portion of the administration of this Plan to one or more Compensation Committees and may authorize further delegation by the Compensation Committee(s) to senior managers of the Company or its Subsidiaries, provided that determinations regarding any Award to a Reporting Person shall be made only by the ECDC. No person shall be eligible or continue to serve as a member of the ECDC unless such person is (i) a "non-employee director" within the meaning of Rule 16b-3 and (ii) an "outside director" within the meaning of Section 162(m) of the Code. B. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. The Committee shall have no discretion relating to the timing, price and size of Awards granted under the Plan, which shall be determined in accordance with the provisions of Sections VI and VII. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon the Company, any Subsidiary or Associated Company, any Participant, any beneficiary of any Award, and any stockholder of the Company. The authority of the Committee to administer, interpret, amend, alter, adjust, suspend, discontinue, or terminate, in accordance with the provisions of the Plan, any Award or to waive any conditions or rights under any Award shall extend until the expiration date of such Award. C. Notwithstanding any other provision of the Plan, the Committee shall have authority to determine for purposes of any Award that (a) is outstanding as of the date that 5 the Company sells any business, or its interest in any business, to Monsanto Company and (b) is held by a Participant who in connection with such sale becomes an employee of Monsanto Company (or a subsidiary or associated company of Monsanto Company) rather than an employee of the Company (or a Subsidiary or Associated Company of the Company), such change of employment shall not constitute a Termination of Employment. With respect to any such Award held by any such Participant, Termination of Employment shall mean such Participant's discontinuance of employment for any reason other than a transfer (that is, a change of employment within the group consisting of Monsanto Company, its subsidiaries, its associated companies). For purposes of this Section IV. C, a subsidiary of Monsanto Company means any corporation (or partnership, joint venture, or other enterprise) of which Monsanto Company owns or controls, directly or indirectly, 50% or more of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power), and an associated company of Monsanto Company means any corporation (or partnership, joint venture, or other enterprise), of which Monsanto Company owns or controls, directly or indirectly, 10% or more, but less than 50% of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). V. Shares Subject to the Plan A. Subject to adjustment as provided in Section V.C. the number of Shares with respect to which Awards may be granted under the Plan shall be such number of Shares as results from the application of the formulas set forth in Sections VI and VII. If, after the effective date of the Plan, an Award granted under the Plan expires or is exercised, forfeited, cancelled or terminated without the delivery of Shares, then the Shares covered by such Award or to which such Award relates, or the number of Shares otherwise to which Awards may be granted, to the extent of any such expiration, exercise, forfeiture, cancellation or termination, shall not thereafter be available for grants or Awards under the Plan. Any Shares delivered pursuant to an Award may consist of authorized and unissued Shares, Shares held in the Company's treasury, or Shares acquired in the open market or otherwise obtained by the Company. B. Notwithstanding any other provisions of this Plan, the Committee is authorized to take such action as it determines to be necessary or advisable, and fair and equitable to Participants, with respect to Awards in the event of: a merger of the Company with, consolidation of the Company into, or the acquisition of the Company by, another corporation; a sale or transfer of all or substantially all of the assets of the Company to another corporation or any other person or entity; a separation from the Company, including any spinoff or other distribution to stockholders other than an ordinary cash dividend; a tender or exchange offer for Shares made by any corporation, person or entity (other than the Company); or other reorganization in which the Company will not survive as an independent, publicly owned corporation. Such action may include 6 (but shall not be limited to) establishing, amending or waiving the forms, terms, conditions and duration of Stock Options, Awards of Restricted Shares and other Awards so as to provide for earlier, later, extended or additional times for exercise or payments, differing methods for calculating payments, alternate forms and amounts of payment, accelerated release of restrictions or other modifications. The Committee may take such actions pursuant to this Section V.B. by adopting rules and regulations of general applicability to all Participants or to certain categories of Participants, by including, amending or waiving terms and conditions in Awards (including, without limitation, agreements with respect to Restricted Shares), or by taking action with respect to individual Participants. The Committee may take such actions as part of the Awards, or before or after the public announcement of any such merger, consolidation, acquisition, sale or transfer of assets, separation, tender or exchange offer or other reorganization. C. In the event that at any time or from time to time after the Effective Date a stock dividend, stock split, recapitalization, merger, consolidation, or other change in capitalization, or a sale by the Company of all or part of its assets, or a separation from the Company, including any spinoff or other distribution to stockholders other than an ordinary cash dividend, results in (a) the outstanding Shares, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of shares of stock or other securities of the Company, or for shares of stock or other securities of any other corporation; or (b) new, different or additional shares or other securities of the Company or of any other corporation being received by the holders of outstanding Shares, then, (i) the total number of Shares authorized for Awards under this Plan; (ii) the number and class of Shares (A) that may be subject to Stock Options, (B) which have not been issued or transferred under outstanding Stock Options, and (C) which have been awarded but are undelivered under this Plan; and (iii) the purchase price to be paid per Share under outstanding Stock Options shall in each case be appropriately adjusted by the Committee in its discretion. VI. Stock Options A. As soon as practicable following the Distribution Date, each Eligible Participant shall receive a Company Stock Option in accordance with the following: 1. Each officer or salaried employee of the Company or a Subsidiary or Associated Company on the Distribution Date who holds an outstanding Monsanto Stock Option granted during calendar year 1997 shall receive as replacement for such Monsanto Stock Option a Company Stock Option (i) with respect to a number Shares 7 equal to the number of shares subject to such Monsanto Stock Option immediately before such replacement, times the Company Ratio (and then, if any resultant fractional share of Company Common Stock exists, rounded up to the nearest whole Share), and (ii) with a per-share exercise price equal to the per-share exercise price of such Monsanto Stock Option immediately before such replacement, divided by the Company Ratio (and then, if necessary, rounded down to the nearest whole cent). 2. Each Eligible Participant other than those listed on Schedule I hereto, who holds an outstanding Monsanto Stock Option granted prior to calendar year 1997 shall receive as replacement for such Monsanto Stock Option (in addition to an Adjusted Monsanto Stock Option from Monsanto) a Company Stock Option (i) with respect to a number of Shares equal to one-fifth of the number of shares of Monsanto Common Stock subject to the Monsanto Stock Option (and then, if necessary, rounded up to the nearest whole share), and (ii) with a per- share exercise price equal to the per-share exercise price of such Monsanto Stock Option immediately before such replacement divided by the Company Ratio (and then, if necessary, rounded down to the nearest whole cent). 3. Each officer or salaried employee of the Company or a Subsidiary or Associated Company listed on Schedule I hereto who holds an outstanding Monsanto Stock Option granted prior to calendar year 1997 shall receive as replacement for such Monsanto Stock Option (in addition to an Adjusted Monsanto Stock Option from Monsanto) a Company Stock Option (i) with respect to a number of Shares equal to the number of shares of Monsanto Common Stock subject to such Monsanto Stock Option times the Company Ratio times 0.24 (and then, if any resultant fractional share of Company Common Stock exists, rounded up to the nearest whole share), and (ii) with a per-share exercise price equal to the per-share exercise price of such Monsanto Stock Option immediately before such replacement divided by the Company Ratio (and then, if necessary, rounded down to the nearest whole cent). 4. The terms and conditions of each Company Stock Option issued pursuant to this Section VI shall be the same as those of the Monsanto Stock Option it replaces, except as otherwise specifically provided in this Section VI and except that, (i) with respect to Company Options held by Participants employed by the Company, its Subsidiaries and Associated Companies, references to employment with or Termination of Employment with Monsanto, its subsidiaries, and its associated companies shall be changed to references to employment with or Termination of Employment with the Company, its Subsidiaries, and Associated Companies, and, (ii) in the case of Company Options held by any Participants, other references to Monsanto shall be changed to references to the Company as appropriate. The Company may, in its discretion, adjust any associated performance goals as may be appropriate to reflect the effects of the Distribution. 5. Notwithstanding the foregoing provisions of this Section VI, the number of Shares subject to a Company Stock Option issued to an individual listed on 8 Schedule II hereto shall be rounded to the nearest whole Share (whether up or down) rather than up to the nearest whole Share. VII. Restricted Shares Holders of unvested Monsanto Restricted Stock who are employees of the Company, its Subsidiaries, its Associated Companies, or Monsanto on the Distribution Date shall have issued in their name by operation of law a number of Restricted Shares equal to one-fifth the number of shares of Monsanto Restricted Stock issued and outstanding in their name on the Record Date. The Restricted Shares shall have the same remaining vesting period and other terms and conditions contained in the related Monsanto Restricted Stock agreement and shall vest to the same extent and at the same rate as the shares of Monsanto Restricted Stock from which they were derived, with such changes and modifications as necessary to substitute the Company for Monsanto as the issuer of the Restricted Shares. VIII. Amendments to Plan and Awards The Board may amend, suspend or terminate the Plan or any portion thereof at any time, provided that no amendment shall be made without stockholder approval if such approval is necessary to comply with any tax or regulatory requirement. No amendment to or discontinuance of this Plan or any provision thereof by the Board or the stockholders of the Company shall, without the written consent of the Participant, adversely affect any Stock Option or Restricted Shares theretofore granted to such Participant under this Plan. Notwithstanding anything to the contrary contained herein, the Committee may amend the Plan in such manner, or in its discretion grant such substitute Awards under the Plan, as may be necessary to conform with local rules and regulations in any jurisdiction outside the United States. IX. Miscellaneous A. Nothing contained in the Plan shall prevent the Company from adopting or continuing in effect other compensation arrangements, which may, but need not, provide for the grant of Options, restricted stock, and other types of awards provided for hereunder, and such arrangements may be either generally applicable or applicable only in specific cases. B. The grant of any Award shall not be construed as giving a Participant the right to be engaged or employed by or retained in the employ of the Company or any Subsidiary or Associated Company. C. The validity, construction, and effect of the Plan, and of any rules and regulations relating to the Plan, shall, to the extent not governed by federal law, be determined in accordance with the laws of the State of Delaware. 9 D. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Participant, other person, or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be construed or deemed amended without in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Participant, other person, or Award and the remainder of the Plan and any such Award shall remain in full force and effect. E. Nothing contained herein shall require the Company to segregate any monies from its general funds, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any Participant. F. No shares of Restricted Stock shall be sold, exchanged, transferred, pledged, or otherwise disposed of during the restricted period. No Stock Options granted under this Plan shall be transferable by a Participant otherwise than by will, by the laws of descent and distribution, or pursuant to a written beneficiary designation. If any Participant makes a transfer in violation hereof, any obligation of the Company with respect to such Stock Option shall forthwith terminate. G. It shall be a condition to the obligation of the Company to deliver Shares upon the exercise of a Stock Option or upon the vesting of Restricted Stock that the Participant pay to the Company cash in an amount equal to all federal, state, local and foreign withholding taxes required to be collected in respect thereof. Notwithstanding the foregoing, to the extent permitted by law and pursuant to such rules as the Committee may adopt, a Participant may authorize the Company to satisfy any such withholding requirement by directing the Company to withhold from any shares of Company Common Stock to be issued, or of Restricted Shares to become unforfeitable, all or a portion of such number of shares as shall be sufficient to satisfy the withholding obligation. H. Shares purchased upon exercise of a Stock Option shall be paid for in such amounts, at such times and upon such terms as specified in the grant of the Option or as determined from time to time by the Committee. Without limiting the foregoing, and subject to such rules as the Committee may adopt, the Participant may deliver Shares (or other evidence of ownership of Shares satisfactory to the Company) with a Fair Market Value equal to the exercise price as payment. As amended 4/28/99 EX-10.2 3 1997 STOCK-BASED INCENTIVE PLAN SOLUTIA INC. 1997 STOCK-BASED INCENTIVE PLAN SECTION 1. PURPOSE; DEFINITIONS The purpose of the Plan is to give the Company a competitive advantage in attracting, retaining and motivating officers and employees and to provide the Company and its Subsidiaries and Associated Companies with a stock plan providing incentives directly linked to the profitability of the Company's businesses and increases in shareholder value. For purposes of the Plan, the following terms are defined as set forth below: a. "Associated Company" means any corporation (or partnership, joint venture, or other enterprise), of which the Company owns or controls, directly or indirectly, 10% or more, but less than 50% of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). b. "Award" means a Stock Appreciation Right, Stock Option, Restricted Stock, unrestricted share of Common Stock, dividend equivalent, interest equivalent or other award granted under this Plan. c. "Board" means the Board of Directors of the Company. d. "Change in Control" and "Change in Control Price" have the meanings set forth in Sections 9(b) and (c), respectively. e. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. f. "Commission" means the Securities and Exchange Commission or any successor agency. g. "Committee" means the Executive Compensation and Development Committee referred to in Section 2. h. "Common Stock" means common stock, par value $0.01 per share, of the Company. i. "Company" means Solutia Inc., a Delaware corporation. 1 j. "Compensation Committee" means one or more committees appointed by the Executive Compensation and Development Committee composed of one or more senior managers of the Company or a Subsidiary or Affiliated Company to whom the Executive Compensation and Development Committee may delegate its powers (or a portion thereof) to administer this Plan pursuant to Section 2. k. "Covered Employee" means a participant designated prior to the grant of shares of Restricted Stock by the Committee who is or may be a "covered employee" within the meaning of Section 162(m)(3) of the Code in the year in which Restricted Stock is expected to be taxable to such participant. l. "Disability" means permanent and total disability as determined by the Committee for purposes of the Plan. m. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. n. "Fair Market Value" means, as of any given date, the average of the highest and lowest sales prices of the Common Stock reported as the New York Stock Exchange-Composite Transactions for such day, or if the Common Stock was not traded on the New York Stock Exchange on such day, then on the next preceding day on which the Common Stock was traded, all as reported by The Wall Street Journal under the heading New York Stock Exchange-Composite Transactions or by such other source as the Committee may select. o. "Incentive Stock Option" means any Stock Option designated as, and qualified as, an "incentive stock option" within the meaning of Section 422 of the Code. p. "Non-Employee Director" means a member of the Board who qualifies as a Non-Employee Director as defined in Rule 16b-3(b)(3), as promulgated by the Commission under the Exchange Act, or any successor definition adopted by the Commission. q. "NonQualified Stock Option" means any Stock Option that is not an Incentive Stock Option. r. "Qualified Performance-Based Award" means an Award of Restricted Stock designated as such by the Committee at the time of grant, based upon a determination that (i) the recipient is or may be a "covered employee" within the meaning of Section 162(m)(3) of the Code in the year in which the Company would expect to be able to claim a tax deduction with respect to such 2 Restricted Stock and (ii) the Committee wishes such Award to qualify for the Section 162(m) Exemption. s. "Performance Goals" means the performance goals established by the Committee in connection with the grant of Restricted Stock. In the case of Qualified Performance-Based Awards, (i) such goals shall be based on the attainment of specified levels of one or more of the following measures: earnings per share, sales, net profit after tax, gross profit, operating profit, cash generation, economic value added, unit volume, return on equity, change in working capital, return on capital or shareholder return, and (ii) such Performance Goals shall be set by the Committee within the time period prescribed by Section 162(m) of the Code and related regulations. t. "Plan" means the Solutia Inc. 1997 Stock-Based Incentive Plan, as set forth herein and as hereinafter amended from time to time. u. "Restricted Stock" means an Award granted under Section 7. v. "Retirement" means retirement from employment with the Company, a Subsidiary or an Associated Company as determined by the Committee for purposes of an Award under the Plan. w. "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission under Section 16(b) of the Exchange Act, as amended from time to time. x. "Section 162(m) Exemption" means the exemption from the limitation on deductibility imposed by Section 162(m) of the Code that is set forth in Section 162(m)(4)(C) of the Code. y. "Stock Appreciation Right" means an Award granted under Section 6. z. "Stock Option" means an Award granted under Section 5. aa. "Subsidiary" means: (i) for the purpose of an Incentive Stock Option, any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Incentive Stock Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain; and (ii) for the purposes of a NonQualified Stock Option, a Stock Appreciation Right or Restricted Stock Award, any corporation (or partnership, joint venture, or other 3 enterprise) of which the Company owns or controls, directly or indirectly, 50% or more of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). bb. "Termination of Employment" means the termination of the participant's employment with the Company and any Subsidiary or Associated Company. A participant employed by a Subsidiary or an Associated Company shall also be deemed to incur a Termination of Employment if the Subsidiary or Associated Company ceases to be such a Subsidiary or Associated Company, as the case may be, and the participant does not immediately thereafter become an employee of the Company or another Subsidiary or Associated Company. Temporary absences from employment because of illness, vacation or leave of absence and transfers among the Company and its Subsidiaries, or, if the Committee so determines, among the group consisting of the Company, its Subsidiaries and Associated Companies, shall not be considered Terminations of Employment. In addition, certain other terms used herein have definitions given to them in the first place in which they are used. SECTION 2. ADMINISTRATION The Plan shall be administered by the Executive Compensation and Development Committee or such other committee of the Board as the Board may from time to time designate (the "Committee"), which shall be composed of not less than two Non-Employee Directors, each of whom shall be an "outside director" for purposes of Section 162(m)(4) of the Code, and shall be appointed by and serve at the pleasure of the Board. The Committee shall have plenary authority to grant Awards pursuant to the terms of the Plan or, in the Committee's discretion, in connection with awards under other bonus plans or programs of the Company, to officers and employees of the Company and its Subsidiaries and Associated Companies. Among other things, the Committee shall have the authority, subject to the terms of the Plan: (a) To select the officers and employees to whom Awards may from time to time be granted; (b) To determine whether and to what extent Incentive Stock Options, NonQualified Stock Options, Stock Appreciation 4 Rights and Restricted Stock, or any combination thereof, are to be granted hereunder; (c) To determine the number of shares of Common Stock to be covered by each Award granted hereunder; (d) To determine the terms and conditions of any Award granted hereunder (including, but not limited to, the option price (subject to Section 5(a)) or base price, as applicable, any vesting condition, restriction or limitation (which may be related to the performance of the participant, the Company or any Subsidiary or Associated Company) and any vesting acceleration or forfeiture waiver regarding any Award and the shares of Common Stock relating thereto, based on such factors as the Committee shall determine; (e) To modify, amend or adjust the terms and conditions of any Award, at any time or from time to time, including but not limited to Performance Goals; provided, however, that the Committee may not adjust upwards the amount payable with respect to a Qualified Performance-Based Award or waive or alter the Performance Goals associated therewith; (f) To determine under what circumstances an Award may be settled in cash or Common Stock under Sections 5(g) and 6(d)(ii); and (g) To determine under what circumstances dividends, dividend equivalents or interest equivalents with respect to an Award shall be paid. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall from time to time deem advisable, to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any award certificate relating thereto) and to otherwise supervise the administration of the Plan. The Committee may act only by a majority of its members then in office, except that the members thereof may delegate all or a portion of the administration of the Plan to one or more Compensation Committees and authorize further delegation by the Compensation Committees to senior managers of the Company or its Subsidiaries (provided that no such delegation may be made that would cause Awards or other transactions under the Plan to cease to be exempt from Section 16(b) of the Exchange Act or not to 5 qualify for, or cease to qualify for, the Section 162(m) Exemption). Any determination made by the Committee or pursuant to delegated authority pursuant to the provisions of the Plan with respect to any Award shall be made in the sole discretion of the Committee or such delegate at the time of the grant of the Award or, unless in contravention of any express term of the Plan, at any time thereafter. All decisions made by the Committee or any appropriate delegate pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. Any authority granted to the Committee may also be exercised by the full Board, except to the extent that the grant or exercise of such authority would cause any Award or transaction to become subject to (or lose an exemption under) the short-swing profit recovery provisions of Section 16 of the Exchange Act or cause an award designated as a Qualified Performance-Based Award not to qualify for, or to cease to qualify for, the Section 162(m) Exemption. To the extent that any permitted action taken by the Board conflicts with action taken by the Committee, the Board action shall control. SECTION 3. COMMON STOCK SUBJECT TO PLAN The total number of shares of Common Stock reserved and available for grant under the Plan shall not exceed 7,800,000. No participant may be granted Awards covering in excess of 500,000 shares of Common Stock in any calendar year. Shares subject to an Award under the Plan may be authorized and unissued shares or may be treasury shares, or both. If any shares of Restricted Stock are forfeited, or if any Stock Option or Stock Appreciation Right terminates without being exercised, or if any Stock Appreciation Right (whether granted alone or in conjunction with a Stock Option) is exercised for cash, shares subject to such Awards shall again be available for distribution in connection with Awards under the Plan. 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 6 Code) or any partial or complete liquidation of the Company, the Committee or Board may make such substitution or adjustments in the aggregate number and kind of shares reserved for issuance under the Plan, in the maximum number of shares with respect to which any participant may be granted Awards in any calendar year, in the number, kind and option price or base price, as applicable, of shares subject to outstanding Stock Options and Stock Appreciation Rights, in the number and kind of shares subject to other outstanding Awards granted under the Plan and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion; provided, however, that the number of shares subject to any Award shall always be a whole number. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. SECTION 4. ELIGIBILITY Officers and employees of the Company, a Subsidiary or an Associated Company who are responsible for or contribute to the growth and profitability of the business of the Company, a Subsidiary or an Associated Company are eligible to be granted Awards under the Plan. SECTION 5. STOCK OPTIONS Stock Options may be granted alone or in addition to other Awards granted under the Plan and may be of two types: Incentive Stock Options and NonQualified Stock Options. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Committee shall have the authority to grant any optionee Incentive Stock Options, NonQualified Stock Options or both types of Stock Options (in each case with or without Stock Appreciation Rights); provided, however, that grants hereunder are subject to the aggregate limit on grants to individual participants set forth in Section 3. Incentive Stock Options may be granted only to employees of the Company and its subsidiaries (within the meaning of Section 424(f) of the Code). To the extent that any Stock Option is not designated as an Incentive Stock Option or, even if so designated, does not qualify as an Incentive Stock Option, it shall constitute a NonQualified Stock Option. Stock Options shall be evidenced by option award certificates, the terms and provisions of which may differ. An option 7 award certificate shall indicate on its face whether it is intended to be an award certificate for an Incentive Stock Option or a NonQualified Stock Option. The grant of a Stock Option shall occur on the date the Committee by resolution selects an individual to be a participant in any grant of a Stock Option, determines the number of shares of Common Stock to be subject to such Stock Option to be granted to such individual and specifies the terms and provisions of the Stock Option, or on such later date as is specified by the Committee Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered nor shall any discretion or authority granted under the Plan be exercised so as to disqualify the Plan under Section 422 of the Code or, without the consent of the optionee affected, to disqualify any Incentive Stock Option under such Section 422. Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions as the Committee shall deem desirable: (a) Option Price. The option price per share of Common Stock purchasable under a Stock Option shall be determined by the Committee and set forth in the option award certificate, and shall not be less than the Fair Market Value of the Common Stock subject to the Stock Option on the date of grant. The option price per share shall not be decreased thereafter except pursuant to Section 3 of this Plan. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than 10 years after the date the Stock Option is granted. (c) Exercisability. Except as otherwise provided herein, Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee. If the Committee provides that any Stock Option is exercisable only in installments, the Committee may at any time waive such installment exercise provisions, in whole or in part, based on such factors as the Committee may determine. In addition, the Committee may at any time accelerate the exercisability of any Stock Option. (d) Method of Exercise. Subject to the provisions of this Section 5, Stock Options may be exercised, in whole or in 8 part, at any time during the option term by giving written notice of exercise, or notice in accordance with such other procedures as may be established from time to time, to the Company or its designated agent specifying the number of shares of Common Stock subject to the Stock Option to be purchased. Such notice shall be accompanied by payment in full of the purchase price in cash or by certified or cashier's check or such other instrument as the Company may accept. If approved by the Committee, payment, in full or in part, may also be made in the form of unrestricted Common Stock already owned by the optionee of the same class as the Common Stock subject to the Stock Option (based on the Fair Market Value of the Common Stock on the date the Stock Option is exercised); provided, however, that, in the case of an Incentive Stock Option, the right to make a payment in the form of already owned shares of Common Stock of the same class as the Common Stock subject to the Stock Option may be authorized only at the time the Stock Option is granted and provided, further, that, in the case of either an Incentive Stock Option or a NonQualified Stock Option, such already owned shares have been held by the optionee for at least six months at the time of exercise. In the discretion of the Committee, payment for any shares subject to a Stock Option may also be made by delivering a properly executed exercise notice to the Company, together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds necessary to pay the purchase price, and, if requested, by the amount of any federal, state, local or foreign withholding taxes. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. In addition, in the discretion of the Committee, payment for any shares subject to a Stock Option may also be made by instructing the Company or its designated agent to withhold a number of such shares having a Fair Market Value on the date of exercise equal to the aggregate exercise price of such Stock Option. No shares of Common Stock shall be issued until full payment therefor has been made. An optionee shall have all of the rights of a shareholder of the Company holding the class or series of Common Stock that is subject to such Stock Option (including, if applicable, the right to vote the shares and the right to receive dividends), when the optionee has given written notice of exer- 9 cise, has paid in full for such shares and, if requested, has given the representation described in Section 12(a). (e) Nontransferability of Stock Options. No Stock Option shall be transferable by the optionee other than by will or by the laws of descent and distribution, or, in the Committee's discretion, pursuant to a written beneficiary designation. All Stock Options shall be exercisable, subject to the terms of this Plan, only by the optionee or guardian or legal representative or beneficiary of the optionee, it being understood that the terms "holder" and "optionee" include any such guardian, legal representative or beneficiary. (f) Termination of Employment. The Stock Option and its related Stock Appreciation Right, if any, may be exercised in full or in part from time to time within ten years from the date of the grant, or such shorter period as may be specified by the Committee in the award certificate, provided that in any event each shall lapse and cease to be exercisable upon, or within such period following, Termination of Employment as shall have been determined by the Committee and as specified in the Stock Option or Stock Appreciation Right award certificate; provided, however, that such period following Termination of Employment shall not exceed twelve months unless employment shall have terminated: (i) as a result of Retirement or Disability, in which event such period shall not exceed -- (A) in the case of a Stock Option, the original term of the Stock Option; and (B) in the case of a Stock Appreciation Right, one year after such Retirement or Disability or after resignation as an officer or employee of the Company, whichever shall last occur; or (ii) as a result of death, or death shall have occurred following Termination of Employment and while the Stock Option or Stock Appreciation Right was still exercisable, in which event such period shall not exceed the original term of the Stock Option; and provided, further, that such period following Termination of Employment shall in no event exceed the original exercise period of the Stock Option or related Stock Appreciation Right, if any. 10 (g) Cashing Out of Stock Option. On receipt of written notice of exercise, the Committee may elect to cash out all or part of the portion of the shares of Common Stock for which a Stock Option is being exercised by paying the optionee an amount, in cash or Common Stock, equal to the excess of the Fair Market Value of the Common Stock over the option price times the number of shares of Common Stock for which the Option is being exercised on the effective date of such cash-out. (h) Change in Control Cash-Out. Notwithstanding any other provision of the Plan, during the 60-day period from and after a Change in Control (the "Exercise Period"), unless the Committee shall determine otherwise at the time of grant, an optionee shall have the right, whether or not the Stock Option is fully exercis- able and in lieu of the payment of the exercise price for the shares of Common Stock being purchased under the Stock Option and by giving notice to the Company, to elect (within the Exercise Period) to surrender all or part of the Stock Option to the Company and to receive cash, within 30 days of such notice, in an amount equal to the amount by which the Change in Control Price per share of Common Stock on the date of such election shall exceed the exercise price per share of Common Stock under the Stock Option (the "Spread") multiplied by the number of shares of Common Stock granted under the Stock Option as to which the right granted under this Section 5(k) shall have been exercised. Notwithstanding the foregoing, if any right granted pursuant to this Section 5(k) would make a Change in Control transaction ineligible for pooling-of-interests accounting under APB No. 16 that but for the nature of such grant would otherwise be eligible for such accounting treatment, the Committee shall have the ability to substitute for the cash payable pursuant to such right Common Stock with a Fair Market Value equal to the cash that would otherwise be payable hereunder. SECTION 6. STOCK APPRECIATION RIGHT (a) Grant and Exercise. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a NonQualified Stock Option, such rights may be granted either at or after the time of grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of grant of such Stock Option. In addition, Stock Appreciation Rights may be granted without relationship to a 11 Stock Option to employees residing in foreign jurisdictions, where the grant of a Stock Option is impossible or impracticable because of securities or tax laws or other governmental regulations. (b) Freestanding Stock Appreciation Rights. A Stock Appreciation Right granted without relationship to a Stock Option, pursuant to Section 6(a), shall be exercisable as determined by the Committee, but in no event after ten years from the date of grant. The base price of a Stock Appreciation Right granted without relationship to a Stock Option shall be the Fair Market Value of a share of Common Stock on the date of grant. A Stock Appreciation Right granted without relationship to a Stock Option shall entitle the holder, upon receipt of such right, to a cash payment determined by multiplying (i) the difference between the base price of the Stock Appreciation Right and the Fair Market Value of a share of Common Stock on the date of exercise of the Stock Appreciation Right, by (ii) the number of shares of Common Stock as to which Stock Appreciation Right shall have been exercised. A freestanding Stock Appreciation Right may be exercised by giving written notice of exercise to the Company or its designated agent specifying the number of shares of Common Stock as to which such Stock Appreciation Right is being exercised. (c) Tandem Stock Appreciation Rights. A Stock Appreciation Right granted in conjunction with a Stock Option may be exercised by an optionee in accordance with Section 6(d) by surrendering the applicable portion of the related Stock Option in accordance with procedures established by the Committee. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in Section 6(d). Stock Options which have been so surrendered shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. A Stock Appreciation Right shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option. (d) Terms and Conditions. Stock Appreciation Rights granted in conjunction with a Stock Option shall be subject to such terms and conditions as shall be determined by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Op- 12 tions to which they relate are exercisable in accordance with the provisions of Section 5 and this Section 6. (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive an amount in cash, equal to the excess of the Fair Market Value of one share of Common Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised. (iii) Stock Appreciation Rights shall be transferable only to permitted transferees of the underlying Stock Option in accordance with Section 5(e). (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 on the number of shares of Common Stock to be issued under the Plan, but only to the extent of the number of shares covered by the Stock Appreciation Right at the time of exercise based on the value of the Stock Appreciation Right at such time. SECTION 7. BONUS SHARES AND RESTRICTED STOCK (a) Administration. Awards of shares of Common Stock or Restricted Stock may be made either alone or in addition to other Awards granted under the Plan. In addition, a participant may receive unrestricted shares of Common Stock or Restricted Stock in lieu of certain cash payments awarded under other plans or programs of the Company. The Committee shall determine the officers and employees to whom and the time or times at which grants of unrestricted shares of Common Stock and Restricted Stock will be awarded, the number of shares to be awarded to any participant (subject to the aggregate limit on grants to individual participants set forth in Section 3 in the case of Qualified Performance-Based Awards), the conditions for vesting, the time or times within which such Awards may be subject to forfeiture and any other terms and conditions of the Awards, in addition to those contained in Section 7(c). (b) Awards and Certificates. Awards of unrestricted shares of Common Stock and Restricted Stock shall be evidenced in such manner as the Committee may deem appropriate, includ- 13 ing, book-entry registration or delivery of one or more stock certificates to the participant, or, in the case of Restricted Stock, a custodian or escrow agent. Any stock certificate issued in respect of unrestricted shares or shares of Restricted Stock shall be registered in the name of such participant. The Committee may require that the stock certificates evidencing shares of Restricted Stock be held in custody or escrow by the Company or its designated agent until the restrictions thereon shall have lapsed and that, as a condition of any Award of Restricted Stock, the participant shall have delivered a stock power, endorsed in blank, relating to the Common Stock covered by such Award. (c) Terms and Conditions. Shares of Restricted Stock shall be subject to the following terms and conditions: (i) The Committee may, prior to or at the time of grant, designate an Award of Restricted Stock as a Qualified Performance- Based Award, in which event it shall condition the grant or vesting, as applicable, of such Restricted Stock upon the attainment of Performance Goals. If the Committee does not designate an Award of Restricted Stock as a Qualified Performance- Based Award, it may also condition the grant or vesting thereof upon the attainment of Performance Goals. Regardless of whether an Award of Restricted Stock is a Qualified Performance-Based Award, the Committee may also condition the grant or vesting thereof upon the continued service of the participant. The conditions for grant or vesting and the other provisions of Restricted Stock Awards (including without limitation any applicable Performance Goals) need not be the same with respect to each recipient. The Committee may at any time, in its sole discretion, accelerate or waive, in whole or in part, any of the foregoing restrictions; provided, however, that in the case of Restricted Stock that is a Qualified Performance-Based Award, the applicable Performance Goals have been satisfied. (ii) Subject to the provisions of the Plan and the terms of the Restricted Stock Award, during the period, if any, set by the Committee, commencing with the date of such Award for which such participant's continued service is required (the "Restriction Period"), and until the later of (A) the expiration of the Restriction Period and (B) the date the applicable Performance Goals (if any) are satisfied, the participant shall not be permit- ted to sell, assign, transfer, pledge or otherwise encumber shares of Restricted Stock; provided that the foregoing shall not prevent a par- 14 ticipant from pledging Restricted Stock as security for a loan, the sole purpose of which is to provide funds to pay the option price for Stock Options. (iii) Except as provided in this paragraph (iii) and Sections 7(c)(i) and 7(c)(ii) and the terms of the Restricted Stock Award, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Company holding the class or series of Common Stock that is the subject of the Restricted Stock, including, if applicable, the right to vote the shares and the right to receive any cash dividends. If so determined by the Committee under the applicable terms of the Restricted Stock Award and subject to Section 12(e) of the Plan, (A) cash dividends on the class or series of Common Stock that is the subject of the Restricted Stock Award shall be automatically deferred and reinvested in additional Restricted Stock, held subject to the vesting of the underlying Restricted Stock, or held subject to meeting Performance Goals applicable only to dividends, and (B) dividends payable in Common Stock shall be paid in the form of Restricted Stock of the same class as the Common Stock with which such dividend was paid, held subject to the vesting of the underlying Restricted Stock, or held subject to meeting Performance Goals applicable only to dividends. (iv) Except to the extent otherwise provided under the applicable terms of the Restricted Stock Award and Sections 7(c)(i), 7(c)(ii), 7(c)(v) and 9(a)(ii), upon a participant's Termination of Employment for any reason during the Restriction Period or before the applicable Performance Goals are satisfied, all shares still subject to restriction shall be forfeited by the participant. (v) Except to the extent otherwise provided in Section 9(a)(ii), in the event of a participant's Termination of Employment by reason of Retirement, the Committee shall have the discretion to waive, in whole or in part, any or all remaining restrictions (other than, in the case of Restricted Stock with respect to which a participant is a Covered Employee, satisfaction of the applicable Performance Goals unless the participant's employment is terminated by reason of death or Disability) with respect to any or all of such participant's shares of Restricted Stock. (vi) If and when any applicable Performance Goals are satisfied and the Restriction Period expires without a prior 15 forfeiture of the Restricted Stock, unlegended certificates for such shares shall be delivered to the participant upon surrender of the legended certificates, or the restrictions on such shares shall be removed from the book-entry registration. SECTION 8. DIVIDEND EQUIVALENTS AND INTEREST EQUIVALENTS (a) The Committee may provide that a participant to whom a Stock Option has been awarded, which is exercisable in whole or in part at a future time for shares of Common Stock (such shares, the "Option Shares") shall be entitled to receive an amount per Option Share, equal in value to the cash dividends, if any, paid per share of Common Stock on issued and outstanding shares, as of the dividend record dates occurring during the period between the date of the Award and the time each such Option Share is delivered pursuant to the exercise of such Stock Option. Such amounts (herein called "dividend equivalents") may, in the discretion of the Committee, be: (i) paid in cash or shares of Common Stock from time to time prior to or at the time of the delivery of such shares of Common Stock or upon expiration of the Stock Option if it shall not have been fully exercised (except that payment of the dividend equivalents on an Incentive Stock Option may not be made prior to exercise); or (ii) converted into contingently credited shares of Common Stock (with respect to which dividend equivalents shall accrue) in such manner, at such value, and deliverable at such time or times, as may be determined by the Committee. Such shares of Common Stock (whether delivered or contingently credited) shall be charged against the limitations set forth in Section 3. (b) The Committee, in its discretion, may authorize payment of interest equivalents on any portion of any Award payable at a future time in cash, and interest equivalents on dividend equivalents which are payable in cash at a future time. SECTION 9. CHANGE IN CONTROL PROVISIONS (a) Impact of Event. Notwithstanding any other provision of the Plan to the contrary, in the event of a Change in Control: 16 (i) Any Stock Options and Stock Appreciation Rights outstanding as of the date such Change in Control is determined to have occurred, and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant. (ii) The restrictions and deferral limitations applicable to any Restricted Stock shall lapse, and such Restricted Stock shall become free of all restrictions and become fully vested and transferable to the full extent of the original grant. (b) Definition of Change in Control. For purposes of the Plan, a "Change in Control" shall mean the happening of any of the following events: (i) The acquisition by any individual, entity or group (with the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (1) any acquisition directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (4) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 9; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption 17 of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets or stock of another corporation (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the 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, (B) no Person (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 (C) 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 (iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 18 (c) Change in Control Price. For purposes of the Plan, "Change in Control Price" means the higher of (i) the highest reported sales price, regular way, of a share of Common Stock in any transaction reported on the New York Stock Exchange Composite Tape or other national exchange on which such shares are listed or on NASDAQ during the 60-day period prior to and including the date of a Change in Control or (ii) if the Change in Control is the result of a tender or exchange offer or a Corporate Transaction, the highest price per share of Common Stock paid in such tender or exchange offer or Corporate Transaction; provided, however, that in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, the Change in Control Price shall be in all cases the Fair Market Value of the Common Stock on the date such Incentive Stock Option or Stock Appreciation Right is exercised. To the extent that the consideration paid in any such transaction described above consists all or in part of securities or other noncash consideration, the value of such securities or other noncash consideration shall be determined in the sole discretion of the Board. SECTION 10. AMENDMENT AND TERMINATION The Board may amend, alter, or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which would impair the rights of an optionee under any Award theretofore granted without the optionee's or recipient's consent, except such an amendment made to cause the Plan to qualify for any exemption provided by Rule 16b-3. In addition, no such amendment shall be made without the approval of the Company's shareholders to the extent such approval is required by law or agreement. The Committee may amend the terms of any Stock Option or other Award theretofore granted, prospectively or retroactively, but no such amendment shall cause a Qualified Performance-Based Award to cease to qualify for the Section 162(m) Exemption or impair the rights of any holder without the holder's consent except such an amendment made to cause the Plan or Award to qualify for any exemption provided by Rule 16b-3. Subject to the above provisions, the Board shall have authority to amend the Plan to take into account changes in law and tax and accounting rules as well as other developments, and to grant Awards which qualify for beneficial treatment under such rules without stockholder approval. 19 SECTION 11. UNFUNDED STATUS OF PLAN It is presently intended that the Plan constitute an "unfunded" plan for incentive and deferred compensation. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Common Stock or make payments; provided, however, that unless the Committee otherwise determines, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. SECTION 12. GENERAL PROVISIONS (a) The Committee may require each person purchasing or receiving shares pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to the distribution thereof. The certifi- cates for such shares may include any legend, or, in the case of book-entry registration any notation, which the Committee deems appropriate to reflect any restrictions on transfer. Notwithstanding any other provision of the Plan or certificates made pursuant thereto, the Company shall not be required to issue or deliver any stock certificate or certificates for shares of Common Stock, or account for such shares by book-entry registration, under the Plan prior to fulfillment of all of the following conditions: (1) Listing or approval for listing upon notice of issuance, of such shares on the New York Stock Exchange, Inc., or such other securities exchange as may at the time be the principal market for the Common Stock; (2) Any registration or other qualification of such shares of the Company under any state, federal or foreign law or regulation, or the maintaining in effect of any such regis- tration or other qualification which the Committee shall, in its absolute discretion upon the advice of counsel, deem necessary or advisable; and (3) Obtaining any other consent, approval, or permit from any state or federal governmental agency or foreign governmental body which the Committee shall, in its absolute discretion after receiving the ad- 20 vice of counsel, determine to be necessary or advisable. (b) Nothing contained in the Plan shall prevent the Company or any Subsidiary or Associated Company from adopting other or additional compensation arrangements for its employees. (c) Adoption of the Plan shall not confer upon any employee any right to continued employment, nor shall it interfere in any way with the right of the Company or a Subsidiary or an Associated Company to terminate the employment of any employee at any time. (d) No later than the date as of which an amount first becomes includible in the gross income of the participant for federal income tax purposes with respect to any Award under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Company, withholding obligations may be settled with Common Stock, including Common Stock that is part of the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and its Subsidiaries or Associated Companies shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the participant. The Committee may establish such procedures as it deems appropriate, including making irrevocable elections, for the settlement of withholding obligations with Common Stock. (e) Reinvestment of dividends in additional Restricted Stock at the time of any dividend payment shall only be permissible if sufficient shares of Common Stock are available under Section 3 for such reinvestment (taking into account then outstanding Stock Options and other Awards). (f) The Committee, in its sole discretion, may establish such procedures as it deems appropriate for a participant to designate a beneficiary to whom any amounts payable in the event of the participant's death are to be paid or by whom any rights of the participant, after the participant's death, may be exercised. (g) In the case of a grant of an Award to any employee of a Subsidiary or Affiliated Company, the Company may, if the 21 Committee so directs, issue or transfer the shares of Common Stock, if any, covered by the Award to the Subsidiary or Affiliated Company, for such lawful consideration as the Committee may specify, upon the condition or understanding that the Subsidiary or Affiliated Company will transfer the shares of Common Stock to the employee in accordance with the terms of the Award specified by the Committee pursuant to the provisions of the Plan. (h) The Plan and all Awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. SECTION 13. EFFECTIVE DATE OF PLAN The Plan shall be effective as of September 1, 1997. SECTION 14. Notwithstanding any other provision of the Plan, the Committee shall have authority to determine for purposes of any Award that (a) is outstanding as of the date that the Company sells any business, or its interest in any business, to Monsanto Company and (b) is held by a participant who in connection with such sale becomes an employee of Monsanto Company (or a subsidiary or associated company of Monsanto Company) rather than an employee of the Company (or a Subsidiary or Associated Company of the Company), such change of employment shall not constitute a Termination of Employment. With respect to any such Award held by any such participant, Termination of Employment shall mean the termination of the participant's employment with Monsanto Company, a subsidiary of Monsanto Company, or an associated company of Monsanto Company other than as the result of a transfer among such companies. A participant employed by a subsidiary or an associated company of Monsanto Company shall also be deemed to incur a Termination of Employment if the subsidiary or associated company ceases to be such a subsidiary or associated company of Monsanto Company, as the case may be, and the participant does not immediately thereafter become an employee of Monsanto Company or another subsidiary or associated company of Monsanto Company. For purposes of this Section 14, a subsidiary of Monsanto Company means any corporation (or partnership, joint venture, or other enterprise) of which Monsanto Company owns or controls, directly or indirectly, 50% or more of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power), and an associ- 22 ated company of Monsanto Company means any corporation (or partnership, joint venture, or other enterprise), of which Monsanto Company owns or controls, directly or indirectly, 10% or more, but less than 50% of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). As amended 4/28/99 23 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 six months ended June 30, 1999, and the Statement of Consolidated Financial Position as of June 30, 1999. Such information is qualified in its entirety by reference to such combined financial statements. 1,000,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 15 0 443 7 368 1,050 3,426 2,390 3,024 927 597 1 0 0 19 3,024 1,363 1,363 1,065 1,065 0 0 (19) 139 45 94 0 0 0 94 0.84 0.81
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