<PAGE>
<PAGE>
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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 SEPTEMBER 30, 1998
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 SEPTEMBER 30, 1998
----- ------------------
COMMON STOCK, $0.01 PAR VALUE 114,610,654 SHARES
----------------------------- ------------------
===============================================================================
<PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SOLUTIA INC.
STATEMENT OF CONSOLIDATED INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
NET SALES................................................................ $ 703 $ 749 $2,168 $2,238
Cost of Goods Sold....................................................... 515 576 1,587 1,700
----- ----- ------ ------
GROSS PROFIT............................................................. 188 173 581 538
Marketing Expenses....................................................... 35 32 109 103
Administrative Expenses.................................................. 36 30 101 93
Technological Expenses................................................... 22 23 62 62
----- ----- ------ ------
OPERATING INCOME......................................................... 95 88 309 280
Equity Earnings from Affiliates.......................................... 5 8 17 25
Interest Expense......................................................... (11) (10) (34) (31)
Other Income (Expense)--Net.............................................. (1) 4 2 9
----- ----- ------ ------
INCOME BEFORE INCOME TAXES............................................... 88 90 294 283
Income Taxes............................................................. 30 34 100 100
----- ----- ------ ------
NET INCOME............................................................... $ 58 $ 56 $ 194 $ 183
===== ===== ====== ======
BASIC EARNINGS PER SHARE................................................. $0.50 $0.47 $ 1.67 $ 1.55
===== ===== ====== ======
DILUTED EARNINGS PER SHARE............................................... $0.47 $0.46 $ 1.56 $ 1.49
===== ===== ====== ======
Weighted Average Equivalent Shares (in millions):
Basic.................................................................. 115.6 118.4 116.3 118.4
Effect of Dilutive Securities:
Common share equivalents--common stock issuable
upon exercise of outstanding stock options......................... 7.4 4.6 7.7 4.3
----- ----- ----- -----
Diluted................................................................ 123.0 123.0 124.0 122.7
===== ===== ===== =====
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
1
<PAGE>
<PAGE>
<TABLE>
SOLUTIA INC.
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(DOLLARS IN MILLIONS)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 63 $ 24
Trade receivables, net of allowance of $6 in 1998 and 1997......................... 424 425
Miscellaneous receivables and prepaid expenses..................................... 126 136
Deferred income tax benefit........................................................ 87 91
Inventories........................................................................ 355 325
------ ------
TOTAL CURRENT ASSETS............................................................... 1,055 1,001
PROPERTY, PLANT AND EQUIPMENT:
Land............................................................................... 17 17
Buildings.......................................................................... 371 357
Machinery and equipment............................................................ 2,763 2,707
Construction in progress........................................................... 116 107
------ ------
Total property, plant and equipment................................................ 3,267 3,188
Less accumulated depreciation...................................................... 2,359 2,265
------ ------
NET PROPERTY, PLANT AND EQUIPMENT.................................................. 908 923
INVESTMENT IN AFFILIATES........................................................... 400 423
LONG-TERM DEFERRED INCOME TAX BENEFIT.............................................. 292 300
OTHER ASSETS....................................................................... 137 121
------ ------
TOTAL ASSETS....................................................................... $2,792 $2,768
====== ======
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable................................................................... $ 281 $ 221
Wages and benefits................................................................. 98 106
Restructuring reserves............................................................. 22 40
Miscellaneous accruals............................................................. 400 335
Short-term debt.................................................................... -- 193
------ ------
TOTAL CURRENT LIABILITIES.......................................................... 801 895
LONG-TERM DEBT..................................................................... 597 597
POSTRETIREMENT LIABILITIES......................................................... 967 958
OTHER LIABILITIES.................................................................. 442 449
STOCKHOLDERS' DEFICIT:
Common stock (authorized, 600,000,000 shares, par value $0.01)
Issued: 118,400,635 shares in 1998 and 1997...................................... 1 1
Additional contributed capital................................................... (128) (119)
Treasury stock, at cost (3,789,981 shares in 1998 and 992,828 shares in 1997).... (102) (22)
Unearned ESOP shares............................................................... (27) (31)
Accumulated other comprehensive income............................................. 23 12
Reinvested earnings................................................................ 218 28
------ ------
STOCKHOLDERS' DEFICIT.............................................................. (15) (131)
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT........................................ $2,792 $2,768
====== ======
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
2
<PAGE>
<PAGE>
<TABLE>
SOLUTIA INC.
STATEMENT OF CONSOLIDATED CASH FLOW
(DOLLARS IN MILLIONS)
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------
1998 1997
------ ------
<S> <C> <C>
INCREASE IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income........................................................................................ $ 194 $ 183
Adjustments to reconcile to Cash From Operations:
Items that did not use (provide) cash:
Deferred income taxes..................................................................... 11 36
Depreciation and amortization............................................................. 103 105
Other..................................................................................... 24 (30)
Working capital changes that provided (used) cash:
Accounts receivable....................................................................... 1 (56)
Inventories............................................................................... (30) (24)
Accounts payable and accrued liabilities.................................................. 88 (111)
Other..................................................................................... 19 (100)
Other items................................................................................... (11) (19)
----- -----
CASH FROM OPERATIONS.............................................................................. 399 (16)
----- -----
INVESTING ACTIVITIES:
Property, plant and equipment purchases........................................................... (84) (126)
Acquisition and investment payments............................................................... (1) (2)
Investment and property disposal proceeds......................................................... 8 --
----- -----
CASH FROM INVESTING ACTIVITIES.................................................................... (77) (128)
----- -----
FINANCING ACTIVITIES:
Net transactions with Monsanto Company............................................................ -- 292
Net repayment of debt obligations................................................................. (190) (56)
Treasury stock purchases.......................................................................... (113) --
Dividend payments................................................................................. (4) --
Common stock issued under employee stock plans.................................................... 24 --
----- -----
CASH FROM FINANCING ACTIVITIES.................................................................... (283) 236
----- -----
INCREASE IN CASH AND CASH EQUIVALENTS............................................................. 39 92
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR................................................................................. 24 --
----- -----
END OF PERIOD..................................................................................... $ 63 $ 92
===== =====
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE>
<PAGE>
SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
1. BASIS OF PRESENTATION
Solutia Inc. (the "company" or "Solutia") is an international producer
and marketer of a range of high performance chemical-based materials which are
used by its customers to make consumer, household, automotive and industrial
products. Prior to September 1, 1997, the businesses that form the company were
wholly owned by Monsanto Company ("Monsanto"). On September 1, 1997, Monsanto
distributed all of the outstanding shares of common stock of the company as a
dividend to Monsanto stockholders (the "Spinoff"). The distribution resulted
in the issuance of one share of the company's common stock for every five
shares of Monsanto common stock held of record as of August 20, 1997. As a
result of the Spinoff, Solutia became an independent publicly held company
listed on the New York Stock Exchange and its operations ceased to be owned by
Monsanto. Monsanto and Solutia entered into a number of agreements with respect
to the separation of the companies and to provide mechanisms for an orderly
transition following the Spinoff.
Financial data included in the accompanying unaudited financial statements,
for periods prior to the Spinoff, were prepared on a basis which reflected an
estimate of what the historical assets, liabilities and operations would have
been if Solutia had been organized as a separate legal entity, owning certain
net assets of Monsanto. Financial data included in the accompanying unaudited
financial statements, for periods subsequent to the Spinoff, have been prepared
on a basis which reflects the historical assets, liabilities, and operations of
the businesses contributed to Solutia by Monsanto.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto set forth in Solutia's 1997 Annual
Report to stockholders and incorporated by reference in the company's annual
report on Form 10-K, filed with the Securities and Exchange Commission on March
13, 1998. As indicated in the notes to the audited financial statements
included in the company's 1997 Annual Report, Monsanto provided certain general
and administrative services to Solutia prior to the Spinoff. The cost for these
services was allocated to Solutia based upon the net capital employed in
Solutia's operations, as well as other methods which management believed to be
reasonable. In preparation for the Spinoff, Monsanto began a transition plan of
separation. As part of this plan, Monsanto discontinued its allocation of
corporate expenses for these general and administrative services on April 1,
1997 as these expenses were specifically identified and segregated as part of
Solutia's ongoing cost infrastructure.
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 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 nine-month periods ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the full year.
2. INVENTORIES
The components of inventories as of September 30, 1998 and December 31,
1997 were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Finished goods....................................... $ 275 $ 259
Goods in process..................................... 79 60
Raw materials and supplies........................... 127 148
----- -----
Inventories, at FIFO cost............................ 481 467
Excess of FIFO over LIFO cost........................ (126) (142)
----- -----
TOTAL................................................ $ 355 $ 325
===== =====
</TABLE>
4
<PAGE>
<PAGE>
3. INTERCOMPANY TRANSACTIONS
Included in the Statement of Consolidated Income for the three months and
nine months ended September 30, 1997 were sales to Monsanto of $9 million and
$42 million, respectively, and allocated interest expense of $5 million and $26
million, respectively. Sales were made at Monsanto's established transfer
prices. Interest expense charged to Solutia in 1997 represents an allocation
from Monsanto of its total interest expense. As discussed in Note 1, Monsanto
discontinued its allocation of the cost of general and administrative expenses
to Solutia, effective April 1, 1997, as part of its transition plan of
separation. Such expenses were specifically identified and segregated as part
of Solutia's on-going cost infrastructure. Allocated costs from Monsanto for
general and administrative services were $12 million for the nine months ended
September 30, 1997.
4. CONTINGENCIES
Monsanto is a party to a number of lawsuits and claims relating to Solutia,
for which Solutia has assumed responsibility in the Spinoff. In addition,
Solutia is also a named party in 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. EARNINGS PER SHARE
Effective December 31, 1997, Solutia adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." Under this new
standard, the presentation of primary and fully diluted earnings per share
required by the previous standards was replaced by basic and diluted earnings
per share. Basic earnings per share measures operating performance assuming no
dilution from securities or contracts to issue common stock. Diluted earnings
per share measures operating performance giving effect to the dilution that
would occur when securities or contracts to issue common stock are exercised or
converted.
For periods ended prior to the Spinoff, the number of weighted average
shares outstanding and common share equivalents used in the earnings per share
calculation was based upon the weighted average number of Monsanto shares
outstanding and Monsanto common share equivalents for the applicable period,
adjusted for the distribution ratio in the Spinoff of one share of the
Company's common stock for every five shares of Monsanto common stock.
6. COMPREHENSIVE INCOME
Effective January 1, 1998, Solutia adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes the standards for reporting
and displaying comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income includes net income
and several other items that were recognized directly in reinvested earnings
under previous accounting standards.
Comprehensive income for the three months and nine months ended September
30, 1998 and 1997 is detailed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME.................................................. $58 $56 $194 $183
Foreign currency translation adjustment..................... 15 (9) 11 20
--- --- ---- ----
COMPREHENSIVE INCOME........................................ $73 $47 $205 $203
=== === ==== ====
</TABLE>
5
<PAGE>
<PAGE>
Accumulated Other Comprehensive Income as of September 30, 1998 and
December 31, 1997 is detailed as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Accumulated currency adjustment..................... $30 $19
Minimum pension liability adjustment................ (7) (7)
--- ---
ACCUMULATED OTHER COMPREHENSIVE INCOME.............. $23 $12
=== ===
</TABLE>
7. OTHER EVENTS
During the quarter, the company announced that it plans to sell its
phosphorus derivatives business and has retained an investment banking firm to
assist in the sale.
In the 1998 second quarter, the company amended certain of its
postretirement health care plans primarily to adjust cost-sharing provisions.
The amendment results in a $161 million reduction in the company's accumulated
postretirement benefit obligation, which is being amortized over the average
remaining service life of plan participants of approximately 12 years.
8. SEGMENT DATA
Segment data for the three months and nine months ended September 30, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
NET INTERSEGMENT NET INTERSEGMENT
SALES SALES PROFIT SALES SALES PROFIT
----- ------------ ------ ----- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
SEGMENT:
Chemicals.............................. $228 $ 1 $ 63 $246 $ 6 $ 63
Fibers................................. 241 -- 56 253 -- 48
Polymers & Resins...................... 235 -- 64 255 -- 60
---- ----- ---- ---- ----- ----
SEGMENT TOTALS........................... 704 1 183 754 6 171
RECONCILIATION TO CONSOLIDATED TOTALS:
Sales eliminations..................... (1) (1) (6) (6)
Other revenues......................... -- 1
Less unallocated service costs:
Cost of goods sold................... (25) (28)
Marketing, administrative and
technological expenses............. (63) (55)
Equity earnings from affiliates........ 5 8
Interest expense....................... (11) (10)
Other income (expense)--net............ (1) 4
---- ----- ---- -----
CONSOLIDATED TOTALS:
NET SALES.............................. $703 $ -- $749 $ --
==== ===== ---- ==== ===== ----
INCOME BEFORE INCOME TAXES............. $ 88 $ 90
==== ====
</TABLE>
6
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
NET INTERSEGMENT NET INTERSEGMENT
SALES SALES PROFIT SALES SALES PROFIT
----- ------------ ------ ----- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
SEGMENT:
Chemicals........................... $ 675 $ 5 $ 173 $ 726 $ 15 $ 172
Fibers.............................. 748 -- 176 745 -- 127
Polymers & Resins................... 748 -- 206 781 5 206
------ ----- ----- ------ ----- -----
SEGMENT TOTALS........................ 2,171 5 555 2,252 20 505
RECONCILIATION TO CONSOLIDATED TOTALS:
Sales eliminations.................. (5) (5) (20) (20)
Other revenues...................... 2 6
Less unallocated service costs:
Cost of goods sold................ (68) (69)
Marketing, administrative and
technological expenses.......... (178) (156)
Equity earnings from affiliates..... 17 25
Interest expense.................... (34) (31)
Other income (expense)--net......... 2 9
------ ----- ------ -----
CONSOLIDATED TOTALS:
NET SALES........................... $2,168 $ -- $2,238 $ --
====== ===== ----- ====== ===== -----
INCOME BEFORE INCOME TAXES.......... $ 294 $ 283
===== =====
</TABLE>
Segment profit only includes 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.
7
<PAGE>
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated statement of
income for the three months and nine months ended September 30, 1997 give
effect to the Spinoff and Solutia's 1997 public debt offering as if the Spinoff
and the public debt offering had occurred at January 1, 1997. The pro forma
information is presented for illustrative purposes only and may not be
indicative of the results that would have been obtained had the transactions
actually occurred on the date assumed, nor is it necessarily indicative of
future consolidated results of operations.
The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with the historical financial statements and the related
notes thereto contained elsewhere in this report on Form 10-Q.
<TABLE>
SOLUTIA INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------
PRO FORMA
HISTORICAL ----------------------------
SOLUTIA ADJUSTMENTS SOLUTIA
---------- ----------- -------
<S> <C> <C> <C>
NET SALES.................................................................... $ 749 $ 749
Cost of Goods Sold........................................................... 576 576
----- -----
GROSS PROFIT................................................................. 173 173
Marketing, Administrative and Technological Expenses......................... 85 $ 3 <FB> 95
7 <FE>
----- ---- -----
OPERATING INCOME............................................................. 88 (10) 78
Equity Earnings from Affiliates.............................................. 8 8
Interest Expense............................................................. (10) (6) <FF> (16)
Other Income (Expense)--Net.................................................. 4 4
----- ---- -----
INCOME BEFORE INCOME TAXES................................................... 90 (16) 74
Income Taxes................................................................. 34 (6) <FG> 28
----- ---- -----
NET INCOME................................................................... $ 56 $(10) $ 46
===== ==== =====
DILUTED EARNINGS PER SHARE................................................... $0.46 $0.37
===== =====
Diluted Weighted Average Equivalent Shares................................... 123.0 123.0
===== =====
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
</TABLE>
8
<PAGE>
<PAGE>
<TABLE>
SOLUTIA INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------
PRO FORMA
HISTORICAL ---------------------------
SOLUTIA ADJUSTMENTS SOLUTIA
---------- ----------- -------
<S> <C> <C> <C>
NET SALES.................................................................... $2,238 $ (9) <FA> $2,229
Cost of Goods Sold........................................................... 1,700 (1) <FB> 1,697
1 <FC>
(3) <FD>
------ ---- ------
GROSS PROFIT................................................................. 538 (6) 532
Marketing, Administrative and Technological Expenses......................... 258 14 <FB> 288
(9) <FD>
25 <FE>
------ ---- ------
OPERATING INCOME............................................................. 280 (36) 244
Equity Earnings from Affiliates.............................................. 25 25
Interest Expense............................................................. (31) (19) <FF> (50)
Other Income (Expense)--Net.................................................. 9 9
------ ---- ------
INCOME BEFORE INCOME TAXES................................................... 283 (55) 228
Income Taxes................................................................. 100 (20) <FG> 80
------ ---- ------
NET INCOME................................................................... $ 183 $(35) $ 148
====== ==== ======
DILUTED EARNINGS PER SHARE................................................... $ 1.49 $ 1.21
====== ======
Diluted Weighted Average Equivalent Shares................................... 122.7 122.7
====== ======
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
</TABLE>
9
<PAGE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
[FN]
<FA> To record the estimated effect of new selling prices and arrangements on
former intercompany sales from Solutia to Monsanto.
<FB> To record the assumed increase in retiree medical and pension costs as a
result of the Spinoff.
<FC> To record the estimated effect of transactions with the P4 joint venture
formed by Monsanto in conjunction with the Spinoff.
<FD> To reverse the historical Monsanto corporate expense allocation to the
Company because the company is no longer subject to the allocation of
corporate expenses from Monsanto following the Spinoff.
<FE> Because the company is no longer subject to this corporate expense
allocation, a pro forma adjustment was made to record estimated general
corporate costs that the company believes it would have incurred had the
company been a separate public company for the periods presented.
<FF> To record additional interest expense as a result of the company's
assumption of debt from Monsanto and the borrowings of Solutia's 1997
public debt offering.
<FG> To record the estimated provision for income tax as a result of the pro
forma adjustments referred to in Notes (A) through (F) above at an
estimated combined U.S. federal income and state income tax rate of 36
percent.
10
<PAGE>
<PAGE>
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 forward-looking statements
include statements regarding expected future cash flows, financial resources,
effective changes in accounting due to recently issued accounting standards,
benefits from new technology, the cost of remediating the year 2000 issue and
the effect of any unremediated or undiscovered year 2000 issues on the
Company's operations. Although the Company believes its expectations reflected
in such forward-looking statements are based on reasonable assumptions, no
assurance can be given that such expectations will prove to have been correct.
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 and business and
market conditions, efficacy of new technology, and increased competitive and/or
customer pressure.
RESULTS OF OPERATIONS--THIRD QUARTER 1998 COMPARED WITH THIRD QUARTER 1997
Third quarter 1998 net sales decreased by 6 percent as compared with the
third quarter of 1997. The net sales decline affected all segments and resulted
primarily from lower average selling prices. This selling price erosion was
driven by contract pricing tied to key raw material costs and the general
softening of selling prices.
Chemicals Segment
Net sales declines in the Chemicals segment occurred as a result of both
average selling price and volume declines. Average selling price and volume
reductions were caused, in part, by the worldwide excess supply of ammonia that
continued through the 1998 third quarter. Also, phosphorus derivatives products
experienced a net sales decrease that resulted entirely from volume slowdowns.
The volume reductions occurred primarily in phosphoric acid and wildfire
products, which offset strong food phosphates volumes. A portion of the net
sales decline was offset by improved sales volumes of ammonia and
chlorobenzenes.
Segment profit for the 1998 third quarter was flat as compared to the 1997
third quarter. Raw material prices decreased slightly faster than average
selling prices, however any potential increase in segment profit was offset by
turnaround maintenance costs at several facilities.
Fibers Segment
The Fibers segment net sales for the 1998 third quarter were down
approximately 5 percent versus the same period of 1997. Carpet net sales
increased 5 percent on higher volumes that were offset partially by lower
average selling prices. Overall, the carpet market remained strong through the
quarter, particularly in the branded staple area. Net sales declines of
Acrilan(R) acrylic fiber, however, more than offset any segment sales gains
from carpet products. Export volumes and export average selling prices for
Acrilan(R) acrylic fibers have declined significantly as selling prices in Asia
have dropped to a level such that margins on sales to the region are not
attractive. The company continues to supply certain long-standing customers, at
prices with minimal margins. In addition, price declines that originated in
Asia are spreading to Latin America and, to a lesser extent, to North America
as competitors seek substitute markets to maintain product volumes.
Profit in the Fibers segment increased approximately 17 percent in the
third quarter of 1998 from the comparable prior year's quarter. Lower raw
material costs and other cost reductions occurred in all Fibers segment
businesses. These cost reductions as well as the strong manufacturing
performance at the carpet facilities were the primary drivers of the segment
profit improvement.
Polymers & Resins Segment
Each of the businesses in the Polymers & Resins segment experienced net
sales decreases in the 1998 third quarter versus the 1997 third quarter. Sales
volumes of Saflex(R) plastic interlayer were affected by the General Motors
strike and lower sales to Asia and Latin America resulting from the financial
turmoil in those areas. Average selling prices for Saflex(R) plastic interlayer
also declined due to competitive pressures. Nylon Plastics & Polymer
11
<PAGE>
<PAGE>
experienced both average selling price and volume decreases. Both decreases
resulted from lower Asian demand which offset volume gains in Europe.
Polymers & Resins segment profit for the 1998 third quarter increased
7 percent from the third quarter of 1997 segment profit. Lower net sales were
more than offset by good manufacturing performance, lower raw material costs
and other cost reductions.
Operating Income
Operating income for the third quarter of 1998 increased approximately 8
percent over the comparable period of the prior year. The increase was driven
by increased gross margins offset by increased administrative costs.
Administrative costs were higher due primarily to employee benefit cost
increases.
Equity Earnings from Affiliates
Equity Earnings from Affiliates was lower in the 1998 third quarter as
compared to the 1997 third quarter due to a loss at the Quimica joint venture.
Quimica's loss occurred as a result of start-up costs for Saflex IIIG(TM)
plastic interlayer production and the devaluation of the Mexican peso.
RESULTS OF OPERATIONS--FIRST NINE MONTHS 1998 COMPARED WITH FIRST NINE MONTHS
1997
For the nine-month period ended September 30, 1998, net sales declined
approximately 3 percent as compared to the same period of 1997. The decline was
caused by lower average selling prices in all segments offset partially by
improved product volumes.
Chemicals Segment
The Chemicals segment's net sales declined by approximately 7 percent as
compared to the previous year due to lower average selling prices for
intermediate products and lower phosphorus derivative product volumes. Formula
contracts, where raw material price decreases are passed on to customers in the
form of lower prices, caused the majority of the average selling price
decreases. The lower volume experienced in phosphorus and derivatives was due
to price reduction actions by competitors.
Profit in the Chemicals segment was essentially flat with the same period
of the prior year due to lower average selling price offsetting the segment's
good manufacturing performance.
Fibers Segment
Significantly higher carpet staple volumes were almost fully offset by
average selling price decreases in all businesses of the Fibers segment. Carpet
volume increases were due to strong builder and commercial sales and new
introductions of Wear-Dated(R) brand products. Price reductions in the Fibers
segment were caused by competitive pressures on carpet staple despite a first
quarter 1998 price increase, and lower pricing of Acrilan(R) acrylic fibers due
to the financial crises in the company's export markets. For both the carpet
and Acrilan(R) acrylic fiber products, the majority of the average selling
price declines occurred during the third quarter. Year-over-year price declines
caused by lower priced imports also affected the Nylon Industrial products.
Fibers segment profit increased significantly on carpet volume increases,
reduced raw material costs and other cost reductions in all businesses.
Polymers & Resins Segment
Polymers & Resins segment net sales declines were driven primarily by
softer pricing and, to lesser extents, by unfavorable currency exchange rate
movements and lower volumes. Lower average selling prices were felt most
significantly by the Company's Saflex(R) plastic interlayer unit and the resins
business where competitors sought to increase market share through price
reductions. Unfavorable currency exchange rate movements had an impact on
Saflex(R) plastic interlayer selling prices also. The effect of currency
exchange rates on the Company's operating income was minimal, however, due to
ex-U.S. sales sourcing from ex-U.S. operations. Lower volumes resulted from
greater internal consumption of nylon polymer.
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Polymers & Resins segment profit for the nine-month period was flat as
compared to the same period of the prior year. The lower sales discussed above
and higher manufacturing costs were offset by reduced raw material costs.
Increased manufacturing costs resulted from planned downtime for maintenance
projects and changeover costs at the Saflex(R) plastic interlayer production
sites as they expand production of the new Saflex IIIG(TM) plastic interlayer
product.
Operating Income
Operating income for the first nine months of 1998 was $309 million, an
increase of $29 million over the comparable period of 1997. The 1997 period
contains $12 million of pre-tax charges associated primarily with the adoption
of Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities."
In addition, this year-over-year comparison was affected in 1998 by the
inclusion of stand-alone expenses for certain general and administrative
services that were provided by Monsanto during 1997. As discussed in note 1 of
the "Notes to the Consolidated Financial Statements," Monsanto provided these
services prior to the Spinoff under a cost allocation arrangement. If Solutia
had operated as a stand-alone entity for all of 1997, management estimates that
general and administrative services would have been higher by approximately $6
million in order to reflect the cost of replacing the services represented by
these allocations. After considering these events, the improvement in operating
income was due largely to lower raw material costs, other cost reductions and
good manufacturing performance.
Equity Earnings from Affiliates
Equity Earnings from Affiliates was lower for the nine-month period of 1998
as compared to 1997 primarily due to the lower earnings from the Company's
Flexsys L.P. joint venture. The lower earnings were attributed to start-up
costs associated with this joint venture's PPD2 facility and unfavorable
currency exchange fluctuations offset by improved sales volumes. The new unit
produces 4-amino-diphenylamine, a product that extends the life of rubber
products. In addition, the Quimica joint venture was affected by start-up costs
for Saflex IIIG(TM) plastic interlayer production and the devaluation of the
Mexican peso.
LIQUIDITY AND CAPITAL RESOURCES
Solutia's working capital at September 30, 1998 increased to $254 million
from $106 million at December 31, 1997, primarily due to higher cash balances
and decreased short-term debt. This was the result of the company's strong cash
flow from operations.
Solutia completed the repayment of its outstanding commercial paper during
the third quarter. Since the September 1, 1997 spin-off, the company repaid
approximately $429 million of debt.
During the third quarter of 1998, the company completed the 5 million share
stock repurchase program announced in September 1997 by purchasing an
additional 1.7 million shares of common stock. The cost for shares repurchased
during the quarter was approximately $43 million.
On October 1, 1998, the company announced a second 5 million share
repurchase program. Repurchases under this second program will begin in the
fourth quarter of 1998 and are currently anticipated to be completed by about
year-end 1999.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 establishes
the accounting guidance for the capitalization of certain internal-use software
costs once certain criteria are met. This accounting standard will be effective
for the Company beginning January 1, 1999. The adoption of SOP 98-1 is not
expected to have a material impact on the Company.
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In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5
provides guidance on the financial reporting of start-up costs and organization
costs. It requires costs of start-up activities and organization costs to be
expensed as incurred. This statement will be effective for the Company's
financial statements for the year ended December 31, 1999. The adoption of
SOP 98-5 is not expected to have a material impact on the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activity." SFAS No. 133
provides comprehensive and consistent standards for the recognition and
measurement of derivative and hedging activities. It requires that derivatives
be recorded on the Statement of Consolidated Financial Position at fair value
and establishes criteria for hedges of changes in the fair value of assets,
liabilities or firm commitments, hedges of variable cash flows of forecasted
transactions, and hedges of foreign currency exposures of net investments in
foreign operations. Changes in the fair value of derivatives that do not meet
the criteria for hedges would be recognized in the Statement of Consolidated
Income. This statement will be effective for the Company beginning January 1,
2000. The Company is evaluating SFAS No. 133 and has not determined its effect
on the consolidated financial statements.
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.
During 1996, Solutia began the process of addressing its Y2K issues. The
process includes six steps: 1) plan, 2) inventory, 3) assess, 4) remediate, 5)
test, 6) develop contingency plans. The planning phase was completed during
1997 and resulted in the Y2K issues being managed around five functional areas.
The functional areas that were identified are business applications, process
control (including embedded chip), supply chain, information technology ("IT")
technical infrastructure and customer issues.
Y2K Issues
Solutia inventoried and assessed its business applications during 1997. At
that time, the company determined that significant portions of its software
required modification or repair to properly function beyond December 31, 1999.
Solutia is addressing the majority of these Y2K issues through the previously
planned installation of software licensed from SAP AG which is Y2K compliant.
The implementation of SAP involves a series of transitions, the first of which
occurred in January 1997. Subsequent implementations have progressed in
accordance with the transition schedule. Through September 30, 1998, the SAP
project is on schedule with approximately 70 percent of the company now on SAP.
The final transition to SAP is scheduled to occur on March 31, 1999. Critical
issues that are not addressed by SAP are in the process of being remediated.
The company expects to complete remediation of all critical business
applications by the end of March 1999. Y2K integrated testing of SAP and
non-SAP systems will occur during mid-1999.
The management of Y2K issues in the process control area is split between
primary process control systems and devices with embedded chips.
Primary process control systems were inventoried and assessed during late
1997. Remediation and testing efforts are underway. Some slippage from
schedules has occurred as resources are temporarily redirected to other Y2K
areas. However, the company expects that critical issues in this area will be
completed on schedule by the end of the second quarter of 1999, with the
exception of a small portion of systems that will be repaired and tested during
planned plant shutdowns in the second half of 1999.
The inventory of the company's devices with embedded chip systems is
complete. The assessment of those devices is in process and will be principally
complete by the end of November 1998. Critical systems in this area will
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be renovated and tested by the end of the second quarter 1999, with the
exception of a small portion of systems that will be repaired during planned
plant shutdowns in the second half of 1999.
Solutia has identified those companies in the supply chain which provide
materials, products or services that are critical to the company's operations.
Critical suppliers' Y2K issues are being assessed through the use of
questionnaires and other inquiries. Approximately half of the company's
critical suppliers have either completed their remediation efforts or have
plans to complete their remediation by mid-1999. Investigation of the remaining
Y2K issues with critical suppliers is continuing on schedule. Audits of
selected suppliers to verify the completion of their remediation are planned
for 1999.
The IT technical infrastructure area is primarily comprised of desktop
computer workstations and software, computer networking infrastructure, host
server systems and voice systems. The inventory and assessment of known long
lead-time items has been completed. Major projects are identified and are
scheduled for completion during 1999. An exhaustive and comprehensive follow-up
investigation of this area is underway to assure no critical components have
been overlooked. Remediation and testing of any new items found will be
addressed by mid-1999.
Solutia has been working with customers to address their Y2K concerns
regarding our ability to operate. Any plans to address the ability of our
significant customers to accept our products after December 31, 1999 will be
determined as contingency plans are developed.
The company intends to perform integrated Y2K testing of critical systems
in all functional areas during the second quarter of 1999. Given the nature of
Solutia's manufacturing and other operations, full-scale integrated testing may
not be practical in some areas and, therefore, may be limited in scope to avoid
significant disruption of the company's operations. Statements of compliance
from vendors and other compliance evidence are expected to mitigate the risk
of not performing integrated testing in those areas.
The development of contingency arrangements for all functional areas is
early in the planning stage. Plans will include procedures that attempt to
minimize the impact of any unremediated and unresolved Y2K issues on Solutia's
operations and financial position. Initial plans are expected to be complete
by mid-1999 and will continue to be refined as developments warrant.
To date, the Company has incurred approximately $5 million in costs related
to Y2K work, excluding the cost of SAP implementation. Additional costs to
evaluate and remediate the remaining issues are currently estimated to be in
the range of $5 - $10 million and will be expensed as incurred during 1998 and
1999.
Based on the status of the Company's work to address its Y2K issues,
including the implementation of SAP, management does not expect the Y2K issue
to pose significant operational problems for the Company. However, if the SAP
implementation is delayed or the remediation of other issues is not completed
timely, Y2K could have a material adverse effect on the Company, depending on
the nature and extent of any remaining non-compliance. Furthermore, if the
Company's customers and suppliers fail to rectify their Y2K issues in their own
systems the resultant effect on the Company may be material. Management
anticipates that the most reasonably likely worst-case scenario would involve
a temporary shutdown of certain units if, in management's judgment, the company
cannot run certain processes safely from an environmental, safety and health
standpoint because of the failure of the company or a supplier to resolve Y2K
issues. Through the development of contingency plans, the company expects to
mitigate the effect that any such temporary shutdowns would have on the company
or third parties.
The estimated costs and date of completion of Y2K remediation are based on
management's best estimates, which were derived from numerous assumptions about
future events. These assumptions include the availability of certain resources,
third-party modification plans and other factors. There can be no guarantee
that these estimates will be achieved and actual results could differ
materially. Specific factors that might cause material differences include, but
are not limited to, the availability and cost of personnel trained in this
area, the ability to identify and correct all relevant computer codes, and the
cost and availability of replacements for devices with embedded chips.
EUROPEAN MONETARY UNION
On January 1, 1999, eleven member countries of the European Union are
expected to adopt the euro as their common legal currency. Effective that date,
conversion rates between the existing sovereign currency ("legacy currency")
of each of these participating countries and the euro will be irrevocably
fixed, and the euro will be
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available for non-cash transactions. The legacy currencies of these countries
will remain legal tender during a transition period from January 1, 1999 to
January 1, 2002. During this transition period, parties may pay for goods and
services using either the euro or the relevant legacy currency. Currency
conversion will be performed using a triangulation method whereby one legacy
currency is converted to the euro and then to the second legacy currency.
The conversion to the euro will be completed in July 2002 when the legacy
currencies of the participating member countries cease to be legal tender.
While the conversion to the euro is expected to increase cross-border price
transparency, and therefore stimulate cross-border competition within the
single currency zone created by the participating countries, the effect on the
price of raw materials that Solutia purchases is expected to generally offset
the effect on the finished products it sells. In addition, the conversion to
the euro is expected to have the positive effect of eliminating currency risk
in cross-border sales.
Since January 1998, Solutia has had a multifunctional team in place to
identify issues arising from the implementation of the euro, plan for the
changeover, and communicate with customers, suppliers, and employees. The
Company expects to be able to invoice and accept payments in euros on January
1, 1999. Information systems will be updated to allow the triangulation method
of currency conversion to the requisite number of decimal places in a timely
fashion. If the updates are not ready by January 1, 1999, triangulation will be
accomplished manually or through outsourcing until the updates are installed.
The cost of the technological updates or any interim measures is not expected
to be material. The software licensed from SAP AG that the Company is already
in the process of implementing is readily adaptable to this function.
For the reasons stated above, management does not expect the introduction
of the euro to have a material effect on Solutia's business, financial
condition, or results of operations. If cross-border price transparency causes
the markets from which the Company purchases raw materials or to which it sells
finished products to behave differently than management expects, the
introduction of the euro could have a material effect on the Company.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FROM 8-K
(a) Exhibits--See the Exhibit index at page 19 of this report.
(b) The Company did not file any reports on Form 8-K during the quarter
ended September 30, 1998.
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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: October 23, 1998
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EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item
601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2 Omitted--Inapplicable
3 Omitted--Inapplicable
4 Omitted--Inapplicable
10 Solutia Inc. Deferred Compensation Plan
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
</TABLE>
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Solutia Inc. Deferred Compensation Plan
SECTION 1. PURPOSE
The Solutia Inc. Deferred Compensation Plan is an unfunded,
deferred compensation plan which is intended to provide eligible
employees of Solutia Inc. and certain of its Subsidiaries with an
opportunity to defer the receipt of all or part of their cash
incentive awards.
SECTION 2. DEFINITIONS
As used in the Plan, the following terms shall have the meanings
set forth below:
"Account" shall mean, for each Participant, such Participant's
Deferred Cash Equivalent Account and Predecessor Plan Account.
"Beneficiary Election" shall mean written instructions, on a form
provided by the Company, relating to elections under Section 6.
"Board" shall mean the Board of Directors of the Company.
"Business Combination" shall have the meaning set forth in
subparagraph (c) of the definition of "Change of Control."
"Change of Control" shall mean any of the following events:
(a) The acquisition by any person, entity or "group," within
the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934 (the "Exchange Act")
(a "Person"), of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange
Act) of 20% or more of either (i) the then
outstanding shares of Common Stock of the Company
(the "Outstanding Company Common Stock") or (ii) the
combined voting power of the then outstanding voting
securities of the Company entitled to vote generally
in the election of directors (the "Outstanding
Company Voting Securities"); provided, however, that,
for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of
Control: (i) any acquisition directly from the
Company, (ii) any acquisition by the Company, (iii)
any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the Company
or (iv) any acquisition by any corporation pursuant
to a transaction which complies with clauses (i),
(ii) and (iii) of subsection (c) of this definition;
or
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(b) 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 of office occurs as a result
of an actual or threatened election contest with
respect to the election or removal of directors or
other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the
Board; or
(c) Approval by the 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, (i) all or substantially all of
the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting
Securities immediately prior to such Business
Combination beneficially own, directly or indirectly,
more than 60% of, respectively, the then outstanding
shares of common stock and the combined voting power
of the then outstanding voting securities entitled to
vote generally in the election of directors, as the
case may be, of the corporation resulting from such
Business Combination (including, without limitation,
a corporation which as a result of such transaction
owns the Company or all or substantially all of the
Company's assets either directly or through one or
more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to
such Business Combination of the Outstanding Company
Common Stock and Outstanding Company Voting
Securities, as the case may be; (ii) no Person
(excluding any corporation resulting from such
Business Combination or any employee benefit plan (or
related trust) of the Company or such corporation
resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or
more of, respectively, the then outstanding shares of
common stock of the corporation resulting from such
Business Combination or the combined voting power of
the then outstanding voting securities of such
corporation except to the extent that such ownership
existed prior to the Business Combination; and (iii)
at least a majority of the members of the board of
directors of the corporation resulting from such
Business Combination were members of the Incumbent
Board at the time of the execution of the initial
agreement, or of the action of the Board, providing
for such Business Combination; or
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(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the ECDC, or its permitted delegate.
"Company" shall mean Solutia Inc.
"Compensation Committee" shall mean 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 8.
"Date Certain Election" shall have the meaning set forth in
Section 7(a).
"Deferral Election" shall mean a written election, on a form
provided by the Company, to defer receipt of Incentive Awards
otherwise payable to a Participant.
"Deferred Cash Equivalent Account" shall mean a book-entry
account in the name of a Participant maintained in the Company's
records with entries denominated in dollars.
"ECDC" shall mean the Executive Compensation and Development
Committee or such other committee of the Board as the Board may from
time to time designate.
"Effective Date" shall mean the date that this Plan is adopted
by the Committee.
"Eligible Participant" shall mean an employee of the Company
or a Participating Subsidiary who (a) is a member of the
Executive Leadership Team of the Company or is classified in grade 82 or
83 (or an equivalent salary grade), and (b) is a U.S. citizen
residing in the United States or a citizen of another country permanently
assigned to and residing in the United States.
"Fiscal Year" shall mean the period commencing January 1 and
ending on the next succeeding December 31.
"Incentive Award" shall mean any cash award under an annual
incentive plan of the Company and any other cash awards designated by
the Committee.
"Incumbent Board" shall have the meaning set forth in
subparagraph (b) of the definition of "Change of Control."
"Outstanding Company Common Stock" shall have the meaning set
forth in subparagraph (a) of the definition of "Change of
Control."
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"Outstanding Company Voting Securities" shall have the meaning
set forth in subparagraph (a) of the definition of "Change of
Control."
"Participant" shall mean an Eligible Participant who delivers
a Deferral Election to the Company. A person shall not cease being a
Participant if the person ceases being an Eligible Participant
if the person has an Account with a positive balance.
"Participating Subsidiary" shall mean a Subsidiary that is
designated as a Participating Subsidiary by the Committee.
"Payment Election" shall have the meaning set forth in Section
7(a).
"Plan" shall mean this Solutia Inc. Deferred Compensation Plan.
"Predecessor Plan" shall mean any U.S. plan, other than a
qualified plan or a supplemental retirement plan, providing for
deferred compensation for Participants (a) in effect on the Effective
Date or (b) maintained by Monsanto or a Subsidiary of Monsanto prior
to September 1, 1997, with respect to which obligations relating to
Participants were assumed by the Company.
"Predecessor Plan Account" shall mean a book-entry account in the
name of a Participant maintained in the Company's records with entries
denominated in dollars representing deferrals and accrued interest
under a Predecessor Plan.
"Retirement" shall mean a voluntary Termination of Employment by
a Participant at age 50 or above or an involuntary Termination of
Employment at age 50 or above other than for cause (as determined by
the Committee).
"Retirement Election" shall have the meaning set forth in Section
7(a).
"Subsidiary" shall mean a 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" shall mean the termination of the
Participant's employment with the Company and any Subsidiary. A
Participant employed by a Subsidiary shall also be deemed to incur a
Termination of Employment if the Subsidiary ceases to be such a
Subsidiary and the Participant does not immediately thereafter become
an employee of the Company or another Subsidiary. Transfers among the
Company and its Subsidiaries shall not be considered Terminations of
Employment.
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SECTION 3. DEFERRAL ELECTIONS
(a) Delivery and Effectiveness of Deferral Elections. A
Participant may elect to defer receipt of an Incentive Award otherwise
payable to the Participant in a future Fiscal Year by delivering a
Deferral Election to the Company not later than June 30 preceding the
Fiscal Year in which the Deferral Election is to become effective or
such other time as the Committee shall determine. A separate Deferral
Election will be required for each Incentive Award. A Deferral
Election shall become irrevocable for a Fiscal Year on June 30 of the
immediately preceding Fiscal Year or at such other time as the
Committee shall determine. During the period in which a Deferral
Election is effective, the Participant shall not be entitled to
receive currently payments covered by such Deferral Election. The
Company shall instead make credits to the Participant's Account in
accordance with Section 4.
(b) Contents of Deferral Elections. A Deferral Election may
relate to all or any portion of an Incentive Award otherwise payable
to a Participant. Each Deferral Election shall specify the type of
Incentive Award and the percentage or dollar amount of the Incentive
Award which shall be subject to such Deferral Election and shall
contain the Participant's Payment Election. If the amount of the
portion of any Incentive Award subject to a Deferral Election is
less than $1,000 (based on a valuation at the time the Incentive Award
would otherwise be paid), that Incentive Award will be paid currently
and no credit relating to such Incentive Award will be made under the Plan.
(c) Compliance with Regulations and Section 162(m) of the
Internal Revenue Code. The term of deferral may be changed by the
Committee to enable the Company to comply with wage controls,
guidelines, or other governmental requirements. Notwithstanding any
other provision of this Plan to the contrary, no portion of the
balance in a Participant's Account shall be paid to any Participant
before the earliest date on which the Company's federal income tax
deduction for such payment is not precluded by Section 162(m) of the
Internal Revenue Code. In the event any payment is delayed solely as
a result of the preceding restriction, such payment shall be made as
soon as administratively practicable following the first date as of
which Section 162(m) of the Internal Revenue Code no longer precludes
the deduction by the Company of such payment. Amounts deferred
because of the Section 162(m) deduction limitation shall continue to
accrue interest at the rate applicable to the Participant's Deferred
Cash Equivalent Account or Predecessor Plan Account, as applicable.
SECTION 4. PARTICIPANT ACCOUNTS
(a) Amounts Credited. There shall be credited to a
Participant's Deferred Cash Equivalent Account amounts related
to Incentive Awards with respect to which a Deferral Election is
made after the Effective Date of this Plan and which would
otherwise have been paid in cash by the Company together with an
amount equal to the matching contribution, if any, that the Company
would have made under the Solutia Inc. Savings and Investment Plan
and/or the Solutia Inc. ERISA Parity Savings and Investment Plan,
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as applicable, had the Deferral Election not been made
("Match"). There shall be credited to a Participant's
Predecessor Plan Account any amounts deferred and unpaid under a
Predecessor Plan together with interest accrued thereon as of the
Effective Date of this Plan. Amounts deferred pursuant to each
Deferral Election, together with any related Match and accrued
interest, shall be accounted for separately within the Participant's
Account.
(b) Interest. Amounts credited to the Participant's Deferred
Cash Equivalent Account shall bear interest as provided in Section
5(a). Interest will begin to accrue with respect to an Incentive
Award beginning with the April 1 immediately following the date the
Incentive Award would otherwise have been paid to the Participant.
Interest shall be credited to Deferred Cash Equivalent Accounts at the
end of each month. Amounts credited to the Participant's Prior Plan
Account shall continue to bear interest as provided in Section 5(b).
SECTION 5. INTEREST RATE
(a) The interest rate to be accrued on a Participant's
Deferred Cash Equivalent Account shall be such rate as is determined,
from time to time, by the ECDC. The determination by the ECDC
pursuant to this Section 5(a) shall be within its sole discretion and
its decision shall be conclusive, final and binding upon all parties
concerned. Participants will be given notice of any change in rate.
(b) The interest rate to be accrued on a Participant's
Predecessor Plan Account during a Fiscal Year shall be equal to the
average yield during the preceding Fiscal Year for the Moody's Baa
bond index composed of investment grade securities rated Baa1, Baa2,
and Baa3 with a twenty-year maturity.
SECTION 6. PAYMENTS FOLLOWING DEATH
(a) Form of Payment. A Participant may deliver a Beneficiary
Election to the Company electing that, in the event the Participant
should die before full payments of all amounts credited to the
Participant's Account, the balance of the Account shall be distributed
in one payment to the person(s) designated in the Beneficiary
Election. In the event that a Participant fails to designate such a
beneficiary, or the beneficiary(ies) predecease(s) the Participant,
payment following the death of the Participant shall be made to the
Participant's estate. An existing beneficiary designation made in
connection with deferrals under a Predecessor Plan will be deemed to
be a Beneficiary Election under this Plan. Payment shall be made as
soon as administratively practicable after the Participant's death.
(b) Change of Beneficiary Designation. The elections
referred to in Section 6(a), may be changed by a Participant at any
time by delivering a new Beneficiary Election to the Company. In the
case of multiple Beneficiary Elections by a Participant,
6
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<PAGE>
the most recent valid Beneficiary Designation in effect as of the date
of the Participant's death shall be controlling.
SECTION 7. PAYMENTS
(a) Commencement of Benefits. A Participant's Deferral
Election made pursuant to Section 3 shall include an election with
respect to the distribution of the amounts to be credited to such
Participant's Account (each such election, a "Payment Election"). Any
similar election related to the distribution of deferred amounts under
the Predecessor Plans shall be deemed a Payment Election under this
Plan with respect to such deferred amounts. Each Payment Election
shall specify (i) subject to any minimum deferral period established
by the Committee, the month and year when the Participant will receive
the amount deferred together with interest accrued thereon ("Date
Certain Election") or (ii) payment after Retirement in one lump sum or
in monthly installments over a specified number of years as set forth
in Section 7(b)(ii) ("Retirement Election").
(b) Payment Period.
(i) Date Certain Election. Payment will be made in one
lump sum in the month and year specified, subject to the provisions of
Section 3(c), Section 7(d), Section 9, and Section 10(b)(ii).
(ii) Retirement Election. A Participant may elect to
receive the amounts deferred pursuant to a Payment Election in one
lump sum payment in January of the year following Retirement or in
January of any subsequent year up to five (5) years following the date
of the Participant's Retirement, or a Participant may elect to receive
the amounts deferred together with the interest accrued thereon in
approximately equal monthly installments beginning a specified number
of months (not exceeding sixty (60) months) after Retirement and
extending over a specified number of years (not exceeding ten (10)
years from the date of the first monthly installment).
(c) Acceleration of Payment for Severe Financial Hardship.
In the event a Participant incurs a severe financial hardship, the
Committee may, in its sole discretion, upon the written request of a
Participant or the Participant's legal representative, accelerate or
otherwise revise the payment schedule for the Participant's Account to
the extent reasonably deemed necessary to eliminate or alleviate the
severe financial hardship. For the purpose of this Section 7(c), a
severe financial hardship must have been caused by an accident,
illness, or other event beyond the control of the Participant.
(d) Termination of Employment. In the event of Termination
of Employment with the Company for any reason (other than Retirement
while the Participant has a Retirement Election in effect), the
Participant or the Participant's beneficiary(ies) will receive a lump
sum as soon as administratively practicable following the
Participant's termination date. Notwithstanding the above, in the
event of Termination of Employment of a Participant in connection with
the sale of a business by the Company where the
7
<PAGE>
<PAGE>
Participant continues working for such business as an employee of the
buyer, the amounts credited to the Participant's Account shall be paid
to the Participant as soon as administratively practicable after the
first anniversary of the Termination of Employment of the Participant.
(e) Immediate Distribution. A Participant may at any time
elect to receive a distribution of all or any portion of the balance
in the Participant's Account. Requests for distributions shall be
submitted in writing (on a form prescribed by the Committee for such
purpose) to the Company. Distributions from the Participant's Account
pursuant to this Section 7(e) will at all times be subject to (i)
reduction for applicable tax withholdings pursuant to Section 9(f),
and (ii) a percentage reduction in the amount requested equal to ten
percent (10%) of the amount requested, which will be forfeited.
Distributions pursuant to this Section 7(e) shall be payable in a
single lump sum, in cash, within thirty (30) days of submission of the
completed form.
SECTION 8. ADMINISTRATION
(a) Administration. The ECDC shall have the authority to
administer the Plan. Without limiting the generality of the preceding
sentence, the ECDC shall have the exclusive right to interpret the
Plan, determine the interest rate to be accrued on Deferred Cash
Equivalent Accounts, determine eligibility for participation in the
Plan, construe any ambiguous provisions of the Plan, correct any
defects, supply omissions, and reconcile inconsistencies to the extent
necessary to effectuate the Plan, and determine the amount of benefits
payable to Participants under the Plan, except to the extent the ECDC
delegates administration pursuant to Section 8(b).
(b) Delegation of Authority. The ECDC may delegate some or
all of its authority under the Plan to one or more Compensation
Committees and authorize further delegation by the Compensation
Committees to senior management of the Company or a Subsidiary;
provided that determinations regarding the interest rate to be accrued
shall be made, and any actions pursuant to Section 9 or Section 10(b)
shall be taken, only by the ECDC.
(c) Actions of the Committee. In carrying out the
responsibilities set forth in Section 8(a):
(i) The Committee may adopt rules and regulations
necessary for the administration of the Plan which are consistent with
the provisions hereof.
(ii) All acts and decisions of the Committee shall apply
uniformly to all Participants in like circumstances. Written records
shall be kept of all acts and decisions
(iii) The Committee shall cause to be kept records
relating to Participants and such other records as are necessary for
proper operation of the Plan.
8
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(d) Any interpretation or determination made by the Committee
pursuant to its discretionary authority shall be final and binding on
the Company, any Participant, and any other affected party.
(e) The Committee shall have the right to hire, at the
expense of the Company, such professional assistants and consultants
as the Committee, in its sole discretion, deems necessary or
advisable, including but not limited to accountants, actuaries,
consultants, counsel and such clerical assistance as is
necessary for proper discharge of its duties hereunder.
SECTION 9. CHANGE OF CONTROL
(a) In the event of a Change of Control as defined in
subparagraph (a) of the definition of Change of Control or a
"proposed change of control" as defined below, the ECDC shall have
complete authority and discretion, but no obligation, to accelerate
payments of Account balances to Participants. A "proposed change of
control" shall mean the submission to the Company's shareholders of (i)
nominees for directors or (ii) a transaction, which, if
elected or approved would result in a Change of Control as described in
subparagraph (b), (c) or (d) of the definition of Change of
Control herein.
(b) The ECDC may also ask the Board to negotiate, as part
of any agreement involving the sale or merger of the Company, or a
sale of substantially all of the Company's assets or a similar
transaction, provisions for the protection of Participants.
SECTION 10. MISCELLANEOUS
(a) Benefits Unfunded. All benefits payable under this
Plan constitute an unfunded obligation of the Company. Payments shall
be made, as due, from the general funds of the Company. The
Company may, at its option, maintain one or more bookkeeping reserve
accounts to reflect its obligations under the Plan and may make such
investments as it may deem desirable to assist it in meeting
its obligations under the Plan. Any such investments shall be
assets of the Company subject to the claims of its general creditors.
No person eligible for a benefit under this Plan shall have any right,
title to, or interest in any such investments. Participants are
general, unsecured creditors of the Company. This Plan constitutes a
mere promise to pay benefits in the future.
(b) Amendment or Termination.
(i) The ECDC may amend or terminate the Plan at
any time, but such amendment or termination shall not adversely
affect the rights of any Participant, without his or her consent, to
any benefit under the Plan to which such Participant
may have previously become entitled prior to the effective
date of such amendment or termination. Any amendment to the Plan
shall be made in writing, with or without a meeting.
9
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<PAGE>
(ii) If the Plan is terminated, a valuation shall
be made of each Participant's Account balance as of the Plan
termination date. The amount of such Account balance shall be
payable to the Participant at the time it would have been payable
under Section 6 and Section 7 had the Plan not been terminated;
provided, however, that the ECDC may elect instead to immediately
distribute all Participants' Account balances in lump sums upon
termination of the Plan.
(c) Statement of Account. Statements will be sent no less
frequently than annually to each Participant showing the value of the
Participant's Account.
(d) Payments to Incompetents. If a Participant entitled to
receive any benefits hereunder is adjudged to be legally incapable of
giving valid receipt and discharge for such benefits, they will be
paid to the duly appointed guardian of such Participant or to such
other legally appointed person as the Committee may designate. Such
payment shall, to the extent made, be deemed a complete discharge of
any liability for such payment under the Plan.
(e) Benefits Not Transferable. The right of any person to
any benefit or payment under the Plan shall not be subject to
voluntary or involuntary transfer, alienation, or assignment and, to
the fullest extent permitted by law, shall not be subject to
attachment, execution, garnishment, sequestration or other legal or
equitable process. In the event a person who is receiving or is
entitled to receive benefits under the Plan attempts to assign,
transfer or dispose of such right, or if an attempt is made to subject
said right to such process, such assignment, transfer, or disposition
shall be null and void.
(f) Tax Withholding. The Company, or any Subsidiary, as
appropriate, is authorized to withhold from any Account or payment due
under the Plan the amount of applicable withholding taxes in respect
of such payment or Account and to take such other action as may be
necessary in the opinion of the Company to satisfy all obligations for
the payment of such federal, state or other governmental entity tax
obligation.
(g) Employment Status. Nothing in the Plan, nor any action
by the Company or any Subsidiary pursuant to the Plan, shall be deemed
to give any Participant any right to remain in the employ of the
Company or any Subsidiary or affect the right of the Company or any
Subsidiary to terminate a Participant's employment with or without
cause.
(h) Governing Law. The provisions of the Plan shall be
construed in accordance with the laws of the State of Delaware.
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Consolidated Income of Solutia Inc. and Subsidiaries for the nine
months ended September 30, 1998, and the Statement of Consolidated Financial
Position as of September 30, 1998. Such information is qualified in its entirety
by reference to such combined financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 36
<SECURITIES> 27
<RECEIVABLES> 430
<ALLOWANCES> 6
<INVENTORY> 355
<CURRENT-ASSETS> 1,055
<PP&E> 3,267
<DEPRECIATION> 2,359
<TOTAL-ASSETS> 2,792
<CURRENT-LIABILITIES> 801
<BONDS> 597
<COMMON> 1
0
0
<OTHER-SE> (16)
<TOTAL-LIABILITY-AND-EQUITY> 2,792
<SALES> 2,168
<TOTAL-REVENUES> 2,168
<CGS> 1,587
<TOTAL-COSTS> 1,587
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34
<INCOME-PRETAX> 294
<INCOME-TAX> 100
<INCOME-CONTINUING> 194
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 194
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 1.56
</TABLE>
