-----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, GqmX/qAwMXCvrJuD7fu3mme3Mga0Dx316LVlPHQbHhU/W1KKDtAi7rdPOg7/Arks 6VA/79zOqTHNRH+ex+9QPw== 0000893220-00-000370.txt : 20000411 0000893220-00-000370.hdr.sgml : 20000411 ACCESSION NUMBER: 0000893220-00-000370 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERCULES INC CENTRAL INDEX KEY: 0000046989 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS CHEMICAL PRODUCTS [2890] IRS NUMBER: 510023450 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-00496 FILM NUMBER: 583568 BUSINESS ADDRESS: STREET 1: 1313 N MARKET ST STREET 2: HERCULES PLZ CITY: WILMINGTON STATE: DE ZIP: 19894 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: HERCULES PLAZA STREET 2: RM 8151 NW CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FORMER COMPANY: FORMER CONFORMED NAME: HERCULES POWDER CO DATE OF NAME CHANGE: 19680321 10-K 1 HERCULES, INC. FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission file number 1-496 HERCULES INCORPORATED A DELAWARE CORPORATION I.R.S. EMPLOYER IDENTIFICATION NO. 51-0023450 HERCULES PLAZA 1313 NORTH MARKET STREET WILMINGTON, DELAWARE 19894-0001 TELEPHONE: 302-594-5000 Securities registered pursuant to Section 12(b) of the Act (Each class is registered on the New York Stock Exchange, Inc.) Title of each class Common Stock ($25/48 Stated Value) 8% Convertible Subordinated Debentures due August 15, 2010 9.42% Trust Originated Preferred Securities ($25 liquidation amount), issued by Hercules Trust I and guaranteed by Hercules Incorporated Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ____ As of March 15, 2000, registrant had outstanding 106,951,188 shares of common stock, $25/48 stated value ("Common Stock"), which is registrant's only class of common stock. The aggregate market value of registrant's Common Stock held by non-affiliates based on the closing price on March 15, 2000 was approximately $1.5 billion. DOCUMENTS INCORPORATED BY REFERENCE (SPECIFIC PAGES INCORPORATED ARE IDENTIFIED UNDER THE APPLICABLE ITEM HEREIN.) Portions of the registrant's definitive Proxy Statement dated March 24, 2000 (the "Proxy Statement") are incorporated by reference in Part III of this Report. Other documents incorporated by reference in this report are listed in the Exhibit Index (see page 62). 2 PART I ITEM 1. BUSINESS: Hercules Incorporated manufactures chemical specialties used in a variety of home, office and industrial products. We are focused on sustaining long-term growth in shareholder value, driven by new product development, continuous improvement in manufacturing costs and responsive customer service. Our principal products are performance (also referred to as functional) and process paper chemicals, water treatment chemicals, water-soluble polymers, food ingredients, resins and polypropylene and polyethylene fibers. The primary markets we serve include pulp and paper, petroleum refineries, food processors and manufacturers, paint manufacturers, construction materials, adhesives, pharmaceutical companies and personal care product manufacturers. Our products have a low cost impact on the end-users but frequently possess characteristics important to the functionality of the finished product or the efficient operation of the manufacturing process. Examples of our products in consumer end uses include the paper coating and strengthener in writing paper, the tackifier (which provides stickiness) in adhesive for labels and tapes, the fibers in inner and outer linings of disposable diapers and the thickeners in products such as jams, jellies, toothpaste, shampoos and water-based paints. Examples of our products in industrial end uses include chemicals that improve manufacturing processes, chemicals that improve the water quality in manufacturing processes, tile cements used in building materials and resins used in industrial adhesives. Industrial and commercial uses for our fibers include decorative fabrics and automotive trim. In the early 1990s, we were focused primarily on increasing our return on equity and reducing our costs of operations. Although these objectives are still important, growth has become our primary deliverable. Accordingly, since 1995, we have implemented internal and external initiatives to achieve growth and have disposed of a number of businesses that did not fit our portfolio and acquired other businesses that better fit our strategy and our current businesses. Internally, we have committed substantial resources to our research and development efforts. Through these efforts, since 1995, we have increased sales of products which are less than five years old. Externally, we consummated five acquisitions in 1998, the largest of which was the acquisition of BetzDearborn Inc. These businesses added approximately $1.5 billion of revenue in 1999. Additionally, the integration of these acquisitions resulted in significant synergies for us in 1999. RECENT EVENTS On February 22, 2000, we announced a new corporate strategy focused on cash generation, debt reduction and growth of the core businesses: Pulp and Paper, BetzDearborn and Aqualon. As part of this strategy, we will monetize our investment in our Food Gums business through the formation of a joint venture with Lehman Brothers Merchant Banking Partners II L.P. This new venture has entered into an agreement to acquire the Kelco biogums business from Monsanto. The Lehman Brothers partnership will own approximately 72% of the new entity and we will own approximately 28%. We expect that the new entity will have annual revenues of approximately $450 million. Further, we have expressed our intention to monetize our Resins business and we are beginning to explore alternatives regarding our FiberVisions business. There can be no assurance that we will successfully consummate the monetization of Food Gums, Resins or FiberVisions. The Food Gums, Resins and FiberVisions businesses account for approximately $900 million of our 1999 revenues. In addition to monetizing assets, we will be concentrating on improving our asset utilization, working capital management and reducing debt and corporate overhead costs. These actions may result in restructuring charges in 2000 as exit plans are finalized. We are also investigating the possibility of joining a consortium of chemical and energy companies in a new online network, to be called Envera Corp., that would provide its members access to business-to-business Internet commerce. Our possible participation could range from an equity investment to trading member status. REPORTABLE SEGMENTS Our reportable segments are: Process Chemicals and Services (comprised of Pulp and Paper and BetzDearborn); Functional Products (comprised of Aqualon and Food Gums); and Chemical Specialties (comprised of Resins and FiberVisions). 3 The financial information regarding our segments, which includes net sales and profit from operations for each of the three years ended December 31, 1999 and capital employed as of December 31, 1999, 1998 and 1997, is provided in Note 26 to the Consolidated Financial Statements. See Part II, Item 8. PROCESS CHEMICALS AND SERVICES (PULP AND PAPER AND BETZDEARBORN) Products and services in this segment are designed to enhance the manufacturing processes, reduce the operating costs or improve the quality of the end products of our customers. At the same time, we help our customers meet their environmental objectives and regulatory requirements. Pulp and Paper and BetzDearborn sell each other's products to their customers and Pulp and Paper also sells Aqualon's products to its customers. In August 1999, we completed the acquisition of the Scriptset water soluble polymer resin business from Solutia Inc. Since 1991, Hercules had an exclusive license to sell Solutia's products in North America to the paper industry. In January 2000, this segment and United States Filter Corporation, a Vivendi Water Company, a global provider of commercial, industrial, municipal and residential water and wastewater systems, entered into an alliance to sell jointly USFilter's capital and chemical feed equipment and Hercules' water and process treatment chemicals.
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS - -------- ------------------ --------------- PULP AND PAPER Performance chemicals: Makers of tissues, Wet strength, dry strength and sizing paper towels, packaging, beverage Process treatment chemicals: containers, newsprint, Deposit control, biofouling control, papers for magazines and foam control, clarification, retention/drainage, books, printing and felt conditioning, deinking, fiber recovery, water writing paper and closure and crepe and release aids other stationery items such as labels and Water treatment chemicals: envelopes Influent water, effluent water, cooling towers and boiler systems BETZDEARBORN Water treatment: Industrial, commercial Influent water, boilers, cooling towers and and institutional wastewater establishments; petroleum refineries, Process treatment: chemical plants, Petroleum refining, chemical processing, metals manufacturers of metals, processing and finishing, automotive assembly, automobile assembly sugar and alcohol production and mineral plants and makers of food processing and beverages
2 4 FUNCTIONAL PRODUCTS (AQUALON AND FOOD GUMS) Products in this segment modify the physical properties of aqueous (water-based) and non-aqueous systems, are principally derived from natural resources and are sold as key ingredients to other manufacturers. A broad range of industries use our products for a variety of applications, including the world's processed food industry (to stabilize and gel foods), construction materials manufacturers (for tile cement) and paint manufacturers (to thicken paints). Aqualon sells products produced by Food Gums to Aqualon's personal care product customers, while Pulp and Paper and Food Gums sell Aqualon products to their customer bases. On December 10, 1999, we announced our intention to close our nitrocellulose operations due to economic conditions brought on by a persistent worldwide over-supply. Since that time, we have entered into a non-binding letter of intent to sell this product line to an undisclosed buyer. We cannot assure you that the sale of this product line will be consummated. In December 1999, we sold our 70% interest in Algas Marinas, our Chilean agar business. On February 22, 2000, we announced our intention to contribute our Food Gums division to a newly organized business venture with Lehman Brothers Merchant Banking Partners II L.P. See "Recent Events" on page 1.
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS - -------- ------------------ --------------- AQUALON Water-soluble polymers: Manufacturers of interior and Hydroxyethylcellulose (HEC), exterior water-based paints, Carboxymethylcellulose (CMC), oilfield service companies for Methylcellulose (MC) and derivatives oil and gas exploration, paper and Hydroxypropylcellulose (HPC) mills, construction material manufacturers and makers of oral hygiene products, cosmetics and dairy and bakery products Solvent-soluble polymers: Producers of furniture lacquer, Pentaerythritol (PE) and printing inks and aviation Ethylcellulose (EC) and fluids Nitrocellulose (NC) FOOD GUMS Pectin: ingredient for jams and jellies, Multi-national and regional yogurt fruit preparations, confectionery, manufacturers and processors dairy applications, bakery products and of food products low-fat and no-fat foods Carrageenan: ingredient for dairy, meat, poultry and fish products, bakery glazings and toothpaste
3 5 CHEMICAL SPECIALTIES (RESINS AND FIBERVISIONS) In this segment, we manufacture hydrocarbon and rosin-based resins. We are the only global manufacturer to make both of these resins. We are also the largest manufacturer of thermal bond polypropylene staple fibers used in products like disposable diapers. In August 1999, Hercules acquired the water soluble polymer resin business of Solutia Inc. In addition, to its use in the paper industry, these products are sold in the adhesive and other industrial specialty markets. In September 1999, FiberVisions and Chisso Corporation announced their plans to establish a joint venture to develop and market bicomponent fibers for use in hygienic and other applications. In the fourth quarter of 1999, Hercules announced its intention to discontinue manufacture of pure dicumyl peroxide at the Beringen, Belgium facility.
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS - -------- ------------------ --------------- RESINS Hydrocarbon resins: for adhesives and Makers of consumer graphic arts and industrial products such as masking, Rosin resins: for adhesives, food, packaging, arts and duct rubber and plastics tape, construction materials, beverages, Terpene resins: for chewing gum chewing gum, wire and and adhesives cables, plastics, fragrances and flavors, Peroxides: for wire and cable insulation, printing inks and copier plastics and rubber toner Terpene specialties: for flavor and fragrance in household and industrial products FIBER VISIONS Polypropylene and polyethylene Makers of disposable Monocomponent fibers and bicomponent products, feminine care (PE/PP) fibers: for disposable hygiene products products, upholstered fabrics, automotive Textile fibers: for automotive, decorative textiles and and industrial applications agricultural fabrics
RAW MATERIALS AND ENERGY SUPPLY Raw materials and supplies are purchased from a variety of industry sources, including agricultural, forestry, mining, petroleum, and chemical industries. Important raw materials for the Process Chemicals and Services segment are cationic and anionic polyacrylarnides and emulsions, biocides, amines, surfactants, rosin, adipic acid, epichlorohydrin, fumaric acid, stearic acid, diethylenetriamine, phosphorus trichloride, wax and starch. Raw materials important to the Functional Products segment are acetaldehyde, fatty acids, chemical cotton, woodpulp, ethyl chloride, alcohols, chlorine, ethylene oxide, propylene oxide, monochloroacetic acid, methyl chloride, caustic, inorganic acids, guar splits, seaweed, terpenes and citrus peel. The important raw materials for the Chemical Specialties segment are ketones, alcohols, phenol, adipic acid, epichlorohydrin, fumaric acid, stearic acid, diethylenetriamine, phosphorus trichloride, wax, casein, starch, pigments, antioxidants, d-limonene, turpentine, crude tall oil, rosin, pine wood stumps, aromatic and aliphatic resin fonners, cumene, catalysts, pure monomers, toluene, clay, process oils, polyethylene resin and polypropylene resin. 4 6 Major requirements for key raw materials and fuels are typically purchased pursuant to multi-year contracts. Hercules is not dependent on any one supplier for a material amount of its raw material or fuel requirements, but certain important raw materials are obtained from sole-source or a few major suppliers. While temporary shortages of raw materials and fuels may occur occasionally, these items are currently readily available. However, their continuing availability and price are subject to domestic and world market and political conditions as well as to the direct or indirect effect of governmental action or regulations. The impact of any future raw material and energy shortages on our business as a whole or in specific world areas cannot be accurately predicted. Operations and products may, at times, be adversely affected by governmental action, shortages or international or domestic events. COMPETITION The specialty chemicals industry is highly fragmented and its participants offer a broad array of product lines and categories, representing many different products designed to meet specific customer requirements. Individual product or service offerings compete on a global, regional and local level due to the nature of the businesses and products, as well as the end-markets and customers served. The industry has become increasingly global as participants focus on establishing and maintaining leadership positions in relatively narrow market niches. Many of our businesses face the competitive pressures discussed above, including industry consolidation, pricing pressures and competing technologies. In Pulp and Paper, for example, our end-markets are consolidating and many of our competitors are attempting to enhance their product offerings on a worldwide basis through alliances and distributor arrangements. In addition, certain of our businesses are subject to intense pricing pressures in various product lines, such as fibers in our hygiene products line and carrageenan in our food ingredients line. FiberVisions, as a fibers manufacturer for carded applications, faces competition from spunbond (SB) and spunbond/melt blown/spunbond (SMS) technologies. SB/SMS products may offer cost savings compared to the products of FiberVisions; however, FiberVisions believes that its carded products provide improved softness and acquisition and distribution properties preferred by certain segments of the disposable diaper and other hygiene products markets. PATENTS AND TRADEMARKS Patents covering a variety of products and processes have been issued to us and our assignees. We are licensed under certain other patents held by other parties covering our products and processes. Our rights under these patents and licenses constitute a valuable asset. We or our wholly owned subsidiaries also have many global trademarks covering our products. Some of the more significant trademarks include: Aquapel(R) sizing agent, Hercon(R) sizing emulsions, Aqualon(R) water-soluble polymers, Natrosol(R) hydroxyethylcellulose, Culminal(R) methylcellulose, Klucel(R) hydroxypropylcellulose, Natrosol FPS(R) water-soluble polymer suspension, Precis(R) sizing agent, Novus(R) polymer, Dianodic(R) cooling water products, Continuum(R) cooling water products, Kymene(R) resin, Regalrez(R) resin, Slendid(R) fat replacer and Herculon(R) fiber. We do not consider any individual patent, license or trademark to be of material importance to Hercules taken as a whole. RESEARCH AND DEVELOPMENT Research and development efforts are directed toward the discovery and development of new products and processes, the improvement and refinement of existing products and processes, the development of new applications for existing products and cost improvement initiatives. For example, in 1999 we entered into an agreement with a biotechnology research and development company to develop new proprietary industrial enzymes for use in new product and process development. We spent $85 million on research activities during 1999, as compared to $61 million in 1998 and $53 million in 1997. 5 7 Process Chemicals and Services currently focuses its research and development efforts on growth (innovative new product development), technical sales and services (incremental improvements to existing products and services) and cost reduction programs to meet diverse customer needs worldwide. Our state-of-the-art facilities located in Europe and the U.S. are large and sophisticated research and development laboratories with pilot plant capabilities that simulate actual operating conditions in our customer facilities. This allows an accurate assessment of the potential impact of new products on plant performance. New product development for performance chemicals is focused on improving end-use properties. Understanding the product end uses is a critical step in the development of strength additives and internal and surface sizes, as well as in the design of products for tissue creping, release and softeners. In four regional operations centers located in Europe, Asia Pacific, South America and the U.S., our scientists conduct research and customer optimization studies focused on solving water and process treatment challenges by using sophisticated techniques and equipment to provide high level analytical testing and advanced technical support to customers worldwide. Aqualon focuses its research and development efforts on targeted, market-oriented technology programs, process technology and responsive technical service to customers. Food Gums focuses its advanced process technology programs on pectin and carrageenan extraction yield improvement, cheaper peel sources for pectin, lower cost processes for carrageenan and faster quality control methods. We have a number of Applications and Development Laboratories positioned in Europe, Asia and the Americas that provide technical support to our major customers. At these laboratories, teams work as a network to develop products, identify new product applications and solve customer problems. Resins focuses a significant portion of its research and development efforts primarily on cost improvement techniques in production processes and the procurement of raw materials. It also engages in new product development (such as resins for new adhesive systems) and modifying existing products for new applications. FiberVisions' major focus in its hygiene product unit is to improve fiber strength while enhancing product properties for loft, softness and stretch, thereby creating a competitive platform that is equal to or better than spunbond. Other research is directed toward the binding, dusting and bonding functions of bicomponent fibers. The textile product unit is investigating the use of specific fibers for new applications in the upholstery, automotive, industrial and decorative fabric industries. The research and development effort is primarily geared toward the development of new fibers and new applications for existing markets. FiberVisions has research and development facilities in the U.S. and Europe designed to serve the business needs of its customers. Pilot spinning and processing lines are used to examine new polymers and processing concepts such as monocomponent or bicomponent fibers from single filament spinning to full-scale production facilities. ENVIRONMENTAL MATTERS We believe that we are in compliance in all material respects with applicable federal, state, and local environmental laws and regulations. Expenditures relating to environmental cleanup costs have not materially affected, and are not expected to materially affect, capital expenditures or competitive position. Additional information regarding environmental matters is provided in Item 3. EMPLOYEES As of December 31, 1999, we had 11,347 employees worldwide. Approximately 6,600 were located in the United States, and, of these employees, about 14% were represented by various local or national unions. 6 8 INTERNATIONAL OPERATIONS Information on net sales and long-lived assets by geographic areas, for each of the three years ended December 31, 1999, appears in Note 26 to the Consolidated Financial Statements. See Part II, Item 8. Direct export sales from the United States to unaffiliated customers were $342 million, $319 million, and $309 million for 1999, 1998, and 1997, respectively. Our operations outside the United States are subject to the usual risks and limitations related to investments in foreign countries, such as fluctuations in currency values, exchange control regulations, wage and price controls, employment regulations, effects of foreign investment laws, governmental instability (including expropriation or confiscation of assets) and other potentially detrimental domestic and foreign governmental policies affecting United States companies doing business abroad. ITEM 2. PROPERTIES: Our corporate headquarters and major research center are located in Wilmington, Delaware, while the administrative headquarters of BetzDearborn is located in Trevose, Pennsylvania. We also own a number of plants and facilities worldwide, in locations strategic to the source of raw materials or to our customers. All of our principal properties are owned by us, except for our corporate headquarters, which is leased. The following are our major worldwide plants: Process Chemicals and Services - BETZDEARBORN - Addison, Illinois; Bakersfield, California; Beaumont, Texas; Buenos Aires, Argentina; Chalon, France; Crissey, France; Edmonton, Alberta, Canada; Ferentino, Italy; Garland, Texas; Helsingborg, Sweden; Herentals, Belgium; Houston, Texas; Hsin Chu Hsien, Taiwan; Iksan City, Korea; Ingelburn, Australia; Jurong Town, Singapore; Kilafors, Sweden; Langhorne, Pennsylvania; Macon, Georgia; Mississauga, Ontario, Canada; New Philadelphia, Ohio; Orange, Texas; Point-Claire, Quebec, Canada; Pudahuel, Santiago, Chile; Qualiano, Italy; Reserve, Louisiana; Santafe de Bogota, Colombia; Santiago, Chile; Sara, Mexico; Sorocaba, Brazil; Stonehouse, Gloucester, United Kingdom; Surabaya, Indonesia; Valencia, Venezuela; Washougal, Washington; Widnes, Cheshire, United Kingdom; and PULP AND PAPER - Aberdeen, Scotland; Beringen, Belgium; Burlington, Ontario, Canada; Busnago, Italy; Chicopee, Massachusetts; Franklin, Virginia; Hattiesburg, Mississippi; Kalamazoo, Michigan; Kim Cheon, Korea; Lilla Edet, Sweden; Mexico City, Mexico; Milwaukee, Wisconsin; Nantou, Taiwan; Pandaan, Indonesia; Paulinia, Brazil; Pendlebury, England; Portland, Oregon; St. Jean, Quebec, Canada; Sandarne, Sweden; Savannah, Georgia; Shanghai, China; Sobernheim, Germany; Tampere, Finland; Tarragona, Spain; Traun, Austria; Voreppe, France; and Zwijndrecht, The Netherlands. Functional Products - AQUALON - Alizay, France; Doel, Belgium; Hopewell, Virginia; Kenedy, Texas; Louisiana, Missouri; Parlin, New Jersey; Zwijndrecht, The Netherlands; and FOOD GUMS - Cebu, The Philippines; Grossenbrode, Germany; Lille Skensved, Denmark; and Limeira, Brazil. Chemical Specialties - FIBERVISIONS L.L.C. - Athens, Georgia; Covington, Georgia; Suzhou, China; and Varde, Denmark; and RESINS - Beringen, Belgium; Brunswick, Georgia; Burlington, Ontario, Canada; Franklin, Virginia; Gibbstown, New Jersey; Hattiesburg, Mississippi; Jefferson, Pennsylvania; Middelburg, The Netherlands; Portland, Oregon; San Juan del Rio, Mexico; Savannah, Georgia; Tokushima, Japan; and Uruapan, Mexico. Our plants and facilities, which are continually added to and modernized, are generally considered to be in good condition and adequate for business operations. From time to time we discontinue operations at, or dispose of, facilities that have for one reason or another become unsuitable. For example, we have decided to close our nitrocellulose operations due to economic conditions brought on by a persistent worldwide over-supply. 7 9 We have initiated the following major expansion projects designed to strengthen our market position in key growth areas, while continuing to improve our manufacturing efficiencies: - a 15,000 metric ton capacity expansion of long spin staple fiber in China; - a 7,000 metric ton methylcellulose capacity increase in Belgium; - a 2,200 metric ton pectin capacity increase in Germany; - a 400 metric ton hydroxypropylcellulose capacity increase in Virginia; and - a 700 metric ton capacity plant for the manufacture of high-performance paper chemicals in China. ITEM 3. LEGAL PROCEEDINGS: ENVIRONMENTAL General Hercules has been identified as a potentially responsible party (PRP) by U.S. federal and state authorities, or by private parties seeking contribution, for the cost of environmental investigation and/or cleanup at numerous sites. The estimated range of the reasonably possible share of costs for the investigation and cleanup is between $60 million and $230 million. The actual costs will depend upon numerous factors, including the number of parties found responsible at each environmental site and their ability to pay; the actual methods of remediation required or agreed to; outcomes of negotiations with regulatory authorities; outcomes of litigation; changes in environmental laws and regulations; technological developments; and the amount of time of remedial activity required, which could range from 0 to 30 years. Hercules becomes aware of sites in which it may be named a PRP in investigatory and/or remedial activities through correspondence from the U.S. Environmental Protection Agency, or other government agencies, or through correspondence from previously named PRPs, who either request information or notify us of our potential liability. We have established procedures for identifying environmental issues at our plant sites. In addition to environmental audit programs, we have environmental coordinators who are familiar with environmental laws and regulations and act as a resource for identifying environmental issues. United States v. Vertac Corporation, USDA No. LR-C-92-137 (E.D. Ark.) Litigation over liability at Jacksonville, Arkansas, the most significant site, has been pending since 1980. As a result of a pretrial Court ruling in October 1993, Hercules has been held jointly and severally liable for costs incurred, and for future remediation costs, at the Jacksonville site by the District Court, Eastern District of Arkansas (the Court). Other defendants in this litigation have either settled with the government or, in the case of the Department of Defense (DOD), have not been held liable. We appealed the Court's order finding the DOD not liable. On January 1, 1995, the Eighth Circuit Court of Appeals upheld the Court's order. We filed a petition to the U.S. Supreme Court requesting review and reversal of the Eighth Circuit Court ruling. This petition was denied on June 26, 1995, and the case was remanded to the District Court for further proceedings. On May 21, 1997, the Court issued a ruling that Uniroyal is liable and that Standard Chlorine is not liable to Hercules for contribution. Through the filing of separate summary judgment motions, Hercules and Uniroyal raised a number of defenses to the United States' ability to recover its costs. On October 23, 1998, the Court denied those motions and granted the United States' summary judgment motion, ordering Hercules and Uniroyal to pay the United States approximately $103 million plus any additional response costs incurred or to be incurred after July 31, 8 10 1997. Trial testimony on the issue of allocation between Hercules and Uniroyal was completed on November 6, 1998. On August 6, 1999, the Court issued a final judgment in which it reduced the $103 million from the previous ruling on summary judgment by approximately $7 million (the amount received by the United States in previous settlements with other parties) and added applicable interest to reach a final total adjudged liability of approximately $100.5 million. This final judgment was based on the Court's findings that (a) Hercules and Uniroyal were jointly and severally liable for approximately $89 million plus any additional response costs incurred or to be incurred after May 31, 1998, and (b) Hercules was solely liable for an additional amount of approximately $11 million. This judgment finalizes the Court's 1993 and 1997 non-final orders in which Hercules and Uniroyal were held jointly and severally liable for past and future remediation costs at the site. Hercules appealed these rulings to the United States Court of Appeals for the Eighth Circuit on December 16, 1999. On February 8, 2000, the Court issued a final judgment on the allocation between Uniroyal and Hercules, finding Uniroyal liable for 2.6 percent and Hercules liable for 97.4 percent of the costs at issue. Hercules appealed that judgment on February 10, 2000. That appeal has been docketed and consolidated with the earlier mentioned appeal. Oral argument before the United States Court of Appeals for the Eighth Circuit is presently scheduled for mid-2000. Neither of the Court's final judgments has changed our outlook on the potential outcome of this matter. Hercules Incorporated v. Aetna Casualty & Surety Company, et al., Del. Super., C.A. No. 92C-10-105 and 90C-FE-195-1-CV (consolidated) In 1992, Hercules brought suit against its insurance carriers for past and future costs for cleanup of certain environmental sites. In April 1998, the trial regarding insurance recovery for the Jacksonville, Arkansas site (see discussion above) was completed. The jury returned a "Special Verdict Form" with findings that, in conjunction with the Court's other opinions, were used by the Court to enter a judgment in August 1999. The judgment determined the amount of Hercules' recovery for past cleanup expenditures and stated that Hercules is entitled to similar coverage for costs incurred since September 30, 1997 and in the future. Hercules has not included any insurance recovery in the estimated range of costs above. Since entry of the Court's August 1999 order, Hercules has entered into settlement agreements with several of its insurance carriers and has recovered certain settlement monies. Pursuant to the settlement agreements, the terms of those settlements and amounts recovered are confidential. Brunswick, Georgia Consent Order and Related Matters In December 1997, Hercules received notice of an enforcement action by the State of Georgia, Environmental Protection Department (EPD). In the notice, EPD requested that Hercules enter into a proposed Consent Order, alleged violations of the Resource Conservation and Recovery Act (RCRA) and sought a civil penalty of $250,000. Hercules, without admitting liability, entered into a Consent Order with the State of Georgia settling those claims. The Consent Order was finalized and became effective in January 1999. The Consent Order requires Hercules to pay a fine of $80,000, install 3 aquaria in the Brunswick, Georgia community, maintain the aquaria for 10 years and remediate certain soils that are located at Hercules Brunswick, Georgia plant. That penalty was timely paid, and Hercules is currently in compliance with that Consent Order. In February 1999, the Brunswick, Georgia plant was subject to a multi-media inspection conducted jointly by the U.S. Environmental Protection Agency (EPA) and EPD. As a result of that inspection, several potential areas of non-compliance with applicable environmental laws were identified. We have already addressed many of these potential areas of non-compliance, and are working with both EPA and EPD to address the others. In March 2000, EPD sent a proposed Consent Order to Hercules which included a proposed penalty of $330,000. We are presently in negotiations with EPD regarding the terms of the proposed Consent Order and the amount of the proposed penalty. In addition to the multi-media inspection at the Brunswick, Georgia plant referred to above, the Hattiesburg, Mississippi plant was also subject to a multi-media inspection. As a result of that inspection several potential areas of non-compliance with applicable environmental laws were identified. We have already addressed many of these potential areas of non-compliance, and are working with both EPA and the Mississippi Department of Environmental Quality (DEQ) to address others. In March 2000, DEQ sent a proposed Consent Order to Hercules which included a proposed penalty of $232,500. We are presently in negotiations with DEQ regarding the terms of the proposed Consent Order and the amount of the proposed penalty. ****** At December 31, 1999, the accrued liability of $60 million for environmental remediation represents management's best estimate of the probable and reasonably estimable costs related to environmental remediation. The extent of liability is evaluated quarterly. The measurement of the liability is evaluated based on currently available information, including the process of remedial investigations at each site and the current status of negotiations with regulatory authorities regarding the method and extent of apportionment of costs among other PRPs. Hercules does not anticipate that its financial condition will be materially affected by environmental 9 11 remediation costs in excess of amounts accrued, although quarterly or annual operating results could be materially affected. Litigation Current Litigation Hercules is a defendant in numerous lawsuits that arise out of, and are incidental to, the conduct of its business. In these legal proceedings, no specifically identified director, officer, or affiliate is a party or a named defendant. These suits concern issues such as product liability, contract disputes, labor-related matters, patent infringement, environmental proceedings (discussed above), property damage, and personal injury matters. Hercules is a defendant in numerous asbestos-related personal injury lawsuits and claims which typically arise from alleged exposure to products which were sold by a former subsidiary of Hercules, or from alleged exposure to asbestos contained in facilities owned or operated by Hercules. In December 1999, Hercules entered into a settlement agreement to resolve the majority of these matters. In connection with that settlement, Hercules entered into an agreement with several of its insurance carriers pursuant to which a majority of the amounts paid will be insured. The terms of both agreements are confidential. In June 1998, Hercules, along with Georgia-Pacific and AlliedSignal, were sued in Georgia State Court by 423 plaintiffs for alleged personal injuries and property damage. This litigation is captioned Coley, et al. v. Hercules Incorporated, et al., No. 98 VSO 140933 B (Fulton County, Georgia). Plaintiffs allege they were damaged by the discharge of hazardous waste from the companies' plants. This case is in the early stages of motion practice and discovery. We have denied liability and intend to vigorously defend. In August 1999, Hercules was sued in an action styled as Cape Composites, Inc. v. Mitsubishi Rayon Co., Ltd., Case No. 99-08260 (U.S. District Court, Central District of California), one of a series of similar class action lawsuits brought on behalf of purchasers of carbon fiber and carbon prepreg in the United States (excluding the government) from the named defendants from January 1, 1993 through January 31, 1999. In these lawsuits, plaintiffs allege violations of Section 1 of the Sherman Antitrust Act for alleged price fixing. In September 1999, these lawsuits were consolidated by the Court into a case captioned Thomas & Thomas Rodmakers v. Newport Adhesives and Composites, Case No. CV-99-07796-GHK (U.S. District Court, Central District of California), with all related cases ordered dismissed. This lawsuit is in the early stages of motion practice and discovery. Hercules, which is named in connection with its former Composites Products Division, which division was sold to Hexcel Corporation in 1996, has denied the material allegations set forth in the consolidated complaint. Hercules intends to vigorously defend this action. In December 1999, an action was filed in the U.S. District Court for the Eastern District of Pennsylvania on behalf of two classes of individuals: (1) veterans of the South Korean military who claim they were exposed to Agent Orange and other chemical defoliants used in the demilitarized zone between North and South Korea between 1967 and 1970 and (2) veterans of the United States military who also claim to have been similarly exposed. This case is captioned Chank Ok-Lee, Individually and as Representative of a Class, and Thomas Wolfe, Individually and as Representative of a Class v. Dow Chemical Co., et al., Civil Action No. 99-6127 (U.S. District Court, Eastern District of Pennsylvania). The case is in the earliest stages of motion practice, including a motion to transfer venue to the Eastern District of New York, where Agent Orange related lawsuits have previously been consolidated. Litigation Resolved in 1999 Hercules was a defendant in three Qui Tam (Whistle Blower) lawsuits in the U.S. District Court for the Central District of Utah, brought by former employees of the Aerospace business sold to Alliant Techsystems Inc. in March 10 12 1995. The first suit (United States of America ex. rel. Katherine A. Colunga v. Hercules Incorporated, et al., Civil No. 89-C-954B(U.S. District Court, Central District of Utah) was dismissed in July 1998. United States of America ex. rel. Benny D. Hullinger, et al., Civil No. 92-CV-085 (U.S. District Court, Central District Utah) The parties to this second lawsuit reached a tentative settlement, subject to approval of the Court, in August 1998. Although it did not intervene in the case, the U.S. Department of Justice ("DOJ") objected to approval of the tentative settlement, arguing that we should only be released from claims that the government contended were actually investigated. The DOJ further argued that the proposed allocation of settlement proceeds between False Claims Act claims and wrongful termination claims should be revised to attribute a higher percentage of recovery to claims arising under the False Claims Act. On February 9, 1999, the Court entered a judgment to approve the settlement and dismiss the lawsuit. On April 12, 1999 the DOJ's 60-day period to appeal the judgment expired without the DOJ having filed a Notice of Appeal. Eight days later, on April 20, 1999, the DOJ filed a Motion to Extend Time for Filing Notice of Appeal. We and the plaintiffs opposed the motion, arguing that the DOJ had not made the showing of excusable neglect required by the rules for such an extension. On May 4, 1999, the Court denied the DOJ's motion. On May 21, 1999, the DOJ determined that they would not appeal further. The Court's judgment dismissing the lawsuit became final on May 28, 1999. United States of America ex. rel. P. Robert Pratt v. Alliant Techsystems, Inc. and Hercules Incorporated, Civil No. 95-4812 SVW (U.S. District Court, Central District of California) In March 1995, we sold our Aerospace business to Alliant Techsystems, Inc. As part of the sale, we received an ownership interest in Alliant. In March 1997, Alliant and Hercules received a partially unsealed complaint that named both as defendants, initiated on an unknown date, and filed in an undisclosed federal court, in a Qui Tam action by a former employee alleging violations of the False Claims Act. The action was subsequently identified as United States of America ex. rel. P. Robert Pratt v. Alliant Techsystems, Inc and Hercules Incorporated. The action alleged labor mischarging at Alliant's Bacchus Works facility in Magna, Utah, and contained a claim for wrongful termination. Damages were not specified, and Alliant and Hercules agreed to share equally the cost of defense until such time as a determination was made as to the applicability of the indemnification provisions of the Purchase and Sale Agreement between Alliant and Hercules. In February 1998, the parties reached a tentative settlement, which has since been finalized, under which all claims alleging mischarging to the Intermediate Nuclear Forces Contract were settled. The settlement was recognized in the fourth quarter 1997. Other portions of the complaint, which included allegations of mischarging to other government contracts and claims for wrongful termination of employment were not resolved by the settlement. The government did not intervene in these other matters. In August 1998, the parties reached a tentative settlement of the remaining portions of the complaint, subject to approval of the Court. The DOJ objected to approval of the tentative settlement, arguing that we should only be released from claims that the government contended were actually investigated, and that the settlement agreement should have contained certain provisions preventing Alliant from recovering certain costs under its government contracts. On February 17, 1999, the Court entered a judgment approving the settlement and dismissing the lawsuit. On March 23, 1999, the DOJ filed a Notice of Appeal. In subsequent discussions with DOJ's counsel, Hercules and Alliant agreed to amend the settlement agreement to include provisions that prevent Alliant from recovering under its government contracts the costs that had been the subject of prior discussions with the DOJ. Following such agreement, the DOJ withdrew its appeal. At this point, the dismissal of the lawsuit became final. The amendment to the settlement agreement was submitted to the Court for its approval on August 2, 1999. The Court subsequently approved the amendment to the settlement agreement. Jeffrey Shelton Jr., et al. v. Hercules Incorporated, Civil No. LR-C-97-131 (E.D. Ark. 1997) This lawsuit involved two individuals seeking medical monitoring and damages for loss of recreational opportunities. They brought a Resource Conservation and Recovery Act (RCRA) citizens suit against us seeking an injunction which would require us to fund or perform various environmental and health studies and pay for any required remediation to the Bayou Meto. Plaintiffs and Hercules filed motions for summary judgment. In October 1999, the Court granted Hercules' motion for summary judgment and the time for any appeal by the plaintiffs has expired. 11 13 Gary Graham, et al. v. Vertac Chemical Corporation and Hercules Incorporated, Civil No. LR-C-98-678 (U.S. District Court, Eastern District of Arkansas). In addition to the Vertac litigation described above in this Item 3 under "Environmental," this lawsuit was filed by a group of 19 individuals seeking damages for personal injuries and diminution of property value as a result of alleged dioxin contamination from the Jacksonville, Arkansas site. This case was dismissed without prejudice on technical grounds on August 2, 1999. The time to appeal has run. Acosta, et al. v. Betz Laboratories, et al., No. BC 161 669 (1996); Adams, et al. v. Betz Laboratories, et al., No. BC 113 000 (1994); Aguilar, et al. v. Betz Laboratories, et al., No. BC 158 588 (1996); and Aguayo et al. v. Betz Laboratories, et al., No. BC 123 749 (1995). BetzDearborn, along with Pacific Gas and Electric (PG&E), is a defendant in these four lawsuits involving in the aggregate approximately 2,350 plaintiffs pending in the Superior Court of Los Angeles County, California (the lawsuits). BetzDearborn maintained insurance coverage for the purpose of securing protection against alleged product and other liabilities, and certain of the insurance carriers have undertaken to pay the cost of the defense of the lawsuits subject to various reservations of rights. In October 1999, BetzDearborn, several of its insurance carriers, and plaintiffs engaged in a mediation, which led to a settlement of plaintiffs' claims against BetzDearborn, which settlement was approved by the court in February 2000. BetzDearborn also reached a settlement with many of its insurance carriers with respect to these cases. All of these settlement agreements are confidential. ****** At December 31, 1999, the consolidated balance sheet reflects a current liability of approximately $101 million for litigation and claims. Estimated insurance recoveries of approximately $46 million have been reflected in current assets. These amounts represent management's best estimate of the probable and reasonably estimable losses and recoveries related to litigation or claims. The extent of the liability and recovery is evaluated quarterly. While it is not feasible to predict the outcome of all pending suits and claims, the ultimate resolution of these matters could have a material effect upon the financial position of Hercules, and the resolution of any of the matters during a specific period could have a material effect on the quarterly or annual operating results for that period. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: No matter was submitted to a vote of security holders during the fourth quarter of 1999, through the solicitations of proxies or otherwise. 12 14 PART II ITEM 5. MARKET FOR HERCULES' COMMON STOCK AND RELATED STOCKHOLDER MATTERS: Our common stock is listed on the New York Stock Exchange (ticker symbol HPC), The Stock Exchange, London, and the Swiss Stock Exchange. It is also traded on the Philadelphia, Midwest, and Pacific Exchanges. The approximate number of holders of record of common stock ($25/48 stated value) as of March 15, 2000, was 19,434.
Period High Low ------ ---- --- 1998 First Quarter............................................... 51 3/8 45 3/16 Second Quarter.............................................. 50 1/2 40 1/2 Third Quarter............................................... 41 1/4 24 5/8 Fourth Quarter.............................................. 35 1/2 24 15/16 1999 First Quarter............................................... 29 3/8 25 1/4 Second Quarter.............................................. 40 11/16 24 Third Quarter............................................... 40 3/8 27 1/16 Fourth Quarter.............................................. 29 1/16 22 3/8
On December 31, 1999, the closing price of the common stock was $27 7/8. Hercules has declared quarterly dividends as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- 1998 ................................. $0.27 $0.27 $0.27 $0.27 1999 ................................. $0.27 $0.27 $0.27 $0.27
13 15 ITEM 6. SELECTED FINANCIAL DATA: A summary of selected financial data for Hercules for the years and year ends specified is set forth in the table below.
(Dollars and shares in millions, except per share) - -------------------------------------------------------------------------------------------------------------------- FOR THE YEAR 1999 1998* 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Net sales $3,248 $2,145 $1,866 $2,060 $2,427 Profit from operations 480 192 228 441 363 Income before effect of change in accounting principle 168 9 324 325 333 Net income 168 9 319 325 333 Dividends 111 104 98 95 95 Per share of common stock Basic: Earnings before effect of change in accounting principle 1.63 .10 3.27 3.10 2.98 Earnings 1.63 .10 3.22 3.10 2.98 Diluted: Earnings before effect of change in accounting principle 1.62 .10 3.18 2.98 2.87 Earnings 1.62 .10 3.13 2.98 2.87 Dividends 1.08 1.08 1.00 .92 .84 Total assets 5,896 5,833 2,411 2,386 2,493 Long-term debt 1,777 3,096 419 345 298 Company-obligated preferred securities of subsidiary trust 992 200 -- -- --
* 1998 includes significant acquisitions (see Note 1.) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: This discussion should be read in connection with the information contained in the Consolidated Financial Statements and Notes thereto. All references to individual Notes refer to Notes to the Consolidated Financial Statements. ACQUISITIONS, DIVESTITURES, AND UNUSUAL ITEMS In 1999, we incurred $39 million of integration charges ($3 million reflected in cost of sales), primarily for employee incentive and retention, consulting, legal and other costs associated with the BetzDearborn Inc. acquisition, partly offset by a $4 million restructuring charge reversal (see Note 13). Integration charges are not anticipated to be significant in 2000. During the fourth quarter of 1999, we decided to exit the nitrocellulose business, part of the Functional Products segment, and to take steps to address the performance of some of our specialty product lines in the Chemical Specialties segment. As a result of these decisions, we incurred $28 million of pre-tax costs, consisting of $25 million of asset write-downs and disposal costs ($9 million related to the Functional Products segment and $16 million related to the Chemical Specialties segment), and $3 million of severance benefits for approximately 20 manufacturing employees at a Chemical Specialties segment plant (see 14 16 Notes 13 and 16). The 1999 Profit from operations also includes a net $5 million charge related to legal and environmental matters (see Notes 16 and 24). Additionally, a production facility fire, a works accident, and the impact of Hurricane Floyd added approximately $8 million to cost of sales, and an executive transition agreement increased selling, general and administrative expense by $8 million. In 1999, we sold our Chilean Agar business, part of the Functional Products segment, for a pre-tax gain of $16 million (see Notes 16 and 23). In 1998, Hercules made five major acquisitions for an aggregate purchase price of approximately $3,620 million, primarily in cash and assumed debt. These acquisitions were accounted for using the purchase method of accounting, and were financed with borrowed funds (see Note 1). The largest of these acquisitions was the purchase of BetzDearborn, a global specialty chemical company providing water and process treatment to a variety of commercial and industrial processes. Additionally, the company acquired Houghton International's paper chemicals group; Citrus Colloids, a pectin manufacturer; Alliance Technical Products, a manufacturer of resins serving the water-based adhesives industry; and the 49% share of FiberVisions owned by Hercules' joint venture partner, making it a wholly owned subsidiary of Hercules. This business is the world's largest producer of thermal-bond fiber for disposable diapers and other hygienic products. The results of operations of the acquired businesses are included in the Consolidated Financial Statements from the dates of acquisition. In 1999 and 1998, these businesses added approximately $1,537 million and $363 million of revenue, respectively. Selling, general and administrative expenses increased in 1999 and 1998 as a result of the amortization of goodwill and intangible assets acquired, while interest and debt expense increased in both years as a result of increased debt required to fund the acquisitions. As a result of the 1998 acquisitions, Hercules incurred charges of $232 million before taxes ($197 million net of income taxes) in the fourth quarter of 1998; $215 million is reflected in Profit from operations and $17 million, primarily related to termination costs of interest rate swaps on extinguished debt, is reflected in Other income (expense) (see Note 18). The largest portion of the charges reflected in Profit from operations was $130 million for purchased in-process research and development related to the acquisition of BetzDearborn (see Note 15). The remainder of the charges are primarily related to the company's plans and actions to integrate the operations of BetzDearborn and improve the efficiencies of its existing operations and support activities. The charges include $31 million of employee termination benefits ($12 million related to the Process Chemicals and Services segment, $7 million related to the Functional Products segment, $5 million related to the Chemical Specialties segment and $7 million related to corporate infrastructure), $5 million of exit costs primarily related to facility closures in the Process Chemicals and Services segment and $29 million of asset write-downs ($15 million related to the Functional Products segment, $8 million related to the Chemical Specialties segment and $6 million related to the Process Chemicals and Services segment) resulting from adverse business negotiations, the BetzDearborn acquisition, and the loss of a customer (see Notes 13 and 16). Additionally, we incurred approximately $11 million of integration expenses related to the acquisition and other expenses of $9 million. These actions are anticipated to yield cost savings and productivity improvements of approximately $165 million before taxes on an annual basis. Other income (expense) in 1998 also included a $62 million charge from the settlements of long-standing "whistle-blower" lawsuits related to the divested Aerospace business (see Notes 18 and 24). The acquisition of BetzDearborn also resulted in the inclusion of a $94 million liability, subsequently adjusted to $98 million, as part of the purchase price allocation. The adjustment reflects $8 million in additional exit costs, net of a $4 million reduction in employee severance benefits. This liability included approximately $74 million related to employee termination benefits and $24 million for office and facility closures, relocation of BetzDearborn employees and other related exit costs, all of which relate to the Process Chemicals and Services segment (see Notes 1 and 13). With respect to the termination benefits and exit costs incurred in 1998 ($31 million in termination benefits and $5 million in exit costs charged to other operating expenses and $98 million in termination benefits and exit costs charged to goodwill), cumulative cash payments totaled $59 million through 1999 (see Notes 13 and 16). Other operating expenses in 1997 reflected charges of $167 million primarily associated with reorganization of management and the adoption of new competitive strategies, and other costs (see Note 16). Included in these charges were $24 million of termination benefits ($3 million in the Chemical Specialties segment, $7 million in the 15 17 Functional Products segment and $14 million for corporate infrastructure), asset write-offs and other charges of $27 million ($3 million in Process Chemicals and Services, $4 million in Functional Products, $13 million in Chemical Specialties and $7 million related to corporate items), and asset impairments of $95 million ($66 million in the Chemicals Specialties segment, $24 million in the Functional Products segment and $5 million in the Process Chemicals and Services segment). The remaining $21 million is related to environmental expenses and executive retirement benefits. Cash payments for termination benefits totaling $21 million have been made through 1999 and the remaining $3 million is expected to be paid in 2000 (see Notes 13 and 16). The asset impairments were the result of changes in the marketplace and the implementation of alternative strategies which culminated in the realignment of assets in order to reduce costs. Additionally, Other income (expense) in 1997 reflects the following items: a $20 million charge related to acquisition activity; a $32 million charge for legal settlements; and a $368 million gain from the monetization of Hercules' investment in Tastemaker (see Notes 18 and 23). The impairment losses recognized in all three years are calculated pursuant to our policy for accounting for long-lived assets (see Summary of Significant Accounting Policies). The above mentioned unusual items, excluding the $98 million BetzDearborn purchase price allocation, are primarily included in Reconciling items in each of the respective years in the segment footnote disclosure (see Note 26). In June 1997, we completed a joint venture of our polypropylene fibers business (see Note 23). SUBSEQUENT EVENTS On February 22, 2000, we announced a new corporate strategy focused on cash generation, debt reduction and growth of the core businesses: Pulp and Paper, BetzDearborn, and Aqualon. As part of this strategy, we will monetize our investment in our Food Gums business through the formation of a joint venture with Lehman Brothers Merchant Banking Partners II L.P. This new venture will subsequently acquire the Kelco biogums business from Monsanto. The Lehman Brothers partnership will own approximately 72% of the new entity and we will own approximately 28%. We expect that the new entity will have annual revenues of approximately $450 million (see Note 22). Further, we have entered into discussions with a third party to monetize our Resins business and we are beginning to explore alternatives regarding our FiberVisions business (see Note 22). These three businesses account for approximately $900 million of our 1999 revenues. In addition to monetizing assets, we will be concentrating on improving our asset utilization, working capital management and reducing corporate overhead costs. The above actions may result in restructuring charges in 2000 as exit plans are finalized. 16 18 RESULTS OF OPERATIONS (All comparisons are with the previous year, unless otherwise stated.) 1999 VS. 1998: Consolidated revenues increased $1,103 million or 51% primarily from the full year revenue impact of the 1998 acquisition of BetzDearborn and FiberVisions, as well as year-over-year volume improvements in all three segments. These improvements were partially offset by pricing declines in all segments due to competitive pressure and the negative effects of a stronger dollar relative to foreign currencies. Consolidated profit from operations increased $288 million or 150%. However, after adjusting for the unusual items described in the previous section, consolidated profit from operations increased $136 million or 34%. This increase is due to the full year operating profit impact of the acquired businesses along with synergies realized, manufacturing cost improvements and volume gains. Offsetting these increases were the negative impact of pricing declines and the full year impact of goodwill and intangible amortization expense. Process Chemicals and Services segment revenues increased $988 million or 138% primarily due to the full year impact of the acquired BetzDearborn revenues and higher volumes, partly offset by lower pricing due to competitive pressure and consolidation within the paper industry. A relatively stronger dollar, particularly versus the Brazilian real, also negatively impacted the revenue comparison. Profit from operations increased $207 million or 158% reflecting a full year of BetzDearborn results in 1999, synergies realized and manufacturing cost improvements. These improvements were offset by lower pricing and higher supply chain costs. Functional Products segment revenues were flat compared to 1998 as food gums volume and pectin pricing improvements were offset by lower pricing due to competitive pressure and over-capacity in various other markets and also by weak demand in the oilfield markets. Profit from operations increased $3 million or 1%. However, excluding the costs primarily associated with a production facility fire at the Parlin, New Jersey plant, operating profit increased $10 million or 5% primarily due to the recovery of the Asian currencies, particularly the Japanese yen, relative to the dollar and manufacturing cost improvements. Chemical Specialties segment revenues increased $119 million or 21% primarily due to the full year effect of the FiberVisions acquisition and resins volume improvements, partly offset by lower pricing due to competitive pricing pressure and lower polymer costs, along with a stronger dollar relative to foreign currencies. Profit from operations rose $14 million or 19%. Excluding the third quarter 1999 impact of Hurricane Floyd on our resins production facilities, operating profit increased $16 million or 21%. The increase in operating profit is primarily due to the inclusion of FiberVisions results for the full year 1999 and lower polymer cost offset by lower pricing. 1998 VS. 1997: Consolidated revenues increased $279 million or 15% as the increase in revenues from acquisitions was partially offset by the effects of the economic crisis in Southeast Asia, the strength of the U.S. dollar, and competitive pricing pressures. Consolidated profit from operations declined $36 million or 16%. However, after adjusting for the impact of the unusual items described in the previous section, profit from operations increased $12 million or 3%, while operating margins decreased from 21% in 1997 to 19% in 1998. These results are due to the operating profit impact of the revenue variance noted above, coupled with manufacturing cost improvement initiatives, partly offset by higher selling, general, and administrative expenses. Process Chemicals and Services segment revenues increased 62%, resulting from acquisitions. Excluding acquisitions, revenues in this segment were negatively impacted by competitive pricing pressures, the impact of the economic crisis in Southeast Asia, and the weakness of foreign currencies relative to the dollar. Profit from operations increased 31% as the favorable impact of acquisitions was partly offset by the adverse revenue impacts described above, higher raw material costs used in the production of wet strength products in Europe, and higher selling, general, and administrative expenses. Functional Products segment revenues declined 4% on lower volumes, particularly in Asia and Eastern Europe, and also the U.S. oilfield markets, along with the negative impact of weaker foreign currencies relative to 17 19 the dollar, partly offset by acquired revenues and improved pectin pricing. Profit from operations declined 4%. This was the result of volume declines and the negative impact of the weaker foreign currencies offset by improved manufacturing costs and pectin pricing. Chemical Specialties segment revenues increased 8% as the additional revenues from acquisitions were partly offset by lower pricing across the major Resins product lines both in the U.S. and in Europe. Profit from operations rose 12% as the profit from acquisitions was partly offset by the pricing declines in Resins. Interest and debt expense and preferred security distributions of subsidiary trusts increased as a result of the increased debt used to fund the 1998 acquisitions, amortization of debt issue costs and the subsequent refinancing of this debt with equity-like securities (see Notes 6 and 7). Equity in income of affiliated companies declined over the three year period as a result of the monetization of Hercules' investment in Alliant Techsystems in 1997 and 1998 and Hercules' investment in Tastemaker in 1997 (see Note 23). The provision for income taxes reflects effective tax rates of 31% in 1999, 88% in 1998, and 45% in 1997 (see Note 19). The 1999 rate was favorably impacted by the utilization of a capital loss and other adjustments related to prior years' assessments. Both the 1998 and 1997 rates are significantly higher than the federal statutory income tax rate of 35%. The 1998 rate is high because the charges for purchased in-process research and development and goodwill amortization are not deductible for income tax purposes. The impact of these nondeductible items was reduced by favorable state tax settlements relating to a prior year's sale of an investment and favorable federal tax adjustments related to prior years' assessments. The 1997 rate reflects the relatively higher tax rate on the monetization of the Tastemaker and Alliant Techsystems investments, along with required increases to tax reserves related to anticipated assessments from federal, state, and foreign authorities. The 2000 tax rate is anticipated to be approximately 36%. FINANCIAL CONDITION Liquidity and financial resources: Net cash flow from operations was $280 million in 1999, $181 million in 1998, and $187 million in 1997. The 1999 increase reflects higher profit from operations, primarily from businesses acquired and lower tax payments offset by higher interest payments, cash expenditures for integration, termination benefits and other exit costs, along with higher working capital requirements. 1998 included higher interest payments related to increased debt and higher payments of legal settlements, offset by lower income tax payments and cash flow from acquired businesses. As noted above, during 1998, the company completed five acquisitions for approximately $3,620 million, primarily in cash and assumed debt (see Notes 1 and 6). The company financed the acquisitions and refinanced existing debt with borrowings under a $3,650 million credit facility with a syndicate of banks. The company's debt agreement contains restrictive covenants that require maintenance of certain financial covenants, including leverage, net worth, and interest coverage, and provides that the entry of a judgment or judgments involving aggregate liabilities of $50 million or more be vacated, discharged, stayed, or bonded within 60 days of entry of such judgment or judgments. During the second quarter of 1999, we amended our credit agreement to allow for borrowing in euros, as well as in U.S. dollars. Approximately $950 million of U.S. dollar denominated debt was converted to euro indebtedness. In September 1998, we filed a shelf registration to increase accessible securities from $300 million to $3,000 million. The registration allowed for issuance of equity, equity-like, and debt securities. In November 1998, Hercules Trust V, a wholly owned subsidiary trust of Hercules, completed a private placement of $200 million Redeemable Hybrid INcome Overnight Shares (RHINOS). The RHINOS are guaranteed by Hercules (see Note 7). Pursuant to amendments to the RHINOS agreements executed on February 9, 2000: (I) the interest rate on the RHINOS was reduced to London Interbank Offered Rate (LIBOR) plus 1.5%, and (2) the RHINOS can be remarketed at any time at the option of the holder. If the holder elects to initiate a remarketing, 18 20 Hercules has the right to redeem the RHINOS. Upon a successful remarketing, the redemption date of the RHINOS will be extended for an additional year. If the RHINOS are not remarketed, they will be redeemed by Hercules on February 9, 2002 (see Note 7). In March 1999, another wholly owned subsidiary trust commenced a public offering, under the registration statement noted above, and sold $362 million of Trust Originated Preferred Securities (TOPrS) (see Note 7). Proceeds of the offering were used to repay long-term debt. The Trust's obligations are guaranteed by Hercules. In July 1999, we completed a public offering of 5,000,000 shares of our common stock, which provided us with net proceeds of $171.5 million (see Note 9). On the same date, we also completed a public offering of 350,000 CRESTS Units with Hercules Trust II, a wholly owned subsidiary trust (see Note 7). This transaction provided net proceeds to Hercules and Trust II of $340.4 million. We used the proceeds from both offerings to repay long-term debt. Each CRESTS Unit consists of one preferred security of Trust II and one warrant to purchase 23.4192 shares of Hercules common stock at an initial exercise price of $1,000 (equivalent to $42.70 per share). The warrants may be exercised, subject to certain conditions, at any time before March 31, 2029, unless there is a reset and remarketing event. Trust II used the proceeds from the sale of its preferred securities to purchase junior subordinated deferrable interest debentures of Hercules. Hercules will pay interest on the debentures while Trust II will pay distributions on its preferred securities. Both are paid quarterly at an annual rate of 6 1/2% of the scheduled liquidation amount of $1,000 per debenture and/or preferred security. On December 23, 1999, we completed a private placement of 170,000 Floating Rate Preferred Securities (Floating Rate Preferred) with Hercules Trust VI, a wholly owned subsidiary trust (see Note 7). The Floating Rate Preferred are guaranteed by Hercules. This transaction provided net proceeds to Hercules and Trust VI of approximately $170 million. We used the proceeds to repay long-term debt. During the second quarter of 1999, we entered into a financing agreement with a bank, which provided for the sale of promissory notes in the principal amount of up to $20 million at any one time. The agreement, which expired in December 1999, provided for commitments by the bank and Hercules under which the bank purchased promissory notes denominated in a number of foreign currencies in exchange for U.S. dollars. The notes were repayable only to the extent that Hercules had sufficient foreign currency revenue. Neither Hercules nor the bank could cancel their obligations under the agreement. Transaction gains and losses related to the notes were deferred and recognized as an adjustment to the revenue supporting the note repayment. As of December 31, 1999, the company has $564 million available under the revolving credit agreement and $254 million of short-term lines of credit. Capital Structure and Commitments: Total capitalization (stockholders' equity, company obligated preferred securities of subsidiary trusts, and debt) decreased to $4.3 billion at December 31, 1999, from $4.4 billion in the prior year. The ratio of debt-to-total capitalization decreased to 57% at December 31, 1999 from 83% at December 31, 1998 as a result of the Floating Rate Preferred offering in December 1999, the CRESTS Units and common stock offerings during the third quarter and the TOPrS offering during the first quarter. The amount accessible under our shelf registration is $1,763 million. As noted earlier, in February 2000 we announced a new strategy that will be focused on cash generation and debt reduction primarily through monetization of assets and better asset utilization. We expect to generate in excess of $1 billion of cash through these actions. The cash will be used to pay down debt, reduce interest expense by approximately $75 million annually and reduce the ratio of debt to total capitalization to approximately 40%. A quarterly dividend has been paid without interruption since 1913, the company's first year of operation. The annual dividend was $1.08 per share during 1999 and 1998. Capital expenditures during 1999 were $196 million, with 28% of the expenditures related to increased production capacity, compared with 27% in 1998 and 38% in 1997. The remainder mostly relates to cost-savings projects, capacity maintenance, and regulatory requirements. The increase in capital expenditures of $39 million in 19 21 1999 over 1998 is primarily due to higher spending in the Functional Products segment due to the methylcellulose expansion in Doel, Belgium and the pectin expansion in Grossenbrode, Germany. The increase in 1998 capital expenditures of approximately $38 million over 1997 is primarily from companies acquired in 1998 and higher spending in the Functional Products segment. Capital expenditures are expected to approximate $185 million during 2000. This includes funds for continuing or completing existing projects, including the methylcellulose expansion in Doel, Belgium mentioned earlier and to fund new projects. YEAR 2000 The company recognized the need to ensure that its operations and relationships with its business partners would not be adversely affected by the Year 2000 problem, and thus developed and implemented a comprehensive project that addressed those areas of vulnerability. A cross-functional Year 2000 Program Office was created by the company at the corporate level to coordinate and provide policies, guidance, and support for its Year 2000 initiatives. Site compliance teams were formed at all major sites worldwide. In addition to its other Year 2000 activities, the company is engaged in a major project to implement SAP R/3(TM) software. All vendor-supplied SAP code is Year 2000 compliant. The resulting systems comprise the company's core business systems, including sales and distribution, inventory and purchasing, finance and control, product costing, human resources and payroll, and fixed assets. The company believes that the Year 2000 problem has been successfully addressed through its Year 2000 initiatives. The company did not experience any difficulties related to the Year 2000 problem on December 31, 1999 and has not experienced any such difficulties that the company is aware of since that date. The company's operations have not, to date, been adversely affected by any difficulties experienced by any of our suppliers or customers in connection with the Year 2000 problem, and the company will continue to monitor its systems for potential difficulties through the remainder of calendar year 2000. The total cost of the company's Year 2000 project was approximately $12 million. These costs do not include the cost to upgrade or replace process control equipment. These costs were expensed as incurred and were funded through operating cash flow. RISK FACTORS Market Risk - Fluctuations in interest and foreign currency exchange rates affect the company's financial position and results of operations. The company uses several strategies to actively hedge interest rate and foreign currency exposure and minimize the effect of such fluctuations on reported earnings and cash flow. (See "Foreign Currency Translation" and "Financial Instruments and Hedging" in the Summary of Significant Accounting Policies and Notes 18 and 21.) Sensitivity of the company's financial instruments to selected changes in market rates and prices, which are reasonably possible over a one-year period, are described below. Market values are the present value of projected future cash flows based on the market rates and prices chosen. The market values for interest rate risk are calculated by the company utilizing a third-party software model that utilizes standard pricing models to determine the present value of the instruments based on the market conditions as of the valuation date. The company's derivative and other financial instruments subject to interest rate risk consist of debt instruments, interest rate swaps, and currency swaps. At December 31, 1999 and 1998, net market value of these combined instruments was a liability of $3.32 billion and $3.66 billion, respectively. The sensitivity analysis assumes an instantaneous 100-basis point move in interest rates from their levels, with all other variables held constant. A 100-basis point increase in interest rates at December 31, 1999 and 1998 would result in an $80 million and $36 million decrease in the net market value of the liability, respectively. A 100-basis point decrease in interest rates at December 31, 1999 and 1998 would result in a $92 million and $45 million increase in the net market value of the liability, respectively. The change in the sensitivity level from year-end 1998 is primarily from the fixed distribution rate associated with the Trust Originated Preferred Securities issued in 1999 (see Note 7). 20 22 Our financial instruments, subject to changes in equity price risk including the warrants component of the CRESTS Units issued in 1999 (see Note 7), represent a net obligation of $29 million, and an asset of $22 million at December 31, 1999 and 1998, respectively. The sensitivity analysis assumes an instantaneous 10% change in valuation with all other variables held constant. A 10% increase in market values at December 31, 1999 and 1998 would increase the net obligation by $15 million, and the asset portion by $2 million, while a 10% decrease would reduce the net obligation by $12 million and the asset portion by $2 million, respectively. The change in equity price risk from year-end 1998 is primarily from the warrants component of the CRESTS unit issued in 1999. Our financial instruments, subject to foreign currency exchange risk, consist of foreign currency forwards, options, and foreign currency debt and represent a net liability position of $885 million, and a net asset position of $6 million at December 31, 1999 and 1998, respectively. The following sensitivity analysis assumes an instantaneous 10% change in foreign currency exchange rates from year-end levels, with all other variables held constant. A 10% strengthening of the U.S. dollar versus other currencies at December 31, 1999 and 1998 would result in an $89 million decrease in the net liability position, and a $63 million increase in the net asset position, while a 10% weakening of the dollar versus all currencies would result in an $88 million increase in the net liability and a $78 million decrease in the net asset position, respectively. The change in the sensitivity level from year-end 1998 is primarily from replacing cross currency swaps with foreign currency debt to hedge exposure to increased investments in foreign subsidiaries, primarily as a result of the BetzDearborn acquisition. Foreign exchange forward and option contracts are used to hedge the company's firm and anticipated foreign currency cash flows. Thus, there is either an asset or cash flow exposure related to all the financial instruments in the above sensitivity analysis for which the impact of a movement in exchange rates would be in the opposite direction and substantially equal to the impact on the instruments in the analysis. There are presently no significant restrictions on the remittance of funds generated by the company's operations outside the United States. Environmental - Hercules has been identified by U.S. federal and state authorities as a "potentially responsible party" for environmental cleanup at numerous sites. The estimated range of reasonably possible costs for remediation is between $60 million and $230 million. The company does not anticipate that its financial condition will be materially affected by environmental remediation costs in excess of amounts accrued, although quarterly or annual operating results could be materially affected (see Note 24). Environmental remediation expenses are funded from internal sources of cash. Such expenses are not expected to have a significant effect on the company's ongoing liquidity. Environmental cleanup costs, including capital expenditures for ongoing operations, are a normal, recurring part of operations and are not significant in relation to total operating costs or cash flows. Litigation - Hercules is a defendant in numerous lawsuits that arise out of, and are incidental to, the conduct of its business. These suits concern issues such as product liability, contract disputes, labor-related matters, patent infringement, environmental proceedings, property damage, and personal injury matters. While it is not feasible to predict the outcome of all pending suits and claims, the ultimate resolution of these matters could have a material effect upon the financial position of Hercules, and the resolution of any of the matters during a specific period could have a material effect on the quarterly or annual operating results for that period (see Note 24). FORWARD-LOOKING STATEMENT This Annual Report on Form 10-K includes forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, reflecting management's current analysis and expectations, based on reasonable assumptions. Results could differ materially depending on such factors as Hercules' inability to generate cash and reduce debt, business climate, economic and competitive uncertainties, Hercules' inability to monetize certain of its identified businesses, higher manufacturing costs, reduced level of customer orders, ability to integrate BetzDearborn, changes in strategies, risks in developing new products and technologies, environmental and safety regulations and clean-up costs, foreign exchange rates, adverse legal and regulatory developments, and adverse changes in economic and political climates around the world. Accordingly, there can be no assurance that the company will meet analysts' earnings estimates. As appropriate, additional factors are contained in reports filed with the Securities and Exchange Commission. This paragraph is included to provide safe harbor for forward-looking statements, which are not required to be publicly revised as circumstances change. 21 23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK: For discussion of quantitative and qualitative disclosures about market risk, see the caption "Risk Factors" under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND REQUIRED SUPPLEMENTARY DATA HERCULES INCORPORATED
CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Accountants................................................................ 23 Consolidated Statement of Income for the Years Ended December 31, 1999, 1998, and 1997.......................................................................................... 24 Consolidated Balance Sheet as of December 31, 1999 and 1998...................................... 25 Consolidated Statement of Cash Flow for the Years Ended December 31, 1999, 1998, and 1997.......................................................................................... 26 Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 1999, 1998, and 1997................................................................................ 27 Consolidated Statement of Comprehensive Income (Loss) for the Years Ended December 31, 1999, 1998, and 1997.......................................................................... 28 Accounting Policies and Notes to Consolidated Financial Statements............................... 29 SUPPLEMENTARY DATA Summary of Quarterly Results (Unaudited)......................................................... 55 Subsidiaries of Registrant....................................................................... 56
22 24 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and the Board of Directors of Hercules Incorporated Wilmington, Delaware In our opinion, the consolidated financial statements listed in the foregoing index present fairly, in all material respects, the financial position of Hercules Incorporated and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 60 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 25 to the financial statements, in 1997, the Company changed its method of accounting for costs incurred in connection with its enterprise software installation. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania February 24, 2000 23 25
HERCULES INCORPORATED CONSOLIDATED STATEMENT OF INCOME (Dollar in millions, except per share) 1999 1998 1997 ---- ---- ---- Net sales ............................................................. $ 3,248 $ 2,145 $ 1,866 ------- ------- ------- Cost of sales ......................................................... 1,770 1,287 1,169 Selling, general, and administrative expenses ......................... 787 377 248 Research and development .............................................. 85 61 53 Goodwill and intangible asset amortization ............................ 79 22 3 Purchased in-process research and development (Note 15) ............... -- 130 -- Other operating expenses, net (Note 16) ............................... 47 76 165 ------- ------- ------- Profit from operations ................................................ 480 192 228 Equity in income of affiliated companies .............................. 1 10 30 Interest and debt expense (Note 17) ................................... 185 101 39 Preferred security distributions of subsidiary trusts ................. 51 2 -- Other income (expense), net (Note 18) ................................. (2) (22) 374 ------- ------- ------- Income before income taxes and effect of change in accounting principle 243 77 593 Provision for income taxes (Note 19) .................................. 75 68 269 ------- ------- ------- Income before effect of change in accounting principle ................ 168 9 324 Effect of change in accounting principle (Note 25) .................... -- -- (5) ------- ------- ------- Net income ............................................................ $ 168 $ 9 $ 319 ======= ======= ======= Earnings per share (Note 20) Basic: Earnings before effect of change in accounting principle ........ $ 1.63 $ .10 $ 3.27 Effect of change in accounting principle ........................ -- -- (.05) ------- ------- ------- Earnings per share .............................................. $ 1.63 $ .10 $ 3.22 ======= ======= ======= Diluted: Earnings before effect of change in accounting principle ........ $ 1.62 $ .10 $ 3.18 Effect of change in accounting principle ........................ -- -- (.05) ------- ------- ------- Earnings per share .............................................. $ 1.62 $ .10 $ 3.13 ======= ======= =======
The accompanying accounting policies and notes are an integral part of the consolidated financial statements. 24 26
HERCULES INCORPORATED CONSOLIDATED BALANCE SHEET (Dollars in millions) December 31, 1999 1998 ---- ---- ASSETS Current assets Cash and cash equivalents ................................................. $ 63 $ 68 Accounts receivable, net (Note 2) ......................................... 766 663 Inventories (Note 3) ...................................................... 380 416 Deferred income taxes (Note 19) ........................................... 129 93 ------- ------- Total current assets ...................................................... 1,338 1,240 Property, plant, and equipment, net (Note 12) ................................... 1,321 1,438 Investments (Note 4) ............................................................ 47 51 Goodwill (net of accumulated amortization - 1999, $91; 1998, $28) ............... 2,390 2,356 Other intangible assets (net of accumulated amortization - 1999, $39; 1998, $22) ................................................................... 180 192 Prepaid pension (Note 14) ....................................................... 217 218 Deferred charges and other assets ............................................... 403 338 ------- ------- Total assets .............................................................. $ 5,896 $ 5,833 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable .......................................................... $ 320 $ 270 Short-term debt (Note 5) .................................................. 678 566 Accrued expenses (Note 12) ................................................ 561 481 ------- ------- Total current liabilities ................................................. 1,559 1,317 Long-term debt (Note 6) ......................................................... 1,777 3,096 Deferred income taxes (Note 19) ................................................. 287 225 Other postretirement benefits (Note 14) ......................................... 129 136 Deferred credits and other liabilities .......................................... 289 300 ------- ------- Total liabilities ......................................................... 4,041 5,074 Company-obligated preferred securities of subsidiary trusts (Note 7) ............ 992 200 Stockholders' equity Series preferred stock (Note 8) ........................................... -- -- Common stock, $25/48 par value (Note 9) ................................... 83 81 (shares issued: 1999 - 159,976,730; 1998 - 154,823,496) Additional paid-in capital ................................................ 757 504 Unearned compensation (Note 10) ........................................... (123) (130) Other comprehensive losses ................................................ (44) (13) Retained earnings ......................................................... 2,125 2,068 ------- ------- 2,798 2,510 Reacquired stock, at cost (shares: 1999 - 53,587,365; 1998 - 53,995,692) ........ 1,935 1,951 ------- ------- Total stockholders' equity ................................................ 863 559 ------- ------- Total liabilities and stockholders' equity ................................ $ 5,896 $ 5,833 ======= =======
The accompanying accounting policies and notes are an integral part of the consolidated financial statements. 25 27
HERCULES INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOW (Dollars in millions) 1999 1998 1997 ---- ---- ---- CASH FLOW FROM OPERATING ACTIVITIES: NET INCOME .............................................................................. $ 168 $ 9 $ 319 Adjustments to reconcile net income to net cash provided from operations: Depreciation ..................................................................... 144 86 73 Amortization ..................................................................... 106 22 3 Write-off in-process research and development .................................... -- 130 -- Nonoperating gain on disposals ................................................... (23) (23) (398) Noncash charges (credits) ........................................................ (13) 38 92 Other ............................................................................ -- (6) 15 Accruals and deferrals of cash receipts and payments: Affiliates' earnings in excess of dividends received ...................... (1) (6) (25) Accounts receivable ....................................................... (69) 26 (41) Inventories ............................................................... (7) (14) (6) Accounts payable and accrued expenses ..................................... (27) (72) 137 Noncurrent assets and liabilities ......................................... 2 (9) 18 ------- ------- ----- Net cash provided by operations ....................................... 280 181 187 ------- ------- ----- CASH FLOW FROM INVESTING ACTIVITIES: Capital expenditures .................................................................... (196) (157) (119) Proceeds of investment and fixed asset disposals ........................................ 50 600 295 Acquisitions, net of cash acquired ...................................................... (10) (3,109) -- Other, net .............................................................................. (37) (25) (34) ------- ------- ----- Net cash (used in) provided by investing activities ................... (193) (2,691) 142 ------- ------- ----- CASH FLOW FROM FINANCING ACTIVITIES: Long-term debt proceeds ................................................................. 279 3,111 343 Long-term debt repayments ............................................................... (1,360) (247) (130) Change in short-term debt ............................................................... 22 (228) (35) Payment of debt issuance costs and underwriting fees .................................... (19) (66) -- Proceeds from issuance of subsidiary trusts' preferred securities ....................... 792 200 -- Proceeds from issuance of warrants ...................................................... 90 -- -- Common stock issued ..................................................................... 182 10 38 Common stock reacquired ................................................................. (3) (114) (458) Proceeds from issuance of subsidiary preferred stock .................................... 12 -- -- Dividends paid .......................................................................... (83) (104) (98) ------- ------- ----- Net cash (used in) provided by financing activities ................... (88) 2,562 (340) Effect of exchange rate changes on cash ................................................. (4) (1) (2) ------- ------- ----- Net increase (decrease) in cash and cash equivalents .................................... (5) 51 (13) Cash and cash equivalents at beginning of year .......................................... 68 17 30 ------- ------- ----- Cash and cash equivalents at end of year ................................................ $ 63 $ 68 $ 17 ======= ======= ===== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (net of amount capitalized) ............................................. $ 184 $ 100 $ 37 Distributions on trust preferred securities ...................................... 36 -- -- Income taxes paid, net ........................................................... 79 117 152 Noncash investing and financing activities: Conversion of notes and debentures ............................................... 2 8 31 ESOP and incentive plan stock issuances .......................................... 8 196 15 Accounts payable for common stock acquisitions ................................... -- -- 5 Investment in long-term notes .................................................... -- -- 504 Accounts receivable from sale of investment/asset disposals ...................... -- -- 8 Assumed debt of acquired businesses .............................................. -- 307 --
The accompanying accounting policies and notes are an integral part of the consolidated financial statements. 26 28
HERCULES INCORPORATED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Dollars in millions) Other Compre- Unearned hensive Common Paid-in Compen- Income Retained Reacquired Stock Capital sation (Loss) Earnings Stock - -------------------------------------------------------------------------------------------------------------------------------- Balances at January 1, 1997 $79 $493 $ -- $45 $1,942 $1,672 (Common shares: issued 152,269,076; reacquired, 50,866,562) Net income -- -- -- -- 319 -- Common dividends, $1.00 per common share -- -- -- -- (98) -- Foreign currency translation adjustment -- -- -- (47) -- -- Purchase of common stock, 9,536,619 shares -- -- -- -- -- 455 Issuance of common stock: Incentive plans, net, 2,113,805 shares From reacquired stock -- (19) -- -- -- (72) Conversion of notes and debentures, 2,087,939 shares 1 30 -- -- -- -- - -------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1997 $80 $504 $ -- $(2) $2,163 $2,055 (Common shares: issued 154,357,015; reacquired, 58,289,376) Net income -- -- -- -- 9 -- Common dividends, $1.08 per common share -- -- -- -- (104) -- Foreign currency translation adjustment -- -- -- (11) -- -- Purchase of common stock, 2,361,390 shares -- -- -- -- -- 109 Issuance of common stock: Incentive plans, net, 764,201 shares From reacquired stock -- (7) -- -- -- (27) ESOP, 5,890,873 shares from reacquired Stock -- -- (130) -- -- (186) Conversion of notes and debentures, 466,481 shares 1 7 -- -- -- -- - -------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1998 $81 $504 $(130) $(13) $2,068 $1,951 (Common shares: issued 154,823,496; reacquired, 53,995,692) Net income -- -- -- -- 168 -- Common dividends, $1.08 per common share -- -- -- -- (111) -- Foreign currency translation adjustment -- -- -- (31) -- -- Impact of allocation of shares held by ESOP -- -- 7 -- -- -- Purchase of common stock, 126,893 shares -- -- -- -- -- 3 Warrants issued in connection with CRESTS Units offering (Note 7) -- 88 -- -- -- -- Issuance of common stock: Incentive plans, net, 535,220 shares From reacquired stock -- -- -- -- -- (19) Conversion of notes and debentures, 153,234 shares -- 2 -- -- -- -- Public offering, 5,000,000 shares 2 163 -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1999 $83 $757 $(123) $(44) $2,125 $1,935 (Common shares: issued 159,976,730 reacquired, 53,587,365)
The accompanying accounting policies and notes are an integral part of the consolidated financial statements. 27 29
HERCULES INCORPORATED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Dollars in millions) Year Ended December 31, - --------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 ---- ---- ---- Net Income $168 $ 9 $319 Foreign currency translation, net of tax (31) (11) (47) ------ ---- ------ Comprehensive income (loss) $137 $ (2) $272 ==== ===== ====
The accompanying accounting policies and notes are an integral part of the consolidated financial statements. 28 30 HERCULES INCORPORATED SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include the accounts of Hercules Incorporated and all majority-owned subsidiaries where control exists. Following the acquisition of BetzDearborn, the company continued BetzDearborn's practice of using a November 30 fiscal year-end for certain former BetzDearborn non-U.S. subsidiaries, excluding Canada, to expedite the year-end closing process. Investments in affiliated companies with a 20% or greater ownership interest are accounted for using the equity method of accounting and, accordingly, consolidated income includes Hercules' share of their income. USE OF ESTIMATES Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION Revenue is recognized generally upon shipment of goods and passage of title. Service revenue is recognized as services are performed. ENVIRONMENTAL EXPENDITURES Environmental expenditures that pertain to current operations or future revenues are expensed or capitalized according to the company's capitalization policy. Expenditures for remediation of an existing condition caused by past operations that do not contribute to current or future revenues are expensed. Liabilities are recognized for remedial activities when the cleanup is probable and the cost can be reasonably estimated. CASH AND CASH EQUIVALENTS Cash in excess of operating requirements is invested in short-term, income-producing instruments. Cash equivalents include commercial paper and other securities with original maturities of 90 days or less. Book value approximates fair value because of the short maturity of those instruments. INVENTORIES Inventories are stated at the lower of cost or market. Domestic inventories are valued predominantly on the last-in, first-out (LIFO) method. Foreign and certain domestic inventories, which in the aggregate represent 59% of total inventories at December 31, 1999, are valued principally on the average-cost method. PROPERTY AND DEPRECIATION Property, plant, and equipment are stated at cost. The company changed to the straight-line method of depreciation, effective January 1, 1991, for newly acquired processing facilities and equipment. Assets acquired before then continue to be depreciated by accelerated methods. The company believes straight-line depreciation provides a better matching of costs and revenues over the lives of the assets. The estimated useful lives of depreciable assets are as follows: buildings - 30 years; plant, machinery and equipment - 15 years; other machinery and equipment - 3 to 15 years. Maintenance, repairs, and minor renewals are charged to income; major renewals and betterments are capitalized. Upon normal retirement or replacement, the cost of property (less proceeds of sale or salvage) is charged to income. 29 31 GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and Other intangible assets are amortized on a straight-line basis over the estimated future periods to be benefited, generally 40 years for goodwill and 5 to 15 years for other intangible assets. LONG-LIVED ASSETS The company reviews its long-lived assets, including goodwill and other intangibles, for impairment on an exception basis whenever events or changes in circumstances indicate carrying amounts of the assets may not be recoverable through undiscounted future cash flows. If an impairment loss has occurred based on expected future cash flows (undiscounted), the loss is recognized in the income statement. The amount of the impairment loss is the excess of the carrying amount of the impaired asset over the fair value of the asset. The fair value represents expected future cash flows from the use of the assets, discounted at the rate used to evaluate potential investments. FOREIGN CURRENCY TRANSLATION With the exception of operations in countries with highly inflationary economies, the financial statements of Hercules' non-U.S. entities are translated into U.S. dollars using current rates of exchange, with gains or losses included in the Other comprehensive income (loss) component of the stockholders' equity section of the balance sheet. The related allocation for income taxes is not significant. For operations in countries with highly inflationary economies, financial statements are translated at either current or historical exchange rates, as appropriate. These adjustments, along with gains and losses on currency transactions (denominated in currencies other than local currency), are reflected in net income. FINANCIAL INSTRUMENTS AND HEDGING Derivative financial instruments are used to hedge risk caused by fluctuating currency and interest rates. The company enters into forward-exchange contracts and currency swaps to hedge foreign currency exposure. Decisions regarding hedging are made on a case-by-case basis, taking into consideration the amount and duration of the exposure, market volatility, and economic trends. The company uses the fair-value method of accounting, recording realized and unrealized gains and losses on these contracts quarterly. They are included in other income (expense), net, except for gains and losses on contracts to hedge specific foreign currency commitments, which are deferred and accounted for as part of the transaction. Gains or losses on instruments used to hedge the value of investments in certain non-U.S. subsidiaries are accounted for under the deferral method and are included in the foreign currency translation adjustment. It is the company's policy to match the term of financial instruments with the term of the underlying designated item. If the designated item is an anticipated transaction no longer likely to occur, gains or losses from the instrument designated as a hedge are recognized in current period earnings. The company does not hold or issue financial instruments for trading purposes. In the Consolidated Statement of Cash Flow, the company reports the cash flows resulting from its hedging activities in the same category as the related item that is being hedged. Net investment hedges, requiring cash receipts or payments from borrowed foreign currencies not identified with any specific cash flows, are classified as financing activities. The company uses interest rate swap agreements to manage interest costs and risks associated with changing rates. The differential to be paid or received is accrued as interest rates change and is recognized in interest expense over the life of the agreements. Counterparties to the forward exchange, currency swap, and interest rate swap contracts are major financial institutions. Credit loss from counterparty nonperformance is not anticipated. STOCK-BASED COMPENSATION Compensation costs attributable to stock option and similar plans are recognized based on any difference between the quoted market price of the stock on the date of grant in excess of the amount the employee is required to pay to acquire the stock (the intrinsic-value method under Accounting Principles Board (APB) Opinion 25). Such amount, if any, is accrued over the related vesting period, as appropriate. Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation," requires companies electing to continue to use the intrinsic-value method to make pro forma disclosures of net income and earnings per share as if the fair-value-based method of accounting had been applied. 30 32 NEW ACCOUNTING STANDARDS Effective January 1, 1999, we adopted the American Institute of Certified Public Accountants Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). As a result of this adoption, such costs will be amortized over a period of 5 to 10 years. PENDING ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. This statement, as amended by Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The company has not yet determined the impact that the adoption of SFAS 133 will have on its earnings or statement of financial position. RECLASSIFICATIONS Certain amounts in the 1998 and 1997 consolidated financial statements and notes have been reclassified to conform to the 1999 presentation. 31 33 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ACQUISITIONS All acquisitions have been accounted for under the purchase method. The results of operations of the acquired businesses are included in the Consolidated Financial Statements from the dates of acquisition. BetzDearborn - On October 15, 1998, the company acquired all of the outstanding shares of BetzDearborn Inc., a global specialty chemical company engaged in the treatment of water and industrial process systems, for $2,235 million in cash and $186 million in common stock exchanged for the shares held by the BetzDearborn ESOP Trust. The shares were valued using the quoted market price of the stock at the time of exchange. In addition, the company assumed debt with a fair value of $117 million and repaid $557 million of other long-term debt held by BetzDearborn. This acquisition was financed with borrowings under a $3,650 million credit facility with a syndicate of banks (see Note 6). During 1999, we completed the BetzDearborn purchase price allocation and increased goodwill by $96 million, to $2,170 million. The increase to goodwill results from adjustments to the fair value of net tangible assets acquired, completion of the evaluation of pre-acquisition contingencies related to litigation and claims, finalization of plans to exit BetzDearborn activities and foreign currency translation adjustments, net of related tax effects. Goodwill is determined as follows:
(Dollars in millions) Cash paid, including transaction costs $2,235 Common stock exchanged for ESOP trust shares 186 Fair value of debt assumed 117 Payment of BetzDearborn long-term debt 557 ------ $3,095 Less: Fair value of net tangible assets acquired 650 Fair value of identifiable intangible assets acquired 145 Purchased in-process research and development 130 ------ BetzDearborn goodwill as of the date of acquisition $2,170 ======
In accordance with the purchase method of accounting, the adjusted purchase price was allocated to the estimated fair value of net assets acquired, with the excess recorded as goodwill. Goodwill is amortized over 40 years on a straight line basis. Identified intangibles are amortized over 10 to 12 years, on a straight line basis. Additionally, approximately $130 million of the purchase price was allocated to purchased in-process research and development and was charged to expense at the date of acquisition (see Note 15). As of the acquisition date, the company began to formulate plans to combine the operations of BetzDearborn and Hercules. We formed a program office, engaged outside consultants and established several functional integration teams to formulate and implement the plan and capture anticipated synergies. At December 31, 1998, the company had identified and approved various actions such as personnel reductions, consolidation of operations and support functions, closure of redundant or inefficient offices and facilities, and relocation of former BetzDearborn employees. Accordingly, the company included a $98 million liability as part of the purchase price allocation. The liability included approximately $74 million related to employee termination benefits and $24 million for office and facility closures, relocation of BetzDearborn employees and other related exit costs (see Note 13). FiberVisions L.L.C. - In July 1998, the company completed the acquisition of the 49% share of FiberVisions L.L.C. owned by its joint venture partner Jacob Holm & Sons A/S for approximately $230 million in cash, plus assumed debt of $188 million. The allocation of the purchase price resulted in $188 million of goodwill, which is being amortized over its estimated useful life of 40 years. 32 34 The following unaudited pro forma information presents a summary of consolidated results of operations of the company as if the BetzDearborn and FiberVisions acquisitions had occurred at the beginning of each of the periods presented below:
Years Ended December 31, 1998 1997 ---- ---- Net sales $3,276 $3,366 Income (loss) before effect of change in accounting Principle (70) 237 Net income (loss) (70) 226 Net earnings per share: Basic Earnings before effect of change in accounting Principle $(.69) $2.25 Earnings per share (.69) 2.15 Diluted Earnings before effect of change in accounting Principle $(.69) $2.21 Earnings per share (.69) 2.11
The pro forma results of operations are for comparative purposes only and reflect increased amortization and interest expense resulting from the acquisitions described above, but do not include any potential cost savings from combining the acquired businesses with the company's operations. Consequently, the pro forma results do not reflect the actual results of operations had the acquisitions occurred on the dates indicated, and are not intended to be a projection of future results or trends. Other - The company also made three other acquisitions in 1998 for an aggregate purchase price of approximately $105 million in cash. These acquisitions included the worldwide paper chemicals group of Houghton International, Inc. and Citrus Colloids Ltd., a pectin manufacturer, in April 1998, and Alliance Technical Products, Ltd., a rosin dispersions company, in September 1998. Allocations of the purchase prices for these acquisitions resulted in approximately $67 million of goodwill, which is being amortized over estimated useful lives ranging from 30 to 40 years. 2. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of: (Dollars in millions) 1999 1998 ---- ---- Trade $639 $598 Other 143 78 ---- ---- Total 782 676 Less allowance for doubtful accounts 16 13 ---- ---- $766 $663 ==== ====
At December 31, 1999, net trade accounts receivable from customers located in the United States, Europe, the Americas, and Asia were $426 million, $151 million, $35 million, and $11 million, respectively. 3. INVENTORIES
The components of inventories are: (Dollars in millions) 1999 1998 ---- ---- Finished products $187 $218 Materials, supplies, and work in process 193 198 ---- ---- $380 $416 ==== ====
33 35 Inventories valued on the LIFO method were lower than if valued under the average-cost method, which approximates current cost, by $31 million and $33 million at December 31, 1999 and 1998, respectively. 4. INVESTMENTS Total equity investments in affiliated companies were $10 million at December 31, 1999, and $9 million at December 31, 1998. Other investments, at cost or less, were $37 million and $42 million at December 31, 1999 and 1998, respectively. Included in these amounts are non-current marketable securities aggregating $32 million and $31 million for the corresponding years, classified as "available for sale." The value of these investments, based on market quotes, approximates book values. 5. SHORT-TERM DEBT
A summary of short-term debt follows: (Dollars in millions) 1999 1998 ---- ---- Banks $26 $80 Current maturities of long-term debt 652 486 ---- ---- $678 $566 ==== ====
Bank borrowings represent primarily foreign overdraft facilities and short-term lines of credit, which are generally payable on demand with interest at various rates. Book values of bank borrowings approximate market value because of their short maturity period. At December 31, 1999, Hercules had $254 million of unused lines of credit that may be drawn as needed, with interest at a negotiated spread over lenders' cost of funds. Lines of credit in use at December 31, 1999, were $26 million. Weighted-average interest rates on short-term borrowings at December 31, 1999 and 1998, were 6.04% and 5.61%, respectively. 6. LONG-TERM DEBT
A summary of long-term debt follows: (Dollars in millions) 1999 1998 ---- ---- 6.15% notes due 2000 $ 100 $ 100 6.60% notes due 2027 (a) 100 100 7.85% notes due 2000 25 25 6.625% notes due 2003 (b) 125 125 8% convertible subordinated debentures due 2010 (c) 3 3 Term loan tranche A due in varying amounts through 2003 (d) 1,187 1,250 Term loan tranche B due 1999 (d) -- 470 Term loan tranche C due 2000 (d) 318 1,000 Revolving credit agreement due 2003 (d) 336 288 ESOP debt (e) 106 110 Term notes at various rates from 4.44% to 9.60% due in varying amounts through 2006 (f) 80 102 Variable rate loans 41 -- Other 8 9 ------ ------ 2,429 3,582 Current maturities of long-term debt (652) (486) ------ ------ Net long-term debt $1,777 $3,096 ====== ======
(a) 30-year debentures with a 10-year put option, exercisable by bondholder at a redemption price equal to principal amount. 34 36 (b) Par value of $125 million issued June 1993. (c) Subordinated debentures are convertible into common stock at $14.90 per share and are redeemable at the option of the company at varying rates. The annual sinking fund requirement of $5 million, beginning in 1996, has been satisfied through conversions of debentures. (d) The BetzDearborn acquisition was financed with borrowings under a $3,650 million credit facility with a syndicate of banks, and was consummated on October 15, 1998. The syndication included three tranches of varying maturity term loans totaling $2,750 million, of which $1,505 million is outstanding at year end 1999, and a $900 million revolving credit agreement of which $336 million is outstanding at year end 1999. On April 19, 1999, a revised and amended credit agreement was issued to allow borrowings in euros, as well as U.S. dollars. Approximately U.S. $950 million of term loan tranche A domestic borrowings were converted into indebtedness denominated in euros during the second quarter 1999. The facility currently bears interest at London Interbank Offered Rate (LIBOR) plus .75%. In addition, a Canadian subsidiary of ours can borrow up to U.S. $100 million from select lenders in Canada in Canadian dollars that currently bears interest at Bankers' Acceptances Rate plus .75%. Interest rates are reset for one, three, or six months periods at the company's option. The company's debt agreement contains various restrictive covenants that, among other things, require maintenance of certain financial covenants: leverage, net worth, and interest coverage, and provides that the entry of judgment or judgments involving aggregate liabilities of $50 million or more be vacated, discharged, stayed, or bonded pending appeal within 60 days of entry. Issuance costs related to the financing are included in Deferred charges and other assets and are being amortized over the term of the loans, using the effective interest method. As of December 31, 1999, $564 million of the $900 million multicurrency revolver is available for use. (e) The company assumed a $94 million loan related to the BetzDearborn ESOP Trust. The proceeds of the loan were originally used by the ESOP Trust for the purchase of BetzDearborn preferred shares which, upon acquisition by Hercules, were converted into equivalent shares of Hercules common stock (see Note 10). The loan was recorded at a fair market value of $110 million at the date of acquisition, and the $16 million fair value step-up is being amortized over the term of the debt. The loan and guarantee, which bears interest at 8.96%, matures in June 2009. (f) Debt assumed in conjunction with the acquisition of FiberVisions L.L.C. (see Note 1), less repayments through December 31, 1999. Long-term debt maturities during the next five years are $652 million in 2000, $344 million in 2001, $348 million in 2002, $863 million in 2003, and $22 million in 2004. 7. COMPANY-OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST Redeemable Hybrid Income Overnight Shares In November 1998, Hercules Trust V, our wholly owned subsidiary ("Trust V"), completed a private placement of $200 million Redeemable Hybrid INcome Overnight Shares (RHINOS). At the same time as the private placement of the RHINOS, we entered into a forward underwriting agreement to issue $200 million of our common stock upon remarketing of the RHINOS. RHINOS are short-term auction-rate reset Preferred Securities of Trust V, which used the proceeds from the RHINOS sale to purchase junior subordinated notes of Hercules. We used these proceeds to partially repay loans under our credit facility. Hercules pays interest on the junior subordinated notes, and Trust V pays distributions on the RHINOS at a floating rate, initially equal to LIBOR plus 1.75%, which is reset on a quarterly basis. The RHINOS are guaranteed by Hercules. We expected to remarket the RHINOS within twelve months of their issuance; however, we amended the RHINOS agreements in July 1999 to eliminate this requirement. Additionally in July 1999, we issued $175 million of our common stock in an underwritten public offering. In October 1999, the RHINOS agreements were amended to extend the redemption date to January 2000. Pursuant to amendments to the RHINOS agreements executed on February 9, 2000: (1) the interest rate on the RHINOS was reduced to LIBOR plus 1.5%, and (2) the RHINOS will be remarketed at any time at the option of the holder. If the holder elects to initiate a remarketing, Hercules has the right to redeem the RHINOS. Upon a successful remarketing, the redemption date of the RHINOS will be extended for an additional year. If the RHINOS are not remarketed, they will be redeemed by Hercules on February 9, 2002. 35 37 Trust Originated Preferred Securities In March 1999, Hercules Trust I, our wholly owned subsidiary trust ("Trust I"), completed a $362 million underwritten public offering of 14,500,000 shares of 9.42% Trust Originated Preferred Securities. Trust I invested the proceeds from the sale of the Preferred Securities in an equal principal amount of 9.42% Junior Subordinated Deferrable Interest Debentures of Hercules due March 2029. We used these proceeds to repay long-term debt. Trust I distributes quarterly cash payments it receives from Hercules on the Debentures to Preferred Security holders at an annual rate of 9.42% on the liquidation amount of $25 per Preferred Security. We may defer interest payments on the Debentures at any time, for up to 20 consecutive quarters. If this occurs, Trust I will also defer distribution payments on the Preferred Securities. The deferred distributions, however, will accumulate distributions at a rate of 9.42% per annum. Trust I will redeem the Preferred Securities when the Debentures are repaid at maturity on March 31, 2029. Hercules may redeem the Debentures, in whole or, on or after March 17, 2004, in part, before their maturity at a price equal to 100% of the principal amount of the Debentures redeemed, plus accrued interest. When Hercules redeems any Debentures before their maturity, Trust I will use the cash it receives to redeem Preferred Securities and common securities as provided in the trust agreement. Hercules guarantees the obligations of Trust I on the Preferred Securities. CRESTS Units In July 1999, we completed a public offering of 350,000 CRESTS Units with Hercules Trust II, a wholly owned subsidiary trust ("Trust II"). This transaction provided net proceeds to Hercules and Trust II of $340.4 million. The preferred security component of the CRESTS Units was initially valued at $741.46 per unit and the warrant component of the CRESTS Units was initially valued at $258.54 per warrant. Each CRESTS Unit consists of one preferred security of Trust II and one warrant to purchase 23.4192 shares of Hercules common stock at an initial exercise price of $1,000 (equivalent to $42.70 per share). The preferred security and warrant components of each CRESTS Unit may be separated and transferred independently. The warrants may be exercised, subject to certain conditions, at any time before March 31, 2029, unless there is a reset and remarketing event. No reset and remarketing event will occur before July 27, 2004, unless all of our common stock is acquired in a transaction that includes cash for a price above a predetermined level. Trust II used the proceeds from the sale of its preferred securities to purchase junior subordinated deferrable interest debentures of Hercules ("debentures"). As of December 31, 1999, no warrants had been exercised. We pay interest on the debentures, and Trust II pays distributions on its preferred securities. Both are paid quarterly at an annual rate of 6-1/2% of the scheduled liquidation amount of $1,000 per debenture and/or preferred security until the scheduled maturity date and redemption date of June 30, 2029, unless there is a reset and remarketing event. We guarantee payments by Trust II on its preferred securities. Trust II must redeem the preferred securities when the debentures are redeemed or repaid at maturity. We used the proceeds from the CRESTS Units offering to repay long-term debt. Issuance costs related to the preferred security component of the CRESTS Units are being amortized over the life of the security and costs related to the warrants were charged to additional paid-in capital. Floating Rate Preferred Securities In December 1999, Hercules Trust VI, our wholly owned subsidiary trust ("Trust VI"), completed a $170 million private offering of 170,000 shares of Floating Rate Preferred Securities. Trust VI invested the proceeds from the sale of the preferred securities in an equal principal amount of Floating Rate Junior Subordinated Deferrable Interest Debentures due 2000 of Hercules. We used these proceeds to repay long-term debt. Trust VI will distribute quarterly cash payments it receives from Hercules on the debentures to preferred security holders at an annual rate of LIBOR plus 2.45%, which is reset on a quarterly basis, on the liquidation amount of $1,000 per preferred security. We may defer interest payments on the debentures at any time during the 36 38 term of the preferred securities. If this occurs, Trust VI will also defer distribution payments on the preferred securities. The deferred distributions, however, will accumulate distributions at a rate of LIBOR plus 2.45%. Trust VI will redeem the preferred securities when the debentures are repaid at maturity on December 29, 2000. Hercules guarantees the obligations of Trust VI on the preferred securities. 8. SERIES PREFERRED STOCK The series preferred stock is without par value and is issuable in series. There are 2,000,000 shares authorized for issuance, none of which have been issued. 9. COMMON STOCK Hercules common stock has a stated value of $25/48, and 300,000,000 shares are authorized for issuance. At December 31, 1999, a total of 29,848,667 shares were reserved for issuance for the following purposes: 773,784 shares for sales to the Savings Plan Trustee; 13,814,399 shares for the exercise of awards under the Stock Option Plan; 6,028,836 shares for awards under incentive compensation plans; 184,206 shares for conversion of debentures and notes; 850,722 shares for employee stock purchases; and 8,196,720 shares for exercise of the warrant component of the CRESTS Units. For the company's stock repurchase program, from its start in 1991 through year-end 1999, the Board authorized the repurchase of up to 74,650,000 shares of company common stock. Of that total, 6,150,000 shares were intended to satisfy requirements of various employee benefit programs. During this period, a total of 66,617,485 shares of common stock were purchased in the open market at an average price of $37.31 per share. In July 1999, we completed a public offering of 5,000,000 shares of our common stock, which provided us with proceeds of $171.5 million, net of underwriting fees of $3.5 million. We used the proceeds from the common stock offering for the partial repayment of a term loan under our credit facility. Issuance costs associated with the stock offering were charged to additional paid-in capital. 10. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) In connection with the acquisition of BetzDearborn in 1998, the company acquired its ESOP and related trust as a long-term benefit for substantially all of BetzDearborn's U.S. employees. The plan is a supplement to BetzDearborn's 401(k) plan. The ESOP trust had long-term debt of $93 million and $94 million at December 31, 1999 and 1998, respectively, which is guaranteed by Hercules. Upon acquisition, the debt had a fair value in excess of its recorded amount for which a step-up was recorded to be amortized over the remaining term of the debt. The fair value, included in long-term debt, was $106 million and $110 million at December 31, 1999 and 1998, respectively. The proceeds of the original loan were used to purchase BetzDearborn convertible preferred stock, which, at the date of acquisition, was converted into Hercules common stock. Under the provisions of the BetzDearborn 401(k) program, employees may invest 2% to 15% of eligible compensation. The company's matching contributions, made in the form of Hercules common stock, are equal to 50% of the first 6% of employee contributions, and fully vest to employees upon the completion of 5 years of service. The amount of the company's matching contributions are included in ESOP expense. After satisfying the 401(k) matching contributions and the dividends on allocated shares, all remaining shares of ESOP stock are allocated to each eligible participant's account based on the ratio of each eligible participant's compensation to total compensation of all participants. The company's contributions and dividends on the shares held by the trust are used to repay the loan, and the shares are allocated to participants as the principal and interest are paid. Long-term debt is reduced as payments are made on the third party financing. In addition, unearned compensation is also reduced as the shares are allocated to employees. The unallocated shares held by the trust are reflected in unearned compensation as a reduction in stockholders' equity on the balance sheet for $123 million and $130 million at December 31, 1999 and 1998, respectively. 37 39
1999 1998 ---- ---- Allocated 1,807,976 1,776,338 Unallocated 3,814,749 4,052,556 --------- --------- Total shares held by ESOP 5,622,725 5,828,894 ========= =========
The ESOP expense is calculated using the shares-allocated method and includes net interest incurred on the debt of $5 million and $1 million for 1999 and 1998, respectively. The company is required to make quarterly contributions to the plan which enable the trust to service its indebtedness. Net ESOP expense is comprised of the following elements:
1999 1998 ---- ---- ESOP expense $13 $ 3 Common stock dividends (charged to retained earnings) (6) (2) --- --- Net ESOP expense $ 7 $ 1 === === ESOP Contributions $ 9 $ 2 === ===
11. LONG-TERM INCENTIVE COMPENSATION PLANS The company's long-term incentive compensation plans provide for the grant of stock options and the award of common stock and other market-based units to certain key employees and non-employee directors. Through 1994, shares of common stock awarded under these plans normally were either restricted stock or performance shares. During the restriction period, award holders have the rights of stockholders, including the right to vote and receive cash dividends, but they cannot transfer ownership. In 1995, Hercules changed the structure of the long-term incentive compensation plans to place a greater emphasis on shareholder value creation through grants of regular stock options, performance-accelerated stock options, and Cash Value Awards (performance-based awards denominated in cash and payable in shares of common or restricted stock, subject to the same restrictions as restricted stock). Restricted stock and other market-based units are awarded with respect to certain programs. The number of awarded shares outstanding was 926,689, 1,083,613, and 873,627 at December 31, 1999, 1998, and 1997, respectively. Under the company's incentive compensation plans, 6,028,836 shares of common stock were available for grant as stock awards or stock option awards. Stock awards are limited to approximately 15% of the total authorizations. Regular stock options are granted at the market price on the date of grant and are exercisable at various periods from one to five years after date of grant. Performance-accelerated stock options are also granted at the market price on the date of grant and are normally exercisable at nine and one-half years. Exercisability may be accelerated based upon the achievement of predetermined performance goals. Both regular and performance-accelerated stock options expire 10 years after the date of grant. Restricted shares, options and performance-accelerated stock options are forfeited and revert to the company in the event of employment termination, except in the case of death, disability, retirement, or other specified events. The company applies APB Opinion 25 in accounting for its plans. Accordingly, no compensation cost has been recognized for the stock option plans. The cost of stock awards and other market-based units, which are charged to income over the restriction or performance period, amounted to $3 million for 1999, $5 million for 1998, and $4 million for 1997. Below is a summary of outstanding stock option grants under the incentive compensation plans during 1997, 1998, and 1999: 38 40
Regular Performance-Accelerated Weighted-average Weighted-average Number of Shares Price Number of Shares Price ---------------- ----- ---------------- ----- January 1, 1997 3,909,587 $32.49 3,075,806 $49.38 Granted 1,708,100 $40.14 810,125 $41.07 Exercised (1,611,449) $20.97 -- -- Forfeited (4,950) $56.26 (10,534) $53.07 - ---------------------------------------------------------------------------------------------------------------- December 31, 1997 4,001,288 $40.41 3,875,397 $47.63 Granted 2,696,215 $32.75 1,170,890 $41.09 Exercised (279,795) $24.93 -- -- Forfeited (66,430) $41.58 (15,035) $46.09 - ---------------------------------------------------------------------------------------------------------------- December 31, 1998 6,351,278 $37.83 5,031,252 $46.12 Granted 1,705,335 $37.49 1,079,455 $36.52 Exercised (94,275) $22.07 -- -- Forfeited (158,780) $37.80 (99,866) $44.41 - ---------------------------------------------------------------------------------------------------------------- December 31, 1999 7,803,558 $37.94 6,010,841 $44.42
The weighted-average fair value of regular stock options granted during 1997, 1998, and 1999 was $10.13, $8.53, and $8.18 respectively. The weighted-average fair value of performance-accelerated stock options granted during 1997, 1998, and 1999 was $9.39, $9.24, and $7.82 respectively. Following is a summary of regular stock options exercisable at December 31, 1997, 1998, and 1999, and their respective weighted-average share prices:
Weighted-average Number of Shares Exercise Price ---------------- -------------- Options exercisable December 31, 1997 2,013,148 $38.54 Options exercisable December 31, 1998 3,300,628 $41.57 Options exercisable December 31, 1999 4,651,273 $39.95
There were no performance-accelerated stock options exercisable at December 31, 1997, 1998 and 1999. Following is a summary of stock options outstanding at December 31, 1999:
Outstanding Options Exercisable Options Number Weighted-average Weighted- Number Weighted- Exercise Price Outstanding Remaining average Exercisable at average Range at 12/31/99 Contractual Life Exercise Price 12/31/99 Exercise Price ----- ----------- ---------------- -------------- -------- -------------- Regular Stock Options - --------------------- $11 - $20 225,013 1.84 $15.66 225,013 $15.66 $21 - $30 1,810,700 8.30 $25.52 751,305 $25.47 $31 - $40 3,553,945 8.06 $38.19 1,870,540 $38.63 $41 - $60 2,213,900 6.79 $49.97 1,804,415 $50.38 --------- --------- 7,803,558 4,651,273 ========= =========
39 41
Outstanding Options Exercisable Options Number Weighted-average Weighted- Number Weighted- Exercise Price Outstanding Remaining average Exercisable at average Range at 12/31/99 Contractual Life Exercise Price 12/31/99 Exercise Price ----- ----------- ---------------- -------------- -------- -------------- Performance-Accelerated Stock Options - ------------------------------------- $25 - $40 2,125,621 8.69 $36.31 -- -- $41 - $50 3,081,420 6.83 $47.09 -- -- $51 - $61 803,800 6.08 $55.63 -- -- --------- 6,010,841 =========
The company estimates at December 31, 1999, 100% of performance-accelerated stock options will eventually vest. The company's Employee Stock Purchase Plan is a qualified non-compensatory plan, which allows eligible employees to acquire shares of common stock through systematic payroll deductions. The plan consists of three-month subscription periods, beginning July 1 of each year. The purchase price is 85% of the fair market value of the common stock on either the first or last day of that subscription period, whichever is lower. Purchases may range from 2% to 15% of an employee's base salary each pay period, subject to certain limitations. Currently, 850,722 shares of Hercules common stock are registered for offer and sale under the plan. Shares issued at December 31, 1999 and 1998, were 949,464 and 573,445, respectively. The company applies APB Opinion 25 and related interpretations in accounting for its Employee Stock Purchase Plan. Accordingly, no compensation cost has been recognized for the Employee Stock Purchase Plan. Had compensation cost for the company's Stock-Based Incentive Plans and Employee Stock Purchase Plan been determined on the basis of fair value according to SFAS No. 123, the fair value of each option granted or share purchased would be estimated on the grant date using the Black-Scholes option pricing model. The following weighted-average assumptions would be used in estimating fair value for 1999, 1998, and 1997:
Performance Accelerated Employee Stock Purchase Assumption Regular Plan Plan Plan ---------- ------------ ----------------------- ----------------------- Dividend yield 3.4% 3.5% 3.5% Risk-free interest rate 5.84% 5.61% 5.02% Expected life 7.4 yrs. 5 yrs. 3 mos. Expected volatility 23.9% 25.5% 35.9%
The company's net income and earnings per share for 1999, 1998, and 1997 would approximate the pro forma amounts below:
(Dollars in millions, except per share) 1999 1998 1997 ---- ---- ---- Net income As reported $ 168 $ 9 $319 Pro forma $ 149 $ (5) $308 Basic earnings per share As reported $1.63 $ .10 $3.22 Pro forma $1.45 $(.06) $3.10 Diluted earnings per share As reported $1.62 $ .10 $3.13 Pro forma $1.44 $(.06) $3.04
SFAS No. 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. 40 42 12. ADDITIONAL BALANCE SHEET DETAIL
(Dollars in millions) 1999 1998 ------ ---- Property, plant, and equipment Land $ 58 $ 74 Buildings and equipment 2,785 2,837 Construction in progress 135 126 ------ ------ Total 2,978 3,037 Accumulated depreciation and amortization 1,657 1,599 ------ ------ Net property, plant, and equipment $1,321 $1,438 ====== ====== Accrued expenses Payroll and employee benefits $ 63 $ 63 Income taxes payable 35 15 Current portion of restructuring liability 66 119 Accrued interest payable 44 49 Legal accrual 101 15 Environmental accrual 29 18 Dividends payable 28 -- Other 195 202 ------ ------ $ 561 $ 481 ====== ======
13. RESTRUCTURING Pursuant to the plans in place to merge the operations of BetzDearborn with Hercules and to rationalize the support infrastructure and other existing operations, approximately 600 employees were terminated and several facilities were closed during 1999. Cash payments during 1999 include $42 million for severance benefits and $14 million for other exit costs. As a result of the completion of plans to exit former BetzDearborn activities, additional exit costs related to facility closures of $8 million and a $4 million reduction in employee severance benefits were reflected in the finalization of the purchase price allocation (see Note 1). We lowered the estimate of severance benefits related to the termination of Hercules employees by $4 million. The lower than planned severance benefits are the result of higher than anticipated attrition, with such voluntary resignations not requiring the payment of termination benefits. Additionally in 1999, we incurred $3 million in severance charges related to a reduction in work force of approximately 20 manufacturing employees within the Chemical Specialties segment (see Note 16). We estimate approximately 1,300 (approximately 1,000 related to the 1998 BetzDearborn acquisition) employees will be terminated, of which approximately 990 employee terminations have occurred since the inception of the plans. In 1998, Hercules incurred restructuring liabilities of $130 million in connection with the acquisition of BetzDearborn (see Notes 1 and 16). These liabilities included charges of $31 million for employee termination benefits and $5 million for exit costs related to facility closures. In addition, a $94 million liability was charged to goodwill as part of the purchase price allocation related to the acquisition of BetzDearborn and included $78 million for employee termination benefits and $16 million for office and facility closures, relocation of BetzDearborn employees and other related exit costs. Cash payments during 1998 included $15 million of severance benefits. In 1997, we incurred $24 million in severance benefits related to the reorganization of management and the adoption of new competitive strategies (see Note 16). Cash payments of $2 million and $10 million are reflected in the table below in 1999 and 1998, respectively. Remaining amounts to be paid, with respect to this plan are $3 million at the end of 1999. Severance benefits payments are based on years of service and generally continue for 3 months to 24 months subsequent to termination. We expect to substantially complete remaining actions under the plans in 2000. A reconciliation of activity with respect to the liabilities established for these plans is as follows: 41 43
(Dollars in millions) 1999 1998 ----- ----- Balance at beginning of year $ 130 $ 15 Acquisition-related accrual -- 130 Cash payments (56) (15) Additional termination benefits and exit costs 11 -- Reversals (8) -- ----- ----- Balance at end of year $ 77 $ 130 ===== =====
14. PENSION AND OTHER POSTRETIREMENT BENEFITS The company provides a defined benefit pension and postretirement benefit plans to employees. The following chart lists benefit obligations, plan assets, and funded status of the plans.
(Dollars in millions) Other Postretirement Pension Benefits Benefits 1999 1998 1999 1998 ------- ------- ----- ----- CHANGE IN BENEFIT OBLIGATION Benefit obligation at January 1 $ 1,499 $ 1,114 $ 154 $ 141 Service cost 30 20 2 1 Interest cost 97 83 13 10 Amendments 6 -- 20 -- Assumption change (147) 52 (9) 3 Acquisition -- 284 -- 9 Translation difference (19) 8 -- -- Actuarial loss (gain) (8) 28 22 10 Benefits paid from plan assets (115) (90) (2) (2) Benefits paid by company -- -- (19) (18) ------- ------- ----- ----- Benefit obligation at December 31 $ 1,343 $ 1,499 $ 181 $ 154 ======= ======= ===== ===== CHANGE IN PLAN ASSETS Fair value of plan assets at January 1 $ 1,589 $ 1,237 $ 8 $ 9 Actual return on plan assets 275 182 1 1 Acquisition -- 256 -- -- Company contributions (refund) 2 (2) -- -- Translation difference (19) 6 -- -- Benefits paid from plan assets (115) (90) (2) (2) ------- ------- ----- ----- Fair value of plan assets at December 31 $ 1,732 $ 1,589 $ 7 $ 8 ======= ======= ===== ===== Funded status of the plans $ 389 $ 90 $(174) $(146) Unrecognized actuarial loss (gain) (197) 89 44 34 Unrecognized prior service cost (benefit) 36 35 (19) (44) Unrecognized net transition obligation (11) (25) -- -- Amount included in accrued expenses- other -- -- 20 20 ------- ------- ----- ----- Prepaid (accrued) benefit cost $ 217 $ 189 $(129) $(136) ======= ======= ===== ===== AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION CONSIST OF: Prepaid benefit cost $ 217 $ 218 -- -- Accrued benefit liability -- (29) (129) (136) ------- ------- ----- ----- $ 217 $ 189 $(129) $(136) ======= ======= ===== ===== ASSUMPTIONS AS OF DECEMBER 31 Weighted-average discount rate 8.00% 7.00% 8.00% 7.00% Expected return on plan assets 9.25% 9.25% 9.25% 9.25% Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
42 44
Other Postretirement Pension Benefits Benefits 1999 1998 1997 1999 1998 1997 ----- ----- ----- ---- ---- ---- Service cost $ 30 $ 20 $ 17 $ 2 $ 1 $ 1 Interest cost 97 83 78 13 10 10 Return on plan assets (expected) (134) (114) (103) (1) (1) (1) Amortization and deferrals 3 12 5 (2) (4) (5) Amortization of transition asset (14) (14) (14) -- -- -- ----- ----- ----- ---- ---- ---- Benefit cost (credit) $ (18) $ (13) $ (17) $ 12 $ 6 $ 5 ===== ===== ===== ==== ==== ====
Pension During 1997, the company recognized a charge of approximately $8 million for special termination benefits. Other Postretirement Benefits The nonpension postretirement benefit plans are contributory health care and life insurance plans. The assumed participation rate in these plans for future eligible retirees was 60% for health care and 100% for life insurance. In August 1993, a Voluntary Employees' Beneficiary Association (VEBA) Trust was established and funded with $10 million of company funds. The company periodically obtains reimbursement for union retiree claims, while other claims are paid from company assets. The participant contributions are immediately used to cover claim payments, and for this reason do not appear as contributions to plan assets. The assumed health care cost trend rate was 4.5% at December 31, 1999, and was 5% for those under age 65 and 4.75% for those over age 65 at December 31, 1998. The assumed health care cost trend rate will be 8% in 2000 to reflect recent experience, decreasing to 4.5% by 2004 and for all subsequent years. A one-percentage point increase or decrease in the assumed health care cost trend rate would increase or decrease the postretirement benefit obligation by $7 million or $8 million, respectively, and would not have a material effect on aggregate service and interest cost components. 15. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT Purchased in-process research and development (IPR&D) represents the value assigned in a purchase business combination to research and development projects of the acquired business that were commenced but not yet completed at the date of the acquisition, and which, if unsuccessful, have no alternative future use in research and development activities or otherwise. Amounts assigned to purchased IPR&D must be charged to expense at the date of consummation of the purchase business combination. Accordingly, the company charged approximately $130 million to expense during 1998 for IPR&D related to the BetzDearborn acquisition (see Note 1). The IPR&D projects were principally included in the water treatment and paper process divisions of the acquired business. The former Water Management Group (WMG) provided specialty water and process treatment programs for boiler, cooling, influent, and effluent applications to markets such as refining, chemical, paper, electric utility, food, industrial, commercial and institutional establishments. Overall, the products are used to control corrosion, scale, deposit formation, and microbiological growth, conserve energy and improve efficiency. Additionally, the former Paper Process Group (PPG) brought to market custom-engineered programs for the process-related problems associated with paper production. These problems include deposition, corrosion, microbiological fouling, foam control, deinking and felt conditioning. Due to the uniqueness of each of the projects, the costs and effort required were estimated based on the information available at the date of acquisition. However, there is a risk that certain projects may not be completed successfully for a variety of reasons, including change in strategies, inability to develop a cost-efficient treatment, and changes in market demand or customer requirements. The IPR&D valuation charge was measured by the stage of completion method, primarily calculated by dividing the costs incurred to the date of acquisition by the total estimated costs. These percentages were applied to 43 45 the results of project-by-project discounted cash flow models that estimated the present value of residual cash flows deemed attributable solely to the underlying IPR&D. The projected revenues, costs, and margins in the cash flow forecasts were consistent with projections by management based on available historical data. The revenue projections were based on an opportunity analysis for each project, which takes into account market and competitive conditions, potential customers, and strategic goals. The weighted-average cost of capital for the overall business was estimated at 11% and the risk-adjusted discount rate used in the IPR&D project valuation model was 13%. 16. OTHER OPERATING EXPENSES (INCOME), NET Other operating expenses (income), net, in 1999 include integration charges of $36 million, primarily for employee incentive and retention, consulting, legal and other costs associated with the BetzDearborn acquisition. During 1999, the company recognized charges of approximately $36 million related to a legal settlement (see Note 24) and asset write-downs and disposal costs including impairment losses of approximately $10 million in the Chemical Specialties segment. Additionally, we recognized an additional $3 million of severance benefits under a plan to terminate approximately 20 employees, primarily manufacturing personnel (see Note 13). The asset write-down and severance charges were incurred primarily as a result of our decisions to exit the nitrocellulose business and rationalize assets in our resins business, which will no longer be utilized. Also during 1999, we realized a $16 million gain on the sale of our Agar business, a $6 million net environmental insurance recovery, and a $4 million reversal of restructuring charges (see Note 13). Other operating expenses in 1998 included $65 million in restructuring charges and $11 million in integration charges associated with the acquisition of BetzDearborn (see Note 1). The restructuring charges include employee termination benefits of $31 million for approximately 350 employees, facility closure costs of $5 million (see Note 13) and asset write-downs of $29 million including impairment losses of $15 million in the Functional Products segment and $6 million in the Chemical Specialties segment. The termination benefits, exit costs, and facility closure costs relate primarily to the acquisition of BetzDearborn during 1998 (see Note 1). Asset impairments in the Chemical Specialties and Functional Products segments resulted from adverse business negotiations, the BetzDearborn acquisition, and the loss of a customer. Other operating charges in 1997 include $146 million, primarily associated with the reorganization of management and the adoption of new competitive strategies. The charges included $95 million in impairment losses ($66 million in the Chemical Specialties segment, $24 million in the Functional Products segment, and $5 million in the Process Chemicals and Services segment) and $27 million in rationalization charges primarily associated with certain assets, which were no longer being utilized, and lease abandonment costs. Also included was $24 million in severance benefits associated with a plan to eliminate approximately 270 employees. There have been no significant adjustments to this plan and cash payments of $9 million, $10 million and $2 million were made in 1997, 1998, and 1999, respectively (see Note 13). The plan included reorganization of management, reductions in operating personnel at certain domestic and foreign facilities, and the consolidation of certain support functions. Other operating expenses in 1997 also include $13 million of net environmental cleanup costs, principally for non-operating sites, and $8 million of executive retirement benefits. 17. INTEREST AND DEBT EXPENSE Interest and debt costs are summarized as follows:
(Dollars in millions) 1999 1998 1997 ---- ---- --- Costs incurred $197 $112 $47 Amount capitalized 12 11 8 ---- ---- --- Amount expensed $185 $101 $39 ==== ==== ===
44 46 18. OTHER INCOME (EXPENSE), NET Other income (expense), net, consists of the following:
(Dollars in millions) 1999 1998 1997 ---- ----- ----- Net gains on dispositions $ 10 $ 23 $ 398 Interest income 8 36 29 Acquisition costs -- -- (20) Legal settlements and accruals (6) (66) (41) Interest rate swap termination -- (13) -- Minority interests (2) -- -- Bank charges (2) (1) (2) Miscellaneous income (expense), net (10) (1) 10 ---- ----- ----- $ (2) $ (22) $ 374 ==== ===== =====
Net gains on dispositions include gains on the sale of real estate and other investments of $10 million in 1999 and $11 million in 1998 and 1997, respectively. Also, gains of $12 million and $19 million in 1998 and 1997, respectively, were recorded from the sale of Alliant Techsystems common stock held by Hercules (see Note 23). Additionally, 1997 includes a gain of $368 million on the completion of transactions that monetized the company's investment of Tastemaker, a 50%-owned flavors joint venture. Interest income in 1998 and 1997 relates primarily to the $500 million note received upon completion of the Tastemaker monetization. Acquisition costs in 1997 represent a charge primarily related to the company's unsuccessful bid for Allied Colloids. The 1998 legal settlements and accruals relate primarily to settlements of Qui Tam ("Whistle Blower") lawsuits (see Note 24). The 1998 loss from terminated interest rate swaps is related to the company's financing effort upon the acquisition of BetzDearborn. Miscellaneous income (expense), net, includes a foreign currency loss of $1 million in 1999 and foreign currency gains of $5 million and $19 million in 1998 and 1997, respectively. 19. INCOME TAXES The domestic and foreign components of income before taxes and effect of change in accounting principle are presented below:
(Dollars in millions) 1999 1998 1997 ----- ----- ---- Domestic $ 4 $(147) $396 Foreign 239 224 197 ----- ----- ---- $ 243 $ 77 $593 ===== ===== ====
A summary of the components of the tax provision follows:
(Dollars in millions) 1999 1998 1997 ----- ----- ---- Currently payable U.S. federal $ (25) $ (26) $169 Foreign 82 74 63 State (4) (4) 2 Deferred Domestic 15 17 30 Foreign 7 7 5 ----- ----- ---- Provision for income taxes $ 75 $ 68 $269 ===== ===== ====
45 47 Deferred tax liabilities (assets) at December 31 consist of:
(Dollars in millions) 1999 1998 ----- ----- Depreciation $ 235 $ 153 Prepaid pension 84 76 Inventory 8 6 Investments 83 84 Other 51 46 ----- ----- Gross deferred tax liabilities 461 365 ----- ----- Postretirement benefits other than pensions (59) (64) Accrued expenses (165) (126) Loss carryforwards (24) (24) Other (71) (31) ----- ----- Gross deferred tax assets (319) (245) ----- ----- Valuation allowance 16 12 ----- ----- $ 158 $ 132 ===== =====
A reconciliation of the U.S. statutory income tax rate to the effective rate follows:
1999 1998 1997 ---- ---- ---- U.S. statutory income tax rate 35% 35% 35% Purchased in-process research and development (Note 15) -- 59 -- Goodwill amortization 9 7 -- Foreign dividends net of credits 3 -- 2 State taxes (2) 2 -- Utilization of capital losses (7) -- -- Reserves (6) (17) 7 Other (1) 2 1 ---- ---- ---- Effective tax rate 31% 88% 45% ==== ==== ====
The net operating losses have indefinite carryforward periods, but may be limited in their use in any given year. The company provides taxes on undistributed earnings of subsidiaries and affiliates included in consolidated retained earnings to the extent such earnings are planned to be remitted and not reinvested permanently. The undistributed earnings of subsidiaries and affiliates on which no provision for foreign withholding or U.S. income taxes has been made amounted to approximately $505 million at December 31, 1999. U.S. and foreign income taxes that would be payable if such earnings were distributed may be lower than the amount computed at the U.S. statutory rate because of the availability of tax credits. 20. EARNINGS PER SHARE The following table shows the amounts used in computing earnings per share and the effect on income and the weighted-average number of shares of dilutive potential common stock: 46 48
(Dollars and shares in millions, except per share) 1999 1998 1997 -------- -------- ------- Basic EPS computation: Income before effect of change in accounting principle $ 168 $ 9 $ 324 Effect of change in accounting principle -- -- (5) -------- -------- ------- Net income $ 168 $ 9 $ 319 ======== ======== ======= Weighted-average shares outstanding 103.2 96.3 99.2 Earnings per share before effect of change in Accounting principle $ 1.63 $ .10 $ 3.27 Effect of change in accounting principle -- -- (.05) -------- -------- ------- Earnings per share $ 1.63 $ .10 $ 3.22 ======== ======== ======== Diluted EPS computation: Income before effect of change in accounting principle $ 168 $ 9 $ 324 Interest on convertible debentures -- -- 2 Effect of change in accounting principle -- -- (5) -------- -------- ------- Net Income $ 168 $ 9 $ 321 ======== ======== ======= Weighted-average shares outstanding 103.2 96.3 99.2 Options .4 .6 1.1 Convertible debentures .3 .5 2.1 -------- -------- ------- Adjusted weighted-average shares 103.9 97.4 102.4 ======== ======== ======= Earnings per share before effect of change in Accounting principle $ 1.62 $ .10 $ 3.18 Effect of change in accounting principle -- -- (.05) -------- -------- ------- Earnings per share $ 1.62 $ .10 $ 3.13 ======== ======== ========
21. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Notional Amounts and Credit Exposure of Derivatives The notional amounts of derivatives summarized below do not represent amounts exchanged by the parties and, thus, are not a measure of the exposure of the company through its use of derivatives. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the derivatives, which relate to interest rates or exchange rates. Interest Rate Risk Management During 1999, the interest rate swap portfolio went through a series of adjustments to reflect the replacement of U.S. dollar debt with a variable euro debt. The series of outstanding interest rate swap agreements at year end, maturing from 2001 through September 2003, effectively converts floating-rate debt into debt with a fixed rate ranging from 5.36% to 5.63% per year for U.S. dollar debt and 2.76% to 3.18% per year for euro debt. These swaps act as a hedge against the company's interest rate exposure on its outstanding variable rate debt. For the years 1999 and 1998, these contracts resulted in a less than 1% change in the effective interest rate on the weighted-average notional principal amounts outstanding. The aggregate notional principal amounts at the end of 1999 and 1998 were $1.2 billion and $1.0 billion, respectively. The following table indicates the types of swaps used and their weighted-average interest rates:
(Dollars in millions) 1999 1998 -------- -------- Pay fixed on swaps notional amount (at year-end) $ 1,160 $ 1,000 Average pay rate 4.0% 6.4% Average receive rate 3.9% 5.5%
47 49 Foreign Exchange Risk Management The company selectively uses foreign currency forward contracts and currency swaps to offset the effects of exchange rate changes on reported earnings, cash flow, and net asset positions. The primary exposures are denominated in euro, Danish kroner, and the British pound sterling. Some of the contracts involve the exchange of two foreign currencies, according to local needs in foreign subsidiaries. The term of the currency derivatives is rarely more than one year. At December 31, 1999 and 1998, the company had outstanding forward-exchange contracts to purchase foreign currencies aggregating $59 million and $117 million and to sell foreign currencies aggregating $72 million and $320 million, respectively. Non-U.S. dollar cross-currency trades aggregated $410 million and $380 million at December 31, 1999 and 1998, respectively. Currency swap agreements, used to hedge net investment positions, totaled $512 million at December 31, 1998. The foreign exchange contracts outstanding at December 31, 1999 will mature during 2000. Fair Values The following table presents the carrying amounts and fair values of the company's financial instruments at December 31, 1999 and 1998:
(Dollars in millions) 1999 1998 ---- ---- Carrying Carrying Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- Investment securities (available for sale) $ 32 $ 32 $ 31 $ 31 Long-term debt (1,777) (1,759) (3,096) (3,101) Company-obligated preferred securities of subsidiary trusts (992) (908) (200) (200) Foreign exchange contracts 2 2 6* 6 Currency swaps -- -- 8* 8 Interest rate swap contracts -- 28 -- 1
*The carrying amount represents the net unrealized gain or net interest payable associated with the contracts at the end of the period. Fair values of derivative contracts are indicative of cash that would have been required had settlement been December 31, 1999. Basis of Valuation Investment securities: Quoted market prices. Long-term debt: Present value of expected cash flows related to existing borrowings discounted at rates currently available to the company for long-term borrowings with similar terms and remaining maturities. Company obligated preferred securities of subsidiary trusts: Year-end interest rates and company common stock price. Foreign exchange contracts: Year-end exchange rates. Currency swaps: Year-end interest and exchange rates. Interest rate swap contracts: Bank or market quotes or discounted cash flows using year-end interest rates. 22. PENDING TRANSACTIONS In February 2000, we announced plans to form a new business venture with Lehman Brothers Merchant Banking Partners II L.P. The new business will include our food gums division, along with the Kelco biogums unit, which will be purchased from Monsanto by the new venture. The Lehman Brothers partnership will own 72% of the new entity, and we will own the remaining 28%. We expect that the new venture will have revenues of approximately $450 million. 48 50 Further, we have entered into discussions with a third party to monetize our resins business and we are beginning to explore alternatives regarding our FiberVisions business. These three businesses account for approximately $900 million of our 1999 revenues. 23. DIVESTITURES In December 1999, we sold our 70% interest in Algas Marinas, our Chilean Agar business, for approximately $27 million. The transaction resulted in a pre-tax gain of approximately $16 million. This unit was included in the Functional Products segment and contributed approximately $24 million of revenue to this segment in 1999. In March 1997, the company completed transactions to monetize its investment in Tastemaker for approximately $608 million, including $108 million in cash and a $500 million, 6.2% interest-bearing five-year note. This note was subsequently sold in 1998. Equity in income of affiliated companies included Tastemaker earnings of $11 million in 1997. In June 1997, the company completed a joint venture of its polypropylene fiber business with Jacob Holm & Sons A/S (Denmark) in which Hercules owned 51% of the joint venture, which was accounted for on the equity method at that time. In July 1998, Hercules purchased its partner's 49% share of the joint venture, with the operating results of FiberVisions being included in Hercules' consolidated financial statements since the date of acquisition (see Note 1). Pursuant to a 1997 agreement, Hercules sold its remaining shares of Alliant Techsystems Inc. for $12 million in 1998. 24. COMMITMENTS AND CONTINGENCIES Leases Hercules has operating leases (including office space, transportation, and data processing equipment) expiring at various dates. Rental expense was $55 million in 1999, $35 million in 1998, and $31 million in 1997. At December 31, 1999, minimum rental payments under noncancelable leases aggregated $282 million with subleases of $24 million. A significant portion of these payments relates to a long-term operating lease for corporate office facilities. The net minimum payments over the next five years are $39 million in 2000, $30 million in 2001, $22 million in 2002, $18 million in 2003, and $17 million in 2004. Environmental Hercules has been identified as a potentially responsible party (PRP) by U.S. federal and state authorities, or by private parties seeking contribution, for the cost of environmental investigation and/or cleanup at numerous sites. The estimated range of the reasonably possible share of costs for the investigation and cleanup is between $60 million and $230 million. The actual costs will depend upon numerous factors, including the number of parties found responsible at each environmental site and their ability to pay; the actual methods of remediation; outcomes of negotiations with regulatory authorities; outcomes of litigation; changes in environmental laws and regulations; technological developments; and the years of remedial activity required, which could range from 0 to 30 years. Hercules becomes aware of sites in which it may be named a PRP in investigatory and/or remedial activities through correspondence from the U.S. Environmental Protection Agency, or other government agencies, or through correspondence from previously named PRPs, who either request information or notify us of our potential liability. We have established procedures for identifying environmental issues at our plant sites. In addition to environmental audit programs, we have environmental coordinators who are familiar with environmental laws and regulations and act as a resource for identifying environmental issues. Litigation over liability at Jacksonville, Arkansas, the most significant site, has been pending since 1980. As a result of a pretrial Court ruling in October 1993, Hercules has been held jointly and severally liable for costs 49 51 incurred, and for future remediation costs, at the Jacksonville site by the District Court, Eastern District of Arkansas (the Court). The case is captioned United States v. Vertac Corporation, USDA No. LR-C-92-137 (E.D. Ark.) Other defendants in this litigation have either settled with the government or, in the case of the Department of Defense (DOD), have not been held liable. We appealed the Court's order finding the DOD not liable. On January 31, 1995, the Eighth Circuit Court of Appeals upheld the Court's order. We filed a petition to the U.S. Supreme Court requesting review and reversal of the Eighth Circuit Court ruling. This petition was denied on June 26, 1995, and the case was remanded to the District Court for further proceedings. On May 21, 1997, the Court issued a ruling that Uniroyal is liable and that Standard Chlorine is not liable to Hercules for contribution. Through the filing of separate summary judgment motions, Hercules and Uniroyal raised a number of defenses to the United States' ability to recover its costs. On October 23, 1998, the Court denied those motions and granted the United States' summary judgment motion, ordering Hercules and Uniroyal to pay the United States approximately $103 million plus any additional response costs incurred or to be incurred after July 31, 1997. Trial testimony on the issue of allocation between Hercules and Uniroyal was completed on November 6, 1998. On August 6, 1999, the Court issued a final judgment in which it reduced the $103 million from the previous ruling on summary judgment by approximately $7 million (the amount received by the United States in previous settlements with other parties) and added applicable interest to reach a final total of approximately $100.5 million. This final judgment was based on the Court's findings that (a) Hercules and Uniroyal were jointly and severally liable for approximately $89 million plus any additional response costs incurred or to be incurred after May 31, 1998, and (b) Hercules was solely liable for an additional amount of approximately $11 million. This judgment finalizes the Court's 1993 and 1997 non-final orders in which Hercules and Uniroyal were held jointly and severally liable for past and future remediation costs at the site. Hercules appealed these rulings to the United States Court of Appeals for the Eighth Circuit on December 16, 1999. On February 8, 2000, the Court issued a final judgment on the allocation between Uniroyal and Hercules, finding Uniroyal liable for 2.6 percent and Hercules liable for 97.4 percent of the costs at issue. Hercules appealed that judgment on February 10, 2000. That appeal has been docketed and consolidated with the earlier mentioned appeal. Oral argument before the United States Court of Appeals for the Eighth Circuit is presently scheduled for early April 2000. Neither of the Court's final judgments has changed our outlook on the potential outcome of this matter. In 1992, Hercules brought suit against its insurance carriers for past and future costs for cleanup of certain environmental sites (Hercules Incorporated v. The Aetna Casualty & Surety Company, et al., Del. Super., C.A. No. 92C-10-105 and 90C-FE-195-CV (consolidated)). In April 1998, the trial regarding insurance recovery for the Jacksonville, Arkansas site (see discussion above) was completed. The jury returned a "Special Verdict Form" with findings that, in conjunction with the Court's other opinions, were used by the Court to enter a judgment in August 1999. The judgment determined the amount of Hercules' recovery for past cleanup expenditures and stated that Hercules is entitled to similar coverage for costs incurred since September 30, 1997, and in the future. Hercules has not included any insurance recovery in the estimated range of costs above. Since entry of the Court's August 1999 order, Hercules has entered into settlement agreements with several of its insurance carriers and has recovered certain settlement monies. The terms of those settlements and amounts recovered are confidential. At December 31, 1999, the accrued liability of $60 million for environmental remediation represents management's best estimate of the probable and reasonably estimable costs related to environmental remediation. The extent of liability is evaluated quarterly. The measurement of the liability is evaluated based on currently available information, including the process of remedial investigations at each site and the current status of negotiations with regulatory authorities regarding the method and extent of apportionment of costs among other PRPs. Hercules does not anticipate that its financial condition will be materially affected by environmental remediation costs in excess of amounts accrued, although quarterly or annual operating results could be materially affected. 50 52 Litigation Hercules is a defendant in numerous lawsuits that arise out of, and are incidental to, the conduct of its business. In these legal proceedings, no specifically identified director, officer, or affiliate is a party or a named defendant. These suits concern issues such as product liability, contract disputes, labor-related matters, patent infringement, environmental proceedings, property damage, and personal injury matters. Hercules was a defendant in three Qui Tam (Whistle Blower) lawsuits in the U.S. District Court for the Central District of Utah, brought by former employees of the Aerospace business sold to Alliant Techsystems Inc. in March 1995. All of these actions were settled in 1999. We recognized a $62 million charge in 1998 related to these settlements. There will be no future impacts to our results of operations or financial condition as a result of these settlements. In addition to the Vertac litigation described above, two individuals sued Hercules in a lawsuit captioned Jeffrey Shelton Jr., et al. v. Hercules Incorporated, Civil No. LR-C-97-131 (E.D. Ark. 1997). These individuals sought medical monitoring and damages for loss of recreational opportunities. They brought a Resource Conservation and Recovery Act (RCRA) citizens suit against us seeking an injunction which would require us to fund or perform various environmental and health studies and pay for any required remediation to the Bayou Meto. Plaintiffs and Hercules filed motions for summary judgment. In October 1999, the Court granted Hercules' motion for summary judgment and the time for any appeal by the plaintiffs has expired. Further, 19 individuals sued Hercules in a matter entitled Gary Graham, et al. v. Vertac Chemical Corporation and Hercules Incorporated, Civil No. LR-C-98-678 (U.S. District Court, Eastern District of Arkansas). These individuals sought damages for personal injuries and diminution of property value as a result of alleged dioxin contamination from the Jacksonville, Arkansas site. This case was dismissed without prejudice on technical grounds on August 2, 1999. The time to appeal has run out. BetzDearborn, along with Pacific Gas and Electric (PG&E), is a defendant in four lawsuits involving in the aggregate approximately 2,350 plaintiffs pending in the Superior Court of Los Angeles County, California (the Lawsuits). BetzDearborn maintained insurance coverage for the purpose of securing protection against alleged product and other liabilities, and certain of the insurance carriers have undertaken to pay the cost of the defense of the Lawsuits subject to various reservations of rights. The lawsuits are captioned as follows: Acosta, et al. v. Betz Laboratories, et al., No. BC 161 669 (1996); Adams, et al. v. Betz Laboratories, et al., No. BC 113 000 (1994); Aguilar, et al. v. Betz Laboratories, et al., No. BC 158 588 (1996); and Aguayo et al. v. Betz Laboratories, et al., No. BC 123 749 (1995). In October 1999, BetzDearborn, several of its insurance carriers, and plaintiffs engaged in a mediation, which led to a settlement of plaintiffs' claims against BetzDearborn, which settlement was approved by the court in February 2000. BetzDearborn also reached a settlement with many of its insurance carriers with respect to these cases. The impact of the settlements resulted in an adjustment to the BetzDearborn purchase price allocation. All of these settlement agreements are confidential. Hercules is a defendant in numerous asbestos-related personal injury lawsuits and claims which typically arise from alleged exposure to products which were sold by a former subsidiary of Hercules, or from alleged exposure to asbestos contained in facilities owned or operated by Hercules. In December 1999, Hercules entered into a Settlement Agreement to resolve the majority of these matters. In connection with that settlement, Hercules entered into an agreement with several of its insurance carriers pursuant to which a majority of the amounts paid will be insured. The net impact of these settlements was reflected in the 1999 results of operations. The terms of both agreements are confidential. At December 31, 1999, the consolidated balance sheet reflects a current liability of approximately $101 million for litigation and claims. Estimated insurance recoveries of approximately $46 million have been reflected in current assets. These amounts represent management's best estimate of the probable and reasonably estimable losses and recoveries related to litigation or claims. The extent of the liability and recovery is evaluated quarterly. While it is not feasible to predict the outcome of all pending suits and claims, the ultimate resolution of these matters could have a material effect upon the financial position of Hercules, and the resolution of any of the matters during a specific period could have a material effect on the quarterly or annual operating results for that period. 51 53 25. CHANGE IN ACCOUNTING PRINCIPLE In November 1997, FASB's Emerging Issues Task Force (EITF) reached a final consensus on Issue 97-13, "Accounting for Costs Incurred in Connection With a Consulting Contract That Combines Business Process Reengineering and Information Technology Transformation." Activities deemed to be business process reengineering include the following: current state assessments, configuring and prototyping, process reengineering, and work force restructuring. The consensus requires that the unamortized amounts of such costs previously capitalized as of the beginning of the quarter which includes November 20, 1997, be charged during that quarter as the cumulative effect of a change in accounting principle. The company adopted the consensus during the fourth quarter of 1997 and recorded a cumulative-effect adjustment of $5 million. 26. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA In 1998, Hercules adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." The statement establishes new standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports. It also establishes standards for related disclosure about products and services, geographic area, and major customers. In compliance with SFAS 131 and with the acquisition of BetzDearborn, the company has identified three reportable segments and has restated prior years to conform with the 1998 presentation. Process Chemicals and Services: (Pulp and Paper and BetzDearborn.) Products and services in this segment are designed to enhance customers' processes and improve their manufacturing costs or environmental impact. Principal products and markets include performance additives and water and process treatment chemicals and related on-site services for a wide variety of industrial and commercial applications including pulp and paper mills, refineries, chemical plants, metals manufacturers, automobile assembly plants, and makers of food and beverages. Functional Products: (Aqualon and Food Gums.) Products from this segment are principally derived from natural resources and are sold as key raw materials to other manufacturers. Principal products and markets include water-soluble polymers and natural gums, used as thickeners, emulsifiers and stabilizers for water-based paints, oil and gas exploration, building materials, dairy and bakery products, and other processed food products such as jams, jellies, and meats. Chemical Specialties: (Resins and FiberVisions.) Products in this segment provide low-cost, technology driven solutions to meet customer needs and market demands. Principal products and markets include rosin and hydrocarbon resins for adhesives used in nonwoven fabrics, textile fibers, and adhesive tapes; thermal-bond polypropylene staple fiber for disposable diapers and other hygienic products; and automotive textiles. The company evaluates performance and makes decisions based primarily on "Profit from Operations" and "Capital Employed." Consolidated capital employed represents the total resources employed in the company and is the sum of total debt, trust preferred securities, and stockholders' equity. Capital employed in each reportable segment represents the net operating assets employed to conduct business in that segment and generally includes working capital (excluding cash) and property, plant and equipment. Other assets and liabilities, primarily goodwill and other intangibles, not specifically allocated to business segments, are reflected in "Reconciling Items" in the table below. Hercules has no single customer representing greater than 10% of its revenues. GEOGRAPHIC REPORTING For geographic reporting, no single country, outside the United States, is material for separate disclosure. However, because the company has significant foreign operations, revenues and long-lived assets are disclosed by geographic region. 52 54 Revenues are reported on a "customer basis," meaning that net sales are included in the geographic area where the customer is located. Long-lived assets are included in the geographic areas in which the producing entities are located. Intersegment sales are eliminated in consolidation. (Dollars in millions)
PROCESS CHEMICALS INDUSTRY SEGMENTS AND FUNCTIONAL CHEMICAL RECONCILING SERVICES PRODUCTS SPECIALTIES ITEMS CONSOLIDATED - ------------------------------------------------------------------------------------------------------------------------------ 1999 Net sales $1,705 $861 $685 $ (3) $3,248 Profit (loss) from operations 338 218 89 (165) (a) 480 Equity in income of affiliated companies 1 Interest and debt expense 185 Preferred security distributions of subsidiary trusts 51 Other expense, net (2) ---- ---- ---- ------ ------ Income before income taxes 243 Capital employed (g) 735 372 379 2,824 (d) 4,310 Capital expenditures 51 74 39 38 202 Depreciation and amortization 66 33 30 121 250 - ------------------------------------------------------------------------------------------------------------------------------ 1998 Net sales $717 $863 $566 $ (1) $2,145 Profit (loss) from operations 131 215 75 (229) (b) 192 Equity in income of affiliated companies 10 Interest and debt expense 101 Preferred security distributions of subsidiary trusts 2 Other expense, net (22) ---- ---- ---- ------ ------ Income before income taxes 77 Capital employed (g) 756 392 388 2,885 (d) 4,421 Capital expenditures 44 53 36 24 157 Depreciation and amortization 22 32 19 35 108 - ------------------------------------------------------------------------------------------------------------------------------ 1997 Net sales $443 $898 $526 $ (1) $1,866 Profit (loss) from operations 100 224 67 (163) (c) 228 Equity in income of affiliated companies 30 Interest and debt expense 39 Other income, net 374 ---- ---- ---- ------ ------ Income before income taxes 593 Capital employed (g) 138 355 168 723 (d) 1,384 Capital expenditures 22 47 30 20 119 Depreciation and amortization 11 34 13 18 76 - ------------------------------------------------------------------------------------------------------------------------------
53 55
UNITED GEOGRAPHIC AREAS STATES EUROPE AMERICAS (e) ASIA PACIFIC TOTAL - --------------------------------------------------------------------------------------------------------------------------- 1999 Net sales $1,711 $1,052 $216 $269 $3,248 Long-lived assets (f) 2,264 948 529 150 3,891 1998 Net sales 944 785 258 158 2,145 Long-lived assets (f) 3,083 681 125 97 3,986 1997 Net sales 826 655 212 173 1,866 Long-lived assets (f) 387 309 19 16 731
(a) Includes integration expenses, severance costs, asset write-downs, and other charges net of litigation and insurance settlements, partially offset by a gain on the sale of a subsidiary and the reversal of restructuring charges (see Notes 13 and 16). Also included are amortization of goodwill and intangibles, corporate research and development and other corporate items not specifically allocated to business segments. (b) Includes costs for purchased in-process research and development, facility closures and contract terminations, employee termination benefits, write-downs of property, plant and equipment, and other integration expenses (see Notes 15 and 16). Also included are amortization of goodwill and intangibles, corporate research and development and other corporate items not specifically allocated to business segments. (c) Primarily includes asset write-downs, impairments and severance costs (see Note 16). Also included are amortization of goodwill and intangibles, corporate research and development and other corporate items not specifically allocated to business segments. (d) Assets and liabilities not specifically allocated to business segments, primarily goodwill, intangibles, and other long-term assets net of liabilities. (e) Ex-U.S.A. (f) Long-lived assets include Property, plant and equipment, Goodwill, and Other intangible assets. In 1998, the goodwill and other intangible assets related to the BetzDearborn acquisition are reflected in the United States region. (g) Represents total segment assets net of operating liabilities. 54 56 Hercules Incorporated Summary of Quarterly Results (Unaudited) (Dollars in millions, except per share)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998 ---- ----- ---- ----- ----- ----- ----- ----- ------- ------- OPERATING RESULTS Net sales $791 $ 430 $817 $ 445 $ 813 $ 510 $ 827 $ 760 $ 3,248 $ 2,145 Cost of sales 423 262 440 267 445 323 462 435 1,770 1,287 Selling, general and administrative expenses 197 60 193 67 188 68 209 182 787 377 Research and development 21 13 20 12 21 17 23 19 85 61 Purchased in-process research and development -- -- -- -- -- -- -- 130 -- 130 Goodwill and intangible asset amortization 20 1 20 1 20 3 19 17 79 22 Other operating expenses (income), net 7 -- 6 (3) 1 (2) 33 81 47 76 ---- ----- ---- ----- ----- ----- ----- ----- ------- ------- Profit (loss) from operations 123 94 138 101 138 101 81 (104) 480* 192* Equity income 1 5 -- 5 -- -- -- -- 1 10 Interest and debt expense 60 11 47 13 38 18 40 59 185 101 Preferred security distributions of subsidiary 5 -- 12 -- 16 -- 18 2 51 2 trusts Other income (expense), net 3 (44) 4 16 (2) 18 (7) (12) (2) (22) ---- ----- ---- ----- ----- ----- ----- ----- ------- ------- Income (loss) before income taxes 62 44 83 109 82 101 16 (177) 243 77 Income taxes 24 16 27 35 25 30 (1) (13) 75 68 ---- ----- ---- ----- ----- ----- ----- ----- ------- ------- Net income (loss) $ 38 $ 28 $ 56 $ 74 $ 57 $ 71 $ 17 $(164) $ 168 $ 9 ==== ===== ==== ===== ===== ===== ===== ===== ======= ======= Earnings per share** Basic Earnings (loss) per share $.37 $ .29 $.56 $ .78 $ .54 $ .75 $ .17 $(1.64) $ 1.63 $ .10 ==== ===== ==== ===== ===== ===== ===== ===== ======= ======= Diluted: Earnings (loss) per share $.37 $ .29 $.56 $ .77 $ .54 $ .74 $ .16 $(1.64) $ 1.62 $ .10 ==== ===== ==== ===== ===== ===== ===== ===== ======= =======
* Includes unusual charges of $62 million in 1999 (see Note 16) and $215 million in 1998 (see Notes 15 and 16). ** Earnings per share calculations for each of the quarters are based on the weighted-average number of shares outstanding for each period. The sum of the quarters may not necessarily be equal to the full year's earnings per share amounts. 55 57 PRINCIPAL CONSOLIDATED SUBSIDIARIES ARGENTINA BetzDearborn Argentina S.A. AUSTRALIA BetzDearborn Australia Pty Ltd. AUSTRIA BetzDearborn Ges.m.b.H. BAHAMAS Hercules International Trade Corporation Limited BELGIUM Hercules Beringen B.V.B.A. Hercules Doel B.V.B.A. Hercules Europe B.V.B.A. Hercules Holding B.V./B.V.B.A. BERMUDA Curtis Bay Insurance Co. Ltd. BRAZIL Hercules do Brasil Produtos Quimicos Ltda.* Hercules Limeira S.A. CANADA BetzDearborn Canada, Inc. Hercules Canada Inc. Hercules Canada (partnership) CHILE Hercules Quimica Chile Ltda CHINA FiberVisions (Suzhou) Nonwovens Products Co. Ltd. FiberVisions (China) Textile Products Ltd.* COLOMBIA Hercules de Colombia S.A. CURACO BetzDearborn Caribbean N.V. CZECH (REPUBLIC) Hercules CZ S.R.O. DENMARK Hercules Copenhagen A/S FiberVisions, A/S Hercules Holding ApS ECUADOR BetzDearborn de Ecuador S.A. FINLAND BetzDearborn OY FRANCE Aqualon France B.V. GERMANY Abieta Chemie, GmbH* Hercules Deutschland GmbH Hercules GmbH Pomosin GmbH HONG KONG Hercules China Limited HUNGARY BetzDearborn Hungary Kft INDIA Hercules Specialty Chemicals India Private Limited INDONESIA P.T. Hercules Mas Indonesia IRELAND BetzDearborn Ireland Limited ITALY BetzDearborn Srl JAPAN Hercules Japan Ltd. Nippon BetzDearborn K.K.* KOREA BetzDearborn Korea, Ltd. Hercules Korea Chemical Co. Ltd. LIECHTENSTEIN Organa Trust LUXEMBOURG Hercules Investment s.a.r.l. MALAYSIA Hercules Chemicals (Malaysia) Sdn. BHD MEXICO Quimica Hercules, S.A. de C.V. Taloquimia S.A.* MOZAMBIQUE Genu Mozambique NETHERLANDS Aqualon France B.V. Hercules B.V. Hercules Holding B.V./B.V.B.A. NORWAY BetzDearborn Norge A/S PAKISTAN Pakistan Gum Industries Ltd.* PERU Hercules del Peru S.A. PHILIPPINES Genu Philippines Inc.* Hercules Cebu, Inc. POLAND Hercules Polska Sp. Zo.o PORTUGAL BetzDearborn Portuguesa, Ltda. SINGAPORE Hercules Chemicals Singapore Pte Ltd. SOUTH AFRICA Hercules Chemicals South Africa (Pty) Ltd. SPAIN Hercules Quimica, S.A. 56 58 SWEDEN BetzDearborn AB SWITZERLAND Fibervisions A.G./Fibervisions Ltd. TAIWAN Hercules Chemicals (Taiwan) Co., Ltd. TANZANIA Zanea Seaweed Company Limited* THAILAND Hercules Chemicals (Thailand) Co., Ltd. UNITED KINGDOM Hercules GB Holding Ltd. Hercules Investments Global Hercules Limited Hercules GB Holdings Limited URUGUAY BetzDearborn de Uruguay S.A. UNITED STATES Aqualon Company, Delaware BetzDearborn Europe, Inc., Delaware BetzDearborn Inc., Pennsylvania BetzDearborn International, Inc., Pennsylvania BL Technologies, Inc., Delaware BLI Holdings, Inc., Delaware DRC, Ltd., Delaware East Bay Realty Services, Inc., Delaware FiberVisions Incorporated, Delaware FiberVisions, L.L.C., Delaware FiberVisions Products, Inc., Georgia Hercules Credit Inc., Delaware Hercules Finance Company, Delaware Hercules Flavor, Inc., Delaware Hercules International Limited, Delaware Hercules Shared Services Corporation, Delaware* WSP, Inc., Delaware VENEZUELA BetzDearborn Venezuela C.A. VIRGIN ISLANDS Hercules Islands Corporation* Hercules Overseas Corp. * This entity is owned in part by Hercules with the remaining interest held by a third party. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: None. 57 59 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: Information regarding directors and nominees for directors of Hercules is included under the caption entitled "Re-election of Directors" on page 8 of the Proxy Statement and is incorporated herein by reference. Information regarding executive officers begins on page 16 of that report. Disclosure of information for directors, officers and other persons not meeting the timely reporting requirements under Section 16(a) of the Exchange Act is contained in the Proxy Statement under the caption entitled "Compliance with Section 16(a) Reporting" on page 21 and is incorporated herein by reference. EXECUTIVE OFFICERS OF THE REGISTRANT: The name, age, and current position of each executive officer (as defined by SEC rules) of Hercules as of March 15, 2000 are listed below. Each of the officers has served in one or more executive capacities with Hercules and/or its affiliates during the past five years. There are no family relationships among executive officers.
NAME AGE CURRENT POSITION R. Keith Elliott(1) 58 Chairman Vincent J. Corbo 56 President and Chief Executive Officer Dominick W. DiDonna 51 Executive Vice President and President, Process Chemicals and Services Segment George MacKenzie 50 Executive Vice President, President, Chemical Specialties Segment and Chief Financial Officer Larry V. Rankin(2) 56 Executive Vice President and President, Functional Chemicals Segment Harry J. Tucci(3) 59 Executive Vice President June B. Barry 48 Executive Vice President and Chief Administrative Officer Israel J. Floyd(4) 53 Executive Vice President, Secretary and General Counsel Michael J. Scott 48 Vice President and Controller Stuart C. Shears 49 Vice President and Treasurer
- ----------------------- (1) Mr. Elliot is retiring from Hercules and will resign as Chairman on March 31, 2000. (2) Mr. Rankin is retiring from Hercules on April 1, 2000. (3) Mr. Tucci will retire from Hercules at the time the Food Gums divestiture is consummated. (4) Mr. Floyd is also responsible for strategic planning and corporate development. ITEM 11. EXECUTIVE COMPENSATION: Information regarding executive compensation of Hercules' directors and executive officers is included in the Proxy Statement under the caption entitled "Board of Directors - Highlights" on page 13 and the caption entitled "Report of the Compensation Committee" on pages 19 and 20, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: Information regarding beneficial ownership of the Common Stock by certain beneficial owners and by management of Hercules is included under the caption entitled "Stock Ownership of Directors and Officers" on page 21 of the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: In 1999, no director or officer had an involvement in such transactions of a nature or magnitude to require disclosure under the applicable SEC thresholds. 58 60 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K: (a) Documents filed as part of this Report: 1. Financial Statements See Item 8 for an Index to the Consolidated Financial Statements of Hercules Incorporated. 2. Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts ..................... 60 All other schedules are omitted because they are not applicable, not required, or the information required is either presented in the Notes to Financial Statements or has not changed materially from that previously reported. 3. Exhibits: A complete listing of exhibits required is given in the Exhibit Index which precedes the exhibits filed with this Report. (b) Reports on Form 8-K. None. 59 61 HERCULES INCORPORATED SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (Dollars in millions)
Col. A. Col. B Col. C Col. D Col. E - ------------------------------------------------------------------------------------------------------------------- Additions -------------------------------- Balance at beginning of Charged to costs Charged to Balance at end Description period and expenses other accounts Deductions of period - ------------------------------------------------------------------------------------------------------------------- Year 1999 - --------- Allowance for doubtful accounts $ 13 -- $ 3 (a) -- $ 16 Tax valuation allowance 12 -- 4 (a) -- 16 Year 1998 - --------- Allowance for doubtful accounts $ 3 -- $ 10 (a) -- $13 Tax valuation allowance 12 -- -- -- 12 Year 1997 - --------- Allowance for doubtful accounts $ 4 -- -- 1 (b) $ 3 Tax valuation allowance 15 -- -- 3 (c) 12
(a) Primarily a result of 1998 acquisitions, including subsequent purchase price allocation adjustments. (b) Write-off of uncollectible accounts, net or recoveries. (c) Utilization of net operating loss carryforwards. 60 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 on March 29, 2000. HERCULES INCORPORATED By: /s/ George MacKenzie ___________________________________ George MacKenzie, Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on March 29, 2000. PRINCIPAL EXECUTIVE DIRECTOR: /s/ R. Keith Elliott Chairman _________________________________ R. Keith Elliott PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: /s/ Vincent J. Corbo President and Chief Executive Office _________________________________ Vincent J. Corbo PRINCIPAL FINANCIAL OFFICER: Executive Vice President and /s/ George MacKenzie Chief Financial Officer _________________________________ George MacKenzie PRINCIPAL ACCOUNTING OFFICER: /s/ Michael J. Scott Vice President and Controller _________________________________ Michael J. Scott DIRECTORS: /s/ R. Keith Elliott ___________________________________ R. Keith Elliott /s/ Vincent J. Corbo ___________________________________ ___________________________________ Vincent J. Corbo Gaynor N. Kelley /s/ John G. Drosdick /s/ Ralph L. MacDonald, Jr. ___________________________________ ___________________________________ John G. Drosdick Ralph L. MacDonald, Jr. /s/ Richard M. Fairbanks, III ___________________________________ ___________________________________ Richard M. Fairbanks, III H. Eugene McBrayer /s/ Peter McCausland ___________________________________ ___________________________________ Alan R. Hirsig Peter McCausland /s/ John A. H. Shober ___________________________________ ___________________________________ Edith E. Holiday John A. H. Shober /s/ Robert G. Jahn ___________________________________ ___________________________________ Robert G. Jahn Paula A. Sneed 61 63 EXHIBIT INDEX
Number Description Incorporated by Reference To 2-A Agreement and Plan of Merger among Hercules, Water Exhibit 2.1, BetzDearborn Inc. Current Report Acquisition Company and BetzDearborn Inc., dated July 30, on Form 8-K, filed July 30, 1998 1998 3-A.1 Restated Certificate of Incorporation of Hercules, as Exhibit 3-A, Annual Report on form 10-K revised and amended July 6, 1988 filed March 26, 1993 3-A.2 Certificate of Amendment to Hercules' Restated Exhibit 4.1a, Registration Statement on Form Certificate of Incorporation as revised and amended S-3, filed September 15, 1998 October 24, 1995 3-B By-Laws of Hercules, as revised and amended October 30, Exhibit 3-B, Annual Report on Form 10-K filed 1991 March 26, 1993 4-A Junior Subordinated Debentures Indenture, dated November Exhibit 4-C, Annual Report on Form 10-K filed 12, 1998, between Hercules and The Chase Manhattan Bank, March 30, 1999 as trustee ("Chase") 4-B First Supplemental Indenture, dated November 12, 1998, Exhibit 4-D, Annual Report on Form 10-K, filed between Hercules and Chase March 30, 1999 4-C Preferred Securities Guarantee Agreement, dated November Exhibit 4-E, Annual Report on form 10-K, filed 12, 1998, executed by Hercules and Chase, with respect to March 30, 1999 Hercules Trust V 4-D Amended and Restated Trust Agreement of Hercules Trust V, Exhibit 4-F, Annual Report on Form 10-K, filed dated November 12, 1998 March 30, 1999 4-E Remarketing Agreement, dated November 12, 1998, among Exhibit 4-G, Annual Report on Form 10-K, filed Hercules, Hercules Trust V and NationsBanc Montgomery March 30, 1999 Securities LLC 4-F Form of Junior Subordinated Debentures Indenture between Exhibit 4.4, Amendment No. 1 to Registration Hercules, and Chase Statement on Form S-3, filed October 29, 1998 4-G Officers' Certificate, dated as of March 17, 1999, Exhibit 4.1, Current Report on Form 8-K dated pursuant to the Junior Subordinated Debentures Indenture March 17, 1999 between Hercules and Chase 4-H Form of Preferred Securities Guarantee by Hercules and Exhibit 4.28, Amendment No. 1 to Registration Chase, with respect to Hercules Trust I Statement on Form S-3, filed October 29, 1998 4-I Form of Amended and Restated Trust Agreement of Hercules Exhibit 4.13, Amendment No. 1 to Registration Trust I Statement on Form S-3, filed October 29, 1998 4-J Form of 9.42% Trust Originated Preferred Securities of Exhibit 4.2, Current Report on Form 8-K, dated Hercules Trust I March 17, 1999
62 64
Number Description Incorporated by Reference To 4-K Form of 9.42% Junior Subordinated Deferrable Interest Exhibit 4.3, Current Report on Form 8-K, dated Debentures due 2029 March 17, 1999 4-L Second Supplemental Indenture, dated July 6, 1999, to the Exhibit 4-A, Quarterly Report on Form 10-Q, Junior Subordinated Debentures Indenture between Hercules filed August 16, 1999 and Chase 4-M Amendment dated as of July 6, 1999 to the Amended and Exhibit 4-B, Quarterly Report on Form 10-Q, Restated Trust Agreement of Hercules Trust V filed August 16, 1999 4-N Termination Agreement, dated as of July 6, 1999, among Exhibit 4-C, Quarterly Report on Form 10-Q, Hercules, Hercules Trust V and Banc of America Securities filed August 16, 1999 LLC 4-O Officer's Certificate, dated as of July 27, 1999, Exhibit 4.1, Current Report on Form 8-K, dated pursuant to the Junior Subordinated Debentures Indenture July 27, 1999 between Hercules and Chase, dated as of November 12, 1998 4-P Amended and Restated Trust Agreement of Hercules Trust II Exhibit 4.2, Current Report on Form 8-K, dated dated as of July 27, 1999, together with Annex I thereto July 27, 1999 4-Q Unit Agreement, dated July 27, 1999, among Hercules, Exhibit 4.3, Current Report on Form 8-K, dated Hercules Trust II and The Chase Manhattan Bank, as unit July 27, 1999 agent 4-R Warrant Agreement, dated July 27, 1999, between Hercules Exhibit 4.4, Current Report on Form 8-K, dated and The Chase Manhattan Bank, as warrant agent July 27, 1999 4-S Form of Series A Junior Subordinated Deferrable Interest Exhibit 4.5, Current Report on Form 8-K, dated Debentures July 27, 1999 4-T Form of Trust II Preferred Securities Exhibit 4.6, Current Report on Form 8-K, dated July 27, 1999 4-U Form of CRESTS Unit Exhibit 4.7, Current Report on Form 8-K, dated July 27, 1999 4-V Form of Warrant Exhibit 4.8, Current Report on Form 8-K, dated July 27, 1999 4-W Amendment No. 2, dated as of October 25, 1999, to the Exhibit 4-A, Quarterly Report on Form 10-Q, Amended and Restated Trust Agreement of Hercules Trust V, filed November 15, 1999 as amended 4-X Third Supplemental Indenture, dated as of October 25, Exhibit 4-B, Quarterly Report on Form 10-Q, 1999, to the Junior Subordinated Debentures Indenture, as filed November 16, 1999 supplemented, between Hercules and Chase, dated as of November 12, 1998
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Number Description Incorporated by Reference To 4-Y Fourth Supplemental Indenture, dated as of December 23, 1999, to the Junior Subordinated Debentures Indenture, as supplemented, between Hercules and Chase, dated as of November 12, 1998 4-Z Form of Amended and Restated Trust Agreement of Hercules Trust VI 4-AA Form of Preferred Securities Guarantee by Hercules and Chase, with respect to Hercules Trust VI 4-AB Form of Floating Rate Preferred Securities of Hercules Included as Exhibit A-1 to Exhibit 4-Z Trust VI 4-AC Form of Floating Rate Junior Subordinated Deferrable Included as Exhibit A to Exhibit 4-Y Interest Debentures due 2000 4-AD Amendment No. 3 dated as of January 24, 2000, to the Amended and Restated Trust Agreement of Hercules Trust V, as amended 4-AE Fifth Supplemental Indenture, dated as of January 24, 2000, to the Junior Subordinated Debentures Indenture, as supplemented, between Hercules and Chase, dated November 12, 1998 4-AF Amendment No. 4 dated as of February 9, 2000, to the Amended and Restated Trust Agreement of Hercules Trust V, as amended 4-AG Sixth Supplemental Indenture, dated as of February 9, 2000, to the Junior Subordinated Debentures Indenture, as supplemented, between Hercules and Chase, dated November 12, 1998 4-AH Remarketing and Contingent Purchase Agreement, dated as of February 9, 2000, among and Banc of America Securities LLC
Hercules is party to several long-term debt instruments under which in each case the total amount of securities Authorized does not exceed 10% of the total assets of Hercules. Hercules agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. 10-A Hercules Executive Survivor Benefit Plan Exhibit 10-D, Annual Report on Form 10-K, filed March 27, 1981* 10-B Hercules Phantom Stock Plan Exhibit E, Notice Annual Meeting and Proxy Statement, dated February 14, 1986*
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Number Description Incorporated by Reference To 10-C Hercules Deferred Compensation Plan Exhibit 10-I, Annual Report on Form 10-K, filed March 29, 1988* 10-D Hercules Annual Management Incentive Compensation Plan Exhibit 10-H, Annual Report on Form 10-K, filed March 26, 1993 10-E Hercules 1993 Nonemployee Director Stock Accumulation Plan Exhibit 4.1, Registration Statement on Form S-8, filed July 16, 1993 10-F Hercules Deferred Compensation Plan for Nonemployee Exhibit 10-J, Annual Report Form 10-K, filed Directors March 26, 1993 10-G Hercules Employee Pension Restoration Plan Exhibit 10-L, Annual Report on Form 10-K, filed March 26, 1993 10-H Form of Employment Contract between Hercules and certain Exhibit 10-J, Annual Report on Form 10-K, of its officers filed March 29, 1988* 10-I Form of Indemnification Agreement between Hercules and Annex II, Notice of Annual Meeting and Proxy certain officers and directors of Hercules Statement, dated February 19, 1987* 10-J Employment Agreement effective August 1, 1998, between Exhibit 10-T, Annual Report on Form 10-K, Hercules and Vincent J. Corbo filed March 30, 1999 10-K Hercules Amended and Restated Long Term Incentive Compensation Plan 10-L BetzDearborn Inc. Employee Stock Ownership and 401(k) Plan 10-M Amended and Restated Credit Agreement, dated April 19, Exhibit 10.2, Current Report on Form 8-K dated 1999, among Hercules, NationsBank, N.A., as April 19, 1999 Administrative Agent, and the lenders party thereto 10-N Forward Underwriting Agreement, dated November 12, 1998, Exhibit 10-R, Annual Report on Form 10-K, between NationsBanc Montgomery Securities and Hercules filed March 30, 1999 10-O Underwriting Agreement, dated March 12, 1999, among Exhibit 1.1, Current Report on Form 8-K, dated Hercules, Hercules Trust I and the Underwriters named March 17, 1999 therein 10-P CRESTS Underwriting Agreement, dated July 21, 1999, among Exhibit 1.1, Current Report on Form 8-K, dated Hercules, Hercules Trust II and the Underwriters named July 27, 1999 therein 10-Q Common Stock Underwriting Agreement, dated July 21, 1999, Exhibit 1.2, Current Report on Form 8-K, dated among Hercules and the Underwriters named therein July 27, 1999
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Number Description Incorporated by Reference To 21 Subsidiaries of Registrant See Part II, Item 8 on page 56 of this 1999 Form 10-K 23-A Consent of Independent Accountants 27 Financial Data Schedule
* Previously filed as indicated and incorporated herein by reference. Exhibits incorporated by reference should be located in SEC File No. 1-496. 66 EX-4.Y 2 FOURTH SUPPLEMENTAL INDENTURE 1 EXHIBIT 4-Y FOURTH SUPPLEMENTAL INDENTURE between HERCULES INCORPORATED, as Issuer and THE CHASE MANHATTAN BANK, as Trustee Dated as of December 23, 1999 2 TABLE OF CONTENTS ARTICLE 1 DEFINITIONS
PAGE SECTION 1.01. Definition of Terms................................................................................2 ARTICLE 2 GENERAL TERMS AND CONDITIONS OF THE SUBORDINATED DEBENTURES SECTION 2.01. Designation and Principal Amount...................................................................5 SECTION 2.02. Maturity...........................................................................................5 SECTION 2.03. Form and Payment; Minimum Transfer Restriction.....................................................5 SECTION 2.04. Exchange and Registration of Transfer of Securities; Restrictions on Transfers; Depository...........................................................................6 SECTION 2.05. Interest...........................................................................................8 ARTICLE 3 REDEMPTION OF THE SUBORDINATED DEBENTURES SECTION 3.01. Redemption.........................................................................................9 SECTION 3.02. No Sinking Fund....................................................................................9 ARTICLE 4 EXTENSION OF INTEREST PAYMENT PERIOD SECTION 4.01. Extension of Interest Payment Period...............................................................9 SECTION 4.02. Notice of Extension...............................................................................10 ARTICLE 5 EXPENSES SECTION 5.01. Payment of Expenses...............................................................................10 SECTION 5.02. Payment upon Resignation or Removal...............................................................11 ARTICLE 6 NOTICE SECTION 6.01. Notice by the Company.............................................................................11
3
PAGE ARTICLE 7 CONVERSION OF SUBORDINATED DEBENTURES SECTION 7.01. Conversion Rights.................................................................................12 ARTICLE 8 FORM OF SUBORDINATED DEBENTURES SECTION 8.01. Form of Subordinated Debenture....................................................................12 ARTICLE 9 ORIGINAL ISSUE OF SUBORDINATED DEBENTURES SECTION 9.01. Subordinated Debentures...........................................................................12 ARTICLE 10 EVENTS OF DEFAULT; ACCELERATION SECTION 10.01. Events of Default................................................................................12 SECTION 10.02. Acceleration.....................................................................................12 ARTICLE 11 MISCELLANEOUS SECTION 11.01. Ratification of Base Indenture; Fourth Supplemental Indenture Controls...........................13 SECTION 11.02. Trustee Not Responsible for Recitals.............................................................13 SECTION 11.03. Governing Law....................................................................................13 SECTION 11.04. References to Co-Chief Executive Officer.........................................................13 SECTION 11.05. Severability.....................................................................................13 SECTION 11.06. Counterparts.....................................................................................13
EXHIBIT A-1 - Form of Subordinated Debenture -ii- 4 FOURTH SUPPLEMENTAL INDENTURE, dated as of December 23, 1999 (the "FOURTH SUPPLEMENTAL INDENTURE"), between Hercules Incorporated, a Delaware corporation (the "COMPANY"), and The Chase Manhattan Bank, a New York banking corporation, as trustee (the "TRUSTEE") under the Junior Subordinated Debentures Indenture dated as of November 12, 1998 between the Company and the Trustee (the "BASE INDENTURE" and together with this Fourth Supplemental Indenture, the "INDENTURE"). WHEREAS, the Company executed and delivered the Base Indenture to the Trustee to provide for the future issuance of the Company's unsecured junior subordinated debentures (the "DEBENTURES") to be issued from time to time in one or more series as might be determined by the Company under the Base Indenture, in an unlimited aggregate principal amount which may be authenticated and delivered as provided in the Base Indenture; WHEREAS, pursuant to the terms of the Indenture, the Company desires to provide for the establishment of a new series of its Debentures to be known as its Floating Rate Junior Subordinated Deferrable Interest Debentures due 2000 (the "SUBORDINATED DEBENTURES"), the form and substance of such Subordinated Debentures and the terms, provisions and conditions thereof to be set forth as provided in the Base Indenture and this Fourth Supplemental Indenture; WHEREAS, Hercules Trust VI, a Delaware statutory business trust (the "TRUST"), has offered to J.P. Morgan Securities Inc., as initial purchaser (the "INITIAL PURCHASER"), $170,000,000 aggregate liquidation amount of its Floating Rate Preferred Securities (the "PREFERRED SECURITIES"), representing undivided beneficial interests in the assets of the Trust, for resale to "qualified institutional buyers" under Rule 144A, and proposes to invest the proceeds from such offering, together with the proceeds of the issuance and sale by the Trust to the Company of $5,258,000 aggregate liquidation amount of its Common Securities, in $175,258,000 aggregate principal amount of the Subordinated Debentures; and WHEREAS, the Company has requested that the Trustee execute and deliver this Fourth Supplemental Indenture, and all requirements necessary to make this Fourth Supplemental Indenture a valid instrument in accordance with its terms, and to make the Subordinated Debentures, when executed by the Company and authenticated and delivered by the Trustee, the valid obligations of the Company, have been performed, and the execution and delivery of this Fourth Supplemental Indenture has been duly authorized in all respects. NOW THEREFORE, in consideration of the purchase and acceptance of the Subordinated Debentures by the Holder thereof, and for the purpose of setting forth, as provided in the Indenture, the form and substance of the Subordinated Debentures and the terms, provisions and conditions thereof, the Company covenants and agrees with the Trustee as follows: 5 ARTICLE 1 DEFINITIONS SECTION 1.01. Definition of Terms. For all purposes of this Fourth Supplemental Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms which are defined in the Base Indenture have the same meanings when used in this Fourth Supplemental Indenture; (b) the terms defined in this Article have the meaning assigned to them in this Article and include the plural as well as the singular; (c) all other terms used herein which are defined in the Trust Indenture Act, whether directly or by reference therein, have the meanings assigned to them therein; (d) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP, and, except as otherwise herein expressly provided, the term "GAAP" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted in the United States of America at the date of such computation; (e) a reference to a Section or Article is to a Section or Article of this Fourth Supplemental Indenture; (f) the words "herein" "hereof" and "hereunder" and other words of similar import refer to this Fourth Supplemental Indenture as a whole and not to any particular Article, Section or other subdivision; (g) headings are for convenience of reference only and do not affect interpretation; and (h) the following terms have the meanings given to them in the Trust Agreement: ADMINISTRATIVE TRUSTEE AFFILIATE COMMON SECURITIES DELAWARE TRUSTEE LIKE AMOUNT LIQUIDATION AMOUNT PERSON PORTAL MARKET PROPERTY TRUSTEE PURCHASE AGREEMENT RULE 144A SECURITIES ACT. 2 6 "ADDITIONAL INTEREST" has the meaning set forth in Section 2.05(d). "BUSINESS DAY" means any day other than a Saturday, Sunday or other day on which banking institutions in The City of New York or Wilmington, Delaware are authorized or required by law, regulation or executive order to close; provided, however, that with respect to LIBOR interest determinations, calculations and payments, such day is also a London Banking Day. "CALCULATION AGENT" means The Chase Manhattan Bank or in the event of resignation by or removal of The Chase Manhattan Bank, any replacement as Calculation Agent appointed by the Company. "CREDIT AGREEMENT" means the Amended and Restated Credit Agreement dated as of April 19, 1999 among the Company, certain subsidiaries of the Company from time to time parties thereto, the several lenders from time to time parties thereto, NationsBank, N.A., as Administrative Agent, Bank of America Canada, as Canadian Administrative Agent, and The Chase Manhattan Bank, Morgan Guaranty Trust Company of New York and Citibank, N.A., as Co-Syndication Agents, as amended, supplemented, modified or superseded from time to time. "DEPOSITORY" has the meaning set forth in the Base Indenture. "DETERMINATION DATE" means two London Banking Days prior to the applicable Interest Payment Date. "DISSOLUTION EVENT" means the dissolution of the Trust pursuant to Section 8.1 of the Trust Agreement, and the distribution of the Subordinated Debentures held by the Property Trustee to the holders of the Preferred Securities issued by the Trust pro rata in accordance with the Trust Agreement. "EXTENDED INTEREST PAYMENT PERIOD" has the meaning set forth in Section 4.01. "GAAP" has the meaning set forth in the Base Indenture. "GLOBAL DEBENTURE" has the meaning set forth in the Base Indenture. "GLOBAL SUBORDINATED DEBENTURE" has the meaning set forth in Section 2.04(a)(i). "GUARANTEE TRUSTEE" means the Preferred Securities Guarantee Trustee as defined in the Preferred Securities Guarantee Agreement dated as of December 23, 1999 between Hercules Incorporated, as Guarantor, and The Chase Manhattan Bank, as Preferred Securities Guarantee Trustee. "HOLDER" has the meaning set forth in the Base Indenture. 3 7 "INTEREST PAYMENT DATE" has the meaning set forth in Section 2.05(b). "INTEREST RATE" has the meaning set forth in Section 2.05(a). "LIBOR" means, with respect to an interest period commencing on an Interest Payment Date (in the following order of priority): (a) the rate (expressed as a percentage per annum) for Eurodollar deposits having a three-month maturity that appears on Telerate page 3750 as of 11:00 a.m. (London time) on the Determination Date; (b) if such rate does not appear on Telerate page 3750 as of 11:00 a.m. (London time) on the Determination Date, the Calculation Agent will request the principal London offices of four leading banks in the London interbank market as selected by the Calculation Agent in consultation with the Company to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for Eurodollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date, and if at least two quotations are provided, LIBOR will be the arithmetic mean of such quotations (rounded upwards if necessary to the fifth decimal place); (c) if fewer than two such quotations are provided as requested in clause (b) above, the Calculation Agent will request four major New York City banks selected by the Calculation Agent in consultation with the Company to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in Eurodollars as of 11:00 a.m. (New York City time) on such Determination Date, and if at least two quotations are provided, LIBOR will be the arithmetic mean of such quotations (rounded upwards if necessary to the fifth decimal place); and (d) if fewer than two such quotations are provided as requested in clause (c) above, LIBOR will be LIBOR as in effect during the preceding interest period. "LONDON BANKING DAY" means any day, other than a Saturday or Sunday, on which banks are open for business (including dealings in deposits in U.S. dollars) in London. "MATURITY DATE" means December 29, 2000. "REGULAR RECORD DATE" has the meaning set forth in Section 2.05(c). "RESTRICTED SECURITY" has the meaning set forth in Section 2.04(c). "SENIOR BANK DEBT ACCELERATION" means an acceleration under the Credit Agreement resulting in the obligations of the Company under the Credit Agreement becoming or having been declared due and payable under Section 6 of the Credit Agreement before such obligations would otherwise have been due and payable. 4 8 "TRANSFER RESTRICTION TERMINATION DATE" means the first date on which the Subordinated Debentures (other than Subordinated Debentures acquired by the Company or any Affiliate thereof) may be sold pursuant to Rule 144(k). "TRUST AGREEMENT" means the Amended and Restated Trust Agreement of Hercules Trust VI, a Delaware statutory business trust, dated as of December 23, 1999. "TRUST SECURITIES" means the Preferred Securities and Common Securities of the Trust. "U.S. DOLLAR," "DOLLAR," "U.S.$," "$" and "USD" means the lawful currency of the United States of America. ARTICLE 2 GENERAL TERMS AND CONDITIONS OF THE SUBORDINATED DEBENTURES SECTION 2.01. Designation and Principal Amount. There is hereby authorized a series of Debentures designated the "Floating Rate Junior Subordinated Deferrable Interest Debentures due 2000," limited in aggregate principal amount to $309,279,000, which amount shall be as set forth in any written order of the Company for the authentication and delivery of Subordinated Debentures pursuant to Section 2.03 of the Base Indenture, except for Subordinated Debentures authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Subordinated Debentures under the terms of the Indenture. Of such aggregate principal amount, $175,258,000 is authenticated and delivered as of the date hereof, and the remaining $134,021,000 of the Subordinated Debentures is issuable only in connection with the Trust's right under the Trust Agreement to issue additional Preferred Securities and Common Securities. SECTION 2.02. Maturity. The principal of the Subordinated Debentures shall be due and payable on the Maturity Date. SECTION 2.03. Form and Payment; Minimum Transfer Restriction. (a) Except as provided in Section 2.04, the Subordinated Debentures shall be issued in fully registered certificated form without coupons in denominations of $1,000,000 in principal amount and integral multiples of $1,000 thereof. Principal and interest on the Subordinated Debentures issued in certificated form will be payable by check or wire transfer, the transfer of such Subordinated Debentures will be registrable and such Subordinated Debentures will be exchangeable for Subordinated Debentures bearing identical terms and provisions at the office or agency of the Trustee; provided, however, that payment of interest may be made at the option of the Company by check mailed to the Holder at such address as shall appear in the Register. Notwithstanding the foregoing, so long as the Holder of any Subordinated Debentures is the Property Trustee, the payment of the principal of and interest (including any Additional Interest, if any) on such Subordinated Debentures held by the Property Trustee will be made at such place and to such account as may be designated by the Property Trustee. 5 9 (b) The Subordinated Debentures may be transferred or exchanged only in minimum denominations of $1,000,000 and integral multiples of $100,000 in excess thereof, and any attempted transfer, sale or other disposition of Subordinated Debentures in a denomination of less than $1,000,000 shall be deemed to be void and of no legal effect whatsoever. SECTION 2.04. Exchange and Registration of Transfer of Securities; Restrictions on Transfers; Depository. (a) If distributed to holders of Preferred Securities in connection with a Dissolution Event, the Subordinated Debentures will be issued in the same form as the Preferred Securities that such Subordinated Debentures replace in accordance with the following procedures. (i) If the Preferred Securities are held in global form, the Subordinated Debentures shall be presented to the Trustee by the Property Trustee in exchange for a Global Debenture in an aggregate principal amount equal to the aggregate principal amount of all outstanding Subordinated Debentures (a "GLOBAL SUBORDINATED DEBENTURE"), to be registered in the name of the Depository, or its nominee, and delivered by the Property Trustee to the Depository for crediting to the accounts of its participants pursuant to the instructions of the Administrative Trustees. The Company upon any such presentation shall execute a Global Subordinated Debenture in such aggregate principal amount and deliver the same to the Trustee for authentication and delivery in accordance with the Indenture. Payments on the Subordinated Debentures issued as a Global Subordinated Debenture will be made to the Depository. (ii) If the Preferred Securities are held in certificated form, the Subordinated Debentures shall be presented to the Trustee by the Property Trustee and each outstanding Preferred Security certificate will be deemed to represent a beneficial interest in such Subordinated Debenture in an aggregate principal amount equal to the aggregate Liquidation Amount of the Preferred Securities represented by such Preferred Security certificate. When the holder of a Preferred Security certificate presents such certificate for transfer or reissuance, such certificate will be canceled and a Subordinated Debenture, registered in the name of such holder or such holder's transferee, as the case may be, in an aggregate principal amount equal to the aggregate Liquidation Amount of the canceled certificate, will be executed by the Company and delivered to the Trustee for authentication and delivery in accordance with the Indenture. On issue of such Subordinated Debentures, Subordinated Debentures with an equivalent aggregate principal amount that were presented by the Property Trustee to the Trustee will be deemed to have been canceled. (b) Any Global Subordinated Debenture may be endorsed with or have incorporated in the text thereof such legends or recitals or changes not inconsistent with the provisions of this Indenture as may be required by the Depository, by a national securities exchange or by the National Association of Securities Dealers, Inc. in order for the Subordinated Debentures to be tradeable on the PORTAL Market or as may be required for the Subordinated Debentures to be tradeable on any other market developed for trading of securities pursuant to Rule 144A or 6 10 required to comply with any applicable law or any regulation thereunder or with the rules and regulations of any securities exchange upon which the Subordinated Debentures may be listed or traded or to conform with any usage with respect thereto, or to indicate any special limitations or restrictions to which any particular Subordinated Debentures are subject. (c) Each Subordinated Debenture that bears or is required to bear the legend set forth in this Section 2.04(c) (a "RESTRICTED SECURITY") shall be subject to the restrictions on transfer provided in the legend set forth in this Section 2.04(c), unless such restrictions on transfer shall be waived by the written consent of the Company, and the Holder of each Restricted Security, by such Holder's acceptance thereof, agrees to be bound by such restrictions on transfer. As used in this Section 2.04(c) and in Section 2.04(d), the term "transfer" encompasses any sale, pledge, transfer or other disposition of any Restricted Security. Prior to the Transfer Restriction Termination Date, any certificate evidencing a Subordinated Debenture shall bear a legend in substantially the following form, unless otherwise agreed by the Company (with written notice thereof to the Trustee): THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES NOT TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY PRIOR TO THE DATE (THE "TRANSFER RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH HERCULES INCORPORATED OR ANY AFFILIATED PERSON OF HERCULES INCORPORATED WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY) UNLESS SUCH OFFER, SALE OR OTHER TRANSFER IS (A) TO HERCULES INCORPORATED OR ANY OF ITS SUBSIDIARIES, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON WHO IS OR WHO THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) THAT IS AN INSTITUTIONAL INVESTOR, (E) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE RIGHT OF HERCULES INCORPORATED OR THE 7 11 TRANSFER AGENT FOR THE SECURITIES PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE THEN HOLDER OF THIS SECURITY AFTER THE TRANSFER RESTRICTION TERMINATION DATE. Following the Transfer Restriction Termination Date, any Subordinated Debenture or security issued in exchange or substitution therefor (other than Subordinated Debentures acquired by the Company or any Affiliate) may, upon surrender of such Subordinated Debenture or security for exchange to the Trustee in accordance with the provisions of this Section 2.04, be exchanged for a new Subordinated Debenture or Subordinated Debentures, of like tenor and aggregate principal amount, which shall not bear the restrictive legend required by this Section 2.04(c). (d) Any Subordinated Debenture that, prior to the Transfer Restriction Termination Date, is purchased or owned by the Company or any Affiliate thereof may not be resold by the Company or such Affiliate unless registered under the Securities Act or resold pursuant to an exemption from the registration requirements thereof. SECTION 2.05. Interest. (a) Interest on the principal amount of each Subordinated Debenture will accrue and be payable at a rate (the "INTEREST RATE") per annum, reset quarterly, equal to LIBOR plus 2.45% of such principal amount. Notwithstanding the foregoing, if the Company fails to pay principal or interest when due, such overdue amount shall accrue interest, compounded quarterly, at the then applicable periodic Interest Rate, but only to the extent permitted by applicable law. The term "INTEREST", as used herein, includes any such additional interest and Additional Interest unless otherwise stated. (b) Interest on the Subordinated Debentures will be payable quarterly in arrears on March 29, 2000, June 29, 2000, September 29, 2000 and December 29, 2000, commencing March 29, 2000 (each, an "INTEREST PAYMENT DATE"), and will accrue from and including the most recent date to which interest has been paid or, if no interest has been paid, from December 23, 1999 (for the Subordinated Debentures issued on such date), to but excluding the related Interest Payment Date, except as otherwise described below. If additional Subordinated Debentures are issued upon the issuance of additional Preferred Securities and Common Securities as contemplated in Section 2.01, the Company will establish the date on which interest will begin to accrue and the initial Interest Payment Date with respect to such additional Subordinated Debentures. For the Subordinated Debentures issued on December 23, 1999, the Interest Rate in effect for the interest period from and including December 23, 1999 to but excluding March 29, 2000 shall be 8 5/8%. The amount of interest payable for any interest period shall be computed on the basis of the actual number of days in such period and a year of 360 days. If an Interest Payment Date is not a Business Day, then such Interest Payment Date will be postponed to the next 8 12 succeeding Business Day, except if such Business Day is in the next succeeding calendar month, such Interest Payment Date will be the immediately preceding Business Day. (c) Interest shall be paid to the Person in whose name such Subordinated Debenture or any predecessor Subordinated Debenture is registered on the books and records of the Company at the close of business on the Regular Record Date for such interest installment, which shall be the fifteenth (15th) day of the month in which the applicable Interest Payment Date falls (the "REGULAR RECORD DATE"). Notwithstanding the foregoing, so long as the Holder of the Subordinated Debenture is the Property Trustee, the payment of the principal of and interest on this Subordinated Debenture will be made at such place and to such account as may be designated by the Property Trustee. (d) If, at any time while the Property Trustee is the Holder of any Subordinated Debentures, the Trust or the Property Trustee is required to pay any taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States, or any other taxing authority, then, in any such case, the Company will pay as additional interest ("ADDITIONAL INTEREST") on the Subordinated Debentures held by the Property Trustee, such additional amounts as shall be required so that the net amounts received and retained by the Trust and the Property Trustee after paying such taxes, duties, assessments or other governmental charges will be equal to the amounts the Trust and the Property Trustee would have received had no such taxes, duties, assessments or other government charges been imposed. ARTICLE 3 REDEMPTION OF THE SUBORDINATED DEBENTURES SECTION 3.01. Redemption. The Subordinated Debentures are not subject to redemption by the Company prior to maturity. SECTION 3.02. No Sinking Fund. The Subordinated Debentures are not entitled to the benefit of any sinking fund. ARTICLE 4 EXTENSION OF INTEREST PAYMENT PERIOD SECTION 4.01. Extension of Interest Payment Period. The Company shall have the right, at any time, and from time to time, during the term of the Subordinated Debentures to extend the interest payment period of the Subordinated Debentures (an "EXTENDED INTEREST PAYMENT PERIOD"), provided no Event of Default has occurred and is continuing with respect to the Subordinated Debentures, and provided, further, that such Extended Interest Payment Period must end on an Interest Payment Date and may not extend beyond the Maturity Date. To the extent permitted by applicable law, interest, the payment of which has been deferred because of the extension of the Interest Payment Period pursuant to this Section 4.01, will bear interest 9 13 thereon at the then applicable periodic Interest Rate for each quarterly period in the Extended Interest Payment Period. At the end of the Extended Interest Payment Period, the Company shall pay all interest then accrued and unpaid on the Subordinated Debentures, including any Additional Sums, which shall be payable to the Holders of the Subordinated Debentures in whose names the Subordinated Debentures are registered in the Register on the first Regular Record Date after the end of the Extended Interest Payment Period. Before the termination of any Extended Interest Payment Period, the Company may shorten or further extend such Extended Interest Payment Period, provided, however, that such Extended Interest Payment Period, together with all such previous further extensions thereof, shall not exceed beyond the Maturity Date. At the termination of any Extended Interest Payment Period and upon the payment of all accrued and unpaid interest and any Additional Sums then due, the Company may elect a new Extended Interest Payment Period, subject to the foregoing requirements. No interest shall be due and payable during an Extended Interest Payment Period, except at the end thereof. SECTION 4.02. Notice of Extension. (a) If the Property Trustee is the only registered holder of the Subordinated Debentures at the time the Company selects an Extended Interest Payment Period, the Company shall give written notice to both the Administrative Trustees and the Property Trustee of its selection of such Extended Interest Payment Period in accordance with the notice provisions of Section 4.01 of the Base Indenture. (b) If the Property Trustee is not the only registered holder of the Subordinated Debentures at the time the Company selects an Extended Interest Payment Period, the Company shall give the holders of the Subordinated Debenture's written notice of its selection of such Extended Interest Payment Period in accordance with the notice provisions of Section 4.01 of the Base Indenture. ARTICLE 5 EXPENSES SECTION 5.01. Payment of Expenses. In connection with the offering, sale and issuance of the Subordinated Debentures to the Property Trustee and in connection with the sale of the Trust Securities by the Trust, the Company, in its capacity as borrower with respect to the Subordinated Debentures, shall: (a) pay all costs and expenses relating to the offering, sale and issuance of the Subordinated Debentures payable pursuant to the Purchase Agreement and compensation of the Trustee under the Indenture in accordance with the provisions of Section 7.06 of the Base Indenture; (b) pay all costs and expenses of the Trust (other than payment in respect of Trust Securities) (including, but not limited to, costs and expenses relating to the organization of the 10 14 Trust; the fees and expenses of the Property Trustee and the Delaware Trustee; the costs and expenses relating to the operation of the Trust, including without limitation, costs and expenses of accountants, attorneys, statistical or bookkeeping services, expenses for printing, engraving, computing or accounting equipment, paying agent(s), registrar(s), transfer agent(s), duplicating and travel; telephone and other telecommunications expenses; and costs and expenses incurred in connection with the acquisition, financing, and disposition of Trust assets); (c) pay all costs and expenses of the Trust or Property Trustee related to the enforcement by the Property Trustee of the rights of the holders of the Preferred Securities; (d) be primarily liable for any indemnification obligations arising with respect to the Trust Agreement; and (e) pay any and all taxes (other than United States withholding taxes attributable to the Trust or its assets) and all liabilities, costs and expenses with respect to such taxes of the Trust. SECTION 5.02. Payment upon Resignation or Removal. Upon termination of this Fourth Supplemental Indenture or the Base Indenture or the removal or resignation of the Trustee pursuant to Section 7.08 of the Base Indenture, the Company shall pay to the Trustee all amounts accrued to the date of such termination, removal or resignation. Upon termination of the Trust Agreement or the removal or resignation of the Delaware Trustee, the Guarantee Trustee or the Property Trustee, as the case may be, the Company shall pay to the Delaware Trustee, the Guarantee Trustee or the Property Trustee and their respective counsel, as the case may be, all amounts accrued to the date of such termination, removal or resignation. ARTICLE 6 NOTICE SECTION 6.01. Notice by the Company. The Company shall give prompt written notice to the Trustee of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Subordinated Debentures pursuant to the provisions of this Article. Notwithstanding any of the provisions of the Base Indenture or this Fourth Supplemental Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Subordinated Debentures pursuant to the provisions of the Base Indenture; provided, however, that if the Trustee shall not have received the notice provided for in this Article at least two Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of or interest on any Subordinated Debenture), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which it was received, and shall not be affected by any notice to the contrary that may be received by it on or after the second Business Day prior to such date. 11 15 ARTICLE 7 CONVERSION OF SUBORDINATED DEBENTURES SECTION 7.01. Conversion Rights. The Subordinated Debentures are not convertible at any time. ARTICLE 8 FORM OF SUBORDINATED DEBENTURES SECTION 8.01. Form of Subordinated Debenture. The Subordinated Debentures and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A-1. Exhibit A-1 is hereby incorporated in and expressly made a part of this Fourth Supplemental Indenture. ARTICLE 9 ORIGINAL ISSUE OF SUBORDINATED DEBENTURES SECTION 9.01. Subordinated Debentures. Each Subordinated Debenture shall be issued in denominations of $1,000,000 and in integral multiples of $100,000 thereof and may, upon execution of this Fourth Supplemental Indenture, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and make available for delivery said Subordinated Debentures to or upon the written order of the Company, signed by its Chief Executive Officer, its President, any Executive Vice President or any Vice President and its Treasurer or an Assistant Treasurer, without any further action by the Company. ARTICLE 10 EVENTS OF DEFAULT; ACCELERATION SECTION 10.01. Events of Default. A Senior Bank Debt Acceleration shall be an Event of Default under Section 6.01(h) of the Base Indenture. SECTION 10.02. Acceleration. Notwithstanding the provisions of Section 6.02 of the Base Indenture, if a Senior Bank Debt Acceleration shall occur, the principal of, and any accrued interest on, all the Subordinated Debentures shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holders of Subordinated Debentures. 12 16 ARTICLE 11 MISCELLANEOUS SECTION 11.01. Ratification of Base Indenture; Fourth Supplemental Indenture Controls. The Base Indenture, as supplemented by this Fourth Supplemental Indenture, is in all respects ratified and confirmed, and this Fourth Supplemental Indenture shall be deemed part of the Base Indenture in the manner and to the extent herein and therein provided. The provisions of this Fourth Supplemental Indenture shall supersede the provisions of the Base Indenture to the extent the Base Indenture is inconsistent herewith. SECTION 11.02. Trustee Not Responsible for Recitals. The recitals herein contained are made by the Company and not by the Trustee, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no representation as to the validity or sufficiency of this Fourth Supplemental Indenture. SECTION 11.03. Governing Law. This Fourth Supplemental Indenture and each Subordinated Debenture shall be governed by and construed in accordance with the laws of the State of New York, as applied to contracts made and performed within the State of New York, without regard to its principles of conflicts of laws. SECTION 11.04. References to Co-Chief Executive Officer. All references in the Base Indenture to a Co-Chief Executive Officer of the Company shall mean its Chief Executive Officer. SECTION 11.05. Severability. If any provision in the Base Indenture, this Fourth Supplemental Indenture or in the Subordinated Debentures shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 11.06. Counterparts. The parties may sign any number of copies of this Fourth Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. Any signed copy shall be sufficient proof of this Fourth Supplemental Indenture. 13 17 IN WITNESS WHEREOF, the parties hereto have caused this Fourth Supplemental Indenture to be duly executed as of the day and year first above written. HERCULES INCORPORATED By ___________________________________ Name: Title: THE CHASE MANHATTAN BANK, as Trustee By ___________________________________ Name: Title: 14 18 EXHIBIT A-1 [FORM OF SUBORDINATED DEBENTURE] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES NOT TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY PRIOR TO THE DATE (THE "TRANSFER RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH HERCULES INCORPORATED OR ANY AFFILIATED PERSON OF HERCULES INCORPORATED WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY) UNLESS SUCH OFFER, SALE OR OTHER TRANSFER IS (A) TO HERCULES INCORPORATED OR ANY OF ITS SUBSIDIARIES, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON WHO IS OR WHO THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) THAT IS AN INSTITUTIONAL INVESTOR, (E) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE RIGHT OF HERCULES INCORPORATED OR THE TRANSFER AGENT FOR THE SECURITIES PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE THEN HOLDER OF THIS SECURITY AFTER THE TRANSFER RESTRICTION TERMINATION DATE. USE THE FOLLOWING IF THIS IS A GLOBAL SUBORDINATED DEBENTURE: [THIS SUBORDINATED DEBENTURE IS A GLOBAL SUBORDINATED DEBENTURE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY (THE "CLEARING AGENCY") OR A NOMINEE OF THE CLEARING AGENCY. THIS SUBORDINATED DEBENTURE IS EXCHANGEABLE FOR SUBORDINATED DEBENTURES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE CLEARING AGENCY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND NO TRANSFER OF THIS SUBORDINATED DEBENTURE (OTHER THAN A TRANSFER OF THIS SUBORDINATED DEBENTURE AS A WHOLE BY THE CLEARING AGENCY A1-1 19 TO A NOMINEE OF THE CLEARING AGENCY OR BY A NOMINEE OF THE CLEARING AGENCY TO THE CLEARING AGENCY OR ANOTHER NOMINEE OF THE CLEARING AGENCY) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES. UNLESS THIS SUBORDINATED DEBENTURE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SUBORDINATED DEBENTURE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY AND ANY PAYMENT HEREON IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] A1-2 20 No.________ CUSIP NO. ____________ HERCULES INCORPORATED FLOATING RATE JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURE DUE 2000 Hercules Incorporated, a Delaware corporation (the "COMPANY", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay the principal sum of _________ Dollars ($ ) on December 29, 2000, or such other date as may be provided pursuant to the terms of the Indenture. (a) Interest on the principal amount of this Subordinated Debenture will accrue and be payable at a rate (the "INTEREST RATE") per annum, reset quarterly, equal to LIBOR plus 2.45% of such principal amount. Notwithstanding the foregoing, if the Company fails to pay principal or interest when due, such overdue amount shall accrue interest, compounded quarterly, at the then applicable periodic Interest Rate, but only to the extent permitted by applicable law. The term "INTEREST", as used herein, includes any such additional interest and Additional Interest unless otherwise stated. (b) Interest on this Subordinated Debenture will be payable quarterly in arrears on March 29, 2000, June 29, 2000, September 29, 2000 and December 29, 2000, commencing March 29, 2000 (each an "INTEREST PAYMENT Date"), will accrue from and including the most recent date to which interest has been paid or, if no interest has been paid, from December 23, 1999, to but excluding the related Interest Payment Date, except as otherwise described below. If additional Subordinated Debentures are issued upon the issuance of additional Preferred Securities and Common Securities as contemplated in Section 2.01, the Company will establish the date on which interest will begin to accrue and the initial Interest Payment Date with respect to such additional Subordinated Debentures. For the Subordinated Debentures issued on December 23, 1999, the Interest Rate in effect for the period from and including December 23, 1999, to but excluding March 29, 2000, shall be 8 5/8%. The Interest Rate in effect thereafter shall be determined by the Calculation Agent on the Determination Date prior to the applicable Interest Payment Date. The amount of interest payable for any interest period shall be computed on the basis of the actual number of days in such period and a year of 360 days. If an Interest Payment Date is not a Business Day, then such Interest Payment Date will be postponed to the next succeeding Business Day, except if such Business Day is in the next succeeding calendar month, such Interest Payment Date will be the immediately preceding Business Day. (c) Interest shall be paid to the Person in whose name such Subordinated Debenture or any predecessor Subordinated Debenture is registered on the books and records of the Company at the close of business on the Regular Record Date for such interest installment, A1-3 21 which shall be the fifteenth (15th) day of the month in which the applicable Interest Payment Date falls (the "REGULAR RECORD DATE"). Notwithstanding the foregoing, so long as the Holder of the Subordinated Debenture is the Property Trustee, the payment of the principal of and interest on this Subordinated Debenture will be made at such place and to such account as may be designated by the Property Trustee. The indebtedness evidenced by this Subordinated Debenture is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all existing and future Senior Indebtedness, and this Subordinated Debenture is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Subordinated Debenture, by accepting the same, (i) agrees to and shall be bound by such provisions, (ii) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (iii) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each Holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. This Subordinated Debenture shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Subordinated Debenture are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. A1-4 22 IN WITNESS WHEREOF, the Company has caused this instrument to be executed. HERCULES INCORPORATED By: _________________________________ Name: Title Attest: By:_______________________________ Name: Title: A1-5 23 [FORM OF CERTIFICATE OF AUTHENTICATION] CERTIFICATE OF AUTHENTICATION This is one of the Subordinated Debentures of the series of Debentures described in the within-mentioned Indenture. Dated: THE CHASE MANHATTAN BANK, as Trustee or as Authentication Agent By _______________________________ By ________________________________ Authorized Signatory Authorized Signatory A1-6 24 [FORM OF REVERSE OF DEBENTURE] This Subordinated Debenture is one of a duly authorized series of Debentures of the Company (herein sometimes referred to as the "DEBENTURES"), specified in the Indenture, all issued or to be issued in one or more series under and pursuant to a Junior Subordinated Debentures Indenture dated as of November 12, 1998, duly executed and delivered between the Company and The Chase Manhattan Bank, as Trustee (the "TRUSTEE"), as supplemented by the Fourth Supplemental Indenture dated as of December 23, 1999, between the Company and the Trustee (the Indenture as so supplemented, the "INDENTURE"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the Holders of the Subordinated Debentures. By the terms of the Indenture, the Debentures are issuable thereunder in series that may vary as to amount, date of maturity, rate of interest and in other respects as provided in the Indenture. This series of Debentures is limited in aggregate principal amount as specified in said Fourth Supplemental Indenture and herein sometimes referred to as the "SUBORDINATED DEBENTURES." In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of all of the Subordinated Debentures may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the Holders of at least a majority in aggregate principal amount of the Debentures of each series affected thereby then outstanding (and, in the case of any series of Debentures held as assets of a Trust and with respect to which a Dissolution Event has not theretofore occurred, such consent of holders of the Preferred Securities and the Common Securities of such Trust as may be required under the Trust Agreement), as defined in the Indenture, to reduce the principal amount of such Debentures; reduce the percentage of the principal amount of such Debentures the Holders of which must consent to an amendment of the Indenture or a waiver; change (i) the stated maturity of the principal of or the interest on such Debentures, or (ii) the rate of interest (or the manner of calculation thereof) on such Debentures, change adversely to the Holders the redemption, conversion or exchange provisions applicable to such Debentures, if any; change the currency in respect of which the payments on such Debentures are to be made; make any change in the subordination provisions in Article 10 of the Indenture that adversely affects the rights of the Holders of the Debentures or any change to any other section thereof that adversely affects their rights; or change the direct action rights of holders of Preferred Securities; provided that, in the case of the outstanding Debentures of a series then held by a Trust, no such amendment shall be made that adversely affects the holders of the Preferred Securities of that Trust, and no waiver of any Event of Default with respect to the Debentures of that series or compliance with any covenant under the Indenture shall be effective, without the prior consent of the holders of at least a majority of the aggregate liquidation amount of the outstanding Preferred Securities of that Trust or the holder of each such Preferred Security, as applicable. A1-7 25 A supplemental indenture that changes or eliminates any covenant or other provision of the Indenture that has expressly been included solely for the benefit of one or more particular series of Debentures, or which modifies the rights of the Holders of Debentures of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under the Indenture of the Holders of Debentures of any other series. No reference herein to the Indenture and no provision of this Subordinated Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Subordinated Debenture at the time and place and at the rate or rates and in the currency herein prescribed. As provided in the Indenture and subject to certain limitations herein and therein set forth, this Subordinated Debenture is transferable by the registered Holder hereof on the Register of the Company, upon surrender of this Subordinated Debenture for registration of transfer at the office or agency of the Trustee in the City and State of New York accompanied by a written instrument or instruments of transfer in form satisfactory to the Company or the Trustee duly executed by the registered Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Subordinated Debentures of authorized denominations and for the same aggregate principal amount and series will be issued to the designated transferee or transferees. No service charge will be made for any such transfer, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto. Prior to due presentment for registration of transfer of this Subordinated Debenture, the Company, the Trustee, any paying agent and the Registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Subordinated Debenture shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the Registrar) for the purpose of receiving payment of or on account of the principal hereof and interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any paying agent nor any Registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Subordinated Debenture, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. The Subordinated Debentures of this series are issuable only in registered form without coupons in denominations of $1,000,000 and any integral multiple of $100,000 in excess thereof. The Subordinated Debentures may be transferred or exchanged only in minimum denominations of $1,000,000 and integral multiples of $100,000 in excess thereof, and any attempted transfer, A1-8 26 sale or other disposition of Subordinated Debentures in a denomination of less than $1,000,000 shall be deemed void and of no legal effect whatsoever. All terms used in this Subordinated Debenture that are defined in the Indenture shall have the meanings assigned to them in the Indenture. THE INDENTURE AND THE DEBENTURES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS PRINCIPLES OF CONFLICTS OF LAWS. A1-9 EX-4.Z 3 FORM OF AMENDED & RESTATED TRUST AGREEMENT 1 EXHIBIT 4-Z AMENDED AND RESTATED TRUST AGREEMENT HERCULES TRUST VI Dated as of December 23, 1999 2 TABLE OF CONTENTS ARTICLE I INTERPRETATION AND DEFINITIONS SECTION 1.1 Definitions.................................................................. 2 ARTICLE II TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application............................................. 8 SECTION 2.2 Lists of Holders of Securities............................................... 9 SECTION 2.3 Reports by the Property Trustee.............................................. 9 SECTION 2.4 Periodic Reports to Property Trustee......................................... 9 SECTION 2.5 Evidence of Compliance with Conditions Precedent............................. 9 SECTION 2.6 Events of Default; Waiver.................................................... 10 SECTION 2.7 Event of Default; Notice..................................................... 11 ARTICLE III ORGANIZATION SECTION 3.1 Name......................................................................... 12 SECTION 3.2 Office....................................................................... 12 SECTION 3.3 Purpose...................................................................... 12 SECTION 3.4 Authority.................................................................... 12 SECTION 3.5 Title to Property of the Trust............................................... 13 SECTION 3.6 Powers and Duties of the Administrative Trustees............................. 13 SECTION 3.7 Prohibition of Actions by the Trust and the Trustees......................... 15 SECTION 3.8 Powers and Duties of the Property Trustee.................................... 16 SECTION 3.9 Certain Duties and Responsibilities of the Property Trustee.................. 18 SECTION 3.10 Certain Rights of Property Trustee........................................... 20 SECTION 3.11 Delaware Trustee............................................................. 22 SECTION 3.12 Execution of Documents....................................................... 23 SECTION 3.13 Not Responsible for Recitals or Issuance of Securities....................... 23 SECTION 3.14 Duration of Trust............................................................ 23 SECTION 3.15 Mergers...................................................................... 23 ARTICLE IV SPONSOR SECTION 4.1 Sponsor's Purchase of Common Securities...................................... 25 SECTION 4.2 Responsibilities of the Sponsor.............................................. 26 SECTION 4.3 Right to Proceed............................................................. 26
i 3 ARTICLE V TRUSTEES SECTION 5.1 Number of Trustees; Appointment of Co-Trustee................................ 26 SECTION 5.2 Delaware Trustee............................................................. 27 SECTION 5.3 Property Trustee; Eligibility................................................ 27 SECTION 5.4 Certain Qualifications of Administrative Trustees and Delaware Trustee Generally................................................... 28 SECTION 5.5 Administrative Trustees...................................................... 28 SECTION 5.6 Delaware Trustee............................................................. 29 SECTION 5.7 Appointment, Removal and Resignation of Trustees............................. 29 SECTION 5.8 Vacancies among Trustees..................................................... 31 SECTION 5.9 Effect of Vacancies.......................................................... 31 SECTION 5.10 Meetings..................................................................... 31 SECTION 5.11 Delegation of Power.......................................................... 32 SECTION 5.12 Merger, Conversion, Consolidation or Succession to Business.................. 32 SECTION 5.13 Compensation................................................................. 32 ARTICLE VI DISTRIBUTIONS SECTION 6.1 Distributions................................................................ 33 ARTICLE VII ISSUANCE OF SECURITIES SECTION 7.1 General Provisions Regarding Securities...................................... 33 SECTION 7.2 Execution and Authentication................................................. 33 SECTION 7.3 Form and Dating.............................................................. 34 SECTION 7.4 Registrar and Paying Agent................................................... 35 SECTION 7.5 Paying Agent to Hold Money in Trust.......................................... 36 SECTION 7.6 Replacement Securities....................................................... 36 SECTION 7.7 Outstanding Preferred Securities............................................. 37 SECTION 7.8 Preferred Securities in Treasury............................................. 37 SECTION 7.9 Temporary Securities......................................................... 37 SECTION 7.10 Cancellation................................................................. 37 SECTION 7.11 CUSIP Numbers................................................................ 38 ARTICLE VIII DISSOLUTION OF TRUST SECTION 8.1 Dissolution of Trust......................................................... 38
ii 4 ARTICLE IX TRANSFER OF INTERESTS SECTION 9.1 Transfer of Securities....................................................... 39 SECTION 9.2 Transfer Procedures and Restrictions......................................... 41 SECTION 9.3 Deemed Security Holders...................................................... 44 SECTION 9.4 Book Entry Interests......................................................... 44 SECTION 9.5 Notices to Clearing Agency................................................... 45 SECTION 9.6 Appointment of Successor Clearing Agency..................................... 45 ARTICLE X LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS SECTION 10.1 Liability.................................................................... 45 SECTION 10.2 Exculpation.................................................................. 46 SECTION 10.3 Fiduciary Duty............................................................... 46 SECTION 10.4 Indemnification.............................................................. 47 SECTION 10.5 Outside Businesses........................................................... 49 ARTICLE XI ACCOUNTING SECTION 11.1 Fiscal Year.................................................................. 50 SECTION 11.2 Certain Accounting Matters................................................... 50 SECTION 11.3 Banking...................................................................... 51 SECTION 11.4 Withholding.................................................................. 51 ARTICLE XII AMENDMENTS AND MEETINGS SECTION 12.1 Amendments................................................................... 51 SECTION 12.2 Meetings of the Holders of Securities; Action by Written Consent.................................................... 53 ARTICLE XIII REPRESENTATIONS OF PROPERTY TRUSTEE AND DELAWARE TRUSTEE SECTION 13.1 Representations and Warranties of Property Trustee........................... 55 SECTION 13.2 Representations and Warranties of Delaware Trustee........................... 55
iii 5 ARTICLE XIV MISCELLANEOUS SECTION 14.1 Notices...................................................................... 56 SECTION 14.2 Governing Law................................................................ 58 SECTION 14.3 Intention of the Parties..................................................... 58 SECTION 14.4 Headings..................................................................... 58 SECTION 14.5 Successors and Assigns....................................................... 58 SECTION 14.6 Partial Enforceability....................................................... 58 SECTION 14.7 Counterparts................................................................. 58 ANNEX I Terms of Preferred Securities and Common Securities............... I-1 EXHIBIT A-1 Form of Preferred Security Certificate............................ A1-1 EXHIBIT A-2 Form of Common Security Certificate............................... A2-1 EXHIBIT B Specimen Debenture................................................ B-1 EXHIBIT C Purchase Agreement................................................ C-1
iv 6 CROSS-REFERENCE TABLE*
Section of Trust Indenture Act Section of of 1939, as amended Agreement ------------------- --------- 310(a)................................................................. 5.3(a) 310(b)................................................................. 5.3(c) 310(c)................................................................. Inapplicable 311(a) and (b)......................................................... 5.3(c) 311(c)................................................................. Inapplicable 312(a)................................................................. 2.2(a) 312(b)................................................................. 2.2(b) 313.................................................................... 2.3 314(a)................................................................. 2.4 314(b)................................................................. Inapplicable 314(c)................................................................. 2.5 314(d)................................................................. Inapplicable 314(e)................................................................. 1.1, 2.5 314(f)................................................................. Inapplicable 315(a)................................................................. 3.9(b) 315(b)................................................................. 2.7(a) 315(c)................................................................. 3.9(a) 315(d)................................................................. 3.9(b) 316(a) and (b)......................................................... 2.6 and Annex I 316(c)................................................................. 3.6(f) 317(a)................................................................. 3.8(h) 317(b)................................................................. 3.8(i) ---------------
*This Cross-Reference Table does not constitute part of the Agreement and shall not affect the interpretation of any of its terms or provisions. i 7 AMENDED AND RESTATED TRUST AGREEMENT OF HERCULES TRUST VI AMENDED AND RESTATED TRUST AGREEMENT (the "Agreement") dated and effective as of December 23, 1999 by the Trustees (as defined herein), the Sponsor (as defined herein) and by the holders, from time to time, of undivided beneficial interests in the assets of the Trust (as defined herein) to be issued pursuant to this Agreement; WHEREAS, the Trustees and the Sponsor established Hercules Trust VI (the "Trust"), a trust created under the Business Trust Act (as defined herein) pursuant to a Trust Agreement dated as of December 21, 1999 (the "Original Agreement"), and a Certificate of Trust filed with the Secretary of State of the State of Delaware on December 21, 1999, for the sole purpose of issuing and selling certain securities representing undivided beneficial interests in the assets of the Trust and investing the proceeds thereof in certain Debentures of the Debenture Issuer (each as hereinafter defined) and engaging in only those activities necessary, advisable or incidental thereto; WHEREAS, the parties hereto desire to amend and restate each and every term and provision of the Original Agreement; and NOW, THEREFORE, it being the intention of the parties hereto that the Trust continue as a business trust under the Business Trust Act, that the Original Agreement be amended and restated in its entirety as provided herein and that this Agreement constitute the governing instrument of such business trust, the Trustees declare that all assets contributed to the Trust will be held in trust for the benefit of the holders, from time to time, of the securities representing undivided beneficial interests in the assets of the Trust issued hereunder, subject to the provisions of this Agreement and, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties, intending to be legally bound hereby, agree as follows: 8 ARTICLE I INTERPRETATION AND DEFINITIONS SECTION 1.1 Definitions. Unless the context otherwise requires: (a) capitalized terms used in this Agreement but not defined in the preamble above or elsewhere herein have the respective meanings assigned to them in this Section 1.1; (b) a term defined anywhere in this Agreement has the same meaning throughout; (c) all references to "the Agreement" or "this Agreement" are to this Agreement and each Annex and Exhibit hereto, as modified, supplemented or amended from time to time; (d) all references in this Agreement to Articles and Sections and Annexes and Exhibits are to Articles and Sections of and Annexes and Exhibits to this Agreement unless otherwise specified; (e) a term defined in the Trust Indenture Act (as defined herein) has the same meaning when used in this Agreement unless otherwise defined in this Agreement or unless the context otherwise requires; and (f) a reference to the singular includes the plural and vice versa. "Administrative Trustee" has the meaning set forth in Section 5.1. "Affiliate" has the same meaning as given to that term in Rule 405 under the Securities Act or any successor rule thereunder. "Agent" means any Paying Agent or Registrar. "Agreement" means this Amended and Restated Trust Agreement, dated as of December 23, 1999, including Annex I and all the exhibits hereto. "Authorized Officer" of a Person means any other Person that is authorized to legally bind such former Person. "Book Entry Interest" means a beneficial interest in a Global Preferred Security Certificate registered in the name of a Clearing Agency or its nominee, ownership and transfers of which shall be maintained and made through book entries by a Clearing Agency as described in Section 9.4. 2 9 "Business Day" means any day other than a Saturday, Sunday or other day on which banking institutions in The City of New York or Wilmington, Delaware are authorized or required by law, regulation or executive order to close; provided, however, that, with respect to LIBOR distribution determinations, calculations and payments, such day is also a London Business Day. "Business Trust Act" means Chapter 38 of Title 12 of the Delaware Code, 12 Del. Code Section 3801 et seq., as it may be amended from time to time, or any successor legislation. "Calculation Agent" means The Chase Manhattan Bank or any successor. "Clearing Agency" means an organization registered as a "Clearing Agency" pursuant to Section 17A of the Exchange Act that is acting as depositary for the Preferred Securities and in whose name or in the name of a nominee of that organization shall be registered a global certificate and which shall undertake to effect book-entry transfers and pledges of the Preferred Securities. "Closing Time" means the Closing Time as defined in the Purchase Agreement. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor legislation. "Commission" means the United States Securities and Exchange Commission as from time to time constituted, or if at any time after the execution of this Agreement such Commission is not existing and performing the duties now assigned to it under applicable federal securities laws, then the body performing such duties at such time. "Common Securities" has the meaning specified in Section 7.1(a). "Common Securities Guarantee" means the Common Securities Guarantee Agreement, dated as of December 23, 1999 of the Sponsor in respect of the Common Securities. "Company Indemnified Person" means (a) any Administrative Trustee; (b) any Affiliate of any Administrative Trustee; (c) any officers, directors, shareholders, members, partners, employees, representatives or agents of any Administrative Trustee; or (d) any officer, employee or agent of the Trust or its Affiliates; provided that the term "Company Indemnified Person" shall not include any Fiduciary Indemnified Person. "Corporate Trust Office" means the office of the Property Trustee for the conduct of corporate trust business at which matters related to this Agreement shall, at any particular time, be principally administered, which office at the date of execution of this Agreement is located at c/o Chase Manhattan Trust Company, National Association, One Liberty Place, 52nd Floor, 1650 Market Street, Philadelphia, Pennsylvania 19103, Attention: Capital Markets Fiduciary Services. "Covered Person" means: (a) any officer, director, shareholder, partner, member, representative, employee or agent of (i) the Trust or (ii) the Trust's Affiliates; and (b) any Holder of Securities. 3 10 "Debenture Issuer" means Hercules Incorporated, a Delaware corporation, or any successor entity resulting from any consolidation, amalgamation, merger or other business combination, in its capacity as issuer of the Debentures under the Indenture. "Debentures" means the Floating Rate Junior Subordinated Deferrable Interest Debentures due 2000 of the Debenture Issuer issued pursuant to the Indenture. "Debenture Trustee" means The Chase Manhattan Bank, a New York banking corporation, as trustee under the Indenture until a successor is appointed thereunder, and thereafter means such successor trustee. "Default" means an event, act or condition that with notice of lapse of time, or both, would constitute an Event of Default. "Definitive Preferred Securities" has the meaning set forth in Section 7.3. "Delaware Trustee" has the meaning set forth in Section 5.2. "Direct Action" has the meaning set forth in Section 3.8(e). "Distribution" means a distribution payable to Holders of Securities in accordance with Section 6.1. "DTC" means The Depository Trust Company, the initial Clearing Agency. "Event of Default" means, with respect to the Securities, an Event of Default (as defined in the Indenture) that has occurred and is continuing in respect of the Debentures. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor legislation. "Fiduciary Indemnified Person" has the meaning set forth in Section 10.4(b). "Fiscal Year" has the meaning set forth in Section 11.1. "Global Preferred Security" has the meaning set forth in Section 7.3. "Holder" means a Person in whose name a Security or Successor Security is registered, such Person being a beneficial owner within the meaning of the Business Trust Act. "Indemnified Person" means a Company Indemnified Person or a Fiduciary Indemnified Person. "Indenture" means the Junior Subordinated Debentures Indenture, dated as of November 12, 1998, between the Debenture Issuer and the Debenture Trustee relating to the Debenture Issuer's junior subordinated debentures, as supplemented by the Fourth Supplemental Indenture thereto, dated as of December 23, 1999, and, as further amended or supplemented from time to time. 4 11 "Investment Company" means an investment company as defined in the Investment Company Act. "Investment Company Act" means the Investment Company Act of 1940, as amended from time to time, or any successor legislation. "Investment Company Event" means that the Trust has received an opinion of counsel experienced in such matters to the effect that, as a result of the occurrence of a change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or will be considered an "investment company" under the Investment Company Act that is required to be registered under this law, which change becomes effective on or after March 12, 1999. "Legal Action" has the meaning set forth in Section 3.6(h). "LIBOR" has the meaning set forth in Section 2 of Annex I hereto. "Like Amount" has the meaning set forth in Section 3 of Annex I hereto. "Liquidation Amount" has the meaning set forth in Section 2 of Annex I hereto. "List of Holders" has the meaning set forth in Section 2.2(a) of Annex I hereto. "London Business Day" means any day other than a Saturday or Sunday on which banks are open for business (including dealings in deposits in U.S. dollars) in London. "Majority in Liquidation Amount" means, with respect to the Securities, except as provided in the terms of the Preferred Securities or by the Trust Indenture Act, Holders of outstanding Securities voting together as a single class or, as the context may require, Holders of outstanding Preferred Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of more than 50% of the aggregate Liquidation Amount (including the amount that would be paid on redemption, liquidation or otherwise, plus accumulated and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. "Officers' Certificate" means, with respect to any Person, a certificate signed by the Chief Executive Officer, the Chief Financial Officer, the President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary. Any Officers' Certificate delivered by the Trust shall be signed by at least one Administrative Trustee. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Agreement shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers' Certificate; 5 12 (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Opinion of Counsel" means a written opinion of counsel, who may be an employee of the Sponsor, and who shall be reasonably acceptable to the Property Trustee, provided, that the General Counsel or Assistant General Counsel of the Sponsor shall be deemed to be reasonably acceptable to the Trustee. "Participants" has the meaning specified in Section 7.3(a). "Paying Agent" has the meaning specified in Section 7.4. "Payment Amount" has the meaning specified in Section 6.1. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "PORTAL Market" means the Private Offerings, Resales and Trading through Automated Linkages Market operated by the National Association of Securities Dealers, Inc. or any successor thereto. "Preferred Securities" has the meaning specified in Section 7.1(a). "Preferred Securities Guarantee" means the Preferred Securities Guarantee Agreement dated as of December 23, 1999 of the Sponsor in respect of the Preferred Securities. "Preferred Security Beneficial Owner" means, with respect to a Book Entry Interest, a Person who is the beneficial owner of such Book-Entry Interest, as reflected on the books of the Clearing Agency, or on the books of a Person maintaining an account with such Clearing Agency (directly as a Clearing Agency Participant or as an indirect participant, in each case in accordance with the rules of such Clearing Agency). "Property Trustee" has the meaning set forth in Section 5.3(a). "Property Trustee Account" has the meaning set forth in Section 3.8(c). "Purchase Agreement" means the Purchase Agreement for the offering and sale of Preferred Securities in the form of Exhibit C. "QIB" means a qualified institutional buyer as defined in Rule 144A. 6 13 "Quorum" means a majority of the Administrative Trustees or, if there are only two Administrative Trustees, both of them. "Registrar" has the meaning set forth in Section 7.4. "Related Party" means, with respect to the Sponsor, any direct or indirect wholly owned subsidiary of the Sponsor or any other Person that owns, directly or indirectly, 100% of the outstanding voting securities of the Sponsor. "Responsible Officer" means, with respect to the Property Trustee, any officer within the Corporate Trust Office of the Property Trustee with direct responsibility for the administration of this Agreement, including any vice-president, any assistant vice-president, any assistant secretary, any assistant treasurer or other officer of the Corporate Trust Office of the Property Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer of the Property Trustee to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Restricted Security" has the meaning set forth in Section 9.1. "Rule 144A" means Rule 144A as promulgated under the Securities Act, or any successor rule. "Rule 144(k)" means Rule 144(k) as promulgated under the Securities Act, or any successor rule. "Securities" or "Trust Securities" means the Common Securities and the Preferred Securities. "Securities Act" means the Securities Act of 1933, as amended from time to time, or any successor legislation. "Securities Guarantees" means the Common Securities Guarantee and the Preferred Securities Guarantee. "Sponsor" means Hercules Incorporated, a Delaware corporation, or any successor entity resulting from any merger, consolidation, amalgamation or other business combination, in its capacity as sponsor of the Trust. "Successor Delaware Trustee" has the meaning set forth in Section 5.7(b)(ii). "Successor Entity" has the meaning set forth in Section 3.15(b)(i). "Successor Property Trustee" has the meaning set forth in Section 3.8(f)(ii). "Successor Securities" has the meaning set forth in Section 3.15(b)(i)(B). "Super Majority" has the meaning set forth in Section 2.6(a)(ii). 7 14 "10% in Liquidation Amount" means, with respect to the Securities, except as provided in the terms of the Preferred Securities or by the Trust Indenture Act, Holders of outstanding Securities voting together as a single class or, as the context may require, Holders of outstanding Preferred Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of 10% or more of the aggregate Liquidation Amount (including the amount that would be paid on redemption, liquidation or otherwise, plus accumulated and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. "Transfer Restriction Termination Date" means the first date on which the Preferred Securities (other than Preferred Securities acquired by the Trust or any Affiliate thereof) may be sold pursuant to Rule 144(k). "Treasury Regulations" means the income tax regulations, including temporary and proposed regulations, promulgated under the Code by the United States Treasury, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "Trustee" or "Trustees" means each Person who has signed this Agreement as a trustee, so long as such Person shall continue as Trustee of the Trust in accordance with the terms hereof, and all other Persons who may from time to time be duly appointed, qualified and serving as Trustees in accordance with the provisions hereof, and references herein to a Trustee or the Trustees shall refer to such Person or Persons solely in their capacity as trustees hereunder. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended from time to time, or any successor legislation. ARTICLE II TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application. (a) This Agreement is subject to the provisions of the Trust Indenture Act that are required to be part of this Agreement in order for this Agreement to be qualified under the Trust Indenture Act and shall, to the extent applicable, be governed by such provisions. (b) The Property Trustee shall be the only Trustee which is a trustee for the purposes of the Trust Indenture Act. (c) If and to the extent that any provision of this Agreement limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. (d) The application of the Trust Indenture Act to this Agreement shall not affect the nature of the Securities as equity securities representing undivided beneficial interests in the assets of the Trust. 8 15 SECTION 2.2 Lists of Holders of Securities. (a) Each of the Sponsor and the Administrative Trustees on behalf of the Trust shall provide the Property Trustee, unless the Property Trustee is the Registrar for the Securities, (i) within 14 days after each record date for payment of Distributions, a list, in such form as the Property Trustee may reasonably require, of the names and addresses of the Holders of the Securities ("List of Holders") as of such record date, provided that neither the Sponsor nor the Administrative Trustees on behalf of the Trust shall be obligated to provide such List of Holders at any time the List of Holders does not differ from the most recent List of Holders given to the Property Trustee by the Sponsor and the Administrative Trustees on behalf of the Trust, and (ii) at any other time, within 30 days of receipt by the Trust of a written request for a List of Holders as of a date no more than 14 days before such List of Holders is given to the Property Trustee. The Property Trustee shall preserve, in as current a form as is reasonably practicable, all information contained in Lists of Holders given to it or which it receives in the capacity as Paying Agent (if acting in such capacity), provided that the Property Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Property Trustee shall comply with the obligations set forth under Sections 311(a), 311(b) and 312(b) of the Trust Indenture Act. SECTION 2.3 Reports by the Property Trustee. Within 60 days after September 1 of each year, commencing September 1, 2000, the Property Trustee shall provide to the Holders of the Preferred Securities such reports as are required by Section 313 of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Property Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. SECTION 2.4 Periodic Reports to Property Trustee. Each of the Sponsor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such documents, reports and information as are required by Section 314 of the Trust Indenture Act (if any) and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. SECTION 2.5 Evidence of Compliance with Conditions Precedent. Each of the Sponsor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such evidence of compliance with any conditions precedent provided for in this Agreement that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) of the Trust Indenture Act may be given in the form of an Officers' Certificate. 9 16 SECTION 2.6 Events of Default; Waiver. (a) The Holders of a Majority in Liquidation Amount of Preferred Securities may, by vote, on behalf of the Holders of all of the Preferred Securities, waive any past Event of Default in respect of the Preferred Securities and its consequences, provided that, if the underlying Event of Default under the Indenture: (i) is not waivable under the Indenture, the Event of Default under the Agreement shall also not be waivable; or (ii) requires the consent or vote of greater than a majority in aggregate principal amount of the holders of the Debentures (a "Super Majority") to be waived under the Indenture, the Event of Default under the Agreement may only be waived by the vote of the Holders of at least the proportion in aggregate Liquidation Amount of the Preferred Securities that the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. The foregoing provisions of this Section 2.6(a) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Agreement and the Securities, as permitted by the Trust Indenture Act. Upon such waiver, any such default shall cease to exist, and any Event of Default with respect to the Preferred Securities arising therefrom shall be deemed to have been cured, for every purpose of this Agreement, but no such waiver shall extend to any subsequent or other default or an Event of Default with respect to the Preferred Securities or impair any right consequent thereon. Any waiver by the Holders of the Preferred Securities of an Event of Default with respect to the Preferred Securities shall also be deemed to constitute a waiver by the Holders of the Common Securities of any such Event of Default with respect to the Common Securities for all purposes of this Agreement without any further act, vote, or consent of the Holders of the Common Securities. (b) The Holders of a Majority in Liquidation Amount of the Common Securities may, by vote, on behalf of the Holders of all of the Common Securities, waive any past Event of Default with respect to the Common Securities and its consequences, provided that, if the underlying Event of Default under the Indenture: (i) is not waivable under the Indenture (except where the Holders of the Common Securities are deemed to have waived such Event of Default under the Agreement as provided below in this Section 2.6(b)), the Event of Default under the Agreement shall also not be waivable; or (ii) requires the consent or vote of a Super Majority to be waived, except where the Holders of the Common Securities are deemed to have waived such Event of Default under the Agreement as provided below in this Section 2.6(b), the Event of Default under the Agreement may only be waived by the vote of the Holders of at least the proportion in aggregate Liquidation Amount of the Common Securities that the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding; 10 17 provided further, each Holder of Common Securities will be deemed to have waived any such Event of Default and all Events of Default with respect to the Common Securities and its consequences until all Events of Default with respect to the Preferred Securities have been cured, waived or otherwise eliminated, and until such Events of Default have been so cured, waived or otherwise eliminated, the Property Trustee will be deemed to be acting solely on behalf of the Holders of the Preferred Securities and only the Holders of the Preferred Securities will have the right to direct the Property Trustee in accordance with the terms of the Securities. The foregoing provisions of this Section 2.6(b) shall be in lieu of Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act and such Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act are hereby expressly excluded from this Agreement and the Securities, as permitted by the Trust Indenture Act. Subject to the foregoing provisions of this Section 2.6(b), upon such waiver, any such default shall cease to exist and any Event of Default with respect to the Common Securities arising therefrom shall be deemed to have been cured for every purpose of this Agreement, but no such waiver shall extend to any subsequent or other default or Event of Default with respect to the Common Securities or impair any right consequent thereon. (c) A waiver of an Event of Default under the Indenture by the Property Trustee, at the direction of the Holders of the Preferred Securities, constitutes a waiver of the corresponding Event of Default under this Agreement. The foregoing provisions of this Section 2.6(c) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Agreement and the Securities, as permitted by the Trust Indenture Act. SECTION 2.7 Event of Default; Notice. (a) The Property Trustee shall, within 90 days after the occurrence of any default with respect to the Securities, transmit by mail, first class postage prepaid, to the Holders of the Securities and to the Sponsor, notices of all such defaults actually known to a Responsible Officer of the Property Trustee, unless such defaults have been cured before the giving of such notice (the term "defaults" for the purposes of this Section 2.7(a) being hereby defined to be a Default as defined in the Indenture, not including any periods of grace provided for therein and irrespective of the giving of any notice provided therein); provided that, except for a default in the payment of principal of (or premium, if any) or interest on any of the Debentures, the Property Trustee shall be protected in withholding such notice if and so long as a committee of Responsible Officers of the Property Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Securities. (b) The Property Trustee shall not be deemed to have actual knowledge of any default except: (i) a default under Sections 6.01(a) and 6.01(b) of the Indenture; or (ii) any default as to which the Property Trustee shall have received written notice or of which a Responsible Officer of the Property Trustee charged with the administration of the Agreement shall have actual knowledge. 11 18 (c) Within ten Business Days after the occurrence of any Event of Default actually known to a Responsible Officer of the Property Trustee, the Property Trustee shall transmit notice of such Event of Default to the Holders of the Preferred Securities, the Administrative Trustees and the Sponsor, unless such Event of Default shall have been cured, waived or otherwise eliminated. The Sponsor and the Administrative Trustees shall file annually with the Property Trustee a certification as to whether or not they are in compliance with all the conditions and covenants applicable to them under this Agreement. ARTICLE III ORGANIZATION SECTION 3.1 Name. The Trust is named "Hercules Trust VI" as such name may be modified from time to time by the Administrative Trustees following written notice to the Delaware Trustee, the Property Trustee and the Holders of Securities. The Trust's activities may be conducted under the name of the Trust or any other name deemed advisable by the Administrative Trustees. SECTION 3.2 Office. The address of the principal office of the Trust is c/o Hercules Plaza, 1313 North Market Street, Wilmington, Delaware 19894-0001. On ten Business Days' prior written notice to the Delaware Trustee, the Property Trustee and the Holders of Securities, the Administrative Trustees may designate another principal office. SECTION 3.3 Purpose. The exclusive purposes and functions of the Trust are (a) to issue and sell Securities, (b) use the proceeds from the sale of the Securities to acquire the Debentures in an aggregate principal amount equal to the aggregate Liquidation Amount of such Securities, and (c) except as otherwise limited herein, to engage in only those other activities necessary, advisable or incidental thereto, including without limitation, those activities specified in Sections 3.6, 3.8, 3.9, 3.10, 3.11 and/or 3.12. SECTION 3.4 Authority. Subject to the limitations provided in this Agreement and to the specific duties of the Property Trustee, the Administrative Trustees shall have exclusive and complete authority to carry out the purposes of the Trust. An action taken by one or more of the Administrative Trustees in accordance with their powers shall constitute the act of and serve to bind the Trust and an action taken by the Property Trustee on behalf of the Trust in accordance with its powers shall constitute the act of and serve to bind the Trust. In dealing with the Trustees acting on behalf of the Trust, no Person shall be required to inquire into the authority of the Trustees to bind the Trust. Persons dealing with the Trust are entitled to rely conclusively on the power and authority of the Trustees as set forth in this Agreement. 12 19 SECTION 3.5 Title to Property of the Trust. Except as provided in Section 3.8 with respect to the Debentures and the Property Trustee Account or as otherwise provided in this Agreement, legal title to all assets of the Trust shall be vested in the Trust. The Holders shall not have legal title to any part of the assets of the Trust, but shall have an undivided beneficial interest in the assets of the Trust. SECTION 3.6 Powers and Duties of the Administrative Trustees. The Administrative Trustees shall have the exclusive power (subject to Section 4.2), duty and authority, and are hereby authorized and directed, to cause the Trust to engage in the following activities: (a) to execute, deliver, issue and sell the Preferred Securities and the Common Securities in accordance with this Agreement; provided, however, that (i) the Trust may issue no more than one series of Preferred Securities and no more than one series of Common Securities, (ii) there shall be no interests in the Trust other than the Securities, and (iii) the issuance of Securities shall be limited to a simultaneous issuance of both Preferred Securities and Common Securities at the Closing Time, subject to (1) the issuance of additional Securities in the event of transfers, exchanges and replacements and (2) the right of the Trust to issue additional Securities, without the consent of any Holders, with the same terms as the applicable Securities (other than the date of issuance and the date on which Distributions begin to accumulate) so as to form the same series with such Securities; (b) in connection with the issue and sale of the Preferred Securities, at the direction of the Sponsor, to: (i) execute and file any documents prepared by the Sponsor, or take any acts as determined by the Sponsor to be necessary in order to qualify or register all or part of the Preferred Securities in any State in which the Sponsor has determined to qualify or register such Preferred Securities for sale; (ii) execute and file an application, prepared by the Sponsor, to qualify the Preferred Securities for trading in the PORTAL Market; (iii) execute and deliver letters, documents, or instruments with DTC and other Clearing Agencies relating to the Preferred Securities; and (iv) execute and file any agreement, certificate or other document which such Administrative Trustee deems necessary or appropriate in connection with the issuance and sale of the Preferred Securities; (c) to acquire the Debentures with the proceeds of the sale of the Preferred Securities and the Common Securities; provided, however, that the Administrative Trustees shall cause legal title to the Debentures to be held of record in the name of the Property Trustee for the benefit of the Holders of the Preferred Securities and the Holders of Common Securities; 13 20 (d) if requested by the Sponsor, to cause the Trust to enter into and to execute and deliver on behalf of the Trust such agreements (including the Purchase Agreement) and arrangements as may be necessary or desirable in connection with the sale of Preferred Securities to the initial purchaser(s) thereof and the consummation thereof, and to take all action, and exercise all discretion, as may be necessary or desirable in connection with the consummation thereof; (e) to give the Sponsor and the Property Trustee prompt written notice of the occurrence of any event specified in Section 8.1; (f) to establish a record date with respect to all actions to be taken hereunder that require a record date be established, including and with respect to, for the purposes of Section 316(c) of the Trust Indenture Act, Distributions, voting rights and redemptions, and to issue relevant notices to the Holders of Preferred Securities and Holders of Common Securities as to such actions and applicable record dates; (g) to take all actions and perform such duties as may be required of the Administrative Trustees pursuant to the terms of the Securities; (h) to bring or defend, pay, collect, compromise, arbitrate, resort to legal action, or otherwise adjust claims or demands of or against the Trust ("Legal Action"), unless pursuant to Section 3.8(e), the Property Trustee has the exclusive power to bring such Legal Action; (i) to employ or otherwise engage employees and agents (who may be designated as officers with titles) and managers, contractors, advisors, and consultants and pay reasonable compensation for such services; (j) to cause the Trust to comply with the Trust's obligations under the Trust Indenture Act; (k) to give the certificate required by Section 314(a)(4) of the Trust Indenture Act to the Property Trustee, which certificate may be executed by any Administrative Trustee; (l) to incur expenses that are necessary or incidental to carry out any of the purposes of the Trust; (m) to act as, or appoint another Person to act as, Registrar for the Securities or to appoint a Paying Agent for the Securities as provided in Section 7.4 except for such time as such power to appoint a Paying Agent is vested in the Property Trustee; (n) to give prompt written notice to the Property Trustee and to Holders of the Securities of any notice received from the Debenture Issuer of its election to defer payments of interest on the Debentures by extending the interest payment period under the Indenture; (o) to take all action that may be necessary or appropriate for the preservation and the continuation of the Trust's valid existence, rights, franchises and privileges as a statutory business trust under the laws of the State of Delaware and of each other jurisdiction in which 14 21 such existence is necessary to protect the limited liability of the Holders of the Preferred Securities or to enable the Trust to effect the purposes for which the Trust was created; (p) to take any action (provided that such action does not materially adversely affect the interests of Holders), not inconsistent with this Agreement or with applicable law, that the Administrative Trustees determine in their discretion to be necessary or desirable in carrying out the activities of the Trust as set out in this Section 3.6, including, but not limited to: (i) causing the Trust not to be deemed to be an Investment Company required to be registered under the Investment Company Act; (ii) causing the Trust to be classified for United States Federal income tax purposes as a grantor trust; and (iii) cooperating with the Debenture Issuer to ensure that the Debentures will be treated as indebtedness of the Debenture Issuer for United States Federal income tax purposes; (q) to take all action necessary to cause all applicable tax returns and tax information reports that are required to be filed with respect to the Trust to be duly prepared and filed by the Administrative Trustees, on behalf of the Trust; and (r) to execute and deliver and record, file or register, as applicable, all documents, certificates, agreements or instruments, perform all duties and powers, and do all things for and on behalf of the Trust in all matters necessary, advisable or incidental to the foregoing. The Administrative Trustees must exercise the powers set forth in this Section 3.6 in a manner that is consistent with the purposes and functions of the Trust set out in Section 3.3, and the Administrative Trustees shall not take any action that is inconsistent with the purposes and functions of the Trust set forth in Section 3.3. Subject to this Section 3.6, the Administrative Trustees shall have none of the powers or the authority of the Property Trustee set forth in Section 3.8. Any expenses incurred by the Administrative Trustees pursuant to this Section 3.6 shall be reimbursed by the Debenture Issuer. SECTION 3.7 Prohibition of Actions by the Trust and the Trustees. (a) The Trust and the Trustees (including the Property Trustee and the Delaware Trustee) shall not, and the Administrative Trustees shall cause the Trust not to, engage in any activity other than as required or authorized by this Agreement. In particular, the Trust shall not: (i) invest any proceeds received by the Trust from holding the Debentures, but shall distribute all such proceeds to Holders of Securities pursuant to the terms of this Agreement and of the Securities; (ii) acquire any assets other than as expressly provided herein; 15 22 (iii) possess Trust property for other than a Trust purpose or execute any mortgage in respect of, or pledge, any Trust property; (iv) make any loans or incur any indebtedness other than loans represented by the Debentures; (v) possess any power or otherwise act in such a way as to vary the Trust assets or the terms of the Securities in any way whatsoever; (vi) issue any securities or other evidences of beneficial ownership of, or beneficial interest in, the Trust other than the Securities; (vii) so long as any Debentures are held by the Property Trustee, the Trustees shall not (A) direct the time, method and place of conducting any proceeding with respect to any remedy available to the Debenture Trustee, or exercise any trust or power conferred upon the Debenture Trustee with respect to the Debentures, (B) waive any past default that is waivable under the Indenture, (C) exercise any right to rescind or annul a declaration of acceleration of the maturity of the principal of the Debentures, or (D) consent to any amendment, modification or termination of the Indenture or the Debentures where such consent shall be required, without, in each case, obtaining (1) the prior approval of the Holders of a Majority in Liquidation Amount of all outstanding Securities; provided, however, that where a consent under the Indenture would require the consent of each holder of Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior approval of each Holder of Securities and (2) an Opinion of Counsel delivered to the Trust from tax counsel experienced in such matters to the effect that the Trust will not be classified as an association taxable as a corporation for United States Federal income tax purposes on account of such action; (viii) revoke any action previously authorized or approved by a vote of the Holders of Preferred Securities except by subsequent vote of such Holders; (ix) revoke any action previously authorized or approved by a vote of the Holders of Common Securities except by subsequent vote of such Holders; or (x) undertake (or permit to be undertaken) any activity that would cause the Trust not to be classified for United States Federal income tax purposes as a grantor trust. SECTION 3.8 Powers and Duties of the Property Trustee. (a) The legal title to the Debentures shall be owned by and held of record in the name of the Property Trustee in trust for the benefit of the Trust and the Holders of the Securities. The right, title and interest of the Property Trustee to the Debentures shall vest automatically in each Person who may hereafter be appointed as Property Trustee in accordance with Section 5.7. Such vesting and cessation of title shall be effective whether or not conveyancing documents with regard to the Debentures have been executed and delivered. 16 23 (b) The Property Trustee shall not transfer its right, title and interest in the Debentures to the Administrative Trustees or to the Delaware Trustee (if the Property Trustee does not also act as Delaware Trustee). (c) The Property Trustee shall: (i) establish and maintain a segregated non-interest bearing trust account (the "Property Trustee Account") in the name of and under the exclusive control of the Property Trustee on behalf of the Holders of the Securities and, upon the receipt of payments of funds made in respect of the Debentures held by the Property Trustee, deposit such funds into the Property Trustee Account and make payments or cause the Paying Agent to make payments to the Holders of the Preferred Securities and Holders of the Common Securities from the Property Trustee Account in accordance with Section 6.1; and funds in the Property Trustee Account shall be held uninvested until disbursed in accordance with this Agreement; (ii) engage in such ministerial activities as shall be necessary or appropriate to effect the redemption of the Preferred Securities and the Common Securities when the Debentures mature; (iii) upon written notice of distribution issued by the Administrative Trustees in accordance with the terms of the Securities, engage in such ministerial activities as shall be necessary or appropriate to effect the distribution of the Debentures to Holders of Securities upon the occurrence of certain events; and (iv) take such ministerial action as may be requested by the Administrative Trustees in connection with the winding up of the affairs of or liquidation of the Trust in accordance with this Agreement and the preparation, execution and filing of a certificate of cancellation or other appropriate certificates with the Secretary of State of the State of Delaware and other appropriate governmental authorities. (d) The Property Trustee shall take all actions and perform such duties as may be specifically required of the Property Trustee pursuant to the terms of this Agreement and the Securities. (e) Subject to Section 3.9, the Property Trustee shall take any Legal Action which arises out of or in connection with an Event of Default of which a Responsible Officer of the Property Trustee has actual knowledge or the Property Trustee's duties and obligations under this Agreement or the Trust Indenture Act and, if the Property Trustee shall have failed to take such Legal Action, the Holders of the Preferred Securities in at least an aggregate Liquidation Amount equal to the specified percentage of Holders of Debentures entitled to take such Legal Action may, to the fullest extent permitted by law, take such Legal Action without first proceeding against the Property Trustee or the Trust; provided however, that if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay the principal of or premium, if any, or interest on the Debentures on the date such principal, premium, if any, or interest is otherwise payable (or in the case of redemption, on the redemption date), then a Holder of Preferred Securities may directly institute 17 24 a proceeding for enforcement of payment to such Holder of the principal of or premium, if any, or interest on the Debentures having a principal amount equal to the aggregate Liquidation Amount of the Preferred Securities of such Holder on or after the respective due date specified in the Debentures (a "Direct Action"). Except as provided in the preceding sentence, the Holders of Preferred Securities will not be able to exercise directly any other remedy available to the holders of the Debentures. (f) The Property Trustee shall continue to serve as a Trustee until either: (i) the Trust has been completely liquidated and the proceeds of the liquidation distributed to the Holders of Securities pursuant to the terms of the Securities and this Agreement; or (ii) a successor Property Trustee has been appointed and has accepted that appointment in accordance with Section 5.7 (a "Successor Property Trustee"). (g) The Property Trustee shall have the legal power to exercise all of the rights, powers and privileges of a holder of Debentures under the Indenture and, if an Event of Default actually known to a Responsible Officer of the Property Trustee occurs and is continuing, the Property Trustee shall, for the benefit of Holders of the Securities, enforce its rights as holder of the Debentures subject to the rights of the Holders pursuant to the terms of the Securities and this Agreement. (h) The Property Trustee shall be authorized to undertake any actions set forth in Section 317(a) of the Trust Indenture Act. (i) For such time as the Property Trustee is the Paying Agent, the Property Trustee may authorize one or more Persons to act as additional Paying Agents and to pay Distributions, redemption payments or liquidation payments on behalf of the Trust with respect to all Securities and any such Paying Agent shall comply with Section 317(b) of the Trust Indenture Act. Any such additional Paying Agent may be removed by the Property Trustee at any time the Property Trustee remains as Paying Agent and a successor Paying Agent or additional Paying Agents may be (but are not required to be) appointed at any time by the Property Trustee while the Property Trustee is acting as Paying Agent. (j) Subject to this Section 3.8, the Property Trustee shall have none of the duties, liabilities, powers or the authority of the Administrative Trustees set forth in Section 3.6. Notwithstanding anything expressed or implied to the contrary in this Agreement or any Annex or Exhibit hereto, the Property Trustee must exercise the powers set forth in this Section 3.8 in a manner that is consistent with the purposes and functions of the Trust set out in Section 3.3. SECTION 3.9 Certain Duties and Responsibilities of the Property Trustee. (a) The Property Trustee, before the occurrence of any Event of Default and after the curing or waiving of all Events of Default that may have occurred, shall undertake to perform 18 25 only such duties as are specifically set forth in this Agreement and in the Securities and no implied covenants or obligations shall be read into this Agreement against the Property Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6) of which a Responsible Officer of the Property Trustee has actual knowledge, the Property Trustee shall exercise such of the rights and powers vested in it by this Agreement, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (b) No provision of this Agreement shall be construed to relieve the Property Trustee from liability for its own negligent action, its own negligent failure to act, its own bad faith or its own willful misconduct, except that: (i) prior to the occurrence of an Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Property Trustee shall be determined solely by the express provisions of this Agreement and in the Securities and the Property Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Agreement and in the Securities, and no implied covenants or obligations shall be read into this Agreement against the Property Trustee; and (B) in the absence of bad faith on the part of the Property Trustee, the Property Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Property Trustee and conforming to the requirements of this Agreement; provided, however, that in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Property Trustee, the Property Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Agreement (but shall not be required to confirm or investigate the accuracy of mathematical calculations or other facts stated therein); (ii) the Property Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Property Trustee, unless it shall be proved that the Property Trustee was negligent in ascertaining the pertinent facts; (iii) the Property Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a Majority in Liquidation Amount of the Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, or exercising any trust or power conferred upon the Property Trustee under this Agreement; (iv) no provision of this Agreement shall require the Property Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably 19 26 assured to it under the terms of this Agreement or indemnity reasonably satisfactory to the Property Trustee against such risk or liability is not reasonably assured to it; (v) the Property Trustee's sole duty with respect to the custody, safekeeping and physical preservation of the Debentures and the Property Trustee Account shall be to deal with such property in a similar manner as the Property Trustee deals with similar property for its own account, subject to the protections and limitations on liability afforded to the Property Trustee under this Agreement and the Trust Indenture Act; (vi) the Property Trustee shall have no duty or liability for or with respect to the value, genuineness, existence or sufficiency of the Debentures or the payment of any taxes or assessments levied thereon or in connection therewith; (vii) the Property Trustee shall not be liable for any interest on any money received by it except as it may otherwise agree in writing with the Sponsor. Money held by the Property Trustee need not be segregated from other funds held by it except in relation to the Property Trustee Account maintained by the Property Trustee pursuant to Section 3.8(c)(i) and except to the extent otherwise required by law; and (viii) the Property Trustee shall not be responsible for monitoring the compliance by the Administrative Trustees or the Sponsor with their respective duties under this Agreement, nor shall the Property Trustee be liable for any default or misconduct of the Administrative Trustees or the Sponsor. SECTION 3.10 Certain Rights of Property Trustee. (a) Subject to the provisions of Section 3.9: (i) the Property Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties; (ii) any direction or act of the Sponsor or the Administrative Trustees contemplated by this Agreement may be sufficiently evidenced by an Officers' Certificate; (iii) whenever in the administration of this Agreement, the Property Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Property Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Sponsor or the Administrative Trustees; 20 27 (iv) the Property Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities laws) or any re-recording, refiling or registration thereof; (v) the Property Trustee may consult with counsel or other experts of its selection and the advice or opinion of such counsel and experts with respect to legal matters or advice within the scope of such experts' area of expertise shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion, such counsel may be counsel to the Sponsor or any of its Affiliates, and may include any of its employees; and the Property Trustee shall have the right at any time to seek instructions concerning the administration of this Agreement from any court of competent jurisdiction; (vi) the Property Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Agreement at the request or direction of any Holder, unless such Holder shall have provided to the Property Trustee security and indemnity, reasonably satisfactory to the Property Trustee, against the costs, expenses (including reasonable attorneys' fees and expenses and the expenses of the Property Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Property Trustee in respect of the time, method or place of conducting any proceeding for any remedy available to the Property Trustee or the exercise of any trust or power conferred on the Property Trustee under this Agreement; (vii) the Property Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Property Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit; (viii) the Property Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, custodians, nominees or attorneys and the Property Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (ix) any action taken by the Property Trustee or its agents hereunder shall bind the Trust and the Holders of the Securities, and the signature of the Property Trustee or its agents alone shall be sufficient and effective to perform any such action and no third party shall be required to inquire as to the authority of the Property Trustee to so act or as to its compliance with any of the terms and provisions of this Agreement, both of which shall be conclusively evidenced by the Property Trustee's or its agent's taking such action; (x) whenever in the administration of this Agreement the Property Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or 21 28 taking any other action hereunder, the Property Trustee (i) may request instructions from the Holders of the Securities which instructions may only be given by the Holders of the same proportion in Liquidation Amount of the Securities as would be entitled to direct the Property Trustee under the terms of the Securities in respect of such remedy, right or action, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be protected in conclusively relying on, or acting in accordance with, such instructions; (xi) except as otherwise expressly provided by this Agreement, the Property Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Agreement; and (xii) the Property Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith, without negligence, and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Agreement. (b) No provision of this Agreement shall be deemed to impose any duty or obligation on the Property Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal, or in which the Property Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts, or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Property Trustee shall be construed to be a duty. (c) It is expressly understood and agreed by the parties hereto that in fulfilling its obligations as Property Trustee hereunder on behalf of the Trust, (i) any agreements or instruments executed or delivered by The Chase Manhattan Bank are executed and delivered not in its individual capacity but solely as Property Trustee under this Agreement in the exercise of the powers and authority conferred and vested in it, (ii) each of the representations, undertakings and agreements herein made on the part of the Trust is made and intended not as representations, warranties, covenants, undertakings and agreements by The Chase Manhattan Bank in its individual capacity but is made and intended for the purpose of binding only the Trust, and (iii) under no circumstances (except with respect to funds delivered to it relating to payments in respect of the Securities) shall The Chase Manhattan Bank in its individual capacity be personally liable for the payment of any indebtedness or expenses of the Trust or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Trust under this Agreement except if such breach or failure is due to any negligence, bad faith or willful misconduct of the Property Trustee. SECTION 3.11 Delaware Trustee. (a) Notwithstanding any other provision of this Agreement other than Section 5.2, the Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities of the Administrative Trustees or the Property Trustee described in this Agreement (except as required under the Business Trust Act). Except as set 22 29 forth in Section 5.2, the Delaware Trustee shall be a Trustee for the sole and limited purpose of fulfilling the requirements of Section 3807 of the Business Trust Act. (b) It is expressly understood and agreed by the parties hereto that in fulfilling its obligations as Delaware Trustee hereunder on behalf of the Trust, (i) any agreements or instruments executed or delivered by Chase Manhattan Bank Delaware are executed and delivered not in its individual capacity but solely as Delaware Trustee under this Agreement in the exercise of the powers and authority conferred and vested in it, (ii) each of the representations, undertakings and agreements herein made on the part of the Trust is made and intended not as representations, warranties, covenants, undertakings and agreements by Chase Manhattan Bank Delaware in its individual capacity but is made and intended for the purpose of binding only the Trust, and (iii) under no circumstances shall Chase Manhattan Bank Delaware in its individual capacity be personally liable for the payment of any indebtedness or expenses of the Trust or be liable for the breach or failure of any obligation, representation, warranty, or covenant made or undertaken by the Trust under this Agreement except if such breach or failure is due to any negligence, bad faith or willful misconduct of the Delaware Trustee. SECTION 3.12 Execution of Documents. Except as otherwise required by the Business Trust Act or applicable law, each Administrative Trustee, individually, is authorized to execute and deliver on behalf of the Trust any documents, agreements, instruments or certificates that the Administrative Trustees have the power and authority to execute and deliver pursuant to this Agreement. SECTION 3.13 Not Responsible for Recitals or Issuance of Securities. The recitals contained in this Agreement and the Securities shall be taken as the statements of the Sponsor, and the Trustees do not assume any responsibility for their correctness. The Trustees make no representations as to the value or condition of the property of the Trust or any part thereof. The Trustees make no representations as to the validity or sufficiency of this Agreement or the Securities. SECTION 3.14 Duration of Trust. The Trust, unless dissolved pursuant to the provisions of Article VIII hereof, shall have existence until December 29, 2001. SECTION 3.15 Mergers. (a) The Trust may not merge with or into, convert into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to any Person, except as described in Section 3.15(b) and (c) and except with respect to the distribution of all Debentures to Holders of Securities pursuant to Section 8.1(a)(iii). 23 30 (b) The Trust may, at the request of the Sponsor, with the consent of the Administrative Trustees or, if there are more than two, a majority of the Administrative Trustees and without the consent of the Holders of the Securities, the Delaware Trustee or the Property Trustee, merge with or into, convert into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to, a trust organized as such under the laws of any State; provided that: (i) such successor entity (the "Successor Entity") either: (A) expressly assumes all of the obligations of the Trust under the Securities; or (B) substitutes for the Securities other securities having substantially the same terms as the Securities (the "Successor Securities") so long as the Successor Securities rank the same as the Securities rank with respect to Distributions and payments upon liquidation, redemption and otherwise; (ii) the Sponsor expressly appoints a trustee of the Successor Entity that possesses the same powers and duties as the Property Trustee with respect to the Debentures; (iii) the Successor Securities (excluding any securities substituted for any Common Securities) are listed, quoted or included for trading, or any Successor Securities will be listed, quoted or included for trading, upon notification of issuance, on any national securities exchange or with any other organization on which the Preferred Securities are then listed, quoted or included; (iv) such merger, conversion, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Preferred Securities (including any Successor Securities) or the Debentures to be downgraded or placed under surveillance or review by any nationally recognized statistical rating organization that publishes a rating on the Preferred Securities or the Debentures; (v) such merger, conversion, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Securities (including the holders of any Successor Securities) in any material respect (other than with respect to any dilution of the interests of such Holders or holders, as the case may be, in the Successor Entity); (vi) the Successor Entity has a purpose substantially identical to that of the Trust; (vii) prior to such merger, conversion, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Sponsor has received an opinion of a nationally recognized independent counsel to the Trust experienced in such matters to the effect that: 24 31 (A) such merger, conversion, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Securities (including the holders of any Successor Securities) in any material respect (other than with respect to any dilution of the interests of such Holders or holders, as the case may be, in the Successor Entity); and (B) following such merger, conversion, consolidation, amalgamation, replacement, conveyance, transfer or lease, neither the Trust nor the Successor Entity, if any, will be required to register as an Investment Company; and (viii) the Sponsor or any permitted successor or assignee owns all of the common securities of the Successor Entity and guarantees the obligations of the Successor Entity under the Successor Securities at least to the extent provided by the Preferred Securities Guarantee and the Common Securities Guarantee. (c) Notwithstanding Section 3.15(b), the Trust shall not, except with the consent of Holders of 100% in Liquidation Amount of the Securities, merge with or into, convert into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to, any other Person or permit any other Person to merge with or into, consolidate, amalgamate, or replace it if such merger, conversion, consolidation, amalgamation, replacement, conveyance, transfer or lease would cause the Trust or the Successor Entity, if any, not to be classified as a grantor trust for United States Federal income tax purposes. ARTICLE IV SPONSOR SECTION 4.1 Sponsor's Purchase of Common Securities. At the Closing Time, the Sponsor will purchase all of the Common Securities then issued by the Trust, in an amount equal to at least 3% of the total capital of the Trust, at the same time as the Preferred Securities are issued and sold. The aggregate Liquidation Amount of Common Securities at any time shall not be less than 3% of the total capital of the Trust. For so long as the Preferred Securities remain outstanding, the Sponsor covenants (i) to maintain, directly or indirectly, 100% ownership of the Common Securities; provided, however, that any permitted successor of the Sponsor under the Indenture may succeed to the Sponsor's interest in the Common Securities, (ii) to use its best efforts to cause the Trust (a) to remain a business trust, except in connection with a distribution of Debentures to the Holders of Securities in liquidation of the Trust, the redemption of all the Securities, or certain mergers, consolidations or amalgamations, each as permitted by this Agreement, and not to voluntarily dissolve, wind up, liquidate or be terminated, except as permitted by this Agreement, and (b) to otherwise continue to be classified as a grantor trust for United States federal income tax purposes, (iii) to use its best efforts to ensure that the Trust shall not be an Investment Company for purposes of the Investment Company Act, (iv) to use its best efforts to cause each Holder of 25 32 Securities to be treated as owning an undivided beneficial interest in the Debentures and (v) to take no action which would cause the dissolution, liquidation or winding up of the Trust, except as otherwise provided in this Agreement. SECTION 4.2 Responsibilities of the Sponsor. In connection with the issue and sale of the Preferred Securities, the Sponsor shall have the exclusive right (subject to Section 3.6) and responsibility to engage in the following activities: (a) to determine the jurisdictions in which to take appropriate action to qualify or register for sale all or part of the Preferred Securities and to do any and all such acts, other than actions which must be taken by the Trust, and advise the Trust of actions it must take, and prepare for execution and filing any documents to be executed and filed by the Trust, as the Sponsor deems necessary or advisable in order to comply with the applicable laws of any such jurisdictions; (b) to prepare, execute and file on behalf of the Trust an application to the PORTAL Market; (c) to prepare, execute and file on behalf of the Trust documents or instruments to be delivered to the Clearing Agency relating to the Preferred Securities; and (d) to negotiate the terms of, execute, enter into and deliver the Purchase Agreement providing for the sale of the Preferred Securities. SECTION 4.3 Right to Proceed. The Sponsor acknowledges the rights of the Holders of Preferred Securities to bring one or more Direct Actions under the circumstances specified in this Agreement. ARTICLE V TRUSTEES SECTION 5.1 Number of Trustees; Appointment of Co-Trustee. The number of Trustees initially shall be five (5), and: (a) at any time before the issuance of any Securities, the Sponsor may, by written instrument, increase or decrease the number of Trustees; and (b) after the issuance of any Securities, the number of Trustees may be increased or decreased by vote of the Holders of a Majority in Liquidation Amount of the Common Securities voting as a class at a meeting of the Holders of the Common Securities; provided, however, that, the number of Trustees shall in no event be less than two (2); provided further that (1) one Trustee shall be a Person meeting the requirements of Section 5.2 (the 26 33 "Delaware Trustee"); (2) there shall be at least one Trustee who is an employee or officer of, or is affiliated with the Sponsor (an "Administrative Trustee"); and (3) one Trustee shall be the Property Trustee, and such Trustee may also serve as Delaware Trustee if it meets the applicable requirements. Notwithstanding the above, unless an Event of Default shall have occurred and be continuing, at any time or times, for the purpose of meeting the legal requirements of the Trust Indenture Act or of any jurisdiction in which any part of the Trust's property may at the time be located, the Holders of a Majority in Liquidation Amount of the Common Securities acting as a class at a meeting of the Holders of the Common Securities, and the Administrative Trustees shall have power to appoint one or more Persons either to act as a co-trustee, jointly with the Property Trustee, of all or any part of the Trust's property, or to act as separate trustee of any such property, in either case with such powers as may be provided in the instrument of appointment, and to vest in such Person or Persons in such capacity any property, title, right or power deemed necessary or desirable, subject to the provisions of this Agreement. In case an Event of Default has occurred and is continuing, the Property Trustee alone shall have power to make any such appointment of a co-trustee. SECTION 5.2 Delaware Trustee. For so long as required by the Business Trust Act, the Delaware Trustee shall be: (a) a natural person who is a resident of the State of Delaware; or (b) if not a natural person, an entity which has its principal place of business in the State of Delaware, and otherwise meets the requirements of applicable law, provided, however, if the Property Trustee has its principal place of business in the State of Delaware and otherwise meets the requirements of applicable law, then the Property Trustee shall also be the Delaware Trustee and Section 3.11 shall have no application. SECTION 5.3 Property Trustee; Eligibility. (a) There shall at all times be one Trustee (the "Property Trustee") which shall act as Property Trustee and which shall: (i) not be an Affiliate of the Sponsor; and (ii) be a corporation organized and doing business under the laws of the United States of America or any State or Territory thereof or of the District of Columbia, or a corporation or Person permitted by the Commission to act as an indenture trustee under the Trust Indenture Act, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, and subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then for the purposes of this Section 5.3(a)(ii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. 27 34 (b) If at any time the Property Trustee shall cease to be eligible to so act under Section 5.3(a), the Property Trustee shall immediately resign in the manner and with the effect set forth in Section 5.7(c). (c) If the Property Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Property Trustee and the Holder of the Common Securities (as if it were the obligor referred to in Section 310(b) of the Trust Indenture Act) shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. (d) The Preferred Securities Guarantee shall be deemed to be specifically described in this Agreement for purposes of clause (i) of the first provision contained in Section 310(b) of the Trust Indenture Act. (e) The initial Property Trustee shall be: The Chase Manhattan Bank c/o Chase Manhattan Trust Company, National Association One Liberty Place, 52nd Floor 1650 Market Street Philadelphia, Pennsylvania 19103 Attention: Capital Markets Fiduciary Services Telephone: (215) 988-1317 Telecopier: (215) 972-8372 SECTION 5.4 Certain Qualifications of Administrative Trustees and Delaware Trustee Generally. Each Administrative Trustee and the Delaware Trustee (unless the Property Trustee also acts as Delaware Trustee) shall be either a natural person who is at least 21 years of age or a legal entity that shall act through one or more Authorized Officers. SECTION 5.5 Administrative Trustees. The initial Administrative Trustees shall be: Israel J. Floyd Michael J. Scott Stuart C. Shears c/o Hercules Incorporated Hercules Plaza 1313 North Market Street Wilmington, Delaware 19894-0001 Telephone: (302) 594-5000 Telecopier: (302) 594-5210 28 35 (a) Except as expressly set forth in this Agreement and except if a meeting of the Administrative Trustees is called with respect to any matter over which the Administrative Trustees have power to act, any power of the Administrative Trustees may be exercised by, or with the consent of, any one such Administrative Trustee. (b) Unless otherwise determined by the Administrative Trustees, and except as otherwise required by the Business Trust Act or applicable law, any Administrative Trustee acting alone is authorized to execute on behalf of the Trust any documents which the Administrative Trustees have the power and authority to cause the Trust to execute pursuant to Section 3.6. SECTION 5.6 Delaware Trustee. The initial Delaware Trustee shall be: Chase Manhattan Bank Delaware 1201 Market Street Wilmington, Delaware 19801 Attention: Corporate Trust Department Telephone: (302) 984-3372 Telecopier: (302) 428-4903 SECTION 5.7 Appointment, Removal and Resignation of Trustees. (a) Subject to Section 5.7(b), Trustees may be appointed or removed without cause at any time: (i) until the issuance of any Securities, by written instrument executed by the Sponsor; (ii) unless an Event of Default shall have occurred and be continuing after the issuance of any Securities, by vote of the Holders of a Majority in Liquidation Amount of the Common Securities voting as a class at a meeting of the Holders of the Common Securities; and (iii) if an Event of Default shall have occurred and be continuing after the issuance of the Securities, with respect to the Property Trustee or the Delaware Trustee, by vote of Holders of a Majority in Liquidation Amount of the Preferred Securities voting as a class at a meeting of Holders of the Preferred Securities (it being understood that in no event will the Holders of the Preferred Securities have the right to vote, appoint, remove or replace the Administrative Trustees, which voting rights are exclusively vested in the Holder of the Common Securities). (b) (i) The Trustee that acts as Property Trustee shall not be removed in accordance with Section 5.7(a) until a Successor Property Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Property Trustee and delivered to the Administrative Trustees and the Sponsor; and 29 36 (ii) the Trustee that acts as Delaware Trustee shall not be removed in accordance with Section 5.7(a) until a successor Trustee possessing the qualifications to act as Delaware Trustee under Sections 5.2 and 5.4 (a "Successor Delaware Trustee") has been appointed and has accepted such appointment by written instrument executed by such Successor Delaware Trustee and delivered to the removed Delaware Trustee, the Property Trustee (if the removed Delaware Trustee is not also the Property Trustee), the Administrative Trustees and the Sponsor. (c) A Trustee appointed to office shall hold office until his successor shall have been appointed or until his death, removal or resignation. Any Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing signed by the Trustee and delivered to the other Trustees, the Sponsor and the Trust, which resignation shall take effect upon such delivery or upon such later date as is specified therein; provided, however, that: (i) No such resignation of the Trustee that acts as the Property Trustee shall be effective: (A) until a Successor Property Trustee has been appointed and has accepted such appointment by instrument executed by such Successor Property Trustee and delivered to the Trust, the Sponsor, the Delaware Trustee (if the resigning Property Trustee is not also the Delaware Trustee) and the resigning Property Trustee; or (B) until the assets of the Trust have been completely liquidated and the proceeds thereof distributed to the Holders of the Securities; and (ii) no such resignation of the Trustee that acts as the Delaware Trustee shall be effective until a Successor Delaware Trustee has been appointed and has accepted such appointment by instrument executed by such Successor Delaware Trustee and delivered to the Trust, the Property Trustee (if the resigning Delaware Trustee is not also the Property Trustee), the Sponsor and the resigning Delaware Trustee. (d) The Holders of the Common Securities or, if an Event of Default shall have occurred and be continuing after the issuance of the Securities, the Holders of the Preferred Securities shall use their best efforts to promptly appoint a Successor Delaware Trustee or Successor Property Trustee, as the case may be, if the Property Trustee or the Delaware Trustee delivers an instrument of resignation in accordance with this Section 5.7. (e) If no Successor Property Trustee or Successor Delaware Trustee shall have been appointed and accepted appointment as provided in this Section 5.7 within 60 days after delivery of an instrument of resignation or removal, the Property Trustee or Delaware Trustee resigning or being removed, as applicable, may petition any court of competent jurisdiction for appointment of a Successor Property Trustee or Successor Delaware Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper and prescribe, appoint a Successor Property Trustee or Successor Delaware Trustee, as the case may be. 30 37 (f) No Property Trustee or Delaware Trustee shall be liable for the acts or omissions to act of any Successor Property Trustee or Successor Delaware Trustee, as the case may be. SECTION 5.8 Vacancies among Trustees. If a Trustee ceases to hold office for any reason and the number of Trustees is not reduced pursuant to Section 5.1, or if the number of Trustees is increased pursuant to Section 5.1, a vacancy shall occur. A resolution certifying the existence of such vacancy by the Administrative Trustees or, if there are more than two, a majority of the Administrative Trustees shall be conclusive evidence of the existence of such vacancy. The vacancy shall be filled with a Trustee appointed in accordance with Section 5.7. SECTION 5.9 Effect of Vacancies. The death, resignation, retirement, removal, bankruptcy, dissolution, liquidation, incompetence or incapacity to perform the duties of a Trustee shall not operate to dissolve, terminate or annul the Trust or to terminate this Agreement. Whenever a vacancy in the number of Administrative Trustees shall occur, until such vacancy is filled by the appointment of an Administrative Trustee in accordance with Section 5.7, the Administrative Trustees in office, regardless of their number, shall have all the powers granted to the Administrative Trustees and shall discharge all the duties imposed upon the Administrative Trustees by this Agreement. SECTION 5.10 Meetings. If there is more than one Administrative Trustee, meetings of the Administrative Trustees shall be held from time to time upon the call of any Administrative Trustee. Regular meetings of the Administrative Trustees may be held at a time and place fixed by resolution of the Administrative Trustees. Notice of any in-person meetings of the Administrative Trustees shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 24 hours before such meeting. Notice of any telephonic meetings of the Administrative Trustees or any committee thereof shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 24 hours before a meeting. Notices shall contain a brief statement of the time, place and anticipated purposes of the meeting. The presence (whether in person or by telephone) of an Administrative Trustee at a meeting shall constitute a waiver of notice of such meeting except where an Administrative Trustee attends a meeting for the express purpose of objecting to the transaction of any activity on the ground that the meeting has not been lawfully called or convened. Unless provided otherwise in this Agreement, any action of the Administrative Trustees may be taken at a meeting by vote of a majority of the Administrative Trustees present (whether in person or by telephone) and eligible to vote with respect to such matter, provided that a Quorum is present, or without a meeting by the unanimous written consent of the Administrative Trustees. In the event there is only one Administrative Trustee, any and all action of such Administrative Trustee shall be evidenced by a written consent of such Administrative Trustee. 31 38 SECTION 5.11 Delegation of Power. (a) Any Administrative Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purpose of executing any documents contemplated in Section 3.6, including any registration statement or amendment thereto filed with the Commission; and (b) The Administrative Trustees shall have power to delegate from time to time to such of their number or to officers of the Trust the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Administrative Trustees or otherwise as the Administrative Trustees may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of this Agreement. SECTION 5.12 Merger, Conversion, Consolidation or Succession to Business. Any Person into which the Property Trustee or the Delaware Trustee or any Administrative Trustee that is not a natural person, as the case may be, may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Property Trustee or the Delaware Trustee, as the case may be, shall be a party, or any Person succeeding to all or substantially all the corporate trust business of the Property Trustee or the Delaware Trustee, as the case may be, shall be the successor of the Property Trustee or the Delaware Trustee, as the case may be, hereunder, provided such Person shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided, however, such successor shall notify the Sponsor and the Trust promptly of its succession. SECTION 5.13 Compensation. The Sponsor agrees: (a) to pay to the Property Trustee and the Delaware Trustee from time to time such compensation as shall be agreed in writing between the Company and the Property Trustee and the Delaware Trustee, respectively, for all services rendered by them hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); and (b) to reimburse the Property Trustee and the Delaware Trustee upon their request for reasonable expenses, disbursements and advances incurred or made by the Property Trustee or the Delaware Trustee, respectively, in accordance with any provision of this Agreement (including the reasonable compensation and the expenses and advances of its agents and counsel), except any such expense or advance as may be attributable to their negligence, willful misconduct or bad faith. 32 39 ARTICLE VI DISTRIBUTIONS SECTION 6.1 Distributions. Holders shall receive Distributions in accordance with the applicable terms of the relevant Holder's Securities. Distributions shall be made on the Preferred Securities and the Common Securities in accordance with the respective terms and preferences set forth herein and in Annex I. If and to the extent that the Debenture Issuer makes a payment of interest (including any compounded interest and additional interest), premium and/or principal on the Debentures held by the Property Trustee (the amount of any such payment being a "Payment Amount"), the Property Trustee shall and is directed, to the extent funds are available for that purpose, to make a distribution (a "Distribution") of the Payment Amount to Holders. ARTICLE VII ISSUANCE OF SECURITIES SECTION 7.1 General Provisions Regarding Securities. (a) The Administrative Trustees shall on behalf of the Trust issue one class of preferred securities representing undivided beneficial interests in the assets of the Trust having such terms as are set forth in Annex I (the "Preferred Securities") and one class of common securities representing undivided beneficial interests in the assets of the Trust having such terms as are set forth in Annex I (the "Common Securities"). The Trust shall issue no securities or other interests in the assets of the Trust other than the Preferred Securities and the Common Securities. (b) The consideration received by the Trust for the issuance of the Securities shall constitute a contribution to the capital of the Trust and shall not constitute a loan to the Trust. (c) Upon issuance of the Securities as provided in this Agreement, the Securities so issued shall be validly issued, fully paid and non-assessable. (d) Every Person, by virtue of having become a Holder or a Preferred Security Beneficial Owner in accordance with the terms of this Agreement, shall be deemed to have expressly assented and agreed to the terms of, and shall be bound by, this Agreement. SECTION 7.2 Execution and Authentication. (a) The Securities shall be signed on behalf of the Trust by an Administrative Trustee. In case any Administrative Trustee of the Trust who shall have signed any of the Securities shall cease to be such Administrative Trustee before the Securities so signed shall be delivered by the Trust, such Securities nevertheless may be delivered as though the Person who signed such Securities had not ceased to be such Administrative Trustee; and any Securities may be signed on behalf of the Trust by such persons who, at the actual date of execution of such Security, shall be the Administrative Trustees of the Trust, although at the date of the execution and delivery of this Agreement any such person was not an Administrative Trustee. 33 40 (b) One Administrative Trustee shall sign the Preferred Securities for the Trust by manual or facsimile signature. A Preferred Security shall not be valid until authenticated by the manual signature of an authorized signatory of the Property Trustee. The signature shall be conclusive evidence that the Preferred Security has been authenticated under this Agreement. A Common Security shall be valid upon execution by an Administrative Trustee without any act of the Property Trustee. Upon a written order of the Trust signed by one Administrative Trustee, the Property Trustee shall authenticate the Preferred Securities for original issue. The aggregate number of Preferred Securities outstanding at any time shall not exceed the number set forth in the terms in Annex I hereto except as provided in Section 7.6. The Property Trustee may appoint an authenticating agent acceptable to the Trust to authenticate Preferred Securities. An authenticating agent may authenticate Preferred Securities whenever the Property Trustee may do so. Each reference in this Agreement to authentication by the Property Trustee includes authentication by such agent. An authenticating agent has the same rights as the Property Trustee hereunder with respect to the Sponsor or an Affiliate. SECTION 7.3 Form and Dating. The Preferred Securities and the Property Trustee's certificate of authentication shall be substantially in the form of Exhibit A-1 and the Common Securities shall be substantially in the form of Exhibit A-2, each of which is hereby incorporated in and expressly made a part of this Agreement. The Preferred Securities shall be issued only in minimum denominations of $1,000,000 Liquidation Amount and integral multiples of $1,000 in excess thereof. The Securities may be in definitive or global form and may be printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to an Administrative Trustee, as evidenced by the execution thereof. The Securities may have letters, CUSIP or other numbers, notations or other marks of identification or designation and such legends or endorsements required by law, stock exchange or quotation system rule, agreements to which the Trust is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Trust). An Administrative Trustee, at the direction of the Sponsor, shall furnish any such legend not contained in Exhibits A-1 or A-2 to the Property Trustee in writing. Each Preferred Security shall be dated the date of its authentication. The terms and provisions of the Securities set forth in Annex I and the forms of Securities set forth in Exhibits A-1 and A-2 are part of the terms of this Agreement and to the extent applicable, the Property Trustee and the Sponsor, by their execution and delivery of this Agreement, expressly agree to such terms and provisions and to be bound thereby. The following four paragraphs shall apply only to any Global Preferred Securities: 34 41 The Preferred Securities shall be issued in the form of one or more permanent global Securities in definitive, fully registered form without Distribution coupons with the appropriate global legends set forth in Exhibit A-1 hereto (a "Global Preferred Security"), which shall be deposited on behalf of the purchasers of the Preferred Securities represented thereby with the Property Trustee, as custodian for the Clearing Agency, and registered in the name of the Clearing Agency or a nominee of the Clearing Agency, duly executed by an Administrative Trustee on behalf of the Trust and authenticated by the Property Trustee as hereinafter provided. The number of Preferred Securities represented by the Global Preferred Security may from time to time be increased or decreased by adjustments made on the records of the Property Trustee and the Clearing Agency or its nominee as hereinafter provided. The Holder of a Global Preferred Security may grant proxies and otherwise authorize any Person, including Participants and Persons that may hold interests through Participants, to take any action which such Holder is entitled to take under this Agreement or the Securities. An Administrative Trustee shall execute and the Property Trustee shall, in accordance with this Section 7.3, authenticate and make available for delivery initially one or more Global Preferred Securities that (i) shall be registered in the name of Cede & Co. or other nominee of such Clearing Agency and (ii) shall be delivered by the Property Trustee to such Clearing Agency or pursuant to such Clearing Agency's written instructions or held by the Property Trustee as custodian for the Clearing Agency. Members of, or participants in, the Clearing Agency ("Participants") shall have no rights under this Agreement with respect to any Global Preferred Security held on their behalf by the Clearing Agency or by the Property Trustee as the custodian of the Clearing Agency or under such Global Preferred Security, and the Clearing Agency may be treated by the Trust, the Property Trustee and any agent of the Trust or the Property Trustee as the absolute owner of such Global Preferred Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Trust, the Property Trustee or any agent of the Trust or the Property Trustee from giving effect to any written certification, proxy or other authorization furnished by the Clearing Agency or impair, as between the Clearing Agency and its Participants, the operation of customary practices of such Clearing Agency governing the exercise of the rights of a holder of a beneficial interest in any Global Preferred Security. Except as provided in Section 9.2, owners of beneficial interests in a Global Preferred Security will not be entitled to receive physical delivery of Preferred Securities in definitive form ("Definitive Preferred Securities"). SECTION 7.4 Registrar and Paying Agent. The Trust shall maintain in the Borough of Manhattan, The City of New York, (i) an office or agency where Preferred Securities may be presented for registration of transfer ("Registrar") and (ii) an office or agency where Preferred Securities may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Preferred Securities and of their transfer. The Trust may appoint the Registrar and the Paying Agent and may appoint one or more co-registrars and one or more additional paying agents in such other locations as it shall determine. The term "Registrar" includes any additional registrar and the term "Paying Agent" includes any additional paying agent. The Trust may change any Registrar or Paying Agent 35 42 without prior notice to any Holder. The Administrative Trustees shall notify the Property Trustee of the name and address of any Agent not a party to this Agreement. If the Trust fails to appoint or maintain another entity as Registrar or Paying Agent, the Property Trustee shall act as such, and as Paying Agent the Property Trustee shall have the rights set forth in Section 3.8(i). The Trust or any of its Affiliates may act as Registrar or Paying Agent. The Trust shall act as Registrar and Paying Agent for the Common Securities. Any Paying Agent shall be permitted to resign as Paying Agent upon 30 days' prior written notice to the Property Trustee, the Administrative Trustees and the Sponsor. In the event that the Property Trustee shall no longer be the Paying Agent, the Trust shall appoint a successor Paying Agent (which shall be a bank or trust company acceptable to the Sponsor) to act as Paying Agent. The Trust initially appoints the Property Trustee as Registrar and Paying Agent for the Preferred Securities. SECTION 7.5 Paying Agent to Hold Money in Trust. The Trust shall require each Paying Agent other than the Property Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Property Trustee all money held by the Paying Agent for the payment of liquidation amounts or Distributions on the Securities and will notify the Property Trustee if there are insufficient funds for such purpose. While any such insufficiency continues, the Property Trustee may require a Paying Agent to pay all money held by it to the Property Trustee. The Trust at any time may require a Paying Agent to pay all money held by it to the Property Trustee and to account for any money disbursed by it. Upon payment over to the Property Trustee, the Paying Agent (if other than the Trust or an Affiliate of the Trust) shall have no further liability for the money. If the Trust or the Sponsor or an Affiliate of the Trust or the Sponsor acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. SECTION 7.6 Replacement Securities. If a Holder of a Security claims that a Security owned by it has been lost, destroyed or wrongfully taken or if such Security is mutilated and is surrendered to the Trust or, in the case of the Preferred Securities, to the Property Trustee, an Administrative Trustee shall execute and the Property Trustee shall authenticate and make available for delivery a replacement Security if the Property Trustee's and the Trust's requirements, as the case may be, are met. An indemnity bond must be provided by the Holder which, in the judgment of the Property Trustee, is sufficient to protect the Trustees, the Sponsor or any authenticating agent from any loss which any of them may suffer if a Security is replaced. The Trust may charge such Holder for its expenses in replacing a Security. Every replacement Security is an additional beneficial interest in the Trust. 36 43 SECTION 7.7 Outstanding Preferred Securities. The Preferred Securities outstanding at any time are all the Preferred Securities authenticated by the Property Trustee except for those cancelled by it, those delivered to it for cancellation, and those described in this Section as not outstanding. If a Preferred Security is replaced, paid or purchased pursuant to Section 7.6 hereof, it ceases to be outstanding unless the Property Trustee receives proof satisfactory to it that the replaced, paid or purchased Preferred Security is held by a bona fide purchaser. If Preferred Securities are considered paid in accordance with the terms of this Agreement, they cease to be outstanding and Distributions thereon shall cease to accumulate. A Preferred Security does not cease to be outstanding because the Trust, the Sponsor or an Affiliate of the Sponsor holds such Preferred Security. SECTION 7.8 Preferred Securities in Treasury. In determining whether the Holders of the required amount of Preferred Securities have concurred in any direction, waiver or consent, Preferred Securities owned by the Trust, the Sponsor or an Affiliate of the Sponsor, as the case may be, shall be disregarded and deemed not to be outstanding, except that for the purposes of determining whether the Property Trustee shall be fully protected in relying on any such direction, waiver or consent, only Preferred Securities which a Responsible Officer of the Property Trustee actually knows are so owned shall be so disregarded. SECTION 7.9 Temporary Securities. Until Definitive Securities are ready for delivery, the Administrative Trustees may prepare and, in the case of the Preferred Securities, the Property Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of Definitive Securities but may have variations that the Trust considers appropriate for temporary Securities. Without unreasonable delay, the Administrative Trustees shall prepare and, in the case of the Preferred Securities, the Property Trustee shall authenticate Definitive Securities in exchange for temporary Securities. SECTION 7.10 Cancellation. The Trust at any time may deliver Preferred Securities to the Property Trustee for cancellation. The Registrar and Paying Agent shall forward to the Property Trustee any Preferred Securities surrendered to them for registration of transfer, redemption, exchange or payment. The Property Trustee shall promptly cancel all Preferred Securities surrendered for registration of transfer, redemption, exchange, payment, replacement or cancellation and shall dispose of cancelled Preferred Securities as the Trust directs, provided that the Property Trustee shall not be obligated to destroy Preferred Securities. The Trust may not issue new Preferred Securities to replace Preferred Securities that it has paid or redeemed or that have been delivered to the Property Trustee for cancellation or that any Holder has exchanged. 37 44 SECTION 7.11 CUSIP Numbers. The Trust, in issuing the Preferred Securities, may use "CUSIP" numbers (if then generally in use), and, if so, the Property Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders of Preferred Securities; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Preferred Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Preferred Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Sponsor will promptly notify the Property Trustee of any change in the CUSIP numbers. ARTICLE VIII DISSOLUTION OF TRUST SECTION 8.1 Dissolution of Trust. (a) The Trust shall automatically dissolve upon the first to occur of the following events: (i) the bankruptcy of the Sponsor; (ii) (A) the filing of a certificate of dissolution or liquidation or its equivalent with respect to the Sponsor or (B) the revocation of the Sponsor's charter and the expiration of 90 days after the date of revocation without a reinstatement thereof; (iii) the distribution of a Like Amount of the Debentures to the Holders of the Securities, provided that the Property Trustee has received written notice from the Sponsor directing the Property Trustee to dissolve the Trust (which direction is optional and, except as otherwise expressly provided herein, within the discretion of the Sponsor), and provided, further, that such dissolution is conditioned on the receipt by the Administrative Trustees of an opinion of an independent tax counsel experienced in such matters (a "No Recognition Opinion") to the effect that the Holders of the Securities will not recognize any gain or loss for United States Federal income tax purposes as a result of the dissolution of the Trust and the distribution of the Debentures; (iv) the entry of a decree of judicial dissolution of the Trust by a court of competent jurisdiction; (v) the redemption of all of the Securities and the payment to the Holders of any and all amounts necessary therefor, all in accordance with the terms of the Securities; or (vi) the expiration of the term of the Trust provided in Section 3.14. (b) As soon as is practicable upon completion of winding up of the Trust following the occurrence of an event referred to in Section 8.1(a), the Administrative Trustees 38 45 shall terminate the Trust by filing a certificate of cancellation with the Secretary of State of the State of Delaware in accordance with the Business Trust Act. (c) The provisions of Section 3.9 and Article X shall survive the termination of the Trust. ARTICLE IX TRANSFER OF INTERESTS SECTION 9.1 Transfer of Securities. (a) Securities may only be transferred, in whole or in part, in accordance with the terms and conditions set forth in this Agreement and in the terms of the Securities. To the fullest extent permitted by law, any transfer or purported transfer of any Security not made in accordance with this Agreement shall be null and void. (b) Subject to this Article IX, Preferred Securities shall be freely transferable. (c) To the fullest extent permitted by law, the Sponsor may not transfer the Common Securities except for any transfer (whether voluntarily or by operation of law) permitted under Article 5 of the Indenture. (d) Each Security that bears or is required to bear the legend set forth in this Section 9.1 (a "RESTRICTED SECURITY") shall be subject to the restrictions on transfer provided in the legend set forth in this Section 9.1, unless such restrictions on transfer shall be waived by the written consent of the Administrative Trustees, and the Holder of each Restricted Security, by such Holder's acceptance thereof, agrees to be bound by such restrictions on transfer. As used in this Section 9.1 and in Section 9.2, the terms "transfer" encompasses any sale, pledge, transfer or other disposition of any Restricted Security. Prior to the Transfer Restriction Termination Date, any certificate evidencing a Security shall bear a legend in substantially the following form, unless otherwise agreed by the Administrative Trustees (with written notice thereof to the Property Trustee): THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES NOT TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON 39 46 WHICH HERCULES TRUST VI (THE "TRUST") OR ANY AFFILIATED PERSON OF THE TRUST WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY) UNLESS SUCH OFFER, SALE OR OTHER TRANSFER IS (A) TO THE TRUST OR HERCULES INCORPORATED OR ANY OF ITS SUBSIDIARIES, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON WHO IS OR WHO THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501 (A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) THAT IS AN INSTITUTIONAL INVESTOR, (E) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE TRUST OR THE TRANSFER AGENT FOR THE SECURITIES PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE THEN HOLDER OF THIS SECURITY AFTER THE RESALE RESTRICTION TERMINATION DATE. The Preferred Securities may be transferred or exchanged only in minimum denominations of $1,000,000 Liquidation Amount and integral multiples of $1,000 in excess thereof, and any attempted transfer, sale or other disposition of Preferred Securities in a denomination of less than $1,000,000 Liquidation Amount shall be deemed to be void and of no legal effect whatsoever. Following the Transfer Restriction Termination Date, any Security or Securities issued in exchange or substitution therefor (other than Securities acquired by the Sponsor or any Affiliate) may, upon surrender of such Security or Securities for exchange to the Trustee in accordance with the provisions of this Section 9.1, be exchanged for a new Security or Securities, as the case may be, in a like aggregate Liquidation Amount and of like tenor that shall not bear the restrictive legend required by this Section 9.1. Any Security that, prior to the Transfer Restriction Termination Date, is purchased or owned by the Sponsor, the Trust or any Affiliate thereof may not be resold by the Sponsor, the Trust or such Affiliate unless registered under the Securities Act or resold pursuant to an exemption from the registration requirements thereof. (e) The Administrative Trustees shall provide for the registration of Securities and of the transfer of Securities, which will be effected without charge but only upon payment (with such indemnity as the Administrative Trustees may require) in respect of any tax or other governmental charges that may be imposed in relation to it. Upon surrender for registration of 40 47 transfer of any Securities, the Administrative Trustees shall cause one or more new Securities to be issued in the name of the designated transferee or transferees. Every Security surrendered for registration of transfer or exchange shall be accompanied by a written instrument of transfer in form satisfactory to the Administrative Trustees duly executed by the Holder or such Holder's attorney duly authorized in writing. Each Security surrendered for registration of transfer shall be canceled by the Administrative Trustees. A transferee of a Security shall be entitled to the rights and subject to the obligations of a Holder hereunder upon the receipt by such transferee of a Security. By acceptance of a Security, each transferee shall be deemed to have agreed to be bound by this Agreement. SECTION 9.2 Transfer Procedures and Restrictions (a) Transfer and Exchange of Definitive Preferred Securities. When Definitive Preferred Securities are presented to the Registrar: (x) to register the transfer of such Definitive Preferred Securities; or (y) to exchange such Definitive Preferred Securities which became mutilated, destroyed, defaced, stolen or lost, for an equal liquidation amount of Definitive Preferred Securities, the Registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Definitive Preferred Securities surrendered for transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Property Trustee and the Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. (b) Transfer of a Definitive Preferred Security for a Beneficial Interest in a Global Preferred Security. Upon receipt by the Property Trustee of a Definitive Preferred Security, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Property Trustee, together with written instructions directing the Property Trustee to make, or to direct the Clearing Agency to make, an adjustment on its books and records with respect to the Global Preferred Security to reflect an increase in the Liquidation Amount of the Preferred Securities represented by such Global Preferred Security, then the Property Trustee shall cancel such Definitive Preferred Security and cause, or direct the Clearing Agency to cause, the aggregate Liquidation Amount of Preferred Securities represented by the appropriate Global Preferred Security to be increased accordingly. If no Global Preferred Securities are then outstanding, an Administrative Trustee shall execute on behalf of the Trust and the Property Trustee shall authenticate, upon written order of any Administrative Trustee, a Global Preferred Security representing an appropriate Liquidation Amount of Preferred Securities. (c) Transfer and Exchange of Global Preferred Securities. Subject to Section 9.2(d), the transfer and exchange of Global Preferred Securities or beneficial interests therein shall be effected through the Clearing Agency in accordance with this Agreement and the procedures of the Clearing Agency therefor. 41 48 (d) Transfer of a Beneficial Interest in a Global Preferred Security for a Definitive Preferred Security. (i) A Global Preferred Security deposited with the Clearing Agency or with the Property Trustee as custodian for the Clearing Agency pursuant to Section 7.3 shall be transferred to the beneficial owners thereof in the form of Definitive Preferred Securities only if such transfer complies with Section 9.2(c) and (1) the Clearing Agency notifies the Trust that it is unwilling or unable to continue as Clearing Agency for such Global Preferred Security or if at any time such Clearing Agency ceases to be a "clearing agency" registered under the Exchange Act and, in each case, a clearing agency is not appointed by the Sponsor within 90 days of receipt of such notice or of becoming aware of such condition, (2) a Default or an Event of Default has occurred and is continuing or (3) the Trust at its sole discretion elects to cause the issuance of Definitive Preferred Securities. (ii) Any Global Preferred Security that is transferable to the beneficial owners thereof in the form of Definitive Preferred Securities pursuant to this Section 9.2(d) shall be surrendered by the Clearing Agency to the Property Trustee located in the Borough of Manhattan, The City of New York, to be so transferred, in whole or from time to time in part, without charge, and the Property Trustee shall authenticate and make available for delivery, upon such transfer of each portion of such Global Preferred Security, an equal aggregate Liquidation Amount of Securities of authorized denominations in the form of Definitive Preferred Securities. Any portion of a Global Preferred Security transferred pursuant to this Section shall be registered in such names as the Clearing Agency shall direct. In the event of the occurrence of any of the events specified in clause (i) above, the Administrative Trustees will promptly make available to the Property Trustee a reasonable supply of Definitive Preferred Securities in fully registered form without Distribution coupons. (e) Restrictions on Transfer and Exchange of Global Preferred Securities. Notwithstanding any other provisions of this Agreement (other than the provisions set forth in subsection (d) of this Section 9.2), a Global Preferred Security may not be transferred as a whole except by the Clearing Agency to a nominee of the Clearing Agency or another nominee of the Clearing Agency or by the Clearing Agency or any such nominee to a successor Clearing Agency or a nominee of such successor Clearing Agency. (f) Cancellation or Adjustment of Global Preferred Security. At such time as all beneficial interests in a Global Preferred Security have either been exchanged for Definitive Preferred Securities to the extent permitted by this Agreement or redeemed, repurchased or canceled in accordance with the terms of this Agreement, such Global Preferred Security shall be returned to the Clearing Agency for cancellation or retained and canceled by the Property Trustee. At any time prior to such cancellation, if any beneficial interest in a Global Preferred Security is exchanged for Definitive Preferred Securities, Preferred Securities represented by such Global Preferred Security shall be reduced and an adjustment shall be made on the books and records of the Property Trustee (if it is then the custodian for such Global Preferred Security) 42 49 with respect to such Global Preferred Security, by the Property Trustee or the Securities Custodian, to reflect such reduction. (g) Obligations with Respect to Transfers and Exchanges of Preferred Securities. (i) To permit registrations of transfers and exchanges, an Administrative Trustee shall execute and the Property Trustee shall authenticate Definitive Preferred Securities and Global Preferred Securities at the Registrar's request in accordance with the terms of this Agreement. (ii) Registrations of transfers or exchanges will be effected without charge, but only upon payment (with such indemnity as the Trust or the Sponsor may require) in respect of any tax or other governmental charge that may be imposed in relation to it. (iii) The Registrar shall not be required to register the transfer of or exchange of (a) Preferred Securities during a period beginning at the opening of business 15 days before the day of mailing of a notice of redemption or any notice of selection of Preferred Securities for redemption and ending at the close of business on the day of such mailing; or (b) any Preferred Security so selected for redemption in whole or in part, except the unredeemed portion of any Preferred Security being redeemed in part. (iv) All Preferred Securities issued upon any registration of transfer or exchange pursuant to the terms of this Agreement shall evidence the same security and shall be entitled to the same benefits under this Agreement as the Preferred Securities surrendered upon such registration of transfer or exchange. (h) No Obligation of the Property Trustee. (i) The Property Trustee shall have no responsibility or obligation to any beneficial owner of a Global Preferred Security, a Participant in the Clearing Agency or other Person with respect to the accuracy of the records of the Clearing Agency or its nominee or of any Participant thereof, with respect to any ownership interest in the Preferred Securities or with respect to the delivery to any Participant, beneficial owner or other Person (other than the Clearing Agency) of any notice (including any notice of redemption) or the payment of any amount, under or with respect to such Preferred Securities. All notices and communications to be given to the Holders and all payments to be made to Holders under the Preferred Securities shall be given or made only to or upon the order of the Holders (which shall be the Clearing Agency or its nominee in the case of a Global Preferred Security). The rights of beneficial owners in any Global Preferred Security shall be exercised only through the Clearing Agency subject to the applicable rules and procedures of the Clearing Agency. The Property Trustee may conclusively rely and shall be fully protected in relying upon information furnished by the Clearing Agency or any agent thereof with respect to its Participants and any beneficial owners. (ii) The Property Trustee and Registrar shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed 43 50 under this Agreement or under applicable law with respect to any transfer of any interest in any Preferred Security (including any transfers between or among Clearing Agency Participants or beneficial owners in any Global Preferred Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Agreement, and to examine the same to determine substantial compliance as to form with the express requirements hereof. SECTION 9.3 Deemed Security Holders. The Trust, the Trustees, the Registrar and the Paying Agent may treat the Person in whose name any Security shall be registered on the books and records of the Trust as the sole owner and Holder of such Security for purposes of receiving Distributions and for all other purposes whatsoever and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Security on the part of any Person other than such Holder, regardless of any notice to the contrary. SECTION 9.4 Book Entry Interests. Global Preferred Securities shall initially be registered on the books and records of the Trust in the name of Cede & Co., the nominee of the Clearing Agency, and no Preferred Security Beneficial Owner will receive a definitive Preferred Security Certificate representing such Preferred Security Beneficial Owner's interests in such Global Preferred Securities, except as provided in Section 9.2. Unless and until Definitive Preferred Securities have been issued to the Preferred Security Beneficial Owners pursuant to Section 9.2: (a) the provisions of this Section 9.4 shall be in full force and effect; (b) the Trust and the Trustees shall be entitled to deal with the Clearing Agency for all purposes of this Agreement (including the payment of Distributions on the Global Preferred Securities and receiving approvals, votes or consents hereunder) as the Holder of the Preferred Securities and the sole holder of the Global Certificates and shall have no obligation to the Preferred Security Beneficial Owners; (c) to the extent that the provisions of this Section 9.4 conflict with any other provisions of this Agreement, the provisions of this Section 9.4 shall control; and (d) the rights of the Preferred Security Beneficial Owners shall be exercised only through the Clearing Agency and shall be limited to those established by law and agreements between such Preferred Security Beneficial Owners and the Clearing Agency and/or the Participants, including receiving and transmitting payments of Distributions on the Global Certificates to such Participants. DTC will make book entry transfers among the Participants. Any Global Preferred Security may be endorsed with or have incorporated in the text thereof such legends or recitals or changes not inconsistent with the provisions of this Agreement as may be required by the Clearing Agency, by any exchange or by the National 44 51 Association of Securities Dealers, Inc. in order for the Preferred Securities to be tradeable on the PORTAL Market or as may be required for the Preferred Securities to be tradeable on any other market developed for trading of securities pursuant to Rule 144A or required to comply with any applicable law or any regulation thereunder or with the rules and regulations of any securities exchange upon which the Preferred Securities may be listed or traded or to conform with any usage with respect thereto, or to indicate any special limitations or restrictions to which any particular Preferred Securities are subject. SECTION 9.5 Notices to Clearing Agency. Whenever a notice or other communication to the Preferred Security Holders is required to be given by a Trustee under this Agreement, such Trustee shall give all such notices and communications specified herein to be given to the Holders of Global Preferred Securities to the Clearing Agency and shall have no notice obligations to the Preferred Security Beneficial Owners. SECTION 9.6 Appointment of Successor Clearing Agency. If any Clearing Agency elects to discontinue its services as securities depositary with respect to the Preferred Securities, the Administrative Trustees may, in their sole discretion, appoint a successor Clearing Agency with respect to the Preferred Securities. ARTICLE X LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS SECTION 10.1 Liability. (a) Except as expressly set forth in this Agreement, the Securities Guarantees and the terms of the Securities, the Sponsor shall not be: (i) personally liable for the return of any portion of the capital contributions (or any return thereon) of the Holders of the Securities which shall be made solely from assets of the Trust; and (ii) required to pay to the Trust or to any Holder of Securities any deficit upon dissolution of the Trust or otherwise. (b) The Sponsor shall be liable for all of the debts and obligations of the Trust (other than with respect to the Securities) to the extent not satisfied out of the Trust's assets. (c) Pursuant to Section 3803(a) of the Business Trust Act, the Holders of the Preferred Securities shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. 45 52 SECTION 10.2 Exculpation. (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Trust or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Agreement or by law, except that this provision shall not be deemed to modify Section 3.9(b). (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Trust and upon such information, opinions, reports or statements presented to the Trust by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Trust, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Securities might properly be paid. SECTION 10.3 Fiduciary Duty. (a) To the extent that, at law or in equity, an Indemnified Person has duties (including fiduciary duties) and liabilities relating thereto to the Trust or to any other Covered Person, an Indemnified Person acting under this Agreement shall not be liable to the Trust or to any other Covered Person for its good faith reliance on the provisions of this Agreement. The provisions of this Agreement, to the extent that they restrict the duties and liabilities of an Indemnified Person otherwise existing at law or in equity (other than the duties imposed on the Property Trustee under the Trust Indenture Act), are agreed by the parties hereto to replace such other duties and liabilities of such Indemnified Person. (b) Unless otherwise expressly provided herein: (i) whenever a conflict of interest exists or arises between any Covered Person and any Indemnified Person; or (ii) whenever this Agreement or any other agreement contemplated herein or therein provides that an Indemnified Person shall act in a manner that is, or provides terms that are, fair and reasonable to the Trust or any Holder of Securities, the Indemnified Person shall resolve such conflict of interest, take such action or provide such terms, considering in each case the relative interest of each party (including its own interest) to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interests, any customary or accepted industry practices, and any applicable generally accepted accounting practices or principles. In the absence of bad faith by the Indemnified Person, the resolution, action or term so made, taken or provided by the Indemnified Person shall not constitute a breach of this Agreement or any other agreement contemplated herein or of any duty or obligation of the Indemnified Person at law or in equity or otherwise. 46 53 (c) Whenever in this Agreement an Indemnified Person is permitted or required to make a decision: (i) in its "discretion" or under a grant of similar authority, the Indemnified Person shall be entitled to consider such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Trust or any other Person; or (ii) in its "good faith" or under another express standard, the Indemnified Person shall act under such express standard and shall not be subject to any other or different standard imposed by this Agreement or by applicable law. SECTION 10.4 Indemnification. (a) (i) The Sponsor shall indemnify, to the full extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Trust) by reason of the fact that he is or was a Company Indemnified Person against expenses (including attorneys' fees and expenses), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Company Indemnified Person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (ii) The Sponsor shall indemnify, to the full extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Trust to procure a judgment in its favor by reason of the fact that he is or was a Company Indemnified Person against expenses (including attorneys' fees and expenses) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust and except that no such indemnification shall be made in respect of any claim, issue or matter as to which such Company Indemnified Person shall have been adjudged to be liable to the Trust unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such Company Indemnified Person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper. 47 54 (iii) To the extent that a Company Indemnified Person shall be successful on the merits or otherwise (including dismissal of an action without prejudice or the settlement of an action without admission of liability) in defense of any action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 10.4(a), or in defense of any claim, issue or matter therein, he shall be indemnified, to the full extent permitted by law, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (iv) Any indemnification under paragraphs (i) and (ii) of this Section 10.4(a) (unless ordered by a court) shall be made by the Sponsor only as authorized in the specific case upon a determination that indemnification of the Company Indemnified Person is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (i) and (ii). Such determination shall be made (1) by the Administrative Trustees by a majority vote of a Quorum consisting of such Administrative Trustees who were not parties to such action, suit or proceeding, (2) if such a Quorum is not obtainable, or, even if obtainable, if a Quorum of disinterested Administrative Trustees so directs, by independent legal counsel in a written opinion, or (3) by the Common Security Holder of the Trust. (v) Expenses (including attorneys' fees and expenses) incurred by a Company Indemnified Person in defending a civil, criminal, administrative or investigative action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 10.4(a) shall be paid by the Sponsor in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Company Indemnified Person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Sponsor as authorized in this Section 10.4(a). Notwithstanding the foregoing, no advance shall be made by the Sponsor if a determination is reasonably and promptly made (1) by the Administrative Trustees by a majority vote of a Quorum of disinterested Administrative Trustees, (2) if such a Quorum is not obtainable, or, even if obtainable, if a quorum of disinterested Administrative Trustees so directs, by independent legal counsel in a written opinion or (3) by the Common Security Holder of the Trust, that, based upon the facts known to the Administrative Trustees, counsel or the Common Security Holder at the time such determination is made, such Company Indemnified Person acted in bad faith or in a manner that such Person did not believe to be in or not opposed to the best interests of the Trust, or, with respect to any criminal proceeding, that such Company Indemnified Person believed or had reasonable cause to believe his conduct was unlawful. In no event shall any advance be made in instances where the Administrative Trustees, independent legal counsel or Common Security Holder reasonably determine that such person deliberately breached his duty to the Trust or its Common or Preferred Security Holders. (vi) The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Section 10.4(a) shall not be deemed exclusive of any other rights to which those seeking indemnification and advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors of the Sponsor or Preferred Security Holders of the Trust or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. All 48 55 rights to indemnification under this Section 10.4(a) shall be deemed to be provided by a contract between the Sponsor and each Company Indemnified Person who serves in such capacity at any time while this Section 10.4(a) is in effect. Any repeal or modification of this Section 10.4(a) shall not affect any rights or obligations then existing. (vii) The Sponsor or the Trust may purchase and maintain insurance on behalf of any Person who is or was a Company Indemnified Person against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Sponsor would have the power to indemnify him against such liability under the provisions of this Section 10.4(a). (viii) For purposes of this Section 10.4(a), references to "the Trust" shall include, in addition to the resulting or surviving entity, any constituent entity (including any constituent of a constituent) absorbed in a consolidation or merger, so that any person who is or was a director, trustee, officer or employee of such constituent entity, or is or was serving at the request of such constituent entity as a director, trustee, officer, employee or agent of another entity, shall stand in the same position under the provisions of this Section 10.4(a) with respect to the resulting or surviving entity as he would have with respect to such constituent entity if its separate existence had continued. (ix) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 10.4(a) shall, unless otherwise provided when authorized or ratified, continue as to a Person who has ceased to be a Company Indemnified Person and shall inure to the benefit of the heirs, executors and administrators of such a person. (b) The Sponsor agrees to indemnify the (i) Property Trustee, (ii) the Delaware Trustee, (iii) any Affiliate of the Property Trustee and the Delaware Trustee, and (iv) any officers, directors, shareholders, members, partners, employees, representatives, custodians, nominees or agents of the Property Trustee and the Delaware Trustee (each of the Persons in (i) through (iv) being referred to as a "Fiduciary Indemnified Person") for, and to hold each Fiduciary Indemnified Person harmless against, any and all loss, liability, damage, claim or expense including taxes (other than taxes based on the income of such Fiduciary Indemnified Person) incurred without negligence, willful misconduct or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against or investigating any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. With respect to the Property Trustee, this provision shall not be deemed to modify Section 3.9(b) or the Trust Indenture Act. The obligation to indemnify as set forth in this Section 10.4(b) shall survive the resignation or removal of the Property Trustee or the Delaware Trustee and the satisfaction and discharge of this Agreement. SECTION 10.5 Outside Businesses. Any Covered Person, the Sponsor, the Delaware Trustee and the Property Trustee (subject to Section 5.3(c)) may engage in or possess an interest in other business ventures of any nature or description, independently or with others, similar or dissimilar to the business of the Trust, and the Trust and the Holders of Securities shall have no rights by virtue of this 49 56 Agreement in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if competitive with the business of the Trust, shall not be deemed wrongful or improper. No Covered Person, the Sponsor, the Delaware Trustee, or the Property Trustee shall be obligated to present any particular investment or other opportunity to the Trust even if such opportunity is of a character that, if presented to the Trust, could be taken by the Trust, and any Covered Person, the Sponsor, the Delaware Trustee and the Property Trustee shall have the right to take for its own account (individually or as a partner or fiduciary) or to recommend to others any such particular investment or other opportunity. Any Covered Person, the Delaware Trustee and the Property Trustee may engage or be interested in any financial or other transaction with the Sponsor or any Affiliate of the Sponsor, or may act as depositary for, trustee or agent for, or act on any committee or body of holders of, securities or other obligations of the Sponsor or its Affiliates. ARTICLE XI ACCOUNTING SECTION 11.1 Fiscal Year. The fiscal year ("Fiscal Year") of the Trust shall be the calendar year, or such other year as is required by the Code. SECTION 11.2 Certain Accounting Matters. (a) At all times during the existence of the Trust, the Administrative Trustees shall keep, or cause to be kept, full books of account, records and supporting documents, which shall reflect in reasonable detail, each transaction of the Trust. The books of account shall be maintained on the accrual method of accounting, in accordance with generally accepted accounting principles, consistently applied. The Trust shall use the accrual method of accounting for United States Federal income tax purposes. The books of account and the records of the Trust shall be examined by and reported upon as of the end of each Fiscal Year of the Trust by a firm of independent certified public accountants selected by the Administrative Trustees. (b) The Administrative Trustees shall cause to be prepared and delivered to each of the Holders of Securities, within 90 days after the end of each Fiscal Year of the Trust, annual financial statements of the Trust, including a balance sheet of the Trust as of the end of such Fiscal Year, and the related statements of income or loss. (c) The Administrative Trustees shall cause to be duly prepared and delivered to each of the Holders of Securities, any annual United States Federal income tax information statement, required by the Code, containing such information with regard to the Securities held by each Holder as is required by the Code and the Treasury Regulations. Notwithstanding any right under the Code to deliver any such statement at a later date, the Administrative Trustees shall endeavor to deliver all such information statements within 30 days after the end of each Fiscal Year of the Trust. 50 57 (d) The Administrative Trustees shall cause to be duly prepared and filed with the appropriate taxing authority, an annual United States Federal income tax return, on a Form 1041 or such other form required by United States Federal income tax law, and any other annual income tax returns required to be filed by the Administrative Trustees on behalf of the Trust with any state or local taxing authority. SECTION 11.3 Banking. The Trust shall maintain one or more bank accounts in the name and for the sole benefit of the Trust; provided, however, that all payments of funds in respect of the Debentures held by the Property Trustee shall be made directly to the Property Trustee Account and no other funds of the Trust shall be deposited in the Property Trustee Account. The sole signatories for such accounts shall be designated by the Administrative Trustees; provided, however, that the Property Trustee shall designate the signatories for the Property Trustee Account. SECTION 11.4 Withholding. The Trust and the Administrative Trustees, on behalf of the Trust, shall comply with all withholding requirements under United States Federal, state and local law. The Administrative Trustees, on behalf of the Trust, shall request, and the Holders shall provide to the Trust, such forms or certificates as are necessary to establish an exemption from withholding with respect to each Holder, and any representations and forms as shall reasonably be requested by the Administrative Trustees to assist them in determining the extent of, and in fulfilling, the Trust's withholding obligations. The Administrative Trustees shall file required forms with applicable jurisdictions and, unless an exemption from withholding is properly established by a Holder, shall remit amounts withheld with respect to the Holder to applicable jurisdictions. To the extent that the Trust is required to withhold and pay over any amounts to any authority with respect to Distributions or allocations to any Holder, the amount withheld shall be deemed to be a Distribution in the amount of the withholding to the Holder. In the event of any claim of excess withholding, Holders shall be limited to an action against the applicable jurisdiction. If the amount required to be withheld was not withheld from actual Distributions made, the Trust may reduce subsequent Distributions by the amount of such withholding. ARTICLE XII AMENDMENTS AND MEETINGS SECTION 12.1 Amendments. (a) Except as otherwise provided in this Agreement or by any applicable terms of the Securities, this Agreement may only be amended by a written instrument approved and executed by: (i) the Sponsor and the Administrative Trustees (or, if there are more than two Administrative Trustees, a majority of the Administrative Trustees); 51 58 (ii) if the amendment affects the rights, powers, duties, obligations or immunities of the Property Trustee, the Property Trustee; and (iii) if the amendment affects the rights, powers, duties, obligations or immunities of the Delaware Trustee, the Delaware Trustee. (b) No amendment shall be made, and any such purported amendment shall be void and ineffective: (i) unless, in the case of any proposed amendment, the Property Trustee shall have first received an Officers' Certificate from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Agreement (including the terms of the Securities); (ii) unless, in the case of any proposed amendment which affects the rights, powers, duties, obligations or immunities of the Property Trustee, the Property Trustee shall have first received: (A) an Officers' Certificate from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Agreement (including the terms of the Securities); and (B) an opinion of counsel (who may be counsel to the Sponsor or the Trust) that such amendment is permitted by, and conforms to, the terms of this Agreement (including the terms of the Securities) and that all conditions precedent to the execution and delivery of such amendment have been satisfied; and (iii) to the extent the result of such amendment would: (A) cause the Trust to fail to be classified for purposes of United States Federal income taxation as a grantor trust; (B) reduce or otherwise adversely affect the powers of the Property Trustee in contravention of the Trust Indenture Act; or (C) cause the Trust to be deemed to be an Investment Company required to be registered under the Investment Company Act. (c) At such time after the Trust has issued any Securities that remain outstanding, any amendment that would adversely affect the rights, privileges or preferences of any Holder of the Securities may be effected only with such additional requirements as may be set forth in the terms of such Securities; provided, however, that, without the consent of each Holder of the Securities, this Agreement may not be amended to (i) change the Distribution rate (or manner of calculation of the Distribution rate), amount, timing or currency or otherwise adversely affect the method of any required payment, (ii) change the purposes of the Trust, (iii) authorize the issuance of any additional beneficial interests in the Trust, (iv) change the redemption provisions, (v) change the conditions precedent for the Sponsor to elect to dissolve the Trust and 52 59 distribute the Debentures to the Holders of the Securities, (vi) change the Liquidation Distribution or other provisions relating to the distribution of amounts payable upon the dissolution and liquidation of the Trust, (vii) affect the limited liability of any Holder of the Securities or (viii) restrict the right of a Holder of the Securities to institute suit for the enforcement of any required payment on or after the due date therefor (or in the case of redemption, on the Redemption Date). (d) Section 9.1(c) and this Section 12.1 shall not be amended without the consent of all of the Holders of the Securities. (e) Article IV shall not be amended without the consent of the Holders of a Majority in Liquidation Amount of the Common Securities. (f) The rights of the Holders of the Common Securities under Article V to increase or decrease the number of, and to appoint and remove, Trustees shall not be amended without the consent of the Holders of a Majority in Liquidation Amount of the Common Securities. (g) Notwithstanding Section 12.1(c), this Agreement may be amended by the Sponsor and the Trustees without the consent of the Holders of the Securities to: (i) cure any ambiguity, correct or supplement any provision in this Agreement that may be inconsistent with any other provision of this Agreement or make any other provisions with respect to matters or questions arising under this Agreement not inconsistent with any other provisions of this Agreement; (ii) modify, eliminate or add to any provisions of this Agreement to such extent as shall be necessary to ensure that the Trust will be classified for United States Federal income tax purposes as a grantor trust at all times that any Securities are outstanding or to ensure that the Trust will not be required to register as an Investment Company under the Investment Company Act; provided, however, that, in each case, such action shall not adversely affect in any material respect the interests of the Holders of the Securities, and any such amendments of this Agreement shall become effective when notice thereof is given to the Holders of the Securities. SECTION 12.2 Meetings of the Holders of Securities; Action by Written Consent. (a) Meetings of the Holders of any class of Securities may be called at any time by the Administrative Trustees (or as provided in the terms of the Securities) to consider and act on any matter on which Holders of such class of Securities are entitled to act under the terms of this Agreement, the terms of the Securities or the rules of any stock exchange or quotation system or market on which the Preferred Securities are listed or admitted for trading. The Administrative Trustees shall call a meeting of the Holders of such class if directed to do so by the Holders of at least 10% in Liquidation Amount of the Securities of such class. Such direction shall be given by delivering to the Administrative Trustees one or more notices in a writing stating that the signing Holders of Securities wish to call a meeting and indicating the general or 53 60 specific purpose for which the meeting is to be called. Any Holders of Securities calling a meeting shall specify in writing the security certificates held by the Holders of Securities exercising the right to call a meeting and only those Securities specified shall be counted for purposes of determining whether the required percentage set forth in the second sentence of this paragraph has been met. (b) Whenever a vote, consent or approval of the Holders of Securities is permitted or required under this Agreement or the rules of any stock exchange or quotation system or market on which the Preferred Securities are listed or admitted for trading, such vote, consent or approval may be given at a meeting of the Holders of Securities. Any action that may be taken at a meeting of the Holders of Securities may be taken without a meeting if a consent in writing setting forth the action so taken is signed by the Holders of Securities owning not less than the minimum amount of Securities in Liquidation Amount that would be necessary to authorize or take such action at a meeting at which all Holders of Securities having a right to vote thereon were present and voting. Prompt notice of the taking of action without a meeting shall be given to the Holders of Securities entitled to vote who have not consented in writing. (c) Except to the extent otherwise provided in the terms of the Securities, the following provisions shall apply to meetings of Holders of Securities: (i) notice of any such meeting shall be given to all the Holders of Securities having a right to vote thereat at least seven days and not more than 60 days before the date of such meeting. The Administrative Trustees may specify that any written ballot submitted to the Security Holders for the purpose of taking any action without a meeting shall be returned to the Trust within the time specified by the Administrative Trustees; (ii) each Holder of a Security may authorize any Person to act for it by proxy on all matters in which a Holder of Securities is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. No proxy shall be valid after the expiration of eleven months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Holder of Securities executing it. Except as otherwise provided herein, all matters relating to the giving, voting or validity of proxies shall be governed by the General Corporation Law of the State of Delaware relating to proxies, and judicial interpretations thereunder, as if the Trust were a Delaware corporation and the Holders of the Securities were stockholders of a Delaware corporation; (iii) each meeting of the Holders of the Securities shall be conducted by the Administrative Trustees or by such other Person that the Administrative Trustees may designate; and (iv) unless the Business Trust Act, this Agreement, the terms of the Securities, the Trust Indenture Act or the listing rules of any stock exchange or quotation system or market on which the Preferred Securities are then listed or trading, otherwise provides, the Administrative Trustees, in their sole discretion, shall establish all other provisions relating to meetings of Holders of Securities, including notice of the time, place or purpose of any meeting at which any matter is to be voted on by any Holders of 54 61 Securities, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy or any other matter with respect to the exercise of any such right to vote. ARTICLE XIII REPRESENTATIONS OF PROPERTY TRUSTEE AND DELAWARE TRUSTEE SECTION 13.1 Representations and Warranties of Property Trustee. The Trustee that acts as initial Property Trustee represents and warrants to the Trust and to the Sponsor at the date of this Agreement, and each Successor Property Trustee represents and warrants, as applicable, to the Trust and the Sponsor at the time of the Successor Property Trustee's acceptance of its appointment as Property Trustee that: (a) the Property Trustee is a banking corporation, a national banking association or a bank or trust company, duly organized, validly existing and in good standing under the laws of the United States or a State of the United States, as the case may be, with corporate power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Agreement; (b) the execution, delivery and performance by the Property Trustee of the Agreement have been duly authorized by all necessary corporate action on the part of the Property Trustee. The Agreement has been duly executed and delivered by the Property Trustee under New York law and constitutes a legal, valid and binding obligation of the Property Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency, and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether the enforcement of such remedies is considered in a proceeding in equity or at law); (c) the execution, delivery and performance of this Agreement by the Property Trustee do not conflict with or constitute a breach of the charter or by-laws of the Property Trustee; and (d) no consent, approval or authorization of, or registration with or notice to, any federal or New York State banking authority is required for the execution, delivery or performance by the Property Trustee of this Agreement. SECTION 13.2 Representations and Warranties of Delaware Trustee. The Trustee that acts as initial Delaware Trustee represents and warrants to the Trust and to the Sponsor at the date of this Agreement, and each Successor Delaware Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Delaware Trustee's acceptance of its appointment as Delaware Trustee that: (a) the Delaware Trustee is a banking corporation, a national banking association or a bank or trust company, duly organized, validly existing and in good standing under the laws 55 62 of the United States or the State of Delaware, as the case may be, with corporate power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Agreement; (b) the execution, delivery and performance by the Delaware Trustee of this Agreement have been duly authorized by all necessary corporate action on the part of the Delaware Trustee. This Agreement has been duly executed and delivered by the Delaware Trustee under Delaware law and constitutes a legal, valid and binding obligation of the Delaware Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency, and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether the enforcement of such remedies is considered in a proceeding in equity or at law); (c) the execution, delivery and performance of this Agreement by the Delaware Trustee do not conflict with or constitute a breach of the charter or by-laws of the Delaware Trustee; (d) no consent, approval or authorization of, or registration with or notice to, any Federal or Delaware banking authority governing the trust powers of the Delaware Trustee is required for the execution, delivery or performance by the Delaware Trustee of this Agreement; and (e) the Delaware Trustee is a natural person who is a resident of the State of Delaware or, if not a natural person, an entity which has its principal place of business in the State of Delaware, and is a Person that satisfies for the Trust Section 3807(a) of the Business Trust Act. ARTICLE XIV MISCELLANEOUS SECTION 14.1 Notices. All notices provided for in this Agreement shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by first class mail, as follows: (a) if given to the Trust, in care of the Administrative Trustees at the Trust's mailing address set forth below (or such other address as the Trust may give notice of to the Holders of the Securities): Hercules Trust VI c/o Hercules Incorporated Hercules Plaza 1313 North Market Street Wilmington, Delaware 19894-0001 56 63 Attention: Israel J. Floyd Telephone: (302) 594-5000 Telecopier: (302) 594-5210 (b) if given to the Delaware Trustee, at the mailing address set forth below (or such other address as Delaware Trustee may give notice of to the Holders of the Securities): Chase Manhattan Bank Delaware 1201 Market Street Wilmington, Delaware 19801 Attention: Corporate Trust Department Telephone: (302) 984-3372 Telecopier: (302) 428-4903 (c) if given to the Property Trustee, at the Property Trustee's mailing address set forth below (or such other address as the Property Trustee may give notice of to the Holders of the Securities): The Chase Manhattan Bank c/o Chase Manhattan Trust Company, National Association One Liberty Place, 52nd Floor 1650 Market Street Philadelphia, Pennsylvania 19103 Attention: Capital Markets Fiduciary Services Telephone: (215) 988-1317 Telecopier: (215) 972-8372 (d) if given to the Holder of the Common Securities, at the mailing address of the Sponsor set forth below (or such other address as the Holder of the Common Securities may give notice to the Trust): Hercules Incorporated Hercules Plaza 1313 North Market Street Wilmington, Delaware 19894-0001 Attention: Vice-President and Treasurer and Corporate Secretary of the Sponsor Telephone: (302) 594-5000 Telecopier: (302) 594-5210 (e) if given to any other Holder, at the address set forth on the books and records of the Trust. 57 64 All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 14.2 Governing Law. This Agreement and the rights of the parties hereunder shall be governed by and construed in accordance with the laws of the State of Delaware and all rights and remedies shall be governed by such laws without regard to principles of conflict of laws, except that the rights, limitations of rights, obligations, duties and immunities of the Property Trustee shall be governed by and construed in accordance with the laws of the State of New York. SECTION 14.3 Intention of the Parties. It is the intention of the parties hereto that the Trust be classified for United States Federal income tax purposes as a grantor trust. The provisions of this Agreement shall be interpreted to further this intention of the parties. SECTION 14.4 Headings. The Table of Contents, Cross-Reference Table and Headings contained in this Agreement are inserted for convenience of reference only and do not affect the interpretation of this Agreement or any provision hereof. SECTION 14.5 Successors and Assigns. Whenever in this Agreement any of the parties hereto is named or referred to, the successors and assigns of such party shall be deemed to be included, and all covenants and agreements in this Agreement by the Sponsor and the Trustees shall bind and inure to the benefit of their respective successors and assigns, whether so expressed. SECTION 14.6 Partial Enforceability. If any provision of this Agreement, or the application of such provision to any Person or circumstance, shall be held invalid, the remainder of this Agreement, or the application of such provision to Persons or circumstances other than those to which it is held invalid, shall not be affected thereby. SECTION 14.7 Counterparts. This Agreement may contain more than one counterpart of the signature page and this Agreement may be executed by the affixing of the signature of each of the Trustees to one of such counterpart signature pages. All of such counterpart signature pages shall be read as though one, and they shall have the same force and effect as though all of the signers had signed a single signature page. 58 65 IN WITNESS WHEREOF, the undersigned have caused this Amended and Restated Trust Agreement to be executed as of the day and year first above written. Michael J. Scott, not in his individual capacity but solely as Administrative Trustee of the Trust ________________________________________________ Stuart C. Shears, not in his individual capacity but solely as Administrative Trustee of the Trust ________________________________________________ Israel J. Floyd, not in his individual capacity but solely as Administrative Trustee of the Trust ________________________________________________ Chase Manhattan Bank Delaware, not in its individual capacity but solely as Delaware Trustee of the Trust By:_____________________________________________ Name: Title: The Chase Manhattan Bank, not in its individual capacity but solely as Property Trustee of the Trust By:_____________________________________________ Name: Title: 59 66 Hercules Incorporated, as Sponsor of the Trust By:_____________________________________________ Name: Title: 60 67 ANNEX I TERMS OF FLOATING RATE PREFERRED SECURITIES FLOATING RATE COMMON SECURITIES Pursuant to Section 7.1 of the Amended and Restated Trust Agreement of the Trust, dated as of December 23, 1999 (as amended from time to time, the "Agreement"), the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Floating Rate Preferred Securities (the "Preferred Securities") and the Floating Rate Common Securities (the "Common Securities," and together with the Preferred Securities, the "Securities") are set forth below (each capitalized term used but not defined herein has the meaning set forth in the Agreement or, if not defined in such Agreement, as defined in the Indenture): 1. Designation and Number. (a) Preferred Securities. Up to and including 170,000 Preferred Securities of the Trust, with an aggregate liquidation amount with respect to the assets of the Trust of one hundred and seventy million dollars ($170,000,000), and with a Liquidation Amount with respect to the assets of the Trust of $1,000 per security, are hereby designated for the purposes of identification only as "Floating Rate Preferred Securities". The Trust may issue, without the consent of the Holders of the Preferred Securities, additional Preferred Securities having the same terms (other than the date of issuance and the date on which Distributions begin to accumulate) as the Preferred Securities issued at the Closing Time so as to form a single series with the Preferred Securities theretofore issued. The certificates evidencing the Preferred Securities shall be substantially in the form of Exhibit A-1 to the Agreement. (b) Common Securities. Up to and including 5,258 Common Securities of the Trust with an aggregate Liquidation Amount with respect to the assets of the Trust of five million two hundred fifty eight thousand dollars ($5,258,000), and with a Liquidation Amount with respect to the assets of the Trust of $1,000 per security, are hereby designated for the purposes of identification only as "Floating Rate Common Securities". If the Trust issued additional Preferred Securities pursuant to the second sentence of Section 1(a), then the Trust will issue additional Common Securities having the same terms (other than the date of issuance and the date on which Distribution begin to accumulate) as the Common Securities issued at the Closing Time so as to form a single series with the Common Securities theretofore issued. The certificate evidencing the Common Securities shall be substantially in the form of Exhibit A-2 to the Agreement. 2. Distributions. (a) Distributions will be payable at the rate per annum, reset quarterly, equal to LIBOR (as defined below) plus 245 basis points (2.45%) of the $1,000 Liquidation Amount per Security (the "Distribution Rate"). Distributions in arrears for more than one quarterly I-1 68 period will bear additional distributions thereon compounded quarterly at the applicable periodic Distribution Rate (to the extent permitted by applicable law). The term "Distributions", as used herein, includes any such additional distributions unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Property Trustee and to the extent the Property Trustee has funds legally available therefor. (b) Distributions on the Securities will be cumulative, will be payable quarterly in arrears on March 29, 2000, June 29, 2000, September 29, 2000 and December 29, 2000 (each, a "Distribution Date"), will accumulate from and including the most recent date to which Distributions have been paid or, if no Distributions have been paid, from and including December 23, 1999, to but excluding the related Distribution Date (a "Distribution Period"). (c) The amount of Distributions payable for any Distribution Period will be computed on the basis of the actual number of days in such Distribution Period and a year of 360 days. If a Distribution Date is not a Business Day, then such Distribution Date will be postponed to the next succeeding Business Day. However, if the next succeeding Business Day is in the next succeeding calendar month, such Distribution Date will be the immediately preceding Business Day. (d) Distributions on a Distribution Date will be payable to the Holders thereof as they appear on the books and records of the Trust on the day immediately preceding such Distribution Date. If the Preferred Securities are ever issued in the form of Definitive Preferred Securities, the record date for the payment of Distributions shall be the 15th day of the calendar month in which the Distribution Date occurs, even if that day is not a Business Day. The relevant record dates for the Common Securities shall be the same as the record dates for the Preferred Securities. Distributions payable on any Securities that are not punctually paid or duly provided for on any Distribution Date, as a result of the Debenture Issuer having failed to make a payment under the Debentures, will cease to be payable to the Holder on the relevant record date, and such defaulted Distributions will instead be payable to the Person in whose name such Securities are registered on the Special Record Date or other specified date for the Debentures determined in accordance with the Indenture. (e) The "Calculation Agent" shall be The Chase Manhattan Bank or any successor appointed by the Sponsor and will calculate the Distribution Rate for each Distribution Period based on LIBOR determined as of two London Business Days prior to the first day of such Distribution Period (each, a "Determination Date"). "LIBOR" means, with respect to a Distribution Period relating to a Distribution Date (in the following order of priority): (1) the rate (expressed as a percentage per annum) for Eurodollar deposits having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the applicable Determination Date; (2) if such rate does not appear on Telerate Page 3750 as of 11:00 a.m. (London time) on the applicable Determination Date, the Calculation Agent will request the principal London offices of four leading banks in the London interbank market as selected by the Calculation Agent in consultation with the Sponsor to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for I-2 69 Eurodollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date, and if at least two quotations are provided, LIBOR will be the arithmetic mean of such quotations (rounded upwards if necessary to the fifth decimal place); (3) if fewer than two such quotations are provided as requested in clause (2) above, the Calculation Agent will request four major New York City banks selected by the Calculation Agent in consultation with the Sponsor to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in Eurodollars as of 11:00 a.m. (New York City time) on such Determination Date, and if at least two quotations are provided, LIBOR will be the arithmetic mean of such quotations (rounded upwards if necessary to the fifth decimal place); and (4) if fewer than two such quotations are provided as requested in clause (3) above, LIBOR will be LIBOR as determined on the preceding Determination Date. The Distribution Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law, as the same may be modified by United States law. Absent manifest error, the Calculation Agent's determination of LIBOR and its calculation of the applicable Distribution Rate for each Distribution Period will be final and binding. (f) As long as no Event of Default has occurred and is continuing under the Indenture, the Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures by extending the interest payment period at any time and from time to time (each period as to which interest payments have been deferred is referred to herein as an "Extension Period"), provided that an Extension Period must end on an Interest Payment Date for the Debentures and may not extend beyond December 29, 2000 (the "Stated Maturity Date"). As a consequence of such deferral, Distributions on the Securities will also be deferred during an Extension Period. Despite such deferral, quarterly Distributions will continue to accumulate with additional interest thereon (to the extent permitted by applicable law but not at a rate greater than the rate at which interest is then accruing on the Debentures) at the Distribution Rate then in effect, compounded quarterly during any Extension Period. Prior to the termination of an Extension Period, the Debenture Issuer may further defer payments of interest by further extending such Extension Period; provided that an Extension Period, together with all such previous and further extensions, may not extend beyond the Stated Maturity Date. At the end of an Extension Period, all accumulated and unpaid Distributions (but only to the extent payments are made in respect of the Debentures held by the Property Trustee and to the extent the Property Trustee has funds legally available therefor) will be payable to the Holders as they appear on the books and records of the Trust on the record date immediately preceding the end of the Extension Period. Upon the termination of any Extension Period (or any extension thereof) and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. I-3 70 (g) In the event that there is any money or other property held by or for the Trust that is not accounted for hereunder, such property shall be distributed on a Pro Rata (as defined herein) basis among the Holders of the Securities. 3. Liquidation Distribution Upon Dissolution. In the event of any dissolution of the Trust, the Trust shall be liquidated by the Administrative Trustees as expeditiously as the Administrative Trustees determine to be possible by distributing, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, to the Holders of the Securities a Like Amount (as defined below) of the Debentures, unless such distribution is determined by the Property Trustee not to be practicable, in which event such Holders will be entitled to receive out of the assets of the Trust legally available for distribution to Holders, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, an amount equal to the aggregate of the Liquidation Amount of $1,000 per Security plus accumulated and unpaid Distributions thereon to the date of payment (such amount is referred to herein as the "Liquidation Distribution"). "Like Amount" means (i) with respect to a redemption of the Securities, Securities having a Liquidation Amount equal to the principal amount of Debentures to be paid in accordance with their terms and (ii) with respect to a distribution of Debentures upon the dissolution of the Trust, Debentures having a principal amount equal to the Liquidation Amount of the Securities of the Holder to whom such Debentures are distributed. If, upon any such liquidation, the Liquidation Distribution can be paid only in part because the Trust has insufficient assets legally available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust on the Securities shall be paid on a Pro Rata basis. 4. Redemption and Distribution. (a) Upon the repayment of the Debentures on the Stated Maturity Date, the proceeds from such repayment shall be simultaneously applied by the Property Trustee to redeem a Like Amount of the Securities at the Redemption Price (as defined below). Holders will be given not less than 30 nor more than 60 days' prior written notice of such redemption. Any redemption of Securities shall be made, and the Redemption Price shall be payable, on the Redemption Date, and only to the extent that the Trust has funds legally available for the payment thereof. (b) The "Redemption Price" shall mean a price equal to 100% of the Liquidation Amount of the Securities to be redeemed plus accumulated and unpaid Distributions thereon, if any, to the date of redemption. (c) On and from the date fixed by the Administrative Trustees for any distribution of Debentures and liquidation of the Trust: (i) the Securities will no longer be deemed to be outstanding, (ii) the Clearing Agency or its nominee (or any successor Clearing Agency or its nominee), as the Holder of the Preferred Securities, will receive a registered global certificate or certificates representing the Debentures to be delivered upon such distribution and I-4 71 (iii) any certificates representing Securities not held by the Clearing Agency or its nominee (or any successor Clearing Agency or its nominee) will be deemed to represent beneficial interests in Debentures until such certificates are presented to the Debenture Issuer or its agent for transfer or reissue. (a) (d) The procedure with respect to redemptions or distributions of Debentures shall be as follows: (i) Notice of any redemption of, or notice of distribution of Debentures in exchange for, the Securities (a "Redemption/Distribution Notice") will be given by an Administrative Trustee on behalf of the Trust by mail to each Holder of Securities to be redeemed or exchanged not fewer than 30 nor more than 60 days before the date fixed for redemption or exchange thereof which, in the case of a redemption, will be the date fixed for redemption of the Debentures. For purposes of the calculation of the date of redemption or exchange and the dates on which notices are given pursuant to this Section 4(f)(i), a Redemption/ Distribution Notice shall be deemed to be given on the day such notice is first mailed by first-class mail, postage prepaid, to Holders of Securities. Each Redemption/Distribution Notice shall be addressed to the Holders of Securities at the address of each such Holder appearing in the books and records of the Trust. No defect in the Redemption/ Distribution Notice or in the mailing of either thereof with respect to any Holder shall affect the validity of the redemption or exchange proceedings with respect to any other Holder. (ii) In the event that fewer than all the outstanding Securities are to be redeemed, the Securities to be redeemed shall be redeemed on a Pro Rata basis from each Holder of Preferred Securities, it being understood that, in respect of Preferred Securities registered in the name of and held of record by the Clearing Agency or its nominee (or any successor Clearing Agency or its nominee) or any nominee, the distribution of the proceeds of such redemption will be made to the Clearing Agency and disbursed by such Clearing Agency in accordance with the procedures applied by such agency or nominee. (iii) If Securities are to be redeemed and the Trust gives a Redemption/Distribution Notice (which notice will be irrevocable), then (A) with respect to Global Preferred Securities representing Preferred Securities issued in book-entry form, by 12:00 noon, New York City time, on the Redemption Date, provided that the Debenture Issuer has paid the Property Trustee a sufficient amount of cash in connection with the maturity of the Debentures by 10:00 a.m., New York City time, on the Stated Maturity Date, the Property Trustee will deposit irrevocably with the Clearing Agency or its nominee (or successor Clearing Agency or its nominee) funds sufficient to pay the Redemption Price with respect to such Preferred Securities and will give the Clearing Agency irrevocable instructions and authority to pay the Redemption Price to the relevant Participants, and (B) with respect to Definitive Preferred Securities and Common Securities, provided that the Debenture Issuer has paid the Property Trustee a sufficient amount of cash in connection with the maturity of the Debentures, the Property Trustee will pay the Redemption Price to the Holders of such Securities by check mailed to the address of such Holder appearing on the books and records of the Trust on the Redemption Date. If a Redemption/Distribution Notice shall have been given and funds I-5 72 deposited as required, then immediately prior to the close of business on the date of such deposit, or on the Redemption Date, as applicable, Distributions will cease to accumulate on the Securities so called for redemption and all rights of Holders of such Securities so called for redemption will cease, except the right of the Holders of such Securities to receive the Redemption Price, but without interest on such Redemption Price, and such Securities shall cease to be outstanding. (iv) Payment of accumulated and unpaid Distributions on the Redemption Date will be subject to the rights of Holders of Securities on the close of business on a record date in respect of a Distribution Date occurring on such Redemption Date. (v) If a Redemption Date is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding Business Day, and no interest or other payment in respect of any such delay will accumulate for the period to but excluding such Business Day. If payment of the Redemption Price in respect of any Securities is improperly withheld or refused and not paid either by the Property Trustee or by the Sponsor as guarantor pursuant to the relevant Securities Guarantee, Distributions on such Securities will continue to accumulate from the original redemption date to the actual date of payment, in which case the actual payment date will be considered the Redemption Date for purposes of calculating the Redemption Price. (vi) Redemption/Distribution Notices shall be sent by the Property Trustee on behalf of the Trust to (A) in respect of the Preferred Securities, the Clearing Agency or its nominee (or any successor Clearing Agency or its nominee) if the Global Preferred Securities have been issued or, if Definitive Preferred Securities have been issued, to the Holders thereof, and (B) in respect of the Common Securities, to the Sponsor. (vii) Subject to the foregoing and applicable law (including, without limitation, United States Federal securities laws and banking laws), the Sponsor or any of its subsidiaries may at any time and from time to time purchase outstanding Preferred Securities by tender, in the open market or by private agreement. 5. Voting Rights - Preferred Securities. (a) Except as provided under Sections 5(b) and 7 and as otherwise required by law or the Agreement, the Holders of the Preferred Securities will have no voting rights. (b) So long as any Debentures are held by the Property Trustee, the Trustees shall not (i) direct the time, method and place of conducting any proceeding with respect to any remedy available to the Debenture Trustee, or exercise any trust or power conferred upon the Debenture Trustee, with respect to the Debentures, (ii) waive any past default that is waivable under the Indenture, (iii) exercise any right to rescind or annul a declaration of acceleration of the maturity of the principal of the Debentures, or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures where such consent shall be required, without, in each case, obtaining (1) the prior approval of the Holders of a Majority in Liquidation Amount of all outstanding Preferred Securities; provided, however, that where a consent under the Indenture would require the consent of each holder of Debentures affected thereby, no such I-6 73 consent shall be given by the Property Trustee without the prior approval of each Holder of the Preferred Securities and (2) an Opinion of Counsel delivered to the Trust from tax counsel experienced in such matters to the effect that the Trust will not be classified as an association taxable as corporation for United States Federal income tax purposes on account of such action. Notwithstanding anything to the contrary contained herein, if an Event of Default under the Agreement has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay principal of or interest on the Debentures on the date such principal or interest is otherwise payable, then a Holder of Preferred Securities may directly institute a proceeding against the Debenture Issuer for enforcement of payment to such Holder of the principal of or interest on a Like Amount of Debentures (a "Direct Action") on or after the respective due date specified in the Debentures. In connection with such a Direct Action, (i) the rights of the Common Securities Holder will be subordinated to the rights of Holders of Preferred Securities with respect to payments made or required to be made by the Debenture Issuer in such Direct Action and (ii) the Debenture Issuer shall remain obligated to pay the principal of or interest on such Debentures, and the Debenture Issuer shall be subrogated to the rights of such Holder of Preferred Securities to the extent of any payment made by the Debenture Issuer to such Holder in such Direct Action. Any approval or direction of Holders of Preferred Securities may be given at a separate meeting of Holders of Preferred Securities convened for such purpose, at a meeting of all of the Holders of Securities or pursuant to written consent. The Property Trustees will cause a notice of any meeting at which Holders of Preferred Securities are entitled to vote to be mailed to each Holder of record of Preferred Securities. Each such notice will include a statement setting forth (i) the date of such meeting, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote and (iii) instructions for the delivery of proxies. No vote or consent of the Holders of the Preferred Securities will be required for the Trust to distribute the Debentures in accordance with the Agreement and these terms of the Securities. Notwithstanding that Holders of Preferred Securities are entitled to vote or consent under any of the circumstances described above, any of the Preferred Securities that are owned by the Sponsor or any Affiliate of the Sponsor shall not be entitled to vote or consent and shall, for purposes of such vote or consent, be treated as if they were not outstanding. 6. Voting Rights - Common Securities. (a) Except as provided under Sections 6(b) and 7 as otherwise required by law or the Agreement, the Holders of the Common Securities will have no voting rights. (b) So long as any Debentures are held by the Property Trustee, the Trustees shall not (i) direct the time, method and place of conducting any proceeding with respect to any remedy available to the Debenture Trustee, or exercise any trust or power conferred upon the Debenture Trustee, with respect to the Debentures, (ii) waive any past default that is waivable under the Indenture, (iii) exercise any right to rescind or annul a declaration of acceleration of I-7 74 the maturity of the principal of the Debentures or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures where such consent shall be required, without, in each case, obtaining (1) the prior approval of the Holders of a Majority in Liquidation Amount of all outstanding Common Securities; provided, however, that where a consent under the Indenture would require the consent of each holder of Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior approval of the Common Securities Holder and (2) an Opinion of Counsel delivered to the Trust from tax counsel experienced in such matters to the effect that the Trust will not be classified as an association taxable as a corporation for United States Federal income tax purposes on account of such action. Notwithstanding anything to the contrary contained herein, if an Event of Default under the Agreement has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay principal of or interest on the Debentures on the date such principal or interest is otherwise payable, then a Holder of Common Securities may institute a Direct Action against the Debenture Issuer for enforcement of payment to such Holder of the principal of or interest on a Like Amount of Debentures on or after the respective due date specified in the Debentures. In connection with such a Direct Action, (i) the rights of the Common Securities Holder will be subordinated to the rights of Holders of Preferred Securities with respect to payments made or required to be made by the Debenture Issuer in such Direct Action and (ii) the Debenture Issuer shall remain obligated to pay the principal of or interest on such Debentures, and the Debenture Issuer shall be subrogated to the rights of such Holder of Preferred Securities to the extent of any payment made by the Debenture Issuer to such Holder in such Direct Action. Any approval or direction of Holder(s) of Common Securities may be given at a separate meeting of Holder(s) of Common Securities convened for such purpose, at a meeting of all of the Holders of Securities or pursuant to written consent. The Administrative Trustees will cause a notice of any meeting at which Holder(s) of Common Securities are entitled to vote to be mailed to each Holder of record of Common Securities. Each such notice will include a statement setting forth (i) the date of such meeting, (ii) a description of any resolution proposed for adoption at such meeting on which such Holder(s) are entitled to vote and (iii) instructions for the delivery of proxies. No vote or consent of the Holder(s) of the Common Securities will be required for the Trust to distribute the Debentures in accordance with the Agreement and these terms of the Securities. 7. Amendments to Agreement. (b) In addition to the requirements set out in Section 12.1 of the Agreement, the Agreement may be amended from time to time by the Sponsor and the Trustees with (i) the consent of Holders of a Majority in Liquidation Amount of all outstanding Securities, and (ii) receipt by the Trustees of an opinion of counsel experienced in such matters to the effect that such amendment or the exercise of any power granted to the Trustees in accordance with such amendment will not affect the Trust's status as a grantor trust for United States Federal income tax purposes or the Trust's exemption from status as an Investment Company under the Investment Company Act; provided, however, that, without the consent of each Holder of the I-8 75 Securities, the Agreement may not be amended to (i) change the Distribution Rate (or manner of calculation of the Distribution Rate), amount, timing or currency or otherwise adversely affect the method of any required payment, (ii) change the purposes of the Trust, (iii) authorize the issuance of any additional beneficial interests in the Trust, (iv) change the redemption provisions, (v) change the conditions precedent for the Sponsor to elect to dissolve the Trust and distribute the Debentures to the Holders of the Securities, (vi) change the Liquidation Distribution or other provisions relating to the distribution of amounts payable upon the dissolution and liquidation of the Trust, (vii) affect the limited liability of any Holder of the Securities or (viii) restrict the right of a Holder of the Securities to institute suit for the enforcement of any required payment on or after the due date therefor (or, in the case of redemption, on the Redemption Date). 8. Pro Rata. A reference herein to any payment, distribution or treatment as being "Pro Rata" shall mean pro rata to each Holder of Securities according to the aggregate Liquidation Amount of the Securities held by such Holder in relation to the aggregate Liquidation Amount of all Securities outstanding unless, in relation to a payment, an Event of Default under the Agreement has occurred and is continuing, in which case any funds legally available to make such payment shall be paid first to each Holder of the Preferred Securities pro rata according to the aggregate Liquidation Amount of Preferred Securities held by such Holder relative to the aggregate Liquidation Amount of all Preferred Securities outstanding, and only after satisfaction of all amounts owed to the Holders of the Preferred Securities, to each Holder of Common Securities pro rata according to the aggregate Liquidation Amount of Common Securities held by such Holder relative to the aggregate Liquidation Amount of all Common Securities outstanding. 9. Ranking. The Preferred Securities rank pari passu with the Common Securities and payment thereon shall be made Pro Rata with the Common Securities, except that, if an Event of Default under the Agreement occurs and is continuing, no payments in respect of Distributions on, or payments upon liquidation, redemption or otherwise with respect to, the Common Securities shall be made until the Holders of the Preferred Securities shall be paid in full the Distributions, Liquidation Distribution, Redemption Price and other payments to which they are entitled at such time. 10. Acceptance of Securities Guarantees and Indenture. Each Holder of Preferred Securities and Common Securities, by the acceptance thereof, agrees to the provisions of the Preferred Securities Guarantee, the Common Securities Guarantee and the Indenture, including the subordination provisions therein. 11. No Preemptive Rights. The Holders of the Preferred Securities and the Common Securities shall have no preemptive or similar rights to subscribe for any additional securities. I-9 76 12. Miscellaneous. These terms constitute a part of the Agreement. The Sponsor will provide a copy of the Agreement, the Preferred Securities Guarantee or the Common Securities Guarantee (as may be appropriate) and the Indenture (including any supplemental indenture) to a Holder without charge on written request to the Sponsor at its principal place of business. I-10 77 EXHIBIT A-1 FORM OF PREFERRED SECURITY CERTIFICATE [FORM OF FACE OF SECURITY] [IF THIS PREFERRED SECURITY IS A GLOBAL PREFERRED SECURITY, INSERT: THIS PREFERRED SECURITY IS A GLOBAL PREFERRED SECURITY WITHIN THE MEANING OF THE AGREEMENT HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY (THE "CLEARING AGENCY") OR A NOMINEE OF THE CLEARING AGENCY. THIS PREFERRED SECURITY IS EXCHANGEABLE FOR PREFERRED SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE CLEARING AGENCY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE AGREEMENT AND NO TRANSFER OF THIS PREFERRED SECURITY (OTHER THAN A TRANSFER OF THIS PREFERRED SECURITY AS A WHOLE BY THE CLEARING AGENCY TO A NOMINEE OF THE CLEARING AGENCY OR BY A NOMINEE OF THE CLEARING AGENCY TO THE CLEARING AGENCY OR ANOTHER NOMINEE OF THE CLEARING AGENCY) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES. UNLESS THIS PREFERRED SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE CLEARING AGENCY TO THE TRUST OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY PREFERRED SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE CLEARING AGENCY AND ANY PAYMENT HEREON IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] THE SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THE SECURITY BY ITS ACCEPTANCE HEREOF AGREES NOT TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH HERCULES TRUST VI (THE "TRUST") OR ANY AFFILIATED PERSON OF THE TRUST WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY) UNLESS SUCH OFFER, SALE OR OTHER A1-1 78 TRANSFER IS (A) TO THE TRUST OR HERCULES INCORPORATED OR ANY OF ITS SUBSIDIARIES, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON WHO IS OR WHO THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) THAT IS AN INSTITUTIONAL INVESTOR, (E) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE TRUST OR THE TRANSFER AGENT FOR THE SECURITIES PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE THEN HOLDER OF THIS SECURITY AFTER THE RESALE RESTRICTION TERMINATION DATE. A1-2 79 Certificate Number Number of Preferred Securities PS-001 ___________ CUSIP NO. _________ Certificate Evidencing Preferred Securities of HERCULES TRUST VI - -------------------------------------------------------------------------------- Floating Rate Preferred Securities (liquidation amount $1,000 per Preferred Security) HERCULES TRUST VI, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that ______________ (the "Holder") is the registered owner of 170,000 securities of the Trust representing undivided beneficial interests in the assets of the Trust designated as the Floating Rate Preferred Securities (liquidation amount $1,000 per Preferred Security) (the "Preferred Securities"). The Preferred Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred Securities represented hereby are issued and shall in all respects be subject to the provisions of the Amended and Restated Trust Agreement of the Trust dated as of December 23, 1999, as the same may be amended from time to time (the "Agreement"), including the designation of the terms of the Preferred Securities as set forth in Annex I to the Agreement. Capitalized terms used but not defined herein shall have the respective meanings given them in the Agreement. The Sponsor will provide a copy of the Agreement, the Preferred Securities Guarantee and the Indenture to a Holder without charge upon written request to the Trust at its principal place of business. Upon receipt of this certificate, the Holder is bound by the Agreement and is entitled to the benefits thereunder and to the benefits of the Preferred Securities Guarantee to the extent provided therein. By acceptance, the Holder agrees to treat, for United States Federal income tax purposes, the Debentures as indebtedness and the Preferred Securities as evidence of indirect beneficial ownership in the Debentures. A1-3 80 IN WITNESS WHEREOF, the Trust has executed this certificate this _______ day of ______________, 1999. HERCULES TRUST VI By: ________________________________ Name: Title: Administrative Trustee PROPERTY TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Preferred Securities referred to in the within-mentioned Agreement. Dated: ___________, 1999 THE CHASE MANHATTAN BANK, as Property Trustee By: ________________________________ Authorized Signatory A1-4 81 [FORM OF REVERSE OF PREFERRED SECURITY] Distributions on the Preferred Securities will be payable at a rate per annum, reset quarterly, equal to LIBOR (as defined in the Agreement) plus 245 basis points (2.45%) of the $1,000 liquidation amount per security (the "Distribution Rate"). The Distribution Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law, as the same may be modified by United States law. Distributions in arrears for more than one quarterly period will bear additional distributions thereon compounded quarterly at the applicable periodic Distribution Rate (to the extent permitted by applicable law). The term "Distributions", as used herein, includes any such additional distributions unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Property Trustee and to the extent the Property Trustee has funds legally available therefor. Distributions on the Preferred Securities will be cumulative, will be payable quarterly in arrears on March 29, 2000, June 29, 2000, September 29, 2000 and December 29, 2000 (each, a "Distribution Date"), will accumulate from and including the most recent date to which Distributions have been paid or, if no Distributions have been paid, from and including December 23, 1999, to but excluding the related Distribution Date (a "Distribution Period"). The amount of Distributions payable for any Distribution Period will be computed on the basis of the actual number of days in such Distribution Period and a year of 360 days. If a Distribution Date is not a Business Day, then such Distribution Date will be postponed to the next succeeding Business Day. However, if the next succeeding Business Day is in the next succeeding calendar month, such Distribution Date will be the immediately preceding Business Day. Distributions on a Distribution Date will be payable to the Holders thereof as they appear on the books and records of the Trust on the day immediately preceding such Distribution Date. If the Preferred Securities are ever issued in the form of Definitive Preferred Securities, the record date for the payment of Distributions shall be the 15th day of the calendar month in which the Distribution Date occurs, even if that day is not a Business Day. The relevant record dates for the Common Securities shall be the same as the record dates for the Preferred Securities. Distributions payable on any Securities that are not punctually paid or duly provided for on any Distribution Date, as a result of the Debenture Issuer having failed to make a payment under the Debentures, will cease to be payable to the Holder on the relevant record date, and such defaulted Distributions will instead be payable to the Person in whose name such Preferred Securities are registered on the Special Record Date or other specified date for the Debentures determined in accordance with the Indenture. As long as no Event of Default has occurred and is continuing under the Indenture, the Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures by extending the interest payment period at any time and from time to time (each period as to which interest payments have been deferred is referred to herein as an "Extension Period"), provided that an Extension Period must end on an Interest Payment Date for the A1-5 82 Debentures and may not extend beyond December 29, 2000 (the "Stated Maturity Date"). As a consequence of such deferral, Distributions on the Preferred Securities will also be deferred during an Extension Period. Despite such deferral, quarterly Distributions will continue to accumulate with additional interest thereon (to the extent permitted by applicable law but not at a rate greater than the rate at which interest is then accruing on the Debentures) at the Distribution Rate then in effect, compounded quarterly during any Extension Period. Prior to the termination of an Extension Period, the Debenture Issuer may further defer payments of interest by further extending such Extension Period; provided that an Extension Period, together with all such previous and further extensions, may not extend beyond the Stated Maturity Date. At the end of an Extension Period, all accumulated and unpaid Distributions (but only to the extent payments are made in respect of the Debentures held by the Property Trustee and to the extent the Property Trustee has funds legally available therefor) will be payable to the Holders as they appear on the books and records of the Trust on the record date immediately preceding the end of the Extension Period. Upon the termination of any Extension Period (or any extension thereof) and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. Subject to other conditions set forth in the Agreement and the Indenture, the Property Trustee may, at the direction of the Sponsor, dissolve the Trust at any time and cause the Debentures to be distributed to the Holders of the Preferred Securities in liquidation of the Trust or, simultaneously with any redemption of the Debentures, cause a Like Amount of the Preferred Securities to be redeemed by the Trust. The Preferred Securities shall be redeemable as provided in the Agreement. A1-6 83 ASSIGNMENT _____________________ FOR VALUE RECEIVED, the undersigned assigns and transfers this Preferred Security Certificate to: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Insert assignee's social security or tax identification number) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Insert address and zip code of assignee) and irrevocably appoints ________________________________________________________________________________ ________________________________________________________________________________ _______________________________________________________________agent to transfer this Preferred Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: _______________________ Signature: __________________ (Sign exactly as your name appears on the other side of this Preferred Security Certificate) Signature Guarantee**: ___________________________________ ______________________ ** Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities and Exchange Act of 1934, as amended. A1-7 84 [INCLUDE THE FOLLOWING IF THE PREFERRED SECURITY IS A RESTRICTED SECURITY] In connection with any transfer of any of the Preferred Securities evidenced hereby, the undersigned confirms that such Preferred Securities are being: CHECK ONE BOX BELOW (1) / / exchanged for the undersigned's own account without transfer; or (2) / / transferred to a "qualified institutional buyer" for its own account or another "qualified institutional buyer" (as defined in Rule 144A) in compliance with Rule 144A under the Securities Act of 1933, as amended; or (3) / / transferred to an institutional "accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Securities Act of 1933 that is acquiring the Preferred Securities for its own account, or for the account of such an institutional "accredited investor," for investment purposes and not with a view to, or offer or sale in connection with, any distribution in violation of the Securities Act of 1933, as amended; or (4) / / transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933, as amended; or (5) / / transferred pursuant to an effective registration statement. Unless one of the boxes is checked, the Transfer Agent will refuse to register any of the Preferred Securities evidenced hereby in the name of any Person other than the Holder hereof; provided, however, that if box (3) or (4) is checked, the Transfer Agent may require, prior to registering any such transfer of the Preferred Securities, such legal opinions, certifications and other information as the Trust has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, as amended; provided, further, that if box (2) is checked, by acceptance hereof, the transferee shall be deemed to have certified that it is a "qualified institutional buyer" acquiring the Preferred Securities for its own account or for the account of another "qualified institutional buyer" over which it exercises sole investment discretion and that it is aware that the Holder is relying upon the exemption from registration afforded by Rule 144A in respect of the Holder's transfer of Preferred Securities to it; provided, further, that after the date that a registration statement has been filed and so long as such Registration Statement continues to be effective, only then may the Transfer Agent permit transfers for which (5) has been checked. _____________________________ Signature A1-8 85 EXHIBIT A-2 FORM OF COMMON SECURITY CERTIFICATE THIS CERTIFICATE IS NOT TRANSFERABLE SUBJECT TO THE TERMS OF THE AGREEMENT (AS DEFINED HEREIN) Certificate Number Number of Common Securities CS-001 ___________ Certificate Evidencing Common Securities of HERCULES TRUST VI Floating Rate Common Securities (liquidation amount $1,000 per Common Security) HERCULES TRUST VI, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that Hercules Incorporated (the "Holder") is the registered owner of 5,258 securities of the Trust representing undivided beneficial interests in the assets of the Trust designated the Floating Rate Common Securities (liquidation amount $1,000 per Common Security) (the "Common Securities"). The Common Securities are not transferable. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities represented hereby are issued and shall in all respects be subject to the provisions of the Amended and Restated Trust Agreement of the Trust dated as of December 23, 1999, as the same may be amended from time to time (the "Agreement"), including the designation of the terms of the Common Securities as set forth in Annex I to the Agreement. Capitalized terms used but not defined herein shall have the meaning given them in the Agreement. The Sponsor will provide a copy of the Agreement, the Common Securities Guarantee and the Indenture to a Holder without charge upon written request to the Trust at its principal place of business. Upon receipt of this certificate, the Holder is bound by the Agreement and is entitled to the benefits thereunder and to the benefits of the Common Securities Guarantee to the extent provided therein. By acceptance, the Holder agrees to treat, for United States Federal income tax purposes, the Debentures as indebtedness and the Common Securities as evidence of indirect beneficial ownership in the Debentures. A2-1 86 IN WITNESS WHEREOF, the Trust has executed this certificate this __________ day of _______________, 1999. HERCULES TRUST VI By: ________________________________ Name: Title: Administrative Trustee A2-2 87 [FORM OF REVERSE OF SECURITY] Distributions on the Common Securities will be payable at a rate per annum, reset quarterly, equal to LIBOR (as defined in the Agreement) plus 245 basis points (2.45%) of the $1,000 liquidation amount per security (the "Distribution Rate"). The Distribution Rate for any Distribution period will at no time be higher than the maximum rate then permitted by New York law, as the same may be modified by United States law. Distributions in arrears for more than one quarterly period will bear additional distributions thereon compounded quarterly at the applicable periodic Distribution Rate (to the extent permitted by applicable law). The term "Distributions", as used herein, includes any such additional distributions unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Property Trustee and to the extent the Property Trustee has funds legally available therefor. Distributions on the Common Securities will be cumulative, will be payable quarterly in arrears on March 29, 2000, June 29, 2000, September 29, 2000 and December 29, 2000 (each, a "Distribution Date"), will accumulate from and including the most recent date to which Distributions have been paid or, if no Distributions have been paid, from and including December 23, 1999, to but excluding the related Distribution Date (a "Distribution Period"). The amount of Distributions payable for any Distribution Period will be computed on the basis of the actual number of days in such Distribution Period and a year of 360 days. If a Distribution Date is not a Business Day, then such Distribution Date will be postponed to the next succeeding Business Day. However, if the next succeeding Business Day is in the next succeeding calendar month, such Distribution Date will be the immediately preceding Business Day. Distributions on a Distribution Date will be payable to the Holders thereof as they appear on the books and records of the Trust on the day immediately preceding such Distribution Date. If the Preferred Securities are ever issued in the form of Definitive Preferred Securities, the record date for the payment of Distributions shall be the 15th day of the calendar month in which the Distribution Date occurs, even if that day is not a Business Day. The relevant record dates for the Common Securities shall be the same as the record dates for the Preferred Securities. Distributions payable on any Securities that are not punctually paid or duly provided for on any Distribution Date, as a result of the Debenture Issuer having failed to make a payment under the Debentures, will cease to be payable to the Holder on the relevant record date, and such defaulted Distributions will instead be payable to the Person in whose name such Preferred Securities are registered on the Special Record Date or other specified date for the Debentures determined in accordance with the Indenture. As long as no Event of Default has occurred and is continuing under the Indenture, the Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures by extending the interest payment period at any time and from time to time (each A2-3 88 period as to which interest payments have been deferred is referred to herein as an "Extension Period"), provided that an Extension Period must end on an Interest Payment Date for the Debentures and may not extend beyond December 29, 2000 (the "Stated Maturity Date"). As a consequence of such deferral, Distributions on the Common Securities will also be deferred during an Extension Period. Despite such deferral, quarterly Distributions will continue to accumulate with additional interest thereon (to the extent permitted by applicable law but not at a rate greater than the rate at which interest is then accruing on the Debentures) at the Distribution Rate then in effect, compounded quarterly during any Extension Period. Prior to the termination of an Extension Period, the Debenture Issuer may further defer payments of interest by further extending such Extension Period; provided that an Extension Period, together with all such previous and further extensions, may not extend beyond the Stated Maturity Date. At the end of an Extension Period, all accumulated and unpaid Distributions (but only to the extent payments are made in respect of the Debentures held by the Property Trustee and to the extent the Property Trustee has funds legally available therefor) will be payable to the Holders as they appear on the books and records of the Trust on the record date immediately preceding the end of the Extension Period. Upon the termination of any Extension Period (or any extension thereof) and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. Subject to other conditions set forth in the Agreement and the Indenture, the Property Trustee may, at the direction of the Sponsor, dissolve the Trust at any time and cause the Debentures to be distributed to the Holders of the Preferred Securities in liquidation of the Trust or, simultaneously with any redemption of the Debentures, cause a Like Amount of the Preferred Securities to be redeemed by the Trust. The Common Securities shall be redeemable as provided in the Agreement. A2-4 EX-4.AA 4 FORM OF PREFERRED SECURITIES GUARANTEE 1 EXHIBIT 4-AA PREFERRED SECURITIES GUARANTEE AGREEMENT HERCULES INCORPORATED Dated as of December 23, 1999 2 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 DEFINITIONS AND INTERPRETATION SECTION 1.01. Definitions and Interpretation.................................................. 2 ARTICLE 2 TRUST INDENTURE ACT SECTION 2.01. Trust Indenture Act; Application................................................ 6 SECTION 2.02. List of Holders of Securities................................................... 6 SECTION 2.03. Reports by the Preferred Securities Guarantee Trustee........................... 6 SECTION 2.04. Periodic Reports to Preferred Securities Guarantee Trustee.................................................................. 7 SECTION 2.05. Evidence of Compliance with Conditions Precedent................................ 7 SECTION 2.06. Events of Default; Waiver....................................................... 7 SECTION 2.07. Event of Default; Notice........................................................ 7 SECTION 2.08. Conflicting Interests........................................................... 8 ARTICLE 3 POWERS, DUTIES AND RIGHTS OF PREFERRED SECURITIES GUARANTEE TRUSTEE SECTION 3.01. Powers and Duties of the Preferred Securities Guarantee Trustee.................................................................. 8 SECTION 3.02. Certain Rights of Preferred Securities Guarantee Trustee........................ 10 SECTION 3.03. Not Responsible for Recitals or Issuance of Preferred Securities Guarantee...................................................... 13 ARTICLE 4 PREFERRED SECURITIES GUARANTEE TRUSTEE SECTION 4.01. Preferred Securities Guarantee Trustee; Eligibility............................. 13 SECTION 4.02. Appointment, Removal and Resignation of Preferred Securities Guarantee Trustee............................................. 14 ARTICLE 5 GUARANTEE SECTION 5.01. Guarantee....................................................................... 15 SECTION 5.02. Waiver of Notice and Demand..................................................... 15 SECTION 5.03. Obligations Not Affected........................................................ 15
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PAGE ---- SECTION 5.04. Rights of Holders............................................................... 16 SECTION 5.05. Guarantee of Payment............................................................ 16 SECTION 5.06. Subrogation..................................................................... 16 SECTION 5.07. Independent Obligations......................................................... 17 ARTICLE 6 LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 6.01. Limitation of Transactions...................................................... 17 SECTION 6.02. Ranking......................................................................... 18 ARTICLE 7 TERMINATION SECTION 7.01. Termination..................................................................... 18 ARTICLE 8 EXCULPATION, INDEMNIFICATION AND COMPENSATION SECTION 8.01. Exculpation..................................................................... 18 SECTION 8.02. Indemnification................................................................. 19 SECTION 8.03. Compensation.................................................................... 19 ARTICLE 9 MISCELLANEOUS SECTION 9.01. Successors and Assigns.......................................................... 20 SECTION 9.02. Amendments...................................................................... 20 SECTION 9.03. Notices......................................................................... 20 SECTION 9.04. Benefit......................................................................... 22 SECTION 9.05. Governing Law................................................................... 22
ii 4 PREFERRED SECURITIES GUARANTEE AGREEMENT THIS PREFERRED SECURITIES GUARANTEE AGREEMENT (the "PREFERRED SECURITIES GUARANTEE"), dated as of December 23, 1999 is executed and delivered by Hercules Incorporated, a Delaware corporation (the "GUARANTOR"), and The Chase Manhattan Bank, a New York banking corporation, as trustee (the "PREFERRED SECURITIES GUARANTEE TRUSTEE"), for the benefit of the Holders (as defined herein) from time to time of the Preferred Securities (as defined herein) of Hercules Trust VI, a statutory business trust formed under the laws of the State of Delaware (the "ISSUER"). WHEREAS, pursuant to an Amended and Restated Trust Agreement (the "TRUST AGREEMENT"), dated as of December 23, 1999, among the Trustees of the Issuer, the Guarantor, as Sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Issuer, the Issuer is issuing on the date hereof 170,000 Floating Rate Preferred Securities, having an aggregate Liquidation Amount of $170,000,000 (collectively, the "PREFERRED SECURITIES"). WHEREAS, as an incentive for the Holders to purchase the Preferred Securities, the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth in this Preferred Securities Guarantee, to pay to the Holders of the Preferred Securities the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein. WHEREAS, the Guarantor is also executing and delivering a guarantee agreement (the "COMMON SECURITIES GUARANTEE") with substantially identical terms to this Preferred Securities Guarantee, for the benefit of the holders of the Common Securities (as defined herein), except that if an event of default under the Trust Agreement has occurred and is continuing, the rights of holders of the Common Securities to receive Guarantee Payments under the Common Securities Guarantee are subordinated, to the extent and in the manner set forth in the Common Securities Guarantee, to the rights of holders of Preferred Securities to receive Guarantee Payments under, and as defined in, this Preferred Securities Guarantee. NOW, THEREFORE, in consideration of the purchase by each Holder of Preferred Securities, which purchase the Guarantor hereby acknowledges shall benefit the Guarantor, the Guarantor executes and delivers this Preferred Securities Guarantee for the benefit of the Holders. 5 ARTICLE 1 DEFINITIONS AND INTERPRETATION SECTION 1.01. Definitions and Interpretation. In this Preferred Securities Guarantee, unless the context otherwise requires: (a) capitalized terms used in this Preferred Securities Guarantee but not defined in the preamble above have the respective meanings assigned to them in this Section 1.01; (b) terms defined in the Trust Agreement as at the date of execution of this Preferred Securities Guarantee have the same meaning when used in this Preferred Securities Guarantee unless otherwise defined in this Preferred Securities Guarantee; (c) a term defined anywhere in this Preferred Securities Guarantee has the same meaning throughout; (d) all references to "THE PREFERRED SECURITIES GUARANTEE" or "THIS PREFERRED SECURITIES GUARANTEE" are to this Preferred Securities Guarantee as modified, supplemented or amended from time to time; (e) all references in this Preferred Securities Guarantee to Articles and Sections are to Articles and Sections of this Preferred Securities Guarantee, unless otherwise specified; (f) a term defined in the Trust Indenture Act has the same meaning when used in this Preferred Securities Guarantee, unless otherwise defined in this Preferred Securities Guarantee or unless the context otherwise requires; and (g) a reference to the singular includes the plural and vice versa. "AFFILIATE" has the same meaning as given to that term in Rule 405 under the Securities Act of 1933, as amended, or any successor rule thereunder. "BUSINESS DAY" means any day other than a Saturday or a Sunday, or a day on which banking institutions in The City of New York or Wilmington, Delaware are authorized or required by law, regulation or executive order to close and that is also a London Banking Day. "COMMON SECURITIES" means the securities representing common undivided beneficial interests in the assets of the Issuer. 2 6 "CORPORATE TRUST OFFICE" means the office of the Preferred Securities Guarantee Trustee for the conduct of corporate trust business at which matters related to this Preferred Securities Guarantee shall, at any particular time, be principally administered, which office at the date of execution of this Preferred Securities Guarantee is located at One Liberty Place, 52nd Floor, 1650 Market Street, Philadelphia, PA 19103. "COVERED PERSON" means any Holder or beneficial owner of Preferred Securities. "DEBENTURES" means the series of junior subordinated debt securities of the Guarantor designated Floating Rate Junior Subordinated Deferrable Interest Debentures due 2000, held by the Property Trustee (as defined in the Trust Agreement) of the Issuer. "EVENT OF DEFAULT" means a default by the Guarantor in respect of any of its payment or other obligations under this Preferred Securities Guarantee. "GUARANTEE PAYMENTS" means the following payments or distributions, without duplication, with respect to the Preferred Securities, to the extent not paid or made by the Issuer: (i) any accumulated and unpaid Distributions (as defined in the Trust Agreement) required to be paid on such Preferred Securities, to the extent the Issuer has funds legally available therefor at such time, (ii) the applicable redemption price with respect to Preferred Securities called for redemption, to the extent that the Issuer has funds legally available therefor at such time, and (iii) upon a voluntary or involuntary dissolution and liquidation of the Issuer (other than in connection with the distribution of the Debentures to Holders of the Common Securities and the Preferred Securities or the redemption or exchange of such Preferred Securities, the lesser of (a) the amounts due upon the dissolution and liquidation of the Issuer, to the extent that the Issuer has funds legally available therefor at the time and (b) the amount of assets of the Issuer remaining available for distribution to Holders of its Preferred Securities after satisfaction of liabilities to creditors of the Issuer as required by applicable law. If an event of default under the Trust Agreement has occurred and is continuing, no Guarantee Payments under the Common Securities Guarantee with respect to the Common Securities or any guarantee payment under any Other Common Securities Guarantees shall be made until the Holders of Preferred Securities shall be paid in full the Guarantee Payments to which they are entitled under this Preferred Securities Guarantee. "HOLDER" shall mean any holder, as registered on the books and records of the Issuer, of any Preferred Securities; provided, however, that, in determining whether the holders of the requisite percentage of Preferred Securities have given 3 7 any request, notice, consent or waiver hereunder, "HOLDER" shall not include the Guarantor or any Affiliate of the Guarantor. "INDEMNIFIED PERSON" means the Preferred Securities Guarantee Trustee, any Affiliate of the Preferred Securities Guarantee Trustee, or any officers, directors, shareholders, members, partners, employees, representatives, nominees, custodians or agents of the Preferred Securities Guarantee Trustee. "INDENTURE" means the Junior Subordinated Debentures Indenture dated as of November 12, 1998, between the Hercules Incorporated, as Issuer (the "DEBENTURE ISSUER"), and The Chase Manhattan Bank, as Trustee, as supplemented by the Fourth Supplemental Indenture dated as of December 23, 1999, pursuant to which the Debentures are to be issued to the Property Trustee of the Issuer. "LIQUIDATION AMOUNT" means $1,000 per Preferred Security. "LIST OF HOLDERS" has the meaning set forth in Section 2.02. "LONDON BANKING DAY" means any day other than a Saturday or Sunday, on which banks are open for business in London. "MAJORITY IN LIQUIDATION AMOUNT OF THE PREFERRED SECURITIES" means, except as provided by the Trust Indenture Act, a vote by Holder(s) of Preferred Securities, voting separately as a class, of more than 50% of the aggregate Liquidation Amount (including the amount payable on redemption, liquidation or otherwise, plus accumulated and unpaid Distributions to the date upon which the voting percentages are determined) of all Preferred Securities. "OFFICERS' CERTIFICATE" means, with respect to any person, a certificate signed by the Chief Executive Officer, the President, a Vice President or the Chief Financial Officer and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Guarantor. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Preferred Securities Guarantee shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers' Certificate; 4 8 (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "OTHER COMMON SECURITIES GUARANTEES" shall have the same meaning as "OTHER GUARANTEES" in the Common Securities Guarantee. "OTHER DEBENTURES" means all junior subordinated debentures issued by the Guarantor from time to time and sold to trusts established by the Guarantor, in each case similar to the Issuer. "OTHER GUARANTEES" means all guarantees issued by the Guarantor with respect to preferred securities similar to the Preferred Securities issued by other trusts established by the Guarantor, in each case similar to the Issuer. "PERSON" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "PREFERRED SECURITIES GUARANTEE TRUSTEE" means The Chase Manhattan Bank, a New York banking corporation, until a Successor Preferred Securities Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Preferred Securities Guarantee and thereafter means each such Successor Preferred Securities Guarantee Trustee. "RESPONSIBLE OFFICER" means, with respect to the Preferred Securities Guarantee Trustee, any officer within the Corporate Trust Office of the Preferred Securities Guarantee Trustee, including any vice president, any assistant vice president, any assistant secretary, the treasurer, any assistant treasurer or other officer of the Corporate Trust Office of the Preferred Securities Guarantee Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer of the Preferred Securities Guarantee Trustee to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "SUCCESSOR PREFERRED SECURITIES GUARANTEE TRUSTEE" means a successor Preferred Securities Guarantee Trustee possessing the qualifications to act as Preferred Securities Guarantee Trustee under Section 4.01. 5 9 "TRUST INDENTURE ACT" means the Trust Indenture Act of 1939, as amended. "TRUST SECURITIES" means, collectively, the Common Securities and the Preferred Securities. ARTICLE 2 TRUST INDENTURE ACT SECTION 2.01. Trust Indenture Act; Application. (a) This Preferred Securities Guarantee is subject to the provisions of the Trust Indenture Act that are required to be part of this Preferred Securities Guarantee and shall, to the extent applicable, be governed by such provisions. (b) If and to the extent that any provision of this Preferred Securities Guarantee limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. SECTION 2.02. Lists of Holders of Securities. (a) The Guarantor shall provide the Preferred Securities Guarantee Trustee (unless the Preferred Securities Guarantee Trustee is otherwise the registrar of the Preferred Securities) with a list, in such form as the Preferred Securities Guarantee Trustee may reasonably require, of the names and addresses of the Holders of the Preferred Securities ("LIST OF HOLDERS"), (i) within 14 days after each record date for payment of Distributions, as of such record date and (ii) at any other time within 30 days of receipt by the Guarantor of a written request for a List of Holders as of a date no more than 14 days before such List of Holders is given to the Preferred Securities Guarantee Trustee, provided that the Guarantor shall not be obligated to provide such List of Holders at any time the List of Holders does not differ from the most recent List of Holders given to the Preferred Securities Guarantee Trustee by the Guarantor. The Preferred Securities Guarantee Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Preferred Securities Guarantee Trustee shall comply with the obligations set forth under Sections 311(a), 311(b) and 312(b) of the Trust Indenture Act. SECTION 2.03. Reports by the Preferred Securities Guarantee Trustee. Within 60 days after September 1 of each year, commencing September 1, 2000, the Preferred Securities Guarantee Trustee shall provide to the Holders of the Preferred Securities such reports as are specified by Section 313 of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of 6 10 the Trust Indenture Act. The Preferred Securities Guarantee Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. SECTION 2.04. Periodic Reports to Preferred Securities Guarantee Trustee. The Guarantor shall provide to the Preferred Securities Guarantee Trustee such documents, reports and information as required by Section 314 of the Trust Indenture Act (if any) and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. Delivery of such reports, information and documents to the Preferred Securities Guarantee Trustee is for informational purposes only and the Preferred Securities Guarantee Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Guarantor's compliance with any of its covenants hereunder (as to which the Preferred Securities Guarantee Trustee is entitled to rely exclusively on Officers' Certificates). SECTION 2.05. Evidence of Compliance with Conditions Precedent. The Guarantor shall provide to the Preferred Securities Guarantee Trustee such evidence of compliance with any conditions precedent, if any, provided for in this Preferred Securities Guarantee that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) may be given in the form of an Officers' Certificate. SECTION 2.06. Events of Default; Waiver. The Holders of a Majority in Liquidation Amount of Preferred Securities may, by vote, on behalf of the Holders of all of the Preferred Securities, waive any past Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Preferred Securities Guarantee, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 2.07. Event of Default; Notice. (a) The Preferred Securities Guarantee Trustee shall, within 90 days after the occurrence of a default with respect to this Preferred Securities Guarantee, mail by first class postage prepaid, to all Holders of the Preferred Securities, notices of all defaults actually known to a Responsible Officer of the Preferred Securities Guarantee Trustee, unless such defaults have been cured before the giving of such notice, provided, that, except in the case of default in the payment of any Guarantee Payment, the Preferred Securities Guarantee Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors and/or Responsible Officers of the Preferred Securities Guarantee 7 11 Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Preferred Securities. (b) The Preferred Securities Guarantee Trustee shall not be deemed to have knowledge of any Event of Default unless the Preferred Securities Guarantee Trustee shall have received written notice, or a Responsible Officer of the Preferred Securities Guarantee Trustee shall have obtained actual knowledge, of such Event of Default. SECTION 2.08. Conflicting Interests. The Indenture shall be deemed to be specifically described in this Preferred Securities Guarantee for the purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. ARTICLE 3 POWERS, DUTIES AND RIGHTS OF PREFERRED SECURITIES GUARANTEE TRUSTEE SECTION 3.01. Powers and Duties of the Preferred Securities Guarantee Trustee. (a) This Preferred Securities Guarantee shall be held by the Preferred Securities Guarantee Trustee for the benefit of the Holders of the Preferred Securities, and the Preferred Securities Guarantee Trustee shall not transfer this Preferred Securities Guarantee to any Person except a Holder of Preferred Securities exercising his or her rights pursuant to Section 5.04(b) or to a Successor Preferred Securities Guarantee Trustee on acceptance by such Successor Preferred Securities Guarantee Trustee of its appointment to act as Successor Preferred Securities Guarantee Trustee. The right, title and interest of the Preferred Securities Guarantee Trustee shall automatically vest in any Successor Preferred Securities Guarantee Trustee, and such vesting and succession of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Preferred Securities Guarantee Trustee. (b) If an Event of Default actually known to a Responsible Officer of the Preferred Securities Guarantee Trustee has occurred and is continuing, the Preferred Securities Guarantee Trustee shall enforce this Preferred Securities Guarantee for the benefit of the Holders of the Preferred Securities. In such event, any moneys collected shall first be paid to the Preferred Securities Guarantee Trustee for amounts due under Section 8.03 and then to the Holders of the Preferred Securities. (c) The Preferred Securities Guarantee Trustee, before the occurrence of any Event of Default and after the curing of all Events of Default that may have 8 12 occurred, shall undertake to perform only such duties as are specifically set forth in this Preferred Securities Guarantee, and no implied covenants shall be read into this Preferred Securities Guarantee against the Preferred Securities Guarantee Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.06) and is actually known to a Responsible Officer of the Preferred Securities Guarantee Trustee, the Preferred Securities Guarantee Trustee shall exercise such of the rights and powers vested in it by this Preferred Securities Guarantee, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (d) No provision of this Preferred Securities Guarantee shall be construed to relieve the Preferred Securities Guarantee Trustee from liability for its own negligent action, its own negligent failure to act, its own bad faith or its own willful misconduct, except that: (i) prior to the occurrence of any Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Preferred Securities Guarantee Trustee shall be determined solely by the express provisions of this Preferred Securities Guarantee, and the Preferred Securities Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Preferred Securities Guarantee, and no implied covenants or obligations shall be read into this Preferred Securities Guarantee against the Preferred Securities Guarantee Trustee; and (B) in the absence of bad faith on the part of the Preferred Securities Guarantee Trustee, the Preferred Securities Guarantee Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Preferred Securities Guarantee Trustee and conforming to the requirements of this Preferred Securities Guarantee; provided, however, that in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Preferred Securities Guarantee Trustee, the Preferred Securities Guarantee Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Preferred Securities Guarantee (but shall not be required to confirm or investigate the accuracy of mathematical calculations or other facts stated therein); 9 13 (ii) the Preferred Securities Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Preferred Securities Guarantee Trustee, unless it shall be proved that the Preferred Securities Guarantee Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; (iii) the Preferred Securities Guarantee Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a Majority in Liquidation Amount of the Preferred Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Preferred Securities Guarantee Trustee, or exercising any trust or power conferred upon the Preferred Securities Guarantee Trustee under this Preferred Securities Guarantee; and (iv) no provision of this Preferred Securities Guarantee shall require the Preferred Securities Guarantee Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if the Preferred Securities Guarantee Trustee shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Preferred Securities Guarantee or indemnity reasonably satisfactory to the Preferred Securities Guarantee Trustee against such risk or liability is not reasonably assured to it. SECTION 3.02. Certain Rights of Preferred Securities Guarantee Trustee. (a) Subject to the provisions of Section 3.01: (i) The Preferred Securities Guarantee Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (ii) Any direction or act of the Guarantor contemplated by this Preferred Securities Guarantee may be sufficiently evidenced by an Officers' Certificate. (iii) Whenever, in the administration of this Preferred Securities Guarantee, the Preferred Securities Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or 10 14 omitting any action hereunder, the Preferred Securities Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Guarantor. (iv) The Preferred Securities Guarantee Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or any continuation statement or any filing under tax or securities laws) or any re-recording, refiling or registration thereof. (v) The Preferred Securities Guarantee Trustee may consult with counsel or other experts of its selection, and the advice or opinion of such counsel and experts with respect to legal matters or advice within the scope of such experts' area of expertise shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion. Such counsel may be counsel to the Guarantor or any of its Affiliates and may include any of its employees. The Preferred Securities Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Preferred Securities Guarantee from any court of competent jurisdiction. (vi) The Preferred Securities Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Preferred Securities Guarantee at the request or direction of any Holder, unless such Holder shall have provided to the Preferred Securities Guarantee Trustee such security and indemnity, reasonably satisfactory to the Preferred Securities Guarantee Trustee, against the costs, expenses (including reasonable attorneys' fees and expenses and the expenses of the Preferred Securities Guarantee Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Preferred Securities Guarantee Trustee, provided, that nothing contained in this Section 3.02(a)(vi) shall be taken to relieve the Preferred Securities Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by the terms of this Preferred Securities Guarantee. (vii) The Preferred Securities Guarantee Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Preferred Securities 11 15 Guarantee Trustee may make, in its discretion, such further inquiry or investigation into such facts or matters as it may see fit. (viii) The Preferred Securities Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, nominees, custodians or attorneys, and the Preferred Securities Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (ix) Any action taken by the Preferred Securities Guarantee Trustee or its agents hereunder shall bind the Holders of the Preferred Securities, and the signature of the Preferred Securities Guarantee Trustee or its agents alone shall be sufficient and effective to perform any such action and no third party shall be required to inquire as to the authority of the Preferred Securities Guarantee Trustee to so act or as to its compliance with any of the terms and provisions of this Preferred Securities Guarantee, both of which shall be conclusively evidenced by the Preferred Securities Guarantee Trustee's or its agent's taking such action. (x) Whenever in the administration of this Preferred Securities Guarantee the Preferred Securities Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Preferred Securities Guarantee Trustee (A) may request instructions from the Holders of a Majority in Liquidation Amount of the Preferred Securities, (B) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (C) shall be protected in conclusively relying on or acting in accordance with such instructions. (xi) Except as otherwise expressly provided by this Preferred Securities Guarantee, the Preferred Securities Guarantee Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Preferred Securities Guarantee. (xii) The Preferred Securities Guarantee Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith, without negligence, and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Preferred Securities Guarantee. (b) No provision of this Preferred Securities Guarantee shall be deemed to impose any duty or obligation on the Preferred Securities Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred 12 16 or imposed on it in any jurisdiction in which it shall be illegal, or in which the Preferred Securities Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Preferred Securities Guarantee Trustee shall be construed to be a duty. SECTION 3.03. Not Responsible for Recitals or Issuance of Preferred Securities Guarantee. The recitals contained in this Preferred Securities Guarantee shall be taken as the statements of the Guarantor, and the Preferred Securities Guarantee Trustee does not assume any responsibility for their correctness. The Preferred Securities Guarantee Trustee makes no representation as to the validity or sufficiency of this Preferred Securities Guarantee. ARTICLE 4 PREFERRED SECURITIES GUARANTEE TRUSTEE SECTION 4.01. Preferred Securities Guarantee Trustee; Eligibility. (a) There shall at all times be a Preferred Securities Guarantee Trustee which shall: (i) not be an Affiliate of the Guarantor; and (ii) be a corporation organized and doing business under the laws of the United States of America or any State or Territory thereof or of the District of Columbia, or a corporation or Person permitted by the Securities and Exchange Commission to act as an indenture trustee under the Trust Indenture Act, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, and subject to supervision or examination by Federal, State, Territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then, for the purposes of this Section 4.01(a)(ii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Preferred Securities Guarantee Trustee shall cease to be eligible to so act under Section 4.01(a), the Preferred Securities Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 4.02(c). (c) If the Preferred Securities Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture 13 17 Act, the Preferred Securities Guarantee Trustee and Guarantor shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. SECTION 4.02. Appointment, Removal and Resignation of Preferred Securities Guarantee Trustee. (a) Subject to Section 4.02(b), the Preferred Securities Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor except during the occurrence and continuation of an Event of Default. (b) The Preferred Securities Guarantee Trustee shall not be removed in accordance with Section 4.02(a) until a Successor Preferred Securities Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Preferred Securities Guarantee Trustee and delivered to the Guarantor. (c) The Preferred Securities Guarantee Trustee shall hold office until a Successor Preferred Securities Guarantee Trustee shall have been appointed or until its removal or resignation. The Preferred Securities Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Preferred Securities Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Preferred Securities Guarantee Trustee has been appointed and has accepted such appointment by instrument in writing executed by such Successor Preferred Securities Guarantee Trustee and delivered to the Guarantor and the resigning Preferred Securities Guarantee Trustee. (d) If no Successor Preferred Securities Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 4.02 within 60 days after delivery of an instrument of removal or resignation, the Preferred Securities Guarantee Trustee resigning or being removed may petition any court of competent jurisdiction for appointment of a Successor Preferred Securities Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Preferred Securities Guarantee Trustee. (e) No Preferred Securities Guarantee Trustee shall be liable for the acts or omissions to act of any Successor Preferred Securities Guarantee Trustee. (f) Upon termination of this Preferred Securities Guarantee or removal or resignation of the Preferred Securities Guarantee Trustee pursuant to this Section 4.02, the Guarantor shall pay to the Preferred Securities Guarantee Trustee all amounts due to the Preferred Securities Guarantee Trustee accrued to the date of such termination, removal or resignation. 14 18 ARTICLE 5 GUARANTEE SECTION 5.01. Guarantee. The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by the Issuer), as and when due, regardless of any defense, right of set-off or counterclaim that the Issuer may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Issuer to pay such amounts to the Holders. SECTION 5.02. Waiver of Notice and Demand. The Guarantor hereby waives notice of acceptance of this Preferred Securities Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Issuer or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 5.03. Obligations Not Affected. The obligations, covenants, agreements and duties of the Guarantor under this Preferred Securities Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer of any express or implied agreement, covenant, term or condition relating to the Preferred Securities to be performed or observed by the Issuer; (b) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Preferred Securities, or any action on the part of the Issuer granting indulgence or extension of any kind; (c) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Issuer or any of the assets of the Issuer; (d) any invalidity of, or defect or deficiency in, the Preferred Securities; 15 19 (e) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (f) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor; it being the intent of this Section 5.03 that the obligations of the Guarantor with respect to the Guarantee Payments shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders to give notice to, or obtain consent of, the Guarantor with respect to the happening of any of the foregoing. SECTION 5.04. Rights of Holders. (a) The Holders of a Majority in Liquidation Amount of the Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Preferred Securities Guarantee Trustee in respect of this Preferred Securities Guarantee or exercising any trust or power conferred upon the Preferred Securities Guarantee Trustee under this Preferred Securities Guarantee. (b) If the Preferred Securities Guarantee Trustee fails to enforce this Preferred Securities Guarantee, any Holder of Preferred Securities may institute a legal proceeding directly against the Guarantor to enforce the rights of such Holder under this Preferred Securities Guarantee, without first instituting a legal proceeding against the Issuer, the Preferred Securities Guarantee Trustee or any other person or entity. The Guarantor waives any right or remedy to require that any action be brought first against the Issuer or any other person or entity before proceeding directly against the Guarantor. Notwithstanding the foregoing, if the Guarantor has failed to make a required Guarantee Payment, a Holder of Preferred Securities may directly institute a proceeding against the Guarantor for enforcement of this Preferred Securities Guarantee for such Guarantee Payment. SECTION 5.05. Guarantee of Payment. This Preferred Securities Guarantee creates a guarantee of payment and not of collection. SECTION 5.06. Subrogation. The Guarantor shall be subrogated to all (if any) rights of the Holders of Preferred Securities against the Issuer in respect of any amounts paid to such Holders by the Guarantor under this Preferred Securities Guarantee; provided, however, that the Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any right that it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Preferred Securities Guarantee, if, at the time of any such payment, any amounts are due 16 20 and unpaid under this Preferred Securities Guarantee. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders. SECTION 5.07. Independent Obligations. The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Issuer with respect to the Preferred Securities, and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Preferred Securities Guarantee notwithstanding the occurrence of any event referred to in subsections (a) through (f), inclusive, of Section 5.03 hereof. ARTICLE 6 LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 6.01. Limitation of Transactions. So long as any Preferred Securities remain outstanding, the Guarantor shall not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Guarantor's capital stock (which includes common and preferred stock), (ii) make any payment of principal, interest or premium, if any, on or repay or repurchase or redeem any debt securities of the Guarantor (including any Other Debentures) that rank pari passu with or junior in right of payment to the Debentures or (iii) make any guarantee payments with respect to any guarantee by the Guarantor of the debt securities of any subsidiary of the Guarantor (including Other Guarantees) if such guarantee ranks pari passu or junior in right of payment to the Debentures (other than (a) dividends or distributions in shares of, or options, warrants or rights to subscribe for or purchase shares of, common stock of the Guarantor; (b) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto; (c) payments under this Preferred Securities Guarantee; (d) as a result of a reclassification of the Guarantor's capital stock or the exchange or the conversion of one class or series of the Guarantor's capital stock for another class or series of the Guarantor's capital stock; (e) the purchase of fractional interests in shares of the Guarantor's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged; and (f) purchases of common stock related to the issuance of common stock or rights under any of the Guarantor's benefit and compensation plans for its directors, officers or employees or any of the Guarantor's dividend reinvestment plans) if at such time (x) there shall have occurred any event of which the Guarantor has actual knowledge that is, or with 17 21 the giving of notice or the lapse of time, or both, would be an Event of Default, (y) the Guarantor shall be in default with respect to its payment obligations under this Preferred Securities Guarantee or (z) the Guarantor shall have given notice of its election of the exercise of its right to extend the interest payment period pursuant to Section 4.01(b) of the Indenture and shall not have rescinded such notice, and any such extension shall have commenced and be continuing. SECTION 6.02. Ranking. This Preferred Securities Guarantee will constitute an unsecured obligation of the Guarantor and will rank (i) subordinate and junior in right of payment to all other liabilities of the Guarantor, including the Debenture, except any liabilities (including the Other Guarantees, the Common Securities Guarantee and the Other Common Securities Guarantees) made pari passu or subordinate by their terms, and (ii) senior to all capital stock now or hereafter issued by the Guarantor and to any guarantee now or hereafter entered into by the Guarantor in respect of any of its capital stock. The foregoing subordination shall not apply to amounts payable under Article 8. ARTICLE 7 TERMINATION SECTION 7.01. Termination. This Preferred Securities Guarantee shall terminate and be of no further force and effect upon (i) full payment of the applicable Redemption Price of all Preferred Securities or (ii) liquidation of the Issuer, upon full payment of all amounts due upon the dissolution and liquidation of the Issuer or upon the exchange of all the Preferred Securities upon distribution of the Debentures to the Holders of the Preferred Securities and the Common Securities. Notwithstanding the foregoing, this Preferred Securities Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any Holder of Preferred Securities must restore payment of any sums paid under the Preferred Securities or under this Preferred Securities Guarantee. ARTICLE 8 EXCULPATION, INDEMNIFICATION AND COMPENSATION SECTION 8.01. Exculpation. (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Guarantor or any Covered Person for any loss, damage, liability, expense or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith in accordance with this Preferred Securities Guarantee and in a manner that such Indemnified Person reasonably believed to be within the scope of the 18 22 authority conferred on such Indemnified Person by this Preferred Securities Guarantee or by law, except that this provision shall not be deemed to modify Section 3.01(d). (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Guarantor and upon such information, opinions, reports or statements presented to the Guarantor by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Guarantor, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Preferred Securities might properly be paid. SECTION 8.02. Indemnification. The Guarantor agrees to indemnify each Indemnified Person for, and to hold each Indemnified Person harmless against, any and all loss, liability, damage, claim or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against, or investigating, any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligation to indemnify as set forth in this Section 8.02 shall survive the termination of this Preferred Securities Guarantee or the resignation of removal of the Preferred Securities Guarantee Trustee. The Preferred Securities Guarantee Trustee will not claim or exact any lien or charge on any Guarantee Payments as a result of any amount due to it under this Preferred Securities Guarantee. SECTION 8.03. Compensation. The Guarantor agrees: (a) to pay to the Preferred Securities Guarantee Trustee from time to time such compensation as shall be agreed in writing between the Guarantor and the Preferred Securities Guarantee Trustee for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); and (b) to reimburse the Preferred Securities Guarantee Trustee upon its request for reasonable expenses, disbursements and advances incurred or made by the Preferred Securities Guarantee Trustee in accordance with any provision of this Preferred Securities Guarantee (including the reasonable compensation and the expenses and advances of its agents and counsel), except any such expense or advance as may be attributable to its negligence or bad faith. 19 23 Subject to Section 8.02, the Preferred Securities Guarantee Trustee shall have a claim and lien prior to the Holders as to all property and funds held by it hereunder for any amount owing to it or any predecessor Preferred Securities Guarantee Trustee for fees and expenses pursuant to this Article. ARTICLE 9 MISCELLANEOUS SECTION 9.01. Successors and Assigns. All guarantees and agreements contained in this Preferred Securities Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Preferred Securities then outstanding. Except in connection with any merger or consolidation of the Guarantor with or into another entity permitted by the Indenture or any sale, transfer or lease of the Guarantor's assets to another entity permitted by the Indenture, the Guarantor may not assign its rights or delegate its obligations under this Preferred Securities Guarantee. SECTION 9.02. Amendments. Except with respect to any changes that do not materially adversely affect the rights of Holders (in which case no approval of Holders will be required), this Preferred Securities Guarantee may only be amended with the prior approval of the Holders of a Majority in Liquidation Amount of the outstanding Preferred Securities (including the amount payable on redemption, liquidation or otherwise, plus accumulated and unpaid Distributions to the date upon which the voting percentages are determined). The provisions of Section 12.2 of the Trust Agreement with respect to meetings of Holders of the Securities apply to the giving of such approval. Except in connection with any permitted merger or consolidation of the Guarantor with or into another entity or any permitted sale, transfer or lease of the Guarantor's assets to another entity (as described in Article 5 of the Indenture), the Guarantor may not assign its rights or delegate its obligations under this Preferred Securities Guarantee without the prior approval of the Holders of a Majority in Liquidation Amount of the Preferred Securities then outstanding. SECTION 9.03. Notices. All notices provided for in this Preferred Securities Guarantee shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by first class mail, as follows: 20 24 (a) If given to the Issuer, in care of the Administrative Trustee at the Issuer's mailing address set forth below (or such other address as the Issuer may give notice of to the Holders of the Common Securities): Hercules Trust VI c/o Hercules Incorporated Hercules Plaza 1313 North Market Street Wilmington, Delaware 19894-0001 Attention: Israel J. Floyd, Administrative Trustee Telecopy: (302) 594-7252 (b) If given to the Preferred Securities Guarantee Trustee, at the Preferred Securities Guarantee Trustee's mailing address set forth below (or such other address as the Preferred Securities Guarantee Trustee may give notice of to the Holders of the Preferred Securities): The Chase Manhattan Bank c/o Chase Manhattan Trust Company, National Association One Liberty Place, 52nd Floor 1650 Market Street Philadelphia, Pennsylvania 19103 Attention: Capital Markets Fiduciary Services Telecopy: (215) 972-8372 (c) If given to the Guarantor, at the Guarantor's mailing address set forth below (or such other address as the Guarantor may give notice of to the Holders of the Preferred Securities): Hercules Incorporated Hercules Plaza 1313 North Market Street Wilmington, Delaware 19894-0001 Attention: Assistant Treasurer of Hercules and Corporate Secretary of Hercules Telecopy: (302) 594-7252 (d) If given to any Holder of Preferred Securities, at the address set forth on the books and records of the Issuer. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be 21 25 delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 9.04. Benefit. This Preferred Securities Guarantee is solely for the benefit of the Holders of the Preferred Securities and, subject to Section 3.01(a), is not separately transferable from the Preferred Securities. SECTION 9.05. Governing Law. THIS PREFERRED SECURITIES GUARANTEE AND THE RIGHTS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND ALL RIGHTS AND REMEDIES SHALL BE GOVERNED BY SUCH LAWS WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. 22 26 THIS PREFERRED SECURITIES GUARANTEE is executed as of the day and year first above written. HERCULES INCORPORATED, as Guarantor By: --------------------------------- Name: Title: THE CHASE MANHATTAN BANK, as Preferred Securities Guarantee Trustee By: --------------------------------- Name: Title: EX-4.AD 5 AMENDMENT NO. 3 DATED AS OF JANUARY 24, 2000 1 EXHIBIT 4-AD AMENDMENT NO. 3 TO THE AMENDED AND RESTATED TRUST AGREEMENT This AMENDMENT NO. 3 (the "AMENDMENT") is made as of January 24, 2000, by Israel J. Floyd, Stuart C. Shears and Michael J. Scott (collectively, the "ADMINISTRATIVE TRUSTEES"), The Chase Manhattan Bank, as Property Trustee ("CHASE"), Hercules Incorporated, a Delaware corporation (the "SPONSOR"), and by the Holders, from time to time, of undivided beneficial interests in the assets of Hercules Trust V (the "TRUST"), a business trust created pursuant to a Trust Agreement dated as of October 14, 1998, as amended by the Amended and Restated Trust Agreement dated as of November 12, 1998, the Amendment to the Amended and Restated Trust Agreement dated as of July 6, 1999 and the Amendment No. 2 to the Amended and Restated Trust Agreement dated as of October 25, 1999 (as amended, the "TRUST AGREEMENT"). WHEREAS, the Trustees and the Sponsor have established the Trust pursuant to the Trust Agreement for the sole purpose of issuing and selling certain securities representing undivided beneficial interests in the assets of the Trust and investing the proceeds thereof in the Auction Rate Reset Junior Subordinated Notes Series A of the Sponsor (the "SUBORDINATED NOTES") and engaging in only those activities necessary, advisable or incidental thereto; WHEREAS, the Trust Agreement provides for the issuance of one class of preferred securities representing undivided beneficial interests in the assets of the Trust (the "PREFERRED SECURITIES") having such terms as are set forth in Annex I thereto ("ANNEX I"); WHEREAS, the Trust Agreement and Annex I provide for amendment of the Trust Agreement and the Preferred Securities, subject to satisfaction of certain requirements; WHEREAS, the parties hereto desire to extend the Mandatory Redemption Date (as defined in the Trust Agreement) of the Preferred Securities; WHEREAS, this Amendment does not affect the rights, powers, duties, obligations or immunities of the Property Trustee or of the Delaware Trustee; WHEREAS, all things necessary to make this Amendment a valid amendment and agreement according to its terms have been done; NOW THEREFORE, in consideration of their mutual covenants contained herein and in the Trust Agreement, the parties hereto, intending to be legally bound, hereby mutually covenant and agree as follows: 2 Article 1 Section 1.01. Definitions. The definition of "Mandatory Redemption Date" contained in Section 1.01 of the Trust Agreement is hereby amended to read in its entirety as follows: ""MANDATORY REDEMPTION DATE" means February 28, 2000." Article 2 Section 2.01. Ratification of the Trust Agreement; this Amendment. The Trust Agreement is in all respects ratified and confirmed, and this Amendment shall be deemed part of the Trust Agreement in the manner and to the extent herein and therein provided. The provisions of this Amendment shall supersede the provisions of the Trust Agreement to extent the Trust Agreement is inconsistent herewith. Section 2.02. Trustees Not Responsible for Recitals. The recitals herein contained are made by the Sponsor and not by the Trustees, and the Trustees assumes no responsibility for the correctness thereof. The Trustees make no representation as to the validity or sufficiency of this Amendment. Section 2.03. Governing Law. This Amendment and the rights of the parties hereunder shall be governed by and construed in accordance with the laws of the State of Delaware, and all rights and remedies shall be governed by such laws, without regard to its principles of conflicts of laws. Section 2.04. Severability. If any provision in the Trust Agreement or this Amendment shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 2.05. Counterparts. The parties may sign any number of copies of this Amendment. Each signed copy shall be an original, but all of them together represent the same agreement. Any signed copy shall be sufficient proof of this Amendment. Section 2.06. Terms Defined. All terms defined elsewhere in the Trust Agreement shall have the same meanings when used herein. Section 2.07. Waiver of Tax Opinion. The parties hereto (including the Holder of the Preferred Securities by its separate consent to this Amendment) waive the requirement set out in Section 8 of Annex I to the Trust Agreement for a reasoned Opinion of Counsel of independent tax counsel. 2 3 IN WITNESS WHEREOF, the parties have signed this Amendment as of the date and year first above written. ------------------------------------------- Israel J. Floyd, not in his individual capacity but solely as Administrative Trustee of the Trust ------------------------------------------- Michael J. Scott, not in his individual capacity but solely as Administrative Trustee of the Trust ------------------------------------------- Stuart C. Shears, not in his individual capacity but solely as Administrative Trustee of the Trust ------------------------------------------- HERCULES INCORPORATED, as Sponsor and Holder of the Common Securities By: ------------------------------------------- Name: Title: THE CHASE MANHATTAN BANK, not in its individual capacity, but solely as Property Trustee of the Trust By: ------------------------------------------- Name: Title: EX-4.AE 6 FIFTH SUPPLEMENTAL INDENTURE, DATED AS OF 1-24-00 1 EXHIBIT 4-AE --------------------------------- FIFTH SUPPLEMENTAL INDENTURE between HERCULES INCORPORATED, as Issuer and THE CHASE MANHATTAN BANK, as Trustee Dated as of January 24, 2000 --------------------------------- 2 TABLE OF CONTENTS
Page ARTICLE 1 SECTION 1.01. Definitions................................................................... 2 ARTICLE 2 SECTION 2.01. Ratification of Base Indenture, the First Supplemental Indenture, the Second Supplemental Indenture and the Third Supplemental Indenture: Fifth Supplemental Indenture Controls............................. 2 SECTION 2.02. Trustee Not Responsible for Recitals.......................................... 2 SECTION 2.03. Governing Law................................................................. 2 SECTION 2.04. Severability.................................................................. 2 SECTION 2.05. Counterparts.................................................................. 2 SECTION 2.06. Terms Defined................................................................. 2
3 FIFTH SUPPLEMENTAL INDENTURE, dated as of January 24, 2000 (the "FIFTH SUPPLEMENTAL INDENTURE"), between Hercules Incorporated, a Delaware corporation (the "Company"), and The Chase Manhattan Bank, a New York banking corporation, as trustee (the "TRUSTEE"). WHEREAS, the Company and the Trustee are parties to the Junior Subordinated Debentures Indenture dated as of November 12, 1998 between the Company and the Trustee (the "BASE INDENTURE"), as supplemented by a First Supplemental Indenture dated as of November 12, 1998 between the Company and the Trustee (the "FIRST SUPPLEMENTAL INDENTURE"), a Second Supplemental Indenture dated as of July 6, 1999 (the "SECOND SUPPLEMENTAL INDENTURE") and a Third Supplemental Indenture dated as of October 25, 1999 (the "THIRD SUPPLEMENTAL INDENTURE" and together with the Base Indenture, the First Supplemental Indenture, the Second Supplemental Indenture and this Fifth Supplemental Indenture, the "INDENTURE"); WHEREAS, the Company executed and delivered the Base Indenture to the Trustee to provide for the issuance of the Company's unsecured junior subordinated debentures (the "DEBENTURES") to be issued from time to time in one or more series as might be determined by the Company under the Indenture, in an unlimited aggregate principal amount which may be authenticated and delivered as provided in the Base Indenture; WHEREAS, pursuant to the terms of the Indenture in the First Supplemental Indenture, the Company provided for the establishment of a new series of its Debentures known as its Auction Rate Reset Junior Subordinated Notes Series A (the "SUBORDINATED NOTES"); WHEREAS, the Indenture provides that the Company and the Trustee may amend the Indenture, with the consent of at least a majority in the aggregate principal amount of the Debentures affected thereby, to provide for, among other things, a change in the stated maturity of that series of Debentures; WHEREAS, the Company and the Trustee desire to modify certain provisions of the Indenture to extend the maturity date of the Subordinated Notes; WHEREAS, all things necessary to make this Fifth Supplemental Indenture a valid indenture and agreement according to its terms have been done; NOW THEREFORE, in consideration of the purchase and acceptance of the Subordinated Notes by the Holder thereof, and for the purpose of amending and restating certain terms of the Indenture relating to the stated maturity of the Subordinated Notes, the Company covenants and agrees with the Trustee as follows: 4 ARTICLE 1 SECTION 1.01. Definitions. The definition of "Maturity Date" contained in Section 1.01 of the Second Supplemental Indenture is hereby amended to read in its entirety as follows: ""MATURITY DATE" means February 28, 2000." ARTICLE 2 SECTION 2.01. Ratification of Base Indenture, the First Supplemental Indenture, the Second Supplemental Indenture and the Third Supplemental Indenture: Fifth Supplemental Indenture Controls. The Base Indenture, as supplemented by the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture and this Fifth Supplemental Indenture, is in all respects ratified and confirmed, and this Fifth Supplemental Indenture shall be deemed part of the Base Indenture in the manner and to the extent herein and therein provided. The provisions of this Fifth Supplemental Indenture shall supersede the provisions of the Base Indenture, the First Supplemental Indenture, the Second Supplemental Indenture and the Third Supplemental Indenture to the extent the Base Indenture, the First Supplemental Indenture, the Second Supplemental Indenture or the Third Supplemental Indenture is inconsistent herewith. SECTION 2.02. Trustee Not Responsible for Recitals. The recitals herein contained are made by the Company and not by the Trustee, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no representation as to the validity or sufficiency of this Fifth Supplemental Indenture. SECTION 2.03. Governing Law. This Fifth Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York, as applied to contracts made and performed within the State of New York, without regard to its principles of conflicts of laws. SECTION 2.04. Severability. If any provision in the Base Indenture, the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture, this Fifth Supplemental Indenture or in the Subordinated Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 2.05. Counterparts. The parties may sign any number of copies of this Fifth Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. Any signed copy shall be sufficient proof of this Fifth Supplemental Indenture. SECTION 2.06. Terms Defined. All terms defined elsewhere in the Indenture shall have the same meanings when used herein. 2 5 IN WITNESS WHEREOF, the parties hereto have caused this Fifth Supplemental Indenture to be duly executed as of the day and year first above written. HERCULES INCORPORATED, as Issuer By: ----------------------------------- Name: Title: THE CHASE MANHATTAN BANK, as Trustee By: ----------------------------------- Name: Title: EX-4.AF 7 AMENDMENT #4 DATED 2/9/2000 TO RESTATED TRUST AGMT 1 EXHIBIT 4-AF AMENDMENT NO. 4 TO THE AMENDED AND RESTATED TRUST AGREEMENT This AMENDMENT NO. 4 (the "AMENDMENT") is made as of February 9, 2000, by Israel J. Floyd, Stuart C. Shears and Michael J. Scott (collectively, the "ADMINISTRATIVE TRUSTEES"), The Chase Manhattan Bank, as Property Trustee ("CHASE"), Hercules Incorporated, a Delaware corporation (the "SPONSOR"), and by the Holders, from time to time, of undivided beneficial interests in the assets of Hercules Trust V (the "TRUST"), a business trust created pursuant to a Trust Agreement dated as of October 14, 1998, as amended by the Amended and Restated Trust Agreement dated as of November 12, 1998, the Amendment to the Amended and Restated Trust Agreement dated as of July 6, 1999, the Amendment No. 2 to the Amended and Restated Trust Agreement dated as of October 25, 1999 and the Amendment No. 3 to the Amended and Restated Trust Agreement dated as of January 24, 2000 (as amended, the "TRUST AGREEMENT"). WHEREAS, the Trustees and the Sponsor have established the Trust pursuant to the Trust Agreement for the sole purpose of issuing and selling certain securities representing undivided beneficial interests in the assets of the Trust (the "SECURITIES") having such terms as are set forth in Annex I thereto ("ANNEX I") and investing the proceeds thereof in the Auction Rate Reset Junior Subordinated Notes Series A of the Sponsor (the "SUBORDINATED NOTES") and engaging in only those activities necessary, advisable or incidental thereto; WHEREAS, the Trust Agreement and Annex I provide for amendment of the Trust Agreement and the Securities, subject to satisfaction of certain requirements; WHEREAS, the parties hereto desire to extend the Mandatory Redemption Date (as defined in the Trust Agreement) and change the Distribution Rate (as defined in Annex I) of the Securities and to provide for remarketing of the Securities in certain circumstances; WHEREAS, this Amendment does not affect the rights, powers, duties, obligations or immunities of the Property Trustee or of the Delaware Trustee; WHEREAS, all things necessary to make this Amendment a valid amendment and agreement according to its terms have been done; NOW THEREFORE, in consideration of their mutual covenants contained herein and in the Trust Agreement, the parties hereto, intending to be legally bound, hereby mutually covenant and agree as follows: 2 ARTICLE 1 SECTION 1.01. Amended Definitions. The following definitions contained in Section 1.01 of the Trust Agreement are hereby amended to read in their entirety as follows: ""FAILED REMARKETING" has the meaning set forth in the Remarketing Agreement." ""FINAL RESET DATE" has the meaning set forth in Section 6.02(a)(ii)." ""MANDATORY REDEMPTION DATE" means February 9, 2002; provided, that on and after the settlement of the sale of the Preferred Securities in a successful Remarketing, the Mandatory Redemption Date shall be the Remarketed Redemption Date; and provided, further, that, in accordance with Section 6.02(a)(iv), in the event the Sponsor elects to pay the aggregate Liquidation Amount of and accumulated and unpaid Distributions on the Preferred Securities upon receipt of the Remarketing Notice, and notifies the Remarketing Agent of such election within five Business Days thereafter, the Mandatory Redemption Date shall be the date eight Business Days after receipt of the Remarketing Notice." ""REMARKETING AGENT" means Banc of America Securities LLC." ""REMARKETING AGREEMENT" means the Remarketing and Contingent Purchase Agreement dated as of February 9, 2000 among the Subordinated Note Issuer, the Trust and the Remarketing Agent." ""REMARKETING PRICE" means 100% of the aggregate stated Liquidation Amount of the Preferred Securities." ""SECONDARY PURCHASE AGREEMENT" means an agreement to be dated as of the Reset Date (or such other date as permitted by applicable law) among the Sponsor, the Trust, the Remarketing Agent and the Secondary Purchaser, in the form agreed among the Sponsor, the Trust, the Remarketing Agent and the Secondary Purchaser." SECTION 1.02. Additional Definitions. The following definitions are hereby inserted in the appropriate alphabetical order in Section 1.01 of the Trust Agreement: ""AFFILIATED BIDDER" has the meaning set forth in Section 6.02(b)." 2 3 ""FINAL RESET DATE" has the meaning set forth in Section 6.02(a)(ii)." ""PRE-REMARKETING DISTRIBUTION DATE" has the meaning set forth in Section 2(b) of Annex I hereto." ""REMARKETED REDEMPTION DATE" means the later of (i) the first anniversary of the Remarketing Settlement Date on which Replacement Securities are issued, and (ii) February 9, 2002." ""REMARKETING NOTICE" has the meaning set forth in Section 6.02(a)(i)." ""REQUESTING HOLDERS" has the meaning set forth in Section 6.02(a)(i)." SECTION 1.03. Deleted Definitions. The definitions of "Maturity Extension Date" and "Remarketed Maturity Date" are hereby deleted in their entirety from Section 1.01 of the Trust Agreement. ARTICLE 2 SECTION 2.01. Application of Articles 1, 2 and 3. The provisions of Article 1, Article 2 and Article 3 hereof shall apply to the Securities and the certificates therefor shall be appropriately amended. SECTION 2.02. Amendment of Distribution Rate. Section 2 of Annex I is hereby amended to read in its entirety as follows: "2. Distributions. (a) "DISTRIBUTIONS" with respect to the Liquidation Amount of $1,000 per Security (the "LIQUIDATION AMOUNT") of each Security will accrue and be payable at a rate (the "DISTRIBUTION RATE") (such rate being the rate of interest payable on the Subordinated Notes to be held by the Property Trustee) per annum equal to (i) from and including November 12, 1998 to but excluding February 9, 2000, LIBOR plus 175 basis points; (ii) from and including February 9, 2000 to but excluding the earlier of (A) the Remarketing Settlement Date on which 3 4 Replacement Securities are issued and (B) the date such Security is redeemed, LIBOR plus 150 basis points; (iii) from and including the Remarketing Settlement Date on which Replacement Securities are issued to but excluding the date such Security is redeemed, the Winning Bid Rate; and (iv) notwithstanding clauses (i), (ii) and (iii) above, if such Security is not redeemed because the Subordinated Note Issuer fails to pay the principal amount of the Subordinated Notes on the date such amount becomes due, then from and including such due date to but excluding the date such Security is redeemed, the applicable Distribution Rate in effect on the due date, compounded quarterly, but only to the extent permitted by applicable law. Distributions that are not paid when due will bear additional distributions ("ADDITIONAL DISTRIBUTIONS") thereon compounded quarterly at the applicable Distribution Rate in effect on the due date specified above (to the extent permitted by applicable law). A Distribution is payable only to the extent that payments are made in respect of the Subordinated Notes held by the Property Trustee and to the extent the Property Trustee has funds on hand legally available therefor. (b) Until the Remarketing Settlement Date on which Replacement Securities are issued, Distributions on the Securities will be payable quarterly in arrears (i) on February 12, May 12, August 12 and November 12 of each year, commencing February 12, 1999 and (ii) on such Remarketing Settlement Date (each, a "PRE-REMARKETING DISTRIBUTION DATE"), and will accumulate from and including the most recent date to which Distributions have been paid or, if no Distributions have been paid, from November 12, 1998, to but excluding the related Pre-Remarketing Distribution Date, except as otherwise described below. The Distribution Rate in effect for the period from and including November 12, 1998 to but excluding February 12, 1999 shall be the rate determined by the Calculation Agent two London Banking Days prior to November 12, 1998 and shall equal LIBOR plus 175 basis points. The Distribution Rate in effect from and including February 12, 1999 to but excluding February 9, 2000, for each quarterly period from and including the immediately preceding Pre-Remarketing Distribution Date to but excluding the applicable Pre-Remarketing Distribution Date, shall be determined by the Calculation Agent two London Banking Days prior to such immediately preceding Pre-Remarketing Distribution Date (a "DATE 4 5 OF DETERMINATION") and shall equal LIBOR plus 175 basis points. The Distribution Rate in effect thereafter, for each quarterly period from and including the immediately preceding Pre-Remarketing Distribution Date to but excluding the applicable Pre-Remarketing Distribution Date, shall be determined by the Calculation Agent two London Banking Days prior to such immediately preceding Pre-Remarketing Distribution Date and shall equal LIBOR plus 150 basis points. The amount of the Distribution payable on February 12, 2000 shall reflect the pro rata application of the two Distribution Rates applicable to the calculation period for such Distribution for each day on which the applicable Distribution Rate was in effect. The amount of Distributions payable for any quarterly period shall be computed on the basis of a 360-day year of twelve 30-day months. Except as provided in the last sentence of this paragraph, the amount of Distributions payable for any period shorter than a full quarterly period for which Distributions are computed will be computed on the basis of the actual number of days elapsed per 30-day month. If a Pre-Remarketing Distribution Date is not a Business Day, then such Pre-Remarketing Distribution Date will be the next succeeding Business Day, except if such Business Day is in the next succeeding calendar month, such Pre-Remarketing Distribution Date will be the immediately preceding Business Day. All percentages resulting from any calculations on the Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward). (c) From and including the Remarketing Settlement Date on which Replacement Securities are issued, Distributions on the Replacement Securities and on the Common Securities will be payable quarterly in arrears (i) on February 12, May 12, August 12 and November 12 of each year, commencing on such Remarketing Settlement Date and (ii) on the Mandatory Redemption Date (each, a "DISTRIBUTION DATE"), and will accumulate from the most recent date to which Distributions have been paid or, if no Distributions have been paid, from and including such Remarketing Settlement Date, to but excluding the related Distribution Date, except as otherwise described below. The amount of Distributions payable for any quarterly period shall be computed on the basis of a 360-day year of twelve 30-day months. Except as provided in the last sentence of this paragraph, the amount of Distributions payable for any period shorter than a full quarterly period for which Distributions are 5 6 computed will be computed on the basis of the actual number of days elapsed per 30-day month. If a Distribution Date is not a Business Day, then such Distribution Date will be postponed to the next succeeding Business Day (and without any interest or other payment in respect of any such delay); provided, that if such Business Day is in the next succeeding calendar month, such Distribution Date will be the immediately preceding Business Day. (d) Distributions on the Securities will be payable to the Holders thereof as they appear on the books and records of the Trust on the fifteenth day prior to each Pre-Remarketing Distribution Date or Distribution Date, as the case may be. Subject to any applicable laws and regulations and the provisions of the Agreement, each such payment in respect of the Preferred Securities will be made in respect of any global certificate representing Preferred Securities, to the Depository (or other applicable Depository), which shall credit the relevant accounts at the Depository (or such other Depository) on the applicable payment dates, or in respect of Preferred Securities in certified form, by check mailed to the address of the Holder entitled thereto as such address shall appear on the register; provided that at the written request of any Holder of at least $10,000,000 aggregate Liquidation Amount of Preferred Securities received by the Property Trustee not later than the fifteenth day prior to the applicable Pre-Remarketing Distribution Date or Distribution Date, Distributions accrued on such Preferred Securities will be payable by wire transfer within the continental United States in immediately available funds to the bank account number of such holder specified in such request. The relevant record dates for the Common Securities shall be the same as the record dates for the Preferred Securities. Distributions payable on any Securities that are not punctually paid on any Distribution Date, as a result of the Subordinated Note Issuer having failed to make a payment under the Subordinated Notes, will cease to be payable to the Holder on the relevant record date, and such defaulted Distributions will instead be payable to the Person in whose name such Securities are registered on the special record date or other specified date determined in accordance with the Indenture. (e) The Distribution Rate on the Securities (as well as the interest rate on the Subordinated Notes) shall be reset in the manner provided in Section 6.03 of the Agreement and in the Indenture. (f) In the event that there is any money or other property held by or for the Trust that is not accounted for hereunder, such property shall be distributed Pro Rata (as defined herein) among the Holders of the Securities." 6 7 SECTION 2.03. Amendment of Securities. Each Holder of Common Securities and each Holder of Preferred Securities (by signing a separate consent to this Amendment) agrees to surrender the certificates representing the Securities to the Property Trustee in exchange for new certificates reflecting the amended terms provided for in this Amendment in the forms set forth as Exhibits A-1 and A-2 attached hereto. Such replacement certificates shall be executed by an Administrative Trustee, and authenticated (in the case of Preferred Securities) and delivered by the Property Trustee to such Holders upon surrender to the Property Trustee of the old certificates. The surrendered certificates shall be canceled by the Property Trustee and shall no longer be outstanding. ARTICLE 3 SECTION 3.01. Remarketing of Preferred Securities. (a) Section 4.03(e) of the Trust Agreement is hereby amended to read in its entirety as follows: "(e) negotiate the terms of, enter into, sign on behalf of the Trust and deliver the Purchase Agreement, in the form of Exhibit C, providing for the sale of the Preferred Securities, the Remarketing Agreement, providing for the Remarketing of the Preferred Securities, or under certain circumstances, the Subordinated Notes, and the Secondary Purchase Agreement providing for the resale of the Preferred Securities." (b) Article 6 of the Trust Agreement is hereby amended to read in its entirety as follows: "ARTICLE 6 DISTRIBUTIONS; RESET RATE; REMARKETING SECTION 6.01. Distributions. Holders shall receive Distributions in accordance with the applicable terms of the relevant Holder's Securities. Distributions shall be made on the Securities in accordance with the respective terms and preferences set forth below and in Annex I. If and to the extent that the Subordinated Note Issuer makes a payment of interest, premium and/or principal on the Subordinated Notes held by the Property Trustee (the amount of any such payment being a "PAYMENT AMOUNT"), the Property Trustee shall and is directed, to the extent funds are available for that purpose, to make a distribution (a "DISTRIBUTION") of the Payment Amount to Holders. 7 8 SECTION 6.02. Remarketing Procedures. (a) (i) Subject to Section 6.04, the Holders of a Majority in Liquidation Amount of the Securities, acting together as a single class (the "REQUESTING HOLDERS") have the right to require Remarketing of the Preferred Securities at any time. The Requesting Holders may exercise this right by delivering a written notice to the Remarketing Agent at any time requesting a Remarketing of the Preferred Securities. Upon the receipt of such notice, the Remarketing Agent shall immediately deliver a written notice to the Sponsor on behalf of the Requesting Holders (the "REMARKETING NOTICE"). If the Requesting Holders exercise their right to require the Remarketing of the Preferred Securities, the Reset Date shall be the sixth Business Day (the "EXPECTED RESET DATE") after the date on which the Remarketing Notice is received by the Sponsor. (ii) Notwithstanding Section 6.02(a)(i): (A) the Sponsor may, by notice to the Remarketing Agent, direct that the Reset Date be delayed if the Sponsor believes it will be unable to meet the conditions to Remarketing in the absence of such a delay; and (B) the Remarketing Agent may, by notice to the Sponsor, direct that the Reset Date be delayed if the Remarketing Agent believes that a Remarketing will not be successful in the absence of such a delay; provided that the Sponsor and the Remarketing Agent, in either such event, will use their reasonable best efforts to establish a delayed Reset Date that is within five Business Days after the Expected Reset Date, but in no event later than the 15th Business Day following the date on which the related Remarketing Notice was received, or the 20th Business Day in the case of a Renewed Remarketing (as hereinafter defined) to which the provisions of Section 6.04 are applicable (as applicable, the "FINAL RESET DATE"). (iii) If the Sponsor and the Remarketing Agent have not agreed, on or prior to the sixth Business Day preceding the Final Reset Date, to a Reset Date that is not later than the Final Reset Date, a Failed Remarketing shall be deemed to have occurred. (iv) Notwithstanding the provisions of this Article 6, upon receipt of a Remarketing Notice the Sponsor shall have the right, in its sole discretion, to elect to pay the aggregate Liquidation Amount of and 8 9 accumulated and unpaid Distributions on the Preferred Securities, rather than proceed with the Remarketing. The Sponsor shall make such election by sending written notice, within five Business Days after the receipt of the Remarketing Notice, to the Remarketing Agent and the Property Trustee. If the Sponsor makes such election, it shall pay the aggregate Liquidation Amount of and accumulated and unpaid Distributions on the Preferred Securities to the Holders thereof on the date eight Business Days after receipt of the Remarketing Notice. (b) The Sponsor shall, by notice to the Remarketing Agent no later than five Business Days prior to the Reset Date, select and specify three Reference Corporate Dealers. By 3:00 p.m., New York City time, on the Reset Date, the Remarketing Agent shall request Bids from such Reference Corporate Dealers. The Remarketing Agent or an Affiliate or Associated Person thereof (any such person, an "AFFILIATED BIDDER") may, at its option, also enter a Bid. The Remarketing Agent shall disclose to the Sponsor the Bids obtained and determine the lowest Bid Rate (the "WINNING BID RATE") from among the Bids obtained on the Reset Date. By approximately 4:30 p.m., New York City time, on the Reset Date, the Remarketing Agent shall notify the Sponsor and the Property Trustee of the Winning Bid Rate. If on a Reset Date, Bids are not submitted by at least two Reference Corporate Dealers, or if the lowest Bid submitted would result in a Winning Bid Rate in excess of the rate permitted by applicable law, such Remarketing shall be deemed to be a Failed Remarketing on the corresponding Remarketing Settlement Date. The Winning Bid Rate determined by the Remarketing Agent, absent manifest error, shall be binding and conclusive upon the Holders of the Trust Securities, the Sponsor and the Trust. (c) On the Reset Date, the Remarketing Agent shall designate as the Secondary Purchaser (the "SECONDARY PURCHASER") the Reference Corporate Dealer providing the Bid containing the Winning Bid Rate. If the Winning Bid Rate is specified in the Bids submitted by two or more bidders, the Remarketing Agent shall, in consultation with the Sponsor, designate one of such bidders as the Secondary Purchaser. (d) On the Reset Date, the Secondary Purchaser shall enter into a Secondary Purchase Agreement for the purchase by such Secondary Purchaser at the Remarketing Price of the aggregate Liquidation Amount of the Preferred Securities, with a Distribution Rate equal to the Winning Bid Rate and with a Mandatory Redemption Date on the Remarketed Redemption Date. 9 10 (e) If a Remarketing has occurred pursuant to this Section 6.02 but settlement of the purchase and sale of the Preferred Securities does not occur on the corresponding Remarketing Settlement Date, then, unless the provisions of Section 6.04 with respect to a Renewed Remarketing shall apply, a Failed Remarketing shall be deemed to have occurred on such Remarketing Settlement Date. (f) At the time and in the manner specified in the Secondary Purchase Agreement, the Secondary Purchaser shall pay on the Remarketing Settlement Date to the Remarketing Agent on behalf of the Holders of the Preferred Securities, an amount of cash equal to the Remarketing Price. (g) Unless otherwise agreed among the Remarketing Agent, the Paying Agent and any Former Holder, the Remarketing Agent shall pay the Remarketing Price to the Paying Agent, acting solely as agent for the Former Holders, and the Paying Agent shall promptly pay such amounts to the Former Holders on the Remarketing Settlement Date in the manner specified in Section 5(g) of Annex I hereto for payments with respect to redemptions of the Preferred Securities. Any amounts held by the Paying Agent for payment to the Former Holders shall not be property of the Trust. (h) The obligation of the Remarketing Agent to make payment to the Former Holders in connection with the Remarketing shall be limited to the extent that the Secondary Purchaser has delivered the Remarketing Price therefor to the Remarketing Agent. (i) Any outstanding Preferred Securities purchased on the Remarketing Settlement Date shall be deemed to be transferred to the Secondary Purchaser and shall be replaced in the manner provided in Section 6.02(j). After the Remarketing Settlement Date (except in the event of (y) a Failed Remarketing or (z) a failure by the Trust to pay on the Remarketing Settlement Date all accrued and unpaid Distributions (including any Additional Distributions) to such Remarketing Settlement Date), (A) the Trust shall make no further payments to, and the Trust shall have no further obligations under this Agreement in respect of, the Holders of such replaced Preferred Securities (the "FORMER HOLDERS"), (B) the Trust shall only be obligated to make payments to the Holders of Replacement Securities and (C) the Preferred Securities of the Former Holders shall no longer represent an obligation of or interest in the Trust but shall only represent a right to receive the proceeds of the Remarketing from the Paying Agent. 10 11 (j) The Sponsor shall cause replacement certificates evidencing the remarketed Preferred Securities (the "REPLACEMENT SECURITIES") to be executed by an Administrative Trustee on behalf of the Trust and authenticated by the Property Trustee in accordance with the provisions of Section 7.03. The Replacement Securities shall be delivered to the purchaser or purchasers of the remarketed Preferred Securities in accordance with the terms of the Secondary Purchase Agreement. SECTION 6.03. Reset of Distribution Rate and Mandatory Redemption Date. From and including the Remarketing Settlement Date on which Replacement Securities are issued, the Distribution Rate on the Securities shall be the Winning Bid Rate and the Mandatory Redemption Date shall be the Remarketed Redemption Date. SECTION 6.04. Renewed Remarketing. If a Remarketing has occurred pursuant to Section 6.02 that would be a Failed Remarketing pursuant to Section 6.02(e), because the purchase and sale of the Preferred Securities do not take place on the corresponding Remarketing Settlement Date, and such failure, in the good faith determination of the Remarketing Agent, results from facts or circumstances other than the action or inaction of the Sponsor, then the provisions of Section 6.02 shall apply to a second remarketing (a "RENEWED REMARKETING") of the Preferred Securities, except that the Expected Reset Date shall be the sixth Business Day following such corresponding Remarketing Settlement Date; provided that upon the occurrence of a Failed Remarketing pursuant to Section 6.02(e), only one Renewed Remarketing may occur pursuant to this Section 6.04, and no Renewed Remarketing shall occur after the Final Reset Date. SECTION 6.05. Failed Remarketing. The Remarketing Agent shall give notice of any Failed Remarketing by 4:00 p.m., New York City time, on the date such Failed Remarketing occurs or is deemed to have occurred to the Sponsor and the Property Trustee. SECTION 6.06. Payment of Taxes, Duties, Etc. of the Trust. Upon receipt under the Subordinated Notes of Additional Interest, the Property Trustee shall promptly pay from such Additional Interest any taxes, duties or governmental charges of whatever nature (other than withholding taxes) imposed on the Trust by the United States or any other taxing authority." 11 12 (c) The following Section 3 is hereby inserted into Annex I: "3. Remarketing. The Preferred Securities shall be remarketed in accordance with the provisions of Article 6 of the Agreement. FROM AND AFTER THE REMARKETING SETTLEMENT DATE ON WHICH REPLACEMENT SECURITIES ARE ISSUED, THIS CERTIFICATE SHALL REPRESENT ONLY THE RIGHT TO RECEIVE THE REMARKETING PRICE, AS PROVIDED IN THE AGREEMENT (AS DEFINED BELOW), AND SHALL NO LONGER REPRESENT AN OBLIGATION OF OR INTEREST IN THE TRUST." ARTICLE 4 SECTION 4.01. Ratification of the Trust Agreement; this Amendment. The Trust Agreement is in all respects ratified and confirmed, and this Amendment shall be deemed part of the Trust Agreement in the manner and to the extent herein and therein provided. The provisions of this Amendment shall supersede the provisions of the Trust Agreement to extent the Trust Agreement is inconsistent herewith. SECTION 4.02. Trustees Not Responsible for Recitals. The recitals herein contained are made by the Sponsor and not by the Trustees, and the Trustees assumes no responsibility for the correctness thereof. The Trustees make no representation as to the validity or sufficiency of this Amendment. SECTION 4.03. Governing Law. This Amendment and the rights of the parties hereunder shall be governed by and construed in accordance with the laws of the State of Delaware, and all rights and remedies shall be governed by such laws, without regard to its principles of conflicts of laws. SECTION 4.04. Severability. If any provision in the Trust Agreement or this Amendment shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 4.05. Counterparts. The parties may sign any number of copies of this Amendment. Each signed copy shall be an original, but all of them together represent the same agreement. Any signed copy shall be sufficient proof of this Amendment. 12 13 SECTION 4.06. Terms Defined. All terms defined elsewhere in the Trust Agreement shall have the same meanings when used herein. SECTION 4.07. Waiver of Tax Opinion. The parties hereto (including the Holder of the Preferred Securities by its separate consent to this Amendment) waive the requirement set out in Section 8 of Annex I and in Section 3.07(a)(vii)(D)(2) of the Trust Agreement for a reasoned Opinion of Counsel of independent tax counsel. 13 14 IN WITNESS WHEREOF, the parties have signed this Amendment as of the date and year first above written. ----------------------------------------------- Israel J. Floyd, not in his individual capacity but solely as Administrative Trustee of the Trust ----------------------------------------------- Michael J. Scott, not in his individual capacity but solely as Administrative Trustee of the Trust ----------------------------------------------- Stuart C. Shears, not in his individual capacity but solely as Administrative Trustee of the Trust ----------------------------------------------- HERCULES INCORPORATED, as Sponsor and Holder of the Common Securities ----------------------------------------------- By: Name: Title: ----------------------------------------------- THE CHASE MANHATTAN BANK, not in its individual capacity, but solely as Property Trustee of the Trust ----------------------------------------------- By: Name: Title: 15 EXHIBIT A-1 FORM OF PREFERRED SECURITY CERTIFICATE PREFERRED SECURITY CERTIFICATE (prior to Remarketing Settlement Date) THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (2) AGREES THAT IT WILL NOT PRIOR TO THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES OF THE SECURITIES EVIDENCED HEREBY UNDER RULE 144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION) RESELL OR OTHERWISE TRANSFER THE SECURITIES EVIDENCED HEREBY EXCEPT (A) TO HERCULES INCORPORATED OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT OR (C) TO A SECONDARY PURCHASER (AS DEFINED IN THE AMENDED AND RESTATED TRUST AGREEMENT OF HERCULES TRUST V DATED AS OF NOVEMBER 12, 1998 (AS AMENDED FROM TIME TO TIME, THE "TRUST AGREEMENT")) THAT HAS ENTERED INTO A SECONDARY PURCHASE AGREEMENT (AS DEFINED IN THE TRUST AGREEMENT) WITH THE TRUST, (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE SECURITIES EVIDENCED HEREBY ARE TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND AND (4) AGREES, WITH RESPECT TO ANY TRANSFER OCCURRING PRIOR TO THE REMARKETING DATE ON WHICH REPLACEMENT SECURITIES ARE ISSUED, TO PROVIDE TO THE PROPERTY TRUSTEE A DULY EXECUTED CERTIFICATE SUBSTANTIALLY TO THE EFFECT OF CLAUSES (1), (2) AND (3), ABOVE. THIS LEGEND WILL BE REMOVED AFTER THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO THE SALES OF THE SECURITIES EVIDENCED HEREBY UNDER RULE 144(K) UNDER THE SECURITIES ACT. FROM AND AFTER THE REMARKETING SETTLEMENT DATE ON WHICH REPLACEMENT SECURITIES ARE ISSUED, THIS CERTIFICATE SHALL REPRESENT ONLY THE RIGHT TO RECEIVE THE REMARKETING PRICE, AS PROVIDED IN THE AGREEMENT (AS DEFINED BELOW), AND SHALL NO LONGER REPRESENT AN OBLIGATION OF OR INTEREST IN THE TRUST. A-1-1 16 Certificate Number Number of Preferred Securities PS-03 200,000 CUSIP NO. __________ Certificate Evidencing Preferred Securities of HERCULES TRUST V Auction Rate Reset Preferred Securities (Liquidation Amount $1,000 per Preferred Security) HERCULES TRUST V, a statutory business trust created under the laws of the State of Delaware (the "TRUST"), hereby certifies that NMS Services, Inc. (the "HOLDER") is the registered owner of 200,000 securities of the Trust representing undivided beneficial interests in the assets of the Trust designated the Auction Reset Rate Preferred Securities (Liquidation Amount $1,000 per Preferred Security) (the "PREFERRED SECURITIES"). This Preferred Security is transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred Securities represented hereby are issued and shall in all respects be subject to the provisions of the Amended and Restated Trust Agreement of the Trust dated as of November 12, 1998, as the same has been and may be amended from time to time, including the designation of the terms of the Preferred Securities as set forth in Annex I to the Agreement (the "AGREEMENT"). Capitalized terms used but not defined herein shall have the meaning given them in the Agreement. The Sponsor will provide a copy of the Agreement, the Preferred Securities Guarantee and the Indenture to a Holder without charge upon written request to the Trust at its principal place of business. Upon receipt of this certificate, the Holder is bound by the Agreement and is entitled to the benefits thereunder and to the benefits of the Preferred Securities Guarantee to the extent provided therein. By acceptance, the Holder agrees to treat, for United States Federal income tax purposes, the Subordinated Notes as indebtedness and the Preferred Securities as evidence of indirect beneficial ownership in the Subordinated Notes. A-1-2 17 IN WITNESS WHEREOF, the Trust has executed this certificate this 9th day of February, 2000. HERCULES TRUST V By: ---------------------------------- Name: Israel J. Floyd Title: Administrative Trustee PROPERTY TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Preferred Securities referred to in the within-mentioned Agreement. Dated: February 9, 2000 THE CHASE MANHATTAN BANK, as Property Trustee By: ----------------------------------- Authorized Signatory 18 [REVERSE OF SECURITY] (a) "DISTRIBUTIONS" with respect to the Liquidation Amount of $1,000 per Preferred Security (the "LIQUIDATION AMOUNT") of each Security will accrue and be payable at a rate (the "DISTRIBUTION RATE") (such rate being the rate of interest payable on the Subordinated Notes to be held by the Property Trustee) per annum equal to (i) from and including November 12, 1998 to but excluding February 9, 2000, LIBOR plus 175 basis points; (ii) from and including February 9, 2000 to but excluding the earlier of (A) the Remarketing Settlement Date on which Replacement Securities are issued and (B) the date such Security is redeemed, LIBOR plus 150 basis points; (iii) from and including the Remarketing Settlement Date on which Replacement Securities are issued to but excluding the date such Security is redeemed, the Winning Bid Rate; and (iv) notwithstanding clauses (i), (ii) and (iii) above, if such Security is not redeemed because the Subordinated Note Issuer fails to pay the principal amount of the Subordinated Notes on the date such amount becomes due, then from and including such due date to but excluding the date such Security is redeemed, the applicable Distribution Rate in effect on the due date, compounded quarterly, but only to the extent permitted by applicable law. Distributions that are not paid when due will bear additional distributions ("ADDITIONAL DISTRIBUTIONS") thereon compounded quarterly at the applicable Distribution Rate in effect on the due date specified above (to the extent permitted by applicable law). A Distribution is payable only to the extent that payments are made in respect of the Subordinated Notes held by the Property Trustee and to the extent the Property Trustee has funds on hand legally available therefor. (b) Until the Remarketing Settlement Date on which Replacement Securities are issued, Distributions on the Securities will be payable quarterly in arrears (i) on February 12, May 12, August 12 and November 12 of each year, commencing February 12, 1999 and (ii) on such Remarketing Settlement Date (each, a "PRE-REMARKETING DISTRIBUTION DATE"), and will accumulate from and including the most recent date to which Distributions have been paid or, if no Distributions have been paid, from November 12, 1998, to but excluding the related Pre-Remarketing Distribution Date, except as otherwise described below. A-1-4 19 The Distribution Rate in effect for the period from and including November 12, 1998 to but excluding February 12, 1999 shall be the rate determined by the Calculation Agent two London Banking Days prior to November 12, 1998 and shall equal LIBOR plus 175 basis points. The Distribution Rate in effect from and including February 12, 1999 to but excluding February 9, 2000, for each quarterly period from and including the immediately preceding Pre-Remarketing Distribution Date to but excluding the applicable Pre-Remarketing Distribution Date, shall be determined by the Calculation Agent two London Banking Days prior to such immediately preceding Pre-Remarketing Distribution Date (a "DATE OF DETERMINATION") and shall equal LIBOR plus 175 basis points. The Distribution Rate in effect thereafter, for each quarterly period from and including the immediately preceding Pre-Remarketing Distribution Date to but excluding the applicable Pre-Remarketing Distribution Date, shall be determined by the Calculation Agent two London Banking Days prior to such immediately preceding Pre-Remarketing Distribution Date and shall equal LIBOR plus 150 basis points. The amount of the Distribution payable on February 12, 2000 shall reflect the pro rata application of the two Distribution Rates applicable to the calculation period for such Distribution for each day on which the applicable Distribution Rate was in effect. The amount of Distributions payable for any quarterly period shall be computed on the basis of a 360-day year of twelve 30-day months. Except as provided in the last sentence of this paragraph, the amount of Distributions payable for any period shorter than a full quarterly period for which Distributions are computed will be computed on the basis of the actual number of days elapsed per 30-day month. If a Pre-Remarketing Distribution Date is not a Business Day, then such Pre-Remarketing Distribution Date will be the next succeeding Business Day, except if such Business Day is in the next succeeding calendar month, such Pre-Remarketing Distribution Date will be the immediately preceding Business Day. All percentages resulting from any calculations on the Preferred Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward). (c) From and including the Remarketing Settlement Date on which Replacement Securities are issued, Distributions on the Replacement Securities and on the Common Securities will be payable quarterly in arrears (i) on February 12, May 12, August 12 and November 12 of each year, commencing on such Remarketing Settlement Date and (ii) on the Mandatory Redemption Date (each, a "DISTRIBUTION DATE"), and will accumulate from the most recent date to which A-1-5 20 Distributions have been paid or, if no Distributions have been paid, from and including such Remarketing Settlement Date, to but excluding the related Distribution Date, except as otherwise described below. The amount of Distributions payable for any quarterly period shall be computed on the basis of a 360-day year of twelve 30-day months. Except as provided in the last sentence of this paragraph, the amount of Distributions payable for any period shorter than a full quarterly period for which Distributions are computed will be computed on the basis of the actual number of days elapsed per 30-day month. If a Distribution Date is not a Business Day, then such Distribution Date will be postponed to the next succeeding Business Day (and without any interest or other payment in respect of any such delay); provided, that if such Business Day is in the next succeeding calendar month, such Distribution Date will be the immediately preceding Business Day. Subject to other conditions set forth in the Agreement and the Indenture, the Property Trustee may, at the direction of the Sponsor, at any time dissolve the Trust and cause the Subordinated Notes to be distributed to the Holders of the Securities in liquidation of the Trust or, simultaneously with any redemption of the Subordinated Notes, cause a Like Amount of the Securities to be redeemed by the Trust. This Preferred Security shall be redeemable as provided in the Agreement. A-1-6 21 --------------------- ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Preferred Security Certificate to: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Insert assignee's social security or tax identification number) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Insert address and zip code of assignee) and irrevocably appoints - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- to transfer this Preferred Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: ------------------------ Signature: ------------------- (Sign exactly as your name appears on the other side of this Preferred Security Certificate) Signature Guarantee(1): ----------------------------------- - -------- (1) Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities and Exchange Act of 1934, as amended. A-1-7 22 EXHIBIT A-2 FORM OF COMMON SECURITY CERTIFICATE COMMON SECURITY CERTIFICATE THIS CERTIFICATE IS NOT TRANSFERABLE EXCEPT IN COMPLIANCE WITH APPLICABLE LAW AND THE PROVISIONS OF THE AMENDED AND RESTATED TRUST AGREEMENT OF HERCULES TRUST V DATED AS OF NOVEMBER 12, 1998, AS AMENDED FROM TIME TO TIME. A-2-1 23 Certificate Number Number of Common Securities CS-03 6,200 Certificate Evidencing Common Securities of HERCULES TRUST V Auction Rate Reset Common Securities (Liquidation Amount $1,000 per Common Security) HERCULES TRUST V, a statutory business trust created under the laws of the State of Delaware (the "TRUST"), hereby certifies that Hercules Incorporated (the "HOLDER") is the registered owner of 6,200 securities of the Trust representing undivided beneficial interests in the assets of the Trust designated the Auction Rate Reset Common Securities (Liquidation Amount $1,000 per Common Security) (the "COMMON SECURITIES"). Except as set forth in the Agreement (as defined herein), the Common Securities are not transferable. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities represented hereby are issued and shall in all respects be subject to the provisions of the Amended and Restated Trust Agreement of the Trust dated as of November 12, 1998, as the same has been and may be amended from time to time, including the designation of the terms of the Common Securities as set forth in Annex I to the Agreement (the "AGREEMENT"). Capitalized terms used but not defined herein shall have the meaning given them in the Agreement. The Sponsor will provide a copy of the Agreement, the Common Securities Guarantee and the Indenture to a Holder without charge upon written request to the Trust at its principal place of business. Upon receipt of this certificate, the Holder is bound by the Agreement and is entitled to the benefits thereunder and to the benefits of the Common Securities Guarantee to the extent provided therein. By acceptance, the Holder agrees to treat, for United States Federal income tax purposes, the Subordinated Notes as indebtedness and the Common Securities as evidence of indirect beneficial ownership in the Subordinated Notes. A-2-2 24 IN WITNESS WHEREOF, the Trust has executed this certificate this 9th day of February, 2000. HERCULES TRUST V By: _______________________________ Name: Israel J. Floyd Title: Administrative Trustee 25 [REVERSE OF COMMON SECURITY] (a) "DISTRIBUTIONS" with respect to the Liquidation Amount of $1,000 per Common Security (the "LIQUIDATION AMOUNT") of each Security will accrue and be payable at a rate (the "DISTRIBUTION RATE") (such rate being the rate of interest payable on the Subordinated Notes to be held by the Property Trustee) per annum equal to (i) from and including November 12, 1998 to but excluding February 9, 2000, LIBOR plus 175 basis points; (ii) from and including February 9, 2000 to but excluding the earlier of (A) the Remarketing Settlement Date on which Replacement Securities are issued and (B) the date such Security is redeemed, LIBOR plus 150 basis points; (iii) from and including the Remarketing Settlement Date on which Replacement Securities are issued to but excluding the date such Security is redeemed, the Winning Bid Rate; and (iv) notwithstanding clauses (i), (ii) and (iii) above, if such Security is not redeemed because the Subordinated Note Issuer fails to pay the principal amount of the Subordinated Notes on the date such amount becomes due, then from and including such due date to but excluding the date such Security is redeemed, the applicable Distribution Rate in effect on the due date, compounded quarterly, but only to the extent permitted by applicable law. Distributions that are not paid when due will bear additional distributions ("ADDITIONAL DISTRIBUTIONS") thereon compounded quarterly at the applicable Distribution Rate in effect on the due date specified above (to the extent permitted by applicable law). A Distribution is payable only to the extent that payments are made in respect of the Subordinated Notes held by the Property Trustee and to the extent the Property Trustee has funds on hand legally available therefor. (b) Until the Remarketing Settlement Date on which Replacement Securities are issued, Distributions on the Securities will be payable quarterly in arrears (i) on February 12, May 12, August 12 and November 12 of each year, commencing February 12, 1999 and (ii) on such Remarketing Settlement Date (each, a "PRE-REMARKETING DISTRIBUTION DATE"), and will accumulate from and including the most recent date to which Distributions have been paid or, if no Distributions have been paid, from November 12, 1998, to but excluding the related Pre-Remarketing Distribution Date, except as otherwise described below. A-2-4 26 The Distribution Rate in effect for the period from and including November 12, 1998 to but excluding February 12, 1999 shall be the rate determined by the Calculation Agent two London Banking Days prior to November 12, 1998 and shall equal LIBOR plus 175 basis points. The Distribution Rate in effect from and including February 12, 1999 to but excluding February 9, 2000, for each quarterly period from and including the immediately preceding Pre-Remarketing Distribution Date to but excluding the applicable Pre-Remarketing Distribution Date, shall be determined by the Calculation Agent two London Banking Days prior to such immediately preceding Pre-Remarketing Distribution Date (a "DATE OF DETERMINATION") and shall equal LIBOR plus 175 basis points. The Distribution Rate in effect thereafter, for each quarterly period from and including the immediately preceding Pre-Remarketing Distribution Date to but excluding the applicable Pre-Remarketing Distribution Date, shall be determined by the Calculation Agent two London Banking Days prior to such immediately preceding Pre-Remarketing Distribution Date and shall equal LIBOR plus 150 basis points. The amount of the Distribution payable on February 12, 2000 shall reflect the pro rata application of the two Distribution Rates applicable to the calculation period for such Distribution for each day on which the applicable Distribution Rate was in effect. The amount of Distributions payable for any quarterly period shall be computed on the basis of a 360-day year of twelve 30-day months. Except as provided in the last sentence of this paragraph, the amount of Distributions payable for any period shorter than a full quarterly period for which Distributions are computed will be computed on the basis of the actual number of days elapsed per 30-day month. If a Pre-Remarketing Distribution Date is not a Business Day, then such Pre-Remarketing Distribution Date will be the next succeeding Business Day, except if such Business Day is in the next succeeding calendar month, such Pre-Remarketing Distribution Date will be the immediately preceding Business Day. All percentages resulting from any calculations on the Common Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward). (c) From and including the Remarketing Settlement Date on which Replacement Securities are issued, Distributions on the Replacement Securities and on the Common Securities will be payable quarterly in arrears (i) on February 12, May 12, August 12 and November 12 of each year, commencing on such Remarketing Settlement Date and (ii) on the Mandatory Redemption Date (each, a "DISTRIBUTION DATE"), and will accumulate from the most recent date to which Distributions have been paid or, if no Distributions have been paid, from and A-2-5 27 including such Remarketing Settlement Date, to but excluding the related Distribution Date, except as otherwise described below. The amount of Distributions payable for any quarterly period shall be computed on the basis of a 360-day year of twelve 30-day months. Except as provided in the last sentence of this paragraph, the amount of Distributions payable for any period shorter than a full quarterly period for which Distributions are computed will be computed on the basis of the actual number of days elapsed per 30-day month. If a Distribution Date is not a Business Day, then such Distribution Date will be postponed to the next succeeding Business Day (and without any interest or other payment in respect of any such delay); provided, that if such Business Day is in the next succeeding calendar month, such Distribution Date will be the immediately preceding Business Day. Subject to other conditions set forth in the Agreement and the Indenture, the Property Trustee may, at the direction of the Sponsor, at any time dissolve the Trust and cause the Subordinated Notes to be distributed to the Holders to the Securities in liquidation of the Trust or, simultaneously with any redemption of the Subordinated Notes, cause a Like Amount of the Securities to be redeemed by the Trust. This Common Security shall be redeemable as provided in the Agreement. A-2-6 EX-4.AG 8 6TH SUPPLEMENTAL INDENTURE 1 EXHIBIT 4-AG SIXTH SUPPLEMENTAL INDENTURE between HERCULES INCORPORATED, as Issuer and THE CHASE MANHATTAN BANK, as Trustee Dated as of February 9, 2000 2 TABLE OF CONTENTS ----------------------
PAGE ---- ARTICLE 1 SECTION 1.01. Amended Definitions....................................... 2 SECTION 1.02. Additional Definitions.................................... 2 SECTION 1.03. Section 1.01(h)........................................... 3 SECTION 1.04. Deleted Definition........................................ 3 SECTION 1.05. Amendment of the Subordinated Notes....................... 3 SECTION 1.06. Application of Articles 1, 2 and 3........................ 3 ARTICLE 2 SECTION 2.01. Amendment of Interest Rate Calculation on the Subordinated Notes.............................................. 3 ARTICLE 3 SECTION 3.01. Remarketing............................................... 7 ARTICLE 4 SECTION 4.01. Ratification of Base Indenture, the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture and the Fifth Supplemental Indenture: Sixth Supplemental Indenture Controls........................... 11 SECTION 4.02. Trustee Not Responsible for Recitals...................... 12 SECTION 4.03. Governing Law............................................. 12 SECTION 4.04. Severability.............................................. 12 SECTION 4.05. Counterparts.............................................. 12 SECTION 4.06. Terms Defined............................................. 12
3 SIXTH SUPPLEMENTAL INDENTURE, dated as of February 9, 2000 (the "SIXTH SUPPLEMENTAL INDENTURE"), between Hercules Incorporated, a Delaware corporation, as issuer (the "COMPANY"), and The Chase Manhattan Bank, a New York banking corporation, as trustee (the "TRUSTEE"). WHEREAS, the Company and the Trustee are parties to the Junior Subordinated Debentures Indenture dated as of November 12, 1998 between the Company and the Trustee (the "BASE INDENTURE"), as supplemented by a First Supplemental Indenture dated as of November 12, 1998 between the Company and the Trustee (the "FIRST SUPPLEMENTAL INDENTURE"), a Second Supplemental Indenture dated as of July 6, 1999 (the "SECOND SUPPLEMENTAL INDENTURE"), a Third Supplemental Indenture dated as of October 25, 1999 (the "THIRD SUPPLEMENTAL INDENTURE"), a Fifth Supplemental Indenture dated as of January 24, 2000 (the "FIFTH SUPPLEMENTAL INDENTURE" and together with the Base Indenture, the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture and this Sixth Supplemental Indenture, the "INDENTURE"); WHEREAS, the Company executed and delivered the Base Indenture to the Trustee to provide for the issuance of the Company's unsecured junior subordinated debentures (the "DEBENTURES") to be issued from time to time in one or more series as might be determined by the Company under the Indenture, in an unlimited aggregate principal amount which may be authenticated and delivered as provided in the Base Indenture; WHEREAS, pursuant to the terms of the Indenture in the First Supplemental Indenture, the Company provided for the establishment of a new series of its Debentures known as its Auction Rate Reset Junior Subordinated Notes Series A (the "SUBORDINATED NOTES"); WHEREAS, the Indenture provides that the Company and the Trustee may amend the Indenture, with the consent of each Holder of any Debenture affected thereby, to provide for, among other things, changes in the stated maturity and interest rate of that series of Debentures; WHEREAS, the Company and the Trustee desire to modify certain provisions of the Indenture to extend the maturity date and change the interest rate of the Subordinated Notes and to provide for remarketing of the Subordinated Notes in certain circumstances; WHEREAS, all things necessary to make this Sixth Supplemental Indenture a valid indenture and agreement according to its terms have been done; 4 NOW THEREFORE, in consideration of the purchase and acceptance of the Subordinated Notes by the Holder thereof, and for the purpose of amending and restating certain terms of the Indenture relating to the stated maturity, interest rate and remarketing of the Subordinated Notes, the Company covenants and agrees with the Trustee as follows: ARTICLE 1 SECTION 1.01. Amended Definitions. The definition of "Maturity Date" contained in Section 1.01 of the Second Supplemental Indenture is hereby amended to read in its entirety as follows: ""MATURITY DATE" means February 9, 2002; provided, that in the event of a successful Remarketing of the Subordinated Notes or the Preferred Securities, as the case may be, the Maturity Date shall be the Remarketed Redemption Date; and provided, further, that, in accordance with Section 10.02(a)(iv), in the event the Company elects to pay the outstanding principal of and accrued and unpaid interest on the Subordinated Notes upon receipt of the Remarketing Notice, and notifies the Remarketing Agent of such election within five Business Days thereafter, the Maturity Date shall be the date eight Business Days after receipt of the Remarketing Notice." SECTION 1.02. Additional Definitions. Section 1.01 of the First Supplemental Indenture is hereby amended by inserting the following definitions in the appropriate alphabetical order: ""AFFILIATED BIDDER" has the meaning set forth in Section 10.02(b)." ""DATE OF DETERMINATION" has the meaning set forth in Section 2.05(b)." ""PRE-REMARKETING INTEREST PAYMENT DATE" has the meaning set forth in Section 2.05(b)." ""PRE-REMARKETING REGULAR RECORD DATE" has the meaning set forth in Section 2.05(c)." 2 5 ""REMARKETED REDEMPTION DATE" means the later of (i) the first anniversary of the Remarketing Settlement Date on which Replacement Securities are issued, and (ii) February 9, 2002." ""REMARKETING NOTICE" has the meaning set forth in Section 10.02(a)(i)." ""REQUESTING HOLDERS" has the meaning set forth in Section 10.02(a)(i)." SECTION 1.03. Section 1.01(h). The term "ASSOCIATED PERSON" is hereby added to the list of defined terms contained in Section 1.01(h) of the First Supplemental Indenture. SECTION 1.04. Deleted Definition. The term "MATURITY EXTENSION DATE" is hereby deleted in its entirety from Section 1.01(h) of the First Supplemental Indenture. SECTION 1.05. Amendment of the Subordinated Notes. The Company shall execute replacement Subordinated Notes in the form attached hereto as Exhibit A to reflect the amended terms provided for in this Sixth Supplemental Indenture, and the Trustee shall authenticate and make such new Subordinated Notes available for delivery to the Holders of the Subordinated Notes upon surrender of the prior certificates therefor. The surrendered prior certificates representing the Subordinated Notes shall be canceled by the Trustee and shall no longer be outstanding. SECTION 1.06. Application of Articles 1, 2 and 3. The provisions of Article 1, Article 2 and Article 3 hereof shall apply to the Subordinated Notes and the certificates therefor shall be appropriately amended. ARTICLE 2 SECTION 2.01. Amendment of Interest Rate Calculation on the Subordinated Notes. Section 2.05 of the First Supplemental Indenture is hereby amended to read in its entirety as follows: "SECTION 2.05. Interest. (a) Interest on the principal amount of each Subordinated Note will accrue and be payable at a rate (the "INTEREST RATE") per annum equal to (i) from and including November 12, 1998 to but excluding February 9, 2000, LIBOR plus 175 basis points; 3 6 (ii) from and including February 9, 2000 to but excluding the earlier of (A) the Remarketing Settlement Date on which Replacement Notes are issued and (B) the date such principal amount is paid, LIBOR plus 150 basis points; (iii) from and including the Remarketing Settlement Date on which Replacement Notes are issued to but excluding the date such principal amount is paid, the Winning Bid Rate; and (iv) notwithstanding clauses (i), (ii) and (iii) above, if the Company fails to pay the principal amount on the date such amount becomes due, then from and including such due date to but excluding the date such principal amount is paid, the applicable Interest Rate in effect on the due date, compounded quarterly, but only to the extent permitted by applicable law. Interest that is not paid when due will bear additional interest thereon compounded quarterly at the applicable Interest Rate in effect on the due date specified above (to the extent permitted by applicable law). The term "INTEREST", as used herein, includes any such additional interest unless otherwise stated. (b) Until the Remarketing Settlement Date on which Replacement Notes are issued, interest on the Subordinated Notes will be payable quarterly in arrears (A) on February 12, May 12, August 12 and November 12 of each year, commencing February 12, 1999 and (B) on such Remarketing Settlement Date (each, a "PRE-REMARKETING INTEREST PAYMENT DATE"), and will accrue from and including the most recent date to which interest has been paid or, if no interest has been paid, from November 12, 1998, to but excluding the related Pre-Remarketing Interest Payment Date, except as otherwise described below. The Interest Rate in effect for the period from and including November 12, 1998 to but excluding February 12, 1999 shall be the rate determined by the Calculation Agent two London Banking Days prior to November 12, 1998 and shall equal LIBOR plus 175 basis points. The Interest Rate in effect from and including February 12, 1999 to but excluding February 9, 2000, for each quarterly period from and including the immediately preceding Pre-Remarketing Interest Payment Date to but excluding the applicable Pre-Remarketing Interest Payment Date, shall be determined by the Calculation Agent two London Banking Days prior to such immediately preceding Pre-Remarketing Interest Payment Date (a "DATE OF DETERMINATION") and shall equal LIBOR plus 175 basis points. 4 7 The Interest Rate in effect thereafter, for each quarterly period from and including the immediately preceding Pre-Remarketing Interest Payment Date to but excluding the applicable Pre-Remarketing Interest Payment Date, shall be determined by the Calculation Agent two London Banking Days prior to such immediately preceding Pre-Remarketing Interest Payment Date and shall equal LIBOR plus 150 basis points. The amount of interest payable on February 12, 2000 shall reflect the pro rata application of the two Interest Rates applicable to the calculation period for such interest payment for each day on which the applicable Interest Rate was in effect. The amount of interest payable for any quarterly period shall be computed on the basis of a 360-day year of twelve 30-day months. Except as provided in the last sentence of this paragraph, the amount of interest payable for any period shorter than a full quarterly period for which interest is computed will be computed on the basis of the actual number of days elapsed per 30-day month. If a Pre-Remarketing Interest Payment Date is not a Business Day, then such Pre-Remarketing Interest Payment Date will be the next succeeding Business Day, except if such Business Day is in the next succeeding calendar month, such Pre-Remarketing Distribution Date will be the immediately preceding Business Day. All percentages resulting from any calculations on the Subordinated Notes will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward). (c) Interest shall be paid to the Person in whose name such Subordinated Note or any predecessor Subordinated Note is registered on the books and records of the Company at the close of business on the Regular Record Date for such interest installment, which shall be fifteen (15) days prior to a Pre-Remarketing Interest Payment Date (the "PRE-REMARKETING REGULAR RECORD DATE"). (d) From and including the Remarketing Settlement Date on which Replacement Notes are issued, interest on the Replacement Notes will be payable quarterly in arrears (A) on February 12, May 12, August 12 and November 12 of each year, commencing on the first such date following such Remarketing Settlement Date and (B) on the Maturity Date (each, an "INTEREST PAYMENT DATE"), and will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from and including such Remarketing Settlement Date, to but excluding the 5 8 related Interest Payment Date, except as otherwise described below. The amount of interest payable for any quarterly period shall be computed on the basis of a 360-day year of twelve 30-day months. Except as provided in the last sentence of this paragraph, the amount of interest payable for any period shorter than a full quarterly period for which interest is computed will be computed on the basis of the actual number of days elapsed per 30-day month. If an Interest Payment Date is not a Business Day, then such Interest Payment Date will be postponed to the next succeeding Business Day (and without any interest or other payment in respect of any such delay); provided, that if such Business Day is in the next succeeding calendar month, such Interest Payment Date will be the immediately preceding Business Day. (e) Interest shall be paid to the Person in whose name the Subordinated Note or any predecessor Subordinated Note is registered on the books and records of the Company, at the close of business on the Regular Record Date for such interest installment, which, in respect of (i) Subordinated Notes of which the Property Trustee is the Holder or (ii) a Global Subordinated Note, shall be the close of business on the Business Day next preceding that Interest Payment Date (the "REGULAR RECORD DATE"). If the Subordinated Notes are not held by the Property Trustee and are not represented by a Global Subordinated Note, the Regular Record Date for such interest installment shall be fifteen (15) days prior to that Interest Payment Date. (f) If, at any time while the Property Trustee is the Holder of any Subordinated Notes, the Trust or the Property Trustee is required to pay any taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States, or any other taxing authority, then, in any such case, the Company will pay as additional interest ("ADDITIONAL INTEREST") on the Subordinated Notes held by the Property Trustee, such additional amounts as shall be required so that the net amounts received and retained by the Trust and the Property Trustee after paying such taxes, duties, assessments or other governmental charges will be equal to the amounts the Trust and the Property Trustee would have received had no such taxes, duties, assessments or other government charges been imposed." 6 9 ARTICLE 3 SECTION 3.01. Remarketing. (a) Article 10 of the First Supplemental Indenture is hereby amended to read in its entirety as follows: "ARTICLE 10 REMARKETING; RESET RATE SECTION 10.01. Effectiveness of this Article; Incorporation of Remarketing Agreement. (a) Sections 10.02 and 10.04 shall become effective if and only if the Subordinated Notes have been distributed to the holders of the Trust Securities prior to Remarketing. Notwithstanding the foregoing, on the Remarketing Settlement Date (except in the case of a Failed Remarketing), the certificates representing the Subordinated Notes held by the Property Trustee shall be exchanged for certificates representing the Replacement Notes. (b) Every Person, by virtue of having become a Holder in accordance with the terms of this Agreement, shall be deemed to have expressly assented and agreed to the terms of, and shall be bound by, this First Supplemental Indenture, including the terms of Exhibit B. Exhibit B is hereby incorporated in and expressly made a part of this First Supplemental Indenture. SECTION 10.02. Remarketing Procedure. (a) (i) Subject to Section 10.04, the holders of a majority in principal amount of the Subordinated Notes (the "REQUESTING HOLDERS") have the right to require Remarketing of the Subordinated Notes at any time. The Requesting Holders may exercise this right by delivering a written notice to the Remarketing Agent at any time requesting a Remarketing of the Subordinated Notes. Upon the receipt of such notice, the Remarketing Agent shall immediately deliver a written notice to the Company on behalf of the Requesting Holders (the "REMARKETING NOTICE"). If the Requesting Holders exercise their right to require the Remarketing of the Subordinated Notes, the Reset Date shall be the sixth Business Day (the "EXPECTED RESET DATE") after the date on which the Remarketing Notice is received by the Company. (ii) Notwithstanding Section 10.02(a)(i): 7 10 (A) the Company may, by notice to the Remarketing Agent, direct that the Reset Date be delayed if the Company believes it will be unable to meet the conditions to Remarketing in the absence of such a delay; and (B) the Remarketing Agent may, by notice to the Company, direct that the Reset Date be delayed if the Remarketing Agent believes that a Remarketing will not be successful in the absence of such a delay; provided that the Company and the Remarketing Agent, in either such event, will use their reasonable best efforts to establish a delayed Reset Date that is within five Business Days after the Expected Reset Date, but in no event later than the 15th Business Day following the date on which the related Remarketing Notice was received, or the 20th Business Day in the case of a Renewed Remarketing (as hereinafter defined) to which the provisions of Section 10.04 apply (as applicable, the "FINAL RESET DATE"). (iii) If the Company and the Remarketing Agent have not agreed, on or prior to the sixth Business Day preceding the Final Reset Date, to a Reset Date that is not later than the Final Reset Date, a Failed Remarketing shall be deemed to have occurred. (iv) Notwithstanding the provisions of this Article 10, upon receipt of a Remarketing Notice the Company shall have the right, in its sole discretion, to elect to pay the outstanding principal of and accrued and unpaid interest on the Subordinated Notes, rather than proceed with the Remarketing. The Company shall make such election by sending written notice, within five Business Days after the receipt of the Remarketing Notice, to the Remarketing Agent and the Trustee. If the Company makes such election, it shall pay the outstanding principal of and accrued and unpaid interest on the Subordinated Notes to the Holders thereof on the date eight Business Days after receipt of the Remarketing Notice. (b) The Company shall, by notice to the Remarketing Agent no later than five Business Days prior to the Reset Date, select and specify three Reference Corporate Dealers. By 3:00 p.m., New York City time, on the Reset Date, the Remarketing Agent shall request Bids from such Reference Corporate Dealers. The Remarketing Agent or an Affiliate or Associated Person thereof (any such person, an "AFFILIATED BIDDER") may, at its option, enter a Bid. The Remarketing Agent shall disclose to the 8 11 Company the Bids obtained and determine the lowest Bid Rate from among the Bids obtained on the Reset Date (the "WINNING BID RATE"). By approximately 4:30 p.m., New York City time, on the Reset Date, the Remarketing Agent shall notify the Company and the Trustee of the Winning Bid Rate. If on a Reset Date, Bids are not submitted by at least two Reference Corporate Dealers, or if the lowest Bid submitted would result in a Winning Bid Rate in excess of the rate permitted by applicable law, the Remarketing shall be deemed to be a Failed Remarketing on the corresponding Remarketing Settlement Date. The Winning Bid Rate determined by the Remarketing Agent, absent manifest error, shall be binding and conclusive upon the holders of the Subordinated Notes, the Company and the Trust. (c) On the Reset Date, the Remarketing Agent shall designate as the Secondary Purchaser (the "SECONDARY PURCHASER") the Reference Corporate Dealer providing the Bid containing the Winning Bid Rate. If the Winning Bid Rate is specified in the Bids submitted by two or more bidders, the Remarketing Agent shall, in consultation with the Company, designate one of such bidders as the Secondary Purchaser. (d) On the Reset Date, the Secondary Purchaser shall enter into a Secondary Purchase Agreement for the purchase by such Secondary Purchaser at the Remarketing Price of the aggregate principal amount of Subordinated Notes, with an Interest Rate equal to the Winning Bid Rate and with a Maturity Date on the Remarketed Redemption Date. (e) If a Remarketing has occurred pursuant to this Section 10.02 but settlement of the purchase and sale of the Subordinated Notes does not occur on the corresponding Remarketing Settlement Date, then, unless the provisions of Section 10.04 with respect to a Renewed Remarketing shall apply, a Failed Remarketing shall be deemed to have occurred on such Remarketing Settlement Date. (f) At the time and in the manner specified in the Secondary Purchase Agreement, the Secondary Purchaser shall pay on the Remarketing Settlement Date to the Remarketing Agent on behalf of the Holders of the Subordinated Notes an amount of cash equal to the Remarketing Price. (g) Unless otherwise agreed among the Remarketing Agent, the Paying Agent and any Former Holder, the Remarketing Agent shall promptly pay the Remarketing Price to the Paying Agent, acting solely as agent for the Former Holders, and the Paying Agent shall pay such amount to the Former Holders in the manner specified in Section 2.02 of the Base 9 12 Indenture for payments of interest and as is otherwise specified herein, except that the Record Date therefor shall be the Business Day immediately preceding the Remarketing Settlement Date. (h) The obligation of the Remarketing Agent to make payment to the Former Holders in connection with the Remarketing shall be limited to the extent that the Secondary Purchaser has delivered the Remarketing Price therefor to the Remarketing Agent. (i) Any outstanding Subordinated Notes purchased on the Remarketing Settlement Date shall be deemed to be transferred to the Secondary Purchaser and shall be replaced in the manner provided in Section 10.02(j). On and after the Remarketing Settlement Date (except in the event of (y) a Failed Remarketing or (z) a failure by the Company to pay on the Remarketing Settlement Date all accrued interest on the Subordinated Notes to such Remarketing Settlement Date), (A) the Company shall make no further payments to, and the Company shall have no further obligations under this First Supplemental Indenture (or the Indenture) in respect of, the holders of such replaced Subordinated Notes (the "FORMER HOLDERS"), (B) the Company shall only be obligated to make payments to the holders of Replacement Notes and (C) the Subordinated Notes of the Former Holders shall no longer represent an obligation of the Company, but shall only represent a right to receive the proceeds of the Remarketing from the Paying Agent. (j) The Company shall cause replacement certificates evidencing the remarketed Subordinated Notes (or, if the Preferred Securities have been remarketed, appropriately revised Subordinated Notes) to be executed by the Company and authenticated by the Trustee in accordance with the provisions of Section 2.03 of the Base Indenture (the "REPLACEMENT NOTES"). If the Subordinated Notes were Remarketed, the Replacement Notes shall be delivered to the purchaser or purchasers of the remarketed Subordinated Notes in accordance with the terms of the Secondary Purchase Agreement. If the Preferred Securities were Remarketed, the Replacement Notes shall be delivered to the Property Trustee of the Trust. SECTION 10.03. Reset of Interest Rate and Maturity Date. From and including the Remarketing Settlement Date on which Replacement Notes are issued, if the Subordinated Notes are remarketed pursuant to Article 10 or the Preferred Securities are remarketed pursuant to Article 6 of the Trust Agreement, the Interest Rate on the Subordinated Notes shall be the Winning Bid Rate and the Maturity Date shall be the Remarketed Maturity Date. 10 13 SECTION 10.04. Renewed Remarketing. If a Remarketing has occurred pursuant to Section 10.02 that would be a Failed Remarketing pursuant to Section 10.02(e), because the purchase and sale of the Subordinated Notes do not take place on the corresponding Remarketing Settlement Date, and the reason for such failure shall, in the good faith determination of the Remarketing Agent, result from facts or circumstances that are not due to the action or inaction of the Company, then the provisions of Section 10.02 shall apply to a second remarketing (a "RENEWED REMARKETING") of the Subordinated Notes, except that the Expected Reset Date shall be the sixth Business Day following such corresponding Remarketing Settlement Date; provided that upon the occurrence of a Failed Remarketing pursuant to Section 10.02, only one Renewed Remarketing may occur pursuant to this Section 10.04, and no Renewed Remarketing shall occur after the Final Reset Date. SECTION 10.05. Failed Remarketing. The Remarketing Agent shall give notice of any Failed Remarketing on the date such Failed Remarketing occurs, or is deemed to occur, by 4:00 p.m., New York City time, on the date of such Failed Remarketing, to the Company, the Trustee and the Paying Agent." ARTICLE 4 SECTION 4.01. Ratification of Base Indenture, the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture and the Fifth Supplemental Indenture: Sixth Supplemental Indenture Controls. The Base Indenture, as supplemented by the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture, the Fifth Supplemental Indenture and this Sixth Supplemental Indenture, is in all respects ratified and confirmed, and this Sixth Supplemental Indenture shall be deemed part of the Base Indenture in the manner and to the extent herein and therein provided. The provisions of this Sixth Supplemental Indenture shall supersede the provisions of the Base Indenture, the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture and the Fifth Supplemental Indenture to the extent the Base Indenture, the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture or the Fifth Supplemental Indenture is inconsistent herewith. SECTION 4.02. Trustee Not Responsible for Recitals. The recitals herein contained are made by the Company and not by the Trustee, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no 11 14 representation as to the validity or sufficiency of this Sixth Supplemental Indenture. SECTION 4.03. Governing Law. This Sixth Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York, as applied to contracts made and performed within the State of New York, without regard to its principles of conflicts of laws. SECTION 4.04. Severability. If any provision in the Base Indenture, the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture, the Fifth Supplemental Indenture, this Sixth Supplemental Indenture or in the Subordinated Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 4.05. Counterparts. The parties may sign any number of copies of this Sixth Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. Any signed copy shall be sufficient proof of this Sixth Supplemental Indenture. SECTION 4.06. Terms Defined. All terms defined elsewhere in the Indenture shall have the same meanings when used herein. 12 15 IN WITNESS WHEREOF, the parties hereto have caused this Sixth Supplemental Indenture to be duly executed as of the day and year first above written. HERCULES INCORPORATED, as Issuer By: __________________________ Name: Title: THE CHASE MANHATTAN BANK, as Trustee By: __________________________ Name: Title: 16 EXHIBIT A FORM OF SUBORDINATED NOTE SUBORDINATED NOTE THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (2) AGREES THAT IT WILL NOT PRIOR TO THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES OF THE SECURITY EVIDENCED HEREBY UNDER RULE 144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION) RESELL OR OTHERWISE TRANSFER THE SECURITY EVIDENCED HEREBY EXCEPT (A) TO HERCULES INCORPORATED OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT OR (C) TO A SECONDARY PURCHASER (AS DEFINED IN THE AMENDED AND RESTATED TRUST AGREEMENT OF HERCULES TRUST V DATED AS OF NOVEMBER 12, 1998 (AS AMENDED FROM TIME TO TIME, THE "TRUST AGREEMENT")) THAT HAS ENTERED INTO A SECONDARY PURCHASE AGREEMENT (AS DEFINED IN THE TRUST AGREEMENT) WITH THE TRUST, (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE SECURITY EVIDENCED HEREBY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND AND (4) AGREES WITH RESPECT TO ANY TRANSFER OCCURRING PRIOR TO THE REMARKETING DATE ON WHICH REPLACEMENT NOTES ARE ISSUED TO ANY PERSON OTHER THAN THE PROPERTY TRUSTEE, TO PROVIDE TO THE INDENTURE TRUSTEE A DULY EXECUTED CERTIFICATE SUBSTANTIALLY TO THE EFFECT OF CLAUSES (1), (2) AND (3), ABOVE. AT THE REQUEST OF THE HOLDER, THIS LEGEND WILL BE REMOVED AFTER THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO THE SALE OF THE SECURITY EVIDENCED HEREBY UNDER RULE 144(K) UNDER THE SECURITIES ACT. FROM AND AFTER THE REMARKETING SETTLEMENT DATE ON WHICH REPLACEMENT NOTES ARE ISSUED TO ANY PERSON OTHER THAN THE PROPERTY TRUSTEE, THIS CERTIFICATE SHALL REPRESENT ONLY THE RIGHT TO RECEIVE THE REMARKETING PRICE, AS PROVIDED IN THE TRUST AGREEMENT, AND SHALL NO LONGER REPRESENT AN OBLIGATION OF THE COMPANY. A-1 17 THIS SECURITY WAS ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR UNITED STATES FEDERAL INCOME TAX PURPOSES. THE ISSUE PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE AND YIELD TO MATURITY WILL BE PROMPTLY MADE AVAILABLE UPON REQUEST TO THE VICE PRESIDENT - TAXES (AT (302) 594-5887) OR THE SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (AT (302) 594-5175), HERCULES INCORPORATED, HERCULES PLAZA, 1313 NORTH MARKET STREET, WILMINGTON, DE 19894-0001. A-2 18 No. SN-03 CUSIP NO. ________ HERCULES INCORPORATED AUCTION RATE RESET JUNIOR SUBORDINATED NOTE SERIES A Hercules Incorporated, a Delaware corporation (the "COMPANY", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to The Chase Manhattan Bank, as Property Trustee, for Hercules Trust V, or registered assigns, the principal sum of Two Hundred Six Million Two Hundred Thousand Dollars ($206,200,000) on February 9, 2002, or such other date as may be provided pursuant to the terms of the Indenture. (a) Interest on the principal amount of each Subordinated Note will accrue and be payable at a rate (the "INTEREST RATE") per annum equal to: (i) from and including November 12, 1998 to but excluding February 9, 2000, LIBOR plus 175 basis points; (ii) from and including February 9, 2000 to but excluding the earlier of (A) the Remarketing Settlement Date on which Replacement Notes are issued and (B) the date such principal amount is paid, LIBOR plus 150 basis points; (iii) from and including the Remarketing Settlement Date on which Replacement Notes are issued to but excluding the date such principal amount is paid, the Winning Bid Rate; and (iv) notwithstanding clauses (i), (ii) and (iii) above, if the Company fails to pay the principal amount on the date such amount becomes due, then from and including such due date to but excluding the date such principal amount is paid, the applicable Interest Rate in effect on the due date, compounded quarterly, but only to the extent permitted by applicable law. Interest that is not paid when due will bear additional interest thereon compounded quarterly at the applicable Interest Rate in effect on the due date specified above (to the extent permitted by applicable law). The term "INTEREST", as used herein, includes any such additional interest unless otherwise stated. A-3 19 (b) Until the Remarketing Settlement Date on which Replacement Notes are issued, interest on the Subordinated Notes will be payable quarterly in arrears (A) on February 12, May 12, August 12 and November 12 of each year, commencing February 12, 1999 and (B) on such Remarketing Settlement Date (each, a "PRE-REMARKETING INTEREST PAYMENT DATE"), and will accrue from and including the most recent date to which interest has been paid or, if no interest has been paid, from November 12, 1998, to but excluding the related Pre-Remarketing Interest Payment Date, except as otherwise described below. The Interest Rate in effect for the period from and including November 12, 1998 to but excluding February 12, 1999 shall be the rate determined by the Calculation Agent two London Banking Days prior to November 12, 1998 and shall equal LIBOR plus 175 basis points. The Interest Rate in effect from and including February 12, 1999 to but excluding February 9, 2000, for each quarterly period from and including the immediately preceding Pre-Remarketing Interest Payment Date to but excluding the applicable Pre-Remarketing Interest Payment Date, shall be determined by the Calculation Agent two London Banking Days prior to such immediately preceding Pre-Remarketing Interest Payment Date (a "DATE OF DETERMINATION") and shall equal LIBOR plus 175 basis points. The Interest Rate in effect thereafter, for each quarterly period from and including the immediately preceding Pre-Remarketing Interest Payment Date to but excluding the applicable Pre-Remarketing Interest Payment Date, shall be determined by the Calculation Agent two London Banking Days prior to such immediately preceding Pre-Remarketing Interest Payment Date and shall equal LIBOR plus 150 basis points. The amount of interest payable on February 12, 2000 shall reflect the pro rata application of the two Interest Rates applicable to the calculation period for such interest payment for each day on which the applicable Interest Rate was in effect. The amount of interest payable for any quarterly period shall be computed on the basis of a 360-day year of twelve 30-day months. Except as provided in the last sentence of this paragraph, the amount of interest payable for any period shorter than a full quarterly period for which interest is computed will be computed on the basis of the actual number of days elapsed per 30-day month. If a Pre-Remarketing Interest Payment Date is not a Business Day, then such Pre-Remarketing Interest Payment Date will be the next succeeding Business Day, except if such Business Day is in the next succeeding calendar month, such Pre-Remarketing Distribution Date will be the immediately preceding Business Day. All percentages resulting from any calculations on the Subordinated Notes will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward). A-4 20 (c) Interest shall be paid to the Person in whose name such Subordinated Note or any predecessor Subordinated Note is registered on the books and records of the Company at the close of business on the Regular Record Date for such interest installment, which shall be fifteen (15) days prior to a Pre-Remarketing Interest Payment Date (the "PRE-REMARKETING REGULAR RECORD DATE"). (d) From and including the Remarketing Settlement Date on which Replacement Notes are issued, interest on the Replacement Notes will be payable quarterly in arrears (A) on February 12, May 12, August 12 and November 12 of each year, commencing on the first such date following such Remarketing Settlement Date and (B) on the Maturity Date (each, an "INTEREST PAYMENT DATE"), and will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from and including such Remarketing Settlement Date, to but excluding the related Interest Payment Date, except as otherwise described below. The amount of interest payable for any quarterly period shall be computed on the basis of a 360-day year of twelve 30-day months. Except as provided in the last sentence of this paragraph, the amount of interest payable for any period shorter than a full quarterly period for which interest is computed will be computed on the basis of the actual number of days elapsed per 30-day month. If an Interest Payment Date is not a Business Day, then such Interest Payment Date will be postponed to the next succeeding Business Day (and without any interest or other payment in respect of any such delay); provided, that if such Business Day is in the next succeeding calendar month, such Interest Payment Date will be the immediately preceding Business Day. (e) Interest shall be paid to the Person in whose name the Subordinated Note or any predecessor Subordinated Note is registered on the books and records of the Company, at the close of business on the Regular Record Date for such interest installment, which, in respect of (i) Subordinated Notes of which the Property Trustee is the Holder or (ii) a Global Subordinated Note, shall be the close of business on the Business Day next preceding that Interest Payment Date (the "REGULAR RECORD DATE"). If the Subordinated Notes are not held by the Property Trustee and are not represented by a Global Subordinated Note, the Regular Record Date for such interest installment shall be fifteen (15) days prior to that Interest Payment Date. The indebtedness evidenced by this Subordinated Note is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all existing and future Senior Indebtedness, and this Subordinated Note is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Subordinated Note, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her A-5 21 attorney-in-fact for any and all such purposes. Each Holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. This Subordinated Note shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Subordinated Note are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. A-6 22 IN WITNESS WHEREOF, the Company has caused this instrument to be executed. HERCULES INCORPORATED By: ____________________________________ Name: Title Attest: By: ______________________________ Name: Title: 23 CERTIFICATE OF AUTHENTICATION This is one of the Subordinated Notes of the series of Debentures described in the within-mentioned Indenture. Dated: THE CHASE MANHATTAN BANK, as Trustee or as Authentication Agent By _______________________________ By _________________________________ Authorized Signatory Authorized Signatory 24 [REVERSE OF NOTE] This Subordinated Note is one of a duly authorized series of Debentures of the Company (herein sometimes referred to as the "DEBENTURES"), specified in the Indenture, all issued or to be issued in one or more series under and pursuant to a Junior Subordinated Debenture Indenture dated as of November 12, 1998, duly executed and delivered between the Company and The Chase Manhattan Bank, as Trustee (the "TRUSTEE"), as supplemented by a First Supplemental Indenture dated as of November 12, 1998, a Second Supplemental Indenture dated as of July 6, 1999, a Third Supplemental Indenture dated as of October 25, 1999, a Fifth Supplemental Indenture dated as of January 24, 2000 and a Sixth Supplemental Indenture dated as of February 9, 2000 (the Indenture as so supplemented, the "INDENTURE"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the Holders of the Subordinated Notes. By the terms of the Indenture, the Debentures are issuable thereunder in series that may vary as to amount, date of maturity, rate of interest and in other respects as provided in the Indenture. This series of Debentures is limited in aggregate principal amount as specified in said Sixth Supplemental Indenture and herein sometimes referred to as the "SUBORDINATED NOTES." Because of the occurrence and continuation of a Special Event or a Failed Remarketing, in certain circumstances, this Subordinated Note may become due and payable at the principal amount together with any interest accrued thereon (the "REDEMPTION PRICE"). The Redemption Price shall be paid prior to 12:00 noon, New York City time, on the date of such redemption or at such earlier time as the Company determines. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of all of the Subordinated Notes may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the Holders of at least a majority in aggregate principal amount of the Debentures of each series affected thereby then outstanding (and, in the case of any series of Debentures held as assets of a Trust and with respect to which a Dissolution Event has not theretofore occurred, such consent of holders of the Preferred Securities and the Common Securities of such Trust as may be required under the Trust Agreement), as defined in the Indenture, to reduce the principal amount of such Debentures; reduce the percentage of the principal amount of such Debentures the Holders of which must consent to an amendment of this Indenture or a waiver; change (i) the stated maturity of the A-9 25 principal of or the interest on such Debentures, or (ii) the rate of interest (or the manner of calculation thereof) on such Debentures, change adversely to the Holders the redemption, conversion or exchange provisions applicable to such Debentures, if any; change the currency in respect of which the payments on such Debentures are to be made; make any change in the Subordination provisions of the Indenture (Article 10) that adversely affects the rights of the Holders of the Debentures or any change to any other Section hereof that adversely affects their rights; or change the direct action rights of holders of Preferred Securities; provided that, in the case of the outstanding Debentures of a series then held by a Trust, no such amendment shall be made that adversely affects the holders of the Preferred Securities of that Trust, and no waiver of any Event of Default with respect to the Debentures of that series or compliance with any covenant under this Indenture shall be effective, without the prior consent of the holders of at least a majority of the aggregate liquidation amount of the outstanding Preferred Securities of that Trust or the holder of each such Preferred Security, as applicable. A supplemental indenture that changes or eliminates any covenant or other provision of this Indenture that has expressly been included solely for the benefit of one or more particular series of Debentures, or which modifies the rights of the Holders of Debentures of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Debentures of any other series. No reference herein to the Indenture and no provision of this Subordinated Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest on this Subordinated Note at the time and place and at the rate or rates and in the currency herein prescribed. As provided in the Indenture and subject to certain limitations herein and therein set forth, this Subordinated Note is transferable by the registered Holder hereof on the Register of the Company, upon surrender of this Subordinated Note for registration of transfer at the office or agency of the Trustee in the City and State of New York accompanied by a written instrument or instruments of transfer in form satisfactory to the Company or the Trustee duly executed by the registered Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Subordinated Notes of authorized denominations and for the same aggregate principal amount and series will be issued to the designated transferee or transferees. No service charge will be made for any such transfer, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto. A-10 26 Prior to due presentment for registration of transfer of this Subordinated Note, the Company, the Trustee, any paying agent and the Registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Subordinated Note shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the Registrar) for the purpose of receiving payment of or on account of the principal hereof and premium, if any, and interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any paying agent nor any Registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Subordinated Note, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. The Subordinated Notes of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple of $1,000 thereof. The Subordinated Notes may be transferred or exchanged only in minimum denominations of $100,000 and integral multiples of $1,000 in excess thereof, and any attempted transfer, sale or other disposition of Subordinated Notes in a denomination of less than $100,000 shall be deemed void and of no legal effect whatsoever. All terms used in this Subordinated Note that are defined in the Indenture shall have the meanings assigned to them in the Indenture. THE INDENTURE AND THE DEBENTURES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS PRINCIPLES OF CONFLICTS OF LAWS. A-11 EX-4.AH 9 REMARKETING & CONTINGENT PURCHASE AGREEMENT 1 EXHIBIT 4-AH REMARKETING AND CONTINGENT PURCHASE AGREEMENT among HERCULES INCORPORATED, HERCULES TRUST V and BANC OF AMERICA SECURITIES LLC Dated as of February 9, 2000 2 REMARKETING AND CONTINGENT PURCHASE AGREEMENT REMARKETING AND CONTINGENT PURCHASE AGREEMENT dated as of February 9, 2000 by and among Hercules Incorporated, a Delaware corporation (the "COMPANY"), Hercules Trust V, a Delaware statutory business trust (the "TRUST"), and Banc of America Securities LLC, as remarketing agent (the "REMARKETING AGENT"). WITNESSETH: WHEREAS, the Trust has issued 200,000 Auction Rate Reset Preferred Securities (the "PREFERRED SECURITIES") in an aggregate stated liquidation amount of $200,000,000 and 6,200 Auction Rate Reset Common Securities (the "COMMON SECURITIES", and together with the Preferred Securities, the "TRUST SECURITIES") in an aggregate stated liquidation amount of $6,200,000 under the Amended and Restated Trust Agreement dated as of November 12, 1998 among the Company, the Administrative Trustees, the Delaware Trustee and the Property Trustee (as the same has been and may be amended from time to time, the "TRUST AGREEMENT"); WHEREAS, the sole assets of the Trust consist of $206,200,000 aggregate principal amount of Auction Rate Reset Junior Subordinated Notes Series A (the "SUBORDINATED NOTES") of the Company purchased by the Trust from the Company with the proceeds of the sale of the Trust Securities; WHEREAS, at the request of the Holders of a Majority in Liquidation Amount of the Trust Securities, the Preferred Securities (or, following the distribution of Subordinated Notes to Holders of Preferred Securities upon the dissolution of the Trust, the Subordinated Notes) may be remarketed in accordance with the terms hereof; WHEREAS, the Company and the Trust have requested that Banc of America Securities LLC ("BAS") act as the Remarketing Agent and, as such, perform the duties described herein; and WHEREAS, BAS is willing to act as Remarketing Agent and, as such, to perform such duties on the terms and conditions expressly set forth herein; NOW, THEREFORE, in consideration of the covenants herein made, and subject to the conditions herein set forth, the parties hereto agree as follows: SECTION 1. Definitions. Capitalized terms used and not defined in this Agreement shall have the meanings assigned to them in the Trust Agreement. In 3 addition, as used in this Agreement, the following terms shall have the following definitions: "1934 ACT REPORTS" has the meaning set forth in Section 2(b)(iv). "AFFILIATED BIDDER" has the meaning set forth in Section 5(b). "ASSOCIATED PERSON" has the meaning set forth in Article 1(ee) of the ByLaws of the National Association of Securities Dealers, Inc. "BAS" has the meaning set forth in the fourth recital hereto. "BID" means an irrevocable offer to purchase the aggregate outstanding Liquidation Amount of Preferred Securities at the Remarketing Price or, following any distribution of Subordinated Notes to Holders, the aggregate outstanding principal amount of such Subordinated Notes, as the case may be, with a Distribution Rate or interest rate, as applicable, equal to the Bid Rate specified in such Bid and with a redemption date or maturity date, as the case may be, on the Remarketed Redemption Date. "BID RATE" means the proposed Distribution Rate on the Preferred Securities and/or interest rate on Subordinated Notes specified in a Bid. "BUSINESS DAY" means any day other than a Saturday, Sunday or other day on which banking institutions in The City of New York or London are authorized or required by law, regulation or executive order to close. "CHANGE OF CONTROL" shall be deemed to have occurred if (i) any Person or group of Persons (within the meaning of Section 13 or 14 of the Exchange Act) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of 30% or more of the Voting Stock of the Company or (ii) Continuing Directors shall cease to be a majority of the members of the Board of Directors of the Company. "COMMISSION" means the Securities and Exchange Commission. "COMPANY" has the meaning set forth in the initial paragraph hereto. "CONTINUING DIRECTORS" means (i) the members of the Board of Directors of the Company on the date hereof and (ii) future members of such Board of Directors who were nominated or appointed by a majority of the Continuing Directors at the date of their nomination or appointment. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 2 4 "EXCHANGE ACT REGULATIONS" means the rules and regulations promulgated under the Exchange Act. "EXPECTED RESET DATE" has the meaning set forth in Section 5(a)(i). "FAILED REMARKETING" means an event deemed to have occurred if, following the giving of notice by the Requesting Holders to the Remarketing Agent as contemplated by Section 5(a)(i), the settlement of a purchase and sale of the Preferred Securities (or, if applicable, the Subordinated Notes) shall not have occurred within the applicable time limit specified in this Agreement and in any event if such a settlement shall not have occurred by the 23rd Business Day following the delivery of the related Remarketing Notice, giving effect, if applicable, to the provisions of Section 7. "FINAL RESET DATE" has the meaning set forth in Section 5(a)(ii). "FORMER HOLDERS" has the meaning set forth in Section 5(i). "GUARANTEE AGREEMENT" means the Preferred Securities Guarantee Agreement dated as of November 12, 1998, executed by the Company for the benefit of Holders of the Preferred Securities, as amended, supplemented, modified or superseded from time to time. "INDENTURE" means the Indenture (the "BASE INDENTURE") dated as of November 12, 1998 between the Company and The Chase Manhattan Bank, as Indenture Trustee, as supplemented by a First Supplemental Indenture dated as of November 12, 1998, a Second Supplemental Indenture dated as of July 6, 1999, a Third Supplemental Indenture dated as of October 25, 1999, a Fifth Supplemental Indenture dated as of January 24, 2000 and a Sixth Supplemental Indenture dated as of February 9, 2000 and as further amended, supplemented, modified or superceded from time to time. "INDENTURE TRUSTEE" means the Trustee pursuant to the Indenture. "INVESTMENT COMPANY ACT" means the Investment Company Act of 1940, as amended. "MATERIAL ADVERSE CHANGE" means any development that could reasonably be expected to result in a material adverse change in the business, properties or financial condition of the Company and its subsidiaries, taken as a whole. "OFFERING MEMORANDUM" has the meaning set forth in Section 12. 3 5 "PREFERRED SECURITIES" has the meaning set forth in the first recital hereto. "REFERENCE CORPORATE DEALER" means a leading dealer of publicly traded debt securities selected by the Company, which dealer shall be a Qualified Institutional Buyer (as defined in Rule 144A under the Securities Act). "REMARKETED REDEMPTION DATE" means the later of (i) the first anniversary of the Remarketing Settlement Date on which Replacement Securities are issued and (ii) February 9, 2002. "REMARKETING" means a remarketing of Preferred Securities or Subordinated Notes pursuant to Section 5. "REMARKETING NOTICE" has the meaning set forth in Section 5(a)(i). "REMARKETING PRICE" means (i) with respect to the Preferred Securities, a price equal to 100% of the aggregate outstanding Liquidation Amount of the Preferred Securities and (ii) with respect to the Subordinated Notes, a price equal to 100% of the aggregate outstanding principal amount of the Subordinated Notes. "REMARKETING SETTLEMENT DATE" means the third Business Day immediately following the Reset Date. "RENEWED REMARKETING" has the meaning set forth in Section 7. "REPLACEMENT PREFERRED SECURITIES" has the meaning set forth in Section 5(j). "REPLACEMENT SECURITIES" has the meaning set forth in Section 5(j). "REPLACEMENT SUBORDINATED NOTES" has the meaning set forth in Section 5(j). "REPRESENTATION DATE" has the meaning set forth in Section 2(a). "REQUESTING HOLDERS" has the meaning set forth in Section 5(a)(i). "RESET DATE" means any date established as a Reset Date pursuant to Section 5. "RESET RATE" means the Winning Bid Rate. "SECONDARY PURCHASE AGREEMENT" means an agreement to be dated as of the Reset Date (or such other date permitted by applicable law) among the 4 6 Company, the Trust, the Remarketing Agent and the Secondary Purchaser providing for the purchase of the Preferred Securities, or the Subordinated Notes, as the case may be, by the Secondary Purchaser, in a form customary for transactions of this type and as otherwise agreed among the Company, the Trust, the Remarketing Agent and the Secondary Purchaser. "SECONDARY PURCHASER" has the meaning set forth in Section 5(c). "SECURITIES ACT" means the Securities Act of 1933, as amended. "SUBORDINATED NOTES" has the meaning set forth in the second recital hereto. "TRANSACTION DOCUMENTS" means this Agreement, the Purchase Agreement, the Trust Agreement, the Guarantee Agreement, the Indenture, the Common Securities, the Secondary Purchase Agreement, the Preferred Securities and the Subordinated Notes; provided that for any representation made as of the date hereof pursuant to Section 2(b), Transaction Documents means this Agreement, the Purchase Agreement, the Trust Agreement, the Guarantee Agreement, the Indenture, the Common Securities, the Letter Agreement, the Preferred Securities and the Subordinated Notes. "TRUST" has the meaning set forth in the initial paragraph hereto. "TRUST AGREEMENT" has the meaning set forth in the initial paragraph hereto. "TRUST SECURITIES" has the meaning set forth in the first recital hereto. "WINNING BID RATE" has the meaning set forth in Section 5(b). "VOTING STOCK" means capital stock of the Company having ordinary voting power for the election of directors. SECTION 2. Representations and Warranties. (a) Basic Warranties. Each of the Company and the Trust, on the one hand, and the Remarketing Agent, on the other hand, represents and warrants to the other as of the date hereof, the Reset Date and the Remarketing Settlement Date (each of the foregoing dates being hereinafter referred to as a "REPRESENTATION DATE") that: (i) Status. It is a duly and validly existing entity under the laws of the jurisdiction of its creation, formation or incorporation and, if relevant under such laws, in good standing. 5 7 (ii) Powers. It has the corporate or trust power and authority to execute, enter into and perform its obligations under, or contemplated under, this Agreement and consummate the transactions contemplated hereby. (iii) No Violation or Conflict. The execution, delivery and performance by such party of this Agreement, the consummation of the transactions herein contemplated and compliance by such party with its obligations hereunder (A) do not violate or conflict with (1) any provision of its organizational documents, (2) any law applicable to it, any order or judgment of any court or other agency of government applicable to it or any of its assets that affects the legality, validity or enforceability of this Agreement and (B) do not and will not conflict with or constitute a breach of any contractual restriction binding on or affecting it or any of its assets. (iv) Consents. All governmental and other consents that are required to have been obtained by it with respect to the performance by such party of its obligations under this Agreement have been obtained and are in full force and effect and all conditions of any such consents have been complied with. (v) Obligations Binding. Its obligations under this Agreement constitute its legal, valid and binding obligations, enforceable against it in accordance with the terms of this Agreement, except as of the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting the enforcement of creditors' rights or by general equitable principles. (vi) Absence of Litigation. There is not pending or, to the best of its knowledge, threatened against or affecting it or any of its Affiliates any action, suit or proceeding at law or in equity or before any court, tribunal, governmental body, agency or official or any arbitrator that could reasonably be expected to materially and adversely affect the legality, validity or enforceability against it of this Agreement or its ability to perform its obligations under this Agreement. (vii) Non-Reliance. It is acting for its own account, and it has made its own independent decision to enter into this Agreement and as to whether this Agreement is appropriate or proper for it based upon its own judgment and upon advice from such advisers as it has deemed necessary. It is not relying on any communication (written or oral) of any other party as investment advice or as a recommendation to enter into this Agreement, it being understood that information and explanations related to the terms and conditions of this Agreement shall not be considered investment 6 8 advice or a recommendation to enter into this Agreement. No communication (written or oral) received from any other party shall be deemed to be an assurance or guarantee as to the expected results of this Agreement. No other party is acting as a fiduciary for or an adviser to it with respect to this Agreement. (viii) Assessment and Understanding. It is capable of assessing the merits of and understanding (on its own behalf or through independent professional advice), and understands and accepts, the terms, conditions and risks of this Agreement. It is also capable of assuming, and assumes, the risks of this Agreement. (b) Representations and Warranties of the Company and the Trust. Each of the Company and the Trust further represents and warrants to the Remarketing Agent as of each Representation Date, as applicable to each such entity, that: (i) Securities Validly Issued. The Preferred Securities and Subordinated Notes have been, and the Replacement Preferred Securities and the Replacement Subordinated Notes will be, validly authorized and executed by the Trust and the Company, as the case may be, and authenticated, issued and delivered in the manner provided for in the Trust Agreement and the Indenture, as the case may be, and delivered against payment of the purchase price therefor as provided in the Purchase Agreement, and constitute, or will constitute, legally binding obligations of the Trust or the Company, as the case may be, entitled to the benefits of the Trust Agreement and Indenture. (ii) No Event of Default. No Event of Default under the Trust Agreement and no Event of Default under the Indenture has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement. (iii) Compliance with Exchange Act Requirements. The Company has made all the filings with the Commission that it is required to make under the Exchange Act and the Exchange Act Regulations, and each such filing complies in all material respects with the requirements of the Exchange Act and Exchange Act Regulations. (iv) No Material Misstatements. The Company's most recent Annual Report on Form 10-K, and its Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed after the end of the fiscal year to which such Annual Report relates (collectively, the "1934 ACT REPORTS"), as supplemented by material press releases, at the time they were filed did 7 9 not, and, after giving effect to the transactions contemplated by the Transaction Documents do not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (v) No Material Adverse Change. Since the respective dates as of which information is given in the 1934 Act Reports, except as otherwise stated therein, or as supplemented by material press releases, there has been no Material Adverse Change. (vi) Not an Investment Company. Neither the Company nor the Trust is an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act. SECTION 3. Covenants. (a) The Company hereby covenants with the Remarketing Agent as follows: (i) Maintain Authorizations. The Company shall use all reasonable efforts to maintain in full force and effect all consents of any governmental or other authority that are required to be obtained by it with respect to this Agreement and shall use all reasonable efforts to obtain any such consents that may become necessary in the future. (ii) Comply with Laws. The Company shall comply in all material respects with all applicable laws and orders to which it may be subject if failure so to comply would materially impair its ability to perform its obligations under this Agreement. (iii) Furnish Documentation. The Company will furnish to the Remarketing Agent: (i) unless available to the Remarketing Agent on EDGAR or the Company's website, each document filed after the date hereof by the Company pursuant to the periodic reporting requirements of the Exchange Act and (ii) in connection with the Remarketing of the Preferred Securities or Subordinated Notes, as the case may be, such other information as the Remarketing Agent may reasonably request from time to time. Notwithstanding the foregoing sentence, the Company agrees to provide the Remarketing Agent with as many copies of the foregoing written materials and other Company-approved information as the Remarketing Agent may reasonably request for use in connection with the Remarketing of the Preferred Securities or Subordinated Notes, as the case may be, and consents to the use thereof for such purpose. 8 10 (iv) Notification. If, at any time prior to the Remarketing Settlement Date, any event or condition known to the Company relating to or affecting the Company, the Preferred Securities or the Subordinated Notes shall occur that could reasonably be expected to cause any of the reports, documents, materials or information referred to in Section 3(a)(iii) or any document incorporated therein by reference to contain an untrue statement of a material fact or omit to state a material fact, the Company shall promptly notify the Remarketing Agent in writing of the then-known circumstances and details of such event or condition. (v) Comply with Securities Laws. The Company will comply with the Securities Act and the rules and regulations of the Commission thereunder, the Exchange Act and the Exchange Act Regulations so as to permit the completion of the Remarketing of the Preferred Securities or Subordinated Notes, as the case may be, as contemplated in this Agreement. (vi) No Purchase of Securities. The Company agrees that neither it nor any of its subsidiaries or Affiliates shall purchase or otherwise acquire, or enter into any agreement to purchase or otherwise acquire, any of the Preferred Securities or Subordinated Notes prior to the Remarketing thereof by the Remarketing Agent, other than pursuant to this Agreement. (vii) Notification of Rating Agency Action. The Company will provide prompt notice by telephone, confirmed in writing (which may include facsimile or other electronic transmission), to the Remarketing Agent of any notification or announcement by a "nationally recognized statistical rating organization" (as defined by the Commission for purposes of Rule 436(g)(2) under the Securities Act) with regard to a downgrade to below investment grade or withdrawal of the rating of any security of the Company or the placement on what is currently called a "watch list"or a "credit watch" with negative implications of any security of the Company. (viii) Restriction on Debt Issuance. During the period commencing on the date on which the Company receives a Remarketing Notice in accordance with Section 5(a)(i) and ending on the earlier of (A) the date of the related Remarketing Settlement Date or (B) the date of the related Failed Remarketing, the Company will not, without the consent of the Remarketing Agent, offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, or announce the offering of, any debt securities with a maturity of more than one year but fewer than two years. (ix) Best Efforts. The Company shall use its best efforts to assist the Remarketing Agent in Remarketing the Preferred Securities or the 9 11 Subordinated Notes, as the case may be, in the manner contemplated by this Agreement. (b) The Remarketing Agent hereby covenants with the Company as follows: (i) Maintain Authorizations. The Remarketing Agent will use all of its reasonable efforts to maintain in full force and effect all consents of any governmental or other authority that are required to be obtained by it with respect to this Agreement and shall use all reasonable efforts to obtain any that may become necessary in the future. (ii) Comply with Laws. The Remarketing Agent shall comply in all material respects with all applicable laws and orders which it may be subject if failure so to comply would materially impair its ability to perform its obligations under this Agreement. SECTION 4. Appointment and Obligations of Remarketing Agent and Calculation Agent; Secondary Purchaser. (a) The Company and the Trust hereby appoint BAS as Remarketing Agent and as Calculation Agent under the Trust Agreement and the Indenture (i) to determine, in accordance with the terms described in Section 5(b), the Reset Rate that, when applied to the Preferred Securities (or, following the distribution of the Subordinated Notes to Holders of the Preferred Securities upon dissolution of the Trust, the Subordinated Notes), shall result in the resale of all outstanding Preferred Securities (or, if applicable, all outstanding Subordinated Notes), at a sales price equal to the Remarketing Price; provided that the Reset Rate shall in no event exceed the rate permitted by applicable law, (ii) to conduct a private auction of all outstanding Preferred Securities or Subordinated Notes, as the case may be, in accordance with Section 5 of this Agreement, and (iii) to enter into a Secondary Purchase Agreement with respect to the Preferred Securities or the Subordinated Notes, as the case may be. (b) Pursuant to the Secondary Purchase Agreement, the Secondary Purchaser, either as the sole purchaser or as the representative of a syndicate of purchasers designated by the Secondary Purchaser, shall agree, subject to the terms and conditions set forth therein, that the Secondary Purchaser and any such other purchasers shall purchase such Preferred Securities or Subordinated Notes, as the case may be, from the holders thereof at a price equal to the Remarketing Price. SECTION 5. Determination of Reset Date; Remarketing Procedures. (a) (i) Subject to Section 7, the Holders of a Majority in Liquidation Amount of the Trust Securities (or, if applicable, the holders of a majority in 10 12 principal amount of the Subordinated Notes), acting together as a single class (the "REQUESTING HOLDERS"), have the right to require Remarketing of the Trust Securities (or, if applicable, the Subordinated Notes) at any time. The Requesting Holders may exercise this right by delivering a written notice to the Remarketing Agent at any time requesting a Remarketing of the Preferred Securities (or, if applicable, the Subordinated Notes). Upon the receipt of such notice, the Remarketing Agent shall immediately deliver a written notice to the Company on behalf of the Requesting Holders (the "REMARKETING NOTICE"). If the Requesting Holders exercise their right to require the Remarketing of the Preferred Securities (or, if applicable, the Subordinated Notes), the Reset Date shall be the sixth Business Day after the date on which the Remarketing Notice is received by the Company (the "EXPECTED RESET DATE"). (ii) Notwithstanding Section 5(a)(i): (A) the Company may, by notice to the Remarketing Agent, direct that the Reset Date be delayed if the Company believes it will be unable to meet the conditions to Remarketing in the absence of such a delay; and (B) the Remarketing Agent may, by notice to the Company, direct that the Reset Date be delayed if the Remarketing Agent believes that a Remarketing will not be successful in the absence of such a delay; provided that the Company and the Remarketing Agent, in either such event, will use their reasonable best efforts to establish a delayed Reset Date that is within five Business Days after the Expected Reset Date, but in no event later than the 15th Business Day following the date on which the related Remarketing Notice was received, or the 20th Business Day in the case of a Renewed Remarketing to which the provisions of Section 7 apply (as applicable, the "FINAL RESET DATE"). (iii) If the Company and the Remarketing Agent have not agreed, on or prior to the sixth Business Day preceding the Final Reset Date, to a Reset Date that is not later than the Final Reset Date, a Failed Remarketing shall be deemed to have occurred. (iv) Notwithstanding the provisions of this Section 5, upon receipt of a Remarketing Notice the Company shall have the right, in its sole discretion, to elect to pay the aggregate Liquidation Amount of and accumulated and unpaid Distributions on the Preferred Securities (or the outstanding principal of and accrued and unpaid interest on the 11 13 Subordinated Notes, as the case may be), rather than proceed with the Remarketing. The Company shall make such election by sending written notice, within five Business Days after the receipt of the Remarketing Notice, to the Remarketing Agent and the Trustee. If the Company makes such election, it shall pay the aggregate Liquidation Amount of and accumulated and unpaid Distributions on the Preferred Securities (or the outstanding principal of and accrued and unpaid interest on the Subordinated Notes, as the case may be) to the Holders thereof on the date eight Business Days after receipt of the Remarketing Notice. (b) The Company shall, by notice to the Remarketing Agent no later than five Business Days prior to the Reset Date, select and specify three Reference Corporate Dealers. By 3:00 p.m., New York City time, on the Reset Date, the Remarketing Agent shall request Bids from such Reference Corporate Dealers. The Remarketing Agent or an Affiliate or Associated Person thereof (any such person, an "AFFILIATED BIDDER") may, at its option, enter a Bid. The Remarketing Agent shall disclose to the Company the Bids obtained and determine the lowest Bid Rate (the "WINNING BID RATE") from among the Bids obtained on the Reset Date. By approximately 4:30 p.m., New York City time, on the Reset Date, the Remarketing Agent shall notify the Company, the Indenture Trustee and the Property Trustee of the Winning Bid Rate. If on a Reset Date, Bids are not submitted by at least two Reference Corporate Dealers, or if the lowest Bid submitted would result in a Winning Bid Rate in excess of the rate permitted by applicable law, the Remarketing shall be deemed to be a Failed Remarketing on the corresponding Remarketing Settlement Date. The Winning Bid Rate determined by the Remarketing Agent, absent manifest error, shall be binding and conclusive upon the Holders of the Trust Securities, the holders of the Subordinated Notes, the Company and the Trust. (c) On the Reset Date, the Remarketing Agent shall designate as the Secondary Purchaser (the "SECONDARY PURCHASER") the Reference Corporate Dealer providing the Bid containing the Winning Bid Rate. If the Winning Bid Rate is specified in the Bids submitted by two or more bidders, the Remarketing Agent shall, in consultation with the Company, designate one of such bidders as the Secondary Purchaser. (d) On the Reset Date, the Secondary Purchaser shall enter into a Secondary Purchase Agreement for the purchase by such Secondary Purchaser at the Remarketing Price of the aggregate Liquidation Amount of Preferred Securities, with (i) a Distribution Rate equal to the Winning Bid Rate (or, if Subordinated Notes shall have been distributed to Holders of the Trust Securities, the aggregate principal amount of Subordinated Notes with an interest rate equal to the Winning Bid Rate) and (ii) a Mandatory Redemption Date (or, in the case of Subordinated Notes, a maturity date) on the Remarketed Redemption Date. 12 14 (e) If a Remarketing shall have occurred pursuant to this Section 5 but settlement of the purchase and sale of the Preferred Securities or Subordinated Notes, as the case may be, does not occur on the corresponding Remarketing Settlement Date, then, unless the provisions of Section 7 with respect to a Renewed Remarketing shall apply, a Failed Remarketing shall be deemed to have occurred on such Remarketing Settlement Date. (f) At the time and in the manner specified in the Secondary Purchase Agreement, the Secondary Purchaser shall pay on the Remarketing Settlement Date to the Remarketing Agent on behalf of the holders of the Preferred Securities or Subordinated Notes, as the case may be, an amount of cash equal to the Remarketing Price. (g) Unless otherwise agreed among the Remarketing Agent, the Paying Agent (under the Trust Agreement or Indenture, as applicable) and any Former Holder, the Remarketing Agent shall promptly pay the Remarketing Price to the Paying Agent, acting solely as agent for the Former Holders, and the Paying Agent shall pay such amount to the Former Holders on the Remarketing Settlement Date in the manner specified in the Trust Agreement or the Indenture, as the case may be. Any amounts held by the Paying Agent for payment to the Former Holders shall not be property of the Trust or the Company, as the case may be. (h) The obligation of the Remarketing Agent to make payment to the Former Holders in connection with the Remarketing shall be limited to the extent that the Secondary Purchaser has delivered the Remarketing Price therefor to the Remarketing Agent. (i) Any outstanding Preferred Securities (or, if applicable, the Subordinated Notes) purchased on the Remarketing Settlement Date shall be deemed to be transferred to the Secondary Purchaser and shall be replaced in the manner provided in Section 5(j). After the Remarketing Settlement Date (except in the event of (y) a Failed Remarketing or (z) a failure by the Trust to pay on the Remarketing Settlement Date all accrued and unpaid Distributions (including any Additional Distributions) to such Remarketing Settlement Date (or, in the case of the Subordinated Notes, a failure by the Company to pay on the Remarketing Settlement Date all accrued interest (including any Additional Interest) on the Subordinated Notes to such Remarketing Settlement Date)), (A) the Trust (or the Company, in the case of the Subordinated Notes) shall make no further payments to, and the Trust (or the Company, in the case of the Subordinated Notes) shall have no further obligations under the Trust Agreement (or the Indenture, in the case of the Subordinated Notes) in respect of, the holders of such replaced securities (the "FORMER HOLDERS"), (B) the Trust (or the Company, in the case of 13 15 the Subordinated Notes) shall only be obligated to make payments to the holders of Replacement Securities and (C) the Preferred Securities (or, if applicable, the Subordinated Notes) of the Former Holders shall no longer represent an obligation of, or interest in, the Trust (or the Company, in the case of the Subordinated Notes) but shall only represent a right to receive the proceeds of the Remarketing from the Paying Agent under the Trust Agreement or the Indenture, as the case may be. (j) (i) The Company shall cause replacement certificates evidencing the remarketed Preferred Securities (the "REPLACEMENT PREFERRED SECURITIES") to be executed by an Administrative Trustee on behalf of the Trust and authenticated by the Property Trustee and (ii) the Subordinated Note Issuer shall cause replacement certificates evidencing the Subordinated Notes (the "REPLACEMENT SUBORDINATED NOTES", and together with the Replacement Preferred Securities, the "REPLACEMENT SECURITIES") to be executed by an authorized signatory and authenticated by the Indenture Trustee, in each case, in accordance with the provisions of this Section 5. If the Preferred Securities are to be purchased on the Remarketing Settlement Date, (A) the Replacement Preferred Securities shall be delivered to the purchaser of the remarketed Preferred Securities in accordance with the terms of the Secondary Purchase Agreement and (B) the Replacement Subordinated Notes shall be delivered to the Property Trustee of the Trust. If the Subordinated Notes are to be purchased on the Remarketing Settlement Date, the Replacement Subordinated Notes shall be delivered to the purchaser of the remarketed Subordinated Notes in accordance with the terms of the Secondary Purchase Agreement. SECTION 6. Reset of Distribution Rate, Mandatory Redemption Date, Interest Rate and Maturity Date. From and including the Remarketing Settlement Date on which Replacement Securities are issued, (a) the Distribution Rate on the Trust Securities and the Interest Rate on the Subordinated Notes shall be the Winning Bid Rate and (b) the Mandatory Redemption Date and the maturity date of the Subordinated Notes shall be the Remarketed Redemption Date. SECTION 7. Renewed Remarketing. If a Remarketing has occurred pursuant to Section 5 that would be a Failed Remarketing pursuant to Section 5(e), because the purchase and sale of the Preferred Securities (or, if applicable, the Subordinated Notes) do not take place on the corresponding Remarketing Settlement Date, and the reason for such failure shall, in the good faith determination of the Remarketing Agent, result from facts or circumstances that are not due to the action or inaction of the Company, then the provisions of Section 5 shall apply to a second remarketing (a "RENEWED REMARKETING") of the Preferred Securities (or, if applicable, the Subordinated Notes), except that the Expected Reset Date shall be the sixth Business Day following such corresponding Remarketing Settlement Date; provided that only one Renewed 14 16 Remarketing may occur pursuant to this Section 7, and no Renewed Remarketing shall occur after the Final Reset Date. SECTION 8. Failed Remarketing; Contingent Purchase Obligation. The Remarketing Agent shall give notice of any Failed Remarketing on the date such Failed Remarketing occurs, or is deemed to have occurred, by 4:00 p.m., New York City time, to the Company, the Subordinated Note Issuer, the Property Trustee, the Indenture Trustee and the Paying Agent under the Indenture. In the case of (i) any Failed Remarketing or (ii) a Change of Control, the Holders of a Majority in Liquidation Amount of the Trust Securities (or, if applicable, the holders of a majority in principal amount of the Subordinated Notes) may, by notice in writing to the Company, which notice, in the case of a Failed Remarketing, shall be given not later than 15 days after the occurrence of such Failed Remarketing, require the Company to purchase from the holders thereof, on a Pro Rata basis in accordance with Section 9 of Annex I to the Trust Agreement, all outstanding Trust Securities (or, if applicable, all outstanding Subordinated Notes) for a purchase price equal to the aggregate Liquidation Amount of such Trust Securities plus accrued but unpaid Distributions thereon (or, if applicable, the aggregate principal amount of such Subordinated Notes plus accrued but unpaid interest thereon). Payment of such purchase price shall be made directly to each such holder on the tenth Business Day following the date of the notice to the Company pursuant to the preceding sentence. Such purchase shall be without recourse of any kind to any such holder. The parties recognize that the occurrence of a Failed Remarketing indicates that it would not be commercially reasonable under the circumstances to require Holders of Trust Securities (or, if applicable, holders of the Subordinated Notes) to attempt to resell such securities otherwise than pursuant to this Section 8, and that therefore in the event of any default by the Company in its obligations under this Section 8, a holder shall be entitled to recover the price of the securities specified herein. SECTION 9. Senior Obligations. The obligations of the Company hereunder constitute senior unsecured obligations, and shall rank pari passu with all other senior unsecured obligations of the Company. Such obligations are not subject to, and shall not be affected by, the provisions of Article 10 of the Base Indenture. SECTION 10. Replacement and Resignation of Remarketing Agent. (a) The Company shall not have the right to replace BAS as the Remarketing Agent, except in the case of bad faith, gross negligence or willful misconduct by BAS. (b) BAS may resign at any time for good reason (after consultation with the Company) and, subject to the following sentence, shall be discharged from its duties and obligations hereunder or as Calculation Agent under the Trust Agreement and the Indenture by giving no less than 10 days' notice. Any such 15 17 resignation shall become effective upon the Company's appointment of a successor to perform the services that would otherwise be performed hereunder by the Remarketing Agent or the Calculation Agent under the Trust Agreement and the Indenture, as the case may be, and the agreement of any such successor so to serve. Upon receiving notice from the Remarketing Agent that it wishes to resign hereunder or as Calculation Agent under the Trust Agreement and the Indenture stating the reasons for such resignation, the Company shall appoint such a successor and enter into a new remarketing agreement with it as soon as reasonably practicable. (c) This Agreement shall terminate as to any Remarketing Agent that is replaced on the effective date of its replacement pursuant to Section 10(b). Notwithstanding any such termination, the obligations of the Company set forth in Section 14 shall survive and remain in full force and effect until all amounts payable under said Section 14 shall have been paid in full. SECTION 11. Dealing in the Securities. BAS, when acting as Remarketing Agent hereunder or under the Secondary Purchase Agreement or when acting in its individual or any other capacity, may, to the extent permitted by law, buy, sell, hold or deal in any of the Preferred Securities or Subordinated Notes. The Remarketing Agent may exercise any vote or join in any action with respect to any Preferred Securities or Subordinated Notes owned by it with like effect as if it did not act in any capacity hereunder. BAS, in its individual capacity, either as principal or agent, may also engage in or have an interest in any financial or other transaction with the Company as freely as if it did not act in any capacity hereunder. SECTION 12. Offering Memorandum. Promptly following its receipt of a Remarketing Notice pursuant to Section 5(a)(i), the Company shall furnish an offering memorandum (the "OFFERING MEMORANDUM") to the Remarketing Agent, in form and substance reasonably satisfactory to the Remarketing Agent, to be used in the remarketing by the Secondary Purchaser or purchasers under the Secondary Purchase Agreement, and shall pay all expenses relating to the preparation and furnishing of such Offering Memorandum. SECTION 13. Conditions to the Remarketing Agent's Obligations. (a) The obligations of the Remarketing Agent, the Secondary Purchaser and any other purchasers to perform their respective obligations hereunder and under the Secondary Purchase Agreement shall be subject to the terms and conditions of the Secondary Purchase Agreement. (b) If at any time during the term of this Agreement, any Event of Default under the Indenture or any Event of Default under the Trust Agreement, or event that with the passage of time or the giving of notice or both would 16 18 become an Event of Default under the Indenture or an Event of Default under the Trust Agreement, has occurred and is continuing under the Indenture or the Trust Agreement, then the obligations and duties of the Remarketing Agent under this Agreement shall be suspended until such default or event has been cured. The Trust shall cause the Property Trustee to provide to the Remarketing Agent notice of all such defaults and events of which the Property Trustee is aware and the Company shall cause the Indenture Trustee to provide to the Remarketing Agent notice of all such defaults and events of which the Indenture Trustee is aware. SECTION 14. Indemnification. The Company shall indemnify and hold harmless the Remarketing Agent and its officers and employees from and against all actions, claims, damages, liabilities and losses, and costs and expenses related thereto (including reasonable legal fees and costs) relating to or arising out of actions or omissions in any capacity hereunder and in any capacity as Calculation Agent under the Trust Agreement and the Indenture, except actions, claims, damages, liabilities, losses, costs and expenses to the extent caused by (a) the bad faith, gross negligence or wilful misconduct of such indemnified party or (b) the breach by the Remarketing Agent of its representations, warranties and covenants hereunder. This Section 14 shall survive the termination of the Agreement, the Trust Agreement, the Indenture and the payment in full of all obligations under the Preferred Securities or the Subordinated Notes, as the case may be, and this Agreement, whether by purchase, repurchase, redemption or otherwise. SECTION 15. Remarketing Agent's Performance: Duty of Care; Power of Attorney. The duties and obligations of the Remarketing Agent hereunder shall be determined solely by the express provisions of this Agreement and the Secondary Purchase Agreement. The Remarketing Agent hereby accepts the obligation set forth in the Trust Agreement and the Indenture to act as attorney-in-fact for the holders of the Preferred Securities or Subordinated Notes, as the case may be. SECTION 16. Expenses. The Company shall pay the reasonable fees and disbursements of the Remarketing Agent's counsel incurred in connection with any Remarketing, including any Renewed Remarketing and any Failed Remarketing and the Company shall pay the reasonable fees, expenses and disbursements of the Remarketing Agent and its counsel in connection with the execution and delivery of the Secondary Purchase Agreement. SECTION 17. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to the choice of law rules thereof. 17 19 SECTION 18. Term of Agreement. Unless otherwise terminated in accordance with the provisions hereof and except as otherwise provided herein, this Agreement shall remain in full force and effect from the date hereof until 30 days after the earlier of (i) the date all Preferred Securities (or, if applicable, Subordinated Notes) shall have been redeemed or purchased pursuant to Section 8 hereof and (ii) the Reset Date in connection with a Remarketing that is not a Failed Remarketing. SECTION 19. Successors and Assigns. The rights and obligations of the Company hereunder may not be assigned or delegated to any other person without the prior written consent of the Remarketing Agent. Subject to the provisions of Section 10, the rights and obligations of the Remarketing Agent hereunder may not be assigned or delegated to any other person without the prior written consent of the Company. This Agreement shall inure to the benefit of and be binding upon the Trust, the Company and the Remarketing Agent and their respective successors and assigns. The terms "successors" and "assigns" shall not include any purchaser of Preferred Securities or Subordinated Notes merely as a result of such purchase. This Agreement shall inure to the benefit of the Holders of the Preferred Securities (or, if applicable, holders of the Subordinated Notes). SECTION 20. Headings. Section headings have been inserted in this Agreement as a matter of convenience of reference only, and it is agreed that such section headings are not a part of this Agreement and shall not be used in the interpretation of any provision of this Agreement. SECTION 21. Severability. If any provision of this Agreement shall be held or deemed to be or shall, in fact, be invalid, inoperative or unenforceable as applied in any particular case in any or all jurisdictions because it conflicts with any provisions of any constitution, statute, rule or public policy or for any other reason, such circumstances shall not have the effect of rendering the provision in question invalid, inoperative or unenforceable in any other case, circumstances or jurisdiction, or of rendering any other provision or provisions of this Agreement invalid, inoperative or unenforceable to any extent whatsoever. SECTION 22. Counterparts. This Agreement may be executed in counterparts, each of which shall be regarded as an original and all of which shall constitute one and the same document. SECTION 23. Amendments. This Agreement may be amended by any instrument in writing signed by the parties hereto; provided that any amendment to Section 5 shall require the consent of all Holders of the Preferred Securities (or, following the distribution of Subordinated Notes to Holders of the Preferred Securities upon dissolution of the Trust, the Subordinated Notes). 18 20 SECTION 24. Notices. Unless otherwise specified, any notices, requests, consents or other communications given or made hereunder or pursuant hereto shall be made in writing or transmitted by any standard form of telecommunication, including telephone, telegraph or telecopy, and confirmed in writing. All written notices and confirmations of notices by telecommunication shall be deemed to have been validly given or made when delivered or mailed, registered or certified mail, return receipt requested and postage prepaid. All such notices, requests, consents or other communications shall be addressed as follows: if to the Company, to: Hercules Incorporated Hercules Plaza 1313 North Market Street Wilmington, DE 19894-0001 Facsimile: Attention: Vice President and Treasurer (with a copy to General Counsel) if to the Trust, to: Hercules Trust V c/o Hercules Incorporated Hercules Plaza 1313 North Market Street Wilmington, DE 19894-0001 Facsimile: Attention: Vice President and Treasurer (with a copy to General Counsel) and if to the Remarketing Agent, to: Banc of America Securities LLC 9 West 57th Street New York, NY 10019 Facsimile: (212) 847-5124 Attention: William Caccamise or to such other address as any of the above shall specify to the other in writing. SECTION 25. Extension Fee. (a) Sponsor agrees to pay to BAS an extension fee (the "EXTENSION FEE") in the amount of 2.25% of the aggregate Liquidation Amount of the Preferred Securities in consideration for the extension of (i) the Mandatory Redemption Date of the Securities (as set forth in Section 19 21 1.01 of Amendment No. 4 to the Trust Agreement) and (ii) the Maturity Date of the Subordinated Notes (as set forth in Section 1.01 of the Sixth Supplemental Indenture). The Extension Fee shall be payable upon execution of this Agreement. (b) In the event of a Remarketing, BAS shall repay to the Company a pro rata portion of the Extension Fee. The pro rata portion of the Extension Fee referred to in the immediately preceding sentence shall be calculated by multiplying (i) the total amount of the Extension Fee by (ii) the number of days from and including the Remarketing Settlement Date to and including February 9, 2002 over the number of days from and including February 9, 2000 to and including February 9, 2002. 20 22 IN WITNESS WHEREOF, each of the Company, the Trust and the Remarketing Agent has caused this Remarketing Agreement to be executed in its name and on its behalf by one of its duly authorized officers as of the date first above written. HERCULES INCORPORATED By: ___________________________________ Name: Title: HERCULES TRUST V By: ___________________________________ Name: Title: Confirmed and Accepted as of the date hereof: BANC OF AMERICA SECURITIES LLC, not individually, but solely as Remarketing Agent By: _____________________________________ Name: Title: EX-10.K 10 LONG TERM INCENTIVE COMPENSATION PLAN 1 Exhibit 10-K HERCULES INCORPORATED LONG TERM INCENTIVE COMPENSATION PLAN (AS AMENDED AND RESTATED) [HERCULES LOGO] Hercules Plaza Wilmington, DE 19894-0001 April 29, 1999 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I PURPOSE ......................................................................... 1 ARTICLE II DEFINITIONS AND CONSTRUCTION .................................................... 1 Section 2.1 Definitions ....................................................... 1 (1) Accelerated Date ................................................. 1 (2) Act............................................................... 1 (3) APD Election ..................................................... 1 (4) Attributable Shares .............................................. 1 (5) Award............................................................. 1 (6) Award Commitment ................................................. 1 (7) Award Items....................................................... 2 (8) Base Salary....................................................... 2 (9) Beneficiary....................................................... 2 (10) Board............................................................ 2 (11) Bonus............................................................ 2 (12) Cash Value Award or CVA.......................................... 2 (13) CEO.............................................................. 2 (14) Change in Control................................................ 2 (15) Code............................................................. 2 (16) Committee ....................................................... 2 (17) Common Stock..................................................... 2 (18) Company ......................................................... 2 (19) Date of Grant ................................................... 2 (20) Designated Retirement Date ...................................... 2 (21) Disability ...................................................... 2 (22) Fair Market Value ............................................... 3 (23) Grantee ......................................................... 3 (24) Grantor ......................................................... 3 (25) Hercules Incorporated Deferred Compensation Plan ................ 3 (26) Hercules Incorporated Non-Qualified Savings Plan ................ 3 (27) Hercules Pension Plan ........................................... 3 (28) Hercules Pension Restoration Plan ............................... 3 (29) Incentive Stock Option or ISO ................................... 3 (30) Management Incentive Compensation Plan .......................... 3 (31) Maximum Award ................................................... 3 (32) Minimum Award ................................................... 3 (33) Nonqualified Option ............................................. 4 (34) Nonreporting Person ............................................. 4 (35) Normal Retirement Date .......................................... 4 (36) Normal Vesting Date ............................................. 4 (37) Option or Stock Option .......................................... 4 (38) Optionee ........................................................ 4 (39) Option Period ................................................... 4 (40) Option Price .................................................... 4 (41) Other Market-Based Awards ....................................... 4 (42) Other Performance-Based Awards .................................. 4 (43) Participating Subsidiary ........................................ 4 (44) PASO Period ..................................................... 4
i 3 (45) Payout Schedule ................................................. 4 (46) Performance Accelerated Stock Option or "PASO" .................. 4 (47) Performance Goal ................................................ 4 (48) Performance Period .............................................. 4 (49) Performance Share ............................................... 5 (50) Performance Share Award ......................................... 5 (51) Performance Share Fair Market Value ............................. 5 (52) Phantom Unit .................................................... 5 (53) Phantom Unit Award .............................................. 5 (54) Phantom Unit Fair Market Value .................................. 5 (55) Reduction in Force .............................................. 5 (56) Related Entity .................................................. 5 (57) Reporting Person ................................................ 5 (58) Restricted Stock ................................................ 5 (59) Restricted Stock Award .......................................... 5 (60) Restricted Stock Unit............................................ 5 (61) Restricted Stock Unit Award...................................... 5 (62) Restricted Period ............................................... 5 (63) Restriction Range ............................................... 5 (64) Retirement ...................................................... 6 (65) Rule 16b-3 ...................................................... 6 (66) SAR ............................................................. 6 (67) SAR Fair Market Value ........................................... 6 (68) Stock Appreciation Right......................................... 6 (69) Stock Appreciation Right Award................................... 6 (70) Stock Option Award............................................... 6 (71) Subsidiary ...................................................... 6 (72) Substitution Awards ............................................. 6 (73) Suspension Period ............................................... 6 (74) Target Award .................................................... 6 Section 2.2 Construction ............................................................... 6 ARTICLE III STOCK AVAILABLE FOR AWARDS .................................................... 7 Section 3.1 Common Stock ......................................................... 7 Section 3.2 Number of Shares Deliverable ......................................... 7 Section 3.3 Reusable Shares ...................................................... 7 Section 3.4 Shares Not Charged Against Available Shares .......................... 7 ARTICLE IV AWARDS AND AWARD AGREEMENTS ................................................... 7 Section 4.1 General............................................................... 7 Section 4.2 Eligibility .......................................................... 8 Section 4.3 Terms and Conditions; Award Commitments .............................. 8 4.3.1 Terms And Conditions.................................................. 8 4.3.2 Award Commitments..................................................... 8 ARTICLE V OPTIONS AND STOCK APPRECIATION RIGHTS........................................... 8 Section 5.1 Award of Options...................................................... 8 5.1.1 Grants................................................................ 8 5.1.2 Types of Options ..................................................... 9 5.1.3 Substantial Stockholder .............................................. 9 5.1.4 Maximum Award ........................................................ 9 Section 5.2 Option Price ......................................................... 9 Section 5.3 Option Periods ....................................................... 9 Section 5.4 Exercise of Options .................................................. 9 5.4.1 Exercisability . ..................................................... 9
ii 4 5.4.2 Certain Limitations. ................................................. 9 5.4.3 Method of Exercise.................................................... 9 Section 5.5 Time and Method ...................................................... 10 5.5.1 Form of Payment....................................................... 10 5.5.2 Time of Payment ...................................................... 10 5.5.3 Methods for Tendering Shares ......................................... 10 5.5.4 ISO Limitation ....................................................... 10 Section 5.6 Delivery of Shares ................................................... 10 Section 5.7 Stockholder Rights ................................................... 10 Section 5.8 Incentive Stock Options .............................................. 10 5.8.1 Individual Limitation ................................................ 10 5.8.2 Code Qualification.................................................... 11 5.8.3 Notice of Disposition ................................................ 11 Section 5.9 Stock Appreciation Rights Awards...................................... 11 5.9.1 Grants................................................................ 11 5.9.2 SAR Exercise.......................................................... 11 5.9.3 Value of SAR Payment ................................................. 11 5.9.4 Time and Method of Payment ........................................... 11 5.9.5 Effect of SAR and Option Exercises.................................... 12 5.9.6 Nature of SARs ....................................................... 12 Section 5.10 Performance Accelerated Stock Options Awards ......................... 12 5.10.1 Grants ............................................................... 12 5.10.2 Accelerated Date ..................................................... 12 5.10.3 PASO Period .......................................................... 12 5.10.4 Exercisability ....................................................... 13 5.10.5 Corporate or Business Goals .......................................... 13 5.10.6 PASOs Treated Like Options ........................................... 13 ARTICLE VI PERFORMANCE SHARE AWARDS ....................................................... 13 Section 6.1 Grants ............................................................... 13 Section 6.2 Performance Period ................................................... 13 Section 6.3 Performance Goals .................................................... 13 Section 6.4 Payout Schedule ...................................................... 14 Section 6.5 Issuance of Stock and Stock Certificates ............................. 14 6.5.1 Issuance.............................................................. 14 6.5.2 Custody and Legends .................................................. 14 Section 6.6 Restrictions and Forfeitures.......................................... 14 Section 6.7 Stockholder Rights.................................................... 15 Section 6.8 Delivery of Shares and Cash Payments.................................. 15 6.8.1 Determination of Performance Results and Award Settlement...................................................... 15 6.8.2 Delivery of Shares and Payment of Cash ............................... 15 6.8.3 Revisions for Significant Events ..................................... 16 6.8.4 Conditions Precedent.................................................. 16 6.8.5 Performance Share Fair Market Value .................................. 16 ARTICLE VII RESTRICTED STOCK AWARDS ........................................................ 17 Section 7.1 Grants ............................................................... 17 Section 7.2 Restricted Period .................................................... 17 Section 7.3 Restrictions and Forfeiture .......................................... 17 Section 7.4 Issuance of Stock and Stock Certificate .............................. 17 7.4.1 Issuance ............................................................. 17 7.4.2 Custody and Legends................................................... 18 Section 7.5 Stockholder Rights ................................................... 18 Section 7.6 Delivery of Shares ................................................... 18
iii 5 ARTICLE VIII PHANTOM UNIT AWARDS............................................................. 18 Section 8.1 Grants ............................................................... 18 Section 8.2 Vesting of Awards .................................................... 19 Section 8.3 Value of Phantom Units Payments ...................................... 19 Section 8.4 Time and Method of Payment ........................................... 19 Section 8.5 Forfeiture of Phantom Units .......................................... 19 Section 8.6 Nature of Phantom Units .............................................. 20 ARTICLE IX CASH VALUE AWARDS .............................................................. 20 Section 9.1 Grants ............................................................... 20 Section 9.2 Performance Period ................................................... 20 Section 9.3 Performance Goals .................................................... 20 Section 9.4 Payout Schedule ...................................................... 20 Section 9.5 Form Of Payout........................................................ 20 Section 9.6 Calculation Of Payout ................................................ 21 ARTICLE X OTHER AWARDS ................................................................... 21 Section 10.1 Other Market-Based Awards ............................................ 21 Section 10.2 Other Performance-Based Awards ....................................... 21 Section 10.3 Terms of Other Awards ................................................ 21 Section 10.4 Stock Option Dividend Equivalents..................................... 22 10.4.1 Grants ............................................................... 22 10.4.2 Interest ............................................................. 22 10.4.3 Forfeiture............................................................ 22 ARTICLE XI SUBSTITUTION AWARDS............................................................. 22 Section 11.1 Substitution of Performance Shares ................................. 22 Section 11.2 Substitution of Restricted Stock ................................... 22 Section 11.3 Substitution Procedures ............................................ 22 Section 11.4 Substitutions in Contemplation of Retirement ....................... 22 ARTICLE XII TERMINATION OF EMPLOYMENT ..................................................... 23 Section 12.1 Retirement ......................................................... 23 12.1.1 Stock Options and SARs ............................................. 23 12.1.2 Performance Share, Restricted Stock, Phantom Unit, and Cash Value Awards ........................................ 23 12.1.3 Performance Accelerated Stock Options .............................. 23 12.1.4 Restricted Stock Unit............................................... 23 Section 12.2 Reduction in Force ................................................. 24 12.2.1 Stock Options and SARs ............................................. 24 12.2.2 Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit and Cash Value Awards ................................. 24 12.2.3 Performance Accelerated Stock Options............................... 24 Section 12.3 Transfers to Certain Related Entities............................... 24 12.3.1 Stock Options and SARs ............................................. 24 12.3.2 Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit and Cash Value Awards ................................. 24 12.3.3 Performance Accelerated Stock Options............................... 24 Section 12.4 Disability or Death................................................. 25 12.4.1 Stock Options and SARs ............................................. 25 12.4.2 Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit and Cash Value Awards ................................. 25 12.4.3 Performance Accelerated Stock Options............................... 25 Section 12.5 Resignation ........................................................ 25
iv 6 12.5.1 Stock Options, SARs and Performance Accelerated Stock Options ...... 25 12.5.2 Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit and Cash Value Awards ................................. 25 Section 12.6 Decrease in Company Ownership ...................................... 26 12.6.1 Stock Options and SARs ............................................. 26 12.6.2 Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit and Cash Value Awards ................................. 26 12.6.3 Performance Accelerated Stock Options .............................. 26 Section 12.7 Termination of Employment for Other Reasons ........................ 26 12.7.1 Stock Options, SARs and Performance Accelerated Stock Options .......................................... 26 12.7.2 Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit and Cash Value Awards.................................. 26 Section 12.8 Termination Date.................................................... 27 Section 12.9 Reporting Person Limitation ........................................ 27 ARTICLE XIII EXCHANGE AWARDS; ABOVE TARGET MICP AWARDS....................................... 27 Section 13.1 Salary/Bonus Reductions............................................. 27 13.1.1 Restricted Stock ................................................... 27 13.1.2 Options............................................................. 27 Section 13.2 Deferred Accounts .................................................. 28 13.2.1 Deferred Compensation Plan Accounts ................................ 28 13.2.2 Non-Qualified Savings Plan Accounts ................................ 28 Section 13.3 Termination of Employment .......................................... 28 13.3.1 Death, Disability and Reduction in Force ........................... 28 13.3.2 Retirement.......................................................... 29 13.3.3 Resignation or Termination for Cause ............................... 29 Section 13.4 Avoidance of Pension Diminution .................................... 29 13.4.1 Governing Provisions ............................................... 29 13.4.2 Exchange Awards .................................................... 30 13.4.3 Designated Retirement Date ......................................... 30 Section 13.5 Irrevocability ..................................................... 30 Section 13.6 Equivalency ........................................................ 30 Section 13.7 MICP Awards ........................................................ 31 Section 13.8 Definition ......................................................... 31 ARTICLE XIV CERTAIN TERMS APPLICABLE TO ALL AWARDS ......................................... 31 Section 14.1 Withholding Taxes .................................................. 31 Section 14.2 Adjustments to Reflect Capital Changes.............................. 32 14.2.1 Recapitalization ................................................... 32 14.2.2 Sale or Reorganization ............................................. 32 14.2.3 Options to Purchase Stock of Acquired Companies ................... 32 Section 14.3 Failure to Comply With Terms and Conditions ........................ 32 Section 14.4 Forfeiture Upon Occurrence of Certain Events ....................... 32 Section 14.5 Regulatory Approvals and Listing ................................... 33 Section 14.6 Restrictions Upon Resale of Stock .................................. 33 Section 14.7 Reporting Person Limitation ........................................ 33 ARTICLE XV DISPUTES .................................................................... 33 ARTICLE XVI ADMINISTRATION OF THE PLAN ..................................................... 34 Section 16.1 Committee .......................................................... 34 Section 16.2 Committee Actions .................................................. 34 Section 16.3 No Liability of Committee Members .................................. 34
v 7 ARTICLE XVII EFFECTIVE DATE, TERM OF THE PLAN AND STOCKHOLDER APPROVAL .......................... 34 ARTICLE XVIII CHANGE IN CORPORATE CONTROL ...................................................... 35 Section 18.1 Options ............................................................ 35 Section 18.2 SARs ............................................................... 35 Section 18.3 All Other Awards ................................................... 35 Section 18.4 Definitions ........................................................ 35 ARTICLE XIX AMENDMENT AND TERMINATION ..................................................... 36 Section 19.1 Amendment .......................................................... 36 Section 19.2 Suspension or Termination .......................................... 36 Section 19.3 No Repricing of Options............................................. 36 ARTICLE XX MISCELLANEOUS .................................................................. 37 Section 20.1 Deferral Election .................................................. 37 Section 20.2 Designation of Beneficiary ......................................... 37 Section 20.3 No Right to an Award or to Continued Employment .................... 37 Section 20.4 Discretion of the Committee and the CEO ............................ 37 Section 20.5 Indemnification and Exculpation .................................... 38 20.5.1 Indemnification .................................................... 38 20.5.2 Exculpation ........................................................ 38 Section 20.6 Unfunded Plan....................................................... 38 Section 20.7 Inalienability of Rights and Interests ............................. 38 Section 20.8 Awards Not Includable for Benefit Purposes ......................... 39 Section 20.9 No Issuance of Fractional Shares ................................... 39 Section 20.10 Modification for Overseas Grantees ................................. 39 Section 20.11 Leaves of Absence .................................................. 39 Section 20.12 Communications ..................................................... 39 20.12.1 Communications by the Committee .................................... 39 20.12.2 Communications by the Participants and Others ...................... 39 Section 20.13 Parties in Interest ................................................ 39 Section 20.14 Severability ....................................................... 40 Section 20.15 Compliance with Laws ............................................... 40 Section 20.16 No Strict Construction ............................................. 40 Section 20.17 Modification ....................................................... 40 Section 20.18 Governing Law ...................................................... 40
vi 8 HERCULES INCORPORATED LONG TERM INCENTIVE COMPENSATION PLAN ARTICLE I PURPOSE The Hercules Incorporated Long Term Incentive Compensation Plan, the terms of which are herein set forth (as the same is now in effect or as hereafter amended from time to time, the "Plan"), is intended to advance the interests of Hercules Incorporated, a Delaware corporation (the "Company"), and its stockholders by providing a means by which the Company and its participating subsidiaries and affiliates shall be able to motivate selected key employees (including officers and directors who are employees) to direct their efforts to those activities that will contribute materially to the Company's success. The Plan is also intended to serve the best interests of the stockholders by linking remunerative benefits paid to employees who have substantial responsibility for the successful operation, administration and management of the Company and/or its participating subsidiaries and affiliates with the enhancement of stockholder value while such key employees increase their proprietary interest in the Company. Finally, the Plan is intended to enable the Company to attract and retain in its employ highly qualified persons for the successful conduct of its business. The Plan became effective as of April 1, 1991, and was amended and restated as of June 30, 1993, April 27, 1995, April 24, 1997, and is hereby further amended and restated as of April 29, 1999. Notwithstanding anything to the contrary, the said amended and restated Plan shall not terminate or adversely affect any Awards granted prior hereto. ARTICLE II DEFINITIONS AND CONSTRUCTION SECTION 2.1 DEFINITIONS The following words and phrases when used in the Plan with an initial capital letter, unless their context clearly indicates to the contrary, shall have the respective meanings set forth below in this Section 2.1: (1) Accelerated Date. As defined in Subsection 5.10.2. (2) Act. The Securities Exchange Act of 1934, as now in effect or as hereafter amended from time to time. References to any section or subsection of the Act are to such section or subsection as the same may from time to time be amended or renumbered and/or any comparable or succeeding provisions of any legislation that amends, supplements or replaces such section or subsection. (3) APD Election. As defined in Subsection 13.4.2 (4) Attributable Shares. As defined in Subsection 9.6. (5) Award. A grant of Award Items in accordance with the provisions of the Plan. A grant of a particular Award Item may sometimes be referred to as follows: "Stock Option Award" for a grant of Stock Options; "Stock Appreciation Right Award" for Stock Appreciation Rights; "PASO Award" for Performance Accelerated Stock Options; "CVA Award" for Cash Value Awards; "Performance Shares Award" for Performance Shares; "Restricted Stock Award" for Restricted Stock; and "Phantom Unit Award" for Phantom Units. (6) Award Commitment. The written commitment delivered by the Company to the Grantee evidencing an Award and setting forth such terms and conditions of the Award as may be deemed appropriate by the Committee. The Award Commitment shall be in a form approved by the Committee, and 1 9 shall be deemed amended from time to time to include such additional terms and conditions as the Committee may specify after the execution in the exercise of its powers under the Plan. (7) Award Items. Individually and collectively, as the case may be, the items awarded to any Grantee in accordance with the provisions of the Plan in the form of Options, Stock Appreciation Rights, Performance Accelerated Stock Options, Cash Value Awards, Performance Shares, Restricted Stock, Phantom Units or other award, or any combination of the foregoing. (8) Base Salary. The regular salary paid to an employee. Base salary shall not include bonuses or other forms of compensation which are not considered regular earnings by the Committee. (9) Beneficiary. Any individual, estate or trust who or which by designation of the Grantee pursuant to Section 20.2 or operation of law succeeds to the rights and obligations of the Grantee under the Plan and Award Commitment upon the Grantee's death. (10) Board. The Board of Directors of the Company. (11) Bonus. An amount payable pursuant to the Management Incentive Compensation Plan or any other short term incentive compensation plan approved by the Committee. (12) Cash Value Award or CVA. A grant in accordance with the provisions of the Plan in the form of a designated cash value payable in cash, Common Stock or Restricted Stock, or a combination thereof, all as determined by the Grantor at the Payout Date. (13) CEO. The Chief Executive Officer of the Company. (14) Change in Control. The occurrence of an event defined in Section 18.4, which event is of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A promulgated under the Act as in effect on the date hereof or, if Item 6(e) is no longer in effect, any regulations issued by the Securities and Exchange Commission pursuant to the Act which serves similar purposes. (15) Code. The Internal Revenue Code of 1986, as now in effect or as hereafter amended from time to time, and as construed and interpreted by valid regulations issued by the United States Internal Revenue Service thereunder. References to any section or subsection of the Code are to such section or subsection as the same may from time to time be amended or renumbered and/or any comparable or succeeding provisions of any legislation that amends, supplements or replaces such section or subsection. (16) Committee. The Compensation Committee of the Board or such other committee as may be designated by the Board to administer the Plan. (17) Common Stock. Voting common stock authorized for issuance by the Company and issued and outstanding. (18) Company. Hercules Incorporated and its successors and assigns. (19) Date of Grant. The date designated by the Grantor as the date as of which the Grantor grants an Award, which shall not be earlier than the date on which the Grantor approves the granting of such Award. (20) Designated Retirement Date. As defined in Section 13.4.3. (21) Disability. A physical or mental impairment sufficient to make the individual eligible for benefits under the Long-Term Disability Plan of Hercules Incorporated or under a disability plan of one of the Participating Subsidiaries (whether or not a participant in such disability plan), so long as for 2 10 Incentive Stock Options such impairment also constitutes a disability within the meaning of Section 22(e)(3) of the Code. (22) Fair Market Value. Unless otherwise indicated in the provisions of the Plan, as of any date the closing price for one share of Common Stock as reported on the Composite Tape for New York Stock Exchange Listed Companies and published in the Eastern Edition of The Wall Street Journal, or, if there is no trading on the date in question, the closing price of the Common Stock, as so reported and published, on the next preceding date on which there was trading in Common Stock. (23) Grantee. An employee of the Company or any Participating Subsidiary to whom an Award is granted. At the time of award, such employee (including any director or officer who is also an employee) must be in the regular full-time employment of the Company or any Participating Subsidiary, without limitation as to length of service. (24) Grantor. The Committee or the CEO, as the case may be, who grants an Award. The Committee shall (i) grant Awards to Reporting Persons and (ii) establish the maximum aggregate amount of particular Award Items to be granted to Nonreporting Persons as a group and (iii) establish the guidelines and oversight under which, pursuant to authorities granted by the Committee, the CEO may grant Awards to Nonreporting Persons. Notwithstanding anything to the contrary, the CEO is not intended to be nor shall be construed as a member of the Committee. In making awards to Nonreporting Persons, the CEO is acting as a delegee of the Committee and is at all times accountable to the Committee and authorized to act only in accordance with the provisions of the Plan and the guidelines and direction provided by the Committee from time to time. (25) Hercules Incorporated Deferred Compensation Plan. The Hercules Incorporated Deferred Compensation Plan as the same is now in effect or as hereafter amended from time to time. (26) Hercules Incorporated Non-Qualified Savings Plan. The Hercules Incorporated Non-Qualified Savings Plan (a portion of the Hercules Incorporated Deferred Compensation Plan) as the same is now in effect or as hereafter amended from time to time. (27) Hercules Pension Plan. The Hercules Pension Plan as the same is now in effect or as hereafter amended from time to time. (28) Hercules Pension Restoration Plan. The Hercules Employee Pension Restoration Plan as the same is now in effect or as hereafter amended from time to time. (29) Incentive Stock Option or ISO. An Option granted pursuant to Section 5.1 which is intended to meet, and structured with a view to satisfying, the requirements of Section 422 of the Code and is designated by the Committee as an Incentive Stock Option. The Award of an Incentive Stock Option shall contain such provisions as are necessary to comply with such Section 422. (30) Management Incentive Compensation Plan. The Hercules Incorporated Annual Management Incentive Compensation Plan as the same is now in effect or as hereafter amended from time to time. (31) Maximum Award. The number or amount of Performance Accelerated Stock Options, Cash Value Awards, or Performance Shares, as the case may be, which vest when the maximum performance in the relevant Performance Range is achieved. (32) Minimum Award. The number or amount of Performance Accelerated Stock Options, Cash Value Awards, or Performance Shares, as the case may be, which vest when the minimum performance in the relevant Performance Range is achieved. 3 11 (33) Nonqualified Option. An Option granted pursuant to Section 5.1 which does not qualify as, and is not designated by the Committee as, an Incentive Stock Option and is designated as a Nonqualified Option. (34) Nonreporting Person. A Grantee who is not subject to Section 16 of the Act. (35) Normal Retirement Date. Age 65. (36) Normal Vesting Date. As defined in Subsection 5.10.1. (37) Option or Stock Option. A right granted pursuant to Article V that for a specified period of time entitles the holder thereof to purchase full shares of Common Stock at a stated price. At the discretion of the Committee, an Option may be an Incentive Stock Option or a Nonqualified Stock Option. (38) Optionee. A Grantee to whom an Option or Stock Appreciation Right or Performance Accelerated Stock Option, as the case may be, is granted pursuant to Article V. (39) Option Period. As defined in Section 5.3. (40) Option Price. The per share price at which shares of Common Stock may be purchased upon exercise of a particular Option or Performance Accelerated Stock Option. (41) Other Market-Based Awards. Awards granted in accordance with Section 9.1. (42) Other Performance-Based Awards. Awards granted in accordance with Section 9.2. (43) Participating Subsidiary. Any Subsidiary (existing from time to time) designated by the Board as a Participating Subsidiary; provided, however, for Incentive Stock Options only, "Participating Subsidiary" means any such Subsidiary which at the time such Option is granted qualifies as a "Subsidiary" of the Company under Section 424(b) of the Code. (44) PASO Period. As defined in Subsection 5.10.3. (45) Payout Schedule. The distribution scheme for applicable Award Items for a given Plan Year upon performance of varying goals, all as established by either the Committee with respect to the Company, or by the CEO (or his designee or designees) with respect to a given subsidiary, business unit, corporate staff group or individual. (46) Performance Accelerated Stock Option or "PASO". Stock Option with a normal vesting date established by the Committee; provided, however, that under certain circumstances such vesting date may be accelerated by the Committee to an earlier date if the Committee determines that the applicable Performance Goal has been met. (47) Performance Goal. The level of performance established by the Grantor, which must be achieved in order to earn or vest the applicable Minimum Award, Target Award, Maximum Award or intermediate level of Award Items. (48) Performance Period. The period of time selected by the Committee during which the achievement of Performance Goals is measured for purposes of determining the extent to which an applicable Award Item has been earned or will vest. (49) Performance Share. A contingent right to receive, when certain performance criteria have been attained, without payment to the Company, the amounts of Common Stock and cash 4 12 determined under Article VI. Such rights are subject to forfeiture or reduction if the applicable Performance Goals are not met within the applicable Performance Period. (50) Performance Share Award. A Performance Share Award under Article VI, settlement of which is contingent upon attainment during a Performance Period of Performance Goals. (51) Performance Share Fair Market Value. As defined in Subsection 6.8.5. (52) Phantom Unit. A right to receive, without payment to the Company, an amount of cash equal to the value of a share of Common Stock as of a future date, plus dividend equivalents and interest payments provided for in Article VIII. A "unit" of phantom units does not represent or entitle the recipient to any equity securities of the Company, but instead involves the creation of an unfunded account for the recipient, the value of which is measured by reference to the value of Common Stock. (53) Phantom Unit Award. An Award of Phantom Units under Article VIII, subject to such forfeiture provisions as are set forth in the Award Commitment. (54) Phantom Unit Fair Market Value. As defined in Section 8.3. (55) Reduction in Force. Termination of employment by the Company or a Participating Subsidiary in such a manner that the employee so terminated is eligible to receive benefits under the Company or a Participating Subsidiary dismissal salary plan. (56) Related Entity. A corporation, partnership, joint venture or other entity not more than 50% but at least 20% of whose outstanding voting stock or voting power for the election of directors is beneficially owned directly or indirectly by the Company. (57) Reporting Person. A Grantee who is subject to Section 16 of the Act. (58) Restricted Stock. Shares of Common Stock issued, without payment to the Company, pursuant to a Restricted Stock Award granted under Article VII. For a specific period of time such shares are subject to a substantial risk of forfeiture and to such restrictions against sale, transfer or other disposition, as determined by the Committee at the time of grant. (59) Restricted Stock Award. An Award of Restricted Stock under Article VII. (60) Restricted Stock Unit. A right to receive, without payment to the Company, a number of shares of Common Stock as of a future date, plus dividend equivalents and interest payments provided for in Article VIII. A unit of a Restricted Stock Unit does not represent or entitle the recipient to any equity securities of the Company until such future date. In the interim, the unit represents an unfunded account for the recipient, the value which is measured by reference to the value of Common Stock. 61) Restricted Stock Unit Award. An award of Restricted Stock Units under Article VIII, subject to such forfeiture provisions as are set forth in the Award Commitment. (62) Restricted Period. As defined in Section 7.2. (63) Restriction Range. As defined in Section 7.2. (64) Retirement. Termination of employment at Normal Retirement Date or with consent of the Company with immediate eligibility for retirement benefits under a retirement or pension plan maintained by the Company, a Participating Subsidiary or Related Entity. (65) Rule 16b-3. Rule 16b-3 of the General Rules and Regulations under the Act, or any law, rule, regulation or other provision that may hereafter replace such Rule. 5 13 (66) SAR. A Stock Appreciation Right, as defined below. (67) SAR Fair Market Value. As defined in Subsection 5.9.3. (68) Stock Appreciation Right. A right granted pursuant to Article V pursuant to which the holder of a related Option, upon exercise of the Stock Appreciation Right and in lieu of exercising the related Option, is entitled to surrender the related Option, or any applicable portion thereof, to the extent unexercised, and to receive an amount equal to the appreciation in market value of a fixed number of shares of Common Stock from the Date of Grant. Stock Appreciation Rights may be payable in shares of Common Stock or cash, or a combination of both. Under the Plan, Stock Appreciation Rights are granted in tandem with Options. (69) Stock Appreciation Right Award. An Award of Stock Appreciation Rights under Article V. (70) Stock Option Award. An Award of Options under Article V. (71) Subsidiary. Any corporation, partnership, joint venture or other entity in which the Company owns, directly or indirectly through one or more intermediaries, at least 50% of the outstanding voting stock or voting power for the election of directors or equivalent governing body. In the case of Incentive Stock Options, Subsidiary shall mean any corporation that qualifies as a "subsidiary corporation" of the Company under Section 424(f) of the Code. (72) Substitution Awards. As defined in Section 11. (73) Suspension Period. As defined in Article XIII. (74) Target Award. The number or amount of Performance Accelerated Stock Options, Cash Value Awards or Performance Shares, as the case may be, which vest when the target performance in the relevant Performance Range is achieved. SECTION 2.2 CONSTRUCTION Whenever any words are used herein in the masculine gender, they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form they shall be construed as though they were also used in the plural form in all cases where they would so apply. Headings of sections and subsections of this Plan are inserted for convenience of reference, are not a part of this Plan, and are not to be considered in the construction hereof. The words "hereof," "herein," "hereunder" and other similar compounds of the word "here" shall mean and refer to the entire Plan, and not to any particular provision or section. The words "includes", "including" and other similar compounds of the word "include" shall mean and refer to including without limitation. All references herein to specific Articles, Sections or Subsections shall mean Articles, Sections or Subsections of this document unless otherwise qualified. 6 14 ARTICLE III STOCK AVAILABLE FOR AWARDS SECTION 3.1 COMMON STOCK Only Common Stock may be delivered under this Plan, such shares to be made available from authorized but unissued shares or from shares reacquired by the Company, including shares purchased in the open market. SECTION 3.2 NUMBER OF SHARES DELIVERABLE Subject to adjustments as provided in Section 14.2: (i) during the period of October 1, 1996, through April 30, 2002, the maximum aggregate number of shares for all Award Items shall be 15,000,000; and (ii) of the maximum 15,000,000 shares available, no more than 8,200,000 shares may be granted for Award Items which are other than Options. SECTION 3.3 REUSABLE SHARES In the event that shares of Common Stock underlying an Award are returned to the Company for any reason (including forfeited or unexercised items) other than the surrender of Options upon the exercise of a Stock Appreciation Rights, the shares so affected shall be available for use under this Plan to the same Grantee or other Grantee by way of any type or form of Option or Award authorized under the Plan; provided, however, that shares received by the Company upon the exercise of an ISO and shares subject to an ISO surrendered upon exercise of a SAR shall not be available for the subsequent award of ISOs under this Plan, and that shares received by the Company upon the return (whether due to forfeiture or otherwise) of Restricted Stock or Performance Shares shall not be available for a subsequent Award under this Plan. SECTION 3.4 SHARES NOT CHARGED AGAINST AVAILABLE SHARES Shares of Common Stock issued in payment of Stock Appreciation Rights shall not be charged against the number of shares of Common Stock available for subsequent Awards. Shares of Common Stock substituted in accordance with Article XI for shares previously awarded under this Plan or the Hercules Incorporated Restricted Stock Plan of 1986 shall not be counted against the authorized aggregate number of shares which may be issued under the Plan. ARTICLE IV AWARDS AND AWARD COMMITMENTS SECTION 4.1 GENERAL 4.1.1 Subject to the provisions of this Plan, the Committee may (i) determine and designate at any time and from time to time those Reporting Persons to whom Awards are to be granted; (ii) determine the time or times when Awards shall be granted; (iii) determine the form or forms of Awards to be granted to any Reporting Person or to Nonreporting Persons, as a group; (iv) determine the number of Award Items subject to each Award to be granted to any Reporting Person; (v) determine the maximum aggregate number of shares of Award Items subject to Awards to be granted to Nonreporting Persons, as a group; (vi) determine the terms and conditions of each Award; (vii) determine the number of shares of Restricted Stock a Reporting Person may acquire by exchange pursuant to Section 13.1 and the time or times of such acquisition; and (viii) determine the number of Options a Reporting or Nonreporting Person may acquire by exchange pursuant to Section 13.1 and the time or times of acquisition. 4.1.2 The CEO shall, subject to the provisions of the Plan, (i) determine and designate at any time and from time to time those Nonreporting Persons to whom Awards are to be granted; (ii) determine the form or forms of Award to be granted any Nonreporting Person and (iii) determine the number of Award Items subject to each 7 15 Award to be granted to any Nonreporting Person. Awards may be granted singly, in combination or in tandem and may be made in combination or in tandem with or in replacement of, or as alternatives to awards or grants under any other employee plan maintained by the Company or its present or future Participating Subsidiaries. Unless this Plan is extended, no Awards shall be granted or exchanges effected under the Plan after April 30, 2002, but any then-current restrictions applicable to any Awards theretofore granted or exchanges theretofore effected shall extend beyond that date in accordance with their provisions and any shares of Common Stock used in payment of Cash Value Awards and/or Performance Shares originally granted before April 30, 2002, may be delivered after April 30, 2002, in accordance with the provisions of the applicable Award. Notwithstanding the later delivery of such shares of Common Stock, the number of such shares shall be credited against the maximum aggregate number in effect under Section 3.2 at the date of such original grant. SECTION 4.2 ELIGIBILITY The persons who shall be eligible to receive Awards granted pursuant to this Plan shall be such employees (including directors and officers who are also employees) of the Company or any of the Participating Subsidiaries as the relevant Grantor shall select from time to time from among those who contribute or may be expected to contribute to the successful performance of the Company or any Participating Subsidiary. Employees eligible for Phantom Unit Awards shall include, in addition to employees of the Company or any of the Participating Subsidiaries, any employees of any other Subsidiary or Related Entity. SECTION 4.3 TERMS AND CONDITIONS; AWARD COMMITMENTS 4.3.1 Terms And Conditions. Each Award granted pursuant to this Plan shall be subject to all of the terms, conditions and restrictions provided in this Plan and such other terms, conditions and restrictions, if any, as may be specified by the Committee with respect to the Award in question at the time of the making of the Award or as may be specified thereafter by the Committee in the exercise of its powers under the Plan. Without limiting the foregoing, it is understood that the Committee may, at any time and from time to time after the granting of an Award hereunder, specify such additional terms, conditions and restrictions with respect to such Award as may be deemed necessary or appropriate to ensure compliance with any and all applicable laws, including, but not limited to, terms and conditions for compliance with Federal and state securities laws and methods of withholding or providing for the payment of required taxes. The terms, conditions and restrictions with respect to any Award, Grantee or Award Commitment need not be identical with the terms, conditions and restrictions with respect to any other Award, Grantee or Award Commitment. 4.3.2 Award Commitments. Each Award granted pursuant to the Plan shall be subject to all the terms, conditions and restrictions provided in the Plan and such other terms, conditions and restrictions, if any, as may be specified by the Committee with respect to the Award in question at the time of the making of the Award or as may be specified thereafter by the Committee in the exercise of its powers under the Plan. Each Award granted pursuant to the Plan shall be evidenced by an Award Commitment and shall comply with, and be subject to, the provisions of the Plan. The Award Commitment shall not be a precondition to the granting of Awards; however, no person shall have any rights under any Award granted under the Plan unless and until the Company shall have executed and delivered an Award Commitment to the Grantee to whom such Award shall have been granted. An executed original of the Award Commitment shall be provided to both the Company and the Grantee. ARTICLE V OPTIONS AND STOCK APPRECIATION RIGHTS SECTION 5.1 AWARD OF OPTIONS 5.1.1 Grants. From time to time and upon the recommendation of the CEO, the Committee may grant Stock Option Awards in such number as it may determine to such Reporting Persons as the Committee may select. From time to time, the CEO may grant Stock Option Awards in such number as he may determine to such Nonreporting Persons as he may select; provided, however, each and all such grants shall be subject to any maximum 8 16 aggregate amount of Options established by the Committee for grants under the Plan for Nonreporting Persons as a group. The Committee shall determine the number of shares of Common Stock to which each Option relates; provided, however, such number of shares of Common Stock shall automatically be reduced on a share for share basis to the extent that shares are issued pursuant to the exercise of the Option or shares subject to the Option are the basis for the exercise of the related Stock Appreciation Right. 5.1.2 Types of Options. Options granted pursuant to the Plan may be either in the form of Incentive Stock Options or in the form of Nonqualified Options. Incentive Stock Options and Nonqualified Options shall be granted separately hereunder. The Committee shall determine whether and to what extent Options granted under the Plan shall be Incentive Stock Options or Nonqualified Options and the Option shall be so designated. 5.1.3 Substantial Stockholder. No Option shall be granted hereunder to any person who, at the time such Option is to be granted, owns stock of the Company or of any of its Subsidiaries possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any such Subsidiary. For purposes of the preceding sentence, the attribution rules of stock ownership set forth in Section 424(d) of the Code shall apply. 5.1.4 Maximum Award To An Individual. During the period from April 29, 1999, through April 30, 2002, no person shall be granted or receive more than 1,500,000 Options and/or Performance Accelerated Stock Options in the aggregate. SECTION 5.2 OPTION PRICE The Option Price of Common Stock covered by each Option shall be determined by the Committee but shall not be less than 100% of the Fair Market Value of a share of Common Stock on the Date of Grant. SECTION 5.3 OPTION PERIODS The Committee shall determine the term of each Option. Subject to earlier termination as provided in Articles XI, XII and XIII, the term shall not exceed ten (10) years from the Date of Grant. SECTION 5.4 EXERCISE OF OPTIONS 5.4.1 Exercisability. Subject to Subsection 5.4.2 and Articles XII and XIII, each Option shall be exercisable at any time or times during the Option Period and in such amount or amounts as the Committee may prescribe and specify in the applicable Award Commitment (subject further in the case of Incentive Stock Options, to such restrictions as may be imposed from time to time by the Code). 5.4.2 Certain Limitations. The Committee may provide that an Option may not be exercised in whole or in part for any period or periods of time, from zero to nine and one-half (9.5) years as specified in the Award Commitment. Except as provided in Article XII, or as otherwise determined by the Committee, an Option may be exercised only during the continuance of the Grantee's employment with the Company or any of its Subsidiaries. Options granted to a Reporting Person shall not be exercisable until at least six (6) months have elapsed from the Date of Grant of the Option. No Option may be exercised after the expiration of the applicable Option Period. No Option may be exercised for a fractional share. 5.4.3 Method of Exercise. A Grantee may exercise an Option, in whole or from time to time in part, by giving written notice of exercise to the Company. The notice of exercise shall be on a form approved by the Committee and shall state the number of shares with respect to which the Option is being exercised. Such notice must be received by the office of the Company designated in the Award Commitment on or before the expiration date of the Option. SECTION 5.5 TIME AND METHOD OF PAYMENT 5.5.1 Form of Payment. The Optionee shall pay the Option Price in cash or, with the Committee's permission and according to such rules as they may prescribe, by delivering shares of Common Stock already owned 9 17 by the Optionee for at least six months prior to the date of exercise and having a Fair Market Value on the date of exercise equal to the Option Price, or a combination of cash and shares. The Committee may also permit payment in accordance with a cashless exercise program under which, if so instructed by the Optionee, shares of Common Stock may be issued directly to the Optionee's broker or dealer upon receipt of the purchase price in cash from the broker or dealer. 5.5.2 Time of Payment. The Optionee shall pay the Option Price not later than ten (10) days after the date of a statement from the Company following exercise setting forth the Option Price, Fair Market Value of Common Stock on the exercise date, the number of shares of Common Stock that may be delivered in payment of the Option Price (if applicable) and the amount of withholding tax due, if any. If the Optionee fails to pay the Option Price within the ten (10) day period, the Committee shall have the right to take whatever action it deems appropriate, including voiding the Option exercise. 5.5.3 Methods for Tendering Shares. The Committee shall determine acceptable methods for tendering shares of Common Stock as payment upon exercise of an Option and may impose such limitations and restrictions on the use of shares of Common stock to exercise an Option as it deems appropriate. 5.5.4 ISO Limitation. Common Stock acquired by the Grantee which is identified as having been obtained through an Incentive Stock Option under the Plan and still subject to Incentive Stock Option holding requirements as defined in the Code, may not be tendered in payment of the Option Price. SECTION 5.6 DELIVERY OF SHARES No shares of Common Stock shall be delivered pursuant to the exercise, in whole or in part, of any Option, unless and until (i) payment in full of the Option Price therefor is received by the Company and (ii) compliance with all applicable requirements and conditions of this Plan, the Award Commitment and such rules and regulations as may be established by the Committee that are preconditions to delivery, including, but not limited to, the requirements and conditions of Section 14.5. Promptly after exercise of the Option, payment in full of the Option Price and compliance with the conditions described in the preceding sentence, the Company shall effect the issuance to the Optionee of such number of shares of Common Stock as are subject to the Option exercise. SECTION 5.7 STOCKHOLDER RIGHTS An Optionee shall have none of the rights or privileges of a stockholder with respect to any shares of Common Stock covered by an Option unless and until the Optionee has given written notice of exercise of the Option, has paid in full the Option Price for such shares of Common Stock and has otherwise complied with this Plan, the Award Commitment and such rules and regulations as may be established by the Committee, and the shares are issued to him. No adjustment shall be made for dividends in cash or property or other distributions or rights with respect to any such shares of Common Stock for which the record date is prior to the date on which the Optionee or a transferee of the Option shall have become the holder of record of any such shares covered by the Option. Notwithstanding anything to the contrary, an Option may include dividend equivalents as described in Section 10.4. SECTION 5.8 INCENTIVE STOCK OPTIONS 5.8.1 Individual Limitation. No Grantee may be granted an ISO under this Plan (or any other plans of the Company or any Participating Subsidiary) which would result in Common Stock with an aggregate Fair Market Value (measured as of the Date of Grant) of more than $100,000 first becoming exercisable in any one calendar year, or which would entitle such Grantee to purchase a number of shares greater than the maximum number permitted by Section 422(d)(1) of the Code as in effect on the Date of Grant. 5.8.2 Code Qualification. Whenever possible, each provision in the Plan and in every Option granted under this Plan which is designated by the Committee as an ISO shall be interpreted in such a manner as to entitle the Option to the tax treatment afforded by Section 422 of the Code. If any provision of the Plan or any Option designated by the Committee as an ISO shall be held not to comply with requirements necessary to entitle such Option to such tax treatment, then (i) such provision shall be deemed to have contained from the outset such language as shall be 10 18 necessary to entitle such Option to the tax treatment afforded under Section 422 of the Code, and (ii) all other provisions of this Plan and the Award Commitment shall remain in full force and effect. If any Award Commitment covering an Option designated by the Committee to be an ISO under the Plan shall not explicitly include any terms required to entitle such ISO to the tax treatment afforded by Section 422 of the Code, all such terms shall be deemed implicit in the designation of such Option and such Option shall be deemed to have been granted subject to all such terms. 5.8.3 Notice of Disposition. An Optionee shall give prompt notice to the Company of any disposition of shares of Common Stock acquired upon exercise of an ISO if such disposition occurs within either two (2) years after grant or one year after receipt of such shares by such Optionee. Such Optionee shall also comply with any applicable withholding requirements. SECTION 5.9 STOCK APPRECIATION RIGHTS AWARDS 5.9.1 Grants. The Committee may grant SARs at the same time as Optionees are awarded Options under the Plan. Each SAR shall be in tandem with and relate to a specific Option under the Plan and shall specify that the number of Option Shares subject to the SAR shall be equal to the number of shares of Common Stock that the Optionee is entitled to receive pursuant to the related Option. 5.9.2 SAR Exercise. A SAR may be exercised, in whole or in part, within the period specified for the exercise of the Option in the related Option grant only upon surrender of the related Option (or portion thereof) by the Optionee. Each SAR shall be exercisable at such time or times, on the conditions and to the extent, but only to the extent, that the related Option is exercisable, provided that no such SAR (except in the case of death or physical or mental incapacity) shall be exercisable prior to the expiration of six (6) months following the Date of Grant and, provided further, that any SAR granted hereunder may provide, at the election of the Committee, that the SAR may be exercised only at a time when the Optionee to whom the SAR has been granted is subject to the provisions of Section 16(b) of the Act. Each SAR and all rights and obligations thereunder shall terminate and may no longer be exercised upon the termination or exercise of the related Option. An Optionee may exercise a SAR by giving written notice of exercise to the Company stating the number of shares of Common Stock subject to exercisable Options with respect to which the SARs are being exercised. The date upon which such written notice is received by the Company shall be the exercise date for the SARs. An Option and SAR covering the same share of Common Stock may not be exercised simultaneously. 5.9.3 Value of SAR Payment. If an Optionee exercises a SAR, he shall receive an amount equal to the product of (i) the amount by which the SAR Fair Market Value on the exercise date of one share of Common Stock exceeds the Option Price of the related Option, times (ii) the number of shares covered by the Option, or portion thereof, which is surrendered. For purposes of this Article V, "SAR Fair Market Value" of a SAR or share of Common Stock on any date shall be the average of the daily closing prices of a share of Common Stock for five (5) consecutive business days immediately preceding the day in question as reported on the Composite Tape for New York Stock Exchange Listed Companies and published in the Eastern Edition of The Wall Street Journal, subject to the provisions of Section 5.9.4. 5.9.4 Time and Method of Payment 5.9.4.1 Any payment which may become due from the Company by reason of an Optionee's exercise of a SAR may be paid to the Optionee all in cash, all in shares of Common Stock or partly in shares and partly in cash, as determined by the Committee. The Committee shall determine the timing of any payment made. 5.9.4.2 If paid in cash, the amount thereof shall be the amount of appreciation determined under Subsection 5.9.3. The payments to be made, in whole or in part, in cash upon the exercise of SARs by any Reporting Person shall be made in accordance with the provisions relating to the exercise of SARs of Rule 16b-3 of the General Rules and 11 19 Regulations under the Act, as in effect at the time of such exercise, or any law, rule, regulation or other provision that may hereafter replace such Rule. 5.9.4.3 In the event that all or a portion of the payment is made in shares of Common Stock, the number of shares of Common Stock received shall be determined by dividing the amount of the appreciation determined under Subsection 5.9.3 by the SAR Fair Market Value of a share of Common Stock on the exercise date of the SAR. Cash will be paid in lieu of any fractional share of Common Stock or, if the Committee should so determine, the number of shares of Common Stock will be rounded downward to the next whole share of Common Stock. All shares shall be valued at their SAR Fair Market Value as of the date of such exercise; provided, however, that with respect to exercises of SARs by an employee who is subject to the provisions of Section 16(b) of the Act during any period commencing on the third business day following the date of release for publication of the quarterly or annual summary statements of the Company's sales and earnings and ending on the twelfth business day following such date (a "window period"), the Committee may prescribe, by rule of general application, such other measure of fair market value per share as the Committee may, in its discretion, determine, but not in excess of the highest sale price of the Common Stock reported on the Composite Tape for New York Stock Exchange Listed Companies and published in the Eastern Edition of The Wall Street Journal during such window period. Notwithstanding the foregoing, the fair market value (or SAR Fair Market Value, if applicable) of SARs that relate to an ISO, shall not be in excess of the maximum amount that would be permissible under Section 422 of the Code without disqualifying such option as an ISO under such Section 422. 5.9.5 Effect of SAR and Option Exercises. Upon exercise of a SAR, the number of shares of Common Stock subject to exercise under the related Option shall automatically be reduced by the number of shares of Common Stock represented by the Option or portion thereof surrendered, as provided in Subsection 5.1.1. Shares of Common Stock subject to Options or portions thereof surrendered upon the exercise of SARs shall not be available for subsequent awards under the Plan. The exercise of any number of Options shall result in an equivalent reduction in the number of shares of Common Stock covered by the related SAR and such shares may not again be subject to a SAR under this Plan. 5.9.6 Nature of SARs. SARs shall be used solely as a device for the measurement and determination of the amount to be paid to Grantees as provided in the Plan. SARs shall not constitute or be treated as property or as a trust fund of any kind. All amounts at any time attributable to the SARs shall be and remain the sole property of the Company and all Grantees' rights hereunder are limited to the rights to receive cash and shares of Common Stock as provided in the Plan. SECTION 5.10 PERFORMANCE ACCELERATED STOCK OPTIONS AWARDS 5.10.1 Grants. From time to time and upon the recommendation of the CEO, the Committee may grant PASOs in such number as it may determine to such Reporting Persons as the Committee may select. From time to time, the CEO may grant PASOs in such number as he may determine to such Nonreporting Persons as he may select; provided, however, each and all such grants shall be subject to Subsection 5.1.4 and any maximum aggregate amount of PASOs established by the Committee for grants under the Plan for Nonreporting Persons as a group. The Committee shall determine the number of PASOs to be awarded; provided, however, such number of PASOs shall automatically be reduced on a share for share basis to the extent that shares are issued pursuant to the exercise of the PASO. Subject to Subsection 5.10.2, each PASO shall specify a normal vesting date ("Normal Vesting Date") (which shall be less than the PASO Period). 5.10.2 Accelerated Date. The date or event designated by the Grantor (which shall be earlier than the Normal Vesting Date) at which the vesting of some or all PASOs shall occur if the Grantor determines that the applicable Performance Goals have been met. 5.10.3 PASO Period. The Committee shall determine the term of each PASO. Subject to earlier termination as provided in Article XII, the term shall not exceed ten (10) years. 12 20 5.10.4 Exercisability. Subject to Subsection 5.10.2 and Article XII, or as otherwise determined by the Committee, each PASO shall be exercisable at any time or times during the PASO Period and in such amount or amounts as the Committee may prescribe and specify in the applicable Award Commitment. 5.10.5 Corporate or Business Goals. From time to time, the Grantor shall determine Performance Goals to be used for, among other things, purposes of determining the Accelerated Date. If the Grantor shall determine minimum target and/or maximum performance goals and (i) if the minimum performance goal is not reached, then the Normal Vesting Date of the affected PASOs shall not be accelerated, and the Grantor may either determine new goals on the PASOs or allow the PASOs to vest at the Normal Vesting Date; (ii) if the minimum performance goal is reached but the target performance goal is not reached, then the Grantor may accelerate the Normal Vesting Date to an Accelerated Date for part of the affected PASOs (as specified in the applicable Award Commitment), and for the remainder of the PASOs, the Grantor may determine new goals or allow the PASOs to vest at the Normal Vesting Date; (iii) if the performance goal is reached and the maximum performance goal is not reached, then the Grantor may accelerate the Normal Vesting Date to an Accelerated Date for part of the affected PASOs, and for the remainder of the PASOs, the Grantor may determine new goals or allow the PASOs to vest at the Normal Vesting Date; and (iv) if the maximum performance goal is reached, then the Normal Vesting Date for all affected PASOs shall be accelerated to the Accelerated Date. 5.10.6 PASOs Treated Like Options. Except as otherwise provided in the Plan, PASOs shall be treated identical to Options; provided, however, that if there is a conflict between a provision specifically covering PASOs and one generally covering Options, then the specific provision shall control as to PASOs. ARTICLE VI PERFORMANCE SHARE AWARDS SECTION 6.1 GRANTS From time to time and upon the recommendation of the CEO, the Committee may grant Performance Share Awards in such number as it may determine to such Reporting Persons as the Committee may select. From time to time, the CEO may grant in such number as he may determine Performance Share Awards to such Nonreporting Persons as he may select; provided, however, each and all such grants shall be subject to any maximum aggregate number of Performance Shares established by the Committee for grants under the Plan for Nonreporting Persons as a group. SECTION 6.2 PERFORMANCE PERIOD At the time of a Performance Share Award grant, the Committee shall establish a Performance Period of not less than one year nor more than five (5) years, commencing the Date of Grant of the Award. SECTION 6.3 PERFORMANCE GOALS At the time of each grant, the Committee shall establish for all Performance Share Awards the Performance Goals for the Company and any Participating Subsidiary, while the CEO (or his designee or designees) shall establish for each individual Performance Share Award the business unit, corporate staff group and individual Performance Goals (other than his own which will be the same as the Performance Goals for the Company), if any. All of the designated Performance Goals must be met as a precondition to any distribution or payment being made with respect to the Performance Share Award following the end of the Performance Period. Except as provided in Article XII, these Performance Goals (although their measurement, including adjustments, if any, as permitted under Subsection 6.8.3, will not occur until after the expiration of the applicable Performance Period) must be met during the continuance of the Grantee's employment with the Company or any Participating Subsidiary, prior to the expiration of the applicable Performance Period and prior to the lapse of restrictions and delivery of any shares of Common Stock and/or the making of any payment with respect to the Performance Share Award. Performance Goals may vary among Grantees and among Awards to a Grantee. Performance Goals shall be based upon such performance criteria 13 21 or combination of factors as the Grantor may deem appropriate, including, but not limited to, specified levels of earnings per share, return on investment, return on stockholders' equity and such other goals related to the Company's performance as are deemed appropriate by the Committee. SECTION 6.4 PAYOUT SCHEDULE In tandem with the establishment of the Performance Goals, the Grantor shall establish a Payout Schedule for that Performance Period for each Performance Share Award. Each Payout Schedule shall establish for each Performance Period minimum, target, maximum and intermediate performance and distribution levels for determining the shares of Common Stock deliverable and/or cash payable, if any, upon settlement of the Performance Share Award at the conclusion of the Performance Period. SECTION 6.5 ISSUANCE OF STOCK AND STOCK CERTIFICATES 6.5.1 Issuance. As soon as possible after the Date of Grant of a Performance Share Award, the Company shall cause to be issued to the Grantee such number of shares of Common Stock as prescribed by the applicable Payout Schedule for attainment of target level of performance, that is, the Target Award. Concurrently, the Company shall cause to be issued a stock certificate or certificates, registered in the name of the Grantee and dated the Date of Grant, evidencing such shares. Each such issuance (of shares and of a stock certificate or certificates) shall be subject throughout the Performance Period to the terms, conditions and restrictions (including forfeiture and restrictions against transfer provisions of Section 6.6) contained in this Plan and/or the Award Commitment entered into between the registered owner of such shares and the Company, except as otherwise provided in this Plan. Although not a precondition to the granting of a Performance Share Award, each such issuance shall be subject to forfeiture to the Company as of the date of issuance if an Award Commitment and a stock power endorsed by the Grantee in blank with respect to the shares of Common Stock covered by the Performance Share Award under this Article VI are not duly executed by the Grantee and timely returned to the Company. 6.5.2 Custody and Legends. Each certificate for shares of Common Stock issued in respect of the Performance Share Award awarded under Subsection 6.5.1 shall be held in custody by the Company for the Grantee's account until the expiration or termination of the applicable Performance Period (except as provided in Article XII) and the satisfaction of any and all other conditions of the Award Commitment applicable to Performance Shares covered by the Performance Share Award. Such certificate shall be imprinted with a legend to indicate that the transferability thereof and the shares of stock represented thereby are subject to the terms, conditions and restrictions (including forfeiture and restrictions against transfer) contained in this Plan and/or an Award Commitment entered into between the registered owner of such shares and the Company, a copy of which Plan and Award Commitment is on file in the office of the Company's Corporate Secretary. Such legend shall not be removed from any stock certificate evidencing Performance Shares until the lapse or release of the restrictions as described in Section 6.8. Each certificate also shall be subject to appropriate stop-transfer orders. SECTION 6.6 RESTRICTIONS AND FORFEITURES The shares of Common Stock issued to a Grantee pursuant to Section 6.5 shall be subject to the following restrictions until the expiration or termination of the Performance Period established pursuant to Section 6.2: (i) a Grantee shall not be entitled to delivery of a certificate evidencing the shares of Common Stock covered by the Performance Share Award until the expiration or termination of the Performance Period; (ii) none of such shares of Common Stock may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the Performance Period and until the satisfaction of any and all other conditions; and (iii) all such Common Stock shall be forfeited and returned to the Company and all rights of the Grantee with respect to such Common Stock (including, but not limited to, those specified in Section 6.7) shall terminate without further obligation on the part of the Company unless (x) the Grantee has remained a regular full time employee of the Company or any Participating Subsidiary until the expiration or termination of the Performance Period (except as provided in Article XII) and (y) the satisfaction of any and all other conditions of the Award Commitment applicable to such Common Stock covered by the Performance Share Award is completed. Upon the forfeiture of any shares of Common Stock, ownership of such forfeited shares shall be transferred to the Company without further acts by the Grantee. 14 22 SECTION 6.7 STOCKHOLDER RIGHTS Following registration in the Grantee's name, and subject to execution of the documents provided for in Section 6.5, during the Performance Period the Grantee shall have the entire beneficial interest in, and all rights and privileges of a stockholder as to, such shares of Common Stock awarded to him with respect to the target level performance, including, but not limited to, the right to vote and receive dividends, subject to the restrictions and forfeiture risks set forth in Section 6.6. Any shares of Common Stock distributed as a dividend or otherwise with respect to any shares issued under a Performance Share Award as to which the restrictions have not yet lapsed shall be subject to the same restrictions as such shares. SECTION 6.8 DELIVERY OF SHARES AND CASH PAYMENTS 6.8.1 Determination of Performance Results and Award Settlement. As soon as practicable after the Performance Period expires or otherwise terminates with respect to each Performance Share Award, the Committee shall determine whether and the extent to which any corporate Performance Goals were achieved during the Performance Period; and the Grantor shall determine whether and the extent to which applicable business unit, corporate staff and individual Performance Goals, if any, were achieved during the Performance Period. Following such determinations, a calculation shall be made of the number of shares of Common Stock whose restrictions shall lapse and shall be deliverable and the cash payable, if any, upon settlement of the Performance Share Award. The computation shall be made by application of the Payout Schedule to the degree of actual performance achieved against Performance Goals (determined as provided in the preceding sentence). 6.8.2 Delivery of Shares and Payment of Cash 6.8.2.1 In the event the minimum level of performance established by the Payout Schedule is not achieved, the entire Performance Share Award is forfeited, including, without limitation, the shares of Common Stock held in custody pursuant to Section 6.5. 6.8.2.2 Should the minimum level of performance established by the Payout Schedule be achieved, the Grantee shall have earned (subject to adjustments as provided by Subsection 6.8.3) the applicable Minimum Award and in settlement thereof the Section 6.6 restrictions on that number of shares of Common Stock held in custody pursuant to Section 6.5 equal to the share number specified by the Payout Schedule for performance at the minimum level shall lapse and as promptly as administratively feasible thereafter, the Company shall deliver to the Grantee a stock certificate or certificates for the number of shares of Common Stock earned. Upon such delivery, shares remaining in custody (which are the difference between the applicable Minimum Award and the applicable Target Award) shall be forfeited and ownership transferred to the Company without further acts by the Grantee. 6.8.2.3 In the event the target level of the Payout Schedule is achieved, the Grantee shall have earned (subject to adjustments as provided by Subsection 6.8.3) the applicable Target Award and in settlement thereof the Section 6.6 restrictions on all of the shares held in custody pursuant to Section 6.5 shall lapse and as soon as administratively feasible thereafter the Company shall deliver to the Grantee a stock certificate or certificates for the number of shares of Common Stock earned. 6.8.2.4 For performance at a level between the minimum performance level of the Payout Schedule and the target level of the Payout Schedule the Section 6.6 restrictions on that number of shares of Common Stock held in custody pursuant to Section 6.5 equal to the share number specified by the Payout Schedule for performance at the applicable intermediate level shall lapse and as promptly as administratively feasible thereafter, the Company shall deliver to the Grantee a stock certificate or certificates for the number of shares of Common Stock earned. Upon such delivery, shares remaining in custody (which are the difference between the number of shares prescribed for the level of performance achieved and the Target Award) shall be forfeited and ownership transferred to the Company without further acts by the Grantee. 6.8.2.5 Should the maximum level of performance established by the Payout Schedule be attained or exceeded, the Grantee shall have earned (subject to adjustments as provided by Subsection 6.8.3) the applicable Maximum Award and in settlement thereof (i) the restrictions on that number of shares of Common Stock held in 15 23 custody pursuant to Section 6.5 equal to the share number specified by the Payout Schedule for performance at the target level shall lapse and as promptly as administratively feasible thereafter the Company shall deliver to the Grantee a stock certificate or certificates for the number of shares of Common Stock earned at the target level, and (ii) the share differential between the number of shares specified by the Payout Schedule for performance at the target level and the number of shares specified in the Payout Schedule for performance at the maximum level of performance shall be paid in cash, shares of Common Stock or a combination thereof, as determined by the Committee. Such share differential shall have a value which is the product of the number of shares constituting the share differential times the Performance Share Fair Market Value on the vesting date. 6.8.2.6 For performance between the target level and the maximum level of performance specified in the Payout Schedule (i) the Section 6.6 restrictions on that number of shares of Common Stock held in custody pursuant to Section 6.5 equal to the share number specified by the Payout Schedule for performance at the target level shall lapse and as promptly as administratively feasible thereafter, the Company shall deliver to the Grantee a stock certificate or certificates for the number of shares of Common Stock earned at the target level, and (ii) the share differential between the share number specified by the Payout Schedule for performance at the target level and the share number specified by the Payout Schedule for performance at the applicable intermediate level shall be paid in cash, shares of Common Stock or a combination thereof, as determined by the Committee. Such share differential shall have a value which is the product of the number of shares constituting the share differential times the Performance Share Fair Market Value on the vesting date. 6.8.2.7 Cash payments normally will be made as soon as practicable following the end of the Performance Period. All shares delivered to a Grantee pursuant to this Subsection 6.8.2 shall be without the legend described in Subsection 6.5.2 and shall be free of all restrictions and forfeitures, except as otherwise provided by Article XII or imposed by law. No payment will be required from the Grantee upon the delivery of any shares of Common Stock, except that the amount necessary to satisfy applicable Federal, state or local tax requirements shall be paid by the Grantee in accordance with the requirements of Section 14.1. 6.8.3 Revisions for Significant Events. When circumstances occur (including, but not limited to, unusual or nonrecurring events, changes in tax laws or accounting principles or practices) that cause any Performance Goal, Payout Schedule and/or level of performance or distribution specified in a Payout Schedule to be inappropriate in the judgment of the party initially responsible for establishing the Performance Goal, Payout Schedule and/or performance or distribution level, such party may make such changes as said party deems equitable in recognition of any unforeseen events or changes in circumstances or changed business or economic conditions. 6.8.4 Conditions Precedent. Incentives shall be paid to the Grantee only upon compliance by the Grantee with all obligations of such Grantee under the Plan and/or the Award Commitment with respect to such Performance Share Awards, including the requirement that, except as provided in Article XII, the Performance Goals (although their measurement, including adjustments, if any, required by the Committee or the CEO, as provided herein, will not occur until after the expiration of the applicable Performance Period) must be met during the continuance of the Grantee's employment with the Company or any of the Participating Subsidiaries, prior to the expiration of the applicable Performance Period and prior to the lapse of restrictions and delivery of any shares of Common Stock and/or the making of any payment with respect to the Performance Share Award. 6.8.5 Performance Share Fair Market Value. As used in this Article VI, "Performance Share Fair Market Value" of a Performance Share Unit or a share of Common Stock on any date shall be the average of the daily closing prices for a share of Common Stock for the five (5) consecutive trading days immediately preceding the day in question as reported on the Composite Tape for New York Stock Exchange Listed Companies and published in the Eastern Edition of The Wall Street Journal. 16 24 ARTICLE VII RESTRICTED STOCK AWARDS SECTION 7.1 GRANTS From time to time and upon the recommendation of the CEO, the Committee may grant Restricted Stock Awards in such number as it may determine to such Reporting Persons as the Committee may select. From time to time, the CEO may grant in such number as he may determine Restricted Stock Awards to such Nonreporting Persons as he may select; provided, however, each and all such grants shall be subject to any maximum aggregate number of shares of Restricted Stock established by the Committee for grants under the Plan for Nonreporting Persons as a group. SECTION 7.2 RESTRICTED PERIOD At the time of a Restricted Stock Award grant, the Committee shall establish (for all Restricted Stock shares which are then being awarded to a Participant or, if it is the intent that the total of such shares shall be divided into separate parts, for each part of such total) a Restricted Period of not less than one year or more than five (5) years (the "Restriction Range"), commencing with the Date of Grant of the Award. Different Restricted Periods may be fixed within the Restriction Range for different parts of the shares of Restricted Stock which are being awarded to a Grantee. SECTION 7.3 RESTRICTIONS AND FORFEITURE The shares of Restricted Stock covered by the Restricted Stock Award granted to a Grantee pursuant to Section 7.1 shall be subject to the following restrictions until the expiration or termination of the Restricted Period established pursuant to Section 7.2: (i) a Grantee shall not be entitled to delivery of a certificate evidencing the shares of Restricted Stock covered by the Restricted Stock Award until the expiration or termination of the Restricted Period and the satisfaction of any and all other conditions specified in the Award Commitment applicable to such Restricted Stock shares; (ii) none of the shares of Restricted Stock may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the Restriction Period and until the satisfaction of any and all other conditions specified in the Award Commitment applicable to such Restricted Stock; and (iii) all of the shares of Restricted Stock shall be forfeited and returned to the Company and all rights of the Grantee with respect to such Restricted Stock shares (including, but not limited to, those specified in Section 7.5) shall terminate without further obligation on the part of the Company unless (x) the Grantee has remained a regular full time employee of the Company or any Participating Subsidiary until the expiration or termination of the Restricted Period or Periods and (y) the satisfaction of any and all other conditions of the Award Commitment applicable to such Restricted Stock shares. Upon the forfeiture of any shares of Restricted Stock, such forfeited shares shall be transferred to the Company without further acts by the Grantee. SECTION 7.4 ISSUANCE OF STOCK AND STOCK CERTIFICATE 7.4.1 Issuance. As soon as practicable after the Date of Grant of a Restricted Stock Award, the Company shall cause to be issued to the Grantee such number of shares of Common Stock as constitutes the Restricted Stock shares awarded under the Restricted Stock Award. Concurrently, the Company shall cause to be issued a stock certificate or certificates, registered in the name of the Grantee and dated as of the Date of Grant, evidencing such shares. Each such issuance (of shares and of a stock certificate or certificates) shall be subject throughout the Performance Period to the terms, conditions and restrictions (including forfeiture and restrictions against transfer provisions of Section 7.3) contained in this Plan and/or the Award Commitment entered into between the registered owner of such shares and the Company, except as otherwise provided in this Plan. Although not a precondition to the granting of a Performance Share Award, each such issuance shall be subject to forfeiture to the Company as of the Date of Grant if an Award Commitment and a stock power endorsed by the Grantee in blank with respect to the shares of Restricted Stock covered by the Award under this Article VII are not duly exercised by the Grantee and timely returned to the Company. 17 25 7.4.2 Custody and Legends. Each certificate for shares of Common Stock issued in respect of the Restricted Stock Award granted under Section 7.1 shall be held in custody by the Company for the Grantee's account until the expiration or termination of the applicable Restricted Period (except as provided in Article XII) and the satisfaction of any and all other conditions of the Award Commitment applicable to such shares of Restricted Stock covered by the Restricted Stock Award. Such certificate shall be imprinted with a legend to indicate that the transferability thereof and the shares of Common Stock represented thereby are subject to the terms, conditions and restrictions (including forfeiture and restrictions against transfer) contained in this Plan and/or an Award Commitment entered into between the registered owner of such shares and the Company, a copy of which Plan and Award Commitment is on file in the office of the Company's Corporate Secretary. Such legend shall not be removed from any stock certificate evidencing such Restricted Stock shares until the lapse or release of the restrictions as described in Section 7.3. Each certificate also shall be subject to appropriate stop-transfer orders. SECTION 7.5 STOCKHOLDER RIGHTS Following registration in the Grantee's name and subject to execution of the documents provided for in Section 7.4, during the Restricted Period the Grantee shall have the entire beneficial interest in, and all rights and privileges of a stockholder as to, such shares of Common Stock covered by the Restricted Stock Award, including, but not limited to, the right to vote such shares and the right to receive dividends, subject to the restrictions and forfeitures set forth in Section 7.3. Any shares of Common Stock distributed as a dividend or otherwise with respect to any shares of Restricted Stock as to which the restrictions have not yet lapsed shall be subject to the same restrictions as such Restricted Stock shares. SECTION 7.6 DELIVERY OF SHARES Upon the expiration (without a forfeiture) or earlier termination of the Restriction Period and the satisfaction of or release from any other conditions by the Grantee under the Plan and/or the Award Commitment with respect to such shares of Restricted Stock, or at such earlier time as provided under the provisions of Article XII and/or Article XIII, all of such shares shall be released from all restrictions and forfeiture provisions under Section 7.3, any similar restrictions and forfeiture provisions under the Award Commitment applicable to such shares and all other restrictions and forfeiture provisions of this Plan or such Award Commitment. As promptly as administratively feasible thereafter the Company shall deliver or cause to be delivered to such Grantee a stock certificate or certificates for the appropriate number of shares of Common Stock, free of such restrictions and forfeitures, except as otherwise provided by Article XIV or imposed by law. No payment will be required from the Grantee upon the delivery of any shares of Restricted Stock, except that amount necessary to satisfy applicable Federal, state or local tax requirements shall be paid by the Grantee in accordance with the requirements of Section 14.1. ARTICLE VIII PHANTOM UNIT AWARDS SECTION 8.1 GRANTS From time to time and upon the recommendation of the CEO, the Committee may grant Phantom Unit Awards in such number as it may determine to such Reporting Persons as the Committee may select. From time to time, the CEO may grant Phantom Unit Awards in such number as he may determine to such Nonreporting Persons as he may select; provided, however, each and all such grants shall be subject to any maximum aggregate number of Phantom Units established by the Committee for grants under the Plan for Nonreporting Persons as a group. Notwithstanding the above paragraph, the Committee may at its discretion grant Phantom Units payable in one share of Hercules Common Stock for each unit at the time of vesting pursuant to Section 8.2. In these cases, such Phantom Units are referred to as Restricted Stock Units and during the period that such Restricted Stock Units are awarded, shall be subject to all the provisions of Section 8.2 except, however, such payment shall be made in shares of Hercules Common Stock as contrasted to cash as provided above. 18 26 SECTION 8.2 VESTING OF AWARDS The amounts credited with respect to each Phantom Unit shall become vested on the date or dates determined and set forth in the applicable Award Commitment at the time of grant unless vested sooner as described in Article XII of the Plan. The vesting period shall be determined by the Committee, but in no case shall such period be less than one year or more than five (5) years. Vesting shall be subject to the terms, conditions and provisions hereinafter with respect to forfeiture and termination of Awards or early vesting or forfeiture of Awards in accordance with the provisions of Article XII. SECTION 8.3 VALUE OF PHANTOM UNITS PAYMENTS The amount payable with respect to each vested Phantom Unit Award shall be the sum of (i) the dividends and interest credited to such account and (ii) an amount determined by multiplying the number of Phantom Units posted to such account by the Phantom Unit Fair Market Value on the date of vesting. For the purpose of determining such amount the Company shall establish and maintain a separate memorandum account for each Grantee granted a Phantom Unit Award pursuant to Section 8.1. As of the Date of Grant of each grant of a Phantom Unit Award the Company shall credit to the account of each Grantee who has been granted a Phantom Unit Award such number of Phantom Units as is specified in the Award. From the Date of Grant until the date that payments under the Plan commence the account of each Grantee shall be credited quarterly with an amount determined by multiplying the amount of Phantom Units credited to each account by the per share dividend paid quarterly by the Company on its Common Stock. In addition, each account (representing dividends and credited interest) shall be credited quarterly with an amount determined by multiplying the account balance at the close of each quarter by an amount representing one-fourth of the average per annum rate of interest established by Morgan Guaranty Trust Company (or by such other major New York commercial bank as the Committee shall designate) in New York from time to time during such quarter as its prime lending rate. As used in this Article VIII, "Phantom Unit Fair Market Value" of a Phantom Unit or a share of Common Stock on any date shall be the average of the daily closing prices for a share of Common Stock for the five (5) consecutive trading days immediately preceding the day in question as reported on the Composite Tape for New York Stock Exchange Listed Companies and published in the Eastern Edition of The Wall Street Journal. SECTION 8.4 TIME AND METHOD OF PAYMENT Any payment which may become due from the Company upon the vesting of a Phantom Unit shall be paid to the Grantee in cash. The date or dates upon which amounts determined pursuant to Section 8.3 shall be paid to the Grantee shall be determined by the Committee prior to the Date of Grant and set forth in the applicable Award Commitment or in accord with such rules and regulations as may be adopted by the Committee. SECTION 8.5 FORFEITURE OF PHANTOM UNITS Except as otherwise provided in Article XII, all of the Phantom Units credited to a Grantee's account (including all dividend equivalents and interest credited thereto) shall be forfeited and all rights of the Grantee with respect to such Phantom Units (including any dividend equivalents and interest related thereto) shall terminate without further obligation on the part of the Company unless and until (i) the Grantee has remained a regular full time employee of the Company or any Participating Subsidiary until vesting as described in Section 8.2 and (ii) the satisfaction of any other conditions specified in the Plan and/or Award Commitment applicable to such Phantom Units, except as may otherwise be determined by the Committee. SECTION 8.6 NATURE OF PHANTOM UNITS Phantom Units shall be used solely as a device for the measurement and determination of the amount to be paid to Grantees as provided in the Plan. Phantom Units shall not constitute or be treated as property or as a trust fund of any kind. All amounts at any time attributable to the Phantom Units shall be and remain the sole property of the Company and all Grantees' rights hereunder are limited to the rights to receive cash and shares of Common Stock as provided in the Plan. 19 27 ARTICLE IX CASH VALUE AWARDS SECTION 9.1 GRANTS From time to time and upon the recommendation of the CEO, the Committee may grant Cash Value Awards in such number as it may determine to such Reporting Persons as the Committee may select. From time to time, the CEO may grant Cash Value Awards in such number as he may determine to such Nonreporting Persons as he may select; provided, however, each and all such grants shall be subject to any maximum dollar value established by the Committee for grants under the Plan for Nonreporting Persons as a group. SECTION 9.2 PERFORMANCE PERIOD At the time of a Cash Value Award grant, the Committee shall establish a Performance Period of not less than one year nor more than five (5) years, commencing on the Date of Grant of the Award. SECTION 9.3 PERFORMANCE GOALS At the time of each grant, the Committee shall establish for all Cash Value Awards the Performance Goals for the Company and any Participating Subsidiary, while the CEO (or his designee or designees) shall establish for each individual Cash Value Award the business unit, corporate staff group and individual Performance Goals (other than his own which will be the same as the Performance Goals for the Company), if any. All of the designated Performance Goals must be met as a precondition to any distribution or payment being made with respect to the Cash Value Award following the end of the Performance Period. Except as provided in Article XII, these Performance Goals (although their measurement, including adjustments, if any, will not occur until after the expiration of the applicable Performance Period) must be met during the continuance of the Grantee's employment with the Company or any Participating Subsidiary, prior to the expiration of the applicable Performance Period and prior to the making of any payment with respect to the Cash Value Award. Performance Goals may vary among Grantees and among Awards to a Grantee. Performance Goals shall be based upon such performance criteria or combination of factors as the Grantor may deem appropriate, including, but not limited to, specified levels of earnings per share, return on investment, return on stockholders' equity and such other goals related to the Company's performance as are deemed appropriate by the Committee. SECTION 9.4 PAYOUT SCHEDULE In tandem with the establishment of the Performance Goals, the Grantor shall establish a Payout Schedule for that Performance Period for each Cash Value Award. Each Payout Schedule shall establish for each Performance Period minimum, target, maximum and intermediate performance and distribution levels for determining the payout of the Common Stock, if any, of the Cash Value Award at the conclusion of the Performance Period. SECTION 9.5 FORM OF PAYOUT Payment of a Cash Value Award shall be made in cash, Common Stock, Restricted Stock or any combination thereof as determined by the Grantor at the time of the Payout. Restricted Stock shall be governed by Articles VII and XII; provided, however, that Restricted Stock granted at less than Fair Market Value shall also be governed by Section 9.6 and the Attributable Shares (defined below) shall be governed by Section 13.3. SECTION 9.6 CALCULATION OF PAYOUT As soon as practicable after the Performance Period expires with respect to the Cash Value Award, the Grantor shall determine whether and the extent to which any Performance Goals were achieved during the Performance Period. The Grantor may also determine the amount and form of the Payout. If the Payout is to be paid in Restricted Stock, then the number of shares calculated by the Grantor may be determined by using either 100% or 85% (as determined by the Committee) of the Fair Market Value on the date of issue. If the Grantor uses 85% of the Fair Market Value, then those shares attributable to the discount (i.e., 100% minus 85%) (the "Attributable Shares") 20 28 shall be subject to the forfeiture provisions under Section 13.3; and otherwise, the Restricted Stock shall be subject to forfeiture under Article XII. ARTICLE X OTHER AWARDS SECTION 10.1 OTHER MARKET-BASED AWARDS The Grantor may grant other Market-Based Awards, provided that the purchase price or base price for the equity securities of the Company shall in no event be less than 100% of the Fair Market Value of such security on the Date of Grant. Such Other Market-Based Awards shall be in a form determined by the Committee, and the Committee shall have complete authority to determine the terms, conditions and restrictions of the awards, not inconsistent with the terms of the Plan. The Committee, upon recommendation of the CEO, shall determine the time or times at which such Other Market-Based Awards shall be made. Any such Other Market-Based Award shall be confirmed by an Award Commitment executed by the Company and the Grantee, which Agreement shall contain such provisions as the Committee determines to be necessary or appropriate to carry out the intent of the Plan with respect to such Award. SECTION 10.2 OTHER PERFORMANCE-BASED AWARDS The Grantor may grant Other Performance-Based Awards. Such Other Performance-Based Awards shall be in a form determined by the Committee, and the Committee shall have complete authority to determine the terms, conditions and restrictions of the awards, not inconsistent with the terms of the Plan. The Committee, upon recommendation of the CEO, shall determine the time or times at which such Other Performance-Based Awards shall be made. Any such Other Performance-Based Award shall be confirmed by an Award Commitment executed by the Company and the Grantee, which Agreement shall contain such provisions as the Committee determines to be necessary or appropriate to carry out the intent of the Plan with respect to such Award. SECTION 10.3 TERMS OF OTHER AWARDS In addition to the terms and conditions specified in the Award Commitment, awards made pursuant to this Article X shall be subject to the following: (a) Any shares of Common Stock subject to Awards made under this Article X may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction or performance period lapses; and (b) If specified by the Committee in the Award Commitment, the recipient of an Award under this Article X shall be entitled to receive, currently or on a deferred basis, interest or dividends or dividend equivalents with respect to the Common Stock covered by the Award; and (c) The Award Commitment with respect to any Award shall contain provisions dealing with the disposition of such Award in the event of a termination of employment prior to the exercise, realization or payment of such Award, whether such termination occurs because of retirement, disability, death or other reason, with such provisions to take account of the specific nature and purpose of the Award. SECTION 10.4 STOCK OPTION DIVIDEND EQUIVALENTS. 10.4.1 Grants. The Grantor may provide that a Grantee to whom an Option has been granted which is exercisable in whole or in part at a future time for shares of Common Stock (referred to in this subsection as "Share" or "Shares") shall be entitled to receive an amount per Share equal in value to the cash dividends, if any, paid per Share on issued and outstanding Shares, as of the dividend record dates occurring during the period between the Date of Grant and the time each such Share is delivered pursuant to exercise of such Stock Option or the related Stock 21 29 Appreciation Right. Such amounts (herein called "Dividend Equivalents") shall be paid in cash at the time of the delivery of such Shares. 10.4.2 Interest. The Grantor may authorize payment of interest on Dividend Equivalents. The interest will be payable in cash at the same time the related Dividend Equivalents are paid. 10.4.3 Forfeiture. To the extent the Stock Options to which Dividend Equivalents and interest are related shall be forfeited all accrued Dividend Equivalents and interest thereon shall also be forfeited. ARTICLE XI SUBSTITUTION AWARDS SECTION 11.1 SUBSTITUTION OF PERFORMANCE SHARES Upon the request of the Grantee, the Committee may grant Restricted Stock Awards in substitution for such numbers of shares of Common Stock of equal value held in custody pursuant to Section 6.5 whose restrictions shall lapse upon expiration or other termination of a Performance Period. The number of Performance Shares available for substitution shall be determined by the method described in Section 11.3. Such Substitution Awards shall be subject to such Restricted Periods and other terms, conditions and restrictions as the Committee may from time to time determine. No substitution shall be permitted after termination of employment, regardless of the reason for termination. Once substitution has been approved by the Committee, no payment will be made with respect to an original Award. SECTION 11.2 SUBSTITUTION OF RESTRICTED STOCK Upon request of the Grantee, the Committee may grant Restricted Stock Awards in substitution for shares of Restricted Stock previously awarded either under this Plan or under the Hercules Incorporated Restricted Stock Plan of 1986. Such Awards shall be subject to such Restricted Periods and other terms, conditions and restrictions as the Committee may from time to time determine. No substitution shall be permitted after termination of employment, regardless of the reason for termination. SECTION 11.3 SUBSTITUTION PROCEDURES Any request of a Grantee pursuant to Section 11.1 or 11.2 shall be filed in writing with the Committee in accordance with such rules and regulations, including any deadline for the making of such request, as the Committee may provide. No substitution shall be permitted past any termination of employment described in Article XII or past the occurrence of any of the events specified in clauses (i), (ii) and (iii) of Section 14.4. SECTION 11.4 SUBSTITUTIONS IN CONTEMPLATION OF RETIREMENT Prior to the expiration of the Performance Period or Restricted Period applicable to any Performance Shares or Restricted Stock Awards granted to a Grantee prior to January 1, 1995, such Grantee may, with the consent of the Committee, surrender all or a portion of his Award in substitution for Phantom Unit Awards subject to the terms and conditions of Article VIII, and provided that: (i) such surrender shall be treated as a forfeiture under the Plan; (ii) such substitution shall be made for retirement planning purposes; (iii) such substitution shall be made prior to December 31 of the year preceding the Grantee's Normal Retirement Date but not more than one year prior to the Grantee's Normal Retirement Date; or, in cases where Retirement with consent occurs prior to the Grantee's Normal Retirement Date, not less than sixty (60) nor more than three hundred and sixty (360) days before an announced Retirement approved by the Company; and (iv) any Phantom Units shall be substituted as of the expiration date of the applicable Performance Period in an amount consistent with the number of shares calculated for each Award being substituted. 22 30 ARTICLE XII TERMINATION OF EMPLOYMENT 12.1 RETIREMENT 12.1.1 Stock Options and SARs. If prior to the expiration of the Option Period a Grantee who has been given an Option or SAR under the Plan shall cease to be employed by the Company, any Participating Subsidiary or Related Entity because of his Retirement, (i) in the case of Nonqualified Options (except PASOs) and their related SARs, each Option and SAR shall become immediately exercisable and shall remain exercisable for a period of five (5) years from the date of cessation of employment (with respect to options granted prior to May 1, 1994, the period shall be three (3) years from the date of cessation of employment), but not beyond the end of the Option Period, and (ii) in the case of ISOs and their related SARs, each Option and SAR shall, at such time as it becomes exercisable under the Award Commitment covering such Option, remain exercisable for a period of three (3) months from the cessation of employment, but not beyond the end of the Option Period. 12.1.2 Performance Share, Restricted Stock, Phantom Unit, and Cash Value Awards. If prior to the expiration of the Performance or Restricted Period a Grantee who has been given a Performance Share, Restricted Stock, Phantom Unit or Cash Value Award under the Plan shall cease to be employed by the Company, any Participating Subsidiary or Related Entity because of his Retirement, (i) that Grantee shall be entitled to Performance Shares or Cash Value at the end of the Performance Period based upon the extent to which the Performance Goals were satisfied at the end of such period (provided, however, the Committee may provide for an earlier payment in settlement of such Performance Shares in such amount and under such terms and conditions as the Committee deems appropriate or desirable); and (ii) all remaining restrictions with respect to such Grantee's Restricted Stock and Phantom Unit Awards shall lapse as of the date of termination. 12.1.3 Performance Accelerated Stock Options. If prior to the expiration of the PASO Period a Grantee who has been given a PASO Award under the Plan shall cease to be employed by the Company, any Participating Subsidiary or Related Entity because of his Retirement, that Grantee shall be entitled to PASOs as follows: If the PASOs are exercisable on the date of Retirement, then the PASOs will remain exercisable until the earlier of five (5) years or the end of the PASO period; if the PASOs are not yet exercisable, then they shall become exercisable at the earlier of (i) such time as the PASOs become exercisable through acceleration due to performance, or (ii) four and one-half (4.5) years after Retirement regardless of performance, or (iii) the end of nine and one-half (9.5) years from the award date. Once the PASOs become exercisable, they shall remain exercisable until the earlier of five (5) years after Retirement or the end of the PASO period, provided, however, the Grantor may provide for acceleration of the vesting date and/or an earlier settlement of such PASOs under such terms and conditions as the Grantor deems appropriate or desirable. 12.1.4 Restricted Stock Unit. If prior to the expiration of the restriction period for a Restricted Stock Unit, a grantee who has been granted a Restricted Stock Unit under the Plan, shall cease to be employed by the Company, any participating subsidiary or related entity because of his retirement, that grantee at his election no less than 60 days prior to his designated retirement date, be entitled to defer the payout of such Restricted Stock Units to a future designated date and on such date all remaining restrictions with respect to such grantee"s Restricted Stock shall lapse as of such designated date and shares shall be distributed to such grantee plus accrued dividend equivalents, plus interest thereon, or if no such election is filed, all remaining restrictions with respect to such grantee"s Restricted Stock shall lapse on the date of termination and such shares shall be distributed along with accrued dividend equivalents, plus interest thereon. SECTION 12.2 REDUCTION IN FORCE 12.2.1 Stock Options and SARs. If prior to the expiration of the Option Period a Grantee who has been given a Option or SAR under the Plan shall cease to be employed by the Company or any Participating Subsidiary because of a Reduction in Force, (i) in the case of Nonqualified Options (except PASOs) and their related SARs, each Option and SAR shall become immediately exercisable and shall remain exercisable for a period of one year from the date of cessation of employment, but not beyond the end of the Option Period, and (ii) in the case of an ISO, each 23 31 Option and SAR shall, at such time as it becomes exercisable under the Award Commitment covering such Option, remain exercisable for a period of three (3) months from the cessation of employment, but not beyond the end of the Option Period. 12.2.2 Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit and Cash Value Awards. If prior to the expiration of the Performance or Restricted Period a Grantee who has been given a Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit or Cash Value Award under the Plan shall cease to be employed by the Company or any Participating Subsidiary because of a Reduction in Force, (i) that Grantee shall be entitled to a Minimum Award of Performance Shares or Cash Value at the end of the Performance Period prorated for the portion of the Performance Period during which the Grantee was employed by the Company, any Participating Subsidiary (provided, however, the Committee may provide for an earlier payment in settlement of such Performance Shares or Cash Value in such amount and under such terms and conditions as the Committee deems appropriate or desirable); and (ii) all remaining restrictions with respect to such Grantee's Restricted Stock, Restricted Stock Unit and Phantom Unit Awards shall lapse, in an amount prorated for the amount of time such Awards have remained under restriction, as of the date of termination. 12.2.3 Performance Accelerated Stock Options. If prior to the expiration of the PASO Period a Grantee who has been given a PASO Award under the Plan shall cease to be employed by the Company or any Participating Subsidiary because of a Reduction in Force, the Grantor shall determine the timing, terms and conditions of the exercise of the Award as the Grantor deems appropriate or desirable except that no PASO may be exercised beyond the end of the PASO Period. SECTION 12.3 TRANSFERS TO CERTAIN RELATED ENTITIES 12.3.1 Stock Options and SARs. If prior to the expiration of the Option Period a Grantee who has been given a Option or SAR under the Plan shall cease to be employed by the Company or any Participating Subsidiary because of a transfer to a Related Entity, (i) in the case of Nonqualified Options (except PASOs) and their related SARs, each Option and SAR shall become immediately exercisable and shall remain exercisable for a period of three (3) years from the date of cessation of employment, but not beyond the end of the Option Period, and (ii) in the case of an ISO, each Option and SAR shall, at such time as it becomes exercisable under the Award Commitment covering such Option, remain exercisable for a period of three (3) months from the cessation of employment, but not beyond the end of the Option Period. 12.3.2 Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit and Cash Value Awards. If prior to the expiration of the Performance or Restricted Period a Grantee who has been given a Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit or Cash Value Award under the Plan shall cease to be employed by the Company or any Participating Subsidiary because of a transfer to a Related Entity, then all restrictions with respect to such Performance Shares, Restricted Stock, Restricted Stock Unit or Phantom Units shall remain in effect until the end of the Performance or Restricted Period; provided, however, the Grantor may provide as the case may be for an earlier payment in settlement of such Performance Shares, Restricted Stock, Restricted Stock Units or Phantom Units and for payment of Cash Value Awards, all in such amount and under such terms and conditions as the Grantor deems appropriate or desirable. 12.3.3 Performance Accelerated Stock Options. If prior to the expiration of the PASO Period a Grantee who has been given a PASO Award under the Plan shall cease to be employed by the Company or any Participating Subsidiary because of a transfer to a Related Entity, the Grantor shall determine the timing, terms and conditions of the exercise of the Award as the Grantor deems appropriate or desirable except that no PASO may be exercised beyond the end of the PASO Period. SECTION 12.4 DISABILITY OR DEATH 12.4.1 Stock Options and SARs. If prior to the end of the Option Period a Grantee who has been granted a Option shall cease to be employed by the Company, any Participating Subsidiary or Related Entity by reason of Death or Disability, (i) in the case of Nonqualified Options (excluding PASOs) and their related SARs, each Option and SAR shall become immediately exercisable and shall remain exercisable for a period of one year from the date 24 32 of cessation of employment, but not beyond the end of the Option Period, and (ii) in the case of an ISO, each Option and SAR shall, at such time as it becomes exercisable under the Award Commitment covering such Option, remain exercisable for a period of one year from the cessation of employment, but not beyond the end of the Option Period. Notwithstanding the foregoing, the Committee may, in its sole discretion, on a case-by-case basis, determine for new Options, or extend for outstanding Options, the period during which the Options may be exercised after the Grantee dies or suffers a Disability, provided that such post-termination exercise period may not extend beyond the expiration of the stated Option Period. 12.4.2 Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit and Cash Value Awards. If prior to the expiration of the Performance or Restricted Period a Grantee who has been given a Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit and Cash Value Award under the Plan shall cease to be employed by the Company, any Participating Subsidiary or Related Entity by reason of Death or Disability, (i) that Grantee shall be entitled to Performance Shares or Cash Value (paid in cash) at the Target Award level on the date of termination; and (ii) all remaining restrictions with respect to such Grantee's Restricted Stock, Restricted Stock Unit, and Phantom Unit Awards shall lapse as of the date of termination. 12.4.3 Performance Accelerated Stock Options. If prior to the expiration of the PASO Period, a Grantee who has been given a PASO Award under the Plan shall cease to be employed by the Company, any Participating Subsidiary or Related Entity because of Disability or Death, then such Grantee (or the Beneficiary of such Grantee) shall be entitled to PASOs as follows: if the PASOs are exercisable on the date of such Disability or Death, then the PASOs will remain exercisable until the earlier of one (1) year or the end of the PASO Period; if the PASOs are not yet exercisable, then they shall become exercisable at the earlier of (i) such time as the PASOs become exercisable through acceleration due to performance, or (ii) six (6) months after such Disability or Death, or (iii) nine and one-half (9.5) years from the award date. Once the PASOs become exercisable, they shall remain exercisable until the earlier of one (1) year after or the end of the PASO Period. Notwithstanding the foregoing, the Committee may, in its sole discretion, on a case-by-case basis, determine for new PASOs, or extend for outstanding PASOs, the period during which the PASOs may be exercised after the Grantee dies or suffers a Disability, provided that such post-termination exercise period may not extend beyond the expiration of the stated PASO Period. SECTION 12.5 RESIGNATION 12.5.1 Stock Options, SARs and Performance Accelerated Stock Options. If the Grantee shall voluntarily resign before eligibility for Retirement (except for Retirement with approval of the Company), the Options (including PASOs) and SARs granted in tandem shall be canceled coincident with the effective date of the termination of employment. 12.5.2 Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit and Cash Value Awards. If prior to the expiration of the Performance or Restricted Period a Grantee who has been given a Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit or Cash Value Award under the Plan shall voluntarily resign (except for Retirement with approval of the Company), then all Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit and Cash Value Awards theretofore awarded to such Grantee as to which there still remains an unexpired portion of the Performance or Restricted Period or the vesting period shall, upon such termination of employment, be forfeited by such Grantee to the Company, without the payment of any consideration by the Company. Thereafter, neither the Grantee nor any heirs, assigns or personal representatives of such Grantee shall have any further rights or interest in such Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit or Cash Value Awards, and the Grantee's name shall thereupon be deleted from the list of the Company's stockholders with respect to such Performance Shares, Restricted Stock, Restricted Stock Units, Phantom Units or Cash Value Award. Notwithstanding any other provisions of this Subsection 12.5.2, the value of any vested and deferred Phantom Units shall be paid to the Grantee as soon as practicable. SECTION 12.6 DECREASE IN COMPANY OWNERSHIP 12.6.1 Stock Options and SARs. If prior to the expiration of the Option Period a Grantee who has been given an Option or SAR under the Plan shall cease to be employed by any Participating Subsidiary because of a 25 33 decrease in the Company's ownership interest in a Participating Subsidiary to below 50% but at or above 20%, (i) in the case of Nonqualified Options (except PASOs) and their related SARs, each Option and SAR shall become immediately exercisable and shall remain exercisable for a period of three (3) years from the date of cessation of employment, but not beyond the end of the Option Period, and (ii) in the case of an ISO, each Option and SAR shall, at such time as it becomes exercisable under the Award Commitment covering such Option, remain exercisable for a period of three (3) months from the cessation of employment, but not beyond the end of the Option Period. 12.6.2 Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit and Cash Value Awards. If prior to the expiration of the Performance or Restricted Period a Grantee who has been given a Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit or Cash Value Award under the Plan shall cease to be employed by any Participating Subsidiary because of a decrease in the Company's ownership interest in a Participating Subsidiary to below 50% but at or above 20%, then all restrictions with respect to such Performance Shares, Restricted Stock, Restricted Stock Units or Phantom Units shall remain in effect until the end of the Performance Period or Restricted Period; provided, however, the Committee may provide, as the case may be, for an earlier payment in settlement of such Performance Shares, Restricted Stock, Restricted Stock Units or Phantom Units and for payment of Cash Value Awards, all in such amount and under such terms and conditions as the Committee deems appropriate or desirable or make any other adjustment deemed appropriate due to the decrease in Company ownership. 12.6.3 Performance Accelerated Stock Options. If prior to the expiration of the PASO Period a Grantee who has been given a PASO Award under the Plan shall cease to be employed by the Company or any Participating Subsidiary because of a decrease in company ownership, the Grantor shall determine the timing, terms and conditions of the exercise of the Award as the Grantor deems appropriate or desirable except that no PASO may be exercised beyond the end of the PASO Period. SECTION 12.7 TERMINATION OF EMPLOYMENT FOR OTHER REASONS 12.7.1 Stock Options, SARs and Performance Accelerated Stock Options. If the Grantee's employment terminates for any reason other than specified in Sections 12.1, 12.2, 12.3, 12.4, 12.5 or 12.6, each Option, SAR and PASO shall terminate; provided, however, the Grantor may provide for acceleration of the vesting date and/or an earlier settlement of such PASOs in such amount and under such terms and conditions as the Grantor deems appropriate or desirable. 12.7.2 Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit and Cash Value Awards. If prior to the expiration of the Performance or Restricted Period a Grantee who has been given a Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit or Cash Value Award under the Plan shall cease to be employed by the Company, any Participating Subsidiary or Related Entity because of any reason other than specified in Sections 12.1, 12.2, 12.3, 12.4, 12.5 or 12.6, then all Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit and Cash Value Awards theretofore awarded to such Grantee as to which there still remains an unexpired portion of the Performance or Restricted Period shall, upon such termination of employment, be forfeited by such Grantee to the Company, without the payment of any consideration by the Company; provided, however, the Grantor may provide for settlement of a Cash Value Award in such amount, at such time and under such terms and conditions as the Grantor deems appropriate or desirable. Thereafter, neither the Grantee nor any heirs, assigns or personal representatives of such Grantee shall have any further rights or interest in such Performance Share, Restricted Stock, Restricted Stock Unit, Phantom Unit or Cash Value Awards, and the Grantee's name shall thereupon be deleted from the list of the Company's stockholders with respect to such Performance Shares or Restricted Stock. Notwithstanding any other provisions of this Subsection 12.7.2, the value of any vested and deferred Phantom Units shall be paid to the Grantee as soon as practicable. SECTION 12.8 TERMINATION DATE Termination of employment of a Grantee for any of the reasons enumerated in this Article XII shall, for purposes of the Plan, be deemed to have occurred as of the date which is recorded in the ordinary course in the Company books and records in accordance with the then-prevailing procedures and practices of the Company. 26 34 SECTION 12.9 REPORTING PERSON LIMITATION Notwithstanding any other provision of this Article XII, a Grantee who ceases to be a Reporting Person through retirement or any other termination of employment shall not be entitled to exercise a SAR. ARTICLE XIII EXCHANGE AWARDS; ABOVE TARGET MICP AWARDS SECTION 13.1 SALARY/BONUS REDUCTIONS 13.1.1 Restricted Stock. A Grantee (including those described in Section 13.8) may elect to reduce and defer his or her current or future Base Salary and/or earned Bonus and, thereafter, exchange such deferred amounts for Restricted Stock. Such elections shall direct deferrals and exchanges on a one-time (annual) basis or, in the alternative in the case of Base Salary, on an ongoing basis covering a period not exceeding five (5) years. Should a Grantee elect a one-time (annual) exchange, the deferred amounts shall be credited to his or her deferred compensation account under this Plan and, thereafter, on the third (3rd) business day following the public announcement of the Company's annual earnings, the deferred amounts shall be exchanged for that number of shares of Restricted Stock that equals the number of whole shares determined by dividing the deferred amount forgone by 85% of the Fair Market Value of one share of Common Stock on the date of the exchange. Should a Grantee elect an exchange of Base Salary on an ongoing basis for a period of one year or less, the number of shares of Restricted Stock he or she shall acquire through such exchanges, which shall be effected on the third (3rd) business day following the public announcement of the Company's annual earnings, shall be determined by dividing the total projected deferred amounts forgone for the designated period by 85% of the Fair Market Value of one share of Common Stock on the date of the exchange. When the elected period extends beyond one year, the number of shares of Restricted Stock acquired through such exchanges, which shall be effected on the third (3rd) business day following the public announcement of the Company's annual earnings, shall equal that number of whole shares of Restricted Stock determined by dividing the discounted present value of the total projected deferred amounts forgone for the designated period (using the appropriate Treasury Bill rates for the applicable period) by 85% of the Fair Market Value of one share of Common Stock on the date of the exchange. Restricted Stock acquired pursuant to exchanges under this Subsection 13.1.1 shall have a Restricted Period of not less than three (3) years (such Restricted Period to be extended up to five (5) years to coincide with a deferral election that extends beyond three (3) years), as determined by the Committee, and shall be subject to all of the terms, conditions and provisions of Article VII, except as may otherwise be determined by the Committee prior to their acquisition. 13.1.2 Options. A Grantee may elect to reduce and defer his or her current or future Base Salary and/or earned Bonus and, thereafter, exchange such deferred amounts for Nonqualified Options. Such elections shall direct deferrals and exchanges on a one-time (annual) basis or, in the alternative in the case of Base Salary, on an ongoing basis covering a period not exceeding five (5) years. Should a Grantee elect a one-time (annual) exchange, the deferred amounts shall be credited to his or her deferred compensation account under this Plan and, thereafter, on the third (3rd) business day following the public announcement of the Company's annual earnings, the deferred amounts shall be exchanged for that number of Options as is determined by the Committee, in its discretion, to be the equivalent in value of that number of whole shares of Restricted Stock determined by dividing the deferred amount forgone by 85% of the Fair Market Value of one share of the Common Stock on the date of the exchange. Should a Grantee elect an exchange of Base Salary on an ongoing basis for a period of one year or less, the number of Options he or she shall acquire through such exchanges is that number of Options as is determined by the Committee, in its discretion, to be the equivalent in value of that number of whole shares of Restricted Stock determined by dividing the total projected deferred amount forgone for the designated period by 85% of the Fair Market Value of one share of Common Stock on the date of the exchange. When the elected period extends beyond one year, the Options acquired through such exchanges, which shall be effected on the third (3rd) business day following the public announcement of the Company's annual earnings, shall be that number of Options determined by the Committee, in its discretion, to be the equivalent in value of that number of whole shares of Restricted Stock determined by dividing the discounted present value of the total projected deferred amounts forgone for the designated period (using the appropriate Treasury Bill rates for the applicable period) by 85% of the Fair Market Value of one share of the Common Stock on the date of the exchange. Options acquired pursuant to this Subsection 13.1.2 shall be exercisable 27 35 according to the following three (3)-year schedule (unless the Grantee's employment with the Company or a Participating Subsidiary is terminated, in which case the provisions of Section 13.3 or Article XII, as apposite, shall govern): 40% of the Options will be exercisable beginning one year after the exchange, a second 40% of the Options will be exercisable beginning two (2) years after the exchange, and the final 20% of the Options will be exercisable beginning three (3) years after the exchange; and shall be subject to all of the terms, conditions and provisions of Article V (as modified as to exercisability by this Subsection 13.1.2), except as may otherwise be determined by the Committee prior to their acquisition. SECTION 13.2 DEFERRED ACCOUNTS 13.2.1 Deferred Compensation Plan Accounts. Subject to the Company's approval, amounts accrued under the Hercules Incorporated Deferred Compensation Plan (other than under the Hercules Incorporated Non-qualified Savings Plan portion thereof) may, upon the Grantee's request for a one-time (annual) exchange, be surrendered in exchange for Restricted Stock and/or Nonqualified Options. The number of shares of Restricted Stock and Options acquired in this manner shall be determined in the same manner as is specified in Subsections 13.1.1 and 13.1.2, respectively, and all Restricted Stock and Options so acquired shall be subject to all of the terms, conditions and provisions of Subsections 13.1.1 and 13.1.2, respectively. Exchanges under this Subsection 13.2.1 shall be effected the third (3rd) business day after the first public announcement of the Company's annual earnings. 13.2.2 Non-Qualified Savings Plan Accounts. Subject to the Company's approval, amounts accrued under the Hercules Incorporated Non-Qualified Savings Plan portion of the Hercules Deferred Compensation Plan may, upon the Grantee's request for a one-time (annual) exchange, be surrendered in exchange for Restricted Stock and/or Nonqualified Options. The number of shares of Restricted Stock and Options acquired in this manner shall be determined in the same manner as is specified in Subsections 13.1.1 and 13.1.2, respectively, except that the computation in each case shall be based on 100% of the Fair Market Value of one share of Common Stock rather than the 85% of the Fair Market Value specified in Subsections 13.1.1 and 13.1.2. All Restricted Stock and Options so acquired shall be subject to all of the terms, conditions and provisions of Subsections 13.1.1 and 13.1.2, respectively. Exchanges under this Subsection 13.2.2 shall be effected the third (3rd) business day after the first public announcement of the Company's annual earnings. SECTION 13.3 TERMINATION OF EMPLOYMENT 13.3.1 Death, Disability and Reduction in Force. Notwithstanding any provisions of Sections 12.2 and 12.4 to the contrary: (a) If prior to the expiration of an applicable Restricted Period a Grantee who has received Restricted Stock pursuant to Subsections 13.1.1, 13.2.1 and/or 13.2.2 shall cease to be employed by the Company by reason of Death, Disability, Reduction in Force or Retirement directly attributable to a Reduction in Force, all restrictions and forfeiture provisions under this Plan with respect to the Restricted Stock exchanged pursuant to this Article XIII shall lapse as of the date of termination of employment and delivery of such shares shall be governed by the provisions of Section 7.6. (b) If prior to the expiration of an applicable Option Period a Grantee who has received Options pursuant to Subsections 13.1.2, 13.2.1 and/or 13.2.2 shall cease to be employed by the Company by reason of Death, Disability, Reduction in Force or Retirement directly attributable to a Reduction in Force, the Option Period shall be adjusted to the lesser of the remaining Option Period or one year from the date of employment termination. Notwithstanding the foregoing, the Committee may, in its sole discretion, on a case-by-case basis, determine for new Options, or extend for outstanding Options, the period during which the Options may be exercised after the Grantee dies or suffers a Disability, provided that such post-termination exercise period may not extend beyond the expiration of the stated Option Period. 28 36 13.3.2 Retirement. Notwithstanding any provisions of Section 12.1 to the contrary: (a) In the event of Retirement (not directly attributable to a Reduction in Force) by a Grantee who has received Restricted Stock pursuant to Subsections 13.1.1, 13.2.1 and/or 13.2.2 prior to the expiration of an applicable Restricted Period, that number of shares of Restricted Stock equal to the amount attributable to the 15% discount made available under this Article XIII, and prorated for the length of time remaining in the Restricted Period, shall be forfeited and returned to the Company. (b) If prior to the expiration of an applicable Option Period a Grantee who has received Options pursuant to Subsections 13.1.2, 13.2.1 and/or 13.2.2 shall cease to be employed by the Company by reason of his or her Retirement (not directly related to a Reduction in Force), the Option Period shall be adjusted to the lesser of the remaining Option Period or five (5) years from the date of termination. In the event of Retirement (not directly attributable to a Reduction in Force) by a Grantee who has received Options pursuant to Subsections 13.1.2, 13.2.1 and/or 13.2.2, a number of Options equal to the amount attributable to the 15% discount and prorated for the length of time remaining in the period during which Options may not be exercised shall be forfeited. 13.3.3 Resignation or Termination for Cause. Notwithstanding any provisions of Sections 12.5 and 12.7 to the contrary: (a) In the event a Grantee who has received Restricted Shares pursuant to Subsections 13.1.1, 13.2.1 and/or 13.2.2 voluntarily resigns (except for retirement with approval of the Company) or terminates employment for reasons other than any of those specified in Sections 12.1, 12.2, 12.3, 12.4 and 12.6 prior to the expiration of an applicable Restricted Period, all shares of Restricted Stock shall be forfeited and returned to the Company and such Grantee shall receive a payment equal to the lower of the Fair Market Value of the Restricted Shares forfeited or the original amount exchanged. (b) In the event a Grantee who has received Options pursuant to Subsections 13.1.2, 13.2.1 and/or 13.2.2 voluntarily resigns (except for retirement with approval of the Company) or terminates employment for reasons other than any of those specified in Sections 12.1, 12.2, 12.3, 12.4 and 12.6 prior to the expiration of the applicable Option Period, all Options shall be forfeited and returned to the Company and such Grantee shall receive a payment equal to the lower of a value (as determined by the Committee) of the Options forfeited or the original amount exchanged. SECTION 13.4 AVOIDANCE OF PENSION DIMINUTION 13.4.1 Governing Provisions. Grantees electing Base Salary and/or Bonus reductions under Section 13.1 may suffer a permanent diminution of their qualified pension entitlement under the Hercules Pension Plan. To offset this diminution in part, exchange awards in respect of pensions otherwise payable as nonqualified pensions (as measured from the date of the APD Election defined next below) may be requested within five (5) years of anticipated retirement. Subject to the Committee's approval of such a request, all such exchanges shall be effected in accordance with the provisions of this Section 13.4. 13.4.2 Exchange Awards. A Grantee who is within five (5) years (but not less than one year) of his or her anticipated retirement date may elect ("APD Election") to exchange the present value (as of the date of the APD Election) of his or her projected benefits payable as of the Designated Retirement Date (as defined below) under the Hercules Pension Restoration Plan (utilizing the method and assumptions used to convert a pension to a partial cash payment under the Hercules Pension Plan) for Restricted Stock issuable under Subsection 13.1.1 and/or Options granted under Subsection 13.1.2. Restricted Stock and/or Options received in such an exchange shall be in substitution of any pension entitlements under the Hercules Pension Restoration Plan, the rights to such entitlements being forfeited and canceled in consideration of such exchange. 13.4.3 Designated Retirement Date. As a part of his or her APD Election, a Grantee shall designate a retirement date ("Designated Retirement Date"). In the event of any termination of employment prior to the Designated Retirement Date, the following will apply: 29 37 (a) If the Grantee elected Restricted Stock, that number of Restricted Stock shares shall be forfeited as has a value (on the date of his or her APD Election) equivalent to the present value determined for purposes of Subsection 13.4.2 minus the present value (as of the APD Election date) of the amount due under the Hercules Pension Restoration Plan as of the date of actual retirement, utilizing the method and assumptions used to convert a pension to a partial cash payment under the Hercules Pension Plan. Further, in the event that the Grantee's actual retirement date occurs within three (3) years of the APD Election, the Grantee shall forfeit that number of Restricted Stock shares (adjusted by the preceding sentence) attributable to the 15% discount made available under Subsection 13.1.1 and prorated for the length of time remaining in the three (3)- year period commencing with the date of the APD Election. (b) If the Grantee elected Nonqualified Options, that number of Options shall be forfeited as the Committee in its discretion shall determine has a value (on the date of his or her APD Election) equivalent to the present value determined for purposes of Subsection 13.4.2 minus the present value (as of the date of his or her APD Election) of the amount due under the Hercules Pension Restoration Plan as of the date of actual retirement, utilizing the method and assumptions used to convert a pension to a partial cash payment under the Hercules Pension Plan. Further, in the event that the Grantee's actual retirement date occurs within three (3) years of the APD Election, the Grantee shall forfeit that number of Options as the Committee in its discretion shall determine has a value equal to that number of Restricted Stock shares (adjusted by the preceding sentence) attributable to the 15% discount made available under Subsection 13.1.2 and prorated for the length of time remaining in the period commencing with the date of the APD Election. (c) Notwithstanding (a) and (b) next above, in the event of the Grantee's death, Disability or termination of employment with the consent of the Company, the Committee may, in its discretion, waive any forfeitures otherwise applicable under this Subsection 13.4.3. SECTION 13.5 IRREVOCABILITY Any election under Sections 13.1, 13.2 or 13.4 shall be irrevocable. SECTION 13.6 EQUIVALENCY Notwithstanding any provision in this Article XIII to the contrary, all elections under this Article XIII that involve an exchange of future compensation or pension benefit entitlement shall in each instance be equalized (that is, recalculated using actual numbers) at the expiration of the period elected or termination of employment and forfeiture shall be applied, if appropriate. SECTION 13.7 MICP AWARDS Any payout under the Management Incentive Compensation Plan for performance above the target level Performance Goals for any Performance Period shall be in that number of whole shares of Restricted Stock obtained by dividing the dollar value of the payout by 85% of the Fair Market Value of one share of Common Stock on the date of such award. Restricted Stock acquired pursuant to this Section 13.7 shall be subject to all of the terms, conditions and provisions of Article VII and Article XIII, except as may otherwise be determined by the Committee prior to the Date of Award. SECTION 13.8 DEFINITION For purposes of this Article XIII, the term "Grantee" includes all employees of the Company or any Participating Subsidiary who are designated by the CEO to be eligible for purposes of this Article XIII. 30 38 ARTICLE XIV CERTAIN TERMS APPLICABLE TO ALL AWARDS SECTION 14.1 WITHHOLDING TAXES The Company shall withhold (or secure payment from the Grantee in lieu of withholding) the amount of any withholding or other tax required by law to be withheld or paid by the Company with respect to any amount payable and/or shares issuable under such Grantee's Award, or with respect to any income recognized upon a disqualifying disposition of shares received pursuant to the exercise of an ISO, and the Company may defer payment or issuance of the cash or stock upon exercise or vesting of an Award unless indemnified to its satisfaction against any liability for any such tax. The amount of such withholding or tax payment shall be determined by the Committee and shall be payable by the Grantee at the time of delivery or when payment is made [except as otherwise payable under Section 14.1(c)] in accordance with the following rules: (a) With respect to Awards payable in cash, the Company will withhold an amount sufficient to satisfy applicable Federal, state and local tax withholding requirements and remit the net award to the Grantee; (b) With respect to Awards payable in stock, the Company will notify the Grantee of the amount due from such Grantee to satisfy the tax withholding requirements with respect to the stock. The Grantee shall pay the amount due to satisfy the tax withholding requirements in cash; provided, however, that the Grantee may elect to meet the tax withholding requirement by requesting the Company, in writing, to withhold from such Award and sell through a brokerage firm the appropriate number of shares of Common Stock, rounded up to the next whole number, which would result in proceeds equal to the tax withholding requirement. Any election by a Grantee to have shares withheld under this Section 14.1 shall be subject to such terms and conditions as the Committee may specify, which may include that the election shall be irrevocable and in the case of a Reporting Person, the election to have shares withheld under this Section 14.1 must be made either (i) not less than six (6) months prior to the date that the tax is to be withheld by the Company, or (ii) during the period beginning on the third business day following the date of the release for publication of the Company's quarterly or annual summary statements of earnings and ending on the twelfth business day following such date. If the cash required (whether paid directly or indirectly through the sale of stock election described above) is not received by the Company within sixty (60) days of notification by the Company of the tax withholding due, the Committee shall have the right to take whatever action it deems appropriate, including voiding the Award. The Company shall not deliver or pay the Award (net of the tax withholding) until the tax withholding obligation is satisfied. At the time that all other restrictions lapse (other than being subject to Section 16 of the Act) a Reporting Person shall make the election described in Subsection (c) below. (c) If permitted under applicable Federal income tax laws, a Grantee may elect to include in gross income for Federal income tax purposes in the year in which a stock Award is made, an amount equal to the Fair Market Value of the Award on the Date of Grant. If the Grantee makes such an election, the Grantee shall promptly notify the Company in writing and shall provide the Company with a copy of the executed election form as filed with the Internal Revenue Service by no later than thirty (30) days from the Date of the Grant. Promptly following such notification, the Grantee shall pay directly to the Company, or make arrangements satisfactory to the Committee, the cash amount determined by the Company to be sufficient to satisfy applicable Federal, state or local withholding tax requirements. If the Grantee shall fail to make such payments, the Company and its Subsidiaries shall, to the extent permissible by law, have the right to deduct from any payment of any kind otherwise due to the Grantee any Federal, state or local taxes of any kind required by law to be withheld with respect to such Restricted Stock. SECTION 14.2 ADJUSTMENTS TO REFLECT CAPITAL CHANGES 14.2.1 Recapitalization. In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other change in capitalization with a similar substantive effect upon the Plan or the Awards granted under the Plan, such adjustments shall be made in the number and kind of shares subject to outstanding 31 39 Awards, the Option Price for such shares and the number and kind of shares available for Awards subsequently granted under the Plan as may be determined appropriate by the Committee. 14.2.2 Sale or Reorganization. After any reorganization, merger or consolidation in which the Company is the surviving corporation, each Grantee shall, at no additional cost, be entitled upon any exercise of an Option or receipt of other Award to receive (subject to any required action by stockholders), in lieu of the number of shares of Common Stock receivable or exercisable pursuant to such Award, the number and class of shares of stock or other securities to which such Grantee would have been entitled pursuant to the terms of the reorganization, merger or consolidation if, at the time of such reorganization, merger or consolidation, such Grantee had been the holder of record of a number of shares of stock equal to the number of shares receivable or exercisable pursuant to such Award. Comparable rights shall accrue to each Grantee in the event of successive reorganizations, mergers or consolidations of the character described above. 14.2.3 Options to Purchase Stock of Acquired Companies. After any reorganization, merger or consolidation in which the Company or a Subsidiary shall be a surviving corporation, the Committee may grant substituted options under the provisions of the Plan, pursuant to Section 424 of the Code, replacing old options granted under a plan of another party to the reorganization, merger or consolidation whose stock subject to the old options that may no longer be issued following such merger or consolidation. The foregoing adjustments and manner of application of the foregoing provisions shall be determined by the Committee in its sole discretion. Any such adjustments may provide for the elimination of any fractional shares which might otherwise become subject to any Options. SECTION 14.3 FAILURE TO COMPLY WITH TERMS AND CONDITIONS Notwithstanding any other provision of the Plan, no payment or delivery with respect to any Award shall be made, and all rights of the Grantee who receives such Award (or his designated Beneficiary or legal representative) to such payment or delivery under the Plan shall be forfeited, at the discretion of the Committee, if, prior to the time of such payment or delivery, the Grantee breaches a restriction or any of the terms, restrictions and/or conditions of the Plan and/or the Award Commitment. SECTION 14.4 FORFEITURE UPON OCCURRENCE OF CERTAIN EVENTS Notwithstanding any other provision of the Plan, no payment of any Award shall be made and all rights of the Grantee who received such Award (or his designated Beneficiary or legal representative) to the payment thereof under the Plan shall be forfeited if, prior to the time of such payment, the Grantee (i) without the Company's consent, shall be employed by a competitor of, or shall be engaged in any activity in competition with, the Company or a Subsidiary; (ii) divulges without the consent of the Company any secret or confidential information belonging to the Company or a Subsidiary; or (iii) has been dishonest or fraudulent in any matter affecting the Company or a Subsidiary or has committed any act which, in the sole judgment of the Committee, has been substantially detrimental to the interests of the Company or a Subsidiary. The Company shall give a Grantee written notice of the occurrence of any such event prior to making any such forfeiture. The determination of the Committee as to the occurrence of any of the events specified in clauses (i), (ii), and (iii) of this Section 14.4 shall be conclusive and binding upon all persons for all purposes. Any Award shall be subject to forfeiture for the reasons provided in this Section 14.4 in such manner as shall be provided by the Committee. SECTION 14.5 REGULATORY APPROVALS AND LISTING The Company shall not be required to issue any certificate or certificates for shares of Common Stock under the Plan prior to (i) obtaining any approval from any governmental agency which the Company shall, in its discretion, determine to be necessary or advisable, (ii) the admission of such shares to listing on any national securities exchange on which the Company's Common Stock may be listed, and (iii) the completion of any registration or other qualification of such shares of Common Stock under any state or Federal law or ruling or regulations of any governmental body which the Company shall, in its discretion, determine to be necessary or advisable. 32 40 SECTION 14.6 RESTRICTIONS UPON RESALE OF STOCK If the shares of Common Stock that have been issued to a Grantee pursuant to the terms of the Plan are not registered under the Securities Act of 1933, as amended ("Securities Act"), pursuant to an effective registration statement, such Grantee, if the Committee shall deem it advisable, may be required to represent and agree in writing (i) that any such shares acquired by such Grantee pursuant to the Plan will not be sold except pursuant to an effective registration statement under the Securities Act, or pursuant to an exemption from registration under said Act and, (ii) that such Grantee is acquiring such shares for his own account and not with a view to the distribution thereof. SECTION 14.7 REPORTING PERSON LIMITATION Notwithstanding any other provision of the Plan, to the extent required to qualify for the exemption provided by Rule 16b-3 under the Act, and any successor provision, (1) any Common Stock or other equity security offered under the Plan to a Reporting Person may not be sold for at least six (6) months after the earlier of acquisition of the security or the date of grant of the derivative security, if any, pursuant to which the Common Stock or other equity security was acquired; and (2) any Option, SAR or other similar right related to an equity security, issued under the Plan to a Reporting Person shall not be transferable other than by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order and shall be exercisable during the Grantee's lifetime only by the Grantee or the Grantee's guardian or legal representative. ARTICLE XV DISPUTES If the employment of a Grantee with the Company or any Participating Subsidiary shall terminate prior to the expiration of the Performance or Restriction Period applicable to any Performance Share, Restricted Stock, Restricted Stock Unit or Phantom Unit Award awarded to such Grantee and there exists a dispute between such Grantee and the Company or the Committee as to the satisfaction of the conditions to the release of such shares or units under the Plan or the terms and conditions of the Performance Share, Restricted Stock, Restricted Stock Unit, or Phantom Unit Award, the Performance Share, Restricted Stock, Restricted Stock Unit or Phantom Unit Awards as to which such dispute shall exist shall remain subject to the restrictions of the Plan until the resolution of such dispute, regardless of any intervening expiration of the Performance or Restriction Period originally applicable to such shares, except that any dividends which may be declared and which may be payable to the participant as of a date during the period from termination of such Grantee's employment to the resolution of such dispute (the "Suspension Period") shall (i) to the extent to which such dividends would have been payable to such Grantee on such Performance Share, Restricted Stock, Restricted Stock Unit or Phantom Unit Award, be held by the Company as part of its general funds and shall be paid to or for the account of such Grantee only upon, and in the event of, a resolution of such dispute in a manner favorable to such Grantee and then only with respect to such Performance Share, Restricted Stock, Restricted Stock Unit or Phantom Unit Award as to which such resolution shall be so favorable, and (ii) in the event the dispute is resolved in a manner unfavorable to the Grantee, be canceled as dividends payable upon Performance Share, Restricted Stock, Restricted Stock Unit or Phantom Unit Award as to which such resolution shall be so unfavorable. In addition, to the extent that resolution of any such dispute shall be unfavorable to the Grantee, the Performance Shares, Restricted Stock, Restricted Stock Unit or Phantom Unit Award as to which such dispute shall have existed shall be forfeited in accordance with the provisions of Article XII or Section 14.4. 33 41 ARTICLE XVI ADMINISTRATION OF THE PLAN SECTION 16.1 COMMITTEE The Plan shall be administered by or under the direction of the Committee. No person shall be eligible or continue to serve as a member of the Committee unless such person is a director of the Company and is a "disinterested person" within the meaning of Rule 16b-3, and no person shall be, or shall have been, eligible to receive an Award under the Plan to acquire stock, stock options, stock appreciation rights, performance shares or restricted stock of the Company or any Participating Subsidiary at any time within the one (1) year immediately preceding the member's appointment to the Committee. SECTION 16.2 COMMITTEE ACTIONS Except for matters required by the terms of this Plan to be decided by the CEO or his designee or designees, the Committee shall have full power and authority to interpret and construe the Plan, to prescribe, amend and rescind rules, regulations, policies and practices, to impose such conditions and restrictions on Awards as it deems appropriate and to make all other determinations necessary or desirable in connection with the administration of, or the performance of its responsibilities under, this Plan. Subject to the limitations of provisions of Section 20.4, each decision, determination, interpretation or other action of the Committee made or taken pursuant to grants of authority under the Plan shall be final and shall be conclusive and binding on all persons for all purposes. The Committee's decisions, determinations and interpretations (including without limitations, the terms and provisions of such awards and the agreements evidencing same) need not be uniform and may be made selectively among Grantees who receive, or are eligible to receive, awards under the Plan, whether or not such Grantees are similarly situated. The Committee may, to the extent that any such action will not prevent the Plan from complying with Rule 16b-3, delegate any of its powers and authority under the Plan as it deems appropriate to designated officers or employees of the Company. SECTION 16.3 NO LIABILITY OF COMMITTEE MEMBERS As and to the extent provided by Section 20.5, no past, present or future member of the Committee shall be personally liable by reason of any contract or other instrument executed by him or on his behalf in his capacity as a member of the Committee, nor for any mistake of judgment made in good faith, and the Company shall indemnify and hold harmless each member of the Committee. ARTICLE XVII EFFECTIVE DATE, TERM OF THE PLAN AND STOCKHOLDER APPROVAL The Plan became effective as of April 1, 1991, and was amended and restated as of June 30, 1993, April 27, 1995, April 24, 1997, and is hereby further amended and restated as of April 29, 1999. The termination date of the Plan shall be April 30, 2002. No Award shall be granted under the Plan after such termination date. The Plan will continue in effect for existing Awards as long as any such Awards are outstanding. ARTICLE XVIII CHANGE IN CORPORATE CONTROL SECTION 18.1 OPTIONS AND PASOS In the event of a Change in Control, (i) all Options and PASOs outstanding on the date of such Change in Control shall become immediately and fully exercisable, and (ii) a Grantee who is an elected officer or director of the Company will be permitted to surrender for cancellation within sixty (60) days after such Change in Control any 34 42 Option or PASO or portion thereof to the extent not yet exercised (or with respect to an Option or PASO or portion thereof granted less than six (6) months prior to the date of the Change in Control, within sixty (60) days after the expiration of a six (6)-month period following the Date of Grant) and to receive a cash payment in an amount equal to the excess, if any, of (x) in the case of a Nonqualified Stock Option or PASO, the adjusted Fair Market Value of the Common Stock subject to the Option or PASO or a portion thereof surrendered or (y) in the case of an ISO, the Fair Market Value of the Common Stock subject to the Option or PASO or portion thereof surrendered over the Option Price. The provisions of this Section 18.1 shall be applicable to Nonqualified Stock Options, PASOs or ISOs. The provisions of this Section 18.1 shall not be applicable to any Options granted to a Grantee if any Change in Control results from such Grantee's beneficial ownership (within the meaning of Rule 13d(3) under the Act) of Common Stock or Company voting securities. SECTION 18.2 SARS In the event of a Change in Control, all SARs shall become immediately and fully exercisable but not before any related ISO is exercisable. Upon any exercise of a SAR (other than a SAR granted in tandem with a related ISO) or any portion thereof during the sixty (60)-day period following the Change in Control, (or with respect to a SAR granted to an officer or director of the Company less than six (6) months prior to the date of the Change in Control, within sixty (60) days after the expiration of a six (6) month period following the Date of Grant) the amount payable shall be determined by reference to the SAR Fair Market Value of the Common Stock and shall be paid in cash. SARs granted in connection with ISOs will be payable as determined by reference to the Fair Market Value of the Common Stock on the date of such exercise and shall be paid in cash. The provisions of this Section 18.2 shall not be applicable to any SARs granted to a Grantee if any Change in Control results from such Grantee's beneficial ownership (within the meaning of Rule 13d(3) under the Act) of Common Stock or Company voting securities. SECTION 18.3 ALL OTHER AWARDS In the event of a Change of Control, all Performance Share Awards, Restricted Stock Awards, Phantom Unit Awards, Cash Value Awards, Other Market-Based Awards (if any) and Other Performance-Based Awards (if any) shall immediately vest and become fully payable within thirty (30) days after a Change in Control to all Grantees who have been granted an Award. In the case of Performance Share Awards and Cash Value Awards, all Awards shall vest at the Maximum Award. SECTION 18.4 DEFINITIONS A Change in Control of the Company shall occur when there is an unsolicited Change in Control of the Company that is not initiated by the Company, and is of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Act, as in effect on the effective date of the Plan; provided, however, that no Change in Control shall be deemed to have occurred unless and until a "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Act) together with all "affiliates" and "associates" of such person (as such terms respectively, are defined in Rule 12b-2 of the General Rules and Regulations under the Act) is or becomes a beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities. ARTICLE XIX AMENDMENT AND TERMINATION SECTION 19.1 AMENDMENT The Board reserves the right at any time or times to modify, alter or amend, in whole or in part, any or all of the provisions of the Plan to any extent and in any manner that it may deem advisable, and no consent or approval by the stockholders of the Company or by any other person, committee or entity of any kind shall be required to make any modification, alteration or amendment; provided, however, that the Board shall not, without the requisite 35 43 affirmative approval of the stockholders of the Company, make any modification, alteration or amendment which (i) except as provided in Section 3, increases the maximum number of shares of Common Stock available for Awards under this Plan, (ii) decreases the Option Price to less than 100% of the Fair Market Value on the Date of Grant of an Option, (iii) extends the period during which Awards may be granted under the Plan beyond April 30, 2002, (iv) changes the employee (or class of employees) eligible to receive Awards under the Plan, (v) materially increase the benefits accruing to a Grantee under the Plan, or (vi) requires stockholders' approval under Rule 16b-3 or the Code, unless such compliance is no longer desired, or under any other applicable law. No modification, alteration or amendment of the Plan may, without the consent of the Grantee (Beneficiaries in case of his death) to whom any Award shall theretofore have been granted under the Plan adversely affect any right of such Grantee under such Award, except in accordance with the provisions of the Plan and/or any Award Commitment applicable to any such Award. Subject to the provisions of this Section 19.1, any modification, alteration or amendment of any provisions of the Plan may be made retroactively. SECTION 19.2 SUSPENSION OR TERMINATION The Board reserves the right at any time to suspend or terminate, in whole or in part, any or all of the provisions of the Plan for any reason and without the consent of or approval by the stockholders of the Company, any Grantee or Beneficiary or any other person, committee or entity of any kind; provided, however, that no such suspension or termination shall affect any right or obligation with respect to any Award theretofore made except as herein otherwise provided. SECTION 19.3 NO REPRICING OF OPTIONS Notwithstanding any other provision in the Plan, the Board shall not amend any outstanding Options to reduce the Option Price of such Option, nor substitute new Options for previously granted Options having a higher Option Price. 36 44 ARTICLE XX MISCELLANEOUS SECTION 20.1 DEFERRAL ELECTION At the discretion of the Committee payment of Phantom Units or any other cash award, or any portion thereof, may be deferred by a Grantee until such time as the Committee may establish. All such deferrals shall be accomplished by the delivery of a written, irrevocable election by the Grantee at such times prior to the time payment would otherwise be made as the Committee shall determine. All deferrals shall be made in accordance with such rules and regulations established by the Committee to ensure that such deferrals comply with all applicable requirements of the Code and its regulations. Deferred payments shall be paid in a lump sum or installments, as determined by the Committee. The Committee also may credit interest at such rates to be determined by the Committee. SECTION 20.2 DESIGNATION OF BENEFICIARY Each Grantee shall file with the Company a written designation of one or more persons as the Beneficiary who shall be entitled to receive the Award, if any, payable under the Plan upon his death. A Grantee may from time to time revoke or change his Beneficiary designation without the consent of any prior Beneficiary by filing a new designation with the Company. The last such designation received by the Company shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Company prior to the Grantee's death, and in no event shall it be effective as of a date prior to such receipt. If no such Beneficiary designation is in effect at the time of a Grantee's death, or if no designated Beneficiary survives the Grantee or if such designation conflicts with law, the Grantee's estate shall be entitled to receive the Award, if any, payable under the Plan upon his death. If the Committee is in doubt as to the right of any person to receive such Award, the Company may retain such Award, without liability for any interest thereon, until the Committee determines the rights thereto, or the Company may pay such Award into any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Company therefor. SECTION 20.3 NO RIGHT TO AN AWARD OR TO CONTINUED EMPLOYMENT No Grantee or other person shall have any claim or right to be granted an Award under the Plan. Neither the action of the Company in establishing this Plan, nor any provisions hereof, nor any action taken by the Company, any Participating Subsidiary, the Committee or the CEO (or his designee or designees) pursuant to such provisions shall be construed as creating in any employee or class of employees any right with respect to continuation of employment by the Company or any of the Participating Subsidiaries, and they shall not be deemed to interfere in any way with the Company's or any Participating Subsidiary's right to employ, discipline, discharge, terminate, lay off or retire any Grantee with or without cause, to discipline any Employee, or to otherwise affect the Company's right to make employment decisions with respect to any Grantee. SECTION 20.4 DISCRETION OF THE COMMITTEE AND THE CEO Whenever the terms of the Plan provide for or permit a decision to be made or an action to be taken by a Grantor, such decision may be made or such action taken in the sole and absolute discretion of such Grantor and shall be final, conclusive and binding on all persons for all purposes; provided, however, that the Board may review any decision or action of the Grantor and if the Board determines that any Award or other decision or act of the Grantor is inequitable or contrary to the provisions of this Plan, it may reverse or modify such Award, decision or act. As provided in Section 16.2 in the case of the Grantor's determinations under the Plan, including, without limitation the determination of the person to receive awards and the amount of such awards, need not be uniform and may be made by him selectively among persons who receive, or are eligible to receive, awards under this Plan, whether or not such persons are similarly retired. 37 45 SECTION 20.5 INDEMNIFICATION AND EXCULPATION 20.5.1 Indemnification. Each person who is or shall have been a member of the Committee and each director, officer or employee of the Company or any Participating Subsidiary to whom any duty or power related to the administration or interpretation of this Plan may be delegated, shall be indemnified and held harmless by the Company against and from any and all loss, cost, liability or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit or proceeding to which he may be or become a party or in which he may be or became involved by reason of any action taken or failure to act under this Plan and against and from any and all amounts paid by him in settlement thereof (with the Company's written approval) or paid by him in satisfaction of a judgment in any such action, suit or proceeding, except a judgment in favor of the Company based upon a finding of his bad faith; subject, however, to the condition that upon the institution of any claim, action, suit or proceeding against him, he shall in writing give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other right to which such person may be entitled under the Company's Restated Certificate of Incorporation, as a matter of law or otherwise, or any power that the Company may have to indemnify him or hold him harmless. 20.5.2 Exculpation. Each member of the Committee, and each director, officer and employee of the Company or of any Participating Subsidiary shall be fully justified in relying or acting upon in good faith any information furnished in connection with the administration of this Plan by any appropriate person or persons other than himself. In no event shall any person who is or shall have been a member of the Committee, or a director, officer or employee of the Company or any Participating Subsidiary be liable for any determination made or other action taken or any omission to act in reliance upon such report or information, for any action (including the furnishing of information) taken or any failure to act, if in good faith. SECTION 20.6 UNFUNDED PLAN This Plan is intended to constitute an unfunded, long-term incentive compensation plan for certain selected employees. No special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts, except as expressly set forth in the Plan with respect to Restricted Stock or Performance Shares held in custody accounts. The Company may, but shall not be obligated to, acquire shares of its Common Stock from time to time in anticipation of its obligations under the Plan, but no Grantee shall have any right in or against any shares of stock so acquired. All such stock shall constitute general assets of the Company and may be disposed of by the Company at such time and for such purposes as it may deem appropriate. No obligation or liability of the Company to any Grantee with respect to any right to receive a distribution or payment under the Plan shall be deemed to be secured by any pledge or other encumbrance on any property of the Company. SECTION 20.7 INALIENABILITY OF RIGHTS AND INTERESTS The rights and interests of a Grantee under this Plan are personal to the Grantee and to any person or persons who may become entitled to distribution or payments under the Plan by reason of death of the Grantee, and the rights and interests of the Grantee or any such person (including, without limitation, any Award distributable or payable under the Plan) shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any such attempted action shall be void and no such benefit or interest shall be any manner liable for or subject to debts, contracts, liabilities, engagements or torts of any Grantees. If any Grantee shall attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any of his rights or interests under the Plan, (including without limitation, any Award payable under the Plan) then the Committee may hold or apply such benefit or any part thereof to or for the benefit of such Grantee or his Beneficiary, his spouse, children, blood relatives or other dependents, or any of them, in such manner and in such proportions as the Committee may consider proper. 38 46 SECTION 20.8 AWARDS NOT INCLUDABLE FOR BENEFIT PURPOSES Payments received by a Grantee pursuant to the provisions of the Plan shall not be included in the determination of benefits under any pension, group insurance or other benefit plan applicable to the Grantee which are maintained by the Company or any of its Subsidiaries, except as may be determined by the Board. SECTION 20.9 NO ISSUANCE OF FRACTIONAL SHARES The Company shall not be required to deliver any fractional share of Common Stock but, as determined by the Committee, may pay in lieu thereof, except as otherwise provided in this Plan, the Fair Market Value (determined as of the date of payment the restrictions terminate) of such fractional share to the Grantee or the Grantee's beneficiary, as the case may be. SECTION 20.10 MODIFICATION FOR OVERSEAS GRANTEES Notwithstanding any provision to the contrary, the Committee may incorporate such provisions, or make such modifications or amendments in Award Commitments of Grantees who reside or are employed outside of the United States of America, or who are citizens of a country other than the United States of America, as the Committee deems necessary or appropriate to accomplish the purposes of the Plan with respect to such Grantee in light of differences in applicable law, tax policies or customs, and to ascertain compliance with all applicable laws. SECTION 20.11 LEAVES OF ABSENCE The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by the recipient of any Award. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (a) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan and, (b) the impact, if any, of any such leave of absence on awards under the Plan theretofore made to any recipient who takes such leave of absence. SECTION 20.12 COMMUNICATIONS 20.12.1 Communications by the Committee. All notices, statements, reports and other communications made, delivered or transmitted to a Grantee, Beneficiary or other person under this Plan shall be deemed to have been duly given, made or transmitted when delivered to, or when mailed by first-class mail, postage prepaid and addressed to, such Grantee, Beneficiary or other person at his address last appearing on the records of the Committee. 20.12.2 Communications by the Participants and Others. All elections, designations, requests, notices, instructions and other communications made, delivered or transmitted by the Company, a Participating Subsidiary, Grantee, Beneficiary or other person to the Committee required or permitted under this Plan shall be in such form as is prescribed from time to time by each such Committee, shall be mailed by first-class mail or delivered to such location as shall be specified by each such Committee, and shall be deemed to have been given and delivered only upon actual receipt thereof by such Committee at such location. SECTION 20.13 PARTIES IN INTEREST The provisions of the Plan and the terms and conditions of any Award shall, in accordance with their terms, be binding upon, and inure to the benefit of, all successors of each Grantee, including, without limitation, such Grantee's estate and the executors, administrators, or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such Grantee. The obligations of the Company under the Plan shall be binding upon the Company and its successors and assigns. SECTION 20.14 SEVERABILITY Whenever possible, each provision in the Plan and every Award at any time granted under the Plan shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Plan or any 39 47 Award at any time granted under the Plan shall be held to be prohibited by or invalid under applicable law, then (a) such provision shall be deemed amended to accomplish the objectives of the provision as originally written to the fullest extent permitted by law, and (b) all other provisions of the Plan and every other Award at any time granted under the Plan shall remain in full force and effect. SECTION 20.15 COMPLIANCE WITH LAWS The Plan and the grant of Awards shall be subject to all applicable Federal and state laws, rules and regulations and to such approvals by any government or regulatory agency as may be required. It is intended that the Plan be applied and administered in compliance with Rule 16b-3. If any provision of the Plan would be in violation of Rule 16b-3 if applied as written, such provision shall not have effect as written and shall be given effect so as to comply with Rule 16b-3, as determined by the Committee. The Board is authorized to amend the Plan and to make any such modifications to Award Commitments to comply with Rule 16b-3, and to make any such other amendments or modifications as it deems necessary or appropriate to better accomplish the purposes of the Plan in light of any amendments made to Rule 16b-3. SECTION 20.16 NO STRICT CONSTRUCTION No rule of strict construction shall be implied against the Company, the Committee, the CEO or any other person in the interpretation of any of the terms of the Plan, any Award granted under the Plan or any rule or procedure established by the Committee. SECTION 20.17 MODIFICATION This document contains all of the provisions of the Plan and no provisions may be waived, modified or otherwise altered except in a writing adopted by the Board. SECTION 20.18 GOVERNING LAW All questions pertaining to validity, construction and administration of the Plan and the rights of all persons hereunder shall be determined with reference to, and the provisions of the Plan shall be governed by and shall be construed in conformity with, the internal laws of the State of Delaware. 40 EX-10.L 11 BETZDEARBORN INC. EMPLOYEE STOCK AND 401K PLAN 1 Exhibit 10-L BETZDEARBORN INC. EMPLOYEE STOCK OWNERSHIP AND 401(K) PLAN (As Amended and Restated Effective January 1, 1998) 2 TABLE OF CONTENTS
Page ---- SECTION 1 DEFINITIONS...................................................................................... 2 1.1 ACCOUNTS......................................................................................... 2 1.2 ACCRUED BENEFIT.................................................................................. 2 1.3 AFFILIATE........................................................................................ 2 1.4 APPROPRIATE FORM................................................................................. 2 1.5 BOARD OF DIRECTORS............................................................................... 2 1.6 CODE............................................................................................. 2 1.7 COMMITTEE........................................................................................ 2 1.8 COMMON STOCK..................................................................................... 2 1.9 COMPANY.......................................................................................... 2 1.10 COMPANY STOCK.................................................................................... 2 1.11 COMPANY STOCK ACCOUNT............................................................................ 2 1.12 COMPENSATION..................................................................................... 2 1.13 COMPENSATION DEFERRAL CONTRIBUTION............................................................... 3 1.14 COMPENSATION DEFERRAL PERCENTAGE................................................................. 3 1.15 DIVERSIFICATION ACCOUNT.......................................................................... 3 1.16 EFFECTIVE DATE................................................................................... 3 1.17 ELIGIBLE EMPLOYEE................................................................................ 3 1.18 EMPLOYEE......................................................................................... 3 1.20 EXEMPT LOAN...................................................................................... 3 1.21 401(K) ACCOUNT................................................................................... 3 1.22 INVESTMENT FUND.................................................................................. 4 1.23 INVESTMENT VEHICLE............................................................................... 4 1.24 LEASED EMPLOYEE.................................................................................. 4 1.25 MATCHING ACCOUNT................................................................................. 4 1.26 MATCHING CONTRIBUTIONS........................................................................... 4 1.27 MATCHING PERCENTAGE.............................................................................. 4 1.28 MAXIMUM COMPENSATION DEFERRAL MATCHING PERCENTAGE................................................ 4 1.29 NORMAL RETIREMENT AGE............................................................................ 4 1.30 NORMAL RETIREMENT DATE........................................................................... 4 1.31 OTHER INVESTMENTS ACCOUNT........................................................................ 4 1.32 PARTICIPANT...................................................................................... 4 1.33 PAYSOP ACCOUNT................................................................................... 4 1.34 PLAN............................................................................................. 4 1.35 PLAN ADMINISTRATOR............................................................................... 4 1.36 PREFERRED STOCK.................................................................................. 5 1.37 QUALIFIED ELECTION PERIOD........................................................................ 5 1.38 QUALIFIED PARTICIPANT............................................................................ 5 1.39 ROLLOVER ACCOUNT................................................................................. 5 1.40 STOCK BONUS ACCOUNT.............................................................................. 5 1.41 STOCK BONUS PLAN................................................................................. 5 1.42 SUSPENSE SUBFUND................................................................................. 5 1.43 TRUST............................................................................................ 5 1.44 TRUST AGREEMENT.................................................................................. 5 1.45 TRUST FUND....................................................................................... 5
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1.46 TRUSTEE......................................................................................... 5 1.47 VALUATION DATE.................................................................................. 5 1.48 VOLUNTARY ACCOUNT............................................................................... 5 SECTION 2 SERVICE......................................................................................... 6 2.1 HOUR OF SERVICE................................................................................. 6 2.2 ELIGIBILITY COMPUTATION PERIOD.................................................................. 8 2.3 YEAR OF ELIGIBILITY SERVICE..................................................................... 8 2.4 YEAR OF VESTING SERVICE......................................................................... 8 2.5 ONE-YEAR BREAK IN SERVICE....................................................................... 8 2.6 NO PARITY BREAK................................................................................. 8 2.7 SERVICE WITH A FOREIGN AFFILIATE................................................................ 8 SECTION 3 PARTICIPATION................................................................................... 9 3.1 CONTINUED PARTICIPATION OF PARTICIPANTS AS OF DECEMBER 31, 1997................................. 9 3.2 ELIGIBILITY AND PARTICIPATION................................................................... 9 3.3 PARTICIPATION AFTER BREAK IN SERVICE............................................................ 9 3.4 LEASED EMPLOYEES................................................................................ 9 SECTION 4 COMPANY CONTRIBUTIONS........................................................................... 9 4.1 COMPANY CONTRIBUTIONS........................................................................... 9 4.2 TIME OF PAYMENT................................................................................. 9 4.3 CONTRIBUTIONS IRREVOCABLE....................................................................... 10 SECTION 5 PARTICIPANTS' ACCOUNTS AND INVESTMENT THEREOF; EXEMPT LOANS..................................... 10 5.1 ACCOUNTS........................................................................................ 10 5.2 INVESTMENT OF TRUST FUND........................................................................ 10 5.3 EXEMPT LOAN..................................................................................... 10 5.4 DIVERSIFICATION OF INVESTMENTS.................................................................. 11 SECTION 6 ALLOCATION OF CONTRIBUTIONS..................................................................... 12 6.1 PARTICIPANTS ENTITLED TO ALLOCATION............................................................. 12 6.2 ALLOCATION OF COMPANY STOCK CONTRIBUTIONS....................................................... 12 6.3 ALLOCATION OF OTHER CONTRIBUTIONS............................................................... 12 6.4 ALLOCATION OF COMPANY STOCK ACQUIRED WITH EXEMPT LOAN........................................... 12 6.5 RELEASE FROM SUSPENSE SUBFUND................................................................... 13 6.6 ALLOCATION OF SHARES RELEASED FROM SUSPENSE SUBFUND............................................. 14 6.7 ALLOCATION OF FORFEITURES....................................................................... 14 SECTION 7 VALUATION....................................................................................... 14 7.1 VALUATION....................................................................................... 14 7.2 ALLOCATION OF GAINS AND LOSSES.................................................................. 15 7.3 DIVIDENDS ON COMPANY STOCK...................................................................... 15 SECTION 8 401(K) PLAN..................................................................................... 16 8.1 DEFINITIONS..................................................................................... 16 8.2 PARTICIPANT COMPENSATION DEFERRALS.............................................................. 17 8.3 COMPANY MATCHING CONTRIBUTIONS.................................................................. 17 8.4 DESIGNATION OF ACCOUNT.......................................................................... 18 8.5 CHANGING RATES OF CONTRIBUTION.................................................................. 18
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8.6 WITHDRAWALS OF COMPENSATION DEFERRAL CONTRIBUTIONS.............................................. 18 8.7 RESTRICTIONS.................................................................................... 19 8.8 PERIODS OF ABSENCE.............................................................................. 19 8.9 TERMINATION OF CONTRIBUTIONS.................................................................... 19 8.10 LIMITATION ON COMPENSATION DEFERRAL CONTRIBUTIONS............................................... 19 8.11 LIMITATIONS ON MATCHING CONTRIBUTIONS........................................................... 20 8.12 ELECTION TO USE CURRENT PLAN YEAR............................................................... 21 8.13 DISTRIBUTION OF EXCESS DEFERRALS................................................................ 22 8.14 DISTRIBUTION OF EXCESS CONTRIBUTIONS............................................................ 22 8.15 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS.................................................. 23 8.16 DESIGNATION AS PROFIT-SHARING PLAN.............................................................. 24 8.17 PARTICIPANT ROLLOVER CONTRIBUTION............................................................... 24 8.18 LOANS........................................................................................... 24 SECTION 9 BENEFITS AND DISTRIBUTIONS...................................................................... 26 9.1 VESTING......................................................................................... 26 9.2 AMOUNT, METHOD, FORM OF BENEFIT PAYMENTS........................................................ 26 9.3 NORMAL AND LATE RETIREMENT...................................................................... 27 9.4 VESTED DEFERRED BENEFITS........................................................................ 27 9.5 DISABILITY RETIREMENT........................................................................... 28 9.6 DEATH........................................................................................... 28 9.7 DESIGNATION OF BENEFICIARY AND FORM OF PAYMENT OF DEATH BENEFIT; SPOUSE'S CONSENT TO NON-SPOUSE BENEFICIARY...................................................... 28 9.8 SPECIAL PROVISION AS TO TIMING OF DISTRIBUTIONS................................................. 29 9.9 REQUIREMENTS CONCERNING DISTRIBUTIONS........................................................... 29 9.10 PUT OPTIONS ON DISTRIBUTED SHARES OF CERTAIN COMPANY STOCK...................................... 30 9.11 DIRECT ROLLOVERS OF ELIGIBLE ROLLOVER DISTRIBUTIONS MADE FROM THIS PLAN......................... 31 9.12 PARTICIPANT'S CONSENT TO DISTRIBUTION OF BENEFITS............................................... 31 SECTION 10 LIMITATIONS ON CONTRIBUTIONS.................................................................... 32 10.1 DEFINITIONS FOR LIMITATIONS ON CONTRIBUTIONS.................................................... 32 10.2 BASIC LIMITATION................................................................................ 33 10.3 COMBINED LIMIT WITH PENSION PLAN................................................................ 34 10.4 COMBINING AND AGGREGATING PLANS................................................................. 34 SECTION 11 TOP-HEAVY PROVISIONS............................................................................ 34 11.1 TOP-HEAVY PREEMPTION............................................................................ 34 11.2 TOP-HEAVY DEFINITIONS........................................................................... 34 11.3 TOP-HEAVY RULES................................................................................. 36 11.4 IMPACT ON MAXIMUM BENEFITS...................................................................... 37 11.5 CHANGE IN TOP-HEAVY STATUS...................................................................... 37 11.6 DUPLICATION OF MINIMUM CONTRIBUTIONS NOT REQUIRED............................................... 37 11.7 REPEAL OF LIMITATION............................................................................ 37 SECTION 12 NONALIENATION OF BENEFITS....................................................................... 37 12.1 NONALIENATION RULE.............................................................................. 37 SECTION 13 FIDUCIARY RESPONSIBILITY........................................................................ 38 13.1 FIDUCIARY DUTIES................................................................................ 38 13.2 ALLOCATION OF RESPONSIBILITY.................................................................... 38 13.3 NO JOINT RESPONSIBILITY......................................................................... 39
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13.4 NO CO-FIDUCIARY LIABILITY.......................................................................39 13.5 ACT IN INTEREST OF PARTICIPANTS.................................................................39 13.6 EMPLOYMENT OF ADVISORS..........................................................................39 13.7 TRANSFER OR MAINTENANCE OF INDICIA OF OWNERSHIP OF PLAN ASSETS OUTSIDE UNITED STATES PROHIBITED................................................................40 13.8 PROHIBITED TRANSACTIONS.........................................................................40 SECTION 14 ADMINISTRATION OF PLAN 00 STOCK BONUS PROFIT SHARING/RETIREMENT COMMITTEE AND PLAN ADMINISTRATOR................................................................42 14.1 MEMBERS OF COMMITTEE............................................................................42 14.2 OFFICERS AND EMPLOYEES OF THE COMMITTEE.........................................................42 14.3 ACTION OF COMMITTEE.............................................................................42 14.4 DISQUALIFICATION OF COMMITTEE MEMBER............................................................43 14.5 EXPENSES OF COMMITTEE...........................................................................43 14.6 POWERS OF THE COMMITTEE.........................................................................43 14.7 ALLOCATION OF FIDUCIARY RESPONSIBILITY..........................................................43 14.8 PLAN ADMINISTRATOR AND HIS GENERAL POWERS.......................................................43 14.9 GENERAL DUTIES OF THE PLAN ADMINISTRATOR........................................................43 14.10 INFORMATION TO BE SUBMITTED BY COMPANY TO THE PLAN ADMINISTRATOR................................44 14.11 CLAIM PROCEDURE.................................................................................44 14.12 SERVICE OF LEGAL PROCESS........................................................................46 14.13 DISCRETIONARY AUTHORITY.........................................................................46 SECTION 15 THE TRUSTEE AND TRUST...........................................................................46 15.1 THE TRUST.......................................................................................46 15.2 ACTIONS AND RESPONSIBILITY OF TRUSTEE...........................................................46 15.3 PAYMENTS........................................................................................46 15.4 RESIGNATION AND REMOVAL OF TRUSTEE..............................................................46 15.5 VOTING RIGHTS AND TENDER OFFERS.................................................................46 SECTION 16 PLAN AMENDMENT, MERGER OR CONSOLIDATION.........................................................48 16.1 AMENDMENT.......................................................................................48 SECTION 17 PLAN TERMINATION................................................................................49 17.1 DISCONTINUANCE OF CONTRIBUTIONS OR TERMINATION..................................................49 SECTION 18 TRANSFERS OF 401(K) ACCOUNTS, MATCHING, STOCK BONUS, VOLUNTARY, AND DIVERSIFICATION ACCOUNTS FROM THE STOCK BONUS PLAN.......................................................................49 18.1 TRANSFERS OF 401(K), MATCHING, STOCK BONUS, VOLUNTARY, AND DIVERSIFICATION ACCOUNTS FROM THE STOCK BONUS PLAN.............................................................49 18.2 DISTRIBUTIONS AND WITHDRAWALS OF AMOUNTS ATTRIBUTABLE TO AMOUNTS TRANSFERRED....................50 18.3 TRANSFER TO DIVERSIFICATION ACCOUNT.............................................................51 18.4 PROTECTED FORMS OF DISTRIBUTION.................................................................51 SECTION 19 TRANSFERS OF PAYSOP ACCOUNTS FROM THE STOCK BONUS PLAN..........................................51 19.1 TRANSFERS OF PAYSOP ACCOUNTS FROM THE STOCK BONUS PLAN..........................................51 19.2 INCOME ON PAYSOP ACCOUNTS.......................................................................51 19.3 NONFORFEITABLE RIGHT TO ALLOCATED COMMON STOCK..................................................52 19.4 ADMINISTRATIVE EXPENSES.........................................................................52 19.5 DIVERSIFICATION WITHDRAWALS.....................................................................52
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19.6 DISTRIBUTIONS OF PAYSOP ACCOUNTS................................................................53 SECTION 20 MISCELLANEOUS...................................................................................53 20.1 PARTICIPATION BY AFFILIATES WITH CONSENT OF BETZDEARBORN INC....................................53 20.2 APPLICATION OF PLAN.............................................................................53 20.3 NO EMPLOYMENT RIGHTS CREATED....................................................................53 20.4 INCAPACITATED PARTICIPANT OR BENEFICIARY........................................................54 20.5 PAYMENT OF PLAN EXPENSES........................................................................54 20.6 UNCLAIMED BENEFITS..............................................................................54 20.7 TREATMENT OF LEASED EMPLOYEES...................................................................54 20.8 CONSTRUCTION....................................................................................54 SECTION 21 SPECIAL PROVISIONS CONCERNING CERTAIN FORMER EMPLOYEES OF THE GRACE GROUP..............................................................................54 21.1 DEFINITIONS.....................................................................................54 21.2 PARTICIPATION BY CERTAIN EMPLOYEES OF THE DEARBORN BUSINESS.....................................55 21.3 YEARS OF VESTING SERVICE........................................................................55 21.4 ALLOCATION OF COMPANY STOCK CONTRIBUTION FOR 1996...............................................55
v 7 BETZDEARBORN INC. EMPLOYEE STOCK OWNERSHIP AND 401(k) PLAN (As Amended and Restated January 1, 1998) WHEREAS, BETZDEARBORN INC. (the "Company") (formerly named "Betz Laboratories, Inc."), a Pennsylvania corporation, established the BetzDearborn Inc. Employee Stock Ownership and 401(k) Plan (the "Plan") (formerly named the "Betz Laboratories, Inc. Employee Stock Ownership and 401(k) Plan"), effective as of January 1, 1989, for the purpose of providing the employees eligible to participate in the Plan the opportunity to share in the success of the Company through stock ownership; WHEREAS, the Plan was most recently amended and restated effective January 1, 1995 and has been amended on three occasions thereafter; WHEREAS, in Section 16.1 of the Plan, the Company has reserved the right to amend the Plan, with certain inapplicable limitations; WHEREAS, the Company desires to amend and restate the Plan to consolidate such three amendments and to make certain other changes; WHEREAS, the ESOP will continue to be maintained for the exclusive benefit of eligible employees and their beneficiaries (within the meaning of section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code")), and is intended to continue to qualify as an "employee stock ownership plan," as defined in section 4975(e)(7) of the Code and as a stock bonus plan under section 401(a) of the Code with a cash or deferred arrangement under section 401(k) of the Code; NOW, THEREFORE, effective January 1, 1998, the BetzDearborn Inc. Employee Stock Ownership and 401(k) Plan is hereby amended and restated; 1 8 SECTION 1 DEFINITIONS The following words and phrases, as used herein, shall have the following meanings, unless the context clearly indicates otherwise: 1.1 "Accounts" shall mean a Participant's Company Stock Account, 401(k) Account, Matching Account, Rollover Account and Other Investments Account. "Accounts" shall also include a Participant's 401(k), Matching, PAYSOP, Stock Bonus, Voluntary, and Diversification Account, if any, transferred from the Stock Bonus Plan. 1.2 "Accrued Benefit" shall mean the sum of the amounts credited to a Participant's Accounts. 1.3 "Affiliate" shall mean any corporation which is a member of a controlled group of corporations, as defined in section 414(b) of the Code, of which the Company is a member; any other trade or business which is under common control, as defined in section 414(c) of the Code, with the Company; any trade or business which is a member of an affiliated service group, as defined in section 414(m) of the Code, of which the Company is a member; and any entity required to be aggregated with the Company pursuant to section 414(o) of the Code. For purposes of applying sections 414(b) and 414(c) of the Code to the limitations on contributions set forth in Section X, the phrase "more than 50 percent" shall be substituted for the phrase "at least 80 percent" each place it appears in section 1563(a)(1) of the Code. 1.4 "Appropriate Form" shall mean the form provided or prescribed by the Plan Administrator for the particular purpose. 1.5 "Board of Directors" shall mean the Board of Directors of BetzDearborn Inc., as such Board may be constituted from time to time. 1.6 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.7 "Committee" shall mean the Stock Bonus Profit Sharing/ Retirement Plan Committee appointed by the Board to establish the guidelines for administration and operation of the Plan and to perform such other duties as are prescribed in Section XIV. 1.8 "Common Stock" shall mean voting common shares issued by BetzDearborn Inc. (formerly named "Betz Laboratories, Inc."), its being intended that such Common Stock constitute "qualifying employer securities" within the meaning of section 4975(e)(8) of the Code. 1.9 "Company" shall mean BetzDearborn Inc. (formerly named "Betz Laboratories, Inc.") and any other corporation which adopts this Plan in accordance with the provisions of Section 20.1. 1.10 "Company Stock" shall mean Preferred Stock and/or Common Stock. 1.11 "Company Stock Account" shall mean the account established by the Plan Administrator for each Participant to which Company Stock allocated to the Participant under Section 6.2, 6.6(a), or 6.6(b) is credited. 1.12 "Compensation" shall mean an Eligible Employee's base salary or wages, including any shift premium pay, overtime pay, incentive compensation, commissions and bonuses paid pursuant to any 2 9 established plan, but excluding any special bonuses, deferred compensation or compensation earned pursuant to the Company's Employee Stock Incentive Plan, except that Compensation shall include the amount includable in the taxable gross income of an employee making an election described in section 83 of the Code. Compensation shall include an Eligible Employee's Compensation Deferral Contribution, if any. Compensation shall include Compensation paid by an Affiliate which is a controlled foreign corporation pursuant to section 957 of the Code. The Plan Administrator may establish rules for translating foreign compensation into U.S. dollars. The annual Compensation of each Participant taken into account under the Plan shall not exceed $160,000, as adjusted by the Commissioner of Internal Revenue for increases in the cost of living in accordance with section 401(a)(17)(B) of the Code. The cost-of-living adjustment in effect for a calendar year shall apply to any period, not exceeding 12 months, beginning in such calendar year over which Compensation is determined (the "determination period"). If a determination period consists of fewer than 12 months, the applicable limit (as adjusted) shall be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. 1.13 "Compensation Deferral Contribution" shall mean the amount of the deferred compensation contributed to the Plan in accordance with Section 8.2. 1.14 "Compensation Deferral Percentage" shall mean any whole percentage number by which a Participant may elect to have the Company reduce his Compensation and make Compensation Deferral Contributions to the Plan. 1.15 "Diversification Account" shall mean the account established in the Investment Fund by the Plan Administrator for each applicable Participant to which such Participant's Diversification Account under the Stock Bonus Plan is transferred, as provided under Section 18.1, and to which diversifications under Section 18.3 are credited. 1.16 "Effective Date" shall mean January 1, 1989. 1.17 "Eligible Employee" shall mean any person employed by the Company other than (i) a nonresident alien who receives no earned income (as defined in section 911(b) of the Code) which constitutes United States source income (as defined in section 861(a)(3) of the Code), or (ii) a person who receives all or a portion of his Compensation from a Foreign Affiliate (as described in Section 2.7 of the Plan). The term "Eligible Employee" shall not include any person who is classified as an independent contractor or a Leased Employee by the Company, regardless of how such individual is classified by the Internal Revenue Service, by any other governmental agency or government, or by any court. 1.18 "Employee" shall mean any individual employed by the Company or an Affiliate. 1.19 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.20 "Exempt Loan" shall mean any loan to the Trust not prohibited by section 4975(c) of the Code, including a loan which meets the requirements set forth in section 4975(d)(3) of the Code and the regulations promulgated thereunder, the proceeds of which are used to finance the acquisition of Company Stock or to refinance such a loan. 1.21 "401(k) Account" shall mean the account established by the Plan Administrator for each Participant to which Compensation Deferral Contributions allocated to the Participant are credited. 3 10 1.22 "Investment Fund" shall mean, in the aggregate, all of the 401(k) Accounts, Other Investments Accounts, Rollover Accounts, Voluntary Accounts, and Diversification Accounts established by the Plan Administrator. 1.23 "Investment Vehicle" shall mean any separate options available for the investment of amounts credited to accounts in the Investment Fund. 1.24 "Leased Employee" shall mean a leased employee of the Company or an Affiliate within the meaning of section 414(n)(2) of the Code. Notwithstanding the foregoing, if all such leased employees constitute less than twenty percent (20%) of the nonhighly compensated work force (within the meaning of section 414(n)(5)(C)(ii) of the Code) of the Company and the Affiliates, the term "Leased Employee" shall not include any leased employee covered by a plan described in section 414(n)(5) of the Code. 1.25 "Matching Account" shall mean the account established by the Plan Administrator for each Participant to which Matching Contributions allocated to the Participant are credited. 1.26 "Matching Contributions" shall mean all amounts allocated to a Participant's Matching Account. 1.27 "Matching Percentage" shall mean the rate at which the Company matches each Participant's Compensation Deferral Percentage. 1.28 "Maximum Compensation Deferral Matching Percentage" shall mean the greatest Compensation Deferral Percentage to be multiplied by the Matching Percentage in the calculation of Matching Contributions. 1.29 "Normal Retirement Age" shall mean age 65. 1.30 "Normal Retirement Date" shall mean the first day of the month following the month in which a Participant attains Normal Retirement Age. 1.31 "Other Investments Account" shall mean the account established by the Plan Administrator for each Participant to which assets allocated to the Participant other than Company Stock and Compensation Deferral Contributions are credited. 1.32 "Participant" shall mean any Eligible Employee who meets or who has met the eligibility requirements of Section 3 and who has commenced to participate in the Plan pursuant to Section 3.2. 1.33 "PAYSOP Account" shall mean the account established by the Plan Administrator for each applicable Participant to which such Participant's PAYSOP Account under the Stock Bonus Plan is transferred, as provided under Section 19.1. 1.34 "Plan" shall mean the BetzDearborn Inc. Employee Stock Ownership and 401(k) Plan (formerly named the "Betz Laboratories, Inc. Employee Stock Ownership and 401(k) Plan"), as set forth in this document and as it may be amended from time to time. 1.35 "Plan Administrator" shall mean the person designated by the Board of Directors to execute the administrative functions required by the Board of Directors, the Committee, the Plan and the Trust Agreement. 4 11 1.36 "Preferred Stock" shall mean Series A ESOP Convertible Preferred Stock issued by BetzDearborn Inc., (formerly named "Betz Laboratories, Inc.") which is convertible into Common Stock, its being intended that such Preferred Stock constitute "qualifying employer securities" within the meaning of section 4975(e)(8) of the Code. 1.37 "Qualified Election Period" shall mean the six-Plan-Year period beginning with the first Plan Year in which the Participant becomes a Qualified Participant. 1.38 "Qualified Participant" shall mean a Participant who has attained age 55 and who has completed at least 10 years of participation in the Plan. 1.39 "Rollover Account" shall mean the account established by the Plan Administrator for each applicable Participant to which assets rolled over to the Plan by the Participant (including a direct rollover) to the Plan are credited. A Participant's Rollover Account shall include a separate subaccount consisting of the Participant's Matching Account, if any, transferred from the Stock Bonus Plan. 1.40 "Stock Bonus Account" shall mean the account established by the Plan Administrator for each applicable Participant to which such Participant's Stock Bonus Account under the Stock Bonus Plan was transferred, as provided under Section 18.1. 1.41 "Stock Bonus Plan" shall mean the Betz Laboratories, Inc. Stock Bonus Profit Sharing and 401(k) Plan. 1.42 "Suspense Subfund" shall mean the subfund established pursuant to Section 6.4 as part of the Trust Fund to hold Company Stock purchased with the proceeds of an Exempt Loan pending the allocation of such Company Stock to Participants' Company Stock Accounts. 1.43 "Trust" shall mean the BetzDearborn Inc. Employee Stock Ownership and 401(k) Trust, created by the Trust Agreement. 1.44 "Trust Agreement" shall mean the agreement by and between the Company and the Trustee, as it may be amended from time to time. 1.45 "Trust Fund" shall mean all cash and securities and all other assets deposited with or acquired by the Trustee in its capacity as such hereunder, together with accumulated income. 1.46 "Trustee" shall mean Putnam Fiduciary Trust Company, or its duly appointed successor. 1.47 "Valuation Date" shall mean the date as of which the Investment Vehicles are valued and Account balances are able to be determined under Section 5, which shall be each business day. 1.48 "Voluntary Account" shall mean the account established by the Plan Administrator for each applicable Participant to which such Participant's Voluntary Account under the Stock Bonus Plan is transferred, as provided under Section 18.1. (Contributions to the Voluntary Account under the Stock Bonus Plan were employee after-tax contributions.) 5 12 SECTION 2 SERVICE 2.1 "Hour of Service" shall mean each hour during the applicable service computation period for which: (a) an Employee is paid, or entitled to be paid, for the performance of duties for the Company or an Affiliate; (b) an Employee is paid, or is entitled to be paid, by the Company or an Affiliate, on account of a period of time during which no duties were performed (whether or not the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability, layoff, jury duty, military duty or leave of absence); or (c) back pay, determined without regard to mitigation of damages, is either awarded, or agreed to be awarded, to an Employee by the Company or an Affiliate, provided that no Hour of Service shall be credited under this subsection (c) if such Hour of Service has been credited under either subsection (a) or subsection (b). Notwithstanding subsection (b), (1) no more than 501 Hours of Service shall be credited under subsection (b) to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period) except that during any period not to exceed six months during which the Employee is temporarily absent with the Company's or an Affiliate's authorization for reasons such as sickness, short-term disability, maternity leave, leave of absence, jury duty or layoff, such Employee shall be credited with the number of Hours of Service during such period of absence equal to those he would have received had he not been absent based on his customary period of work; (2) no Hour of Service shall be credited under subsection (b) to an Employee indirectly paid, or entitled on account of a period during which no duties are performed if such payment is made or due under a plan maintained solely for the purposes of complying with any applicable worker's compensation, unemployment compensation or disability insurance laws; (3) no Hour of Service shall be credited under subsection (b) to an Employee for any payment which solely reimburses him for medical or medically related expenses he has incurred; and (4) no Hour of Service shall be credited under subsection (b) to an Employee for any payments made or due to him under this Plan or any other employee pension benefit plan maintained by the Company or an Affiliate. For purposes of subsection (b), a payment shall be deemed to be made by, or due from, the Company or an Affiliate regardless of whether such payment is made by, or due from, the Company or an Affiliate directly, or indirectly through, among others, a trust fund, insurer, or other entity to which the Company or an Affiliate contributes or pays premiums and regardless or whether contributions made or due to the trust fund, insurer or other entity are for the benefit of particular Employees or are on behalf of a group of Employees in the aggregate. 6 13 An authorized leave of absence for service in active duty in the Armed Forces of the United States shall not constitute a One-Year Break in Service and an Employee shall receive, upon his return, in addition to the credit for Hours of Service to which he is entitled under the provisions of this section, such other credit for such military service as may be prescribed by Federal laws relating to military service and veteran's reemployment rights. In the case of a payment which is made, or due, on account of a period during which an Employee performs no duties, and which results in the crediting of Hours of Service under subsection (b), or in the case of an award or agreement for back pay, to the extent that such award or agreement is made with respect to a period described in subsection (b) the number of Hours of Service to be credited shall be determined in accordance with the applicable regulations prescribed by the Secretary of Labor and set forth in 29 CFR Section 2530.200b-2(b). Hours of Service described in subsection (a), (b) and (c) shall be credited to service computation periods in accordance with the applicable regulations prescribed by the Secretary of Labor and set forth in 29 CFR Section 2530.200b-2(c). The number of Hours of Service to be credited to an Employee in a service computation period shall be determined in the following manner: (a) In the case of an Employee for whom the Company or the Affiliate maintains records of his hours worked and hours for which payment is made or due, the number of Hours of Service to be credited to such Employee in a service computation period shall be determined from such records. (b) In the case of an Employee for whom the Company or the Affiliate does not maintain records of his hours worked and hours for which payment is made or due, the number of Hours of Service to be credited to such Employee in a service computation period shall be determined on the basis of periods of employment which shall be the payroll periods of the Company or the Affiliate applicable to such Employee. An Employee shall be credited with a number of Hours of Service, determined in accordance with the following table, for each of his payroll periods in which he actually has at least one Hour of Service; PAYROLL PERIOD HOURS OF SERVICE CREDITED
weekly 45 bi-weekly 90
The nature and extent of credit for Hours of Service recognized under this subsection shall be determined in accordance with any applicable law or regulation. (c) Solely for the purpose of determining whether a Participant has incurred a One-Year Break in Service, an "Hour of Service" is also, with respect to any Employee who is absent from work for maternity or paternity reasons, each hour which would otherwise have been credited to such Employee but for such absence, or, in any case in which such hours cannot be determined, eight hours per day of such absence. An absence from work for maternity or paternity reasons means a continuous absence: (1) by reason of the pregnancy of the Employee; (2) by reason of the birth of a child of the Employee; 7 14 (3) by reason of the placement of a child with the Employee in connection with the adoption of such child by such Employee; or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this subsection (c) shall be credited in the service computation period in which the absence begins if the crediting is necessary to prevent a One-Year Break in Service in that service computation period, or, in all other cases, in the following service computation period. 2.2 "Eligibility Computation Period" shall mean any of the following 12-consecutive-month periods: (a) the 12-consecutive-month period beginning on the date on which an Employee first completes an Hour of Service (his "date of employment") or the date on which an Employee first completes an Hour of Service following a One-Year Break in Service (his "date of reemployment"); (b) any Plan Year beginning after an Employee's date of employment or date of reemployment. 2.3 "Year of Eligibility Service" shall mean an Eligibility Computation Period during which an Employee completes 1,000 or more Hours of Service. 2.4 Year of Vesting Service. An individual shall complete a Year of Vesting Service in any Plan Year in which he completes 1,000 or more Hours of Service, whether or not he is in the employ of the Company or an Affiliate at the end of such Plan Year. In addition to Years of Vesting Service completed pursuant to the preceding sentence, any individual who was a participant in the BetzDearborn Inc. Employees' Retirement Plan (formerly named the "Betz Laboratories, Inc. Retirement Plan") on December 31, 1988, shall be credited with the number of Years of Vesting Service under this Plan with which he was credited under such Retirement Plan on that date for purposes of vesting. 2.5 One-Year Break in Service. An Employee shall be considered to have incurred a "One-Year Break in Service" in any Plan Year beginning on or after January 1, 1989 in which he does not have at least 501 Hours of Service. 2.6 No Parity Break. All of a Participant's Years of Eligibility Service and Years of Vesting Service shall be taken into account without regard to how many One-Year Breaks in Service a Participant incurs. 2.7 Service with a Foreign Affiliate. An Employee's service with a Foreign Affiliate shall be counted for purposes of eligibility to participate in the Plan and for determination of Years of Vesting Service. An Employee who is 21 and who has completed a Year of Eligibility Service by reason of employment with a Foreign Affiliate shall commence participation upon his first Hour of Service with the Company. "Foreign Affiliate" shall mean (i) any corporation more than eighty percent (80%) owned by the Company which is incorporated in a country other than the United States, and (ii) any Affiliate incorporated in the United States to the extent it does business (and the Employee performs services) in a country other than the United States. 8 15 SECTION 3 PARTICIPATION 3.1 Continued Participation of Participants as of December 31, 1997. Any Employee who was a Participant as of December 31, 1997, shall continue to participate in the Plan, provided he is an Eligible Employee on that date. 3.2 Eligibility and Participation. An Eligible Employee, other than an indificual who is hired on a temporary basis (i.e., for a period expected to be less than one year), shall become a Participant in the Plan on the later of (i) the date he first completes an Hour of Service for the Company, or (ii) the date he attains age 21, provided he is an Eligible Employee on such date. An Eligible Employee who is hired on a temporary basis shall become a Participant in the Plan on the January 1 or July 1 coincident with or immediately following the later of (i) the date he completes one Year of Eligibility Service, or (ii) the date he attains age 21, provided he is an Eligible Employee on such date. An Employee who becomes an Eligible Employee after satisfying the foregoing eligibility requirements shall become a Participant on the date on which he becomes an Eligible Employee. 3.3 Participation After Break in Service. If a Participant separates from service and is thereafter reemployed by the Company, he shall resume participation in the Plan immediately upon his return to the service of the Company. 3.4 Leased Employees. A Leased Employee shall not be eligible to participate in the Plan. SECTION 4 COMPANY CONTRIBUTIONS 4.1 Company Contributions (a) For each of its fiscal years, the Company shall make a contribution to the Trust in cash sufficient to pay any currently maturing obligations under an Exempt Loan (to the extent such obligations will not be paid by dividends on Company Stock under Section 7.3). (b) In addition, for each of its fiscal years, the Company may make a contribution to the Trust, in cash or in kind (including Company Stock). The amount of such contribution (if any) for any year shall be determined by appropriate action by the Board of Directors. (c) All or any part of the cash contributions made pursuant to subsection (a) or (b) may be applied to repay any outstanding Exempt Loan. The Plan Administrator, subject to any pledge or similar agreement, shall direct the Trustee as to the portion of such contributions to be applied to repay each such Exempt Loan. (d) The Company shall also contribute to the Trust in cash each Participant's Compensation Deferral Contributions under Section 8. 4.2 Time of Payment. The Company shall make payment of those cash contributions to the Trust necessary to pay any currently maturing obligations under an Exempt Loan in sufficient time to enable the Trustee to make timely payment of the obligation to the lender under the Exempt Loan. The Company shall make payment of a Participant's Compensation Deferral Contribution as soon as practicable after the applicable deferral date. The Company shall make payment of any other contributions to the Trust for any fiscal year for which it makes other contributions within the time 9 16 prescribed by law, including extensions of time, for the filing of its Federal income tax return for such year. 4.3 Contributions Irrevocable (a) General Rule. Except as provided in subsection (b), all Company contributions to the Trust shall be irrevocable. Neither such contributions nor any income therefrom shall be used for any purpose other than the exclusive benefit of Participants or their beneficiaries under the Plan. (b) Circumstances of Return of Company Contributions. (1) In the case of a Company contribution made by a mistake of fact, such contribution may be returned to the Company within one year after the payment of the contribution. (2) Company contributions are conditioned on their deductibility under section 404 of the Code, and, to the extent a deduction is disallowed, the affected contribution (to the extent disallowed) may be returned to the Company within one year after the disallowance of the deduction. SECTION 5 PARTICIPANTS' ACCOUNTS AND INVESTMENT THEREOF; EXEMPT LOANS 5.1 Accounts. A Participant's interest in the Trust Fund shall be reflected in his Accounts. The Plan Administrator shall establish Account records for each Participant. Notwithstanding the foregoing, the Trust Fund shall be treated as a single trust for purposes of investment and administration, and nothing contained herein shall require a physical segregation of assets for any such Account. 5.2 Investment of Trust Fund. Subject to Section 5.4, the Trust Fund shall be invested primarily in Company Stock. Among other investments, cash or cash equivalents may be held in the Trust Fund for the purposes of, inter alia, making distributions to Participants, acquiring shares of Company Stock from shareholders of BetzDearborn Inc. or directly from BetzDearborn Inc. or enabling the Plan to repay an Exempt Loan. Neither the Company nor the Committee nor the Plan Administrator nor the Trustee shall have any responsibility or duty to time any transaction involving Company Stock in order to anticipate market conditions or changes in stock value, nor shall any such person have any responsibility or duty to sell Company Stock held in the Trust Fund (or otherwise to provide investment management for Company Stock held in the Trust Fund) in order to maximize return or minimize loss. 5.3 Exempt Loan. The Board of Directors may direct the Trustee to have the Plan enter into one or more Exempt Loans to finance the acquisition of Company Stock. Notwithstanding any other provision of the Plan, all proceeds of an Exempt Loan shall be used, within a reasonable time after receipt by the Trustee, for the following purposes only: (a) to acquire Company Stock; (b) to repay the same Exempt Loan; or (c) to repay any previous Exempt Loan. 10 17 An Exempt Loan shall be repaid only from amounts loaned to the Trust, from Company cash contributions to the Trust and earnings attributable thereto, from any collateral given for the Exempt Loan and from dividends paid on Company Stock acquired with proceeds of an Exempt Loan. An Exempt Loan shall be for a specific term, shall bear a reasonable rate of interest and shall not be payable on demand except in the event of default. An Exempt Loan may be secured by a pledge of the Company Stock acquired with its proceeds (or acquired with the proceeds of a prior Exempt Loan which is being refinanced). No other assets of the Trust Fund may be pledged as collateral for an Exempt Loan, and no lender shall have recourse against assets of the Trust Fund other than any Company Stock remaining subject to pledge. Except as otherwise permitted by section 409(l) of the Code and any regulations issued thereunder, no Company Stock acquired with the proceeds of an Exempt Loan may be subject to a put, call or other option, or buy-sell or similar arrangement while held in or when distributed from the Trust Fund, whether or not the Plan continues to be an employee stock ownership plan within the meaning of section 4975(e)(7) of the Code and whether or not the Exempt Loan has been repaid. A Participant's protections in the preceding sentence shall be nonterminable, within the meaning of Treas. Reg. Section 4975-11(a)(3)(ii). 5.4 Diversification of Investments. (a) Election by Qualified Participant. Subject to subsection (d), each Qualified Participant shall be permitted to direct the Plan, within 90 days after the last day of each Plan Year during the Participant's Qualified Election Period, as to the investment of (i) twenty-five percent (25%) of the total number of shares of Company Stock that have ever been allocated to the Qualified Participant's Company Stock Account and Matching Account on or before the most recent allocation date immediately preceding the applicable 90-day period, less (ii) the number of shares of Company Stock previously directed pursuant to a prior diversification election under this subsection (a). The number of shares of Company Stock subject to direction shall be rounded to the nearest whole integer. With respect to a Qualified Participant's diversification election for the last Plan Year in his Qualified Election Period, "fifty percent (50%)" shall be substituted for "twenty-five percent (25%)" where it appears in this subsection (a). Any such diversification election that requires a disposition of Preferred Stock by the Trustee shall be effected by the Trustee only by the tender of such Preferred Stock to the Company in exchange for shares of Common Stock with a fair market value on the date of tender (net after commissions and cost of sale) equal to the cash redemption price of such Preferred Shares. The Company is obligated to make such exchange pursuant to Section 6 of the Trust Agreement. For purposes of this subsection (a), "fair market value" shall have the same meaning as in Section 6 of the Trust Agreement. (b) Method of Directing Investment. The Participant's direction shall be provided to the Plan Administrator in writing or in any other manner acceptable to the Plan Administrator; shall be implemented no later than 180 days after the close of the Plan Year to which the direction applies; and shall specify which, if any, of the options set forth in subsection (c) the Participant selects. (c) Investment Options. (1) A fund invested principally in equity securities offering unusual opportunities for growth and capital appreciation, but which may also be invested in preferred stocks and other securities convertible into such equity securities. 11 18 (2) A fund invested principally in fixed income securities and other property which produces a fixed return. (3) A fund invested principally in fixed income securities maturing in not over two years. (d) De Minimis Rule. If the fair market value (determined on the Valuation Date immediately preceding the applicable 90-day direction period) of the Company Stock allocated to a Qualified Participant's Company Stock Account and Matching Account is $500 or less, the Qualified Participant may not direct the investment of any portion of his Company Stock Account and Matching Account balance pursuant to this Section for the Plan Year ending on the Valuation Date. SECTION 6 ALLOCATION OF CONTRIBUTIONS 6.1 Participants Entitled to Allocation. Except as provided in Section 8, each contribution to the Trust Fund for a Plan Year (except for a contribution to be used to amortize an Exempt Loan) and Company Stock released from the Suspense Subfund pursuant to Section 6.5 for a Plan Year shall be allocated by the Plan Administrator to and among each Participant (i) who in such Plan Year completed 1,000 or more Hours of Service for the Company, and (ii) who was an Eligible Employee on the last day of such Plan Year. Notwithstanding the preceding clause (ii), a Participant or his beneficiary, as the case may be, shall be entitled to an allocation for the Plan Year in which the Participant's employment terminates, regardless of whether the Participant was an Eligible Employee on the last day of such Plan Year, if the Participant meets one or both of the following: (a) the Participant's termination of employment occurs on or after his Normal Retirement Date; or (b) the Participant's termination of employment occurs by reason of his death or by reason of his total and permanent disability (as defined in Section 9.5(b)). (c) the Participant elects Early Retirement under the BetzDearborn Inc. Employees' Retirement Plan upon his termination of employment. 6.2 Allocation of Company Stock Contributions. The Plan Administrator shall, as of December 31 of each Plan Year for which the Company makes a Company Stock contribution, allocate such contribution (including fractional shares to 1/1000 of a share) to the Company Stock Account of each Participant entitled to an allocation for the Plan Year in the same proportion that such Participant's Compensation for the Plan Year bears to the total Compensation of all Participants entitled to an allocation for the Plan Year. 6.3 Allocation of Other Contributions. The Plan Administrator shall, as of December 31 of each Plan Year for which the Company makes a contribution in a form other than Company Stock (except for a contribution to be used to amortize an Exempt Loan or a contribution under Section 8), allocate such contribution to the Other Investments Account of each Participant entitled to an allocation for the Plan Year in the same proportion that such Participant's Compensation for the Plan Year bears to the total Compensation of all Participants entitled to an allocation for the Plan Year. 6.4 Allocation of Company Stock Acquired with Exempt Loan. Company Stock acquired by the Trust with the proceeds of an Exempt Loan shall be added to and maintained in the Suspense Subfund 12 19 established within the Trust Fund and shall thereafter be released from the Suspense Subfund as provided in Section 6.5 and allocated to the Company Stock Accounts of Participants as provided in Section 6.6. 6.5 Release from Suspense Subfund. Company Stock acquired by the Trust with the proceeds of an Exempt Loan shall be released from the Suspense Subfund as the Exempt Loan is repaid, in one of the alternative methods set forth in subsection (a) and subsection (b) as elected by the Committee in its sole discretion. (a) First Alternative. The first alternative method is, for each Plan Year until the Exempt Loan is fully repaid, to release a number of shares of Company Stock from the Suspense Subfund (including fractional shares to 1/1000 of a share) equal to the number of unreleased shares of Company Stock in the Suspense Subfund immediately before such release multiplied by a fraction. The numerator of the fraction is the amount of principal and interest paid on the Exempt Loan for the Plan Year, and the denominator of the fraction is the sum of the numerator plus the principal and interest to be paid on the Exempt Loan for all future Plan Years during the term of the Exempt Loan (determined without reference to any possible extensions or renewals thereof). For purposes of computing the denominator of the fraction, if the interest rate on the Exempt Loan is variable, the interest to be paid in future Plan Years shall be calculated by assuming that the interest rate in effect as of the end of the applicable Plan Year will be the interest rate in effect for the remainder of the term of the Exempt Loan. Notwithstanding the foregoing, if the Exempt Loan is repaid with the proceeds of a subsequent Exempt Loan, such repayment shall not operate to release all the Company Stock in the Suspense Subfund; rather, such release shall be effected pursuant to the foregoing provisions of this section on the basis of payments of principal and interest on such substitute loan. (b) Second Alternative. The second alternative method is, for each Plan Year until the Exempt Loan is fully repaid, to determine the number of shares of Company Stock released from the Suspense Subfund as provided in subsection (a) but basing such release upon only the amount of principal paid on the Exempt Loan for the Plan Year (without regard to interest payments). This method may be used only if the following three conditions are met: (1) the Exempt Loan provides for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for 10 years; (2) the interest portion of any payment is disregarded for purposes of determining the number of shares released only to the extent it would be treated as interest under standard loan amortization tables; and (3) if the Exempt Loan is renewed, extended or refinanced, the sum of the expired duration of the Exempt Loan and the renewal period, the extension period or the duration of a new Exempt Loan does not exceed 10 years. (c) More Than One Exempt Loan. If at any time there is more than one Exempt Loan outstanding, separate accounts shall be established under the Suspense Subfund for each Exempt Loan. Each Exempt Loan for which a separate account is maintained shall be treated separately for purposes of subsections (a) and (b) governing the release of shares from the Suspense Subfund. (d) Treasury Regulations. It is intended that the provisions of this section be applied and construed in a manner consistent with the requirements and provisions of Treas. Reg. Section54.4975-7(b)(8), and any successor regulation thereto. 13 20 6.6 Allocation of Shares Released from Suspense Subfund. (a) Company Stock released from the Suspense Subfund under Section 6.5 shall first be allocated under this subsection (a). The number of shares of Company Stock released from the Suspense Subfund as a result of the cash dividends described in Section 7.3(a)(2) shall be determined. There shall then be allocated to each Participant's Company Stock Account a sufficient number of such shares (including fractional shares to 1/1000 of a share) such that the fair market value of the shares allocated to the Participant's Company Stock Account equals the amount of such dividends which would have been allocated to the Participant's Other Investments Account but for the requirement in Section 7.3(a)(2) that such dividends be used to repay an Exempt Loan. If the foregoing rule is not met, the Plan Administrator shall notify the Company and additional contributions to the Plan shall be made by the Company and used by the Trustee to repay the Exempt Loan to the extent necessary to release additional shares of Company Stock from the Suspense Subfund to meet the foregoing rule. (b) Allocations to Match Participants' Compensation Deferral Contributions. After the allocations described in subsection (a) are made, shares of Company Stock released from the Suspense Subfund for a Plan Year under Section 6.5 (including fractional shares of 1/1000 of a share) shall be allocated to Participants' Matching Accounts as described in Section 8.3(a). (c) Allocation of Remainder. After the allocations described in subsections (a) and (b) are made, any remaining shares of Company Stock released from the Suspense Subfund for a Plan Year pursuant to Section 6.5 (including fractional shares to 1/1000 of a share) shall be allocated by the Plan Administrator as of December 31 of the Plan Year to the Company Stock Accounts of each Participant entitled to an allocation for the Plan Year in the same proportion that such Participant's Compensation for the Plan Year bears to the total Compensation for the Plan Year of all Participants entitled to an allocation for the Plan Year. 6.7 Allocation of Forfeitures. All forfeitures occurring under Section 9.4 shall be allocated in the manner described in Section 6.2 or Section 6.3 (as applicable) as of December 31 of the Plan Year in which the event causing the forfeiture occurs. SECTION 7 VALUATION 7.1 Valuation. (a) The "Company Stock Subfund" established within the Trust Fund consists of all of the Company Stock Accounts, Matching Accounts, Stock Bonus Accounts, and PAYSOP Accounts of Participants. The "Other Investments Subfund" established within the Trust Fund consists of the Investment Fund. As of each Valuation Date, each such Subfund and the Suspense Subfund shall be valued separately by the Trustee (or, if required by applicable law, the Trustee shall cause the Subfund to be valued by an independent appraiser, as described in the following paragraph), and any net increase or decrease in the fair market value of the applicable Subfund, including earnings or losses realized or sustained during the Plan Year or part of the Plan Year then ending, shall be computed. For the purpose of determining such net increase or decrease, the value of the applicable Subfund on the immediately preceding Valuation Date shall be reduced by amounts paid out or due as benefits from such Subfund during the Plan Year or part of the Plan Year then ending. For purposes of the valuation described above, the fair market value of shares of Company Stock held by the Trustee shall be determined as of the Valuation Date coincident with the last 14 21 day of the Plan Year, and as of such other Valuation Dates as the Plan Administrator so directs, and, in the case of Preferred Stock, by a recognized independent firm of security analysts or appraisers meeting requirements similar to those contained in Treasury regulations under section 170(a)(1) of the Code (if any). (b) Notwithstanding any other provision of the Plan, to the extent that Participants' Accounts are invested in Investment Vehicles, the value of which is priced daily ("Daily Pricing Media"), all amounts contributed to the Trust Fund will be invested at the time of the actual receipt by the Investment Vehicle, and the value of each Account shall reflect the results of such daily pricing from the time of actual receipt until the time of distribution. Investment elections and changes shall be effective upon receipt of authorized transaction instructions. References elsewhere in the Plan to the investment of contributions "as of" a date other than that described in this Section shall apply only to the extent, if any, that assets of the Trust Fund are not invested in Daily Pricing Media. 7.2 Allocation of Gains and Losses. As of each Valuation Date, the net increase or decrease in the market value of the Company Stock Subfund and of the Other Investments Subfund, as calculated under Section 7.1, shall be separately allocated (i) with respect to the Company Stock Subfund, among the Company Stock Accounts, Matching Accounts, Stock Bonus Accounts, and PAYSOP Accounts of the Participants in the proportion that each such Account bears to the total of all such Accounts immediately prior to the valuation and before the allocations for the current Plan Year pursuant to Section 6 and (ii) with respect to the Other Investments Subfund, among the separate Accounts in the Investment Vehicles in the proportion that an amount in each Account in the Investment Vehicle bears to the total of all Accounts in the Investment Vehicle prior to the valuation and before the allocations for the current Plan Year pursuant to Section 6. 7.3 Dividends on Company Stock. (a) Cash Dividends. (1) Any cash dividends received which are attributable to shares of Company Stock held in Participants' Accounts which were not acquired with the proceeds of an Exempt Loan shall be credited to such Accounts as of the record date of the dividend. (2) Any cash dividends received which are attributable to shares of Company Stock (i) acquired with the proceeds of an Exempt Loan and (ii) previously allocated to Participants' Company Stock Accounts or Matching Accounts shall be used by the Trustee to repay an Exempt Loan. Upon such repayment, shares of Company Stock shall be (i) released from the Suspense Subfund in accordance with Section 6.5(a) or Section 6.5(b) (as applicable) and (ii) allocated to Participants' Company Stock Accounts and Matching Accounts in accordance with Section 6.6. (3) Any cash dividends received which are attributable to shares of Company Stock (i) acquired with the proceeds of an Exempt Loan and (ii) held in the Suspense Subfund shall be used by the Trustee to repay an Exempt Loan. Upon such repayment, shares of Company Stock shall be (i) released from the Suspense Subfund in accordance with Section 6.5(a) or Section 6.5(b) (as applicable) and (ii) allocated to Participants' Company Stock Accounts and/or Matching Accounts in accordance with Section 6.6. (b) Stock Dividends. Stock dividends paid (and stock received by the Trustee as a result of a stock split, stock conversion or reorganization or recapitalization of the Company) with respect to shares of Company Stock held in the Trust Fund shall be credited (i) to the Accounts to which such Company Stock was previously allocated or is otherwise held or (ii) in the case of Company Stock still 15 22 maintained in the Suspense Subfund pursuant to Section 6 or otherwise unallocated, to the Suspense Subfund or to the otherwise unallocated Company Stock. SECTION 8 401(k) PLAN 8.1 Definitions. The following definitions shall apply for purposes of this Section: (a) "Actual Deferral Percentage" shall mean the ratio (expressed as a percent) of Compensation Deferral Contributions on behalf of an Eligible Participant for the relevant Plan Year to such Eligible Participant's Statutory Compensation for such Plan Year. Actual Deferral Percentages shall be calculated to the nearest 1/100th of one percent. (b) "Average Actual Deferral Percentage" shall mean the average (expressed as a percentage) of the Actual Deferral Percentages of the Eligible Participants in a group. Average Actual Deferral Percentages shall be calculated to the nearest 1/100 of one percent. (c) "Average Contribution Percentage" shall mean the average (expressed as a percentage) of the Contribution Percentages of the Eligible Participants in a group. Average contribution Percentage shall be calculated to the nearest 1/100 of one percent. (d) "Contribution Percentage" shall mean the ratio (expressed as a percent) of the Matching Contributions on behalf of an Eligible Participant for the relevant Plan Year to such Eligible Participant's Statutory Compensation for such Plan Year. Contribution Percentages shall be calculated to the nearest 1/100th of one percent. (e) "Determination Year" shall mean the Plan Year for which a determination of which Employees are Highly Compensated Employees is being made. (f) "Eligible Participant" shall mean an Employee who is authorized under the terms of the Plan to have Compensation Deferral Contributions made to the Plan on his behalf for the relevant Plan Year. (g) "Excess Aggregate Contributions" shall mean the amount described in section 401(m)(6)(B) of the Code. (h) "Excess Contributions" shall mean the amount described in section 401(k)(8)(B) of the Code. (i) "Excess Deferral Amount" shall mean the Amount of Compensation Deferral Contributions for a calendar year which the Participant allocates to this Plan pursuant to the claims procedure set forth in Section 8.13(b). (j) "Highly Compensated Employee" shall mean, for Plan Years beginning after December 31, 1996, an Employee described in either paragraph (1) or paragraph (2). The determination of who is a Highly Compensated Employee shall be made in accordance with section 414(q) of the Code and Treasury regulations thereunder. 16 23 (1) An Employee is a Highly Compensated Employee for a Plan Year if he is a five percent (5%) owner (as defined in section 416(i)(1)(B) of the Code) of the Company or an Affiliate at any time during the Determination Year or the Look-Back Year. (2) An Employee is a Highly Compensated Employee for a Plan Year if he received "compensation" (as defined in section 414(q)(4) of the Code) from the Company and Affiliates in excess of $80,000 (as adjusted by the Secretary of the Treasury in accordance with section 414(q)(1) of the Code) during the Look-Back Year, and (if the Committee so elects for any Determination Year) was in the Top-Paid Group for the Look-Back Year. (k) "Non-Highly Compensated Employee" shall mean, for Plan Years beginning after December 31, 1996, an Employee who is not a Highly Compensated Employee. (l) "Statutory Compensation" shall mean all compensation as defined in Treas. Reg. Sections 1.415-2(d)(2) and (3) paid to or on behalf of an Eligible Participant during the portion of the relEvant Plan Year during which he is eligible to participate in the Plan, plus all amounts that are not currently includable in the Eligible Participant's gross income during such period by reason of the application of section 125, 402(e)(3) or 402(h)(1)(B) of the Code. The annual Statutory Compensation of each Eligible Participant taken into account under the Plan shall not exceed $150,000, as adjusted by the Commissioner of Internal Revenue for increases in the cost of living in accordance with section 401(a)(17)(B) of the Code. (m) "Top-Paid Group" shall mean the top twenty percent (20%) of the Employees when ranked on the basis of Compensation from the Company and Affiliates. Employees described in section 414(q)(5) of the Code shall be excluded for purposes of determining the number of employees in the Top-Paid Group. 8.2 Participant Compensation Deferrals. (a) Deferral Percentages. Each Participant may direct the Company to reduce his Compensation by 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 or fifteen percent (15%). Compensation shall be reduced by means of payroll deductions. (b) Determination of Maximum Compensation Deferral Percentage. Notwithstanding subsection (a), prior to the beginning of each Plan Year, for the purpose of meeting the nondiscrimination requirements and limitations of Sections 8.10 and 8.11, the Plan Administrator may establish a maximum limitation of less than fifteen percent (15%) on the elective deferrals that may be elected by Highly Compensated Employees. 8.3 Company Matching Contributions. (a) Matching Contributions. Shares of Company Stock that have been released from the Suspense Subfund under Section 6.5 and that have not and will not be transferred to the Company Stock Account of Participants under Section 6.6(a) shall be allocated to a Participant's Matching Account. The shares so allocated shall have a fair market value as of the immediately preceding Valuation Date equal to the Matching Rate, multiplied by the lesser of (i) the Participant's Compensation Deferral Percentage or (ii) the Maximum Compensation Deferral Matching Percentage, multiplied by the Participant's Compensation. (b) Matching Rate. The Matching Rate shall be twenty-five (25%). The Maximum Compensation Deferral Matching Percentage shall be four percent (4%). 17 24 8.4 Designation of Account. A Participant may designate in which Investment Vehicles his Compensation Deferral Contributions (including Compensation Deferral Contributions which were made under the Stock Bonus Plan and are transferred to the Participant's 401(k) Account in this Plan) and his Rollover Account (if any) shall be invested. Each Participant shall submit instructions designating in multiples of five percent (5%) the Investment Vehicles in which his Account balances in the Investment Fund shall be invested. Allocations to the Accounts of the Participant in the Investment Fund shall continue to be invested in the manner selected by the Participant until the receipt of instructions changing the Participant's investment selection. The Plan Administrator shall establish rules and procedures for the selection of Investment Vehicles including rules for the designation of an investment selection in the event any Participant fails to make a designation. The Plan Administrator may limit the number of times per year that Participants may change their investment selection. A Participant's selection of his investment option shall be effective as of any Valuation Date. The Participant's Account balances shall be adjusted as of each Valuation Date, in accordance with Section 7.2, based on the performance of the Investment Vehicles selected by the Participant. Each Account shall be valued separately. 8.5 Changing Rates of Contribution. A Participant shall establish, suspend, increase or decrease his Compensation Deferral Percentage by filing an Appropriate Form with the Plan Administrator or his designee, or in any other manner acceptable to the Plan Administrator, which shall be made effective within 30 days from day of receipt or other notification. A Participant's Compensation Deferral Percentage shall continue in effect, notwithstanding any change in Compensation, until the Participant elects to change it. The Plan Administrator may limit the number of times per year each Participant may change his Compensation Deferral Percentage. 8.6 Withdrawals of Compensation Deferral Contributions. A Participant may not withdraw any Matching Contributions (including Matching Contributions which were made under the Stock Bonus Plan and are transferred to the Participant's Rollover Account in this Plan) or earnings on his 401(k) Account. A Participant may withdraw Compensation Deferral Contributions (including Compensation Deferral Contributions which were made under the Stock Bonus Plan and are transferred to the Participant's 401(k) Account in this Plan) in accordance with subsections (a) and (b). (a) The Plan Administrator may grant consent to a requested withdrawal only to the extent of an immediate and heavy financial need of the Participant for which funds are not reasonably available from other resources of the Participant. The amount of an immediate and heavy financial need may include any amounts necessary to pay any Federal, state, or local income taxes or penalties reasonably anticipated to result from the withdrawal. The circumstances which may warrant approval of a Participant's application for a hardship withdrawal are: (1) payment of tuition and related educational expenses for the next 12 months of post-secondary education for the Participant, his dependents, spouse or children; (2) expenses for medical care described in section 213(d) of the Code previously incurred by the Participant, his spouse, or his dependents, or necessary for those persons to obtain medical care described in section 213(d) of the Code; (3) costs directly related to the purchase of a principal residence for the Participant (excluding mortgage payments); 18 25 (4) the need to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence; or (5) such other circumstances as may be deemed hardships pursuant to Treas. Reg. Section 1.401(k)-1(d)(2)(ii)(B). A Participant may apply to withdraw from his 401(k) Account at any time by submitting an Appropriate Form to the Plan Administrator specifying the reason for the withdrawal and the amount of the withdrawal, or in any other manner acceptable to the Plan Administrator. The Plan Administrator shall review all requests for withdrawal within 30 days. If approved by the Plan Administrator, withdrawals shall equal the lesser of (i) the amount required to meet the need created by the hardship, or (ii) the amount to the credit of the Participant's 401(k) Account. The Plan Administrator must make the determination of the existence of financial hardship in a uniform and nondiscriminating manner. If the Plan Administrator consents to a request for a withdrawal, then the sum approved to be withdrawn shall be paid to the Participant as soon as administratively practicable after approval of the request. (b) A Participant may withdraw his Compensation Deferral Contributions or any portion thereof without the consent of the Plan Administrator at any time after he has attained age 59-1/2. 8.7 Restrictions. A Participant may make one or more withdrawals, in accordance with Section 8.6, in a Plan Year. All withdrawals will be based on the value of the Participant's 401(k) Account as of the Valuation Date immediately preceding the distribution. The Plan Administrator shall establish guidelines for determining from which Investment Vehicles the withdrawal shall be taken. In the event of a withdrawal of all or any part of his 401(k) Account prior to the date he attains age 59-1/2, the Participant's Compensation Deferral Contributions shall thereupon cease and the Participant shall not be eligible to resume Compensation Deferral Contributions or elective contributions to any other plan maintained by the Company or any Affiliate which is qualified under section 401(a) of the Code, until the first payroll period following the 12-month period after the Participant's receipt of the hardship withdrawal. The suspension described in the preceding sentence shall not apply if the withdrawal occurs after the Participant attains age 59-1/2. 8.8 Periods of Absence. A Participant who is on a leave of absence with the consent of the Company may continue to have contributions made under the Plan by salary reduction and payroll deductions when Compensation is being continued by the Company. 8.9 Termination of Contributions. Compensation Deferral Contributions shall terminate coincident with the date the Participant terminates employment for any reason, including retirement or death. 8.10 Limitation on Compensation Deferral Contributions. (a) Maximum Amount of Compensation Deferral Contributions. No Participant shall be permitted to have Compensation Deferral Contributions made under this Plan during any calendar year in excess of $10,000 as adjusted by the Secretary of the Treasury for increases in the cost of living in accordance with section 402(g)(5) of the Code. 19 26 (b) Average Actual Deferral Percentage. For Plan Years beginning after December 31, 1996, Compensation Deferral Contributions for Eligible Participants who are Highly Compensated Employees shall meet at least one of the following two tests: (1) The Average Actual Deferral Percentage for Eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Actual Deferral Percentage for the preceding Plan Year, for those Eligible Participants in such preceding Plan Year who were Non-Highly Compensated Employees for such preceding Plan Year, multiplied by 1.25. (2) The Average Actual Deferral Percentage for Eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Actual Deferral Percentage for the preceding Plan Year, for those Eligible Participants in such preceding Plan Year who were Non-Highly Compensated Employees for such preceding Plan Year, multiplied by two; provided that the Average Actual Deferral Percentage for those Eligible Participants who are Highly Compensated Employees for the Plan Year does not exceed the Average Actual Deferral Percentage for Eligible Participants who were Non-Highly Compensated Employees for the preceding Plan Year by more than two percentage points. (c) Special Rules. (1) For purposes of this Section, the Actual Deferral Percentage for any Eligible Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have elective deferrals allocated to his account under two or more plans or arrangements described in section 401(k) of the Code that are maintained by the Company or an Affiliate shall be determined as if all such elective deferrals were made under a single arrangement. (2) A Compensation Deferral Contribution shall be taken into account under subsection (b) for a Plan Year only if it relates to Compensation that would have been received by the Eligible Participant in the Plan Year, but for the Eligible Participant's election to defer a portion of his Compensation under Section 8.2. (3) A Compensation Deferral Contribution shall be taken into account under subsection (b) for a Plan Year only if it is allocated to the Eligible Participant's 401(k) Account as of a date within that Plan Year. For this purpose, a Compensation Deferral Contribution shall be considered allocated as of a date within the Plan Year if the allocation is not contingent on participation in the Plan or the performance of services after the date and the Compensation Deferral Contribution is actually paid to the Trust Fund no later than 12 months after the end of the Plan Year to which the Compensation Deferral Contribution relates. (4) The determination and treatment of the Compensation Deferral Contributions and Actual Deferral Percentage of any Eligible Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. 8.11 Limitations on Matching Contributions. (a) Contribution Percentages. For Plan Years beginning after December 31, 1996, the Matching Contributions for Eligible Participants who are Highly Compensated Employees shall meet at least one of the following two tests: 20 27 (1) The Average Contribution Percentage for Eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Contribution Percentage for the preceding Plan Year, for those Eligible Participants in such preceding Plan Year who were Non-Highly Compensated Employees for such preceding Plan Year, multiplied by 1.25. (2) The Average Contribution Percentage for Eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Contribution Percentage for the preceding Plan Year, for those Eligible Participants in such preceding Plan Year who were Non-Highly Compensated Employees for such preceding Plan Year, multiplied by two; provided that the Average Contribution Percentage for Eligible Participants who are Highly Compensated Employees for the Plan Year does not exceed the Average Contribution Percentage for Eligible Participants who were Non- Highly Compensated Employees for the preceding Plan Year by more than two percentage points, subject to Treas. Reg. Section 1.401(m)-2 (modified as necessary to reflect the Small Business Job Protection Act of 1996). If it is necessary to reduce the Average Contribution Percentage for Eligible Participants who are Highly Compensated Employees for the Plan Year to prevent the multiple use of the alternative limitation, the Contribution Percentage of all Highly Compensated Employees shall be subject to reduction to the extent necessary under Section 8.15. (b) Special Rules. (1) For purposes of this Section, the Contribution Percentage for any Eligible Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to make after-tax contributions, or to have employer matching contributions allocated to his account, under two or more plans described in section 401(a) of the Code or arrangements described in section 401(k) of the Code that are maintained by the Company or an Affiliate shall be determined as if all such after-tax and employer matching contributions were made under a single plan. (2) In the event that this Plan satisfies the requirements of section 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of section 410(b) of the Code only if aggregated with this Plan, then this Section shall be applied by determining the Contribution Percentages of Eligible Participants as if all such plans were a single plan. (3) A Matching Contribution shall be taken into account under subsection (a) for a Plan Year only if it is (i) made on account of the Eligible Participant's Compensation Deferral Contributions for the Plan Year, (ii) allocated to the Eligible Participant's Company Stock Account during the Plan Year, and (iii) paid to the Trust Fund on or before the last day of the 12th month following the end of the Plan Year. (4) The determination and treatment of the Contribution Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. 8.12 Election to Use Current Plan Year. The Company may elect to apply Section 8.10(b) and (c) and Section 8.11 by using the Plan Year rather than the preceding Plan Year, as permitted under section 401(k)(3)(A) of the Code, provided that if such an election is made, it may not be changed except as provided by the Secretary of the Treasury. 21 28 8.13 Distribution of Excess Deferrals. (a) In General. Notwithstanding any other provision of the Plan, Excess Deferral Amounts plus any income and minus any loss allocable thereto shall be distributed no later than each April 15 to Participants who claim allocable Excess Deferral Amounts for the preceding calendar year. (b) Claims. A Participant's claim shall be in writing; shall be submitted to the Plan Administrator no later than March 1; shall specify the Participant's Excess Deferral Amount for the preceding calendar year; and shall be accompanied by the Participant's written statement that if the Excess Deferral Amount is not distributed, it, when added to amounts deferred under other plans or arrangements described in section 401(k), 408(k) or 403(b) of the Code, exceeds the limit imposed on the Participant by section 402(g) of the Code for the year in which the deferral occurred. (c) Determination of Income or Loss. A Participant's Excess Deferral Amount shall be adjusted for income or loss up to December 31 of the taxable year for which the Excess Deferral Amount was deferred or to the extent that such Excess Deferral Amount is invested in Investment Vehicles the value of which is priced daily, up to the date of distribution in accordance with Section 7.1(b). The income or loss allocable to a Participant's Excess Deferral Amount shall be determined in accordance with Section 7.2. (d) Accounting for Excess Deferral Amounts. Excess Deferral Amounts distributed under this Section shall be distributed from the Participant's 401(k) Account. 8.14 Distribution of Excess Contributions. (a) In General. Notwithstanding any other provision of the Plan, Excess Contributions plus any income and minus any loss allocable thereto shall be distributed within the 12-month period beginning on the earlier of the last day of the Plan Year for which such Excess Contributions were made, or the date of the complete termination of the Plan, to Participants on whose behalf the Excess Contributions were made for such Plan Year. (If the Excess Contributions are distributed after the first March 15, after the last day of the Plan Year in which the Excess Contributions arose, the Company will be subject to a ten percent (10%) excise tax under section 4979 of the Code with respect to the Excess Contributions.) (b) Determination and Distribution of Excess Contributions. The amount of Excess Contributions for Plan Years beginning on or after January 1, 1997 shall be determined in the following manner. First, the Actual Deferral Percentage for the ("ADP") of the Highly Compensated Employee(s) with the highest ADP shall be reduced to the extent necessary to satisfy Section 8.10(b) or to cause such ADP to equal the ADP of the Highly Compensated Employee(s) with the next highest ADP. Second, this process shall be repeated until Section 8.10(b) is satisfied. The amount of Excess Contributions equals the total amount of reductions in Compensation Deferral Contributions that would be required to achieve the ADPs determined in the preceding sentences. Then, the Compensation Deferral Contributions of the Highly Compensated Employee(s) with the highest Compensation Deferral Contribution amount for the Plan Year shall be reduced and distributed to such Employee(s) to the extent necessary to equal the amount of Excess Contributions determined in the preceding paragraph, or to cause the amount of such Compensation Deferral Contributions to equal the amount of Compensation Deferral Contributions of the Highly Compensated Employee(s) with the next highest amount for the Plan Year. This process shall be repeated until an amount equal to the total Excess Contributions determined in the preceding paragraph is distributed. The Average Actual Deferral Percentage tests in Section 8.10(b) shall not be re-run. 22 29 (c) Determination of Income or Loss. The Excess Contributions shall be adjusted for income or loss up to the last day of the Plan Year for which such Excess Contributions were made, or, to the extent that such Excess Contributions are invested in Investment Vehicles the value of which is priced daily, up to the date of distribution in accordance with Section 7.1(b). The income or loss allocable to a Participant's Excess Contributions shall be determined in accordance with Section 7.2. (d) Accounting for Excess Contributions. Excess Contributions shall be distributed from the Participant's 401(k) Account in proportion to the Participant's Compensation Deferral Contributions for the Plan Year. (e) Reduction for Excess Deferrals Distributed. The Excess Contributions which would otherwise be distributed under this Section shall be reduced, in accordance with regulations issued under section 401(k) of the Code, by the amount of Excess Deferrals distributed to the Participant under Section 8.13. 8.15 Distribution of Excess Aggregate Contributions. (a) In General. Excess Aggregate Contributions, plus any income and minus any loss allocable thereto, shall be distributed within the 12-month period beginning on the earlier of the last day of the Plan Year for which such Excess Aggregate Contributions were made or the date of the complete termination of the Plan, to Participants on whose behalf the Excess Aggregate Contributions were allocated for such Plan Year. (If the Excess Aggregate Contributions are distributed after the first March 15 after the last day of the Plan Year in which the Excess Aggregate Contributions arose, the Company will be subject to a ten percent (10%) excise tax under section 4979 of the Code with respect to the Excess Aggregate Contributions.) (b) Determination of Excess Aggregate Contributions. The amount of Excess Aggregate Contributions for a Highly Compensated Employee for Plan Years beginning on or after January 1, 1997 shall be determined in the following manner. First, the Average Contribution Percentage ("ACP") of the Highly Compensated Employee(s) with the highest ACP shall be reduced to the extent necessary to satisfy Section 8.11(a) or to cause such ACP to equal the ACP of the Highly Compensated Employee(s) with the next highest ACP. Second, this process shall be repeated until Section 8.11(a) is satisfied. The amount of Excess Aggregate Contributions equals the total amount of reductions in Matching Contributions that would be required to achieve the ACPs determined in the preceding sentences. Then, the Matching Contributions of the Highly Compensated Employee(s) with the highest Matching Contribution amount for the Plan Year shall be reduced and distributed to such Employee(s) to the extent necessary to equal the amount of Excess Aggregate Contributions determined in the preceding paragraph, or to cause the amount of such Matching Contributions to equal the amount of Matching Contributions of the Highly Compensated Employee(s) with the next highest amount for the Plan Year. This process shall be repeated until an amount equal to the total Excess Aggregate Contributions determined in the preceding paragraph is distributed. The Average Contribution Percentage tests in Section 8.11(a) shall not be re-run. (c) Determination of Income or Loss. The Excess Aggregate Contributions shall be adjusted for income or loss up to the last day of the Plan Year for which such Excess Aggregate Contributions were made, or, to the extent that such Excess Aggregate Contributions are invested in Investment Vehicles the value of which is priced daily, up to the date of distribution in accordance with 23 30 Section 7.1(b). The income or loss allocable to a Participant's Excess Aggregate Contributions shall be determined in accordance with Section 7.2. 8.16 Designation as Profit-Sharing Plan. This Section, in conjunction with the remainder of the Plan, constitutes a profit-sharing plan, within the meaning of section 401(a)(27) of the Code. 8.17 Participant Rollover Contribution. (a) Rollovers. With the approval of the Committee, a Participant may make a contribution to the Plan of any portion of an amount that qualifies as an eligible rollover distribution under section 402(c)(4) or 403(a)(4) of the Code, or as a rollover contribution under section 408(d)(3)(A)(ii) of the Code. Any rollover contribution so authorized shall be placed in the Participant's Rollover Account. 8.18 Loans. (a) General Rule. Upon receipt of a request for a loan, the Plan Administrator shall direct the Trustee to make a loan to a Participant who is an active employee (or to any terminated Participant or beneficiary who is a "party in interest" to the Plan within the meaning of section 3(14) of ERISA), provided such loan meets the requirements of this Section and the requirements of such procedures and guidelines as may be adopted by the Plan Administrator which are consistent with this Section. For purposes of this Section, the term "Participant" shall be deemed to include any terminated Participant or beneficiary to whom Plan loans are available, except where the context otherwise requires. A Participant's loan request shall be made by means of a completed application on a form supplied by the Plan Administrator, or in any other manner acceptable to the Plan Administrator. (b) Terms of Loan. Each loan granted or renewed under this Section shall bear a rate of interest which is two percentage points greater than the prime lending rate, as announced in The Wall Street Journal, on the business day coincident with or first following the fifteenth calendar day of the month in which the loan is made or such other rate as may be determined by the Plan Administrator to be required by law. The interest rate and other conditions for the repayment of the loan shall be fixed at the time the loan is made. All loans shall be repayable by their terms within five years. (c) Limitations. The amount of a loan to a Participant shall not exceed the lesser of: (1) one-half of the amount of the sum of the Participant's Rollover and 401(k) Accounts as of such date; or (2) $50,000, reduced by the highest outstanding balance of the Participant's loans from the Plan during the one-year period ending on the day before such loan is made. The minimum amount of any loan under this Section shall be $1,000. A Participant may not have more than one loan outstanding at any time. (d) Repayment Terms. Except as may be provided in regulations issued by the Secretary of the Treasury, each loan shall require substantially level amortization, with payments not less frequently than quarterly over the term of the loan. A Participant shall be required to repay any loans through payroll deduction, except that he may elect to prepay the entire outstanding balance of the loan in a single lump sum. 24 31 Each loan shall be evidenced by a promissory note and shall be secured by the vested balance of the Participant's Accounts; provided that, immediately after the origination of such loan, not more than fifty percent (50%) of the vested balance of the Participant's Accounts shall be used as security for the loan. Each loan shall also be secured by such other collateral, if any, as may be required by the Plan Administrator. If the Participant ceases to be actively employed and receiving Compensation before absence or disability leave, the Plan Administrator may permit the Participant to continue to make loan repayments or may, in the Plan Administrator's discretion accelerate such loan. If the Participant separates from service, and if, following such separation, the Participant is no longer a party in interest to the Plan, the loan shall be accelerated, and the unpaid balance of the loan, and accrued interest thereon, shall be deducted from the amount of any benefits which become payable to or on behalf of the Participant under the Plan. (e) General Requirements. All loans shall (i) be available to all eligible Participants on a reasonably equivalent basis, (ii) not be made available to Highly Compensated Employees (as defined in Section 8.1(j) in an amount (when calculated as a percentage of the borrower's Accrued Benefit under the Plan) greater than the amount (similarly calculated) made available to other Participants, and (iii) be made in accordance with this Section. (f) Accounts Available for Loans. (1) Order of Accounts. Any loan made to a Participant under this Section shall be considered an earmarked investment of such Participant's Accounts. Each loan shall be made from, and repayments shall be credited to, the Participant's Accounts in the order listed below: (A) first, from the Participant's Rollover Account; and (B) second, from the Participant's 401(k) Account. (2) Investment of Participant's Accounts. Until a loan to a Participant is repaid, the outstanding balance of the loan shall be treated as an investment by such Participant for his Account(s) only, and the interest paid by such Participant shall be credited to his Account(s) only. The Participant's Account(s) shall not share in any other earnings of the Plan with respect to the amount of the loan. (3) Loan Date. Each loan shall be made as soon as practicable following approval of the Participant's loan application by the Plan Administrator. To the extent any loan is made from a particular Account of a Participant which is invested partially in different investment media, such loan shall be made pro-rata from the investments of such Account in each such investment medium (other than Preferred Stock), valued as of the most recent Valuation Date or, to the extent that such loan is made from amounts invested in Investment Vehicles the value of which is priced daily, as of the date of the loan. (4) Investment of Loan Repayments. Loan repayments which are credited to a Participant's Account(s) shall be reinvested in accordance with Sections 5.2, 5.4, or 8.4, as applicable. 25 32 SECTION 9 BENEFITS AND DISTRIBUTIONS 9.1 Vesting. A Participant shall at all times have a nonforfeitable (vested) right to all amounts allocated to his 401(k) and Rollover Accounts. A Participant shall have a nonforfeitable (vested) right to his entire Accrued Benefit when he attains Normal Retirement Age. Before his Normal Retirement Age, a Participant shall have a nonforfeitable (vested) right to the percentage of his Company Stock, Matching, and Other Investments Accounts determined under the following table:
Years Nonforfeitable of Vesting Service Percentage ------------------ ---------- less than 5 0% 5 or more 100%
There shall be no divestment of a Participant's Accrued Benefit for cause. 9.2 Amount, Method, Form of Benefit Payments. (a) Amount. The amount of any benefits payable under this Section shall be the Participant's vested Accrued Benefit and based on the Valuation Date immediately preceding distribution. (b) Method. Except as otherwise required by Sections 9.8 and 9.9, benefits shall be paid as follows: (1) with respect to any Participant who dies while in the service of the Company or an Affiliate, or any Participant whose Accrued Benefit does not exceed (and has not at the time of any prior distribution exceeded) $5,000, one lump sum payment paid as soon as practicable following the Participant's death or other event which requires the benefit payment, as applicable; (2) with respect to any Participant whose vested Accrued Benefit exceeds (or at the time of any prior distribution exceeded) $5,000, one lump sum payment paid as soon as practicable after the event occurs which requires the benefit payment, provided any consent required by Section 9.4(b) is given. (c) Form. Benefits from the Participant's Company Stock, Matching, and Other Investments Accounts shall be paid in whole shares of Company Stock. To the extent the Participant's Company Stock and Matching Accounts hold Preferred Stock, benefits shall be paid in shares of Common Stock derived from the sale to the Company or conversion of the Preferred Stock, plus cash for any fractional shares. If the fair market value of Common Stock (closing price) is equal to or greater than the value of the Preferred Stock, both as determined under subsection (a), then shares of Common Stock derived from the sale or conversion of the Preferred Stock to Common Stock shall be distributed to the Participant. If the fair market value of Common Stock (closing price), determined as of the date of distribution, is less than the value of the Preferred Stock, determined under subsection (a), then, in addition to the shares of Common Stock derived from the sale or conversion of the Preferred Stock, there shall be contributed to the Plan by the Company and distributed to the Participant additional whole shares of Common Stock with a value as of the date of distribution as close as possible to equaling (but not exceeding) the shortfall, with any remaining shortfall distributed to the Participant in cash. Benefits from the Participant's 401(k) and Rollover Accounts shall be paid in cash, except that, to the extent the Investment Vehicle in which the Accounts are invested consists of Company Stock, such benefits shall be paid in Company Stock. 26 33 Notwithstanding the foregoing, a Participant may elect to receive all benefits from his Other Investments, 401(k) and Rollover Accounts in cash. 9.3 Normal and Late Retirement. (a) A Participant may retire at any time on or after his Normal Retirement Date. (b) If a Participant continues in the service of the Company after his Normal Retirement Date, he shall continue to participate in the Plan until he actually retires. The benefits of a Participant who retires on or after his Normal Retirement Date shall be paid in accordance with Section 9.2, but not later than the time specified in Sections 9.8 and 9.9. 9.4 Vested Deferred Benefits. (a) If a Participant with a vested Accrued Benefit separates from service before attaining Normal Retirement Age for any reason other than death, benefits shall be paid to him in accordance with Section 9.2, but not later than the time specified in Sections 9.8 and 9.9. (b) In the case of any Participant whose vested Accrued Benefit exceeds (or at the time of any prior distribution exceeded) $5,000, the Plan Administrator shall not direct that all or any part of such vested Accrued Benefit be distributed, or commence to be distributed, before the Participant attains Normal Retirement Age, unless the Participant consents in writing to such distribution, or unless the benefit becomes distributable under Section 9.6 upon the death of the Participant. (c) If a Participant without a vested right to his Accrued Benefit (other than his 401(k) and Rollover Accounts) separates from service, his Accrued Benefit (other than his 401(k) and Rollover Accounts) shall be immediately forfeited and allocated as provided in Section 6.7. (d) If the terminated Participant returns to service with the Company prior to incurring five consecutive One-Year Breaks in Service, any amount forfeited under subsection (c) shall be restored to the Participant's Company Stock, Matching and Other Investments Accounts as of the last day of the month in which the terminated Participant returns to service. For this purpose, unallocated forfeitures shall be utilized first. If not sufficient, the Company shall contribute additional amounts to restore the specified Accounts. (e) The following events shall constitute a separation from service for purposes of this Section: (1) the sale or other disposition by the Company to an unrelated entity of substantially all of the assets (within the meaning of section 409(d)(2) of the Code) used by the Company in a trade or business of the Company with respect to a Participant who continues employment with the entity acquiring such assets; or (2) the sale or other disposition by the Company to an unrelated entity of the Company's interest in a subsidiary (within the meaning of section 409(d)(3) of the Code) with respect to a Participant who continues employment with the subsidiary. Notwithstanding the foregoing, an event shall not be treated as described in this subsection unless (i) the Participant receives a "lump-sum distribution" (as defined in section 401(k)(10)(B)(ii) of the Code) by reason of the event, (ii) the Company continues to maintain the Plan 27 34 after the sale or other disposition and the purchaser does not maintain the Plan after the sale or other disposition, within the meaning of Treas. Reg. Section 1.401(k)-1(d)(4)(i), and (iii) the distribution is made in connection with the disposition of assets or a subsidiary, within the meaning of Treas. Reg. Section 1.401(k)-1(d)(4)(iii). 9.5 Disability Retirement. (a) If, before attaining Normal Retirement Age, a Participant in the service of the Company suffers a total and permanent disability (as defined in subsection (b)), such Participant shall then retire, he shall become one hundred percent (100%) vested in his Accrued Benefit and his Accrued Benefit shall be paid to him pursuant to Section 9.4(a). (b) "Total and Permanent Disability" shall mean the total and permanent incapacity of a Participant to perform the duties of such Participant's employment with the Company, such incapacity to be deemed to exist when so determined by the Company's long term disability carrier under the Company's long term disability policy. 9.6 Death. If a Participant dies while in the service of the Company, his Accrued Benefit shall be paid to his designated beneficiary or beneficiaries in accordance with Section 9.7. If a Participant with a vested Accrued Benefit dies after separating from service and before receiving all of the benefit payments to which he was entitled, the remainder of his vested Accrued Benefit shall be paid to his designated beneficiary or beneficiaries in accordance with Section 9.7. 9.7 Designation of Beneficiary and Form of Payment of Death Benefit; Spouse's Consent to Non-Spouse Beneficiary. (a) Designation of Beneficiary and Form of Payment. In the event a Participant has a surviving spouse at his death, such surviving spouse shall be the Participant's beneficiary, unless the spouse has consented in the manner described in subsection (b) to the payment of the Participant's Accrued Benefit to a beneficiary other than the spouse. In the event the Participant has no surviving spouse at his death, the beneficiary shall be the beneficiary designated by the Participant. Any designation by the Participant and/or consent by the Participant's spouse shall be made by a written form delivered to the Plan Administrator. Except as otherwise provided with respect to a surviving spouse, a Participant may, at any time prior to his death, change his beneficiary designation by completing a new written form, but a beneficiary designation shall remain in effect until such new form is received by the Plan Administrator. The death benefit shall be paid in one lump sum payment, to be made as soon as practicable following receipt of all information and documents necessary to make the distribution. If a Participant dies without effectively designating a surviving beneficiary and without a surviving spouse, then the beneficiary shall be legal representative of the Participant. (b) Requirements for Spouse's Consent. To be effective, a consent by a spouse to a Participant's designation of a nonspouse beneficiary must be filed in writing with the Plan Administrator, must be specific with respect to the particular nonspouse beneficiary consented to, must be irrevocable and must be witnessed by a Plan representative designated by the Plan Administrator or by a notary public. In addition, any such spousal consent shall be limited to the nonspouse beneficiary or beneficiaries specifically designated by the Participant, which designation may not be changed without a further spousal consent (unless the initial spousal consent expressly permits designations by the Participant without any further consent by the spouse). 28 35 Notwithstanding the foregoing, if the Participant establishes to the satisfaction of the Plan Administrator that such written consent may not be obtained because there is no spouse or the spouse cannot be located, the Participant's designation of a nonspouse beneficiary will be effective without the requirement of the spouse's consent. Any consent required under this Section shall be valid only with respect to the spouse who signs the consent, and any establishment that the consent of a spouse may not be obtained shall be effective only with respect to such spouse. Additionally, a revocation of a prior beneficiary designation may be made by a Participant without the consent of the spouse at any time. The number of revocations or consents shall not be limited. 9.8 Special Provision as to Timing of Distributions. Notwithstanding any other provision of the Plan, other than such provisions as require the consent of the Participant to a distribution with a present value in excess of $3,500, a Participant's Accrued Benefit shall be distributed not later than the times set forth below: (a) If the Participant separates from service by reason of the attainment of Normal Retirement Age or disability, the distribution of the Participant's Accrued Benefit shall be made in a lump sum payment not later than one year after the end of the Plan Year in which such event occurs. (b) If the Participant separates from service for a reason other than those enumerated in subsection (a) and other than by reason of his death and is not reemployed by the Company by the end of the fifth Plan Year following the Plan Year of such separation from service, distribution of the Participant's Accrued Benefit shall be made in a lump sum payment not later than one year after the end of the fifth Plan Year following the Plan Year in which the Participant separated from service. (c) If the Participant separates from service for a reason other than those enumerated in subsection (a), and is reemployed by the Company before the date distribution is required to begin under subsection (b), distribution to the Participant, prior to any subsequent separation from service, shall be in accordance with terms of the Plan other than this Section. 9.9 Requirements Concerning Distributions. All benefit distributions under this Section shall be subject to the following requirements: (a) Before Death. (1) Last Date for Commencement of Payments. The payment of benefits to a Participant under this Plan shall occur not later than the 60th day after the close of the Plan Year in which the latest of the following events occurs: (i) the Participant attains Normal Retirement Age; or (ii) the Participant terminates service with the Company. Notwithstanding the above, if the amount of payment required otherwise to occur on a date determined under this Section or under any other Section of the Plan cannot be ascertained by such date, or if the Plan Administrator is unable to locate the Participant or beneficiary after making reasonable efforts to do so, a payment retroactive to such date may be made no later than 60 days after the later of (i) the earliest date on which the amount of such payment can be ascertained under the Plan, or (ii) the earliest date on which the Participant or beneficiary is located. 29 36 (2) Additional Rule for Commencement of Benefit Payments. The distribution of benefits to a Participant who attains age 70-1/2 after December 31, 1996 shall occur not later than April 1 of the calendar year following the calendar year in which the Participant attains age 70-1/2 or the Participant terminates employment, whichever is later. However, if the Participant is a five percent (5%) owner (within the meaning of Q&A B-2(d) of Prop. Treas. Reg. Section1.401(a)(9)-1 or any successor thereto), then the distribution of benefits shall occur not later than April 1 of the calendar year following the calendar year in which the Participant attains age 70-1/2, regardless of whether the Participant has terminated employment. An active Participant who attained age 70-1/2 before January 1, 1997 and, therefore, commenced benefit payments under the prior terms of the Plan, and who is not a five percent (5%) owner, shall be permitted to cease such benefit payments (except for the payment due by April 1, 1997 for a Participant who attained age 70-1/2 in 1996) until April 1 of the calendar year following the calendar year in which he terminates employment. With respect to a Participant (other than a five percent (5%) owner) who attains age 70-1/2 prior to January 1, 1999, such Participant may elect in the form and manner prescribed by the Plan Administrator to receive a distribution of benefits commencing no later than April 1 of the calendar year in which the Participant attains age 70-1/2. (b) After Death. If a Participant dies before the date described in subsection (a)(2), and before his Accrued Benefit is distributed to him, his entire benefit shall be distributed by December 31 of the year containing the fifth anniversary of the date of the Participant's death. (c) Regulations Control. Distributions under this Section shall be made in accordance with section 401(a)(9) of the Code and regulations issued thereunder. This section and section 401(a)(9) of the Code shall take precedence over any distribution options in the Plan inconsistent with this Section or section 401(a)(9) of the Code. 9.10 Put Options on Distributed Shares of Certain Company Stock. If the distribution of the benefits under Section 9.2 is made in the form of shares of Company Stock which are "not readily tradeable on an established market," within the meaning of section 409(h)(1)(B) of the Code, a Participant or a beneficiary, or a donee or heir of a Participant or beneficiary, shall be granted at the time that shares are distributed to him, an option to "put" the shares to the Company, provided that all such shares are so put; provided, further, that the Trust shall have the option to assume the rights and obligations of the Company at the time the put option is exercised. A put option shall provide that, for a period of 60 days after such shares are distributed to a Participant or beneficiary, or donee or heir of a Participant or beneficiary, (and, if the put is not exercised within such 60-day period, for an additional period of 60 days in the following Plan Year), he would have the right to have the Company purchase such shares at their fair market value, determined by an independent appraiser as described in Section 7.1, under a fair valuation formula. The put option shall be exercised by notifying the Company it writing. The terms of payment for the purchase of such shares of Company Stock shall be as set forth in the put and may be either in a lump sum or in up to five equal annual installments (with interest on the unpaid principal balance at a reasonable rate of interest), as determined by the Plan Administrator. Payment for the purchase of such shares must commence within 30 days after the put is exercised. The period during which the put option is exercisable does not include any time during which the distributee is unable to exercise it because the party bound by the put option is prohibited from honoring it by applicable Federal or state law. If payment is made in installments, adequate security and a reasonable rate of interest must be provided. In the case of a purchase from a "disqualified person" (as defined in Section 13.8(d)), all purchases of Company Stock shall be made at prices which, in the judgment of the Plan Administrator, do not exceed the fair market value of such shares as of the date of the transaction. 30 37 A Participant's rights set forth in this Section shall be nonterminable, within the meaning of Treas. Reg. Section 4975-11(a)(3)(ii). 9.11 Direct Rollovers of Eligible Rollover Distributions Made from this Plan. (a) Direct Rollovers. This Section applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee's election under this Section, a Distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. (b) Definitions. (1) "Eligible Rollover Distribution" shall mean any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated beneficiary, or for a specified period of 10 years or more; any distribution to the extent such distributions is required under section 401(a)(9) of the Code; and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion of net unrealized appreciation with respect to employer securities). (2) "Eligible Retirement Plan" shall mean an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code, or a qualified trust described in section 401(a) of the Code, that accepts the Distributee's eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. (3) "Distributee" includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order (within the meaning of section 414(p) of the Code) are Distributees with regard to the interest of the spouse or former spouse. (4) "Direct Rollover" shall mean a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. 9.12 Participant's Consent to Distribution of Benefits. (a) Except as provided in paragraphs (b) and (c) below, the committee shall provide each Participant, not more than 90 days and not fewer than 30 days prior to the date his Accrued Benefit is paid to him, written notice of his right to defer receipt of the payment until his Normal Retirement Date. Payment shall not be made prior to the Participant's Normal Retirement Date unless the Participant affirmatively elects a distribution in writing, on a form filed with the Committee. (b) The written notice described in paragraph (a) above shall not apply to the payment if (i) the Participant receives an involuntary lump sum payment pursuant to Section 9.2(b)(1), or (ii) the payment is made on or after the Participant's Normal Retirement Date. 31 38 (c) A payment may be made fewer than 30 days after the notice described in paragraph (a) above is given to the Participant, provided that: (1) The Committee clearly informs the Participant that he has a right to a period of at least 30 days after receiving such notice to consider whether or not to elect the distribution; and (2) The Participant, after receiving the notice, affirmatively elects the distribution. SECTION 10 LIMITATIONS ON CONTRIBUTIONS 10.1 Definitions for Limitations on Contributions. (a) "Annual additions" shall mean the sum of the following amounts credited to a Participant's Company Stock, 401(k), Matching and Other Investments Accounts for the limitation year: (1) Company contributions (including Compensation Deferral Contributions, other than Excess Deferral Amounts distributed in accordance with Section 8.13); and (2) forfeitures. For this purpose, Company contributions credited to a Participant's Company Stock and Matching Accounts shall include amounts contributed by the Company for the Plan Year which are used to repay principal and/or interest (except as provided below) on one or more Exempt Loans, or to purchase shares of Company Stock, and which are deemed allocated to such Participant's Company Stock and Matching Accounts for purposes of this subsection (a). The portion of such Company contribution which is deemed allocated to a Participant's Company Stock and Matching Accounts for purposes of this subsection (a) shall be an amount which bears the same ratio to the total contribution made by the Company for such Plan Year which is used to repay principal and/or interest (except as provided below) on one or more Exempt Loans, or to purchase shares of Company Stock, as the number of shares of Company Stock allocated to such Participant's Company Stock Account for such Plan Year on the Valuation Date coincident with the last day of such Plan Year bears to the total number of shares of Company Stock allocated to the Company Stock and Matching Accounts of all Participants for such Plan Year on such Valuation Date. Notwithstanding the above, (i) allocations of Company Stock resulting from Company contributions used to pay interest on an Exempt Loan and (ii) allocations of forfeited Company Stock previously acquired with the proceeds of an Exempt Loan shall not be annual additions for the limitation year; provided that the requirements of section 415(c)(6)(C) of the Code are met for such limitation year. Company contributions and forfeitures allocated to an Employee's 401(k) and Matching Accounts under the Stock Bonus Plan which are transferred to this Plan will not constitute annual additions to this Plan. (b) "Defined benefit fraction" shall mean a fraction, the numerator of which is the Participant's projected annual benefit under the BetzDearborn Inc. Employees' Retirement Plan, and the denominator of which is the lesser of 125% of the dollar limitation in effect for the limitation year under section 415(b)(1)(A) of the Code or 140% of the Participant's highest average limitation compensation. 32 39 (c) "Defined contribution fraction" shall mean a fraction, the numerator of which is the sum of the annual additions to the Participant's Company Stock, 401(k), Matching and Other Investments Accounts under the Plan for the current and all prior limitation years, and the denominator of which is the sum of the maximum amounts for the current and all prior years of employment with the Company. The maximum amount in any limitation year is the lesser of 125% of the dollar limitation in effect under section 415(c)(1)(A) of the Code or thirty-five percent (35%) of the Participant's limitation compensation for such year. (d) "Highest average compensation" shall mean the Participant's average limitation compensation for the three consecutive years of service that produce the highest average. (e) "Limitation compensation" shall mean a Participant's wages, salaries and fees for professional services and other amounts received for personal services actually rendered in the service of the Company or any Affiliate, and excluding contributions by the Company or any Affiliate to a plan of deferred compensation which are not includable in the Participant's gross income for the taxable year in which contributed, or any distributions from a plan of deferred compensation (except any amounts received by a Participant pursuant to an unfunded, nonqualified plan in the year such amounts are includable in his gross income). For purposes of applying the limitations of this Section, compensation for a limitation year is the compensation actually paid or includable in gross income during such year. For Limitation Years beginning after December 31, 1997, the term "Limitation Compensation" shall include any elective deferral (as defined in section 402(g)(3) of the Code), and any amount which is contributed or deferred by the Company or an Affiliate at the election of the Employee and which is not includable in the gross income of the Employee by reason of section 125 of the Code. (f) "Limitation year" shall mean the calendar year. (g) "Maximum permissible amount" shall mean the lesser of-- (1) $30,000 (or, if greater, 1/4 fourth of the defined benefit dollar limitation set forth in section 415(b)(1) of the Code as in effect for the limitation year); or (2) twenty-five percent (25%) of the Participant's limitation compensation for the limitation year. The dollar amount of the maximum permissible amount under paragraph (1) for a limitation year shall be increased by the lesser of (i) one hundred percent (100%) of the otherwise applicable dollar amount or (ii) the amount of Company Stock allocated to the Participant's Company Stock and Matching Accounts for the limitation year, provided the requirements of section 415(c)(6)(A) of the Code are met for such limitation year. (h) "Projected annual benefit" shall mean the annual retirement benefit (adjusted to an actuarially equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or qualified joint and survivor annuity) to which the Participant is entitled under the terms of the BetzDearborn Inc. Employees' Retirement Plan. 10.2 Basic Limitation. The amount of annual additions which may be credited to the Participant's Accounts for any limitation year shall not exceed the lesser of the maximum permissible amount or any other limitation contained in this Plan. If, as a result of the allocation of forfeitures, a reasonable error in estimating a Participant's annual compensation, or a reasonable error in determining the amount of Compensation Deferral Contributions that may be made to the Plan with respect to any Participant under the limits of section 415 of the Code, or under other limited facts and under the limits 34 40 And circumstances as determined by the Commissioner of Internal Revenue, the annual additions for a Participant for the limitation year would otherwise exceed the maximum permissible amount, then: (a) Compensation Deferral Contributions for such limitation year shall be distributed to the Participant, to the extent required to reduce the annual additions to the maximum permissible amount; and (b) If necessary, other amounts to be contributed by the Company on behalf of such Participant shall be reduced so that the annual additions for the limitation year equal the maximum permissible amount. Compensation Deferral Contributions distributed in accordance with subsection (a) shall be disregarded for purposes of Section 8.10 and Section 8.11. 10.3 Combined Limit with Pension Plan. Before January 1, 2000, for any Participant who also has an accrued benefit under the BetzDearborn Inc. Employees' Retirement Plan, the sum of the Participant's defined benefit fraction and defined contribution fraction shall not exceed 1.0 in any limitation year. If the sum of such fractions with respect to any Participant for any limitation year would otherwise exceed 1.0, the allocations and benefits under this Plan and the Retirement Plan shall be adjusted in accordance with section 415 of the Code and regulations issued thereunder. 10.4 Combining and Aggregating Plans. For purposes of applying the limitations set forth in this Section: (a) all qualified defined benefit plans ever maintained by the Company or any Affiliate shall be treated as one defined benefit plan; and (b) all qualified defined contribution plans ever maintained by the Company or any Affiliate shall be treated as one defined contribution plan. SECTION 11 TOP-HEAVY PROVISIONS 11.1 Top-Heavy Preemption. Notwithstanding any other provision of this Plan the contrary, during any Plan Year in which this Plan is top-heavy, as defined in Section 11.2, the Plan shall be governed in accordance with this Section, which shall control over other provisions hereof. 11.2 Top-Heavy Definitions. (a) "Determination date" shall mean, with respect to any Plan Year after the first Plan Year, the last day of the preceding Plan Year and, with respect to the first Plan Year, the last day of such first Plan Year. (b) "Determination period" shall mean, with respect to any Plan Year, the Plan Year containing the determination date and the four preceding Plan Years. (c) "Key Employee" shall mean any Employee or former Employee (and the beneficiaries of such Employee) who at any time during a Plan Year included in the determination period was-- 34 41 (1) an officer of the Company or any Affiliate having an annual limitation compensation greater than 150% of the amount in effect under section 415(c)(1)(A) of the Code for such Plan Year; (2) one of the 10 Employees having annual limitation compensation from the Company and the Affiliates greater than the amount in effect under section 415(c)(1) (A) of the Code and owning (or considered as owning within the meaning of section 318 of the Code) both more than a one-half percent (1/2 percent) interest and the largest interests in the Company or any Affiliate; (3) a five percent (5%) owner of the Company or any Affiliate; or (4) a one percent (1%) owner of the Company or any Affiliate who has an annual limitation compensation from the Company and the Affiliates of more than $150,000. The determination of who is a key Employee shall be made in Accordance with section 416(i) of the Code and regulations thereunder. (d) "Limitation compensation" shall mean limitation compensation as defined in Section 10.1(e). (e) "Non-key Employee" shall mean any Employee who is not a key Employee. (f) "Permissive aggregation group" shall mean, with respect to any Plan Year, the required aggregation group plus any other defined contribution plan or defined benefit plan which the Plan Administrator elects to include, provided such permissive aggregation group meets the requirements of sections 401(a)(4) and 410 of the Code with such defined contribution plan or defined benefit plan being taken into account. (g) "Required aggregation group" shall mean, with respect to any Plan Year: (1) Each defined contribution plan and each defined benefit plan of the Company or any Affiliate in which a key Employee is a participant or was a participant at any time during the determination period (regardless of whether the plan has been terminated); and (2) Each other defined contribution plan and each other defined benefit plan of the Company or any Affiliate which, during the determination period, enables any defined benefit plan or defined contribution plan described in paragraph (1) to meet the requirements of section 401(a)(4) or 410 of the Code. (h) "Top-heavy plan" shall mean, for any Plan Year beginning on or after January 1, 1989, this Plan if: (1) this Plan is not part of a required or permissive aggregation group, and the top-heavy ratio for the Plan exceeds sixty percent (60%); (2) this Plan is part of a required aggregation group and not part of a permissive aggregation group, and the top-heavy ratio for the required aggregation group exceeds sixty percent (60%); or 35 42 (3) this Plan is part of a required aggregation group and part of a permissive aggregation group, and the top-heavy ratio for the permissive aggregation group exceeds sixty percent (60%). (i) "Top-heavy ratio" shall mean a fraction. The numerator of the fraction is the sum of the account balances of all key Employees under the Plan, or, if the Plan is a member of a required or permissive aggregation group, under all defined contribution plans in such required or permissive aggregation group (hereinafter the "aggregation group"), plus the sum of the present values of accrued benefits of all key Employees under all defined benefit plans in the aggregation group, as of the determination date. The denominator of the fraction is a similar sum determined for all Employees. For purposes of determining the fraction, the numerator and denominator shall include any part of any account balance or accrued benefit distributed in the determination period. With respect to Plan Years beginning on or after January 1, 1989, if any individual has not been credited with at least one Hour of Service with the Company or any Affiliate at any time during the determination period, any account balance or accrued benefit of, or distribution to, such individual shall not be taken into account. For purposes of the preceding paragraph, the sum of account balances and the present values of accrued benefits shall be determined as of the most recent valuation date that falls within the 12-month period ending on the determination date. The calculation of the top-heavy ratio shall be made in accordance with section 416 of the Code and the regulations thereunder. Solely for the purpose of determining if the Plan, or any other plan included in a required aggregation group of which this Plan is a part, is top-heavy (within the meaning of section 416(g) of the Code) the accrued benefit of a non-key Employee shall be determined under (i) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Company and the Affiliates, or (ii) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of section 411(b)(1)(C) of the Code. (j) "Valuation date" shall mean, with respect to this Plan, the first day of the Plan Year. 11.3 Top-Heavy Rules. Notwithstanding any other provision of the Plan, the following rules shall apply for any Plan Year in which the Plan is determined to be a top-heavy plan: (a) Minimum Benefit. The Company contributions and forfeitures allocated on behalf of any Participant in this Plan who is a non-key Employee for the Plan Year shall not be less than the lesser of (i) five percent (5%) of such Participant's limitation compensation or (ii) the largest percentage of the Company contributions and forfeitures allocated on behalf of any key Employee under this Plan for such Plan Year (as a percentage of the first $150,000 as adjusted for increases in the cost of living in accordance with section 401(a)(17)(B) of the Code of the key Employee's limitation compensation). For purposes of clause (ii) of the preceding sentence, Company contributions made on behalf of a key Employee, pursuant to the key Employee's salary reduction agreement, shall be treated as Company contributions allocated on behalf of the key Employee. This paragraph (a) shall not apply to any Participant who was not employed by the Company on the last day of the Plan Year. The minimum benefit shall be provided without regard to any Social Security contribution. The minimum benefit shall be provided even though, under other Plan provisions, the Participant would not otherwise be entitled to receive an allocation, or would have received a lesser allocation, in the Plan Year because (i) of the Participant's failure to complete 1,000 Hours of Service, (ii) of the Participant's failure to make mandatory employee contributions to the Plan or (iii) the Participant's limitation compensation is less than a stated amount. 36 43 (b) Minimum Vesting. Notwithstanding the provisions of Section 9.1, for any Plan Year in which this Plan is a top-heavy plan, the following minimum vesting schedule shall apply to the Participant's Accrued Benefit:
Years of Nonforfeitable Vesting Service Percentage --------------- -------------- less than 2 0% 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 or more 100%
This subsection (b) does not apply to the Accrued Benefit of any Participant who does not have an Hour of Service after the Plan has initially become a top-heavy plan; such Participant's vested Accrued Benefit shall be determined without regard to this subsection (b). 11.4 Impact on Maximum Benefits. For any Plan Year in which the Plan is a top-heavy plan, Section 10.1 shall be read by substituting the number "100" for the number "125" wherever it appears therein, except that such substitution shall not have the effect of reducing any benefit accrued under a defined benefit plan prior to the first day of the Plan Year in which this provision becomes applicable. 11.5 Change in Top-Heavy Status. If the Plan becomes a top-heavy plan and subsequently ceases to be such, the vesting schedule in Section 11.3(b) shall continue to apply in determining the nonforfeitable percentage of any Participant who had at least three years of service as of December 31 of the last Plan Year of top-heaviness. For other Participants, such schedule shall apply only to the Participant's Accrued Benefit as of such December 31. 11.6 Duplication of Minimum Contributions Not Required. The Plan Administrator shall, to the maximum extent permitted by the Code and regulations thereunder, apply the provisions of this Section by taking into account the benefits payable and the contributions made under all other defined contribution and defined benefit plans maintained by the Company or any Affiliate which are qualified under section 401(a) of the Code to prevent inappropriate omissions or duplication of minimum benefits or contributions. 11.7 Repeal of Limitation. In the event that Congress should provide by statute, or the Treasury Department should provide by regulation or ruling, that the limitations provided in this Section are no longer necessary for the Plan to meet the requirements of section 401 of the Code or other applicable law then in effect, such limitations shall become void and shall no longer apply, without the necessity of further amendment to the Plan. SECTION 12 NONALIENATION OF BENEFITS 12.1 Nonalienation Rule. The right of any Participant or beneficiary to any benefit payment shall not be subject to any voluntary or involuntary alienation or assignment. The preceding sentence shall also apply to the creation, assignment or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order, unless such order is determined to be a qualified 37 44 domestic relations order (as defined in section 414(p) of the Code) or a domestic relations order entered before January 1, 1985. SECTION 13 FIDUCIARY RESPONSIBILITY 13.1 Fiduciary Duties. A "fiduciary," as defined in section 3(21) of ERISA, shall discharge its duties with respect to the Plan and Trust in the interest of the Participants and their beneficiaries: (a) for the exclusive purpose of: (1) providing benefits to Participants and their beneficiaries; and (2) defraying reasonable expenses of administering the Plan and Trust; (b) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; (c) by diversifying the investments of the Plan and Trust so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and (d) in accordance with the documents and instruments governing the Plan and Trust insofar as they are consistent with the provisions of ERISA. Notwithstanding the above, the diversification requirements of subsection (c) and the prudence requirement (to the extent that it requires diversification) of subsection (b) are not violated by the acquisition or holding of Company Stock to the extent permitted under the Plan and Trust Agreement. 13.2 Allocation of Responsibility. Authority and responsibility for management of the Plan and Trust shall be allocated among the following persons: (a) The Board of Directors shall have sole responsibility for the appointment, removal and replacement of members of the Committee and the Plan Administrator described in Section 14, and the Trustee described in Section XV. The Board shall also have sole responsibility for: (1) the design of the Plan and Trust Agreement, including the right to amend or terminate the Plan and Trust Agreement (under Section 16.1 or 17.1, respectively) at any time; (2) qualification of the Plan and Trust Agreement and any amendments or documents relating thereto under the Code and ERISA; (3) funding of the Company's contributions to the Plan; and (4) the exercise of all other fiduciary functions assigned to it in the Plan or Trust Agreement. To the extent that it is carrying out this responsibility, the members of the Board of Directors shall be "named fiduciaries" of the Plan for purposes of section 402(a)(1) of ERISA. 38 45 (b) The Committee shall have sole responsibility for establishing the guidelines for the administration and operation of the Plan, as set forth in Section 14. To the extent it is carrying out these duties, the members of the Committee shall be "named fiduciaries" with respect to the Plan. (c) The Plan Administrator shall have sole responsibility for the execution of the administrative duties assigned him by the Board of Directors, the Committee, and the Plan and Trust Agreement. To the extent he is carrying out this responsibility, the Plan Administrator shall be a "named fiduciary" of the Plan. (d) The Trustee shall, subject to any guidelines established by the Committee, have sole responsibility for investment, management and control of the assets in the Trust Fund in accordance with the terms of the Plan and the Trust Agreement. To the extent it is carrying out this responsibility, the Trustee shall be a "named fiduciary" of the Plan. 13.3 No Joint Responsibility. It is the purpose of this Plan and Trust Agreement to allocate to each of the fiduciaries identified in Section 13.2 exclusive responsibility of prudent execution of the functions assigned to him or it (or to the entity of which he or it is a member) and no responsibility for execution of functions assigned to others. Whenever one such fiduciary is required by the Plan and Trust Agreement to follow the directions of another such fiduciary, the two fiduciaries shall not be deemed to have been assigned a shared responsibility, but the fiduciary giving the directions shall have sole responsibility for the functions assigned to him or it, including issuing of such directions, and the fiduciary receiving the directions shall have sole responsibility for the functions assigned to him or it, including following such directions insofar as they are on their face proper under this Plan and Trust Agreement and under applicable law. 13.4 No Co-Fiduciary Liability. (a) A fiduciary shall not be liable for a breach of fiduciary responsibility by another fiduciary to whom other fiduciary responsibilities have been assigned under the Plan except under the following circumstances: (1) if he or it participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach; (2) if, by his or its failure properly to discharge his or its own fiduciary responsibilities, he or it has enabled such other fiduciary to commit a breach; or (3) if he or it has knowledge of a breach by such other fiduciary, unless he or it makes reasonable efforts under the circumstances to remedy the breach. (b) If the Committee appoints an investment manager or managers under Section 14.6, then, notwithstanding Section 13.3 and subsections (a)(2) and (3), the Trustee shall not be liable for the acts and omissions of such investment manager. 13.5 Act in Interest of Participants. In carrying out the responsibilities allocated to him or it under this Plan and Trust Agreement, each fiduciary shall act solely in the interests of the Plan's Participants and their beneficiaries. 13.6 Employment of Advisors. A fiduciary identified in Section 13.2 may consult with counsel, who may be counsel to the Company, and shall be fully protected in acting upon the advise of such counsel, with regard to such fiduciary's responsibilities under the Plan. 39 46 13.7 Transfer or Maintenance of Indicia of Ownership of Plan Assets Outside United States Prohibited. Except as authorized by the Secretary of Labor by regulation, no fiduciary shall maintain the indicia of ownership of any assets of the Plan or Trust outside the jurisdiction of the district courts of the United States. 13.8 Prohibited Transactions (a) Unless otherwise exempted by ERISA or by the Secretary of Labor, a fiduciary with respect to the Plan or Trust shall not cause the Plan or Trust to engage in a transaction if he or it knows, or should know, that such transaction constitutes a direct or indirect: (1) sale or exchange, or leasing, of any property between the Plan or Trust and a party in interest or a disqualified person; (2) lending of money or other extension of credit between the Plan or Trust and a party in interest or a disqualified person; (3) furnishing of goods, services, or facilities between the Plan or Trust and a party in interest or a disqualified person; (4) transfer to, or use by or for the benefit of, a party in interest or a disqualified person, of any assets of the Plan or Trust; or (5) an acquisition, on behalf of the Plan or Trust, of any securities issued by the Company or an affiliate which are not "qualifying employer securities" within the meaning of section 4975(e)(8) of the Code. (b) Unless otherwise exempted by the Secretary of Labor, a fiduciary with respect to the Plan or Trust shall not: (1) deal with the assets of the Plan or Trust in his or its own interest or for his or its own account; (2) in his or its individual or any other capacity act in any transaction involving the Plan or Trust on behalf of a party (or represent a party) whose interests are adverse to the interests of the Plan or Trust or the interests of the Participants or their beneficiaries; or (3) receive any consideration for his or its own personal account from any party dealing with the Plan or Trust in connection with a transaction involving the assets of the Plan or Trust. (c) Notwithstanding anything to the contrary set forth in this Section, a fiduciary shall be entitled to: (1) receive any benefit to which the fiduciary may be entitled as a Participant or beneficiary in the Plan or Trust, so long as the benefit is computed and paid on a basis which is consistent with the terms of the Plan and Trust as applied to all Participants and their beneficiaries; 40 47 (2) receive any reasonable compensation for services rendered except that no person so serving who already receives full-time pay from the Company, from an employee organization whose employees are Participants in the Plan or from an association of employers whose employees are Participants in the Plan shall receive compensation from the Plan or Trust, except for reimbursement of expenses properly and actually incurred; (3) receive reimbursement of expenses properly and actually incurred, in the performance of its duties with the Plan and Trust; (4) serve as a fiduciary in addition to being an officer, employee, agent or other representative of a party in interest or disqualified person; and (5) acquire or sell qualifying employer securities if (i) such acquisition or sale is for adequate consideration, and (ii) no commission is charged with respect to such acquisition or sale. (d) For purposes of this Section, the words "party in interest" or "disqualified person" mean: (1) any fiduciary, counsel or employee of the Plan or Trust; (2) a person providing services to the Plan or Trust; (3) the Company; (4) an employee organization any of whose members are covered by the Plan; (5) an owner, direct or indirect of fifty percent (50%) or more of: (A) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation, (B) the capital interest or the profits interest of a partnership, or (C) the beneficial interest of a trust or unincorporated enterprise, which is an employer or employee organization described in subsection (d)(1), (2), (3) or (5) above; (6) a corporation, partnership, or trust or estate of which (or in which) fifty percent (50%) or more of: (A) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation, (B) the capital interest or profits interest of such partnership, or (C) the beneficial interest of such trust or estate is owned directly or indirectly, or held by persons described in subsection (d)(1), (2), (3), (4) or (5) above; (7) an employee, officer, director (or an individual having powers or responsibilities similar to those of officers or directors), or a ten percent (10%) or more shareholder directly or indirectly of a person described in subsection (d)(2), (3), (4), (5) or (6), or of the Plan or Trust; or 41 48 (8) a ten percent (10%) or more (directly or indirectly in capital or profits) partner or joint venturer of a person described in subsection (d)(2), (3), (4), (5) or (6). (e) For purposes of this Section, the words "adequate consideration" mean: (1) in the case of a security for which there is a generally recognized market either, (A) the price of the security prevailing on a national securities exchange registered under section 6 of the Securities Exchange Act of 1934, or which has been listed for more than one month (at the time of such sale or purchase), on an electronic quotation system administered by a national securities association registered under such Act, or (B) if the security is not traded on such a national securities exchange, or so listed on such an electronic quotation system, a price not less favorable to the Plan than the offering price for the security as established by the current bid and asked prices quoted by persons independent of the issuer and of any party in interest or disqualified person; and (2) in the case of an asset other than a security for which there is a generally recognized market, the fair market value of the asset as determined in good faith by the Trustee or named fiduciary pursuant to the terms of the Plan and in accordance with regulations prescribed by the Secretary of Labor. SECTION 14 ADMINISTRATION OF PLAN -- STOCK BONUS PROFIT SHARING/RETIREMENT COMMITTEE AND PLAN ADMINISTRATOR 14.1 Members of Committee. The Board shall appoint a Stock Bonus Profit Sharing/Retirement Plan Committee (the "Committee") to consist of not less than three members, to hold office, without special compensation for Committee membership, at the pleasure of the Board of Directors. Members of the Committee may, but are not required to, be Participants under the Plan or officers, employees or members of the Board of Directors. Any member may resign by giving notice, in writing, filed with the Chairman or Secretary of the Board of Directors. Vacancies shall be filled promptly by the Board of Directors in such manner that the composition of the Committee shall be as herein prescribed. The Plan Administrator shall notify the Trustee of the appointment of the Committee and of any subsequent changes in its membership. 14.2 Officers and Employees of the Committee. The members of the Committee shall elect a Chairman who shall be a member of the Committee and a Secretary who may, but need not be, a member of the Committee. The Secretary shall keep minutes of the Committee's proceedings and all data, records and documents pertaining to the Committee's guidelines for administration and operation of the Plan and the Trust. 14.3 Action of Committee. A majority of the Committee shall constitute a quorum for the transaction of business. Resolutions or other actions of the Committee at any meeting shall be determined by the vote or other affirmative expression of a majority of its members present at such meeting. Resolutions or other action may be taken without a meeting upon the written consent of all members of the Committee. The Chairman or the Secretary may execute any certificate or other written direction on 42 49 behalf of the Committee. In the event the Committee members entitled to vote on any question are unable to determine such question by a majority vote, such question shall be determined by the Board of Directors. 14.4 Disqualification of Committee Member. A member of the Committee who is a Participant or beneficiary shall not vote on any question relating specifically to himself. 14.5 Expenses of Committee. All expenses of the Committee properly and actually incurred in the performance of its duties under the Plan and the Trust Agreement shall be paid or reimbursed by the Company. 14.6 Powers of the Committee. The Committee shall have full power to establish guidelines for the administration and operation of the Plan and to review any action taken by the Plan Administrator, including the power to appoint one or more investment managers to manage (including the power to acquire and dispose of) any designated assets of the Trust. 14.7 Allocation of Fiduciary Responsibility. The Committee from time to time may allocate to one of its members, to the Plan Administrator and/or may delegate to any other persons or organizations any of the rights, powers, duties and responsibilities of the Committee with respect to the operation and administration of the Plan and the Trust Agreement. Any such allocation or delegation shall be reviewed periodically by the Committee and shall be terminable upon such notice as the Committee, in its discretion, deems reasonable and proper under the circumstances. 14.8 Plan Administrator and His General Powers. The Plan Administrator shall be the Vice President - Human Resources of the Company or any other person designated by the Board. The Plan Administrator shall serve without compensation, and at the pleasure of the Board. The Plan Administrator shall be responsible for the administration and operation of the Plan pursuant to the guidelines established by the Committee and subject to the review of the Committee, and for any other duties assigned him by the Board of Directors and/or the Committee. 14.9 General Duties of the Plan Administrator. The general duties of the Plan Administrator shall include the following: (a) determining all questions relating to the eligibility of Employees to become Participants and the status of Employees as Participants under the Plan; (b) determining the Accrued Benefit payable to Participants or beneficiaries and authorizing and directing the Trustee with respect to the payment of, or provision for, benefits under the Plan; (c) engaging for the Plan any administrative, legal, medical, accounting, clerical or other services he may deem appropriate to effectuate the Plan; (d) as provided in Section 14.13, construing and interpreting the Plan and the Trust Agreement whenever necessary to carry out their intention and purpose and making and publishing such rules for the regulation of the Plan and the Trust Agreement as are consistent with the guidelines established by the Committee and with the terms of the Plan and the Trust Agreement; (e) compiling and maintaining, in conjunction with the Company, all records he determines to be necessary, appropriate or convenient in connection with the administration of the Plan and the Trust Agreement; 43 50 (f) determining, in accordance with the terms of the Plan, the allocation, disposition and distribution of assets in the Trust Fund in the event the Plan is terminated; (g) appointing and contracting with such independent public accountant or accountants as shall be necessary to comply with the reporting and disclosure requirements of any applicable Federal or state law, including the preparation and filing of all returns and reports required to be filed by the Plan with any governmental agency; (h) furnishing of all required forms, statements, information and reports to Participants (or their beneficiaries); (i) developing a policy for the funding of the Plan consistent with the guidelines established by the Committee and subject to approval by the Board of Directors and consistent with the needs of the Plan and the requirements of ERISA; and (j) processing of all Claims filed under Section 14.11. The decision of the Plan Administrator, after review by the Committee, except as otherwise provided in Section 14.7(i), with respect to matters within his jurisdiction shall be final, binding and conclusive upon the Committee, the Company and upon each Participant, beneficiary and every other person or party interested or concerned. 14.10 Information to be Submitted by Company to the Plan Administrator. To enable the Plan Administrator to perform his functions, the Company shall supply full and timely information to him on all matters relating to Participants, former Participants, and beneficiaries as the Plan Administrator may require, and shall maintain such other records as the Plan Administrator may determine are necessary in order to determine the benefits due or which may become due to the Participants, former Participants and beneficiaries under the Plan. The Plan Administrator shall advise the Trustee of such of the foregoing facts as may be pertinent to the Trustee's responsibilities under the Plan and Trust Agreement. 14.11 Claim Procedure. (a) Filing Claim for Benefits. If an individual (hereinafter referred to as the "Applicant," which reference shall include the legal representative, if any, of the individual) does not receive the timely payment of the benefits to which the Applicant believes he is entitled to receive under the terms of the Plan, the Applicant may make a claim ("Claim") for benefits in the manner hereinafter provided. All Claims for benefits under the Plan shall be made in writing and shall be signed by the Applicant. Claims shall be submitted to the Plan Administrator. If the Applicant does not furnish sufficient information with the Claim for the Plan Administrator to determine the validity of the Claim, the Plan Administrator shall furnish the Applicant with forms prescribed by the Plan Administrator within 10 days of receipt of the initial Claim, indicating any additional information which is necessary for the Plan Administrator to determine the validity of the Claim. Each Claim hereunder shall be acted on and approved or disapproved by the Plan Administrator within 60 days following the receipt by the Plan Administrator of the information necessary to process the Claim. In the event the Plan Administrator denies a Claim for benefits in whole or in part, the Plan Administrator shall notify the Applicant in writing of the denial of the Claim and notify such Applicant of his right to a review of the Plan Administrator's decision by the Committee. Such notice by 44 51 the Plan Administrator shall also set forth, in a manner calculated to be understood by the Applicant, the specific reason for such denial, the specific Plan provisions on which the denial is based, a description of any additional material or information necessary to perfect the Claim with an explanation of such material or information where necessary and an explanation of the Plan's Claim review procedure as set forth in this Section. If no action is taken by the Plan Administrator on an Applicant's Claim within 60 days after receipt by the Plan Administrator, such application shall be deemed to be denied for purposes of the following appeals procedure. (b) Appeals Procedure. Any Applicant whose Claim for benefits is denied in whole or in part (such Applicant being hereinafter referred to as the "Claimant" which reference shall include the legal representative, if any, of the individual) may appeal from such denial to the Committee for a review of the decision by the Committee. Such appeal must be made within 60 days after the Claimant has received written notice of the denial as provided above. An appeal must be submitted in writing within such period and must: (1) request a review by the Committee of the Claim for benefits under the Plan; (2) set forth all of the grounds upon which the Claimant's request for review is based and any facts in support thereof; and (3) set forth any issues or comments which the Claimant deems pertinent to the appeal. The Committee shall act upon each appeal within 60 days after receipt thereof unless special circumstances require an extension of the time for processing, in which case a decision shall be rendered by the Committee as soon as possible but not later than 120 days after the appeal is received by the Committee. The Committee shall make a full and fair review of each appeal and any written materials submitted by the Claimant and/or the Company in connection therewith. The Committee may require the Claimant and/or the Company to submit such additional facts, documents or other evidence as the Committee in its discretion deems necessary or advisable in making its review. The Claimant shall be given the opportunity to review pertinent documents or materials upon submission of a written request to the Committee, provided the Committee finds the requested documents or materials are pertinent to the appeal. On the basis of its review, the Committee shall make an independent determination of the Claimant's eligibility for benefits under the Plan. The decision of the Committee on any Claim for benefits shall be final and conclusive upon all parties thereto. In the event the Committee denies an appeal, in whole or in part, the Committee shall give written notice of the decision to the Claimant, which notice shall set forth in a manner calculated to be understood by the Claimant the specific reasons for such denial and which shall make specific reference to the pertinent Plan provisions on which the Committee decision was based. (c) Review of Accrued Benefit Statement. If a Participant or former Participant believes any statement of his Accrued Benefit he receives pursuant to Section 14.11 is incorrect, such Participant, or former Participant may submit a written request for correction or verification of such statement to the Plan Administrator and the Plan Administrator shall respond in writing to such request in 45 52 the same manner as provided above for an Applicant. If the Participant, or former Participant believes the Plan Administrator's response is incorrect, the Participant, or former Participant may request in writing within 30 days of the response that the Committee review such statement, and the Committee shall follow the same procedure with respect to such request as provided above for a Claimant. 14.12 Service of Legal Process. The name and address of the person designated for the service of legal process with respect to the Plan is as follows: Plan Administrator Employee Stock Ownership and 401(k) Plan BetzDearborn Inc. 4636 Somerton Road Trevose, Pennsylvania 19053 14.13 Discretionary Authority. The Plan Administrator shall have sole discretion to carry out his responsibilities under this Section to construe and interpret the provisions of the Plan and to determine all questions concerning benefit entitlements, including the power to construe and determine disputed or doubtful terms. To the maximum extent permissible under law, the Plan Administrator's determinations on all such matters shall be final and binding upon all persons involved. SECTION 15 THE TRUSTEE AND TRUST 15.1 The Trust. The Trust which is a part of this Plan shall consist of all amounts contributed to the Plan, and the earnings and appreciation thereon, less payments made by the Trustee under the Plan and the Trust Agreement entered into pursuant to the Plan. 15.2 Actions and Responsibility of Trustee. The Trustee shall have, subject to the power of the Committee to appoint investment managers, responsibility to hold, invest, reinvest and administer the Trust assets and, in so holding and otherwise managing such Trust assets, the Trustee shall act solely in the interest of the Participants and their beneficiaries. 15.3 Payments. The Trustee shall make all payments of Accrued Benefits under the Plan upon the written instructions of the Plan Administrator. 15.4 Resignation and Removal of Trustee. The Board may remove the Trustee at any time upon delivery of any written notice called for in the Trust Agreement; and the Trustee may resign at any time upon delivery of such notice to the Board. Upon such removal or resignation of the Trustee, the Board shall appoint a successor Trustee and enter into a successor trust agreement pursuant to the Plan. 15.5 Voting Rights and Tender Offers. (a) Voting Rights. The Trustee shall have no discretion or authority to vote Company Stock held in the Trust on any matter presented for a vote by the stockholders of the Company except in accordance with timely directions received by the Trustee from Participants who have Company Stock allocated to or otherwise held in their Accounts under the Plan. Such directions shall be given by Participants acting in their capacity as "named fiduciaries" within the meaning of section 403(a)(1) of ERISA ("Named Fiduciaries") with respect to both allocated and otherwise held Company Stock and unallocated Company Stock. Upon timely receipt of such instructions as described in subsection (c)(1), the Trustee shall vote the Company Stock held in the Trust as set forth below. 46 53 Each Participant who has Company Stock allocated to or otherwise held in his Accounts shall, as Named Fiduciary, direct the Trustee with respect to the vote of Company Stock allocated to or otherwise held in his Accounts and the Trustee shall follow the directions of those Participants who provide timely instructions to the Trustee. The direction of a Participant with respect to Company Stock allocated to or otherwise held in his Accounts shall also constitute his direction, as Named Fiduciary, to the Trustee with respect to the vote of a portion of the shares of Company Stock held in the Suspense Subfund (or otherwise unallocated) or for which no directions were timely received by the Trustee, whether or not allocated to the Account of any Participant. Such direction shall be with respect to such number of votes equal to the total number of votes attributable to Company Stock in the Suspense Subfund (or otherwise unallocated) or with respect to which no directions were timely received multiplied by a fraction, the numerator of which is the number of votes attributable to Company Stock allocated to or otherwise held in the Participant's Accounts and the denominator of which is the total number of votes attributable to Company Stock allocated to or otherwise held in the Accounts of all such Participants who have provided directions to the Trustee under this subsection (a). (b) Tender Offers for Company Stock. In the event an offer is received by the Trustee (including but not limited to a tender offer or exchange offer within the meaning of the Securities Exchange Act of 1934, as from time to time amended and in effect) to acquire any shares of Company Stock held in the Trust, or any shares or other securities into which shares of Company Stock held in the Trust are convertible or for which they are exchangeable; whether or not allocated or otherwise held in the Account of any Participant (an "Offer"), the Trustee shall have no discretion or authority to sell, exchange, transfer or convert any of such shares pursuant to such Offer except to the extent, and only to the extent, that the Trustee is timely directed to do so in writing with respect to any Company Stock subject to such Offer and allocated to or otherwise held in a Participant's Account by the Participant, as Named Fiduciary. In addition, such direction of a Participant with respect to Company Stock allocated to or otherwise held in his Accounts shall also constitute his direction, as Named Fiduciary, to the Trustee with respect to any Company Stock subject to such Offer held in the Suspense Subfund (or otherwise unallocated), with respect to an amount of such unallocated Company Stock equal to the total amount of unallocated Company Stock multiplied by a fraction, the numerator of which is the amount of Company Stock allocated to or otherwise held in the Participant's Accounts and the denominator of which is the total amount of Company Stock allocated to or otherwise held in the Accounts of all Participants. Upon timely receipt of such directions as described in subsection (c)(2), the Trustee shall sell, exchange or transfer pursuant to such Offer only such shares as to which such directions were given. In the event, under the terms of an Offer or otherwise, any shares of Company Stock tendered for sale, exchange or transfer pursuant to such Offer may be withdrawn from such Offer, the Trustee shall follow such directions respecting the withdrawal of such securities from such Offer in the same manner and the same proportion as shall be timely received by the Trustee from the Participants as Named Fiduciaries entitled under this subsection (b) to give directions as to the sale, exchange or transfer of securities pursuant to such Offer. (c) Voting and Tender Offer Directions. Voting and tender offer directions shall be given in accordance with the following provisions: (1) Voting Directions. As promptly as possible before each annual or special shareholders' meeting of the Company, the Plan Administrator shall direct the Trustee to furnish to each Participant a copy of any proxy solicitation material, together with a form requesting confidential instructions on how the Company Stock allocated to or otherwise held in such Participant's Accounts and held in the Suspense Subfund (or otherwise unallocated) (including fractional shares to 1/1000 of a share) is to be voted. Upon timely receipt of such instructions, the 47 54 Trustee shall vote the Company Stock as directed, in blocks. The instructions received by the Trustee from Participants shall be held by the Trustee in strict confidence and shall not be divulged or released to any person (except for agents of the Trustee who shall at all times be subject to the same restrictions as the Trustee), including officers of the Company or Eligible Employees or employees of any other company. The Trustee and the Plan Administrator shall not make recommendations to Participants on whether to vote or how to vote. (2) Tender Offer Directions. The Trustee shall notify each Participant of each tender or exchange offer and shall utilize its best efforts to distribute or cause to be distributed to such Participant in a timely manner all information distributed to shareholders of the Company in connection with any such tender or exchange offer. A Participant's instructions to the Trustee as to the manner in which to respond to any such tender or exchange offer shall remain in force until superseded in writing by the Participant. The Trustee shall tender or exchange such shares of Company Stock as described in subsection (b). Unless and until shares of Company Stock are tendered or exchanged, the individual instructions received by the trustee from Participants shall be held by the Trustee in strict confidence and shall not be divulged or released to any person, including officers of the Company or Eligible Employees, or employees of any other company. SECTION 16 PLAN AMENDMENT, MERGER OR CONSOLIDATION 16.1 Amendment. The Board of Directors shall have the right to amend this Plan at any time, by written resolution, subject to the following limitations: (a) No such amendment shall cause any part of the Trust Fund to be used for or diverted to any purpose other than the exclusive benefit of the Participants or their beneficiaries. (b) No such amendment shall cause any reduction in the amount of any Participant's Accrued Benefit. For purposes of this subsection (b), an amendment which has the effect of (i) eliminating or reducing an early retirement benefit or a retirement-type subsidy or (ii) eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment, shall be treated as reducing accrued benefits as provided in section 411(d)(6) of the Code and the regulations thereunder. (c) No such amendment shall change any vesting schedule unless, in the case of an individual who is a Participant on (i) the date the amendment is adopted or (ii) the date the amendment is effective, if later, the nonforfeitable percentage of such Participant's right to his Accrued Benefit is not less than his percentage computed under the Plan without regard to such amendment. Furthermore, no such amendment shall otherwise change any vesting schedule unless each Participant having three or more years of service is permitted to elect, in accordance with regulations under the Code, to have the nonforfeitable percentage of his Accrued Benefit determined under the Plan without regard to such amendment; provided that no election shall be given to any Participant whose nonforfeitable percentage under the Plan as amended cannot at any time be less than such percentage determined without regard to such amendment. 16.2 Merger or Consolidation. This Plan and Trust shall not be merged or consolidated with, nor shall any assets or liabilities be transferred to, any other plan and trust, unless the benefits payable to each Participant if the Plan were terminated immediately after such action would be equal to or greater than the benefits which would have been payable to each Participant if the Plan had been terminated immediately before such action. 48 55 SECTION 17 PLAN TERMINATION 17.1 Discontinuance of Contributions or Termination The Board of Directors shall have the right to discontinue the Company's contributions hereunder and to terminate or partially terminate this Plan by delivery of written notice to the Trustee of such action. Upon complete discontinuance of the Company's contributions, or termination or partial termination of the Plan, the rights of all affected Participants to benefits accrued to the date of such discontinuance or termination shall become nonforfeitable except to the extent that law or regulations may preclude such vesting in order to prevent discrimination in favor of highly compensated Employees. Upon final termination of the Plan, the Plan Administrator shall direct the Trustee to distribute all assets remaining in the Trust, after payment of any proper expenses, to the Participants in accordance with the vested Accrued Benefits of such Participants as of the date of such termination. Such payments shall be made in cash and at such time and in such manner as the Plan Administrator shall in its discretion determine, subject to Section 9.8 and Section 9.9. Any shares of Company Stock held in the Suspense Subfund which cannot be allocated to the Company Stock Accounts of Participants because such shares have not been released from the Suspense Subfund pursuant to Section 6.5, shall be delivered to the Company. Notwithstanding the foregoing, amounts credited to a Participant's 401(k) Account shall not be distributed prior to the Participant's attainment of age 59 1/2, separation from service (within the meaning of Section 9.4), total and permanent disability (as defined in Section 9.5(b)), death, or financial hardship (within the meaning of Section 8.6(a)), except as a "lump-sum distribution" (as defined in section 401(k)(10)(B)(ii) of the Code) to a Participant or his beneficiary as soon as administratively feasible after the termination of the Plan, provided that the Company does not establish or maintain a successor plan within the meaning of section 401(k)(10)(a)(i) of the Code and Treas. Reg. Section 1.401(k)-1(d)(3). SECTION 18 TRANSFERS OF 401(K) ACCOUNTS, MATCHING, STOCK BONUS, VOLUNTARY, AND DIVERSIFICATION ACCOUNTS FROM THE STOCK BONUS PLAN 18.1 Transfers of 401(k), Matching, Stock Bonus, Voluntary, and Diversification Accounts from the Stock Bonus Plan. The Stock Bonus Plan has been amended, effective September 1, 1990, to provide for the transfer of all 401(k), Matching, Stock Bonus, Voluntary, and Diversification Accounts (and all liabilities attributable to such Accounts) thereunder to this Plan. The Plan Administrator of this Plan is directed to accept such transfer. The Plan Administrator shall deposit the transferred Accounts as follows: (a) an Employee's transferred 401(k) Account, if any, shall be consolidated with his 401(k) Account in this Plan; (b) an Employee's transferred Matching Account, if any, shall be deposited in his Rollover Account in this Plan; and 49 56 (c) an Employee's transferred Stock Bonus, Voluntary, and/or Diversification Accounts, if any, shall be maintained as separate Accounts in this Plan. The Plan Administrator shall establish a 401(k) Account and/or Rollover Account in this Plan for each Employee who did not have such Account(s) prior to the transfer of his 401(k) Account and/or Matching Account from the Stock Bonus Plan. Once a Participant's Accounts have been transferred from the Stock Bonus Plan, no subsequent employer or employee contribution shall be made under the terms of the Stock Bonus Plan and credited to any Participant's Accounts in this Plan. Notwithstanding the preceding sentence, Accounts transferred from the Stock Bonus Plan shall share in allocations of gains and losses under Sections 7.1 and 7.2. 18.2 Distributions and Withdrawals of Amounts Attributable to Amounts Transferred. (a) Method of Distributions. (1) Distribution Upon Retirement, Disability or Death. Upon the retirement, total and permanent disability (as defined in Section 9.5(b)), or death of a Participant whose 401(k), Matching, Stock Bonus, Voluntary, and/or Diversification Accounts were transferred to this Plan from the Stock Bonus Plan, the amounts in his Accounts shall be payable to the Participant or his beneficiary in a lump sum, installment payments, or any other manner permitted under the Stock Bonus Plan (all references in this Section to the Stock Bonus Plan shall be to the Stock Bonus Plan as it was in effect on September 1, 1990). Installment payments, if elected, will be made in equal quarterly, semiannual, or annual installments, over a period certain not extending beyond the life expectancy of the Participant or the joint life expectancies of the Participant and his spouse. If a Participant whose 401(k), Matching, Stock Bonus, Voluntary, and/or Diversification Accounts were transferred to this Plan from the Stock Bonus Plan dies without having made an election as to the form of his benefit distribution, the Participant's entire benefit under this Plan shall be distributed in a lump sum to the beneficiary of the Participant unless the beneficiary is the Participant's spouse. In such event, payment of the amounts in the Participant's Accounts shall be made in one lump sum to the Participant's spouse unless the spouse elects, no later than 60 days after the date of death of such Participant, to have the amounts due such spouse paid in installments. If the spouse elects installment payments, such payments will be paid in the manner described in the preceding paragraph. Payment of the amounts in the Participant's Accounts shall be made or commence no later than 60 days after the last day of the Plan Year in which the Participant terminates employment by reason of retirement, disability, or death. (2) Distribution Upon Other Termination of Employment. Upon termination of employment for reasons other than retirement, disability, or death, a Participant whose 401(k), Matching, Stock Bonus, Voluntary, and/or Diversification Accounts were transferred to this Plan from the Stock Bonus Plan shall receive payment of his entire Accrued Benefit under this Plan in accordance with Section 9.2 of this Plan. (b) In-Service Withdrawals. An Employee whose Voluntary Account was transferred to this Plan from the Stock Bonus Plan may elect to withdraw at any time any portion or all of the amount in his Voluntary Account, in accordance with Section 6.9 of the Stock Bonus Plan. Any 50 57 withdrawal may not be for less than the lessor of (i) $500, or (ii) the Employee's entire interest in the Voluntary Account. (c) Form of Distribution or Withdrawal. To the extent permitted under the Stock Bonus Plan, a lump sum distribution described in this Section may be paid in cash or securities, including Common Stock, as elected by the Employee. As provided in Sections 8.4 and 8.5 of the Stock Bonus Plan, an Employee may receive only cash from his Voluntary Account and/or Diversification Account. 18.3 Transfer to Diversification Account. (a) Eligibility to Make Transfers. Any Participant may direct the Trustee, in accordance with paragraphs (b) or (c) below, to transfer a portion or all of the vested interest in such Participant's Stock Bonus Account to the Investment Fund. Amounts diversified from a Stock Bonus Account shall be allocated to the Participant's Diversification Account. A Participant may not diversify any stock held in his separate PAYSOP Account. (b) Valuation of Diversification. The transfer of the Participant's vested interest from his Stock Bonus Account, invested in Common Stock, to his Diversification Account shall be valued as provided in Section 7.1. (c) How to Make Election. A Participant may elect to diversify his shares of Common Stock at any time during the Plan Year by filing the Appropriate Form with the Plan Administrator in respect to each diversification request, or in any other manner acceptable to the Plan Administrator. No automatic diversifications upon a regular basis shall be permitted. 18.4 Protected Forms of Distribution. A Participant whose 401(k), Matching, Stock Bonus, Voluntary, and/or Diversification Accounts in the Stock Bonus Plan were transferred to this Plan who was or becomes eligible for a protected form of distribution (as described in section 411(d)(6) of the Code, and rules and regulations thereunder), under the terms of the Stock Bonus Plan as it was in effect on September 1, 1990, and which was not otherwise provided under this Plan, shall be eligible to elect such form of distribution with respect to that portion of his total Account which equals the value of the amount transferred from the Stock Bonus Plan effective September 1, 1990. Notwithstanding anything in this Plan to the contrary, it is intended that the forms of distribution provided under the plan comply with section 411(d)(6) of the Code, and rules and regulations thereunder. SECTION 19 TRANSFERS OF PAYSOP ACCOUNTS FROM THE STOCK BONUS PLAN 19.1 Transfers of PAYSOP Accounts from the Stock Bonus Plan. The Stock Bonus Plan has been amended, effective October 1, 1992, to provide for the transfer of all PAYSOP Accounts (and all liabilities attributable to such Accounts) thereunder to this Plan. The Plan Administrator of this Plan is directed to accept such transfer. A Participant's transferred PAYSOP Account shall be maintained as a separate Account in this Plan. 19.2 Income on PAYSOP Accounts. Dividends and other income attributable to the PAYSOP shall be reinvested in Common Stock and allocated to each Participant's PAYSOP Account according to the number of shares allocated to such Account within a reasonable time after receipt of such dividends. 51 58 19.3 Nonforfeitable Right to Allocated Common Stock. Each Participant shall have a nonforfeitable right to all Common Stock and income allocated to his PAYSOP Account. However, no Common Stock may be distributed from a Participant's PAYSOP Account before the end of the 84th month beginning after the month in which such Common Stock was allocated. The foregoing rule shall not apply in the following cases: (a) The Participant's death, total and permanent disability (as defined in Section 9.5(b) of this Plan), separation from service, or termination of the PAYSOP Plan; (b) A transfer of the Participant from the service of the Company to the service of an acquiring employer where: (1) The Company sells to the acquiring employer substantially all of the assets used by the Company in a trade or business conducted by the Company, or (2) The Company sells to the acquiring employer all of the stock of a subsidiary of the Company; (c) Where the Company disposed of its interest in a subsidiary and the Participant continues to be employed by such subsidiary; or (d) Any distribution required under Section 9.9 or 19.5 of this Plan. 19.4 Administrative Expenses. Administrative expenses or costs incurred by the Trustee and by the Committee in connection with the PAYSOP, including the fees of their counsel, accountants, salaries (if any), and other items, in the performance of their duties may be paid by the Company; provided that, as reimbursement for the expense of administering the PAYSOP, the Company may direct the Trustee in writing to pay from the Trust Fund so much of the amounts paid or incurred during a taxable year, as expenses of administering the PAYSOP, as does not exceed the smaller of (i) the sum of ten percent (10%) of the first $100,000 and five percent (5%) of any amount in excess of $100,000 of the income from dividends paid to the PAYSOP during the Plan Year ending with or within the Company's taxable year, or (ii) $100,000. 19.5 Diversification Withdrawals. (a) Election. Within 90 days after the last day of each Plan Year during a Participant's Qualified Election Period, the Qualified Participant shall be permitted to elect on an Appropriate Form, or in any other manner acceptable to the Plan Administrator, to withdraw from his PAYSOP Account twenty-five percent (25%) of the value of his PAYSOP Account balance attributable to shares of Company Stock which were acquired by the PAYSOP after December 31, 1986. Within 90 days after the close of the last Plan Year in the Participant's Qualified Election Period, a Qualified Participant may elect to withdraw from his PAYSOP Account fifty percent (50%) of the value of such account balance. (b) Time of Distribution. The Participant's withdrawal shall be distributed by the Plan Administrator no later than 180 days after the close of the Plan Year to which the direction applies. (c) Determination of Amount for Diversification Requirements. The portion of a Participant's Account balance attributable to shares of Company Stock which were acquired by the Plan after December 31, 1986, shall be determined by multiplying the number of shares of such securities held in the account by a fraction, the numerator of which is the number of shares acquired by the PAYSOP 52 59 after December 31, 1986 and allocated to Participant's PAYSOP Accounts (not to exceed the number of shares held by the PAYSOP on the date the individual becomes a Qualified Participant), and the denominator of which is the total number of shares held by all PAYSOP Accounts at the date the individual becomes a Qualified Participant. 19.6 Distributions of PAYSOP Accounts. (a) Method of Distribution. Distribution of PAYSOP Accounts shall be made in the same manner as described in Sections 18.2(a) and (b) and 18.4 of this Plan with respect to all other Accounts transferred from the Stock Bonus Plan, except that all references to the Stock Bonus Plan shall be to the Stock Bonus Plan as it was in effect on October 1, 1992. (b) Form of Distribution. (1) Distributions of Common Stock from a Participant's PAYSOP Account shall be in full shares of Common Stock, and cash shall be distributed in lieu of any fractional shares of Common Stock allocated. Fractional shares shall be valued by reference to their fair market value, determined in accordance with Section 7.1. (2) Notwithstanding the foregoing, the Committee may determine that any or all of the distributions under Section 19.3 or subsection (1) above shall be made in cash in lieu of Common Stock, or partially in cash and partially in Common Stock; provided, that the Committee shall have advised each Participant (or beneficiary) in writing that he has a right to demand that his benefits be distributed in the form of shares of Common Stock. When a cash distribution is made, the Participant's shares of Common Stock shall be valued at their fair market value, determined in accordance with Section 7.1. (3) It is intended that the distributions described in subsections (1) and (2) above shall be made in accordance with regulations which may hereafter be issued by the Department of Treasury. SECTION 20 MISCELLANEOUS 20.1 Participation by Affiliates with Consent of BetzDearborn Inc. Any corporation which is an Affiliate, with approval of the Board of Directors, by resolution of its own board of directors, may adopt the Plan and Trust hereby created. From and after the effective date when such corporation shall have become a party to this Plan and the Trust Agreement, it shall for all purposes of this Plan and the Trust Agreement be included within the meaning of the word "Company" and shall be an affiliated company for purposes of benefit accrual and vesting. 20.2 Application of Plan. This Plan shall not apply to any person who retired or otherwise separated from the service of the Company before the Effective Date. The right of any such person to any retirement benefit or otherwise shall be governed solely by the provisions of the BetzDearborn Inc. Employees' Retirement Plan or the Plan in effect on the date of such retirement or other separation from service. 20.3 No Employment Rights Created. The Plan and Trust do not confer upon any Participant or other Employee any right to be continued in the employ of the Company or an Affiliate, and the 53 60 Company expressly reserves the right to terminate the employment of any Employee whether or not a Participant, whenever the interest of the Company, in its sole judgment, may so require. 20.4 Incapacitated Participant or Beneficiary. If the Plan Administrator deems any person incapable of receiving any benefit to which he is entitled by reason of minority, illness, infirmity or other incapacity, the Plan Administrator may direct the Trustee to make payment to such person's legally appointed guardian, or, if none has been appointed, to the holder of a legally valid power of attorney from such person. Such payments shall, to the extent thereof discharge the liability of the Company, the Committee, the Plan Administrator, the Trustee and the Trust. 20.5 Payment of Plan Expenses. Except as otherwise provided in the Trust Agreement, the Plan shall pay the expenses of administering the Trust which is part of this Plan (to the extent such expenses are not paid by the Company), including the compensation of the Trustee, which shall be as mutually agreed by the Company and the Trustee. 20.6 Unclaimed Benefits. Any benefits payable to a Participant or beneficiary not claimed for a period of five years from the date of entitlement as determined by the Plan Administrator following a diligent effort to locate such Participant or beneficiary and with the approval of the Plan Administrator, shall be forfeited and applied in accordance with the terms of Section 6.7; provided, however, that such forfeited benefits shall be reinstated if a claim for them is made by the Participant or beneficiary. 20.7 Treatment of Leased Employees. Notwithstanding any other provisions of the Plan, for purposes of the pension requirements of section 414(n)(3) of the Code, Employees shall include Leased Employees. 20.8 Construction. Construction and administration of this Plan and of the Trust Agreement shall be governed by ERISA and other applicable Federal law and to the extent not governed by Federal law, by Pennsylvania law. 20.9 Gender and Number. The masculine pronoun wherever used shall include the feminine and the singular may include the plural, and vice versa, as the context may require. SECTION 21 SPECIAL PROVISIONS CONCERNING CERTAIN FORMER EMPLOYEES OF THE GRACE GROUP 21.1 Definitions. The following words and phrases, as used herein, shall have the following meanings, unless the context clearly indicates otherwise: (a) "Buyer Group" shall mean, collectively, Betz Laboratories, Inc. and any entity of which it owns directly or indirectly fifty percent (50%) or more of the voting power or other similar interests and, at any time on or after the Closing Date, the Transferred Companies and Transferred Joint Ventures. (b) "Closing Date" shall mean the Closing Date under the Sale Agreement, which is expected to be June 28, 1996. (c) "Continued Employee" shall mean any employee - 54 61 (1) who is an employee of the Grace Group (other than the Transferred Companies or Transferred Joint Ventures) who is employed exclusively in the Dearborn Business (as defined in the Sale Agreement); (2) who is an employee of the Grace Group (other than the Transferred Companies or Transferred Joint Ventures) who performs substantial services for the Dearborn Business and is designated by Grace as an employee who is to be transferred with the Dearborn Business; or (3) who replaces any employee described in paragraph (i) or (ii) above (excluding any such employee who is on long-term disability on the Closing Date) and who accepts an offer of employment made by a member of the Buyer Group in accordance with the Sale Agreement. (d) "Grace" shall mean W.R. Grace & Co.-Conn. (e) "Grace Group" shall mean, collectively, W.R. Grace & Co. and any entities of which it owns directly or indirectly fifty percent (50%) or more of the voting power or other similar interests at any time prior to the closing under the Sale Agreement, the Transferred Companies, and the Transferred Joint Ventures. (f) "Sale Agreement" shall mean the Grace Dearborn Worldwide Purchase and Sale Agreement, entered into by W.R. Grace & Co.-Conn. and the Company, dated March 11, 1996. (g) "Transferred Companies" shall mean Grace Dearborn N.V.; Alexim N.V.; Finac N.V.; Grace Dearborn, Inc.; Grace Service Chemicals S.A.; Grace Dearborn B.V.; Dearborn Holdings AB; Grace Dearborn AB; and Dearborn USA, Limited Partnership. (h) "Transferred Joint Ventures" shall mean Dearborn I.E.I. (India) Private Ltd. and Nippon Dearborn K.K. (i) "U.S. Employee" shall mean an employee of Dearborn USA, Limited Partnership, or a Continued Employee. 21.2 Participation by Certain Employees of the Dearborn Business. Notwithstanding Section 3.2, each U.S. Employee who participated in the W.R. Grace & Co. Salaried Employees Savings and Investment Plan immediately prior to the Closing Date shall become a Participant in the Plan on the date he first completes an Hour of Service for the Company. 21.3 Years of Vesting Service. Each U.S. Employee's service with the Grace Group prior to the Closing Date shall be counted for purposes of determining Years of Vesting Service under this Plan on and after the Closing Date. 21.4 Allocation of Company Stock Contribution for 1996. For purposes of determining entitlement to allocations of contributions under Section 6 for 1996, a Participant's service in 1996 with the Grace Group prior to the Closing Date shall be counted for purposes of determining if the Participant completed 1,000 or more Hours of Service under Section 6.1. However, only Compensation received in 1996 as an Eligible Employee shall be counted for purposes of determining the amount of a Participant's allocation under Sections 6.2, 6.3, 6.6(c), and 6.7. 55 62 IN WITNESS WHEREOF, BETZDEARBORN INC. has caused these presents to be duly executed as of this ----- day of ----------, ----. BETZDEARBORN INC. ------------------------- By: ------------------------- Title: ------------------------- ATTEST: - ------------------------------ Title: - ------------------------------ [CORPORATE SEAL] 56 63 FIRST AMENDMENT TO BETZDEARBORN INC. EMPLOYEE STOCK OWNERSHIP AND 401(K) PLAN THIS FIRST AMENDMENT made on this day of ______________, 1998, by BETZDEARBORN INC. (the "Corporation"), a corporation organized and existing under the laws of the State of Pennsylvania; W I T N E S S E T H: WHEREAS, the Corporation, as Plan Sponsor, maintains the BetzDearborn Inc. Employee Stock Ownership and 401(k) (the "Plan"), which was established by an indenture dated January 1, 1989, and last amended and restated by an indenture dated January 1, 1998; and WHEREAS, the Corporation desires to amend the Plan to make certain changes related to vesting and to the definitions of "Company Stock" and "Preferred Stock." NOW, THEREFORE, the Corporation does hereby amend the Plan effective as of the effective time of the merger among the Corporation and Hercules Inc. ("Hercules") and Water Acquisition, Co., a wholly owned subsidiary of Hercules, as follows: 1. By deleting existing Plan Section 1.8 in its entirety and replacing it with the following new Plan Section 1.8: "1.8 `Common Stock' shall mean the common stock of Hercules, Inc., it being intended that such Common Stock constitute `qualifying employer securities' within the meaning of Section 4975(e)(8) of the Code." 2. By deleting existing Plan Section 1.10 in its entirety and replacing with the following new Plan Section 1.10: "1.10 `Company Stock' shall mean the common stock of Hercules, Inc., it being intended that such Company Stock constitute `qualifying employer securities' within the meaning of Section 4975(e)(8) of the Code." 3. By deleting existing Plan Section 1.36 in its entirety and replacing it with the following new Plan Section 1.36: "1.36 [RESERVED]" 4. By deleting the second paragraph of Plan Section 5.4(a) in its entirety. 64 5. By deleting the second paragraph of existing Plan Section 7.1(a) in its entirety and replacing it with the following new second paragraph of Plan Section 7.1(a): "For purposes of the valuation described above, the fair market value of shares of Company Stock held by the Trustee shall be determined as of the Valuation Date coincident with the last day of the Plan Year, and as of such other Valuation Dates as the Plan Administrator so directs." 6. By deleting existing Plan Section 8.18(f)(3) in its entirety and replacing it with the following new Plan Section 8.18(f)(3): "(3) Loan Date. Each loan shall be made as soon as practicable following approval of the Participant's loan application by the Plan Administrator. To the extent any loan is made from a particular Account of a Participant which is invested partially in different investment media, such loan shall be made pro rata from the investments of such Account in each such investment medium, valued as of the most recent Valuation Date or, to the extent that such loan is made from amounts invested in Investment Vehicles the value of which is priced daily, as of the date of the loan." 7. By adding the following sentence to the end of existing Plan Section 9.1: "Notwithstanding any other provision of the Plan, an Employee who is a Participant of the Plan as of the effective time of the merger among the Corporation and Hercules, Inc. and Water Acquisition Co., a wholly owned subsidiary of Hercules, Inc., shall be fully vested in all of his Accounts." 8. By deleting existing Plan Section 9.2(c) in its entirety and replacing it with the following new Plan Section 9.2(c): "(c) Form. Benefits from the Participant's Company Stock, Matching, and Other Investments Accounts shall be paid in whole shares of Company Stock. Benefits from the Participant's 401(k) and Rollover Accounts shall be paid in cash, except that, to the extent the Investment Vehicle in which the Accounts are invested consists of Company Stock, such benefits shall be paid in Company Stock. Notwithstanding the foregoing, a Participant may elect to receive all benefits from his Other Investments, 401(k) and Rollover Accounts in cash." 9. By adding the following sentence to the end of existing Plan Section 18.4: "Notwithstanding anything contained in Plan Section 18, any distribution which would have been required to be made in the form of "employer securities" (within the meaning of Code Section 409(l)) will be made in the form of Common Stock." 2 65 Except as specifically amended hereby, the Plan shall remain in full force and effect as prior to this First Amendment. IN WITNESS WHEREOF, the Corporation has executed this First Amendment as of the date and the year first above written. PLAN SPONSOR: BETZDEARBORN INC. By: --------------------------- Title: --------------------------- ATTEST: - --------------------------------- Title: - --------------------------------- [CORPORATE SEAL] 3 66 SECOND AMENDMENT TO BETZDEARBORN INC. EMPLOYEE STOCK OWNERSHIP AND 401(k) PLAN THIS SECOND AMENDMENT made on this day of ___________, 1998, by BETZDEARBORN INC. (the "Corporation"), a corporation organized and existing under the laws of the State of Pennsylvania; W I T N E S S E T H: WHEREAS, the Corporation, as Plan Sponsor, maintains the BetzDearborn Inc. Employee Stock Ownership and 401(k) (the "Plan"), which was established by an indenture dated January 1, 1989, and last amended and restated by an indenture dated January 1, 1998; and WHEREAS, the Corporation desires to amend the Plan to revise the formula for 'Company Matching Contributions' and the day on which the interest rate applicable to loans under the Plan is set. NOW, THEREFORE, the Corporation does hereby amend the Plan effective as of January 1, 1999, as follows: 1. By deleting existing Plan Section 8.3(b) in its entirety and replacing it with the following new Plan Section 8.3(b): "(b) Matching Rate. The Matching Rate shall be fifty percent (50%). The Maximum Compensation deferral Percentage shall be six percent (6%)." 2. By deleting existing Plan Section 8.18(b) in its entirety and replacing it with the following new Plan Section 8.18(b): "(b) Terms of Loan. Each loan granted or renewed under this Section shall bear a rate of interest which is two percentage points greater than the prime lending rate, as announced in The Wall Street Journal, on the first business day of each calendar quarter in which the loan is made or such other rate as may be determined by the Plan Administrator to be required by law. The interest rate and other conditions for the repayment of the loan shall be fixed at the time the loan is made. All loans shall be repayable by their terms within five years." 67 Except as specifically amended hereby, the Plan shall remain in full force and effect as prior to this Second Amendment. IN WITNESS WHEREOF, the Corporation has executed this Second Amendment as of the date and the year first above written. PLAN SPONSOR: BETZDEARBORN INC. By: ------------------------------------- Title: ---------------------------------- ATTEST: - ------------------------------------ Title: ------------------------------ [CORPORATE SEAL] 68 THIRD AMENDMENT TO BETZDEARBORN INC. EMPLOYEE STOCK OWNERSHIP AND 401(K) PLAN THIS THIRD AMENDMENT made on this --- day of March, 1999, by BETZDEARBORN INC. (the "Corporation"), a corporation organized and existing under the laws of the State of Pennsylvania; W I T N E S S E T H: WHEREAS, the Corporation, as Plan Sponsor, maintains the BetzDearborn Inc. Employee Stock Ownership and 401(k) (the "Plan"), which was established by an indenture dated January 1, 1989, and last amended and restated by an indenture dated January 1, 1998; and WHEREAS, as a condition to receipt of a favorable determination on the tax-qualified status of the Plan, the Corporation desires to amend the Plan to reflect the required provisions of the Uniformed Service Employment and Reemployment Rights Act of 1994; and WHEREAS, the officers of the Corporation are authorized to amend the Plan as required for the continued qualification of the Plan. NOW, THEREFORE, the Corporation does hereby amend the Plan effective as of December 12, 1994, by adding the following new Plan Section 4.4 to the Plan: "4.4 Notwithstanding any provision of the Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code." Except as specifically amended hereby, the Plan shall remain in full force and effect as prior to this Third Amendment. IN WITNESS WHEREOF, the Corporation has executed this Third Amendment as of the date and the year first above written. BETZDEARBORN INC. By: ----------------------------- Title: ----------------------------- ATTEST: - -------------------------------- Title: - -------------------------------- [CORPORATE SEAL] EX-23.A 12 CONSENT OF INDEPENDENT ACCOUNTANTS 1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement of Hercules Incorporated on Form S-8 Registration No. 33-37279 (which includes Registration No. 33-21668), No. 33-21667, No. 33-47664, No. 33-51178, No. 33-52621, No. 33-66136, No. 33-62314, No. 33-65352, No. 333-38795, No. 333-38797 and No. 333-68863 and on Form S-3 (Registration No. 333-63423 and No. 333-29225) of our report, which includes an explanatory paragraph regarding a change, in 1997, in the company's method of accounting for costs incurred in connection with an enterprise software installation, dated February 24, 2000, on our audits of the consolidated financial statements and financial statement schedule of Hercules Incorporated and subsidiary companies as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999, which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers Philadelphia, Pennsylvania March 29, 2000 EX-27 13 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HERCULES INCORPORATED'S CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 DEC-31-1999 63,000 0 782,000 16,000 380,000 1,338,000 2,978,000 1,657,000 5,896,000 1,559,000 1,777,000 992,000 0 83,000 780,000 5,896,000 3,248,000 3,248,000 1,770,000 2,768,000 51,000 0 185,000 243,000 75,000 168,000 0 0 0 168,000 1.63 1.62
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