-----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, Go8vrMqrf73+Fg1M0uQIjZJnCb3g/f6uIHqaVvSA7BvrUbH6DPGEGxYJk1JXCBhE njs3SDsQKzntp9tuArB43A== 0000893220-01-500545.txt : 20010810 0000893220-01-500545.hdr.sgml : 20010810 ACCESSION NUMBER: 0000893220-01-500545 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 20010809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AQUALON CO CENTRAL INDEX KEY: 0001157007 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 23244147 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-28 FILM NUMBER: 1702883 BUSINESS ADDRESS: BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 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: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210 FILM NUMBER: 1702855 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HISPAN CORP CENTRAL INDEX KEY: 0001157022 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510310259 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-01 FILM NUMBER: 1702856 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: 1313 N MARKET STREET STREET 2: C/O HERCULES PLAZA CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERCULES SHARED SERVICES CORP CENTRAL INDEX KEY: 0001157059 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510099408 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-02 FILM NUMBER: 1702857 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERCULES INVESTMENTS LLC CENTRAL INDEX KEY: 0001157058 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 522071249 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-03 FILM NUMBER: 1702858 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERCULES INTERNATIONAL LTD LLC CENTRAL INDEX KEY: 0001157057 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-04 FILM NUMBER: 1702859 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERCULES INTERNATIONAL LTD CENTRAL INDEX KEY: 0001157056 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510367297 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-05 FILM NUMBER: 1702860 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERCULES FLAVOR INC CENTRAL INDEX KEY: 0001157054 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510339950 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-06 FILM NUMBER: 1702861 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERCULES FINANCE CO CENTRAL INDEX KEY: 0001157053 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 311342715 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-07 FILM NUMBER: 1702862 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERCULES EURO HOLDINGS LLC CENTRAL INDEX KEY: 0001157049 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-08 FILM NUMBER: 1702863 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERCULES CREDIT INC CENTRAL INDEX KEY: 0001157047 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510261785 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-09 FILM NUMBER: 1702864 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERCULES COUNTRY CLUB INC CENTRAL INDEX KEY: 0001157045 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510333273 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-10 FILM NUMBER: 1702865 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERCULES CHEMICAL CORP CENTRAL INDEX KEY: 0001157043 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510099407 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-11 FILM NUMBER: 1702866 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIBERVISIONS PRODUCTS INC CENTRAL INDEX KEY: 0001157042 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 582131693 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-12 FILM NUMBER: 1702867 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIBERVISIONS LP CENTRAL INDEX KEY: 0001157040 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510387251 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-13 FILM NUMBER: 1702868 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIBERVISIONS LLC CENTRAL INDEX KEY: 0001157039 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 512044047 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-14 FILM NUMBER: 1702869 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIBERVISIONS INC CENTRAL INDEX KEY: 0001157037 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 522043124 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-15 FILM NUMBER: 1702870 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EAST BAY REALTY SERVICES INC CENTRAL INDEX KEY: 0001157035 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510333230 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-16 FILM NUMBER: 1702871 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: D R C LTD CENTRAL INDEX KEY: 0001157032 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510363246 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-17 FILM NUMBER: 1702872 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COVINGTON HOLDINGS INC CENTRAL INDEX KEY: 0001157031 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510384615 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-18 FILM NUMBER: 1702873 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHEMICAL TECHNOLOGIES INDIA LTD CENTRAL INDEX KEY: 0001157029 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510363245 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-19 FILM NUMBER: 1702874 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLI HOLDINGS CORP CENTRAL INDEX KEY: 0001157021 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510363245 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-20 FILM NUMBER: 1702875 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BL TECHNOLOGIES INC CENTRAL INDEX KEY: 0001157025 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510363245 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-21 FILM NUMBER: 1702876 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BL CHEMICALS INC CENTRAL INDEX KEY: 0001157019 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510264309 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-22 FILM NUMBER: 1702877 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BETZDEARBORN INTERNATIONAL INC CENTRAL INDEX KEY: 0001157017 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 231720942 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-23 FILM NUMBER: 1702878 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BETZDEARBORN EUROPE INC CENTRAL INDEX KEY: 0001157016 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 232157907 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-24 FILM NUMBER: 1702879 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BETZDEARBORN CHINA LTD CENTRAL INDEX KEY: 0001157015 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 980171857 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-25 FILM NUMBER: 1702880 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BETZDEARBORN INC CENTRAL INDEX KEY: 0000011884 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS CHEMICAL PRODUCTS [2890] IRS NUMBER: 231503731 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-26 FILM NUMBER: 1702881 BUSINESS ADDRESS: STREET 1: 4636 SOMERTON RD CITY: TREVOSE STATE: PA ZIP: 19053 BUSINESS PHONE: 2153553300 MAIL ADDRESS: STREET 1: 4636 SOMERTON ROAD CITY: TREVOSE STATE: PA ZIP: 19053 FORMER COMPANY: FORMER CONFORMED NAME: BETZ LABORATORIES INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATHENS HOLDINGS INC CENTRAL INDEX KEY: 0001157008 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510387251 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-67210-27 FILM NUMBER: 1702882 BUSINESS ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: C/O HERCULES PLAZA STREET 2: 1313 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19894-0001 S-4 1 w51743s-4.txt FORM S-4 HERCULES INCORPORATED 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 9, 2001 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ HERCULES INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 2869 51-0023450 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
HERCULES PLAZA 1313 NORTH MARKET STREET WILMINGTON, DELAWARE 19894-0001 TELEPHONE: (302) 594-5000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ ISRAEL J. FLOYD, ESQUIRE GENERAL COUNSEL HERCULES INCORPORATED HERCULES PLAZA 1313 NORTH MARKET STREET WILMINGTON, DELAWARE 19894-0001 TELEPHONE: (302) 594-5128 ------------------------ COPIES TO: JUSTIN P. KLEIN, ESQUIRE BALLARD SPAHR ANDREWS & INGERSOLL, LLP 1735 MARKET STREET, 51ST FLOOR PHILADELPHIA, PENNSYLVANIA 19103 TELEPHONE: (215) 864-8606 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) (TABLE OF ADDITIONAL REGISTRANTS APPEARS ON FOLLOWING PAGE) APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effectiveness of this Registration Statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- ------------------------ CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------------------- 11 1/8% Senior Notes due 2007.... $400,000,000 100% $400,000,000(1) $100,000(2) - --------------------------------------------------------------------------------------------------------------------------------- Guarantees of 11 1/8% Senior Notes due 2007................. (3) (3) (3) (3) - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(f) under the Securities Act. (2) Calculated pursuant to Rule 457(f) under the Securities Act. (3) No separate registration fee is required pursuant to Rule 457(n) under the Securities Act. ------------------------ THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SEC ACTING PURSUANT TO SECTION 8(a) MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 ADDITIONAL REGISTRANTS
STATE OR OTHER PRIMARY STANDARD JURISDICTION OF INDUSTRIAL I.R.S. EMPLOYER EXACT NAME OF REGISTRANT AS INCORPORATION OR CLASSIFICATION CODE IDENTIFICATION SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER NUMBER - --------------------------- ---------------- ------------------- --------------- Aqualon Company(1)........................... Delaware 2869 23-2441476 Athens Holdings, Inc.(1)..................... Delaware 6719 51-0387251 BetzDearborn Inc.(2)......................... Pennsylvania 2899 23-1503731 BetzDearborn China, Ltd.(3).................. Delaware 2899 98-0171857 BetzDearborn Europe, Inc.(2)................. Delaware 6719 23-2157907 BetzDearborn International, Inc.(1).......... Pennsylvania 2899 23-1720942 BL Chemicals Inc.(3)......................... Delaware 2899 51-0264309 BL Technologies, Inc.(3)..................... Delaware 6794 51-0363247 BLI Holdings Corp.(3)........................ Delaware 2899 51-0363245 Chemical Technologies India, Ltd.(2)......... Delaware 6719 23-2757648 Covington Holdings, Inc.(1).................. Delaware 6719 51-0384615 D R C Ltd.(3)................................ Delaware 6794 51-0363246 East Bay Realty Services, Inc.(1)............ Delaware 6719 51-0333230 FiberVisions Incorporated(1)................. Delaware 2824 52-2043124 FiberVisions, L.L.C.(1)...................... Delaware 6719 51-2044047 FiberVisions, L.P.(1)........................ Delaware 2824 51-0387251 FiberVisions Products, Inc.(1)............... Georgia 2824 58-2131693 Hercules Chemical Corporation(1)............. Delaware N/A 51-0099407 Hercules Country Club, Inc.(1)............... Delaware 7997 51-0333273 Hercules Credit, Inc.(1)..................... Delaware 6719 51-0261785 Hercules Euro Holdings, LLC(1)............... Delaware 6719 * Hercules Finance Company(1).................. Delaware 2899, 2821, 2869 31-1342715 Hercules Flavor, Inc.(1)..................... Delaware 6719 51-0339950 Hercules International Limited(1)............ Delaware 6719 51-0367297 Hercules International Limited, LLC(1)....... Delaware 2899, 2821, 2869 * Hercules Investments, LLC(1)................. Delaware 6719 52-2071249 Hercules Shared Services Corporation(1)...... Delaware 2899, 2821, 2869 51-0099408 HISPAN Corporation(1)........................ Delaware N/A 51-0310259 WSP, Inc.(1)................................. Delaware 6719 41-1575136
- --------------- * Pass-through entity. (1) Address, including zip code, and telephone number, including area code, of registrant's principal executive offices: Hercules Plaza, 1313 North Market Street, Wilmington, Delaware 19894-0001, (302) 594-5000. Name, address, including zip code, and telephone number, including area code, of agent for service: Israel J. Floyd, Esquire, General Counsel, Hercules Incorporated, Hercules Plaza, 1313 North Market Street, Wilmington, Delaware 19894-0001, (302) 594-5128, with copies to Justin P. Klein, Esquire, Ballard Spahr Andrews & Ingersoll, LLP, 1735 Market Street, Philadelphia, Pennsylvania 19103, (215) 864-8606. (2) Address, including zip code, and telephone number, including area code, of registrant's principal executive offices: 4636 Somerton Road, Trevose, Pennsylvania 19053, (215) 355-3300. Name, address, including zip code, and telephone number, including area code, of agent for service: Israel J. Floyd, Esquire, General Counsel, Hercules Incorporated, Hercules Plaza, 1313 North Market Street, Wilmington, Delaware 19894-0001, (302) 594-5128, with copies to Justin P. Klein, Esquire, Ballard Spahr Andrews & Ingersoll, LLP, 1735 Market Street, Philadelphia, Pennsylvania 19103, (215) 864-8606. (3) Address, including zip code, of registrant's principal executive offices: 3505 Silverside Road, Wilmington, Delaware 19810. Telephone number, including area code, of registrant's principal executive offices: BetzDearborn China, Ltd. -- none; BL Chemicals, Inc. -- (302) 477-9837; BL Technologies, Inc. -- (302) 477-6982; BLI Holdings Corp. -- (302) 477-9835; and D R C Ltd. -- (302) 477-9839. Name, address, including zip code, and telephone number, including area code, of agent for service: Israel J. Floyd, Esquire, General Counsel, Hercules Incorporated, Hercules Plaza, 1313 North Market Street, Wilmington, Delaware 19894-0001, (302) 594-5128, with copies to Justin P. Klein, Esquire, Ballard Spahr Andrews & Ingersoll, LLP, 1735 Market Street, Philadelphia, Pennsylvania 19103, (215) 864-8606. 2 3 PROSPECTUS SUBJECT TO COMPLETION, DATED AUGUST 9, 2001 HERCULES INCORPORATED Hercules Plaza 1313 North Market Street Wilmington, Delaware 19894-0001 302-594-5000 HERCULES INCORPORATED EXCHANGE OFFER For $400,000,000 of Its 11 1/8% Senior Notes Due 2007 THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 2001, UNLESS EXTENDED. If all of the conditions to the exchange offer are satisfied, we will exchange all of our 11 1/8% Senior Notes due 2007 issued on November 14, 2000, which we refer to as the old notes, that are validly tendered and not withdrawn prior to the expiration of the exchange offer, for 11 1/8% Senior Notes due 2007, which we refer to as the new notes. You may withdraw your tender of old notes at any time before the expiration of this exchange offer. The new notes that we issue to you in exchange for your old notes will be substantially identical to your old notes except that, unlike your old notes, the new notes will have no transfer restrictions or registration rights. The new notes that we issue to you in exchange for your old notes are new securities with no established market for trading. YOU SHOULD CONSIDER CERTAIN RISKS BEFORE DECIDING WHETHER TO TENDER YOUR OLD NOTES. SEE "RISK FACTORS" BEGINNING ON PAGE 10. Each broker-dealer that receives new notes for its own account pursuant to this exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of new notes. The letter of transmittal accompanying this prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new notes received in exchange for old notes where the old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that, for a period of up to one year after the consummation of this exchange offer, we will make this prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." Neither the SEC nor any state securities commission has approved or disapproved of the new notes or determined that this prospectus is adequate or accurate. Any representation to the contrary is a criminal offense. The information in this prospectus is not complete and may be changed. We have filed a registration statement relating to the new notes and the guarantees with the SEC and we cannot issue the new notes until the registration statement is effective. This prospectus is not an offer to sell the new notes and it is not soliciting an offer to buy the new notes in any jurisdiction where the offer or sale is not permitted. This prospectus is dated , 2001. 4 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 1 Risk Factors................................................ 10 Use of Proceeds............................................. 17 Capitalization.............................................. 18 Selected Historical Financial Data.......................... 19 Unaudited Pro Forma Financial Data.......................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 24 Description of Senior Credit Facility....................... 35 Business.................................................... 36 Management.................................................. 47 Principal Stockholders...................................... 58 The Exchange Offer.......................................... 60 Description of Notes........................................ 67 Certain Federal Income Tax Consequences..................... 101 Plan of Distribution........................................ 105 Legal Matters............................................... 105 Experts..................................................... 105 Available Information....................................... 106 Index to Financial Statements............................... F-1
------------------------ FORWARD-LOOKING STATEMENTS This prospectus includes "forward-looking statements" including, in particular, the statements about our plans, strategies and prospects under the headings "Prospectus Summary," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," and in the Unaudited Pro Forma Financial Information and the related notes thereto. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this prospectus are set forth in the prospectus, including under the headings "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements and risk factors contained throughout this prospectus. ------------------------ This prospectus incorporates important business and financial information about us that is not included or delivered with this prospectus. This information is available without charge to you upon written or oral request to Israel J. Floyd, Esquire, Secretary and General Counsel, Hercules Incorporated, Hercules Plaza, 1313 North Market Street, Wilmington, Delaware 19894-0001, Telephone: 302-594-5128. TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST THE INFORMATION NO LATER THAN , 2001, WHICH IS FIVE BUSINESS DAYS PRIOR TO THE TERMINATION OF THE EXCHANGE OFFER. i 5 PROSPECTUS SUMMARY The following summary contains information about Hercules and this exchange offer. It does not contain all of the information that may be important to you in making a decision to tender your notes pursuant to the exchange offer. For a more complete understanding of Hercules and the exchange offer, we urge you to read this entire prospectus carefully, including the "Risk Factors" section and our consolidated financial statements and the notes to those statements. THE COMPANY Hercules Incorporated is a leading, diversified, global manufacturer and marketer of specialty chemicals and related services for a broad range of business, consumer and industrial applications. We are focused on maximizing cash flow, reducing debt, improving return on capital and delivering stockholder value by concentrating on the performance of our businesses, as well as ongoing improvements throughout all of our operations. Our performance will continue to be driven by superior service to our customers and development of new products, including products that improve our customers' manufacturing costs and processes. Our principal products are chemicals used by the paper industry to increase product performance and enhance the manufacturing process; water treatment and industrial process chemicals; water-soluble polymers; and polypropylene and polyethylene fibers. These products impart such qualities as durability, water-resistance and improved aesthetics to everyday consumer goods such as writing paper, toothpaste and diapers. The primary markets we serve include pulp and paper, personal care, petroleum refining, oil and gas drilling and recovery, paints and coatings, construction materials and pharmaceuticals. While our products have a low cost impact on our customers' total product costs, they frequently possess characteristics important to the functionality and aesthetics of the finished product or the efficient operation of the manufacturing process. Examples of our products in consumer end-uses include strength additives for tissue and toweling, sizing agents for milk and juice cartons, fibers that comprise the inner and outer linings of disposable diapers and hygiene products, thickeners in products such as toothpaste, shampoos and water-based paints and water control additives for building products such as tile cements, grouts, stuccos, plasters and joint compounds. We also offer products and related services that improve and reduce the cost of a variety of manufacturing processes, including water management programs that control corrosion and improve water quality. Although price is important to our competitive strategy, we primarily compete on the basis of the performance and quality of our products. We strive to continually improve our products by investing in technology and research and development. We have committed substantial resources to our research and development efforts. Research and development expenditures totaled approximately $80 million in 2000. Such expenditures enable us to consistently bring to market products which have improved functional properties or which offer similar properties at a lower cost. This area has become increasingly important, as our customers have come to rely more on us to provide new solutions to improve their product offerings and processes. Additionally, we strive to make our products more price-competitive by effectively managing our production costs and sharing savings with our customers. In addition to developing products internally, we also selectively enter into strategic partnerships and alliances that add to the breadth of our products and services. We continually review our corporate strategy in order to compete most effectively in our changing markets. Starting in 2000, we implemented a program designed to refocus our business by monetizing certain assets, thereby generating cash to reduce our debt, while concentrating on improving the efficiency, profitability and growth potential of our remaining businesses. In the fourth quarter of 2000, we announced our intention to pursue a merger or sale of the company or one or more of its businesses in the belief that, over the long term, becoming part of a larger enterprise is the best strategic path for the company. If a sale of the company occurs, it would most likely be in a two-step process, with the sale of our BetzDearborn division constituting the first step. We are continuing to talk with potential buyers of our BetzDearborn division, as well as potential buyers of the company or our other businesses. There can be no assurance that any of these parties will be prepared to pay a price that is acceptable to us or that any transaction will occur. In June 2001, we 1 6 announced a comprehensive cost reduction program to improve our return on capital. This cost reduction program is being implemented while we continue to explore strategic alternatives, including the merger or sale of the company or one or more of our businesses. After the sale of our Food Gums division in September 2000 and the bulk of our Resins division in May 2001, our reporting segments are Process Chemicals and Services (comprised of Pulp and Paper and BetzDearborn), Functional Products (comprised of Aqualon) and Chemical Specialties (comprised of the remainder of Resins and FiberVisions). We are a publicly traded company and our common stock is listed on the New York Stock Exchange under the symbol "HPC." As of July 31, 2001, we had a common equity market capitalization of approximately $1.15 billion, based on 108,364,379 shares outstanding and a share price of $10.60. RECENT DEVELOPMENTS In April 2001, the United States Court of Appeals for the Eighth Circuit reversed an earlier judgment of the United States District Court for the Eastern District of Arkansas in United States v. Vertac Corporation, et al., which had held Hercules jointly and severally liable under CERCLA for remediation costs at a site in Jacksonville, Arkansas, and remanded the case to the District Court to determine the extent of Hercules' responsibility, if any, applying the concept of divisibility of damages. In May 2001, the Supreme Court of New York (the trial court) accepted a Special Referee's Report and rejected our position in a case captioned Hexcel Corporation v. Hercules Incorporated. The Special Referee's Report, issued in January 2001, recommended that Hercules be found liable to Hexcel for a total of approximately $7.3 million plus interest. As a result, judgment was entered against us in the amount of approximately $10 million. We believe the Court's decision is incorrect, at least in part, as a matter of law and we will appeal the Court's decision. On May 1, 2001, we completed the sale of our hydrocarbon resins business and select portions of our rosin resins business to a subsidiary of Eastman Chemical Company, receiving gross proceeds of approximately $244 million. On May 31, 2001, we completed the sale of our peroxides business to GEO Specialty Chemicals, Inc., receiving gross proceeds of approximately $92 million. Additionally, on May 25, 2001, we completed the sale of our interest in Hercules-Sanyo, Inc., a toner resin joint venture, to a wholly-owned subsidiary of Sanyo Chemical Industries, Ltd., our joint venture partner. We are actively pursuing the sale of the remaining portion of the Resins division. Due to a delay in closing the Eastman transaction, which in turn delayed the pay down of debt, our debt as of March 31, 2001 was significantly higher than expected. As a result, we would have been out of compliance with the debt/EBITDA ratio covenant in our senior credit facility and ESOP credit facility as of that date. On April 5, 2001, our lenders granted waivers with respect to this and one other covenant. In July 2001, our senior credit facility was amended and, in August 2001, our ESOP credit facility will be amended to modify certain covenants. On May 8, 2001, our Board of Directors named Dr. William H. Joyce as Chief Executive Officer and a member of our Board of Directors. On June 28, 2001, Dr. Joyce was elected to the additional position of Chairman of the Board. On June 21, 2001, we announced the certification by IVS Associates, Inc., the independent inspectors of election, of the results of the election of members to our Board of Directors. According to the certification, Samuel J. Heyman, Sunil Kumar and Raymond Troubh were elected members of our Board of Directors by our stockholders at our annual meeting. 2 7 On June 28, 2001, we announced that Gloria Shaffer had been elected and Paula A. Sneed had been re-elected members of our Board of Directors by our Board of Directors. Also on June 28, 2001, we announced a comprehensive cost reduction program to improve our return on capital. This cost reduction program is being implemented while we continue to explore strategic alternatives, including the merger or sale of the company or one or more of its businesses. On July 1, 2001, George MacKenzie, Vice Chairman and Chief Financial Officer, retired from Hercules and resigned from the Board of Directors. On August 2, 2001, we reported results of operations for the second quarter ended June 30, 2001. Our net sales and profit from operations were approximately $670 million and $129 million, respectively. Our corresponding results for the second quarter of 2000 were approximately $822 million and $96 million, respectively. As of June 30, 2001, our total debt was $2.2 billion. Total debt does not include $622 million of company-obligated preferred securities of subsidiary trusts. 3 8 THE EXCHANGE OFFER We are offering to exchange $400,000,000 aggregate principal amount of our old notes for a like aggregate principal amount of our new notes. In order to exchange your old notes, you must properly tender them and we must accept your tender. We will exchange all outstanding old notes that are validly tendered and not validly withdrawn. The Exchange Offer............ We will exchange our old notes for a like aggregate principal amount of our new notes. Expiration Date............... This exchange offer will expire at 5:00 p.m., New York City time, on , 2001, unless we decide to extend it. Conditions to the Exchange Offer......................... We will complete this exchange offer only if: - there is no litigation or threatened litigation which would impair our ability to proceed with this exchange offer; - there is no change in the laws and regulations which would impair our ability to proceed with this exchange offer; - there is no change in the current interpretation of the staff of the SEC which permits resales of the new notes; - there is no stop order issued by the SEC which would suspend the effectiveness of the registration statement which includes this prospectus or the qualification of the new notes under the Trust Indenture Act of 1939; and - we obtain all the governmental approvals we deem necessary to complete this exchange offer. See "The Exchange Offer -- Conditions to the Exchange Offer." Procedures for Tendering Old Notes......................... To participate in this exchange offer, you must complete, sign and date the letter of transmittal and transmit it, together with your old notes to be exchanged and all other documents required by the letter of transmittal, to Wells Fargo Bank Minnesota, N.A., as exchange agent, at its address indicated in this prospectus. See "The Exchange Offer -- Exchange Agent." In the alternative, you can tender your old notes by book-entry delivery following the procedures described in this prospectus. If your old notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, you should contact that person promptly to tender your old notes in this exchange offer. See "The Exchange Offer -- Procedures for Tendering Old Notes." Guaranteed Delivery Procedures.................... If you wish to tender your old notes and you cannot get the required documents to the exchange agent on time, you may tender your old notes by using the guaranteed delivery procedures described in this prospectus. See "The Exchange Offer -- Procedures for Tendering Old Notes -- Guaranteed Delivery Procedure." Withdrawal Rights............. You may withdraw the tender of your old notes at any time before 5:00 p.m., New York City time, on the expiration date of the exchange offer. To withdraw, you must send a written notice of withdrawal to the exchange agent at the address or facsimile number indicated in this prospectus before 5:00 p.m., New York City time, on the expiration date of the exchange offer. 4 9 Acceptance of Old Notes and Delivery of New Notes......... If all of the conditions to the completion of this exchange offer are satisfied, we will accept any and all old notes that are properly tendered in this exchange offer on or before 5:00 p.m., New York City time, on the expiration date. We will return any old notes that we do not accept for exchange to you without expense as promptly as practicable after the expiration date. We will deliver the new notes to you as promptly as practicable after the expiration date and acceptance of your old notes for exchange. See "The Exchange Offer -- Acceptance of Old Notes for Exchange; Delivery of New Notes." Federal Income Tax Considerations Relating to the Exchange Offer.............. Exchanging your old notes for new notes will not be a taxable event to you for United States federal income tax purposes. See "Certain Federal Income Tax Consequences." Exchange Agent................ Wells Fargo Bank Minnesota, N.A. is serving as exchange agent in the exchange offer. Fees and Expenses............. We will pay all expenses related to this exchange offer. See "The Exchange Offer -- Fees and Expenses." Use of Proceeds............... We will not receive any proceeds from the issuance of the new notes. We are making this exchange offer solely to satisfy certain of our obligations under a registration rights agreement entered into in connection with the offering of the old notes. See "Use of Proceeds." Consequences to Holders Who Do Not Participate in the Exchange Offer.............. If you do not participate in this exchange offer: - you will not necessarily be able to require us to register your old notes under the Securities Act; - you will not be able to resell, offer to resell or otherwise transfer your old notes unless they are registered under the Securities Act or unless you resell, offer to resell or otherwise transfer them under an exemption from the registration requirements of, or in a transaction not subject to, the Securities Act; and - the trading market for your old notes will become more limited to the extent other holders of old notes participate in the exchange offer. See "Risk Factors -- Risks Related to the Exchange Offer -- Failure to exchange old notes may have negative consequences." Resales....................... It may be possible for you to resell the new notes issued in the exchange offer without compliance with the registration and prospectus delivery provisions of the Securities Act, subject to some conditions. See "Risk Factors -- Risks Related to the Exchange Offer -- Some broker-dealers who participate in the exchange offer must deliver a prospectus in connection with resales of the new notes" and "Plan of Distribution." 5 10 THE OFFERING Issuer........................ Hercules Incorporated. Notes Offered................. $400 million aggregate principal amount of 11 1/8% Senior Notes due 2007. The form and terms of the new notes are the same as the form and terms of the old notes except that, because the issuance of the new notes is registered under the Securities Act, the new notes will not bear legends restricting their transfer and, upon the effectiveness of the registration statement which includes this prospectus, will not be entitled to registration rights under the registration rights agreement. The new notes will evidence the same debt as the old notes, and the old notes and the new notes will be governed by the same indenture. Maturity Date................. November 15, 2007. Interest Payment Dates........ The new notes will bear interest semi-annually in cash in arrears on May 15 and November 15 of each year, commencing November 15, 2001. Optional Redemption........... Upon a change of control, as defined in "Description of New Notes," we will have the option, at any time before November 15, 2001, to redeem all of the new notes at a redemption price equal to 111.125% of their principal amount plus accrued and unpaid interest. In addition, on or before November 15, 2003, we may redeem up to 35% of the aggregate principal amount of the new notes originally issued at a redemption price of 111.125% with the proceeds of public equity offerings within 45 days of the closing of a public equity offering. We may make that redemption only if, after the redemption, at least 65% of the aggregate principal amount of new notes originally issued remains outstanding. Change of Control............. If a change of control occurs, we will be required to make an offer to purchase the new notes. Prior to November 15, 2001, the purchase price will equal 111.125% of the principal amount of the new notes on the date of purchase, plus accrued and unpaid interest to the date of repurchase. On or after November 15, 2001, the purchase price will equal 101% of the principal amount of the new notes on the date of purchase, plus accrued and unpaid interest to the date of repurchase. Subsidiary Guarantees......... The new notes will be jointly and severally guaranteed on an unsecured, senior basis by certain of our wholly owned domestic subsidiaries. Ranking....................... The new notes will be our general unsecured senior obligations. The new notes will effectively rank junior to all of our secured obligations to the extent of the value of the assets securing those obligations. At March 31, 2001, our total debt was $2.7 billion, of which $1.8 billion was outstanding under our senior credit facility. Total debt does not include $622 million of company-obligated preferred securities of subsidiary trusts. 6 11 Certain Covenants............. The terms of the new notes will restrict our ability and the ability of our restricted subsidiaries to, among other things: - Incur additional indebtedness; - Create liens; - Engage in sale-leaseback transactions; - Pay dividends or make other equity distributions; - Purchase or redeem capital stock; - Make investments; - Sell assets; - Engage in transactions with affiliates; or - Effect a consolidation or merger. However, these limitations will be subject to a number of important qualifications and exceptions. Use of Proceeds............... We will not receive any proceeds from the exchange offer. We are making this exchange offer solely to satisfy our obligations under the registration rights agreement that we entered into in connection with the offering of the old notes. We used the net proceeds from the sale of the old notes to repay certain preferred securities of subsidiary trusts and to reduce term loan tranche A. 7 12 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION The following table sets forth selected historical and unaudited pro forma financial information for Hercules. The year-end financial information has been derived from our audited financial statements for the year ended December 31, 2000. The interim financial information has been derived from our unaudited financial statements for the three month periods ended March 31, 2001 and March 31, 2000. We believe that the financial statements reflect all normal adjustments necessary for a fair presentation of the financial information. The results for the three months ended March 31, 2001 do not necessarily indicate the results to be expected for the full year. You should read the financial information below in conjunction with our financial statements and the related notes, and the other financial and operating data included elsewhere herein. The pro forma financial information for the year ended December 31, 2000 and the three month period ended March 31, 2000 gives effect to the sale of our Food Gums division and the offering of the old notes, borrowings under term loan tranche D, the third amendment to our senior credit facility and the applications of the proceeds therefrom (together, the "Refinancing") as if they had occurred at the beginning of the periods presented. The unaudited pro forma financial information presented is for informational purposes only and does not purport to be indicative of our results of operations or financial position.
PRO FORMA THREE MONTHS --------------------------- YEAR ENDED ENDED THREE MONTHS DECEMBER 31, MARCH 31, YEAR ENDED ENDED ------------------------ --------------- DECEMBER 31, MARCH 31, 2000 1999 1998 2001 2000 2000 2000 ------ ------ ------ ------ ------ ------------ ------------ (UNAUDITED) (UNAUDITED) (DOLLARS IN MILLIONS) STATEMENT OF INCOME DATA: Net sales(a)...................... $3,152 $3,309 $2,145 $ 702 $ 798 $2,995 $731 Operating costs and expenses: Cost of sales(a)................ 1,784 1,831 1,287 409 450 1,696 407 Selling, general and administrative expenses(b).... 810 787 377 190 197 793 191 Research and development........ 80 85 61 19 21 75 19 Purchased in-process research and development............... -- -- 130 -- -- -- -- Goodwill and intangible asset amortization(b)............... 80 79 22 19 20 82 20 Other operating expenses (income), net(c).............. (46) 47 76 3 4 (50) 3 ------ ------ ------ ------ ------ ------ ---- Profit from operations............ 444 480 192 62 106 399 91 Equity in income (loss) of affiliated companies............ (2) 1 10 (3) -- (10) (2) Interest and debt expense......... 164 185 101 55 32 211 46 Preferred security distributions of subsidiary trusts............ 96 51 2 15 23 68 15 Other income (expense), net....... (18) (2) (22) (3) 5 (17) 4 ------ ------ ------ ------ ------ ------ ---- Income (loss) before income taxes........................... 164 243 77 (14) 56 93 32 Provision for income taxes........ 66 75 68 (4) 20 44 13 ------ ------ ------ ------ ------ ------ ---- Net income (loss)................. $ 98 $ 168 $ 9 $ (10) $ 36 $ 49 $ 19 ====== ====== ====== ====== ====== ====== ==== RATIO OF EARNINGS TO FIXED CHARGES(d)...................... 1.6x 1.9x 1.5x (e) 1.9x 1.3x 1.5x BALANCE SHEET DATA: Cash and cash equivalents......... $ 54 $ 63 $ 68 $ 161 $ 85 Working capital (deficit)......... 100 (221) (77) 188 (62) Property, plant and equipment, net............................. 1,104 1,321 1,438 1,080 1,304 Total assets...................... 5,309 5,896 5,833 5,323 5,851 Total debt........................ 2,603 2,455 3,662 2,711 2,541 Company-obligated preferred securities of subsidiary trusts.......................... 622 992 200 622 992 Stockholders' equity.............. 816 863 559 775 875
8 13
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, ------------------------ ---------------- 2000 1999 1998 2001 2000 ------ ------ ------ ------- ------ (UNAUDITED) (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) PER SHARE DATA: Net income (loss) -- basic....... $ 0.91 $ 1.63 $ 0.10 $ (0.09) $ 0.34 Net income (loss) -- diluted..... 0.91 1.62 0.10 (0.09) 0.34 Cash dividend per common share... 0.62(f) 1.08 1.08 -- 0.27(f) OTHER DATA: Net cash provided by (used in) operations..................... $ 70 $ 280 $ 181 $ 9 $ (12) Proceeds of investment and fixed asset disposals................ 418 50 600 -- 6 Capital expenditures............. 187 196 157 23 52 Depreciation..................... 132 144 86 27 33 Amortization..................... 114 106 22 27 27
- --------------- (a) Net sales and cost of sales for the year 1999 have been restated to reflect a change in policy regarding the classification of shipping and handling. Costs for shipping and handling that were previously reported as a direct reduction of sales revenues are now being reported as a component of cost of sales. Accordingly, net sales and cost of sales for the year 1999 were increased by $60 million. There is no impact on operating profits as a result of this change. Annual periods prior to 1999 have not been restated for this change as the overall impact is deemed to be immaterial. (b) Annual selling, general and administrative expenses for 1998 have been reclassified to conform with the 1999 and 2000 presentation for goodwill and intangible asset amortization. (c) Included in other operating expenses (income), net for the year 2000 is a $168 million gain for the sale of the Food Gums division. (d) For the purposes of determining earnings in the calculation of the "Ratio of Earnings to Fixed Charges," consolidated pre-tax income from continuing operations has been adjusted for minority interests in consolidated subsidiaries and income or loss from equity investees, increased by the amount of previously capitalized interest amortization during the period and increased by the amount of fixed charges, excluding capitalized interest expense. Fixed charges consist of interest and debt expense on borrowings (including capitalized interest), preferred security distributions of subsidiary trusts and one-third (the proportion deemed representative of the interest portion) of rent expense. (e) Due to the loss for the three months ended March 31, 2001, the ratio of earnings to fixed charges was less than 1:1. We needed to generate an additional $12 million in earnings to achieve a ratio of earnings to fixed charges of 1:1. (f) In August 2000, the Board of Directors reduced the quarterly dividend to $0.08 per share, which was paid in September 2000. In November 2000, the Board of Directors suspended the payment of quarterly dividends. In addition, payment of dividends is significantly restricted by the senior credit facility, the ESOP credit facility and the indenture governing the notes. 9 14 RISK FACTORS You should carefully consider the following discussion of risks, and the other information in this prospectus, before deciding whether to tender your old notes in the exchange offer. RISKS RELATED TO THE NOTES WE HAVE SUBSTANTIAL INDEBTEDNESS, WHICH MAKES US MORE VULNERABLE TO ECONOMIC AND INDUSTRY CONDITIONS AND COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH OR PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES. We have now and will continue to have a significant amount of indebtedness. As of March 31, 2001, our total debt was approximately $2.7 billion. Total debt does not include $622 million of company-obligated preferred securities of subsidiary trusts. Our substantial indebtedness has significant consequences. For example, it could: - make it more difficult for us to satisfy all of our obligations under the notes and our other indebtedness; - increase our vulnerability to economic downturns and competitive pressures; - require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes; - reduce our cash flow due to increased interest expense in times of rising interest rates; - limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate or in pursuing attractive business opportunities requiring debt financing; - place us at a disadvantage to our competitors that have less debt; - limit our ability to borrow additional funds due to restrictive covenants; and - make it more difficult for us to achieve the merger or sale of the company or one or more of our businesses. Any of the foregoing consequences could have a material adverse effect on us. Our ability to pay the principal of, and interest on, our indebtedness as it comes due will depend upon our current and future performance. Our performance is affected by general economic conditions and by financial, competitive, political, business and other factors. Many of these factors are beyond our control. We believe that the cash generated from our business, together with the proceeds from the sale of certain assets, will be sufficient to enable us to make our debt payments, including payments on the notes, as they become due. If, however, we do not generate enough cash or are unable to sell assets, we may be required to refinance some or all of our indebtedness, incur additional indebtedness or sell equity. No assurance can be given that any refinancings, additional borrowings or sales of equity will be possible when needed or that we will be able to negotiate acceptable terms. In addition, our access to capital is affected by prevailing conditions in the financial and equity capital markets, as well as our financial condition (including leverage levels), financial performance and prospects. See "Capitalization." DESPITE CURRENT INDEBTEDNESS LEVELS, WE MAY INCUR SUBSTANTIALLY MORE INDEBTEDNESS, WHICH COULD EXACERBATE THE RISKS DESCRIBED ABOVE. We and our subsidiaries may incur substantial additional indebtedness in the future. As of March 31, 2001, we had a $2.1 billion senior credit facility with a syndicate of banks and a $94 million credit facility related to the BetzDearborn ESOP Trust. Under the senior credit facility, we have a $900 million revolving credit agreement, which permits certain additional borrowings. If new indebtedness is added to our and our subsidiaries' current indebtedness levels, the risks described above that we and they face could increase. See "Capitalization" and "Selected Historical Financial Data." 10 15 OUR SENIOR CREDIT FACILITY, OUR ESOP CREDIT FACILITY AND THE INDENTURE GOVERNING OUR NOTES CONTAIN COVENANTS WHICH LIMIT THE DISCRETION OF OUR MANAGEMENT IN THE OPERATION OF OUR BUSINESS. The senior credit facility, the ESOP credit facility and the indenture governing the notes, which together account for a large portion of our debt, contain numerous restrictive covenants, including, among other things, covenants that limit our ability to: - borrow money and incur contingent liabilities; - make dividend or other restricted payments; - use assets as security in other transactions; - enter into transactions with affiliates; - enter into new lines of business; - issue and sell stock of restricted subsidiaries; and - sell assets or merge with or into other companies. In addition, the senior credit facility and the ESOP credit facility limit our ability to make capital expenditures and require us to meet financial ratios and tests, including maximum leverage, minimum net worth and interest coverage levels. These restrictions could limit our ability to plan for or react to market conditions or meet extraordinary capital needs and could otherwise restrict corporate activities. Our ability to comply with the covenants and other terms of the senior credit facility, the ESOP credit facility and the indenture governing the notes and to satisfy these and our other debt obligations will depend on our future operating performance and our ability to sell assets. If we fail to comply with such covenants and terms, we will be in default and the maturity of related debt could be accelerated and any underlying security could be enforced. From time to time, we have been required to obtain waivers from our lenders in order to maintain compliance under our senior credit facility and our ESOP credit facility, including waivers with respect to our compliance with certain financial covenants. A default under the indenture governing the notes would also constitute an event of default under our senior credit facility and the ESOP credit facility and would give our lenders the ability to accelerate the repayment of borrowings under these credit facilities. If we were unable to repay borrowings under these credit facilities, the lenders could enforce the underlying security. We cannot assure you that, if the repayment of borrowings under these credit facilities or the notes were accelerated, we would be able to pay these amounts in full from internally generated funds, from the proceeds of debt or equity financings or from the proceeds of asset sales. See "Description of Notes." ALTHOUGH THE NOTES CONSTITUTE SENIOR INDEBTEDNESS, THEY AND THE GUARANTEES THEREOF WILL BE EFFECTIVELY SUBORDINATED TO OUR AND THE GUARANTORS' SECURED OBLIGATIONS AND THE OBLIGATIONS OF ANY OF OUR NONGUARANTOR SUBSIDIARIES. The notes and the guarantees are unsecured and therefore will be effectively subordinated to any secured obligations we or the guarantors may incur to the extent of the value of the assets securing such obligations. In the event of a bankruptcy or similar proceeding involving us or a guarantor, the assets which serve as collateral will be available to satisfy the related secured obligations before any payments are made on the notes or the guarantees. Borrowings under our senior credit facility and our ESOP credit facility are secured by liens on our property and assets, pledges of the stock of substantially all of our domestic subsidiaries and 65% of the stock of foreign subsidiaries directly owned by us and a pledge of intercompany indebtedness. As of March 31, 2001, these borrowings totaled approximately $1.9 billion. Our 6.60% notes due 2027 and our 6.625% notes due 2003 are similarly secured. In addition, we derive substantially all of our operating income from our operating subsidiaries. If any of our nonguarantor subsidiaries becomes insolvent, liquidates, reorganizes, dissolves or otherwise winds up, the assets of that subsidiary will be used first to satisfy the claims of its creditors, including its trade creditors. Consequently, your claims will be effectively subordinated to all of the liabilities of our non- 11 16 guarantor subsidiaries. At March 31, 2001, our total debt was $2.7 billion, of which $1.8 billion was outstanding under our senior credit facility. WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE INDENTURE GOVERNING THE NOTES OR TO REPAY INDEBTEDNESS AS A RESULT OF THE CHANGE OF CONTROL, WHICH MAY PREVENT US FROM ENTERING INTO CERTAIN BUSINESS COMBINATIONS. Upon the occurrence of certain change of control events, we must make an offer to purchase all of the outstanding notes at a premium equal to 111.125% of the principal amount of the notes plus accrued interest, if any, if the notes are purchased prior to November 15, 2001, and 101% of the principal amount of the notes plus accrued interest, if any, if the notes are purchased on or after November 15, 2001. We may not have sufficient funds to pay the purchase price for all of the notes tendered by holders seeking to accept the offer to purchase. In addition, we may be required to repay our senior credit facility and our ESOP credit facility upon a change of control and these credit facilities prohibit us from repaying the notes prior to their stated maturity, including, if required, upon a change of control. Our failure to purchase all validly tendered notes upon a change of control would result in an event of default under the indenture governing the notes, which in turn would be an event of default under the senior credit facility and the ESOP credit facility with the previously described consequences. See "Description of Notes -- Repurchase at the Option of Holders -- Change of Control." THE NOTES AND THE GUARANTEES ARE SUBJECT TO THE PROVISIONS OF FEDERAL BANKRUPTCY LAW AND COMPARABLE PROVISIONS OF STATE LAW WITH RESPECT TO FRAUDULENT CONVEYANCES. Under applicable provisions of federal bankruptcy law or comparable provisions of state fraudulent transfer law, if, among other things, we or any guarantor, at the time we incurred the indebtedness evidenced by the notes or a guarantee, (i) (a) was or is insolvent or rendered insolvent by reason of such occurrence, (b) was or is engaged in a business or transaction for which the assets remaining with us or such guarantor constituted unreasonably small capital or (c) intended or intends to incur, or believed or believes that we would incur, debts beyond our ability to pay such debts as they mature, and (ii) we or such guarantor received or receives less than reasonably equivalent value or fair consideration for the incurrence of such indebtedness, then the notes and the guarantees, and any pledge or other security interest securing such indebtedness, could be voided, or claims in respect of the notes or the guarantees could be subordinated to all other debts of us or such guarantor, as the case may be. In addition, the payment of interest and principal by us pursuant to the notes or the payment of amounts by a guarantor pursuant to a guarantee could be voided and required to be returned to the person making such payment, or to a fund for the benefit of the creditors of us or such guarantor, as the case may be. The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, we or a guarantor would be considered insolvent if (i) the sum of our debts, including contingent liabilities, were greater than the saleable value of all of our assets at a fair valuation or if the present fair saleable value of our assets were less than the amount that would be required to pay our probable liability on our existing debts, including contingent liabilities, as they become absolute and mature or (ii) we could not pay our debts as they become due. On the basis of historical financial information, recent operating history and other factors, we and each guarantor believe that, after giving effect to the indebtedness incurred in connection with the offering of the notes, we were not insolvent, did not have unreasonably small capital for the business in which we were engaged and did not incur debts beyond our ability to pay such debts as they mature. There can be no assurance, however, as to what standard a court would apply in making such determinations or that a court would agree with our or the guarantors' conclusions in this regard. 12 17 WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THESE NOTES. The old notes have not been registered under the Securities Act or any state securities law and, unless so registered, may not be offered or sold except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and any applicable state securities laws. Although the new notes will be registered and may be resold or otherwise transferred by the holders who are not affiliates (as defined under Rule 405 of the Securities Act) of Hercules, they will be new securities for which there is currently no established trading market. We do not intend to apply for listing of the new notes on a national securities exchange or for quotation of the new notes on an automated dealer quotation system. Although the initial purchasers in the offering of the old notes have informed Hercules that they currently intend to make a market in the new notes, they are not obligated to do so, and any such market-making, if initiated, may be discontinued at any time without notice. The liquidity of any market for the new notes will depend upon the number of holders of the new notes, the interest of securities dealers in making a market in the new notes and other factors. Accordingly, there can be no assurance as to the development or liquidity of any market for the new notes. If an active trading market for the new notes does not develop, the market price and liquidity of the new notes may be adversely affected. If the new notes are traded, they may trade at a discount from their face value, depending upon prevailing interest rates, the market for similar securities, our performance and certain other factors. The liquidity of, and trading markets for, the new notes may also be adversely affected by general declines in the market for non-investment grade debt. Such declines may adversely affect the liquidity of, and trading markets for, the new notes independent of our financial performance or prospects. Notwithstanding the registration of the new notes in the exchange offer, holders who are affiliates (as defined under Rule 405 of the Securities Act) of Hercules may publicly offer for sale or resell the new notes only in compliance with provisions of Rule 144 under the Securities Act. Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the new notes. There can be no assurance that the market, if any, for the new notes will not be subject to similar disruptions. Any such disruptions may have an adverse effect on the holders of the new notes. WE MAY BE REQUIRED TO PAY LIQUIDATED DAMAGES IF WE ARE UNABLE TO COMPLY WITH THE TERMS OF THE REGISTRATION RIGHTS AGREEMENT THAT WE ENTERED INTO WITH RESPECT TO THE NOTES. In connection with the issuance and sale of the old notes, we and the guarantors entered into a registration rights agreement. Under the registration rights agreement, we are required to meet certain deadlines with respect to the filing and effectiveness of the exchange offer registration statement which includes this prospectus and the consummation of the exchange offer or the filing and effectiveness of a shelf registration statement relating to the resale of the old notes by certain holders. We are also required to use our best efforts to maintain the effectiveness of any registration statements for a certain period of time. During any period of time in which we are unable to comply with the terms of the registration rights agreement, we may be required to pay liquidated damages of $20,000 to $200,000 per week. RISKS RELATED TO THE EXCHANGE OFFER FAILURE TO EXCHANGE OLD NOTES MAY HAVE NEGATIVE CONSEQUENCES. The old notes have not been registered under the Securities Act or any state securities laws and therefore may not be offered, sold or otherwise transferred except in compliance with the registration requirements of the Securities Act and any other applicable securities laws, or pursuant to an exemption therefrom or in a transaction not subject thereto, and in each case in compliance with certain other conditions and restrictions. Old notes which remain outstanding after consummation of the exchange offer will continue to bear a legend reflecting such restrictions on transfer. In addition, upon consummation of the exchange offer, holders of old notes which remain outstanding will not be entitled to any rights to have such old notes registered under the Securities Act or to any similar rights under the registration rights agreement (subject to certain limited 13 18 exceptions). Hercules does not intend to register under the Securities Act any old notes which remain outstanding after consummation of the exchange offer (subject to such limited exceptions, if applicable). To the extent that old notes are tendered and accepted in the exchange offer, a holder's ability to sell untendered old notes could be adversely affected. The new notes and any old notes which remain outstanding after consummation of the exchange offer will vote together as a single class for purposes of determining whether holders of the requisite percentage in outstanding principal amount thereof have taken certain actions or exercised certain rights under the indenture. FAILURE TO COMPLY WITH EXCHANGE OFFER PROCEDURES MAY PRECLUDE EXCHANGE OF OLD NOTES. Subject to the conditions set forth in this prospectus, delivery of new notes in exchange for old notes tendered and accepted for exchange pursuant to the exchange offer will be made only after timely receipt by the exchange agent of (i) certificates for old notes or a book-entry confirmation of a book-entry transfer of old notes into the exchange agent's account at The Depository Trust Company ("DTC"), (ii) a completed and signed letter of transmittal with any required signature guarantees or, in the case of a book-entry transfer, an agent's message in lieu of the letter of transmittal and (iii) any other documents required by the letter of transmittal. Therefore, holders of old notes desiring to tender such old notes in exchange for new notes should allow sufficient time to ensure timely delivery. We have no duty to give notification of defects or irregularities with respect to the tenders of old notes for exchange. See "The Exchange Offer -- Conditions to the Exchange Offer." SOME BROKER-DEALERS WHO PARTICIPATE IN THE EXCHANGE OFFER MUST DELIVER A PROSPECTUS IN CONNECTION WITH RESALES OF THE NEW NOTES. Based on certain no-action letters issued by the staff of the SEC, we believe that you may offer for resale, resell or otherwise transfer the new notes without further compliance with the registration and prospectus delivery requirements of the Securities Act. However, in some instances described in this prospectus, you may remain obligated to comply with the registration and prospectus delivery requirements of the Securities Act to transfer your new notes. See "Plan of Distribution." In these cases, if you transfer any new notes without delivering a prospectus meeting the requirements of the Securities Act or without an exemption from registration of your new notes under the Securities Act, you may incur liability under the Securities Act. We do not and will not assume, or indemnify you against, this liability. RISKS RELATED TO THE BUSINESS OUR BUSINESS MAY BE ADVERSELY AFFECTED BY EFFORTS TO MERGE OR SELL THE COMPANY OR ONE OR MORE OF OUR BUSINESSES AND WE MAY NOT SUCCEED IN OUR EFFORTS TO MERGE OR SELL THE COMPANY OR ONE OR MORE OF OUR BUSINESSES. We have determined to and have previously announced that we will consider the full range of strategic alternatives available to us, including the possible merger or sale of the company or one or more of our businesses. Efforts to merge or sell a company or business typically divert the attention of management from running the company and a merger or sale may divert management's attention and otherwise have an adverse effect on our business. While the merger or sale of the company or one or more of our businesses may ultimately benefit us and our stockholders, there can be no assurance that the merger or sale of the company or one or more of our businesses will occur or that it will be on terms favorable to us or to our stockholders. In addition, there can be no assurance that an attempted sale of the company or one or more of our businesses will not divert management's attention to the detriment of the company and our stockholders. OUR COMPREHENSIVE COST REDUCTION PROGRAM MAY BE UNSUCCESSFUL. We recently announced a comprehensive cost reduction program to improve our return on capital. Cost reduction programs can have an adverse effect on a company's operations. While a cost reduction program 14 19 may ultimately benefit us and our stockholders, there can be no assurance that such a program will be successful. IF WE ARE NOT SUCCESSFUL IN MERGING OR SELLING THE COMPANY OR ONE OR MORE OF OUR BUSINESSES, WE MAY HAVE TO HIRE ADDITIONAL EMPLOYEES. When we announced that we were considering the merger or sale of the company or one or more of our businesses, we lost a large number of employees. It is difficult to retain and replace employees in these circumstances, especially in light of our recently announced cost reduction program. If we are not successful in merging or selling the company or one or more of our businesses, we may have to hire additional employees. We cannot assure you that we will be able to hire the employees we need or that, if we are able to hire them, we can do so on terms favorable to us and in conformity with our cost reduction plan. WE HAVE POTENTIAL ENVIRONMENTAL LIABILITIES. In the ordinary course of our business, we are subject to numerous environmental laws and regulations covering compliance matters or imposing liability for the costs of, and damages resulting from, cleaning up sites, past spills, disposals and other releases of hazardous substances. Changes in these laws and regulations may have a material adverse effect on our financial position and results of operations. Any failure by us to adequately comply with such laws and regulations could subject us to significant future liabilities. We have been identified by United States federal and state authorities as a potentially responsible party for environmental cleanup at numerous sites. As of March 31, 2001, the estimated range of reasonably possible costs for remediation was between $65 million and $239 million. These cost estimates are based upon the facts and circumstances as they are presently known to us and are updated quarterly based upon new information that we receive. Although not presently anticipated, actual remediation-related liabilities may exceed the current estimates. We do not anticipate that our overall financial condition or liquidity will be materially affected by environmental remediation costs in excess of amounts accrued, which, in accordance with generally accepted accounting principles, totaled $65 million at March 31, 2001, although quarterly or annual operating results could be materially affected. Environmental remediation expenses are funded from internal sources of cash. Such expenses are not expected to have a significant effect on our 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. WE ARE SUBJECT TO LITIGATION. We are a defendant in numerous lawsuits that arise out of, and are incidental to, the current and past conduct of our business. In addition to environmental matters, these suits concern issues such as product liability, contract disputes, labor-related matters, patent infringement, 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 our financial position, and the resolution of any matters during a specific period could have a material effect on the quarterly or annual operating results for that period. WE ARE SUBJECT TO COMPETITION FOR CUSTOMERS. The global specialty chemicals industry is highly competitive. Some of our competitors have greater financial, technical, marketing and other resources and less debt, which could provide them with a competitive advantage over us. Also, our competitors have in the past caused, and could in the future cause, a reduction in the prices for some of our products as a result of intensified price competition. Additionally, although we do not compete primarily on the basis of price, our customers are price sensitive. Accordingly, in periods where we are not able to pass on increased production costs, including costs associated with the increasing prices of our raw materials, our gross margins may deteriorate. 15 20 WE ARE SUBJECT TO TECHNOLOGICAL CHANGE AND INNOVATION. Many of our products could be affected by rapid technological change and new product introductions and enhancements. We believe we must continue to enhance our existing products, develop and manufacture new products with improved capabilities and make improvements in our productivity in order to maintain our competitive position. Our inability to anticipate, respond to or utilize changing technologies could have a material adverse effect on our business and results of operations. INTEREST AND FOREIGN CURRENCY EXCHANGE RATE FLUCTUATIONS IMPACT OUR FINANCIAL PERFORMANCE. Our products are sold around the world and, as a result, currency fluctuations impact our financial performance. Our revenues in foreign countries largely are generated in foreign currencies, while costs incurred to generate those revenues are only partly incurred in the same currencies. Because our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have an impact on our results of operations. We sometimes enter into hedging transactions to reduce this currency exchange risk, but such transactions cannot eliminate all of the risks associated with currency fluctuations. OUR INTERNATIONAL OPERATIONS ARE AFFECTED BY GLOBAL AND REGIONAL CONDITIONS. Our international operations are subject to risks, such as currency exchange controls, labor unrest, regional economic uncertainty, political instability, restrictions on the transfer of funds into or out of a country, export duties and quotas, domestic and foreign customs and tariffs and current and changing regulatory environments. These events could have an adverse effect on our international operations in the future by reducing the demand for our products, increasing our costs or otherwise having an adverse affect on our results of operations. In recent years, many economies, including some in Asia, have been highly volatile and, at times, recessionary, resulting in significant fluctuations in local currencies and other instabilities. These instabilities may continue or worsen, which could have an adverse impact on our results of operations. OUR PRODUCTION FACILITIES ARE SUBJECT TO OPERATING HAZARDS. We are dependent on the continued operation of our production facilities. Such production facilities are subject to hazards associated with the manufacture, handling, storage and transportation of chemical materials and products, including pipeline leaks and ruptures, explosions, fires, inclement weather and natural disasters, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, remediation complications, chemical spills, discharges or releases of toxic or hazardous substances or gases, storage tank leaks and other environmental risks. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage and could have a material adverse effect on us. WE MAY NOT HAVE READY ACCESS AT ALL TIMES TO RAW MATERIALS. While we may occasionally experience temporary shortages in raw materials and fuels, 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 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. MANY OF OUR CUSTOMERS ARE IN CYCLICAL INDUSTRIES. Many of our customers are in industries and businesses that are cyclical in nature and sensitive to changes in general economic conditions. The demand for our products depends, in part, upon the general economic conditions of the markets of our customers. Downward economic cycles in our customers' industries may reduce sales of our products. 16 21 USE OF PROCEEDS We will not receive any of the proceeds from the exchange offer. We are making this exchange offer solely to satisfy our obligations under the registration rights agreement that we entered into in connection with the offering of the old notes. In consideration for issuing the new notes in exchange for the old notes as described in this prospectus, we will receive old notes in like principal amount. The old notes surrendered in exchange for the new notes will be retired and cancelled. The net proceeds from the offering of the old notes were used to repay certain preferred securities of subsidiary trusts and to reduce term loan tranche A. 17 22 CAPITALIZATION The following table sets forth the historical capitalization of Hercules as of March 31, 2001, the date of our most recent balance sheet.
AS OF MARCH 31, 2001 --------- (DOLLARS IN MILLIONS) SHORT-TERM DEBT: Bank debt................................................... $ 86 Current maturities of long-term debt........................ 213 ------- Total short-term debt....................................... 299 ------- LONG-TERM DEBT: Revolving credit agreement due 2003(a)...................... 581 Term loan tranche A due in varying amounts through 2003..... 874 Term loan tranche D due 2005................................ 375 ESOP debt(b)................................................ 101 6.625% notes due 2003....................................... 125 6.60% notes due 2027........................................ 100 8% convertible subordinated debentures due 2010............. 3 11.125% notes due 2007...................................... 400 Term notes at various rates from 5.23% to 9.60% due in varying amounts through 2006(c)........................... 60 Other....................................................... 6 ------- Total long-term debt.............................. $ 2,625 Current maturities of long-term debt.............. (213) ------- Net long-term debt................................ $ 2,412 ------- COMPANY-OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUSTS(D): 9.42% Trust Originated Preferred Securities................. 362 6.5% CRESTS Units (preferred securities component).......... 260 ------- Total Company-obligated preferred securities of subsidiary trusts................................ 622 ------- STOCKHOLDERS' EQUITY: Common stock (shares issued: 159,984,444)................... 83 Additional paid-in capital.................................. 718 Unearned compensation....................................... (113) Other comprehensive losses.................................. (188) Retained earnings........................................... 2,147 Reacquired stock, at cost (shares: 52,002,252).............. (1,872) ------- Total stockholders' equity........................ 775 ------- Total Capitalization........................................ $ 4,108 =======
- --------------- (a) Represents the $900 million revolving credit agreement, of which approximately $581 million was outstanding at March 31, 2001. The facility also includes a multi-currency revolver of which $270 million was available as of March 31, 2001. However, actual availability under the revolving credit agreement is constrained by our ability to meet certain covenants in our senior credit facility. (b) We assumed a $94 million loan guarantee related to the BetzDearborn ESOP Trust. The loan was recorded at fair market value of $110 million at the date of the acquisition. (c) Represents term notes related to the July 1998 acquisition of the remaining 49% share of FiberVisions L.L.C. from a former joint venture partner. (d) The $362 million of Trust Originated Preferred Securities matures on March 31, 2029 and the $260 million of CRESTS Units (preferred securities component) matures on June 30, 2029. 18 23 SELECTED HISTORICAL FINANCIAL DATA The following table sets forth selected historical information for Hercules. The year-end financial information has been derived from our audited financial statements. The interim financial information has been derived from our unaudited financial statements. We believe that the financial statements reflect all normal adjustments necessary for a fair presentation of the financial information. The results for the three months ended March 31, 2001 do not necessarily indicate the results to be expected for the full year. You should read the financial information below in conjunction with our financial statements and the related notes, and the other financial and operating data included elsewhere herein.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------- ---------------------------------------------- 2001 2000 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ ------ ------ (UNAUDITED) (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Net sales(a)......................... $ 702 $ 798 $3,152 $3,309 $2,145 $1,866 $2,060 Operating costs and expenses: Cost of sales(a)................... 409 450 1,784 1,831 1,287 1,169 1,320 Selling, general and administrative expenses(b)...................... 190 197 810 787 377 248 260 Research and development........... 19 21 80 85 61 53 56 Purchased in-process research and development...................... -- -- -- -- 130 -- -- Goodwill and intangible asset amortization(b).................. 19 20 80 79 22 3 2 Other operating expenses (income), net(c)........................... 3 4 (46) 47 76 165 (19) ------ ------ ------ ------ ------ ------ ------ Profit from operations............... 62 106 444 480 192 228 441 Equity in income of affiliated companies.......................... (3) -- (2) 1 10 30 53 Interest and debt expense............ 55 32 164 185 101 39 35 Preferred security distributions of subsidiary trusts.................. 15 23 96 51 2 -- -- Other income (expense), net.......... (3) 5 (18) (2) (22) 374 26 ------ ------ ------ ------ ------ ------ ------ Income (loss) before income taxes.... (14) 56 164 243 77 593 485 Provision for income taxes........... (4) 20 66 75 68 269 160 ------ ------ ------ ------ ------ ------ ------ Income (loss) before effect of changes in accounting principles... (10) 36 98 168 9 324 325 Effect of changes in accounting principles......................... -- -- -- -- -- (5) -- ------ ------ ------ ------ ------ ------ ------ Net income (loss).................... $ (10) $ 36 $ 98 $ 168 $ 9 $ 319 $ 325 ====== ====== ====== ====== ====== ====== ====== RATIO OF EARNINGS TO FIXED CHARGES(d)......................... (e) 1.9x 1.6x 1.9x 1.5x 10.8x 9.7x BALANCE SHEET DATA: Cash and cash equivalents............ $ 161 $ 85 $ 54 $ 63 $ 68 $ 17 $ 30 Working capital (deficit)............ 188 (62) 100 (221) (77) (110) 45 Property, plant and equipment, net... 1,080 1,304 1,104 1,321 1,438 687 865 Total assets......................... 5,323 5,851 5,309 5,896 5,833 2,411 2,386 Total debt........................... 2,711 2,541 2,603 2,455 3,662 694 658 Company-obligated preferred securities of subsidiary trusts.... 622 992 622 992 200 0 0 Stockholders' equity................. 775 875 816 863 559 690 887
19 24
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------- ---------------------------------------------- 2001 2000 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ ------ ------ (UNAUDITED) (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) CASH FLOW DATA: Net cash provided by (used in) operations......................... $ 9 $ (12) $ 70 $ 280 $ 181 $ 187 $ 225 Proceeds of investment and fixed asset disposals.................... -- 6 418 50 600 295 196 Capital expenditures................. 23 52 187 196 157 119 120 Depreciation......................... 27 33 132 144 86 73 106 Amortization......................... 27 27 114 106 22 3 4 PER SHARE DATA: Net Income (loss) -- basic........... $(0.09) $ 0.34 $ 0.91 $ 1.63 $ 0.10 $ 3.22(g) $ 3.10 Net Income (loss) -- diluted......... (0.09) 0.34 0.91 1.62 0.10 3.13(g) 2.98 Cash dividend per common share....... 0 0.27(f) 0.62(f) 1.08 1.08 1.00 0.92
- --------------- (a) Net sales and cost of sales for the year 1999 have been restated to reflect a change in policy regarding the classification of shipping and handling. Costs for shipping and handling that were previously reported as a direct reduction of sales revenues are now being reported as a component of cost of sales. Accordingly, net sales and cost of sales for the year 1999 were increased by $60 million. There is no impact on operating profits as a result of this change. Annual periods prior to 1999 have not been restated for this change as the overall impact is deemed to be immaterial. (b) Annual selling, general and administrative expenses for 1996, 1997 and 1998 have been reclassified to conform with the 1999 and 2000 presentation for goodwill and intangible asset amortization. (c) For purposes of comparison, the following is a brief summary of significant operating expense (income) items recorded in the accompanying "Historical Statements of Income." Year 2000 -- A gain of $(168) million was recorded from the sale of our Food Gums division. This gain was partially offset by $66 million in asset impairments and write offs. Also included in the year were $18 million in restructuring charges and $25 million associated with the sale of the nitrocellulose business. Year 1999 -- Includes $36 million related to a legal settlement, asset write-offs and disposal costs and $36 million in costs associated with the BetzDearborn acquisition. These charges were partially offset by a $(16) million gain recognized on the sale of our Agar business. Year 1998 -- Includes $65 million in restructuring charges and $11 million in integration charges associated with the acquisition of BetzDearborn were recorded. Year 1997 -- Includes a $146 million charge associated with management organizational changes. Year 1996 -- Included probable recoveries of $(13) million related to environmental remediation, which were subsequently recovered. (d) For the purposes of determining earnings in the calculation of the "Ratio of Earnings to Fixed Charges," consolidated pre-tax income from continuing operations has been adjusted for minority interests in consolidated subsidiaries and income or loss from equity investees, increased by the amount of previously capitalized interest amortization during the period and increased by the amount of fixed charges, excluding capitalized interest expense. Fixed charges consist of interest and debt expense on borrowings (including capitalized interest), preferred security distributions of subsidiary trusts and one-third (the proportion deemed representative of the interest portion) of rent expense. (e) Due to the loss for the three months ended March 31, 2001, the ratio of earnings to fixed charges was less than 1:1. We needed to generate an additional $12 million in earnings to achieve a ratio of earnings to fixed charges of 1:1. (f) In August 2000, the Board of Directors reduced the quarterly dividend to $.08 per share, which was paid in September 2000. In November 2000, the Board Directors suspended the payment of quarterly dividends. In addition, payment of dividends is significantly restricted by the senior credit facility, the ESOP credit facility and the indenture governing the notes. (g) After the effect of change in accounting principle. 20 25 UNAUDITED PRO FORMA FINANCIAL DATA The following Unaudited Pro Forma Consolidated Statements of Income of Hercules for the year ended December 31, 2000 and the three month period ended March 31, 2000 reflect the sale of our Food Gums division and the offering of the old notes, borrowings under term loan tranche D, the third amendment to our senior credit facility and the application of the proceeds therefrom (together, the "Refinancing") as if they had occurred at the beginning of the periods presented. The Unaudited Pro Forma Financial Information reflects assumptions and adjustments deemed appropriate by management, which are described in the accompanying notes. The Unaudited Pro Forma Financial Information presented is for informational purposes only and does not purport to be indicative of our results of operations or financial position had the sale of our Food Gums division and the Refinancing actually occurred on the date assumed nor is it necessarily indicative of our future results of operations or financial position. The Unaudited Pro Forma Financial Information should be read in conjunction with our audited consolidated financial statements and the related notes included in this prospectus. HERCULES INCORPORATED PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) YEAR ENDED DECEMBER 31, 2000
FOOD GUMS PRO FORMA REFINANCING HERCULES FOOD GUMS(A) ADJUSTMENTS ADJUSTMENTS(H) PRO FORMA -------- ------------ ----------- -------------- --------- (IN MILLIONS EXCEPT FOR PER SHARE AMOUNTS) Net sales..................... $3,152 $157 $2,995 Cost of sales................. 1,784 88 1,696 Selling, general and administrative expenses..... 810 31 $ 14(b) 793 Research and development...... 80 5 75 Goodwill and intangible asset amortization................ 80 -- 2(c) 82 Other operating expenses (income), net............... (46) 2 (2)(c) (50) ------ ---- ---- ---- ------ Profit from operations........ $ 444 $ 31 $(14) $ -- $ 399 ------ ---- ---- ---- ------ Equity (loss) of affiliated companies................... (2) -- (8)(d) (10) Interest and debt expense..... 164 4 (17)(e) 68 211 Preferred security distributions of subsidiary trusts...................... 96 -- (28) 68 Other income (expense), net... (18) (1) (17) ------ ---- ---- ---- ------ Income before income taxes.... $ 164 $ 26 $ (5) $(40) $ 93 Provision for income taxes.... 66 8 1(f) (15)(f) 44 ------ ---- ---- ---- ------ Net income.................... $ 98 $ 18 $ (6) $(25) $ 49 ====== ==== ==== ==== ====== Earnings Per Share Per share -- basic.......... $ .91 $ 0.46 Weighted average shares outstanding -- basic..... 107.2 107.2 Per share -- assuming dilution................. $ .91 $ 0.46 Weighted average shares outstanding -- assuming dilution................. 107.4 107.4
The accompanying notes are an integral part of the Unaudited Pro Forma Financial Information. 21 26 HERCULES INCORPORATED PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2000
FOOD GUMS PRO FORMA REFINANCING HERCULES FOOD GUMS(a) ADJUSTMENTS ADJUSTMENTS(h) PRO FORMA -------- ------------ ----------- -------------- --------- (IN MILLIONS EXCEPT FOR PER SHARE AMOUNTS) Net sales..................... $ 785 $54 $ 731 Cost of sales................. 437 30 407 Selling, general and administrative expenses..... 197 11 $ 5(b) 191 Research and development...... 21 2 19 Goodwill and intangible asset amortization................ 20 -- -- 20 Other operating expenses (income), net............... 4 1 -- 3 ------ --- --- ---- ------ Profit from operations........ $ 106 $10 $(5) $ -- $ 91 ------ --- --- ---- ------ Equity in (loss) of affiliated companies................... -- -- (2)(d) (2) Interest and debt expense..... 32 1 (4)(g) 19 46 Preferred security distributions of subsidiary trusts...................... 23 -- (8) 15 Other income (expense), net... 5 1 4 ------ --- --- ---- ------ Income before income taxes.... $ 56 $10 $(3) $(11) $ 32 Provision for taxes on income...................... 20 3 --(f) (4)(f) 13 ------ --- --- ---- ------ Net income.................... $ 36 $ 7 $(3) $ (7) $ 19 ====== === === ==== ====== Earnings Per Share Per share -- basic.......... $ 0.34 $ 0.18 Weighted average shares outstanding -- basic..... 106.7 106.7 Per share -- assuming dilution................. $ 0.34 $ 0.18 Weighted average shares outstanding -- assuming dilution................. 106.9 106.9
The accompanying notes are an integral part of the Unaudited Pro Forma Financial Information. 22 27 NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION (a) Eliminates the results of operations of the Food Gums division as if the divestiture had been completed as of the beginning of the period presented. (b) Reflects the adjustment for corporate allocations that had been included in the Food Gums division. (c) Reclassifies this item to the appropriate category to be consistent with the consolidated financial statement presentation. (d) Gives effect to equity in the pro forma loss of $28 million for December 31, 2000 and $7 million for March 31, 2000 of CP Kelco ApS at 28.57%. (e) Reflects a reduction in interest expense of approximately $21 million from the application of $318 million in proceeds from the divestiture of the Food Gums division to reduce long-term debt, which had variable interest rates ranging from 6.85% to 9.5%. This reduction was offset by an adjustment of approximately $4 million for corporate allocated interest expense included in the Food Gums division. (f) Reflects income tax effect of pro forma adjustments (excluding equity in (loss) of affiliated companies which is not tax deductible) at a statutory rate of 37%, including state income taxes. (g) Reflects a reduction in interest expense of approximately $5 million from the application of the proceeds from the divestiture of the Food Gums division to the reduction in long-term debt, offset by an adjustment of approximately $1 million for corporate allocated interest expense included in the Food Gums division. (h) Adjusted for the issuance of the 11.125% notes of $400 million and borrowings under the term loan tranche D of $375 million and the application of the net proceeds. Pro forma interest expense reflects an interest rate of 11.125% on the notes and an interest rate of LIBOR + 2.75% on term loan tranche D. Effective November 14, 2000, we entered into an amendment to our senior credit facility which included an increase in the interest rate related to the revolving credit agreement and term loan tranche A to LIBOR + 2.25%. This 1.5% increase in the rate has also been reflected in pro forma interest expense. The costs of issuing the notes of $20 million and the costs of borrowings under term loan tranche D of $9 million are amortized and reflected in the respective periods. An increase of 1/8 of 1% relating to financing that is not fixed would increase interest expense by approximately $.5 million and $.1 million for the year ended December 31, 2000 and the three month period ended March 31, 2000, respectively. (i) The Company recorded a loss of approximately $3 million to write off deferred financing costs not amortized related to the debt and company-obligated preferred securities of subsidiary trusts which were paid down using the proceeds of the notes and the borrowing under term loan tranche D. The write off of unamortized financing costs of approximately $6 million related to these facilities has not been reflected in the unaudited pro forma statement of income for the period ended March 31, 2000. 23 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our financial statements and unaudited pro forma financial information, including the related notes, which are contained elsewhere in this prospectus. ACQUISITIONS, DIVESTITURES AND UNUSUAL ITEMS During 2000, we completed the divestiture of our Food Gums and nitrocellulose businesses. Additionally, in June 2000, one of our joint venture partners exercised a right of first refusal to purchase the ink toner portion of our Resins division and, in September 2000, we signed a letter of intent relating to the sale of our hydrocarbon resins division and select portions of our rosin resins business to a subsidiary of Eastman Chemical Company. We closed the Resins transactions in the second quarter of 2001. In May 2000, we acquired the paper chemicals business of Quaker Chemical Corporation. In September 2000, we announced that we had formed a strategic marketing alliance with National Starch and Chemical Company for the sale of over 300 million pounds of National Starch's papermaking chemicals starch product line. These transactions were consistent with our announced strategy to monetize certain businesses and grow other businesses. In the fourth quarter of 2000, we announced our intention to pursue a merger or sale of the company or one or more of its businesses in the belief that, over the long term, becoming part of a larger enterprise is the best strategic path for the company. To that end, we retained Goldman, Sachs & Co. and Credit Suisse First Boston to assist the Board of Directors in its identification and evaluation of various alternatives. If a sale of the company occurs, it would most likely be in a two-step process, with the sale of our BetzDearborn division constituting the first step. We are continuing to talk with potential buyers of our BetzDearborn division, as well as potential buyers of the company or our other businesses. There can be no assurance that any of these parties will be prepared to pay a price that is acceptable to us or that any transaction will occur. We incurred a loss of $25 million, including $4 million for termination benefits, in connection with the June 2000 sale of the nitrocellulose business. We completed the sale of our Food Gums division to CP Kelco, a joint venture with Lehman Brothers Merchant Banking II, L.P., in the third quarter 2000, realizing a net gain on the sale of approximately $168 million. We received approximately $395 million in cash proceeds, recorded certain selling and tax expenses of approximately $77 million and retained a 28.6% equity position in CP Kelco. CP Kelco simultaneously acquired the Kelco biogums business of Pharmacia Corporation (formerly Monsanto Company). During the fourth quarter of 2000, Lehman Brothers made an additional capital contribution to CP Kelco, thereby reducing our equity position. During 2000, we recognized $66 million in asset impairment charges and write-offs, primarily in the FiberVisions business. Restructuring charges of $18 million, including $4 million related to the nitrocellulose divestiture, were incurred for 2000 restructuring plans, primarily relating to severance and termination benefits for approximately 410 employee terminations in our Process Chemicals & Services segment and corporate realignment due to the divestitures of certain of our businesses (Food Gums and nitrocellulose). Offsetting these restructuring charges was $4 million of reversals relating to prior year plans. Environmental charges of $8 million were incurred, offset by $11 million in recoveries of insurance and environmental claims. Profit from operations also includes $16 million in severance benefits and compensation expense not associated with restructuring plans. Additionally, we incurred $5 million of integration charges, primarily for consulting and other costs associated with the acquisition of BetzDearborn Inc., and $1 million for other items. The asset impairments were triggered by significantly higher raw material costs and the loss of a facility's major customer. Selling, general and administrative expenses increased in 2000 as a result of a $21 million increase to our reserve for doubtful accounts. 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 acquisition, partly offset by a $4 million restructuring charge reversal. 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- 24 29 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. The 1999 profit from operations also includes a net $5 million charge related to legal and environmental matters. 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. In 1998, we 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. 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, we 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 our joint venture partner, making it a wholly owned subsidiary. FiberVisions 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 2000, 1999 and 1998, these businesses added approximately $1,492 million, $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 all years as a result of increased debt required to fund the acquisitions. As a result of the 1998 acquisitions, we 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). 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. The remainder of the charges is primarily related to our 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. Additionally, we incurred approximately $11 million of integration expenses related to the acquisition and other expenses of $9 million. 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. The acquisition of BetzDearborn also resulted in the inclusion of a $98 million liability as part of the purchase price allocation. 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. 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 $95 million through 2000. 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." 25 30 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. RESULTS OF OPERATIONS
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ------------ -------------------------- 2001 2000 2000 1999 1998 ---- ---- ------ ------ ------ (UNAUDITED) (DOLLARS IN MILLIONS) NET SALES BY INDUSTRY SEGMENT: Process Chemicals and Services................... $407 $416 $1,717 $1,725 $ 717 Functional Products(a)........................... 131 206 742 875 863 Chemical Specialties............................. 164 177 695 711 566 Reconciling Items................................ -- (1) (2) (2) (1) ---- ---- ------ ------ ------ Consolidated..................................... $702 $798 $3,152 $3,309 $2,145 ==== ==== ====== ====== ====== PROFIT FROM OPERATIONS: Process Chemicals and Services................... $ 63 $ 77 $ 297 $ 338 $ 131 Functional Products(a)........................... 24 52 176 218 215 Chemical Specialties............................. 17 16 59 89 75 Reconciling Items................................ (42)(b) (39)(c) (88) (165)(d) (229)(e) ---- ---- ------ ------ ------ Consolidated..................................... $ 62 $106 $ 444 $ 480 $ 192 ==== ==== ====== ====== ======
- --------------- (a) Net sales and profit from operations in 2001 reflect the divestitures of the Food Gums and nitrocellulose businesses in 2000. (b) Includes $21 million of goodwill and intangible asset amortization and other asset amortization, approximately $3 million of environmental charges and approximately $18 million of other corporate charges. (c) Includes $25 million of goodwill and intangible asset amortization and other asset amortization, approximately $9 million of environmental and other corporate charges, approximately $2 million in integration costs and approximately $3 million of corporate research and development costs. (d) 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. Also included are amortization of goodwill and intangibles, corporate research and development and other corporate items not specifically allocated to business segments. (e) 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. Also included are amortization of goodwill and intangibles, corporate research and development and other corporate items not specifically allocated to business segments. The discussion that follows speaks to comparisons in the table through profit from operations. QUARTER AND THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO QUARTER AND THREE MONTHS ENDED MARCH 31, 2000 Within the following discussion, unless otherwise stated, "quarter" and "three-month period" refer to the first quarter of 2001 and the three months ended March 31, 2001. All comparisons are with the corresponding periods in the previous year, unless otherwise noted. Consolidated net sales decreased $96 million, or 12%, and volumes declined 8%, principally reflecting the effects of the divested Food Gums and nitrocellulose businesses. In addition, net sales and volumes were down as a result of the economic slowdown in the United States and foreign economies. On a comparable basis 26 31 (excluding the divested Food Gums and nitrocellulose businesses), net sales for the quarter were down $26 million, or 4%. The strength of the U.S. dollar versus other currencies continued to negatively impact results. Excluding the effects of divested businesses and foreign currency transactions, net sales were down $6 million, or 1%, for the quarter. Consolidated profit from operations declined $44 million, or 42%, on an absolute basis and $33 million, or 35%, on a comparable basis. Higher freight, raw material and energy costs coupled with soft demand and competitive pricing pressure in key markets contributed to the lower profit from operations. The slowing worldwide economy particularly impacted the Pulp and Paper and Aqualon Divisions. Process Chemicals and Services segment net sales were down 2% and profit from operations declined 18%. The Pulp and Paper Division was impacted by weak demand and competitive pressure in the North American and European markets. Volume for the Pulp and Paper Division declined 4%. BetzDearborn net sales and profit from operations were essentially flat. Higher costs for freight, utility and selling, general and administrative expenses were offset by price increases instituted in 2000, a 4% increase in volumes and favorable changes in product mix. Functional Products segment net sales declined $75 million, or 36%, on an absolute basis and $5 million, or 4%, on a comparable basis. The decline in segment net sales primarily reflects the effects of the divested Food Gums and nitrocellulose businesses. Slower sales in emerging international regions and to the United States paint market were only partially offset by strong sales to the oilfield sector and to a rebounding construction market in Europe. Profit from operations declined 54% on an absolute basis and 38% on a comparable basis. Higher raw material and energy costs unfavorably impacted results. In addition, segment results reflect additional costs during the quarter relating to the commissioning of a new methylcellulose facility. On a comparable business basis, Aqualon Division volume rose 1% in the quarter versus the first quarter 2000. Chemical Specialties segment net sales declined $13 million, or 7%, although profit from operations increased $1 million, or 6%. Higher pricing and lower selling, general and administrative costs in both the Resins and FiberVisions Divisions led to this improvement and more than offset higher raw material and energy costs and unfavorable product mix variables. Segment volumes were 9% lower in the quarter, principally relating to the FiberVisions Division's exit of a number of lower margin textiles sectors in 2000. Equity in loss of affiliated companies represents the company's equity interest in CP Kelco, net of the associated income tax benefit. Interest and debt expense and preferred security distributions of subsidiary trusts increased $15 million as a result of higher borrowing costs. Other income (expense), net decreased $8 million, primarily due to current year unfavorable foreign currency losses of approximately $1 million, as compared to foreign currency gains of $3 million in 2000, combined with non-operating related legal costs of $2 million and $1 million, respectively. The effective tax rate for the quarter was 40% before inclusion of the equity loss. The anticipated rate for 2001 is approximately 140% and reflects the effects of non-deductible goodwill amortization with anticipated lower pre-tax income base. The effective tax rate of 35.7% for the first quarter 2000 reflects the effect of non-deductible goodwill amortization offset by favorable audit settlements and the utilization of research and development credits and a capital loss. YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Within the following discussion, all comparisons are with the previous year, unless otherwise stated. Consolidated revenues were $3,152 million for 2000, a decrease of $157 million or 5% from 1999. Approximately $135 million of this decrease is attributable to the strength of the U.S. dollar in 2000, principally versus the Euro, which weakened dramatically throughout the year. Excluding the impact of the stronger dollar, consolidated revenues decreased approximately $22 million or 1%. Additionally, consolidated revenues decreased approximately $111 million when compared to 1999 as a result of revenues attributable to the divested Food Gums, nitrocellulose and agar businesses. Revenues relating to our ongoing businesses 27 32 (excluding Food Gums, nitrocellulose and agar) increased by approximately $89 million in 2000 after adjusting for currency effects. Consolidated profit from operations decreased $36 million or 8%. Excluding divested businesses, consolidated profit from operations decreased $140 million. The Euro adversely impacted operating profit by approximately $36 million. Raw material and energy costs escalated significantly in 2000 and were difficult to recover in a timely manner. As 2000 ended, demand slowed in several of our key markets. Excluding the foreign currency effects, consolidated profit from operations decreased approximately $104 million or 21%. Process Chemicals and Services segment revenues were down $8 million or less than 1%. Excluding the impact of the stronger dollar, revenues were up $51 million or 3%, reflecting a 2% increase in volumes over 1999. Profit from operations decreased $41 million or 12%. Excluding the impact of the stronger dollar, profit from operations was down $26 million or 8%. During 2000, we increased our reserve for doubtful accounts by $21 million. Functional Products segment revenues were down $133 million or 15% and profit from operations decreased $42 million or 19%. Excluding the divested Food Gums and nitrocellulose businesses, segment revenues were down $22 million or 4%, and profit from operations decreased $33 million or 18%. The strengthening U.S. dollar vis-a-vis the Euro was the primary variant in year on year operating results. Excluding the impact of the stronger dollar, revenues were up $16 million or 3% and profit from operations was down $16 million or 9%. Higher raw material and energy costs, combined with unfavorable product mix changes negatively impacted operating profit towards the end of the year. While demand in the paint and construction markets normally slows at year-end, we saw a more significant slowdown in demand than is typical in these markets. Business in the oilfield industry remained strong in the fourth quarter. Volumes for this segment were up almost 7% year over year. Chemical Specialties segment revenues were down $16 million or 2% and profit from operations decreased $30 million or 34%. Excluding the impact of the stronger dollar, revenues were up $22 million or 3%, and profit from operations was down $27 million or 30%. Operating performance was negatively impacted by significantly higher polypropylene feed stock costs and lower volumes. Volumes for this segment were down just under 1%. The slowdown in the adhesives end market was a primary driver in lower volumes. YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 Within the following discussion, all comparisons are with the previous year, unless otherwise stated. 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 $141 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% in 1999, 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 in 1999 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 28 33 million or 1% in 1999. However, excluding the costs primarily associated with a production facility fire at the Parlin, New Jersey, plant operating profit increased $10 million or 5% in 1999, 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% in 1999, 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. INTEREST AND DEBT EXPENSE AND PREFERRED SECURITY DISTRIBUTIONS; EQUITY INCOME; PROVISION FOR INCOME TAXES Interest and debt expense and preferred security distributions of subsidiary trusts increased $24 million or 10% in 2000 versus 1999. Amortization of debt issuance costs had a significant effect on current year interest expense. Additionally, our debt was downgraded by the major rating agencies during the year, with a corresponding increase in our borrowing costs. Equity in income of affiliated companies declined over the three-year period ended December 31, 2000, principally as a result of the monetization of our investment in Alliant Techsystems; 2000 was negatively impacted by an equity loss in CP Kelco in the fourth quarter. The provision for income taxes reflects effective tax rates of 40% in 2000, 31% in 1999 and 88% in 1998. The primary cause of the increase in the effective tax rate for the year 2000 was the effect of non-deductible goodwill amortization on a lower pre-tax income base, offset by the benefit of the utilization of research and development credits, favorable audit settlements and utilization of a capital loss. The 1999 rate was favorably impacted by the utilization of a capital loss and other adjustments related to prior years' assessments. The 1998 rate is significantly higher than the federal statutory income tax rate of 35% because the charges for purchased in-process research and development and goodwill amortization related to BetzDearborn were 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. FINANCIAL CONDITION Liquidity and Financial Resources Net cash provided by operations was $9 million for the quarter compared to cash used in operations of $12 million in the first quarter 2000. The increase primarily reflects lower working capital requirements and non-cash charges offset by lower net income and less depreciation and amortization. Current and quick ratios have increased to 1.2 and .87, respectively, at March 31, 2001, compared with 1.1 and .78, respectively, at December 31, 2000. As of March 31, 2001, we had $270 million available under our revolving credit agreement and $125 million of short-term lines of credit. We expect to meet short-term cash requirements from operating cash flow and availability under lines of credit. Net cash flow from operations was $70 million in 2000, $280 million in 1999 and $181 million in 1998. The 2000 decrease reflects lower net income, the payment of legal settlements, net of insurance recoveries, and higher working capital requirements. The 1999 increase reflects higher profit from operations, primarily from acquired businesses, 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 increased payments for legal settlements, offset by lower income tax payments and cash flow from acquired businesses. Net cash provided by (used in) investing activities was $213 million in 2000, ($193) million in 1999 and ($2,691) million in 1998. In September 2000, we sold our Food Gums Division for which we received 29 34 approximately $395 million in cash proceeds. After recording certain selling and tax expenses of $77 million, the net proceeds of approximately $318 million were applied to repay term loan tranche C. Capital expenditures during 2000, 1999 and 1998 were $179 million, $196 million and $157 million, respectively. The decrease of $17 million in capital expenditures for 2000 was primarily due to stringent capital spending controls instituted during the year. The increase of $39 million in capital expenditures for 1999 was 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. As noted above, during 1998, we completed five acquisitions for approximately $3,620 million, primarily in cash and assumed debt. We financed the acquisitions and refinanced existing debt with borrowings under a $3,650 million senior credit facility with a syndicate of banks. The senior credit facility 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. In September 1998, we filed a shelf registration statement to increase accessible securities from $300 million to $3,000 million. The registration statement 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"). We repaid the RHINOS on November 14, 2000 with a portion of the proceeds of the 11 1/8% senior notes offering. In March 1999, Hercules Trust I, a wholly owned subsidiary trust of Hercules, completed a public offering of $362 million of Trust Originated Preferred Securities ("TOPrS"). We used the proceeds of the offering to repay long-term debt. Hercules Trust I's obligations are guaranteed by us. During the second quarter of 1999, we amended our senior credit facility 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 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. On the same date, Hercules and Hercules Trust II, a wholly owned subsidiary trust of Hercules, completed a public offering of 350,000 CRESTS Units, which provided us with net proceeds 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 Hercules 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). Hercules Trust II's obligations are guaranteed by us. The warrants may be exercised, subject to certain conditions, at any time before March 31, 2029, unless there is a reset and remarketing event. On December 23, 1999, Hercules Trust VI, a wholly owned subsidiary trust of Hercules, completed a private placement of 170,000 Floating Rate Preferred Securities ("Floating Rate Preferred Securities"). We repaid the Floating Rate Preferred Securities on December 29, 2000 with a portion of the proceeds of the 11 1/8% senior notes offering. On November 14, 2000, we completed a refinancing and modification of our existing debt as part of an overall program to obtain a financial structure that will appropriately support the organization. In conjunction with and conditioned upon the effectiveness of amendments to our credit facilities, we borrowed $375 million under the senior credit facility (term loan tranche D) and also issued $400 million of 11 1/8% senior notes due 2007. Our senior credit facility and ESOP credit facility were amended to: (i) modify our financial covenants; (ii) change the mandatory prepayment provisions; and (iii) provide for security, among other things. Term loan tranche D initially bore interest at LIBOR + 2.75%, matures on November 15, 2005 and will require only nominal principal payments prior to maturity. The notes accrue interest at 11 1/8% per annum, payable semi-annually commencing May 15, 2001. The notes are guaranteed by certain of our current and future wholly owned domestic restricted subsidiaries. At any time prior to November 15, 2003, we may on any one or more occasions, redeem up to 35% of the aggregate principal amount of the notes issued at a 30 35 redemption price of 111.125% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any, to the redemption date, with the net cash proceeds of one or more public equity offerings, provided that (i) at least 65% of the aggregate principal amount of the notes issued under the indenture remains outstanding, immediately after the occurrence of such redemption (excluding notes held by us and our subsidiaries); and (ii) the redemption occurs within 45 days of the date of the closing of such public equity offering. At any time prior to November 15, 2001, we may also redeem all of the notes upon the occurrence of a change of control at a redemption price equal to 111.125% of the principal amount of the notes redeemed, plus accrued and unpaid interest and liquidated damages, if any, to the date of redemption. Except as described above, the notes will not be redeemable at our option prior to maturity. We are not required to make any mandatory redemption or sinking fund payment with respect to the notes. The notes are subject to a registration rights agreement that requires us to file the exchange offer registration statement which includes this prospectus with the SEC within 270 days (on or before August 11, 2001) and to use our best efforts to have the registration statement declared effective prior to 330 days from November 14, 2000 (on or before October 10, 2001). The proceeds of term loan tranche D and the notes were used to reduce borrowings under our revolving credit agreement, repay the RHINOS and the Floating Rate Preferred Securities and reduce the current portion of term loan tranche A. Both our senior credit facility and our ESOP credit facility require quarterly compliance with certain financial covenants, including a leverage ratio ("debt/EBITDA ratio"), an interest coverage ratio and minimum net worth. In addition, we are required to deliver our annual audited consolidated financial statements to the lenders within 90 days of our fiscal year end. Due to the delay in closing the Eastman transaction, which in turn delayed the pay down of the debt, our debt as of March 31, 2001 was significantly higher than expected. As a result, we would have been out of compliance with the debt/EBITDA ratio covenant of our credit facilities as of March 31, 2001. In addition, due to the fact that we had extended the filing date for our 10-K, our annual audited financial statements were not provided to the lenders by March 31, 2001. On April 5, 2001, in consideration for the payment of a fee, our lenders granted waivers with respect to: (1) compliance with the debt/EBITDA ratio as of March 31, 2001 and (2) an extension of time to deliver the December 31, 2000 audited financial statements to April 17, 2001. These statements were completed and delivered by April 17, 2001. With respect to the covenant regarding the debt/EBITDA ratio, the waivers required that the Eastman transaction be consummated on or before May 31, 2001. In addition, we were required to demonstrate, as of the last day of the month in which the Eastman transaction closed, that the leverage ratio did not exceed 4.75 to 1.00 after giving affect to the application of the net cash proceeds from the Eastman transaction to prepay term loan tranche A and the ESOP credit facility. We closed the Eastman transaction on May 1, 2001 and achieved this leverage ratio. A breach of any of the terms and conditions of the waivers would have given lenders the right to accelerate repayment of substantially all of our indebtedness if they chose to do so. Upon any such acceleration, the debt would have become immediately due and payable and any loan commitments terminated. While, as indicated above, we satisfied all conditions of the waiver and remain in compliance with our debt covenants, current and future compliance is dependent upon generating sufficient EBITDA and cash flow which are, in turn, impacted by business performance, economic climate, competitive uncertainties and possibly the resolution of contingencies. Although no assurances can be given in this regard, we expect that we will be in compliance with all debt covenants during the remainder of the term of the debt. In the event we are not in compliance with the debt covenants in the future, we will pursue various alternatives, which may include, among other things, refinancing of debt, debt covenant amendments or debt covenant waivers. While we believe we would be successful in pursuing these alternatives, there can be no assurance that we would be. 31 36 Capital Structure and Commitments Total capitalization (stockholders' equity, company obligated preferred securities of subsidiary trusts, and debt) increased to $4.1 billion at March 31, 2001, from $4.0 billion at year-end 2000. The ratio of debt-to-total capitalization increased to 66% at March 31, 2001 from 64% at December 31, 2000. Total capitalization decreased to $4.0 billion at December 31, 2000, from $4.3 billion in the prior year. The ratio of debt-to-total capitalization increased to 64% at December 31, 2000 from 57% at December 31, 1999, as a result of the repayment of the RHINOS and the Floating Rate Preferred Securities in the fourth quarter. The current ratio increased to 1.1 at December 31, 2000, compared to .86 at December 31, 1999. The quick ratio increased to .78 at December 31, 2000, compared to .61 at December 31, 1999. On October 4, 2000, Moody's Investors Service, Inc., downgraded our senior unsecured credit rating to Ba1 with a stable outlook. On October 19, 2000, Standard & Poor's Ratings Services downgraded our corporate credit rating to BB+ and placed us on Credit Watch with "developing" implications. On November 9, 2000, Moody's Investors Service, Inc. assigned a Ba1 rating to term loan tranche D and a Ba2 rating to the 11 1/8% senior notes due 2007. Also on November 9, 2000, Standard & Poor's Ratings Services assigned a BB+ rating to term loan tranche D and a BB- rating to the notes. Both ratings were placed on CreditWatch with "developing" implications. On January 23, 2001, Standard & Poor's Ratings Services downgraded our corporate credit rating to BB, which initiated a 50 basis point increase in the interest rates of term loan tranche A and term loan tranche D. On January 25, 2001, Standard & Poor's Ratings Services assigned a B+ rating to the notes. These actions and future adverse actions, if any, by the rating agencies are likely to result in us incurring higher interest costs in future periods. Quarterly dividends of $0.27 per share were declared and paid in the first and second quarters of 2000. In August 2000, the Board of Directors reduced our quarterly dividend payment to $.08 per share, which was paid in September 2000 for the third quarter of 2000. On November 13, 2000, the Board of Directors determined to suspend the payment of the quarterly dividend beginning with the fourth quarter of 2000, subject to reconsideration of the policy by the Board, in its discretion, when warranted under appropriate circumstances. In addition, payment of future dividends is significantly restricted by the senior credit facility, the ESOP credit facility and the indenture governing the notes. The annual dividend was $.62 and $1.08 per share during 2000 and 1999, respectively. Capital expenditures are expected to approximate $85 million during 2001. This includes funds for continuing or completing existing projects and for implementing new projects. 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, as amended by Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133" and Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," requires that all derivative instruments be recorded on the balance sheet at their fair value. SFAS 133, as amended, is effective for all fiscal quarters of fiscal years beginning after December 31, 2000. We adopted SFAS 133 effective January 1, 2001. During 2000, we converted substantially all of our foreign currency denominated borrowings to fixed rate U.S. dollar denominated borrowings and closed most of our outstanding interest rate swaps. Based on these actions and a review of our contracts and agreements, we believe that the adoption of SFAS 133 will not have a material effect on our earnings or statement of financial position. However, due to certain provisions in our debt agreements, our results of operations could be materially affected in 2001 if it becomes more likely that a change of control will occur before November 15, 2001. In June 2001, the Financial Accounting Standards Board approved the issuance of Statement of Financial Accounting Standards No. 141 ("SFAS 141"), Business Combinations, and Statement of Financial Accounting Standards No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets. These statements will 32 37 generally become effective for us on January 1, 2002, although business combinations initiated after July 1, 2001 are subject to the non-amortization and purchase accounting provisions. SFAS 142 stipulates that goodwill is no longer subject to amortization, but must be evaluated periodically for impairment beginning January 1, 2002. We estimate that the non-amortization provision will benefit our diluted earnings per share by approximately $0.40 to $0.50 per share in the year 2002. The assessment of goodwill for impairment is a complex issue in which a company must determine, among other things, the fair value of each defined component of its operating segments. It is, therefore, not possible at this time to predict the impact, if any, which the impairment assessment provisions of SFAS 142 will have on our financial statements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Fluctuations in interest and foreign currency exchange rates affect our financial position and results of operations. We use several strategies from time to time to actively hedge interest rate and foreign currency exposure and minimize the effect of such fluctuations on reported earnings and cash flow. Sensitivity of our 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 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. Our derivative and other financial instruments subject to interest rate risk consist of debt instruments, interest rate swaps and currency swaps. At March 31, 2001, net market value of these combined instruments was a liability of $3.17 billion. At December 31, 2000 and 1999, net market value of these combined instruments, substantially all of which were debt at December 31, 2000, was a liability of $3.08 billion and $3.32 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 March 31, 2001 would result in a $58 million decrease in the net market value of the liability. A 100-basis point decrease in interest rates at March 31, 2001 would result in an $81 million increase in the net market value of the liability. During 2000, the interest rate swap portfolio was substantially terminated. A 100-basis point increase in interest rates at December 31, 2000 and 1999 would result in a $70 million and $80 million decrease in the net market value of the liability, respectively. A 100-basis point decrease in interest rates at December 31, 2000 and 1999 would result in a $78 million and $92 million increase in the net market value of the liability, respectively. Our financial instruments subject to changes in equity price risk, including the warrants component of the CRESTS Units issued in 1999, represented a net obligation of $41 million. These instruments represented net obligations of $72 million and $29 million at December 31, 2000 and 1999, respectively. The increase in the net obligation is primarily a result of the effect of the depressed stock price on the market value of the warrant component of the CRESTS Units and a decrease in securities held by our captive insurance company. The sensitivity analysis assumes an instantaneous 10% change in valuation with all other variables held constant. A 10% increase in market values at March 31, 2001 would increase the net obligation by $4 million, while a 10% decrease would reduce the net obligation by $4 million. The change in equity price risk from year-end 2000 is primarily from the impact of the reduction in our stock price on the warrants component of the CRESTS units. A 10% increase in market value at December 31, 2000 and 1999 would increase the net obligation by $9 million and $15 million, respectively, while a 10% decrease would reduce the net obligation by $9 million and $12 million, respectively. Our financial instruments subject to foreign currency exchange risk consist of foreign currency forwards, options, and foreign currency debt and represented a net asset position of $1 million at March 31, 2001. These instruments represented net liabilities of $1 million and $885 million at December 31, 2000 and 1999, respectively. The decrease in the net liability position was due to the termination of our foreign exchange position in multi-currency denominated debt. 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 March 31, 2001 would result in a $3 million 33 38 increase in the net asset position, while a 10% weakening of the dollar versus all currencies would also result in a $3 million decrease in the net asset position. The change in the sensitivity level from year-end 2000 is primarily due to the strengthening of the U.S. dollar in the first quarter. A 10% strengthening of the U.S. dollar versus other currencies at December 31, 2000 and 1999 would result in a $2 million decrease and an $89 million decrease in the net liability position, respectively, while a 10% weakening of the dollar versus all currencies would result in a $3 million increase and an $88 million increase in the net liability position, respectively. Foreign exchange forward and option contracts have been used to hedge our 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 our operations outside the United States. We have not designated any derivative as a hedge instrument under SFAS 133 and, accordingly, changes in the fair value of derivatives are recorded each period in earnings. During 2000, the interest rate swap portfolio was substantially terminated due to the conversion of foreign denominated debt to U.S. dollar denominated debt in the first half of 2000 and the November 2000 debt restructuring which replaced variable rate debt with fixed rate debt. 34 39 DESCRIPTION OF SENIOR CREDIT FACILITY In October 1998, we financed our acquisition of BetzDearborn with borrowings under a $3.65 billion senior credit facility and the assumption of $94 million loan related to the BetzDearborn ESOP Trust. As of March 31, 2001, the senior credit facility consisted of a $900 million revolving credit agreement, of which $581 million was outstanding, and varying maturity term loans totaling $1.25 billion. The principal amounts outstanding and maturities of the revolving credit agreement and the term loans were as follows:
PRINCIPAL AMOUNT ITEM OUTSTANDING MATURITY - ---- ------------ -------- Revolving credit agreement................................ $581 million October 15, 2003 Term loan tranche A....................................... $874 million October 15, 2003 Term loan tranche D....................................... $375 million November 14, 2005
As of March 31, 2001, the revolving credit agreement, term loan tranche A and term loan tranche D bore interest at LIBOR + 2.75%, LIBOR + 2.75% and LIBOR + 3.25%, respectively, which are also the current rates. Under the existing covenant provisions of the senior credit facility, we have agreed to, among other things, maintain certain specified financial ratios and consolidated net worth, not make certain distributions with respect to our capital stock, not make certain investments and not allow our subsidiaries to incur certain types and amounts of debt. During the second quarter of 2001, we were granted a waiver of one of the financial covenants in our senior credit facility. The senior credit facility was amended in July 2001 to modify certain financial covenants. The senior credit facility is secured by our property and assets, a pledge of the stock of substantially all of our domestic subsidiaries and 65% of the stock of foreign subsidiaries directly owned by us and a pledge of intercompany indebtedness. 35 40 BUSINESS OVERVIEW Hercules Incorporated is a leading, diversified, global manufacturer and marketer of specialty chemicals and related services for a broad range of business, consumer and industrial applications. We are focused on maximizing cash flow, reducing debt, improving return on capital and delivering stockholder value by concentrating on the performance of our businesses, as well as ongoing improvements throughout all of our operations. Our performance will continue to be driven by superior service to our customers and development of new products, including products that improve our customers' manufacturing costs and processes. Our principal products are chemicals used by the paper industry to increase product performance and enhance the manufacturing process; water treatment and industrial process chemicals; water-soluble polymers; and polypropylene and polyethylene fibers. These products impart such qualities as durability, water-resistance and improved aesthetics to everyday consumer goods such as writing paper, toothpaste and diapers. The primary markets we serve include pulp and paper, personal care, petroleum refining, oil and gas drilling and recovery, paints and coatings, construction materials and pharmaceuticals. While our products have a low cost impact on our customers' total product costs, they frequently possess characteristics important to the functionality and aesthetics of the finished product or the efficient operation of the manufacturing process. Examples of our products in consumer end-uses include strength additives for tissue and toweling, sizing agents for milk and juice cartons, fibers that comprise the inner and outer linings of disposable diapers and hygiene products, thickeners in products such as toothpaste, shampoos and water-based paints and water control additives for building products such as tile cements, grouts, stuccos, plasters and joint compounds. We also offer products and related services that improve and reduce the cost of a variety of manufacturing processes, including water management programs that control corrosion and improve water quality. Although price is important to our competitive strategy, we primarily compete on the basis of the performance and quality of our products. We strive to continually improve our products by investing in technology and research and development. We have committed substantial resources to our research and development efforts. Research and development expenditures totaled approximately $80 million in 2000. Such expenditures enable us to consistently bring to market products which have improved functional properties or which offer similar properties at a lower cost. This area has become increasingly important, as our customers have come to rely more on us to provide new solutions to improve their product offerings and processes. Additionally, we strive to make our products more price-competitive by effectively managing our production costs and sharing savings with our customers. In addition to developing products internally, we also selectively enter into strategic partnerships and alliances that add to the breadth of our products and services. We continually review our corporate strategy in order to compete most effectively in our changing markets. Starting in 2000, we implemented a program designed to refocus our business by monetizing certain assets, thereby generating cash to reduce our debt, while concentrating on improving the efficiency, profitability and growth potential of our remaining businesses. In the fourth quarter of 2000, we announced our intention to pursue a merger or sale of the company or one or more of its businesses in the belief that, over the long term, becoming part of a larger enterprise is the best strategic path for the company. If a sale of the company occurs, it would most likely be in a two-step process, with the sale of our BetzDearborn division constituting the first step. We are continuing to talk with potential buyers of our BetzDearborn division, as well as potential buyers of the company or our other businesses. There can be no assurance that any of these parties will be prepared to pay a price that is acceptable to us or that any transaction will occur. In June 2001, we announced a comprehensive cost reduction program to improve our return on capital. This cost reduction program is being implemented while we continue to explore strategic alternatives, including the merger or sale of the company or one or more of our businesses. Our reportable segments are Process Chemicals and Services (comprised of Pulp and Paper and BetzDearborn); Functional Products (comprised of Aqualon); and Chemical Specialties (comprised of Resins and FiberVisions). 36 41 PROCESS CHEMICALS AND SERVICES (PULP AND PAPER AND BETZDEARBORN) We believe that our Pulp and Paper division is one of the largest and most complete suppliers of functional and process improvement products and related services to the global pulp and paper industry. In addition, we believe that our BetzDearborn division is among the world's leading providers of advanced- engineered chemical treatment programs for water, wastewater and process systems across a wide range of industries. Products and services in this segment are designed to enhance our customers' profitability by improving production yields and overall product quality, and better enable them to meet their environmental objectives and regulatory requirements. In August 1999, we completed the acquisition of the Scripset(R) water-soluble polymer resin business from Solutia Inc. Since 1991, we had an exclusive license to sell Solutia's Scripset(R) products in North America to the paper industry. In January 2000, BetzDearborn 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 United States Filter's capital and chemical feed equipment and our water and process treatment chemicals. In May 2000, we acquired the Pulp and Paper Division of Quaker Chemical Corporation, which provided specialty chemicals designed for application in the tissue papermaking process and the pulping process. Key product technologies including softeners, debonders and lotions used in the manufacture of tissue and towel and specialized products for the pulping industry were added to the products offered by Pulp and Paper. In September 2000, we announced that we had formed a strategic marketing alliance with National Starch and Chemical Company for the sale of over 300 million pounds of National Starch's papermaking chemicals starch product line. At June 30, 2001, the principal products and primary markets of this segment were:
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS - -------- ------------------ --------------- Pulp and Paper Performance chemicals: Wet strength, dry strength, sizing and surface treatments, creping adhesives and release. Process treatment chemicals: Deposit, contaminant, Makers of tissues, paper towels, microbiological and foam packaging, beverage containers, control, clarification, newsprint, papers for magazines retention/drainage, felt and books, printing and writing conditioning, deinking, fiber paper and other stationery items recovery and water closure. such as labels and envelopes. Water treatment chemicals: Influent water, effluent water, cooling towers and utility systems.
37 42
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS - -------- ------------------ --------------- BetzDearborn Water treatment: Influent water, boilers, cooling Industrial, commercial and systems and wastewater. institutional establishments. Process treatment: Antifoulants, emulsion breakers, Petroleum refineries, chemical antifoams, finished additives, plants, manufacturers of metals, polymerization inhibitors, automobile assembly plants, deposit and corrosion control, mineral processors and makers of cleaners and sterilizers, food and beverages. clarifying aids, leaching and agglomeration aids, polymers, dust control, membrane cleaners, conversion coatings, sealers, paint detackifiers, strippers and grate cleaners.
FUNCTIONAL PRODUCTS (AQUALON) We believe that our Aqualon division is a world leader in manufacturing products that manage the properties of water-based systems. Products in this segment modify the physical properties of aqueous (water-based) and non-aqueous systems. These products are principally derived from renewable natural raw materials and are sold as key ingredients to other manufacturers, including makers of oral hygiene and personal care products, construction materials and latex paints, and are used in the oil and gas industry for drilling and recovery. In June 2000, we completed the sale of our nitrocellulose business, which we had decided to exit in December 1999 due to economic conditions brought on by a persistent worldwide over-supply. Since the divestiture of the nitrocellulose business, we have determined that the polyols business lacks strategic fit and are pursuing alternative strategies for this unit. Prior to September 28, 2000, this segment also included our Food Gums Division. On September 28, 2000, we sold our Food Gums Division to CP Kelco, a joint venture we entered with Lehman Brothers Merchant Banking Partners II, L.P. As of June 30, 2001, we retained a minority equity position in CP Kelco. At June 30, 2001, the principal products and primary markets of this segment were:
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS - -------- ------------------ --------------- Aqualon Water-soluble polymers: Manufacturers of interior and Hydroxyethylcellulose (HEC), exterior architectural paints, Carboxymethylcellulose (CMC), oilfield service companies for Methylcellulose (MC) and oil and gas drilling and derivatives, recovery, paper mills, Hydroxypropylcellulose (HPC) and construction material Guar derivatives. manufacturers and makers of oral hygiene products, cosmetics, personal care products and dairy and bakery products. Solvent-soluble polymers: Pentaerythritol (PE) and Producers of coating resins, Ethylcellulose (EC). printing inks and aviation fluids.
38 43 CHEMICAL SPECIALTIES (RESINS AND FIBERVISIONS) In this segment, we manufacture wood rosin resins and terpene resins and specialties. Product applications include adhesives, rubber and plastic modifiers, food and beverages and aroma chemicals. Additionally, we believe that we are the largest manufacturer of thermal-bond polyolefin fine denier staple fibers used in products like disposable diapers. We also produce olefin fiber and yarn for the domestic textile and industrial markets used in fabrics, residential upholstery and geotextiles, carpets and asphalt. At June 30, 2001, the principal products and primary markets of this segment were:
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS - -------- ------------------ --------------- Resins Rosin resins: for adhesives, food, rubber and plastics. Terpene resins: Makers of consumer and for chewing gum and adhesives. industrial products such as masking, packaging, arts and Terpene specialties: duct tape, construction for flavor and fragrance in materials, beverages, chewing household and industrial gum, plastics, fragrances and products. flavors and printing inks. FiberVisions Polypropylene and polyethylene fibers: for disposable hygiene and other Makers of disposable hygiene products. products, upholstered and geotextile fabrics, carpets and asphalt. Textile fibers: for decorative and industrial applications.
On May 1, 2001, we completed the sale of our hydrocarbons resins business and select portions of our rosin resins business to a subsidiary of Eastman Chemical Company. On May 31, 2001, we completed the sale of our peroxides business to GEO Specialty Chemicals, Inc. Additionally, on May 25, 2001, we completed the sale of our interest in Hercules-Sanyo, Inc., a toner resin joint venture, to a wholly owned subsidiary of Sanyo Chemical Industries, Ltd., our joint venture partner. We are actively pursuing the sale of the remaining portion of the Resins division. RAW MATERIALS AND ENERGY SUPPLY Raw materials and supplies are purchased from a variety of industry sources, including agricultural, forestry, mining and petroleum and chemical industries. Important raw materials for the Process Chemicals and Services segment are cationic and anionic polyacrylamides and emulsions, biocides, amines, surfactants, rosin, adipic acid, epichlorohydrin, fumaric acid, stearic acid, diethylenetriamine, phosphorus trichloride, wax, casein, starch, fatty acids and tall oil rosin. Raw materials important to the Functional Products segment are acetaldehyde, fatty acids, chemical cotton, wood pulp, ethyl chloride, alcohols, chlorine, ethylene oxide, propylene oxide, monochloroacetic acid, methyl chloride, caustic, inorganic acids and guar splits. 39 44 The important raw materials for the Chemical Specialties segment are ketones, alcohols, antioxidants, d-limonene, turpentine, rosin, pine wood stumps, catalysts, toluene, polyethylene resins and polypropylene resins. Major requirements for key raw materials and fuels are typically purchased pursuant to multi-year contracts. We are not dependent on any one supplier for a material amount of our 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 domestic and international 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. 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, we believe that FiberVisions' carded products provide improved softness, uniformity and liquid management 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 currently have over 3,500 patents worldwide covering our products. We and 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, Herculon(R) fiber, Presstige(R) deposit control additives, Spectrum(R) microbiocides, Ultra-pHase(R) sizing agent, Hercobond(R) dry strength resin, Chromaset(R) surface size, ProSoft(R) tissue softeners and Zenix(R) contaminant control. 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 manufacturing cost improvement initiatives. For example, in 2000 we entered into an agreement with a biotechnology research and development company to develop new 40 45 proprietary industrial enzymes for creating new products and improving our manufacturing processes. We spent $80 million on research activities during 2000, as compared to $85 million in 1999 and $61 million in 1998. Process Chemicals and Services currently focuses its research and development efforts on growth (innovative high-value product development), technical sales and services (incremental improvements to existing products and services) and process cost reduction programs to meet diverse customer needs worldwide. Its state-of-the-art facilities located in Europe and the United States 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 United States, Process Chemicals and Services 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. Aqualon has a number of Applications and Development Laboratories positioned in Europe, Asia and the Americas that provide technical support to its major customers. At these laboratories, teams work as a network to develop products, identify new product applications and solve customer problems. 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 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. The FiberVisions Division has research and development facilities in the United States 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 Our businesses are subject to various environmental laws and regulations. We believe that we are in compliance in all material respects with applicable federal, state and local environmental laws and regulations. These laws are subject to change. There can be no assurance that we will continue to be in compliance with these laws and regulations or that we will be able to comply with the laws and regulations if they change. Expenditures relating to environmental cleanup costs have not materially affected, and are not expected to materially affect, capital expenditures or competitive position. See "-- Litigation -- Environmental." EMPLOYEES As of June 30, 2001, we had 9,599 employees worldwide. Approximately 4,850 were located in the United States, and about 17% of these employees were represented by various local or national unions. INTERNATIONAL OPERATIONS Direct export sales from the United States to unaffiliated customers were $376 million, $342 million and $319 million for 2000, 1999 and 1998, respectively. Our operations outside the United States are subject to the 41 46 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. PROPERTIES Our corporate headquarters and major research center are located in Wilmington, Delaware, while the administrative headquarters and primary research center of BetzDearborn are located in Trevose, Pennsylvania. We also own a number of plants and facilities worldwide, in locations strategic to the sources of our raw materials or to our customers. All of our principal properties are owned by us, except for our corporate headquarters, which is leased. Our major worldwide plants are listed below. Process Chemicals and Services BetzDearborn Addison, Illinois; Bakersfield, California; Bangalore, India; Beaumont, Texas; Buenos Aires, Argentina; Chalon, France; Edmonton, Alberta, Canada; Ferentino, Italy; Garland, Texas; Helsingborg, Sweden; Herentals, Belgium; Iksan City, Korea; Ingelburn, Australia; Jurong Town, Singapore; Langhorne, Pennsylvania; Macon, Georgia; New Philadelphia, Ohio; Orange, Texas; Point-Claire, Quebec, Canada; Pudahuel, Santiago, Chile; Santa Fe de Bogota, Colombia; Sorocaba, Brazil; Valencia, Venezuela; Washougal, Washington; and Widnes, Cheshire, United Kingdom. Pulp and Paper Aberdeen, Scotland; Beringen, Belgium; Burlington, Ontario, Canada; Busnago, Italy; Chicopee, Massachusetts; Franklin, Virginia; Hattiesburg, Mississippi; Kalamazoo, Michigan; Kimcheon, Korea; Milwaukee, Wisconsin; Nantou, Taiwan; Pandaan, Indonesia; Paulinia, Brazil; Pendlebury, United Kingdom; Portland, Oregon; St. Jean, Quebec, Canada; Sandarne, Sweden; Sara, Mexico; 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; and Zwijndrecht, The Netherlands. Chemical Specialties FiberVisions Athens, Georgia; Covington, Georgia; Suzhou, China; and Varde, Denmark. Resins Beringen, Belgium; Brunswick, Georgia; Burlington, Ontario, Canada; Franklin, Virginia; Hattiesburg, Mississippi; Portland, Oregon; San Juan del Rio, Mexico; and Savannah, Georgia. Our plants and facilities, which are continually added to and modernized, are generally considered to be in good condition with adequate capacity for projected business operations. From time to time we discontinue operations at, or dispose of, facilities that have for one reason or another become unsuitable. 42 47 During 2000, we initiated and/or completed 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 Denmark; - A 7,000 metric ton methylcellulose capacity increase in Belgium; - A 1,000 metric ton expansion of the Kenedy, Texas, facility to manufacture a newly developed rheology modifier; and - A 400 metric ton hydroxypropylcellulose capacity increase in Virginia. LEGAL PROCEEDINGS Environmental We have been identified as a potentially responsible party ("PRP") by United States federal and state authorities, or by private parties seeking contribution, for the cost of environmental investigation and/or cleanup at numerous sites. As of March 31, 2001, the estimated range of the reasonably possible share of costs for the investigation and cleanup was between $65 million and $239 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 years of remedial activity required, which could range from 0 to 30 years. We become aware of sites in which we may be named a PRP in investigatory and/or remedial activities through correspondence from the United States Environmental Protection Agency (the "EPA"), 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, et al. v. Vertac Corporation, et al., USDC No. LR-C-80-109 and LR-C-80-110 (E.D. Ark.) This case, a cost-recovery action based upon the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA," or the "Superfund statute"), as well as other statutes, has been pending since 1980, and involves liability for costs expended and to be expended in connection with the investigation and remediation of the Vertac Chemical Company ("Vertac") site in Jacksonville, Arkansas. We owned and operated the site from December 1961 until 1971. The site was used for the manufacture of certain herbicides and, at the order of the United States, Agent Orange. In 1971, the site was leased to Vertac's predecessor. In 1976, we sold the site to Vertac. The site was abandoned by Vertac in 1987, and Vertac was subsequently placed into receivership. Both prior to and following the abandonment of the site, the EPA and the Arkansas Department of Pollution Control and Ecology (the "ADPC&E") were involved in the investigation and remediation of contamination at and around the site. Pursuant to several orders issued under CERCLA, we actively participated in many of these activities. The cleanup is essentially complete, except for certain on-going maintenance and monitoring activities. This litigation primarily concerns the responsibility for and the allocation of liability for the costs incurred in connection with these activities. Although initially involving many parties, as a result of various United States District Court rulings and decisions, as well as a trial, Hercules and Uniroyal were held jointly and severally liable by the District Court for the approximately $100 million in costs allegedly incurred by the EPA and ADPC&E, as well as costs incurred in the future. That decision was made final by the District Court on September 13, 1999. Both Hercules and Uniroyal timely appealed that judgment to the United States Court of Appeals for the Eighth Circuit. On February 8, 2000, the District 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. 43 48 Hercules timely appealed that judgment. Oral argument in both appeals was held before the Eighth Circuit on June 12, 2000. On April 10, 2001, the United States Court of Appeals for the Eighth Circuit issued an opinion in the consolidated appeals described above. In that opinion, the Appeals Court reversed the District Court's decision, which had held Hercules jointly and severally liable for costs incurred and to be incurred at the Jacksonville site, among other things, and remanded the case back to the District Court for a determination of whether the harms at the site giving rise to the government's claims are divisible. The Appeals Court also vacated the District Court's allocation decision finding Hercules liable for 97.4% of the costs at issue, ordering that these issues be revisited following further proceedings with respect to divisibility. Finally, the Appeals Court affirmed the judgment of liability against Uniroyal. As a result of the rulings described above, we will be allowed to present both facts and law to the District Court in support of our belief that we should not be liable under CERCLA for some or all of the costs incurred by the government in connection with the site because those harms are divisible. Should we prevail on remand, any liability to the government will be either eliminated or reduced. 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, we sued our 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 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 our recovery for past cleanup expenditures and stated that we are entitled to similar coverage for costs incurred since September 30, 1997 and in the future. We have not included any insurance recovery in the estimated range of costs above. Since entry of the Court's August 1999 order, we have entered into settlement agreements with several of our insurance carriers and have recovered certain settlement monies. The terms of those settlements and amounts recovered are confidential. We have appealed certain of the trial court's rulings to the Delaware Supreme Court. Oral argument was held on February 13, 2001 before the Delaware Supreme Court, but no ruling has yet been issued. Brunswick, Georgia Consent Order and Related Matters In December 1997, we received notice of an enforcement action by the State of Georgia, Environmental Protection Department (the "EPD"). In the notice, EPD requested that we enter into a proposed Consent Order, alleged violations of the Resource Conservation and Recovery Act ("RCRA") and sought a civil penalty of $250,000. Without admitting liability, we 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 us to pay a fine of $80,000, install three aquaria in the Brunswick, Georgia, community, maintain the aquaria for ten years and remediate certain soils that are located at our Brunswick, Georgia, plant. That penalty was paid, and we are 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 EPA and the EPD. As a result of that inspection, several potential areas of non-compliance with applicable environmental laws were identified. In March 2000, the EPD sent us a proposed Consent Order, which included a proposed penalty of $330,000. Following negotiations, in August 2000, we entered into a consent order with EPD to resolve these potential areas of non-compliance and to pay a penalty of $160,000. In addition to the multi-media inspection at the Brunswick, Georgia plant addressed in the above paragraph, 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. In March 2000, the Department of Environmental Quality ("DEQ") sent us a proposed Consent Order, which included a proposed penalty of $232,500. Following negotiations in December 2000, we entered into a consent order with the DEQ in which the proposed penalty was reduced to $26,800 plus $57,200 in Supplemental Environmental Projects. 44 49 At March 31, 2001, the accrued liability of $65 million for environmental remediation represented 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. While it is not feasible to predict the outcome of all pending suits and claims, the ultimate resolution of these environmental matters could have a material effect upon our results of operations and financial position. Other We are a defendant in numerous lawsuits that arise out of, and are incidental to, the conduct of our 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. We are a defendant in numerous asbestos-related personal injury lawsuits and claims which typically arise from alleged exposure to asbestos fibers from resin-encapsulated pipe and tank products which were sold by a former subsidiary of Hercules to a limited industrial market, or from alleged exposure to asbestos contained in facilities owned or operated by us. Lawsuits are received and matters settled on a regular basis. In December 1999, we entered into a settlement agreement to resolve the majority of the matters then pending. In connection with that settlement, we entered into an agreement with several of our insurance carriers pursuant to which a majority of the amounts paid will be insured. The terms of both agreements are confidential. During 2000 and 2001, we entered into additional settlement agreements, the terms of which are also confidential. In accordance with the terms of the previously mentioned agreement with several of our insurance carriers, the majority of the amounts paid and to be paid pursuant to the various settlement agreements will be insured. Further, we continue to pursue additional insurance coverage from carriers who were not part of the previously mentioned agreement. In June 1998, Hercules and David T. Smith Jr., a former Hercules employee and former plant manager of the Brunswick plant, along with Georgia-Pacific Corporation and AlliedSignal Inc., 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. On February 11, 2000, the Court dismissed Georgia-Pacific Corporation and AlliedSignal Inc., without prejudice. In September 2000, David T. Smith was dismissed by the Court with prejudice. This case is in the early stages of motion practice and discovery. We have denied liability and intend to vigorously defend this case. On July 18, 2000, we were served with a complaint in a case captioned Erica Nicole Sullivan, et al. v. Hercules Incorporated and David T. Smith, Jr., Civil Action File No. 00-1-05463-99 (Cobb County, Georgia). Based on the allegations contained in the complaint, this matter is very similar to the Coley litigation, and is brought on behalf of approximately 700 plaintiffs for alleged personal injury and property damage arising from the discharge of hazardous waste from our plant. This case is in the early stages of motion practice and discovery. Venue has been removed to the United States District Court for the Northern District of Georgia, Atlanta Division, Civil Action No. 1-00-CV-2121 CMA. We deny any liability to plaintiffs, and we will vigorously defend this case. In August 1999, we were sued in a case captioned 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 purported 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. The lawsuits were brought following published reports of a Los Angeles federal grand jury investigation of the carbon fiber and carbon prepreg industries. In these lawsuits, the 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 (CTx) (United States District Court, Central District of California), with all related cases ordered dismissed. This lawsuit is in the early stages of motion practice and discovery. We are named in 45 50 connection with its former Composites Products Division, which was sold to Hexcel Corporation in 1996, and have denied liability and will vigorously defend this action. In connection with the grand jury investigation noted above, in January 2000, the United States Department of Justice (the "DOJ"), Antitrust Division, served a grand jury subpoena duces tecum upon us seeking information relating to our former Composite Products Division. We have been advised that we are one of several manufacturers of carbon fiber and carbon prepreg that have been served with such a subpoena and we have responded to the subpoena. In December 1999, an action was filed in the United States 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 claim to have been similarly exposed. This case is captioned Chang 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 (United States District Court, Eastern District of Pennsylvania). During 2000, this case was transferred by the Multi-District Litigation ("MDL") Panel to the United States District Court for the Eastern District of New York, where Agent Orange cases have previously been consolidated. There has been little activity in this case since the transfer by the MDL Panel to the Eastern District of New York. In 1999, we were sued by Hexcel Corporation in a case captioned Hexcel Corporation v. Hercules Incorporated, Index No. 602293/99, Supreme Court of New York, County of New York. In this case, Hexcel sought recovery of a total of approximately $8,422,000 (plus interest) in "post-closing" adjustments to the purchase price paid by Hexcel for our former Composite Products Division. The basis for these alleged "adjustments" is the Sale and Purchase Agreement between Hercules and Hexcel dated as of April 15, 1996. In June 2000, the Court granted Hexcel's motion for summary judgment as to liability, finding Hercules liable to Hexcel on technical grounds, but reserved ruling on the amount of damages. The Court then referred the damages determination to a Special Referee. In January 2001, the Special Referee issued a report recommending that Hercules be found liable to Hexcel for a total of approximately $7,300,000 plus interest. In February 2001, Hexcel moved to confirm the Special Referee's report and Hercules cross-moved to confirm in part and reject in part the Special Referee's report. We have specifically challenged the majority of the Special Referee's findings, and we have argued that a $2,000,000 indemnity "basket" established by the terms of the Sale and Purchase Agreement should apply, reducing any award to Hexcel by $2,000,000. In May 2001, the Court accepted the Special Referee's Report and rejected our position. We believe that the Court's decision is incorrect, at least in part, as a matter of law and we will appeal it. In addition to the foregoing, in October 2000, Hexcel brought an action against Hercules to compel arbitration to determine the proper "Working Capital Adjustment" under the terms of the Sale and Purchase Agreement. Hexcel claims it is owed approximately $1,500,000, while we believe we are owed approximately $129,000. We have agreed to arbitrate the matter, and the parties are in the process of selecting an arbitrator. We believe Hexcel's claims in this latter action are without merit. At March 31, 2001, the consolidated balance sheet reflects a current liability of approximately $29 million for litigation and claims. 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 our financial position, 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. 46 51 MANAGEMENT DIRECTORS The directors of Hercules as of July 31, 2001 are listed below.
NAME AGE POSITION - ---- --- -------- William H. Joyce.................................. 65 Chairman and Chief Executive Officer John G. Drosdick.................................. 57 Director Richard Fairbanks................................. 60 Director Samuel J. Heyman.................................. 62 Director Alan R. Hirsig.................................... 61 Director Edith E. Holiday.................................. 49 Director Gaynor N. Kelley.................................. 70 Director Sunil Kumar....................................... 52 Director H. Eugene McBrayer................................ 69 Director Peter McCausland.................................. 51 Director Gloria Shaffer.................................... 70 Director Paula A. Sneed.................................... 53 Director Raymond Troubh.................................... 75 Director
William H. Joyce. Chairman and Chief Executive Officer since July 2001. Dr. Joyce joined Hercules as Chief Executive Officer in May 2001. Dr. Joyce had been Chairman, President and Chief Executive Officer of Union Carbide Corporation since 1996. From 1995 to 1996, Dr. Joyce was President and Chief Executive Officer and from 1993 to 1995, he was President. Prior to that, Dr. Joyce had been Chief Operating Officer since 1992. Dr. Joyce holds a B.S. degree in Chemical Engineering from Penn State University and an M.B.A. and a Ph.D. from New York University. Dr. Joyce received the National Medal of Technology Award in 1993 and the Plastics Academy's Industry Achievement Award in 1994 and Lifetime Achievement Award in 1997. In 1997, he was inducted into the National Academy of Engineering. Dr. Joyce is a director of CVS Corporation. Dr. Joyce is also a trustee of the Universities Research Association, Inc. and Co-Chairman of the Council of Government-University-Industry Research of The National Academies. John G. Drosdick. Director since 1998. Mr. Drosdick is Chairman, Chief Executive Officer and President of Sunoco, Inc., an independent petroleum refiner-marketer in the United States. He was president and Chief Operating Officer of Sunoco from 1996 to 2000. Mr. Drosdick was president of Ultramar Corporation from 1992 to 1996. He is a director of Sunoco, Inc., and serves on the board of Lincoln National Corporation. Richard Fairbanks. Director since 1993. Mr. Fairbanks has been a managing director or a counselor at the Center for Strategic & International Studies since 1992. He was Ambassador-at-Large under President Reagan. He is a member of the boards of directors of SEACOR Smit, Inc., GATX Corporation, and SPACEHAB, Inc.; member, Council on Foreign Relations, Council of American Ambassadors; and founder, The American Refugee Committee of Washington. Samuel J. Heyman. Director since 2001. Mr. Heyman has been a director and Chairman of ISP since its formation and served as its Chief Executive Officer from its formation until June 1999. Mr. Heyman also has been a director of G-I Holdings Inc., an affiliate of the ISP, or of its predecessor GAF Corporation, for more than five years and was Chairman, President and Chief Executive Officer of G-I Holdings for more than five years until September 2000. In January 2001, G-I Holdings filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code due to its asbestos-related claims. Mr. Heyman was a director and Chairman of the Board of Building Materials Corporation of America, an indirect wholly owned subsidiary of G-I Holdings, from its formation to September 2000 and served as Chief Executive Officer of 47 52 BMCA and certain of its subsidiaries from June 1999 to September 2000, which position he also held from June 1996 to January 1999. He is also the Chief Executive Officer, Manager and General Partner of a number of closely held real estate development companies and partnerships whose investments include commercial real estate and a portfolio of publicly traded securities. Alan R. Hirsig. Director since 1998. Mr. Hirsig retired as President and Chief Executive Officer of ARCO Chemical Company, which was bought by Lyondell Chemical Company, in 1998. He is a director of Philadelphia Suburban Corporation, Celanese A.G., and Checkpoint Systems Corporation. Additionally, he is a director or trustee of Bryn Mawr College, Curtis Institute of Music, Rosenbach Museum and Library, as well as a chairman of the YMCA of Philadelphia. Mr. Hirsig served as past chairman of the Chemical Manufacturers Association. Edith E. Holiday. Director since 1993. Ms. Holiday is an attorney. She was assistant to the President of the United States and Secretary of the Cabinet from 1990 until early 1993 and served as General Counsel of the United States Treasury Department from 1989 through 1990. She served as counselor to the Secretary of the Treasury and Assistant Secretary for Public Affairs and Public Liaison, United States Treasury Department from 1988 to 1989. Ms. Holiday is a director of Amerada Hess Corporation, H.J. Heinz Company, Beverly Enterprises, Inc., RTI International Metals, Inc., and director or trustee of various investment companies in the Franklin Templeton Group of Funds. Gaynor N. Kelley. Director since 1989. Mr. Kelley retired as Chairman and Chief Executive Officer of The Perkin-Elmer Corporation (now Applera Corporation), a manufacturer of biotechnology instrumentation and systems, in June 1996. He is a member of the boards of directors of Alliant Techsystems Inc. and Prudential Insurance Co. of America. Sunil Kumar. Director since 2001. Mr. Kumar has been director, President and Chief Executive Officer of ISP since June 1999. Mr. Kumar was a director, President and Chief Executive Officer of BMCA from May 1995, July 1996 and January 1999, respectively, until June 1999. He was also Chief Operating Officer of BMCA from March 1996 to January 1999. Mr. Kumar also was President, Commercial Roofing Products Division, and Vice President of BMCA from February 1995 to March 1996. He was also a director and Vice-Chairman of the Board of G-I Holdings from January 1999 to June 1999. In January 2001, G-I Holdings filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code due to its asbestos-related claims. H. Eugene McBrayer. Director since 1992. Mr. McBrayer retired as President of Exxon Chemical Company in January 1992, after 37 years of service. He is a former Chairman of the Board of the Chemical Manufacturers Association. Peter McCausland. Director since 1997. Mr. McCausland is Chairman and Chief Executive Officer of Airgas, Inc. (a distributor of industrial, medical, and specialty gases and related equipment), a company he founded in 1982. He served as General Counsel for MG Industries, Inc., an industrial gas producer. He was a partner in the firm of McCausland, Keen & Buckman that specialized in mergers, acquisitions, and financings. He is a director of the Independence Seaport Museum and The Eisenhower Exchange Fellowships. Gloria Shaffer. Director since 2001. Ms. Shaffer served as a Commissioner of the Department of Consumer Protection of the State of Connecticut from 1991 to 1995, as a member of the Civil Aeronautics Board from 1978 to 1984 and as the Secretary of State of the State of Connecticut from 1970 to 1978. Ms. Shaffer also previously served on the Board of Directors of Amity Bank and Amity Bankcorp, Mott's Inc. and Emery Air Worldwide and, since 1996, has served as a partner at C.A. White, Inc., a real estate development firm. Paula A. Sneed. Director since 1994. Ms. Sneed is Group Vice President, President e-Commerce and Marketing Services of Kraft Foods, Inc., the nation's largest packaged foods company. She joined General Foods (which later merged with Kraft Foods) in 1977 and has held a variety of management positions, including Vice President, Consumer Affairs; Senior Vice President and President, Foodservice Division; Executive Vice President and General Manager, Desserts Division; Executive Vice President and General 48 53 Manager, Dinners and Enhancers Division; Senior Vice President, Marketing Services and Chief Marketing Officer; and Executive Vice President, President e-Commerce Division. She is also a director of Airgas, Inc. Raymond S. Troubh. Director since 2001. Mr. Troubh has been a financial consultant for more than five years. Prior to that he was a general partner of Lazard Freres & Co., an investment banking firm, and a governor of the American Stock Exchange. Mr. Troubh has served as a director of the following public companies: Time Warner, Inc., Becton, Dickinson and Company and America West Airlines, Inc., and is a director of ARIAD Pharmaceuticals, Inc., a biopharmaceutical company, Diamond Offshore Drilling, Inc., a contract drilling company, General American Investors Company, an investment trust company, Gentiva Health Services, Inc., a healthcare provider, Health Net, Inc., a managed healthcare company, Starwood Hotels & Resorts, Inc., a hotel operating company, Triarc Companies, Inc., a holding company, and WHX Corporation, a steel products company. He is also a trustee of Corporate Renaissance Group Liquidating Trust, Inc., MicroCap Liquidating Trust and Petrie Stores Liquidating Trust. OFFICERS The executive officers of Hercules as of July 31, 2001 are listed below. There are no family relationships among executive officers.
NAME AGE CURRENT POSITION - ---- --- ---------------- William H. Joyce................ 65 Chairman and Chief Executive Officer Fred G. Aanonsen................ 54 Vice President and Controller Edward V. Carrington............ 58 Vice President, Human Resources and Corporate Resources Richard G. Dahlen............... 62 Chief Legal Officer Robert C. Flexon................ 42 Vice President, Work Processes Israel J. Floyd................. 54 Corporate Secretary and General Counsel Bruce W. Jester................. 49 Vice President, Taxes Stuart C. Shears................ 50 Vice President and Treasurer Allen A. Spizzo................. 43 Vice President, Corporate Affairs and Strategic Planning
Fred G. Aanonsen joined Hercules in July 2001. Prior to joining Hercules, he spent 25 years at Union Carbide Corporation, where most recently he had been the Director of Accounting and Financial Processing since 1998. Mr. Aanonsen is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants, the New York State Society of Certified Public Accountants and the Financial Executives Institute. Edward V. Carrington originally joined Hercules when it acquired Radiant Color in 1969 and assumed his current position in June 2001. Prior to that, he had served in a consulting role since October 2000. From 1997 until 2000, he was Vice President of Buttonwood Cottages, Inc., a vacation resort complex, and President of Rentals in Paradise, Inc., a vacation home rental business. From 1992 until his retirement from Hercules in 1997, he was Vice President, Human Resources. Richard G. Dahlen originally joined Hercules in 1996. Mr. Dahlen assumed his current position in June 2001. Prior to that, he had served in a consulting role since October 2000. From 1999 until 2000, he was retired and from 1996 until his retirement in 1999, he served as Vice President, Law and General Counsel. Mr. Dahlen is a member of the Finance Committee and Board of Directors of the Delaware Theatre Company. Robert C. Flexon joined Hercules in 2000 and has held his current position since June 2001. He had been Vice President, Business Analysis and Controller since 2000. Previously, he was with Atlantic Richfield Company for more than ten years, serving in several capacities that included: general auditor, ARCO, from 1998 to 2000; franchise manager, ARCO Products Company, from 1996 to 1998; and controller, ARCO Products Company, from 1995 to 1996. 49 54 Israel J. Floyd joined Hercules in 1973 and has held his current position since 2001. From 2000 to 2001, he was Executive Vice President, Secretary and General Counsel. He had been Vice President, Secretary and General Counsel since 1999 and, prior to that, was Secretary and Assistant General Counsel from 1992 to 1999. Bruce W. Jester joined Hercules in 1980 and has held his current position since 1997. He was assistant treasurer and director, Taxes from 1994 to 1997. Stuart C. Shears joined Hercules in 1978 and has held his current position since 1999. He was assistant treasurer from 1997 to 1999 and, prior to that, was director, Finance & Credit from 1991 to 1997. Allen A. Spizzo originally joined Hercules in 1979. He returned to Hercules in 1997 and has held his current position since April 2001. From 2000 to 2001, he was Vice President, Investor Relations and Strategic Planning. Prior to that, he was director of corporate development from 1997 to 2000. Previously, he was a group vice president of Metton America, Incorporated, in Atlanta, Georgia, from 1995 to 1997. EXECUTIVE COMPENSATION The following table contains information concerning compensation paid or to be paid to those serving as Chief Executive Officer and the other most highly compensated executive officers of the company as of the end of 2000 for services rendered to the company and our subsidiaries during the past three completed fiscal years. SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS --------------------------- ------------------------------------ ALL OTHER SALARY BONUS OTHER RESTRICTED OPTIONS INCENTIVE COMPENSATION YEAR ($) ($) ($) STOCK($)(6) (SHARES) PAYOUTS($) ($)(7) ---- ------- ------- ------- ----------- --------- ---------- ------------ T. L. Gossage(1)...................... 2000 27,995 1,848,043 1,000,000 63,588(8) Chief Executive Officer and 1999 Chairman 1998 V. J. Corbo(2)........................ 2000 687,500 281,217 387,500 2,718,000 6,181,087 Chairman, President 1999 721,878 160,679 3,548,500 112,500 102,116 and Chief Executive Officer 1998 494,273 320,000 90,493 2,367,602 93,048 J. B. Barry(3)........................ 2000 400,000 18,167 50,000 12,447 Executive Vice President 1999 323,519 9,824 893,000 39,000 5,536 Corporate Resources Executive Vice President 1998 56,466 20,000 Corporate Development D. W. DiDonna......................... 2000 400,008 22,029 142,000 5,100 Vice President Corporate 1999 357,420 27,508 893,000 33,375 9,669 Development 1998 260,402 120,000 11,260 181,375 7,855 I. J. Floyd........................... 2000 383,340 24,029 256,000 50,000 9,926 Secretary and General 1999 225,259 3,110 517,000 9,375 10,647 Counsel 1998 165,328 33,000 50,375 7,274 G. MacKenzie(4) Vice Chairman....................... 2000 500,004 17,601 639,375 50,000 29,649 1999 359,170 20,910 893,000 37,470 1998 271,670 200,000 19,514 160,000 37,581 H. J. Tucci(5)........................ 2000 400,006 31,566 50,000 16,355 Executive Vice President and 1999 341,670 72,618 893,000 33,000 29,966 Chief Development Officer 1998 245,850 185,000 18,707 50,083 175,000 27,369
- --------------- (1) Effective October 17, 2000, Mr. Gossage succeeded Dr. Corbo as Chief Executive Officer and Chairman. Mr. Gossage received a nominal salary of $1.00/week for benefit participation purposes. Mr. Gossage received no other cash compensation (base or annual incentive). Mr. Gossage retired as Chief Executive Officer on May 8, 2001. William H. Joyce became Chief Executive Officer on May 8, 2001 and Chairman on July 1, 2001. 50 55 (2) Dr. Corbo resigned his positions as Chairman of the Board, President and Chief Executive Officer of Hercules on October 17, 2000, and retired from Hercules effective November 1, 2000. His base salary reflects the period through October 31, 2000. The "Other" column includes $90,272 for use of the Company plane for Dr. Corbo. Arrangements with respect to the termination of Dr. Corbo's employment are described more fully below under "Employment Contracts." Dr. Corbo's "All Other Compensation" includes, pursuant to the severance agreement outlined under "Employment Contracts," 48 semi-monthly payments of $65,312.50 each, totaling $3,135,000, plus a cash payment of $2,832,754. Amounts also included in this column are $22,250, the total value of the annual company contributions to the defined contribution plans plus earnings thereon, $47,096, the dividends and interest on stock options, and $143,987, dividends on restricted stock units. (3) Ms. Barry became a Hercules employee on October 15, 1998. Salary and bonus for 1998 reflect period from October 15, 1998, to December 31, 1998. Ms. Barry retired from Hercules on June 30, 2001. (4) Mr. MacKenzie retired from Hercules on June 30, 2001. (5) Mr. Tucci retired from Hercules on December 1, 2000. His base salary reflects the period through November 30, 2000. (6) These values are determined by multiplying the number of shares of restricted stock awarded by the closing market price of Hercules common stock on the date of grant and subtracting the consideration, if any, paid by the executive officer. Dividends may be paid on a current basis or accrued. Mr. Floyd's restricted stock grant for the year 2000 will vest only if Hercules' stock price reaches $50 before November 4, 2002. The number and value (determined by taking the number of shares of restricted stock multiplied by the year-end closing market price, $19.0625, net of any consideration paid) of aggregate restricted stock holdings is shown below. Included in the table are restricted shares that each executive officer purchased under the terms of the Hercules Long-Term Incentive Compensation Plan as well as shares that have been granted outright. The aggregate amount paid for restricted shares by executive officers was $1,071,907. (7) Major components of "All other compensation" are listed below in addition to components indicated in notes 2 and 8:
AGGREGATE COMPANY MATCH DIVIDEND AND RESTRICTED (DEFINED INTEREST CREDITS NAME SHARES NET VALUE CONTRIBUTION PLAN) ON STOCK OPTIONS - ---- ---------- ---------- ------------------ ---------------- T. L. Gossage............... 128,003 $2,440,057 0 0 V. J. Corbo................. 0 0 22,250 47,096 G. MacKenzie................ 99,492 1,542,175 18,334 11,314 D. W. DiDonna............... 39,747 724,375 5,100 0 H. J. Tucci................. 0 0 11,846 4,509 I. J. Floyd................. 42,910 741,531 9,926 0 J. B. Barry................. 38,000 724,375 12,447 0
- --------------- (8) When Mr. Gossage first retired from Hercules effective January 1, 1997, as reported in Hercules' 1997 proxy statement, he was granted a special pension benefit to be paid over the period from his retirement through the end of 2001. In connection with his return to Hercules effective October 17, 2000, the remaining 14 monthly payments under this arrangement were paid in a lump sum, as reflected below. The value to Mr. Gossage of this lump sum payment without discount was $63,588, as shown in the table above. OPTION GRANTS IN LAST FISCAL YEAR The following table discloses information concerning individual grants of stock options made during the last completed fiscal year to the executive officers named in the summary compensation table. 51 56
NO. OF PERCENT OF SECURITIES TOTAL UNDERLYING OPTIONS EXERCISE OF OPTIONS GRANTED TO BASE PRICE EXPIRATION GRANT DATE NAME GRANTED EMPLOYEES ($/SH) DATE GRANT DATE VALUE(1) - ---- ---------- ---------- ----------- ---------- ----------- ---------- T. L. Gossage........ 500,000(2) 13.9% 14.4375 (2) 10/17/2000 $2,130,500 500,000(2) 13.9% 17.325 (2) 10/17/2000 1,636,550 V. J. Corbo.......... 200,000(3) 5.5% 17.25 10/17/2005 2/18/2000 1,469,580 187,500(4) 5.2% 14.0625 10/17/2005 6/30/2000 1,097,888 G. MacKenzie......... 50,000(3) 1.4% 17.25 2/18/2010 2/18/2000 442,385 D. W. DiDonna........ 50,000(3) 1.4% 17.25 2/18/2010 2/18/2000 442,385 92,000(5) 2.5% 16.00 4/27/2010 4/27/2000 746,442 H. J. Tucci.......... 50,000(3) 1.4% 17.25 12/1/2005 2/18/2000 367,395 I. J. Floyd.......... 40,000(3) 1.1% 17.25 2/18/2010 2/18/2000 353,908 10,000(5) 0.3% 16.00 4/27/2010 4/27/2000 81,135 J. B. Barry.......... 50,000(3) 1.4% 17.25 2/18/2010 2/18/2000 442,385
- --------------- (1) The Black-Scholes option-pricing model was used to determine the fair value of employee stock options in the table above as of the date of the grant. No adjustments for risk of forfeiture have been made. Significant assumptions are as follows:
REGULAR OPTIONS PASOS --------------- ------- Dividend yield.............................................. 0.0% 0.0% Risk free interest rate..................................... 5.9% 6.2% Expected life............................................... 3.6 years 5 years Expected volatility......................................... 41.3% 35.6%
(2) Vesting date is the earlier of October 15, 2001, or retirement, death or termination because of disability, or a change of control. The expiration date is the first anniversary of retirement, death or termination because of disability. (3) Vesting schedule is as follows: 40% on February 19, 2001; 40% on February 18, 2002; and 20% on February 18, 2003. (4) Performance-accelerated stock options ("PASOs") become exercisable upon the achievement of predetermined performance goals. If goals are not achieved, the options become exercisable at 9.5 years and expire at 10 years; however, due to retirement, the expiration date for this award is October 17, 2005. (5) Vesting schedule is as follows: 40% on April 27, 2001; 40% on April 29, 2002; and 20% on April 28, 2003. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The table set forth below discloses certain information concerning the exercise of stock options (exercised and unexercised) during the last completed fiscal year by the executive officers named in the summary compensation table as well as certain information concerning the number and value of unexercised options. The value of options is calculated using the difference between the option exercise price and $19.0625 (year-end stock price) multiplied by the number of shares underlying the option. 52 57
NO. OF SECURITIES VALUE OF UNEXERCISED NO. OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS SHARES OPTIONS AT YEAR-END AT YEAR-END ACQUIRED ON VALUE --------------------------- ----------------------------------- NAME EXERCISE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE ($) UNEXERCISABLE ($) - ---- ----------- ------------ ----------- ------------- --------------- ----------------- T. L. Gossage......... 0 264,000 1,174,000 0 3,181,250 V. J. Corbo(1)........ 0 462,700 619,500 1,381,876 0 G. MacKenzie.......... 0 170,820 353,500 3,231 90,625 D. W. DiDonna......... 0 148,100 331,175 0 372,375 H. J. Tucci........... 9,900 33,825 322,400 120,000 176,975 0 I. J. Floyd........... 0 71,800 112,575 35,812 103,125 J. B. Barry........... 0 7,200 81,800 0 90,625
- --------------- (1) Dr. Corbo resigned his positions as Chairman of the Board, President and Chief Executive Officer of Hercules on October 17, 2000, and retired from Hercules effective on November 1, 2000. As a result of his retirement, 187,500 of Dr. Corbo's options became exercisable as of November 1, 2000. PENSION PLANS The following table shows the estimated annual pension benefits payable to a covered participant at normal retirement age under Hercules' qualified benefits pension plan, as well as nonqualified supplemental benefits, based on the stated remuneration and years of service with Hercules and its subsidiaries.
REMUNERATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS - ------------ -------- -------- -------- ---------- ---------- $ 200,000........................ $ 45,714 $ 60,952 $ 76,190 $ 91,428 $ 106,666 250,000....................... 57,714 76,952 96,190 115,428 134,666 300,000....................... 69,714 92,952 116,190 139,428 162,666 350,000....................... 81,714 108,952 136,190 163,428 190,666 400,000....................... 93,714 124,952 156,190 187,428 218,666 450,000....................... 105,714 140,952 176,190 211,428 246,666 500,000....................... 117,714 156,952 196,190 235,428 274,666 600,000....................... 141,714 188,952 236,190 283,428 330,666 700,000....................... 165,714 220,952 276,190 331,428 386,666 750,000....................... 177,714 236,952 296,190 355,428 414,666 800,000....................... 189,714 252,952 316,190 379,428 442,666 900,000....................... 213,714 284,952 356,190 427,428 498,666 1,000,000....................... 237,714 316,952 396,190 475,428 554,666 1,500,000....................... 357,714 476,952 596,190 715,428 834,666 2,000,000....................... 477,714 636,952 796,190 955,428 1,114,666
Annual contributions by Hercules to its qualified pension plan, if any are required, are determined statistically by an independent actuary, and no amount is attributed to an individual employee. Due to the funded status of the qualified pension plan, Hercules did not make a contribution to it in 2000. Except in special cases, the aggregate retirement benefit, under both the qualified and nonqualified plans, is an amount determined by taking the sum of (i) 1.2% of the employee's average annual earnings (based on the highest 60 consecutive months during the last 10 years of employment) up to one-half the Social Security Tax Base ($76,200 in 2000), and (ii) 1.6% of the employee's average annual earnings (as determined above) in excess of one-half of the Social Security Tax Base, multiplied by the employee's total years and months of credited service. For this purpose, "average annual earnings" consist of salary plus annual incentive or bonus compensation. For Ms. Barry, who participates in the former BetzDearborn Retirement Plan, the aggregate retirement benefit is determined by taking the sum of (i) 1.2% of the employee's average annual earnings (based on the highest three consecutive calendar years during the last 10 calendar years of employment) up to the Social 53 58 Security Covered Compensation (average of 35 years of the Social Security Taxable Wage Base), and (ii) 1.8% of the employee's average annual earnings (as determined above) in excess of the Social Security Covered Compensation, multiplied by the employee's total years of credited service. For Messrs. Gossage, Corbo, MacKenzie, DiDonna, Tucci and Floyd and Ms. Barry, the compensation amounts used for average annual earnings for 2000 are shown under the "Salary" and "Bonus" columns of the summary compensation table. The estimated credited years of service for Messrs. Gossage, Corbo, MacKenzie, DiDonna, Tucci and Floyd and Ms. Barry are 35, 31, 21, 20, 23, 27 and 9, respectively. EMPLOYMENT CONTRACTS On October 17, 2000, Hercules entered into a written agreement with Mr. Gossage which provided for him to suspend his regular Hercules retirement benefits and serve as Chairman and Chief Executive Officer. Mr. Gossage's compensation consisted of (i) a nominal salary of $1.00 per week to cover employee benefit participation requirements plus employment-related benefits available to other salaried employees, (ii) reimbursement of all employment-related expenses, including temporary living expenses, and (iii) the grant under the terms of our Long-Term Incentive Compensation Plan of (a) a stock option to purchase 1,000,000 shares of common stock, half at a per share exercise price of $14.4375 (the price of our common stock on the date of grant) and the balance at a per share exercise price of $17.325, and (b) 128,003 shares of restricted stock. The stock options and restricted stock vest at the earlier of October 15, 2001, or Mr. Gossage's retirement, death or termination because of disability or a change in control and the stock options will remain exercisable until the first anniversary of his retirement, death or termination because of disability. Hercules also agreed to accelerate payment of the balance of a special pension benefit of $1,300,000 per year over 5 years, which became effective January 1, 1997. This special pension was reported in our 1997 proxy statement. Mr. Gossage retired as Chief Executive Officer on May 8, 2001. On May 8, 2001, Hercules entered into a written agreement with Dr. Joyce which provides for him to serve as Chairman and Chief Executive Officer. Dr. Joyce's compensation consists of (i) a base annual salary of $1,000,000, (ii) target annual variable compensation of $1,000,000 and (iii) stock options to acquire 1,250,000 shares of common stock at a per share exercise price of $12.00 (the price of our common stock on the date of grant). The stock options have ten-year terms and vest at the earlier of a change of control, termination other than for cause, death or disability or April 30, 2003. Dr. Joyce's employment agreement also provides for further grants of stock options for each calendar year after 2001, at such times as Hercules generally makes stock option grants to other employees and in amounts and with terms and conditions consistent with his position. In the event Dr. Joyce's employment is terminated other than for cause, Hercules would be required to pay him an amount equal to the base salary and variable compensation he would have received had he remained employed through April 30, 2003, but not less than $2,000,000. CHANGE IN CONTROL AGREEMENTS Since 1986, Hercules has entered into change in control agreements with its senior executives. These agreements seek to ensure the stability of Hercules' management during a period of transition within Hercules and only become effective upon a change in control event. Hercules' Compensation Committee periodically reviews these agreements and revises them, if necessary, to reflect contemporary business practices in change in control situations. During fiscal year 2000, Hercules entered into change in control agreements with Dr. Corbo, Ms. Barry and Messrs. DiDonna, Floyd, MacKenzie and Tucci. Under the terms of the agreements, a change in control occurs: - if any individual, entity or group (with certain exceptions) becomes the beneficial owner of 20% or more of the outstanding shares of Hercules common stock; - if there is a change in a majority of the board of directors other than by election or nomination by a vote of the majority of directors comprising the incumbent board; 54 59 - upon approval by the stockholders of a reorganization, merger, consolidation or sale that results in Hercules' stockholders owning less than 60% of the combined voting power of the surviving corporation following the transaction; or - if Hercules' stockholders approve a complete liquidation of the Company. Under the terms of these agreements, upon a change in control, Hercules is required to continue to employ the above named executives, in substantially the same position and level of compensation (including benefits) as that executive held immediately before the change in control, for a period of three years following the change in control. If Hercules terminates the executive (within the three year period following a change in control) for any reason other than cause, death or disability, or if Hercules takes actions which permit the executive to terminate his or her employment for good reason, such as diminishing the executive's responsibilities or requiring the executive to relocate, during such three year period, the executive is entitled to the following: - a lump sum cash payment equal to: - any unpaid prorated portion of the executive's bonus; - any monthly salary earned but unpaid as of the date of termination; - three times the executive's base salary and bonus; and - the difference between the amount the executive would be entitled to if Hercules contributed for up to an additional six years of service (including years of service credited during the employment period) and five years of age to the executive's retirement plan and that amount the executive was actually entitled to under this plan on the date of termination; - three years of continued welfare benefits and perquisites; - outplacement services at a cost of up to $50,000; - full vesting of all stock options held by or previously granted to the executive; and - payment for any Internal Revenue Service excise taxes for "excess parachute payments" (as defined under the Internal Revenue Code). In 2001, Hercules entered into similar change in control agreements with Dr. Joyce, Mr. Aanonsen, Mr. Carrington and Mr. Dahlen. The 2001 change in control agreements are the same as the 2000 change in control agreements, except as described below. The change in control agreements with Dr. Joyce and Mr. Aanonsen provide for additional special payments of up to $3,000,000 and $125,000, respectively, if a change of control occurs on or before April 30, 2002, and in connection therewith, all or substantially all of the common stock of the company is purchased for cash and all or substantially all of the then-outstanding employee stock options are cancelled in exchange for cash or no consideration without being replaced by comparable new stock options. Dr. Joyce, Mr. Carrington and Mr. Dahlen's change in control agreements provide that if the executive terminates his employment on at least 180 days' advance notice after a change of control and, in the case of a change in control triggered by stockholder approval of a reorganization, merger, consolidation or sale described above, after consummation of that transaction, the termination will be treated as a termination for good reason, giving rise to the severance pay and benefits described above. The change in control agreements with Mr. Carrington and Mr. Dahlen provide for cash payments consisting in part of two, rather than three, times their base salaries and bonuses and two, rather than three, years of continued welfare benefits and perquisites. The agreements entered into with Dr. Joyce and Messrs. Aanonsen, Carrington and Dahlen do not provide for the additional pension service or age credits described above. 55 60 SEVERANCE, RESIGNATION, TERMINATION AND SEPARATION AGREEMENTS On October 17, 2000, Dr. Corbo resigned from all of his positions at Hercules and its subsidiaries including his positions as Chief Executive Officer and Chairman of the Hercules Board. Dr. Corbo has received and he (or in the event in his death, his estate or named beneficiary) is entitled to receive certain severance payments and continuing benefits pursuant to a resignation agreement between Dr. Corbo and Hercules dated October 17, 2000. Specifically, Dr. Corbo received a lump sum cash payment of $2,832,753.83 upon his resignation and Dr. Corbo (or in the event of his death, his estate or named beneficiary) will receive (i) two times his then current salary and target annual bonus (or a total of $3,135,000), which amount is paid over 48 semi-monthly equal installments beginning November 1, 2000, (ii) certain continuing rights and accelerated vesting schedules under Hercules' various stock option plans and long-term compensation plans, (iii) certain continuing pension benefits based on granting three additional years of service credits plus elimination of early retirement reduction and (iv) certain one-time perquisites, such as, reimbursement for legal fees incurred in connection with the resignation agreement and reimbursement for tax return preparation and advice. Additionally, Dr. Corbo and his immediate family will receive medical, dental and vision benefits until the earlier of his death and December 31, 2002 and life insurance benefits payable at his death. Many of the above listed items are contingent upon Dr. Corbo's adherence to certain covenants in the resignation agreement regarding confidentiality, non-competition and non-disparagement. On December 1, 2000, Mr. Tucci retired from Hercules. He served as the Chairman, Chief Executive Officer and President of CP Kelco, a joint venture in which Hercules holds a minority interest, until June 30, 2001. In conjunction with Mr. Tucci's retirement from Hercules, Hercules agreed to make certain severance payments to Mr. Tucci. Mr. Tucci will receive (i) 120 consecutive monthly payments of $7,000, (ii) an additional four full years of pension service credit as well as additional pension payments based upon number of years of service to CP Kelco, (iii) reimbursement for certain equity interests in Hercules held by Mr. Tucci, which were forfeited upon his retirement, and (iv) reimbursement for certain other perquisites. Additionally, Hercules will pay, in the event of Mr. Tucci's death, his named beneficiary or estate an amount equal to two times his final twelve-month salary plus average of his last two calendar year MICP awards. On June 30, 2001, Ms. Barry retired from Hercules. In connection with Ms. Barry's retirement, she and Hercules entered into a separation agreement pursuant to which she has received or will receive certain severance payments and continuing benefits. Specifically, Ms. Barry has received or will receive, among other things, (i) a lump sum payment of $1,320,000, (ii) a special lifetime pension benefit and (iii) health and dental coverage for herself, her spouse and her children until December 31, 2001. In exchange for such payments and benefits, Ms. Barry covenanted not to sue Hercules and agreed to release and forever discharge the Company from any claims against Hercules, other than claims relating to the validity or enforceability of the separation agreement, claims for legally mandated benefits and vested benefits under any qualified or non-qualified savings and pension plans or welfare plans in which she may have participated or will continue to participate and any other rights or claims that may arise after the date of execution the separation agreement. In addition to the payments and benefits provided for in the separation agreement, in connection with Ms. Barry's previous participation in a BetzDearborn executive pension plan, she was entitled to and received a lump sum payment of $833,693 upon her retirement. On June 30, 2001, Mr. MacKenzie retired from Hercules. In connection with Mr. MacKenzie's retirement, he and Hercules entered into a separation agreement pursuant to which he has received or will receive certain severance payments and continuing benefits. Specifically, Mr. MacKenzie has received or will receive, among other things, (i) a lump sum payment of $1,650,000 and (ii) special pension benefits, including a special pension benefit derived by adding five and a half years to his age and three years to his credited service which, together with benefits earned under all Hercules pension plans, amounts to a total lifetime benefit of $14,376 per month payable as a single life annuity and a special pension benefit of $16,677 per year for ten years. In exchange for such payments and benefits, Mr. MacKenzie covenanted not to sue the Company and agreed to release and forever discharge Hercules from any claims against Hercules, other than claims relating to the validity or enforceability of the separation agreement, claims for legally mandated benefits and vested benefits under any qualified or non-qualified savings and pension plans or welfare plans in 56 61 which he may have participated or will continue to participate and any other rights or claims that may arise after the date of execution the separation agreement. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Since the beginning of 2000, no director or officer has been involved in any transactions of a nature or magnitude to require disclosure under applicable SEC thresholds. 57 62 PRINCIPAL STOCKHOLDERS The following table sets forth information, as of July 1, 2001, with respect to the beneficial ownership of Hercules common stock by (i) each of our directors, (ii) each of those serving as Chief Executive Officer and our most highly compensated executive officers for fiscal 2000, (iii) all of our directors and current executive officers as a group and (iv) each beneficial owner of more than 5% of the outstanding shares of our common stock. This beneficial ownership is reported in accordance with the rules of the SEC, under which a person may be deemed to be the beneficial owner of shares if that person has or shares the power to vote or dispose of those shares or has the right to acquire beneficial ownership of those shares within 60 days (for example, through the exercise of an option). Accordingly, the shares shown in the table as beneficially owned by certain individuals may include shares owned by certain members of their respective families. Because of these rules, more than one person may be deemed to be the beneficial owner of the same shares. The inclusion of the shares shown in the table is not necessarily an admission of beneficial ownership of those shares by the person indicated.
SHARES OPTIONS BENEFICIALLY EXERCISABLE RESTRICTED PERCENT OF NAME OWNED(1) WITHIN 60 DAYS STOCK UNITS SHARES(2) ---- ------------ -------------- ----------- ---------- DIRECTORS AND OFFICERS W. H. Joyce, Chairman(3)........................ -- -- -- -- J. G. Drosdick, Director........................ 9,423 6,000 1,100 * R. M. Fairbanks, III, Director.................. 15,545 21,000 1,253 * I. J. Floyd, Officer............................ 65,199 103,000 -- * S. J. Heyman, Director(4)....................... 10,719,200 -- -- 9.9 % A. R. Hirsig, Director.......................... 6,554 6,000 1,100 * E. E. Holiday, Director......................... 3,999 21,000 1,376 * G. N. Kelley, Director.......................... 9,744 27,000 2,185 * S. Kumar, Director.............................. -- -- -- -- H. E. McBrayer, Director........................ 77,324 24,000 1,527 * P. McCausland, Director......................... 11,326 9,000 1,100 * G. Shaffer, Director............................ 500 -- -- * P. A. Sneed, Director........................... 11,925 18,000 1,253 * R. S. Troubh, Director.......................... 7,500 -- -- * J. Barry(5)..................................... 72,058 38,000 -- * V. J. Corbo(6).................................. 109,119 245,200 -- * D. W. DiDonna................................... 44,199 266,900 -- * T. L. Gossage(7)................................ 129,003 264,000 -- * G. MacKenzie(8)................................. 129,250 252,820 -- * H. J. Tucci(9).................................. 53,231 209,200 -- * All Directors and Executive Officers as a Group(10)..................................... 11,513,590 1,747,460 10,894 10.6 %
58 63
SHARES OPTIONS BENEFICIALLY EXERCISABLE RESTRICTED PERCENT OF NAME OWNED(1) WITHIN 60 DAYS STOCK UNITS SHARES(2) ---- ------------ -------------- ----------- ---------- 5% STOCKHOLDERS International Specialty Products, Inc.(11)...... 10,719,200 9.9 % ISP Investments Inc. ISP Opco Holdings Inc. c/o ISP Management Company, Inc. 1361 Alps Road Wayne, New Jersey 07670 T. Rowe Price Associates, Inc.(12).............. 7,198,428 6.6 % 100 E. Pratt Street Baltimore, Maryland 21202 Mario J. Gabelli and related entities(13)....... 8,039,000 7.4 % c/o Gabelli Asset Management Inc. One Corporate Center Rye, New York 10580
- --------------- * Less than 1% of the outstanding shares of Hercules common stock. (1) Includes shares, as of July 1, 2001, in the Savings and Investments Plan as follows: R. G. Dahlen, 2,030; R. C. Flexon, 413; I. J. Floyd, 1,683; B. W. Jester, 1,239; S. C. Shears, 1,410; A. A. Spizzo, 1,391; J. B. Barry, 2,630; D. W. DiDonna, 1,587; and G. MacKenzie, 3,725. Includes shares with restrictions and forfeiture risks as specified under the Long-Term Incentive Compensation Plan as follows: R. C. Flexon, 5,000; I. J. Floyd, 44,553; B. W. Jester, 1,575; S. C. Shears, 4,600; A. A. Spizzo, 1,055; J. B. Barry, 38,000; D. W. DiDonna, 38,000; and G. MacKenzie, 81,652. Owners have the same voting and dividend rights as do other stockholders of Hercules, except for the right to sell or transfer. Included in the nonemployee directors' totals are one-time equity awards. Mr. Kelley's total includes 1,594 shares that he holds jointly with his spouse. (2) Based on 108,575,651 shares outstanding on July 1, 2001. (3) Named Chief Executive Officer on May 8, 2001 and Chairman on July 1, 2001. (4) Includes 10,719,200 shares held indirectly through International Specialty Products, Inc. ("ISP"). Mr. Heyman is the majority stockholder of ISP. (5) Retired on June 30, 2001. (6) Resigned on October 17, 2000. (7) Retired on May 8, 2001. (8) Retired on June 30, 2001. (9) Retired on December 1, 2000. (10) Consists of the following individuals: W. H. Joyce, F. G. Aanonsen, E. V. Carrington, R. G. Dahlen, J. G. Drosdick, R. M. Fairbanks, III, R. C. Flexon, I. J. Floyd, S. J. Heyman, A. R. Hirsig, E. E. Holiday, B. W. Jester, G. N. Kelley, S. Kumar, H. E. McBrayer, P. McCausland, G. Shaffer, S. C. Shears, P. A. Sneed, A. A. Spizzo and R. S. Troubh. (11) Share holding as of July 1, 2001, as reported on Amendment No. 11 to the Schedule 13D filed by such stockholder. (12) Share holding as of July 1, 2001, as reported on Schedule 13G most recently filed by such stockholder. (13) Share holding as of July 1, 2001, as reported on Amendment No. 3 to the Schedule 13D filed by such stockholder. 59 64 THE EXCHANGE OFFER TERMS OF THE EXCHANGE OFFER We are offering to exchange our new notes for a like aggregate principal amount of our old notes. The new notes that we propose to issue in this exchange offer will be substantially identical to our old notes except that, unlike our old notes, the new notes will have no transfer restrictions or registration rights. See "Description of Notes." We reserve the right in our sole discretion to purchase or make offers for any old notes that remain outstanding following the expiration or termination of this exchange offer and, to the extent permitted by applicable law, to purchase old notes in the open market or privately negotiated transactions, one or more additional tender or exchange offers or otherwise. The terms and prices of these purchases or offers could differ significantly from the terms of this exchange offer. In addition, nothing in this exchange offer will prevent us from exercising our right to discharge our obligations on the old notes by depositing certain securities with the trustee and otherwise. EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION This exchange offer will expire at 5:00 p.m., New York City time, on , 2001, unless we extend it in our reasonable discretion. The expiration date of this exchange offer will be at least 20 business days after the commencement of the exchange offer in accordance with Rule 14e-1(a) under the Securities Exchange Act of 1934. We expressly reserve the right to delay acceptance of any old notes, extend or terminate this exchange offer and not accept any old notes that we have not previously accepted if any of the conditions described below under "-- Conditions to the Exchange Offer" have not been satisfied or waived by us. We will notify the exchange agent of any extension by oral notice promptly confirmed in writing or by written notice. We will also notify the holders of the old notes by mailing an announcement or by a press release or other public announcement communicated before 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date, unless applicable laws require us to do otherwise. We also expressly reserve the right to amend the terms of this exchange offer in any manner. If we make any material change, we will promptly disclose this change in a manner reasonably calculated to inform the holders of our old notes of the change, including providing public announcement or giving oral or written notice to these holders. A material change in the terms of this exchange offer could include a change in the timing of the exchange offer, a change in the exchange agent and other similar changes in the terms of this exchange offer. If we make any material change to this exchange offer, we will disclose this change by means of a post-effective amendment to the registration statement which includes this prospectus and will distribute an amended or supplemented prospectus to each registered holder of old notes. In addition, we will extend this exchange offer for an additional five to ten business days as required by the Exchange Act or the rules promulgated thereunder, depending on the significance of the amendment, if the exchange offer would otherwise expire during that period. We will promptly notify the exchange agent by oral notice, promptly confirmed in writing, or written notice of any delay in acceptance, extension, termination or amendment of this exchange offer. PROCEDURES FOR TENDERING OLD NOTES Proper Execution and Delivery of Letters of Transmittal To tender your old notes in this exchange offer, you must use ONE OF THE THREE alternative procedures described below: (1) Regular Delivery Procedure: Complete, sign and date the letter of transmittal. Have the signatures on the letter of transmittal guaranteed if required by the letter of transmittal. Mail or otherwise deliver the letter of transmittal together with the certificates representing the old notes being tendered 60 65 and any other required documents to the exchange agent on or before 5:00 p.m., New York City time, on the expiration date. (2) Book-Entry Delivery Procedure: Send a timely confirmation of a book-entry transfer of your old notes, if this procedure is available, into the exchange agent's account at The Depository Trust Company ("DTC") in accordance with the procedures for book-entry transfer on or before 5:00 p.m., New York City time, on the expiration date. See "-- Book-Entry Delivery Procedure." (3) Guaranteed Delivery Procedure: If time will not permit you to complete your tender by using the procedures described in (1) or (2) above before the expiration date and this procedure is available, comply with the guaranteed delivery procedures. See "-- Guaranteed Delivery Procedure." The method of delivery of the old notes, the letter of transmittal and all other required documents is at your election and risk. Instead of regular mail, we recommend that you use an overnight or hand-delivery service. If you choose the mail, we recommend that you use registered or certified mail, properly insured, with return receipt requested. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO ASSURE TIMELY DELIVERY. You should not send any letters of transmittal or old notes to us. You must deliver all documents to the exchange agent at the address provided below. You may also request your broker, dealer, commercial bank, trust company or nominee to tender your old notes on your behalf. Only a holder of old notes may tender old notes in this exchange offer. A holder is any person in whose name old notes are registered on our books or any other person who has obtained a properly completed bond power from the registered holder. If you are the beneficial owner of old notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your old notes, you must contact that registered holder promptly and instruct that registered holder to tender your old notes on your behalf. If you wish to tender your old notes on your own behalf, you must, before completing and executing the letter of transmittal and delivering your old notes, either make appropriate arrangements to register the ownership of the old notes in your name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. You must have any signatures on a letter of transmittal or a notice of withdrawal guaranteed by: (1) a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc.; (2) a commercial bank or trust company having an office or correspondent in the United States; or (3) an eligible guarantor institution within the meaning of Rule 17Ad-15 under the Exchange Act, unless the old notes are tendered: (a) by a registered holder or by a DTC participant whose name appears on a security position listing as the owner, who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the letter of transmittal and the new notes are being issued directly to this registered holder or deposited into this participant's account at DTC, or (b) for the account of a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an eligible guarantor institution within the meaning of Rule 17Ad-15 under the Exchange Act. If the letter of transmittal or any bond powers are signed by: (1) the recordholder(s) of the old notes tendered: the signature must correspond with the name(s) written on the face of the old notes without alteration, enlargement or any change whatsoever. (2) a DTC participant: the signature must correspond with the name as it appears on the security position listing as the holder of the old notes. 61 66 (3) a person other than the registered holder of any old notes: these old notes must be endorsed or accompanied by bond powers and a proxy that authorize this person to tender the old notes on behalf of the registered holder, in form satisfactory to us as determined in our sole discretion, in each case, as the name of the registered holder or holders appears on the old notes. (4) trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity: these persons should so indicate when signing. Unless waived by us, evidence satisfactory to us of their authority to so act must also be submitted with the letter of transmittal. Book-Entry Delivery Procedure Any financial institution that is a DTC participant may make book-entry deliveries of old notes by causing DTC to transfer these old notes into the exchange agent's account at DTC in accordance with DTC's procedures for transfer. To effectively tender notes through DTC, the financial institution that is a DTC participant will electronically transmit its acceptance through the Automatic Tender Offer Program. DTC will then edit and verify the acceptance and send an agent's message to the exchange agent for its acceptance. An agent's message is a message transmitted by DTC to the exchange agent stating that DTC has received an express acknowledgment from the DTC participant tendering the notes that this participant has received and agrees to be bound by the terms of the letter of transmittal, and that we may enforce this agreement against this participant. The exchange agent will make a request to establish an account for the old notes at DTC for purposes of the exchange offer within two business days after the date of this prospectus. A delivery of old notes through a book-entry transfer into the exchange agent's account at DTC will only be effective if an agent's message or the letter of transmittal or a facsimile of the letter of transmittal with any required signature guarantees and any other required documents is transmitted to and received by the exchange agent at the address indicated below under "-- Exchange Agent" on or before the expiration date unless the guaranteed delivery procedures described below are complied with. DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. Guaranteed Delivery Procedure If you are a registered holder of old notes and desire to tender your notes and (1) your old notes are not immediately available, (2) time will not permit your old notes or other required documents to reach the exchange agent before the expiration date or (3) the procedures for book-entry transfer, including delivery of an agent's message, cannot be completed on a timely basis, you may still tender in this exchange offer if: (1) you tender through a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an eligible guarantor institution within the meaning of Rule 17Ad-15 under the Exchange Act, (2) on or before the expiration date, the exchange agent receives a properly completed and duly executed letter of transmittal or a facsimile of the letter of transmittal, and a notice of guaranteed delivery, substantially in the form provided by us, with your name and address as holder of the old notes and the amount of old notes tendered, stating that the tender is being made by that letter and notice and guaranteeing that within three New York Stock Exchange trading days after the expiration date the certificates for all the old notes tendered, in proper form for transfer, or a book-entry confirmation with an agent's message, as the case may be, and any other documents required by the letter of transmittal will be deposited by the eligible institution with the exchange agent, and (3) the certificates for all your tendered old notes in proper form for transfer or a book-entry confirmation, as the case may be, and all other documents required by the letter of transmittal are received by the exchange agent within three New York Stock Exchange trading days after the expiration date. 62 67 ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES Your tender of old notes will constitute an agreement between you and us governed by the terms and conditions provided in this prospectus and in the related letter of transmittal. We will be deemed to have received your tender as of the date when your duly signed letter of transmittal accompanied by your old notes tendered, a timely confirmation of a book-entry transfer of the old notes into the exchange agent's account at DTC with an agent's message or a notice of guaranteed delivery from an eligible institution is received by the exchange agent. All questions as to the validity, form and eligibility, including time of receipt, acceptance and withdrawal of tenders, will be determined by us in our sole discretion. Our determination will be final and binding. We reserve the absolute right to reject any and all old notes not properly tendered or any old notes which, if accepted, would, in our opinion or our counsel's opinion, be unlawful. We also reserve the absolute right to waive any conditions of this exchange offer or irregularities or defects in tender as to particular old notes. Our interpretation of the terms and conditions of this exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of old notes must be cured within such time as we shall determine. Neither we, the exchange agent nor any other person will be under any duty to give notification of defects or irregularities with respect to tenders of old notes. Neither we, the exchange agent nor any other person will incur liability for any failure to give notification of these defects or irregularities. Tenders of old notes will not be deemed to have been made until such irregularities have been cured or waived. The exchange agent will return without cost to their holders any old notes that are not properly tendered and as to which the defects or irregularities have not been cured or waived as promptly as practicable following the expiration date. If all the conditions to the exchange offer are satisfied or waived on the expiration date, we will accept all old notes properly tendered and will issue the new notes promptly thereafter. See "-- Conditions to the Exchange Offer." For purposes of this exchange offer, old notes will be deemed to have been accepted as validly tendered for exchange when, as and if we give oral or written notice of acceptance to the exchange agent. We will issue the new notes in exchange for the old notes tendered pursuant to a notice of guaranteed delivery by an eligible institution only against delivery to the exchange agent of the letter of transmittal, the tendered old notes and any other required documents, or the receipt by the exchange agent of a timely confirmation of a book-entry transfer of old notes into the exchange agent's account at DTC with an agent's message, in each case, in form satisfactory to us and the exchange agent. If any tendered old notes are not accepted for any reason provided by the terms and conditions of this exchange offer or if old notes are submitted for a greater principal amount than the holder desires to exchange, the unaccepted or non-exchanged old notes will be returned without expense to the tendering holder, or, in the case of old notes tendered by book-entry transfer procedures described above, will be credited to an account maintained with the book-entry transfer facility, as promptly as practicable after withdrawal, rejection of tender or the expiration or termination of the exchange offer. By tendering into this exchange offer, you will irrevocably appoint our designees as your attorneys-in-fact and proxies with full power of substitution and resubstitution to the full extent of your rights on the old notes tendered. This proxy will be considered coupled with an interest in the tendered old notes. This appointment will be effective only when and to the extent that we accept your old notes in this exchange offer. All prior proxies on the old notes will then be revoked and you will not be entitled to give any subsequent proxy. Any proxy that you may give subsequently will not be deemed effective. Our designees will be empowered to exercise all voting and other rights of the holders as they may deem proper at any meeting of note holders or otherwise. The old notes will be validly tendered only if we are able to exercise full voting rights on the old notes, including voting at any meeting of the note holders, and full rights to consent to any action taken by the note holders. 63 68 WITHDRAWAL OF TENDERS Except as otherwise provided in this prospectus, you may withdraw tenders of old notes at any time before 5:00 p.m., New York City time, on the expiration date. For a withdrawal to be effective, you must send a written notice of withdrawal to the exchange agent before 5:00 p.m., New York City time, on the expiration date at the address provided below under "-- Exchange Agent" and before acceptance of your tendered old notes for exchange by us. Any notice of withdrawal must: (1) specify the name of the person having tendered the old notes to be withdrawn, (2) identify the old notes to be withdrawn, including, if applicable, the registration number or numbers and total principal amount of the old notes, (3) be signed by the person having tendered the old notes to be withdrawn in the same manner as the original signature on the letter of transmittal by which these old notes were tendered, including any required signature guarantees, or be accompanied by documents of transfer sufficient to permit the trustee for the old notes to register the transfer of these old notes into the name of the person having made the original tender and withdrawing the tender, (4) specify the name in which any of these old notes are to be registered, if this name is different from that of the person having tendered the old notes to be withdrawn, and (5) if applicable because the old notes have been tendered through the book-entry procedure, specify the name and number of the participant's account at DTC to be credited, if different than that of the person having tendered the old notes to be withdrawn. We will determine all questions as to the validity, form and eligibility, including time of receipt, of all notices of withdrawal and our determination will be final and binding on all parties. Old notes that are withdrawn will be deemed not to have been validly tendered for exchange in this exchange offer. The exchange agent will return without cost to their holders all old notes that have been tendered for exchange and are not exchanged for any reason, as promptly as practicable after withdrawal, rejection of tender or expiration or termination of this exchange offer. You may retender properly withdrawn old notes in this exchange offer by following one of the procedures described under "-- Procedures for Tendering Old Notes" above at any time on or before the expiration date. CONDITIONS TO THE EXCHANGE OFFER We will complete this exchange offer only if: (1) there is no action or proceeding instituted or threatened in any court or before any governmental agency or body that in our judgment would reasonably be expected to prohibit, prevent or otherwise impair our ability to proceed with this exchange offer, (2) there is no change in the laws and regulations which, in our judgment, would reasonably be expected to impair our ability to proceed with this exchange offer, (3) there is no change in the current interpretation of the staff of the SEC which permits resales of the new notes, (4) there is no stop order issued by the SEC or any state securities authority suspending the effectiveness of the registration statement which includes this prospectus or the qualification of the indenture for our new notes under the Trust Indenture Act of 1939 and there are no proceedings initiated or, to our knowledge, threatened for that purpose, and (5) we obtain all governmental approvals that we deem in our sole discretion necessary to complete this exchange offer. 64 69 These conditions are for our sole benefit. We may assert any one of these conditions regardless of the circumstances giving rise to it and may also waive any one of them, in whole or in part, at any time and from time to time, if we determine in our reasonable discretion that it has not been satisfied, subject to applicable law. We will not be deemed to have waived our rights to assert or waive these conditions if we fail at any time to exercise any of them. Each of these rights will be deemed an ongoing right which we may assert at any time and from time to time. If we determine that we may terminate this exchange offer because any of these conditions is not satisfied, we may: (1) refuse to accept and return to their holders any old notes that have been tendered, (2) extend the exchange offer and retain all notes tendered before the expiration date, subject to the rights of the holders of the old notes to withdraw their tenders, or (3) waive any condition that has not been satisfied and accept all properly tendered old notes that have not been withdrawn or otherwise amend the terms of this exchange offer in any respect. See "-- Expiration Date; Extensions; Amendments; Termination." ACCOUNTING TREATMENT We will record the new notes at the same carrying value as the old notes as reflected in our accounting records on the date of the exchange. Accordingly, we will not recognize any gain or loss for accounting purposes. We will amortize the costs of the exchange offer and the unamortized expenses related to the issuance of the new notes over the term of the new notes. EXCHANGE AGENT We have appointed Wells Fargo Bank Minnesota, N.A. as exchange agent for this exchange offer. You should direct all questions and requests for assistance on the procedures for tendering and all requests for additional copies of this prospectus or the letter of transmittal to the exchange agent as follows: By registered and certified mail: Wells Fargo Bank Minnesota, N.A. MAC #N9303-121 Corporate Trust Operations P.O. Box 1517 Minneapolis, Minnesota 55480-1517 By regular mail or overnight delivery: Wells Fargo Bank Minnesota, N.A. MAC #N9303-121 Corporate Trust Operations 6th & Marquette Avenues Minneapolis, Minnesota 55479 By hand: Wells Fargo Bank Minnesota, N.A. Corporate Trust Operations, 12th Floor 608 Second Avenue South Minneapolis, Minnesota 55402 Facsimile: (612) 667-4927 Telephone: (800) 344-5128 65 70 FEES AND EXPENSES We will bear the expenses of soliciting tenders in this exchange offer, including fees and expenses of the exchange agent and trustee and accounting, legal, printing and related fees and expenses. We will not make any payments to brokers, dealers or other persons soliciting acceptances of this exchange offer. However, we will pay the exchange agent reasonable and customary fees for its services and will reimburse the exchange agent for its reasonable out-of-pocket expenses in connection with this exchange offer. We will also pay brokerage houses and other custodians, nominees and fiduciaries their reasonable out-of-pocket expenses for forwarding copies of the prospectus, letters of transmittal and related documents to the beneficial owners of the old notes and for handling or forwarding tenders for exchange to their customers. We will pay all transfer taxes, if any, applicable to the exchange of old notes in accordance with this exchange offer. However, tendering holders will pay the amount of any transfer taxes, whether imposed on the registered holder or any other persons, if: (1) certificates representing new notes or old notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the old notes tendered; (2) tendered old notes are registered in the name of any person other than the person signing the letter of transmittal; or (3) a transfer tax is payable for any reason other than the exchange of the old notes in this exchange offer. If you do not submit satisfactory evidence of the payment of any of these taxes or of any exemption from this payment with the letter of transmittal, we will bill you directly for the amount of these transfer taxes. YOUR FAILURE TO PARTICIPATE IN THE EXCHANGE OFFER WILL HAVE ADVERSE CONSEQUENCES The old notes were not registered under the Securities Act or under the securities laws of any state and you may not resell them, offer them for resale or otherwise transfer them unless they are subsequently registered or resold under an exemption from the registration requirements of the Securities Act and applicable state securities laws. If you do not exchange your old notes for new notes in accordance with this exchange offer, or if you do not properly tender your old notes in this exchange offer, you will not be able to resell, offer to resell or otherwise transfer the old notes unless they are registered under the Securities Act or unless you resell them, offer to resell or otherwise transfer them under an exemption from the registration requirements of, or in a transaction not subject to, the Securities Act. In addition, you will not necessarily be able to require us to register the old notes under the Securities Act. DELIVERY OF PROSPECTUS Each broker-dealer that receives new notes for its own account in exchange for old notes, where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such new notes. See "Plan of Distribution." 66 71 DESCRIPTION OF NOTES You can find the definitions of certain terms used in this description under the subheading "Certain Definitions." In this description, the word "Hercules" refers only to Hercules Incorporated and not to any of its subsidiaries. Hercules issued the old notes and will issue the new notes under an indenture among itself, the Guarantors and Wells Fargo Bank Minnesota, N.A., as trustee. The terms of the new notes are identical in all material respects to the respective terms of the old notes except that (i) the new notes have been registered under the Securities Act, and therefore will not be subject to certain restrictions on transfer applicable to the old notes, and (ii) holders of the new notes generally will not be entitled to certain rights, including the payment of Liquidated Damages, pursuant to the registration rights agreement. The terms of the new notes include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939. Any old notes which remain outstanding after consummation of the exchange offer and the new notes issued in the exchange offer will vote together as a single class for purposes of determining whether holders of the requisite percentage of outstanding principal amount thereof have taken certain actions or exercised certain rights under the Indenture. The following description is a summary of the material provisions of the indenture and the registration rights agreement. It does not restate those agreements in their entirety. We urge you to read the indenture and the registration rights agreement because they, and not this description, define your rights as holders of the notes. Copies of the indenture and the registration rights agreement are available as set forth below under "-- Additional Information." Certain defined terms used in this description but not defined below under "-- Certain Definitions" have the meanings assigned to them in the indenture. The registered Holder of a note will be treated as the owner of it for all purposes. Only registered Holders will have rights under the indenture. BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES The Notes The notes will be: - general unsecured obligations of Hercules; - pari passu in right of payment with all existing and future unsecured senior Indebtedness of Hercules; - senior in right of payment to any future subordinated Indebtedness of Hercules; and - unconditionally guaranteed by the Guarantors. However, the notes will be effectively subordinated to all borrowings under the senior credit facility, which is secured by substantially all of the assets of Hercules and the Guarantors. See "Risk Factors -- Risks Related to the Notes -- Although the notes constitute senior indebtedness, they and the guarantees thereof will be effectively subordinated to our and the guarantors' secured obligations and the obligations of any of our non-guarantor subsidiaries." All references to notes herein includes the old notes and the new notes. The Guarantees The notes are guaranteed by all of Hercules' wholly-owned Domestic Restricted Subsidiaries. Each guarantee of the notes: - is a general unsecured obligation of the Guarantor; - is equal in right of payment to all existing and future Senior Debt of that Guarantor, and - is senior in right of payment with any future subordinated Indebtedness of that Guarantor. 67 72 Not all of Hercules' subsidiaries have guaranteed the notes. In the event of a bankruptcy, liquidation or reorganization of any of these non-guarantor subsidiaries, the non-guarantor subsidiaries will pay the holders of their debt and their trade creditors before they will be able to distribute any of their assets to Hercules. The guarantees of the notes are unsecured and, therefore, will be effectively subordinated to any secured debt of the Guarantors. See "Risk Factors -- Risks Related to the Notes -- Although the notes constitute senior indebtedness, they and the guarantees thereof will be effectively subordinated to our and the guarantors' secured obligations and the obligations of our non-guarantor subsidiaries." As of the date of the indenture, essentially all of Hercules' domestic subsidiaries were "Restricted Subsidiaries." However, under the circumstances described below under the subheading "-- Certain Covenants -- Designation of Restricted and Unrestricted Subsidiaries," Hercules will be permitted to designate certain of its subsidiaries as "Unrestricted Subsidiaries." The Unrestricted Subsidiaries will not be subject to many of the restrictive covenants in the indenture. The Unrestricted Subsidiaries will not guarantee the notes. PRINCIPAL, MATURITY AND INTEREST Hercules may issue notes with a maximum aggregate principal amount of $500 million, of which $400 million old notes were issued on November 14, 2000. Hercules may issue additional notes from time to time after this exchange offer. Any offering of additional notes is subject to the covenant described below under the caption "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock." The notes and any additional notes subsequently issued under the indenture will be treated as a single class for all purposes under the indenture, including, without limitation, waivers, amendments, redemptions and offers to purchase. Hercules will issue notes in denominations of $1,000 and integral multiples of $1,000. The notes will mature on November 15, 2007. Interest on the notes will accrue at the rate of 11.125% per annum and will be payable semi-annually in arrears on May 15 and November 15, commencing on May 15, 2001. Hercules will make each interest payment to the Holders of record on the immediately preceding May 1 and November 1. Interest on the notes will accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. METHODS OF RECEIVING PAYMENTS ON THE NOTES If a Holder has given wire transfer instructions to Hercules, Hercules will pay all principal, interest and premium and Liquidated Damages, if any, on that Holder's notes in accordance with those instructions. All other payments on notes will be made at the office or agency of the paying agent and registrar within the City and State of New York unless Hercules elects to make interest payments by check mailed to the Holders at their address set forth in the register of Holders. PAYING AGENT AND REGISTRAR FOR THE NOTES The trustee will initially act as paying agent and registrar. Hercules may change the paying agent or registrar without prior notice to the Holders of the notes, and Hercules or any of its Subsidiaries may act as paying agent or registrar. TRANSFER AND EXCHANGE A Holder may transfer or exchange notes in accordance with the indenture. The registrar and the trustee may require a Holder to furnish appropriate endorsements and transfer documents in connection with a transfer of notes. Holders will be required to pay all taxes due on transfer. Hercules is not required to transfer or exchange any note selected for redemption. Also, Hercules is not required to transfer or exchange any note for a period of 15 days before a selection of notes to be redeemed. 68 73 SUBSIDIARY GUARANTEES The notes are guaranteed by each of Hercules' current and future wholly-owned Domestic Restricted Subsidiaries. These Subsidiary Guarantees are joint and several obligations of the Guarantors. The obligations of each Guarantor under its Subsidiary Guarantee are limited as necessary to prevent that Subsidiary Guarantee from constituting a fraudulent conveyance under applicable law. See "Risk Factors -- Risks Related to the Notes -- The notes and the guarantees are subject to the provisions of federal bankruptcy law and comparable provisions of state law with respect to fraudulent conveyances." A Guarantor may not sell or otherwise dispose of all or substantially all of its assets to, or consolidate with or merge with or into (whether or not such Guarantor is the surviving Person), another Person, other than Hercules or another Guarantor, unless: (1) immediately after giving effect to that transaction, no Default or Event of Default exists; and (2) either: (a) the Person acquiring the property in any such sale or disposition or the Person formed by or surviving any such consolidation or merger assumes all the obligations of that Guarantor under the indenture, its Subsidiary Guarantee and the registration rights agreement pursuant to a supplemental indenture satisfactory to the trustee; or (b) the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the indenture. The Subsidiary Guarantee of a Guarantor will be released: (1) in connection with any sale or other disposition of all or substantially all of the assets of that Guarantor (including by way of merger or consolidation) to a Person that is not (either before or after giving effect to such transaction) a Subsidiary of Hercules, if the sale or other disposition complies with the "Asset Sale" provisions of the indenture; (2) in connection with any sale of all of the Capital Stock of a Guarantor to a Person that is not (either before or after giving effect to such transaction) a Subsidiary of Hercules, if the sale complies with the "Asset Sale" provisions of the indenture; or (3) if Hercules designates any Restricted Subsidiary that is a Guarantor as an Unrestricted Subsidiary in accordance with the applicable provisions of the indenture. See "-- Repurchase at the Option of Holders -- Asset Sales." OPTIONAL REDEMPTION At any time prior to November 15, 2003, Hercules may on any one or more occasions redeem up to 35% of the aggregate principal amount of notes issued under the indenture at a redemption price of 111.125% of the principal amount, plus accrued and unpaid interest and Liquidated Damages, if any, to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that: (1) at least 65% of the aggregate principal amount of notes issued under the indenture remains outstanding immediately after the occurrence of such redemption (excluding notes held by Hercules and its Subsidiaries); and (2) the redemption occurs within 45 days of the date of the closing of such Public Equity Offering. At any time prior to November 15, 2001, Hercules may also redeem all or a part of the notes upon the occurrence of a Change of Control, upon not less than 30 nor more than 60 days prior notice (but in no event may any such redemption occur more than 90 days after the occurrence of such Change of Control) mailed by first-class mail to each Holder's registered address, at a redemption price equal to 111.125% of the principal amount of notes redeemed plus accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption (the "Redemption Date"). 69 74 Except pursuant to the preceding paragraphs, the notes will not be redeemable at Hercules' option prior to maturity. MANDATORY REDEMPTION Hercules is not required to make mandatory redemption or sinking fund payments with respect to the notes. REPURCHASE AT THE OPTION OF HOLDERS Change of Control If a Change of Control occurs, each Holder of notes will have the right to require Hercules to repurchase all or any part (equal to $1,000 or an integral multiple of $1,000) of that Holder's notes pursuant to a Change of Control Offer on the terms set forth in the indenture. In the Change of Control Offer, Hercules will offer a Change of Control Payment in cash equal to (i) 111.125% of the aggregate principal amount of notes repurchased if such Change of Control is prior to November 15, 2001 and (ii) 101% of the aggregate principal amount of notes repurchased if such Change of Control is on or after November 15, 2001 plus, in each case, accrued and unpaid interest and Liquidated Damages, if any, on the notes repurchased, to the date of purchase. Within ten days following any Change of Control, Hercules will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase notes on the Change of Control Payment Date specified in the notice, which date will be no earlier than 30 days and no later than 60 days from the date such notice is mailed, pursuant to the procedures required by the indenture and described in such notice. Hercules will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with the repurchase of the notes as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the Change of Control provisions of the indenture, Hercules will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the Change of Control provisions of the indenture by virtue of such conflict. On the Change of Control Payment Date, Hercules will, to the extent lawful: (1) accept for payment all notes or portions of notes properly tendered pursuant to the Change of Control Offer; (2) deposit with the paying agent an amount equal to the Change of Control Payment in respect of all notes or portions of notes properly tendered; and (3) deliver or cause to be delivered to the trustee the notes properly accepted together with an officers' certificate stating the aggregate principal amount of notes or portions of notes being purchased by Hercules. The paying agent will promptly mail to each Holder of notes properly tendered the Change of Control Payment for such notes, and the trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new note equal in principal amount to any unpurchased portion of the notes surrendered, if any; provided that each new note will be in a principal amount of $1,000 or an integral multiple of $1,000. Hercules will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. The provisions described above that require Hercules to make a Change of Control Offer following a Change of Control will be applicable whether or not any other provisions of the indenture are applicable. Except as described above with respect to a Change of Control, the indenture does not contain provisions that permit the Holders of the notes to require that Hercules repurchase or redeem the notes in the event of a takeover, recapitalization or similar transaction. 70 75 Hercules will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the indenture applicable to a Change of Control Offer made by Hercules and purchases all notes properly tendered and not withdrawn under the Change of Control Offer. The definition of Change of Control includes a phrase relating to the direct or indirect sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the properties or assets of Hercules and its Subsidiaries taken as a whole. Although there is a limited body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a Holder of notes to require Hercules to repurchase its notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of Hercules and its Subsidiaries taken as a whole to another Person or group may be uncertain. ASSET SALES Hercules will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless: (1) Hercules (or the Restricted Subsidiary, as the case may be) receives consideration at the time of the Asset Sale at least equal to the fair market value of the assets or Equity Interests issued or sold or otherwise disposed of; (2) the fair market value is determined by (i) in the case of property valued at less than $5.0 million, Hercules' principal financial or accounting officer and evidenced by an Officers' Certificate delivered to the trustee and (ii) in the case of property valued at $5.0 million or more, Hercules' Board of Directors and evidenced by a resolution of the Board of Directors set forth in an officers' certificate delivered to the trustee; and (3) at least 75% of the consideration received in the Asset Sale by Hercules or such Restricted Subsidiary is in the form of cash. For purposes of this provision, each of the following will be deemed to be cash: (a) any liabilities, as shown on Hercules' or such Restricted Subsidiary's most recent balance sheet, of Hercules or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the notes or any Subsidiary Guarantee) that are assumed by the transferee of any such assets pursuant to a customary novation or an assignment agreement that releases Hercules or such Restricted Subsidiary from further liability; and (b) any securities, notes or other obligations received by Hercules or any such Restricted Subsidiary from such transferee that are contemporaneously, subject to ordinary settlement periods, converted by Hercules or such Restricted Subsidiary into cash, to the extent of the cash received in that conversion. Notwithstanding the foregoing, Hercules and its Restricted Subsidiaries may engage in Asset Swaps; provided that, (1) immediately after giving effect to such Asset Swap, Hercules would be permitted to incur at least $1.00 of Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described below under the caption "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock" and (2) Hercules' or the Restricted Subsidiary's Board of Directors, as the case may be, determines that such Asset Swap is fair to Hercules or such Restricted Subsidiary, as the case may be, from a financial point of view and such determination is (A) in the case of Asset Swaps valued at less than $5.0 million, Hercules' principal financial or accounting officer and evidenced by an Officers' Certificate delivered to the trustee, (B) for Asset Swaps valued at $5.0 million or more but less than $10.0 million, evidenced by a resolution of such Board of Directors set forth in an Officer's Certificate delivered to the Trustee and (C) for Asset Swaps valued at $10.0 million or more, evidenced by an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing. 71 76 Within 360 days after the receipt of any Net Proceeds from an Asset Sale, Hercules may apply those Net Proceeds: (1) to repay Indebtedness and/or other Obligations under a Credit Facility and, if the Indebtedness repaid is revolving credit Indebtedness, to correspondingly reduce commitments with respect thereto; (2) to acquire all or substantially all of the assets of, or a majority of the Voting Stock of, another Permitted Business; or (3) to acquire or obtain other long-term assets that are used or useful in a Permitted Business. Pending the final application of any Net Proceeds, Hercules may temporarily reduce revolving credit borrowings or otherwise invest the Net Proceeds in any manner that is not prohibited by the indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the preceding paragraph will constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million, Hercules will make an Asset Sale Offer to all Holders of notes and all holders of other Indebtedness that is pari passu with the notes containing provisions similar to those set forth in the indenture with respect to offers to purchase or redeem with the proceeds of sales of assets to purchase the maximum principal amount of notes and such other pari passu Indebtedness that may be purchased out of the Excess Proceeds. The offer price in any Asset Sale Offer will be equal to 100% of principal amount plus accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase, and will be payable in cash. If any Excess Proceeds remain after consummation of an Asset Sale Offer, Hercules may use those Excess Proceeds for any purpose not otherwise prohibited by the indenture. If the aggregate principal amount of notes and other pari passu Indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds, the trustee will select the notes and such other pari passu Indebtedness to be purchased on a pro rata basis. Upon completion of each Asset Sale Offer, the amount of Excess Proceeds will be reset at zero. Hercules will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with each repurchase of notes pursuant to an Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with the Asset Sale provisions of the indenture, Hercules will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the Asset Sale provisions of the indenture by virtue of such conflict. The agreements governing Hercules' other Indebtedness contain prohibitions of certain events, including events that would constitute a Change of Control or an Asset Sale. In addition, the exercise by the Holders of notes of their right to require Hercules to repurchase the notes upon a Change of Control or an Asset Sale could cause a default under these other agreements, even if the Change of Control or Asset Sale itself does not, due to the financial effect of such repurchases on Hercules. Finally, Hercules' ability to pay cash to the Holders of notes upon a repurchase may be limited by Hercules' then existing financial resources. See "Risk Factors -- Risks Related to the Notes -- We may not have the ability to raise the funds necessary to finance the Change of Control offer required by the indenture governing the notes or to repay indebtedness as a result of the Change of Control, which may prevent us from entering into certain business combinations." SELECTION AND NOTICE If less than all of the notes are to be redeemed at any time, the trustee will select notes for redemption is follows: (1) if the notes are listed on any national securities exchange, in compliance with the requirements of the principal national securities exchange on which the notes are listed; or (2) if the notes are not listed on any national securities exchange, on a pro rata basis. No notes of $1,000 or less can be redeemed in part. Notices of redemption will be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder of notes to be redeemed at its registered address, except that redemption notices may be mailed more than 60 days prior to a 72 77 redemption date if the notice is issued in connection with a defeasance of the notes or a satisfaction and discharge of the indenture. Notices of redemption may not be conditional. If any note is to be redeemed in part only, the notice of redemption that relates to that note will state the portion of the principal amount of that note that is to be redeemed. A new note in principal amount equal to the unredeemed portion of the original note will be issued in the name of the Holder of notes upon cancellation of the original note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on notes or portions of them called for redemption. CERTAIN COVENANTS Restricted Payments Hercules will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: (1) declare or pay any dividend or make any other payment or distribution on account of Hercules' or any of its Restricted Subsidiaries' Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving Hercules or any of its Restricted Subsidiaries) or to the direct or indirect holders of Hercules' or any of its Restricted Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of Hercules or to Hercules or a Restricted Subsidiary of Hercules); (2) purchase, redeem or otherwise acquire or retire for value (including, without limitation, in connection with any merger or consolidation involving Hercules) any Equity Interests of Hercules or any direct or indirect parent of Hercules; (3) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the notes or the Subsidiary Guarantees, except a payment of interest or principal at the Stated Maturity thereof; or (4) make any Restricted Investment (all such payments and other actions set forth in these clauses (1) through (4) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (1) no Default or Event of Default has occurred and is continuing or would occur as a consequence of such Restricted Payment; and (2) Hercules would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described below under the caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock;" and (3) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by Hercules and its Restricted Subsidiaries after the date of the indenture (excluding Restricted Payments permitted by clauses (2), (3) and (4) of the next succeeding paragraph), is less than the sum, without duplication, of: (a) 50% of the Consolidated Net Income of Hercules for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date of the indenture to the end of Hercules' most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (b) 100% of the aggregate Qualified Proceeds received by Hercules since the date of the indenture as a contribution to its common equity capital or from the issue or sale of Equity Interests of Hercules (other than Disqualified Stock) or from the issue or sale of convertible or exchangeable Disqualified Stock or convertible or exchangeable debt securities of Hercules that 73 78 have been converted into or exchanged for such Equity Interests (other than Equity Interests (or Disqualified Stock or debt securities) sold to a Subsidiary of Hercules), plus (c) to the extent that any Restricted Investment that was made after the date of the indenture is sold for cash or otherwise liquidated or repaid for cash, the lesser of (i) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (ii) the initial amount of such Restricted Investment. So long as no Default has occurred and is continuing or would be caused thereby, the preceding provisions will not prohibit: (1) the payment of any dividend within 60 days after the date of declaration of the dividend, if at the date of declaration the dividend payment would have complied with the provisions of the indenture; (2) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness of Hercules or any Guarantor or of any Equity Interests of Hercules in exchange for, or out of the net cash proceeds of the substantially concurrent sale (other than to a Restricted Subsidiary of Hercules) of, Equity Interests of Hercules (other than Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition will be excluded from clause (3)(b) of the preceding paragraph; (3) the defeasance, redemption, repurchase or other acquisition of subordinated Indebtedness of Hercules or any Guarantor with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (4) the payment of any dividend by a Restricted Subsidiary of Hercules to the holders of its Equity Interests on a pro rata basis; (5) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of Hercules or any Restricted Subsidiary of Hercules held by any member of Hercules' (or any of its Restricted Subsidiaries') management pursuant to any management equity subscription agreement, stock option agreement, employee benefit plan or similar agreement; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests may not exceed $10.0 million in any twelve-month period; and (6) other Restricted Payments in an aggregate amount not to exceed $100.0 million. The amount of all Restricted Payments (other than cash) will be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by Hercules or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any assets or securities that are required to be valued by this covenant and have a fair market value that exceeds (i) $5.0 million will be evidenced by a certificate issued by the chief executive officer, chief financial officer or general counsel and will be delivered to the trustee or (ii) $20.0 million will be approved by a majority of disinterested members of the Board of Directors whose resolution with respect thereto will be delivered to the trustee. The approval by a majority of disinterested members of the Board of Directors' must be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing. A copy of any fairness opinion or appraisal required by the indenture, together with the resolution of the Board of Directors, must be delivered to the trustee no later than the date of making any Restricted Payment. Incurrence of Indebtedness and Issuance of Preferred Stock Hercules will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt), and Hercules will not issue any Disqualified Stock and will not permit any of its Subsidiaries to issue any shares of preferred stock; provided, however, that Hercules may incur Indebtedness (including Acquired Debt) or issue Disqualified Stock, and the Guarantors may incur Indebtedness or issue preferred stock, if the Fixed Charge Coverage Ratio for Hercules' most recently ended four full fiscal quarters for which internal financial statements are available 74 79 immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock or preferred stock is issued would have been at least 2.0 to 1 for any incurrence on or prior to November 15, 2002 and 2.5 to 1 any time thereafter, in each case, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred or the preferred stock or Disqualified Stock had been issued, as the case may be, at the beginning of such four-quarter period. The first paragraph of this covenant will not prohibit the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (1) the incurrence by Hercules and any of its Subsidiaries of additional Indebtedness and letters of credit under Credit Facilities in an aggregate principal amount at any one time outstanding under this clause (1) (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of Hercules and its Subsidiaries thereunder) not to exceed the greater of (i) $2.2 billion and (ii) the Borrowing Base less the aggregate amount of all repayments, optional or mandatory, of the principal of any term Indebtedness under a Credit Facility that have been made by Hercules or any of its Subsidiaries since the date of the indenture and less the aggregate amount of all commitment reductions with respect to any revolving credit borrowings under a Credit Facility that have been made by Hercules or any of its Subsidiaries since the date of the indenture; (2) the incurrence by Hercules and its Subsidiaries of the Existing Indebtedness; (3) the incurrence by Hercules and the Guarantors of Indebtedness represented by the notes and the related Subsidiary Guarantees to be issued on the date of the indenture and the Exchange notes and the related Subsidiary Guarantees to be issued pursuant to the registration rights agreement; (4) the incurrence by Hercules or any of its Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case, incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of Hercules or such Subsidiary or in a Permitted Business, in an aggregate principal amount, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (4), not to exceed $25.0 million at any time outstanding; (5) the incurrence by Hercules or any of its Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness (other than intercompany Indebtedness) that was permitted by the indenture to be incurred under the first paragraph of this covenant or clauses (2), (3), (4), (5), (10) or (12) of this paragraph; (6) the incurrence by Hercules or any of its Subsidiaries of intercompany Indebtedness between or among Hercules and any of its Restricted Subsidiaries; provided, however, that: (a) if Hercules or any Guarantor is the obligor on such Indebtedness, such Indebtedness must be expressly subordinated to the prior payment in full in cash of all Obligations with respect to the notes, in the case of Hercules, or the Subsidiary Guarantee, in the case of a Guarantor; and (b) (i) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than Hercules or a Subsidiary of Hercules and (ii) any sale or other transfer of any such Indebtedness to a Person that is not either Hercules or a Restricted Subsidiary of Hercules; will be deemed, in each case, to constitute an incurrence of such Indebtedness by Hercules or such Subsidiary, as the case may be, that was not permitted by this clause (6); (7) the incurrence by Hercules or any of its Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of the indenture to be outstanding; 75 80 (8) the guarantee by Hercules or any of the Guarantors of Indebtedness of Hercules or a Subsidiary of Hercules that was permitted to be incurred by another provision of this covenant; (9) the accrual of interest, the accretion or amortization of original issue discount, the payment of interest on any Indebtedness in the form of additional Indebtedness with the same terms, and the payment of dividends on Disqualified Stock in the form of additional shares of the same class of Disqualified Stock will not be deemed to be an incurrence of Indebtedness or an issuance of Disqualified Stock for purposes of this covenant; provided, in each such case, that the amount thereof is included in Fixed Charges of Hercules as accrued; (10) the incurrence by Hercules' Unrestricted Subsidiaries of Non-Recourse Debt, provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such event will be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of Hercules that was not permitted by this clause (10); (11) Indebtedness in respect of performance and surety bonds, terminable guarantees and completion guarantees or other similar forms of Indebtedness provided by Hercules or a Restricted Subsidiary in the ordinary course of business; and (12) the incurrence by Hercules or any of its Subsidiaries of additional Indebtedness in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (12), not to exceed $100.0 million. Hercules will not incur any Indebtedness (including Permitted Debt) that is contractually subordinated in right of payment to any other Indebtedness of Hercules unless such Indebtedness is also contractually subordinated in right of payment to the notes on substantially identical terms; provided, however, that no Indebtedness of Hercules will be deemed to be contractually subordinated in right of payment to any other Indebtedness of Hercules solely by virtue of being unsecured. For purposes of determining compliance with this "Incurrence of Indebtedness and Issuance of Preferred Stock" covenant, in the event that an item of proposed Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (1) through (12) above, or is entitled to be incurred pursuant to the first paragraph of this covenant, Hercules will be permitted to classify such item of Indebtedness on the date of its incurrence, or later reclassify all or a portion of such item of Indebtedness, in any manner that complies with this covenant. Indebtedness under Credit Facilities outstanding on the date on which notes are first issued and authenticated under the indenture will be deemed to have been incurred on such date in reliance on the exception provided by clause (1) of the definition of Permitted Debt. Liens Hercules will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind securing Indebtedness, Attributable Debt or trade payables on any asset now owned or hereafter acquired, except Permitted Liens. Dividend and Other Payment Restrictions Affecting Subsidiaries Hercules will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to: (1) pay dividends or make any other distributions on its Capital Stock to Hercules or any of its Restricted Subsidiaries, or with respect to any other interest or participation in, or measured by, its profits, or pay any indebtedness owed to Hercules or any of its Restricted Subsidiaries; (2) make loans or advances to Hercules or any of its Restricted Subsidiaries; or (3) transfer any of its properties or assets to Hercules or any of its Restricted Subsidiaries. 76 81 However, the preceding restrictions will not apply to encumbrances or restrictions existing under or by reason of: (1) agreements governing Existing Indebtedness and Credit Facilities as in effect on the date of the indenture and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings of those agreements, provided that the amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are no more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in those agreements on the date of the indenture; (2) the indenture, the notes and the Subsidiary Guarantees; (3) applicable law; (4) any instrument governing Indebtedness or Capital Stock of a Person acquired by Hercules or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness or Capital Stock was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the indenture to be incurred; (5) customary non-assignment provisions in leases entered into in the ordinary course of business; (6) purchase money obligations for property acquired in the ordinary course of business that impose restrictions on that property of the nature described in clause (3) of the preceding paragraph; (7) any agreement for the sale or other disposition of a Restricted Subsidiary that restricts distributions by that Restricted Subsidiary pending its sale or other disposition; (8) Permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive, taken as a whole, than those contained in the agreements governing the Indebtedness being refinanced; (9) Liens securing Indebtedness otherwise permitted to be incurred under the provisions of the covenant described above under the caption "-- Liens" that limit the right of the debtor to dispose of the assets subject to such Liens; (10) provisions with respect to the disposition or distribution of assets or property in joint venture agreements, assets sale agreements, stock sale agreements and other similar agreements entered into in the ordinary course of business; and (11) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business. Merger, Consolidation or Sale of Assets Hercules may not, directly or indirectly: (1) consolidate or merge with or into another Person (whether or not Hercules is the surviving corporation); or (2) sell, assign, transfer, convey or otherwise dispose of all or substantially all of the properties or assets of Hercules and its Restricted Subsidiaries taken as a whole, in one or more related transactions, to another Person; unless: (1) either: (a) Hercules is the surviving corporation; or (b) the Person formed by or surviving any such consolidation or merger (if other than Hercules) or to which such sale, assignment, transfer, conveyance or other disposition has been made is a corporation organized or existing under the laws of the United States, any state of the United States or the District of Columbia; (2) the Person formed by or surviving any such consolidation or merger (if other than Hercules) or the Person to which such sale, assignment, transfer, conveyance or other disposition has been made assumes all the obligations of Hercules under the notes, the indenture and the registration rights agreement pursuant to agreements reasonably satisfactory to the trustee; 77 82 (3) immediately after such transaction no Default or Event of Default exists; and (4) Hercules or the Person formed by or surviving any such consolidation or merger (if other than Hercules), or to which such sale, assignment, transfer, conveyance or other disposition has been made: (a) will have Consolidated Net Worth immediately after the transaction equal to or greater than the Consolidated Net Worth of Hercules immediately preceding the transaction; and (b) will, on the date of such transaction after giving pro forma effect thereto and any related financing transactions as if the same had occurred at the beginning of the applicable four quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described above under the caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock." In addition, Hercules may not, directly or indirectly, lease all or substantially all of its properties or assets, in one or more related transactions, to any other Person. This "Merger, Consolidation or Sale of Assets" covenant will not apply to a sale, assignment, transfer, conveyance or other disposition of assets between or among Hercules and any of its Wholly Owned Restricted Subsidiaries which are Guarantors. Transactions with Affiliates Hercules will not, and will not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each, an "Affiliate Transaction"), unless: (1) the Affiliate Transaction is on terms that are no less favorable to Hercules or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by Hercules or such Restricted Subsidiary with an unrelated Person; and (2) Hercules delivers to the trustee: (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5.0 million, a certificate issued by the chief executive officer, chief financial officer or general counsel certifying that such Affiliate Transaction complies with this covenant; and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $25.0 million, a resolution by the Board of Directors, that is approved by a majority of disinterested members, accompanied by an opinion issued by an accounting, appraisal or investment banking firm of national standing, as to the fairness to the Holders of such Affiliate Transaction from a financial point of view. The following items will not be deemed to be Affiliate Transactions and, therefore, will not be subject to the provisions of the prior paragraph: (1) any employment agreement entered into by Hercules or any of its Restricted Subsidiaries in the ordinary course of business; (2) transactions between or among Hercules and/or its Restricted Subsidiaries; (3) transactions with a Person that is an Affiliate of Hercules solely because Hercules owns an Equity Interest in, or controls, such Person; (4) payment of reasonable directors fees to Persons who are not otherwise Affiliates of Hercules; (5) sales of Equity Interests (other than Disqualified Stock) to Affiliates of Hercules; and (6) Restricted Payments that are permitted by the provisions of the indenture described above under the caption "-- Restricted Payments." 78 83 Additional Subsidiary Guarantees If Hercules or any of its Subsidiaries acquires or creates another wholly-owned Restricted Domestic Subsidiary after the date of the indenture, then that newly acquired or created Domestic Subsidiary will become a Guarantor and execute a supplemental indenture and deliver an opinion of counsel satisfactory to the trustee within 15 Business Days of the date on which it was acquired or created; provided, however, that this covenant shall not apply to any Subsidiary that has properly been designated as an Unrestricted Subsidiary in accordance with the indenture for so long as it continues to constitute an Unrestricted Subsidiary. Designation of Restricted and Unrestricted Subsidiaries The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if that designation would not cause a Default. If a Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate fair market value of all outstanding Investments owned by Hercules and its Restricted Subsidiaries in the Subsidiary properly designated will be deemed to be an Investment made as of the time of the designation and will reduce the amount available for Restricted Payments under the first paragraph of the covenant described above under the caption "-- Restricted Payments" or Permitted Investments, as determined by Hercules. That designation will only be permitted if the Investment would be permitted at that time and if the Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary to be a Restricted Subsidiary if the redesignation would not cause a Default. Sale and Leaseback Transactions Hercules will not, and will not permit any of its Restricted Subsidiaries to, enter into any sale and leaseback transaction; provided that Hercules or any Guarantor may enter into a sale and leaseback transaction if. (1) Hercules or that Guarantor, as applicable, could have (a) incurred Indebtedness in an amount equal to the Attributable Debt relating to such sale and leaseback transaction under the Fixed Charge Coverage Ratio test in the first paragraph of the covenant described above under the caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock" and (b) incurred a Lien to secure such Indebtedness pursuant to the covenant described above under the caption "-- Liens"; (2) the gross cash proceeds of that sale and leaseback transaction are at least equal to the fair market value, as determined in good faith by (i) in the case of property valued at less than $5.0 million, Hercules' principal financial or accounting officer and evidenced by an Officers' Certificate delivered to the trustee and (ii) in the case of property valued at $5.0 million or more, the Board of Directors and set forth in an officers' certificate delivered to the trustee, of the property that is the subject of that sale and leaseback transaction; and (3) the transfer of assets in that sale and leaseback transaction is permitted by, and Hercules applies the proceeds of such transaction in compliance with, the covenant described above under the caption "-- Repurchase at the Option of Holders -- Asset Sales." Business Activities Hercules will not, and will not permit any Restricted Subsidiary to, engage in any business other than Permitted Businesses, except to such extent as would not be material to Hercules and its Restricted Subsidiaries taken as a whole. Payments for Consent Hercules will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration to or for the benefit of any Holder of notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the indenture or the notes unless such 79 84 consideration is offered to be paid and is paid to all Holders of the notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. REPORTS Whether or not required by the SEC, so long as any notes are outstanding, Hercules will furnish to the Holders of notes, within the time periods specified in the SEC's rules and regulations: (1) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K (including exhibits thereto) if Hercules were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report on the annual financial statements by Hercules' certified independent accountants; and (2) all current reports that would be required to be filed with the SEC on Form 8-K if Hercules were required to file such reports. If Hercules has designated any of its Subsidiaries as Unrestricted Subsidiaries, then the quarterly and annual financial information required by the preceding paragraph will include a reasonably detailed presentation, either on the face of the financial statements or in the footnotes thereto, and in "Management's Discussion and Analysis of Financial Condition and Results of Operations," of the financial condition and results of operations of Hercules and its Restricted Subsidiaries separate from the financial condition and results of operations of the Unrestricted Subsidiaries of Hercules. In addition, following the consummation of the exchange offer contemplated by the registration rights agreement, whether or not required by the SEC, Hercules will file a copy of all of the information and reports referred to in clauses (1) and (2) above with the SEC for public availability within the time periods specified in the SEC's rules and regulations (unless the SEC will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition, Hercules and the Subsidiary Guarantors have agreed that, for so long as any notes remain outstanding, they will furnish to the Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. EVENTS OF DEFAULT AND REMEDIES Each of the following is an Event of Default: (1) default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the notes; (2) default in payment when due of the principal of, or premium, if any, on the notes; (3) failure by (i) Hercules or any of its Subsidiaries to comply with the provisions described under the captions "-- Repurchase at the Option of Holders -- Change of Control," "-- Repurchase at the Option of Holders -- Asset Sales," "-- Certain Covenants -- Restricted Payments," "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock" or "-- Certain Covenants -- Merger, Consolidation or Sale of Assets;" or (ii) any of Hercules' wholly owned Domestic Restricted Subsidiaries to provide a Subsidiary Guarantee of the notes by February 15, 2001. (4) failure by Hercules or any of its Subsidiaries for 60 days after notice to comply with any of the other agreements in the indenture; (5) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by Hercules or any of its 80 85 Subsidiaries (or the payment of which is guaranteed by Hercules or any of its Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the indenture, if that default: (a) is caused by a failure to pay when due (including any grace period set forth in writing in the instruments governing such Indebtedness) principal of, or interest or premium, if any, on such Indebtedness (a "Payment Default"); or (b) results in the acceleration of such Indebtedness prior to its express maturity, and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $50.0 million or more; (6) failure by Hercules or any of its Subsidiaries to pay final judgments aggregating in excess of $50.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; and (7) except as permitted by the indenture, any Subsidiary Guarantee shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Subsidiary Guarantee; and (8) certain events of bankruptcy or insolvency described in the indenture with respect to Hercules or any of its Subsidiaries. In the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to Hercules, any Subsidiary that is a Significant Subsidiary or any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary, all outstanding notes will become due and payable immediately without further action or notice. If any other Event of Default occurs and is continuing, the trustee or the Holders of at least 25% in principal amount of the then outstanding notes may declare all the notes to be due and payable immediately. Holders of the notes may not enforce the indenture or the notes except as provided in the indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding notes may direct the trustee in its exercise of any trust or power. The trustee may withhold from Holders of the notes notice of any continuing Default or Event of Default if it determines that withholding notice is in their interest, except a Default or Event of Default relating to the payment of principal or interest or Liquidated Damages. The Holders of a majority in aggregate principal amount of the notes then outstanding by notice to the trustee may on behalf of the Holders of all of the notes waive any existing Default or Event of Default and its consequences under the indenture except a continuing Default or Event of Default in the payment of interest or Liquidated Damages on, or the principal of, the notes. Hercules is required to deliver to the trustee annually a statement regarding compliance with the indenture. Upon becoming aware of any Default or Event of Default, Hercules is required to deliver to the trustee a statement specifying such Default or Event of Default. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No director, officer, employee, incorporator or stockholder of Hercules or any Guarantor, as such, will have any liability for any obligations of Hercules or the Guarantors under the notes, the indenture, the Subsidiary Guarantees, the pledge agreement or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of notes by accepting a note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the notes. The waiver may not be effective to waive liabilities under the federal securities laws. 81 86 LEGAL DEFEASANCE AND COVENANT DEFEASANCE Hercules may, at its option and at any time, elect to have all of its obligations discharged with respect to the outstanding notes and all obligations of the Guarantors discharged with respect to their Subsidiary Guarantees ("Legal Defeasance") except for: (1) the rights of Holders of outstanding notes to receive payments in respect of the principal of, or interest or premium and Liquidated Damages, if any, on such notes when such payments are due from the trust referred to below; (2) Hercules' obligations with respect to the notes concerning issuing temporary notes, registration of notes, mutilated, destroyed, lost or stolen notes and the maintenance of an office or agency for payment and money for security payments held in trust; (3) the rights, powers, trusts, duties and immunities of the trustee, and Hercules' and the Guarantor's obligations in connection therewith; and (4) the Legal Defeasance provisions of the indenture. In addition, Hercules may, at its option and at any time, elect to have the obligations of Hercules and the Guarantors released with respect to certain covenants that are described in the indenture ("Covenant Defeasance") and thereafter any omission to comply with those covenants will not constitute a Default or Event of Default with respect to the notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "-- Events of Default and Remedies" will no longer constitute an Event of Default with respect to the notes. In order to exercise either Legal Defeasance or Covenant Defeasance: (1) Hercules must irrevocably deposit with the trustee, in trust, for the benefit of the Holders of the notes, cash in U.S. dollars, non-callable Government Securities, or a combination of cash in U.S. dollars and non-callable Government Securities, in amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, or interest and premium and Liquidated Damages, if any, on the outstanding notes on the stated maturity or on the applicable redemption date, as the case may be, and Hercules must specify whether the notes are being defeased to maturity or to a particular redemption date; (2) in the case of Legal Defeasance, Hercules has delivered to the trustee an opinion of counsel reasonably acceptable to the trustee confirming that (a) Hercules has received from, or there has been published by, the Internal Revenue Service a ruling or (b) since the date of the indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel will confirm that, the Holders of the outstanding notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (3) in the case of Covenant Defeasance, Hercules has delivered to the trustee an opinion of counsel reasonably acceptable to the trustee confirming that the Holders of the outstanding notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (4) no Default or Event of Default has occurred and is continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit); (5) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the indenture) to which Hercules or any of its Subsidiaries is a party or by which Hercules or any of its Subsidiaries is bound; 82 87 (6) Hercules must deliver to the trustee an officers' certificate stating that the deposit was not made by Hercules with the intent of preferring the Holders of notes over the other creditors of Hercules with the intent of defeating, hindering, delaying or defrauding creditors of Hercules or others; and (7) Hercules must deliver to the trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent relating to the Legal Defeasance or the Covenant Defeasance have been complied with. AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next three succeeding paragraphs, the indenture or the notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, notes), and any existing default or compliance with any provision of the indenture or the notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding notes (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, notes). Without the consent of each Holder affected, an amendment or waiver may not (with respect to any notes held by a non-consenting Holder): (1) reduce the principal amount of notes whose Holders must consent to an amendment, supplement or waiver; (2) reduce the principal of or change the fixed maturity of any note or alter the provisions with respect to the redemption of the notes (other than provisions relating to the covenants described above under the caption "-- Repurchase at the Option of Holders"); (3) reduce the rate of or change the scheduled time for payment of interest on any note; (4) waive a Default or Event of Default in the payment of principal of, or interest or premium, or Liquidated Damages, if any, on the notes (except a rescission of acceleration of the notes by the Holders of at least a majority in aggregate principal amount of the notes and a waiver of the payment default that resulted from such acceleration); (5) make any note payable in money other than that stated in the notes; (6) make any change in the provisions of the indenture relating to waivers of past Defaults or the rights of Holders of notes to receive payments of principal of, or interest or premium or Liquidated Damages, if any, on, the notes; (7) waive a redemption payment with respect to any note (other than a payment required by one of the covenants described above under the caption "-- Repurchase at the Option of Holders"); (8) release any Guarantor from any of its obligations under its Subsidiary Guarantee or the indenture, except in accordance with the terms of the indenture; or (9) make any change in the preceding amendment and waiver provisions. Notwithstanding the preceding, without the consent of any Holder of notes, Hercules, the Guarantors and the trustee may amend or supplement the indenture or the notes: (1) to cure any ambiguity, defect or inconsistency; (2) to provide for uncertificated notes in addition to or in place of certificated notes; (3) to provide for the assumption of Hercules' obligations to Holders of notes in the case of a merger or consolidation or sale of all or substantially all of Hercules' assets; (4) to make any change that would provide any additional rights or benefits to the Holders of notes or that does not adversely affect the legal rights under the indenture of any such Holder; or 83 88 (5) to comply with requirements of the SEC in order to effect or maintain the qualification of the indenture under the Trust Indenture Act. SATISFACTION AND DISCHARGE The indenture will be discharged and will cease to be of further effect as to all notes issued thereunder, when: (1) either: (a) all notes that have been authenticated, except lost, stolen or destroyed notes that have been replaced or paid and notes for whose payment money has been deposited in trust and thereafter repaid to Hercules, have been delivered to the trustee for cancellation; or (b) all notes that have not been delivered to the trustee for cancellation have become due and payable by reason of the mailing of a notice of redemption or otherwise or will become due and payable within one year and Hercules or any Guarantor has irrevocably deposited or caused to be deposited with the trustee as trust funds in trust solely for the benefit of the Holders, cash in U.S. dollars, non-callable Government Securities, or a combination of cash in U.S. dollars and non- callable Government Securities, in amounts as will be sufficient without consideration of any reinvestment of interest, to pay and discharge the entire indebtedness on the notes not delivered to the trustee for cancellation for principal, premium and Liquidated Damages, if any, and accrued interest to the date of maturity or redemption; (2) no Default or Event of Default has occurred and is continuing on the date of the deposit or will occur as a result of the deposit and the deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which Hercules or any Guarantor is a party or by which Hercules or any Guarantor is bound; (3) Hercules or any Guarantor has paid or caused to be paid all sums payable by it under the indenture; and (4) Hercules has delivered irrevocable instructions to the trustee under the indenture to apply the deposited money toward the payment of the notes at maturity or the redemption date, as the case may be. In addition, Hercules must deliver an officers' certificate and an opinion of counsel to the trustee stating that all conditions precedent to satisfaction and discharge have been satisfied. CONCERNING THE TRUSTEE If the trustee becomes a creditor of Hercules or any Guarantor, the indenture limits its right to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue or resign. The Holders of a majority in principal amount of the then outstanding notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the trustee, subject to certain exceptions. The indenture provides that in case an Event of Default occurs and is continuing, the trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the trustee will be under no obligation to exercise any of its rights or powers under the indenture at the request of any Holder of notes, unless such Holder has offered to the trustee security and indemnity satisfactory to it against any loss, liability or expense. 84 89 ADDITIONAL INFORMATION Anyone who receives this prospectus may obtain a copy of the indenture and registration rights agreement without charge by writing to Hercules Incorporated, Hercules Plaza, 1313 North Market Street, Wilmington, DE 19894-0001, Attention: General Counsel. BOOK-ENTRY, DELIVERY AND FORM Except as described in the next paragraph, the new notes will initially be issued in the form of one or more Global Notes (the "Global Notes"). The Global Notes will be deposited on the date of the closing of this exchange offer with, or on behalf of, The Depository Trust Company ("DTC") and registered in the name of Cede & Co., as nominee of DTC (such nominee being referred to herein as the "Global Note Holder"). Notes that are issued as described below under "-- Certificated Notes" will be issued in the form of registered definitive certificates (the "Certificated Notes"). Upon the transfer of Certificated Notes, Certificated Notes may, unless all Global Notes have previously been exchanged for Certificated Notes, be exchanged for an interest in the Global Note representing the principal amount of notes being transferred, subject to the transfer restrictions set forth in the indenture. DTC has advised Hercules that DTC is a limited-purpose trust company created to hold securities for its participating organizations (collectively, the "Participants") and to facilitate the clearance and settlement of transactions in those securities between Participants through electronic book-entry changes in accounts of its Participants. The Participants include securities brokers and dealers (including the initial purchasers), banks, trust companies, clearing corporations and certain other organizations. Access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (collectively, the "Indirect Participants"). Persons who are not Participants may beneficially own securities held by or on behalf of DTC only through the Participants or the Indirect Participants. The ownership interests in, and transfers of ownership interests in, each security held by or on behalf of DTC are recorded on the records of the Participants and Indirect Participants. Investors in the Global Notes may also hold their interest in the Global Notes through the Euroclear System or Clearstream Banking, S.A. if they are direct participants in those systems or indirectly through organizations that are participants in those systems. Euroclear and Clearstream will hold omnibus positions in the Global Notes on behalf of the Euroclear participants and the Clearstream participants, respectively, through customers' securities accounts in Euroclear's and Clearstream's names on the books of their respective depositories, which are Morgan Guaranty Trust Company of New York, Brussels office, as operator of Euroclear, and Citibank, N.A. and The Chase Manhattan Bank, N.A., as operators of Clearstream. These depositories, in turn, will hold these positions in their names on the books of DTC. Interests held through Euroclear or Clearstream may be subject to the procedures and requirements of DTC, as well as the procedures and requirements of those systems. DTC has also advised Hercules that, pursuant to procedures established by it: (1) upon deposit of the Global Notes, DTC will credit the accounts of Participants with portions of the principal amount of the Global Notes; and (2) ownership of these interests in the Global Notes will be shown on, and the transfer of ownership of these interests will be effected only through, records maintained by DTC (with respect to the Participants) or by the Participants and the Indirect Participants (with respect to other owners of beneficial interest in the Global Notes). The laws of some states require that certain Persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in a Global Note to such Persons will be limited to such extent. So long as the Global Note Holder is the registered owner of any notes, the Global Note Holder will be considered the sole Holder under the indenture of any notes evidenced by the Global Notes. Beneficial owners 85 90 of notes evidenced by the Global Notes will not be considered the owners or Holders of the notes under the indenture for any purpose, including with respect to the giving of any directions, instructions or approvals to the trustee thereunder. Neither Hercules nor the trustee will have any responsibility or liability for any aspect of the records of DTC or for maintaining, supervising or reviewing any records of DTC relating to the notes. Payments in respect of the principal of, and interest and premium and Liquidated Damages, if any, on a Global Note registered in the name of the Global Note Holder on the applicable record date will be payable by the trustee to or at the direction of the Global Note Holder in its capacity as the registered Holder under the indenture. Under the terms of the indenture, Hercules and the trustee will treat the Persons in whose names the notes, including the Global Notes, are registered as the owners of the notes for the purpose of receiving payments and for all other purposes. Consequently, neither Hercules, the trustee nor any agent of Hercules or the trustee has or will have any responsibility or liability for: (1) any aspect of DTC's records or any Participant's or Indirect Participant's records relating to or payments made on account of beneficial ownership interest in the Global Notes or for maintaining, supervising or reviewing any of DTC's records or any Participant's or Indirect Participant's records relating to the beneficial ownership interests in the Global Notes; or (2) any other matter relating to the actions and practices of DTC or any of its Participants or Indirect Participants. DTC has advised Hercules that its current practice, upon receipt of any payment in respect of securities such as the notes (including principal and interest), is to credit the accounts of the relevant Participants with the payment on the payment date unless DTC has reason to believe it will not receive payment on such payment date. Each relevant Participant is credited with an amount proportionate to its beneficial ownership of an interest in the principal amount of the relevant security as shown on the records of DTC. Payments by the Participants and the Indirect Participants to the beneficial owners of notes will be governed by standing instructions and customary practices and will be the responsibility of the Participants or the Indirect Participants and will not be the responsibility of DTC, the trustee or Hercules. Neither Hercules nor the trustee will be liable for any delay by DTC or any of its Participants in identifying the beneficial owners of the notes, and Hercules and the trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee for all purposes. CERTIFICATED NOTES Subject to certain conditions, any Person having a beneficial interest in a Global Note may, upon prior written request to the trustee, exchange such beneficial interest for notes in the form of Certificated Notes. Upon any such issuance, the trustee is required to register such Certificated Notes in the name of, and case the same to be delivered to, such Person or Persons (or their nominee). In addition, if: (1) DTC (a) notifies Hercules that it is unwilling or unable to continue as depositary for the Global Notes and Hercules fails to appoint a successor depositary or (b) has ceased to be a clearing agency registered under the Exchange Act; (2) Hercules, at its option, notifies the trustee in writing that it elects to cause the issuance of the Certificated Notes; or (3) there has occurred and is continuing a Default or Event of Default with respect to the notes; then, upon surrender by the Global Note Holder of its Global Note, notes in such form will be issued to each person that the Global Note Holder and DTC identify as being the beneficial owner of the related notes. Neither Hercules nor the trustee will be liable for any delay by the Global Note Holder or DTC in identifying the beneficial owners of notes and Hercules and the trustee may conclusively rely on, and will be protected in relying on, instructions from the Global Note Holder or DTC for all purposes. 86 91 SAME DAY SETTLEMENT AND PAYMENT Hercules will make payments in respect of the notes represented by the Global Notes (including principal, premium, if any, interest and Liquidated Damages, if any) by wire transfer of immediately available funds to the accounts specified by the Global Note Holder. Hercules will make all payments of principal, interest and premium and Liquidated Damages, if any, with respect to Certificated Notes by wire transfer of immediately available funds to the accounts specified by the Holders of Certificated Notes or, if no such account is specified, by mailing a check to each such Holder's registered address. The notes represented by the Global Notes are expected to be eligible to trade in DTC's Same-Day Funds Settlement System, and any permitted secondary market trading activity in such notes will, therefore, be required by DTC to be settled in immediately available funds. Hercules expects that secondary trading in any Certificated Notes will also be settled in immediately available funds. Because of time zone differences, the securities account of a Euroclear or Clearstream participant purchasing an interest in a global note from a Participant will be credited, and any such crediting will be reported to the relevant Euroclear or Clearstream participant, during the securities settlement processing day (which must be a business day for Euroclear and Clearstream) immediately following the DTC settlement date. DTC has advised us that cash received in Euroclear or Clearstream as a result of sales of interests in a Global Note by or through Euroclear or Clearstream participant to a Participant will be received with value on the DTC settlement date but will be available in the relevant Euroclear or Clearstream cash account only as of the business day for Euroclear or Clearstream following the DTC settlement date. REGISTRATION RIGHTS; LIQUIDATED DAMAGES The following description is a summary of the material provisions of the registration rights agreement. It does not restate that agreement in its entirety. We urge you to read the registration rights agreement in its entirety because it, and not this description, defines your registration rights as Holders of these notes. See "--Additional Information." Hercules, the Guarantors and the initial purchasers entered into the registration rights agreement on November 14, 2000. Pursuant to the registration rights agreement, Hercules and the Guarantors agreed to file with the SEC an exchange offer registration statement on the appropriate form under the Securities Act with respect to the new notes. Hercules and the Guarantors are offering to the Holders of Transfer Restricted Securities pursuant to the exchange offer who are able to make certain representations the opportunity to exchange their Transfer Restricted Securities for new notes. If: (1) Hercules and the Guarantors are not (a) required to file the exchange offer registration statement; or (b) permitted to consummate the exchange offer because the exchange offer is not permitted by applicable law or SEC policy; or (2) any Holder of Transfer Restricted Securities notifies Hercules prior to the 20th day following consummation of the exchange offer that: (a) it is prohibited by law or SEC policy from participating in the exchange offer; or (b) that it may not resell the new notes acquired by it in the exchange offer to the public without delivering a prospectus and the prospectus contained in the exchange offer registration statement is not appropriate or available for such resales; or (c) that it is a broker-dealer and owns notes acquired directly from Hercules or an affiliate of Hercules, 87 92 Hercules and the Guarantors will file with the SEC a Shelf Registration Statement to cover resales of the notes by the Holders of the notes who satisfy certain conditions relating to the provision of information in connection with the Shelf Registration Statement. Hercules and the Guarantors will use their best efforts to cause the applicable registration statement to be declared effective as promptly as possible by the SEC. For purposes of the preceding, "Transfer Restricted Securities" means each note until: (1) the date on which such note has been exchanged by a Person other than a broker-dealer for a new note in the exchange offer; (2) following the exchange by a broker-dealer in the exchange offer of a note for a new note, the date on which such new note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the exchange offer Registration Statement; (3) the date on which such note has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement; or (4) the date on which such note is distributed to the public pursuant to Rule 144 under the Securities Act. The registration rights agreement provides that: (1) Hercules and the Guarantors will file an exchange offer Registration Statement with the SEC on or prior to August 11, 2001; (2) Hercules and the Guarantors will use their best efforts to have the exchange offer Registration Statement declared effective by the SEC on or prior to October 10, 2001; (3) unless the exchange offer would not be permitted by applicable law or SEC policy, Hercules and the Guarantors will (a) commence the exchange offer; and (b) use their best efforts to issue on or prior to 30 business days, or longer, if required by the federal securities laws, after the date on which the exchange offer Registration Statement was declared effective by the SEC, new notes in exchange for all old notes tendered prior thereto in the exchange offer, and (4) if obligated to file the Shelf Registration Statement, Hercules and the Guarantors will use their best efforts to file the Shelf Registration Statement with the SEC on or prior to 30 days after such filing obligation arises and to cause the Shelf Registration to be declared effective by the SEC on or prior to 90 days after such obligation arises. If: (1) Hercules and the Guarantors fail to file any of the registration statements required by the registration rights agreement on or before the date specified for such filing; or (2) any of such registration statements is not declared effectively by the SEC on or prior to the date specified for such effectiveness (the "Effectiveness Target Date"); or (3) Hercules and the Guarantors fail to consummate the exchange offer within 30 business days of the Effectiveness Target Date with respect to the exchange offer Registration Statement; or (4) the Shelf Registration Statement or the exchange offer Registration Statement is declared effective but thereafter ceases to be effective or usable in connection with resales of Transfer Restricted Securities during the periods specified in the registration rights agreement (each such event referred to in clauses (1) through (4) above, a "Registration Default"), 88 93 then Hercules and the Guarantors will pay Liquidated Damages to each Holder of notes, with respect to the first 90-day period immediately following the occurrence of the first Registration Default in an amount equal to $.05 per week per $1,000 principal amount of notes held by such Holder. The amount of the Liquidated Damages will increase by an additional $.05 per week per $1,000 principal amount of notes with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of Liquidated Damages for all Registration Defaults of $.50 per week per $1,000 principal amount of notes. All accrued Liquidated Damages will be paid by Hercules and the Guarantors on each Damages Payment Date to the Global Note Holder by wire transfer of immediately available funds or by federal funds check and to Holders of Certificated Notes by wire transfer to the accounts specified by them or by mailing checks to their registered addresses if no such accounts have been specified. Following the cure of all Registration Defaults, the accrual of Liquidated Damages will cease. Holders of notes will be required to make certain representations to Hercules (as described in the registration rights agreement) in order to participate in the exchange offer and will be required to deliver certain information to be used in connection with the Shelf Registration Statement and to provide comments on the Shelf Registration Statement within the time periods set forth in the registration rights agreement in order to have their notes included in the Shelf Registration Statement and benefit from the provisions regarding Liquidated Damages set forth above. By acquiring Transfer Restricted Securities, a Holder will be deemed to have agreed to indemnify Hercules and the Guarantors against certain losses arising out of information furnished by such Holder in writing for inclusion in any Shelf Registration Statement. Holders of notes will also be required to suspend their use of the prospectus included in the Shelf Registration Statement under certain circumstances upon receipt of written notice to that effect from Hercules. CERTAIN DEFINITIONS Set forth below are certain defined terms used in the indenture. Reference is made to the indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "Acquired Debt" means, with respect to any specified Person: (1) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, whether or not such Indebtedness is incurred in connection with, or in contemplation of, such other Person merging with or into, or becoming a Subsidiary of, such specified Person; and (2) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control," as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the Voting Stock of a Person will be deemed to be control. For purposes of this definition, the terms "controlling," "controlled by" and "under common control with" have correlative meanings. "Asset Sale" means: (1) the sale, lease, conveyance or other disposition of any assets or rights, other than sales of inventory in the ordinary course of business; provided that the sale, conveyance or other disposition of all or substantially all of the assets of Hercules and its Subsidiaries taken as a whole will be governed by the provisions of the indenture described above under the caption "-- Repurchase at the Option of Holders -- Change of Control" and/or the provisions described above under the caption "-- Certain 89 94 Covenants -- Merger, Consolidation or Sale of Assets" and not by the provisions of the Asset Sale covenant; and (2) the issuance of Equity Interests by any of Hercules' Restricted Subsidiaries or the sale of Equity Interests in any of its Subsidiaries. Notwithstanding the preceding, the following items will not be deemed to be Asset Sales: (1) any single transaction or series of related transactions that involves assets having a fair market value of less than $5.0 million; (2) a transfer of assets between or among Hercules and its Subsidiaries, (3) an issuance of Equity Interests by a Subsidiary to Hercules or to another Subsidiary; (4) the sale or lease of equipment, inventory, accounts receivable or other assets in the ordinary course of business; (5) the sale or other disposition of cash or Cash Equivalents; and (6) a Restricted Payment or Permitted Investment that is permitted by the covenant described above under the caption "-- Certain Covenants -- Restricted Payments." "Asset Swap" means an exchange of assets by Hercules or one or more of its Restricted Subsidiaries for: (1) one or more Permitted Businesses; (2) a controlling interest in any Person whose assets consist primarily of one or more Permitted Businesses; and/or (3) long-term assets that are used in a Permitted Business in a like-kind exchange pursuant to Section 1031 of the Internal Revenue Code or any similar or successor provision to the Internal Revenue Code. "Attributable Debt" in respect of a sale and leaseback transaction means, at the time of determination, the present value of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction including any period for which such lease has been extended or may, at the option of the lessor, be extended. Such present value shall be calculated using a discount rate equal to the rate of interest implicit in such transaction, determined in accordance with GAAP. "Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the beneficial ownership of any particular "person" (as that term is used in Section 13(d)(3) of the Exchange Act), such "person" will be deemed to have beneficial ownership of all securities that such "person" has the right to acquire by conversion or exercise of other securities, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition. The terms "Beneficially Owns" and "Beneficially Owned" have a corresponding meaning. "Board of Directors" means: (1) with respect to a corporation, the board of directors of the corporation; (2) with respect to a partnership, the board of directors of the general partner of the partnership; and (3) with respect to any other Person, the board or committee of such Person serving a similar function. "Borrowing Base" means, as of any date, an amount equal to: (1) 85% of the face amount of all accounts receivable owned by Hercules and its Subsidiaries as of the end of the most recent fiscal quarter preceding such date that were not more than 90 days past due; plus 90 95 (2) 50% of the book value of all inventory (whether raw material, in-process finished product or other) owned by Hercules and its Subsidiaries as of the end of the most recent fiscal quarter preceding such date; minus (3) the aggregate amount of trade payables of Hercules and its Subsidiaries outstanding as of the end of the most recent fiscal quarter preceding such date to the extent that such amount is incurred to acquire inventory, all calculated on a consolidated basis and in accordance with GAAP. "Capital Lease Obligation" means, at the time any determination is to be made, the amount of the liability in respect of a capital lease that would at that time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means: (1) in the case of a corporation, corporate stock; (2) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock; (3) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited); and (4) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means: (1) U.S. dollars; (2) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality of the United States government (provided that the full faith and credit of the United States is pledged in support of those securities) having maturities of not more than six months from the date of acquisition; (3) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case, with any lender party to the Credit Agreement or with any domestic commercial bank having capital and surplus in excess of $500.0 million or a Thomson Bank Watch Rating of "B" or better; (4) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (2) and (3) above entered into with any financial institution meeting the qualifications specified in clause (3) above; (5) commercial paper having the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Rating Services and in each case maturing within six months after the date of acquisition; and (6) money market funds at least 90% of the assets of which constitute Cash Equivalents of the kinds described in clauses (1) through (5) of this definition. "Change of Control" means the occurrence of any of the following: (1) the direct or indirect sale, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the proper- ties or assets of Hercules and its Restricted Subsidiaries taken as a whole to any "person" (as that term is used in Section 13(d)(3) of the Exchange Act); (2) the adoption of a plan relating to the liquidation or dissolution of Hercules; (3) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), becomes the Beneficial Owner, directly 91 96 or indirectly, of more than 50% of the Voting Stock of Hercules, measured by voting power rather than number of shares; or (4) the first day on which a majority of the members of the Board of Directors of Hercules are not Continuing Directors. "Consolidated Cash Flow" means, with respect to any specified Person for any period, the Consolidated Net Income of such Person for such period plus: (1) an amount equal to any extraordinary loss plus any net loss realized by such Person or any of its Restricted Subsidiaries in connection with an Asset Sale, to the extent such losses were deducted in computing such Consolidated Net Income; plus (2) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period, to the extent that such provision for taxes was deducted in computing such Consolidated Net Income; plus (3) consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net of the effect of all payments made or received pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income; plus (4) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash expenses (excluding any such non-cash expense to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Restricted Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income; minus (5) non-cash items increasing such Consolidated Net Income for such period, other than the accrual of revenue in the ordinary course of business, in each case, on a consolidated basis and determined in accordance with GAAP. "Consolidated Lease Expense" means, with respect to any specified Person for any period, the aggregate rental obligations of the specified Person and its consolidated Restricted Subsidiaries determined on a consolidated basis in accordance with GAAP payable in respect of such period under leases of real and/or personal property (net of income from subleases of such properties, but including taxes, insurance, maintenance and similar expenses that the lessee is obligated to pay under the terms of such leases), whether or not such obligations are reflected as liabilities or commitments on a consolidated balance sheet of the specified Person and its Restricted Subsidiaries or in the notes thereto. "Consolidated Net Income" means, with respect to any specified Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that: (1) the Net Income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting will be included only to the extent of the amount of dividends or distributions paid in cash to the specified Person or a Wholly Owned Restricted Subsidiary of the Person; (2) the Net Income of any Restricted Subsidiary will be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been 92 97 obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders; (3) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition will be excluded; (4) the cumulative effect of a change in accounting principles will be excluded; (5) the Net Income (but not loss) of any Unrestricted Subsidiary will be excluded, whether or not distributed to the specified Person or one of its Subsidiaries. "Consolidated Net Worth" means, with respect to any specified Person as of any date, the sum of: (1) the consolidated equity of the common stockholders of such Person and its consolidated Subsidiaries as of such date; plus (2) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of preferred stock (other than Disqualified Stock) that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such preferred stock. "Consolidated Tangible Assets" means, as of any date of determination, the total assets, less goodwill, deferred financing costs and other intangibles (in each case net of accumulated amortization) shown on the balance sheet of Hercules and its Restricted Subsidiaries as of the most recent date for which such balance sheet is available, determined on a consolidated basis in accordance with GAAP. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of Hercules who: (1) was a member of such Board of Directors on the date of the indenture; or (2) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Credit Agreement" means that certain Amended and Restated Credit Agreement, to be dated as of November 14, 2000, by and among Hercules, the subsidiaries of the Hercules as may from time to time be borrowers and/or guarantors thereunder in accordance with the provisions thereof, the several banks and other financial institutions from time to time parties thereto, NationsBank, N.A., as administrative agent for the lenders, Bank of America Canada, as Canadian administrative agent for the lenders, and The Chase Manhattan Bank, Morgan Guaranty Trust Company of New York and Citibank, N.A., as Co-Syndication Agents, providing for term and revolving credit borrowings, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, renewed, refunded, replaced or refinanced from time to time. "Credit Facilities" means, one or more debt facilities (including, without limitation, the Credit Agreement) or commercial paper facilities, in each case with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. "Default" means any event that is, or with the passage of time or the giving of notice or both would be, an Event of Default. "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible, or for which it is exchangeable, in each case at the option of the holder of the Capital Stock), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder of the Capital Stock, in whole or in part, on 93 98 or prior to the date that is 91 days after the date on which the notes mature. Notwithstanding the preceding sentence, any Capital Stock that would constitute Disqualified Stock solely because the holders of the Capital Stock have the right to require Hercules to repurchase such Capital Stock upon the occurrence of a change of control or an asset sale will not constitute Disqualified Stock if the terms of such Capital Stock provide that Hercules may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with the covenant described above under the caption "-- Certain Covenants -- Restricted Payments." "Domestic Subsidiary" means any Subsidiary of Hercules that was formed under the laws of the United States or any state of the United States or the District of Columbia or that guarantees or otherwise provides direct credit support for any Indebtedness of Hercules. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Existing Indebtedness" means the Indebtedness of Hercules and its Subsidiaries (other than Indebtedness under the Credit Agreement) in existence on the date of the indenture, until such amounts are repaid. "Fixed Charges" means, with respect to any specified Person for any period, the sum, without duplication, of: (1) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued, including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net of the effect of all payments made or received pursuant to Hedging Obligations; plus (2) the consolidated interest of such Person and its Restricted Subsidiaries that was capitalized during such period; plus (3) any interest expense on Indebtedness of another Person that is Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries, whether or not such Guarantee or Lien is called upon; plus (4) the product of (a) all dividends, whether paid or accrued and whether or not in cash, on any series of preferred stock of such Person or any of its Restricted Subsidiaries, other than dividends on Equity Interests payable solely in Equity Interests of Hercules (other than Disqualified Stock) or to Hercules or a Restricted Subsidiary of Hercules, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person and its Restricted Subsidiaries, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "Fixed Charge Coverage Ratio" means with respect to any specified Person for any period, the ratio of the Consolidated Cash Flow of such Person and its Restricted Subsidiaries for such period to the Fixed Charges of such Person and its Restricted Subsidiaries for such period. In the event that the specified Person or any of its Restricted Subsidiaries incurs, assumes, Guarantees, repays, repurchases or redeems any Indebtedness (other than ordinary working capital borrowings) or issues, repurchases or redeems preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated and on or prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio will be calculated giving pro forma effect to such incurrence, assumption, Guarantee, repayment, repurchase or redemption of Indebtedness, or such issuance, repurchase or redemption of preferred stock, and the use of the proceeds therefrom as if the same had occurred at the beginning of the applicable four-quarter reference period. 94 99 In addition, for purposes of calculating the Fixed Charge Coverage Ratio: (1) acquisitions that have been made by the specified Person or any of its Restricted Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date will be given pro forma effect as if they had occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period will be calculated on a pro forma basis under the Securities Act, but without giving effect to clause (3) of the proviso set forth in the definition of Consolidated Net Income; (2) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, will be excluded; and (3) the Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, will be excluded, but only to the extent that the obligations giving rise to such Fixed Charges will not be obligations of the specified Person or any of its Restricted Subsidiaries following the Calculation Date. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect from time to time. "Guarantee" means a guarantee other than by endorsement of negotiable instruments for collection in the ordinary course of business, direct or indirect, in any manner including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof, of all or any part of any Indebtedness. "Guarantors" means each of: (1) the wholly owned Domestic Restricted Subsidiaries of Hercules; and (2) any other subsidiary that executes a Subsidiary Guarantee in accordance with the provisions of the indenture; and their respective successors and assigns. "Hedging Obligations" means, with respect to any specified Person, the obligations of such Person under: (1) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements; and (2) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "Indebtedness" means, with respect to any specified Person, any indebtedness of such Person, whether or not contingent: (1) in respect of borrowed money; (2) evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof); (3) in respect of banker's acceptances; (4) representing Capital Lease Obligations; (5) representing the balance deferred and unpaid of the purchase price of any property, except any such balance that constitutes an accrued expense or trade payable; or (6) representing any Hedging Obligations, 95 100 if and to the extent any of the preceding items (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of the specified Person prepared in accordance with GAAP. In addition, the term "Indebtedness" includes all Indebtedness of others secured by a Lien on any asset of the specified Person (whether or not such Indebtedness is assumed by the specified Person) and, to the extent not otherwise included, the Guarantee by the specified Person of any indebtedness of any other Person. The amount of any Indebtedness outstanding as of any date will be: (1) the accreted value of the Indebtedness, in the case of any Indebtedness issued with original issue discount; and (2) the principal amount of the Indebtedness, together with any interest on the Indebtedness that is more than 30 days past due, in the case of any other Indebtedness. "Investments" means, with respect to any Person, all direct or indirect investments by such Person in other Persons (including Affiliates) in the forms of loans (including Guarantees or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If Hercules or any Subsidiary of Hercules sells or otherwise disposes of any Equity Interests of any direct or indirect Subsidiary of Hercules such that, after giving effect to any such sale or disposition, such Person is no longer a Subsidiary of Hercules, Hercules will be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described above under the caption "-- Certain Covenants -- Restricted Payments." The acquisition by Hercules or any Subsidiary of Hercules of a Person that holds an Investment in a third Person will be deemed to be an Investment by Hercules or such Subsidiary in such third Person in an amount equal to the fair market value of the Investment held by the acquired Person in such third Person in an amount determined as provided in the final paragraph of the covenant described above under the caption "-- Certain Covenants -- Restricted Payments." "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction. "Net Income" means, with respect to any specified Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however: (1) any gain or loss, together with any related provision for taxes on such gain or loss, realized in connection with: (a) any Asset Sale; or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries; and (2) any extraordinary gain or loss, together with any related provision for taxes on such extraordinary gain or loss. "Net Proceeds" means the aggregate cash proceeds received by Hercules or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale, including, without limitation, legal, accounting and investment banking fees, and sales commissions, and any relocation expenses incurred as a result of the Asset Sale, taxes paid or payable as a result of the Asset Sale, in each case, after taking into account any available tax credits or deductions and any tax sharing arrangements, and amounts required to be applied to the repayment of Indebtedness, other than Senior Debt/Indebtedness under a Credit Facility, secured by a Lien on the asset or assets that were the 96 101 subject of such Asset Sale and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "Non-Recourse Debt" means Indebtedness: (1) as to which neither Hercules nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable as a guarantor or otherwise, or (c) constitutes the lender; (2) no default with respect to which (including any rights that the holders of the Indebtedness may have to take enforcement action against an Unrestricted Subsidiary) would permit upon notice, lapse of time or both any holder of any other Indebtedness of Hercules or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment of the Indebtedness to be accelerated or payable prior to its stated maturity; and (3) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of Hercules or any of its Restricted Subsidiaries. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Permitted Business" means the research, development, distribution, manufacturing, sales and/or marketing of chemicals and/or related products, services and businesses. "Permitted Investments" means: (1) any Investment in Hercules or in a Restricted Subsidiary of Hercules; (2) any Investment in Cash Equivalents; (3) any Investment by Hercules or any Subsidiary of Hercules in a Person, if as a result of such Investment: (a) such Person becomes a Subsidiary of Hercules; or (b) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, Hercules or a Subsidiary of Hercules that is a Guarantor; (4) any Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with the covenant described above under the caption "-- Repurchase at the Option of Holders -- Asset Sales"; (5) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of Hercules; (6) any Investments received in compromise of obligations of such persons incurred in the ordinary course of trade creditors or customers that were incurred in the ordinary course of business, including pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of any trade creditor or customer; (7) Investments made after the original issuance of the notes in a Permitted Business in the form of joint ventures, operating agreements, partnership agreements or other similar or customary agreements, interests or arrangements with unaffiliated third parties, the aggregate outstanding amount of which does not exceed 5.0% of Consolidated Tangible Assets at any time; (8) Hedging Obligations; and (9) other Investments in any Person that is not also a Subsidiary of Hercules having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (9) since the date of the indenture not to exceed $50.0 million. 97 102 "Permitted Liens" means: (1) Liens securing Indebtedness and other Obligations under Credit Facilities that were permitted by clause (1) of the definition of "Permitted Debt" to be incurred; (2) Liens in favor of Hercules or the Guarantors; (3) Liens on property of a Person existing at the time such Person is merged with or into or consolidated with Hercules or any Subsidiary of Hercules; provided that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with Hercules or the Subsidiary; (4) Liens on property existing at the time of acquisition of the property by Hercules or any Subsidiary of Hercules, provided that such Liens were in existence prior to the contemplation of such acquisition; (5) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (6) Liens to secure Indebtedness (including Capital Lease Obligations) permitted by clause (4) and (12) of the second paragraph of the covenant entitled "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock" covering only the assets acquired with such Indebtedness; (7) Liens existing on the date of the indenture; (8) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded, provided that any reserve or other appropriate provision as is required in conformity with GAAP has been made therefor; (9) Liens incurred in the ordinary course of business of Hercules or any Subsidiary of Hercules with respect to obligations that do not exceed $5.0 million at any one time outstanding; and (10) Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries. "Permitted Refinancing Indebtedness" means any Indebtedness of Hercules or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of Hercules or any of its Restricted Subsidiaries (other than intercompany Indebtedness); provided that: (1) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount (or accreted value, if applicable) of the Indebtedness extended, refinanced, renewed, replaced, defeased or refunded (plus all accrued interest on the Indebtedness and the amount of all expenses and premiums incurred in connection therewith); (2) such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (3) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the notes on terms at least as favorable to the Holders of notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (4) such Indebtedness is incurred either by Hercules or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, limited liability company or government or other entity. 98 103 "Qualified Proceeds" means cash, Cash Equivalents and the fair market value of other property, the fair market value of which will be determined by (A) for property valued at less than $5.0 million, the Board of Directors, which determination shall be evidenced by a resolution of the Board of Directors set forth in an Officer's Certificate delivered to the Trustee and (B) for property valued at $5.0 million or more, an accounting, appraisal or investment banking firm of national standing and evidenced by an opinion or appraisal issued by such accounting, appraisal or investment banking firm. "Related Party" means: (1) any controlling stockholder, 80% (or more) owned Subsidiary, or immediate family member (in the case of an individual) of any Principal; or (2) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of any one or more Principals and/or such other Persons referred to in the immediately preceding clause (1). "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" of a Person means any Subsidiary, other than Hercules Trust I, Hercules Trust II, Hercules Trust III or Hercules Trust IV, of the referent Person that is not an Unrestricted Subsidiary. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof. "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which the payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and will not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Subsidiary" means, with respect to any specified Person: (1) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees of the corporation, association or other business entity is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person (or a combination thereof); and (2) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are that Person or one or more Subsidiaries of that Person (or any combination thereof). "Unrestricted Subsidiary" means any Subsidiary of Hercules that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution, but only to the extent that such Subsidiary: (1) has no Indebtedness other than Non-Recourse Debt; (2) is not party to any agreement, contract, arrangement or understanding with Hercules or any Restricted Subsidiary of Hercules unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to Hercules or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of Hercules; (3) is a Person with respect to which neither Hercules nor any of its Restricted Subsidiaries has any direct or indirect obligation (a) to subscribe for additional Equity Interests or (b) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (4) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of Hercules or any of its Restricted Subsidiaries; and 99 104 (5) has at least one director on its Board of Directors that is not a director or executive officer of Hercules or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of Hercules or any of its Restricted Subsidiaries. Any designation of a Subsidiary of Hercules as an Unrestricted Subsidiary will be evidenced to the trustee by filing with the trustee a certified copy of the Board Resolution giving effect to such designation and an officers' certificate certifying that such designation complied with the preceding conditions and was permitted by the covenant described above under the caption "-- Certain Covenants -- Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the preceding requirements as an Unrestricted Subsidiary, it will thereafter cease to be an Unrestricted Subsidiary for purposes of the indenture and any Indebtedness of such Subsidiary will be deemed to be incurred by a Restricted Subsidiary of Hercules as of such date and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under the caption "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock," Hercules will be in default of such covenant. The Board of Directors of Hercules may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation will be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of Hercules of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation will only be permitted if (1) such Indebtedness is permitted under the covenant described under the caption "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock," calculated on a pro forma basis as if such designation had occurred at the beginning of the four-quarter reference period; and (2) no Default or Event of Default would be in existence following such designation. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing: (1) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect of the Indebtedness, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment; by (2) the then outstanding principal amount of such Indebtedness. "Wholly Owned Restricted Subsidiary" of any specified Person means a Restricted Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) will at the time be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries of such Person. 100 105 CERTAIN FEDERAL INCOME TAX CONSEQUENCES GENERAL The following discussion summarizes certain United States federal income tax considerations associated with the exchange of old notes for new notes and the ownership and disposition of new notes. This summary applies only to beneficial owners of old notes who acquired such old notes at the initial offering from initial purchasers for the original offering price therefor and who acquire new notes pursuant to the exchange offer. This summary does not purport to be a complete analysis of all of the potential United States federal income tax consequences relating to the purchase, ownership and disposition of the new notes, nor does this summary describe any federal estate or gift tax consequences. There can be no assurance that the Internal Revenue Service ("IRS") will take a similar view of the tax consequences described herein. Furthermore, this discussion does not address all aspects of taxation that might be relevant to particular purchasers in light of their individual circumstances. For instance, this discussion does not address the alternative minimum tax provisions of the Internal Revenue Code of 1986, as amended (the "Code"), or special rules applicable to certain categories of purchasers (including dealers in securities or foreign currencies, insurance companies, regulated investment companies, financial institutions, tax-exempt entities, holders whose functional currency is not the U.S. dollar and, except to the extent discussed below, Foreign holders (as defined below)) or to purchasers who hold the new notes as part of a hedge, straddle, conversion, constructive ownership or constructive sale transaction or other risk reduction transaction. This discussion is based on the provisions of the Code, the Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof, all as in effect as of the date hereof and all of which are subject to change (possibly on a retroactive basis). The discussion below assumes that the old notes are held as capital assets within the meaning of Code Section 1221. EACH HOLDER IS URGED TO CONSULT SUCH HOLDER'S TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE EXCHANGE OF AN OLD NOTE FOR A NEW NOTE IN LIGHT OF SUCH HOLDER'S PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT OF THE CODE, AS WELL AS STATE, LOCAL AND FOREIGN INCOME TAX, ESTATE AND GIFT TAX AND OTHER TAX LAWS. EXCHANGE OFFER The exchange of old notes for new notes pursuant to the exchange offer will not be treated as an exchange or other taxable event for United States federal income tax purposes because, under United States Treasury regulations, the new notes will not be considered to differ materially in kind or extent from the old notes. As a result, the holders of old notes (1) will not recognize taxable gain or loss upon the exchange of old notes for new notes and (2) will have the same tax basis and holding period in the new notes as they had in the old notes immediately before the exchange. UNITED STATES HOLDERS The following summary is a general description of certain United States federal income tax consequences applicable to a "United States holder." For the purpose of this discussion, the term "United States holder" means a holder of an old note that is for United States federal income tax purposes: (1) a citizen or resident of the United States, (2) a corporation, partnership or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, (3) an estate, the income of which is subject to United States federal income taxation regardless of its source, or (4) a trust, the administration of which is subject to the primary supervision of a court within the United States and which has one or more United States persons with authority to control all substantial decisions, or a trust that was in existence on August 20, 1996 and has elected to continue to be treated as a United States trust. Interest payable on the new notes will be includible in the income of a United States holder at the time accrued or received in accordance with such holder's regular method of accounting for United States federal income tax purposes. 101 106 A United States holder will recognize capital gain or loss upon the sale or other taxable disposition of a new note in an amount equal to the difference between the amount realized from such disposition (exclusive of any accrued interest not previously included in income, which amount will be taxable as ordinary income) and the holder's adjusted tax basis in the new note. Such capital gain or loss will be long-term capital gain or loss if the holder has held the old note and the new note for a combined holding period of more than one year at the time of disposition. Holders of new notes (other than corporations) are generally entitled to claim a preferential tax rate for net long-term capital gains. NON-UNITED STATES HOLDERS The following summary is a general description of certain United States federal income tax consequences to a "Foreign holder" (which, for the purpose of this discussion, means a holder that is not a United States holder). Special rules not discussed in this summary may apply to a holder that is a "controlled foreign corporation," "passive foreign investment company," "expatriate," a corporation that accumulates earnings to avoid United States federal income tax or a "foreign personal holding company." The following summary is subject to the discussion below concerning backup withholding. (a) Assuming that a Foreign holder's income and gain on a new note are not effectively connected with the conduct by such holder of a trade or business in the United States or attributed to a United State's permanent establishment, payments of interest on a new note by us or our paying agent to a Foreign holder will not be subject to United States federal income tax or withholding tax, provided that: - such holder does not own, actually or constructively, 10% or more of the total combined voting power of all classes of our stock entitled to vote; - such holder is not, for United States federal income tax purposes, a controlled foreign corporation related, directly or indirectly, to us through stock ownership; - such holder is not a bank receiving interest described in Code Section 881(c)(3)(A); and - the certification requirements under Code Section 871(h) or 881(c) and Treasury Regulations thereunder (summarized below) are met. Payments of interest on a new note that do not satisfy all of the foregoing requirements are generally subject to United States federal income tax and withholding tax at a flat rate of 30% (or a lower applicable treaty rate, provided certain certification requirements are met). Except to the extent otherwise provided under an applicable tax treaty, a Foreign holder generally will be subject to United States federal income tax in the same manner as a United States holder with respect to interest on a new note if such interest is effectively connected with the conduct of a United States trade or business by, or if a treaty applies, is attributable to a United States permanent establishment of, the Foreign holder. Effectively connected interest income received by a corporate Foreign holder may also, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate, or, if applicable, a lower treaty rate. Such effectively connected interest income will not be subject to withholding tax if the Foreign holder delivers an IRS Form W-8ECI to the payor. (b) In general, a Foreign holder of a new note will not be subject to United States federal withholding tax on the receipt of payments of principal on the new note and will not be subject to United States federal income tax on any gain recognized on the sale, exchange, redemption, retirement or other taxable disposition of such note, unless: - such Foreign holder is a nonresident alien individual who is present in the United States for 183 or more days in the taxable year of disposition and certain other conditions are met; - the Foreign holder is required to pay tax pursuant to the provisions of United States tax law applicable to certain United States expatriates; or 102 107 - the gain is effectively connected with the conduct of a United States trade or business by, or if a tax treaty applies, is attributable to a United States permanent establishment of, the Foreign holder. Under applicable law, in order to obtain the exemption from withholding tax described in paragraph (a) above, either (1) a Foreign holder of a new note must provide its name and address, and certify, under penalties of perjury, to us or our paying agent, that such holder is a Foreign holder or (2) a securities clearing organization, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business (a "Financial Institution") and holds a new note on behalf of the Foreign holder must certify, under penalties of perjury, to us or our paying agent that such certificate has been received from the holder by it or by any intermediary Financial Institution. A certificate described in this paragraph is effective only with respect to payments of interest made to the certifying Foreign holder after issuance of the certificate in the calendar year of its issuance and the two immediately succeeding calendar years. Under Treasury Regulations, the foregoing certification may be provided by the Foreign holder of a new note on IRS Form W-8BEN, W-8IMY or W-8EXP, as applicable. Federal withholding tax is not an additional tax. Rather, any amounts withheld from a payment to a holder are generally allowed as a credit against such Foreign holder's United States federal income tax liability and may entitle such Foreign holder to a refund provided that certain required information is provided to the IRS. BACKUP WITHHOLDING AND INFORMATION REPORTING Under current United States federal income tax law, a 30.5% (30% after December 31, 2001) backup withholding tax and information reporting requirements apply to certain payments of principal and interest made to, and to the proceeds of sale before maturity by, certain holders of the new notes. In the case of a noncorporate United States holder, information reporting requirements will apply to payments of principal or interest made by us or our paying agent on a new note. We will be required to withhold backup withholding tax if: - a holder fails to furnish its Taxpayer Identification Number ("TIN") (which, for an individual, is the individual's Social Security number) to us in the manner required; - a holder furnishes an incorrect TIN and the payor is so notified by the IRS; - the payor is notified by the IRS that such holder has failed to properly report payments of interest or dividends; or - under certain circumstances, a holder fails to certify, under penalties of perjury, that such holder has furnished a correct TIN and has not been notified by the IRS that such holder is subject to backup withholding for failure to report interest or dividend payments. United States Holders Backup withholding and information reporting does not apply with respect to payments made to certain exempt recipients, including a corporation. United States holders should consult their tax advisors regarding their qualification for exemption from backup withholding and information reporting, and the procedure for obtaining such an exemption if applicable. The amount of any backup withholding imposed upon a payment to a United States holder will be allowed as a credit against such holder's United States federal income tax liability and may entitle such holder to a refund, provided that certain required information is furnished to the IRS. Foreign Holders In the case of a Foreign holder, under currently applicable Treasury Regulations, backup withholding and information reporting will not apply to payments of principal or interest made by us or our paying agent on a new note (absent actual knowledge that the holder is actually a United States holder) if the holder has 103 108 provided the required certification under penalties of perjury that it is not a United States holder or has otherwise established an exemption. If the Foreign holder provides the required certification, such holder may nevertheless be subject to withholding of United States federal income tax as described above under "-- Non-United States Holders." Foreign holders should consult their tax advisors regarding the application of information reporting and backup withholding in their particular situations, the availability of an exemption therefrom, and the procedure for obtaining such an exemption, if available. Any amounts withheld from a payment to a Foreign holder under the backup withholding rules will be allowed as a credit against such holder's United States federal income tax liability and may entitle such holder to a refund, provided that certain required information is furnished to the IRS. 104 109 PLAN OF DISTRIBUTION Each broker-dealer that receives new notes for its own account pursuant to the exchange offer in exchange for old notes acquired by such broker-dealer as a result of market making or other trading activities may be deemed to be an "underwriter" within the meaning of the Securities Act and, therefore, must deliver a prospectus meeting the requirements of the Securities Act in connection with any resales, offers to resell or other transfers of the new notes received by it in connection with the exchange offer. Accordingly, each such broker-dealer must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such new notes. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new notes received in exchange for old notes where such old notes were acquired as a result of market-making activities or other trading activities. We have agreed that, for a period of up to one year after the consummation of this exchange offer, we will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. We will not receive any proceeds from any sale of new notes by broker-dealers. New notes received by broker-dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the new notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such new notes. Any broker-dealer that resells new notes that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of such new notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of new notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of one year after the consummation of this exchange offer, we will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests such documents in the letter of transmittal. We have agreed to pay all expenses incident to this exchange offer other than commissions or concessions of any brokers or dealers and will indemnify the holders of the notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS Certain legal matters in connection with the validity of the new notes and the guarantees will be passed upon for us by Ballard Spahr Andrews & Ingersoll, LLP, Philadelphia, Pennsylvania. EXPERTS The consolidated financial statements as of December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000 included in this prospectus have been so included in reliance on the report (which contains an emphasis of matter paragraph relating to the Company's future debt covenant compliance and plans as described in Note 23 to the consolidated financial statements) of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 105 110 AVAILABLE INFORMATION We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and file reports, proxy statements and other information with the SEC. We have also filed with the SEC a registration statement on Form S-4 to register the new notes. This prospectus, which forms part of the registration statement, does not contain all of the information included in that registration statement. For further information about us and the new notes offered in this prospectus, you should refer to the registration statement and its exhibits. You may read and copy any document we file with the SEC at the SEC's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of these reports, proxy statements and information may be obtained at prescribed rates from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. In addition, the SEC maintains a web site that contains reports, proxy statements and other information regarding registrants, such as us, that file electronically with the SEC. The address of this web site is http://www.sec.gov. Anyone who receives a copy of this prospectus may obtain a copy of the indenture or the registration rights agreement without charge by writing to Hercules Incorporated, Hercules Plaza, 1313 North Market Street, Wilmington, Delaware 19894-0001, Attention: Israel J. Floyd, Esquire, Secretary and General Counsel. 106 111 INDEX TO FINANCIAL STATEMENTS HERCULES INCORPORATED
PAGE ---- CONSOLIDATED ANNUAL FINANCIAL STATEMENTS Report of Independent Accountants........................... F-2 Consolidated Statement of Income for the Years Ended December 31, 2000, 1999 and 1998.......................... F-3 Consolidated Balance Sheet as of December 31, 2000 and 1999...................................................... F-4 Consolidated Statement of Cash Flow for the Years Ended December 31, 2000, 1999 and 1998.......................... F-5 Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998.................... F-6 Consolidated Statement of Comprehensive Income (Loss) for the Years Ended December 31, 2000, 1999 and 1998.......... F-7 Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements......................... F-8 CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) Consolidated Statement of Income (unaudited) for the three month periods ended March 31, 2001 and March 31, 2000..... F-49 Consolidated Balance Sheet (unaudited) as of March 31, 2001 and December 31, 2000..................................... F-50 Consolidated Statement of Cash Flow (unaudited) for the three month periods ended March 31, 2001 and March 31, 2000...................................................... F-51 Consolidated Statement of Comprehensive Income (Loss) (unaudited) for the three month periods ended March 31, 2001 and March 31, 2000................................... F-52 Notes to Financial Statements (unaudited)................... F-53
F-1 112 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 accompanying index present fairly, in all material respects, the financial position of Hercules Incorporated and subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion. As discussed in Note 23, on April 5, 2001 the Company received waivers from certain of its lenders of debt covenant violations at March 31, 2001. The debt covenant violations, conditions of the waivers, management's outlook as to future debt covenant compliance and plans should they not be in compliance in the future are discussed in Note 23. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania April 10, 2001 F-2 113 HERCULES INCORPORATED CONSOLIDATED STATEMENT OF INCOME
2000 1999 1998 ------ ------ ------ (DOLLARS IN MILLIONS, EXCEPT PER SHARE) Net sales................................................... $3,152 $3,309 $2,145 ------ ------ ------ Cost of sales............................................... 1,784 1,831 1,287 Selling, general and administrative expenses................ 810 787 377 Research and development.................................... 80 85 61 Goodwill and intangible asset amortization.................. 80 79 22 Purchased in-process research and development (Note 16)..... -- -- 130 Other operating (income) expenses, net (Note 17)............ (46) 47 76 ------ ------ ------ Profit from operations...................................... 444 480 192 Equity in income (loss) of affiliated companies............. (2) 1 10 Interest and debt expense (Note 18)......................... 164 185 101 Preferred security distributions of subsidiary trusts....... 96 51 2 Other income (expense), net (Note 19)....................... (18) (2) (22) ------ ------ ------ Income before income taxes.................................. 164 243 77 Provision for income taxes (Note 20)........................ 66 75 68 ------ ------ ------ Net income.................................................. $ 98 $ 168 $ 9 ====== ====== ====== Earnings per share (Note 21) Basic:.................................................... $ 0.91 $ 1.63 $ 0.10 Diluted:.................................................. $ 0.91 $ 1.62 $ 0.10
The accompanying accounting policies and notes are an integral part of the consolidated financial statements. F-3 114 HERCULES INCORPORATED CONSOLIDATED BALANCE SHEET
DECEMBER 31, ---------------------- 2000 1999 --------- --------- (DOLLARS IN MILLIONS) ASSETS Current assets Cash and cash equivalents................................. $ 54 $ 63 Accounts receivable, net (Note 2)......................... 626 766 Inventories (Note 3)...................................... 305 380 Deferred income taxes (Note 20)........................... 37 129 ------ ------ Total current assets...................................... 1,022 1,338 Property, plant, and equipment, net (Note 12)............... 1,104 1,321 Investments (Note 4)........................................ 53 47 Goodwill and other intangible assets, net (Note 13)......... 2,391 2,570 Prepaid pension (Note 15)................................... 246 217 Deferred charges and other assets........................... 493 403 ------ ------ Total assets.............................................. $5,309 $5,896 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable.......................................... $ 259 $ 320 Short-term debt (Note 5).................................. 261 678 Accrued expenses (Note 12)................................ 402 561 ------ ------ Total current liabilities................................. 922 1,559 Long-term debt (Note 6)..................................... 2,342 1,777 Deferred income taxes (Note 20)............................. 187 287 Other postretirement benefits (Note 15)..................... 122 129 Deferred credits and other liabilities...................... 298 289 ------ ------ Total liabilities......................................... 3,871 4,041 Commitments and contingencies (Note 25)..................... -- -- Company-obligated preferred securities of subsidiary trusts (Note 7).................................................. 622 992 Stockholders' equity Series preferred stock (Note 8)........................... -- -- Common stock, $25/48 par value (Note 9)................... 83 83 (shares issued: 2000 -- 159,984,444; 1999 -- 159,976,730) Additional paid-in capital................................ 726 757 Unearned compensation (Note 10)........................... (115) (123) Other comprehensive losses................................ (143) (44) Retained earnings......................................... 2,157 2,125 ------ ------ 2,708 2,798 Reacquired stock, at cost (shares: 2000 -- 52,442,393; 1999 -- 53,587,365)....................................... 1,892 1,935 ------ ------ Total stockholders' equity.................................. 816 863 ------ ------ Total liabilities and stockholders' equity.................. $5,309 $5,896 ====== ======
The accompanying accounting policies and notes are an integral part of the consolidated financial statements. F-4 115 HERCULES INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOW
2000 1999 1998 ------- ------- ------- (DOLLARS IN MILLIONS) CASH FLOW FROM OPERATING ACTIVITIES: Net income.................................................. $ 98 $ 168 $ 9 Adjustments to reconcile net income to net cash provided from operations: Depreciation.............................................. 132 144 86 Amortization.............................................. 114 106 22 Write-off of in-process research and development.......... -- -- 130 Gain on disposals......................................... (142) (23) (23) Noncash charges (credits)................................. 105 (13) 38 Other..................................................... -- -- (6) Accruals and deferrals of cash receipts and payments: Affiliates' earnings in excess of dividends received.... 2 (1) (6) Accounts receivable..................................... 48 (69) 26 Inventories............................................. (3) (7) (14) Accounts payable and accrued expenses................... (190) (27) (72) Noncurrent assets and liabilities....................... (94) 2 (9) ------- ------- ------- Net cash provided by operations...................... 70 280 181 ------- ------- ------- CASH FLOW FROM INVESTING ACTIVITIES: Capital expenditures........................................ (187) (196) (157) Proceeds of investment and fixed asset disposals............ 418 50 600 Acquisitions, net of cash acquired.......................... (6) (10) (3,109) Other, net.................................................. (12) (37) (25) ------- ------- ------- Net cash (used in) provided by investing activities........................................... 213 (193) (2,691) ------- ------- ------- CASH FLOW FROM FINANCING ACTIVITIES: Long-term debt proceeds..................................... 1,889 279 3,111 Long-term debt repayments................................... (1,790) (1,360) (247) Change in short-term debt................................... 92 22 (228) Payment of debt issuance costs and underwriting fees........ (28) (19) (66) Proceeds from issuance of subsidiary trusts preferred securities................................................ -- 792 200 Repayment of subsidiary trust preferred securities.......... (370) -- -- Proceeds from issuance of warrants.......................... -- 90 -- Common stock issued......................................... 13 182 10 Common stock reacquired..................................... (2) (3) (114) Proceeds from issuance of subsidiary preferred stock........ -- 12 -- Dividends paid.............................................. (94) (83) (104) ------- ------- ------- Net cash (used in) provided by financing activities........................................... (290) (88) 2,562 ------- ------- ------- Effect of exchange rate changes on cash..................... (2) (4) (1) ------- ------- ------- Net increase (decrease) in cash and cash equivalents........ (9) (5) 51 Cash and cash equivalents at beginning of year.............. 63 68 17 ------- ------- ------- Cash and cash equivalents at end of year.................... $ 54 $ 63 $ 68 ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (net of amount capitalized)...................... $ 164 $ 184 $ 100 Distributions on trust preferred securities............... 85 36 -- Income taxes paid, net.................................... 29 79 117 Noncash investing and financing activities: Conversion of notes and debentures........................ -- 2 8 ESOP and incentive plan stock issuances................... 8 8 196 Assumed debt of acquired businesses....................... -- -- 307 Acquisition of minority interest.......................... (11) -- --
The accompanying accounting policies and notes are an integral part of the consolidated financial statements. F-5 116 HERCULES INCORPORATED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
OTHER COMPREHENSIVE COMMON PAID-IN UNEARNED INCOME RETAINED REACQUIRED STOCK CAPITAL COMPENSATION (LOSS) EARNINGS STOCK ------ ------- ------------ ------------- -------- ---------- (DOLLARS IN MILLIONS) Balances at January 1, 1998............................. $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) Net income.............................................. -- -- -- -- 98 -- Common dividends, $0.62 per common share................ -- -- -- -- (66) -- Foreign currency translation adjustment................. -- -- -- (99) -- -- Impact of allocation of shares held by ESOP............. -- -- 8 -- -- -- Purchase of common stock, 174,547 shares................ -- -- -- -- -- 5 Issuance of common stock: Incentive plans, net, 1,319,519 shares, from reacquired stock.................................... -- (31) -- -- -- (48) Conversion of notes and debentures, 7,714 shares...... -- -- -- -- -- -- --- ---- ----- ----- ------ ------ Balances at December 31, 2000........................... $83 $726 $(115) $(143) $2,157 $1,892 (Common shares: issued,159,984,444; reacquired, 52,442,393)
The accompanying accounting policies and notes are an integral part of the consolidated financial statements. F-6 117 HERCULES INCORPORATED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
YEAR ENDED DECEMBER 31, ----------------------- 2000 1999 1998 ----- ----- ----- (DOLLARS IN MILLIONS) Net income.................................................. $ 98 $168 $ 9 Foreign currency translation, net of tax.................... (99) (31) (11) ---- ---- ---- Comprehensive income (loss)................................. $ (1) $137 $ (2) ==== ==== ====
The accompanying accounting policies and notes are an integral part of the consolidated financial statements. F-7 118 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 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 consolidated financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION The Company recognizes revenue when the earnings process is complete. This generally occurs when products are shipped to the customer or services are performed in accordance with terms of the agreement, title and risk of loss have been transferred, collectibility is probable, and pricing is fixed and determinable. Accruals are made for sales returns and other allowances based on the company's experience. The corresponding shipping and handling costs are included in cost of sales. 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 represented 62% of total inventories at December 31, 2000, 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. F-8 119 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. 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, customer relationships and trademarks and tradenames 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 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). The related allocation for income taxes is not significant. DERIVATIVE INSTRUMENTS AND HEDGING Derivative financial instruments have been 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 monthly. 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 which have been used to hedge the value of investments in certain non-U.S. subsidiaries 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. The Company used 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. Counter parties to the forward exchange, currency swap, and interest rate swap contracts are major financial institutions. Credit loss from counter party nonperformance is not anticipated. During 2000 the interest rate swap portfolio was terminated due to the conversion of foreign denominated debt to U.S. dollar denominated debt in the first half of 2000; and the debt restructing in November 2000 that replaced variable rate debt with fixed rate debt. STOCK-BASED COMPENSATION Compensation costs attributable to stock option and similar plans are recognized based on any excess of the quoted market price of the stock on the date of grant over the amount the employee is required to pay to acquire the stock (the intrinsic-value method under Accounting Principles Board Opinion 25 (APB 25). Such F-9 120 amount, if any, is accrued over the related vesting period, as appropriate. Statement of Financial Accounting Standard 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. COMPUTER SOFTWARE COSTS 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). Our prior accounting was generally consistent with the requirements of SOP 98-1 and, accordingly, adoption of SOP 98-1 had no material effect. Computer software costs are being amortized over a period of 5 to 10 years. NEW 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, as amended by Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133," and Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," requires that all derivative instruments be recorded on the balance sheet at their fair value. SFAS 133, as amended, is effective for all fiscal quarters of fiscal years beginning after December 31, 2000. The Company adopted SFAS 133 effective January 1, 2001. As discussed in Notes 6 and 22, during 2000, the Company converted substantially all of its foreign currency denominated borrowings to fixed rate U.S. dollar denominated borrowings and closed most of its outstanding interest rate swaps. Based on these actions and a review of our contracts and agreements, the Company believes that the adoption of SFAS No. 133 will not have a material effect on its earnings or statement of financial position. However, due to certain provisions of our debt agreements, the results of operations could be materially affected in 2001 if it becomes more likely that a change of control will occur before November 15, 2001. In December 1999, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's views in applying generally accepted accounting principles to selected revenue recognition issues. Accordingly, guidance is provided with respect to the recognition, presentation and disclosure of revenue in the financial statements. Adoption of SAB 101, as amended by Staff Accounting Bulletin Nos. 101A and 101B, was effective October 1, 2000. Adoption of SAB 101 did not have a material effect. RECLASSIFICATIONS Certain amounts in the 1999 and 1998 consolidated financial statements and notes have been reclassified to conform to the 2000 presentation. F-10 121 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..... 725 Purchased in-process research and development............. 130 ------ BetzDearborn goodwill as of the date of acquisition....... $1,590 ======
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 40 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 16). 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 14). 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. F-11 122 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 the year ended December 31, 1998:
1998 ---------------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE) Net sales................................................... 3,276 Income (loss) before effect of change in accounting principle................................................. (70) Net income (loss)........................................... (70) Net earnings per share: Basic Earnings before effect of change in accounting principle............................................ (0.69) Earnings per share..................................... (0.69) Diluted Earnings before effect of change in accounting principle............................................ (0.69) Earnings per share..................................... (0.69)
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 five other acquisitions; three in 1998, one in 1999 and one in 2000, for an aggregate purchase price of approximately $121 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; Alliance Technical Products, Ltd., a rosin dispersions Company, in September 1998; the Scripset(R) water-soluble polymer resin business of Solutia Inc. in July 1999; and Quaker Chemical Corporation's paper chemicals business in May 2000. Allocations of the purchase prices for these acquisitions resulted in approximately $75 million of goodwill, which is being amortized over estimated useful lives ranging from 30 to 40 years. Citrus Colloids Ltd. was subsequently divested in September 2000 as part of the Food Gums transaction. 2. ACCOUNTS RECEIVABLE, NET Accounts receivable, net, consists of:
2000 1999 ---- ---- (DOLLARS IN MILLIONS) Trade....................................................... $562 $639 Other....................................................... 91 143 ---- ---- Total....................................................... 653 782 Less allowance for doubtful accounts........................ 27 16 ---- ---- $626 $766 ==== ====
At December 31, 2000, net trade accounts receivable from customers located in the United States, Europe, the Americas and Asia were $284 million, $170 million, $51 million and $30 million, respectively. 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. F-12 123 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. INVENTORIES The components of inventories are:
2000 1999 ---- ---- (DOLLARS IN MILLIONS) Finished products........................................... $171 $187 Materials, supplies and work in process..................... 134 193 ---- ---- $305 $380 ==== ====
Inventories valued on the LIFO method were lower than if valued under the average-cost method, which approximates current cost, by $31 million at both December 31, 2000 and 1999. 4. INVESTMENTS Total equity investments in affiliated companies were $40 million at December 31, 2000, and $10 million at December 31, 1999. On September 29, 2000, we sold our Food Gums Division to CP Kelco, a joint venture with Lehman Brothers Merchant Banking Partners II, L.P. We retained a 28.6% equity position with a historical cost basis of $30 million in CP Kelco. During the fourth quarter of 2000, Lehman Brothers made an additional capital contribution to CP Kelco thereby reducing our equity position to approximately 23%. Other investments, at cost or less, were $13 million and $37 million at December 31, 2000 and 1999, respectively. Included in these amounts are non-current marketable securities aggregating $12 million and $32 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:
2000 1999 ---- ---- (DOLLARS IN MILLIONS) Banks....................................................... $118 $ 26 Current maturities of long-term debt........................ 143 652 ---- ---- $261 $678 ==== ====
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, 2000, Hercules had $182 million of unused short-term 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, 2000, were $118 million. Weighted-average interest rates on short-term borrowings at December 31, 2000 and 1999 were 5.88% and 6.04%, respectively. F-13 124 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. LONG-TERM DEBT A summary of long-term debt follows:
2000 1999 --------- --------- (DOLLARS IN MILLIONS) 6.15% notes due 2000....................................... $ -- $ 100 6.60% notes due 2027(a).................................... 100 100 7.85% notes due 2000....................................... -- 25 6.625% notes due 2003(b)................................... 125 125 11.125% senior notes due 2007(c)........................... 400 -- 8% convertible subordinated debentures due 2010(d)......... 3 3 Term loan tranche A due in varying amounts through 2003(e).................................................. 875 1,187 Term loan tranche C due 2000(e)............................ -- 318 Term loan tranche D due 2005(e)............................ 375 -- Revolving credit agreement due 2003(e)..................... 437 336 ESOP debt(f)............................................... 101 106 Term notes at various rates from 5.23% to 9.72% due in varying amounts through 2006(g).......................... 65 80 Variable rate loans........................................ -- 41 Other...................................................... 4 8 ------ ------ $2,485 $2,429 Current maturities of long-term debt....................... (143) (652) ------ ------ Net long-term debt......................................... $2,342 $1,777 ====== ======
- --------------- (a) 30-year debentures with a 10-year put option, exercisable by bondholder at a redemption price equal to principal amount. (b) Par value of $125 million issued June 1993. (c) The senior notes accrue interest at 11 1/8% per annum, payable semi-annually commencing May 15, 2001. The senior notes are guaranteed by each of Hercules' current and future wholly owned domestic restricted subsidiaries. At any time prior to November 15, 2003, Hercules may on any one or more occasions, redeem up to 35% of the aggregate principal amount of the senior notes issued at a redemption price of 111.125% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any, to the redemption date, with the net cash proceeds of one or more public equity offerings; provided that (i) at least 65% of the aggregate principal amount of the senior notes issued under the indenture remains outstanding immediately after the occurrence of such redemption (excluding notes held by Hercules and its Subsidiaries); and (ii) the redemption occurs within 45 days of the date of the closing of such public equity offering. At any time prior to November 15, 2001, Hercules may also redeem all or part of the senior notes upon the occurrence of a change of control at a redemption price equal to 111.125% of the principal amount of the senior notes redeemed, plus accrued and unpaid interest and liquidated damages, if any, to the date of redemption. Except as described above, the senior notes will not be redeemable at Hercules' option prior to maturity. Hercules is not required to make mandatory redemption or sinking fund payments with respect to senior notes. If a change of control occurs, each holder of the notes will have the right to require Hercules to repurchase all or any part of that Holder's notes pursuant to a change of control offer on the terms set forth in the indenture. In the change of control offer, Hercules will offer a change of control payment in cash equal to (i) if such change of control is prior to November 15, 2001, 111.125% of the aggregate principal amount of notes repurchased and (ii) if such F-14 125 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) change of control is after November 15, 2001, 101% of the aggregate principal amount of the notes repurchased plus, in each case, accrued and unpaid interest and Liquidated Damages, if any, on the notes repurchased, to the date of purchase. The 11 1/8% senior notes are subject to a registration rights agreement that requires Hercules to file an Exchange Offer registration statement with the Securities and Exchange Commission within 270 days (August 11, 2001) and to use its best efforts to have the registration statement declared effective within 330 days (see Note 23). (d) 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. (e) 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 $875 million was outstanding at year end 2000, and a $900 million revolving credit agreement of which $437 million was outstanding at year end 2000. On April 19, 1999, the credit agreement was amended 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. In addition, a Canadian subsidiary of ours can borrow up to U.S. $100 million from select lenders in Canada in Canadian dollars that bears interest at Bankers' Acceptances Rate plus 2.25% at December 31, 2000. Interest rates are reset for one, three, or six month periods at the company's option. The company's credit 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, 2000, $459 million of the $900 million multi-currency revolver is available for use. However, the actual availability under the revolving credit agreement is constrained by our ability to meet covenants in our senior credit facility. In July 2000, the credit agreement was amended to modify the maximum leverage ratio, defined as debt/EBITDA, for the period April 1, 2000 through June 30, 2000. During the third quarter of 2000, we were granted waivers of some of the financial covenants in our senior credit facility and our ESOP credit facility through November 15, 2000. Effective November 14, 2000, our senior credit facility and our ESOP credit facility were amended to (i) modify certain financial covenants; (ii) change the mandatory prepayment provisions; and (iii) provide for security, among other things. The senior credit facility amendments were conditioned upon, among other things, the issuance by us of the 11 1/8% senior notes and term loan tranche D (described below). The amendment to the senior credit facility increased the interest rate on amounts outstanding under the revolving credit agreement, term loan tranche A and term loan tranche C to LIBOR + 2.25% (8.90% at December 31, 2000). The senior credit facility and ESOP credit facility, as amended, are secured by liens on our property and assets (and those of our Canadian Subsidiaries), a pledge of the stock of substantially all of our domestic subsidiaries and 65% of the stock of foreign subsidiaries directly owned by us and a pledge of domestic intercompany indebtedness. In connection with the amendments to the senior credit facility and the ESOP credit facility, our 6.60% notes due 2027 and our 6.625% notes due 2003 were also secured as required by the indenture under which such notes were issued. As a result of the amendments, the Company was in compliance with all of the covenants. On November 14, 2000, in conjunction with and conditioned upon the effectiveness of the third amendment, we borrowed $375 million under the senior credit facility (term loan tranche D) and we issued $400 million of 11 1/8% senior notes due 2007. Term loan tranche D initially bore interest at LIBOR + 2.75% (9.47% at December 31, 2000), matures on November 15, 2005, and will require only nominal principal payments prior to maturity. On January 23, 2001, our corporate credit rating was downgraded by Standard & Poor's Rating Services to BB which F-15 126 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) resulted in an increase to the interest rates on the term loan tranche A and term loan tranche D to LIBOR + 2.75% and LIBOR + 3.25%, respectively (see Note 23). (f) 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 that, 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 mature in June 2009. During the third quarter of 2000, we were granted waivers of some of the financial covenants in our senior credit facility and our ESOP credit facility through November 15, 2000. Effective November 14, 2000, our senior credit facility was permanently amended. The senior credit facility and ESOP credit facility, as amended, are secured by liens on our property and assets (and those of our Canadian Subsidiaries), a pledge of the stock of substantially all of our domestic subsidiaries and 65% of the stock of foreign subsidiaries directly owned by us and a pledge of domestic intercompany indebtedness. Effective with the November 14, 2000 amendment, the rate was increased to 11.95%. Effective January 23, 2001, as a result of the lowered credit rating, the interest rate on the loan and guarantee increased to 12.95% (see Note 23). (g) Debt assumed in conjunction with the acquisition of FiberVisions L.L.C. (see Note 1), net of repayments through December 31, 2000. Long-term debt maturities during the next five years are $143 million in 2001, $328 million in 2002, $859 million in 2003, $25 million in 2004 and $385 million in 2005. 7. COMPANY-OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST Redeemable Hybrid Income Overnight Shares In November 1998, Hercules Trust V, our wholly owned subsidiary, completed a private placement of $200 million Redeemable Hybrid INcome Overnight Shares (RHINOS). We repaid the RHINOS with a portion of the proceeds from the offering of 11 1/8% senior notes on November 14, 2000. TRUST ORIGINATED PREFERRED SECURITIES In March 1999, Hercules Trust I ("Trust I"), our wholly owned subsidiary trust, 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. F-16 127 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, 2000, 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. We repaid the debentures with a portion of the proceeds from the offering of 11 1/8% senior notes on December 29, 2000. 8. SERIES PREFERRED STOCK There are 2,000,000 shares of series preferred stock without par value 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, 2000, a total of 27,960,812 shares were reserved for issuance for the following purposes: 402,253 shares for sales to the Savings Plan Trustee; 17,135,353 shares for the exercise of awards under the Stock Option Plan; 1,847,855 shares for awards under incentive compensation plans; 176,492 shares for conversion of debentures and notes; 202,139 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 2000, 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 66,792,032 shares of common stock were purchased in the open market at an average price of $37.29 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 F-17 128 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $91 million and $93 million at December 31, 2000 and 1999, 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 $101 million and $106 million at December 31, 2000 and 1999, 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 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. The company's common stock dividends were suspended during the fourth quarter of 2000. 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 $115 million and $123 million at December 31, 2000 and 1999, respectively.
2000 1999 --------- --------- Allocated............................................. 1,858,459 1,807,976 Unallocated........................................... 3,582,334 3,814,749 --------- --------- Total shares held by ESOP............................. 5,440,793 5,622,725 ========= =========
The ESOP expense is calculated using the shares-allocated method and includes net interest incurred on the debt of $6 million and $5 million for 2000 and 1999, 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:
2000 1999 ---- ---- (DOLLARS IN MILLIONS) ESOP expense................................................ $13 $13 Common stock dividends (charged to retained earnings)....... (3) (6) --- --- Net ESOP expense............................................ $10 $ 7 --- --- ESOP Contributions.......................................... $10 $ 9 === ===
F-18 129 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 491,488 at December 31, 2000, and 926,689 and 1,083,613 at December 31, 1999 and 1998, respectively. At December 31, 2000, under the company's incentive compensation plans, 1,847,855 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 $1 million for 2000, $3 million for 1999 and $5 million for 1998. F-19 130 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Below is a summary of outstanding stock option grants under the incentive compensation plans during 1998, 1999 and 2000:
REGULAR PERFORMANCE-ACCELERATED ------------------------------ ----------------------------- NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE SHARES PRICE SHARES PRICE ---------- ---------------- --------- ---------------- January 1, 1998..................... 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 Granted............................. 3,418,275 $16.75 187,500 $14.06 Exercised........................... (28,500) $11.83 -- -- Forfeited........................... (217,405) $34.30 (38,916) $42.31 ---------- ------ --------- ------ December 31, 2000................... 10,975,928 $31.49 6,159,425 $43.51
The weighted-average fair value of regular stock options granted during 1998, 1999 and 2000 was $8.53, $8.18 and $7.19 respectively. The weighted-average fair value of performance-accelerated stock options granted during 1998, 1999 and 2000 was $9.24, $7.82 and $5.86 respectively. Following is a summary of regular stock options exercisable at December 31, 1998, 1999, and 2000, and their respective weighted-average share prices:
NUMBER OF WEIGHTED-AVERAGE OPTIONS EXERCISABLE SHARES EXERCISE PRICE - ------------------- --------- ---------------- December 31, 1998................................. 3,300,628 $41.57 December 31, 1999................................. 4,651,273 $39.95 December 31, 2000................................. 6,237,147 $38.43
At December 31, 2000, there were 50,000 performance-accelerated stock options exercisable at a weighted average exercise price of $47.00 per share. There were no performance-accelerated stock options exercisable at December 31, 1998 and 1999. F-20 131 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS ------------------------------------------------- ------------------------------ NUMBER WEIGHTED-AVERAGE NUMBER EXERCISE OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE PRICE RANGE AT 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/00 EXERCISE PRICE - ---------------------------- ----------- ---------------- ---------------- ----------- ---------------- Regular Stock Options $12 - $20 3,565,188 8.91 $16.72 301,363 $16.56 $20 - $30 1,778,275 7.31 $25.52 1,326,820 $25.51 $30 - $40 3,475,865 7.09 $38.20 2,573,914 $38.41 $40 - $50 1,436,400 6.07 $47.43 1,332,350 $47.41 $50 - $60 720,200 5.18 $55.09 702,700 $55.22 ---------- --------- 10,975,928 6,237,147 ========== ========= Performance-Accelerated Stock Options $14 - $40 2,289,405 7.84 $34.47 -- -- $40 - $50 3,068,770 5.83 $47.09 50,000 $47.00 $50 - $61 801,250 5.08 $55.63 -- -- ---------- --------- 6,159,425 50,000 ========== =========
The Company currently expects that 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, 202,139 shares of Hercules common stock are registered for offer and sale under the plan. Shares issued at December 31, 2000 and 1999, were 1,597,861 and 949,464, 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 2000, 1999 and 1998:
REGULAR PERFORMANCE EMPLOYEE STOCK ASSUMPTION PLAN ACCELERATED PLAN PURCHASE PLAN - ---------- --------- ---------------- -------------- Dividend yield.............................. 2% 3.4% 0.0% Risk-free interest rate..................... 5.88% 5.38% 5.41% Expected life............................... 7.1 yrs.. 5 yrs. 3 mos. Expected volatility......................... 29.20% 27.31% 44.86%
F-21 132 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The company's net income and earnings per share for 2000, 1999 and 1998 would approximate the pro forma amounts below:
2000 1999 1998 ----- ----- ------ (DOLLARS IN MILLIONS, EXCEPT PER SHARE) Net income As reported............................................ $ 98 $ 168 $ 9 Pro forma.............................................. $ 74 $ 149 $ (5) Basic earnings per share As reported............................................ $0.91 $1.63 $ 0.10 Pro forma.............................................. $0.69 $1.45 $(0.06) Diluted earnings per share As reported............................................ $0.91 $1.62 $ 0.10 Pro forma.............................................. $0.69 $1.44 $(0.06)
12. ADDITIONAL BALANCE SHEET DETAIL
2000 1999 --------- --------- (DOLLARS IN MILLIONS) Property, plant, and equipment Land...................................................... $ 44 $ 58 Buildings and equipment................................... 2,394 2,785 Construction in progress.................................. 126 135 ------- ------- Total..................................................... 2,564 2,978 Accumulated depreciation and amortization................. (1,460) (1,657) ------- ------- Net property, plant, and equipment........................ $ 1,104 $ 1,321 ======= ======= Accrued expenses Payroll and employee benefits............................. $ 78 $ 63 Income taxes payable...................................... 17 35 Current portion of restructuring liability................ 34 66 Current portion of postretirement benefits................ 20 20 Accrued interest payable.................................. 30 44 Legal accrual............................................. 25 101 Environmental accrual..................................... 24 29 Dividends payable......................................... -- 28 Other..................................................... 174 175 ------- ------- $ 402 $ 561 ======= =======
F-22 133 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. GOODWILL AND OTHER INTANGIBLE ASSETS At December 31, 2000 and 1999, the goodwill and other intangible assets were:
2000 1999 --------- --------- (DOLLARS IN MILLIONS) Goodwill.................................................... $1,856 $1,915 Customer relationships...................................... 314 322 Trademarks and tradenames................................... 238 244 Other intangibles........................................... 193 219 ------ ------ Total....................................................... 2,601 2,700 Less accumulated amortization............................... (210) (130) ------ ------ Net goodwill and other intangible assets.................. $2,391 $2,570 ====== ======
14. RESTRUCTURING The consolidated balance sheet reflects liabilities for employee severance benefits and other exit costs, primarily related to the plans initiated upon the acquisition of BetzDearborn in 1998. In addition, we terminated approximately 100 employees in connection with the sale of our nitrocellulose business (see Note 17). This resulted in the addition of approximately $4 million in severance benefits to the accrued liability. In the third quarter of 2000, we committed to plans relating to the restructuring of our Process Chemicals & Services segment and corporate realignment due to the divestiture of our non-core businesses. This resulted in the addition of approximately $13 million in severance benefits to the accrued liability (see Note 17). In the fourth quarter of 2000, we committed to a plan relating to the restructuring of several foreign entities in our Process Chemicals & Services segments. This resulted in the addition of approximately $1 million in severance benefits to the accrued liability. We estimate approximately 310 employees will be terminated in connection with the third and fourth quarter 2000 plans. As a result of these plans, we estimate approximately 1,705 employees will be terminated, of which approximately 1,360 employee terminations have occurred since inception of the aforementioned plans. Approximately 375 employees were terminated during the year ended December 31, 2000. Cash payments during 2000 included $36 million for severance benefits and $9 million for other exit costs. We lowered the estimate for severance benefits and other exit costs related to the termination of both legacy Hercules and BetzDearborn employees by $4 million and $12 million, respectively. 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 included $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, an $8 million increase in exit costs related to facility closures 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 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 17). In 1998, Hercules incurred restructuring liabilities of $130 million in connection with the acquisition of BetzDearborn (see Notes 1 and 17). 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, F-23 134 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) including $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. Cash payments of $1 million and $2 million for the 1997 Restructuring Plan are reflected in the table below in 2000 and 1999, respectively. Remaining amounts to be paid, with respect to this plan are $2 million at the end of 2001. A reconciliation of activity with respect to the liabilities established for these plans is as follows:
2000 1999 -------- -------- (DOLLARS IN MILLIONS) Balance at beginning of year................................ $ 77 $130 Cash payments............................................... (45) (56) Additional termination benefits and exit costs.............. 18 11 Reversals against goodwill.................................. (12) (4) Reversals against earnings.................................. (4) (4) ---- ---- Balance at end of year...................................... $ 34 $ 77 ==== ====
Severance benefits payments are based on years of service and generally continue for 3 to 24 months subsequent to termination. Actions under the 1998 restructuring plans are substantially complete as of December 31, 2000. We anticipate that actions under the 1999 and 2000 restructuring plans will be substantially completed by the end of 2001. 15. 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.
OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS ---------------- -------------- 2000 1999 2000 1999 ------ ------ ----- ----- (DOLLARS IN MILLIONS) CHANGE IN BENEFIT OBLIGATION Benefit obligation at January 1........................ $1,343 $1,499 $ 181 $ 154 Service cost........................................... 26 30 1 2 Interest cost.......................................... 101 97 14 13 Amendments............................................. -- 6 (7) 20 Assumption change...................................... 71 (147) 8 (9) Settlements............................................ (6) -- -- -- Translation difference................................. (16) (19) -- -- Actuarial loss (gain).................................. 11 (8) 15 22 Benefits paid from plan assets......................... (103) (115) (4) (2) Benefits paid by Company............................... -- -- (20) (19) ------ ------ ----- ----- Benefit obligation at December 31........................ $1,427 $1,343 $ 188 $ 181 ====== ====== ===== =====
F-24 135 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS ---------------- -------------- 2000 1999 2000 1999 ------ ------ ----- ----- (DOLLARS IN MILLIONS) CHANGE IN PLAN ASSETS Fair value of plan assets at January 1................. $1,732 $1,589 $ 7 $ 8 Actual return on plan assets........................... (44) 275 -- 1 Asset transfers and receivables........................ 4 -- -- -- Settlements............................................ (4) -- -- -- Company contributions (refund)......................... 2 2 -- -- Translation difference................................. (19) (19) -- -- Benefits paid from plan assets......................... (103) (115) (4) (2) ------ ------ ----- ----- Fair value of plan assets at December 31................. $1,568 $1,732 $ 3 $ 7 ====== ====== ===== ===== Funded status of the plans............................... $ 142 $ 389 $(186) $(174) Unrecognized actuarial loss (gain)....................... 71 (197) 66 44 Unrecognized prior service cost (benefit)................ 32 36 (22) (19) Unrecognized net transition obligation................... 1 (11) -- -- Amount included in accrued expenses -- other............. -- -- 20 20 ------ ------ ----- ----- Prepaid (accrued) benefit cost........................... $ 246 $ 217 $(122) $(129) ====== ====== ===== ===== AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION CONSIST OF: Prepaid benefit cost................................... $ 246 $ 217 $ -- $ -- Accrued benefit liability.............................. -- -- (122) (129) ------ ------ ----- ----- $ 246 $ 217 $(122) $(129) ====== ====== ===== ===== ASSUMPTIONS AS OF DECEMBER 31 Weighted-average discount rate......................... 7.50% 8.00% 7.50% 8.00% 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%
OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS ----------------------- -------------------- 2000 1999 1998 2000 1999 1998 ----- ----- ----- ---- ---- ---- Service cost................................. $ 26 $ 30 $ 20 $ 1 $ 2 $1 Interest cost................................ 101 97 83 14 13 10 Return on plan assets (expected)............. (142) (134) (114) (1) (1) (1) Amortization and deferrals................... 3 3 12 (2) (2) (4) Amortization of transition asset............. (11) (14) (14) -- -- -- ----- ----- ----- --- --- -- Benefit cost (credit)........................ $ (23) $ (18) $ (13) $12 $12 $6 ===== ===== ===== === === ==
Other Postretirement Benefits The non-pension 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 Trust was established and funded with $10 million of Company funds. The Company periodically obtains reimbursement for union retiree claims, F-25 136 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 8.0% for the year ended December 31, 2000. The assumed health care cost trend rate was 4.5% for the year ended December 31, 1999, and was 5% for those under age 65 and 4.75% for those over age 65 for the year ended December 31, 1998. The assumed health care cost trend rate will be 7% in 2001, 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 $6 million or $4 million, respectively, and would not have a material effect on aggregate service and interest cost components. 16. 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 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 and foam control, fouling, 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 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 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 took 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%. 17. OTHER OPERATING EXPENSES (INCOME), NET Other operating expenses (income), net, in 2000 include a gain of $168 million from the sale of the Food Gums division. On September 28, 2000, we sold our Food Gums division to CP Kelco, a joint venture with Lehman Brothers Merchant Banking Partners II, L.P., which contributed approximately $300 million in equity. We received approximately $395 million in cash proceeds, recorded certain selling and tax expenses of F-26 137 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) approximately $77 million initially retaining a 28.6% equity position in CP Kelco. CP Kelco simultaneously acquired Kelco biogums business of Pharmacia Corporation (formerly Monsanto Corporation). Partially offsetting the gain from the sale of the Food Gums Division is $66 million of charges for asset impairments and write-offs, primarily in the FiberVisions business. Restructuring charges of $18 million, including $4 million (below) related to the nitrocellulose divestiture, were incurred for 2000 plans, primarily relating to severance and termination benefits for approximately 410 employee terminations in our Process Chemicals & Services segment and corporate realignment due to the divestitures of our non-core businesses (Food Gums, Resins, nitrocellulose). Offsetting these restructuring charges was $4 million of reversals relating to prior year plans. Environmental charges of $8 million were incurred, offset by $11 million in recoveries of insurance for environmental claims. Additionally, we incurred a loss of $25 million, including $4 million for severance and termination benefits (Note 14), associated with the sale of the nitrocellulose business, and $5 million associated with the integration of the BetzDearborn acquisition were incurred. Also reflected in 2000 are $16 million severance benefits and compensation expense not associated with restructuring plans and $1 million for other items. The asset impairments were triggered by significantly higher raw material costs and the loss of a facility's major customer. 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 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 14). 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 14). 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 14) 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. 18. INTEREST AND DEBT EXPENSE Interest and debt costs are summarized as follows:
2000 1999 1998 ----- ----- ----- (DOLLARS IN MILLIONS) Costs incurred.............................................. $175 $197 $112 Amount capitalized.......................................... 11 12 11 ---- ---- ---- Amount expensed............................................. $164 $185 $101 ==== ==== ====
F-27 138 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 19. OTHER INCOME (EXPENSE), NET Other income (expense), net, consists of the following:
2000 1999 1998 ----- ----- ----- (DOLLARS IN MILLIONS) Net gains (losses) on dispositions.......................... $ (1) $10 $ 23 Interest income, net........................................ 5 7 36 Legal settlements and accruals, net......................... (10) (7) (66) Bank charges................................................ (3) (2) (1) Minority interests.......................................... -- (2) -- Interest rate swap termination.............................. -- -- (13) Miscellaneous expense, net.................................. (9) (8) (1) ---- --- ---- $(18) $(2) $(22) ==== === ====
Net gains (losses) on dispositions include a loss of $1 million from the sale of non-operating real estate and other investments in 2000, and gains of $10 million in 1999 and $11 million in 1998. Also, a gain of $12 million in 1998 was recorded from the sale of Alliant Techsystems common stock held by Hercules (see Note 24). Interest income in 1998 relates primarily to the $500 million note received upon completion of the Tastemaker monetization. The 1998 legal settlements and accruals relate primarily to settlements of Qui Tam ("Whistle Blower") lawsuits. Legal settlements and accruals in 2000 and 1999 primarily represent certain other legal expenses and settlements associated with former operations of the Company. The 1998 loss from terminated interest rate swaps is related to the company's financing effort upon the acquisition of BetzDearborn. 20. INCOME TAXES The domestic and foreign components of income before taxes and effect of change in accounting principle are presented below:
2000 1999 1998 ---- ---- ----- (DOLLARS IN MILLIONS) Domestic.................................................... $(17) $ 4 $(147) Foreign..................................................... 181 239 224 ---- ---- ----- $164 $243 $ 77 ==== ==== =====
A summary of the components of the tax provision follows:
2000 1999 1998 ----- ----- ----- (DOLLARS IN MILLIONS) Currently payable U.S. federal.............................................. $ 14 $(25) $(26) Foreign................................................... 70 82 74 State..................................................... 4 (4) (4) Deferred Domestic.................................................. (21) 15 17 Foreign................................................... (1) 7 7 ---- ---- ---- Provision for income taxes.................................. $ 66 $ 75 $ 68 ==== ==== ====
F-28 139 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred tax liabilities (assets) at December 31 consisted of:
2000 1999 -------- -------- (DOLLARS IN MILLIONS) Depreciation.............................................. $ 232 $ 235 Prepaid pension........................................... 68 84 Inventory................................................. 11 8 Investments............................................... 88 83 Other..................................................... 79 51 ----- ----- Gross deferred tax liabilities............................ $ 478 $ 461 ----- ----- Postretirement benefits other than pensions............... $ (70) $ (59) Accrued expenses.......................................... (172) (165) Loss carryforwards........................................ (10) (24) Other..................................................... (104) (71) ----- ----- Gross deferred tax assets................................. (356) (319) ----- ----- Valuation allowance....................................... 28 16 ----- ----- $ 150 $ 158 ===== =====
A reconciliation of the U.S. statutory income tax rate to the effective rate follows:
2000 1999 1998 ---- ---- ---- U.S. statutory income tax rate.............................. 35% 35% 35% Purchased in-process research and development (Note 16)..... -- -- 59 Goodwill amortization....................................... 14 9 7 Valuation allowances........................................ 8 -- -- Research and development credits............................ (6) -- -- Tax rate differences on subsidiary earnings................. (5) -- -- Incremental tax on cash repatriations from non-US subsidiaries.............................................. 2 3 -- State taxes................................................. 2 (2) 2 Utilization of capital losses............................... (5) (7) -- Reserves.................................................... (6) (6) (17) Other....................................................... 1 (1) 2 -- -- --- Effective tax rate.......................................... 40% 31% 88% == == ===
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 $246 million and $505 million at December 31, 2000 and 1999, respectively. 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. F-29 140 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 21. 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:
2000 1999 1998 --------- --------- -------- (DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE) Basic EPS computation: Net income................................................ $ 98 $ 168 $ 9 ====== ====== ===== Weighted-average shares outstanding....................... 107.2 103.2 96.3 ------ ------ ----- Earnings per share........................................ $ 0.91 $ 1.63 $0.10 ====== ====== ===== DILUTED EPS COMPUTATION: Net income................................................ $ 98 $ 168 $ 9 ====== ====== ===== Weighted-average shares outstanding....................... 107.2 103.2 96.3 Options................................................... 0.0 0.4 0.6 Convertible debentures.................................... 0.2 0.3 0.5 ------ ------ ----- Adjusted weighted-average shares.......................... 107.4 103.9 97.4 ====== ====== ===== Earnings per share........................................ $ 0.91 $ 1.62 $0.10 ====== ====== =====
22. DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The Company enters into forward-exchange contracts and currency swaps to hedge currency exposure. The Company used interest rate swap agreements to manage interest costs and risks associated with changing rates. 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 2000, the interest rate swap portfolio, which replaced variable rate debt with fixed rate debt, was substantially terminated due to the conversion of foreign denominated debt to U.S. dollar denominated debt in the first half of 2000 and the November 2000 debt restructuring. 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 December 31, 1999, with maturities from 2001 through September 2003, effectively converted floating-rate debt into debt with a fixed rate ranging from 5.36% to 6.23% per year for U.S. dollar debt and 2.76% to 3.18% per year for euro debt. These swaps acted as a hedge against the company's interest rate exposure on its outstanding variable rate debt. For the years 2000 and 1999, 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 2000 and 1999 were $20 million and $1.2 billion, respectively. F-30 141 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table indicates the types of swaps used and their weighted-average interest rates:
2000 1999 ---- ------ (DOLLARS IN MILLIONS) Pay fixed on swaps notional amount (at year-end)............ $ 20 $1,160 Average pay rate............................................ 3.8% 4.0% Average receive rate........................................ 4.3% 3.9%
Foreign Exchange Risk Management The Company has selectively used 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 the euro, Danish kroner and 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 three months. At December 31, 2000 and 1999, the Company had outstanding forward-exchange contracts to purchase foreign currencies aggregating $19 million and $59 million and to sell foreign currencies aggregating $39 million and $72 million, respectively. Non-U.S. dollar cross-currency trades aggregated $188 million and $410 million at December 31, 2000 and 1999, respectively. The foreign exchange contracts outstanding at December 31, 2000 will mature during 2001. Fair Values The following table presents the carrying amounts and fair values of the company's financial instruments at December 31, 2000 and 1999:
2000 1999 ---------------------- ---------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- (DOLLARS IN MILLIONS) Investment securities (available for sale)................................... $ 11 $ 11 $ 32 $ 32 Long-term debt............................ (2,342) (2,325) (1,777) (1,759) Company-obligated preferred securities of subsidiary trusts....................... (622) (492) (992) (908) Foreign exchange contracts................ (1) (1) 2 2 Interest rate swap contracts.............. -- -- -- 28
Fair values of derivative contracts are indicative of cash that would have been required had settlement been made at December 31, 2000 and 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. F-31 142 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - Interest rate swap contracts: Bank or market quotes or discounted cash flows using year-end interest rates. 23. SUBSEQUENT EVENTS During March 2001, definitive purchase and sale agreements were signed for the sale of our hydrocarbon resins division and select portions of our rosin resins divisions (the "Eastman transaction") to Eastman Chemical Resins, Inc., a subsidiary of Eastman Chemical Company ("Eastman"). Also in March 2001, we entered into an agreement to sell the Peroxides portion of our Resins division (the "Peroxide transaction"). We anticipate closing both transactions prior to May 31, 2001. Both our senior credit facility and our ESOP Trust loan (Note 6) require quarterly compliance with certain financial covenants, including leverage ratio ("debt/EBITDA ratio"), an interest coverage ratio and minimum net worth. In addition, we are required to deliver our annual audited consolidated financial statements to the lenders within 90 days of the Company's fiscal year end. Due to the delay in closing the Eastman transaction, which in turn delayed the pay down of the debt, our debt as of March 31, 2001 was significantly higher than planned. As a result, the Company would have been out of compliance with the debt/EBITDA ratio covenant of its senior credit facility as of March 31, 2001. In addition, due to the fact that the Company has extended the filing date for this 10-K, the Company's annual audited financial statements were not provided to the lenders by March 31, 2001. On April 5, 2001, in consideration for the payment of a fee, our senior credit facility bank syndicate and ESOP lender granted waivers with respect to: (1) compliance with the debt/EBITDA ratio as of March 31, 2001, and (2) an extension of time to deliver the December 31, 2000 audited financial statements to April 17, 2001. These statements have now been completed. With respect to the covenant regarding the debt/EBITDA ratio, the waiver requires that the Eastman transaction be consummated on or before May 31, 2001. In addition, the Company must demonstrate, as of the last day of the month in which the Eastman transaction closes, that the leverage ratio does not exceed 4.75 to 1.00 after giving affect to the application of the net cash proceeds from the Eastman transaction to prepay the Tranche A Term loan and the ESOP Trust loan. The Company expects to achieve this leverage ratio, although it may be necessary to close the Peroxide transaction prior to or in the same month as the Eastman transaction. A breach of any of the terms and conditions of the waiver would give the lenders the right to accelerate repayment of substantially all of our indebtedness if they choose to do so. Upon any such acceleration, the debt would become immediately due and payable and any loan commitments terminated. Although no assurances can be given in this regard, we anticipate closing the Eastman and Peroxides transactions prior to May 31, 2001. Using the net proceeds for repayment of debt, we expect that we will be in compliance with all debt covenants during the second quarter 2001 as well as the remainder of the year. While, as indicated above, we expect to satisfy all conditions of the waiver and remain in compliance with our debt covenants, current and future compliance is dependent upon generating sufficient EBITDA and cash flow which are, in turn, impacted by business performance, economic climate, competitive uncertainties and possibly the resolution of contingencies, including those set forth in Note 25 to the consolidated financial statements. In the event the Company is not in compliance with the debt covenants at the conditional date or thereafter, we would pursue various alternatives, which may include, among other things, refinancing of debt, debt covenant amendments, or debt covenant waivers. While we believe we would be successful in pursuing these alternatives, there can be no assurance that we would be successful. F-32 143 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On April 10, 2001, the United States Court of Appeals for the Eighth Circuit issued an opinion in the United States, et al. v. Vertac Corporation, et al., as described in Item 3. In that opinion, the Appeals Court reversed the Court's October 12, 1993 grant of partial summary judgment, which had held Hercules jointly and severally liable for costs incurred and to be incurred at the Jacksonville site, and remanded the case back to the U.S. District Court for the Eastern District of Arkansas for a determination of whether the harms at the site giving rise to the government's claims are divisible. The Appeals Court also vacated the Court's October 23, 1998 order granting the United States' summary judgment motion and the February 8, 2000 judgment finding Hercules liable for 97.4% of the costs at issue, ordering that these issues be revisited following further proceedings with respect to divisibility. Finally, the Appeals Court affirmed the judgment of liability against Uniroyal. As a result of the Appellate rulings described above, Hercules will be allowed to present both facts and law to the Court in support of Hercules' belief that it should not be liable under CERCLA for some or all of the costs incurred by the government in connection with the site because those harms are divisible. Should Hercules prevail on remand, any liability to the government will be either eliminated or reduced (see Note 25). 24. 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. On September 28, 2000, we sold our Food Gums division to CP Kelco, a joint venture we entered into with Lehman Brothers Merchant Banking Partners II, L.P., which contributed approximately $300 million in equity. We received approximately $395 million in cash proceeds, recorded certain selling and tax expenses of approximately $77 million and retained a 28.6% equity position in CP Kelco. CP Kelco simultaneously acquired Pharmacia's Kelco biogums business. The net proceeds from the sale of the Food Gums division have been used to permanently reduce borrowings under our senior credit facility. Food Gums had net sales of approximately $208 million in 1999. In November 2000, the Company announced it was exploring strategic alternatives for all or parts of the Company with the assistance of Goldman Sachs & Co. and Credit Suisse First Boston. Since this process is ongoing, any potential sale of all or part of the business may have a material impact on the estimates and assumptions used to prepare the amounts reported in the consolidated financial statements and accompanying notes. There can be no assurance that a transaction will occur. The majority of the remaining portions of the Resins division, including the ink toner portion that one of our joint venture partners exercised a right of first refusal to purchase in June 2000, are expected to be sold during 2001. The Resins division, including those portions associated with the Eastman and Peroxides transactions, had approximately $450 million in net sales in 2000. 25. COMMITMENTS AND CONTINGENCIES Leases Hercules has operating leases (including office space, transportation and data processing equipment) expiring at various dates. Rental expense was $57 million in 2000, $55 million in 1999 and $35 million in 1998. At December 31, 2000, minimum rental payments under noncancelable leases aggregated $289 million with subleases of $20 million. A significant portion of these payments relates to a long-term operating lease for F-33 144 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) corporate office facilities. The net minimum payments over the next five years are $43 million in 2001, $36 million in 2002, $29 million in 2003, $23 million in 2004 and $19 million in 2005. 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 $64 million and $240 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 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 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, et al, v. Vertac Corporation, et al, USDC No. LR-C-80-109 and LR-C-80-110 (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 been held not 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 Court for further proceedings. On May 21, 1997, the Court issued a ruling that Uniroyal was liable and that Standard Chlorine was 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 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. F-34 145 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 was held on June 12, 2000. On April 10, 2001, the United States Court of Appeals for the Eighth Circuit issued an opinion in the consolidated appeals described above. In that opinion, the Appeals Court reversed the Court's October 12, 1993 grant of partial summary judgment, which had held Hercules jointly and severally liable for costs incurred and to be incurred at the Jacksonville site, and remanded the case back to the U.S. District Court for the Eastern District of Arkansas for a determination of whether the harms at the site giving rise to the government's claims are divisible. The Appeals Court also vacated the Court's October 23, 1998 order granting the United States' summary judgment motion and the February 8, 2000 judgment finding Hercules liable for 97.4% of the costs at issue, ordering that these issues be revisited following further proceedings with respect to divisibility. Finally, the Appeals Court affirmed the judgment of liability against Uniroyal. As a result of the Appellate rulings described above, Hercules will be allowed to present both facts and law to the Court in support of Hercules' belief that it should not be liable under CERCLA for some or all of the costs incurred by the government in connection with the site because those harms are divisible. Should Hercules prevail on remand, any liability to the government will be either eliminated or reduced. In 1992, Hercules brought suit against its insurance carriers for past and future costs for cleanup of certain environmental sites (Hercules Incorporated v. 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. Hercules has appealed certain of the trial court's rulings to the Delaware Supreme Court. Oral argument was held on February 13, 2001 before the Delaware Supreme Court, but no ruling has been issued. At December 31, 2000, the accrued liability of $64 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. While it is not feasible to predict the outcome of all pending suits and claims, the ultimate resolution of these environmental matters could have a material effect upon the results of operations and the financial position of Hercules. 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. F-35 146 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Hercules is a defendant in numerous asbestos-related personal injury lawsuits and claims which typically arise from alleged exposure to asbestos fibers from resin-encapsulated pipe and tank products which were sold by a former subsidiary of Hercules to a limited industrial market, or from alleged exposure to asbestos contained in facilities owned or operated by Hercules. Lawsuits are received and matters settled on a regular basis. In December 1999, Hercules entered into a Settlement Agreement to resolve the majority of these matters then pending. 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. During 2000 and 2001, Hercules entered into additional settlement agreements. The terms of these settlements are also confidential. In accordance with the terms of the previously mentioned agreement with several of Hercules' insurance carriers, the majority of the amounts paid and to be paid pursuant to these various settlement agreements will be insured. Further, Hercules continues to pursue additional insurance coverage from carriers who were not part of the previously mentioned agreement. 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. At December 31, 2000, the consolidated balance sheet reflects a current liability of approximately $25 million for litigation and claims. 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. Other At December 31, 2000, Hercules had $21 million in letters of credit outstanding with lenders, $4 million of which were issued under the senior credit facility (Note 6). 26. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA In 1998, Hercules adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information." The statement established new standards for reporting information about operating segments in annual financial statements and required selected information about operating segments in interim financial reports. It also established standards for related disclosure about products and services, geographic area, and major customers. In compliance with SFAS 131, the Company has identified three reportable segments. Process Chemicals and Services: (Pulp and Paper and BetzDearborn.) Products and services in this segment are designed to enhance customers' processes and products, 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.) 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 solvent-soluble polymers, used as thickeners, emulsifiers and stabilizers for water-based paints, oil and gas exploration, building materials, dairy and bakery products, cosmetic and oral hygiene F-36 147 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) products and producers of lacquers, inks and aviation fluids. Prior to September 28, 2000, this segment also included our Food Gums Division, which was sold to CP Kelco, a joint venture we entered with Lehman Brothers Merchant Banking Partners II, L.P. 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 yarns for decorative fabrics. 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, Company-obligated preferred securities of subsidiary trusts 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. 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.
PROCESS CHEMICALS FUNCTIONAL CHEMICAL RECONCILING INDUSTRY SEGMENT AND SERVICES PRODUCTS SPECIALTIES ITEMS CONSOLIDATED - ---------------- ------------ ---------- ----------- ----------- ------------ 2000 Net sales........................... $1,717 $ 742 $695 $ (2) $3,152 Profit (loss) from operations....... 297 176 59 (88) 444 Equity in income of affiliated companies......................... (2) Interest and debt expense........... 164 Preferred security distributions of subsidiary trusts................. 96 Other expense, net.................. (18) ------ Income before income taxes.......... 164 ------ Capital employed(a)................. 632 219 308 2,882(b) 4,041 Capital expenditures................ 39 76 36 28 179 Depreciation and amortization....... 51 26 25 144 246
F-37 148 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROCESS CHEMICALS FUNCTIONAL CHEMICAL RECONCILING INDUSTRY SEGMENT AND SERVICES PRODUCTS SPECIALTIES ITEMS CONSOLIDATED - ---------------- ------------ ---------- ----------- ----------- ------------ 1999 Net sales........................... $1,725 $ 875 $711 $ (2) $3,309 Profit (loss) from operations....... 338 218 89 (165)(c) 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(a)................. 735 372 379 2,824(b) 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)(d) 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(a)................. 756 392 388 2,885(b) 4,421 Capital expenditures................ 44 53 36 24 157 Depreciation and amortization....... 22 32 19 35 108
UNITED ASIA GEOGRAPHIC AREAS STATES EUROPE AMERICAS(E) PACIFIC TOTAL - ---------------- ------------ ---------- ----------- ----------- ------------ (DOLLARS IN MILLIONS) 2000 Net sales........................... $1,702 $ 964 $215 $ 271 $3,152 Long-lived assets(f)................ 2,267 748 382 98 3,495 1999 Net sales........................... $1,742 $1,074 $220 $ 273 $3,309 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
- --------------- (a) Represents total segment assets net of operating liabilities. (b) Assets and liabilities not specifically allocated to business segments, primarily goodwill, intangibles, and other long-term assets net of liabilities. (c) 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 F-38 149 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) charges (see Notes 14 and 17). Also included are amortization of goodwill and intangibles, corporate research and development and other corporate items not specifically allocated to business segments. (d) 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 16 and 17). Also included are amortization of goodwill and intangibles, corporate research and development and other corporate items not specifically allocated to business segments. (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. 27. CONSOLIDATING CONDENSED FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES One of the amendments to our senior credit facility effective November 14, 2000 (see Note 6) included a guarantee by each of our current and future wholly owned domestic restricted subsidiaries (each, a "Guarantor Subsidiary"). The guarantee of each Guarantor Subsidiary is full and unconditional and joint and several. The indenture under which our registered 6.6% notes due 2027 and 6.625% notes due 2003 were issued requires the holders of such notes to be on the same basis as the holders of any other subsequently issued debt that provides either guarantees or pledges of collateral. As a result, the following wholly-owned domestic restricted subsidiaries jointly and severally, and full and unconditionally guarantee the senior credit facility, our registered 6.6% notes dues 2027, 6.625% notes due 2003 and our 11.125% notes due 2007. Aqualon Company Athens Holding Inc. BetzDearborn China, Inc. BetzDearborn Europe, Inc BetzDearborn International, Inc BetzDearborn Inc. BL Chemicals Inc. BL Technologies, Inc BLI Holdings, Inc Chemical Technologies India, Ltd. Covington Holdings, Inc. DRC, Ltd East Bay Realty Services, Inc. FiberVisions Incorporated FiberVisions Products, Inc FiberVisions, L.L.C. FiberVisions L.P. Hercules Chemical Corporation Hercules Country Club, Inc. Hercules Credit, Inc Hercules Euro Holdings, Inc. Hercules Finance Company Hercules Flavor, Inc. Hercules International Limited Hercules International Limited, L.L.C. Hercules Investments L.L.C. Hercules Shared Services Corp HISPAN Corporation WSP, Inc The non-guarantor subsidiaries (the "Non-Guarantor Subsidiaries") include all of the Company's foreign subsidiaries and certain domestic subsidiaries. The Company conducts much of its business through and derives much of its income from its subsidiaries. Therefore the Company's ability to make required payments with respect to its indebtedness and other obligations depends on the financial results and condition of its subsidiaries and its ability to receive funds from its subsidiaries. There are no restrictions on the ability of any of the Guarantor Subsidiaries to transfer funds to the Company, however there may be restrictions for certain foreign Non-Guarantor Subsidiaries. The following condensed consolidating financial information for the Company presents the financial information of Hercules, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries based on the Company's understanding of Securities and Exchange Commission's interpretation and application of F-39 150 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Rule 3-10 under the Securities and Exchange Commission's Regulation S-X. The financial information may not necessarily be indicative of results of operations or financial position had the Guarantor Subsidiaries or Non-Guarantor Subsidiaries operated as independent entities. In this presentation, Hercules consists of parent Company operations. Guarantor Subsidiaries and Non-Guarantor Subsidiaries of Hercules are reported on an equity basis. For companies acquired during 1998, the goodwill and fair values of the assets and liabilities acquired have been presented on a "push-down" accounting basis. CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS DECEMBER 31, 2000
UNCONSOLIDATED --------------------------------------- GUARANTOR NON-GUARANTOR ELIMINATIONS & PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------ ------------ ------------- -------------- ------------ (MILLIONS OF DOLLARS) Net sales...................... $606 $1,532 $1,701 $(687) $3,152 Cost of sales.................. 432 995 1,050 (693) 1,784 Selling, general, and administrative expenses...... 84 338 388 810 Research and development....... 33 35 12 80 Goodwill and intangible asset amortization................. 7 48 25 80 Other operating expenses (income), net................ 38 92 (176) (46) ---- ------ ------ ----- ------ Profit from operations......... 12 24 402 6 444 Equity in income (loss) from affiliated companies, net of tax.......................... -- -- (2) (2) Equity in income from consolidated subsidiaries, net of tax................... 350 48 4 (402) -- Interest and debt expense...... 283 (129) 10 164 Preferred security distributions of subsidiary trusts....................... -- -- 96 96 Other income (expense), net.... (17) (9) 8 (18) ---- ------ ------ ----- ------ Income (loss) before income taxes........................ 62 192 306 (396) 164 Provision for income taxes..... (58) 68 54 2 66 ---- ------ ------ ----- ------ Net income (loss).............. $120 $ 124 $ 252 $(398) $ 98 ==== ====== ====== ===== ======
F-40 151 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS DECEMBER 31, 1999
UNCONSOLIDATED --------------------------------------- GUARANTOR NON-GUARANTOR ELIMINATIONS & PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------ ------------ ------------- -------------- ------------ (MILLIONS OF DOLLARS) Net sales..................... $ 584 $1,570 $1,827 $(672) $3,309 Cost of sales................. 424 974 1,100 (667) 1,831 Selling, general, and administrative expenses..... 118 365 304 787 Research and development...... 28 13 44 85 Goodwill and intangible asset amortization................ 9 53 17 79 Other operating expenses, net......................... 23 23 1 47 ----- ------ ------ ----- ------ Profit (loss) from operations.................. (18) 142 361 (5) 480 Equity in income (loss) from affiliated companies, net of tax......................... 2 -- (1) 1 Equity in income from consolidated subsidiaries, net of tax.................. 331 143 6 (480) -- Interest and debt expense..... 261 (51) (25) 185 Preferred security distributions of subsidiary trusts...................... -- -- 51 51 Other income (expense), net... (3) (1) 4 (2) (2) ----- ------ ------ ----- ------ Income (loss) before income taxes....................... 51 335 344 (487) 243 Provision for income taxes.... (121) 89 110 (3) 75 ----- ------ ------ ----- ------ Net income (loss)............. $ 172 $ 246 $ 234 $(484) $ 168 ===== ====== ====== ===== ======
F-41 152 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS DECEMBER 31, 1998
UNCONSOLIDATED --------------------------------------- GUARANTOR NON-GUARANTOR ELIMINATIONS & PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------ ------------ ------------- -------------- ------------ (MILLIONS OF DOLLARS) Net sales...................... $558 $963 $1,309 $(685) $2,145 Cost of sales.................. 400 707 859 (679) 1,287 Selling, general, and administrative expenses...... 80 119 178 377 Research and development....... 27 24 10 61 Purchased in-process research and development.............. -- 130 -- 130 Goodwill and intangible asset amortization................. 14 5 3 22 Other operating expenses, net.......................... 40 24 12 76 ---- ---- ------ ----- ------ Profit (loss) from operations................... (3) (46) 247 (6) 192 Equity in income of affiliated companies, net of tax........ 10 -- 10 Equity in income from consolidated subsidiaries, net of tax................... 119 67 6 (192) -- Interest and debt expense (income)..................... 121 (32) 12 101 Preferred security distributions of subsidiary trusts....................... -- -- 2 2 Other income (expense), net.... (70) 36 10 2 (22) ---- ---- ------ ----- ------ Income (loss) before income taxes........................ (65) 89 249 (196) 77 Provision for income taxes..... (75) 59 85 (1) 68 ---- ---- ------ ----- ------ Net income (loss).............. $ 10 $ 30 $ 164 $(195) $ 9 ==== ==== ====== ===== ======
F-42 153 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING CONDENSED BALANCE SHEET DECEMBER 31, 2000
UNCONSOLIDATED ------------------------------------- GUARANTOR NON-GUARANTOR ELIMINATIONS & PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------ ------------ ------------- -------------- ------------ (MILLIONS OF DOLLARS) ASSETS Current assets Cash and cash equivalents....... $ 1 $ 7 $ 46 $ -- $ 54 Accounts receivable, net........ 110 183 333 626 Intercompany receivables........ 37 81 79 (197) -- Inventories..................... 63 124 128 (10) 305 Deferred income taxes........... 28 2 7 37 ------ ------- ------ ------- ------ Total current assets............ 239 397 593 (207) 1,022 Property, plant, and equipment, net............................. 264 359 481 1,104 Investments in subsidiaries....... 4,357 1,578 69 (6,004) -- Goodwill and other intangible assets, net..................... 35 1,471 885 2,391 Deferred charges and other assets.......................... 648 36 108 792 ------ ------- ------ ------- ------ Total assets.................... $5,543 $ 3,841 $2,136 $(6,211) $5,309 ====== ======= ====== ======= ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable................ 121 14 122 2 259 Accrued expenses................ 132 130 140 402 Intercompany payables........... 45 68 84 (197) -- Short-term debt................. 127 5 129 261 ------ ------- ------ ------- ------ Total current liabilities....... 425 217 475 (195) 922 Long-term debt.................... 2,063 97 182 2,342 Deferred income taxes............. 82 48 57 187 Other postretirement benefits and other liabilities............... 210 169 41 420 Company-obligated preferred securities of subsidiary trusts.......................... -- -- 622 622 Intercompany notes payable/(receivable)............ 1,947 (2,656) 719 (10) -- Stockholders' equity.............. 816 5,966 40 (6,006) 816 ------ ------- ------ ------- ------ Total liabilities and stockholders' equity......... $5,543 $ 3,841 $2,136 $(6,211) $5,309 ====== ======= ====== ======= ======
F-43 154 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING CONDENSED BALANCE SHEET DECEMBER 31, 1999
UNCONSOLIDATED ------------------------------------- GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------- ------------ ------------ (MILLIONS OF DOLLARS) ASSETS Current assets Cash and cash equivalents......... $ 2 $ 23 $ 38 $ -- $ 63 Accounts receivable, net.......... 99 278 389 766 Intercompany receivable........... 22 24 78 (124) -- Inventories....................... 63 147 184 (14) 380 Deferred income taxes............. 119 10 129 ------ ------- ------ ------- ------ Total current assets.............. 305 472 699 (138) 1,338 Property, plant, and equipment, net............................... 251 436 634 1,321 Investments in subsidiaries......... 4,190 1,776 68 (6,034) -- Goodwill and other intangible assets, net....................... 45 1,536 989 2,570 Deferred charges and other assets... 517 44 106 667 ------ ------- ------ ------- ------ Total assets...................... $5,308 $ 4,264 $2,496 $(6,172) $5,896 ====== ======= ====== ======= ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable.................. 48 125 147 320 Accrued expenses.................. 148 250 163 561 Intercompany payable.............. 31 57 36 (124) -- Short-term debt................... 641 2 35 678 ------ ------- ------ ------- ------ Total current liabilities......... 868 434 381 (124) 1,559 Long-term debt...................... 1,611 107 59 1,777 Deferred income taxes............... 77 119 91 287 Other postretirement benefits and other liabilities................. 159 203 56 418 Company-obligated preferred securities of subsidiary trusts... -- -- 992 992 Intercompany notes payable (receivable)...................... 1,730 (1,189) (541) -- -- Stockholders' equity................ 863 4,590 1,458 (6,048) 863 ------ ------- ------ ------- ------ Total liabilities and stockholders' equity........... $5,308 $ 4,264 $2,496 $(6,172) $5,896 ====== ======= ====== ======= ======
F-44 155 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS DECEMBER 31, 2000
UNCONSOLIDATED -------------------------------------- GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ (MILLIONS OF DOLLARS) NET CASH PROVIDED BY (USED IN) OPERATIONS........................... $ (91) $(24) $ 234 $(49) $ 70 CASH FLOW FROM INVESTING ACTIVITIES: Capital expenditures................. (37) (38) (112) -- (187) Proceeds of investment and fixed asset disposals................... -- 14 404 -- 418 Acquisitions, net of cash acquired... (6) -- -- -- (6) Other, net........................... (19) (1) 8 -- (12) ------- ---- ----- ---- ------- Net cash (used in) provided by investing activities.............. (62) (25) 300 -- 213 ------- ---- ----- ---- ------- CASH FLOW FROM FINANCING ACTIVITIES: Long-term debt proceeds.............. 1,858 27 4 -- 1,889 Long-term debt repayments............ (1,756) (27) (7) -- (1,790) Change in short-term debt............ -- -- 92 -- 92 Payment of debt issuance costs and underwriting fees................. (28) -- -- -- (28) Repayment of subsidiary trust preferred securities.............. -- -- (370) -- (370) Change in intercompany, noncurrent... 161 33 (194) -- -- Common stock issued.................. 13 -- -- -- 13 Common stock reacquired.............. (2) -- -- -- (2) Dividends paid....................... (94) -- (49) 49 (94) ------- ---- ----- ---- ------- Net cash (used in) provided by financing activities.............. 152 33 (524) 49 (290) ------- ---- ----- ---- ------- Effect of exchange rate changes on cash................................. -- -- (2) -- (2) ------- ---- ----- ---- ------- Net increase (decrease) in cash and cash equivalents..................... (1) (16) 8 -- (9) Cash and cash equivalents at beginning of year.............................. 2 23 38 -- 63 ------- ---- ----- ---- ------- Cash and cash equivalents at end of year................................. $ 1 $ 7 $ 46 $ -- $ 54 ======= ==== ===== ==== =======
F-45 156 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS DECEMBER 31, 1999
UNCONSOLIDATED -------------------------------------- GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ (MILLIONS OF DOLLARS) NET CASH PROVIDED BY (USED IN) OPERATIONS........................... $ (59) $ 198 $ 243 $(102) $ 280 CASH FLOW FROM INVESTING ACTIVITIES: Capital expenditures................. (42) (66) (88) -- (196) Proceeds of investment and fixed asset disposals................... 2 28 20 -- 50 Acquisitions, net of cash acquired... (10) -- -- -- (10) Other, net........................... (24) (15) 2 -- (37) ------- ----- ----- ----- ------- Net cash (used in) provided by investing activities.............. (74) (53) (66) -- (193) ------- ----- ----- ----- ------- CASH FLOW FROM FINANCING ACTIVITIES: Long-term debt proceeds.............. 274 5 -- -- 279 Long-term debt repayments............ (1,344) (16) -- -- (1,360) Change in short-term debt............ 99 (17) (60) -- 22 Payment of debt issuance costs and underwriting fees................. -- -- (19) -- (19) Proceeds from issuance of subsidiary trusts' preferred securities...... -- -- 792 -- 792 Change in intercompany, noncurrent... 915 (112) (804) 1 -- Proceeds from issuance of warrants... 90 -- -- -- 90 Common stock issued.................. 182 -- -- -- 182 Common stock reacquired.............. (3) -- -- -- (3) Proceeds from issuance of subsidiary preferred stock................... -- 12 -- -- 12 Dividends paid....................... (83) -- (101) 101 (83) ------- ----- ----- ----- ------- Net cash (used in) provided by financing activities.............. 130 (128) (192) 102 (88) ------- ----- ----- ----- ------- Effect of exchange rate changes on cash................................. -- -- (4) -- (4) ------- ----- ----- ----- ------- Net increase (decrease) in cash and cash equivalents..................... (3) 17 (19) -- (5) Cash and cash equivalents at beginning of year.............................. 5 6 57 -- 68 ------- ----- ----- ----- ------- Cash and cash equivalents at end of year................................. $ 2 $ 23 $ 38 $ -- $ 63 ======= ===== ===== ===== =======
F-46 157 HERCULES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS DECEMBER 31, 1998
UNCONSOLIDATED -------------------------------------- GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ (MILLIONS OF DOLLARS) NET CASH PROVIDED BY (USED IN) OPERATIONS........................... $ 119 $ 32 $119 $(89) $ 181 CASH FLOW FROM INVESTING ACTIVITIES: Capital expenditures................. (39) (52) (66) -- (157) Proceeds of investment and fixed asset disposals................... 77 522 1 -- 600 Acquisitions, net of cash acquired... (3,109) -- -- -- (3,109) Other, net........................... (14) (11) -- -- (25) ------- ----- ---- ---- ------- Net cash (used in) provided by investing activities.............. (3,085) 459 (65) -- (2,691) ------- ----- ---- ---- ------- CASH FLOW FROM FINANCING ACTIVITIES: Long-term debt proceeds.............. 2,960 151 -- -- 3,111 Long-term debt repayments............ (175) (72) -- -- (247) Change in short-term debt............ (212) 7 (23) -- (228) Payment of debt issuance costs and underwriting fees................. (59) -- (7) -- (66) Change in intercompany, noncurrent... 665 (573) (92) -- -- Proceeds from trust preferred securities........................ -- -- 200 -- 200 Common stock issued.................. 10 -- -- -- 10 Common stock reacquired.............. (114) -- -- -- (114) Dividends paid....................... (104) -- (89) 89 (104) ------- ----- ---- ---- ------- Net cash (used in) provided by financing activities.............. 2,971 (487) (11) 89 2,562 ------- ----- ---- ---- ------- Effect of exchange rate changes on cash................................. -- -- (1) -- (1) ------- ----- ---- ---- ------- Net increase (decrease) in cash and cash equivalents..................... 5 4 42 -- 51 Cash and cash equivalents at beginning of year.............................. -- 2 15 -- 17 ------- ----- ---- ---- ------- Cash and cash equivalents at end of year................................. $ 5 $ 6 $ 57 $ -- $ 68 ======= ===== ==== ==== =======
F-47 158 HERCULES INCORPORATED SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER YEAR ------------- ------------- ------------- -------------- --------------- 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999 ----- ----- ----- ----- ----- ----- ------ ----- ------ ------ Operating Results Net sales..................... $ 798 $ 806 $ 822 $ 833 $ 815 $ 828 $ 717 $ 842 $3,152 $3,309 Cost of sales................. 450 438 462 456 463 460 409 477 1,784 1,831 Selling, general, and administrative expenses..... 197 197 206 193 210 188 197 209 810 787 Research and development...... 21 21 20 20 20 21 19 23 80 85 Goodwill and intangible asset amortization................ 20 20 20 20 20 20 20 19 80 79 Other operating expenses (income), net............... 4 7 18 6 (105) 1 37 33 (46) 47 ----- ----- ----- ----- ----- ----- ------ ----- ------ ------ Profit (loss) from operations.................. $ 106 $ 123 $ 96 $ 138 $ 207 $ 138 $ 35 $ 81 $ 444 $ 480* Equity income................. -- 1 -- -- -- -- (2) -- (2) 1 Interest and debt expense..... 32 60 42 47 42 38 48 40 164 185 Preferred security distributions of subsidiary trusts...................... 23 5 23 12 23 16 27 18 96 51 Other income (expense), net... 5 3 (6) 4 (13) (2) (4) (7) (18) (2) ----- ----- ----- ----- ----- ----- ------ ----- ------ ------ Income (loss) before income taxes....................... $ 56 $ 62 $ 25 $ 83 $ 129 $ 82 $ (46) $ 16 $ 164 $ 243 Income taxes.................. 20 24 9 27 54 25 (17) (1) 66 75 ----- ----- ----- ----- ----- ----- ------ ----- ------ ------ Net income (loss)............. $ 36 $ 38 $ 16 $ 56 $ 75 $ 57 $ (29) $ 17 $ 98 $ 168 ===== ===== ===== ===== ===== ===== ====== ===== ====== ====== Earnings per share** Basic: Earnings (loss) per share... $0.34 $0.37 $0.15 $0.56 $0.70 $0.54 $(0.28) $0.17 $ 0.91 $ 1.63 Diluted: Earnings (loss) per share... $0.34 $0.37 $0.15 $0.56 $0.70 $0.54 $(0.28) $0.16 $ 0.91 $ 1.62
- --------------- * Includes net unusual credits of $56 million in 2000 and unusual charges of $62 million in 1999 (see Note 17). ** 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. F-48 159 HERCULES INCORPORATED CONSOLIDATED STATEMENT OF INCOME (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
THREE MONTHS ENDED MARCH 31, --------------- 2001 2000 ------ ----- (UNAUDITED) Net sales................................................... $ 702 $ 798 Cost of sales............................................... 409 450 Selling, general, and administrative expenses............... 190 197 Research and development.................................... 19 21 Goodwill and intangible asset amortization.................. 19 20 Other operating expenses, net............................... 3 4 ------ ----- Profit from operations...................................... 62 106 Equity in loss of affiliated companies, net of tax.......... (3) -- Interest and debt expense................................... 55 32 Preferred security distributions of subsidiary trusts....... 15 23 Other income (expense), net................................. (3) 5 ------ ----- Income (loss) before income taxes........................... (14) 56 Provision for income taxes.................................. (4) 20 ------ ----- Net income (loss)........................................... $ (10) $ 36 ====== ===== Earnings per share: Basic..................................................... $(0.09) $0.34 ====== ===== Diluted................................................... $(0.09) $0.34 ====== ===== Dividends per share......................................... $ -- $0.27 ====== =====
See accompanying notes to financial statements. F-49 160 HERCULES INCORPORATED CONSOLIDATED BALANCE SHEET (DOLLARS IN MILLIONS)
MARCH 31, DECEMBER 31, 2001 2000 ----------- ----------------- (UNAUDITED) ASSETS Current assets Cash and cash equivalents................................. $ 161 $ 54 Accounts and notes receivable, net........................ 519 535 Other current assets...................................... 81 91 Inventories Finished products...................................... 169 171 Materials, supplies and work in process................ 135 134 Deferred income taxes..................................... 42 37 ------- ------- Total current assets................................... 1,107 1,022 Property, plant and equipment............................... 2,543 2,564 Accumulated depreciation and amortization................... (1,463) (1,460) ------- ------- Net property, plant and equipment........................... 1,080 1,104 Goodwill and other intangible assets, net................... 2,345 2,391 Other assets................................................ 791 792 ------- ------- Total assets.............................................. $ 5,323 $ 5,309 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable.......................................... $ 255 $ 259 Accrued expenses.......................................... 355 385 Short-term debt........................................... 299 261 Income taxes payable...................................... 10 17 ------- ------- Total current liabilities................................. 919 922 Long-term debt.............................................. 2,412 2,342 Deferred income taxes....................................... 186 187 Postretirement benefits and other liabilities............... 409 420 Commitments and contingencies (Note 12) Company-obligated preferred securities of subsidiary trusts.................................................... 622 622 Stockholders' equity Common stock (shares issued: 2001 -- 159,984,444; 2000 -- 159,984,444)................................... 83 83 Additional paid-in capital................................ 718 726 Unearned compensation..................................... (113) (115) Other comprehensive losses................................ (188) (143) Retained earnings......................................... 2,147 2,157 ------- ------- 2,647 2,708 Reacquired stock, at cost (shares: 2001 -- 52,002,252; 2000 -- 52,442,393).................................... (1,872) (1,892) ------- ------- Total stockholders' equity................................ 775 816 ------- ------- Total liabilities and stockholders' equity................ $ 5,323 $ 5,309 ======= =======
See accompanying notes to financial statements. F-50 161 HERCULES INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOW (DOLLARS IN MILLIONS)
THREE MONTHS ENDED MARCH 31, ---------------- 2001 2000 ------ ------ (UNAUDITED) Net cash provided by (used in) operations................... $ 9 $(12) ---- ---- CASH FLOW FROM INVESTING ACTIVITIES: Capital expenditures........................................ (23) (52) Proceeds of investment and fixed asset disposals............ -- 6 Other, net.................................................. (2) (20) ---- ---- Net cash used in investing activities..................... (25) (66) ---- ---- CASH FLOW FROM FINANCING ACTIVITIES: Long-term debt proceeds..................................... 147 200 Long-term debt repayments................................... (3) (72) Change in short-term debt................................... (28) (2) Common stock issued......................................... 8 3 Common stock reacquired..................................... -- (1) Dividends paid.............................................. -- (28) ---- ---- Net cash provided by financing activities................. 124 100 ---- ---- Effect of exchange rate changes on cash..................... (1) -- ---- ---- Net increase in cash and cash equivalents................... 107 22 Cash and cash equivalents -- beginning of period............ 54 63 ---- ---- Cash and cash equivalents -- end of period.................. $161 $ 85 ==== ==== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized)...................... $ 38 $ 33 Preferred security distributions of subsidiary trusts..... 18 18 Income taxes.............................................. 5 11 Non-cash investing and financing activities: Incentive plan stock issuances............................ 5 6
See accompanying notes to financial statements. F-51 162 HERCULES INCORPORATED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (DOLLARS IN MILLIONS)
THREE MONTHS ENDED MARCH 31, ------------ 2001 2000 ---- ---- (UNAUDITED) Net income (loss)........................................... $(10) $36 Foreign currency translation, net of tax.................... (45) (4) ---- --- Comprehensive income (loss)................................. $(55) $32 ==== ===
See accompanying notes to financial statements. F-52 163 HERCULES INCORPORATED NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. These condensed consolidated financial statements are unaudited, but in the opinion of management include all adjustments necessary to present fairly Hercules' financial position and results of operations for interim periods. These condensed consolidated financial statements should be read in conjunction with the accounting policies, financial statements and notes included in our annual report on Form 10-K for the year ended December 31, 2000. Certain prior period amounts have been reclassified to conform to the current period presentation. Pursuant to Securities and Exchange Commission ("SEC") Regulation S-X, Rule 3-10, the Company is required to provide condensed consolidating financial information on the Company and its subsidiaries in a prescribed format in all periodic reports filed with the SEC. The information necessary to present all of the required disclosure was not available in time to be included in this Form 10-Q filing. The Company is in the process of preparing the required condensed consolidating financial information and intends to file a Form 10-Q/A, which will include this information as soon as it is available. 2. Revenue Recognition -- The Company recognizes revenue when the earnings process is complete. This generally occurs when products are shipped to the customer or services are performed in accordance with terms of the agreement, title and risk of loss have been transferred, collectibility is probable, and pricing is fixed and determinable. Accruals are made for sales returns and other allowances based on the Company's experience. The corresponding shipping and handling costs are included in cost of sales. 3. Derivative Instruments and Hedging -- On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended ("SFAS 133"). The new standard requires that all derivative instruments be reported on the balance sheet at their fair values. The Company has not designated any derivative as a hedge instrument and accordingly, changes in fair value of derivatives are recorded each period in earnings. The adoption of SFAS 133 did not result in a pre or post tax cumulative-effect-type adjustment to income and did not result in a change to accumulated other comprehensive loss. Under procedures and controls established by the Company's risk management policies, the Company strategically enters into contractual arrangements (derivatives) in the ordinary course of business to reduce the exposure to foreign currency and interest rates. The policies have established a variety of approved derivative instruments to be utilized in each risk management program and the level of exposure coverage based on an assessment of risk factors. Derivative instruments utilized during the period include forwards, swaps and options. The Company has not designated any non-derivatives as hedging instruments. The Company uses forward exchange contracts, generally no greater than three months in term, to reduce its net exposure, by currency, related to foreign currency denominated intercompany receivables. The objective of this program is to maintain an overall balanced position in foreign currencies so that exchange gains and losses resulting from exchange rate changes, net of related tax effect, are minimized. The Company has used interest rate swap agreements to manage interest costs and risks associated with changing rates. Counterparties to the forward exchange, currency swap and interest swap contracts are major financial institutions. Credit loss from counterparty nonperformance is not anticipated. During 2000, the interest rate swap portfolio was substantially terminated. F-53 164 4. The following table shows the amounts used in computing earnings per share (EPS) and the effect on income and the weighted-average number of shares of dilutive potential common stock:
THREE MONTHS ENDED MARCH 31, ---------------------- 2001 2000 -------- -------- (AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA) Basic Net income (loss)...................................... $ (10) $ 36 Weighted-average shares outstanding.................... 107.9 106.7 ------ ------ EPS.................................................... $(0.09) $ 0.34 ====== ====== Diluted Net income (loss)...................................... (10) $ 36 Interest on convertible debentures..................... -- -- ------ ------ Net income for EPS calculation......................... $ (10) $ 36 ====== ====== Weighted-average shares outstanding.................... 107.9 106.7 Options................................................ -- -- Debentures............................................. -- .2 ------ ------ Adjusted weighted-average shares....................... 107.9 106.9 ------ ------ EPS.................................................... $(0.09) $ 0.34 ====== ======
5. Cost and expenses include depreciation of $27 million and $33 million for the three months ended March 31, 2001 and 2000, respectively. 6. Other operating expenses for the three months ended March 31, 2001 and 2000 include environmental charges of approximately $3 million and $2 million, respectively. The first quarter 2000 also includes integration charges of $2 million, primarily for employee retention, consulting, legal and other costs associated with the BetzDearborn acquisition. 7. Interest and debt costs are summarized as follows:
THREE MONTHS ENDED MARCH 31, ------------ 2001 2000 ---- ---- (DOLLARS IN MILLIONS) Costs incurred.............................................. $57 $34 Amount capitalized.......................................... (2) (2) --- --- Interest expense............................................ $55 $32 === ===
8. Other income (expense) for the three months ended March 31, 2001, includes foreign currency losses of approximately $1 million as compared to foreign currency gains of approximately $3 million in the first quarter 2000, combined with non-operating related legal costs of $2 million and $1 million in the quarters ended March 31, 2001 and 2000, respectively. 9. The consolidated balance sheet reflects liabilities for employee severance benefits and other exit costs, primarily related to the 1998 plans initiated upon the acquisition of BetzDearborn. During 2000, we committed to additional plans relating to the restructuring of our Process Chemicals & Services segment and corporate realignment due to the divestiture of our non-core businesses. As a result of all these plans, we estimate approximately 1,705 employees will be terminated, of which approximately 1,370 employee terminations have occurred since the inception of the plans. F-54 165 Pursuant to the plans in place, approximately 10 employees were terminated during the three months ended March 31, 2001. Cash payments during the first quarter included $5 million for severance benefits. A reconciliation of activity with respect to the liabilities established for these plans is as follows:
THREE MONTHS ENDED MARCH 31, ------------ 2001 2000 ---- ---- (DOLLARS IN MILLIONS) Balance at beginning of year................................ $34 $77 Cash payments............................................... (5) (9) --- --- Balance at end of period.................................... $29 $68 === ===
Severance benefit 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 by the end of 2001. 10. A summary of short-term and long-term debt follows:
MARCH 31, DECEMBER 31, 2001 2000 --------- ------------ (DOLLARS IN MILLIONS) SHORT-TERM: Banks................................................ $ 86 $118 Current maturities of long-term debt................. 213 143 ---- ---- $299 $261 ==== ====
At March 31, 2001, we had $125 million of unused lines of credit that may be drawn as needed. Lines of credit in use at March 31, 2001 were $86 million.
MARCH 31, DECEMBER 31, 2001 2000 --------- ------------ (DOLLARS IN MILLIONS) LONG-TERM: 6.60% notes due 2027................................. $ 100 $ 100 6.625% notes due 2003................................ 125 125 11.125% senior notes due 2007........................ 400 400 8% convertible subordinated debentures due 2010...... 3 3 Term loan tranche A due in varying amounts through 2003............................................... 874 875 Term loan tranche D due 2005......................... 375 375 Revolving credit agreement due 2003.................. 581 437 ESOP debt............................................ 101 101 Term notes at various rates from 5.23% to 9.60% due in varying amounts through 2006.................... 60 65 Other................................................ 6 4 ------ ------ $2,625 $2,485 Current maturities of long-term debt................. (213) (143) ------ ------ Net long-term debt................................... $2,412 $2,342 ====== ======
In 1998, we entered into a $3,650 million credit facility with a syndicate of banks which includes varying maturity term loans totaling $2,750 million, of which $874 million was still outstanding at March 31, 2001. In addition, the facility includes a $900 million revolving credit agreement, of which $581 million was outstanding at March 31, 2001. Through this revolving credit facility, a Canadian subsidiary of ours can F-55 166 borrow up to U.S. $100 million from select lenders in Canada in Canadian dollars. As of March 31, 2001, $319 million of the multi-currency revolver is available for use. However, actual availability under the revolving credit agreement is constrained by our ability to meet covenants in our senior credit facility (see Note 15). On January 23, 2001, our corporate credit rating was downgraded by Standard & Poor's Rating Services to BB which resulted in an increase to the interest rate on the term loan tranche A to LIBOR + 2.75%, on the term loan tranche D to LIBOR + 3.25% and on the ESOP loan and guarantee to 12.95%. 11. Guaranteed Preferred Beneficial Interests in Company's Subordinated Debentures consists of:
MARCH 31, DECEMBER 31, 2001 2000 --------- ------------ (DOLLARS IN MILLIONS) 9.42% Trust Originated Preferred Securities.......... $362 $362 6 1/2% CRESTS Units.................................. 260 260 ---- ---- $622 $622 ==== ====
TRUST ORIGINATED PREFERRED SECURITIES In March 1999, Hercules Trust I ("Trust I"), our wholly owned subsidiary trust, 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 its 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 its 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 $350 million public offering of 350,000 CRESTS Units with Hercules Trust II, a wholly owned subsidiary trust ("Trust II"). Trust II used the proceeds from the sale of its preferred securities to purchase Series A Junior Subordinated Deferrable Interest Debentures of Hercules. 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 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. 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. As of March 31, 2001, 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 6.5% 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 F-56 167 reset and remarketing event. We may defer interest payments on the debentures at any time, for up to 20 consecutive quarters. If this occurs, Trust II will also defer distribution payments on its preferred securities. The deferred distributions will accumulate distributions at a rate of 6.5% per annum. 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. 12. Commitments and Contingencies 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 $65 million and $239 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 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. At March 31, 2001, the accrued liability of $65 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. While it is not feasible to predict the outcome of all pending suits and claims, the ultimate resolution of these environmental matters could have a material effect upon the results of operations and the financial position of Hercules. On April 10, 2001, the United States Court of Appeals for the Eighth Circuit issued an opinion in the United States, et al. v. Vertac Corporation, et al. In that opinion, the Appeals Court reversed the Court's October 12, 1993 grant of partial summary judgment, which had held Hercules jointly and severally liable for costs incurred and to be incurred at the Jacksonville site, and remanded the case back to the U.S. District Court for the Eastern District of Arkansas for a determination of whether the harms at the site giving rise to the government's claims are divisible. The Appeals Court also vacated the Court's October 23, 1998 order granting the United States' summary judgment motion and the February 8, 2000 judgment finding Hercules liable for 97.4% of the costs at issue, ordering that these issues be revisited following further proceedings with respect to divisibility. Finally, the Appeals Court affirmed the judgment of liability against Uniroyal. As a result of the Appellate rulings described above, Hercules will be allowed to present both facts and law to the Court in support of Hercules' belief that it should not be liable under CERCLA for some or all of the costs incurred by the government in connection with the site because those harms are divisible. Should Hercules prevail on remand, any liability to the government will be either eliminated or reduced. In 1992, Hercules brought suit against its insurance carriers for past and future costs for cleanup of certain environmental sites (Hercules Incorporated v. 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 F-57 168 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. Hercules has appealed certain of the trial court's rulings to the Delaware Supreme Court. Oral argument was held on February 13, 2001 before the Delaware Supreme Court, but no ruling has been issued. 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 is a defendant in numerous asbestos-related personal injury lawsuits and claims which typically arise from alleged exposure to asbestos fibers from resin-encapsulated pipe and tank products which were sold by a former subsidiary of Hercules to a limited industrial market, or from alleged exposure to asbestos contained in facilities owned or operated by Hercules. Lawsuits are received and matters settled on a regular basis. In December 1999, Hercules entered into a Settlement Agreement to resolve the majority of these matters then pending. 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. During 2000 and 2001, Hercules entered into additional settlement agreements. The terms of these settlements are also confidential. In accordance with the terms of the previously mentioned agreement with several of Hercules' insurance carriers, the majority of the amounts paid and to be paid pursuant to these various settlement agreements will be insured. Further, Hercules continues to pursue additional insurance coverage from carriers who were not part of the previously mentioned agreement. At March 31, 2001, the consolidated balance sheet reflects a current liability of approximately $29 million for litigation and claims. 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. 13. Segment Information
THREE MONTHS ENDED MARCH 31, ---------------- 2001 2000 ----- ----- (DOLLARS IN MILLIONS) Net Sales: Process Chemicals and Services............................ $407 $416 Functional Products(a).................................... 131 206 Chemical Specialties...................................... 164 177 Reconciling Items......................................... -- (1) ---- ---- Consolidated........................................... $702 $798 ==== ====
F-58 169
THREE MONTHS ENDED MARCH 31, ---------------- 2001 2000 ----- ----- (DOLLARS IN MILLIONS) Profit from Operations: Process Chemicals and Services............................ $ 63 $ 77 Functional Products(a).................................... 24 52 Chemical Specialties...................................... 17 16 Reconciling Items......................................... (42)(b) (39)(c) ---- ---- Consolidated........................................... $ 62 $106 ==== ====
- --------------- (a) Net sales and Profit from operations in 2001 reflect the divestitures of the food gums and nitrocellulose businesses in 2000. (b) Includes $21 million of goodwill and intangible asset amortization and other asset amortization, approximately $3 million of environmental charges and $18 million of other corporate charges. (c) Includes $25 million of goodwill and intangible asset amortization and other asset amortization, approximately $9 million of environmental and other corporate charges, approximately $2 million in integration costs and approximately $3 million of corporate research and development costs. 14. Pending Transactions In March 2001, we entered into an agreement to sell the Peroxides portion of our Resins division (the "Peroxide transaction"). We anticipate closing the Peroxide transaction on or before May 31, 2001. In November 2000, the Company announced it was exploring strategic alternatives for all or parts of the Company. The Company has retained Goldman Sachs & Co. and Credit Suisse First Boston to assist in this process. This process continues. A future decision to sell certain of our business could result in a material impairment change in the period such decision is made. There can be no assurance that a transaction will occur. The majority of the remaining portions of the Resins division, including the ink toner portion that one of our joint venture partners exercised a right of first refusal to purchase in June 2000, are expected to be sold during 2001. The Resins division, including those portions associated with the Eastman and Peroxides transactions, had approximately $450 million in net sales in 2000. 15. Subsequent Events During March 2001, definitive purchase and sale agreements were signed for the sale of our hydrocarbon resins division and select portions of our rosin resins divisions (the "Eastman transaction") to Eastman Chemical Resins, Inc., a subsidiary of Eastman Chemical Company ("Eastman"). On May 1, 2001, we completed the Eastman transaction, receiving gross proceeds of approximately $244 million. Both our senior credit facility and our ESOP Trust loan (Note 10) require quarterly compliance with certain financial covenants, including a debt/EBITDA ratio ("leverage ratio"), an interest coverage ratio and minimum net worth. In addition, we are required to deliver our annual audited consolidated financial statements to the lenders within 90 days of the Company's fiscal year end. Due to a delay in closing the Eastman transaction, which in turn delayed the pay down of debt, our debt as of March 31, 2001 was significantly higher than planned. As a result, the Company would have been out of compliance with the debt/EBITDA ratio covenant of its senior credit facility as of March 31, 2001. In addition, due to the fact that the Company extended the filing date for the December 31, 2000 Form 10-K, the Company's annual audited financial statements were not provided to the lenders by March 31, 2001. On April 5, 2001, in consideration for the payment of a fee, our senior credit facility bank syndicate and ESOP lender granted waivers with respect to: (1) compliance with the debt/EBITDA ratio as of March 31, F-59 170 2001, and (2) an extension of time to deliver the December 31, 2000 audited financial statements to April 17, 2001. These statements were completed and delivered on time. With respect to the covenant regarding the debt/EBITDA ratio, the waiver required that the Eastman transaction be consummated on or before May 31, 2001. On May 1, 2001, we completed the Eastman transaction, receiving gross proceeds of approximately $244 million. In addition, the Company must demonstrate, as of the last day of the month in which the Eastman transaction closes, that the leverage ratio does not exceed 4.75 to 1.00 after giving affect to the application of the net cash proceeds from the Eastman transaction to prepay the Tranche A term loan and the ESOP Trust loan. The Company expects to achieve this leverage ratio, although it will be necessary to close the Peroxide transaction on or before May 31, 2001. Although no assurances can be given in this regard, we anticipate closing the Peroxides transaction on or before May 31, 2001. Using the net proceeds for repayment of debt, we expect that we will be in compliance with all debt covenants during the second quarter 2001 as well as through March 31, 2002. A breach of any of the terms and conditions of the waivers would give the lenders the right to accelerate repayment of substantially all of our indebtedness if they choose to do so. Upon any such acceleration, the debt would become immediately due and payable and any loan commitments terminated. While, as indicated above, we expect to satisfy all conditions of the waivers and remain in compliance with our debt covenants, current and future compliance is dependent upon generating sufficient EBITDA and cash flow which are, in turn, impacted by business performance, economic climate, competitive uncertainties and possibly the resolution of contingencies, including those set forth in Note 13 to the consolidated financial statements. In the event the Company is not in compliance with the debt covenants at May 31, 2001 or thereafter, we would pursue various alternatives, which may include, among other things, refinancing of debt, debt covenant amendments or debt covenant waivers. While we believe we would be successful in pursuing these alternatives, there can be no assurance that we would be successful. On March 23, 2001, ISP filed with the SEC its definitive proxy statement for soliciting proxies from the Company's shareholders to vote for ISP's own slate of director nominees in opposition of management. In response to ISP's filings, the Company filed its definitive proxy statement on April 12, 2001. ISP's proxy contest has resulted in the incurrence of substantial fees and expenses and the diversion of management's time and efforts from the Company's ongoing strategy to reduce debt, decrease spending and generate cash. In addition, the proxy contest could negatively impact the Company's current process aimed at a sale or merger of the Company and/or its business. On April 10, 2001, the United States Court of Appeals for the Eighth Circuit issued an opinion in the United States, et al. v. Vertac Corporation, et al. In that opinion, the Appeals Court reversed the Court's October 12, 1993 grant of partial summary judgment, which had held Hercules jointly and severally liable for costs incurred and to be incurred at the Jacksonville site, and remanded the case back to the U.S. District Court for the Eastern District of Arkansas for a determination of whether the harms at the site giving rise to the government's claims are divisible. The Appeals Court also vacated the Court's October 23, 1998 order granting the United States' summary judgment motion and the February 8, 2000 judgment finding Hercules liable for 97.4% of the costs at issue, ordering that these issues be revisited following further proceedings with respect to divisibility. Finally, the Appeals Court affirmed the judgment of liability against Uniroyal. As a result of the Appellate rulings described above, Hercules will be allowed to present both facts and law to the Court in support of Hercules' belief that it should not be liable under CERCLA for some or all of the costs incurred by the government in connection with the site because those harms are divisible. Should Hercules prevail on remand, any liability to the government will be either eliminated or reduced. In 1999, Hercules was sued by Hexcel Corporation (Hexcel) in a case captioned Hexcel Corporation v. Hercules Incorporated, Index No. 602293/99, Supreme Court of New York, County of New York. In this case, Hexcel sought recovery of a total of approximately $8,422,000 (plus interest) in "post-closing" adjustments to the purchase price paid by Hexcel for Hercules' former Composite Products Division. The basis for these alleged "adjustments" derive from the Sale and Purchase Agreement between Hercules and F-60 171 Hexcel dated as of April 15, 1996. In June 2000, the Court granted Hexcel's motion for summary judgment as to liability, finding Hercules liable to Hexcel on technical grounds, but reserved ruling on the amount of damages. The Court then referred the damages determination to a Special Referee. In January 2001, the Special Referee issued a Report, recommending that Hercules be found liable to Hexcel for a total of approximately $7,300,000 plus interest. In February 2001, Hexcel moved to confirm the Special Referee's Report and Hercules cross-moved to confirm in part and reject in part the Special Referee's Report. We have specifically challenged the majority of the Special Referee's findings, and we have argued that a $2,000,000 indemnity "basket" established by the terms of the April 1996 Sale and Purchase Agreement should apply, reducing any award to Hexcel by $2,000,000. In May 2001, the Court accepted the Special Referee's Report and rejected our position. We believe the Court's decision is incorrect, at least in part, as a matter of law and we will appeal the Court's decision. In addition to the foregoing, in October 2000, Hexcel brought an action against Hercules to compel arbitration to determine the proper "Working Capital Adjustment" under the terms of the April 1996 Sale and Purchase Agreement. Hexcel claims it is owed approximately $1,500,000, while we believes Hercules is owed approximately $129,000. The parties have agreed to arbitrate the matter. We believe Hexcel's claims in this latter matter are without merit. F-61 172 HERCULES INCORPORATED Exchange Offer For $400,000,000 of Its 11 1/8% Senior Notes Due 2007 ---------------------- PROSPECTUS , 2001 ---------------------- No person has been authorized to give any information or to make any representations other than those contained in this prospectus, and, if given or made, any information or representations must not be relied upon as having been authorized. This prospectus does not constitute an offer to sell or the solicitation of an offer to buy any securities other than the securities to which it relates or an offer to sell or the solicitation of an offer to buy these securities in any circumstances in which this offer or solicitation is unlawful. Neither the delivery of this prospectus nor any sale made under this prospectus shall, under any circumstances, create any implication that there has been no change in the affairs of Hercules Incorporated since the date of this prospectus or that the information contained in this prospectus is correct as of any time subsequent to its date. Broker-dealers that effect transactions in these securities, whether or not participating in the exchange offer, may be required to deliver a prospectus. This is in addition to the broker-dealers' obligation to deliver a prospectus when acting as underwriters. 173 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Under the provisions of the Restated Certificate of Incorporation of Hercules Incorporated (the "Company"), each person who is or was a director or officer of the Company shall be indemnified by the Company as of right to the full extent permitted or authorized by the Delaware General Corporation Law. Under such law, to the extent that such a person is successful on the merits or otherwise in defense of any action, suit, or proceeding brought against him by reason of the fact that he is a director or officer of the Company, he shall be indemnified against expenses, liability and loss including attorneys' fees reasonably incurred in connection therewith. If unsuccessful in defense of a third-party civil suit, or if such a suit is settled, such a person shall be indemnified under such law against both (1) expenses (including attorneys' fees) and (2) judgments, fines, penalties and amounts paid in settlement if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interest of the Company, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. If unsuccessful in defense of a suit brought by or in the right of the Company, or if such suit is settled, such a person shall be indemnified under such law only against expenses including attorney's fees incurred in the defense or settlement of such suit if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interest of the Company except that if such a person is adjudged to be liable in such a suit for negligence or misconduct in the performance of his duty to the Company, he cannot be indemnified unless the Court of Chancery of the State of Delaware or any other court in which such action or suit was brought determines that he is fairly and reasonably entitled to indemnity for such expenses. Under provisions of the Restated Certificate of Incorporation, a director of the Company shall have no personal liability to the Company or its stockholders for monetary damages for breach of his fiduciary duty as a director to the full extent permitted by the Delaware General Corporation Law, as it may be amended from time to time. The Company has purchased liability insurance policies which provide specified coverage for certain liabilities incurred by officers and directors in their capacities as such. The stockholders of the Company have also approved a form of indemnification agreement to be entered into between the Company and its directors and officers, which provides for indemnification to the extent permitted by Delaware law and, in addition, sets forth the procedures for determining entitlement to indemnification, the manner of the advancement of expenses, remedies of the indemnitee and certain other matters of a similar nature. The Company has entered into such agreements with all of its officers and directors. The organic documents of each corporate registrant, other than the Company and WSP, Inc., contain provisions that provide for indemnification of each registrant's respective officers and directors that are consistent with the laws of such registrant's jurisdiction of incorporation. The organic documents of WSP, Inc., a Delaware corporation, do not include any specific indemnification provisions. The organic documents of each non-corporate registrant contain similar provisions related to the indemnification of each registrant's members, managers, general partners and partners, or their representatives, as applicable. The foregoing summaries are necessarily subject to the complete text of the relevant statute or document. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. A complete listing of exhibits and financial statements required is given in the Exhibit Index, which precedes the exhibits filed with this Registration Statement, and the Index to Financial Statements, which precedes the financial statements included in the prospectus which is a part of this Registration Statement. II-1 174 ITEM 22. UNDERTAKINGS. Each Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made of the securities registered hereby, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment hereto) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement; provided, however, that the undertakings set forth in paragraphs (i) and (ii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by a Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are incorporated by reference in this Registration Statement. (2) That, for purposes of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered hereby which remain unsold at the termination of the offering. (4) That, for purposes of determining any liability under the Securities Act, each filing of a Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (5) That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (6) That every prospectus (i) that is filed pursuant to paragraph (5) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to this Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 175 (7) To file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) of Section 310 of the Trust Indenture Act in accordance with the rules and regulations prescribed by the SEC under the Trust Indenture Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of a Registrant pursuant to the provisions described under Item 20 above or otherwise, each Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by a Registrant of expenses incurred or paid by a director, officer or controlling person of a Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, such Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 176 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Hercules Incorporated certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Wilmington, State of Delaware, on August 9, 2001. HERCULES INCORPORATED By: /s/ WILLIAM H. JOYCE ------------------------------------ William H. Joyce Chairman and Chief Executive Officer We, the undersigned officers and directors of Hercules Incorporated, hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and directors to enable Hercules Incorporated to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ WILLIAM H. JOYCE Director and Principal August 9, 2001 - --------------------------------------------------- Executive Officer (Chairman William H. Joyce and Chief Executive Officer) /s/ STUART C. SHEARS Principal Financial Officer August 9, 2001 - --------------------------------------------------- (Vice President and Treasurer) Stuart C. Shears /s/ FRED G. AANONSEN Principal Accounting Officer August 9, 2001 - --------------------------------------------------- (Vice President and Controller) Fred G. Aanonsen /s/ JOHN G. DROSDICK Director August 9, 2001 - --------------------------------------------------- John G. Drosdick /s/ RICHARD FAIRBANKS Director August 9, 2001 - --------------------------------------------------- Richard Fairbanks /s/ SAMUEL J. HEYMAN Director August 9, 2001 - --------------------------------------------------- Samuel J. Heyman
II-4 177
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ ALAN R. HIRSIG Director August 9, 2001 - --------------------------------------------------- Alan R. Hirsig Director August , 2001 - --------------------------------------------------- Edith E. Holiday /s/ GAYNOR N. KELLEY Director August 9, 2001 - --------------------------------------------------- Gaynor N. Kelley /s/ SUNIL KUMAR Director August 9, 2001 - --------------------------------------------------- Sunil Kumar Director August , 2001 - --------------------------------------------------- H. Eugene McBrayer /s/ PETER MCCAUSLAND Director August 9, 2001 - --------------------------------------------------- Peter McCausland Director August , 2001 - --------------------------------------------------- Gloria Schaffer /s/ PAULA A. SNEED Director August 9, 2001 - --------------------------------------------------- Paula A. Sneed /s/ RAYMOND TROUBH Director August 9, 2001 - --------------------------------------------------- Raymond Troubh
II-5 178 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. AQUALON COMPANY By: /s/ FRED G. AANONSEN ------------------------------------ Name: Fred G. Aanonsen Title: President and Controller We, the undersigned officers and members of the partnership committee of Aqualon Company, hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and members of the partnership committee to enable Aqualon Company to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ FRED G. AANONSEN President and Controller August 9, 2001 - --------------------------------------------------- (Principal Executive Officer and Fred G. Aanonsen Principal Financial Officer) and Member of Partnership Committee /s/ STUART C. SHEARS Vice President and Treasurer and August 9, 2001 - --------------------------------------------------- Member of Partnership Committee Stuart C. Shears /s/ ISRAEL J. FLOYD Member of Partnership Committee August 9, 2001 - --------------------------------------------------- Israel J. Floyd /s/ MONIKA RIESE-MARTIN Member of Partnership Committee August 9, 2001 - --------------------------------------------------- Monika Riese-Martin /s/ THOMAS F. WERTZ Member of Partnership Committee August 9, 2001 - --------------------------------------------------- Thomas F. Wertz
II-6 179 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrants certify that they have duly caused this Registration Statement to be signed on their behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. ATHENS HOLDINGS, INC. COVINGTON HOLDINGS, INC. By: /s/ LESLIE B. SHOREY ------------------------------------ Name: Leslie B. Shorey Title: President and Treasurer We, the undersigned officers and directors of Athens Holdings, Inc. and Covington Holdings, Inc., hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and directors to enable Athens Holdings, Inc. and Covington Holdings, Inc. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ LESLIE B. SHOREY President and Treasurer (Principal August 9, 2001 - --------------------------------------------------- Executive Officer, Principal Leslie B. Shorey Financial Officer and Principal Accounting Officer) and Director /s/ ILENE PETERSON Director August 9, 2001 - --------------------------------------------------- Ilene Peterson /s/ KARI JOHNSON Director August 9, 2001 - --------------------------------------------------- Kari Johnson
II-7 180 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. BETZDEARBORN CHINA, LTD. By: /s/ HANS HJORTH ------------------------------------ Name: Hans Hjorth Title: President We, the undersigned officers and directors of BetzDearborn China, Ltd., hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and directors to enable BetzDearborn China, Ltd. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ HANS HJORTH President (Principal Executive August 9, 2001 - --------------------------------------------------- Officer) and Director Hans Hjorth /s/ FRED G. AANONSEN Controller (Principal Financial August 9, 2001 - --------------------------------------------------- Officer) Fred G. Aanonsen /s/ STUART C. SHEARS Vice President and Treasurer August 9, 2001 - --------------------------------------------------- (Principal Accounting Officer) Stuart C. Shears Director August , 2001 - --------------------------------------------------- Kenneth R. Dunnill /s/ ISRAEL J. FLOYD Director August 9, 2001 - --------------------------------------------------- Israel J. Floyd
II-8 181 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrants certify that they have duly caused this Registration Statement to be signed on their behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. BETZDEARBORN EUROPE, INC. BETZDEARBORN INTERNATIONAL, INC. BL CHEMICALS INC. BL TECHNOLOGIES, INC. BLI HOLDINGS CORP. CHEMICAL TECHNOLOGIES INDIA, LTD. D R C LTD. By: /s/ CRAIG A. ROGERSON ------------------------------------ Name: Craig A. Rogerson Title: President We, the undersigned officers and directors of BetzDearborn Europe, Inc., Betzdearborn International, Inc., BL Chemicals Inc., BL Technologies, Inc., BLI Holdings Corp., Chemical Technologies India, Ltd. and D R C Ltd., hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and directors to enable BetzDearborn Europe, Inc., Betzdearborn International, Inc., BL Chemicals Inc., BL Technologies, Inc., BLI Holdings Corp., Chemical Technologies India, Ltd. and D R C Ltd. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ CRAIG A. ROGERSON President (Principal Executive August 9, 2001 - --------------------------------------------------- Officer) and Director Craig A. Rogerson /s/ STUART C. SHEARS Assistant Treasurer (Principal August 9, 2001 - --------------------------------------------------- Financial Officer) and Director Stuart C. Shears /s/ JAMES J. INGOLDSBY Treasurer (Principal Accounting August 9, 2001 - --------------------------------------------------- Officer) James J. Ingoldsby /s/ ISRAEL J. FLOYD Director August 9, 2001 - --------------------------------------------------- Israel J. Floyd
II-9 182 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. BETZDEARBORN INC. By: /s/ CRAIG A. ROGERSON ------------------------------------ Name: Craig A. Rogerson Title: President We, the undersigned officers and directors of BetzDearborn Inc., hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and directors to enable BetzDearborn Inc. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ CRAIG A. ROGERSON President (Principal Executive August 9, 2001 - --------------------------------------------------- Officer) and Director Craig A. Rogerson /s/ STUART C. SHEARS Assistant Treasurer (Principal August 9, 2001 - --------------------------------------------------- Financial Officer) and Director Stuart C. Shears /s/ JAMES J. INGOLDSBY Treasurer (Principal Accounting August 9, 2001 - --------------------------------------------------- Officer) James J. Ingoldsby /s/ DOMINICK W. DIDONNA Director August 9, 2001 - --------------------------------------------------- Dominick W. DiDonna /s/ ISRAEL J. FLOYD Director August 9, 2001 - --------------------------------------------------- Israel J. Floyd
II-10 183 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. EAST BAY REALTY SERVICES, INC. By: /s/ ISAAC A. KEATON ------------------------------------ Name: Isaac A. Keaton Title: President We, the undersigned officers and directors of East Bay Realty Services, Inc., hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and directors to enable East Bay Realty Services, Inc. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ ISAAC A. KEATON President (Principal Executive August 9, 2001 - --------------------------------------------------- Officer) and Director Isaac A. Keaton /s/ FRED G. AANONSEN Vice President and Controller August 9, 2001 - --------------------------------------------------- (Principal Financial Officer) Fred G. Aanonsen /s/ STUART C. SHEARS Treasurer and Assistant Secretary August 9, 2001 - --------------------------------------------------- (Principal Accounting Officer) Stuart C. Shears /s/ ISRAEL J. FLOYD Director August 9, 2001 - --------------------------------------------------- Israel J. Floyd /s/ BRUCE W. JESTER Director August 9, 2001 - --------------------------------------------------- Bruce W. Jester
II-11 184 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. FIBERVISIONS INCORPORATED By: /s/ JOHN P. MURTA ------------------------------------ Name: John P. Murta Title: President and Director We, the undersigned officers and directors of FiberVisions Incorporated, hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and directors to enable FiberVisions Incorporated to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ JOHN P. MURTA President (Principal Executive August 9, 2001 - --------------------------------------------------- Officer) and Director John P. Murta /s/ LESLIE B. SHOREY Treasurer (Principal Financial August 9, 2001 - --------------------------------------------------- Officer and Principal Accounting Leslie B. Shorey Officer) /s/ KATHLEEN J. TRZASKOS Director August 9, 2001 - --------------------------------------------------- Kathleen J. Trzaskos /s/ GEOFFREY E. MEYER Director August 9, 2001 - --------------------------------------------------- Geoffrey E. Meyer
II-12 185 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. FIBERVISIONS, L.L.C. By: /s/ JOHN P. MURTA ------------------------------------ Name: John P. Murta Title: President We, the undersigned officers and members of the board of managers of FiberVisions, L.L.C., hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and members of the board of managers to enable FiberVisions, L.L.C. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ JOHN P. MURTA President (Principal Executive August 9, 2001 - --------------------------------------------------- Officer) John P. Murta /s/ LESLIE B. SHOREY Treasurer and Director of August 9, 2001 - --------------------------------------------------- Financial Control (Principal Leslie B. Shorey Financial Officer and Principal Accounting Officer) /s/ DOMINICK W. DIDONNA Member of Board of Managers August 9, 2001 - --------------------------------------------------- Dominick W. DiDonna /s/ ISRAEL J. FLOYD Member of Board of Managers August 9, 2001 - --------------------------------------------------- Israel J. Floyd /s/ ALLEN A. SPIZZO Member of Board of Managers August 9, 2001 - --------------------------------------------------- Allen A. Spizzo
II-13 186 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. FIBERVISIONS, L.P. By: /s/ JOHN P. MURTA ------------------------------------ Name: John P. Murta Title: President We, the undersigned officers and directors of the general partner of FiberVisions, L.P., hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and directors of the general partner of FiberVisions, L.P. to enable FiberVisions, L.P. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ JOHN P. MURTA President (Principal Executive August 9, 2001 - --------------------------------------------------- Officer) and Director of General John P. Murta Partner, FiberVisions Products, Inc. /s/ LESLIE B. SHOREY Treasurer and Director of August 9, 2001 - --------------------------------------------------- Financial Control (Principal Leslie B. Shorey Financial Officer and Principal Accounting Officer) /s/ KATHLEEN J. TRZASKOS Director of General Partner, August 9, 2001 - --------------------------------------------------- FiberVisions Products, Inc. Kathleen J. Trzaskos /s/ GEOFFREY E. MEYER Director of General Partner, August 9, 2001 - --------------------------------------------------- FiberVisions Products, Inc. Geoffrey E. Meyer
II-14 187 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. FIBERVISIONS PRODUCTS, INC. By: /s/ JOHN P. MURTA ------------------------------------ Name: John P. Murta Title: President We, the undersigned officers and directors of FiberVisions Products, Inc., hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and directors to enable FiberVisions Products, Inc. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ JOHN P. MURTA President (Principal Executive August 9, 2001 - --------------------------------------------------- Officer) and Director John P. Murta /s/ LESLIE B. SHOREY Treasurer and Director of August 9, 2001 - --------------------------------------------------- Financial Control (Principal Leslie B. Shorey Financial Officer and Principal Accounting Officer) /s/ KATHLEEN J. TRZASKOS Director August 9, 2001 - --------------------------------------------------- Kathleen J. Trzaskos /s/ GEOFFREY E. MEYER Director August 9, 2001 - --------------------------------------------------- Geoffrey E. Meyer
II-15 188 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrants certify that they have duly caused this Registration Statement to be signed on their behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. HERCULES CHEMICAL CORPORATION HERCULES FLAVOR, INC. HERCULES INTERNATIONAL LIMITED HISPAN CORPORATION By: /s/ FRED G. AANONSEN ------------------------------------ Name: Fred G. Aanonsen Title: President We, the undersigned officers and directors of Hercules Chemical Corporation, Hercules Flavor, Inc., Hercules International Limited and Hispan Corporation, hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and directors to enable Hercules Chemical Corporation, Hercules Flavor, Inc., Hercules International Limited and Hispan Corporation to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ FRED G. AANONSEN President (Principal Executive August 9, 2001 - --------------------------------------------------- Officer) and Director Fred G. Aanonsen /s/ STUART C. SHEARS Vice President and Treasurer August 9, 2001 - --------------------------------------------------- (Principal Financial Officer and Stuart C. Shears Principal Accounting Officer) and Director /s/ ISRAEL J. FLOYD Director August 9, 2001 - --------------------------------------------------- Israel J. Floyd /s/ BRUCE W. JESTER Director August 9, 2001 - --------------------------------------------------- Bruce W. Jester
II-16 189 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. HERCULES COUNTRY CLUB, INC. By: /s/ ISRAEL J. FLOYD ------------------------------------ Name: Israel J. Floyd Title: President We, the undersigned officers and directors of Hercules Country Club, Inc., hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and directors to enable Hercules Country Club, Inc. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ ISRAEL J. FLOYD President (Principal Executive August 9, 2001 - --------------------------------------------------- Officer) and Director Israel J. Floyd /s/ THOMAS W. HUNSBERGER Treasurer (Principal Financial August 9, 2001 - --------------------------------------------------- Officer and Principal Accounting Thomas W. Hunsberger Officer) and Director Director August , 2001 - --------------------------------------------------- Thomas Celello /s/ GEOFFREY E. MEYER Director August 9, 2001 - --------------------------------------------------- Geoffrey E. Meyer Director August , 2001 - --------------------------------------------------- Donald Peloso Director August , 2001 - --------------------------------------------------- Ed Reznick
II-17 190
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ ALLEN A. SPIZZO Director August 9, 2001 - --------------------------------------------------- Allen A. Spizzo /s/ RANDAL H. TATE Director August 9, 2001 - --------------------------------------------------- Randal H. Tate Director August , 2001 - --------------------------------------------------- Jane Witham
II-18 191 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. HERCULES CREDIT, INC. By: /s/ FRED G. AANONSEN ------------------------------------ Name: Fred G. Aanonsen Title: President We, the undersigned officers and directors of Hercules Credit, Inc., hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and directors to enable Hercules Credit, Inc. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ FRED G. AANONSEN President (Principal Executive August 9, 2001 - --------------------------------------------------- Officer) Fred G. Aanonsen /s/ STUART C. SHEARS Vice President and Treasurer August 9, 2001 - --------------------------------------------------- (Principal Financial Officer and Stuart C. Shears Principal Accounting Officer) and Director /s/ ISRAEL J. FLOYD Director August 9, 2001 - --------------------------------------------------- Israel J. Floyd
II-19 192 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. HERCULES EURO HOLDINGS, LLC By: /s/ FRED G. AANONSEN ------------------------------------ Name: Fred G. Aanonsen Title: President We, the undersigned officers and members of the board of managers of Hercules Euro Holdings, LLC, hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and members of the board of managers to enable Hercules Euro Holdings, LLC to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ FRED G. AANONSEN President (Principal Executive August 9, 2001 - --------------------------------------------------- Officer) Fred G. Aanonsen /s/ STUART C. SHEARS Assistant Treasurer (Principal August 9, 2001 - --------------------------------------------------- Executive Officer and Principal Stuart C. Shears Accounting Officer) /s/ ISRAEL J. FLOYD Member of Board of Managers August 9, 2001 - --------------------------------------------------- Israel J. Floyd /s/ BRUCE W. JESTER Member of Board of Managers August 9, 2001 - --------------------------------------------------- Bruce W. Jester
II-20 193 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. HERCULES FINANCE COMPANY By: /s/ FRED G. AANONSEN ------------------------------------ Name: Fred G. Aanonsen Title: President We, the undersigned officers and partners' representatives of Hercules Finance Company, hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and partners' representatives to enable Hercules Finance Committee to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ FRED G. AANONSEN President (Principal Executive August 9, 2001 - --------------------------------------------------- Officer) and Partner Fred G. Aanonsen Representative /s/ STUART C. SHEARS Vice President and Treasurer August 9, 2001 - --------------------------------------------------- (Principal Financial Officer and Stuart C. Shears Principal Accounting Officer) and Partner Representative /s/ ISRAEL J. FLOYD Partner Representative August 9, 2001 - --------------------------------------------------- Israel J. Floyd /s/ BRUCE W. JESTER Partner Representative August 9, 2001 - --------------------------------------------------- Bruce W. Jester
II-21 194 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. HERCULES INTERNATIONAL LIMITED, LLC By: /s/ FRED G. AANONSEN ------------------------------------ Name: Fred G. Aanonsen Title: President We, the undersigned officers and members of the board of managers of Hercules International Limited, LLC, hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and members of the board of managers to enable Hercules International Limited, LLC to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ FRED G. AANONSEN President (Principal Executive August 9, 2001 - --------------------------------------------------- Officer) and Member of Board of Fred G. Aanonsen Managers /s/ STUART C. SHEARS Vice President and Treasurer August 9, 2001 - --------------------------------------------------- (Principal Financial Officer and Stuart C. Shears Principal Accounting Officer) and Member of Board of Managers /s/ ISRAEL J. FLOYD Member of Board of Managers August 9, 2001 - --------------------------------------------------- Israel J. Floyd /s/ BRUCE W. JESTER Member of Board of Managers August 9, 2001 - --------------------------------------------------- Bruce W. Jester
II-22 195 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. HERCULES INVESTMENTS, LLC By: /s/ FRED G. AANONSEN ------------------------------------ Name: Fred G. Aanonsen Title: President We, the undersigned officers and members of the board of managers of Hercules Investments, LLC, hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and members of the board of managers to enable Hercules Investments, LLC to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ FRED G. AANONSEN President (Principal Executive August 9, 2001 - --------------------------------------------------- Officer) and Member of Board of Fred G. Aanonsen Managers /s/ STUART C. SHEARS Treasurer (Principal Financial August 9, 2001 - --------------------------------------------------- Officer and Principal Accounting Stuart C. Shears Officer) and Member of Board of Managers /s/ ISRAEL J. FLOYD Member of Board of Managers August 9, 2001 - --------------------------------------------------- Israel J. Floyd /s/ BRUCE W. JESTER Member of Board of Managers August 9 2001 - --------------------------------------------------- Bruce W. Jester
II-23 196 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. HERCULES SHARED SERVICES CORPORATION By: /s/ FRED G. AANONSEN ------------------------------------ Name: Fred G. Aanonsen Title: Vice President and Controller We, the undersigned officers and directors of Hercules Shared Services Corporation, hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and directors to enable Hercules Shared Services Corporation to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- President (Principal Executive August , 2001 - --------------------------------------------------- Officer) Anne T. Schumann /s/ FRED G. AANONSEN Vice President and Controller August 9, 2001 - --------------------------------------------------- (Principal Financial Officer) Fred G. Aanonsen and Director /s/ STUART C. SHEARS Treasurer (Principal Accounting August 9, 2001 - --------------------------------------------------- Officer) and Director Stuart C. Shears /s/ EDWARD V. CARRINGTON Director August 9, 2001 - --------------------------------------------------- Edward V. Carrington /s/ ISRAEL J. FLOYD Director August 9, 2001 - --------------------------------------------------- Israel J. Floyd /s/ BRUCE W. JESTER Director August 9, 2001 - --------------------------------------------------- Bruce W. Jester
II-24 197 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the following registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Wilmington, State of Delaware, on August 9, 2001. WSP, INC. By: /s/ FRED G. AANONSEN ------------------------------------ Name: Fred G. Aanonsen Title: President We, the undersigned officers and directors of WSP, Inc., hereby severally constitute William H. Joyce, Fred G. Aanonsen, Stuart C. Shears and Israel J. Floyd, and any of them singly, our true and lawful attorneys with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, this Registration Statement and any and all amendments, including post-effective amendments, to this Registration Statement and generally to do all such things in our name and on our behalf in our capacities as officers and directors to enable WSP, Inc. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to this Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ FRED G. AANONSEN President (Principal Executive August 9, 2001 - --------------------------------------------------- Officer) and Director Fred G. Aanonsen /s/ STUART C. SHEARS Treasurer (Principal Financial August 9, 2001 - --------------------------------------------------- Officer and Principal Accounting Stuart C. Shears Officer) and Director /s/ ISRAEL J. FLOYD Director August 9, 2001 - --------------------------------------------------- Israel J. Floyd /s/ BRUCE W. JESTER Director August 9, 2001 - --------------------------------------------------- Bruce W. Jester
II-25 198 EXHIBIT INDEX
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO - ------ ----------- ---------------------------- 2.1 Agreement and Plan of Merger among Exhibit 2.1, BetzDearborn Inc. Current Hercules, Water Acquisition Company and Report on Form 8-K, filed July 30, 1998 BetzDearborn Inc., dated July 30, 1998 3.1 Restated Certificate of Incorporation Exhibit 3-A, Annual Report on Form of Hercules, as revised and amended 10-K, filed March 26, 1993 July 6, 1988 3.2 Certificate of Amendment dated October Exhibit 4.1a, Registration Statement on 24, 1995, to Hercules' Restated Form S-3, filed September 15, 1998 Certificate of Incorporation as revised and amended July 5, 1998 3.3 By-Laws of Hercules, as revised and Exhibit 3-B, Annual Report on Form amended October 30, 1991 10-K, filed March 26, 1993 4.1 Officers' Certificate, dated as of Exhibit 4.1, Current Report on Form March 17, 1999, pursuant to the Junior 8-K, dated March 17, 1999 Subordinated Debentures Indenture between Hercules and Chase 4.2 Form of Preferred Securities Guarantee Exhibit 4.28, Amendment No. 1 to by Hercules and Chase, with respect to Registration Statement on Form S-3, Hercules Trust I filed October 29, 1998 4.3 Form of Amended and Restated Trust Exhibit 4.13, Amendment No. 1 to Agreement of Hercules Trust I Registration Statement on Form S-3, filed October 29, 1998 4.4 Form of 9.42% Trust Originated Exhibit 4.2, Current Report on Form Preferred Securities of Hercules Trust 8-K, dated March 17, 1999 I 4.5 Form of 9.42% Junior Subordinated Exhibit 4.3, Current Report on Form Deferrable Interest Debentures due 2029 8-K, dated March 17, 1999 4.6 Officer's Certificate, dated as of July Exhibit 4.1, Current Report on Form 27, 1999, pursuant to the Junior 8-K, dated July 27, 1999 Subordinated Debentures Indenture between Hercules and Chase, dated as of November 12, 1998 4.7 Amended and Restated Trust Agreement of Exhibit 4.2, Current Report on Form Hercules Trust II, dated as of July 27, 8-K, dated July 27, 1999 1999, together with Annex I thereto 4.8 Unit Agreement, dated July 27, 1999, Exhibit 4.3, Current Report on Form among Hercules, Hercules Trust II and 8-K, dated July 27, 1999 The Chase Manhattan Bank, as unit Agent 4.9 Warrant Agreement, dated July 27, 1999, Exhibit 4.4, Current Report on Form between Hercules and The Chase 8-K, dated July 27, 1999 Manhattan Bank, as warrant agent 4.10 Form of Series A Junior Subordinated Exhibit 4.5, Current Report on Form Deferrable Interest Debentures 8-K, dated July 27, 1999 4.11 Form of Trust II Preferred Securities Exhibit 4.6, Current Report on Form 8-K, dated July 27, 1999 4.12 Form of CRESTS Unit Exhibit 4.7, Current Report on Form 8-K, dated July 27, 1999 4.13 Form of Warrant Exhibit 4.8, Current Report on Form 8-K, dated July 27, 1999
199
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO - ------ ----------- ---------------------------- 4.14 Rights Agreement, dated as of August Exhibit 4.1 to Hercules Registration of 24, 2000, between Hercules Incorporated Certain Classes of Securities on Form and Chase Mellon Shareholder Services, 8-A, filed August 10, 2000 L.L.C. 4.15 Indenture, dated as of November 14, Exhibit 4-A, Quarterly Report on Form 2000, between Hercules Incorporated, as 10-Q, filed November 14, 2000 issuer, and Wells Fargo Bank Minnesota, N.A., as trustee (including the form of 11 1/8% senior notes due 2007 included as Exhibit A thereto) 4.16 Registration Rights Agreement, dated as Exhibit 4-B Quarterly Report on Form of November 14, 2000, among Hercules 10-Q, filed November 14, 2000 Incorporated and all of its domestic subsidiaries and Donaldson, Lufkin & Jenrette Securities Corporation and Credit Suisse First Boston Corporation, as the initial purchasers 5.1** Opinion of Ballard Spahr Andrews & Ingersoll as to the validity of the new notes and the related guarantees 8.1** Opinion of Ballard Spahr Andrews & Ingersoll, LLP as to certain tax matters 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. 10.1 Hercules Executive Survivor Benefit Exhibit 10-D, Annual Report on Form Plan 10-K, filed March 27, 1981 10.2 Hercules Deferred Compensation Plan Exhibit 10-I, Annual Report on Form 10-K, filed March 29, 1988 10.3 Hercules Annual Management Incentive Exhibit 10-H, Annual Report on Form Compensation Plan 10-K, filed March 26, 1993 10.4 Hercules Deferred Compensation Plan for Exhibit 10-J, Annual Report Form 10-K, Nonemployee Directors filed March 26, 1993 10.5 Hercules Employee Pension Restoration Exhibit 10-L, Annual Report on Form Plan 10-K, filed March 26, 1993 10.6 Form of Indemnification Agreement Annex II, Notice of Annual Meeting and between Hercules and certain officers Proxy Statement, dated February 19, and directors of Hercules 1987 10.7 Employment Agreement effective August Exhibit 10-T, Annual Report on Form 1, 1998, between Hercules and Vincent 10-K, filed March 30, 1999 J. Corbo 10.8 Hercules Amended and Restated Long Term Exhibit 10-K, Annual Report on Form Incentive Compensation Plan 10-K, filed March 29, 2000 10.9 BetzDearborn Inc. Employee Stock Exhibit 10-L, Annual Report on Form Ownership and 401(k) Plan 10-K, filed March 29, 2000
200
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO - ------ ----------- ---------------------------- 10.10 Amended and Restated Credit Agreement, Exhibit 10.2, Current Report on Form dated April 19, 1999, among Hercules, 8-K, dated April 19, 1999 NationsBank, N.A., as Administrative Agent, and the lenders party thereto 10.11 Underwriting Agreement, dated March 12, Exhibit 1.1, Current Report on Form 1999, among Hercules, Hercules Trust I 8-K, dated March 17, 1999 and the Underwriters named therein 10.12 CRESTS Units Underwriting Agreement, Exhibit 1.1, Current Report on Form dated July 21, 1999, among Hercules, 8-K, dated July 27, 1999 Hercules Trust II and the Underwriters named therein 10.13 Common Stock Underwriting Agreement, Exhibit 1.2, Current Report on Form dated July 21, 1999, among Hercules and 8-K, dated July 27, 1999 the Underwriters named therein 10.14 First Amendment to Amended and Restated Exhibit 10-A, Quarterly Report on Form Credit Agreement, dated March 31, 2000, 10-Q, filed August 15, 2000 among Hercules Incorporated, Betz Dearborn Canada, certain subsidiaries of Hercules, the several banks and other financial institutions identified in the agreement and Bank of America, N.A., as administrative agent, and Bank of America Canada, as Canadian administrative agent 10.15 First Amendment to Amended and Restated Exhibit 10-A, Quarterly Report on Form Credit Agreement, dated March 31, 2000, 10-Q, filed August 15, 2000 among Hercules Incorporated, Betz Dearborn Canada, certain subsidiaries of Hercules, the several banks and other financial institutions identified in the agreement and Bank of America, N.A., as administrative agent, and Bank of America Canada, as Canadian administrative agent 10.16 Second Amendment to Amended and Exhibit 10-B, Quarterly Report on Form Restated Credit Agreement, dated July 10-Q, filed August 15, 2000 26, 2000, among Hercules Incorporated, BetzDearborn Canada, certain subsidiaries of Hercules, the several banks and other financial institutions identified in the agreement and Bank of America, N.A., as administrative agent, and Bank of America Canada, as Canadian administrative agent 10.17 Share Purchase Agreement, dated as of Exhibit 2-1, Current Report on Form August 10, 2000, among CP Kelco ApS 8-K, dated September 28, 2000 (formerly known as Hercules Copenhagen ApS), Hercules Investment ApS, Hercules Incorporated, Lehman FG Newco, Inc., WSP, Inc. and Hercules Holding BV/BVBA
201
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO - ------ ----------- ---------------------------- 10.18 Third Amendment to Amended and Restated Exhibit 10-T, Annual Report on Form Credit Agreement, dated November 14, 10-K, filed April 17, 2001 2000, among Hercules Incorporated, BetzDearborn Canada, certain subsidiaries of Hercules, the several banks and other financial institutions identified in the agreement, and Bank of America, N.A., as administrative agent, and Bank of America Canada, as Canadian administrative agent 10.19* Form of Change-of-Control Employment Agreements between Hercules Incorporated and each of Dominick W. DiDonna and Israel J. Floyd 10.20* Resignation Agreement, dated as of October 17, 2000, between Hercules Incorporated and Vincent J. Corbo 10.21* Letter Agreement, dated November 1, 2000, between Hercules Incorporated and Harry J. Tucci 10.22 Letter Agreement, dated November 1, Exhibit 10-B, Quarterly Report on Form 2000, between Hercules Incorporated and 10-Q, filed May 16, 2001 Thomas L. Gossage 10.23 Employment Agreement, effective as of Exhibit 10-A, Quarterly Report on Form May 8, 2001, between Hercules 10-Q, filed May 16, 2001 Incorporated and William H. Joyce 10.24* Change-of-Control Employment Agreement, dated as of May 8, 2001, by and between Hercules Incorporated and William H. Joyce 10.25* Form of Change-of-Control Employment Agreements, dated as of June 15, 2001, by and between Hercules Incorporated and each of Edward V. Carrington and Richard G. Dahlen 10.26* Separation Agreement and General Release of Claims, dated June 22, 2001, between Hercules Incorporated and June B. Barry 10.27* Separation Agreement and General Release of Claims, dated June 21, 2001, between Hercules Incorporated and George MacKenzie 10.28* Change-of-Control Employment Agreement, dated as of July 2, 2001, by and between Hercules Incorporated and Fred G. Aanonsen
202
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO - ------ ----------- ---------------------------- 10.29* Fourth Amendment to Amended and Restated Credit Agreement, dated July 17, 2001, among Hercules Incorporated, BetzDearborn Canada, certain subsidiaries of Hercules, the several banks and other financial institutions identified in the agreement and Bank of America, N.A., as administrative agent, and Bank of America Canada, as Canadian administrative agent 12.1* Statement re computation of ratio of earnings to fixed charges 21.1 Subsidiaries of Registrant See Part II, Item 8 on page 66 of Annual Report on Form 10-K, filed April 17, 2001 23.1** Consent of PricewaterhouseCoopers LLP 23.2** Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in Exhibits 5.1 and 8.1) 24.1* Powers of Attorney (included on signature pages) 25.1** Form T-1 Statement of Eligibility of Wells Fargo Bank Minnesota, N.A. to act as trustee under the Indenture 99.1** Form of Letter of Transmittal 99.2** Form of Notice of Guaranteed Delivery
- --------------- * Filed herewith. ** To be filed by amendment. EX-10.19 3 w51743ex10-19.txt FORM OF 2000 CHANGE-OF-CONTROL EMPLOYMENT AGREE. 1 Exhibit 10.19 CHANGE-OF-CONTROL EMPLOYMENT AGREEMENT AGREEMENT, dated as of the ____ day of ________ 2000 (this "Agreement"), by and between Hercules Incorporated, a Delaware corporation (the "Company"), and ____________________ (the "Executive"). WHEREAS, the Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders/stockholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein). The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the current Company and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control that ensure that the compensation and benefits expectations of the Executive will be satisfied and that are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: SECTION 1. CERTAIN DEFINITIONS. (a) "Effective Date" means the first date during the Change of Control Period (as defined herein) on which a Change of Control occurs. Notwithstanding anything in this Agreement to the contrary, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (1) was at the request of a third party that has taken steps reasonably calculated to effect a Change of Control or (2) otherwise arose in connection with or anticipation of a Change of Control, then "Effective Date" means the date immediately prior to the date of such termination of employment. (b) "Change of Control Period" means the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that, commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof, the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless, at least 60 days prior to the Renewal Date, the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. (c) "Affiliated Company" means any company controlled by, controlling or under common control with the Company. (d) "Change of Control" means: 2 (1) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this Section l(d), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Affiliated Company or (iv) any acquisition by any corporation pursuant to a transaction that complies with Sections l(d)(3)(A), l(d)(3)(B) and 1 (d) (3) (C). (2) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board. (3) Approval by the shareholders of the Company of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, 60% or more of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or 2 3 (4) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (e) "Alternative Change of Control" means a Change of Control as defined above, except that the phrase "Approval by the shareholder of the Company" in clause (3) of Section 1 (d) shall be deemed to read "Consummation." SECTION 2. EMPLOYMENT PERIOD. The Company hereby agrees to continue the Executive in its employ, subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of the Effective Date (the "Employment Period"). The Employment Period shall terminate upon the Executive's termination of employment for any reason. SECTION 3. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (1) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the office where the Executive was employed immediately preceding the Effective Date or at any other location less than 30 miles from such office. (2) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period, it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that, to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (1) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary (the "Annual Base Salary") at an annual rate at least equal to 12 times the highest monthly base salary paid or payable, including any base salary that has been earned but deferred, to the Executive by the Company and the Affiliated Companies in respect of the 12-month period immediately preceding the month in which the Effective Date occurs. The 3 4 Annual Base Salary shall be paid at such intervals as the Company pays executive salaries generally. During the Employment Period, the Annual Base Salary shall be reviewed at least annually, beginning no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date. Any increase in the Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. The Annual Base Salary shall not be reduced after any such increase and the term "Annual Base Salary" shall refer to the Annual Base Salary as so increased. (2) ANNUAL BONUS. In addition to the Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the Executive's Recent Target Bonus, as DEFINED in the next sentence. The "Recent Target Bonus" means the Annual Base Salary times a percentage equal to the percentage of base salary most recently established, before the Effective Date, for purposes of determining the Executive's target bonus under the Company's Management Incentive Compensation Plan or any predecessor or successor plan (the "MICP"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. Any bonus paid to the Executive under the MICP as a result of the Change of Control (a "Change of Control Bonus") shall be taken into account in determining whether the requirements of this Section 3(b)(2) have been met with respect to the fiscal year in which the Change of Control occurs. (3) INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Employment Period, the Executive shall be entitled to participate in all cash incentive, equity incentive, savings and retirement plans, practices, policies, and programs applicable generally to other peer executives of the Company and the Affiliated Companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and the Affiliated Companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the Affiliated Companies. The Executive shall also continue to be entitled to any supplemental pension benefits to which he may be entitled pursuant to any individual agreement with the company or any Affiliated Companies (collectively, "Enhanced Pension Benefits"). (4) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and the Affiliated Companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and the Affiliated Companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits that are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any 4 5 time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the Affiliated Companies. (5) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and the Affiliated Companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. (6) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and the Affiliated Companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. (7) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and the Affiliated Companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. (8) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and the Affiliated Companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. SECTION 4. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically if the Executive dies during the Employment Period. If the Company determines in good faith that the Disability (as defined herein) of the Executive has occurred during the Employment Period (pursuant to the definition of "Disability"), it may give to the Executive written notice in accordance with Section 11(b) of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. "Disability" means the absence of the 5 6 Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness that is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. "Cause" means: (1) the willful and continued failure of the Executive to perform substantially the Executive's duties (as contemplated by Section 3(a)(1)(A)) with the Company or any Affiliated Company (other than any such failure resulting from incapacity due to physical or mental illness or following the Executive's delivery of a Notice of Termination for Good Reason), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company that specifically identifies the manner in which the Board or the Chief Executive Officer of the Company believes that the Executive has not substantially performed the Executive's duties, or (2) the willful engaging by the Executive in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company. For purposes of this Section 4(b), no act, or failure to act, on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer of the Company or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board (excluding the Executive, if the Executive is a member of the Board) at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel for the Executive, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in Section 4(b)(1) or 4(b)(2), and specifying the particulars thereof in detail. (c) GOOD REASON. The Executive's employment may be terminated by the Executive for Good Reason or by the Executive voluntarily without Good Reason. "Good Reason" means: (1) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a), or any other diminution in such position, authority, duties or responsibilities (whether or not occurring solely as a result of the Company's ceasing to be a publicly traded entity), excluding for this purpose an isolated, 6 7 insubstantial and inadvertent action not taken in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive; (2) any failure by the Company to comply with any of the provisions of Section 3(b), other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive; (3) the Company's requiring the Executive (i) to be based at any office or location other than as provided in Section 3(a)(1)(B), (ii) to be based at a location other than the principal executive offices of the Company if the Executive was employed at such location immediately preceding the Effective Date, or (iii) to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (4) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (5) any failure by the Company to comply with and satisfy Section 10(c). For purposes of this Section 4(c), any good faith determination of Good Reason made by the Executive shall be conclusive. The Executive's mental or physical incapacity following the occurrence of an event described above in clauses (1) through (5) shall not affect the Executive's ability to terminate employment for Good Reason. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(b). "Notice of Termination" means a written notice that (1) indicates the specific termination provision in this Agreement relied upon, (2) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (3) if the Date of Termination (as defined herein) is other than the date of receipt of such notice, specifies the Date of Termination (which Date of Termination shall be not more than 30 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's respective rights hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (1) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified in the Notice of Termination, (which date shall not be more than 30 days after the giving of such notice), as the case may be, (2) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, and (3) if the Executive's employment is terminated by reason of 7 8 death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. SECTION 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON; OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or Disability or the Executive terminates employment for Good Reason: (1) the Company shall pay to the Executive, in a lump sum in cash within 30 days after the Date of Termination, the aggregate of the following amounts: (A) the sum of: (i) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid; (ii) the product of (x) the higher of (I) the Recent Target Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof that has been earned but deferred (and annualized for any fiscal year consisting of less than 12 full months or during which the Executive was employed for less than 12 full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount, the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination and the denominator of which is 365; provided, that if the Date of Termination occurs in the same fiscal year as the Change of Control, then such product shall be reduced (but not below zero) by the amount of any Change of Control Bonus payable to the Executive; and (iii) any accrued vacation pay, in each case, to the extent not theretofore paid (the sum of the amounts described in subclauses (i), (ii) and (iii), the "Accrued Obligations"); (B) the amount equal to the product of (i) three and (ii) the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus; and (C) an amount equal to the excess of (i) the actuarial equivalent of the benefit under the Company's qualified defined benefit retirement plan (the "Retirement Plan") (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Retirement Plan immediately prior to the Effective Date), any excess or supplemental retirement plan in which the Executive participates (collectively, the "SERP") and any Enhanced Pension Benefits that the Executive would receive if the Executive's employment had continued for a number of years and fractions of years equal to the sum of (1) one or, if greater, the number of years and fractions of years from the Date of Termination through the third anniversary of the Change of Control (the "Continuation Period") plus (II) three years, and had achieved an age equal to the (x) Executive's actual age, plus (y) the number of years and fractions of years in the Continuation Period, plus (z) such additional number of years and fractions thereof, as may be necessary for the Executive to be eligible for unreduced early retirement benefits under the Retirement Plan, the SERP and the Enhanced Pension Benefits (if any), but the number described in this clause (z) shall not 8 9 exceed five; with the foregoing calculations being made with the assumptions that all accrued benefits are fully vested, and that the Executive's compensation during the period of assumed continued employment is that required by Sections 3(b)(1) and 3(b)(2); over (ii) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan, the SERP and the Enhanced Pension Benefits (if any) as of the Date of Termination; (2) for three years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue welfare and fringe benefits to the Executive and/or the Executive's family at least equal to those that would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(b)(4) and (6) if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies and their families, provided, however, that, if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility; and for purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the Date of Termination and to have retired on the last day of such period; (3) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in the Executive's sole discretion provided, that the cost of such outplacement shall not exceed $50,000; (4) all stock options and restricted stock held by the Executive immediately before the Date of Termination shall vest in full, and such stock options shall remain exercisable until the first to occur of the first anniversary of the Date of Termination and the expiration of their original terms; and (5) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or that the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and the Affiliated Companies (such other amounts and benefits, the "Other Benefits"). (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, the Company shall provide the Executive's estate or beneficiaries with the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. The Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, the term "Other Benefits" as utilized in this Section 5(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, 9 10 benefits at least equal to the most favorable benefits provided by the Company and the Affiliated Companies to the estates and beneficiaries of peer executives of the Company and the Affiliated Companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and the Affiliated Companies and their beneficiaries. (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, the Company shall provide the Executive with the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. The Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, the term "Other Benefits" as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and the Affiliated Companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and the Affiliated Companies and their families. (d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment is terminated for Cause during the Employment Period, the Company shall provide to the Executive (1) the Executive's Annual Base Salary through the Date of Termination, (2) the amount of any compensation previously deferred by the Executive, and (3) the Other Benefits, in each case, to the extent theretofore unpaid, and shall have no other severance obligations under this Agreement. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, the Company shall provide to the Executive the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. In such case, all the Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. SECTION 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or the Affiliated Companies and for which the Executive may qualify, nor, subject to Section 11(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any other contract or agreement with the Company or the Affiliated Companies. Amounts that are vested benefits or that the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or the Affiliated Companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement, except as explicitly modified by this Agreement. Notwithstanding the foregoing, if the Executive receives payments and benefits pursuant to Section 5(a) of this Agreement, the Executive shall not be entitled to any severance pay or benefits under any severance plan, 10 11 program or policy of the Company and the Affiliated Companies, including without limitation the Executive Severance Plan, unless otherwise specifically provided therein in a specific reference to this Agreement. SECTION 7. FULL SETTLEMENT; CONTESTS. (a) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense, or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. (b) The Company agrees to pay as incurred (within 10 days following the Company's receipt of an invoice from the Executive), to the full extent permitted by law, all legal fees and expenses that the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus, in each case, interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). Notwithstanding the foregoing, the Company shall have no obligation to pay the Executive's legal fees and expenses in connection with any action initiated by the Executive as to which the trier of fact finds that the Executive's claim was frivolous or brought in bad faith. SECTION 8. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution in the nature of compensation (within the meaning of Section 28OG(b)(2) of the Code) to or for the benefit of the Executive, whether paid or payable pursuant to this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax (the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (the "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by PriceWaterhouseCoopers (the "Accounting Firm"). The Accounting Firm shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been 11 12 a Payment or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within 5 days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (the "Underpayment"), consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Section 8(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than 10 business days after the Executive is informed in writing of such claim. The Executive shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that the Company desires to contest such claim, the Executive shall: (1) give the Company any information reasonably requested by the Company relating to such claim, (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (3) cooperate with the Company in good faith in order effectively to contest such claim, and (4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the 12 13 Company shall control all proceedings taken in connection with such contest, and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that, if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties) imposed with respect to such advance or with respect to any imputed income in connection with such advance; and provided, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 8(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (e) Notwithstanding any other provision of this Section 8, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for the benefit of the Executive, all or any portion of the Gross-Up Payment, and the Executive hereby consents to such withholding. SECTION 9. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or the Affiliated Companies, and their respective businesses, which information, knowledge or data shall have been obtained by the Executive during the Executive's employment by the Company or the Affiliated Companies and which information, knowledge or data shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those persons designated by the Company. In no event shall an asserted violation of the provisions of 13 14 this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. SECTION 10. SUCCESSORS. (a) This Agreement is personal to the Executive, and, without the prior written consent of the Company, shall not be assignable by the Executive other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. Except as provided in Section 10(c), without the prior written consent of the Executive this Agreement shall not be assignable by the Company. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. "Company" means the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law or otherwise. SECTION 11. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified other than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: if to the Executive: Hercules Incorporated Hercules Plaza Wilmington, Delaware 19894-0001 if to the Company: Hercules Incorporated Hercules Plaza Wilmington, Delaware 19894-0001 Attn: Chief Executive Officer 14 15 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such United States federal, state or local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Sections 4(c)(1) through 4(c)(5), shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a), prior to the Effective Date, the Executive's employment may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date, except as specifically provided herein, this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. 15 16 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from the Board, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. ________________________________________ [Executive] HERCULES INCORPORATED By______________________________________ President and Chief Executive Officer Attest: ______________________________ Secretary 16 EX-10.20 4 w51743ex10-20.txt RESIGNATION AGREEMENT BETWEEN HERCULES & V.J.CORBO 1 Exhibit 10.20 RESIGNATION AGREEMENT This Resignation Agreement (this "Agreement") by and between Hercules Incorporated, a Delaware corporation (the "Company") and Vincent J. Corbo (the "Executive"), is dated as of October 17, 2000. WHEREAS, the Executive has been employed by the Company as its Chief Executive Officer; and WHEREAS, the Executive and the Company are parties to an agreement dated as of August 12, 1998 (the "Employment Agreement"); and WHEREAS, the Company and the Executive have agreed that it is in the best interest of the Company and the Executive for the Executive to resign, and they wish to set forth their mutual agreement as to the terms and conditions of such resignation; NOW, THEREFORE, the Company and the Executive hereby agree as follows: 1. Resignation. Effective as of October 17, 2000 (the "Resignation Date"), the Executive hereby resigns from his employment with the Company, from his position as a member and Chairman of the Board of Directors of the Company, and from all other positions the Executive may currently hold as an officer or member of the board of directors of any of the Company's subsidiaries or affiliates, pursuant to the provision of the Employment Agreement headed "Special Circumstances." (The Company and all of its subsidiaries and affiliates are hereinafter referred to as the "Hercules Entities.") The Company hereby waives the 60-day advance notice required by such provision. 2. Severance Payments and Benefits. (a) The Company shall pay to the Executive the sum of $3,135,000, representing two times his current base salary and target annual bonus, in forty-eight semi-monthly installments of $65,312.50 each, beginning as soon as practicable after the execution of this Agreement (the "Execution Date"); provided, that if the Executive violates any of the covenants contained in Sections 4 and 5 of this Agreement or in Section 10 of the Company's Employee Pension Restoration Plan (the "Pension Restoration Plan") (such covenants, collectively, the "Covenants"), he shall forfeit his right to receive any such installments that have not yet been paid; and provided, further, that upon the death of the Executive, any such amounts that have not yet been paid to the Executive and have not been forfeited shall be paid as soon as practicable after the date of his death to the Executive's surviving spouse or, if he has no surviving spouse, to his estate. (b) The Company shall pay to the Executive, as soon as practicable after the Execution Date, a cash payment of $2,832,753.83. If the Executive should die before receiving such payment, it shall be paid to the Executive's surviving spouse or, if he has no surviving spouse, to his estate. (c) The Company shall provide the Executive with the pension benefits to which he is entitled under the enhanced pension benefit set forth in the provision of the Employment Agreement headed "Pension Adjustments" (the "Enhanced Pension"), the 2 Pension Plan of Hercules Incorporated, and the Pension Restoration Plan. The Company and the Executive agree that the foregoing pension benefits are as set forth in Schedule A hereto. Notwithstanding the foregoing, the Executive shall forfeit his rights to benefits under the Pension Restoration Plan and the Enhanced Pension if at any time after the Resignation Date he violates any of the Covenants. In addition, the Executive shall be entitled to receive his vested benefits under the Company's Savings and Investment Plan in accordance with its terms. (d) Until the first to occur of December 31, 2002 and the Executive's death, the Company shall continue to provide the Executive and his eligible dependents with medical, dental, vision and life insurance benefits (including without limitation under the Hercules Executive Survivor Benefits Program) on the same terms and conditions as other employees of the Company, as in effect from time to time, as if he had remained employed during that period, subject to his payment of such employee contributions, copayments and similar charges as apply to employees generally; provided, that such continued benefits shall terminate to the extent the Executive becomes eligible for the same type benefits (i.e., medical, dental, vision and/or life insurance benefits) from another employer. Notwithstanding the foregoing, the Executive shall forfeit all rights under the preceding sentence if he violates any of the Covenants. The period for the required continuation coverage under Section 601 et seq. of the Employee Retirement Income S and Section 4980B of the Code (known as "COBRA" benefits) shall be considered to begin on the Execution Date. The Executive shall be also be entitled to such retiree medical and life insurance benefits for which he may be eligible under the terms and conditions of the Company's plans, as in effect from time to time, based upon his service through the Resignation Date; provided, that such benefits shall not be provided to the extent they would duplicate any benefits provided under the first sentence of this Section 2(d). (e) The Executive shall be fully vested as of the Resignation Date in his benefits under the Company's Director's Charitable Award Program, subject to forfeiture if he violates any of the Covenants. (f) The Company agrees to pay as incurred, within 10 days following the Company's receipt of an invoice from the Executive, all reasonable legal fees and expenses that the Executive may incur in connection with entering into this Agreement. (g) Until December 31, 2001, the Company will provide the Executive with tax and financial advice and tax return preparation services in accordance with the Company program in which he participates immediately before the Resignation Date, at a cost not to exceed $20,000. (h) As soon as practicable after the Execution Date, the Company shall convey to the Executive title to the 1996 Jaguar XJS automobile that he currently uses. 3. Equity Awards. (a) Schedule B hereto sets forth a complete list of all of the Executive's currently outstanding awards under the Company's Long Term Incentive Compensation Plan (the "LTIP"), other than the 60,600 restricted stock units provided for under the Employment Agreement and the matching grant awards set forth on Schedule C hereto. The awards listed on Schedule B, which consist of performance accelerated stock options ("PASOs"), 2 3 regular stock options ("Options"), restricted stock (the "Schedule B Restricted Stock") and restricted stock units (the "Schedule B RSUs"), are hereinafter referred to as the "Equity Awards." Notwithstanding any provision in the LTIP or the award agreements relating to the Equity Awards to the contrary, the consequences of the termination of the Executive's employment for the Equity Awards shall be as set forth in this Section 3. The PASOs that have not yet vested shall vest on the earliest of (i) achievement of the applicable performance target (without regard to any minimum vesting date), (ii) April 17, 2005, and (iii) 9.5 years after the applicable date of grant of the PASO, and each PASO shall remain exercisable until the earlier of October 17, 2005 or the expiration of its term. The Options that have not yet vested shall vest in full on the Execution Date, and each Option shall remain exercisable until the earlier of October 17, 2005 or the expiration of its term. All Schedule B Restricted Stock and Schedule B RSUs shall vest in full as of the Execution Date, and the Schedule B RSUs shall be settled in cash equal to the value indicated on Schedule B plus any accumulated dividend equivalents as promptly as practicable thereafter. It is expressly acknowledged that (i) the foregoing consequences are different from those that would apply under the terms of the Equity Awards and the LTIP, absent this Agreement and (ii) the Equity Awards shall be treated in the same manner as other, comparable awards under the LTIP in the event of a "change of control" of the Company (as defined in the LTIP). (b) The Executive has heretofore been granted the opportunity to participate in the Company's Matching Grant Program with respect to the grants of restricted stock and restricted stock units identified on Schedule C hereto. Such grants shall vest, and such restricted stock units shall be settled in cash, in accordance with their terms, if the Executive completes the exchanges with respect to such grants on or before January 2, 2001. 4. Mutual Nondisparagement. (a) The Executive shall not make, participate in the making of, or encourage any other person to make, any statements, written or oral, which criticize, disparage, or defame the goodwill or reputation of, or which are intended to embarrass or adversely affect the morale of, (i) any of the Hercules Entities or (ii) any of the present, former or future directors, officers, executives, employees and/or shareholders of any of the Hercules Entities in their respective capacities as such. The Executive further agrees not to make any negative statements, written or oral, relating to his employment, the termination of his employment, or any aspect of the business of the Hercules Entities. (b) Neither the Company, nor any individual while serving as an officer or director of the Company, shall make, participate in the making of, or encourage any employees or any other person to make, any statements, written or oral, which criticize, disparage, or defame the reputation of, or which are intended to embarrass, the Executive. The Company further agrees not to make any negative statements, written or oral, relating to the Executive's employment or the termination of his employment. (c) Notwithstanding the foregoing, nothing in this Section 4 shall prohibit any person from making truthful statements when required by order of a court or other body having Jurisdiction, or as otherwise may be required by law or legal process. 3 4 5. The Executive's Covenants. (a) The Executive shall make himself available to the Company following the Resignation Date to assist the Hercules Entities, as may be requested by the Company, with respect to pending and future litigations, arbitrations, governmental investigations or other dispute resolutions relating to matters that arose during the Executive's employment with the Company. The Company will reimburse the Executive for all reasonable expenses and costs he may incur as a result of providing assistance under this Section 5(a), upon receipt of proper documentation thereof. (b) Confidentiality. The existence of and terms and conditions of this Agreement shall be held confidential by the parties hereto, except for disclosure (i) by the Company as may be required by applicable securities laws, as determined by the Company upon the advice of counsel, (ii) by the Executive to his legal and financial advisors and his spouse, each of whom shall be instructed by the Executive to maintain the terms of this Agreement in strict confidence in accordance with the terms hereof, (iii) by either party if required by order of a court or other body having jurisdiction over such matter, and (iv) by either party with the written consent of the other. In addition, the Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Hercules Entities and their respective businesses that he has obtained during his employment by the Company and the other Hercules Entities that is not public knowledge (other than as a result of the Executive's violation of this Section 5(b)) ("Confidential Information"). The Executive shall not communicate, divulge or disseminate Confidential Information at any time, except with the prior written consent of the Company or as otherwise required by law or legal process. (c) Noncompetition and Nonsolicitation of Employees and Customers. Until October 17, 2002, the Executive (A) shall not engage, anywhere within the geographical areas in which any Hercules Entity is then conducting its business operations, directly or indirectly, alone, in association with or as a shareholder, principal, agent, partner, officer, director, employee or consultant of any other organization, in any business (a "Competitive Business") which competes with any business then being conducted by such Hercules Entity; provided, that the foregoing shall not prohibit the Executive from owning a maximum of two percent (2%) of the outstanding stock, of any publicly traded corporation; (B) shall not solicit or encourage any officer, employee or consultant of any of the Hercules Entities to leave the employ of any of the Hercules Entities for employment by or with any Competitive Business; (C) shall not solicit, divert or to take away, the business or patronage of any of the customers or accounts, or prospective customers or accounts, of any Hercules Entity, which were contacted, solicited or served by the Executive at any time during the period of twelve months immediately preceding the Resignation Date; and (D) shall not acquire, or assist any other party in acquiring, any shares of any of the Hercules Entities, or otherwise seek, or assist any other party in seeking to gain control of any of the Hercules Entities. (d) The Executive acknowledges and agrees that because of the nature of the business in which the Company and the other Hercules Entities are engaged and because of the nature of the Confidential Information to which the Executive has had access during his employment, it would be impractical and excessively difficult to determine the actual damages of the Company and the other Hercules Entities in the event the Executive breached any of the covenants of Sections 5(b) and (c), and remedies at law (such as monetary damages) for any 4 5 breach of the Executive's obligations under Sections 5(b) and (c) would be inadequate. The Executive therefore agrees and consents that if he commits any breach of a covenant under Sections 5(b) and (c) or threatens to commit any such breach, the Company shall have the right (in addition to, and not in lieu of, any other right or remedy that may be available to it) to temporary and permanent injunctive relief from a court of competent jurisdiction, without posting any bond or other security and without the necessity of proof of actual damage. With respect to any provision of Sections 5(b) and (c) that is finally determined to be unenforceable, the Executive and the Company hereby agree that this Agreement or any provision hereof may be reformed so that it is enforceable to the maximum extent permitted by law. If any of the covenants of Sections 5(b) and (c) is determined to be wholly or partially unenforceable in any jurisdiction, such determination shall not be a bar to or in any way diminish the Company's right to enforce any such covenant in any other jurisdiction. (e) Notwithstanding the foregoing, the Executive shall be released from his obligations under Sections 5(a) and 5(c) above if (i) the Company fails to make any payment or provide any benefit to the Executive under this Agreement when it is due under the terms hereof, other than as a result of the Executive's forfeiture thereof in accordance herewith as a result of the Executive's violation of any of the Covenants, (ii) the Executive gives the Company notice of such failure, and (iii) the Company fails to correct such failure within 10 business days after receiving such notice. 6. Mutual Releases. (a) The Executive, on behalf of himself and his successors, assigns, heirs and any and all other persons claiming through the Executive, if any, and each of them, shall and does hereby forever relieve, release, and discharge the Company and the other Hercules Entities and their respective predecessors, successors, assigns, owners, attorneys, representatives, affiliates, parent corporations, subsidiaries (whether or not wholly-owned), divisions, partners and their officers, directors, agents, employees, servants, executors, administrators, accountants, investigators, insurers, and any and all other related individuals and entities, if any, and each of them, in any and all capacities, from any and all claims, debts, liabilities, demands, obligations, liens, promises, acts, agreements, costs and expenses (including, but not limited to, attorneys' fees), damages, actions and causes of action, of whatever kind or nature, including, without limitation, any statutory, civil or administrative claim, or any claim, arising out of acts or omissions occurring before the execution of this Agreement, whether known or unknown, suspected or unsuspected, fixed or contingent, apparent or concealed (collectively referred to as "claims"), including, but not limited to, any claims based on, arising out of, related to or connected with the subject matter of the Employment Agreement, this Agreement, the Executive's employment or the termination thereof, and any and all facts in any manner arising out of, related to or connected with the Executive's employment with, or termination of employment from, the Company and its subsidiaries and affiliates, including, but not limited to, any claims arising from rights under federal, state, and local laws prohibiting discrimination on the basis of race, national origin, sex, religion, age, marital status, pregnancy, handicap, ancestry, sexual orientation, or any other form of discrimination, and any common law claims of any kind, including, but not limited to, contract, tort, and property rights including, but not limited to, breach of contract, breach of the implied covenant of good faith and fair dealing, tortious interference with contract or current or prospective economic advantage, fraud, deceit, misrepresentation, defamation, wrongful termination, infliction of emotional distress, breach of 5 6 fiduciary duty, and any other common law claim of any kind whatever. The Executive expressly waives any and all rights under any applicable law with respect to claims that he does not know or suspect to exist in his favor at the time of executing this release, even though if known by him, such claims must have materially affected his settlement with the Company. (b) The Company, on behalf of itself and the other Hercules Entities, their respective successors and assigns, and any and all other persons claiming through any Hercules Entity, and each of them, shall and does hereby forever relieve, release, and discharge the Executive and his successors, assigns, and heirs, from any and all claims, debts, liabilities, demands, obligations, liens, promises, acts, agreements, costs and expenses (including, but not limited to, attorneys' fees), damages, actions and causes of action, of whatever kind or nature, including, without limitation, any statutory, civil or administrative claim, or any claim, arising out of acts or omissions occurring before the execution of this Agreement, whether known or unknown, suspected or unsuspected, fixed or contingent, apparent or concealed (collectively referred to as "claims"), including, but not limited to, any claims based on, arising out of, related to or connected with the subject matter of the Employment Agreement, this Agreement, the Executive's employment or the termination thereof, and any and all facts in any manner arising out of, related to or connected with the Executive's employment with, or termination of employment from, the Company and its subsidiaries and affiliates, including, but not limited to, any claims arising from rights under federal, state, and local laws prohibiting discrimination on the basis of race, national origin, sex, religion, age, marital status, pregnancy, handicap, ancestry, sexual orientation, or any other form of discrimination, and any common law claims of any kind, including, but not limited to, contract, tort, and property rights including, but not limited to, breach of contract, breach of the implied covenant of good faith and fair dealing, tortious interference with contract or current or prospective economic advantage, fraud, deceit, misrepresentation, defamation, wrongful termination, infliction of emotional distress, breach of fiduciary duty, and any other common law claim of any kind whatever. The Company expressly waives any and all rights under any applicable law with respect to claims that it does not know or suspect to exist in its favor at the time of executing this release, even though if known by it, such claims must have materially affected its settlement with the Executive. (c) It is expressly acknowledged by the Company and the Executive that the foregoing provisions of this Section 6 shall not adversely affect, release or waive: (i) any claims or rights under this Agreement; (ii) any rights the Executive may have to indemnification pursuant to Delaware and/or other applicable law or the by-laws and/or certificate of incorporation of the Company; or (iii) rights the Executive may have under any directors or officers' insurance policy maintained by the Company and in effect presently, which insurance the Company agrees to maintain in full force and effect for the Executive for such periods and on the same basis as for other former officers and directors of the Company. 6 7 7. Entire Agreement, Other Benefits, Secrecy Agreement. This Agreement sets forth the entire agreement of the Company and the Executive with respect to the subject matter hereof, and supersedes in their entirety the Employment Agreement, the Employment Agreement dated as of August 24, 2000 between the Executive and the Company, any severance plan of any of the Hercules Entities (including without limitation the Severance Pay Plan effective April 16, 2000 and the letter from June B. Barry to the Executive dated April 13, 2000) in their entirety. Without limiting the generality of the foregoing, the Executive expressly acknowledges and agrees that except as specifically set forth in this Agreement, he is not entitled to receive any severance pay, severance benefits, compensation or employee benefits of any kind whatsoever from any of the Hercules Entities. Notwithstanding the foregoing or any other provision of this Agreement, this Agreement does not supersede the agreement dated October 2, 1969 attached hereto as Exhibit D, which remains in full force and effect. 8. Successors. This Agreement is personal to the Executive, and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors. 9. Amendment. This Agreement may be amended, modified or changed only by a written instrument executed by the Executive and the Company. 10. Governing Law, Consent to Suit. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. (b) The parties hereto irrevocably consent to jurisdiction in the courts of the state of Delaware for resolution of any claim or dispute arising hereunder, and such shall be the exclusive forum for the resolution of such claim or dispute. 11. Notices. All notices and other communications hereunder shall be in writing; shall be delivered by hand delivery to the other party or mailed by registered or certified mail, return receipt requested, postage prepaid; shall be deemed delivered upon actual receipt; and shall be addressed as follows: If to the Company: Hercules Incorporated 1313 North Market Street Wilmington, Delaware 19894-0001 Attention: General Counsel 7 8 With a copy to: David A. Katz, Esq. Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 If to the Executive: Vincent J. Corbo 5 Southview Path Southern Slopes Chadds Ford, Pennsylvania 19317 With a copy to: R. Franklin Balotti, Esq. Richards, Layton & Finger One Rodney Square P.O. Box 551 Wilmington, Delaware 19899 or to such other address as either party shall have furnished to the other in writing in accordance herewith. 12. Tax Withholding. Notwithstanding any other provision of this Agreement, the Company may withhold from any amounts payable under this Agreement, or any other benefits received pursuant hereto, such Federal, state and/or local taxes as shall be required to be withheld under any applicable law or regulation. 13. Violation of Covenants. Notwithstanding any other provision of this Agreement, the Executive shall not forfeit any of his entitlements hereunder as a result of a breach of any of the Covenants unless (i) the Company gives the Executive notice of such breach, and (ii) the Executive fails to either demonstrate to the Company's satisfaction that no breach in fact occurred or to cure such breach, in either case within 10 business days after receiving such notice. 8 9 IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement as of the date first set forth above. /s/ Vincent J. Corbo ------------------------- Vincent J. Corbo HERCULES INCORPORATED By: /s/ Thomas L. Gossage -------------------------- 9 EX-10.21 5 w51743ex10-21.txt LETTER AGREEMENT BETWEEN HERCULES & HARRY J. TUCCI 1 Exhibit 10.21 [LETTERHEAD OF HERCULES INCORPORATED] November 1, 2000 Mr. Harry J. Tucci 220 Slonaker Road Spring City, Pennsylvania 19475 Dear Harry: Terms and Conditions of Your Termination From Hercules Incorporated In recognition of your service to Hercules Incorporated ("Company") and your acceptance of your new role as Chairman, CEO and President of CP Kelco, the Board of Directors has authorized me to offer you special benefits and payments. These will be effective when you officially retire from the Company. 1. Hercules Executive Survivor Benefit Plan (H.E.S.B.P.). This benefit provides payments to your beneficiary or estate in case of your death. The payment will be made from Company assets in an amount equal to two (2) times the sum of your final twelve months salary plus the average of your last two calendar year MICP awards. 2. Executive Incentive Plan Stock Forfeiture Reimbursement. Because your retirement causes you to forfeit Above-Target MICP Restricted Stock, Executive Stock Purchase Program and Nonqualified Pension Exchange shares, the Company will reimburse you for the lost shares, valued using the closing price of Hercules stock on your last day of employment. 3. Periodic Payments Having A Total Present Value of $600,000. Concurrent with your retirement, you may elect to receive 120 consecutive monthly payments of $7,000 each, or you may elect an addition to your pension of $4,700/month for life. If you elect to receive the pension annuity, you may elect the usual forms of pension receipt, including a 51% lump sum. These options are in lieu of the payments outlined in the June 29, 1999 R. Keith Elliott letter. 4. Four (4) Additional Years of Pension Service Credit. The Company will provide a total annual pension of $132,500 (before nonqualified pension exchange reduction). This represents the addition of four (4) full years of service, bringing your total added service for beyond actual employment to eight (8) years. This pension will be effective with your retirement and paid in monthly installments. You will have the usual payment elections provided to Hercules retirees. 2 Mr. Harry J. Tucci November 1, 2000 Page 2 5. Pension Supplement for CP Kelco Service. If you remain with CP Kelco until Hercules' normal retirement age 65, Hercules will pay 50% of the cost of increasing your pension from $132,500 to $264,000. Lehman will pay the remaining 50%. This is a fixed dollar amount and not influenced by any other portion of this agreement. In the event you retire from CP Kelco prior to age 65 (May 2005), you will receive a prorated portion of the additional pension calculated by dividing (a) the number of months between Hercules retirement and your CP Kelco date of retirement, by (b) the number of months between your Hercules retirement and 6/l/05. 6. Full Share BetzDearborn Integration Bonus Plan. Provided that Plan awards are earned and payouts are approved by the Hercules Compensation Committee and the Hercules Board of Directors, you will be paid at the same time, in the same form, and upon the same terms as other Plan participants. Your bonus will be a full share with no pro-ration. 7. Custodial Care for your Spouse. Hercules will reimburse the care provided for your wife through September 29. Additional reimbursement will be charged to CP Kelco and subject to authorization from CP Kelco. This letter represents the full and complete offer by Hercules consistent with your signed Employment Agreement dated September 30, 2000 and CP Kelco ApS, and in order to complete your retirement from Hercules in an orderly manner, please indicate your acceptance of these special terms and conditions by signing a copy of this letter and returning it to me no later than November 22. In addition, please sign a copy of the attached waiver and release form claims and return it to me by the same date. Sincerely, HERCULES INCORPORATED /s/ Thomas L. Gossage ---------------------- Thomas L. Gossage Chairman and Chief Executive Officer ACCEPTED BY: /s/ Harry J. Tucci November 22, 2000 - ------------------------------- ------------------------------ Harry J. Tucci Date 3 HARRY J. TUCCI CONFIDENTIAL RELEASE AND WAIVER OF CLAIMS This Confidential Release and Waiver of Claims will confirm the agreement we have entered in connection with the termination of your employment with Hercules Incorporated and/or its subsidiaries and affiliates (the "Company"). Your last day of employment with the Company will be November 30, 2000. 1. Payments And Benefits: In consideration of the release set forth in paragraph 2 and the representations and promises set forth in this Confidential Release and Waiver of Claims you will receive termination compensation pursuant to and as set forth in the attached letter from me dated November 1, 2000 to this Confidential Release and Waiver of Claims, and which are hereinafter referred to as the "Termination Benefits," which benefits you would not otherwise be entitled to receive upon termination of employment by the Company. 2. Release: You voluntarily, knowingly and willingly release and forever discharge on behalf of yourself, your heirs, executors, successors and assigns the Company, and their parents, subsidiaries and affiliates, together with their respective officers, directors, partners, shareholders, employees and agents, and each of their predecessors, successors and assigns, from any and all charges, complaints, claims, promises, agreements, controversies, causes of action and demands of any nature whatsoever which against them you or your executors, administrators, successors, or assigns ever had, now have or hereafter can, shall or may have by reason of any matter, cause or thing whatsoever arising prior to the time you sign this Agreement. This Release includes, but is not limited to, any rights or claims relating in any way to your employment relationship with the Company, or the termination thereof, or under any statute, including the Federal Age Discrimination in Employment Act, Title VII of the Civil Rights Act, the Americans with Disabilities Act, or any other foreign, federal, state or local law, and any potential claims under common law, or judicial decision. The foregoing Release shall not apply to claims for legally mandated benefits and vested benefits under any qualified or nonqualified savings and pension plans in which you may have participated, or any other rights or claims that may arise after this Confidential Release and Waiver of Claims is executed. 3. Agreement Not To Sue The Company: You represent that you have no complaints, charges or lawsuits pending against the Company. You agree that you will not seek or be entitled to any personal recovery in any proceeding of any nature whatsoever against the Company arising out of any of the matters released in paragraph 2 above. You further agree that upon the filing of any charge, complaint or lawsuit in violation of this paragraph 3, you will not be entitled to any further Termination Benefits and will pay back to the Company any and all cash Termination Benefits received by you. You further agree that you will reimburse the Company for any and all costs, including reasonable attorneys' fees, incurred by the Company in defending or otherwise disposing of any such charge, complaint or lawsuit. 1 4 4. Company Information: (a) You represent that you have returned or will immediately return to the Company all "Company Information," including, without limitation, customer information, formulatory information, product and pricing information, mailing lists, reports, files, memoranda, records and software, credit cards, door and file keys, computer access codes and disks and instructional manuals, and other physical or personal property which you received or prepared or helped prepare in connection with your employment with the Company, and you will not retain any copies, duplicates, reproductions or excerpts thereof. The term "Company Information" as used in this Agreements means (i) confidential information of the Company, including without limitation information received from third parties under confidential conditions, and (ii) other technical, business or financial information or trade secrets, the use or disclosure of which might reasonably be construed to be contrary to the interests of the Company or its affiliates, and (iii) any and all other information you received during the course of your employment with the Company. (b) We agree that in the course of your employment with the Company you have acquired Company Information as defined in paragraph 5(a). You understand and agree that such Company Information has been disclosed to you in confidence and for the use only on behalf of the Company. You acknowledge that you have no ownership right or interest in any Company Information used or developed during the course of your employment. You understand and agree that (i) you will keep such Company Information confidential at all times after your employment with the Company, and (ii) you will not make use of Company Information on your own behalf, or on behalf of any third party. 5. Nonsolicitation of Customers: You agree that you will not, during the period when you are receiving any Termination Benefits, on your own behalf or on behalf of any competitor of the Company or any of its affiliates or their respective predecessors (collectively, the "Company and its Affiliates"), directly or indirectly solicit or engage in business with any customer or prospective customer of the Company and its Affiliates for which you rendered sales or technical services or for which you had supervisory responsibility for the preceding period of 18 months ending on the date of the termination of your employment. This paragraph 5 will not apply to any regular business activity related to the Hercules Incorporated Food Gums business and CP Kelco as long as you are employed by CP Kelco or a direct affiliate of CP Kelco. 6. Agreement Confidential: You agree to keep this Agreement and its terms confidential except as may be required to enforce the Agreement or to obtain legal or tax advice. 7. No Admission: The Company's offer to you of this Agreement and the payment set forth herein is not intended to be, and shall not be construed as, any admission of liability by the Company to you or of any improper conduct on the Company's part, all of which the Company specifically denies. 2 5 8. Knowing And Voluntary Agreement: (a) The Company advises you to consult with an attorney of your choosing prior to signing this Agreement. You represent that you have had the opportunity to review this Agreement and, specifically, the Release in paragraph 2, with an attorney of your choice. You also agree that you have no right to receive the Termination Benefits unless you sign this Release, that you voluntarily consented to the Release set forth in paragraph 2, and that you have entered into this Agreement freely, knowingly and voluntarily. (b) You have at least twenty-one (21) days to consider the terms of this Agreement which you hereby acknowledge you have received. However, you may sign and return this Agreement sooner if you wish. Further more, once you have signed this Agreement, you have seven (7) additional days from the date you sign it to revoke your consent. The Agreement will not become effective until seven (7) days after the date you have signed it, which will be the effective date of this Agreement. (c) In making your decision to accept the Termination Benefits, and to execute this Confidential Release and Waiver of Claims, you have relied solely on the information contained in the Program and have not relied upon any representation, promises, or agreements of any kind, except those set forth in the Program documents and this Confidential Release and Waiver of Claims. 9. Entire Agreement: The terms described in this Confidential Release and Waiver of Claims, together with the terms of the November 1, 2000, letter, constitute the entire Agreement between us and supercedes all prior and existing understandings, contracts, and agreements, whether written or oral, with respect to your compensation, benefits, or severance benefits, or any other aspect of your employment. This Agreement may not be altered or modified other than in a writing signed by you and the Company. The Agreement will be governed by the law of Delaware, without reference to its choice of law rules. 10. Severability: In the event that any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remainder hereof shall not in any way be affected or impaired thereby. Moreover, if any one or more of the provisions contained in this Agreement shall be held to be excessively broad as to duration, activity, or subject, such provision(s) shall be construed by limiting and reducing them so as to be enforceable to the maximum extent allowed by applicable law. 3 6 If the above sets forth our agreement as you understand it and voluntarily consent to it, please so signify by executing the enclosed copy of this Confidential Release and Waiver of Claims and return it to the undersigned. AGREED TO AND ACCEPTED: HERCULES INCORPORATED /s/ Harry J. Tucci By: /s/ Thomas L. Gossage - ------------------------ --------------------------- (Employee Name) Date Signed: November 22, 2000 Date Signed: ------------------ ---------------- 4 EX-10.24 6 w51743ex10-24.txt CHANGE-OF-CONTROL AGREE.BETW.HERCULES & W.H. JOYCE 1 Exhibit 10.24 CHANGE OF CONTROL EMPLOYMENT AGREEMENT AGREEMENT, dated as of the 8th day of May 2001 (this "Agreement"), by and between Hercules Incorporated, a Delaware corporation (the "Company"), and William H. Joyce (the "Executive"). WHEREAS, the Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders/stockholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein). The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the current Company in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control that ensure that the compensation and benefits expectations of the Executive will be satisfied and that are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: SECTION 1. CERTAIN DEFINITIONS. (a) "Effective Date" means the first date during the Change of Control Period (as defined herein) on which a Change of Control occurs. Notwithstanding anything in this Agreement to the contrary, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (1) was at the request of a third party that has taken steps reasonably calculated to effect a Change of Control or (2) otherwise arose in connection with or anticipation of a Change of Control, then "Effective Date" means the date immediately prior to the date of such termination of employment. (b) "Change of Control Period" means the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that, commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof, the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless, at least 60 days prior to the Renewal Date, the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. (c) "Affiliated Company" means any company controlled by, controlling or under common control with the Company. (d) "Change of Control" means: 2 (1) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this Section l(d), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Affiliated Company or (iv) any acquisition by any corporation pursuant to a transaction that complies with Sections l(d)(3)(A), l(d)(3)(B) and 1(d)(3)(C). (2) The individuals listed below (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board. The following individuals constitute the Incumbent Board as of the date hereof: John G. Drosdick, Richard Fairbanks, Thomas L. Gossage, Alan R. Hirsig, Edith E. Holiday, William H. Joyce, Gaynor N. Kelley, George MacKenzie, Ralph L. MacDonald, Jr., H. Eugene McBrayer, Peter McCausland, John A. H. Shober and Paula A. Sneed. (3) Approval by the shareholders of the Company of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, 60% or more of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such 2 3 ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or (4) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (e) "Alternative Change of Control" means a Change of Control as defined above, except that the phrase "Approval by the shareholders of the Company" in clause (3) of Section 1(d) shall be deemed to read "Consummation." SECTION 2. EMPLOYMENT PERIOD. The Company hereby agrees to continue the Executive in its employ, subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of the Effective Date (the "Employment Period"). The Employment Period shall terminate upon the Executive's termination of employment for any reason. SECTION 3. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (1) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the office where the Executive was employed immediately preceding the Effective Date or at any other location less than 30 miles from such office. (2) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period, it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that, to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. 3 4 (b) COMPENSATION. (1) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary (the "Annual Base Salary") at an annual rate at least equal to 12 times the highest monthly base salary paid or payable, including any base salary that has been earned but deferred, to the Executive by the Company and the Affiliated Companies in respect of the 12-month period immediately preceding the month in which the Effective Date occurs. The Annual Base Salary shall be paid at such intervals as the Company pays executive salaries generally. During the Employment Period, the Annual Base Salary shall be reviewed at least annually, beginning no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date. Any increase in the Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. The Annual Base Salary shall not be reduced after any such increase and the term "Annual Base Salary" shall refer to the Annual Base Salary as so increased. (2) ANNUAL BONUS. In addition to the Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the Executive's Recent Target Bonus, as defined in the next sentence. The "Recent Target Bonus" means the Annual Base Salary times a percentage equal to the percentage of base salary most recently established, before the Effective Date, for purposes of determining the Executive's target bonus under the Company's Management Incentive Compensation Plan or any predecessor or successor plan (the "MICP"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. Any bonus paid to the Executive under the MICP as a result of the Change of Control (a "Change of Control Bonus") shall be taken into account in determining whether the requirements of this Section 3(b)(2) have been met with respect to the fiscal year in which the Change of Control occurs. (3) INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Employment Period, the Executive shall be entitled to participate in all cash incentive, equity incentive, savings and retirement plans, practices, policies, and programs applicable generally to other peer executives of the Company and the Affiliated Companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and the Affiliated Companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the Affiliated Companies. The Executive shall also continue to be entitled to any supplemental pension benefits to which he may be entitled pursuant to any individual agreement with the company or any Affiliated Companies (collectively, "Enhanced Pension Benefits"). (4) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in 4 5 and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and the Affiliated Companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and the Affiliated Companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits that are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the Affiliated Companies. (5) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and the Affiliated Companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. (6) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, if applicable, tax and financial planning services, payment of club dues, and use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and the Affiliated Companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. (7) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and the Affiliated Companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. (8) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and the Affiliated Companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. (9) SPECIAL PAYMENT. If a Change of Control occurs on or before April 30, 2002, and in connection therewith, all or substantially all of the common stock of the Company (the Common Stock) is purchased for cash and all or substantially all then-outstanding employee stock options granted by the Company are cancelled in exchange for cash or no 5 6 consideration and without being replaced by comparable new stock options, then the Company shall pay the Executive, within five business days after the Change of Control, a cash payment equal to $3,000,000 less the product of (1) the excess, if any, of the per-share amount of the cash paid for the Common Stock, over $12.00 times (2) 1,250,000; provided, that if there is no such excess described in clause (1), then such cash payment shall equal $3,000,000. SECTION 4. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically if the Executive dies during the Employment Period. If the Company determines in good faith that the Disability (as defined herein) of the Executive has occurred during the Employment Period (pursuant to the definition of "Disability"), it may give to the Executive written notice in accordance with Section 11(b) of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. "Disability" means the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness that is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. "Cause" means: (1) the willful and continued failure of the Executive to perform substantially the Executive's duties (as contemplated by Section 3(a)(1)(A)) with the Company or any Affiliated Company (other than any such failure resulting from incapacity due to physical or mental illness or following the Executive's delivery of a Notice of Termination for Good Reason), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company that specifically identifies the manner in which the Board or the Chief Executive Officer of the Company believes that the Executive has not substantially performed the Executive's duties, or (2) the willful engaging by the Executive in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company. For purposes of this Section 4(b), no act, or failure to act, on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer of the Company or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire 6 7 membership of the Board (excluding the Executive, if the Executive is a member of the Board) at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel for the Executive, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in Section 4(b)(1) or 4(b)(2), and specifying the particulars thereof in detail. (c) GOOD REASON. The Executive's employment may be terminated by the Executive for Good Reason or by the Executive voluntarily without Good Reason. "Good Reason" means: (1) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a), or any other diminution in such position, authority, duties or responsibilities (whether or not occurring solely as a result of the Company's ceasing to be a publicly traded entity), excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive; (2) any failure by the Company to comply with any of the provisions of Section 3(b), other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive; (3) the Company's requiring the Executive (i) to be based at any office or location other than as provided in Section 3(a)(1)(B), (ii) to be based at a location other than the principal executive offices of the Company if the Executive was employed at such location immediately preceding the Effective Date, or (iii) to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (4) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (5) any failure by the Company to comply with and satisfy Section 10(c). For purposes of this Section 4(c), any good faith determination of Good Reason made by the Executive shall be conclusive. The Executive's mental or physical incapacity following the occurrence of an event described above in clauses (1) through (5) shall not affect the Executive's ability to terminate employment for Good Reason. In addition, anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason pursuant to a Notice of Termination given after an Alternative Change of Control, with a Date of Termination that is during the Employment Period but not less that 180 days after the date such Notice of Termination is given, shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause or other than for Cause, or by the Executive for Good Reason, shall be communicated by Notice of 7 8 Termination to the other party hereto given in accordance with Section 11(b). "Notice of Termination" means a written notice that (1) indicates the specific termination provision in this Agreement relied upon, (2) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (3) if the Date of Termination (as defined herein) is other than the date of receipt of such notice, specifies the Date of Termination (which Date of Termination shall be not more than 30 days after the giving of such notice unless such notice is given pursuant to the last sentence of Section 4(c)). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's respective rights hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (1) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified in the Notice of Termination, (which date shall not be more than 30 days after the giving of such notice unless such notice is given pursuant to the last sentence of Section 4(c)), as the case may be, (2) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, and (3) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. SECTION 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON; OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or Disability or the Executive terminates employment for Good Reason: (1) the Company shall pay to the Executive, in a lump sum in cash within 30 days after the Date of Termination, the aggregate of the following amounts: (A) the sum of: (i) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid; (ii) the product of (x) the higher of (I) the Recent Target Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof that has been earned but deferred (and annualized for any fiscal year consisting of less than 12 full months or during which the Executive was employed for less than 12 full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount, the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination and the denominator of which is 365; provided, that if the Date of Termination occurs in the same fiscal year as the Change of Control, then such product shall be reduced (but not below zero) by the amount of any Change of Control Bonus payable to the Executive; and (iii) any accrued vacation pay, in each case, to the 8 9 extent not theretofore paid (the sum of the amounts described in subclauses (i), (ii) and (iii), the "Accrued Obligations"); and (B) the amount equal to the product of (i) three and (ii) the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus; (2) for three years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue welfare and fringe benefits to the Executive and/or the Executive's family at least equal to those that would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(b)(4) and (6) if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies and their families, provided, however, that, if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility; and for purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the expiration of three years after the Date of Termination and to have retired on the last day of such period; (3) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in the Executive's sole discretion provided, that the cost of such outplacement shall not exceed $50,000; (4) all stock options and restricted stock held by the Executive immediately before the Date of Termination shall vest in full, and such stock options shall remain exercisable until the first to occur of the first anniversary of the Date of Termination and the expiration of their original terms (unless the option by its terms provides for a longer period of continued exercisability); and (5) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or that the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and the Affiliated Companies (such other amounts and benefits, the "Other Benefits"). (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period but after the Executive has given a Notice of Termination for Good Reason or the Company has given a Notice of Termination other than for Cause, such termination shall be treated as a termination by the Executive for Good Reason and the Executive's estate and/or beneficiaries shall be entitled to the benefits provided for in Section 5(a) above, other than Section 5(a)(3). If the Executive's employment is terminated by reason of the Executive's death during the Employment Period other than as described in the preceding sentence, the Company shall provide the Executive's estate or beneficiaries with the Accrued 9 10 Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. The Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, the term "Other Benefits" as utilized in this Section 5(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and the Affiliated Companies to the estates and beneficiaries of peer executives of the Company and the Affiliated Companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and the Affiliated Companies and their beneficiaries. (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period but after the Executive has given a Notice of Termination for Good Reason or the Company has given a Notice of Termination other than for Cause, such termination shall be treated as a termination by the Executive for Good Reason and the Executive shall be entitled to the benefits provided for in Section 5(a) above, other than Section 5(a)(3). If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period other than as described in the preceding sentence, the Company shall provide the Executive with the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. The Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, the term "Other Benefits" as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and the Affiliated Companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and the Affiliated Companies and their families. (d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment is terminated for Cause during the Employment Period, the Company shall provide to the Executive (1) the Executive's Annual Base Salary through the Date of Termination, (2) the amount of any compensation previously deferred by the Executive, and (3) the Other Benefits, in each case, to the extent theretofore unpaid, and shall have no other severance obligations under this Agreement. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, the Company shall provide to the Executive the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. In such case, all the Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 10 11 SECTION 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or the Affiliated Companies and for which the Executive may qualify, nor, subject to Section 11(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any other contract or agreement with the Company or the Affiliated Companies. Amounts that are vested benefits or that the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or the Affiliated Companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement, except as explicitly modified by this Agreement. Notwithstanding the foregoing, if the Executive receives payments and benefits pursuant to Section 5(a) of this Agreement, the Executive shall not be entitled to any severance pay or benefits under any severance plan, program or policy of the Company and the Affiliated Companies, including without limitation the Executive Severance Plan, unless otherwise specifically provided therein in a specific reference to this Agreement. SECTION 7. FULL SETTLEMENT; CONTESTS. (a) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense, or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. (b) The Company agrees to pay as incurred (within 10 days following the Company's receipt of an invoice from the Executive), to the full extent permitted by law, all legal fees and expenses that the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus, in each case, interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). Notwithstanding the foregoing, the Company shall have no obligation to pay the Executive's legal fees and expenses in connection with any action initiated by the Executive as to which the trier of fact finds that the Executive's claim was frivolous or brought in bad faith. SECTION 8. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Executive, whether paid or payable pursuant to this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax (the "Excise Tax"), then the Executive shall be entitled to receive 11 12 an additional payment (the "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by PriceWaterhouseCoopers (the "Accounting Firm"). The Accounting Firm shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within 5 days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (the "Underpayment"), consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Section 8(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than 10 business days after the Executive is informed in writing of such claim. The Executive shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that the Company desires to contest such claim, the Executive shall: (1) give the Company any information reasonably requested by the Company relating to such claim, (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, 12 13 (3) cooperate with the Company in good faith in order effectively to contest such claim, and (4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the Company shall control all proceedings taken in connection with such contest, and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that, if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties) imposed with respect to such advance or with respect to any imputed income in connection with such advance; and provided, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 8(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (e) Notwithstanding any other provision of this Section 8, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for the benefit of the Executive, all or any portion of the Gross-Up Payment, and the Executive hereby consents to such withholding. 13 14 SECTION 9. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or the Affiliated Companies, and their respective businesses, which information, knowledge or data shall have been obtained by the Executive during the Executive's employment by the Company or the Affiliated Companies and which information, knowledge or data shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those persons designated by the Company. In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. SECTION 10. SUCCESSORS. (a) This Agreement is personal to the Executive, and, without the prior written consent of the Company, shall not be assignable by the Executive other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. Except as provided in Section 10(c), without the prior written consent of the Executive this Agreement shall not be assignable by the Company. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. "Company" means the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law or otherwise. SECTION 11. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified other than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: 14 15 if to the Executive: William H. Joyce Hercules Incorporated Hercules Plaza Wilmington, Delaware 19894-0001 if to the Company: Hercules Incorporated Hercules Plaza Wilmington, Delaware 19894-0001 Attn: ------------------------------------------------ or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such United States federal, state or local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Sections 4(c)(1) through 4(c)(5), shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under the Agreement dated May 8, 2001 between the Executive and the Company (the "Prior Agreement") any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a), prior to the Effective Date, the Executive's employment may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. 15 16 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from the Board, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ William H. Joyce ------------------------- William H. Joyce HERCULES INCORPORATED By /s/ Edward V. Carrington ----------------------- [name] [title] Office of Chairman Attest: Israel J. Floyd - ----------------------- [name] Israel J. Floyd [title] Secretary 16 EX-10.25 7 w51743ex10-25.txt FORM OF 2001 CHANGE-OF-CONTROL AGREEMENTS 1 EXHIBIT 10.25 CHANGE-OF-CONTROL EMPLOYMENT AGREEMENT AGREEMENT, dated as of the ____ day of ________ 2001 (this "Agreement"), by and between Hercules Incorporated, a Delaware corporation (the "Company"), and ____________________ (the "Executive"). WHEREAS, the Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders/stockholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein). The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the current Company in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control that ensure that the compensation and benefits expectations of the Executive will be satisfied and that are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: SECTION 1. CERTAIN DEFINITIONS. (a) "Effective Date" means the first date during the Change of Control Period (as defined herein) on which a Change of Control occurs. Notwithstanding anything in this Agreement to the contrary, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (1) was at the request of a third party that has taken steps reasonably calculated to effect a Change of Control or (2) otherwise arose in connection with or anticipation of a Change of Control, then "Effective Date" means the date immediately prior to the date of such termination of employment. (b) "Change of Control Period" means the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that, commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof, the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless, at least 60 days prior to the Renewal Date, the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. (c) "Affiliated Company" means any company controlled by, controlling or under common control with the Company. (d) "Change of Control" means: 2 (1) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this Section l(d), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Affiliated Company or (iv) any acquisition by any corporation pursuant to a transaction that complies with Sections l(d)(3)(A), l(d)(3)(B) and 1(d)(3)(C). (2) The individuals listed below (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board. The following individuals constitute the Incumbent Board as of the date hereof: John G. Drosdick, Richard Fairbanks, Thomas L. Gossage, Alan R. Hirsig, Edith E. Holiday, William H. Joyce, Gaynor N. Kelley, George MacKenzie, Ralph L. MacDonald, Jr., M. Eugene McBrayer, Peter McCausland, John A. H. Shober and Paula A. Sneed. (3) Approval by the shareholders of the Company of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, 60% or more of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such 2 3 ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or (4) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (e) "Alternative Change of Control" means a Change of Control as defined above, except that the phrase "Approval by the shareholders of the Company" in clause (3) of Section 1(d) shall be deemed to read "Consummation." SECTION 2. EMPLOYMENT PERIOD. The Company hereby agrees to continue the Executive in its employ, subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of the Effective Date (the "Employment Period"). The Employment Period shall terminate upon the Executive's termination of employment for any reason. SECTION 3. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (1) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the office where the Executive was employed immediately preceding the Effective Date or at any other location less than 30 miles from such office. (2) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period, it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that, to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. 3 4 (b) COMPENSATION. (1) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary (the "Annual Base Salary") at an annual rate at least equal to 12 times the highest monthly base salary paid or payable, including any base salary that has been earned but deferred, to the Executive by the Company and the Affiliated Companies in respect of the 12-month period immediately preceding the month in which the Effective Date occurs. The Annual Base Salary shall be paid at such intervals as the Company pays executive salaries generally. During the Employment Period, the Annual Base Salary shall be reviewed at least annually, beginning no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date. Any increase in the Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. The Annual Base Salary shall not be reduced after any such increase and the term "Annual Base Salary" shall refer to the Annual Base Salary as so increased. (2) ANNUAL BONUS. In addition to the Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the Executive's Recent Target Bonus, as defined in the next sentence. The "Recent Target Bonus" means the Annual Base Salary times a percentage equal to the percentage of base salary most recently established, before the Effective Date, for purposes of determining the Executive's target bonus under the Company's Management Incentive Compensation Plan or any predecessor or successor plan (the "MICP"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. Any bonus paid to the Executive under the MICP as a result of the Change of Control (a "Change of Control Bonus") shall be taken into account in determining whether the requirements of this Section 3(b)(2) have been met with respect to the fiscal year in which the Change of Control occurs. (3) INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Employment Period, the Executive shall be entitled to participate in all cash incentive, equity incentive, savings and retirement plans, practices, policies, and programs applicable generally to other peer executives of the Company and the Affiliated Companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and the Affiliated Companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the Affiliated Companies. The Executive shall also continue to be entitled to any supplemental pension benefits to which he may be entitled pursuant to any individual agreement with the company or any Affiliated Companies (collectively, "Enhanced Pension Benefits"). (4) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in 4 5 and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and the Affiliated Companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and the Affiliated Companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits that are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the Affiliated Companies. (5) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and the Affiliated Companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. (6) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, if applicable, tax and financial planning services, payment of club dues, and use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and the Affiliated Companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. (7) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and the Affiliated Companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. (8) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and the Affiliated Companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. SECTION 4. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically if the Executive dies during the Employment Period. If the Company determines 5 6 in good faith that the Disability (as defined herein) of the Executive has occurred during the Employment Period (pursuant to the definition of "Disability"), it may give to the Executive written notice in accordance with Section 11(b) of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. "Disability" means the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness that is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. "Cause" means: (1) the willful and continued failure of the Executive to perform substantially the Executive's duties (as contemplated by Section 3(a)(1)(A)) with the Company or any Affiliated Company (other than any such failure resulting from incapacity due to physical or mental illness or following the Executive's delivery of a Notice of Termination for Good Reason), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company that specifically identifies the manner in which the Board or the Chief Executive Officer of the Company believes that the Executive has not substantially performed the Executive's duties, or (2) the willful engaging by the Executive in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company. For purposes of this Section 4(b), no act, or failure to act, on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer of the Company or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board (excluding the Executive, if the Executive is a member of the Board) at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel for the Executive, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in Section 4(b)(1) or 4(b)(2), and specifying the particulars thereof in detail. (c) GOOD REASON. The Executive's employment may be terminated by the Executive for Good Reason or by the Executive voluntarily without Good Reason. "Good Reason" means: 6 7 (1) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a), or any other diminution in such position, authority, duties or responsibilities (whether or not occurring solely as a result of the Company's ceasing to be a publicly traded entity), excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive; (2) any failure by the Company to comply with any of the provisions of Section 3(b), other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive; (3) the Company's requiring the Executive (i) to be based at any office or location other than as provided in Section 3(a)(1)(B), (ii) to be based at a location other than the principal executive offices of the Company if the Executive was employed at such location immediately preceding the Effective Date, or (iii) to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (4) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (5) any failure by the Company to comply with and satisfy Section 10(c). For purposes of this Section 4(c), any good faith determination of Good Reason made by the Executive shall be conclusive. The Executive's mental or physical incapacity following the occurrence of an event described above in clauses (1) through (5) shall not affect the Executive's ability to terminate employment for Good Reason. In addition, anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason pursuant to a Notice of Termination given after an Alternative Change of Control, with a Date of Termination that is during the Employment Period but not less than 180 days after the date such Notice of Termination is given, shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or other than for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(b). "Notice of Termination" means a written notice that (1) indicates the specific termination provision in this Agreement relied upon, (2) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (3) if the Date of Termination (as defined herein) is other than the date of receipt of such notice, specifies the Date of Termination (which Date of Termination shall be not more than 30 days after the giving of such notice unless such notice is given pursuant to the last sentence of Section 4(c)). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, 7 8 hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's respective rights hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (1) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified in the Notice of Termination, (which date shall not be more than 30 days after the giving of such notice unless such notice is given pursuant to the last sentence of Section 4(c)), as the case may be, (2) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, and (3) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. SECTION 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON; OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or Disability or the Executive terminates employment for Good Reason: (1) the Company shall pay to the Executive, in a lump sum in cash within 30 days after the Date of Termination, the aggregate of the following amounts: (A) the sum of: (i) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid; (ii) the product of (x) the higher of (I) the Recent Target Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof that has been earned but deferred (and annualized for any fiscal year consisting of less than 12 full months or during which the Executive was employed for less than 12 full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount, the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination and the denominator of which is 365; provided, that if the Date of Termination occurs in the same fiscal year as the Change of Control, then such product shall be reduced (but not below zero) by the amount of any Change of Control Bonus payable to the Executive; and (iii) any accrued vacation pay, in each case, to the extent not theretofore paid (the sum of the amounts described in subclauses (i), (ii) and (iii), the "Accrued Obligations"); and (B) the amount equal to the product of (i) two and (ii) the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus; (2) for two years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue welfare and fringe benefits to the Executive and/or the Executive's family at least equal to those that would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(b)(4) and (6) if the 8 9 Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies and their families, provided, however, that, if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility; and for purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the expiration of two years after the Date of Termination, and to have retired on the last day of such period; (3) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in the Executive's sole discretion provided, that the cost of such outplacement shall not exceed $50,000; (4) all stock options and restricted stock held by the Executive immediately before the Date of Termination shall vest in full, and such stock options shall remain exercisable until the first to occur of the first anniversary of the Date of Termination and the expiration of their original terms (unless the option by its terms provides for a longer period of continued exercisability); and (5) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or that the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and the Affiliated Companies (such other amounts and benefits, the "Other Benefits"). (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period but after the Executive has given a Notice of Termination for Good Reason or the Company has given a Notice of Termination other than for Cause, such termination shall be treated as a termination by the Executive for Good Reason and the Executive's estate and/or beneficiaries shall be entitled to the benefits provided for in Section 5(a) above, other than Section 5(a)(3). If the Executive's employment is terminated by reason of the Executive's death during the Employment Period other than as described in the preceding sentence, the Company shall provide the Executive's estate or beneficiaries with the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. The Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, the term "Other Benefits" as utilized in this Section 5(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and the Affiliated Companies to the estates and beneficiaries of peer executives of the Company and the Affiliated Companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's 9 10 beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and the Affiliated Companies and their beneficiaries. (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period but after the Executive has given a Notice of Termination for Good Reason or the Company has given a Notice of Termination other than for Cause, such termination shall be treated as termination by the Executive for Good Reason and the Executive shall be entitled to the benefits provided for in Section 5(a) above, other than Section 5(a)(3). If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period other than as described in the preceding sentence, the Company shall provide the Executive with the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. The Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, the term "Other Benefits" as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and the Affiliated Companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and the Affiliated Companies and their families. (d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment is terminated for Cause during the Employment Period, the Company shall provide to the Executive (1) the Executive's Annual Base Salary through the Date of Termination, (2) the amount of any compensation previously deferred by the Executive, and (3) the Other Benefits, in each case, to the extent theretofore unpaid, and shall have no other severance obligations under this Agreement. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, the Company shall provide to the Executive the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. In such case, all the Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. SECTION 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or the Affiliated Companies and for which the Executive may qualify, nor, subject to Section 11(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any other contract or agreement with the Company or the Affiliated Companies. Amounts that are vested benefits or that the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or the Affiliated Companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement, except as explicitly modified by this Agreement. Notwithstanding the foregoing, if the Executive receives payments and benefits pursuant to Section 5(a) of this Agreement, the Executive shall not be entitled to any severance pay or benefits under any severance plan, 10 11 program or policy of the Company and the Affiliated Companies, including without limitation the Executive Severance Plan, unless otherwise specifically provided therein in a specific reference to this Agreement. SECTION 7. FULL SETTLEMENT; CONTESTS. (a) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense, or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. (b) The Company agrees to pay as incurred (within 10 days following the Company's receipt of an invoice from the Executive), to the full extent permitted by law, all legal fees and expenses that the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus, in each case, interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). Notwithstanding the foregoing, the Company shall have no obligation to pay the Executive's legal fees and expenses in connection with any action initiated by the Executive as to which the trier of fact finds that the Executive's claim was frivolous or brought in bad faith. SECTION 8. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Executive, whether paid or payable pursuant to this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax (the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (the "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by PriceWaterhouseCoopers (the "Accounting Firm"). The Accounting Firm shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been 11 12 a Payment or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within 5 days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (the "Underpayment"), consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Section 8(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than 10 business days after the Executive is informed in writing of such claim. The Executive shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that the Company desires to contest such claim, the Executive shall: (1) give the Company any information reasonably requested by the Company relating to such claim, (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (3) cooperate with the Company in good faith in order effectively to contest such claim, and (4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the 12 13 Company shall control all proceedings taken in connection with such contest, and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that, if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties) imposed with respect to such advance or with respect to any imputed income in connection with such advance; and provided, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 8(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (e) Notwithstanding any other provision of this Section 8, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for the benefit of the Executive, all or any portion of the Gross-Up Payment, and the Executive hereby consents to such withholding. SECTION 9. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or the Affiliated Companies, and their respective businesses, which information, knowledge or data shall have been obtained by the Executive during the Executive's employment by the Company or the Affiliated Companies and which information, knowledge or data shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those persons designated by the Company. In no event shall an asserted violation of the provisions of 13 14 this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. SECTION 10. SUCCESSORS. (a) This Agreement is personal to the Executive, and, without the prior written consent of the Company, shall not be assignable by the Executive other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. Except as provided in Section 10(c), without the prior written consent of the Executive this Agreement shall not be assignable by the Company. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. "Company" means the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law or otherwise. SECTION 11. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified other than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: if to the Executive: ---------------------------- Hercules Incorporated Hercules Plaza Wilmington, Delaware 19894-0001 if to the Company: Hercules Incorporated Hercules Plaza Wilmington, Delaware 19894-0001 Attn: Chief Executive Officer 14 15 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such United States federal, state or local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Sections 4(c)(1) through 4(c)(5), shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. 15 16 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from the Board, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. ------------------------------------ [Executive] HERCULES INCORPORATED By ---------------------------------- William H. Joyce Chief Executive Officer Attest: - ------------------------------ Israel J. Floyd Secretary 16 EX-10.26 8 w51743ex10-26.txt SEPARATION AGREE. & GEN. RELEASE OF CLAIMS J.BARRY 1 EXHIBIT 10.26 C O N F I D E N T I A L SEPARATION AGREEMENT AND GENERAL RELEASE OF CLAIMS This Separation Agreement and General Release of Claims ("Agreement") is entered into between Hercules incorporated ("Employer"), and June B. Barry ("Employee"). In consideration of the mutual promises and covenants contained herein and other good and valuable consideration, the receipt of which hereby is acknowledged, the parties agree as follows: 1. SEPARATION DATE. Effective upon the close of business on June 30, 2001 but subject to the 21-day consideration period described in Section 16, Employee shall cease to be employed by Employer (the "Separation Date"). Between now and the Separation Date and for 30 days following said Separation Date on an "as needed" basis (at no additional charge to Employer), Employee shall assist in transitioning her duties and responsibilities, and perform such other duties and responsibilities as she may be assigned that are not inconsistent therewith. 2. SEVERANCE PAYMENT. Within twenty (20) days of receipt of this Agreement executed by Employee, and provided Employee has not revoked this Agreement in accordance with paragraph 17 below, Employer shall pay to Employee severance in the amount of One Million Three Hundred Twenty Thousand dollars ($1,320,000.00), less all applicable withholdings and deductions. Employee expressly waives all rights to benefits under the Merger Severance Plan, Change in Control Agreement, Severance Plan, and under any and all other plans or agreements purporting to provide for severance payments. 3. SPECIAL PENSION BENEFIT. Employee's regular benefit entitlement under and pursuant to the provisions of the BetzDearborn Pension Plan, having satisfied all of the requirements of Section 6.6 (Vested Benefit) of the BetzDearborn Pension Plan, and including one year Service Credit for Plan Year 2001, will be approximately $28,000/year payable at age 55. Employee will be granted an additional special pension benefit payable under the Hercules Employee Pension Restoration Plan of $1,333.33 per month effective July 1, 2006, such amount payable for Employee's lifetime. The additional benefit is payable pursuant to the provisions of the BetzDearborn Pension Plan but is payable under the Hercules Pension Restoration Plan, which is a nonqualified pension plan payable from the assets of Hercules Incorporated. Additionally, Employee will be entitled to the Early Retirement Benefit described in Attachment 2 to Employee's Employment Offer Letter dated October 6, 1998. The value of this account on March 31, 2001 was $833,693.00. Interest will be credited to June 30, 2001. 2 C O N F I D E N T I A L 4. NON-QUALIFIED SAVINGS PLAN ACCOUNT BALANCE. Employee will receive her account balance in the subject plan. The value of this account is $24,900 as of March 31, 2001. Interest will be credited to June 30, 2001. Also reported as of March 31, 2001 as part of this account was $36,900 which was the value of dividends and interest accrued applicable to the Shareholder Value Award granted to Employee November 19, 1999 which by its terms will be forfeited on June 30, 2001. 5. ACCRUED VACATION PAY. Employee has or will take all accrued and earned vacation as of June 30, 2001. Employee acknowledges and agrees that she is not entitled to any additional payment for accrued vacation time. 6. HEALTH & DENTAL BENEFIT CONTINUATION. Employer agrees to continue Employee's participation (including that of her spouse and children) for a period of six months beginning July 1, 2001 in the Health and Dental Plans at the same cost as applicable to employee electing the same coverage. Following the six month period of coverage, Employer shall issue to Employee notice of her right to elect continued health coverage in accordance with the Consolidated Omnibus Budget Reconciliation Act ("COBRA"). If Employee elects continuation coverage, Employee shall be responsible for paying 100% of the premiums and administrative fees. 7. GROUP LIFE INSURANCE COVERAGE. Employee is a participant in the Hercules Group Life Insurance Plan. At resignation, Employee is eligible to convert $150,000 coverage to a private pay plan. Should Employee so convert, Hercules shall reimburse Employee for her premium cost for up to 6 months of coverage following resignation. 8. IMPACT OF SEVERANCE ON OTHER BENEFITS. Except as expressly provided in this Agreement, both Employee's and her dependents' participation in, coverage by and entitlement to all compensation, fringe benefit and employee benefit programs of Employer shall cease upon the Separation Date. 9. COOPERATION FOLLOWING THE SEPARATION DATE. Employee agrees that she will cooperate with any reasonable request of Employer to continue to aid in the transition of her function or to answer questions regarding her functional area following the Separation Date. Employee, prior to June 30, 2001, agrees to list all open projects, accountabilities and unfinished assignments with a description of status. 10. AGREEMENT NOT TO SEEK FUTURE EMPLOYMENT WITH EMPLOYER. Employee agrees that she will not apply for or otherwise seek employment with Employer (as defined below) at any time in the future unless mutually agreed in writing by both parties. 2 3 C O N F I D E N T I A L 11. NO ADMISSION. The benefits provided to Employee in this Agreement are not intended to be, and shall not be construed as, any admission of liability by Employer or of any improper conduct on Employer's part, all of which Employer specifically denies. 12. COMPANY INFORMATION. (a) Employee represents that she has returned or will immediately return to Employer all "Company Information," including, without limitation, customer information, formulary information, product and pricing information, mailing lists, reports, files, memoranda, records and software, credit cards, door and file keys, computer equipment, computer access codes and disks and instructional manuals, and other property which Employee received or prepared or helped prepare in connection with Employee's employment with Employer, and Employee will not retain any copies, duplicates, reproductions or excerpts thereof. The term "Company Information" as used in this Agreement means (i) confidential information of Employer, including without limitation information received from third parties under confidential conditions, and (ii) other information; including technical, business or financial information or trade secrets, the use or disclosure of which might reasonably be construed to be contrary to the interests of Employer or its affiliates. Notwithstanding the foregoing, Employee may, if she desires, keep material and or notes that are of a personal nature which were accumulated or prepared during her employment with Employer. Employee agrees to provide Employer with a list of such retained material with a general reference as to the contents. Such material or notes will be kept confidential (except in response to subpoena) and will remain available for review by Employer, should Employer elect to review them, for as long as they are retained by Employee. (b) The parties agree that in the course of Employee's employment, Employee has acquired Company Information as defined in paragraph 12(a). Employee understands and agrees that such Company Information has been disclosed to Employee in confidence and for the use only on behalf of Employer. Employee acknowledges that she has no ownership right or interest in any Company Information used or developed during the course of her employment. Employee understands and agrees that (i) Employee will keep such Company Information confidential at all times after her employment with Employer, and (ii) Employee will not make use of Company Information on her own behalf, or on behalf of any third party. (c) Employee further acknowledges that she was privy to confidential and privileged information during the course of her employment in her capacity as Executive Vice President, Corporate Resources Group. (d) Employee will be permitted to retain the computer and fax machine provided by Hercules and will be disconnected effective July 1, 2001 from Hercules 3 4 C O N F I D E N T I A L provided internet, intranet and other telephone line connections. In consideration of Hercules transferring such computer and fax equipment to Employee, Employee will cooperate with Hercules to download and transfer to Hercules all files contained therein and thereupon erase such files from the computer. 13. GENERAL RELEASE OF CLAIMS AND COVENANT NOT TO SUE. Employee for herself and her respective heirs, administrators, executors, agents, beneficiaries and assigns, does waive, release and forever discharge Employer (as defined below) of and from any and all Claims (as defined below). Employee agrees not to file a lawsuit to assert any Claim and further agrees that she will not counsel, assist or encourage any other person to assert any rights or demands or causes of action against Employer or to counsel, assist or encourage any other person to seek any damages, penalties, losses, attorneys' fees, costs or expenses against Employer, provided, however, that this sentence shall not be construed to prevent or apply to any testimony that Employee may provide pursuant to subpoena. This release covers all Claims arising from the beginning of time up to and including the date of this Agreement, but does not cover Claims relating to the validity or enforcement of this Agreement, or to Claims for legally mandated benefits and vested benefits under any qualified or nonqualified savings and pension plans or welfare plans in which Employee may have participated or will continue to participate in, or any other rights or claims that may arise after this Agreement is executed. The following provisions further explain this general release and covenant not to sue: (a) DEFINITION OF "CLAIMS". "Claims" includes without limitation all actions or demands of any kind that Employee now has, or may have or claim to have in the future. More specifically, Claims include rights, causes of action, damages, penalties, losses, attorneys' fees, costs, expenses, obligations, agreements, judgments and all other liabilities of any kind or description whatsoever, either in law or in equity, whether known or unknown, suspected or unsuspected. The nature of Claims covered by this release and covenant not to sue includes without limitation all actions or demands in any way based on Employee's employment with Employer, the terms and conditions of such employment or Employee's separation from employment except as to those rights, benefits and obligations set forth in and granted by this Agreement. More specifically, all of the following are among the types of Claims which are waived and barred by this release and covenant not to sue: - Contract Claims (whether express or implied); - Tort Claims, such as for defamation or emotional distress; - Claims under federal, state and municipal laws, regulations, ordinance or court decisions of any kind; 4 5 C O N F I D E N T I A L - Claims of discrimination, harassment or retaliation, whether based on race, color, religion, gender, sex, age, sexual orientation, handicap and/or disability, national origin or any other legally protected class; - Claims under the AGE DISCRIMINATION IN EMPLOYMENT ACT, Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act and similar state statutes and municipal ordinances; - Claims under the Employee Retirement Income Security Act, the Fair Labor Standards Act, state wage payment laws and state wage and hour laws; - Claims for wrongful discharge; and - Claims for reasonable attorneys' fees, including litigation expenses and costs. - Claims made pursuant to the letters ("Letters") and subject matters of the "Letters" listed in Attachment A hereto, except as specifically provided herein. Nothing contained in the foregoing portion of this paragraph 13 shall be construed to release Employer, or any insurance carrier providing insurance coverage to Employer or its directors and officers, from any obligation (if any exists) which Employer or such insurance carrier may otherwise have to defend or indemnify Employee in any action, suit or proceeding brought by a third party against Employee based on or arising from Employee's actions as an officer of Employer prior to the Separation Date. (b) DEFINITION OF "EMPLOYER". "Employer" includes without limitation Hercules Incorporated and its respective past, present and future parents, affiliates, subsidiaries, divisions, predecessors, successors, assigns, employee benefit plans and trusts. It also includes all past, present and future managers, directors, officers, partners, agents, employees, attorneys, representatives, consultants, associates, fiduciaries, plan sponsors, administrators and trustees of each of the foregoing. (c) EMPLOYEE'S ACKNOWLEDGMENT OF SCOPE OF RELEASE. Employee declares and agrees that any Claims she may have incurred or sustained may not be fully known to her and may be more numerous and more serious than she now believes or expects. Further, in making this Agreement, Employee relies wholly upon her own judgment of the future development, progress and result of said Claims, both known and unknown, and acknowledges that she has not been influenced to any extent whatsoever in the making of this Agreement by any representations or statements regarding said Claims made by individuals or entities who are within the definition of Employer above. Employee further acknowledges that she accepts the terms herein in full settlement and satisfaction of all such Claims. 5 6 C O N F I D E N T I A L 14. AGREEMENT CONFIDENTIAL. Employee agrees to keep this Agreement and its terms confidential except as may be required to enforce the Agreement or to obtain legal or tax advice. 15. NON-DISPARAGEMENT. Employer and Employee agree that they will not engage in any activity or make any statement that may disparage or reflect negatively on Employer or Employee, including those entities and individuals related to Employer as defined in the Release section of this Agreement. 16. CONSIDERATION PERIOD. Employee acknowledges that she is being provided with a period of twenty-one (21) days to consider the terms of this offer from the date this Agreement first was presented to her on June 21, 2001. Employee agrees that any changes to this offer, whether material or immaterial, will not restart the running of the 21-day period. - Employee agrees to notify Employer of her acceptance of this Agreement by delivering a signed and witnessed copy to Employer, addressed to the attention of Edward V. Carrington, no later than July 13, 2001. Should Employee not accept this Agreement, she shall continue as an active employee without break in service. Employee understands that she may take the entire 21-day period to consider this Agreement. Employee may return this Agreement in less than the full 21-day period only if her decision to shorten the consideration period is knowing and voluntary and was not induced in any way by Employer. - By signing and returning this Agreement, Employee acknowledges that the consideration period afforded Employee a reasonable period of time to consider fully each and every term of this Agreement, including the release and covenant not to sue, and that Employee has given the terms full and complete consideration. 17. REVOCATION PERIOD. Employee acknowledges that she shall have seven (7) days after signing this Agreement to revoke it if she chooses to do so. If Employee elects to revoke this Agreement, she shall give written notice of revocation to Employer by delivering it to E. V. Carrington in such a manner that it is actually received within the seven-day period. 18. ADVICE TO CONSULT LEGAL REPRESENTATIVE. Employee acknowledges that she has consulted with legal counsel of her choosing, at her own expense, regarding the meaning and binding effect of this Agreement before signing it. 19. KNOWING AND VOLUNTARY AGREEMENT. Employee, intending to be legally bound hereby, certifies and warrants that she has read carefully this Agreement and has executed it voluntarily and with full knowledge and understanding of its significance, meaning and binding effect. Employee further declares that she is competent to understand the content and effect of this Agreement, and that her decision to enter into this Agreement has not been influenced in any way by fraud, duress, coercion, mistake or misleading information. 6 7 C O N F I D E N T I A L 20. HEADINGS. The headings contained in this Agreement are not a part of the Agreement and are included solely for ease of reference. 21. INTEGRATION AND MODIFICATION. Employee declares and represents that no promise or agreement has been made to her other than those expressed herein. Except as stated herein, this Agreement constitutes the entire agreement of the parties and supersedes all prior understandings, whether oral or written, between them. Any modification of this Agreement must be made in writing and signed by all parties. 22. SEVERABILITY. If any provision of this Agreement is or shall be declared invalid or unenforceable by a court of competent jurisdiction, the remaining provisions shall not be affected thereby and shall remain in full force and effect. 23. GOVERNING LAW. Except to the extent any such laws are preempted by Federal law, the parties agree that the terms of this Agreement shall be governed by the laws of Delaware without giving effect to the choice of laws principles of any state, and that either party may pursue its/her respective rights hereunder in any court of competent jurisdiction. IN WITNESS WHEREOF, and with the intention of being legally bound, the parties have executed this Agreement on the dates noted below. AGREED TO AND ACCEPTED /s/ June B. Barry --------------------------------- June B. Barry Date: June 22, 2001 HERCULES INCORPORATED By: /s/ Edward V. Carrington ------------------------------ Title: Office of Chairman --------------------------- Date: June 22, 2001 ---------------------------- 7 8 C O N F I D E N T I A L ATTACHMENT A "LETTERS"
DATE AUTHOR SUBJECT MATTER February 15, 2000 V.J. Corbo Executive Benefits February 18, 2000 R.L. Fluir Stock Option Award Certificate April 13, 2000 V.J. Corbo Executive Benefits June 5, 2000 V.J. Corbo Executive Benefits June 30, 2000 V.J. Corbo Executive Benefits
8 EX-10.27 9 w51743ex10-27.txt SEPARATION AGREE.& GEN. REL. OF CLAIMS G.MACKENZIE 1 EXHIBIT 10.27 CONFIDENTIAL SEPARATION AGREEMENT AND GENERAL RELEASE OF CLAIMS This Separation Agreement and General Release of Claims ("Agreement") is entered into between Hercules Incorporated ("Employer"), and George MacKenzie ("Employee"). In consideration of the mutual promises and covenants contained herein and other good and valuable consideration, the receipt of which hereby is acknowledged, the parties agree as follows: 1. SEPARATION DATE. Effective upon the close of business on June 30, 2001, Employee shall cease to be employed by Employer (the "Separation Date") and shall become a Pensioner (as that term is defined in the Hercules Retirement Pension Plan) effective July 1, 2001. Between now and the Separation Date and for 30 days following said Separation Date on an as needed" basis (at no additional charge to Employer), Employee shall assist in transitioning his duties and responsibilities, and perform such other duties and responsibilities as he may be assigned that are not inconsistent therewith. 2. SEVERANCE PAYMENT. Within twenty (20) days of receipt of this Agreement, executed by Employee, and provided Employee has not revoked this Agreement in accordance with paragraph 16 below, Employer shall pay to Employee severance in the amount of One Million Six Hundred Fifty Thousand dollars ($1,650,000.00), less all applicable withholdings and deductions. Employee expressly waives all rights to benefits under the Merger Severance Plan, Change in Control Agreement, Severance Plan, and under any and all other plans or agreements purporting to provide for severance payments. 3. SPECIAL PENSION BENEFITS. In addition to Employee's regular benefit entitlement under the Pension Plan of Hercules Incorporated, Employee will be granted a special pension benefit payable under the Hercules Employee Pension Restoration Plan of $13,172.59 per month effective July 1, 2001, such amount payable until age 55 after which the amount will be $11,312.43, subject to optional forms of payment elections pursuant to the Pension Plan of Hercules Incorporated. This benefit is derived by adding 5-1/2 years to Employee's current age and three years to Employee's current credited service, then using these additions to calculate Employee's pension entitlement pursuant to the Pension Plan of Hercules Incorporated and subtracting the benefit calculated not using these additions. The total lifetime benefit from all Plans will be $14,376.95 per month payable as a single life annuity. Additionally, Employee shall be entitled to a special pension benefit of $16,677 per year payable in monthly installments for a period commencing July 1, 2001 and ending June 30, 2011. This benefit is not subject to the 5l% lump sum payment option but is subject to the normal joint and survivor option election provisions of the Pension Plan of Hercules Incorporated. 1 2 CONFIDENTIAL All of the additional benefits payable pursuant to the terms of this Agreement are payable under the Hercules Pension Restoration Plan which is a nonqualified pension plan payable from the assets of Hercules Incorporated. 4. ACCRUED VACATION PAY. Employer shall pay to Employee his earned but not taken plus accrued vacation calculated as of June 30, 2001 in the amount of 54 days, less 5 days taken in 2001, such amount equal to Ninety-Four Thousand Five Hundred Forty dollars and Fifty-Eight cents ($94,540.58), less applicable deductions and withholdings. Employee accepts this payment in full satisfaction for vacation time and hereby acknowledges and agrees that he is not entitled to any additional payment for accrued vacation time. 5. Employee meets the age and severance requirement to be a Pensioner as that term is defined in the Pension Plan of Hercules Incorporated. As such, Employee will be eligible to continue participation in the Health Care Plans applicable to Pensioners and the Hercules Executive Survivor Benefit Plan. 6. DENTAL BENEFIT CONTINUATION. Upon an appropriate triggering event, Employer shall issue to Employee notice of his right to elect continued dental coverage in accordance with the Consolidated Omnibus Budget Reconciliation Act ("COBRA"). If Employee elects continuation coverage, Employee shall be responsible for paying 100% of the premiums and administrative fees. 7. IMPACT OF SEVERANCE ON OTHER BENEFITS. Except as expressly provided in this Agreement, or pursuant to the terms of benefit plans applicable to Pensioners, both Employee's and his dependents' participation in, coverage by and entitlement to all compensation, fringe benefit and employee benefit programs of Employer shall cease upon the Separation Date. Employer and Employee specifically agree that Employee is, and will remain, eligible for Retiree Medical Coverage as long as it is offered to other pensioners from the same employment status as Employee and remain eligible to participate in the Hercules Executive Survivor Benefit Plan. Pursuant to Hercules benefit plan policy applicable to pensioners, Employee is eligible to enroll Employee and his eligible dependents in any of the available Health Care Plans applicable to Pensioners. Under this Policy and as long as it is available to Pensioners, Employee may suspend participation for a period of time and then re-enroll at a later date. Hercules reserves the right to amend, suspend or terminate this Plan at any time. Employee, as a participant in the Hercules Executive Survivor Benefit Plan, will maintain coverage applicable to pensioners in the amount of two times final annual salary ($1MM). This is a non-insured benefit and not subject to tax gross-up. 2 3 CONFIDENTIAL 8. COOPERATION FOLLOWING THE SEPARATION DATE. Employee agrees that he will cooperate with any reasonable request of Employer to continue to aid in the transition of his function or to answer questions regarding his functional area following the Separation Date. Employee, prior to June 30, 2001, agrees to list all open projects, accountabilities and unfinished assignments with a description of status. 9. AGREEMENT TO RESIGN BOARD APPOINTMENT. Employee agrees to resign as of the next meeting from all Board assignments applicable to the Company, affiliated Companies or subsidiaries of Hercules. 10. NO ADMISSION. The benefits provided to Employee in this Agreement are not intended to be, and shall not be construed as, any admission of liability by Employer or of any improper conduct on Employer's part, all of which Employer specifically denies. 11. COMPANY INFORMATION. (a) Employee represents that he has returned or will immediately return to Employer all "Company Information," including, without limitation, customer information, formulary information, product and pricing information, mailing lists, reports, files, memoranda, records and software, credit cards, door and file keys, computer access codes and disks and instructional manuals, and other property which Employee received or prepared or helped prepare in connection with Employee's employment with Employer, and Employee will not retain any copies, duplicates, reproductions or excerpts thereof. The term "Company Information" as used in this Agreement means (i) confidential information of Employer, including without limitation information received from third parties under confidential conditions, and (ii) other information; including technical, business or financial information or trade secrets, the use or disclosure of which might reasonably be construed to be contrary to the interests of Employer or its affiliates. (b) The parties agree that in the course of Employee's employment, Employee has acquired Company Information as defined in paragraph 11(a). Employee understands and agrees that such Company Information has been disclosed to Employee in confidence and for the use only on behalf of Employer. Employee acknowledges that he has no ownership right or interest in any Company Information used or developed during the course of his employment. Employee understands and agrees that (i) Employee will keep such Company Information confidential at all times after his employment with Employer, and (ii) Employee will not make use of Company Information on his own behalf, or on behalf of any third party. (c) Employee further acknowledges that he was privy to confidential and privileged information during the course of his employment in his capacity as Chief Financial Officer and Vice Chairman of the Board of Directors for the Employer. 3 4 CONFIDENTIAL (d) Employee will be permitted to retain the computer and fax machine provided by Hercules and will be disconnected effective July 1, 2001 from Hercules provided internet, intranet and other telephone line connections. In consideration of Hercules transferring such computer and fax equipment to Employee, Employee will cooperate with Hercules to download and transfer to Hercules all files contained therein and erase such files thereupon from the computer. 12. GENERAL RELEASE OF CLAIMS AND COVENANT NOT TO SUE. Employee for himself and his respective heirs, administrators, executors, agents, beneficiaries and assigns, does waive, release and forever discharge Employer (as defined below) of and from any and all Claims (as defined below). Employee agrees not to file a lawsuit to assert any Claim and further agrees that he will not counsel, assist or encourage any other person to assert any rights or demands or causes of action against Employer or to counsel, assist or encourage any other person to seek any damages, penalties, losses, attorneys' fees, costs or expenses against Employer. This release covers all Claims arising from the beginning of time up to and including the date of this Agreement, but does not cover Claims relating to the validity or enforcement of this Agreement, or to Claims for legally mandated benefits and vested benefits under any qualified or non-qualified savings and pension plans or welfare plans in which Employee may have participated or will continue to participate in, or any other rights or claims that may arise after this Agreement is executed. The following provisions further explain this general release and covenant not to sue: (a) DEFINITION OF "CLAIMS". "Claims" includes without limitation all actions or demands of any kind that Employee now has, or may have or claim to have in the future. More specifically, Claims include rights, causes of action, damages, penalties, losses, attorneys' fees, costs, expenses, obligations, agreements, judgments and all other liabilities of any kind or description whatsoever, either in law or in equity, whether known or unknown, suspected or unsuspected. The nature of Claims covered by this release and covenant not to sue includes without limitation all actions or demands in any way based on Employee's employment with Employer, the terms and conditions of such employment or Employee's separation from employment. More specifically, all of the following are among the types of Claims which are waived and barred by this release and covenant not to sue: - Contract Claims (whether express or implied); - Tort Claims, such as for defamation or emotional distress; - Claims under federal, state and municipal laws, regulations, ordinance or court decisions of any kind; 4 5 CONFIDENTIAL - Claims of discrimination, harassment or retaliation, whether based on race, color, religion, gender, sex, age, sexual orientation, handicap and/or disability, national origin or any other legally protected class; - Claims under the AGE DISCRIMINATION IN EMPLOYMENT ACT, Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act and similar state statutes and municipal ordinances; - Claims under the Employee Retirement Income Security Act, the Fair Labor Standards Act, state wage payment laws and state wage and hour laws; - Claims for wrongful discharge; and - Claims for reasonable attorneys' fees, including litigation expenses and costs. Nothing contained in the foregoing portion of this paragraph 12 shall be construed to release Employer, or any insurance carrier providing insurance coverage to Employer or its directors and officers, from any obligation (if any exists) which Employer or such insurance carrier may otherwise have to defend or indemnify Employee in any action, suit or proceeding brought by a third party against Employee based on or arising from Employee's actions as an officer or director of Employer prior to the Separation Date. (b) DEFINITION OF "EMPLOYER". "Employer" includes without limitation Hercules Incorporated and its respective past, present and future parents, affiliates, subsidiaries, divisions, predecessors, successors, assigns, employee benefit plans and trusts. It also includes all past, present and future managers, directors, officers, partners, agents, employees, attorneys, representatives, consultants, associates, fiduciaries, plan sponsors, administrators and trustees of each of the foregoing. (c) EMPLOYEE'S ACKNOWLEDGMENT OF SCOPE OF RELEASE. Employee declares and agrees that any Claims he may have incurred or sustained may not be fully known to him and may be more numerous and more serious than he now believes or expects. Further, in making this Agreement, Employee relies wholly upon his own judgment of the future development, progress and result of said Claims, both known and unknown, and acknowledges that he has not been influenced to any extent whatsoever in the making of this Agreement by any representations or statements regarding said Claims made by individuals or entities who are within the definition of Employer above. Employee further acknowledges that he accepts the terms herein in full settlement and satisfaction of all such Claims. 13. AGREEMENT CONFIDENTIAL. Employee agrees to keep this Agreement and its terms confidential except as may be required to enforce the Agreement or to obtain legal or tax advice. 5 6 CONFIDENTIAL 14. NON-DISPARAGEMENT. Employer and Employee agree that they will not engage in any activity or make any statement that may disparage or reflect negatively on Employer or Employee, including those entities and individuals related to Employer as defined in the Release section of this Agreement. 15. CONSIDERATION PERIOD. Employee acknowledges that he has been provided with a period of twenty-one (21) days to consider the terms of this offer from the date this Agreement first was presented to him on June 15, 2001. Employee agrees that any changes to this offer, whether material or immaterial, will not restart the running of the 21-day period. - Employee agrees to notify Employer of his acceptance of this Agreement by delivering a signed and witnessed copy to Employer, addressed to the attention of Edward V. Carrington, no later than July 6, 2001. Employee understands that he may take the entire 21-day period to consider this Agreement. Employee may return this Agreement in less than the full 21-day period only if his decision to shorten the consideration period is knowing and voluntary and was not induced in any way by Employer. - By signing and returning this Agreement, Employee acknowledges that the consideration period afforded Employee a reasonable period of time to consider fully each and every term of this Agreement, including the release and covenant not to sue, and that Employee has given the terms full and complete consideration. 16. REVOCATION PERIOD. Employee acknowledges that he shall have seven (7) days after signing this Agreement to revoke it if he chooses to do so. If Employee elects to revoke this Agreement, he shall give written notice of revocation to Employer by delivering it to E. V. Carrington in such a manner that it is actually received within the seven-day period. 17. ADVICE TO CONSULT LEGAL REPRESENTATIVE. Employee acknowledges that he has been advised to consult with legal counsel of his choosing, at his own expense, regarding the meaning and binding effect of this Agreement before signing it. 18. KNOWING AND VOLUNTARY AGREEMENT. Employee, intending to be legally bound hereby, certifies and warrants that he has read carefully this Agreement and has executed it voluntarily and with full knowledge and understanding of its significance, meaning and binding effect. Employee further declares that he is competent to understand the content and effect of this Agreement, and that his decision to enter into this Agreement has not been influenced in any way by fraud, duress, coercion, mistake or misleading information. 19. HEADINGS. The headings contained in this Agreement are not a part of the Agreement and are included solely for ease of reference. 6 7 CONFIDENTIAL 20. INTEGRATION AND MODIFICATION. Employee declares and represents that no promise or agreement has been made to him other than those expressed herein. Except as stated herein, this Agreement constitutes the entire agreement of the parties and supersedes all prior understandings, whether oral or written, between them. Any modification of this Agreement must be made in writing and signed by all parties. 21. SEVERABILITY. If any provision of this Agreement is or shall be declared invalid or unenforceable by a court of competent jurisdiction, the remaining provisions shall not be affected thereby and shall remain in full force and effect. 22. GOVERNING LAW. Except to the extent any such laws are preempted by Federal law, the parties agree that the terms of this Agreement shall be governed by the laws of Delaware without giving effect to the choice of laws principles of any state, and that either party may pursue its/his respective rights hereunder in any court of competent jurisdiction. 23. Employee has received letter dated June 12, 2001 from R. L. Fluri regarding "Long-Term Incentive Retirement Elections including schedule of "Stock Options - Expiration Dates". These options will continue to be administered pursuant to the terms of the Long-Term Incentive Plan dated April 29, 1999 (copy attached). IN WITNESS WHEREOF, and with the intention of being legally bound, the parties have executed this Agreement on the dates noted below. AGREED TO AND ACCEPTED /s/ George MacKenzie ------------------------------------ George MacKenzie Date: June 21, 2001 ------------------------------- HERCULES INCORPORATED By: /s/ Edward V. Carrington --------------------------------- Title: Office of the Chairman ------------------------------ Date: June 21, 2001 ------------------------------- 7 EX-10.28 10 w51743ex10-28.txt CHANGE-OF-CONTROL EMPLOYMENT AGREE. F.G. AANONSEN 1 Exhibit 10.28 CHANGE-OF-CONTROL EMPLOYMENT AGREEMENT AGREEMENT, dated as of the 2nd day of July, 2001 (this "Agreement"), by and between Hercules Incorporated, a Delaware corporation (the "Company"), and Fred G. Aanonsen (the "Executive"). WHEREAS, the Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders/stockholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein). The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the current Company in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control that ensure that the compensation and benefits expectations of the Executive will be satisfied and that are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: SECTION 1. CERTAIN DEFINITIONS. (a) "Effective Date" means the first date during the Change of Control Period (as defined herein) on which a Change of Control occurs. Notwithstanding anything in this Agreement to the contrary, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (1) was at the request of a third party that has taken steps reasonably calculated to effect a Change of Control or (2) otherwise arose in connection with or anticipation of a Change of Control, then "Effective Date" means the date immediately prior to the date of such termination of employment. (b) "Change of Control Period" means the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that, commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof, the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless, at least 60 days prior to the Renewal Date, the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. (c) "Affiliated Company" means any company controlled by, controlling or under common control with the Company. (d) "Change of Control" means: 2 (1) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this Section 1(d), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Affiliated Company or (iv) any acquisition by any corporation pursuant to a transaction that complies with Sections 1(d)(3)(A), 1(d)(3)(B) and 1(d)(3)(C). (2) The individuals listed below (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to May 17, 2001 whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board. Consistent with the offer of employment of May 17, 2001 and acceptance thereof by the Executive on May 17, 2001, the following individuals constitute the Incumbent Board: John G. Drosdick, Richard Fairbanks, Thomas L. Gossage, Alan R. Hirsig, Edith E. Holiday, William H. Joyce, Gaynor N. Kelley, George MacKenzie, Ralph L. MacDonald, H. Eugene McBrayer, Peter McCausland, John A. H. Shober and Paula A. Sneed. (3) Approval by the shareholders of the Company of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, 60% or more of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of 2 3 the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or (4) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. SECTION 2. EMPLOYMENT PERIOD. The Company hereby agrees to continue the Executive in its employ, subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of the Effective Date (the "Employment Period"). The Employment Period shall terminate upon the Executive's termination of employment for any reason. SECTION 3. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (1) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the office where the Executive was employed immediately preceding the Effective Date or at any other location less than 30 miles from such office. (2) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period, it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that, to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (1) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary (the "Annual Base Salary") at an annual rate at least equal to 12 times the highest monthly base salary paid or payable, including any base salary that has been 3 4 earned but deferred, to the Executive by the Company and the Affiliated Companies in respect of the 12-month period immediately preceding the month in which the Effective Date occurs. The Annual Base Salary shall be paid at such intervals as the Company pays executive salaries generally. During the Employment Period, the Annual Base Salary shall be reviewed at least annually, beginning no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date. Any increase in the Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. The Annual Base Salary shall not be reduced after any such increase and the term "Annual Base Salary" shall refer to the Annual Base Salary as so increased. (2) ANNUAL BONUS. In addition to the Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the Executive's Recent Target Bonus, as DEFINED in the next sentence. The "Recent Target Bonus" means the Annual Base Salary times a percentage equal to the percentage of base salary most recently established, before the Effective Date, for purposes of determining the Executive's target bonus under the Company's Management Incentive Compensation Plan or any predecessor or successor plan (the "MICP"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. Any bonus paid to the Executive under the MICP as a result of the Change of Control (a "Change of Control Bonus") shall be taken into account in determining whether the requirements of this Section 3(b)(2) have been met with respect to the fiscal year in which the Change of Control occurs. (3) INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Employment Period, the Executive shall be entitled to participate in all cash incentive, equity incentive, savings and retirement plans, practices, policies, and programs applicable generally to other peer executives of the Company and the Affiliated Companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and the Affiliated Companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the Affiliated Companies. The Executive shall also continue to be entitled to any supplemental pension benefits to which he may be entitled pursuant to any individual agreement with the company or any Affiliated Companies (collectively, "Enhanced Pension Benefits"). (4) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and the Affiliated Companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and the Affiliated Companies, but in no event shall such plans, practices, policies and 4 5 programs provide the Executive with benefits that are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the Affiliated Companies. (5) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and the Affiliated Companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. (6) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, if applicable, tax and financial planning services, payment of club dues, and use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and the Affiliated Companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. (7) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and the Affiliated Companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. (8) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and the Affiliated Companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. (9) SPECIAL PAYMENT. If a Change of Control occurs on or before April 30, 2002, and in connection therewith, all or substantially all of the common stock of the Company (the Common Stock) is purchased for cash and all or substantially all then-outstanding employee stock options granted by the Company are cancelled in exchange for cash or no consideration and without being replaced by comparable new stock options, then the Company shall pay the Executive, within five business days after the Change of Control, a cash payment equal to $125,000 less the product of (1) the excess, if any, of the per-share amount of the cash paid for the Common Stock, over $12.00 times (2) 52,000; provided, that if there is no such excess described in clause (1), then such cash payment shall equal $125,000. 5 6 SECTION 4. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically if the Executive dies during the Employment Period. If the Company determines in good faith that the Disability (as defined herein) of the Executive has occurred during the Employment Period (pursuant to the definition of "Disability"), it may give to the Executive written notice in accordance with Section 11(b) of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. "Disability" means the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness that is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. "Cause" means: (1) the willful and continued failure of the Executive to perform substantially the Executive's duties (as contemplated by Section 3(a)(1)(A)) with the Company or any Affiliated Company (other than any such failure resulting from incapacity due to physical or mental illness or following the Executive's delivery of a Notice of Termination for Good Reason), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company that specifically identifies the manner in which the Board or the Chief Executive Officer of the Company believes that the Executive has not substantially performed the Executive's duties, or (2) the willful engaging by the Executive in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company. For purposes of this Section 4(b), no act, or failure to act, on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer of the Company or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board (excluding the Executive, if the Executive is a member of the Board) at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel for the Executive, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in Section 4(b)(1) or 4(b)(2), and specifying the particulars thereof in detail. 6 7 (c) GOOD REASON. The Executive's employment may be terminated by the Executive for Good Reason or by the Executive voluntarily without Good Reason. "Good Reason" means: (1) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a), or any other diminution in such position, authority, duties or responsibilities (whether or not occurring solely as a result of the Company's ceasing to be a publicly traded entity), excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive; (2) any failure by the Company to comply with any of the provisions of Section 3(b), other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive; (3) the Company's requiring the Executive (i) to be based at any office or location other than as provided in Section 3(a)(1)(B), (ii) to be based at a location other than the principal executive offices of the Company if the Executive was employed at such location immediately preceding the Effective Date, or (iii) to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (4) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (5) any failure by the Company to comply with and satisfy Section 10(c). For purposes of this Section 4(c), any good faith determination of Good Reason made by the Executive shall be conclusive. The Executive's mental or physical incapacity following the occurrence of an event described above in clauses (1) through (5) shall not affect the Executive's ability to terminate employment for Good Reason. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, other than for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(b). "Notice of Termination" means a written notice that (1) indicates the specific termination provision in this Agreement relied upon, (2) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (3) if the Date of Termination (as defined herein) is other than the date of receipt of such notice, specifies the Date of Termination (which Date of Termination shall be not more than 30 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from 7 8 asserting such fact or circumstance in enforcing the Executive's or the Company's respective rights hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (1) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified in the Notice of Termination, (which date shall not be more than 30 days after the giving of such notice), as the case may be, (2) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, and (3) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. SECTION 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON; OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or Disability or the Executive terminates employment for Good Reason: (1) the Company shall pay to the Executive, in a lump sum in cash within 30 days after the Date of Termination, the aggregate of the following amounts: (A) the sum of: (i) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid; (ii) the product of (x) the higher of (I) the Recent Target Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof that has been earned but deferred (and annualized for any fiscal year consisting of less than 12 full months or during which the Executive was employed for less than 12 full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount, the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination and the denominator of which is 365; provided, that if the Date of Termination occurs in the same fiscal year as the Change of Control, then such product shall be reduced (but not below zero) by the amount of any Change of Control Bonus payable to the Executive; and (iii) any accrued vacation pay, in each case, to the extent not theretofore paid (the sum of the amounts described in subclauses (i), (ii) and (iii), the "Accrued Obligations"); and (B) the amount equal to the product of (i) three and (ii) the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus. (2) for three years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue welfare and fringe benefits to the Executive and/or the Executive's family at least equal to those that would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(b)(4) and (6) if the Executive's employment had not been terminated or, if more favorable to the Executive, as in 8 9 effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies and their families, provided, however, that, if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility; and for purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the Date of Termination and to have retired on the last day of such period; (3) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in the Executive's sole discretion provided, that the cost of such outplacement shall not exceed $50,000; (4) all stock options and restricted stock held by the Executive immediately before the Date of Termination shall vest in full, and such stock options shall remain exercisable until the first to occur of the first anniversary of the Date of Termination and the expiration of their original terms (unless the option by its terms provides for a longer period of continued exercisability); and (5) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or that the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and the Affiliated Companies (such other amounts and benefits, the "Other Benefits"). (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period but after the Executive has given a Notice of Termination for Good Reason or the Company has given a Notice of Termination other than for Cause, such termination shall be treated as a termination by the Executive for Good Reason and the Executive's estate and/or beneficiaries shall be entitled to the benefits provided for in Section 5(a) above, other than Section 5(a)(3). If the Executive's employment is terminated by reason of the Executive's death during the Employment Period other than as described in the preceding sentence, the Company shall provide the Executive's estate or beneficiaries with the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. The Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, the term "Other Benefits" as utilized in this Section 5(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and the Affiliated Companies to the estates and beneficiaries of peer executives of the Company and the Affiliated Companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's 9 10 beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and the Affiliated Companies and their beneficiaries. (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period but after the Executive has given a Notice of Termination for Good Reason or the Company has given a Notice of Termination other than for Cause, such termination shall be treated as a termination by the Executive for Good Reason and the Executive shall be entitled to the benefits provided for in Section 5(a) above, other than Section 5(a)(3). If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period other than as described in the preceding sentence, the Company shall provide the Executive with the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. The Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, the term "Other Benefits" as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and the Affiliated Companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and the Affiliated Companies and their families. (d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment is terminated for Cause during the Employment Period, the Company shall provide to the Executive (1) the Executive's Annual Base Salary through the Date of Termination, (2) the amount of any compensation previously deferred by the Executive, and (3) the Other Benefits, in each case, to the extent theretofore unpaid, and shall have no other severance obligations under this Agreement. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, the Company shall provide to the Executive the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. In such case, all the Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. SECTION 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or the Affiliated Companies and for which the Executive may qualify, nor, subject to Section 11(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any other contract or agreement with the Company or the Affiliated Companies. Amounts that are vested benefits or that the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or the Affiliated Companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement, except as explicitly modified by this Agreement. Notwithstanding the foregoing, if the Executive receives payments and benefits pursuant to Section 5(a) of this Agreement, the Executive shall not be entitled to any severance pay or benefits under any severance plan, 10 11 program or policy of the Company and the Affiliated Companies, including without limitation the Executive Severance Plan, unless otherwise specifically provided therein in a specific reference to this Agreement. SECTION 7. FULL SETTLEMENT; CONTESTS. (a) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense, or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. (b) The Company agrees to pay as incurred (within 10 days following the Company's receipt of an invoice from the Executive), to the full extent permitted by law, all legal fees and expenses that the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus, in each case, interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). Notwithstanding the foregoing, the Company shall have no obligation to pay the Executive's legal fees and expenses in connection with any action initiated by the Executive as to which the trier of fact finds that the Executive's claim was frivolous or brought in bad faith. SECTION 8. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Executive, whether paid or payable pursuant to this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax (the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (the "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by PriceWaterhouseCoopers (the "Accounting Firm"). The Accounting Firm shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been 11 12 a Payment or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within 5 days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (the "Underpayment"), consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Section 8(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than 10 business days after the Executive is informed in writing of such claim. The Executive shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that the Company desires to contest such claim, the Executive shall: (1) give the Company any information reasonably requested by the Company relating to such claim, (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (3) cooperate with the Company in good faith in order effectively to contest such claim, and (4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the 12 13 Company shall control all proceedings taken in connection with such contest, and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that, if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties) imposed with respect to such advance or with respect to any imputed income in connection with such advance; and provided, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 8(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (e) Notwithstanding any other provision of this Section 8, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for the benefit of the Executive, all or any portion of the Gross-Up Payment, and the Executive hereby consents to such withholding. SECTION 9. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or the Affiliated Companies, and their respective businesses, which information, knowledge or data shall have been obtained by the Executive during the Executive's employment by the Company or the Affiliated Companies and which information, knowledge or data shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those persons designated by the Company. In no event shall an asserted violation of the provisions of 13 14 this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. SECTION 10. SUCCESSORS. (a) This Agreement is personal to the Executive, and, without the prior written consent of the Company, shall not be assignable by the Executive other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. Except as provided in Section 10(c), without the prior written consent of the Executive this Agreement shall not be assignable by the Company. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. "Company" means the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law or otherwise. SECTION 11. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified other than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: if to the Executive: Fred G. Aanonsen Hercules Incorporated Hercules Plaza Wilmington, Delaware 19894-0001 if to the Company: Hercules Incorporated Hercules Plaza Wilmington, Delaware 19894-0001 Attn: Chief Executive Officer 14 15 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such United States federal, state or local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Sections 4(c)(1) through 4(c)(5), shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) 15 16 THIS PAGE INTENTIONALLY LEFT BLANK 16 17 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from the Board, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/Fred G. Aanonsen _______________________________________________ Fred G. Aanonsen HERCULES INCORPORATED By /s/ William H. Joyce _____________________________________________ William H. Joyce Chairman and Chief Executive Officer Attest: Israel J. Floyd __________________________________ Israel J. Floyd 17 EX-10.29 11 w51743ex10-29.txt FOURTH AMEND.TO AMENDED & RESTATED CREDIT AGREE. 1 Exhibit 10.29 FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment"), dated as of July 17, 2001, is entered into by and among HERCULES INCORPORATED, a Delaware corporation (the "Company"), BETZDEARBORN CANADA, INC., an Ontario corporation (the "Canadian Borrower"), certain subsidiaries of the Company identified on the signature pages hereto (the "Subsidiary Guarantors"), the several banks and other financial institutions identified on the signature pages hereto, BANK OF AMERICA, N.A., as administrative agent (the "Administrative Agent") and BANK OF AMERICA CANADA, as Canadian administrative agent (the "Canadian Administrative Agent"). Except as otherwise defined in this Amendment, terms defined in the Credit Agreement referred to below (as amended by this Amendment) are used herein as defined therein. RECITALS A. The Company, the Canadian Borrower, the Subsidiary Guarantors party thereto, the Lenders party thereto, the Administrative Agent and the Canadian Administrative Agent entered into that certain Amended and Restated Credit Agreement dated as of April 19, 1999 (as amended by that First Amendment to Amended and Restated Credit Agreement dated as of March 31, 2000, as amended by that Second Amendment to Amended and Restated Credit Agreement dated as of July 26, 2000 and as further amended by that Third Amendment to Amended and Restated Credit Agreement dated as of November 14, 2000, and as may be further amended, restated, modified or supplemented from time to time, the "Credit Agreement"). B. The Company has requested certain modifications to the Credit Agreement. C. Such modifications require the consent of the Required Lenders. D. The Required Lenders have consented to the requested modifications on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 2 I. AMENDMENTS TO CREDIT AGREEMENT Subject to the satisfaction of the conditions precedent set forth in Section 5 in Article II hereof, from and after the Fourth Amendment Effective Date (as defined below), the Credit Agreement in the following respects: 1. Section 5.2(d)(i) of the Credit Agreement is hereby deleted in its entirety and the following substituted therefor: (i) Leverage Ratio. It will not permit, as of the last day of any fiscal quarter, the Leverage Ratio to exceed the ratio set forth below for the applicable period:
Period Maximum Leverage Ratio Closing Date through March 31, 1999 5.0 to 1.0 April 1, 1999 through September 30, 1999 4.5 to 1.0 October 1, 1999 through March 31, 2000 3.5 to 1.0 April 1, 2000 through June 30, 2000 3.75 to 1.0 July 1, 2000 through September 30, 2000 3.5 to 1.0 October 1, 2000 through June 30, 2001 4.75 to 1.0 July 1, 2001 through September 30, 2001 5.25 to 1.0 October 1, 2001 through December 31, 2001 5.00 to 1.0 January 1, 2002 through March 31, 2002 4.75 to 1.0 April 1, 2002 through June 30, 2002 4.50 to 1.0 July 1, 2002 and thereafter 4.25 to 1.0
2. Section 5.2(d)(iii) of the Credit Agreement is hereby deleted in its entirety and the following substituted therefor: (iii) Interest Coverage Ratio. It will not permit, as of the last day of any fiscal quarter, the Interest Coverage Ratio to be less than the ratio set forth below for the applicable period:
Minimum Interest Period Coverage Ratio Closing Date through September 30, 1999 2.5 to 1.0 October 1, 1999 through September 30, 2000 3.0 to 1.0 October 1, 2000 through June 30, 2001 1.75 to 1.0 July 1, 2001 through September 30, 2001 1.65 to 1.0 October 1, 2001 through December 31, 2001 1.75 to 1.0 January 1, 2002 and thereafter 2.00 to 1.0
3. The definition of "Asset Disposition" in Section 7 of the Credit Agreement is hereby deleted in its entirety and the following substituted therefor: 2 3 "Asset Disposition": the disposition of any or all of the assets (including without limitation the Capital Stock of a Subsidiary) of the Company or any of its Subsidiaries whether by sale, lease, transfer or otherwise (including a disposition pursuant to any casualty or condemnation event, but excluding a disposition pursuant to a Permitted Receivables Financing). The term "Asset Disposition" shall not include (i) the sale of inventory in the ordinary course of business, (ii) the sale or disposition of machinery and equipment no longer used or useful in the conduct of such Person's business, (iii) any Equity Issuance by the Company, (iv) intercompany transfers from a Credit Party or a wholly-owned Subsidiary of a Credit Party to a Credit Party, (v) intercompany transfers from any wholly-owned Subsidiary of a Credit Party (which Subsidiary is not itself a Credit Party or a First Tier Foreign Subsidiary) to any wholly-owned Subsidiary of a Credit Party; or (vi) intercompany transfers from a First Tier Foreign Subsidiary to another First Tier Foreign Subsidiary as long as the Company can demonstrate pursuant to documentation reasonably satisfactory to the Collateral Agent that the Collateral Agent's security interest in the Pledged Stock of such First Tier Foreign Subsidiary receiving the assets is as perfected as the Collateral Agent's security interest in the prior First Tier Foreign Subsidiary. 4. The definition of "Consolidated Net Worth" in Section 7 of the Credit Agreement is hereby deleted in its entirety and the following substituted therefor: "Consolidated Net Worth": as of the end of the most recently ended calendar month, the sum of (i) all items that would be included under stockholders' equity on a consolidated balance sheet of the Company and its Consolidated Subsidiaries plus (ii) insurance reserves. Consolidated Net Worth shall be determined in accordance with generally accepted accounting principles substantially the same as those used by the Company in preparing the financial statements referred to in subsection 1.2 and on a consolidated basis substantially the same as that used by the Company in preparing such financial statements; provided, however, that neither (A) foreign currency translation adjustments under Financial Accounting Standards Board Statement No. 52, "Foreign Currency Translation" (B) items reported in comprehensive income and accumulated other comprehensive income under Financial Accounting Standards Board Statement No. 130 (including but not limited to gains or losses for derivatives designated as a hedge of exposure to variable cash flows of forecasted transactions and derivatives designated as a hedge of foreign currency exposure of a net investment in a foreign operation) nor (C) items and charges related to the impairment of goodwill in connection with the Acquisition to the extent, in the amount and only for so long as required by generally accepted accounting principles, shall in any case be taken into account in calculating Consolidated Net Worth. 5. The definition of Consolidated EBITDA in Section 7 of the Credit Agreement is hereby deleted in its entirety and the following substituted therefor: 3 4 "Consolidated EBITDA": for any fiscal period, (i) Consolidated Net Income for such period, plus (ii) Consolidated Interest Expense for such period, plus (iii) to the extent deducted in computing such Consolidated Net Income, the sum of (a) taxes, (b) depreciation, (c) amortization, (d) any non-cash charges, (e) for the fiscal quarter ended June 30, 2001 through the fiscal quarter ended June 30, 2002 only, any non-recurring cash charges associated with the restructuring of the Company and its Subsidiaries initiated on or after April 1, 2001 in an aggregate amount not to exceed $50,000,000 and (f) any extraordinary, unusual or non-recurring cash losses or cash charges incurred in connection with (x) the Acquisition in an amount not to exceed $170 million after taxes in the aggregate for all such add-backs pursuant to this subclause (x) and (y) the settlement prior to the Closing Date of certain litigation in an amount not to exceed $63 million after taxes in the aggregate for all such add-backs pursuant to this subclause (y), minus (iv) any extraordinary gains and noncash gains. II. MISCELLANEOUS 1. Representations and Warranties. Each of the Credit Parties represents and warrants to the Lenders, the Administrative Agent and the Canadian Administrative Agent as follows: (i) It has taken all necessary action to authorize the execution, delivery and performance of this Amendment. (ii) This Amendment has been duly executed and delivered by such Credit Party and constitutes such Credit Party's legal, valid and binding obligation, enforceable in accordance with its terms, except as such enforceability may be limited (x) by general principles of equity and conflicts of laws or (y) by bankruptcy, reorganization, insolvency, moratorium or other laws of general application relating to or affecting the enforcement of creditors' rights. (iii) No consent, approval, authorization or order of, or filing, registration or qualification with, any court or governmental authority or third party is required in connection with the execution, delivery or performance by such Credit Party of this Amendment. (iv) The execution and delivery of this Amendment does not diminish or reduce its obligations under the Credit Documents (including, without limitation, in the case of each Guarantor, such Guarantor's guaranty pursuant to Section 3A of the Credit Agreement) in any manner, except as specifically set forth herein. (v) Such Credit Party has no claims, counterclaims, offsets, or defenses to the Credit Documents and the performance of its obligations thereunder, or if such Credit Party has any such claims, counterclaims, offsets, or defenses to the Credit Documents or any transaction related to the Credit Documents, the same are hereby waived, 4 5 relinquished and released in consideration of the Required Lenders' execution and delivery of this Amendment. (vi) The representations and warranties of the Credit Parties set forth in Section 1 of the Credit Agreement are true and correct as of the date hereof (except those that expressly relate to an earlier date) and all of the provisions of the Credit Documents, except as amended hereby, are in full force and effect. (vii) Subsequent to the execution and delivery of this Amendment and after giving effect hereto, no unwaived event has occurred and is continuing which constitutes a Default or an Event of Default. 2. Liens. Each Credit Party affirms the liens and security interests created and granted by it in the Credit Documents (including, but not limited to, the Pledge Agreement, the Security Agreement and the Mortgages) and agrees that this Amendment shall in no manner adversely affect or impair such liens and security interests. 3. Effect of Amendment. Except as expressly modified and amended in this Amendment, all of the terms, provisions and conditions of the Credit Documents shall remain unchanged and in full force and effect. The Credit Documents and any and all other documents heretofore, now or hereafter executed and delivered pursuant to the terms of the Credit Agreement are hereby amended so that any reference to the Credit Agreement shall mean a reference to the Credit Agreement as amended hereby. 4. Expenses. The Company agrees to pay all reasonable costs and expenses incurred in connection with the preparation, execution and delivery of this Amendment, including the reasonable fees and expenses of the Administrative Agent's legal counsel. 5. Conditions Precedent. This Amendment shall become effective on the day (the "Fourth Amendment Effective Date") on which each of the following conditions precedent has been satisfied: (a) the Administrative Agent shall have received counterparts of this Amendment, duly executed and delivered by each of the Credit Parties, the Required Lenders and by the Administrative Agent and the Canadian Administrative Agent. (b) the Administrative Agent shall have received from a Responsible Officer of the Company a certificate to the effect that as of the date hereof and as of the Fourth Amendment Effective Date all representations and warranties made by the Company and each other Credit Party in this Amendment and each other Credit Document are true and correct in all material respects; (c) no Default or Event of Default shall have occurred and be continuing; and (d) each Lender party to the Credit Agreement who executes this Amendment on or before 5:00 P.M. Eastern Standard Time on July 11, 2001 (provided this 5 6 Amendment is approved by the Required Lenders) shall have received an amendment fee equal to 0.10% of the sum of each Lender's Commitment Percentage. 6. Counterparts. This Amendment may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. 7. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of North Carolina. 8. ENTIRETY. THIS AMENDMENT, THE CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS EMBODY THE ENTIRE AGREEMENT BETWEEN THE PARTIES AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS, IF ANY, RELATING TO THE SUBJECT MATTER HEREOF. THESE CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. 6 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment, to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. THE COMPANY: HERCULES INCORPORATED, a Delaware corporation By: _________________________________________ Name: _______________________________________ Title: _______________________________________ CANADIAN BORROWER: BETZDEARBORN CANADA, INC., an Ontario corporation By: _________________________________________ Name: _______________________________________ Title: ______________________________________ 8 OTHER SUBSIDIARY GUARANTORS: HERCULES CREDIT, INC., a Delaware corporation HERCULES FLAVOR, INC., a Delaware corporation WSP, INC., a Delaware corporation AQUALON COMPANY, a Delaware partnership HERCULES FINANCE COMPANY, a Delaware partnership FIBERVISIONS, L.L.C., a Delaware limited liability company FIBERVISIONS INCORPORATED, a Delaware corporation FIBERVISIONS PRODUCTS, INC., a Georgia corporation HERCULES INTERNATIONAL LIMITED, a Delaware corporation BETZDEARBORN INC., a Pennsylvania corporation BETZDEARBORN EUROPE, INC., a Delaware corporation D R C LTD., a Delaware corporation BL TECHNOLOGIES, INC., a Delaware corporation BLI HOLDINGS CORP., a Delaware corporation HERCULES SHARED SERVICES CORPORATION, a Delaware corporation BETZDEARBORN INTERNATIONAL, INC., a Pennsylvania corporation ATHENS HOLDINGS, INC., a Delaware corporation BETZDEARBORN CHINA, LTD., a Delaware corporation BL CHEMICALS INC., a Delaware corporation CHEMICAL TECHNOLOGIES INDIA, LTD., a Delaware corporation [signature pages continue] 9 COVINGTON HOLDINGS, INC., a Delaware corporation EAST BAY REALTY SERVICES, INC., a Delaware corporation FIBERVISIONS, L.P., a Delaware partnership HERCULES CHEMICAL CORPORATION, a Delaware corporation HERCULES COUNTRY CLUB, INC., a Delaware corporation HERCULES EURO HOLDINGS, LLC, a Delaware limited liability company HERCULES INTERNATIONAL LIMITED, L.L.C., a Delaware limited liability company HERCULES INVESTMENTS, L.L.C., a Delaware limited liability company HISPAN CORPORATION, a Delaware corporation By: _________________________________ Name: _______________________________ Title: ______________________________ for each of the foregoing 10 ADMINISTRATIVE AGENT: BANK OF AMERICA, N.A., in its capacity as Administrative Agent and as a Lender By:_________________________________________ Name:_______________________________________ Title:______________________________________ CANADIAN BANK OF AMERICA CANADA, ADMINISTRATIVE AGENT: as Canadian Administrative Agent By:_________________________________________ Name:_______________________________________ Title:______________________________________ 11 LENDERS: ____________________________________________ [NAME OF LENDER] By:_________________________________________ Name:_______________________________________ Title:______________________________________ 12 TRANCHE D LENDER: ______________________________ By:_________________________________________ Name:_______________________________________ Title:______________________________________ EX-12.1 12 w51743ex12-1.txt STATEMENT RE COMPUTATION OF RATIO OF EARNINGS 1 Exhibit 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ( Dollars in millions, except ratios )
Year Ended December 31, ---------------------------------------- 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Pre-tax income from continuing operations before adjustment for minority interests in consolidated subsidiaries or income or loss from equity investees.......................... 432 563 67 243 166 Less: Capitalized interest..................................................... -5 -8 -11 -12 -11 Amortization of interest costs previously capitalized.......................... 6 4 4 4 6 ---- ---- ---- ---- ---- Adjusted pre-tax income from continuing operations before adjustment for minority interests in consolidated subsidiaries or income or loss from equity investees....................................... $433 $559 $ 60 $235 $161 ==== ==== ==== ==== ==== Fixed charges: Interest expense, including capitalized interest, amortization of debt issuance cost, preferred security distribution of subsidiary trusts........................................................................ 40 47 114 248 271 One-third (deemed representative of the interest portion) of rent expense...... 10 10 12 18 19 ---- ---- ---- ---- ---- Total fixed charges............................................................ $ 50 $ 57 $126 $266 $290 ==== ==== ==== ==== ==== Adjusted pre-tax income from continuing operations before adjustment for minority interests in consolidated subsidiaries or income or loss from equity investees plus fixed charges........................................... $483 $616 $186 $501 $451 ==== ==== ==== ==== ==== Ratio of earnings to fixed charges............................................. 9.7 10.8 1.5 1.9 1.6
2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ( Dollars in millions, except ratios )
Three Months Ended March 31, ------------------- 2000 2001 ---- ---- Pre-tax income (loss) from continuing operations before adjustment for minority interests in consolidated subsidiaries or income or loss from equity investees............................. 56 (11) Less: Capitalized interest........................................................ (2) (2) Amortization of interest costs previously capitalized............................. 1 1 ----- ----- Adjusted pre-tax income (loss) from continuing operations before adjustment for minority interests in consolidated subsidiaries or income or loss from equity investees.......................................... $ 55 $ (12) ----- ----- Fixed charges: Interest expense, including capitalized interest, amortization of debt issuance cost, preferred security distribution of subsidiary trusts........................................................................... 57 72 One-third (deemed representative of the interest portion) of rent expense......... 5 5 ----- ----- Total fixed charges............................................................... $ 62 $ 77 ===== ===== Adjusted pre-tax income (loss) from continuing operations before adjustment for minority interests in consolidated subsidiaries or income or loss from equity investees plus fixed charges..................................................... $ 117 $ 65 ===== ===== Ratio of earnings to fixed charges................................................ 1.9 (A)
Pro Forma ---------------------------------- Three Months Ended Year Ended March 31, December 31, 2000 2000 ---- ---- Pre-tax income from continuing operations before adjustment for minority interests in consolidated subsidiaries or income or loss from equity investees........................... 34 103 Less: Capitalized interest...................................................... -2 -11 Amortization of interest costs previously capitalized........................... 1 6 ----- ----- Adjusted pre-tax income from continuing operations before adjustment for minority interests in consolidated subsidiaries or income or loss from equity investees........................... $ 33 $ 98 ----- ----- Fixed charges: Interest expense, including capitalized interest, amortization of debt issuance cost, preferred security distribution of subsidiary trusts......................................................................... 63 290 One-third (deemed representative of the interest portion) of rent expense....... 5 19 ----- ----- Total fixed charges............................................................. $ 68 $ 309 ===== ===== Adjusted pre-tax income from continuing operations before adjustment for minority interests in consolidated subsidiaries or income or loss from equity investees plus fixed charges.................................................. $ 101 $ 407 ===== ===== Ratio of earnings to fixed charges.............................................. 1.5 1.3
(A) Due to the loss for the three months ended March 31, 2001, the ratio of earnings to fixed charges was less than 1:1. The Company needed to generate an additional $12 million in earnings to achieve a ratio of earnings to fixed charges of 1:1. EX-25.1 13 w51743ex25-1.txt FORM T-1 1 Exhibit 25.1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ----------------------------- CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION (Exact name of trustee as specified in its charter) A U.S. NATIONAL BANKING ASSOCIATION 41-1592157 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national Identification No.) bank) SIXTH STREET AND MARQUETTE AVENUE Minneapolis, Minnesota 55479 (Address of principal executive offices) (Zip code)
Stanley S. Stroup, General Counsel WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION Sixth Street and Marquette Avenue Minneapolis, Minnesota 55479 (612) 667-1234 (Agent for Service) ----------------------------- HERCULES INCORPORATED (Exact name of obligor as specified in its charter) DELAWARE 51-0023450 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) HERCULES PLAZA 1313 NORTH MARKET STREET WILLMINGTON, DELAWARE 19894-0001 (Address of principal executive offices) (Zip code)
----------------------------- EXCHANGE OFFER FOR $400,000,000 OF ITS 11 1/8 % SENIOR NOTES DUE 2007 (Title of the indenture securities) 2 Item 1. General Information. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Comptroller of the Currency Treasury Department Washington, D.C. Federal Deposit Insurance Corporation Washington, D.C. The Board of Governors of the Federal Reserve System Washington, D.C. (b) Whether it is authorized to exercise corporate trust powers. The trustee is authorized to exercise corporate trust powers. Item 2. Affiliations with Obligor. If the obligor is an affiliate of the trustee, describe each such affiliation. None with respect to the trustee. No responses are included for Items 3-14 of this Form T-1 because the obligor is not in default as provided under Item 13. Item 15. Foreign Trustee. Not applicable. Item 16. List of Exhibits. List below all exhibits filed as a part of this Statement of Eligibility. Wells Fargo Bank incorporates by reference into this Form T-1 the exhibits attached hereto. Exhibit 1. a. A copy of the Articles of Association of the trustee now in effect.*** Exhibit 2. a. A copy of the certificate of authority of the trustee to commence business issued June 28, 1872, by the Comptroller of the Currency to The Northwestern National Bank of Minneapolis.* b. A copy of the certificate of the Comptroller of the Currency dated January 2, 1934, approving the consolidation of The Northwestern National Bank of Minneapolis and The Minnesota Loan and Trust Company of Minneapolis, with the surviving entity being titled Northwestern National Bank and Trust Company of Minneapolis.* c. A copy of the certificate of the Acting Comptroller of the Currency dated January 12, 1943, as to change of corporate title of Northwestern National Bank and Trust Company of Minneapolis to Northwestern National Bank of Minneapolis.* d. A copy of the letter dated May 12, 1983 from the Regional Counsel, Comptroller of the Currency, acknowledging receipt of notice of name 3 change effective May 1, 1983 from Northwestern National Bank of Minneapolis to Norwest Bank Minneapolis, National Association.* e. A copy of the letter dated January 4, 1988 from the Administrator of National Banks for the Comptroller of the Currency certifying approval of consolidation and merger effective January 1, 1988 of Norwest Bank Minneapolis, National Association with various other banks under the title of "Norwest Bank Minnesota, National Association."* f. A copy of the letter dated July 10, 2000 from the Administrator of National Banks for the Comptroller of the Currency certifying approval of consolidation effective July 8, 2000 of Norwest Bank Minnesota, National Association with various other banks under the title of "Wells Fargo Bank Minnesota, National Association."**** Exhibit 3. A copy of the authorization of the trustee to exercise corporate trust powers issued January 2, 1934, by the Federal Reserve Board.* Exhibit 4. Copy of By-laws of the trustee as now in effect.*** Exhibit 5. Not applicable. Exhibit 6. The consent of the trustee required by Section 321(b) of the Act. Exhibit 7. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority.** Exhibit 8. Not applicable. Exhibit 9. Not applicable. * Incorporated by reference to exhibit number 25 filed with registration statement number 33-66026. ** Incorporated by reference to exhibit number 25 filed with registration statement number 333-64538 *** Incorporated by reference to exhibit T3G filed with registration statement number 022-22473. **** Incorporated by reference to exhibit number 25.1 filed with registration statement number 001-15891. 4 SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, Wells Fargo Bank Minnesota, National Association, a national banking association organized and existing under the laws of the United States of America, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Minneapolis and State of Minnesota on the 7th day of August, 2001. WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION /s/ Michael G. Slade --------------------------- Michael G. Slade Corporate Trust Officer 5 EXHIBIT 6 August 7, 2001 Securities and Exchange Commission Washington, D.C. 20549 Gentlemen: In accordance with Section 321(b) of the Trust Indenture Act of 1939, as amended, the undersigned hereby consents that reports of examination of the undersigned made by Federal, State, Territorial, or District authorities authorized to make such examination may be furnished by such authorities to the Securities and Exchange Commission upon its request therefor. Very truly yours, WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION /s/ Michael G. Slade --------------------------- Michael G. Slade Corporate Trust Officer -----END PRIVACY-ENHANCED MESSAGE-----