10-K 1 FORM 10-K, HERCULES, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994 Commission file number 1-496 HERCULES INCORPORATED A DELAWARE CORPORATION L.R.S. EMPLOYER IDENTIFICATION NO. 51-0023450 HERCULES PLAZA 1313 NORTH MARKET STREET WILMINGTON, DELAWARE 19894-0001 TELEPHONE: 302-594-5000 Securities registered pursuant to Section 12(b) of the Act (Each class is registered on the New York Stock Exchange, Inc.) Title of each class Common Stock ($25/48 Stated Value) 6 1/2 % Convertible Subordinated Debentures due June 30, 1999 8% Convertible Subordinated Debentures due August 15, 2010 Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and has been subject to such filing requirements for the past 90 days. Disclosure of delinquent filers pursuant to item 405 of Regulation S-K is contained in registrant's definitive Proxy Statement dated March 23, 1995 and is incorporated by reference in Part III Item 10 herein. As of February 27, 1995, registrant had outstanding 116,210,936 shares of common stock, $25/48 stated value ("Common Stock"), which is registrant's only class of common stock. The aggregate market value of registrant's Common Stock held by non-affiliates based on the closing price on February 27, 1995 was approximately $5.1 billion. DOCUMENTS INCORPORATED BY REFERENCE (SPECIFIC PAGES INCORPORATED ARE IDENTIFIED UNDER THE APPLICABLE ITEM HEREIN.) Portions of the registrant's definitive Proxy Statement dated March 23, 1995 (the "Proxy Statement") are incorporated by reference in Part lll of this Report. Other documents incorporated by reference in this report are listed in the Exhibit Index. 2 PART I ITEM 1. BUSINESS: Hercules Incorporated ("Hercules" or the "Company") is a diversified, worldwide producer of chemicals and related products. The Company was incorporated in Delaware in 1912. In March 1995, Hercules completed the sale of a substantial portion of its Aerospace segment (which produced solid fuel systems for aerospace applications) to Alliant Techsystems Incorporated. Hercules now holds a 30% ownership interest in Alliant and two of the eight nonemployee seats on the Alliant Board of Directors. Hercules' 30% interest in Alliant will be accounted for on the equity method, and is not expected to be material to Hercules' consolidated financial statements. Accordingly, information related to the Aerospace segment has been omitted in this Form 10-K, except where relevant. INDUSTRY SEGMENTS Hercules operates, both domestically and throughout the world, in two industry segments: Chemical Specialties and Food & Functional Products. The financial information regarding Hercules' industry segments, which includes net sales and profit from operations for each of the three years in the period ended December 31, 1994 and identifiable assets as of December 31, 1994, 1993 and 1992, is provided in Note 24 to the Consolidated Financial Statements. Information regarding principal products produced and sold by each industry segment and principal markets served by each segment is presented in the columns so designated in the segment table presented below. These products are sold directly to customers from plants and warehouses, as well as being sold in some cases (particularly in markets outside the United States) to and through distributors.
BUSINESS UNITS PRINCIPAL PRODUCTS PRIMARY MARKETS -------------- ------------------ --------------- Chemical Specialties -------------------- Paper Technology Reactive sizes, rosin size, Writing and printing paper, tissues and dispersed rosin sizes, wet- toweling, liquid packaging, kraft paper, strength resins, wax emulsions, corrugated and linerboard packaging, and defoamers, and retention aids. kraft specialties. Fibers Polypropylene nonwoven fiber and Disposable hygiene products, home polypropylene textile yarns. furnishings, and automotive. Resins Rosin resins, hydrocarbon resins, Adhesives for tapes, labels, carpet peroxides. backing, packaging, and sealants; graphic arts, particularly inks and toners; rubber, including plastic compounds for wire and cable insulation; the construction industry; and household products. Food & Functional Products -------------------------- Aqualon Carboxymethylcellulose, Paints and lacquers, adhesives, paper, hydroxypropylcellulose, ethyl- personal care products and cosmetics, cellulose, nitrocellulose, pharmaceuticals, food and beverages, hydrox-yethylcellulose, inks, oil well drilling, rubber, and methylcellulose, and smokeless powder. pentaerythritol.
1 3 Food Gums Food gums and aroma chemicals. Processed meats, jellies and jams, baked goods, convenience foods, and beverages. Electronics & Printing Products Photopolymer resins. Printing and publishing.
In general, Hercules does not produce against a backlog of firm orders; production is geared primarily to the level of incoming orders and the projections of future demand. Significant inventories of finished products, work in process and raw materials are maintained to meet delivery requirements of customers and Hercules' production schedules. The businesses of each of the segments are not seasonal to any significant extent. RAW MATERIALS AND ENERGY Raw materials and supplies are purchased from a variety of industry sources, including agricultural, forestry, mining, petroleum and chemical industries. The important raw materials for the Chemical Specialties segment are d-limonene, turpentine, crude tall oil, rosin, pine wood stumps, aromatic and aliphatic resin formers, ketones, cumene, catalysts, alcohols, pure monomers, toluene, clay, phenol, adipic acid, epichlorohydrin, fumaric acid, process oils, stearic acid, diethylenetriamine, phosphorus trichloride, wax, casein, starch, polypropylene resin, pigments, and antioxidants. Raw materials important to the Food & Functional Products segment are acetaldehyde, fatty acids, chemical cotton, woodpulp, ethyl chloride, alcohols, chlorine, ethylene oxide, propylene oxide, monochloroacetic acid, methyl chloride, caustic, inorganic acids, fruit and floral extracts, guar splits, seaweed, terpenes, and citrus peel. 2 4 Major requirements for key raw materials and fuels are typically purchased pursuant to multi-year contracts. Hercules is not dependent on any one supplier for a material amount of its raw material or fuel requirements, but certain important raw materials are obtained from sole-source or a few major suppliers. While temporary shortages of raw materials and fuels may occur occasionally, these items are currently readily available. However, their continuing availability and price are subject to domestic and world market and political conditions as well as to the direct or indirect effect of United States Government regulations. The impact of any future raw material and energy shortages on Hercules' business as a whole or in specific world areas cannot be accurately predicted. Operations and products may, at times, be adversely affected by legislation, shortages or international or domestic events. COMPETITION Hercules encounters substantial competition in each of its two industry segments. This competition, from other manufacturers of the same products and from manufacturers of different products designed for the same uses, is expected to continue in both the United States and markets outside the United States. Some of Hercules' competitors, such as companies engaged in petroleum operations, have more direct access to raw materials, and some have greater financial resources than Hercules. The number of Hercules' principal competitors varies from product to product. It is not practicable to estimate the number of all competitors because of the large variety of Hercules' products, the markets served and the world-wide business interests of Hercules. PATENTS AND TRADEMARKS Patents covering a variety of products and processes have been issued to Hercules and its assignees. In addition, Hercules is licensed under certain other patents covering the products and processes. Taken as a whole, the rights of Hercules under these patents and licenses, which expire from time to time, are considered by Hercules to constitute a valuable asset. However, Hercules does not consider any single patent or license, or any group thereof related to a specific product or process, to be of material importance to its business as a whole. Hercules also has registered trademarks for a number of its products. Some of the more significant trademarks include: AQUAPEL(R) sizing agent, HERCON(R) sizing emulsions, KYMENE(R) resin, MAGNAMITE(R) graphite fiber, MERIGRAPH(R) photopolymer resin, NANOCHEM(R) synthetic resin, REGALREZ(R) resin, SYCAR(R) resin, HERCULON(R) olefin fiber, SLENDID(R) fat replacer, NATROSOL(R) hydroxyethylcellulose, CULMINAL(R) methylcellulose, KLUCEL(R) hydroxypropylcellulose, NATROSOL FPS(R) water-soluble polymer suspension, AQUA MER(R) dry film photoresists, and PRECIS(TM) sizing agent. RESEARCH AND DEVELOPMENT Research and development, which is directed toward the discovery and development of new products and processes, the improvement and refinement of existing products and processes and development of new applications for existing products, is primarily company-sponsored. Hercules spent $64,780,000 on research activities during 1994, as compared to $76,121,000 in 1993 and $70,208,000 in 1992. During the three-year period, research and development expenditures for the Chemical Specialties and Food & Functional Products segments were between 1.8% and 2.6% of sales. 3 5 ENVIRONMENTAL MATTERS Hercules believes that it is in compliance in all material respects with applicable federal, state and local environmental laws and regulations. Expenditures relating to environmental cleanup costs have not and are not expected to materially affect capital expenditures or competitive position. Additional information regarding environmental matters is provided in Notes 15 and 23(c) to the Consolidated Financial Statements. EMPLOYEES As of December 31, 1994, Hercules had 11,989 employees worldwide (of which 3,741 were in the areospace business). Approximately 8,895 were located in the United States, and of these employees about 30% were represented by various local or national unions. INTERNATIONAL OPERATIONS Information on net sales, profit from operations, identifiable assets by geographic areas, and the amount of export sales, for each of the last three years appear in Note 24 to the Consolidated Financial Statements. Hercules' operations outside the United States are subject to the usual risks and limitations related to investments in foreign countries, such as fluctuations in currency values, exchange control regulations, wage and price controls, employment regulations, effects of foreign investment laws, governmental instability (including expropriation or confiscation of assets) and other potentially detrimental domestic and foreign governmental policies affecting United States companies doing business abroad. ITEM 2. PROPERTIES: The Company's corporate headquarters and major research center are located in WiImington, Delaware. Information as to Hercules' principal manufacturing facilities and the industry segment served by each is presented below. All principal properties are owned by Hercules except for the Company's corporate headquarters, which is leased to the Company. The following are Hercules' major worldwide plants: Chemical Specialties - Aberdeen, Scotland; Beringen, Belgium; Brunswick, Georgia; Burlington, Ontario, Canada; Busnago, Italy; Chicopee, Massachusetts; Franklin, Virginia; Gibbstown, New Jersey; Hattiesburg, Mississippi; Iberville, Quebec, Canada; Jefferson, Pennsylvania; Kalamazoo, Michigan; Kim Cheon, Korea; Lilla Edet, Sweden; Mexico City, Mexico; Middelburg, the Netherlands; Milwaukee, Wisconsin; Nant'ou, Taiwan; Oxford, Georgia; Pandaan, Indonesia; Paulinia, Brazil; Pendlebury, England; Portland, Oregon; St.-Jean, Quebec, Canada; Sandarne, Sweden; Savannah, Georgia; Sobernheim, Germany; Tampere, Finland; Tarragona, Spain; Traun, Austria; Uruapan, Mexico; Voreppe, France; Zwijndrecht, the Netherlands. Food & Functional Products - Alizay, France; Barneveld, the Netherlands; Doel, Belgium; Grossenbrode, Germany; Hopewell, Virginia; Kenedy, Texas; Lille Skensved, Denmark; Louisiana, Missouri; Middletown, Delaware; Parlin, New Jersey; Sao Paulo, Brazil; Tarragona, Spain; Zwijndrecht, the Netherlands. Hercules plants and facilities, which are continually added to and modernized, are generally considered to be in good condition and adequate for business operations. From time to time Hercules discontinues operations at, or disposes of, facilities that have for one reason or another become unsuitable. ITEM 3. LEGAL PROCEEDINGS: For discussion of legal proceedings see Note 23(d) to the Hercules Financial Statements. In September 1993, Hercules and the U.S. Environmental Protection Agency (EPA) Region 1 reached an agreement in principle which, when effectuated, will settle the EPA's claims that Hercules violated its wastewater permit with the City of Chicopee and the federal pretreatment standard for industrial users of 4 6 publicly owned treatment works at its Chicopee, MA facility. Hercules has signed a Consent Decree (the "Decree") based on this agreement requiring supplemental environmental projects (at a cost of approximately $375,000), compliance with permit limits in the future, and $250,000 in fines. Hercules expects the Decree to be finalized in the first quarter of 1995. On February 17, 1994, Hercules received an Administrative Order and Notice of Civil Administrative Penalty Assessment (the "Order") for alleged violations of Hercules' water discharge (NPDES) permit at its Kenvil, New Jersey facility. The fine identified in the Order is $141,750. Although Hercules has requested an administrative hearing on this matter, negotiations with the State of New Jersey Department of Environmental Protection ("NJDEP") are ongoing. Hercules expects that the ultimate penalty amount to be paid to NJDEP under the terms of the Order will exceed $100,000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: No matter was submitted to a vote of security holders during the fourth quarter of 1994, through the solicitations of proxies or otherwise. 5 7 EXECUTIVE OFFICERS OF THE REGISTRANT: The name, age and current position of each executive officer (as defined by Securities and Exchange Commission rules) of the Company as of February 27, 1995, are listed below. Each of the officers, except for R. Keith Elliott, Herbert K. Pattberg, and Vikram Jog, have during the past five years, served in one or more executive capacities with the Company and/or its affiliates. Mr. Elliott served with Engelhard Corporation as Vice President of Finance, Chief Financial Officer and Director from 1985 to 1988 and as Senior Vice President, Chief Financial Officer and Director from 1988 to 1990. Since joining Hercules in 1991, Mr. Elliott has held the positions of Sr. Vice President and Chief Financial Officer and most recently Executive Vice President and Chief Financial Officer. Herbert Pattberg was employed by Henkel KgaA for 22 years, most recently as group vice president, Oleochemicals. Mr. Pattberg joined Hercules in 1993 in his present position of president, S.A. Hercules Europe N.V., Brussels, Belgium. Vikram Jog has been with Hercules since 1992, as director, Corporate Reporting, director, Corporate Analysis and now his current position as Controller. Prior to joining Hercules, Mr. Jog was employed at Price Waterhouse, LLP and Coopers & Lybrand L.L.P. There are no family relationships among executive officers.
NAME AGE CURRENT POSITION Thomas L. Gossage 60 Chairman, President and Chief Executive Officer R. Keith Elliott 53 Executive Vice President and Chief Financial Officer Vincent J. Corbo 51 Senior Vice President,Technology Robert J. A. Fraser 45 Group Vice President and President, Hercules Food & Functional Products Company C. Doyle Miller 54 Group Vice President and President, Hercules Chemical Specialties Company Michael B. Keehan 59 Vice President and General Counsel George MacKenzie 45 Vice President, Finance Vikram Jog 38 Controller Jan M. King 45 Treasurer Israel J. Floyd 48 Secretary and Assistant General Counsel James D. Beach 60 Vice President, Operations Support Edward V. Carrington 52 Vice President, Human Resources James R. Rapp 56 Vice President, Investor Relations Herbert K. Pattberg 51 President, Hercules Europe
6 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS: Hercules Incorporated common stock is listed on the New York Stock Exchange (ticker symbol HPC), The Stock Exchange, London, and the Swiss Stock Exchange. It is also traded on the Philadelphia, Midwest, and Pacific Stock Exchanges. On December 8, 1994, the company announced a three-for-one split of its common stock effected in the form of a 200% tax-free stock dividend distributed on January 30, 1995, to shareholders of record as of January 8, 1995. The information presented below reflects the three-for-one stock split. The approximate number of holders of record of common stock ($25/48 stated value) as of January 31, 1995, was 19,665.
Period High Low ------ ---- --- 1993 First Quarter . . . . . . . . . . . . . . . . 25 1/2 21 1/8 Second Quarter . . . . . . . . . . . . . . . . 26 1/8 23 1/4 Third Quarter . . . . . . . . . . . . . . . . 30 1/2 25 1/2 Fourth Quarter . . . . . . . . . . . . . . . . 38 1/4 29 5/8 1994 First Quarter . . . . . . . . . . . . . . . . 40 1/2 35 1/4 Second Quarter . . . . . . . . . . . . . . . . 38 1/2 32 1/8 Third Quarter . . . . . . . . . . . . . . . . 36 7/8 32 7/8 Fourth Quarter . . . . . . . . . . . . . . . . 40 33 1/4
On December 31, 1994, the closing price of the common stock was $38 1/2. The company has paid quarterly cash dividends as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- 1993 . . . . . . . . . . . . . . . . . . . . . . . $0.19 $0.19 $0.19 $0.19 1994 . . . . . . . . . . . . . . . . . . . . . . . $0.19 $0.19 $0.19 $0.19
7 9 ITEM 6. SELECTED FINANCIAL DATA: A summary of selected financial data for Hercules for the years and year ends specified is set forth in the table below.
(Dollars and shares in millions, except per share) =================================================================================================================== FOR THE YEAR 1994 1993 1992 1991 1990 ------------------------------------------------------------------------------------------------------------------- Net Sales $ 2,821 $ 2,773 $ 2,865 $ 2,929 $ 3,200 Profit from Operations 419 308 244 187 190 Income Before Extraordinary Item and Effect of Changes in Accounting Principles 274 208 168 95 96 Net Income (Loss) 274 (33) 168 95 96 Dividends 89 95 101 105 105 Per Share of Common Stock Earnings Before Extraordinary Item and Effect of Changes in Accounting Principles 2.29 1.62 1.23 .67 .68 Earnings (Loss) 2.29 (.26) 1.23 .67 .68 Dividends .75 .75 .75 .75 .75 Total Assets 2,941 3,162 3,228 3,467 3,700 Long-Term Debt 307 317 431 483 601
Per-share amounts for all periods presented have been restated to give retroactive recognition to the three-for-one stock split distributed January 30, 1995. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: This discussion should be read in connection with the information contained in the Consolidated Financial Statements and Notes thereto. In March 1995, Hercules completed the sale of a substantial portion of its Aerospace segment to Alliant Techsystems Incorporated (Alliant), at a gain, for approximately $300 million in cash and 3.86 million shares of newly issued Alliant common stock. Included in the transaction were Aerospace units with combined revenues and operating profits of $657 million and $110 million, respectively in 1994, $688 million and $110 million, respectively in 1993, and $745 million and $62 million, respectively in 1992. Hercules now holds a 30% ownership interest in Alliant and two of the eight nonemployee seats on the Alliant Board of Directors. After funding the needs of the business, cash proceeds from the sale will be used primarily to repurchase Hercules shares. This transaction has no effect on the 1994 finanical statements; Hercules' 30% interest in Alliant will be accounted for on the equity method. Additionally during 1994, the company completed previously announced divestitures of its Packaging Films and Liquid Molding Resins business units in April 1994 and October 1994, respectively, for $173 million in cash, subject to post-closing adjustments. See Note 22 to the financial statements. On December 8, 1994, the company announced a three-for-one split of its common stock effected in the form of a 200% tax-free stock dividend distributed on January 30, 1995, to shareholders of record as of January 9, 1995. RESULTS OF OPERATIONS All comparisons within the following discussion are to the previous year, unless otherwise stated. Consolidated net sales: Chemical businesses (Chemical Specialties and Food & Functional Products segments) sales increased 10% in 1994 on increased volumes and prices, reflecting improvement in western economies. However, the divestiture of the Packaging Films unit in April 1994 and reduced Aerospace revenues resulted in consolidated net sales remaining relatively flat. In 1993, sales declined approximately 3% mostly in the Aerospace and Chemical Specialties segments, reflecting continued cutbacks in defense budgets, weaker European currencies, and recessionary conditions in Europe. 8 10 Profit from operations increased 36%, or $111 million, in 1994. Gross profit improved approximately $55 million, or 7%, and gross profit margins increased to 32% from 30% a year ago primarily on the strength of the chemical businesses. This gross profit improvement, resulting from the aforementioned volume and price increases, coupled with manufacturing cost improvements, was partially offset by the sale of Packaging Films and lower Aerospace margins. Selling, general and administrative (SG&A) expenses remained relatively flat while research and development (R&D) expenses declined. Cost savings from previous restructurings and the continuation of cost-management programs were offset by increased expense for employee incentive compensation programs (primarily related to performance above target levels) and increased manufacturing support and marketing expenses. The lower R&D expenses relate primarily to lower spending in the Aerospace segment and other divested businesses. Other operating expenses (Note 15 to the financial statements) declined $48 million. Lower 1994 environmental expenses and severance costs, coupled with 1993 restructuring charges related to the disposition of Liquid Molding Resins and a company-wide reduction in personnel, account for the favorable change. Environmental expenses declined from $35 million to $20 million as no significant new sites requiring recognition of environmental expenditures were identified. Environmental expenses are discussed further below and in Note 23 to the financial statements. In 1993, profit from operations increased 26%, or $63 million. Contract changes and settlements related to the Titan IV solid rocket motor upgrade (SRMU) program in the Aerospace segment aggregated approximately $60 million. Increased gross margins were offset by higher R&D expenses. SG&A expenses were unchanged. Cost savings from previous restructurings and divestitures, and the continuation of cost-management programs, were offset by increased expenses for employee incentive compensation programs. Other operating expenses were also unchanged. Lower environmental expenses were offset by higher restructuring and other charges. Environmental costs were higher in 1992 compared with 1993 pursuant to a court decision giving wider latitude to the U.S. Environmental Protection Agency in selecting the remediation methods for cleanup at the Jacksonville, Arkansas, site (see Note 23 to the financial statements). Chemical Specialties: Net sales increased 11%, or $105 million, in 1994. Higher pricing for resins in adhesives, chewing gum, construction, and graphic arts markets along with overall resins volume increases accounted for the sales improvement. In addition, strong polypropylene nonwoven fiber volume in the diaper coverstock market and increased volumes of rosin size and emulsion products due to higher utilization rates in the paper industry added to the sales increase. Profit from operations increased 32%, or $48 million, in 1994, primarily due to the increased revenues. Additionally, reduced manufacturing cost per unit derived from higher production volume added to the operating profit improvement. In 1993, net sales declined by 5%, or $47 million. Weaker European currencies were a significant factor in the sales decline. While overall volumes were relatively stable, recessionary conditions in Europe resulted in pricing pressures. Profit from operations declined by 8%, or $13 million, in 1993, primarily due to the decline in revenues. Manufacturing cost improvements, lower raw material costs, and cost savings from the rationalization of worldwide administration and support functions were largely offset by asset writeoffs, higher incentive compensation, and R&D expenses. In 1995, strong market demand is expected to continue in the Americas and Europe. Manufacturing cost improvements will continue to be important, especially as raw material prices continue to increase. Food & Functional Products: Net sales increased 9%, or $78 million, in 1994. Water-soluble polymer sales increased reflecting volume and price improvements due to strong demand in the paint, construction, and regulated markets. This improvement was partially offset by lower volumes in the oil and gas markets along with declines in coatings due to continued pricing pressures from foreign manufacturers on furniture coating applications. Additionally, volume improvements in food gums and printing product applications added to the revenue improvement. Profit from operations increased 31%, or $35 million, in 1994, primarily due to the aforementioned price and volume improvements. Additionally, lower manufacturing costs and higher yield from process improvements and better utilization of capacity added to the operating profit improvement. In 1993, net sales were relatively flat. Although overall volumes increased, particularly in food gums, revenues were adversely affected by weaker European currencies, partially offset by higher water-soluble 9 11 polymer prices. Profit from operations increased by 4%, or $4 million, principally due to higher yield from process improvements and better utilization of capacity. In 1995, demand in major markets is expected to remain strong. Successful implementation of incremental capacity projects and manufacturing cost improvements will continue to be important. Aerospace: Net sales declined 1%, or $11 million, in 1994. The sales decrease relates primarily to decline in production volumes, lower flight incentives, overall defense budget cuts, reduced number of new programs, program cancellations, and funding delays. Sales (and operating profit) were favorably affected by $48 millon related to a re-evaluation of the Titan IV SRMU contract deferral established in 1993. This resulted from diminished program risk coincident with progress in 1994 toward program completion and a second favorable contract modification in 1994, the final portion of which was negotiated in the fourth quarter. In 1993, Titan IV SRMU contract modifications and settlements had a $28 million favorable effect on sales. The basis for the deferral and subsequent adjustment thereof is based on management's evaluation and quantification of risks inherent in the program, prior difficulties with this contract, and the effects of contract modifications and restructurings. Additionally, 1994 sales (and operating profit) benefited $8 million from a one-time sale of a technology license. Profit from operations declined $7 million, or 7%, as a result of the following: lower profit related to the Titan IV SRMU contract deferrals and settlements ($48 million in 1994 compared with $60 million in 1993); manufacturing problems in the Ordnance business unit resulting in a $13 million decline in operating profits; lower flight incentives of $15 million; and lower margins in composite materials as a result of defense reductions. Partially offsetting these unfavorable effects were improved Titan operating performance, realization of past cost reduction actions, the one-time sale of technology, and improved performance in the tactical missiles business unit. Net sales declined by 5%, or $43 million, in 1993 principally because of overall defense budget cuts, funding delays, and program terminations and cancellations. Additionally, the 1992 results were favorably affected by ordnance replenishment sales resulting from the 1991 Gulf War. Despite the reduction in sales, profit from operations increased by 102%, or $52 million, as a result of the following: Titan IV SRMU contract modifications and settlements of $60 million ($28 million favorable effect on net sales); incentive and award fees (a normal part of successful government contracting) of $21 million; continued cost management; the phaseout of several loss programs; and favorable resolution of contractual issues. Offsetting these favorable effects were increased charges approximating $16 million, principally related to incentive compensation plans, severance costs, and the 1992 favorable settlement of a cost-allowability issue on Government contracts. Both declines in new program opportunities and cancellations or stretch-outs of existing programs are possible in the continued budget-reduction environment of the Department of Defense. In addition, accelerating industry-wide excess capacity is likely to increase price competition. Although aggressive cost-reduction efforts will continue to be a focus, the occurrence of these events may adversely affect Aerospace segment results in the future. Corporate and other: Net sales declined $124 million in 1994 primarily due to the divestiture of the Packaging Films business in April 1994. Operating losses declined $35 million principally reflecting restructuring charges taken in 1993 coupled with lower environmental expenses. In 1993, net sales were relatively flat. Operating losses declined by $20 million, reflecting lower losses in Liquid Molding Resins (before restructuring charges) and lower environmental expenses. The 1993 restructuring charges for planned asset dispositions did not vary significantly from 1992 charges related to rationalization of worldwide administration and support functions. Equity in income of affiliated companies increased by $2 million. The improvement reflects improved earnings in Tastemaker, the 50%-owned flavors joint venture, partially offset by the sale of Hercules' interest in several affiliates in 1993. In 1993, income increased $8 million reflecting improved Tastemaker earnings. Interest and debt expense decreased by 22% and 12% in 1994 and 1993, respectively, principally because of reduced levels of average debt and increased capitalized interest related to higher capital spending. 10 12 Other income (expense) net, (see Note 17) showed an unfavorable change of $24 million in 1994. The decline primarily reflects 1993 favorable litigation settlements of $29 million. In 1993, other income (expense) net, decreased by $30 million. The decline principally reflects lower net gains on dispositions and lower interest income offset by favorable litigation settlements, lower foreign currency losses, and 1992 shutdown costs. The provision for income taxes reflects effective tax rates of 33% in 1994 and 1993, and 37% in 1992. Both the 1994 and the 1993 rates have been favorably affected by research and experimentation tax credits of $4 million and $10 million, respectively. The 1993 rate was offset by a relatively high tax rate on the sale of Hercules' investment in a foreign affiliate. Without these unusual items, effective tax rates would have been 35% in both 1994 and 1993. See Note 18 to the financial statements for further information. FINANCIAL CONDITION Liquidity and financial resources: Net cash flow from operations was $298 million, $659 million, and $305 million in 1994, 1993, and 1992, respectively. The substantial increase in 1993 and subsequent decrease in 1994 were due principally to Titan IV SRMU recoveries in 1993 of approximately $262 million. Additionally, cash flow from operations in 1994 reflected higher tax payments associated with the Titan settlement and the sale of the Packaging Films business, while 1993 reflected cash proceeds from favorable litigation settlements. Also in 1994 working capital requirements were higher. Overall cash flow in 1994 was favorably affected by the proceeds from asset disposals of $202 million, primarily related to the sale of the Packaging Films business. In the three-year period ended December 31, 1994, the company satisfied its cash requirements for capital expenditures, other investing activities, and dividends entirely from operating cash flows. In addition to internally generated cash, various credit sources are available to the company. These include short-term lines of credit, of which $66 million was available at December 31, 1994, and revolving credit agreements with several banks providing $380 million ($280 million of which was available at December 31, 1994). In addition, the company has a shelf registration in the amount of $50 million available, subject to market conditions. Working capital has increased in 1994 primarily reflecting the recognition of previously deferred revenue associated with the Titan IV SRMU of $48 million. Working capital decreased in 1993 largely reflecting recoveries of accounts receivable, resulting from the restructuring of the Titan IV SRMU contract. In addition, water-soluble polymer inventories were managed downward. Capital expenditures increased in 1994 to $164 million from $150 million in both 1993 and 1992. The increase primarily reflects spending on a new methylcellulose facility in Doel, Belgium, which was completed in late 1994. Commitments and Capital Structure: Total capitalization (stockholders' equity plus total debt) of $1.8 billion at December 31, 1994, remained unchanged from December 31, 1993. Stockholders' equity declined $73 million while total debt increased $15 million. As a result, total debt as a percentage of capitalization increased to 28% from 26%. Concurrent with the three-for-one split of common stock, the Board also increased the quarterly dividend 12.5% to $.21 per share on a post-split basis. Also, at December 31, 1994, 12,774,600 shares of common stock on a post-split basis remained authorized for repurchase. Fluctuations in interest and foreign currency exchange rates affect the company's financial position and results of operations. The company uses several strategies to actively hedge foreign currency exposure and minimize the effect of such fluctuations in reported earnings. (See "Foreign Currency Translation" and "Financial Instruments and Hedging" in the Summary of Significant Accounting Policies and Notes 17 and 20 11 13 to the financial statements.) There are presently no significant restrictions on the remittance of funds generated by the company's operations outside the United States. Hercules has been identified as a potentially responsible party (PRP) by Federal and State authorities for environmental cleanup at numerous sites. The estimated range of the reasonably possible costs of remediation is between $64 million and $244 million. The company does not anticipate that its financial condition will be materially affected by environmental remediation costs in excess of amounts accrued, although quarterly or annual operating results could be materially affected. Additional details regarding environmental matters are provided in Note 23 to the financial statements. Environmental remediation expenses for nonoperating and operating sites have been funded from internal sources of cash. Such expenses are not expected to have a significant effect on the company's ongoing liquidity. Environmental cleanup costs, including capital expenditures for ongoing operations, are a normal, recurring part of operations and are not significant in relation to total operating costs or cash flows. A quarterly dividend has been paid without interruption since 1913, the company's first year of operation. The quarterly dividend of $.56 per share, during 1994 (pre-split basis), represents a total payout for the year of $89 million. During 1994, about 43% of capital expenditures pertained to production-capacity increases, compared with 35% in 1993 and 30% in 1992. Most of the remainder relates to cost-savings projects, regulatory requirements, and research facilities. Capital expenditures are expected to approximate $146 million during 1995. This amount includes funds for continuation and/or completion of ongoing projects as well as resins upgrade and modernization at Jefferson, Pennsylvania, and a new polypropylene fiber plant in Mexico. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND REQUIRED SUPPLEMENTARY DATA HERCULES INCORPORATED
CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Consolidated Statement of Operations for the Years Ended December 31, 1994, 1993, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Consolidated Balance Sheet as of December 31, 1994 and 1993 . . . . . . . . . . . . . . . 15 Consolidated Statement of Cash Flows for the Years Ended December 31, 1994, 1993, and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 1994, 1993, and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 18-34 SUPPLEMENTARY DATA Summary of Quarterly Results (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . 35 Subsidiaries of Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
12 14 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and the Board of Directors of Hercules Incorporated Wilmington, Delaware We have audited the consolidated financial statements of Hercules Incorporated and subsidiary companies listed in the index on page 12 of this Form 10-K. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hercules Incorporated and subsidiary companies as of December 31, 1994 and 1993, and the consolidated results of their operations and their cash flow for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. As discussed in Notes 14 and 18 to the financial statements, in 1993, the company changed its methods of accounting for postemployment benefits, postretirement benefits other than pensions, and income taxes. Coopers & Lybrand, L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania 19103 January 30, 1995 13 15 Hercules Incorporated
Consolidated Statement of Operations (Dollars in thousands, except per share) Year Ended December 31 --------------------------------------------- 1994 1993 1992 =============================================================================================================== Net Sales $2,821,015 $2,773,404 $2,864,859 Cost of sales 1,924,342 1,931,015 2,092,210 Selling, general and administrative expenses 373,941 371,725 371,472 Research and development 64,780 76,121 70,208 Other operating expenses, net (Note 15) 39,104 86,912 86,542 --------------------------------------------- Profit from operations 418,848 307,631 244,427 Equity in income of affiliated companies 25,605 24,108 15,984 Interest and debt expense (Note 16) 28,137 36,159 41,196 Other income (expense), net (Note 17) (8,028) 15,606 45,607 --------------------------------------------- Income before income taxes and effect of changes in accounting principles 408,288 311,186 264,822 Provision for income taxes (Note 18) 134,132 102,766 96,925 --------------------------------------------- Income before effect of changes in accounting principles 274,156 208,420 167,897 Extraordinary charge for early retirement of debt (Note 6) -- (3,578) -- Effect of changes in accounting principles (Notes 14 and 18) -- (238,218) -- --------------------------------------------- Net income (loss) $ 274,156 ($33,376) $ 167,897 ============================================= Earnings (loss) per share (Note 19): Before effect of changes in accounting principles $ 2.29 $ 1.62 $ 1.23 Extraordinary charge from early retirement of debt (Note 6) -- (.03) -- Effect of changes in accounting principles (Notes 14 and 18) -- (1.85) -- --------------------------------------------- Earnings (loss) per share $ 2.29 $ (.26) $ 1.23 =============================================
The accompanying accounting policies and notes are an integral part of the consolidated financial statements. 14 16 Hercules Incorporated
Consolidated Balance Sheet (Dollars in thousands) December 31 --------------------------------------- 1994 1993 Assets --------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents $111,637 $154,628 Accounts receivable, net (Note 1) 588,851 575,924 Inventories (Note 2) 362,254 412,366 Deferred income taxes (Note 18) 89,573 83,605 --------------------------------------- Total Current Assets 1,152,315 1,226,523 Property, Plant and Equipment, net (Note 12) 1,216,055 1,309,335 Investments (Note 3) 224,760 232,077 Prepaid pension (Note 13) 222,412 229,923 Deferred charges and other assets 125,711 164,103 --------------------------------------- Total Assets $2,941,253 $3,161,961 ======================================= Liabilities and Stockholders' Equity --------------------------------------------------------------------------------------------------------------- Current Liabilities Accounts payable $ 162,858 $ 168,026 Short-term debt (Note 5) 188,347 163,901 Accrued expenses (Note 12) 416,265 552,284 --------------------------------------- Total Current Liabilities 767,470 884,211 Long-term debt (Note 6) 307,217 316,871 Deferred income taxes (Note 18) 129,183 126,203 Other postretirement benefits (Note 14) 253,435 272,955 Deferred credits and other liabilities 189,267 193,514 Stockholders' Equity Series preferred stock (Note 7) -- -- Common stock (Note 8) (Shares issued: 1994, 149,115,459; 1993, 59,899,295) 77,665 31,198 Additional paid-in capital 394,749 453,553 Foreign currency translation adjustment 49,422 29,593 Retained earnings 1,474,329 1,955,005 --------------------------------------- 1,996,165 2,469,349 Reacquired stock, at cost (1994, 32,480,067; 1993, 19,062,295 shares) 701,484 1,101,142 --------------------------------------- Total Stockholders' Equity 1,294,681 1,368,207 --------------------------------------- Total Liabilities and Stockholders' Equity $2,941,253 $3,161,961 =======================================
The accompanying accounting policies and notes are an integral part of the consolidated financial statements. 15 17 Hercules Incorporated
Consolidated Statement of Cash Flow (Dollars in thousands) Increase (Decrease) in Cash and Cash Equivalents Year Ended December 31 ------------------------------------------ 1994 1993 1992 CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) $ 274,156 $ (33,376) $ 167,897 Adjustments to reconcile net income to net cash provided from operations: Effect of changes in accounting principles -- 238,218 -- Extraordinary charge for early retirement of debt -- 3,578 -- Depreciation 147,974 169,292 171,752 Contract deferrals and provisions (48,000) 98,257 -- Nonoperating gain on disposals (14,437) (5,505) (87,678) Other nonoperating items 57,522 48,285 14,129 Accruals and deferrals of cash receipts and payments: Affiliates earnings less than dividends received (5,624) 191 2,839 Accounts receivable (17,791) 151,987 (35,899) Inventories 35,924 31,507 28,870 Accounts payable and accrued expenses (77,972) (29,261) 71,778 Deferred charges (15,508) 9,697 (28,269) Noncurrent credits and liabilities (38,492) (23,382) (482) ------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED FROM OPERATIONS 297,752 659,488 304,937 CASH FLOW FROM INVESTING ACTIVITIES: Capital expenditures (164,182) (149,466) (150,111) Proceeds of investment and fixed asset disposals 202,007 60,829 114,987 Payments for businesses acquired, net of cash acquired -- (1,137) -- Cash invested in unconsolidated affiliates, net (2,416) (5,540) (15,644) Other 5,262 (8,332) (9,049) ------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED FROM (USED FOR) INVESTING ACTIVITIES 40,671 (103,646) (59,817) CASH FLOW FROM FINANCING ACTIVITIES: Long-term debt proceeds 80,008 194,588 116,618 Long-term debt repayments (138,420) (221,294) (161,542) Change in short-term debt 97,821 (28,247) (1,961) Common stock issued 8,915 16,560 9,381 Common stock reacquired (342,035) (320,488) (230,903) Dividends paid (89,045) (94,962) (100,561) ------------------------------------------------------------------------------------------------------------------------- NET CASH USED FOR FINANCING ACTIVITIES (382,756) (453,843) (368,968) Effect of exchange rate changes on cash 1,342 (923) (1,218) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (42,991) 101,076 (125,066) Cash and cash equivalents at beginning of year 154,628 53,552 178,618 ------------------------------------------ Cash and cash equivalents at end of year $ 111,637 $ 154,628 $ 53,552 ========================================== ------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (net of amount capitalized) $ 30,988 $ 38,359 $ 41,840 Income taxes paid, net 194,385 132,827 61,507 Noncash investing and financing activities: Conversion of notes and debentures 31,180 18,524 18,961 Contribution of net assets to joint venture -- -- 52,230 Incentive plan stock issuances 41,233 61,600 8,773 Accounts payable for common stock acquisitions 7,946 22,046 1,764 Premium for early retirement of debt -- 4,144 -- -------------------------------------------------------------------------------------------------------------------------
The accompanying accounting policies and notes are an integral part of the consolidated financial statements. 16 18 Hercules Incorporated
Consolidated Statement of Stockholders' Equity (Dollars in thousands) Common Paid-In Translation Retained Reacquired Stock Capital Adjustment Earnings Stock ------------------------------------------------------------------------------------------------------------------- Balances at January 1, 1992 $30,290 $357,758 $80,367 $2,016,007 $566,035 (Common shares: Issued 58,155,928; reacquired, 11,463,354) Net Income -- -- -- 167,897 -- Cash dividends, $.75 per common share -- -- -- (100,561) -- Foreign currency translation adjustment -- -- (44,989) -- -- Purchase of common stock, 4,336,450 shares -- -- -- -- 231,433 Retirement of reacquired stock, 157,005 shares (82) (7,675) -- -- (7,757) Issuance of common stock: Incentive plans, net, 338,667 shares 176 17,978 -- -- -- Conversion of notes and debentures, 826,958 shares 431 18,530 -- -- -- ------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1992 30,815 386,591 35,378 2,083,343 789,711 (Common shares: Issued 59,164,548; reacquired, 15,642,799) Net Loss -- -- -- (33,376) -- Cash dividends, $.75 per common share -- -- -- (94,962) -- Foreign currency translation adjustment -- -- (5,785) -- -- Purchase of common stock, 3,959,300 shares -- -- -- -- 340,770 Issuance of common stock: Incentive plans, net, 857,015 shares including 539,804 from reacquired stock 166 48,655 -- -- (29,339) Conversion of notes and debentures, 417,536 shares 217 18,307 -- -- -- =================================================================================================================== Balances at December 31, 1993 31,198 453,553 29,593 1,955,005 1,101,142 (Common shares: Issued 59,899,295; reacquired, 19,062,295) Net Income -- -- -- 274,156 -- Cash dividends, $.75 per common share -- -- -- (89,045) -- Foreign currency translation adjustment -- -- 19,829 -- -- Purchase of common stock, 2,981,500 shares -- -- -- -- 327,935 Issuance of common stock: Incentive plans, net, 317,262 shares including 217,106 from reacquired stock 52 4,764 -- -- (13,473) Conversion of notes and debentures, 705,702 shares 368 30,812 -- -- -- Retirement of reacquired stock, 11,000,000 shares (5,729) (94,380) -- (614,011) (714,120) Three-for-one common stock split effected in the form of a stock dividend: issued 99,410,306 shares; 21,653,378 treasury shares 51,776 -- -- (51,776) -- Balances at December 31, 1994 $77,665 $394,749 $49,422 $1,474,329 $701,484 =================================================================================================================== (Common shares: Issued 149,115,459; reacquired, 32,480,067)
The accompanying accounting policies and notes are an integral part of the consolidated financial statements. 17 19 Hercules Incorporated SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Hercules Incorporated and all wholly owned subsidiaries. Investments in affiliated companies owned 20% or more are accounted for on the equity method and, accordingly, consolidated income includes Hercules' share of their income. RECLASSIFICATIONS On December 8, 1994, the company's Board of Directors authorized a three-for-one stock split effected in the form of a 200% tax-free stock dividend distributed on January 30, 1995, to stockholders of record as of January 9, 1995. Stockholders' equity at December 31, 1994, has been adjusted to give retroactive effect to the stock split by reclassifying from retained earnings to common stock the par value of the additional shares arising from the split. In addition, all references in the financial statements to per-share amounts, number of shares at December 31, 1994, and stock option data of the company's common stock have been restated. Equity in income of affiliated companies is reported before applicable income taxes and included in income before income taxes and effect of changes in accounting principles. Previously, equity in income of affiliated companies was reported net of applicable income taxes and included in income before effect of changes in accounting principles. Management believes that the current presentation is more meaningful. The effect on income before income taxes is $25,605, $24,108, and $15,984 for the years ended December 31, 1994, December 31, 1993, and December 31, 1992, respectively. The effect on the provision for income taxes is $8,700, $6,881, and $8,601 for the comparable periods. Financial statements for 1993 and 1992 have been reclassified to conform with the 1994 presentation. LONG-TERM CONTRACTS Aerospace segment sales are principally under long-term contracts and include cost-reimbursement and fixed-price contracts. Sales under cost-reimbursement contracts are recognized as costs are incurred and include a proportion of the fees expected to be realized equal to the ratio of costs incurred to date to total estimated costs. Sales under fixed-price contracts are recognized as the actual cost of work performed relates to the estimate at completion. Cost or performance incentives, which are incorporated in certain contracts, are recognized when realization is assured and amounts can be reasonably estimated. Estimated amounts for contract changes and claims are included in contract sales only when realization is probable. Assumptions used for recording sales and earnings are adjusted in the period of change to reflect revisions in contract value and estimated costs. In the period in which it is determined that a loss will be incurred on a contract, the entire amount of the estimated loss is charged to income. ENVIRONMENTAL EXPENDITURES Environmental expenditures that pertain to current operations or relate to future revenues are expensed or capitalized consistent with the company's capitalization policy. Expenditures that result from the 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. In accordance with company policy, cash equivalents include commercial paper and other securities with original maturities of 90 days or less. The 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 inventories and certain domestic inventories, which in the aggregate represent approximately 53% of total inventories, are valued principally on the average cost method. Inventoried costs relating to long-term contracts are stated at actual production cost. 18 20 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 the effective date of the change continue to be depreciated principally by accelerated methods. The company believes that straight-line depreciation provides for a better matching of costs and revenues over the lives of the assets. 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. INCOME TAXES Income taxes for 1994 and 1993 are determined in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, which requires an asset and liability approach for financial accounting and reporting of income taxes. Changes in enacted tax rates are reflected in the tax provision as they occur. A valuation allowance is recorded to reduce deferred tax assets when realization of a tax benefit is unlikely. For years prior to 1993, the provision for income taxes was determined under Accounting Principles Board Opinion 11 (APB 11), whereby the income tax provision was calculated under the deferred method. 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. FOREIGN CURRENCY TRANSLATION With the exception of operations in countries with highly inflationary economies, the financial statements of Hercules' non-U.S. entities are translated into U.S. dollars using current rates of exchange, with gains or losses resulting from translation included in the foreign currency translation adjustment account in the stockholders' equity section of the balance sheet. The related allocation for income taxes is not significant. For foreign operations in countries with highly inflationary economies, financial statements are translated at either current or historical exchange rates, as appropriate. These currency adjustments, along with gains and losses on foreign currency transactions (denominated in currencies other than local currency), are reflected in net income. The translation loss of the inflationary component of interest income related to holding marketable securities in highly inflationary economies is classified as a reduction in interest income. FINANCIAL INSTRUMENTS AND HEDGING Derivative financial instruments are used to hedge risk caused by fluctuating currency and interest rates. The company enters into forward exchange and foreign currency option contracts and currency swaps to hedge foreign currency exposure. Realized and unrealized gains and losses on these contracts are included in net income, 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 contracts used to hedge the value of investments in certain foreign subsidiaries are included in the foreign currency translation adjustment account. The company does not hold or issue financial instruments for trading purposes. In addition, the company uses interest rate swap agreements to manage interest costs and risks associated with changing interest rates. The differential to be paid or received is accrued as interest rates change and is recognized in interest expense over the life of the agreements. Counterparties to the forward exchange, currency swap and interest rate swap contracts are major financial institutions. Credit loss from counterparty nonperformance is not anticipated. 19 21 Hercules Incorporated NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share) 1. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of: 1994 1993 --------------------- Trade $537,383 $539,611 Other 58,675 42,573 ------------------------- Total 596,058 582,184 Less allowance for doubtful accounts 7,207 6,260 ------------------------- $588,851 $575,924 =========================
Trade accounts receivable include amounts under long-term contracts and subcontracts (principally with the U.S. Government or U.S. Government contractors) of $171,705 at December 31, 1994, and $196,465 at December 31, 1993, net of progress payments of $297,200 and $373,132, respectively. Included in these amounts are unbilled accounts receivable (work in progress and claims) of $94,369 and $113,282, respectively, representing recoverable costs and accrued profits, which will be billed in accordance with contract terms and delivery schedules. Receivables that will not be collected within one year are $31,496 at December 31, 1994, and $15,144 at December 31, 1993. Long-term U.S. Government contracts and subcontracts are subject to termination by the Government; however, in these circumstances, an equitable settlement of work performed is negotiated unless in the unlikely event it is determined to be a termination for default. Additionally, certain contracts are subject to final cost submissions and rate settlements. At December 31, 1994, there were no significant receivables subject to litigation. Additionally at December 31, 1994, net accounts receivable from customers located in the United States, Europe and other regions were $396,764, $160,798, and $31,289, respectively. 2. INVENTORIES The components of inventories are as follows:
1994 1993 --------------------- Finished products $171,891 $199,053 Materials, supplies and work in process 190,363 213,313 ------------------------- $362,254 $412,366 =========================
Inventories valued on the LIFO method were lower than if valued under the average cost method, which approximates current cost by $34,171 and $35,273 at December 31, 1994 and 1993, respectively. 3. INVESTMENTS Total equity investments in affiliated companies were $133,810 and $142,917 at December 31, 1994 and 1993, respectively. Dividends received from affiliated companies were $11,281 in 1994, $18,381 in 1993, and $10,222 in 1992. Other investments, at cost or less, were $90,950 and $89,160, for the years ended December 31, 1994 and 1993, respectively. Included in these amounts are noncurrent marketable securities aggregating $53,242 and $52,264 for the corresponding years. The company's investments in equity and debt securities covered under the scope of Statement of Financial Accounting Standards (SFAS), No. 115, "Accounting for Certain Investments in Debt and Equity Securities" are classified as "available for sale". The value of these investments, based on market quotes, approximates book values. 4. CONTRACT DEFERRALS AND PROVISIONS Hercules entered into a Supplemental Agreement with the Titan IV SRMU prime contractor effective October 15, 1993. Contemporaneously with this agreement, which called for contract changes related to production, delivery, and launch schedules, the prime contractor entered into a Supplemental Agreement to its Titan IV 20 22 prime contract with the Air Force, which was also effective October 15, 1993. As a result, Hercules dismissed its lawsuit against the prime contractor and received payments of $215,000 in November 1993, primarily for amortized investment in development and tooling costs and increased risk associated with the contract changes. Additional agreements between the parties provided for Hercules to receive payments for settlements of contract claims aggregating $84,000, of which $21,700 and $47,000 were received for 1994 and 1993, respectively. Estimated costs at completion for the Titan IV SRMU program and other contracts are reviewed quarterly and consider the progress of the contracts, changes in contract terms and conditions, and other contingencies. Year-end deferrals and provisions are considered adequate to complete the contracts and amounted to $63,097 and $118,321 at December 31, 1994 and 1993, respectively. The decrease in the deferrals and provisions principally reflects diminished program risk relating to the Titan IV SRMU program coincident with 1994 progress toward program completion and a favorable contract modification, the final portion of which was negotiated in the fourth quarter of 1994. 5. SHORT-TERM DEBT A summary of short-term debt follows:
1994 1993 ---------------------------------- Commercial paper $100,000 $ -- Banks 35,600 29,566 Current maturities of long-term debt 52,747 134,335 ---------------------------------- $188,347 $163,901 ==================================
Commercial paper is issued or renewed for varying periods, with interest at prevailing market rates. 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 commercial paper and bank borrowings approximate market value because of their short maturity period. At December 31, 1994, Hercules had $66,376 of unused lines of credit that may be drawn as needed, with interest at a negotiated spread over lenders' cost of funds. Lines of credit in use at December 31, 1994, were $28,783. 6. LONG-TERM DEBT A summary of long-term debt follows:
1994 1993 --------------------------------- 9.6% notes due 1994 $ -- $50,000 Term loans due 1993-1995 (a) 52,393 52,166 6.5% convertible subordinated debentures due 1999 (b) 4,242 5,568 7.85% notes due 2000 25,000 25,000 6.625% notes due 2003 (c) 124,842 124,823 8% convertible subordinated debentures due 2010 (d) 66,905 96,759 8.5% debentures due 2017 (e) -- 79,144 Variable rate loans (f) 75,400 -- Other 11,182 17,746 --------------------------------- 359,964 451,206 Current maturities of long-term debt (52,747) (134,335) --------------------------------- Net long-term debt $307,217 $316,871 =================================
21 23 (a) The term loans are with several banks and bear interest at various rates at an agreed-upon spread over lenders' cost of funds. (b) The subordinated debentures are convertible into common stock at $11.67 per share and are redeemable at the option of the company at varying rates. (c) Par value of $125,000 issued June 1993. (d) The subordinated debentures are convertible into common stock at $14.90 per share and are redeemable at the option of the company at varying rates. Beginning in 1996, the debentures require an annual sinking fund of $5,000. (e) Debentures were redeemed in first quarter 1994. In December 1993, the company notified the holders of its intention to redeem the debentures in January 1994. An extraordinary charge of $3,578 (net of a tax benefit of $2,288), or $.03 per share, was recorded, principally for redemption premiums and unamortized issuance costs. 1993 "Current maturities of long-term debt" included these debentures. (f) Uncollateralized bank borrowings with average maturities of 400 days, with interest at a negotiated spread over lenders' cost of funds. The company has entered into a revolving credit and competitive advance facility agreement with various banks providing for commitments that terminate in 1995 and 1998. Under the agreement, Hercules may borrow up to a total of $380,000 (of which $280,000 was available at December 31, 1994) at an agreed-upon spread over London Interbank Offered Rate (LIBOR). This agreement requires the maintenance of certain financial ratios. Long-term debt maturities during the next five years are $52,747 in 1995, $78,067 in 1996, $1,763 in 1997, $895 in 1998, and $4,414 in 1999. 7. SERIES PREFERRED STOCK The series preferred stock is without par value and is issuable in series. There are 2,000,000 shares authorized for issuance, of which none have been issued. 8. COMMON STOCK Hercules common stock has a stated value of $25/48, and 150,000,000 shares are authorized for issuance. At December 31, 1994, a total of 18,020,784 shares were reserved for issuance for the following purposes: 879,999 shares for sales to the Savings Plan Trustee; 8,102,250 shares for the exercise of awards under the Stock Option Plan; 2,527,713 shares for awards under incentive compensation plans; 4,854,609 shares for conversion of debentures and notes; and 1,656,213 shares for employee stock purchases. Under the company's stock repurchase program started in 1991 through the year ended December 31, 1994, the Board of Directors had authorized the repurchase of up to 47,850,000 shares of company common stock, 4,350,000 shares of which was intended to satisfy requirements of various employee benefit programs. During this period, a total of 35,075,400 shares of common stock was purchased in the open market at an average price of $26.16 per share. 9. PREFERRED STOCK PURCHASE RIGHTS Each outstanding share of common stock carries one preferred stock purchase right. The right may be exercised, under certain conditions, to purchase one three-thousandth of a share of new Series A Junior Participating Preferred Stock (no par) for $180. The rights are not exercisable or transferable apart from the common stock until 10 days after a public announcement that a person or group has acquired 20% or more, or intends to commence a tender offer for 30% or more, of the common stock of Hercules. The rights, which expire on July 13, 1995, do not have voting rights, are subject to adjustment to prevent dilution, and may be redeemed (under certain conditions) by the company at a price of $.007 per right at any time prior to an 22 24 acquisition of 20% or more of the company's common stock, and, if no change of control of the company's Board of Directors has occurred, for 10 days thereafter. In the event that the company is acquired in a merger, or other business combination transaction of 50% or more of its consolidated assets or earning power are sold, each right will entitle its holder to purchase from the surviving or acquiring corporation, for the exercise price, common stock having a market value of twice the exercise price of the right. Alternatively, if a 20% holder were to acquire the company by means of a reverse merger in which the company and its stock survive, or were to engage in certain "self-dealing" transactions, each right not owned by the 20% holder would become exercisable for the number of common shares which, at that time, would have a market value of two times the exercise price of the right. At December 31, 1994, 150,000 shares of Series A Junior Participating Preferred Stock were reserved for issuance at certain terms upon the exercise of the Preferred Stock Purchase Rights. The voting, dividend, and liquidation rights of each three-thousandth of a share are generally equivalent to rights enjoyed by one share of common stock, subject to certain minimum preferences. 10. STOCK-BASED INCENTIVE PLANS The 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 nonemployee directors. Shares of common stock awarded under these plans normally are either restricted stock (shares subject to restrictions on transfer and subject to risk of forfeiture until earned by continued employment) or performance shares (shares subject to the same restrictions and risk of forfeiture, whose ultimate distribution is contingent on performance as measured against predetermined objectives over a specified period of time). During the restriction period, award holders have the rights of stockholders, including the right to vote and receive cash dividends, except for the right to transfer ownership. Shares are forfeited and revert to the company as a result of employment termination, except in the case of death, disability, retirement, or other specified events. The number of awarded shares outstanding was 3,269,250, 2,863,341, and 1,420,095 at December 31, 1994, 1993, and 1992, respectively. The cost of stock awards and other market-based units, which is charged to income over the period during which the restrictions lapse or over the performance period, amounted to $41,256, $36,606, and $12,304 during 1994, 1993, and 1992, respectively. At December 31, 1994, there were 2,527,713 shares of common stock available for award under the plans. Under the company's stock option plans, options are granted at the market price on the date of grant, are exercisable at various periods from one to five years after date of grant, and expire 10 years after date of grant. A summary of the status of the company's stock option plans for the three years ended December 31, 1994, follows:
Shares -------------------------------- Available for Grant Outstanding Price Range January 1, 1992 5,203,800 3,251,310 $11.33 - $19.04 Granted (1,012,200) 1,012,200 $16.33 - $18.50 Exercised (699,090) $11.83 - $19.04 Cancelled 5,940 (91,125) $11.83 - $19.04 ---------------------------------------------------------------------------------------------------------------------------- December 31, 1992 4,197,540 3,473,295 $11.33 - $19.04 Authorized 1,800,000 Granted (935,550) 935,550 $22.92 - $37.17 Exercised (1,002,597) $11.83 - $19.04 Cancelled (5,700) $11.83 - $19.04 ---------------------------------------------------------------------------------------------------------------------------- December 31, 1993 5,061,990 3,400,548 $11.33 - $37.17 Granted (872,700) 872,700 $35.29 - $38.33 Exercised (348,438) $11.83 - $25.00 Cancelled (11,850) $12.25 - $16.21 ---------------------------------------------------------------------------------------------------------------------------- December 31, 1994 4,189,290 3,912,960 $11.33 - $38.33
23 25 Options exercisable at December 31, 1994, 1993, and 1992 were 2,242,950, 1,834,878, and 2,461,095, respectively. 11. EMPLOYEE STOCK PURCHASE PLAN In April 1993, the company approved a qualified, noncompensatory, Employee Stock Purchase Plan, which allows eligible employees to acquire shares of common stock through systematic payroll deductions. The plan consists of three-month subscription periods starting on July 1, 1993. The purchase price for each share is 85% of the lower of the fair market value of the common stock on either the first or last day of that subscription period. Purchases are limited from 2% to 15% of an employee's base salary each pay period, subject to certain limitations. Currently, 1,800,000 shares of Hercules common stock are registered for offer and sale under the plan. Shares issued at December 31, 1994, and December 31, 1993, were 143,787 and 36,288, respectively. 12. ADDITIONAL BALANCE SHEET DETAIL
1994 1993 ---------------------------- Property, Plant and Equipment Land $ 32,368 $ 33,188 Buildings and equipment 2,998,002 3,102,072 Construction in progress 70,379 135,036 ---------------------------- Total 3,100,749 3,270,296 Accumulated depreciation and amortization 1,884,694 1,960,961 ---------------------------- Net Property, Plant and Equipment $ 1,216,055 $ 1,309,335 ============================ Accrued Expenses Payroll and employee benefits $ 77,819 $ 83,127 Income taxes payable 31,318 86,539 Contract deferrals and provisions (Note 4) 63,097 118,321 Other 244,031 264,297 ---------------------------- Accrued Expenses $ 416,265 $ 552,284 ============================
13. PENSION BENEFITS Hercules and its consolidated subsidiaries maintain various defined benefit pension plans covering substantially all employees. Benefits for the majority of plans are based on average final pay and years of service, while benefits for certain represented locations are based on stated amounts and years of service. The company's funding policy, consistent with statutory requirements and tax considerations, is based on actuarial computations utilizing the Entry Age Normal method of calculation. Net periodic pension cost includes the following components:
1994 1993 1992 ------------------------------------------------------------ Service cost (benefits earned during the year) $ 27,938 $ 28,347 $ 26,658 Interest cost on projected benefit obligation 99,671 94,866 92,012 Return on plan assets 3,195 (240,192) (47,695) Plan deferrals and amortization (111,348) 130,651 (65,803) Amortization of transition asset (18,928) (18,952) (20,135) ------------------------------------------------------------ Net periodic pension expense (credit) $ 528 $ (5,280) $(14,963) ============================================================
The company's pension plans have assets in excess of the accumulated benefit obligation. Plan assets include equity and fixed income securities and real estate. The following table presents a reconciliation of the funded status of the pension plans to prepaid pension expense. 24 26
1994 1993 ----------------------------------------------------------------------------------------------------------------- Plan assets at fair value $1,268,463 $1,446,555 ----------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation (vested, 1994 - $1,020,673; 1993 - $1,128,583) 1,063,070 1,179,427 Effect of increase in compensation 117,947 175,180 ----------------------------------------------------------------------------------------------------------------- Projected benefit obligation 1,181,017 1,354,607 ----------------------------------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 87,446 91,948 Unrecognized net loss 192,572 206,698 Unrecognized prior service cost 52,391 60,054 Unrecognized transition asset (109,997) (128,777) ----------------------------------------------------------------------------------------------------------------- Prepaid pension expense $ 222,412 $ 229,923 ==================================
Significant assumptions used in determining pension obligations and the related pension expense include a weighted-average discount rate of 8.6% at December 31, 1994, and 7.25% at December 31, 1993, and an assumed rate of increase in future compensation of 4.5% at both dates. The 1994 discount rate was changed from 7.25% to 8.6% on October 1, 1994, based upon an interim valuation performed by the company's actuaries due to the pending sale of the Aerospace business. The increase in the discount rate reflects the significant increase in interest rates in 1994. The expected long-term rate of return on plan assets was 9.0% for 1994 and 1993. The change in assumptions noted above decreased the accumulated benefit obligation and the projected benefit obligation by approximately $142,600 and $186,300 respectively. 14. OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS Hercules provides certain defined benefit postretirement health care and life insurance benefits to retired employees. Substantially all employees are covered and become eligible for these benefits upon satisfying the appropriate age and service requirements necessary for receipt of these benefits. Effective January 1, 1993, Hercules adopted Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." SFAS No. 106 requires the recognition of these benefit costs on an accrual basis. Prior to January 1, 1993, the costs of retiree health care and life insurance were expensed as incurred. The effect of adopting this accounting standard was recognized immediately as the effect of a change in accounting principle and resulted in a charge of $187,860 (net of a tax benefit of $115,140) or $1.46 per share against 1993 net income. This represented the accumulated postretirement benefit obligation existing at January 1, 1993. This amount excluded approximately $60,000 related to employees of Government-owned, contractor-operated plants. Based on opinion of company counsel, management believes that postretirement benefits for these employees are the obligation of the United States Government. The new accounting standard would have increased periodic benefit expenses; however, modifications to the Hercules benefit plans announced in February 1993 have more than offset the increase. The following provides a reconciliation of the accumulated postretirement benefit obligation (APBO) to the liabilities reflected in the company's balance sheet at December 31, 1994 and 1993: 25 27
Accumulated postretirement benefit obligation: 1994 1993 ---------------------------------- Retirees $173,342 $198,440 Fully eligible employees 14,420 8,712 Other employees 23,474 34,848 ---------------------------------- Total accumulated postretirement benefit obligation 211,236 242,000 Plan assets at fair value 8,772 10,625 ---------------------------------- APBO in excess of plan assets 202,464 231,375 Unrecognized prior service benefit 59,013 58,974 Unrecognized gain (loss) on plan assets (457) 325 Unrecognized actuarial gain 16,993 1,703 ---------------------------------- Accrued postretirement benefit cost 278,013 292,377 Amount included in accrued expenses -- Other (24,578) (19,422) ---------------------------------- Other postretirement benefits $253,435 $272,955 ==================================
The postretirement plans are contributory. In August 1993, the company established a Voluntary Employees' Beneficiary Association (VEBA) Trust and contributed $10,000 to fund postretirement benefits for eligible employees. Benefits for retirees not eligible under the Trust continue to be paid by the company. The company will periodically seek reimbursement from the Trust for claims paid by the company that are eligible for reimbursement. During 1994, $2,004 in reimbursements was obtained from the Trust. The plan assets are invested primarily in equity funds. The weighted average of the expected long-term rate of return on plan assets is 9%. In January 1994, Hercules implemented managed care and managed care pharmacy programs for retirees. These programs reduced the accumulated postretirement benefit obligation by $8,205. In February 1993, the company modified its health care benefits. The changes provided for increased cost-sharing by current and future retirees. The plan modifications reduced the accumulated postretirement benefit obligation by $61,832. These amounts are being amortized over the average remaining service lives of the company's active employees. In addition, the components of net periodic benefit costs have been reduced by $9,950 and $8,600 in 1994 and 1993, respectively, as a result of these changes. The net periodic postretirement benefit costs for 1994 and 1993 are as follows:
1994 1993 -------------------------------- Service cost (benefits attributed to service during the year) $ 1,832 $ 2,084 Interest cost on accumulated postretirement benefit obligation 17,076 19,873 Plan deferrals and amortization (4,747) (2,533) Return on plan assets (152) (625) -------------------------------- Net periodic postretirement benefit cost $14,009 $18,799 ================================
In 1992, the annual costs of these benefits were expensed as paid and totaled $22,550. The weighted-average discount rate used to estimate the accumulated postretirement benefit obligation was 8.6% and 7.25% at December 31, 1994 and 1993, respectively. The 1994 discount rate was changed from 7.25% to 8.6% on October 1, 1994 based upon an interim valuation performed by the company's actuaries due to the pending sale of the Aerospace business. The increase in the discount rate reflects the significant increase in interest rates in 1994. The assumed health care cost trend rate at December 31, 1994, was 9% grading down to 5% in 1998 and thereafter. The assumed health care cost trend rate at December 31, 1993, was 10% grading down to 5% in 1998 and thereafter. At December 31, 1994 and 1993, the assumed compensation increases for life insurance were based on graded scales averaging 4.4% for salaried employees and 3.4% for wage employees. The change in the assumptions noted above did not have a material effect on the accumulated postretirement benefit obligation. A one-percentage-point increase in the assumed health care cost trend rate would have increased the accumulated postretirement benefit obligation as of December 31, 1994, and the net periodic postretirement benefit cost for 1994 by $17,000 and $1,800, respectively, and $19,500 and $1,800, respectively, as of December 31, 1993. Hercules provides certain disability and workers' compensation benefits to former or inactive employees. Effective January 1, 1993, Hercules adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits". This statement requires recognition of these benefits on an accrual basis. Prior to January 1, 1993, 26 28 disability benefits and workers' compensation benefits were expensed as claims were reported. The company's accrued liability under SFAS No. 112 at December 31, 1994, and December 31, 1993, was approximately $19,000. The effect of adopting SFAS No. 112 was recognized immediately in 1993 as the effect of a change in accounting principle and resulted in a charge of $12,400 (net of a tax benefit of $7,600) or $.10 per share against 1993 net income. Adoption of this standard did not materially affect 1993 results of operations. 15. OTHER OPERATING EXPENSES, NET Other operating expenses, net, include environmental cleanup costs, principally for nonoperating sites of $20,366 in 1994, $34,744 in 1993, and $45,152 in 1992. Other operating expenses, net, in 1994 also included employee separation costs from a corporate-wide early retirement incentive option and involuntary terminations and writeoffs of $18,738. Net restructuring and other writeoffs in 1993 were $52,168 including $25,000 of estimated operating losses, shutdown costs and loss on sale related to the disposition of the Liquid Molding Resins business, $20,654 of severance costs related to involuntary terminations, and $4,600 of asset writedowns associated with an idle manufacturing facility. 1992 restructuring charges and other writeoffs of $44,998 were principally severance costs including rationalization of worldwide administrative and support functions. 16. INTEREST AND DEBT EXPENSE Interest and debt costs are summarized as follows:
1994 1993 1992 ------------------------------------------------ Costs incurred $36,038 $41,897 $48,966 Amount capitalized 7,901 5,738 7,770 ------------------------------------------------ Amount expensed $28,137 $36,159 $41,196 ================================================
17. OTHER INCOME (EXPENSE), NET Other income (expense), net, consists of the following:
1994 1993 1992 ------------------------------------------------ Interest income $8,191 $8,695 $13,414 Net gains on dispositions 14,437 5,505 87,678 Gain from litigation settlements -- 29,036 -- Investment writeoffs -- -- (18,063) Miscellaneous expense, net (30,656) (27,630) (37,422) ------------------------------------------------ $(8,028) $15,606 $45,607 ================================================
Net gains on dispositions primarily reflect the sale of the company's interests in affiliated companies. Gain from litigation settlements in 1993 substantially relates to businesses acquired in the 1980s. Investment writeoffs in 1992 primarily reflect the termination of a joint venture to supply paraxylene for an exclusive purchase and resale contract. Owing to market conditions, this contract was in a loss position and the termination caused immediate recognition of the estimated losses associated with the remaining obligations under the contract. Miscellaneous expense, net, includes net foreign currency gains (losses) of $(8,557), $(1,132) and $(8,055) in 1994, 1993, and 1992, respectively. 27 29 18. INCOME TAXES Effective January 1, 1993, Hercules adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." (See "Income Taxes" under Summary of Significant Accounting Policies.) Deferred tax balances at January 1, 1993, were remeasured in accordance with SFAS No. 109, resulting in a charge of $37,958, or $.29 per share, against net income. The charge primarily represents the effect of adjusting deferred taxes to reflect recognition of foreign tax credits on a tax rather than book basis. The effect of adopting this standard was recognized immediately as the effect of a change in accounting principle and financial statements for years prior to 1993 were not restated. Information shown below for those prior years was determined under the provisions of Accounting Principles Board (APB) Opinion 11. The domestic and foreign components of income before taxes on income are presented below.
1994 1993 1992 -------------------------------------------------- Domestic $243,211 $177,957 $133,769 Foreign 165,077 133,229 131,053 -------------------------------------------------- $408,288 $311,186 $264,822 ==================================================
A summary of the components of the tax provision follows:
1994 1993 1992 --------------------------------------------------- Currently payable U.S. Federal $83,162 $105,792 $50,836 Foreign 45,802 36,705 42,804 State 5,753 4,880 2,830 Deferred Domestic (5,200) (41,707) 6,125 Foreign 4,615 (2,904) (5,670) --------------------------------------------------- Provision for income taxes 134,132 102,766 96,925 (excluding extraordinary item and effect of accounting changes) Extraordinary item -- (2,288) -- Effect of accounting changes: Postretirement benefits -- (115,140) -- Postemployment benefits -- (7,600) -- Income taxes -- 37,958 -- --------------------------------------------------- Total provision $134,132 $15,696 $96,925 ===================================================
Deferred tax liabilities (assets) at December 31, 1994 and 1993 consist of: 1994 1993 ------------------------------- Depreciation $192,485 $203,686 Prepaid pension 87,984 88,202 Inventory 8,373 8,556 Other 12,801 12,801 ------------------------------- Gross deferred tax liabilities 301,643 313,245 ------------------------------- Postretirement benefits other than pensions (112,874) (118,706) Accrued expenses (100,388) (94,255) Government contracts (14,621) (32,745) Loss carryforwards (16,471) (17,270) Foreign tax credit carryforwards -- (4,306) Other (32,873) (23,664) ------------------------------- Gross deferred tax assets (277,227) (290,946) ------------------------------- Valuation allowance 15,194 20,299 ------------------------------- $ 39,610 $ 42,598 ===============================
28 30 Included in the SFAS No. 109 adoption at January 1, 1993, were valuation allowances of $35,629. The decrease in the valuation allowance in 1994 and 1993 relates principally to utilization of foreign tax credit carryforwards. Under the provisions of APB 11, deferred taxes for 1992 relate to the following timing differences between financial and taxable income:
1992 ----- Depreciation $13,021 Pension expense 9,842 Government contracts 7,995 Interest 510 Environmental expenses (8,864) Undistributed earnings (7,665) Inventory (1,998) Severance benefits (4,061) Other, net (8,325) ---------- $ 455 =========
In the fourth quarter of 1993, based upon clarification of certain tax law provisions concerning research and experimentation (R&E) credits, the company recognized an R&E credit of $9,700. Upon further clarification, the company recognized an additional $4,000 of R&E credit in 1994. The tax credit relates to research and development expenditures incurred on certain Government contracts. Additional amounts of R&E credit may be recorded in future years as clarifications of the R&E credit provisions continue to occur. A reconciliation of the U.S. statutory income tax rate to the effective rate (excluding extraordinary item and effect of changes in accounting principles) follows:
1994 1993 1992 ----------------------------------------------- U.S. statutory income tax rate 35% 35% 34% R&E tax credit (1) (4) -- Undistributed earnings -- -- (3) Foreign dividends net of credits 1 4 7 State taxes 1 2 1 Sale of investments -- -- (1) Difference in foreign tax rates -- 1 2 Valuation allowance (1) (5) -- Other (2) -- (3) ------------------------------------------------ Effective tax rate 33% 33% 37% ================================================
The undistributed earnings of subsidiaries and affiliates on which no provision for foreign withholding or U.S. income taxes has been made amounted to $246,833 at December 31, 1994. 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. 19. EARNINGS PER SHARE Primary earnings per share are calculated on the basis of the average number of common and common equivalent shares, using net income adjusted to reflect the elimination of interest expense, net of taxes, on the 6.5% convertible debentures. Shares (post- split basis) and interest expense used in the calculation are as follows:
Shares Interest ----------------------------------- 1994 120,040,209 $149 1993 128,594,688 $226 1992 136,921,479 $717
29 31 Fully diluted earnings per share, which additionally assumes conversion of the 8% convertible subordinated debentures, are not materially different from primary earnings per share or are anti-dilutive. Equivalent shares are increased by an additional 4,900,548 in 1994, 6,843,036 in 1993, and 7,711,332 in 1992, and net income is further adjusted to eliminate interest expense, net of taxes, of $3,855 for 1994, $5,287 for 1993, and $6,066 for 1992. 20. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT a. 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. b. Interest Rate Risk Management In April 1992, the company entered into a three-year amortizing interest rate swap agreement whereby 5.52% per annum fixed-rate debt has been effectively converted to floating-rate debt. Beginning in March 1993, the company entered into another agreement effectively converting floating-rate debt into debt with a fixed rate of 7.52% per annum. In March 1994, the company entered into two additional agreements effectively converting floating-rate debt into debt with a fixed rate of 4.92% and 4.923% per annum, respectively. For the years 1994 and 1993, these contracts resulted in an (increase) reduction in the effective interest rate of (.6%) and 0.7% per annum, respectively, on the weighted-average notional principal amounts outstanding. The aggregate notional principal amounts at the end of the corresponding periods were $160,000 and $150,000, respectively. These agreements mature through the first quarter of 1996. The following table indicates the types of swaps used and their weighted-average interest rates.
1994 1993 --------------------------- Receive-fixed swaps - notional amount $50,000 $100,000 Average receive rate 5.5% 5.5% Average pay rate 4.3% 3.3% Pay-fixed swaps - notional amount 110,000 50,000 Average pay rate 6.1% 7.5% Average receive rate 4.5% 3.3%
c. Foreign Exchange Risk Management The company enters into forward exchange contracts and purchased options to hedge certain firm purchase and sale commitments denominated in foreign currencies (principally Danish kroner, Dutch guilder, Belgian franc, British pound sterling, and German mark). Some of the contracts involve the exchange of two foreign currencies, according to local needs in foreign subsidiaries. The term of the currency derivatives is rarely more than one year. The purpose of the company's foreign currency hedging activities is to protect the company from the risk that the eventual net cash flows resulting from the sale of products to foreign customers and purchases from foreign suppliers will be adversely affected by changes in exchange rates. Foreign exchange contracts do not expose the company to accounting risk due to exchange rate movements as gains and losses on the contracts offset gains and losses on the underlying exposures being hedged. At December 31, 1994 and 1993, the company had outstanding forward exchange contracts to purchase foreign currencies aggregating $50,946 and $24,251 and to sell foreign currencies aggregating $283,782 and $271,869, respectively. Non-U.S. dollar cross-currency trades aggregated $401,756 and $258,530, respectively. The forward exchange contracts mature during 1995. No currency swap agreements were outstanding at December 31, 1994 or 1993. Additionally, there were no deferrals of gains or losses on forward exchange contracts at December 31, 1994. d. Fair Values The following table presents the carrying amounts and fair values of the company's financial instruments at December 31, 1994 and 1993.
December 31, 1994 December 31, 1993 -------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------------------------------------------------------------- Investment securities $53,242 $53,242 $52,264 $52,264 Long-term debt (359,964) (460,041) (451,206) (619,897) Foreign exchange contracts (1,100)* (1,100) (975)* (975) Interest rate swap contracts (1,029)* 862 (191)* (1,335)
*The carrying amount represents the net unrealized gain (loss) or net interest receivable (payable) associated with the contracts at the end of the period. 30 32 FAIR VALUE DISCLOSURES The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Investment securities Valued at 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. Foreign exchange contracts Year-end exchange rates. Interest rate swap contracts Bank or market quotes or discounted cash flows using year-end interest rates. 21. PENDING DIVESTITUTE In March 1995, Hercules expects to complete the sale of a substantial portion of its Aerospace segment to Alliant Techsystems Incorporated (Alliant), at a gain, for approximately $300 million in cash and 3.86 million shares of newly issued Alliant common stock. Net sales for the business units to be divested were $657,393, $687,955 and $745,600 for the years ended December 31, 1994, 1993 and 1992, respectively. Operating profits were $110,427, $110,224 and $61,709 for the corresponding periods. 22. DIVESTITURES During 1994, the company completed the divestiture of its Packaging Films and Liquid Molding Resins business units for $172,600 in cash, subject to post-closing adjustments. The effect of the divestitures on the results of operations is not significant. Net sales of these units were $46,825, $164,229, and $170,353 for the years ended December 31, 1994, 1993, and 1992. Operating losses for the corresponding periods were $0, $27,816 (including restructuring charges of $25,000), and $11,900. 23. COMMITMENTS AND CONTINGENCIES (A) LEASES: Hercules has certain operating leases, including office space and transportation and data processing equipment, expiring at various dates. Rental expense relating to these leases was $40,579 in 1994, $46,005 in 1993, and $48,090 in 1992. At December 31, 1994, minimum rental payments under non-cancelable leases aggregated $336,666 with subleases of $9,616. A significant portion of the lease payments relate to a long-term operating lease for corporate office facilities. The net minimum payments over the next five years are $25,345 in 1995, $17,028 in 1996, $15,715 in 1997, $18,207 in 1998, and $20,257 in 1999. (B) CAPITAL EXPENDITURES: Capital expenditures are expected to approximate $146,000 in 1995. (C) ENVIRONMENTAL: Hercules has been identified as a potentially responsible party (PRP) by U.S. Federal and State authorities for environmental cleanup at numerous sites. The estimated range of the reasonably possible costs of remediation is between $64,000 and $244,000. The actual costs will depend upon numerous factors, including the number of parties found liable at each environmental site and their ability to pay, the actual method of remediation, outcome of negotiations with regulatory authorities, outcome of litigation, changes in environmental laws and regulations, technological developments, and the years of remedial activity required, which could range up to 30 years. Hercules becomes aware of sites in which it may be but has not yet been named a PRP principally through its knowledge of investigation of sites by the U.S. Environmental Protection Agency (EPA) or other Government agency or through correspondence with previously named PRPs requesting information of Hercules' activities at sites under investigation. Hercules brought suit in late 1992 against its insurance carriers for past and future costs for remediation of certain environmental sites. Hercules has not included any insurance recovery in the estimates set forth above. 31 33 Hercules has established procedures for identification of environmental issues at Hercules plant sites. Hercules designates an environmental coordinator at all operating facilities. Environmental coordinators are familiar with environmental laws and regulations and are a resource for identification of environmental issues. Hercules also has an environmental audit program which is designed to identify environmental issues at operating plant sites. Through these programs, Hercules identifies potential environmental, regulatory, and remedial 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). Appeal of the Court's ruling with respect to the finding of Hercules being jointly and severally liable will be filed promptly after issuance of a final court order. In mid-November 1993, an advisory jury found Uniroyal Chemical, Ltd., liable for the Jacksonville site, but also found that Uniroyal had proven a reasonable basis for allocation of responsibility. That same advisory jury found that Standard Chlorine of Delaware is not a liable party for the Jacksonville site. The Court may take the jury's findings into consideration when reaching its decision regarding these parties. The Court has not entered its ruling on the liability of Uniroyal and Standard Chlorine. Appeals of the Court's expected rulings with respect to Uniroyal and Standard Chlorine are probable. Other defendants in this litigation have either settled with the Government or, in the case of the Department of Defense, have not been held liable. Hercules appealed the Court's order finding the Department of Defense not liable. On January 31, 1995 the 8th Circuit Court of Appeals upheld the Court's order holding the Department of Defense not liable. Hercules intends to petition the U.S. Supreme Court on this ruling. Hercules' potential costs for remediation of the Jacksonville site are presently estimated between $23,000 and $149,000. Hercules' potential costs are based on its assessment of potential liability, the level of participation by other PRPs and upon current estimates of the costs to remediate the Jacksonville site. The costs to remediate will vary as Records of Decision are issued on each operable unit of the site and as remediation methods are approved by the EPA. At December 31, 1994, the accrued liability 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 quarterly based on currently available information, including the progress of remedial investigation at each site and the current status of negotiations with regulatory authorities regarding the method and extent of apportionment of costs among other PRPs. The company does not anticipate that its financial condition will be materially affected by environmental remediation costs in excess of amounts accrued, although quarterly or annual operating results could be materially affected. (D) 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 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, and personal injury matters. Hercules also is a defendant in one Federal Administrative Law Proceeding and two Qui Tam ("Whistle Blower") lawsuits brought by former employees. Under the terms of the agreements relating to the sale of a substantial portion of the Aerospace segment, all litigation and legal disputes arising in the ordinary course of the operation of the business sold will be assumed by Alliant Techsystems Inc. except for a few specific lawsuits and disputes including the two Qui Tam lawsuits referred to above. Although Hercules will remain responsible for the Qui Tam actions, Alliant has agreed to reimburse Hercules for a portion of all litigation costs incurred, and a portion of damages, if any, awarded in these suits. The Qui Tam suits were brought by former employees who had been terminated by Hercules in Reduction-in-Force programs. The first Qui Tam suit involves allegations relating to submission of false claims and records, delivery of defective products, and a deficient quality control program. The second Qui Tam suit involves allegations of mischarging of work performed under Government contracts, misuse of Government equipment, other acts of financial mismanagement and wrongful termination claims. The subject matter of both of these Qui Tam suits was investigated by the U.S. Department of Justice. As a result of these investigations, the Government declined to intervene, i.e., prosecute Hercules in either of these suits. 32 34 Hercules denies the allegations made in these suits and intends to vigorously defend these allegations in Court. While it is not feasible to predict the outcome of all pending suits and claims, management does not anticipate that the ultimate resolution of these matters will have a material effect upon the consolidated financial position of Hercules, although 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. 24. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA (Dollars in millions) In the Operations by Industry Segment and Geographic Area table that follows, sales to the U.S. Government and other customers under Government contracts, principally by the Aerospace segment, aggregate $602, $633, and $696 in 1994, 1993 and 1992, respectively. Intersegment sales are eliminated and are insignificant. Operating results and other financial data are prepared on an "entity basis," which means that net sales, profit (loss) from operations, and assets of a legal entity are included in the geographic area where the legal entity is located. For example, a direct sale from the United States to an unaffiliated customer in Europe is reported as a U.S. sale. Interarea sales between Hercules locations are made at transfer prices that approximate market price and have been eliminated from consolidated net sales. Operating profit for the individual area does not include the full profitability generated by sales of Hercules products imported from other geographic areas. Identifiable assets include net trade accounts receivable, inventories, and net property, plant and equipment. Consolidated foreign subsidiaries had net assets (including translation adjustment) of $574 at December 31, 1994, $520 at December 31, 1993, and $552 at December 31, 1992, and net income excluding the extraordinary item and effect of changes in accounting principles of $117 in 1994, $95 in 1993, and $91 in 1992. Direct export sales from the United States to unaffiliated customers were $286, $256, and $260 for 1994, 1993, and 1992, respectively. 33 35 24. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA (Dollars in millions) continued
Food & INDUSTRY SEGMENTS Chemical Functional Corporate & 1994 Specialties Products Aerospace Other Total --------------------------------------------------------------------------------------------------------------------------- Net Sales $1,081 $945 $743 $52 $2,821 Profit (Loss) from Operations 197 148 98 (24) 419 Identifiable Assets 715 780 601 25 2,121 Capital Expenditures 52 100 10 2 164 Depreciation 49 53 40 6 148 1993 --------------------------------------------------------------------------------------------------------------------------- Net Sales 976 867 754 176 2,773 Profit (Loss) from Operations 149 113 105 (59) 308 Identifiable Assets 676 699 664 216 2,255 Capital Expenditures 51 68 23 7 149 Depreciation 54 55 44 16 169 1992 --------------------------------------------------------------------------------------------------------------------------- Net Sales 1,023 865 797 180 2,865 Profit (Loss) from Operations 162 109 52 (79)(1) 244 Identifiable Assets 676 734 835 218 2,463 Capital Expenditures 54 73 17 6 150 Depreciation 51 56 50 15 172 GEOGRAPHIC AREAS United 1994 States Europe Other Eliminations Total ------------------------------------------------------------------------------------------------------------------------- Net Sales to Unaffiliated Customers $1,921 $709 $191 $ $2,821 Interarea Sales 103 97 12 (212) -- ---------------------------------------------------------------------- Total 2,024 806 203 (212) 2,821 Profit from Operations 250 145 24 419 Identifiable Assets 1,406 622 93 2,121 1993 ------------------------------------------------------------------------------------------------------------------------- Net Sales to Unaffiliated Customers 1,994 624 155 2,773 Interarea Sales 87 76 16 (179) -- ---------------------------------------------------------------------- Total 2,081 700 171 (179) 2,773 Profit from Operations 193 111 4 308 Identifiable Assets 1,627 546 82 2,255 1992 ------------------------------------------------------------------------------------------------------------------------- Net Sales to Unaffiliated Customers 2,023 680 162 2,865 Interarea Sales 93 65 15 (173) -- ---------------------------------------------------------------------- Total 2,116 745 177 (173) 2,865 Profit from Operations 135 96 13 244 Identifiable Assets 1,842 532 89 2,463
(1) Includes worldwide rationalization of $23, principally related to administration and support functions that supplied services to the Chemical Specialties and Food & Functional Products segments. 34 36 Hercules Incorporated Summary of Quarterly Results (Unaudited) (Dollars in millions, except per share)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year Operating Results 1994 1993 1994 1993 1994 1993 1994 1993 1994 1993 ------------------------------------------------------------------------------------------------------------------------- Net Sales $680 $672 $706 $711 $681 $676 $754 $714 $2,821 $2,773 Cost of Sales 476 478 490 510 466 481 491 462 1,923 1,931 SG&A and R&D 110 110 106 107 104 104 121 126 440 447 Other Operating Expenses, Net 16 36 9 8 6 7 8 36 39 87 ------------------------------------------------------------------------------------------------------------------------- Profit from Operations 78 48 100 86 106 84 134 90 419 308 Equity Income 6 4 8 8 7 5 5 6 26 24 Interest and Debt Expense 7 10 7 10 7 8 7 8 28 36 Other Income (Expense) - Net 1 28 (4) 4 (6) (2) 1 (15) (8) 15 ------------------------------------------------------------------------------------------------------------------------- Income Before Taxes 78 71 97 88 100 79 133 73 408 311 Income Taxes 26 27 32 34 34 27 42 15 134 103 ------------------------------------------------------------------------------------------------------------------------- Income Before Extraordinary Item and Accounting Changes 52 44 65 54 66 52 91 58 274 208 ------------------------------------------------------------------------------------------------------------------------- Income Before Extraordinary Item and Accounting Changes 52 44 65 54 66 52 91 58 274 208 Extraordinary Item - - - - - - - (3) - (3) Accounting Changes - (238) - - - - - - - (238) ------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $52 $(194) $65 $54 $66 $52 $91 $55 $274 $(33) =============================================================================== Earnings (Loss) Per Share ------------------------- Before Extraordinary Item and Accounting Changes $.43 $.34 $.54 $.42 $.55 $.40 $.77 $.46 $2.29 $1.62 Extraordinary Item - - - - - - - (.03) - (.03) Accounting Changes - (1.83) - - - - - - - (1.85) ------------------------------------------------------------------------------------------------------------------------- Earnings (Loss) Per Share $.43 $(1.49) $.54 $.42 $.55 $.40 $.77 $.43 $2.29 $(.26) ================================================================================ Net Sales by Industry Segment ----------------------------- Chemical Specialties $255 $240 $272 $254 $271 $240 $283 $242 $1,081 $976 Food & Functional Products 222 215 244 235 243 215 235 202 945 867 Aerospace 160 172 183 175 165 178 234 229 743 754 Corporate & Other 43 45 6 47 1 43 2 41 52 176 ------------------------------------------------------------------------------------------------------------------------- Total $680 $672 $706 $711 $681 $676 $754 $714 $2,821 $2,773 ================================================================================ Profit (Loss) from Operations by Industry Segment ------------------- Chemical Specialties $43 $36 $54 $42 $53 $41 $47 $30 $197 $149 Food & Functional Products 33 31 40 35 43 30 32 17 148 113 Aerospace 9 13 13 14 15 15 61 63 98 105 Corporate & Other (7) (32) (7) (5) (5) (2) (6) (20) (24) (59) ------------------------------------------------------------------------------------------------------------------------- Total $78 $48 $100 $86 $106 $84 $134 $90 $419 $308 ===============================================================================
35 37 Principal Consolidated, Wholly Owned Subsidiaries (Directly or Indirectly) AUSTRIA THE NETHERLANDS Patex Chemie GmbH, Traun Hercules B.V., Rijswijk THE BAHAMAS SINGAPORE (REPUBLIC OF) Hercules International Trade Corporation Limited Hercules Singapore Pte Ltd., Singapore (HINTCO), Nassau SPAIN BELGIUM Ceratonia S.A., Tarragona Hercules Belgium N.V., Doel/Beringen Hercules Aerospace Espena, S.A., Madrid S.A. Hercules Europe N.V., Brussels SWEDEN BERMUDA Hercules AB, Goteborg Curtis Bay Insurance Co., Ltd., Hamilton UNITED STATES BRAZIL Aqualon Company, Wilmington, Delaware Aqualon do Brasil S.A., Seo Paulo Hercules Credit, Inc., Wilmington, Delaware Hercules do Brasil Produtos Quimicos Ltda., Hercules Trading Corporation, Wilmington, Seo Paulo Delaware CANADA VIRGIN ISLANDS Hercules Canada Inc., Missisauga, Ontario Hercules Overseas Corporation, St. Croix DENMARK Copenhagen Pectin A/S, Lille Skensved ENGLAND Hercules Limited, Surrey FINLAND Oy Hercofinn Ab, Helsinki FRANCE Aqualon France B.V., Rueil Hercules S.A., Rueil GERMANY Hercules GmbH, Dusseldorf Pomosin GmbH, Grossenbrode/Holstein HONG KONG Hercules China Limited, Hong Kong ITALY Hercules Italia S.p.A., Milan JAPAN Hercules Japan Ltd., Tokyo MEXICO Quimica Hercules, S.A. de C.V., Mexico, D.F.
36 38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: Information regarding directors and nominees for directors of the Company is included under the caption entitled "Election of Three Directors (Proxy Item No. 1)" on pages 3 through 4 of the Proxy Statement and is incorporated herein by reference. Information regarding executive officers is contained on pages 18 through 20 of that report. Disclosure of information for directors, officers, and other persons not meeting the timely reporting requirements under section 16(a) of the Exchange Act is contained in the Proxy Statement under the caption entitled "Compliance with Section 16(a) of the Securities Exchange Act of 1934" on page 12 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION: Information regarding executive compensation of Hercules' directors and executive officers is included in the Proxy Statement under the caption entitled "Corporate Governance-Directors and Executives" on pages 9 through 11, and the caption entitled "Executive Compensation" on pages 12 through 14, respectively, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: Information regarding beneficial ownership of the Common Stock by certain beneficial owners and by management of the Company is included under the caption entitled "Security Ownership of Certain Beneficial Owners" on pages 8 and 9 of the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: Information regarding certain relationships and related transactions with management is included under the caption entitled "Certain Relationships and Related Transactions" on page 9 of the Proxy Statement and is incorporated herein by reference. 37 39 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K: (a) Documents filed as part of this Report: 1. Financial Statements These documents are listed in the Index to Consolidated Financial Statements. See Item 8. 2. Financial Statement Schedules: All schedules are omitted because they are not applicable, not required, or the information required is either presented in the Notes to Financial Statements or has not changed materially from that previously reported. 3. Exhibits: A complete listing of exhibits required is given in the Exhibit Index which precedes the exhibits filed with this Report. (b) Reports on Form 8-K. Hercules was not required to file any reports on Form 8-K for the quarter ended December 31, 1994. However, an optional filing (Item 5 event) 8-K filing was made on October 28, 1994 related to the acquisition by Alliant Techsystems of a substantial portion of the Aerospace segment and included the Purchase and Sale Agreement between Hercules Incorporated and Alliant Techsystems dated October 28, 1994 and press release from Hercules Incorporated dated October 28, 1994. 38 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 24, 1995. HERCULES INCORPORATED By R. KEITH ELLIOTT ---------------------------------------------------------- R. Keith Elliott, Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on March 24, 1995. PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: Chairman, President and THOMAS L. GOSSAGE Chief Executive Officer --------------------------------------- Thomas L. Gossage PRINCIPAL FINANCIAL OFFICER AND DIRECTOR: Executive Vice President and R. KEITH ELLIOTT Chief Financial Officer --------------------------------------- R. Keith Elliott PRINCIPAL ACCOUNTING OFFICER: Controller VIKRAM JOG --------------------------------------- Vikram Jog DIRECTORS: MANFRED CASPARI RALPH L. MACDONALD, JR. -------------------------------------- --------------------------------------- Manfred Caspari Ralph L. MacDonald, Jr. RICHARD M. FAIRBANKS, III H. EUGENE MCBRAYER -------------------------------------- --------------------------------------- Richard M. Fairbanks, III H. Eugene McBrayer EDITH E. HOLIDAY PAULA A. SNEED -------------------------------------- --------------------------------------- Edith E. Holiday Paula A. Sneed ROBERT G. JAHN LEE M. THOMAS -------------------------------------- --------------------------------------- Robert G. Jahn Lee M. Thomas GAYNOR N. KELLEY -------------------------------------- Gaynor N. Kelley
39 41 EXHIBIT INDEX
Number Description Incorporated by Reference to 3-A Restated Certificate of Incorporation of Hercules Exhibit 3-A, Annual Report on Form 10-K, Incorporated as revised and amended July 6, 1988. filed March 26, 1993. 3-B By-Laws of Hercules Incorporated as revised and Exhibit 3-B, Annual Report on Form 10-K, amended October 30, 1991. filed March 26, 1993. 4-A Form of Rights Agreement between the Company and Form 8-A filed July 10, 1987*. Manufacturers Hanover Trust Company, dated as of June 24,1987. 4-B The Company 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. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, the Company agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. 10-A Hercules Incorporated Unit Incentive Plan. Appendix A, Notice of Annual Meeting and Proxy Statement Dated February 10, 1969*. 10-B Hercules Executive Survivor Benefit Plan. Exhibit 10-D, Annual Report on Form 10-K, filed March 27, 1981*. 10-C Hercules Incorporated Phantom Stock Plan. Exhibit E, Notice of Annual Meeting and Proxy Statement Dated February 14, 1986*. 10-D Hercules Incorporated Restricted Stock Plan of 1986. Exhibit B, Notice of Annual Meeting and Proxy Statement Dated February 14, 1986*. 10-E Hercules Incorporated Stock Option Plan of 1986. Exhibit D, Notice of Annual Meeting and Proxy Statement Dated February 14, 1986*. 10-F Hercules Incorporated Deferred Compensation Plan. Exhibit 10-I, Annual Report on Form 10-K, filed March 29, 1988. 10-G Hercules Incorporated Long Term Incentive Exhibit 4.1, Registration Statement on Compensation Plan. Form S-8, filed July 1, 1993. 10-H Hercules Incorporated Annual Management Incentive Exhibit 10-H, Annual Report on Form 10-K, Compensation Plan. filed March 26, 1993. 10-I Hercules Incorporated 1993 Nonemployee Director Stock Exhibit 4.1, Registration Statement on Accumulation Plan. Form S-8, filed July 16, 1993.
40 42 EXHIBIT INDEX (CONT'D)
Number Description Incorporated by Reference to 10-J Hercules Incorporated Deferred Compensation Plan for Exhibit 10-J, Annual Report on Form 10-K, Nonemployee Directors. filed March 26, 1993. 10-K Hercules Incorporated Retirement Plan for Nonemployee Exhibit 10-K, Annual Report on Form 10-K, Directors. filed March 26, 1993. 10-L Hercules Employee Pension Restoration Plan. Exhibit 10-L, Annual Report on Form 10-K, filed March 26, 1993. 10-M Form of Employment Contract between the Company and Exhibit 10-J, Annual Report on Form 10-K, certain directors and officers of the Company. filed March 29, 1988*. 10-N Form of Indemnification Agreement between the Company Annex II, Notice of Annual Meeting and and certain directors and officers of the Company. Proxy Statement Dated February 19, 1987*. 10-O Employment contract between the Company and R. Keith Exhibit 10-O, Annual Report on Form 10-K, Elliott entered into April 19, 1991. filed March 26, 1993. 10-P Hercules Incorporated Long Term Incentive Compensation Plan 21 Subsidiaries of the Registrant. Page 36 of 1994 Form 10-K. See Part II, Item 8. 23-A Consent of Independent Accountants. Page 42 of 1994 Form 10-K. 23-B Consent of Company Counsel. Page 42 of 1994 Form 10-K. 27 Financial Data Schedule
* Previously filed as indicated and incorporated herein by reference. Exhibits incorporated by reference should be located in SEC File No. 1-496. 41 43 EXHIBIT 23-A. CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Hercules Incorporated and subsidiary companies on Form S-8 [Registration No. 33-37279 (which includes Registration No. 33-21668), No. 33-14912, No. 33-15052, No. 33-21667, No. 33-47664, No. 33-51178, No. 33-52621, No. 33-66136 and No. 33-65352] and on Form S-3 (Registration No. 33-15104 and No. 33-33768) of our report dated January 30, 1995 on our audits of the consolidated financial statements of Hercules Incorporated and subsidiary companies as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, which report is included in this Annual Report on Form 10-K. Coopers & Lybrand, L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania 19103 March 27, 1995 EXHIBIT 23-B. CONSENT OF COMPANY COUNSEL I hereby consent to the reference to Company Counsel in Notes 23(c) and 23(d) of Notes to the Consolidated Financial Statements. Wilmington, Delaware Michael B. Keehan March 27, 1995 Vice President and General Counsel Hercules Incorporated 42 EX-10.P 2 HERCULES INC LONG TERM INCENTIVE COMPENSATION PLAN 1 HERCULES INCORPORATED LONG TERM INCENTIVE COMPENSATION PLAN (AMENDED AND RESTATED AS OF APRIL 27, 1995) Hercules Incorporated Hercules Plaza Wilmington, DE 19894-0001 April 27, 1995 2 TABLE OF CONTENTS
Page ---- ARTICLE I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 2.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (1) Accelerated Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (2) Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (3) APD Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (4) Attributable Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (5) Award. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (6) Award Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (7) Award Items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (8) Base Salary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (9) Beneficiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (10) Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (11) Bonus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (12) Cash Value Award or CVA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (13) CEO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (14) Change in Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
- 98 - 3 (15) Code. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (16) Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (17) Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (18) Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (19) Date of Grant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (20) Designated Retirement Date . . . . . . . . . . . . . . . . . . . . . . . . . 5 (21) Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (22) Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (23) Grantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (24) Grantor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (25) Hercules Incorporated Deferred Compensation Plan . . . . . . . . . . . . . . 7 (26) Hercules Incorporated Non-Qualified Savings Plan . . . . . . . . . . . . . . 7 (27) Hercules Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (28) Hercules Pension Restoration Plan . . . . . . . . . . . . . . . . . . . . . . 7 (29) Incentive Stock Option or ISO . . . . . . . . . . . . . . . . . . . . . . . . 7 (30) Management Incentive Compensation Plan . . . . . . . . . . . . . . . . . . . 8 (31) Maximum Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (32) Minimum Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (33) Nonqualified Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (34) Nonreporting Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (35) Normal Retirement Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (36) Normal Vesting Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (37) Option or Stock Option . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (38) Optionee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
- 99 - 4 (39) Option Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (40) Option Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (41) Other Market-Based Awards . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (42) Other Performance-Based Awards . . . . . . . . . . . . . . . . . . . . . . . 9 (43) Participating Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (44) PASO Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 (45) Payout Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 (46) Performance Accelerated Stock Option or "PASO" . . . . . . . . . . . . . . . 10 (47) Performance Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 (48) Performance Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 (49) Performance Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 (50) Performance Share Award . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 (51) Performance Share Fair Market Value . . . . . . . . . . . . . . . . . . . . . 11 (52) Phantom Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 (53) Phantom Unit Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 (54) Phantom Unit Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . 11 (55) Reduction in Force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (56) Related Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (57) Reporting Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (58) Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (59) Restricted Stock Award . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (60) Restricted Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (61) Restriction Range . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (62) Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
- 100 - 5 (63) Rule 16b-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (64) SAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (65) SAR Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (66) Stock Appreciation Right. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (67) Stock Appreciation Right Award. . . . . . . . . . . . . . . . . . . . . . . . . 13 (68) Stock Option Award. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 (69) Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 (70) Substitution Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 (71) Suspension Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 (72) Target Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 2.2 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 STOCK AVAILABLE FOR AWARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 3.1 Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 3.2 Number of Shares Deliverable . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 3.3 Reusable Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 3.4 Shares Not Charged Against Available Shares . . . . . . . . . . . . . . . . . . 16 ARTICLE IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 AWARDS AND AWARD AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 4.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 4.2 Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 4.3 Terms and Conditions; Award Commitments . . . . . . . . . . . . . . . . . . . . 18
- 101 - 6 4.3.1 Terms And Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4.3.2 Award Commitments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 OPTIONS AND STOCK APPRECIATION RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 5.1 Award of Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.1.1 Grants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.1.2 Types of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.1.3 Substantial Stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.1.4 Maximum Award To An Individual. . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 5.2 Option Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 5.3 Option Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 5.4 Exercise of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.4.1 Exercisability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.4.2 Certain Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.4.3 Method of Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 5.5 Time and Method of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.5.1 Form of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.5.2 Time of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5.5.3 Methods for Tendering Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5.5.4 ISO Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 5.6 Delivery of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 5.7 Stockholder Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 5.8 Incentive Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
- 102 - 7 5.8.1 Individual Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.8.2 Code Qualification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5.8.3 Notice of Disposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 5.9 Stock Appreciation Rights Awards. . . . . . . . . . . . . . . . . . . . . . . . 26 5.9.1 Grants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.9.2 SAR Exercise. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.9.3 Value of SAR Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 5.9.4 Time and Method of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . 27 5.9.5 Effect of SAR and Option Exercises. . . . . . . . . . . . . . . . . . . . . . . 28 5.9.6 Nature of SARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 5.10 Performance Accelerated Stock Options Awards . . . . . . . . . . . . . . . . . 29 5.10.1 Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5.10.2 Accelerated Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.10.3 PASO Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.10.4 Exercisability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.10.5 Corporate or Business Goals . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.10.6 PASOs Treated Like Options . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE VI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 PERFORMANCE SHARE AWARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 6.1 Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 6.2 Performance Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 6.3 Performance Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 6.4 Payout Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
- 103 - 8 Section 6.5 Issuance of Stock and Stock Certificates . . . . . . . . . . . . . . . . . . . 33 6.5.1 Issuance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 6.5.2 Custody and Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 6.6 Restrictions and Forfeitures. . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 6.7 Stockholder Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 6.8 Delivery of Shares and Cash Payments. . . . . . . . . . . . . . . . . . . . . . 36 6.8.1 Determination of Performance Results and Award Settlement. . . . . . . . . . . 36 6.8.2 Delivery of Shares and Payment of Cash . . . . . . . . . . . . . . . . . . . . 36 6.8.3 Revisions for Significant Events . . . . . . . . . . . . . . . . . . . . . . . 39 6.8.4 Conditions Precedent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 6.8.5 Performance Share Fair Market Value . . . . . . . . . . . . . . . . . . . . . . 40 ARTICLE VII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 RESTRICTED STOCK AWARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 7.1 Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 7.2 Restricted Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 7.3 Restrictions and Forfeiture . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 7.4 Issuance of Stock and Stock Certificate . . . . . . . . . . . . . . . . . . . . . 42 7.4.1 Issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 7.4.2 Custody and Legends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 7.5 Stockholder Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 7.6 Delivery of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 ARTICLE VIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
- 104 - 9 PHANTOM UNIT AWARDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 8.1 Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 8.2 Vesting of Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 8.3 Value of Phantom Units Payments . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 8.4 Time and Method of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 8.5 Forfeiture of Phantom Units . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 8.6 Nature of Phantom Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 ARTICLE IX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 CASH VALUE AWARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 9.1 Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 9.2 Performance Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 9.3 Performance Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 9.4 Payout Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 9.5 Form Of Payout. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 9.6 Calculation Of Payout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 ARTICLE X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 OTHER AWARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 10.1 Other Market-Based Awards . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 10.2 Other Performance-Based Awards . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 10.3 Terms of Other Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 10.4 Stock Option Dividend Equivalents. . . . . . . . . . . . . . . . . . . . . . . . 53 10.4.1 Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
- 105 - 10 10.4.2 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 10.4.3 Forfeiture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 ARTICLE XI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 SUBSTITUTION AWARDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 11.1 Substitution of Performance Shares . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 11.2 Substitution of Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 11.3 Substitution Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 11.4 Substitutions in Contemplation of Retirement . . . . . . . . . . . . . . . . . . . 55 ARTICLE XII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 TERMINATION OF EMPLOYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 12.1 Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 12.1.1 Stock Options and SARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 12.1.2 Performance Share, Restricted Stock, Phantom Unit, and Cash Value Awards . . . . . . . . . . . . . . . . . . . . . . . 56 12.1.3 Performance Accelerated Stock Options . . . . . . . . . . . . . . . . . . . . . . 57 Section 12.2 Reduction in Force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 12.2.1 Stock Options and SARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 12.2.2 Performance Share, Restricted Stock, Phantom Unit and Cash Value Awards . . . . . . . . . . . . . . . . . . . . . . . . 58 12.2.3 Performance Accelerated Stock Options. . . . . . . . . . . . . . . . . . . . . . . 58 Section 12.3 Transfers to Certain Related Entities. . . . . . . . . . . . . . . . . . . . . . . 59 12.3.1 Stock Options and SARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
- 106 - 11 12.3.2 Performance Share, Restricted Stock, Phantom Unit and Cash Value Awards . . . . . 59 12.3.3 Performance Accelerated Stock Options. . . . . . . . . . . . . . . . . . . . . . . 60 Section 12.4 Disability or Death. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 12.4.1 Stock Options and SARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 12.4.2 Performance Share, Restricted Stock, Phantom Unit and Cash Value Awards . . . . . 60 Section 12.4.3 Performance Accelerated Stock Options. . . . . . . . . . . . . . . . . . . . . . . 61 Section 12.5 Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 12.5.1 Stock Options, SARs and Performance Accelerated Stock Options . . . . . . . . . . 61 12.5.2 Performance Share, Restricted Stock, Phantom Unit and Cash Value Awards . . . . . 61 Section 12.6 Decrease in Company Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . 62 12.6.1 Stock Options and SARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 12.6.2 Performance Share, Restricted Stock, Phantom Unit and Cash Value Awards . . . . . 63 12.6.3 Performance Accelerated Stock Options . . . . . . . . . . . . . . . . . . . . . . 63 Section 12.7 Termination of Employment for Other Reasons . . . . . . . . . . . . . . . . . . . 64 12.7.1 Stock Options, SARs and Performance Accelerated Stock Options . . . . . . . . . . 64 12.7.2 Performance Share, Restricted Stock, Phantom Unit and Cash Value Awards. . . . . 64 Section 12.8 Termination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 12.9 Reporting Person Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
- 107 - 12 ARTICLE XIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 EXCHANGE AWARDS; ABOVE TARGET MICP AWARDS. . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 13.1 Salary/Bonus Reductions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 13.1.1 Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 13.1.2 Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 13.2 Deferred Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 13.2.1 Deferred Compensation Plan Accounts . . . . . . . . . . . . . . . . . . . . . 68 13.2.2 Non-Qualified Savings Plan Accounts . . . . . . . . . . . . . . . . . . . . . 69 Section 13.3 Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 13.3.1 Death, Disability and Reduction in Force . . . . . . . . . . . . . . . . . . . 69 13.3.2 Retirement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 13.3.3 Resignation or Termination for Cause . . . . . . . . . . . . . . . . . . . . . 71 Section 13.4 Avoidance of Pension Diminution . . . . . . . . . . . . . . . . . . . . . . . . 72 13.4.1 Governing Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 13.4.2 Exchange Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 13.4.3 Designated Retirement Date . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Section 13.5 Irrevocability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Section 13.6 Equivalency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Section 13.7 MICP Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Section 13.8 Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 ARTICLE XIV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 CERTAIN TERMS APPLICABLE TO ALL AWARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Section 14.1 Withholding Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
- 108 - 13 Section 14.2 Adjustments to Reflect Capital Changes. . . . . . . . . . . . . . . . . . . . . . 77 14.2.1 Recapitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 14.2.2 Sale or Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 14.2.3 Options to Purchase Stock of Acquired Companies . . . . . . . . . . . . . . . . . 78 Section 14.3 Failure to Comply With Terms and Conditions . . . . . . . . . . . . . . . . . . 79 Section 14.4 Forfeiture Upon Occurrence of Certain Events . . . . . . . . . . . . . . . . . . 79 Section 14.5 Regulatory Approvals and Listing . . . . . . . . . . . . . . . . . . . . . . . 80 Section 14.6 Restrictions Upon Resale of Stock . . . . . . . . . . . . . . . . . . . . . . . 80 Section 14.7 Reporting Person Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . 81 ARTICLE XV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 DISPUTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 ARTICLE XVI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 ADMINISTRATION OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Section 16.1 Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Section 16.2 Committee Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Section 16.3 No Liability of Committee Members . . . . . . . . . . . . . . . . . . . . . . . 84 ARTICLE XVII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 EFFECTIVE DATE, TERM OF THE PLAN AND STOCKHOLDER APPROVAL . . . . . . . . . . . . . . . . . . 84 ARTICLE XVIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 CHANGE IN CORPORATE CONTROL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
- 109 - 14 Section 18.1 Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Section 18.2 SARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 18.3 All Other Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 18.4 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 ARTICLE XIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 AMENDMENT AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Section 19.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Section 19.2 Suspension or Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 ARTICLE XX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Section 20.1 Deferral Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Section 20.2 Designation of Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Section 20.3 No Right to an Award or to Continued Employment . . . . . . . . . . . . . . . . 90 Section 20.4 Discretion of the Committee and the CEO . . . . . . . . . . . . . . . . . . . . 91 Section 20.5 Indemnification and Exculpation . . . . . . . . . . . . . . . . . . . . . . . . 91 20.5.1 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 20.5.2 Exculpation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Section 20.6 Unfunded Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Section 20.7 Inalienability of Rights and Interests . . . . . . . . . . . . . . . . . . . . . 93 Section 20.8 Awards Not Includable for Benefit Purposes . . . . . . . . . . . . . . . . . . . 94 Section 20.9 No Issuance of Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . 94 Section 20.10 Modification for Overseas Grantees . . . . . . . . . . . . . . . . . . . . . . 94
- 110 - 15 Section 20.11 Leaves of Absence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Section 20.12 Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 20.12.1 Communications by the Committee . . . . . . . . . . . . . . . . . . . . . . . 95 20.12.2 Communications by the Participants and Others . . . . . . . . . . . . . . . . . 95 Section 20.13 Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Section 20.14 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Section 20.15 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Section 20.16 No Strict Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Section 20.17 Modification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Section 20.18 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
- i - 16 HERCULES INCORPORATED LONG TERM INCENTIVE COMPENSATION PLAN ARTICLE I PURPOSE The Hercules Incorporated Long Term Incentive Compensation Plan, the terms of which are herein set forth (as the same is now in effect or as hereafter amended from time to time, the "Plan"), is intended to advance the interests of Hercules Incorporated, a Delaware corporation (the "Company"), and its stockholders by providing a means by which the Company and its participating subsidiaries and affiliates shall be able to motivate selected key employees (including officers and directors who are employees) to direct their efforts to those activities that will contribute materially to the Company's success. The Plan is also intended to serve the best interests of the stockholders by linking remunerative benefits paid to employees who have substantial responsibility for the successful operation, administration and management of the Company and/or its participating subsidiaries and affiliates with the enhancement of stockholder value while such key employees increase their proprietary interest in the Company. Finally, the Plan is intended to enable the Company to attract and retain in its employ highly qualified persons for the successful conduct of its business. The Plan became effective as of April 1, 1991, and was amended and restated as of June 30, 1993, and is hereby further amended and restated. Notwithstanding anything to the contrary, the said amendment and restated Plan shall not terminate or adversely affect any Awards granted prior hereto. - 1 - 17 ARTICLE II DEFINITIONS AND CONSTRUCTION Section 2.1 Definitions The following words and phrases when used in the Plan with an initial capital letter, unless their context clearly indicates to the contrary, shall have the respective meanings set forth below in this Section 2.1: (1) Accelerated Date. As defined in Subsection 5.10.2. (2) Act. The Securities Exchange Act of 1934, as now in effect or as hereafter amended from time to time. References to any section or subsection of the Act are to such section or subsection as the same may from time to time be amended or renumbered and/or any comparable or succeeding provisions of any legislation that amends, supplements or replaces such section or subsection. (3) APD Election. As defined in Subsection 13.4.2 (4) Attributable Shares. As defined in Subsection 9.6. (5) Award. A grant of Award Items in accordance with the provisions of the Plan. A grant of a particular Award Item may sometimes be referred to as follows: "Stock Option Award" for a grant of Stock Options; "Stock Appreciation Right Award" for Stock - 2 - 18 Appreciation Rights; "PASO Award" for Performance Accelerated Stock Options; "CVA Award" for Cash Value Awards; "Performance Shares Award" for Performance Shares; "Restricted Stock Award" for Restricted Stock; and "Phantom Unit Award" for Phantom Units. (6) Award Commitment. The written commitment delivered by the Company to the Grantee evidencing an Award and setting forth such terms and conditions of the Award as may be deemed appropriate by the Committee. The Award Commitment shall be in a form approved by the Committee, and shall be deemed amended from time to time to include such additional terms and conditions as the Committee may specify after the execution in the exercise of its powers under the Plan. (7) Award Items. Individually and collectively, as the case may be, the items awarded to any Grantee in accordance with the provisions of the Plan in the form of Options, Stock Appreciation Rights, Performance Accelerated Stock Options, Cash Value Awards, Performance Shares, Restricted Stock, Phantom Units or other award, or any combination of the foregoing. (8) Base Salary. The regular salary paid to an employee. Base salary shall not include bonuses or other forms of compensation which are not considered regular earnings by the Committee. (9) Beneficiary. Any individual, estate or trust who or which by designation of the Grantee pursuant to Section 20.2 or operation of law succeeds to the rights and - 3 - 19 obligations of the Grantee under the Plan and Award Commitment upon the Grantee's death. (10) Board. The Board of Directors of the Company. (11) Bonus. An amount payable pursuant to the Management Incentive Compensation Plan or any other short term incentive compensation plan approved by the Committee. (12) Cash Value Award or CVA. A grant in accordance with the provisions of the Plan in the form of a designated cash value payable in cash, Common Stock or Restricted Stock, or a combination thereof, all as determined by the Grantor at the Payout Date. (13) CEO. The Chief Executive Officer of the Company. (14) Change in Control. The occurrence of an event defined in Section 18.4, which event is of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A promulgated under the Act as in effect on the date hereof or, if Item 6(e) is no longer in effect, any regulations issued by the Securities and Exchange Commission pursuant to the Act which serves similar purposes. (15) Code. The Internal Revenue Code of 1986, as now in effect or as hereafter amended from time to time, and as construed and interpreted by valid regulations issued by the United States Internal Revenue Service thereunder. References to any section - 4 - 20 or subsection of the Code are to such section or subsection as the same may from time to time be amended or renumbered and/or any comparable or succeeding provisions of any legislation that amends, supplements or replaces such section or subsection. (16) Committee. The Compensation Committee of the Board or such other committee as may be designated by the Board to administer the Plan. (17) Common Stock. Voting common stock authorized for issuance by the Company and issued and outstanding. (18) Company. Hercules Incorporated and its successors and assigns. (19) Date of Grant. The date designated by the Grantor as the date as of which the Grantor grants an Award, which shall not be earlier than the date on which the Grantor approves the granting of such Award. (20) Designated Retirement Date. As defined in Section 13.4.3. (21) Disability. A physical or mental impairment sufficient to make the individual eligible for benefits under the Long-Term Disability Plan of Hercules Incorporated or under a disability plan of one of the Participating Subsidiaries (whether or not a participant in such disability plan), so long as for Incentive Stock Options such impairment also constitutes a disability within the meaning of Section 22(e)(3) of the Code. - 5 - 21 (22) Fair Market Value. Unless otherwise indicated in the provisions of the Plan, as of any date the closing price for one share of Common Stock as reported on the Composite Tape for New York Stock Exchange Listed Companies and published in the Eastern Edition of The Wall Street Journal, or, if there is no trading on the date in question, the closing price of the Common Stock, as so reported and published, on the next preceding date on which there was trading in Common Stock. (23) Grantee. An employee of the Company or any Participating Subsidiary to whom an Award is granted. At the time of award, such employee (including any director or officer who is also an employee) must be in the regular full-time employment of the Company or any Participating Subsidiary, without limitation as to length of service. (24) Grantor. The Committee or the CEO, as the case may be, who grants an Award. The Committee shall (i) grant Awards to Reporting Persons and (ii) establish the maximum aggregate amount of particular Award Items to be granted to Nonreporting Persons as a group and (iii) establish the guidelines and oversight under which, pursuant to authorities granted by the Committee, the CEO may grant Awards to Nonreporting Persons. Notwithstanding anything to the contrary, the CEO is not intended to be nor shall be construed as a member of the Committee. In making awards to Nonreporting Persons, the CEO is acting as a delegee of the Committee and is at all times accountable to the Committee and authorized to act only in accordance with the provisions of the Plan and the guidelines and direction provided by the Committee from time to time. - 6 - 22 (25) Hercules Incorporated Deferred Compensation Plan. The Hercules Incorporated Deferred Compensation Plan as the same is now in effect or as hereafter amended from time to time. (26) Hercules Incorporated Non-Qualified Savings Plan. The Hercules Incorporated Non-Qualified Savings Plan (a portion of the Hercules Incorporated Deferred Compensation Plan) as the same is now in effect or as hereafter amended from time to time. (27) Hercules Pension Plan. The Hercules Pension Plan as the same is now in effect or as hereafter amended from time to time. (28) Hercules Pension Restoration Plan. The Hercules Employee Pension Restoration Plan as the same is now in effect or as hereafter amended from time to time. (29) Incentive Stock Option or ISO. An Option granted pursuant to Section 5.1 which is intended to meet, and structured with a view to satisfying, the requirements of Section 422 of the Code and is designated by the Committee as an Incentive Stock Option. The Award of an Incentive Stock Option shall contain such provisions as are necessary to comply with such Section 422. - 7 - 23 (30) Management Incentive Compensation Plan. The Hercules Incorporated Annual Management Incentive Compensation Plan as the same is now in effect or as hereafter amended from time to time. (31) Maximum Award. The number or amount of Performance Accelerated Stock Options, Cash Value Awards, or Performance Shares, as the case may be, which vest when the maximum performance in the relevant Performance Range is achieved. (32) Minimum Award. The number or amount of Performance Accelerated Stock Options, Cash Value Awards, or Performance Shares, as the case may be, which vest when the minimum performance in the relevant Performance Range is achieved. (33) Nonqualified Option. An Option granted pursuant to Section 5.1 which does not qualify as, and is not designated by the Committee as, an Incentive Stock Option and is designated as a Nonqualified Option. (34) Nonreporting Person. A Grantee who is not subject to Section 16 of the Act. (35) Normal Retirement Date. Age 65. (36) Normal Vesting Date. As defined in Subsection 5.10.1. - 8 - 24 (37) Option or Stock Option. A right granted pursuant to Article V that for a specified period of time entitles the holder thereof to purchase full shares of Common Stock at a stated price. At the discretion of the Committee, an Option may be an Incentive Stock Option or a Nonqualified Stock Option. (38) Optionee. A Grantee to whom an Option or Stock Appreciation Right or Performance Accelerated Stock Option, as the case may be, is granted pursuant to Article V. (39) Option Period. As defined in Section 5.3. (40) Option Price. The per share price at which shares of Common Stock may be purchased upon exercise of a particular Option or Performance Accelerated Stock Option. (41) Other Market-Based Awards. Awards granted in accordance with Section 9.1. (42) Other Performance-Based Awards. Awards granted in accordance with Section 9.2. (43) Participating Subsidiary. Any Subsidiary (existing from time to time) designated by the Board as a Participating Subsidiary; provided, however, for Incentive Stock Options only, "Participating Subsidiary" means any such Subsidiary which at the time such - 9 - 25 Option is granted qualifies as a "Subsidiary" of the Company under Section 424(b) of the Code. (44) PASO Period. As defined in Subsection 5.10.3. (45) Payout Schedule. The distribution scheme for applicable Award Items for a given Plan Year upon performance of varying goals, all as established by either the Committee with respect to the Company, or by the CEO (or his designee or designees) with respect to a given subsidiary, business unit, corporate staff group or individual. (46) Performance Accelerated Stock Option or "PASO". Stock Option with a normal vesting date established by the Committee; provided, however, that under certain circumstances such vesting date may be accelerated by the Committee to an earlier date if the Committee determines that the applicable Performance Goal has been met. (47) Performance Goal. The level of performance established by the Grantor, which must be achieved in order to earn or vest the applicable Minimum Award, Target Award, Maximum Award or intermediate level of Award Items. (48) Performance Period. The period of time selected by the Committee during which the achievement of Performance Goals is measured for purposes of determining the extent to which an applicable Award Item has been earned or will vest. - 10 - 26 (49) Performance Share. A contingent right to receive, when certain performance criteria have been attained, without payment to the Company, the amounts of Common Stock and cash determined under Article VI. Such rights are subject to forfeiture or reduction if the applicable Performance Goals are not met within the applicable Performance Period. (50) Performance Share Award. A Performance Share Award under Article VI, settlement of which is contingent upon attainment during a Performance Period of Performance Goals. (51) Performance Share Fair Market Value. As defined in Subsection 6.8.5. (52) Phantom Unit. A right to receive, without payment to the Company, an amount of cash equal to the value of a share of Common Stock as of a future date, plus dividend equivalents and interest payments provided for in Article VIII. A "unit" of phantom units does not represent or entitle the recipient to any equity securities of the Company, but instead involves the creation of an unfunded account for the recipient, the value of which is measured by reference to the value of Common Stock. (53) Phantom Unit Award. An Award of Phantom Units under Article VIII, subject to such forfeiture provisions as are set forth in the Award Commitment. (54) Phantom Unit Fair Market Value. As defined in Section 8.3. - 11 - 27 (55) Reduction in Force. Termination of employment by the Company or a Participating Subsidiary in such a manner that the employee so terminated is eligible to receive benefits under the Company or a Participating Subsidiary dismissal salary plan. (56) Related Entity. A corporation, partnership, joint venture or other entity not more than 50% but at least 20% of whose outstanding voting stock or voting power for the election of directors is beneficially owned directly or indirectly by the Company. (57) Reporting Person. A Grantee who is subject to Section 16 of the Act. (58) Restricted Stock. Shares of Common Stock issued, without payment to the Company, pursuant to a Restricted Stock Award granted under Article VII. For a specific period of time such shares are subject to a substantial risk of forfeiture and to such restrictions against sale, transfer or other disposition, as determined by the Committee at the time of grant. (59) Restricted Stock Award. An Award of Restricted Stock under Article VII. (60) Restricted Period. As defined in Section 7.2. (61) Restriction Range. As defined in Section 7.2. - 12 - 28 (62) Retirement. Termination of employment at Normal Retirement Date or with consent of the Company with immediate eligibility for retirement benefits under a retirement or pension plan maintained by the Company, a Participating Subsidiary or Related Entity. (63) Rule 16b-3. Rule 16b-3 of the General Rules and Regulations under the Act, or any law, rule, regulation or other provision that may hereafter replace such Rule. (64) SAR. A Stock Appreciation Right, as defined below. (65) SAR Fair Market Value. As defined in Subsection 5.9.3. (66) Stock Appreciation Right. A right granted pursuant to Article V pursuant to which the holder of a related Option, upon exercise of the Stock Appreciation Right and in lieu of exercising the related Option, is entitled to surrender the related Option, or any applicable portion thereof, to the extent unexercised, and to receive an amount equal to the appreciation in market value of a fixed number of shares of Common Stock from the Date of Grant. Stock Appreciation Rights may be payable in shares of Common Stock or cash, or a combination of both. Under the Plan, Stock Appreciation Rights are granted in tandem with Options. (67) Stock Appreciation Right Award. An Award of Stock Appreciation Rights under Article V. - 13 - 29 (68) Stock Option Award. An Award of Options under Article VI. (69) Subsidiary. Any corporation, partnership, joint venture or other entity in which the Company owns, directly or indirectly through one or more intermediaries, at least 50% of the outstanding voting stock or voting power for the election of directors or equivalent governing body. In the case of Incentive Stock Options, Subsidiary shall mean any corporation that qualifies as a "subsidiary corporation" of the Company under Section 424(f) of the Code. (70) Substitution Awards. As defined in Section 11 (71) Suspension Period. As defined in Article XIII. (72) Target Award. The number or amount of Performance Accelerated Stock Options, Cash Value Awards or Performance Shares, as the case may be, which vest when the target performance in the relevant Performance Range is achieved. Section 2.2 Construction Whenever any words are used herein in the masculine gender, they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form they shall be construed as though they were also used in the plural form in all cases where they would so apply. Headings of sections and subsections of this Plan are inserted for convenience of reference, are not a part of this Plan, and are - 14 - 30 not to be considered in the construction hereof. The words "hereof," "herein," "hereunder" and other similar compounds of the word "here" shall mean and refer to the entire Plan, and not to any particular provision or section. The words "includes", "including" and other similar compounds of the word "include" shall mean and refer to including without limitation. All references herein to specific Articles, Sections or Subsections shall mean Articles, Sections or Subsections of this document unless otherwise qualified. ARTICLE III STOCK AVAILABLE FOR AWARDS Section 3.1 Common Stock Only Common Stock may be delivered under this Plan, such shares to be made available from authorized but unissued shares or from shares reacquired by the Company, including shares purchased in the open market. Section 3.2 Number of Shares Deliverable Subject to adjustments as provided in Section 14.2: (i) during the period April 1, 1991, through April 30, 1995, the maximum aggregate number of shares for all Award Items (other than Options) shall be 4,400,000 (which is less than the original 6,000,000 shares authorized under the Plan for Award Items (other than Options) for the period April 1, 1991 through March 31, 1996); (ii) during the period April 1, 1991 through April 30, 1994, the maximum aggregate number of shares for which Options may be granted shall be 3,600,000 (which is less than the original 7,200,000 shares authorized under the Plan for Options during the period April 1, 1991 through March 31, 1996); and (iii) during the period May 1, 1995, through April 30, 1998, the maximum aggregate number of shares for all Award Items (other than Options) shall be - 15 - 31 1,600,000 (which is less than the original 4,200,000 shares authorized under the Plan during the period April 1, 1996 through March 31, 2000); and (iv) during the period May 1, 1994 through April 30, 1998, the maximum aggregate number of shares for which Options may be granted shall be 5,200,000 (which is more than the original 4,800,000 shares authorized for Options under the Plan from April 1, 1996 through March 31, 2000). Section 3.3 Reusable Shares In the event that shares of Common Stock underlying an Award are returned to the Company for any reason (including forfeited or unexercised items) other than the surrender of Options upon the exercise of a Stock Appreciation Rights, the shares so affected shall be available for use under this Plan to the same Grantee or other Grantee by way of any type or form of Option or Award authorized under the Plan; provided, however, that shares received by the Company upon the exercise of an ISO and shares subject to an ISO surrendered upon exercise of a SAR shall not be available for the subsequent award of ISOs under this Plan, and that shares received by the Company upon the return (whether due to forfeiture or otherwise) of Restricted Stock or Performance Shares shall not be available for a subsequent Award under this Plan. Section 3.4 Shares Not Charged Against Available Shares Shares of Common Stock issued in payment of Stock Appreciation Rights shall not be charged against the number of shares of Common Stock available for subsequent Awards. Shares of Common Stock substituted in accordance with Article XI for shares previously awarded under this Plan or the Hercules Incorporated Restricted Stock Plan of 1986 shall be counted against the authorized aggregate number of shares which may be issued under the Plan. - 16 - 32 ARTICLE IV AWARDS AND AWARD COMMITMENTS Section 4.1 General 4.1.1 Subject to the provisions of this Plan, the Committee may (i) determine and designate at any time and from time to time those Reporting Persons to whom Awards are to be granted; (ii) determine the time or times when Awards shall be granted; (iii) determine the form or forms of Awards to be granted to any Reporting Person or to Nonreporting Persons, as a group; (iv) determine the number of Award Items subject to each Award to be granted to any Reporting Person; (v) determine the maximum aggregate number of shares of Award Items subject to Awards to be granted to Nonreporting Persons, as a group; (vi) determine the terms and conditions of each Award; (vii) determine the number of shares of Restricted Stock a Reporting Person may acquire by exchange pursuant to Section 13.1 and the time or times of such acquisition; and (viii) determine the number of Options a Reporting or Nonreporting Person may acquire by exchange pursuant to Section 13.1 and the time or times of acquisition. 4.1.2 The CEO shall, subject to the provisions of the Plan, (i) determine and designate at any time and from time to time those Nonreporting Persons to whom Awards are to be granted; (ii) determine the form or forms of Award to be granted any Nonreporting Person and (iii) determine the number of Award Items subject to each Award to be granted to any Nonreporting Person. Awards may be granted singly, in combination or in tandem and may be made in combination or in tandem with or in replacement of, or as alternatives to awards or grants under any other employee plan - 17 - 33 maintained by the Company or its present or future Participating Subsidiaries. Unless this Plan is extended, no Awards shall be granted or exchanges effected under the Plan after April 30, 1998, but any then-current restrictions applicable to any Awards theretofore granted or exchanges theretofore effected shall extend beyond that date in accordance with their provisions and any shares of Common Stock used in payment of Cash Value Awards and/or Performance Shares originally granted before April 30, 1998, may be delivered after April 30, 1998, in accordance with the provisions of the applicable Award. Notwithstanding the later delivery of such shares of Common Stock, the number of such shares shall be credited against the maximum aggregate number in effect under Section 3.2 at the date of such original grant. Section 4.2 Eligibility The persons who shall be eligible to receive Awards granted pursuant to this Plan shall be such employees (including directors and officers who are also employees) of the Company or any of the Participating Subsidiaries as the relevant Grantor shall select from time to time from among those who contribute or may be expected to contribute to the successful performance of the Company or any Participating Subsidiary. Employees eligible for Phantom Unit Awards shall include, in addition to employees of the Company or any of the Participating Subsidiaries, any employees of any other Subsidiary or Related Entity. Section 4.3 Terms and Conditions; Award Commitments 4.3.1 Terms And Conditions. Each Award granted pursuant to this Plan shall be subject to all of the terms, conditions and restrictions provided in this Plan and such other terms, conditions and - 18 - 34 restrictions, if any, as may be specified by the Committee with respect to the Award in question at the time of the making of the Award or as may be specified thereafter by the Committee in the exercise of its powers under the Plan. Without limiting the foregoing, it is understood that the Committee may, at any time and from time to time after the granting of an Award hereunder, specify such additional terms, conditions and restrictions with respect to such Award as may be deemed necessary or appropriate to ensure compliance with any and all applicable laws, including, but not limited to, terms and conditions for compliance with Federal and state securities laws and methods of withholding or providing for the payment of required taxes. The terms, conditions and restrictions with respect to any Award, Grantee or Award Commitment need not be identical with the terms, conditions and restrictions with respect to any other Award, Grantee or Award Commitment. 4.3.2 Award Commitments. Each Award granted pursuant to the Plan shall be subject to all the terms, conditions and restrictions provided in the Plan and such other terms, conditions and restrictions, if any, as may be specified by the Committee with respect to the Award in question at the time of the making of the Award or as may be specified thereafter by the Committee in the exercise of its powers under the Plan. Each Award granted pursuant to the Plan shall be evidenced by an Award Commitment and shall comply with, and be subject to, the provisions of the Plan. The Award Commitment shall not be a precondition to the granting of Awards; however, no person shall have any rights under any Award granted under the Plan unless and until the Company shall have executed and delivered an Award Commitment to the Grantee to whom such Award shall have been granted. An executed original of the Award Commitment shall be provided to both the Company and the Grantee. - 19 - 35 ARTICLE V OPTIONS AND STOCK APPRECIATION RIGHTS Section 5.1 Award of Options 5.1.1 Grants. From time to time and upon the recommendation of the CEO, the Committee may grant Stock Option Awards in such number as it may determine to such Reporting Persons as the Committee may select. From time to time, the CEO may grant Stock Option Awards in such number as he may determine to such Nonreporting Persons as he may select; provided, however, each and all such grants shall be subject to any maximum aggregate amount of Options established by the Committee for grants under the Plan for Nonreporting Persons as a group. The Committee shall determine the number of shares of Common Stock to which each Option relates; provided, however, such number of shares of Common Stock shall automatically be reduced on a share for share basis to the extent that shares are issued pursuant to the exercise of the Option or shares subject to the Option are the basis for the exercise of the related Stock Appreciation Right. 5.1.2 Types of Options. Options granted pursuant to the Plan may be either in the form of Incentive Stock Options or in the form of Nonqualified Options. Incentive Stock Options and Nonqualified Options shall be granted separately hereunder. The Committee shall determine whether and to what extent Options granted under the Plan shall be Incentive Stock Options or Nonqualified Options and the Option shall be so designated. 5.1.3 Substantial Stockholder. No Option shall be granted hereunder to any person who, at the time such Option is to be granted, owns stock of the Company or of any of its Subsidiaries - 20 - 36 possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any such Subsidiary. For purposes of the preceding sentence, the attribution rules of stock ownership set forth in Section 424(d) of the Code shall apply. 5.1.4 Maximum Award To An Individual. During the period from May 1, 1994, through April 30, 1998, no person shall be granted or receive more than 1,500,000 Options and/or Performance Accelerated Stock Options in the aggregate. Section 5.2 Option Price The Option Price of Common Stock covered by each Option shall be determined by the Committee but shall not be less than 100% of the Fair Market Value of a share of Common Stock on the Date of Grant. Section 5.3 Option Periods The Committee shall determine the term of each Option. Subject to earlier termination as provided in Articles XI, XII and XIII, the term shall not exceed ten (10) years from the Date of Grant. Section 5.4 Exercise of Options 5.4.1 Exercisability. Subject to Subsection 5.4.2 and Articles XII and XIII, each Option shall be exercisable at any time or times during the Option Period and in such amount or amounts as the - 21 - 37 Committee may prescribe and specify in the applicable Award Commitment (subject further in the case of Incentive Stock Options, to such restrictions as may be imposed from time to time by the Code). 5.4.2 Certain Limitations. The Committee may provide that an Option may not be exercised in whole or in part for any period or periods of time, from zero to nine and one-half (9.5) years as specified in the Award Commitment. Except as provided in Article XII, an Option may be exercised only during the continuance of the Grantee's employment with the Company or any of its Subsidiaries. Options granted to a Reporting Person shall not be exercisable until at least six (6) months have elapsed from the Date of Grant of the Option. No Option may be exercised after the expiration of the applicable Option Period. No Option may be exercised for a fractional share. 5.4.3 Method of Exercise. A Grantee may exercise an Option, in whole or from time to time in part, by giving written notice of exercise to the Company. The notice of exercise shall be on a form approved by the Committee and shall state the number of shares with respect to which the Option is being exercised. Such notice must be received by the office of the Company designated in the Award Commitment on or before the expiration date of the Option. Section 5.5 Time and Method of Payment 5.5.1 Form of Payment. The Optionee shall pay the Option Price in cash or, with the Committee's permission and according to such rules as they may prescribe, by delivering shares of Common Stock already owned by the Optionee for at least six months prior to the date of exercise and having a Fair Market Value on the date of exercise equal to the Option Price, or a combination of cash and shares. The Committee may also permit payment in accordance with a cashless exercise program under which, if so instructed by the Optionee, shares of Common Stock may be issued - 22 - 38 directly to the Optionee's broker or dealer upon receipt of the purchase price in cash from the broker or dealer. 5.5.2 Time of Payment. The Optionee shall pay the Option Price not later than ten (10) days after the date of a statement from the Company following exercise setting forth the Option Price, Fair Market Value of Common Stock on the exercise date, the number of shares of Common Stock that may be delivered in payment of the Option Price (if applicable) and the amount of withholding tax due, if any. If the Optionee fails to pay the Option Price within the ten (10) day period, the Committee shall have the right to take whatever action it deems appropriate, including voiding the Option exercise. 5.5.3 Methods for Tendering Shares. The Committee shall determine acceptable methods for tendering shares of Common Stock as payment upon exercise of an Option and may impose such limitations and restrictions on the use of shares of Common stock to exercise an Option as it deems appropriate. 5.5.4 ISO Limitation. Common Stock acquired by the Grantee which is identified as having been obtained through an Incentive Stock Option under the Plan and still subject to Incentive Stock Option holding requirements as defined in the Code, may not be tendered in payment of the Option Price. Section 5.6 Delivery of Shares No shares of Common Stock shall be delivered pursuant to the exercise, in whole or in part, of any Option, unless and until (i) payment in full of the Option Price therefor is received by the - 23 - 39 Company and (ii) compliance with all applicable requirements and conditions of this Plan, the Award Commitment and such rules and regulations as may be established by the Committee that are preconditions to delivery, including, but not limited to, the requirements and conditions of Section 14.5. Promptly after exercise of the Option, payment in full of the Option Price and compliance with the conditions described in the preceding sentence, the Company shall effect the issuance to the Optionee of such number of shares of Common Stock as are subject to the Option exercise. Section 5.7 Stockholder Rights An Optionee shall have none of the rights or privileges of a stockholder with respect to any shares of Common Stock covered by an Option unless and until the Optionee has given written notice of exercise of the Option, has paid in full the Option Price for such shares of Common Stock and has otherwise complied with this Plan, the Award Commitment and such rules and regulations as may be established by the Committee, and the shares are issued to him. No adjustment shall be made for dividends in cash or property or other distributions or rights with respect to any such shares of Common Stock for which the record date is prior to the date on which the Optionee or a transferee of the Option shall have become the holder of record of any such shares covered by the Option. Notwithstanding anything to the contrary, an Option may include dividend equivalents as described in Section 10.4. Section 5.8 Incentive Stock Options 5.8.1 Individual Limitation. No Grantee may be granted an ISO under this Plan (or any other plans of the Company or any Participating Subsidiary) which would result in Common Stock with an - 24 - 40 aggregate Fair Market Value (measured as of the Date of Grant) of more than $100,000 first becoming exercisable in any one calendar year, or which would entitle such Grantee to purchase a number of shares greater than the maximum number permitted by Section 422(d)(1) of the Code as in effect on the Date of Grant. 5.8.2 Code Qualification. Whenever possible, each provision in the Plan and in every Option granted under this Plan which is designated by the Committee as an ISO shall be interpreted in such a manner as to entitle the Option to the tax treatment afforded by Section 422 of the Code. If any provision of the Plan or any Option designated by the Committee as an ISO shall be held not to comply with requirements necessary to entitle such Option to such tax treatment, then (i) such provision shall be deemed to have contained from the outset such language as shall be necessary to entitle such Option to the tax treatment afforded under Section 422 of the Code, and (ii) all other provisions of this Plan and the Award Commitment shall remain in full force and effect. If any Award Commitment covering an Option designated by the Committee to be an ISO under the Plan shall not explicitly include any terms required to entitle such ISO to the tax treatment afforded by Section 422 of the Code, all such terms shall be deemed implicit in the designation of such Option and such Option shall be deemed to have been granted subject to all such terms. 5.8.3 Notice of Disposition. An Optionee shall give prompt notice to the Company of any disposition of shares of Common Stock acquired upon exercise of an ISO if such disposition occurs within either two (2) years after grant or one year after receipt of such shares by such Optionee. Such Optionee shall also comply with any applicable withholding requirements. - 25 - 41 Section 5.9 Stock Appreciation Rights Awards 5.9.1 Grants. The Committee may grant SARs at the same time as Optionees are awarded Options under the Plan. Each SAR shall be in tandem with and relate to a specific Option under the Plan and shall specify that the number of Option Shares subject to the SAR shall be equal to the number of shares of Common Stock that the Optionee is entitled to receive pursuant to the related Option. 5.9.2 SAR Exercise. A SAR may be exercised, in whole or in part, within the period specified for the exercise of the Option in the related Option grant only upon surrender of the related Option (or portion thereof) by the Optionee. Each SAR shall be exercisable at such time or times, on the conditions and to the extent, but only to the extent, that the related Option is exercisable, provided that no such SAR (except in the case of death or physical or mental incapacity) shall be exercisable prior to the expiration of six (6) months following the Date of Grant and, provided further, that any SAR granted hereunder may provide, at the election of the Committee, that the SAR may be exercised only at a time when the Optionee to whom the SAR has been granted is subject to the provisions of Section 16(b) of the Act. Each SAR and all rights and obligations thereunder shall terminate and may no longer be exercised upon the termination or exercise of the related Option. An Optionee may exercise a SAR by giving written notice of exercise to the Company stating the number of shares of Common Stock subject to exercisable Options with respect to which the SARs are being exercised. The date upon which such written notice is received by the Company shall be the exercise date for the SARs. - 26 - 42 An Option and SAR covering the same share of Common Stock may not be exercised simultaneously. 5.9.3 Value of SAR Payment. If an Optionee exercises a SAR, he shall receive an amount equal to the product of (i) the amount by which the SAR Fair Market Value on the exercise date of one share of Common Stock exceeds the Option Price of the related Option, times (ii) the number of shares covered by the Option, or portion thereof, which is surrendered. For purposes of this Article V, "SAR Fair Market Value" of a SAR or share of Common Stock on any date shall be the average of the daily closing prices of a share of Common Stock for five (5) consecutive business days immediately preceding the day in question as reported on the Composite Tape for New York Stock Exchange Listed Companies and published in the Eastern Edition of The Wall Street Journal, subject to the provisions of Section 5.9.4. 5.9.4 Time and Method of Payment 5.9.4.1 Any payment which may become due from the Company by reason of an Optionee's exercise of a SAR may be paid to the Optionee all in cash, all in shares of Common Stock or partly in shares and partly in cash, as determined by the Committee. The Committee shall determine the timing of any payment made. 5.9.4.2 If paid in cash, the amount thereof shall be the amount of appreciation determined under Subsection 5.9.3. The payments to be made, in whole or in part, in cash upon the exercise of SARs by any Reporting Person shall be made in accordance with the provisions relating to the exercise of SARs of Rule 16b-3 of the General Rules and Regulations under the Act, as in effect at - 27 - 43 the time of such exercise, or any law, rule, regulation or other provision that may hereafter replace such Rule. 5.9.4.3 In the event that all or a portion of the payment is made in shares of Common Stock, the number of shares of Common Stock received shall be determined by dividing the amount of the appreciation determined under Subsection 5.9.3 by the SAR Fair Market Value of a share of Common Stock on the exercise date of the SAR. Cash will be paid in lieu of any fractional share of Common Stock or, if the Committee should so determine, the number of shares of Common Stock will be rounded downward to the next whole share of Common Stock. All shares shall be valued at their SAR Fair Market Value as of the date of such exercise; provided, however, that with respect to exercises of SARs by an employee who is subject to the provisions of Section 16(b) of the Act during any period commencing on the third business day following the date of release for publication of the quarterly or annual summary statements of the Company's sales and earnings and ending on the twelfth business day following such date (a "window period"), the Committee may prescribe, by rule of general application, such other measure of fair market value per share as the Committee may, in its discretion, determine, but not in excess of the highest sale price of the Common Stock reported on the Composite Tape for New York Stock Exchange Listed Companies and published in the Eastern Edition of The Wall Street Journal during such window period. Notwithstanding the foregoing, the fair market value (or SAR Fair Market Value, if applicable) of SARs that relate to an ISO, shall not be in excess of the maximum amount that would be permissible under Section 422 of the Code without disqualifying such option as an ISO under such Section 422. 5.9.5 Effect of SAR and Option Exercises. Upon exercise of a SAR, the number of shares of Common Stock subject to exercise under the related Option shall automatically be reduced by the - 28 - 44 number of shares of Common Stock represented by the Option or portion thereof surrendered, as provided in Subsection 5.1.1. Shares of Common Stock subject to Options or portions thereof surrendered upon the exercise of SARs shall not be available for subsequent awards under the Plan. The exercise of any number of Options shall result in an equivalent reduction in the number of shares of Common Stock covered by the related SAR and such shares may not again be subject to a SAR under this Plan. 5.9.6 Nature of SARs. SARs shall be used solely as a device for the measurement and determination of the amount to be paid to Grantees as provided in the Plan. SARs shall not constitute or be treated as property or as a trust fund of any kind. All amounts at any time attributable to the SARs shall be and remain the sole property of the Company and all Grantees' rights hereunder are limited to the rights to receive cash and shares of Common Stock as provided in the Plan. Section 5.10 Performance Accelerated Stock Options Awards 5.10.1 Grants. From time to time and upon the recommendation of the CEO, the Committee may grant PASOs in such number as it may determine to such Reporting Persons as the Committee may select. From time to time, the CEO may grant PASOs in such number as he may determine to such Nonreporting Persons as he may select; provided, however, each and all such grants shall be subject to Subsection 5.1.4 and any maximum aggregate amount of PASOs established by the Committee for grants under the Plan for Nonreporting Persons as a group. The Committee shall determine the number of PASOs to be awarded; provided, however, such number of PASOs shall automatically be reduced on a share for share basis to the extent that shares are - 29 - 45 issued pursuant to the exercise of the PASO. Subject to Subsection 5.10.2, each PASO shall specify a normal vesting date ("Normal Vesting Date") (which shall be less than the PASO Period). 5.10.2 Accelerated Date. The date or event designated by the Grantor (which shall be earlier than the Normal Vesting Date) at which the vesting of some or all PASOs shall occur if the Grantor determines that the applicable Performance Goals have been met. 5.10.3 PASO Period. The Committee shall determine the term of each PASO. Subject to earlier termination as provided in Article XII, the term shall not exceed ten (10) years. 5.10.4 Exercisability. Subject to Subsection 5.10.2 and Article XII each PASO shall be exercisable at any time or times during the PASO Period and in such amount or amounts as the Committee may prescribe and specify in the applicable Award Committment. 5.10.5 Corporate or Business Goals. From time to time, the Grantor shall determine Performance Goals to be used for, among other things, purposes of determining the Accelerated Date. If the Grantor shall determine minimum target and/or maximum performance goals and (i) if the minimum performance goal is not reached, then the Normal Vesting Date of the affected PASOs shall not be accelerated, and the Grantor may either determine new goals on the PASOs or allow the PASOs to vest at the Normal Vesting Date; (ii) if the minimum performance goal is reached but the target performance goal is not reached, then the Grantor may accelerate the Normal Vesting Date to an Accelerated Date for part of the affected PASOs (as specified in the applicable Award Commitment), and for the remainder of the PASOs, the Grantor may determine new goals or allow the PASOs to vest at the Normal Vesting Date; (iii) if the performance goal is reached and the maximum - 30 - 46 performance goal is not reached, then the Grantor may accelerate the Normal Vesting Date to an Accelerated Date for part of the affected PASOs, and for the remainder of the PASOs, the Grantor may determine new goals or allow the PASOs to vest at the Normal Vesting Date; and (iv) if the maximum performance goal is reached, then the Normal Vesting Date for all affected PASOs shall be accelerated to the Accelerated Date. 5.10.6 PASOs Treated Like Options. Except as otherwise provided in the Plan, PASOs shall be treated identical to Options; provided, however, that if there is a conflict between a provision specifically covering PASOs and one generally covering Options, then the specific provision shall control as to PASOs. ARTICLE VI PERFORMANCE SHARE AWARDS Section 6.1 Grants From time to time and upon the recommendation of the CEO, the Committee may grant Performance Share Awards in such number as it may determine to such Reporting Persons as the Committee may select. From time to time, the CEO may grant in such number as he may determine Performance Share Awards to such Nonreporting Persons as he may select; provided, however, each and all such grants shall be subject to any maximum aggregate number of Performance Shares established by the Committee for grants under the Plan for Nonreporting Persons as a group. - 31 - 47 Section 6.2 Performance Period At the time of a Performance Share Award grant, the Committee shall establish a Performance Period of not less than one year nor more than five (5) years, commencing the Date of Grant of the Award. Section 6.3 Performance Goals At the time of each grant, the Committee shall establish for all Performance Share Awards the Performance Goals for the Company and any Participating Subsidiary, while the CEO (or his designee or designees) shall establish for each individual Performance Share Award the business unit, corporate staff group and individual Performance Goals (other than his own which will be the same as the Performance Goals for the Company), if any. All of the designated Performance Goals must be met as a precondition to any distribution or payment being made with respect to the Performance Share Award following the end of the Performance Period. Except as provided in Article XII, these Performance Goals (although their measurement, including adjustments, if any, as permitted under Subsection 6.8.3, will not occur until after the expiration of the applicable Performance Period) must be met during the continuance of the Grantee's employment with the Company or any Participating Subsidiary, prior to the expiration of the applicable Performance Period and prior to the lapse of restrictions and delivery of any shares of Common Stock and/or the making of any payment with respect to the Performance Share Award. Performance Goals may vary among Grantees and among Awards to a Grantee. Performance Goals shall be based upon such performance criteria or combination of factors as the Grantor may deem appropriate, including, but not limited to, specified levels of earnings per share, return on investment, return on stockholders' - 32 - 48 equity and such other goals related to the Company's performance as are deemed appropriate by the Committee. Section 6.4 Payout Schedule In tandem with the establishment of the Performance Goals, the Grantor shall establish a Payout Schedule for that Performance Period for each Performance Share Award. Each Payout Schedule shall establish for each Performance Period minimum, target, maximum and intermediate performance and distribution levels for determining the shares of Common Stock deliverable and/or cash payable, if any, upon settlement of the Performance Share Award at the conclusion of the Performance Period. Section 6.5 Issuance of Stock and Stock Certificates 6.5.1 Issuance. As soon as possible after the Date of Grant of a Performance Share Award, the Company shall cause to be issued to the Grantee such number of shares of Common Stock as prescribed by the applicable Payout Schedule for attainment of target level of performance, that is, the Target Award. Concurrently, the Company shall cause to be issued a stock certificate or certificates, registered in the name of the Grantee and dated the Date of Grant, evidencing such shares. Each such issuance (of shares and of a stock certificate or certificates) shall be subject throughout the Performance Period to the terms, conditions and restrictions (including forfeiture and restrictions against transfer provisions of Section 6.6) contained in this Plan and/or the Award Commitment entered into between the registered owner of such shares and the Company, except as otherwise provided in this Plan. Although not a precondition to the granting of a Performance Share - 33 - 49 Award, each such issuance shall be subject to forfeiture to the Company as of the date of issuance if an Award Commitment and a stock power endorsed by the Grantee in blank with respect to the shares of Common Stock covered by the Performance Share Award under this Article VI are not duly executed by the Grantee and timely returned to the Company. 6.5.2 Custody and Legends. Each certificate for shares of Common Stock issued in respect of the Performance Share Award awarded under Subsection 6.5.1 shall be held in custody by the Company for the Grantee's account until the expiration or termination of the applicable Performance Period (except as provided in Article XII) and the satisfaction of any and all other conditions of the Award Commitment applicable to Performance Shares covered by the Performance Share Award. Such certificate shall be imprinted with a legend to indicate that the transferability thereof and the shares of stock represented thereby are subject to the terms, conditions and restrictions (including forfeiture and restrictions against transfer) contained in this Plan and/or an Award Commitment entered into between the registered owner of such shares and the Company, a copy of which Plan and Award Commitment is on file in the office of the Company's Corporate Secretary. Such legend shall not be removed from any stock certificate evidencing Performance Shares until the lapse or release of the restrictions as described in Section 6.8. Each certificate also shall be subject to appropriate stop-transfer orders. Section 6.6 Restrictions and Forfeitures The shares of Common Stock issued to a Grantee pursuant to Section 6.5 shall be subject to the following restrictions until the expiration or termination of the Performance Period established pursuant to Section 6.2: (i) a Grantee shall not be entitled to delivery of a certificate evidencing the - 34 - 50 shares of Common Stock covered by the Performance Share Award until the expiration or termination of the Performance Period; (ii) none of such shares of Common Stock may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the Performance Period and until the satisfaction of any and all other conditions; and (iii) all such Common Stock shall be forfeited and returned to the Company and all rights of the Grantee with respect to such Common Stock (including, but not limited to, those specified in Section 6.7) shall terminate without further obligation on the part of the Company unless (x) the Grantee has remained a regular full time employee of the Company or any Participating Subsidiary until the expiration or termination of the Performance Period (except as provided in Article XII) and (y) the satisfaction of any and all other conditions of the Award Commitment applicable to such Common Stock covered by the Performance Share Award is completed. Upon the forfeiture of any shares of Common Stock, ownership of such forfeited shares shall be transferred to the Company without further acts by the Grantee. Section 6.7 Stockholder Rights Following registration in the Grantee's name, and subject to execution of the documents provided for in Section 6.5, during the Performance Period the Grantee shall have the entire beneficial interest in, and all rights and privileges of a stockholder as to, such shares of Common Stock awarded to him with respect to the target level performance, including, but not limited to, the right to vote and receive dividends, subject to the restrictions and forfeiture risks set forth in Section 6.6. Any shares of Common Stock distributed as a dividend or otherwise with respect to any shares issued under a Performance Share Award as to which the restrictions have not yet lapsed shall be subject to the same restrictions as such shares. - 35 - 51 Section 6.8 Delivery of Shares and Cash Payments 6.8.1 Determination of Performance Results and Award Settlement. As soon as practicable after the Performance Period expires or otherwise terminates with respect to each Performance Share Award, the Committee shall determine whether and the extent to which any corporate Performance Goals were achieved during the Performance Period; and the Grantor shall determine whether and the extent to which applicable business unit, corporate staff and individual Performance Goals, if any, were achieved during the Performance Period. Following such determinations, a calculation shall be made of the number of shares of Common Stock whose restrictions shall lapse and shall be deliverable and the cash payable, if any, upon settlement of the Performance Share Award. The computation shall be made by application of the Payout Schedule to the degree of actual performance achieved against Performance Goals (determined as provided in the preceding sentence). 6.8.2 Delivery of Shares and Payment of Cash 6.8.2.1 In the event the minimum level of performance established by the Payout Schedule is not achieved, the entire Performance Share Award is forfeited, including, without limitation, the shares of Common Stock held in custody pursuant to Section 6.5. 6.8.2.2 Should the minimum level of performance established by the Payout Schedule be achieved, the Grantee shall have earned (subject to adjustments as provided by Subsection 6.8.3) the applicable Minimum Award and in settlement thereof the Section 6.6 restrictions on that number of shares of Common Stock held in custody pursuant to Section 6.5 equal to the share number - 36 - 52 specified by the Payout Schedule for performance at the minimum level shall lapse and as promptly as administratively feasible thereafter, the Company shall deliver to the Grantee a stock certificate or certificates for the number of shares of Common Stock earned. Upon such delivery, shares remaining in custody (which are the difference between the applicable Minimum Award and the applicable Target Award) shall be forfeited and ownership transferred to the Company without further acts by the Grantee. 6.8.2.3 In the event the target level of the Payout Schedule is achieved, the Grantee shall have earned (subject to adjustments as provided by Subsection 6.8.3) the applicable Target Award and in settlement thereof the Section 6.6 restrictions on all of the shares held in custody pursuant to Section 6.5 shall lapse and as soon as administratively feasible thereafter the Company shall deliver to the Grantee a stock certificate or certificates for the number of shares of Common Stock earned. 6.8.2.4 For performance at a level between the minimum performance level of the Payout Schedule and the target level of the Payout Schedule the Section 6.6 restrictions on that number of shares of Common Stock held in custody pursuant to Section 6.5 equal to the share number specified by the Payout Schedule for performance at the applicable intermediate level shall lapse and as promptly as administratively feasible thereafter, the Company shall deliver to the Grantee a stock certificate or certificates for the number of shares of Common Stock earned. Upon such delivery, shares remaining in custody (which are the difference between the number of shares prescribed for the level of performance achieved and the Target Award) shall be forfeited and ownership transferred to the Company without further acts by the Grantee. - 37 - 53 6.8.2.5 Should the maximum level of performance established by the Payout Schedule be attained or exceeded, the Grantee shall have earned (subject to adjustments as provided by Subsection 6.8.3) the applicable Maximum Award and in settlement thereof (i) the restrictions on that number of shares of Common Stock held in custody pursuant to Section 6.5 equal to the share number specified by the Payout Schedule for performance at the target level shall lapse and as promptly as administratively feasible thereafter the Company shall deliver to the Grantee a stock certificate or certificates for the number of shares of Common Stock earned at the target level, and (ii) the share differential between the number of shares specified by the Payout Schedule for performance at the target level and the number of shares specified in the Payout Schedule for performance at the maximum level of performance shall be paid in cash, shares of Common Stock or a combination thereof, as determined by the Committee. Such share differential shall have a value which is the product of the number of shares constituting the share differential times the Performance Share Fair Market Value on the vesting date. 6.8.2.6 For performance between the target level and the maximum level of performance specified in the Payout Schedule (i) the Section 6.6 restrictions on that number of shares of Common Stock held in custody pursuant to Section 6.5 equal to the share number specified by the Payout Schedule for performance at the target level shall lapse and as promptly as administratively feasible thereafter, the Company shall deliver to the Grantee a stock certificate or certificates for the number of shares of Common Stock earned at the target level, and (ii) the share differential between the share number specified by the Payout Schedule for performance at the target level and the share number specified by the Payout Schedule for performance at the applicable intermediate level shall be paid in cash, shares of Common Stock or a combination thereof, as determined by the Committee. - 38 - 54 Such share differential shall have a value which is the product of the number of shares constituting the share differential times the Performance Share Fair Market Value on the vesting date. 6.8.2.7 Cash payments normally will be made as soon as practicable following the end of the Performance Period. All shares delivered to a Grantee pursuant to this Subsection 6.8.2 shall be without the legend described in Subsection 6.5.2 and shall be free of all restrictions and forfeitures, except as otherwise provided by Article XII or imposed by law. No payment will be required from the Grantee upon the delivery of any shares of Common Stock, except that the amount necessary to satisfy applicable Federal, state or local tax requirements shall be paid by the Grantee in accordance with the requirements of Section 14.1. 6.8.3 Revisions for Significant Events. When circumstances occur (including, but not limited to, unusual or nonrecurring events, changes in tax laws or accounting principles or practices) that cause any Performance Goal, Payout Schedule and/or level of performance or distribution specified in a Payout Schedule to be inappropriate in the judgment of the party initially responsible for establishing the Performance Goal, Payout Schedule and/or performance or distribution level, such party may make such changes as said party deems equitable in recognition of any unforeseen events or changes in circumstances or changed business or economic conditions. 6.8.4 Conditions Precedent. Incentives shall be paid to the Grantee only upon compliance by the Grantee with all obligations of such Grantee under the Plan and/or the Award Commitment with respect to such Performance Share Awards, including the requirement that, except as provided in Article XII, the Performance Goals (although their measurement, including adjustments, if any, required by the Committee or the CEO, as provided herein, will not occur until after the expiration of - 39 - 55 the applicable Performance Period) must be met during the continuance of the Grantee's employment with the Company or any of the Participating Subsidiaries, prior to the expiration of the applicable Performance Period and prior to the lapse of restrictions and delivery of any shares of Common Stock and/or the making of any payment with respect to the Performance Share Award. 6.8.5 Performance Share Fair Market Value. As used in this Article VI, "Performance Share Fair Market Value" of a Performance Share Unit or a share of Common Stock on any date shall be the average of the daily closing prices for a share of Common Stock for the five (5) consecutive trading days immediately preceding the day in question as reported on the Composite Tape for New York Stock Exchange Listed Companies and published in the Eastern Edition of The Wall Street Journal. ARTICLE VII RESTRICTED STOCK AWARDS Section 7.1 Grants From time to time and upon the recommendation of the CEO, the Committee may grant Restricted Stock Awards in such number as it may determine to such Reporting Persons as the Committee may select. From time to time, the CEO may grant in such number as he may determine Restricted Stock Awards to such Nonreporting Persons as he may select; provided, however, each and all such grants shall be subject to any maximum aggregate number of shares of Restricted Stock established by the Committee for grants under the Plan for Nonreporting Persons as a group. - 40 - 56 Section 7.2 Restricted Period At the time of a Restricted Stock Award grant, the Committee shall establish (for all Restricted Stock shares which are then being awarded to a Participant or, if it is the intent that the total of such shares shall be divided into separate parts, for each part of such total) a Restricted Period of not less than one year or more than five (5) years (the "Restriction Range"), commencing with the Date of Grant of the Award. Different Restricted Periods may be fixed within the Restriction Range for different parts of the shares of Restricted Stock which are being awarded to a Grantee. Section 7.3 Restrictions and Forfeiture The shares of Restricted Stock covered by the Restricted Stock Award granted to a Grantee pursuant to Section 7.1 shall be subject to the following restrictions until the expiration or termination of the Restricted Period established pursuant to Section 7.2: (i) a Grantee shall not be entitled to delivery of a certificate evidencing the shares of Restricted Stock covered by the Restricted Stock Award until the expiration or termination of the Restricted Period and the satisfaction of any and all other conditions specified in the Award Commitment applicable to such Restricted Stock shares; (ii) none of the shares of Restricted Stock may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the Restriction Period and until the satisfaction of any and all other conditions specified in the Award Commitment applicable to such Restricted Stock; and (iii) all of the shares of Restricted Stock shall be forfeited and returned to the Company and all rights of the Grantee with respect to such Restricted Stock shares (including, but not limited to, those specified in Section 7.5) shall terminate without further obligation on the part of the Company unless (x) the Grantee has remained a regular full time employee of the Company or any Participating Subsidiary - 41 - 57 until the expiration or termination of the Restricted Period or Periods and (y) the satisfaction of any and all other conditions of the Award Commitment applicable to such Restricted Stock shares. Upon the forfeiture of any shares of Restricted Stock, such forfeited shares shall be transferred to the Company without further acts by the Grantee. Section 7.4 Issuance of Stock and Stock Certificate 7.4.1 Issuance. As soon as practicable after the Date of Grant of a Restricted Stock Award, the Company shall cause to be issued to the Grantee such number of shares of Common Stock as constitutes the Restricted Stock shares awarded under the Restricted Stock Award. Concurrently, the Company shall cause to be issued a stock certificate or certificates, registered in the name of the Grantee and dated as of the Date of Grant, evidencing such shares. Each such issuance (of shares and of a stock certificate or certificates) shall be subject throughout the Performance Period to the terms, conditions and restrictions (including forfeiture and restrictions against transfer provisions of Section 7.3) contained in this Plan and/or the Award Commitment entered into between the registered owner of such shares and the Company, except as otherwise provided in this Plan. Although not a precondition to the granting of a Performance Share Award, each such issuance shall be subject to forfeiture to the Company as of the Date of Grant if an Award Commitment and a stock power endorsed by the Grantee in blank with respect to the shares of Restricted Stock covered by the Award under this Article VII are not duly exercised by the Grantee and timely returned to the Company. 7.4.2 Custody and Legends. Each certificate for shares of Common Stock issued in respect of the Restricted Stock Award granted under Section 7.1 shall be held in custody by the Company for the Grantee's account until the expiration or termination of the applicable Restricted Period (except - 42 - 58 as provided in Article XII) and the satisfaction of any and all other conditions of the Award Commitment applicable to such shares of Restricted Stock covered by the Restricted Stock Award. Such certificate shall be imprinted with a legend to indicate that the transferability thereof and the shares of Common Stock represented thereby are subject to the terms, conditions and restrictions (including forfeiture and restrictions against transfer) contained in this Plan and/or an Award Commitment entered into between the registered owner of such shares and the Company, a copy of which Plan and Award Commitment is on file in the office of the Company's Corporate Secretary. Such legend shall not be removed from any stock certificate evidencing such Restricted Stock shares until the lapse or release of the restrictions as described in Section 7.3. Each certificate also shall be subject to appropriate stop-transfer orders. Section 7.5 Stockholder Rights Following registration in the Grantee's name and subject to execution of the documents provided for in Section 7.4, during the Restricted Period the Grantee shall have the entire beneficial interest in, and all rights and privileges of a stockholder as to, such shares of Common Stock covered by the Restricted Stock Award, including, but not limited to, the right to vote such shares and the right to receive dividends, subject to the restrictions and forfeitures set forth in Section 7.3. Any shares of Common Stock distributed as a dividend or otherwise with respect to any shares of Restricted Stock as to which the restrictions have not yet lapsed shall be subject to the same restrictions as such Restricted Stock shares. - 43 - 59 Section 7.6 Delivery of Shares Upon the expiration (without a forfeiture) or earlier termination of the Restriction Period and the satisfaction of or release from any other conditions by the Grantee under the Plan and/or the Award Commitment with respect to such shares of Restricted Stock, or at such earlier time as provided under the provisions of Article XII and/or Article XIII, all of such shares shall be released from all restrictions and forfeiture provisions under Section 7.3, any similar restrictions and forfeiture provisions under the Award Commitment applicable to such shares and all other restrictions and forfeiture provisions of this Plan or such Award Commitment. As promptly as administratively feasible thereafter the Company shall deliver or cause to be delivered to such Grantee a stock certificate or certificates for the appropriate number of shares of Common Stock, free of such restrictions and forfeitures, except as otherwise provided by Article XIV or imposed by law. No payment will be required from the Grantee upon the delivery of any shares of Restricted Stock, except that amount necessary to satisfy applicable Federal, state or local tax requirements shall be paid by the Grantee in accordance with the requirements of Section 14.1. ARTICLE VIII PHANTOM UNIT AWARDS Section 8.1 Grants From time to time and upon the recommendation of the CEO, the Committee may grant Phantom Unit Awards in such number as it may determine to such Reporting Persons as the - 44 - 60 Committee may select. From time to time, the CEO may grant Phantom Unit Awards in such number as he may determine to such Nonreporting Persons as he may select; provided, however, each and all such grants shall be subject to any maximum aggregate number of Phantom Units established by the Committee for grants under the Plan for Nonreporting Persons as a group. Section 8.2 Vesting of Awards The amounts credited with respect to each Phantom Unit shall become vested on the date or dates determined and set forth in the applicable Award Commitment at the time of grant unless vested sooner as described in Article XII of the Plan. The vesting period shall be determined by the Committee, but in no case shall such period be less than one year or more than five (5) years. Vesting shall be subject to the terms, conditions and provisions hereinafter with respect to forfeiture and termination of Awards or early vesting or forfeiture of Awards in accordance with the provisions of Article XII. Section 8.3 Value of Phantom Units Payments The amount payable with respect to each vested Phantom Unit Award shall be the sum of (1) the dividends and interest credited to such account and (2) an amount determined by multiplying the number of Phantom Units posted to such account by the Phantom Unit Fair Market Value on the date of vesting. For the purpose of determining such amount the Company shall establish and maintain a separate memorandum account for each Grantee granted a Phantom Unit Award pursuant to Section 8.1. As of the Date of Grant of each grant of a Phantom Unit Award the Company shall credit to the account of each Grantee who has been granted a Phantom Unit Award such number of - 45 - 61 Phantom Units as is specified in the Award. From the Date of Grant until the date that payments under the Plan commence the account of each Grantee shall be credited quarterly with an amount determined by multiplying the amount of Phantom Units credited to each account by the per share dividend paid quarterly by the Company on its Common Stock. In addition, each account (representing dividends and credited interest) shall be credited quarterly with an amount determined by multiplying the account balance at the close of each quarter by an amount representing one-fourth of the average per annum rate of interest established by Morgan Guaranty Trust Company (or by such other major New York commercial bank as the Committee shall designate) in New York from time to time during such quarter as its prime lending rate. As used in this Article VIII, "Phantom Unit Fair Market Value" of a Phantom Unit or a share of Common Stock on any date shall be the average of the daily closing prices for a share of Common Stock for the five (5) consecutive trading days immediately preceding the day in question as reported on the Composite Tape for New York Stock Exchange Listed Companies and published in the Eastern Edition of The Wall Street Journal. Section 8.4 Time and Method of Payment Any payment which may become due from the Company upon the vesting of a Phantom Unit shall be paid to the Grantee in cash. The date or dates upon which amounts determined pursuant to Section 8.3 shall be paid to the Grantee shall be determined by the Committee prior to the Date of Grant and set forth in the applicable Award Commitment or in accord with such rules and regulations as may be adopted by the Committee. - 46 - 62 Section 8.5 Forfeiture of Phantom Units Except as otherwise provided in Article XII, all of the Phantom Units credited to a Grantee's account (including all dividend equivalents and interest credited thereto) shall be forfeited and all rights of the Grantee with respect to such Phantom Units (including any dividend equivalents and interest related thereto) shall terminate without further obligation on the part of the Company unless and until (i) the Grantee has remained a regular full time employee of the Company or any Participating Subsidiary until vesting as described in Section 8.2 and (ii) the satisfaction of any other conditions specified in the Plan and/or Award Commitment applicable to such Phantom Units, except as may otherwise be determined by the Committee. Section 8.6 Nature of Phantom Units Phantom Units shall be used solely as a device for the measurement and determination of the amount to be paid to Grantees as provided in the Plan. Phantom Units shall not constitute or be treated as property or as a trust fund of any kind. All amounts at any time attributable to the Phantom Units shall be and remain the sole property of the Company and all Grantees' rights hereunder are limited to the rights to receive cash and shares of Common Stock as provided in the Plan. - 47 - 63 ARTICLE IX CASH VALUE AWARDS Section 9.1 Grants From time to time and upon the recommendation of the CEO, the Committee may grant Cash Value Awards in such number as it may determine to such Reporting Persons as the Committee may select. From time to time, the CEO may grant Cash Value Awards in such number as he may determine to such Nonreporting Persons as he may select; provided, however, each and all such grants shall be subject to any maximum dollar value established by the Committee for grants under the Plan for Nonreporting Persons as a group. Section 9.2 Performance Period At the time of a Cash Value Award grant, the Committee shall establish a Performance Period of not less than one year nor more than five (5) years, commencing on the Date of Grant of the Award. Section 9.3 Performance Goals At the time of each grant, the Committee shall establish for all Cash Value Awards the Performance Goals for the Company and any Participating Subsidiary, while the CEO (or his designee or designees) shall establish for each individual Cash Value Award the business unit, corporate staff group and individual Performance Goals (other than his own which will be the same - 48 - 64 as the Performance Goals for the Company), if any. All of the designated Performance Goals must be met as a precondition to any distribution or payment being made with respect to the Cash Value Award following the end of the Performance Period. Except as provided in Article XII, these Performance Goals (although their measurement, including adjustments, if any, will not occur until after the expiration of the applicable Performance Period) must be met during the continuance of the Grantee's employment with the Company or any Participating Subsidiary, prior to the expiration of the applicable Performance Period and prior to the making of any payment with respect to the Cash Value Award. Performance Goals may vary among Grantees and among Awards to a Grantee. Performance Goals shall be based upon such performance criteria or combination of factors as the Grantor may deem appropriate, including, but not limited to, specified levels of earnings per share, return on investment, return on stockholders' equity and such other goals related to the Company's performance as are deemed appropriate by the Committee. Section 9.4 Payout Schedule In tandem with the establishment of the Performance Goals, the Grantor shall establish a Payout Schedule for that Performance Period for each Cash Value Award. Each Payout Schedule shall establish for each Performance Period minimum, target, maximum and intermediate performance and distribution levels for determining the payout of the Common Stock, if any, of the Cash Value Award at the conclusion of the Performance Period. - 49 - 65 Section 9.5 Form Of Payout Payment of a Cash Value Award shall be made in cash, Common Stock, Restricted Stock or any combination thereof as determined by the Grantor at the time of the Payout. Restricted Stock shall be governed by Articles VII and XII; provided, however, that Restricted Stock granted at less than Fair Market Value shall also be governed by Section 9.6 and the Attributable Shares (defined below) shall be governed by Section 13.3. Section 9.6 Calculation Of Payout As soon as practicable after the Performance Period expires with respect to the Cash Value Award, the Grantor shall determine whether and the extent to which any Performance Goals were achieved during the Performance Period. The Grantor may also determine the amount and form of the Payout. If the Payout is to be paid in Restricted Stock, then the number of shares calculated by the Grantor may be determined by using either 100% or 85% (as determined by the Committee) of the Fair Market Value on the date of issue. If the Grantor uses 85% of the Fair Market Value, then those shares attributable to the discount (i.e., 100% minus 85%) (the "Attributable Shares") shall be subject to the forfeiture provisions under Section 13.3; and otherwise, the Restricted Stock shall be subject to forfeiture under Article XII. - 50 - 66 ARTICLE X OTHER AWARDS Section 10.1 Other Market-Based Awards The Grantor may grant other Market-Based Awards, provided that the purchase price or base price for the equity securities of the Company shall in no event be less than 100% of the Fair Market Value of such security on the Date of Grant. Such Other Market-Based Awards shall be in a form determined by the Committee, and the Committee shall have complete authority to determine the terms, conditions and restrictions of the awards, not inconsistent with the terms of the Plan. The Committee, upon recommendation of the CEO, shall determine the time or times at which such Other Market-Based Awards shall be made. Any such Other Market-Based Award shall be confirmed by an Award Commitment executed by the Company and the Grantee, which Agreement shall contain such provisions as the Committee determines to be necessary or appropriate to carry out the intent of the Plan with respect to such Award. Section 10.2 Other Performance-Based Awards The Grantor may grant Other Performance-Based Awards. Such Other Performance-Based Awards shall be in a form determined by the Committee, and the Committee shall have complete authority to determine the terms, conditions and restrictions of the awards, not inconsistent with the terms of the Plan. The Committee, upon recommendation of the CEO, shall determine the time or times at which such Other Performance-Based Awards shall be made. Any such Other Performance-Based Award shall be confirmed by an Award Commitment executed by the Company - 51 - 67 and the Grantee, which Agreement shall contain such provisions as the Committee determines to be necessary or appropriate to carry out the intent of the Plan with respect to such Award. Section 10.3 Terms of Other Awards In addition to the terms and conditions specified in the Award Commitment, awards made pursuant to this Article X shall be subject to the following: (a) Any shares of Common Stock subject to Awards made under this Article X may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction or performance period lapses; and (b) If specified by the Committee in the Award Commitment, the recipient of an Award under this Article X shall be entitled to receive, currently or on a deferred basis, interest or dividends or dividend equivalents with respect to the Common Stock covered by the Award; and (c) The Award Commitment with respect to any Award shall contain provisions dealing with the disposition of such Award in the event of a termination of employment prior to the exercise, realization or payment of such Award, whether such termination occurs because of retirement, disability, death or other reason, with such provisions to take account of the specific nature and purpose of the Award. - 52 - 68 Section 10.4 Stock Option Dividend Equivalents. 10.4.1 Grants. The Grantor may provide that a Grantee to whom an Option has been granted which is exercisable in whole or in part at a future time for shares of Common Stock (referred to in this subsection as "Share" or "Shares") shall be entitled to receive an amount per Share equal in value to the cash dividends, if any, paid per Share on issued and outstanding Shares, as of the dividend record dates occurring during the period between the Date of Grant and the time each such Share is delivered pursuant to exercise of such Stock Option or the related Stock Appreciation Right. Such amounts (herein called "Dividend Equivalents") shall be paid in cash at the time of the delivery of such Shares. 10.4.2 Interest. The Grantor may authorize payment of interest on Dividend Equivalents. The interest will be payable in cash at the same time the related Dividend Equivalents are paid. 10.4.3 Forfeiture. To the extent the Stock Options to which Dividend Equivalents and interest are related shall be forfeited all accrued Dividend Equivalents and interest thereon shall also be forfeited. - 53 - 69 ARTICLE XI SUBSTITUTION AWARDS Section 11.1 Substitution of Performance Shares Upon the request of the Grantee, the Committee may grant Restricted Stock Awards in substitution for such numbers of shares of Common Stock of equal value held in custody pursuant to Section 6.5 whose restrictions shall lapse upon expiration or other termination of a Performance Period. The number of Performance Shares available for substitution shall be determined by the method described in Section 11.3. Such Substitution Awards shall be subject to such Restricted Periods and other terms, conditions and restrictions as the Committee may from time to time determine. No substitution shall be permitted after termination of employment, regardless of the reason for termination. Once substitution has been approved by the Committee, no payment will be made with respect to an original Award. Section 11.2 Substitution of Restricted Stock Upon request of the Grantee, the Committee may grant Restricted Stock Awards in substitution for shares of Restricted Stock previously awarded either under this Plan or under the Hercules Incorporated Restricted Stock Plan of 1986. Such Awards shall be subject to such Restricted Periods and other terms, conditions and restrictions as the Committee may from time to time determine. No substitution shall be permitted after termination of employment, regardless of the reason for termination. - 54 - 70 Section 11.3 Substitution Procedures Any request of a Grantee pursuant to Section 11.1 or 11.2 shall be filed in writing with the Committee in accordance with such rules and regulations, including any deadline for the making of such request, as the Committee may provide. No substitution shall be permitted past any termination of employment described in Article XII or past the occurrence of any of the events specified in clauses (i), (ii) and (iii) of Section 14.4. Section 11.4 Substitutions in Contemplation of Retirement Prior to the expiration of the Performance Period or Restricted Period applicable to any Performance Shares or Restricted Stock Awards granted to a Grantee, such Grantee may, with the consent of the Committee, surrender all or a portion of his Award in substitution for Phantom Unit Awards subject to the terms and conditions of Article VIII, and provided that: (i) such surrender shall be treated as a forfeiture under the Plan; (ii) such substitution shall be made for retirement planning purposes; (iii) such substitution shall be made prior to December 31 of the year preceding the Grantee's Normal Retirement Date but not more than one year prior to the Grantee's Normal Retirement Date; or, in cases where Retirement with consent occurs prior to the Grantee's Normal Retirement Date, not less than sixty (60) nor more than three hundred and sixty (360) days before an announced Retirement approved by the Company; and (iv) any Phantom Units shall be substituted as of the expiration date of the applicable Performance Period in an amount consistent with the number of shares calculated for each Award being substituted. - 55 - 71 ARTICLE XII TERMINATION OF EMPLOYMENT 12.1 Retirement 12.1.1 Stock Options and SARs. If prior to the expiration of the Option Period a Grantee who has been given an Option or SAR under the Plan shall cease to be employed by the Company, any Participating Subsidiary or Related Entity because of his Retirement, (i) in the case of Nonqualified Options (except PASOs) and their related SARs, each Option and SAR shall become immediately exercisable and shall remain exercisable for a period of five (5) years from the date of cessation of employment, but not beyond the end of the Option Period, and (ii) in the case of ISOs and their related SARs, each Option and SAR shall, at such time as it becomes exercisable under the Award Commitment covering such Option, remain exercisable for a period of three (3) months from the cessation of employment, but not beyond the end of the Option Period. 12.1.2 Performance Share, Restricted Stock, Phantom Unit, and Cash Value Awards. If prior to the expiration of the Performance or Restricted Period a Grantee who has been given a Performance Share, Restricted Stock, Phantom Unit or Cash Value Award under the Plan shall cease to be employed by the Company, any Participating Subsidiary or Related Entity because of his Retirement, (i) that Grantee shall be entitled to Performance Shares or Cash Value at the end of the Performance Period based upon the extent to which the Performance Goals were satisfied at the end of such period (provided, however, the Committee may provide for an earlier payment in settlement of such Performance Shares in such amount and under such terms and conditions as the Committee - 56 - 72 deems appropriate or desirable); and (ii) all remaining restrictions with respect to such Grantee's Restricted Stock and Phantom Unit Awards shall lapse as of the date of termination. 12.1.3 Performance Accelerated Stock Options. If prior to the expiration of the PASO Period a Grantee who has been given a PASO Award under the Plan shall cease to be employed by the Company, any Participating Subsidiary or Related Entity because of his Retirement, that Grantee shall be entitled to PASOs as follows: If the PASOs are exercisable on the date of Retirement, then the PASOs will remain exercisable until the earlier of five (5) years or the end of the PASO period; if the PASOs are not yet exercisable, then they shall become exercisable at the earlier of (i) such time as the PASOs become exercisable through acceleration due to performance, or (ii) four and one-half (4.5) years after Retirement regardless of performance, or (iii) the end of nine and one-half (9.5) years from the award date. Once the PASOs become exercisable, they shall remain exercisable until the earlier of five (5) years after Retirement or the end of the PASO period, provided, however, the Grantor may provide for acceleration of the vesting date and/or an earlier settlement of such PASOs under such terms and conditions as the Grantor deems appropriate or desirable. Section 12.2 Reduction in Force 12.2.1 Stock Options and SARs. If prior to the expiration of the Option Period a Grantee who has been given a Option or SAR under the Plan shall cease to be employed by the Company or any Participating Subsidiary because of a Reduction in Force, (i) in the case of Nonqualified Options (except PASOs) and their related SARs, each Option and SAR shall become immediately exercisable and shall remain exercisable for a period of one year from the date of cessation of employment, but not beyond the end of the Option Period, and (ii) in the case of an ISO, each Option and SAR shall, - 57 - 73 at such time as it becomes exercisable under the Award Commitment covering such Option, remain exercisable for a period of three (3) months from the cessation of employment, but not beyond the end of the Option Period. 12.2.2 Performance Share, Restricted Stock, Phantom Unit and Cash Value Awards. If prior to the expiration of the Performance or Restricted Period a Grantee who has been given a Performance Share, Restricted Stock, Phantom Unit or Cash Value Award under the Plan shall cease to be employed by the Company or any Participating Subsidiary because of a Reduction in Force, (i) that Grantee shall be entitled to a Minimum Award of Performance Shares or Cash Value at the end of the Performance Period prorated for the portion of the Performance Period during which the Grantee was employed by the Company, any Participating Subsidiary (provided, however, the Committee may provide for an earlier payment in settlement of such Performance Shares or Cash Value in such amount and under such terms and conditions as the Committee deems appropriate or desirable); and (ii) all remaining restrictions with respect to such Grantee's Restricted Stock and Phantom Unit Awards shall lapse, in an amount prorated for the amount of time such Awards have remained under restriction, as of the date of termination. 12.2.3 Performance Accelerated Stock Options. If prior to the expiration of the PASO Period a Grantee who has been given a PASO Award under the Plan shall cease to be employed by the Company or any Participating Subsidiary because of a Reduction in Force, the Grantor shall determine the timing, terms and conditions of the exercise of the Award as the Grantor deems appropriate or desirable except that no PASO may be exercised beyond the end of the PASO Period. - 58 - 74 Section 12.3 Transfers to Certain Related Entities 12.3.1 Stock Options and SARs. If prior to the expiration of the Option Period a Grantee who has been given a Option or SAR under the Plan shall cease to be employed by the Company or any Participating Subsidiary because of a transfer to a Related Entity, (i) in the case of Nonqualified Options (except PASOs) and their related SARs, each Option and SAR shall become immediately exercisable and shall remain exercisable for a period of three (3) years from the date of cessation of employment, but not beyond the end of the Option Period, and (ii) in the case of an ISO, each Option and SAR shall, at such time as it becomes exercisable under the Award Commitment covering such Option, remain exercisable for a period of three (3) months from the cessation of employment, but not beyond the end of the Option Period. 12.3.2 Performance Share, Restricted Stock, Phantom Unit and Cash Value Awards. If prior to the expiration of the Performance or Restricted Period a Grantee who has been given a Performance Share, Restricted Stock, Phantom Unit or Cash Value Award under the Plan shall cease to be employed by the Company or any Participating Subsidiary because of a transfer to a Related Entity, then all restrictions with respect to such Performance Shares, Restricted Stock or Phantom Units shall remain in effect until the end of the Performance or Restricted Period; provided, however, the Grantor may provide as the case may be for an earlier payment in settlement of such Performance Shares, Restricted Stock or Phantom Units and for payment of Cash Value Awards, all in such amount and under such terms and conditions as the Grantor deems appropriate or desirable. - 59 - 75 12.3.3 Performance Accelerated Stock Options. If prior to the expiration of the PASO Period a Grantee who has been given a PASO Award under the Plan shall cease to be employed by the Company or any Participating Subsidiary because of a transfer to a Related Entity, the Grantor shall determine the timing, terms and conditions of the exercise of the Award as the Grantor deems appropriate or desirable except that no PASO may be exercised beyond the end of the PASO Period. Section 12.4 Disability or Death 12.4.1 Stock Options and SARs. If prior to the end of the Option Period a Grantee who has been granted a Option shall cease to be employed by the Company, any Participating Subsidiary or Related Entity by reason of death or Disability, (i) in the case of Nonqualified Options (excluding PASOs) and their related SARs, each Option and SAR shall become immediately exercisable and shall remain exercisable for a period of one year from the date of cessation of employment, but not beyond the end of the Option Period, and (ii) in the case of an ISO, each Option and SAR shall, at such time as it becomes exercisable under the Award Commitment covering such Option, remain exercisable for a period of one year from the cessation of employment, but not beyond the end of the Option Period. 12.4.2 Performance Share, Restricted Stock, Phantom Unit and Cash Value Awards. If prior to the expiration of the Performance or Restricted Period a Grantee who has been given a Performance Share, Restricted Stock, Phantom Unit and Cash Value Award under the Plan shall cease to be employed by the Company, any Participating Subsidiary or Related Entity by reason of death or Disability, (i) that Grantee shall be entitled to Performance Shares or Cash Value (paid in cash) at the Target Award level on the date of termination; and (ii) all remaining restrictions with - 60 - 76 respect to such Grantee's Restricted Stock and Phantom Unit Awards shall lapse as of the date of termination. Section 12.4.3 Performance Accelerated Stock Options. If prior to the expiration of the PASO Period, a Grantee who has been given a PASO Award under the Plan shall cease to be employed by the Company, any Participating Subsidiary or Related Entity because of Disability or Death, then such Grantee (or the Beneficiary of such Grantee) shall be entitled to PASOs as follows: if the PASOs are exercisable on the date of such Disability or Death, then the PASOs will remain exercisable until the earlier of one (1) year or the end of the PASO Period; if the PASOs are not yet exercisable, then they shall become exercisable at the earlier of (i) such time as the PASOs become exercisable through acceleration due to performance, or (ii) six (6) months after such Disability or Death, or (iii) nine and one-half (9.5) years from the award date. Once the PASOs become exercisable, they shall remain exercisable until the earlier of one (1) year after or the end of the PASO Period. Section 12.5 Resignation 12.5.1 Stock Options, SARs and Performance Accelerated Stock Options. If the Grantee shall voluntarily resign before eligibility for Retirement (except for Retirement with approval of the Company), the Options (including PASOs) and SARs granted in tandem shall be canceled coincident with the effective date of the termination of employment. 12.5.2 Performance Share, Restricted Stock, Phantom Unit and Cash Value Awards. If prior to the expiration of the Performance or Restricted Period a Grantee who has been given a - 61 - 77 Performance Share, Restricted Stock, Phantom Unit or Cash Value Award under the Plan shall voluntarily resign (except for Retirement with approval of the Company), then all Performance Share, Restricted Stock, Phantom Unit and Cash Value Awards theretofore awarded to such Grantee as to which there still remains an unexpired portion of the Performance or Restricted Period or the vesting period shall, upon such termination of employment, be forfeited by such Grantee to the Company, without the payment of any consideration by the Company. Thereafter, neither the Grantee nor any heirs, assigns or personal representatives of such Grantee shall have any further rights or interest in such Performance Share, Restricted Stock, Phantom Unit or Cash Value Awards, and the Grantee's name shall thereupon be deleted from the list of the Company's stockholders with respect to such Performance Shares, Restricted Stock, Phantom Units or Cash Value Award. Notwithstanding any other provisions of this Subsection 12.5.2, the value of any vested and deferred Phantom Units shall be paid to the Grantee as soon as practicable. Section 12.6 Decrease in Company Ownership 12.6.1 Stock Options and SARs. If prior to the expiration of the Option Period a Grantee who has been given an Option or SAR under the Plan shall cease to be employed by any Participating Subsidiary because of a decrease in the Company's ownership interest in a Participating Subsidiary to below 50% but at or above 20%, (i) in the case of Nonqualified Options (except PASOs) and their related SARs, each Option and SAR shall become immediately exercisable and shall remain exercisable for a period of three (3) years from the date of cessation of employment, but not beyond the end of the Option Period, and (ii) in the case of an ISO, each Option and SAR shall, at such time as it becomes exercisable under the Award Commitment covering such Option, remain exercisable for - 62 - 78 a period of three (3) months from the cessation of employment, but not beyond the end of the Option Period. 12.6.2 Performance Share, Restricted Stock, Phantom Unit and Cash Value Awards. If prior to the expiration of the Performance or Restricted Period a Grantee who has been given a Performance Share, Restricted Stock, Phantom Unit or Cash Value Award under the Plan shall cease to be employed by any Participating Subsidiary because of a decrease in the Company's ownership interest in a Participating Subsidiary to below 50% but at or above 20%, then all restrictions with respect to such Performance Shares, Restricted Stock or Phantom Units shall remain in effect until the end of the Performance Period or Restricted Period; provided, however, the Committee may provide, as the case may be, for an earlier payment in settlement of such Performance Shares, Restricted Stock or Phantom Units and for payment of Cash Value Awards, all in such amount and under such terms and conditions as the Committee deems appropriate or desirable or make any other adjustment deemed appropriate due to the decrease in Company ownership. 12.6.3 Performance Accelerated Stock Options. If prior to the expiration of the PASO Period a Grantee who has been given a PASO Award under the Plan shall cease to be employed by the Company or any Participating Subsidiary because of a decrease in company ownership, the Grantor shall determine the timing, terms and conditions of the exercise of the Award as the Grantor deems appropriate or desirable except that no PASO may be exercised beyond the end of the PASO Period. - 63 - 79 Section 12.7 Termination of Employment for Other Reasons 12.7.1 Stock Options, SARs and Performance Accelerated Stock Options. If the Grantee's employment terminates for any reason other than specified in Sections 12.1, 12.2, 12.3, 12.4, 12.5 or 12.6, each Option, SAR and PASO shall terminate; provided, however, the Grantor may provide for acceleration of the vesting date and/or an earlier settlement of such PASOs in such amount and under such terms and conditions as the Grantor deems appropriate or desirable. 12.7.2 Performance Share, Restricted Stock, Phantom Unit and Cash Value Awards. If prior to the expiration of the Performance or Restricted Period a Grantee who has been given a Performance Share, Restricted Stock, Phantom Unit or Cash Value Award under the Plan shall cease to be employed by the Company, any Participating Subsidiary or Related Entity because of any reason other than specified in Sections 12.1, 12.2, 12.3, 12.4, 12.5 or 12.6, then all Performance Share, Restricted Stock, Phantom Unit and Cash Value Awards theretofore awarded to such Grantee as to which there still remains an unexpired portion of the Performance or Restricted Period shall, upon such termination of employment, be forfeited by such Grantee to the Company, without the payment of any consideration by the Company; provided, however, the Grantor may provide for settlement of a Cash Value Award in such amount, at such time and under such terms and conditions as the Grantor deems appropriate or desirable. Thereafter, neither the Grantee nor any heirs, assigns or personal representatives of such Grantee shall have any further rights or interest in such Performance Share, Restricted Stock, Phantom Unit or Cash Value Awards, and the Grantee's name shall thereupon be deleted from the list of the Company's stockholders with respect to such Performance Shares or Restricted Stock. Notwithstanding any other provisions of this Subsection - 64 - 80 12.7.2, the value of any vested and deferred Phantom Units shall be paid to the Grantee as soon as practicable. Section 12.8 Termination Date Termination of employment of a Grantee for any of the reasons enumerated in this Article XII shall, for purposes of the Plan, be deemed to have occurred as of the date which is recorded in the ordinary course in the Company books and records in accordance with the then-prevailing procedures and practices of the Company. Section 12.9 Reporting Person Limitation Notwithstanding any other provision of this Article XII, a Grantee who ceases to be a Reporting Person through retirement or any other termination of employment shall not be entitled to exercise a SAR. ARTICLE XIII EXCHANGE AWARDS; ABOVE TARGET MICP AWARDS Section 13.1 Salary/Bonus Reductions 13.1.1 Restricted Stock. A Grantee (including those described in Section 13.8) may elect to reduce and defer his or her current or future Base Salary and/or earned Bonus and, thereafter, - 65 - 81 exchange such deferred amounts for Restricted Stock. Such elections shall direct deferrals and exchanges on a one-time (annual) basis or, in the alternative in the case of Base Salary, on an ongoing basis covering a period not exceeding five (5) years. Should a Grantee elect a one-time (annual) exchange, the deferred amounts shall be credited to his or her deferred compensation account under this Plan and, thereafter, on the third (3rd) business day following the public announcement of the Company's annual earnings, the deferred amounts shall be exchanged for that number of shares of Restricted Stock that equals the number of whole shares determined by dividing the deferred amount forgone by 85% of the Fair Market Value of one share of Common Stock on the date of the exchange. Should a Grantee elect an exchange of Base Salary on an ongoing basis for a period of one year or less, the number of shares of Restricted Stock he or she shall acquire through such exchanges, which shall be effected on the third (3rd) business day following the public announcement of the Company's annual earnings, shall be determined by dividing the total projected deferred amounts forgone for the designated period by 85% of the Fair Market Value of one share of Common Stock on the date of the exchange. When the elected period extends beyond one year, the number of shares of Restricted Stock acquired through such exchanges, which shall be effected on the third (3rd) business day following the public announcement of the Company's annual earnings, shall equal that number of whole shares of Restricted Stock determined by dividing the discounted present value of the total projected deferred amounts forgone for the designated period (using the appropriate Treasury Bill rates for the applicable period) by 85% of the Fair Market Value of one share of Common Stock on the date of the exchange. Restricted Stock acquired pursuant to exchanges under this Subsection 13.1.1 shall have a Restricted Period of not less than three (3) years (such Restricted Period to be extended up to five (5) years to coincide with a deferral election that extends beyond three (3) years), as determined by the Committee, and shall be subject to all of the terms, - 66 - 82 conditions and provisions of Article VII, except as may otherwise be determined by the Committee prior to their acquisition. 13.1.2 Options. A Grantee may elect to reduce and defer his or her current or future Base Salary and/or earned Bonus and, thereafter, exchange such deferred amounts for Nonqualified Options. Such elections shall direct deferrals and exchanges on a one-time (annual) basis or, in the alternative in the case of Base Salary, on an ongoing basis covering a period not exceeding five (5) years. Should a Grantee elect a one-time (annual) exchange, the deferred amounts shall be credited to his or her deferred compensation account under this Plan and, thereafter, on the third (3rd) business day following the public announcement of the Company's annual earnings, the deferred amounts shall be exchanged for that number of Options as is determined by the Committee, in its discretion, to be the equivalent in value of that number of whole shares of Restricted Stock determined by dividing the deferred amount forgone by 85% of the Fair Market Value of one share of the Common Stock on the date of the exchange. Should a Grantee elect an exchange of Base Salary on an ongoing basis for a period of one year or less, the number of Options he or she shall acquire through such exchanges is that number of Options as is determined by the Committee, in its discretion, to be the equivalent in value of that number of whole shares of Restricted Stock determined by dividing the total projected deferred amount forgone for the designated period by 85% of the Fair Market Value of one share of Common Stock on the date of the exchange. When the elected period extends beyond one year, the Options acquired through such exchanges, which shall be effected on the third (3rd) business day following the public announcement of the Company's annual earnings, shall be that number of Options determined by the Committee, in its discretion, to be the equivalent in value of that number of whole shares of Restricted Stock determined by dividing the discounted present value of the total projected deferred amounts forgone for the designated - 67 - 83 period (using the appropriate Treasury Bill rates for the applicable period) by 85% of the Fair Market Value of one share of the Common Stock on the date of the exchange. Options acquired pursuant to this Subsection 13.1.2 shall be exercisable according to the following three (3)-year schedule (unless the Grantee's employment with the Company or a Participating Subsidiary is terminated, in which case the provisions of Section 13.3 or Article XII, as apposite, shall govern): 40% of the Options will be exercisable beginning one year after the exchange, a second 40% of the Options will be exercisable beginning two (2) years after the exchange, and the final 20% of the Options will be exercisable beginning three (3) years after the exchange; and shall be subject to all of the terms, conditions and provisions of Article V (as modified as to exercisability by this Subsection 13.1.2), except as may otherwise be determined by the Committee prior to their acquisition. Section 13.2 Deferred Accounts 13.2.1 Deferred Compensation Plan Accounts. Subject to the Company's approval, amounts accrued under the Hercules Incorporated Deferred Compensation Plan (other than under the Hercules Incorporated Non-qualified Savings Plan portion thereof) may, upon the Grantee's request for a one-time (annual) exchange, be surrendered in exchange for Restricted Stock and/or Nonqualified Options. The number of shares of Restricted Stock and Options acquired in this manner shall be determined in the same manner as is specified in Subsections 13.1.1 and 13.1.2, respectively, and all Restricted Stock and Options so acquired shall be subject to all of the terms, - 68 - 84 conditions and provisions of Subsections 13.1.1 and 13.1.2, respectively. Exchanges under this Subsection 13.2.1 shall be effected the third (3rd) business day after the first public announcement of the Company's annual earnings. 13.2.2 Non-Qualified Savings Plan Accounts. Subject to the Company's approval, amounts accrued under the Hercules Incorporated Non-Qualified Savings Plan portion of the Hercules Deferred Compensation Plan may, upon the Grantee's request for a one-time (annual) exchange, be surrendered in exchange for Restricted Stock and/or Nonqualified Options. The number of shares of Restricted Stock and Options acquired in this manner shall be determined in the same manner as is specified in Subsections 13.1.1 and 13.1.2, respectively, except that the computation in each case shall be based on 100% of the Fair Market Value of one share of Common Stock rather than the 85% of the Fair Market Value specified in Subsections 13.1.1 and 13.1.2. All Restricted Stock and Options so acquired shall be subject to all of the terms, conditions and provisions of Subsections 13.1.1 and 13.1.2, respectively. Exchanges under this Subsection 13.2.2 shall be effected the third (3rd) business day after the first public announcement of the Company's annual earnings. Section 13.3 Termination of Employment 13.3.1 Death, Disability and Reduction in Force. Notwithstanding any provisions of Sections 12.2 and 12.4 to the contrary: (a) If prior to the expiration of an applicable Restricted Period a Grantee who has received Restricted Stock pursuant to Subsections 13.1.1, 13.2.1 and/or 13.2.2 shall cease to be employed by the Company by reason of Death, Disability, Reduction in Force or - 69 - 85 Retirement directly attributable to a Reduction in Force, all restrictions and forfeiture provisions under this Plan with respect to the Restricted Stock exchanged pursuant to this Article XIII shall lapse as of the date of termination of employment and delivery of such shares shall be governed by the provisions of Section 7.6. (b) If prior to the expiration of an applicable Option Period a Grantee who has received Options pursuant to Subsections 13.1.2, 13.2.1 and/or 13.2.2 shall cease to be employed by the Company by reason of Death, Disability, Reduction in Force or Retirement directly attributable to a Reduction in Force, the Option Period shall be adjusted to the lesser of the remaining Option Period or one year from the date of employment termination. 13.3.2 Retirement. Notwithstanding any provisions of Section 12.1 to the contrary: (a) In the event of Retirement (not directly attributable to a Reduction in Force) by a Grantee who has received Restricted Stock pursuant to Subsections 13.1.1, 13.2.1 and/or 13.2.2 prior to the expiration of an applicable Restricted Period, that number of shares of Restricted Stock equal to the amount attributable to the 15% discount made available under this Article XIII, and prorated for the length of time remaining in the Restricted Period, shall be forfeited and returned to the Company. (b) If prior to the expiration of an applicable Option Period a Grantee who has received Options pursuant to Subsections 13.1.2, 13.2.1 and/or 13.2.2 shall cease to be employed by the Company by reason of his or her Retirement (not directly related to a Reduction in Force), the Option Period shall be adjusted to the lesser of the remaining Option Period or three (3) years - 70 - 86 from the date of termination. In the event of Retirement (not directly attributable to a Reduction in Force) by a Grantee who has received Options pursuant to Subsections 13.1.2, 13.2.1 and/or 13.2.2, a number of Options equal to the amount attributable to the 15% discount and prorated for the length of time remaining in the period during which Options may not be exercised shall be forfeited. 13.3.3 Resignation or Termination for Cause. Notwithstanding any provisions of Sections 12.5 and 12.7 to the contrary: (a) In the event a Grantee who has received Restricted Shares pursuant to Subsections 13.1.1, 13.2.1 and/or 13.2.2 voluntarily resigns (except for retirement with approval of the Company) or terminates employment for reasons other than any of those specified in Sections 12.1, 12.2, 12.3, 12.4 and 12.6 prior to the expiration of an applicable Restricted Period, all shares of Restricted Stock shall be forfeited and returned to the Company and such Grantee shall receive a payment equal to the lower of the Fair Market Value of the Restricted Shares forfeited or the original amount exchanged. (b) In the event a Grantee who has received Options pursuant to Subsections 13.1.2, 13.2.1 and/or 13.2.2 voluntarily resigns (except for retirement with approval of the Company) or terminates employment for reasons other than any of those specified in Sections 12.1, 12.2, 12.3, 12.4 and 12.6 prior to the expiration of the applicable Option Period, all Options shall be forfeited and returned to the Company and such Grantee shall receive a payment equal to the lower of a value (as determined by the Committee) of the Options forfeited or the original amount exchanged. - 71 - 87 Section 13.4 Avoidance of Pension Diminution 13.4.1 Governing Provisions. Grantees electing Base Salary and/or Bonus reductions under Section 13.1 may suffer a permanent diminution of their qualified pension entitlement under the Hercules Pension Plan. To offset this diminution in part,exchange awards in respect of pensions otherwise payable as nonqualified pensions (as measured from the date of the APD Election defined next below) may be requested within five (5) years of anticipated retirement. Subject to the Committee's approval of such a request, all such exchanges shall be effected in accordance with the provisions of this Section 13.4. 13.4.2 Exchange Awards. A Grantee who is within five (5) years (but not less than one year) of his or her anticipated retirement date may elect ("APD Election") to exchange the present value (as of the date of the APD Election) of his or her projected benefits payable as of the Designated Retirement Date (as defined below) under the Hercules Pension Restoration Plan (utilizing the method and assumptions used to convert a pension to a partial cash payment under the Hercules Pension Plan) for Restricted Stock issuable under Subsection 13.1.1 and/or Options granted under Subsection 13.1.2. Restricted Stock and/or Options received in such an exchange shall be in substitution of any pension entitlements under the Hercules Pension Restoration Plan, the rights to such entitlements being forfeited and canceled in consideration of such exchange. 13.4.3 Designated Retirement Date. As a part of his or her APD Election, a Grantee shall designate a retirement date ("Designated Retirement Date"). In the event of any termination of employment prior to the Designated Retirement Date, the following will apply: - 72 - 88 (a) If the Grantee elected Restricted Stock, that number of Restricted Stock shares shall be forfeited as has a value (on the date of his or her APD Election) equivalent to the present value determined for purposes of Subsection 13.4.2 minus the present value (as of the APD Election date) of the amount due under the Hercules Pension Restoration Plan as of the date of actual retirement, utilizing the method and assumptions used to convert a pension to a partial cash payment under the Hercules Pension Plan. Further, in the event that the Grantee's actual retirement date occurs within three (3) years of the APD Election, the Grantee shall forfeit that number of Restricted Stock shares (adjusted by the preceding sentence) attributable to the 15% discount made available under Subsection 13.1.1 and prorated for the length of time remaining in the three (3)- year period commencing with the date of the APD Election. (b) If the Grantee elected Nonqualified Options, that number of Options shall be forfeited as the Committee in its discretion shall determine has a value (on the date of his or her APD Election) equivalent to the present value determined for purposes of Subsection 13.4.2 minus the present value (as of the date of his or her APD Election) of the amount due under the Hercules Pension Restoration Plan as of the date of actual retirement, utilizing the method and assumptions used to convert a pension to a partial cash payment under the Hercules Pension Plan. Further, in the event that the Grantee's actual retirement date occurs within three (3) years of the APD Election, the Grantee shall forfeit that number of Options as the Committee in its discretion shall determine has a value equal to that number of Restricted Stock shares (adjusted by the preceding sentence) attributable to the 15% discount made available under Subsection 13.1.2 and prorated for the length of time remaining in the period commencing with the date of the APD Election. - 73 - 89 (c) Notwithstanding (a) and (b) next above, in the event of the Grantee's death, Disability or termination of employment with the consent of the Company, the Committee may, in its discretion, waive any forfeitures otherwise applicable under this Subsection 13.4.3. Section 13.5 Irrevocability Any election under Sections 13.1, 13.2 or 13.4 shall be irrevocable. Section 13.6 Equivalency Notwithstanding any provision in this Article XIII to the contrary, all elections under this Article XIII that involve an exchange of future compensation or pension benefit entitlement shall in each instance be equalized (that is, recalculated using actual numbers) at the expiration of the period elected or termination of employment and forfeiture shall be applied, if appropriate. Section 13.7 MICP Awards Any payout under the Management Incentive Compensation Plan for performance above the target level Performance Goals for any Performance Period shall be in that number of whole shares of Restricted Stock obtained by dividing the dollar value of the payout by 85% of the Fair Market Value of one share of Common Stock on the date of such award. Restricted Stock acquired pursuant to this Section 13.7 shall be subject to all of the terms, conditions and provisions of Article VII and Article XIII, except as may otherwise be determined by the Committee prior to the Date of Award. - 74 - 90 Section 13.8 Definition For purposes of this Article XIII, the term "Grantee" includes all employees of the Company or any Participating Subsidiary who are designated by the CEO to be eligible for purposes of this Article XIII. ARTICLE XIV CERTAIN TERMS APPLICABLE TO ALL AWARDS Section 14.1 Withholding Taxes The Company shall withhold (or secure payment from the Grantee in lieu of withholding) the amount of any withholding or other tax required by law to be withheld or paid by the Company with respect to any amount payable and/or shares issuable under such Grantee's Award, or with respect to any income recognized upon a disqualifying disposition of shares received pursuant to the exercise of an ISO, and the Company may defer payment or issuance of the cash or stock upon exercise or vesting of an Award unless indemnified to its satisfaction against any liability for any such tax. The amount of such withholding or tax payment shall be determined by the Committee and shall be payable by the Grantee at the time of delivery or when payment is made [except as otherwise payable under Section 14.1(c)] in accordance with the following rules: - 75 - 91 (a) With respect to Awards payable in cash, the Company will withhold an amount sufficient to satisfy applicable Federal, state and local tax withholding requirements and remit the net award to the Grantee; (b) With respect to Awards payable in stock, the Company will notify the Grantee of the amount due from such Grantee to satisfy the tax withholding requirements with respect to the stock. The Grantee shall pay the amount due to satisfy the tax withholding requirements in cash; provided, however, that the Grantee may elect to meet the tax withholding requirement by requesting the Company, in writing, to withhold from such Award and sell through a brokerage firm the appropriate number of shares of Common Stock, rounded up to the next whole number, which would result in proceeds equal to the tax withholding requirement. Any election by a Grantee to have shares withheld under this Section 14.1 shall be subject to such terms and conditions as the Committee may specify, which may include that the election shall be irrevocable and in the case of a Reporting Person, the election to have shares withheld under this Section 14.1 must be made either (i) not less than six (6) months prior to the date that the tax is to be withheld by the Company, or (ii) during the period beginning on the third business day following the date of the release for publication of the Company's quarterly or annual summary statements of earnings and ending on the twelfth business day following such date. If the cash required (whether paid directly or indirectly through the sale of stock election described above) is not received by the Company within sixty (60) days of notification by the Company of the tax withholding due, the Committee shall have the right to take whatever action it deems appropriate, including voiding the Award. The Company shall not deliver or pay the Award (net of the tax withholding) until the tax withholding obligation is satisfied. At the time that all other restrictions lapse (other - 76 - 92 than being subject to Section 16 of the Act) a Reporting Person shall make the election described in Subsection (c) below. (c) If permitted under applicable Federal income tax laws, a Grantee may elect to include in gross income for Federal income tax purposes in the year in which a stock Award is made, an amount equal to the Fair Market Value of the Award on the Date of Grant. If the Grantee makes such an election, the Grantee shall promptly notify the Company in writing and shall provide the Company with a copy of the executed election form as filed with the Internal Revenue Service by no later than thirty (30) days from the Date of the Grant. Promptly following such notification, the Grantee shall pay directly to the Company, or make arrangements satisfactory to the Committee, the cash amount determined by the Company to be sufficient to satisfy applicable Federal, state or local withholding tax requirements. If the Grantee shall fail to make such payments, the Company and its Subsidiaries shall, to the extent permissible by law, have the right to deduct from any payment of any kind otherwise due to the Grantee any Federal, state or local taxes of any kind required by law to be withheld with respect to such Restricted Stock. Section 14.2 Adjustments to Reflect Capital Changes 14.2.1 Recapitalization. In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other change in capitalization with a similar substantive effect upon the Plan or the Awards granted under the Plan, such adjustments shall be made in the number and kind of shares subject to outstanding Awards, the Option Price for such shares and the - 77 - 93 number and kind of shares available for Awards subsequently granted under the Plan as may be determined appropriate by the Committee. 14.2.2 Sale or Reorganization. After any reorganization, merger or consolidation in which the Company is the surviving corporation, each Grantee shall, at no additional cost, be entitled upon any exercise of an Option or receipt of other Award to receive (subject to any required action by stockholders), in lieu of the number of shares of Common Stock receivable or exercisable pursuant to such Award, the number and class of shares of stock or other securities to which such Grantee would have been entitled pursuant to the terms of the reorganization, merger or consolidation if, at the time of such reorganization, merger or consolidation, such Grantee had been the holder of record of a number of shares of stock equal to the number of shares receivable or exercisable pursuant to such Award. Comparable rights shall accrue to each Grantee in the event of successive reorganizations, mergers or consolidations of the character described above. 14.2.3 Options to Purchase Stock of Acquired Companies. After any reorganization, merger or consolidation in which the Company or a Subsidiary shall be a surviving corporation, the Committee may grant substituted options under the provisions of the Plan, pursuant to Section 424 of the Code, replacing old options granted under a plan of another party to the reorganization, merger or consolidation whose stock subject to the old options that may no longer be issued following such merger or consolidation. The foregoing adjustments and manner of application of the foregoing provisions shall be determined by the Committee in its sole discretion. Any such adjustments may provide for the elimination of any fractional shares which might otherwise become subject to any Options. - 78 - 94 Section 14.3 Failure to Comply With Terms and Conditions Notwithstanding any other provision of the Plan, no payment or delivery with respect to any Award shall be made, and all rights of the Grantee who receives such Award (or his designated Beneficiary or legal representative) to such payment or delivery under the Plan shall be forfeited, at the discretion of the Committee, if, prior to the time of such payment or delivery, the Grantee breaches a restriction or any of the terms, restrictions and/or conditions of the Plan and/or the Award Commitment. Section 14.4 Forfeiture Upon Occurrence of Certain Events Notwithstanding any other provision of the Plan, no payment of any Award shall be made and all rights of the Grantee who received such Award (or his designated Beneficiary or legal representative) to the payment thereof under the Plan shall be forfeited if, prior to the time of such payment, the Grantee (i) without the Company's consent, shall be employed by a competitor of, or shall be engaged in any activity in competition with, the Company or a Subsidiary; (ii) divulges without the consent of the Company any secret or confidential information belonging to the Company or a Subsidiary; or (iii) has been dishonest or fraudulent in any matter affecting the Company or a Subsidiary or has committed any act which, in the sole judgment of the Committee, has been substantially detrimental to the interests of the Company or a Subsidiary. The Company shall give a Grantee written notice of the occurrence of any such event prior to making any such forfeiture. The determination of the Committee as to the occurrence of any of the events specified in clauses (i), (ii), and (iii) of this Section 14.4 shall be conclusive and binding upon all persons for all purposes. Any - 79 - 95 Award shall be subject to forfeiture for the reasons provided in this Section 14.4 in such manner as shall be provided by the Committee. Section 14.5 Regulatory Approvals and Listing The Company shall not be required to issue any certificate or certificates for shares of Common Stock under the Plan prior to (i) obtaining any approval from any governmental agency which the Company shall, in its discretion, determine to be necessary or advisable, (ii) the admission of such shares to listing on any national securities exchange on which the Company's Common Stock may be listed, and (iii) the completion of any registration or other qualification of such shares of Common Stock under any state or Federal law or ruling or regulations of any governmental body which the Company shall, in its discretion, determine to be necessary or advisable. Section 14.6 Restrictions Upon Resale of Stock If the shares of Common Stock that have been issued to a Grantee pursuant to the terms of the Plan are not registered under the Securities Act of 1933, as amended ("Securities Act"), pursuant to an effective registration statement, such Grantee, if the Committee shall deem it advisable, may be required to represent and agree in writing (i) that any such shares acquired by such Grantee pursuant to the Plan will not be sold except pursuant to an effective registration statement under the Securities Act, or pursuant to an exemption from registration under said Act and, (ii) that such Grantee is acquiring such shares for his own account and not with a view to the distribution thereof. - 80 - 96 Section 14.7 Reporting Person Limitation Notwithstanding any other provision of the Plan, to the extent required to qualify for the exemption provided by Rule 16b-3 under the Act, and any successor provision, (1) any Common Stock or other equity security offered under the Plan to a Reporting Person may not be sold for at least six (6) months after the earlier of acquisition of the security or the date of grant of the derivative security, if any, pursuant to which the Common Stock or other equity security was acquired; and (2) any Option, SAR or other similar right related to an equity security, issued under the Plan to a Reporting Person shall not be transferable other than by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order and shall be exercisable during the Grantee's lifetime only by the Grantee or the Grantee's guardian or legal representative. ARTICLE XV DISPUTES If the employment of a Grantee with the Company or any Participating Subsidiary shall terminate prior to the expiration of the Performance or Restriction Period applicable to any Performance Share, Restricted Stock or Phantom Unit Award awarded to such Grantee and there exists a dispute between such Grantee and the Company or the Committee as to the satisfaction of the conditions to the release of such shares or units under the Plan or the terms and conditions of the Performance Share, Restricted Stock or Phantom Unit Award, the Performance Share, Restricted Stock or Phantom Unit Awards as to which such dispute shall exist shall remain subject to the - 81 - 97 restrictions of the Plan until the resolution of such dispute, regardless of any intervening expiration of the Performance or Restriction Period originally applicable to such shares, except that any dividends which may be declared and which may be payable to the participant as of a date during the period from termination of such Grantee's employment to the resolution of such dispute (the "Suspension Period") shall (i) to the extent to which such dividends would have been payable to such Grantee on such Performance Share, Restricted Stock or Phantom Unit Award, be held by the Company as part of its general funds and shall be paid to or for the account of such Grantee only upon, and in the event of, a resolution of such dispute in a manner favorable to such Grantee and then only with respect to such Performance Share, Restricted Stock or Phantom Unit Award as to which such resolution shall be so favorable, and (ii) in the event the dispute is resolved in a manner unfavorable to the Grantee, be canceled as dividends payable upon Performance Share, Restricted Stock or Phantom Unit Award as to which such resolution shall be so unfavorable. In addition, to the extent that resolution of any such dispute shall be unfavorable to the Grantee, the Performance Shares, Restricted or Phantom Unit Award as to which such dispute shall have existed shall be forfeited in accordance with the provisions of Article XII or Section 14.4. - 82 - 98 ARTICLE XVI ADMINISTRATION OF THE PLAN Section 16.1 Committee The Plan shall be administered by or under the direction of the Committee. No person shall be eligible or continue to serve as a member of the Committee unless such person is a director of the Company and is a "disinterested person" within the meaning of Rule 16b-3, and no person shall be, or shall have been, eligible to receive an Award under the Plan to acquire stock, stock options, stock appreciation rights, performance shares or restricted stock of the Company or any Participating Subsidiary at any time within the one (1) year immediately preceding the member's appointment to the Committee. Section 16.2 Committee Actions Except for matters required by the terms of this Plan to be decided by the CEO or his designee or designees, the Committee shall have full power and authority to interpret and construe the Plan, to prescribe, amend and rescind rules, regulations, policies and practices, to impose such conditions and restrictions on Awards as it deems appropriate and to make all other determinations necessary or desirable in connection with the administration of, or the performance of its responsibilities under, this Plan. Subject to the limitations of provisions of Section 20.4, each decision, determination, interpretation or other action of the Committee made or taken pursuant to grants of authority under the Plan shall be final and shall be conclusive and binding on all persons for all purposes. The Committee's decisions, determinations and interpretations (including without - 83 - 99 limitations, the terms and provisions of such awards and the agreements evidencing same) need not be uniform and may be made selectively among Grantees who receive, or are eligible to receive, awards under the Plan, whether or not such Grantees are similarly situated. The Committee may, to the extent that any such action will not prevent the Plan from complying with Rule 16b-3, delegate any of its powers and authority under the Plan as it deems appropriate to designated officers or employees of the Company. Section 16.3 No Liability of Committee Members As and to the extent provided by Section 20.5, no past, present or future member of the Committee shall be personally liable by reason of any contract or other instrument executed by him or on his behalf in his capacity as a member of the Committee, nor for any mistake of judgment made in good faith, and the Company shall indemnify and hold harmless each member of the Committee. ARTICLE XVII EFFECTIVE DATE, TERM OF THE PLAN AND STOCKHOLDER APPROVAL The Plan became effective as of April 1, 1991, and was amended and restated as of June 30, 1993, and is hereby further amended and restated. The termination date of the Plan shall be April 30, 1998. No Award shall be granted under the Plan after such termination - 84 - 100 date. The Plan will continue in effect for existing Awards as long as any such Awards are outstanding. ARTICLEX VIII CHANGE IN CORPORATE CONTROL Section 18.1 Options And PASOs In the event of a Change in Control, (1) all Options and PASOs outstanding on the date of such Change in Control shall become immediately and fully exercisable, and (2) a Grantee who is an elected officer or director of the Company will be permitted to surrender for cancellation within sixty (60) days after such Change in Control any Option or PASO or portion thereof to the extent not yet exercised (or with respect to an Option or PASO or portion thereof granted less than six (6) months prior to the date of the Change in Control, within sixty (60) days after the expiration of a six (6)-month period following the Date of Grant) and to receive a cash payment in an amount equal to the excess, if any, of (a) in the case of a Nonqualified Stock Option or PASO, the adjusted Fair Market Value of the Common Stock subject to the Option or PASO or a portion thereof surrendered or (b) in the case of an ISO, the Fair Market Value of the Common Stock subject to the Option or PASO or portion thereof surrendered over the Option Price. The provisions of this Section 18.1 shall be applicable to Nonqualified Stock Options, PASOs or ISOs. The provisions of this Section 18.1 shall not be applicable to any Options granted to a Grantee if any Change in Control results from such Grantee's - 85 - 101 beneficial ownership (within the meaning of Rule 13d(3) under the Act) of Common Stock or Company voting securities. Section 18.2 SARs In the event of a Change in Control, all SARs shall become immediately and fully exercisable but not before any related ISO is exercisable. Upon any exercise of a SAR (other than a SAR granted in tandem with a related ISO) or any portion thereof during the 60-day period following the Change in Control, (or with respect to a SAR granted to an officer or director of the Company less than six (6) months prior to the date of the Change in Control, within sixty (60) days after the expiration of a six (6) month period following the Date of Grant) the amount payable shall be determined by reference to the SAR Fair Market Value of the Common Stock and shall be paid in cash. SARs granted in connection with ISOs will be payable as determined by reference to the Fair Market Value of the Common Stock on the date of such exercise and shall be paid in cash. The provisions of this Section 18.2 shall not be applicable to any SARs granted to a Grantee if any Change in Control results from such Grantee's beneficial ownership (within the meaning of Rule 13d(3) under the Act) of Common Stock or Company voting securities. Section 18.3 All Other Awards In the event of a Change of Control, all Performance Share Awards, Restricted Stock Awards, Phantom Unit Awards, Cash Value Awards, Other Market-Based Awards (if any) and Other Performance-Based Awards (if any) shall immediately vest and become fully payable within thirty (30) - 86 - 102 days after a Change in Control to all Grantees who have been granted an Award. In the case of Performance Share Awards and Cash Value Awards, all Awards shall vest at the Maximum Award. Section 18.4 Definitions A Change in Control of the Company shall occur when there is an unsolicited Change in Control of the Company that is not initiated by the Company, and is of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Act, as in effect on the effective date of the Plan; provided, however, that no Change in Control shall be deemed to have occurred unless and until a "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Act) together with all "affiliates" and "associates" of such person (as such terms respectively, are defined in Rule 12b-2 of the General Rules and Regulations under the Act) is or becomes a beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities. ARTICLE XIX AMENDMENT AND TERMINATION Section 19.1 Amendment The Board reserves the right at any time or times to modify, alter or amend, in whole or in part, any or all of the provisions of the Plan to any extent and in any manner that it may deem advisable, - 87 - 103 and no consent or approval by the stockholders of the Company or by any other person, committee or entity of any kind shall be required to make any modification, alteration or amendment; provided, however, that the Board shall not, without the requisite affirmative approval of the stockholders of the Company, make any modification, alteration or amendment which (i) except as provided in Section 3, increases the maximum number of shares of Common Stock available for Awards under this Plan, (ii) decreases the Option Price to less than 100% of the Fair Market Value on the Date of Grant of an Option, (iii) extends the period during which Awards may be granted under the Plan beyond April 30, 1998, (iv) changes the employee (or class of employees) eligible to receive Awards under the Plan, (v) materially increase the benefits accruing to a Grantee under the Plan, or (vi) requires stockholders' approval under Rule 16b-3 or the Code, unless such compliance is no longer desired, or under any other applicable law. No modification, alteration or amendment of the Plan may, without the consent of the Grantee (Beneficiaries in case of his death) to whom any Award shall theretofore have been granted under the Plan adversely affect any right of such Grantee under such Award, except in accordance with the provisions of the Plan and/or any Award Commitment applicable to any such Award. Subject to the provisions of this Section 19.1, any modification, alteration or amendment of any provisions of the Plan may be made retroactively. Section 19.2 Suspension or Termination The Board reserves the right at any time to suspend or terminate, in whole or in part, any or all of the provisions of the Plan for any reason and without the consent of or approval by the stockholders of the Company, any Grantee or Beneficiary or any other person, committee or entity of any kind; provided, however, that no such suspension or termination shall affect any right or obligation with respect to any Award theretofore made except as herein otherwise provided. - 88 - 104 ARTICLE XX MISCELLANEOUS Section 20.1 Deferral Election At the discretion of the Committee payment of Phantom Units or any other cash award, or any portion thereof, may be deferred by a Grantee until such time as the Committee may establish. All such deferrals shall be accomplished by the delivery of a written, irrevocable election by the Grantee at such times prior to the time payment would otherwise be made as the Committee shall determine. All deferrals shall be made in accordance with such rules and regulations established by the Committee to ensure that such deferrals comply with all applicable requirements of the Code and its regulations. Deferred payments shall be paid in a lump sum or installments, as determined by the Committee. The Committee also may credit interest at such rates to be determined by the Committee. Section 20.2 Designation of Beneficiary Each Grantee shall file with the Company a written designation of one or more persons as the Beneficiary who shall be entitled to receive the Award, if any, payable under the Plan upon his death. A Grantee may from time to time revoke or change his Beneficiary designation without the consent of any prior Beneficiary by filing a new designation with the Company. The last such designation received by the Company shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Company prior to the Grantee's death, - 89 - 105 and in no event shall it be effective as of a date prior to such receipt. If no such Beneficiary designation is in effect at the time of a Grantee's death, or if no designated Beneficiary survives the Grantee or if such designation conflicts with law, the Grantee's estate shall be entitled to receive the Award, if any, payable under the Plan upon his death. If the Committee is in doubt as to the right of any person to receive such Award, the Company may retain such Award, without liability for any interest thereon, until the Committee determines the rights thereto, or the Company may pay such Award into any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Company therefor. Section 20.3 No Right to an Award or to Continued Employment No Grantee or other person shall have any claim or right to be granted an Award under the Plan. Neither the action of the Company in establishing this Plan, nor any provisions hereof, nor any action taken by the Company, any Participating Subsidiary, the Committee or the CEO (or his designee or designees) pursuant to such provisions shall be construed as creating in any employee or class of employees any right with respect to continuation of employment by the Company or any of the Participating Subsidiaries, and they shall not be deemed to interfere in any way with the Company's or any Participating Subsidiary's right to employ, discipline, discharge, terminate, lay off or retire any Grantee with or without cause, to discipline any Employee, or to otherwise affect the Company's right to make employment decisions with respect to any Grantee. - 90 - 106 Section 20.4 Discretion of the Committee and the CEO Whenever the terms of the Plan provide for or permit a decision to be made or an action to be taken by a Grantor, such decision may be made or such action taken in the sole and absolute discretion of such Grantor and shall be final, conclusive and binding on all persons for all purposes; provided, however, that the Board may review any decision or action of the Grantor and if the Board determines that any Award or other decision or act of the Grantor is inequitable or contrary to the provisions of this Plan, it may reverse or modify such Award, decision or act. As provided in Section 16.2 in the case of the Grantor's determinations under the Plan, including, without limitation the determination of the person to receive awards and the amount of such awards, need not be uniform and may be made by him selectively among persons who receive, or are eligible to receive, awards under this Plan, whether or not such persons are similarly retired. Section 20.5 Indemnification and Exculpation 20.5.1 Indemnification. Each person who is or shall have been a member of the Committee and each director, officer or employee of the Company or any Participating Subsidiary to whom any duty or power related to the administration or interpretation of this Plan may be delegated, shall be indemnified and held harmless by the Company against and from any and all loss, cost, liability or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit or proceeding to which he may be or become a party or in which he may be or became involved by reason of any action taken or failure to act under this Plan and against and from any and all amounts paid by him in settlement thereof (with the Company's written approval) or paid by him in satisfaction of a judgment in any such action, suit or proceeding, except a judgment - 91 - 107 in favor of the Company based upon a finding of his bad faith; subject, however, to the condition that upon the institution of any claim, action, suit or proceeding against him, he shall in writing give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other right to which such person may be entitled under the Company's Restated Certificate of Incorporation, as a matter of law or otherwise, or any power that the Company may have to indemnify him or hold him harmless. 20.5.2 Exculpation. Each member of the Committee, and each director, officer and employee of the Company or of any Participating Subsidiary shall be fully justified in relying or acting upon in good faith any information furnished in connection with the administration of this Plan by any appropriate person or persons other than himself. In no event shall any person who is or shall have been a member of the Committee, or a director, officer or employee of the Company or any Participating Subsidiary be liable for any determination made or other action taken or any omission to act in reliance upon such report or information, for any action (including the furnishing of information) taken or any failure to act, if in good faith. Section 20.6 Unfunded Plan This Plan is intended to constitute an unfunded, long-term incentive compensation plan for certain selected employees. No special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts, except as expressly set forth in the Plan with respect to Restricted Stock or Performance Shares held in custody accounts. The Company may, but shall not be obligated to, acquire shares of its Common Stock from time to time in - 92 - 108 anticipation of its obligations under the Plan, but no Grantee shall have any right in or against any shares of stock so acquired. All such stock shall constitute general assets of the Company and may be disposed of by the Company at such time and for such purposes at it may deem appropriate. No obligation or liability of the Company to any Grantee with respect to any right to receive a distribution or payment under the Plan shall be deemed to be secured by any pledge or other encumbrance on any property of the Company. Section 20.7 Inalienability of Rights and Interests The rights and interests of a Grantee under this Plan are personal to the Grantee and to any person or persons who may become entitled to distribution or payments under the Plan by reason of death of the Grantee, and the rights and interests of the Grantee or any such person (including, without limitation, any Award distributable or payable under the Plan) shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any such attempted action shall be void and no such benefit or interest shall be any manner liable for or subject to debts, contracts, liabilities, engagements or torts of any Grantees. If any Grantee shall attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any of his rights or interests under the Plan, (including without limitation, any Award payable under the Plan) then the Committee may hold or apply such benefit or any part thereof to or for the benefit of such Grantee or his Beneficiary, his spouse, children, blood relatives or other dependents, or any of them, in such manner and in such proportions as the Committee may consider proper. - 93 - 109 Section 20.8 Awards Not Includable for Benefit Purposes Payments received by a Grantee pursuant to the provisions of the Plan shall not be included in the determination of benefits under any pension, group insurance or other benefit plan applicable to the Grantee which are maintained by the Company or any of its Subsidiaries, except as may be determined by the Board. Section 20.9 No Issuance of Fractional Shares The Company shall not be required to deliver any fractional share of Common Stock but, as determined by the Committee, may pay in lieu thereof, except as otherwise provided in this Plan, the Fair Market Value (determined as of the date of payment the restrictions terminate) of such fractional share to the Grantee or the Grantee's beneficiary, as the case may be. Section 20.10 Modification for Overseas Grantees Notwithstanding any provision to the contrary, the Committee may incorporate such provisions, or make such modifications or amendments in Award Commitments of Grantees who reside or are employed outside of the United States of America, or who are citizens of a country other than the United States of America, as the Committee deems necessary or appropriate to accomplish the purposes of the Plan with respect to such Grantee in light of differences in applicable law, tax policies or customs, and to ascertain compliance with all applicable laws. - 94 - 110 Section 20.11 Leaves of Absence The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by the recipient of any Award. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (a) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan and, (b) the impact, if any, of any such leave of absence on awards under the Plan theretofore made to any recipient who takes such leave of absence. Section 20.12 Communications 20.12.1 Communications by the Committee. All notices, statements, reports and other communications made, delivered or transmitted to a Grantee, Beneficiary or other person under this Plan shall be deemed to have been duly given, made or transmitted when delivered to, or when mailed by first-class mail, postage prepaid and addressed to, such Grantee, Beneficiary or other person at his address last appearing on the records of the Committee. 20.12.2 Communications by the Participants and Others. All elections, designations, requests, notices, instructions and other communications made, delivered or transmitted by the Company, a Participating Subsidiary, Grantee, Beneficiary or other person to the Committee required or permitted under this Plan shall be in such form as is prescribed from time to time by each such Committee, shall be mailed by first-class mail or delivered to such location as shall be specified by each such Committee, and shall be deemed to have been given and delivered only upon actual receipt thereof by such Committee at such location. - 95 - 111 Section 20.13 Parties in Interest The provisions of the Plan and the terms and conditions of any Award shall, in accordance with their terms, be binding upon, and inure to the benefit of, all successors of each Grantee, including, without limitation, such Grantee's estate and the executors, administrators, or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such Grantee. The obligations of the Company under the Plan shall be binding upon the Company and its successors and assigns. Section 20.14 Severability Whenever possible, each provision in the Plan and every Award at any time granted under the Plan shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Plan or any Award at any time granted under the Plan shall be held to be prohibited by or invalid under applicable law, then (a) such provision shall be deemed amended to accomplish the objectives of the provision as originally written to the fullest extent permitted by law, and (b) all other provisions of the Plan and every other Award at any time granted under the Plan shall remain in full force and effect. Section 20.15 Compliance with Laws The Plan and the grant of Awards shall be subject to all applicable Federal and state laws, rules and regulations and to such approvals by any government or regulatory agency as may be required. It is intended that the Plan be applied and administered in compliance with Rule 16b-3. If - 96 - 112 any provision of the Plan would be in violation of Rule 16b-3 if applied as written, such provision shall not have effect as written and shall be given effect so as to comply with Rule 16b-3, as determined by the Committee. The Board is authorized to amend the Plan and to make any such modifications to Award Commitments to comply with Rule 16b-3, and to make any such other amendments or modifications as it deems necessary or appropriate to better accomplish the purposes of the Plan in light of any amendments made to Rule 16b-3. Section 20.16 No Strict Construction No rule of strict construction shall be implied against the Company, the Committee, the CEO or any other person in the interpretation of any of the terms of the Plan, any Award granted under the Plan or any rule or procedure established by the Committee. Section 20.17 Modification This document contains all of the provisions of the Plan and no provisions may be waived, modified or otherwise altered except in a writing adopted by the Board. Section 20.18 Governing Law All questions pertaining to validity, construction and administration of the Plan and the rights of all persons hereunder shall be determined with reference to, and the provisions of the Plan shall be governed by and shall be construed in conformity with, the internal laws of the State of Delaware. - 97 - EX-27 3 FINANCIAL DATA SCHEDULE
5 Hercules Incorporated 1994 10-K 1000 YEAR DEC-31-1994 DEC-31-1994 111,637 0 588,851 0 362,254 1,152,315 3,100,749 1,884,694 2,941,253 767,470 0 77,665 0 0 1,217,016 2,941,253 2,821,015 2,821,015 1,924,342 2,402,167 8,028 0 28,137 408,288 134,132 274,156 0 0 0 274,156 2.29 0