<PAGE> 1
Prospectus Supplement (Not Complete)
(To prospectus dated October 30, 1998)
Issued July 6, 1999
350,000 CRESTS(SM) UNITS
CONSISTING OF PREFERRED SECURITIES OF HERCULES TRUST II
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
HERCULES INCORPORATED
AND WARRANTS TO PURCHASE SHARES OF COMMON STOCK OF
HERCULES INCORPORATED
------------------------
THE CRESTS UNITS
- - Each CRESTS Unit consists of one preferred security of the Trust and one
warrant to purchase shares of common stock of Hercules.
- - The purchase price for each CRESTS Unit will be $1,000, allocated $ for
the preferred security and $ for the warrant.
- - You may separate the preferred security and warrant components of each CRESTS
Unit after issuance and thereafter transfer them separately.
THE TRUST
The Trust will:
- - issue preferred securities as part of the CRESTS Units sold to the public,
which preferred securities will be effectively guaranteed, fully and
unconditionally, by Hercules, and sell common securities to Hercules;
- - use the aggregate proceeds to buy an equal principal amount of Series A Junior
Subordinated Deferrable Interest Debentures of Hercules; and
- - distribute the cash payments it receives from Hercules on the debentures to
the holders of the preferred securities and the common securities.
THE PREFERRED SECURITIES
- - For each preferred security that you own, you will receive cumulative cash
distributions accumulating from July , 1999 at an annual rate of % of
the scheduled liquidation amount of $1,000 per preferred security, on March
31, June 30, September 30 and December 31 of each year, beginning September
30, 1999, unless a new distribution rate is established in a remarketing as
discussed below.
- - Hercules may defer interest payments on the debentures at any time, and from
time to time, for up to 20 consecutive quarterly periods. If Hercules defers
interest payments, the Trust will also defer payments of distributions on your
preferred securities.
- - The Trust will redeem the preferred securities when the debentures mature on
June 30, 2029 at a redemption price equal to their scheduled liquidation
amount of $1,000 plus accumulated distributions, if any. However, the Trust
will redeem the preferred securities one year after any remarketing at a
redemption price equal to the accreted liquidation amount of the preferred
securities plus accumulated distributions, if any.
THE WARRANTS
- - For each warrant that you own, you will be entitled to purchase shares
of Hercules common stock at an exercise price initially equal to $1,000
(equivalent to $ per share).
- - The warrants may be exercised at any time prior to March 31, 2029 unless there
is a reset and remarketing, in which case the expiration date of the warrants
will be accelerated and the exercise price will be reduced as discussed below.
- - Hercules common stock is listed on the New York Stock Exchange under the
symbol "HPC." On July 2, 1999, the last reported sale price of Hercules common
stock on the New York Stock Exchange was $40 1/16 per share.
RESET AND REMARKETING
- - If at any time after July , 2004 and before January 31, 2029, the closing
price of Hercules common stock exceeds $ per share for at least 20
trading days within the immediately preceding 30 trading days, Hercules may
exercise its right to accelerate the expiration date of the warrants, in which
case:
- the expiration date of the warrants will be accelerated to a date 15
business days following the reset date selected by Hercules;
- the exercise price of the warrants will be reduced to the accreted
liquidation amount of the preferred securities as of the reset date;
- the preferred securities will be remarketed at a price equal to at least
100.5% of their accreted liquidation amount, plus accumulated
distributions, if any, as of the reset date and a new distribution rate
will be established; and
- the mandatory redemption date of the preferred securities will be reset to
the date one year following the remarketing.
- - In addition, if on January 31, 2029 there has been no prior remarketing, and
the closing price of Hercules common stock exceeds $ per share for at
least 20 trading days within the immediately preceding 30 trading days, there
will be an automatic reset and remarketing.
------------------------
INVESTING IN THE CRESTS UNITS INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE S-15.
------------------------
<TABLE>
<CAPTION>
Per CRESTS Unit Total
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<S> <C> <C>
Offering Price.............................................. $ $
Discounts and Commissions to Underwriters................... $ $
Offering Proceeds........................................... $ $
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
The underwriters have the right to purchase up to 50,000 additional CRESTS
Units to cover any over-allotments. The underwriters can exercise this right at
any time within thirty days after the offering. Banc of America Securities LLC
expects to deliver the CRESTS Units to investors on July , 1999.
- ---------------
(SM) Service mark of Banc of America Securities LLC.
BANC OF AMERICA SECURITIES LLC
<TABLE>
<S> <C>
SALOMON SMITH BARNEY CHASE SECURITIES INC.
DEUTSCHE BANC ALEX. BROWN J.P. MORGAN & CO.
</TABLE>
------------------------
July , 1999
The information in this prospectus supplement is not complete and may
be changed. This prospectus supplement is not an offer to
sell or the solicitation of an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
<PAGE> 2
[HERCULES LOGO]
OUR BUSINESSES
PROCESS CHEMICALS AND SERVICES SEGMENT
Products and services in this segment are designed to enhance the manufacturing
processes, reduce the operating costs or improve the quality of the end
products of its customers; at the same time, helping its customers meet their
environmental objectives and regulatory requirements.
PULP AND PAPER
[two photos]
Pulp and Paper is a global supplier of functional, process and water treatment
chemicals for the pulp and paper industry.
BETZDEARBORN
[two photos]
BetzDearborn is a global supplier of advanced engineered chemical treatment
programs for water, wastewater and industrial process systems.
- -------------------------------------------------------------------------------
FUNCTIONAL PRODUCTS SEGMENT
Products in this segment modify the physical properties of aqueous
(water-based) solutions and non-aqueous systems, are principally derived from
natural resources and are sold as key ingredients to other manufacturers.
AQUALON
[two photos]
Aqualon's products modify the physical properties of aqueous (water-based) and
non-aqueous systems and are used by a broad range of industries including
construction material and paint manufacturers.
FOOD GUMS
[two photos]
Food Gums is a global producer and supplier of carrageenan and pectin. These
products are used to stabilize and gel foods as diverse as jams, jellies,
processed meats, processed dairy foods and water desserts.
- -------------------------------------------------------------------------------
CHEMICAL SPECIALTIES SEGMENT
This segment manufactures hydrocarbon and rosin-based resins and is the only
global manufacturer to make both. It is also the largest manufacturer of
thermal bond polypropylene staple fibers.
RESINS
[two photos]
Resins is among the oldest and largest suppliers of resins and the only
manufacturer to produce and market hydrocarbon and rosin-based resins. Resins
also makes specialty terpene products for the aroma chemicals industry.
FIBERVISIONS
[two photos]
FiberVisions is the largest manufacturer of thermal bond polypropylene staple
fiber and a supplier of fine denier staple fibers to the disposable hygiene
product industry. It also sells fibers to the fabricated textile market.
<PAGE> 3
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
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PAGE
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<S> <C>
Prospectus Supplement Summary............................... S-4
Risk Factors................................................ S-15
Use of Proceeds............................................. S-20
Price Range of Common Stock and Dividend Policy............. S-21
Capitalization.............................................. S-22
Selected Historical Financial Information................... S-23
Unaudited Pro Forma Financial Information................... S-24
Accounting Treatment........................................ S-25
Management's Discussion and Analysis........................ S-26
Business.................................................... S-34
Management.................................................. S-44
Description of CRESTS Units................................. S-48
Certain U.S. Federal Income Tax Consequences................ S-62
ERISA Considerations........................................ S-66
Underwriting................................................ S-68
Legal Matters............................................... S-70
Experts..................................................... S-70
Index to Consolidated Financial Statements.................. A-1
PROSPECTUS
PAGE
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Available Information....................................... 2
Incorporation of Certain Documents by Reference............. 3
The Company................................................. 4
The Hercules Trusts......................................... 4
Use of Proceeds............................................. 6
Ratio of Earnings to Fixed Charges.......................... 6
Description of the Securities to be Offered................. 7
Description of Debt Securities.............................. 8
Description of Capital Stock................................ 24
Description of Warrants..................................... 33
Description of Trust Preferred Securities................... 33
Description of Guarantees................................... 41
Description of Purchase Contracts and Purchase Units........ 43
Plan of Distribution........................................ 44
Legal Matters............................................... 45
Experts..................................................... 45
</TABLE>
Please rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. Such information
is accurate only as of the dates on the front cover of this prospectus
supplement and the accompanying prospectus, respectively. Our business,
financial condition, results of operations and prospects may have changed since
such dates. No person has been authorized to provide you with different or
additional information. No offer is being made to sell these securities in any
jurisdiction where the offer or sale is not permitted.
S-3
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PROSPECTUS SUPPLEMENT SUMMARY
This prospectus supplement and the accompanying prospectus are referred to
collectively as the "Prospectus Documents" and should be read together. This
summary highlights selected information from the Prospectus Documents. You
should carefully read the Prospectus Documents before making a decision about
whether to invest in the CRESTS Units. You should pay special attention to "Risk
Factors" beginning on page S-15 and our financial statements and the related
notes contained or incorporated by reference herein. Unless otherwise specified,
information in this prospectus supplement assumes that no portion of the
underwriters' over-allotment option will be exercised.
The Prospectus Documents include forward-looking statements, as defined in
the Private Securities Litigation Reform Act of 1995, reflecting our current
analysis and expectations, based on reasonable assumptions. Actual results could
differ materially from such statements depending on such risk factors as
business climate, economic and competitive uncertainties, higher manufacturing
costs, reduced level of customer orders, inability to integrate newly acquired
businesses, changes in strategies, risks in developing new products and
technologies, our ability and that of our customers and suppliers to achieve
Year 2000 readiness, environmental and safety regulations and clean-up costs,
foreign exchange rates, adverse legal and regulatory developments and adverse
changes in economic and political climates around the world. As appropriate,
additional risk factors are contained in "Risk Factors" beginning on page S-15
and in reports filed with the Securities and Exchange Commission. This paragraph
is included to provide safe harbor for forward-looking statements, which are not
required to be publicly revised as circumstances change.
HERCULES INCORPORATED
Hercules is a diversified, global producer of specialty chemicals used in a
variety of home, office and industrial products. We are focused on sustaining
long-term growth in shareholder value, driven by new product development,
continuous improvement in manufacturing costs and responsive customer service.
We produce a large number of high-margin specialty chemicals and have leadership
positions in our principal product lines. Our principal products are performance
(also referred to as functional) and process paper chemicals, water treatment
chemicals, water-soluble polymers, food ingredients, resins and polypropylene
and polyethylene fibers. The primary markets we serve include pulp and paper,
petroleum refineries, food processors and manufacturers, paint manufacturers,
construction materials, adhesives, pharmaceutical companies and personal care
product manufacturers. Historical net sales in 1998 by region were: United
States $944 million, or 44%; Europe $785 million, or 37%; Canada and Latin
America $258 million, or 12%; and Asia Pacific $158 million, or 7%.
Our products have a low cost impact on the end-users but frequently possess
characteristics important to the functionality of the finished product or the
efficient operation of the manufacturing process. Examples of our products in
consumer end uses include the paper coating and strengthener in writing paper,
the tackifier (which provides stickiness) in adhesive for labels and tapes, the
fibers in inner and outer linings of disposable diapers and the thickeners in
products such as jams, jellies, toothpaste, shampoos and water-based paints.
Examples of our products in industrial end uses include chemicals that improve
manufacturing processes, chemicals that improve the water quality in
manufacturing processes, tile cements used in building materials and resins used
in industrial adhesives. Industrial and commercial uses for our fibers include
decorative fabrics and automotive trim.
In the early 1990s, we were focused primarily on increasing our return on
equity and reducing our costs of operations. Although these objectives are still
important, growth has now become our primary deliverable. Accordingly, since
1995, we have implemented internal and external initiatives to achieve growth
and have disposed of a number of businesses that did not fit our portfolio and
acquired other businesses that better fit our strategy and our current
businesses.
Internally, we have committed substantial resources to our research and
development efforts. Through these efforts, since 1995, we have increased sales
of products which are less than five years old. Externally, we consummated five
acquisitions in 1998. Taking into account these acquisitions, on an annualized
basis, we
S-4
<PAGE> 5
had revenues of approximately $3.3 billion for 1998. While these acquisitions
have resulted in significant synergies, we expect to realize even more synergies
as the integration process continues.
Our reporting segments are: Process Chemicals and Services (comprised of
Pulp and Paper and BetzDearborn); Functional Products (comprised of Aqualon and
Food Gums); and Chemical Specialties (comprised of Resins and FiberVisions).
Prior to 1998, we had five established franchises in pulp and paper, food gums,
the physical property modification of aqueous systems, resins and fibers. The
October 1998 acquisition of BetzDearborn, Inc., a global specialty chemical
company, added our sixth global franchise, water and process treatment programs
used in a wide variety of industrial and commercial applications, and extended
our existing pulp and paper franchise. We believe that the strategic combination
of Hercules and BetzDearborn has created a paper chemical business with the most
complete specialty chemicals product and service offerings for the pulp and
paper industry.
In 1998, we made the following four additional strategic business
acquisitions: FiberVisions -- we purchased the remaining minority interest in
FiberVisions, L.L.C. and we now own 100% of FiberVisions, which was added to
Chemical Specialties; Houghton International's paper chemicals group -- which
was added to Pulp and Paper; Citrus Colloids -- a pectin manufacturer, which
gave Food Gums alternate pectin-extraction technologies; and Alliance Technical
Products -- a manufacturer of resins, which strengthened Resins dispersion
capabilities.
PROCESS CHEMICALS AND SERVICES (PULP AND PAPER AND BETZDEARBORN)
Products and services in this segment are designed to enhance the
manufacturing processes, reduce the operating costs or improve the quality of
the end products of our customers. At the same time, we help our customers meet
their environmental objectives and regulatory requirements. Pulp and Paper and
BetzDearborn sell each other's products to their customers and Pulp and Paper
also sells Aqualon's products to its customers.
For 1998, this segment had net sales of $717 million, or 34% of total net
sales, and profit from operations of $131 million, or 31% of total profit from
operations, excluding corporate and one-time items. For the three months ended
March 31, 1999, this segment had net sales of $412 million, or 52% of total net
sales, and profit from operations of $78 million, or 49% of total profit from
operations, excluding amortization of goodwill and intangibles and other
corporate and one-time items.
<TABLE>
<CAPTION>
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS
- ------------------ ------------------------------------- -------------------------------------
<S> <C> <C>
PULP AND PAPER Performance chemicals:
Wet strength, dry strength and sizing
Process treatment chemicals:
Deposit control, biofouling control, Makers of tissues, paper towels,
foam control, clarification, packaging, beverage containers,
retention/drainage, felt newsprint, papers for magazines and
conditioning, deinking, fiber books, printing and writing paper and
recovery, water closure and crepe and other stationery items such as labels
release aids and envelopes
Water treatment chemicals:
Influent water, effluent water,
cooling towers and boiler systems
BETZDEARBORN Water treatment: Industrial, commercial and
Influent water, boilers, cooling institutional establishments
towers and wastewater
Process treatment:
Petroleum refineries, chemical Petroleum refining, chemical plants,
processing, metals processing and manufacturers of metals, automobile
finishing, automotive assembly, sugar assembly plants and makers of food
and alcohol production and mineral and beverages
processing
</TABLE>
S-5
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FUNCTIONAL PRODUCTS (AQUALON AND FOOD GUMS)
Products in this segment modify the physical properties of aqueous
(water-based) and non-aqueous systems, are principally derived from natural
resources and are sold as key ingredients to other manufacturers. A broad range
of industries use our products for a variety of applications, including the
world's processed food industry (to stabilize and gel foods), construction
materials manufacturers (for tile cement) and paint manufacturers (to thicken
paints). Aqualon sells products produced by Food Gums to Aqualon's personal care
product customers, while Pulp and Paper and Food Gums sell Aqualon products to
their customer bases.
For 1998, this segment had net sales of $863 million, or 40% of total net
sales, and profit from operations of $215 million, or 51% of total profit from
operations, excluding corporate and one-time items. For the three months ended
March 31, 1999, this segment had net sales of $208 million, or 26% of total net
sales, and profit from operations of $54 million, or 34% of total profit from
operations, excluding amortization of goodwill and intangibles and other
corporate and one-time items.
<TABLE>
<CAPTION>
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS
- ------------------ ------------------------------------- -------------------------------------
<S> <C> <C>
AQUALON Water-soluble polymers: Manufacturers of interior and
Hydroxyethylcellulose (HEC), exterior water-based paints, oilfield
Carboxymethylcellulose (CMC), service companies for oil and gas
Methylcellulose (MC) and derivatives exploration, paper mills,
and Hydroxypropylcellulose (HPC) construction materials manufacturers
and makers of oral hygiene products,
cosmetics and dairy and bakery
products
Solvent-soluble polymers:
Nitrocellulose (NC), Pentaerythritol Producers of furniture lacquer,
(PE) and Ethylcellulose (EC) printing inks and aviation fluids
FOOD GUMS Pectin: ingredient for jams and
jellies, yogurt fruit preparations,
confectionery, dairy applications,
bakery products and low-fat and
no-fat foods Multi-national and regional
manufacturers and processors of food
Carrageenan: ingredient for dairy, products
meat, poultry and fish products,
bakery glazings and toothpaste
Agar: ingredient for dessert gels,
confectionery gels and icings
</TABLE>
S-6
<PAGE> 7
CHEMICAL SPECIALTIES (RESINS AND FIBERVISIONS)
In this segment, we manufacture hydrocarbon and rosin-based resins. We are
the only global manufacturer to make both of these resins. We are also the
largest manufacturer of thermal bond polypropylene staple fibers used in
products like disposable diapers.
For 1998, this segment had net sales of $566 million, or 26% of total net
sales, and profit from operations of $75 million, or 18% of total profit from
operations, excluding corporate and one-time items. For the three months ended
March 31, 1999, this segment had net sales of $171 million, or 22% of total net
sales, and profit from operations of $26 million, or 17% of total profit from
operations, excluding amortization of goodwill and intangibles and other
corporate and one-time items.
<TABLE>
<CAPTION>
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS
- ------------------ ------------------------------------- -------------------------------------
<S> <C> <C>
RESINS Hydrocarbon resins: for adhesives and
graphic arts
Rosin resins: for adhesives, food,
rubber and plastics Makers of consumer and industrial
products such as masking, packaging,
Terpene resins: for chewing gum and arts and duct tape, construction
adhesives materials, beverages, chewing gum,
wire and cables, plastics, fragrances
Peroxides: for wire and cable and flavors, printing inks and copier
insulation, plastics and rubber toner
Terpene specialties: for flavor and
fragrance in household and industrial
products
FIBERVISIONS Polypropylene and polyethylene
monocomponent fibers and bicomponent Makers of disposable diapers, adult
(PE/PP) fibers: for disposable incontinence products, feminine care
hygiene products products, upholstered fabrics,
automotive textiles and agricultural
Textile fibers: for automotive, fabrics
decorative and industrial
applications
</TABLE>
STRATEGY
We are focused on sustaining long-term growth in shareholder value by:
- revenue growth -- through internal growth (e.g., broadening our market
reach) and external growth (e.g., strategic business transactions);
- new product innovations and producing a broader array of
products -- through a focused commitment to research and development;
- cost improvements -- through continuing cost reduction programs developed
and implemented by the joint efforts of manufacturing and research and
development; and
- responsive customer service and cross-selling our products -- through
collaborations with our customers and coordination of our internal forces
(including sales, manufacturing and research and development) to meet the
needs of our customers.
S-7
<PAGE> 8
Our strategy for growth involves the continued improvement in the
performance of our businesses, prudent financial discipline and taking advantage
of strategic business transactions as suitable opportunities arise. Our business
and financial goals are to achieve:
- internal revenue growth of one to two times global Gross Domestic Product
and growth through acquisitions of 1% to 3% per year;
- manufacturing cost improvement of 5% each year;
- operating margins of 18% to 20%; and
- earnings per share growth greater than revenue growth.
REVENUE GROWTH
We intend to increase revenues through internal and external growth.
Our internal growth strategy involves new product development, product
enhancement, cross-selling and market and geographical expansion. Our new
product introductions have been received positively in the marketplace, as
evidenced by the significant increase in our sales of products less than five
years old.
Our external growth strategy resulted in five business acquisitions in 1998
that contributed approximately $450 million (or $1.6 billion annualized) to our
1998 revenues. We intend to continue to seek to increase revenues through
business transactions, including alliances and joint ventures.
NEW PRODUCT INNOVATIONS AND PRODUCING A BROADER ARRAY OF PRODUCTS
We believe that new product innovation allows us to maintain and grow
profit margins in the face of competition. Over the last three years, we have
spent a total of $170 million on research and development. In addition, we added
100 research and development scientists with specific expertise in areas of our
research focus. Our goal is to have 30% of our sales come from products less
than five years old. In 1996, 14% of our sales came from these products, rising
to 16% in 1998 and projected to be 21% in 1999.
COST IMPROVEMENTS
Our goal is to achieve manufacturing cost improvements of 5% each year
through operating efficiencies, among other things. This has become a
fundamental business goal across all three of our segments. We expect that our
enhanced research and development activities will contribute to these efforts.
RESPONSIVE CUSTOMER SERVICE AND CROSS-SELLING OUR PRODUCTS
Responsive customer service continues to be a key component in the growth
of our businesses. We believe a primary measurement of our success is not just
how many products we sell but how our products can add value or generate cost
savings for our customers. We strive to be recognized by our customers for
excellence in delivering solutions and cost effectiveness built on technical
capability. Recently, we began to utilize the site manager concept in the pulp
and paper industry which we believe will allow us to better understand and meet
the needs of our customers. We collaborate with many of our customers to develop
new products and new applications to meet their needs. We actively explore the
sale of complementary products to customers of other divisions. Our corporate
marketing group continues to create closer ties with major customers and to
develop business-to-business marketing as a core competency.
RECENT DEVELOPMENTS
On July 1, 1999, Vincent J. Corbo, previously our President and Chief
Operating Officer, also became our Chief Executive Officer. R. Keith Elliott
stepped down as our Chief Executive Officer as of July 1, 1999. He will remain
in his current position as Chairman of the Board of Directors until March 31,
2000.
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CRESTS UNITS OFFERING
SECURITIES OFFERED........ 350,000 CRESTS Units.
CRESTS UNITS.............. Each CRESTS Unit will consist of a preferred security
of the Trust and a warrant to purchase
shares of Hercules common stock. The
purchase price for each CRESTS Unit will be $1,000,
$ of which will represent the purchase price
of the preferred security component and $ of
which will represent the purchase price of the
warrant component. At any time after issuance, you
may separate the preferred security and warrant
components of each CRESTS Unit and thereafter
transfer them separately.
WARRANTS.................. Each warrant will entitle you to purchase
shares of Hercules common stock at an
exercise price initially equal to $1,000 (equivalent
to $ per share). However, upon the occurrence of
a reset event (as defined below), the exercise price
will be reduced to the accreted liquidation amount
(as defined below) of a preferred security of the
Trust plus accumulated distributions, if any, to the
reset date. See "Description of CRESTS
Units -- Certain Terms of the
Warrants -- Acceleration of Expiration Date" and
"-- Certain Terms of the Preferred Securities --
Redemption" beginning on page S-56 and S-49,
respectively. In addition, the exercise price will be
subject to adjustment upon the occurrence of certain
other events. See "Description of CRESTS
Units -- Certain Terms of the
Warrants -- Anti-Dilution Adjustments" beginning on
page S-57.
A "reset event" shall occur if:
- on any date after July , 2004, the closing price
of Hercules common stock on the New York Stock
Exchange has exceeded $ per share (subject to
anti-dilution adjustments) for at least 20 trading
days within the immediately preceding 30 trading
days; and
- Hercules elects to remarket the preferred
securities and to accelerate the expiration date of
the warrants and gives written notice of such
election to the holders of the CRESTS Units, the
preferred securities and the warrants. See
"Description of CRESTS Units -- Certain Terms of
the Preferred Securities -- Remarketing" beginning
on page S-50.
In addition, if there has not previously been a
remarketing, a reset event shall be deemed to have
occurred if, on January 31, 2029, the closing price
of Hercules common stock on the New York Stock
Exchange has exceeded $ per share for at least 20
trading days within the immediately preceding 30
trading days. See "Description of CRESTS
Units -- Certain Terms of the
Warrants -- Acceleration of Expiration Date"
beginning on page S-56.
EXERCISE OF WARRANTS...... The warrants may be exercised at any time prior to
March 31, 2029 (the "expiration date"). However, upon
the occurrence of a reset event, the expiration date
of the warrants will be accelerated to the date that
is 15 business days following the reset date related
to the reset event.
You will be required to tender cash in order to
exercise your warrants. If, however, (i) a reset date
has occurred, (ii) you hold warrants as part of
complete CRESTS Units on the reset date and (iii) you
have satisfied the conditions for remarketing of the
preferred securities you hold as part of such CRESTS
Units, then the portion of the proceeds of the
remarketing
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<PAGE> 10
equal to the exercise price of the warrants on the
reset date will automatically be applied by the
remarketing agent to pay the exercise price of the
warrants. See "Description of CRESTS Units -- Certain
Terms of the Warrants -- Acceleration of Expiration
Date" beginning on page S-56.
Hercules has agreed to use its best efforts to
maintain the effectiveness of a shelf registration
statement until the expiration date of the warrants
covering the issuance and sale of common stock upon
the exercise of the warrants and to deliver a then
current prospectus to the exercising holders of the
warrants. However, if such effectiveness is not
maintained, or delivery cannot be effected, then the
warrants will not be exercisable.
COMMON STOCK
OUTSTANDING............. Hercules will have 105,225,337 shares of its common
stock outstanding after this offering. This
information is presented as of March 31, 1999, and
includes 4,368,175 shares of common stock from the
contemplated separate common stock offering described
in "Use of Proceeds" on page S-20, but excludes (i)
shares issuable upon exercise of the
warrants component of the CRESTS Units offered
hereby, (ii) shares issuable upon exercise
of the warrants component of the CRESTS Units subject
to the over-allotment option granted to the
underwriters hereunder and 655,226 shares subject to
the over-allotment option granted to the underwriters
in the contemplated separate common stock offering
and (iii) shares reserved for issuance upon exercise
of outstanding stock options and awards under
incentive compensation plans, for employee stock
purchases, for sales to our Savings Plan Trustee and
for conversion of outstanding debentures and notes
(which reserved shares totaled 16,023,661 shares at
December 31, 1998).
PREFERRED SECURITIES...... The preferred securities will represent undivided
beneficial interests in the assets of the Trust. Each
preferred security will initially have a liquidation
amount equal to $ , which will accrete to
$1,000 on June 30, 2029, unless the preferred
securities are remarketed upon the occurrence of a
reset event.
DEBENTURES................ The Trust has been formed for the sole purpose of
issuing its preferred securities as part of the
CRESTS Units, issuing its common securities to
Hercules and investing the proceeds in a new series
of subordinated debentures of Hercules. For a
description of the Trust, see "The Hercules Trusts"
beginning on page 4 of the accompanying prospectus.
The maturity and interest rate on the debentures will
correspond to the redemption date and distribution
rate on the preferred securities.
QUARTERLY DISTRIBUTIONS ON
PREFERRED SECURITIES.... Holders of preferred securities will be entitled to
receive cumulative cash distributions at an annual
rate of % of the scheduled liquidation amount of
$1,000 per preferred security, except that on and
after a reset date, if any, distributions on the
preferred securities will be payable at the annual
distribution rate established in the remarketing of
the preferred securities. Distributions will
accumulate from July , 1999 and will be payable
quarterly in arrears on March 31, June 30, September
30 and December 31 of each year, beginning September
30, 1999.
DEFERRAL OF
DISTRIBUTIONS............. Hercules may, on one or more occasions, defer
interest payments on the debentures for up to 20
consecutive quarterly periods unless an event of
default under the debentures has occurred and is
continuing. A deferral of
S-10
<PAGE> 11
interest payments cannot extend beyond the stated
maturity date of the debentures.
If Hercules defers interest payments on the
debentures, the Trust will also defer its
distributions on the preferred securities. During
this deferral period, distributions will continue to
accumulate on the preferred securities at the then
applicable annual rate. Also, the deferred
distributions will themselves accumulate
distributions at the then applicable annual rate.
Once Hercules makes all deferred interest payments on
the debentures, with accrued interest, it may again
defer interest payments on the debentures if no event
of default under the debentures has then occurred and
is continuing. During any period in which Hercules
defers interest payments on the debentures, it will
not generally be permitted to:
- pay a dividend or make any other payment or
distribution on its capital stock;
- redeem, purchase or make a liquidation payment on
any of its capital stock;
- make a principal, premium or interest payment on,
or repurchase or redeem, any of its debt securities
that rank equal with or junior to the debentures;
or
- make any guarantee payment with respect to any
guarantee of the debt securities of a subsidiary of
Hercules that ranks equal with or junior to the
debentures.
REDEMPTION OF PREFERRED
SECURITIES.............. The Trust will redeem all of the outstanding
preferred securities when the debentures are paid at
maturity on June 30, 2029 or, if applicable, on the
date that is one year following a reset date, if any.
The redemption price for the preferred securities
will be:
- in the absence of a remarketing, their scheduled
liquidation amount of $1,000 per security; or
- in the event of a remarketing prior to June 30,
2029, their accreted liquidation amount, plus
accumulated distributions, if any, to the date of
redemption.
As used herein, the term "accreted liquidation
amount" means, at any date, the sum of the initial
purchase price of the preferred security component of
each CRESTS Unit plus the accrued discount (i.e., the
difference between the scheduled liquidation amount
of $1,000 payable in respect of such preferred
security on June 30, 2029 and such initial purchase
price), calculated from July , 1999 to the date of
calculation at the rate of % per annum on a
quarterly bond equivalent yield basis using a 360-
day year of twelve 30-day months until such sum
equals $1,000 on June 30, 2029. However, if the
preferred securities are remarketed, then, at all
times on and after the reset date, the term "accreted
liquidation amount" shall mean the accreted
liquidation amount, calculated pursuant to the
preceding sentence, as of the reset date.
REMARKETING............... If a reset event occurs, the preferred securities
will be remarketed at the annual distribution rate
that would result in a resale of the preferred
securities at a price equal to at least 100.5% of the
accreted liquidation amount thereof plus accumulated
distributions, if any. In order for any
S-11
<PAGE> 12
preferred securities to be remarketed and sold,
holders must affirmatively elect to resell the
desired number of preferred securities. Proceeds from
such resales, less the remarketing agent's fee, will
be disbursed to the relevant holders, except in
certain circumstances in which a portion of such
proceeds will automatically be applied toward payment
of the exercise price of the warrants. See
"Description of CRESTS Units -- Certain Terms of the
Warrants -- Acceleration of Expiration Date"
beginning on page S-56.
GUARANTEE OF PREFERRED
SECURITIES.............. Hercules will fully and unconditionally guarantee the
preferred securities based on its obligations:
- to make payments on the debentures under the junior
subordinated debentures indenture;
- under the preferred securities guarantee; and
- under the trust agreement.
If Hercules does not make a required payment on the
debentures, the Trust will not have sufficient funds
to make the related payment on the preferred
securities. The preferred securities guarantee does
not cover payments on the preferred securities when
the Trust does not have sufficient funds to make such
payments. The debentures will rank junior to senior
indebtedness, while the preferred securities
guarantee will rank junior to all of Hercules other
liabilities.
DISTRIBUTION OF DEBENTURES
AND DISSOLUTION......... Hercules, as the sponsor of the Trust, will have the
right to dissolve the Trust at any time upon receipt
of a legal opinion that the dissolution and any
distribution of the debentures would not result in a
taxable event to holders of the preferred securities.
If Hercules exercises this right to dissolve the
Trust, after satisfaction of liabilities to creditors
of the Trust as required by applicable law, the Trust
will be liquidated by distribution of the debentures
to holders of the preferred securities and the common
securities. The Trust may also be dissolved in
certain circumstances where the debentures will not
be distributed to you. In those situations, after
satisfaction of creditors of the Trust, the Trust
will be obligated to pay in cash the accreted
liquidation amount of each preferred security, plus
accumulated distributions, if any, to the date such
payment is made. However, the Trust will be able to
make this liquidation distribution only if Hercules
has made the corresponding payment in respect of the
debentures.
U.S. FEDERAL INCOME TAX
CONSEQUENCES............ Each CRESTS Unit will be treated for U.S. federal
income tax purposes as consisting of two separate and
distinct assets: (i) a preferred security
representing an undivided beneficial ownership
interest in the debentures, acquired at original
issue for a price of $ , and (ii) a warrant to
purchase shares of Hercules common stock,
acquired at original issue for a price of $ .
As a consequence, if you are a U.S. taxpayer, you
will be required to include as ordinary income
amounts constituting original issue discount ("OID").
The amount of interest income, including OID, on
which you will be taxed will exceed your share of the
cash interest payments you will receive on the
preferred securities. For more information about the
U.S. federal income tax consequences of holding a
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<PAGE> 13
CRESTS Unit, a preferred security or a warrant, see
"Certain U.S. Federal Income Tax Consequences"
beginning on page S-62.
ERISA MATTERS............. Employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Internal Revenue
Code, as well as individual retirement accounts and
Keogh plans subject to Section 4975 of the Internal
Revenue Code, may purchase preferred securities of
the Trust (as part of CRESTS Units or otherwise) if
the investing fiduciary of a given plan determines
that investment in those preferred securities
satisfies ERISA's fiduciary standards and other
requirements that apply to investments by the plan.
RESCISSION OF
MODIFICATIONS TO
THE TERMS OF PREFERRED
SECURITIES AND
WARRANTS................ Modifications of the terms of the preferred
securities and the warrants shall not become
effective, and the preferred securities shall not be
remarketed, upon the occurrence of a reset event if:
- an event of default under the trust agreement or a
deferral of distributions to holders of the
preferred securities has occurred and is
continuing;
- the closing price of Hercules common stock on the
New York Stock Exchange as of the fifth business
day preceding the reset date or as of the reset
date is less than the per share exercise price of
the warrants;
- a shelf registration statement covering the
issuance and sale of Hercules common stock to the
holders of warrants upon exercise of such warrants
is not effective under the Securities Act or a then
current prospectus is not delivered to such
holders, as the case may be, as of the reset date;
or
- the remarketing agent is unable to remarket all of
the preferred securities to be remarketed at the
established minimum price prior to the close of
business on the fifth business day following the
reset date or all of the conditions precedent to
the remarketing have not been fulfilled. See
"Description of CRESTS Units -- Certain Terms of
the Preferred Securities -- Remarketing" beginning
on page S-50.
In such cases, the terms of the preferred securities
and the warrants will be subject to modification, and
the preferred securities remarketed, upon the
occurrence of another reset event, if any.
FORM...................... The CRESTS Units, the preferred securities and the
warrants will be represented by one or more global
securities that will be deposited with, and
registered in the name of, The Depository Trust
Company, New York, New York ("DTC") or its nominee.
This means that you will not receive a certificate
for your CRESTS Units, or, if separated after
issuance, the warrants or the preferred securities
but, instead, you will hold your interest through the
DTC system. See "Description of CRESTS Units --
Book-Entry-Only Issuance -- DTC" beginning on page
S-59.
LISTING................... None of the CRESTS Units, the preferred securities or
the warrants will be listed for trading on any
national or regional securities exchange or quoted on
any automated quotation system.
USE OF PROCEEDS........... Hercules and the Trust will use the net proceeds from
this offering of the CRESTS Units and the
contemplated separate sale of common stock of
Hercules described in "Use of Proceeds" on page S-20
to repay a portion of the debt outstanding under the
credit facility.
S-13
<PAGE> 14
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth selected historical and pro forma financial
information for Hercules. The year-end information has been derived from our
audited financial statements. The interim financial information has been derived
from our unaudited financial statements. We believe that the financial
statements reflect all normal adjustments necessary for a fair presentation of
the financial information. The results for the three months ended March 31, 1999
do not necessarily indicate the results to be expected for the full year. You
should read the financial information below in conjunction with our financial
statements and the related notes, and the other financial and operating data
included elsewhere herein or incorporated by reference herein from our Annual
Report on Form 10-K for the year ended December 31, 1998, our Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999, and the historical
consolidated financial statements of BetzDearborn and the related notes for the
year ended December 31, 1997 and the unaudited financial statements of
BetzDearborn for the period ended June 30, 1998, as set forth in our Current
Report on Form 8-K dated October 15, 1998. Annual selling, general and
administrative expenses for 1996, 1997 and 1998 have been reclassified to
conform with the 1999 presentation for goodwill and intangible asset
amortization.
<TABLE>
<CAPTION>
THREE MONTHS PRO FORMA
ENDED MARCH 31, COMBINED(1) YEAR ENDED DECEMBER 31,
---------------- ----------- ------------------------
1999 1998 1998 1998 1997 1996
------ ------ ----------- ------ ------ ------
(UNAUDITED) (UNAUDITED)
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Net sales............................................. $ 791 $ 430 $3,093 $2,145 $1,866 $2,060
Cost of sales......................................... 423 262 1,665 1,287 1,169 1,320
Selling, general and administrative expenses(2)....... 197 60 765 377 248 260
Profit from operations................................ 123 94 437 192 228 441
Income before income taxes............................ 62 44 131 77 593 485
Provision for income taxes............................ 24 16 55 68 269 160
Net income............................................ 38 28 76 9 319 325
Earnings per share
Basic............................................... .37 .29 .75 .10 3.22 3.10
Diluted............................................. .37 .29 .75 .10 3.13 2.98
Weighted average shares outstanding
Basic............................................... 100.8 95.9 100.7 96.3 99.2 104.9
Diluted............................................. 101.5 97.4 101.8 97.4 102.4 109.7
CASH FLOW DATA
Capital expenditures.................................. $ 38 $ 28 $ 157 $ 119 $ 120
Depreciation.......................................... 34 16 86 73 106
Amortization.......................................... 28 1 22 3 2
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(3)
------ ---------------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
BALANCE SHEET DATA
Working capital...................... $ 240 $ 240
Cash and cash equivalents............ 46 46
Total assets......................... 5,783 5,783
Total debt........................... 3,287 2,775
Guaranteed preferred beneficial
interests in Hercules' subordinated
debentures......................... 562 825
Stockholders' equity................. 561 823
</TABLE>
- ---------------
(1) The pro forma combined information is stated for the year ended December 31,
1998, and is based on the historical financial statements of Hercules and
BetzDearborn after giving effect to the acquisition using the purchase
method of accounting.
(2) Excludes goodwill and intangible asset amortization.
(3) The Pro Forma As Adjusted balance sheet data has been adjusted to reflect
the sale of the CRESTS Units and the contemplated separate sale of common
stock of Hercules and the application of the net proceeds to repay a portion
of the debt outstanding under the credit facility.
S-14
<PAGE> 15
RISK FACTORS
Your investment in the CRESTS Units will involve certain risks. You should
carefully consider the following discussion of risks, and the other information
included or incorporated by reference in the Prospectus Documents, before
deciding whether to invest in the CRESTS Units.
WE HAVE SIGNIFICANT INDEBTEDNESS.
As of March 31, 1999, Hercules had approximately $3.3 billion of total
debt. Total debt amounted to approximately 75% of our total capitalization.
After taking into account the planned repayment of some of our debt with the
proceeds from this offering of the CRESTS Units and the contemplated separate
sale of common stock described in "Use of Proceeds" on page S-20, we would have
approximately $2.8 billion of total debt, and total debt would amount to
approximately 63% of our total capitalization. See "Capitalization" on page
S-22.
We have an outstanding credit facility with a syndicate of banks which was
used to refinance existing debt and to finance our acquisition of BetzDearborn
and which was amended and restated in April 1999 (the "credit facility"). See
"Management's Discussion and Analysis -- Financial Condition" beginning on page
S-29 for a description of the credit facility. We also have a $94 million credit
facility related to the BetzDearborn ESOP Trust (the "ESOP credit facility").
The credit facility and the ESOP credit facility, which account for most of our
debt, contain restrictive covenants that require us to maintain certain
financial ratios, including leverage, net worth and interest coverage, and place
limits on our ability to take certain corporate actions, such as amending our
governing documents, without lender approval.
The credit facility and the ESOP credit facility also provide that the
entry of any judgments against us involving aggregate liabilities of $50 million
or more, which have not been vacated, discharged, stayed or bonded pending
appeal within 60 days of entry, is an event of default. As previously disclosed
in reports filed with the Securities and Exchange Commission, in an action
involving us and another company, a court has ordered us and the other company
to pay $102.9 million, plus additional response costs. A trial on the allocation
of damages between us and the other company has been completed but the judgment
has not been rendered. We expect to appeal any determination of liability
against us. If the court finds against us for $50 million or more after all of
our appeals have been exhausted and we do not pay that amount, then certain of
our lenders, including the lenders under the credit facility and the ESOP credit
facility, may accelerate their loans. However, we believe that we will have
access to sufficient funds to pay any such judgment within the 60-day period,
although no assurance can be given that we will have sufficient funds or that
the impact will not be significant if we do not have such funds.
WE HAVE POTENTIAL ENVIRONMENTAL LIABILITIES.
In the ordinary course of our business, we are subject to numerous
environmental laws and regulations covering compliance matters or imposing
liability for the costs of, and damages resulting from, cleaning up sites, past
spills, disposals and other releases of hazardous substances. Changes in these
laws and regulations may have a material adverse effect on our financial
position and results of operations. Any failure by us to adequately comply with
such laws and regulations could subject us to significant future liabilities.
We have been identified by U.S. federal and state authorities as a
potentially responsible party for environmental cleanup at numerous sites. The
estimated range of reasonably possible costs for remediation is between $63
million and $199 million. Remediation costs typically have been funded from
internal sources of cash, are a normal, recurring part of operations and are not
significant in relation to total operating costs or cash flows. We do not
anticipate that our overall financial condition or liquidity will be materially
affected by environmental remediation costs in excess of amounts accrued,
although quarterly or annual operating results could be materially affected.
S-15
<PAGE> 16
WE MAY NOT ACHIEVE OUR PLANNED INTEGRATION OF NEWLY ACQUIRED BUSINESSES AND
OPERATIONS.
In 1998, we made five key acquisitions. As is the case with any integration
of major businesses that previously operated independently, the integration
processes will require the dedication of management and operational resources.
The difficulties of combining operations may be heightened by, among other
things, the necessity of coordinating geographically separate organizations,
integrating personnel with disparate business backgrounds and combining
different processes, systems and corporate cultures. The integration process
could cause an interruption of, or loss of momentum in, the activities of the
combined business; a loss of key employees, customers or suppliers; a loss of
revenues; increases in costs; and/or other difficulties, some of which may not
have been foreseen. We may not be able to realize the operating efficiencies,
cost savings and other benefits that are sought from such acquisitions,
including the anticipated synergies from the acquisition of BetzDearborn.
WE ARE SUBJECT TO COMPETITION FOR CUSTOMERS AND ACQUISITIONS.
The global specialty chemicals industry is highly competitive. We compete
for customers and acquisition candidates. Some of our competitors have greater
financial, technical, marketing and other resources, which could provide them
with a competitive advantage over us. Also, our competitors have in the past
caused, and could in the future cause, a reduction in the prices for some of our
products as a result of intensified price competition.
WE ARE SUBJECT TO TECHNOLOGICAL CHANGE AND INNOVATION.
Many of our products could be affected by rapid technological change and
new product introductions and enhancements. We believe we must continue to
enhance our existing products, to develop and manufacture new products with
improved capabilities and to make improvements in our productivity in order to
maintain our competitive position. Our inability to anticipate, respond to or
utilize changing technologies could have a material adverse effect on our
business and results of operations.
MANY OF OUR CUSTOMERS ARE IN CYCLICAL INDUSTRIES.
Many of our customers are in industries and businesses that are cyclical in
nature and sensitive to changes in general economic conditions. The demand for
our products depends, in part, upon the general economic conditions of the
markets of our customers. Downward economic cycles in our customers' industries
may reduce sales of our products.
CURRENCY FLUCTUATIONS COULD IMPACT OUR FINANCIAL PERFORMANCE.
Our products are sold around the world and, as a result, currency
fluctuations could impact our financial performance in the future. Our revenues
in foreign countries largely are generated in foreign currencies, while costs
incurred to generate those revenues are only partly incurred in the same
currencies. Since our financial statements are denominated in U.S. dollars,
changes in currency exchange rates between the U.S. dollar and other currencies
will have an impact on our results of operations. To reduce this currency
exchange risk, we enter into hedging transactions but such transactions do not
eliminate all of the risks associated with currency fluctuations.
OUR INTERNATIONAL OPERATIONS ARE AFFECTED BY GLOBAL AND REGIONAL CONDITIONS.
Our international operations are subject to risks, such as currency
exchange controls, labor unrest, regional economic uncertainty, political
instability, restrictions on the transfer of funds into or out of a country,
export duties and quotas, domestic and foreign customs and tariffs and current
and changing regulatory environments. These events could have an adverse effect
on our international operations in the future by reducing the demand for our
products, increasing the prices at which we can sell our products or otherwise
having an adverse affect on our results of operations. In recent years, many
economies, including some in Asia, have been highly volatile and recessionary,
resulting in significant fluctuations in local
S-16
<PAGE> 17
currencies and other instabilities. These instabilities may continue or worsen,
which could have a continued adverse impact on our results of operations.
OUR PRODUCTION FACILITIES ARE SUBJECT TO OPERATING HAZARDS, AND WE MAY NOT HAVE
READY ACCESS AT ALL TIMES TO RAW MATERIALS.
We are dependent on the continued operation of our production facilities.
Such production facilities are subject to hazards associated with the
manufacture, handling, storage and transportation of chemical materials and
products, including pipeline leaks and ruptures, explosions, fires, inclement
weather and natural disasters, mechanical failure, unscheduled downtime, labor
difficulties, transportation interruptions, remediation complications, chemical
spills, discharges or releases of toxic or hazardous substances or gases,
storage tank leaks and other environmental risks. These hazards can cause
personal injury and loss of life, severe damage to or destruction of property
and equipment and environmental damage and could have a material adverse effect
on us.
While we may occasionally experience temporary shortages in raw materials
and fuels, these items are currently readily available. However, their
continuing availability and price are subject to domestic and world market and
political conditions as well as to the direct or indirect effect of governmental
regulations. The impact of any future raw material and energy shortages on our
business as a whole or in specific world areas cannot be accurately predicted.
Operations and products may, at times, be adversely affected by governmental
actions, shortages or international or domestic events.
IF YEAR 2000 PROBLEMS CANNOT BE FULLY IDENTIFIED, CONTROLLED OR RESOLVED, WE
COULD HAVE INTERRUPTIONS IN, OR FAILURES OF, OUR NORMAL BUSINESS OPERATIONS.
The ability of computers, software or any equipment utilizing
microprocessors to properly recognize and process data at the turn of century is
commonly referred to as a Y2K compliance issue. Failure on our part or that of
our business partners to correct a material Y2K compliance problem could result
in an interruption in, or a failure of, certain normal business activities or
operations. Such failures could have a material adverse impact on our
operations.
We have already taken substantial steps to address the Y2K issue. We
believe that, with the implementation of new business systems and completion of
our Y2K project as scheduled, the possibility of significant interruptions of
our normal operations is reduced. However, we cannot assure you that we will
identify and address all significant internal or external Y2K problems in a
prompt and cost-effective manner. Such Y2K problems, if not fixed, could have a
material adverse effect on our business or results of operations. For a more
complete discussion of Y2K issues, you should read "Management's Discussion and
Analysis -- Year 2000 Readiness Disclosure" beginning on page S-31.
HERCULES' OBLIGATIONS UNDER THE DEBENTURES AND THE PREFERRED SECURITIES
GUARANTEE ARE SUBORDINATED.
Hercules' obligations under the debentures are unsecured and will rank
junior in priority of payment to Hercules' senior indebtedness. This means that
Hercules cannot make any payments of principal (including redemption payments)
or interest on the debentures if it defaults on a payment on its senior
indebtedness or if the maturity of any of its senior indebtedness has been
accelerated. See "Description of CRESTS Units -- Certain Terms of the
Debentures -- Subordination" beginning on page S-52 for the definition of senior
indebtedness. In the event of the bankruptcy, liquidation or dissolution of
Hercules, its assets would be available to pay obligations under the debentures
only after all payments had been made on its senior indebtedness. At March 31,
1999, on a pro forma basis, as if on that date Hercules and the Trust had issued
and sold the CRESTS Units offered hereby and Hercules had issued and sold
approximately $175 million of its common stock in the contemplated separate
common stock offering and, in each case, applied the estimated net proceeds
thereof as described in this prospectus supplement, the total amount of
Hercules' senior indebtedness would have been approximately $3.2 billion. See
"Capitalization" on page S-22 and "Use of Proceeds" on page S-20.
S-17
<PAGE> 18
Hercules' obligations under the preferred securities guarantee are
unsecured and will rank in priority of payment:
- junior to all of Hercules' other liabilities, except those liabilities
made equal with or junior to the preferred securities guarantee by their
terms; and
- senior to all of Hercules' capital stock now outstanding or issued in the
future, including its common stock and to any guarantee now or hereafter
entered into by Hercules in respect of any of its capital stock.
This means that Hercules cannot make any payments on the preferred
securities guarantee if it defaults on a payment of any of its other
liabilities, except those liabilities made equal with or junior to the preferred
securities guarantee by their terms. In the event of the bankruptcy, liquidation
or dissolution of Hercules, its assets would be available to pay obligations
under the preferred securities guarantee only after all payments had been made
on its other liabilities (except those liabilities made equal with or junior to
the preferred securities guarantee by their terms).
Neither the debentures nor the preferred securities guarantee will limit
the ability of Hercules and its subsidiaries to incur additional indebtedness,
including indebtedness that ranks senior in priority of payment to the
debentures and the preferred securities guarantee.
For more information, see "Description of CRESTS Units -- Certain Terms of
the Debentures -- Subordination" beginning on page S-52 and "Description of
Guarantees -- General -- Ranking" on page 41 of the accompanying prospectus.
THE PREFERRED SECURITIES GUARANTEE COVERS PAYMENTS ONLY IF THE TRUST HAS CASH
AVAILABLE.
The ability of the Trust to pay distributions on the preferred securities,
the redemption price of the preferred securities and the applicable liquidation
amount of each preferred security is solely dependent upon Hercules making the
related payments on the debentures when due.
If Hercules defaults on its obligation to pay principal (including
redemption payments) or interest on the debentures, the Trust will not have
sufficient funds to pay distributions, the redemption price or the applicable
liquidation amount of each preferred security. In those circumstances, you will
not be able to rely upon the preferred securities guarantee for payment of these
amounts because the preferred securities guarantee covers such payment only when
the Trust has sufficient funds on hand but fails to make such payment.
Instead, you may:
- seek legal redress against Hercules directly or seek other remedies to
collect your pro rata share of payments owed; or
- rely on the property trustee to enforce the Trust's rights under the
debentures.
AN EFFECTIVE REGISTRATION STATEMENT AND DELIVERY OF A THEN CURRENT PROSPECTUS IS
REQUIRED BEFORE YOU CAN EXERCISE THE WARRANTS.
Holders of the warrants will be able to exercise their warrants only if (i)
a registration statement covering the issuance and sale of the shares of common
stock upon exercise of the warrants is then in effect or the sale of the shares
upon exercise of the warrants is exempt from the registration requirements of
the Securities Act of 1933, (ii) the shares have been registered, qualified or
are deemed to be exempt under the securities laws of the state of residence of
the exercising holder of the warrants and (iii) a then current prospectus is
delivered to the exercising holders of the warrants. Hercules currently has an
effective registration statement covering the common stock issuable upon
exercise of the warrants. Although Hercules has agreed to use its best efforts
to maintain the effectiveness of such registration statement until the
expiration date of the warrants, to have all the shares of common stock so
registered or qualified and to deliver a then current prospectus to the
exercising holders of the warrants, there can be no assurance that it will be
able to do so. The warrant agreement governing the terms of the warrants,
however, provides that the
S-18
<PAGE> 19
originally scheduled expiration date of the warrants will be extended if
Hercules was required to but did not maintain an effective registration
statement with respect to the shares of common stock underlying the warrants or
was required to but did not deliver a then current prospectus to exercising
holders of the warrants during the 90 days immediately preceding such originally
scheduled expiration date of the warrants (or if Hercules has not maintained the
registration or qualification of the shares under applicable state securities
laws during such period). See "Description of CRESTS Units -- Certain Terms of
the Warrants -- Exercise of Warrants" beginning on page S-55.
THERE IS NO EXISTING TRADING MARKET FOR THE CRESTS UNITS, THE PREFERRED
SECURITIES AND THE WARRANTS.
The CRESTS Units, the preferred securities and the warrants are new issues
of securities and there is currently no trading market for any of these
securities. Hercules does not intend to apply for listing or quotation of any of
the CRESTS Units, the preferred securities or the warrants on any national
securities exchange or quotation system. No assurance can be given as to the
development or liquidity of any trading market for the CRESTS Units, the
preferred securities or the warrants. Similarly, no assurance can be given
regarding the ability of holders of the CRESTS Units, the preferred securities
or the warrants to sell their securities or the prices at which such holders may
be able to sell their securities.
THE EXISTING TERMS OF THE PREFERRED SECURITIES AND THE WARRANTS MAY BE MODIFIED.
If a reset date occurs after July , 2004, but prior to January 31, 2029,
Hercules will have the right to cause a remarketing of the preferred securities
and establish a new distribution rate thereon, to accelerate the mandatory
redemption date of the preferred securities to one year following the reset date
at a redemption price equal to the accreted liquidation amount thereof plus
accumulated distributions, if any, to reduce the exercise price of the warrants
to the accreted liquidation amount of the preferred securities plus accumulated
distributions, if any, and to accelerate the expiration date of the warrants to
15 business days following the reset date. In addition, if a remarketing of the
preferred securities has not previously taken place, a reset event will be
deemed to occur and the foregoing modifications to the terms of the preferred
securities and the warrants shall be deemed effective if, on January 31, 2029,
the closing price of Hercules common stock exceeds $ per share for at
least 20 trading days within the immediately preceding 30 trading days. If a
reset event occurs, holders of the warrants will be required to determine
whether to exercise their warrants at the reduced exercise price prior to the
accelerated expiration date and holders of the preferred securities will be
required to determine whether to hold, or alternatively to sell through the
remarketing, their preferred securities with a new one year maturity and a new
distribution rate established in the remarketing.
YOUR CASH DISTRIBUTIONS ON THE PREFERRED SECURITIES WILL BE LESS THAN THE AMOUNT
OF INTEREST YOU WILL BE REQUIRED TO INCLUDE IN YOUR TAXABLE INCOME.
You will be taxed on the cash payments you receive from the Trust in
respect of interest payments made by Hercules on the debentures. In addition,
regardless of the method of accounting you normally use, during the period you
own the preferred securities, you will be required to accrue as interest income,
using the constant yield method of accounting, your share of OID on the
debentures owned by the Trust. Consequently, the amount of interest income,
including OID, that you will be required to include in your U.S. federal taxable
income during the period you own the preferred securities will exceed your share
of cash payments, if any, that are distributed to you by the Trust in respect of
interest payments made by Hercules on the debentures.
THERE CAN BE NO ASSURANCE THAT THE PREFERRED SECURITIES WILL TRADE AT A PRICE
THAT FULLY REFLECTS YOUR SHARE OF THE ACCRUED BUT UNPAID OID ON THE DEBENTURES
OWNED BY THE TRUST.
Your tax basis in the preferred securities will be increased by the OID you
are required to accrue. The OID will accrue on a daily basis during the time you
hold the preferred securities. Moreover, even if the Trust ceases to make
current cash distributions to you because Hercules exercises its option to defer
interest payments on the debentures, OID will continue to accrue on the
debentures (and will include the amount, if any, of accrued but unpaid stated
interest). There can be no assurance that the preferred securities will trade
S-19
<PAGE> 20
at a price that fully reflects your share of the accrued but unpaid OID on the
preferred securities. If you sell the preferred securities for less than your
adjusted tax basis, you will recognize a loss which should be treated as a
capital loss. Subject to certain limited exceptions, capital losses cannot be
applied to offset ordinary income, including interest income, for U.S. federal
income tax purposes.
If you sell the preferred securities prior to their maturity, you may not
receive the same return on investment as someone else who continues to hold the
preferred securities. In addition, the existence of the accrued but unpaid OID
or of Hercules' right to defer payments of interest on the debentures may mean
that the market price for the preferred securities (which represent an undivided
beneficial interest in the debentures) may be more volatile than other
securities that do not have these features.
YOU HAVE LIMITED VOTING RIGHTS.
You will have limited voting rights. In general, unless an event of default
under the trust agreement has occurred and is continuing, only Hercules may
elect or remove any of the trustees, and in no event may holders of the
preferred securities remove the administrative trustees.
See "The Hercules Trusts" beginning on page 4 of the accompanying
prospectus and "Description of Trust Preferred Securities -- General -- Voting
Rights; Amendment of a Trust Agreement" beginning on page 38 of the accompanying
prospectus for more information.
USE OF PROCEEDS
All of the proceeds received from the sale of the preferred securities and
the common securities of the Trust will be invested by the Trust in the
debentures. Hercules intends to use the net proceeds from the issuance of the
debentures and the sale of the warrants, estimated to be $ million ($
million if the underwriters' over-allotment option is exercised in full), and
the net proceeds to Hercules from the contemplated separate common stock
offering of Hercules discussed in the next paragraph, estimated to be
approximately $ million ($ million if the underwriters' over-allotment
option for such sale is exercised in full), each after deducting underwriting
discounts and estimated offering expenses payable by Hercules, for the partial
repayment of the tranche C term loan made under the credit facility. Such term
loan bears interest at the London Interbank Offered Rate (LIBOR) plus 0.75% and
is payable on December 31, 2000. See "Capitalization" on page S-22.
Concurrently with this offering, Hercules expects to offer 4,368,175 shares
of its common stock in a separate public offering. This offering of CRESTS Units
is not conditioned upon the commencement or consummation of the common stock
offering and this prospectus supplement relates only to this offering.
S-20
<PAGE> 21
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock, without par value ($25/48 stated value), is listed on the
New York Stock Exchange under the symbol "HPC", the London Stock Exchange and
the Swiss Exchange. The following table sets forth high and low sale prices of
our common stock as reported on the New York Stock Exchange (New York Stock
Exchange Composite Tape).
<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1997
First Quarter................................... $47 7/8 $41 1/2
Second Quarter.................................. 49 3/16 37 3/4
Third Quarter................................... 54 1/2 47 7/8
Fourth Quarter.................................. 50 3/4 41 9/16
FISCAL YEAR ENDED DECEMBER 31, 1998
First Quarter................................... 51 3/8 45 3/16
Second Quarter.................................. 50 1/2 40 1/2
Third Quarter................................... 41 1/4 24 5/8
Fourth Quarter.................................. 35 1/2 24 15/16
FISCAL YEAR ENDING DECEMBER 31, 1999
First Quarter................................... 29 3/8 25 1/4
Second Quarter.................................. 40 11/16 24
Third Quarter (through July 2).................. 40 3/16 38 3/8
</TABLE>
On July 2, 1999, the last reported sale price of our common stock on the
New York Stock Exchange was $40 1/16 per share and we had approximately 18,934
stockholders.
We have paid a quarterly dividend without interruption since 1913, our
first year of operation. Our board of directors has the authority to declare
payments of dividends. The amount of any future dividend payments will depend
upon our results of operations, financial condition, cash position and
requirements, investment opportunities, future prospects and other factors
deemed relevant by our board of directors in its sole discretion.
Our last dividend payment of $0.27 per share was declared on April 29,
1999, and was paid on June 25, 1999 to stockholders holding common stock at the
close of business on June 4, 1999.
Certain of our credit agreements contain restrictions on our ability to pay
dividends on our common stock if a default has occurred or would occur upon
payment of the dividend.
S-21
<PAGE> 22
CAPITALIZATION
The following table sets forth as of March 31, 1999 (1) the historical
capitalization of Hercules; (2) the capitalization of Hercules as adjusted to
give effect to the sale of the CRESTS Units and the application of the net
proceeds to reduce amounts outstanding under the credit facility; and (3) such
amounts as adjusted on a pro forma basis to reflect the contemplated separate
sale of common stock and the application of the net proceeds to reduce amounts
outstanding under the credit facility.
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------------------
PRO FORMA
ACTUAL AS ADJUSTED AS ADJUSTED
------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Short-Term Debt:
Bank debt............................................... $ 223 $ 223 $ 223
Current maturities of long-term debt.................... 44 44 44
------- ------- -------
Short-term debt...................................... 267 267 267
------- ------- -------
Long-Term Debt:
6.15% notes due 2000.................................... 100 100 100
6.60% debentures due 2027............................... 100 100 100
7.85% notes due 2000.................................... 25 25 25
6.625% notes due 2003................................... 125 125 125
8% convertible subordinated debentures due 2010......... 3 3 3
Term loan tranche A due in varying amounts through
2003(a).............................................. 1,250 1,250 1,250
Term loan tranche C due 2000(a)......................... 1,000 660 488
Revolving credit agreement due 2003(a).................. 224 224 224
ESOP debt(b)............................................ 108 108 108
Term notes at various rates from 4.03% to 9.60% in
varying amounts through 2006(c)...................... 93 93 93
Variable rate loans..................................... 22 22 22
Other................................................... 14 14 14
------- ------- -------
Total long-term debt................................. 3,064 2,724 2,552
Current maturities of long-term debt................. (44) (44) (44)
------- ------- -------
Net long-term debt................................... 3,020 2,680 2,508
------- ------- -------
Guaranteed preferred beneficial interests in Hercules'
subordinated debentures(d).............................. 562 825 825
------- ------- -------
Stockholders' Equity:
Common stock -- 300,000,000 shares authorized. Shares
issued: actual and as adjusted -- 154,833,121; and
pro forma as adjusted -- 159,201,296................. 81 81 83
Additional paid-in capital(d)........................... 504 591 764
Unearned compensation................................... (130) (130) (130)
Foreign currency translation adjustment................. (23) (23) (23)
Retained earnings....................................... 2,079 2,079 2,079
Reacquired stock at cost -- 53,975,959 shares........... (1,950) (1,950) (1,950)
------- ------- -------
Total stockholders' equity........................... 561 648 823
------- ------- -------
Total Capitalization...................................... $ 4,410 $ 4,420 $ 4,423
======= ======= =======
</TABLE>
- ---------------
(a) The BetzDearborn acquisition was financed with borrowings under the credit
facility. The facility includes two remaining tranches of varying maturity
term loans currently totaling $2.25 billion and a $900 million revolving
credit agreement.
(b) Hercules assumed a $94 million loan guarantee related to the BetzDearborn
ESOP Trust. The loan was recorded at fair market value at the date of
acquisition.
(c) These term notes relate to the July 1998 acquisition of the remaining 49%
share of FiberVisions L.L.C. from a former joint venture partner.
(d) Based on allocation of 75% of the initial offering price of the CRESTS Units
to guaranteed preferred beneficial interests in Hercules' subordinated
debentures and 25% to additional paid-in capital of Hercules.
S-22
<PAGE> 23
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth selected historical financial information
for Hercules. The year-end information has been derived from our audited
financial statements. The interim financial information has been derived from
our unaudited financial statements. We believe that the financial statements
reflect all normal adjustments necessary for a fair presentation of the
financial information. The results of the three months ended March 31, 1999 do
not necessarily indicate the results to be expected for the full year. You
should read this information in conjunction with our financial statements and
the related notes and the other financial and operating data included elsewhere
herein or incorporated by reference herein from our Annual Report on Form 10-K
for the year ended December 31, 1998 and Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999. Annual selling, general and administrative
expenses for 1994, 1995, 1996, 1997 and 1998 have been reclassified to conform
with the 1999 presentation for goodwill and intangible asset amortization.
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS
ENDED MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------- ------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------ ------ ------ ------ ------ ------ ------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Net sales................................ $ 791 $ 430 $2,145 $1,866 $2,060 $2,427 $2,821
Operating costs and expenses:
Cost of sales.......................... 423 262 1,287 1,169 1,320 1,591 1,924
Selling, general and administrative
expenses............................. 197 60 377 248 260 365 372
Research and development............... 21 13 61 53 56 59 65
Purchased in-process research and
development.......................... -- -- 130 -- -- -- --
Goodwill and intangible asset
amortization......................... 20 1 22 3 2 2 2
Other operating expenses (income),
net.................................. 7 -- 76 165 (19) 47 39
------ ------ ------ ------ ------ ------ ------
Profit from operations................... 123 94 192 228 441 363 419
Equity in income of affiliated
companies.............................. 1 5 10 30 53 41 26
Interest and debt expense................ 65 11 103 39 35 28 28
Other income (expense), net.............. 3 (44) (22) 374 26 129 (9)
------ ------ ------ ------ ------ ------ ------
Income before income taxes............... 62 44 77 593 485 505 408
Provision for income taxes............... 24 16 68 269 160 172 134
------ ------ ------ ------ ------ ------ ------
Income before effect of changes in
accounting principles.................. 38 28 9 324 325 333 274
Effect of changes in accounting
principles............................. -- -- -- (5) -- -- --
------ ------ ------ ------ ------ ------ ------
Net income............................... $ 38 $ 28 $ 9 $ 319 $ 325 $ 333 $ 274
====== ====== ====== ====== ====== ====== ======
RATIO OF EARNINGS TO FIXED CHARGES(1)...... 1.9x 3.3x 1.5x 10.0x 10.2x 11.8x 9.2x
BALANCE SHEET DATA
Working capital (deficit)................ $ 240 $ (125) $ (77) $ (110) $ 45 $ 180 $ 385
Property, plant and equipment, net....... 1,380 691 1,438 687 865 1,000 1,216
Total assets............................. 5,783 2,536 5,833 2,411 2,386 2,493 2,941
Total debt............................... 3,287 826 3,662 694 658 505 496
Guaranteed preferred beneficial interests
in Hercules' subordinated debentures... 562 -- 200 -- -- -- --
Stockholders' equity..................... 561 630 559 690 887 1,082 1,295
CASH FLOW DATA
Net cash provided from operations........ $ 13 $ 38 $ 181 $ 187 $ 225 $ 328 $ 298
Proceeds of investment and fixed asset
disposals.............................. -- 34 600 295 196 376 202
Capital expenditures..................... 38 28 157 119 120 117 164
Depreciation............................. 34 16 86 73 106 133 148
Amortization............................. 28 1 22 3 2 2 2
Dividends paid........................... 27 26 104 98 95 95 89
Common stock reacquired (net of common
stock issued).......................... -- 53 104 420 402 569 333
</TABLE>
- ---------------
(1) For the purposes of determining earnings in the calculation of the ratio of
earnings to fixed charges, consolidated pre-tax income has been adjusted to
reflect the distributed income of less than 50 percent owned subsidiaries,
increased by the amount of previously capitalized interest amortized during
the period and increased by the amount of fixed charges, excluding
capitalized interest expense. Fixed charged consist of interest expense on
borrowings (including capitalized interest) and one-third (the proportion
deemed representative of the interest portion) of rent expenses.
S-23
<PAGE> 24
'
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Combined Statement of Income of
Hercules for the year ended December 31, 1998 (the "Pro Forma Statement of
Income") reflects the acquisition of BetzDearborn as if it had occurred at
January 1, 1998. The pro forma information is based on the historical financial
statements of Hercules and BetzDearborn after giving effect to the acquisition
using the purchase method of accounting and a preliminary purchase price
allocation. The actual allocation of the purchase price is expected to be
completed by October 15, 1999, based on a complete evaluation of the assets
acquired and liabilities assumed. Accordingly, the information presented herein
may differ from the final purchase price allocation. The Pro Forma Statement of
Income also reflects assumptions and adjustments deemed appropriate by
management, which are described in the accompanying notes. Cost savings benefits
from synergies to be derived from the acquisition, which may be significant, are
not reflected in the Pro Forma Statement of Income. Selling, general and
administrative expenses have been reclassified to conform with the 1999
presentation for goodwill and intangible asset amortization.
The Pro Forma Statement of Income does not purport to be indicative of our
results of operations had the acquisition actually occurred on the date assumed
nor is it necessarily indicative of our future operating results. The Pro Forma
Statement of Income should be read in conjunction with audited consolidated
financial statements of Hercules and the related notes attached as Annex A, the
historical consolidated financial statements of BetzDearborn and the related
notes for the year ended December 31, 1997 and the unaudited financial
statements of BetzDearborn for the period ended June 30, 1998, as set forth in
our Current Report on Form 8-K dated October 15, 1998, which is incorporated by
reference herein.
<TABLE>
<CAPTION>
YEAR ENDED
HERCULES DECEMBER 31, 1998
YEAR ENDED -----------------------
DECEMBER 31, 1998 BETZDEARBORN PRO FORMA PRO FORMA
AS REPORTED 1/1/98 TO 9/30/98 ADJUSTMENTS COMBINED
----------------- ----------------- ----------- ---------
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales.................................. $2,145 $948 $ $3,093
Cost of sales.............................. 1,287 390 (12)(a) 1,665
Selling, general and administrative
expenses................................. 377 388 765
Research and development................... 61 30 91
Purchased in-process research and
development.............................. 130 -- (130)(b) --
Goodwill and intangible asset
amortization............................. 22 12 48(c) 70
(12)(d)
Other operating expenses (income), net..... 76 -- (11)(e) 65
------ ---- ----- ------
Profit from operations..................... 192 128 117 437
Equity in income of affiliated companies... 10 -- 10
Interest and debt expense.................. 103 29 150(f) 282
Other income (expense), net................ (22) (12) (34)
------ ---- ----- ------
Income before income taxes................. 77 87 (33) 131
Income tax expense......................... 68 31 (44)(g) 55
------ ---- ----- ------
Net income................................. $ 9 $ 56 $ 11 $ 76
====== ==== ===== ======
Earnings per share
Basic.................................... $ .10 $ .75
Diluted.................................. $ .10 $ .75
Weighted-average shares outstanding
Basic.................................... 96.3 100.7(h)
Diluted.................................. 97.4 101.8(h)
</TABLE>
The accompanying notes are an integral part of the Pro Forma Statement of
Income.
S-24
<PAGE> 25
- ---------------
Notes to Pro Forma Statement of Income
(a) To record the net change in depreciation expense resulting from the increase
in fair value of fixed assets and the adjustment to estimated useful lives.
(b) To remove nonrecurring write-off of purchased in-process research and
development.
(c) To record amortization of goodwill of $2.07 billion over its estimated
useful life of 40 years and amortization of other identified intangible
assets of $145 million over their estimated useful lives ranging from 10 to
15 years.
(d) To eliminate historical BetzDearborn goodwill and intangible amortization.
(e) To remove nonrecurring integration charges related to the acquisition.
(f) To record incremental interest expense at an assumed interest rate of 7.3%,
the approximate borrowing rate for Hercules, on borrowings under the credit
facility and amortization of debt issuance costs.
(g) To record the tax effect of the pro forma adjustments at the statutory rate
of 35% for the period presented. In-process research and development and
amortization of goodwill (substantially non-deductible) have not been tax
effected.
(h) Shares of the BetzDearborn ESOP were exchanged for approximately 5.9 million
Hercules common shares and are considered outstanding.
ACCOUNTING TREATMENT
The financial statements of the Trust will be consolidated with Hercules'
consolidated financial statements, with the preferred securities shown as a
separate line item in Hercules' balance sheet outside of the stockholders'
equity section as "Guaranteed preferred beneficial interests in Hercules'
subordinated debentures." Disclosures concerning the preferred securities, the
preferred securities guarantee and the debentures will be included in the notes
to Hercules' consolidated financial statements.
S-25
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion is not a complete description of our financial
affairs. You should read it in conjunction with our financial statements and the
related notes which are attached as Annex A or incorporated by reference herein
from our Annual Report on Form 10-K for the year ended December 31, 1998 and our
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
SEGMENT REPORTING
In 1998, we adopted Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related Information." In
compliance with SFAS No. 131 and as a result of the acquisition of BetzDearborn,
we have identified three reportable segments and have restated prior years to
conform with the 1998 presentation. The three segments are: Process Chemicals
and Services, comprised of Pulp and Paper and BetzDearborn; Functional Products,
comprised of Aqualon and Food Gums; and Chemical Specialties, comprised of
Resins and FiberVisions. Accordingly, the segment comparisons provided herein
are presented on the basis prescribed by this standard.
RESULTS OF OPERATIONS
FIRST QUARTER OF 1999 COMPARED TO THE FIRST QUARTER OF 1998
The table below reflects net sales and profit from operations for the
quarter ended March 31, 1998, on a pro forma basis, and profit from operations
for the quarter ended March 31, 1999, excluding integration costs. Acquisitions
during 1998, which were accounted for using the purchase method, significantly
impact the comparability of results for the first quarter of 1999. Accordingly,
pro forma net sales and profit from operations for the quarter ended March 31,
1998 are provided to facilitate comparisons. The pro forma information includes
BetzDearborn and FiberVisions as if the acquisitions had occurred on January 1,
1998. Pro forma adjustments have been made primarily to reflect increased
goodwill and intangible amortization in reconciling items. Cost savings from
combining operations with Hercules have not been reflected. Consequently, the
pro forma results do not reflect the actual results of operations had the
acquisitions occurred on the date indicated, and are not intended to be a
projection of future results or trends.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------
1999 1998
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Net Sales by Industry Segment
Process Chemicals and Services............................ $412 $403
Functional Products....................................... 208 215
Chemical Specialties...................................... 171 177
---- ----
Total............................................. $791 $795
==== ====
Profit (Loss) from Operations
Process Chemicals and Services............................ $ 80 $ 64
Functional Products....................................... 54 56
Chemical Specialties...................................... 26 26
Reconciling Items......................................... (28)(a) (18)(b)
---- ----
Total............................................. $132 $128
==== ====
</TABLE>
- ---------------
(a) Includes $20 million of goodwill and intangible asset amortization, $5
million of corporate charges, $2 million of corporate research and
development costs and $1 million of other items.
(b) Includes $19 million of goodwill and intangible asset amortization and $3
million of corporate research and development costs, offset by $4 million
from sale of technology.
S-26
<PAGE> 27
The discussion that follows relates to comparisons in the table through
profit (loss) from operations.
Net sales were relatively flat for the quarter, as volume improvements in
Process Chemicals and Services were more than offset by lower volumes in
Functional Products and lower pricing in Chemical Specialties. Profit from
operations increased $4 million, or 3%. The increase, partially offset by higher
corporate charges, is primarily from cost improvements in Process Chemicals and
Services, as a result of integrating the BetzDearborn businesses. Consequently,
operating margins improved from 16.1% to 16.7%.
Process Chemicals and Services net sales were up $9 million, or 2%, as
increased volumes to the paper industry were partially offset by weaker pricing
in the hydrocarbon and petrochemical markets. Profit from operations increased
$16 million, or 25%. The improvement in profit from operations is primarily the
result of lower selling, general and administrative expenses from the
integration of BetzDearborn.
Functional Products net sales declined $7 million, or 3%, primarily from
volume decreases due to weakness in the construction and oilfield markets, which
were partially offset by improved pectin pricing. Profit from operations was
down $2 million, or 4%. This is a result of the volume declines, partially
offset by the pricing improvements, noted above.
Chemical Specialties net sales were down $6 million, or 3%, reflecting
continued competitive pricing pressure and the pass-through effects of lower
polypropylene raw material prices. The net sales decline from lower pricing was
partly offset by sales volume improvement in the European and Asian hygienics
markets. Profit from operations was flat, as the pricing declines noted above
were offset by lower raw material costs and volume improvements.
Equity in income of affiliated companies decreased $4 million, because
FiberVisions results were consolidated in our financial statements for the first
quarter of 1999. Prior to our purchase of the remaining 49% share of
FiberVisions in July 1998, FiberVisions results were accounted for on the equity
method.
Interest and debt expense increased $54 million during the quarter ended
March 31, 1999 as a result of the additional financial leverage resulting from
the 1998 acquisitions.
Other income, net increased $47 million. The quarter ended March 31, 1998
included a $63 million charge for legal settlements and accruals, which was
partly reduced by gains on sales of investments and higher interest income.
The provision for income taxes for the quarter ended March 31, 1999
reflects an estimated annual effective rate of 39.5%, compared to 88% for the
full year of 1998. The tax rates reflect the effect of non-deductible goodwill
and intangible amortization. Additionally, the 1998 tax rate reflects the effect
of the non-deductible charge for purchased in-process research and development.
We are pursuing tax-planning initiatives and we believe we will show some
improvement in the effective rate during the remainder of 1999.
ACQUISITIONS, DIVESTITURES AND ONE-TIME ITEMS
In 1998, we made five major acquisitions for an aggregate purchase price of
approximately $3.62 billion, primarily in cash and assumed debt. These
acquisitions were accounted for on the purchase method of accounting, resulting
in $2.5 billion of goodwill and other intangible assets, and were financed with
borrowed funds. Total debt increased by approximately $3.0 billion in 1998.
The combined annualized revenue of the acquired businesses in 1998 was
approximately $1.6 billion. The largest of these acquisitions was the purchase
of BetzDearborn. BetzDearborn reported 1997 revenue of approximately $1.3
billion. Additionally, we acquired Houghton International's paper chemicals
group; Citrus Colloids, a pectin manufacturer; Alliance Technical Products, a
manufacturer of resins serving the water-based adhesives industry; and the 49%
share of FiberVisions owned by our joint venture partner, making FiberVisions a
wholly owned subsidiary.
The results of operations of the acquired businesses are included in the
consolidated financial statements from the dates of acquisition. In 1998, these
businesses added $363 million and $41 million of net sales and
S-27
<PAGE> 28
profit from operations, respectively, after amortization of goodwill and
intangible assets of $19 million. Interest and debt expense increased
significantly as a result of the increased debt.
Primarily as a result of the acquisitions, we incurred charges of $232
million before taxes ($197 million net of income taxes) in the fourth quarter of
1998; $215 million was reflected in profit from operations and $17 million was
reflected in other income (expense). The largest portion of these charges is
$130 million for purchased in-process research and development related to the
acquisition of BetzDearborn. The remainder of the charges relates to our plans
and actions to integrate the operations of BetzDearborn and improve the
efficiencies of our existing operations and support activities. Charges include
employee termination benefits, exit costs related to facility closures,
write-downs of property, plant and equipment, integration expenses and contract
terminations. These actions are anticipated to yield synergies of at least $150
million before taxes on an annual basis; approximately half of these are
expected to be realized by the end of 1999 and the remainder by the end of 2000.
We expect to incur additional integration expenses during 1999. Other income
(expense) in 1998 also included a $62 million charge from the settlements of
long-standing "whistle-blower" lawsuits related to the divested Aerospace
business.
Other operating expenses in 1997 included charges of $167 million for asset
rationalizations and impairments, termination benefits primarily associated with
reorganization of management and the adoption of new competitive strategies and
other costs. Additionally, other income (expense) in 1997 reflected the
following items: a $20 million charge related to acquisition activity, a $32
million charge for legal settlements and a $368 million gain from the
monetization of our investment in Tastemaker.
Equity in income of affiliated companies declined in 1998 and in 1997 as a
result of the monetization of our investment in Alliant Techsystems in those
years and the monetization of our investment in Tastemaker in 1997.
Profit from operations in 1996 included $13 million of probable
environmental recoveries, a $2 million favorable settlement of an environmental
remediation claim and a $3 million favorable adjustment to spare parts
inventories.
We divested or joint ventured several businesses in 1996 and 1997. Net
sales and profit from operations related to these businesses were $84 million
and $9 million, respectively, in 1997 and $286 million and $25 million,
respectively, in 1996.
1998 COMPARED TO 1997
Net sales increased $279 million, or 15%, as the increase in net sales from
acquisitions was partially offset by the effects of the economic crisis in
Southeast Asia, the strength of the U.S. dollar and competitive pricing
pressures. Profit from operations declined $36 million, or 16%. However, after
adjusting for the impact of the one-time items described under
"-- -- Acquisitions, Divestitures and One-time Items" beginning on page S-27,
profit from operations increased $12 million, or 3%, while operating margins
decreased from 21.2% in 1997 to 19.0% in 1998. These results are due to the
profit from operations impact of the net sales variance noted above, coupled
with manufacturing cost improvement initiatives, partly offset by higher
selling, general and administrative expenses and higher goodwill and intangible
asset amortization.
Process Chemicals and Services net sales increased $274 million, or 62%, as
a result of acquisitions. Excluding acquisitions, net sales in this segment were
negatively impacted by competitive pricing pressures, the impact of the economic
crisis in Southeast Asia and the weakness of foreign currencies relative to the
U.S. dollar. Profit from operations increased $31 million, or 31%, as the
favorable impact of acquisitions was partly offset by the adverse impacts on net
sales described above, higher raw material costs used in the production of wet
strength products in Europe and higher selling, general and administrative
expenses.
Functional Products net sales declined $35 million, or 4%, on lower
volumes, particularly in Asia and Eastern Europe, and also the U.S. oilfield
markets, along with the negative impact of weaker foreign currencies relative to
the U.S. dollar, partly offset by acquired revenues and improved pectin pricing.
Profit from operations declined $9 million, or 4%. This was the result of
improved manufacturing costs and pectin pricing mitigating the volume declines
and the negative impact of the weaker foreign currencies noted above.
S-28
<PAGE> 29
Chemical Specialties net sales increased $40 million, or 8%, as the
additional net sales from acquisitions were partly offset by lower pricing
across the major Resins product lines both in the U.S. and in Europe. Profit
from operations rose $8 million, or 12%, as the profit from acquisitions was
partly offset by the pricing declines in Resins.
1997 COMPARED TO 1996
Net sales declined $194 million, or 9%, primarily due to divestitures,
partly offset by generally higher volumes. Weaker foreign currencies impacted
net sales by $88 million, or 4%. Profit from operations declined $213 million,
or 48%. Excluding divestitures and one-time items described under
"-- -- Acquisitions, Divestitures and One-time Items" beginning on page S-27,
profit from operations decreased $12 million, or 3%, on a comparable basis.
Higher volumes and manufacturing cost improvements were offset by weaker foreign
currencies, which negatively impacted profit from operations by $19 million, or
5%.
Process Chemicals and Services net sales decreased $9 million, or 2%, as
higher volume from increased market share of wet strength products in Europe and
in alkaline size associated with stronger industry-wide operating rates was
essentially offset by regional competitive pricing pressure across all major
product lines and weaker foreign currencies relative to the U.S. dollar. Profit
from operations declined $8 million, or 7%, primarily due to the effects of
lower pricing and higher selling, general and administrative expense spending,
along with the negative effect of the weaker foreign currencies relative to the
U.S. dollar. These negative impacts were only partly offset by lower raw
material costs in the production of alkaline size and wet strength products and
the beneficial impact of continuing manufacturing cost improvement initiatives.
Functional Products net sales declined $26 million, or 3%, primarily due to
the divestiture of a business unit, generally softer pricing and weaker foreign
currencies relative to the U.S. dollar. These declines were partly offset by
higher water-soluble polymers and food gums volumes in various applications.
Profit from operations increased $4 million, or 2%, as a result of the volume
improvement described above, along with manufacturing cost improvement
initiatives partly offset by the divested business.
Chemical Specialties net sales declined $107 million, or 17%, primarily due
to the formation of the FiberVisions joint venture in June 1997, the divestiture
of a business unit and weaker foreign currencies relative to the U.S. dollar,
partly offset by Resins volume improvements. Profit from operations decreased
$28 million, or 29%, primarily due to the divestitures, higher manufacturing
costs at several Resins plants resulting from the introduction of new processes
and operability issues and the effect of the weaker foreign currencies relative
to the U.S. dollar.
TAX MATTERS
The provision for income taxes reflects effective tax rates of 88% in 1998,
45% in 1997 and 33% in 1996. Both the 1998 and 1997 rates are significantly
higher than the federal statutory income tax rate of 35%. The 1998 rate is high
because the charges for purchased in-process research and development and
goodwill amortization are not deductible for income tax purposes. The impact of
these non-deductible items was reduced by favorable state tax settlements
relating to a prior year's sale of an investment and favorable federal tax
adjustments related to assessments in prior years. The 1997 rate reflects the
relatively higher tax rate on the monetization of the Tastemaker investment and
the sale of the Alliant Techsystems investment, along with required increases to
tax reserves related to anticipated assessments from federal, state and foreign
authorities. The 1996 rate was favorably affected by tax loss carryforwards. The
1999 tax rate is anticipated to be approximately 39.5%, reflecting the effects
of the nondeductible goodwill.
FINANCIAL CONDITION
LIQUIDITY AND FINANCIAL RESOURCES
Cash provided by operations was $13 million in the first quarter of 1999
compared to $38 million in the first quarter of 1998. The first quarter 1999
decrease is primarily attributable to higher interest payments,
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pension benefit payments reimbursed by the pension trust in the second quarter
of 1999 and cash outlays for termination benefits and integration expenses.
Net cash flow from operations was $181 million in 1998, $187 million in
1997 and $225 million in 1996. Net cash flow in 1998 included higher interest
payments related to increased debt and higher payments of legal settlements,
offset by lower income tax payments and cash flow from acquired businesses. Net
cash flow in 1997 decreased as compared to 1996, primarily from lower trade
payables, severance payments and higher legal and environmental spending,
partially offset by lower tax payments.
During 1998, we completed five acquisitions for approximately $3.62
billion, primarily in cash and assumed debt. We financed the acquisitions and
refinanced existing debt with borrowings under the credit facility. Borrowings
consisted of three tranches of varying maturity term loans totaling $2.75
billion due in various amounts through December 2003. As of March 31, 1999, we
had refinanced a $500 million tranche and our indebtedness under the term loans
now totals $2.25 billion. The facility initially bore interest at LIBOR plus
2.0% and currently bears interest at LIBOR plus 0.75% following the refinancing
of the $500 million tranche. The credit facility also includes a $900 million
revolving credit agreement. Current and quick ratios have improved to 1.2 and
0.8, respectively, at March 31, 1999, compared with 0.9 and 0.6, respectively,
at December 31, 1998. As of March 31, 1999, Hercules had $676 million available
under the revolving credit agreement and $216 million of short-term lines of
credit. In April 1999, the credit facility was amended and restated in order to
allow (1) us to borrow in Euros as well as U.S. dollars; (2) BetzDearborn
Canada, Inc., (our Canadian subsidiary) to borrow up to $100 million from select
lenders in Canada in Canadian dollars; and (3) us to have greater flexibility in
making corporate changes within the Hercules family of entities without the need
to obtain consent from the lenders. The credit facility and the ESOP credit
facility contain restrictive covenants that require us to maintain certain
financial covenants, including leverage, net worth and interest coverage.
During the quarter ended March 31, 1999, we entered into a financing
agreement with NationsBank, N.A., an affiliate of Banc of America Securities
LLC, which provides for the sale of promissory notes in the principal amount of
up to $20 million at any one time. The agreement, which expires in December
1999, provides for commitments by the bank and us under which the bank purchases
promissory notes denominated in a number of foreign currencies in exchange for
U.S. dollars. The notes are repayable only to the extent of future revenues of
certain foreign subsidiaries. Obligations under the agreement are not cancelable
by us or the bank. Transaction gains and losses related to the notes are
deferred and recognized as an adjustment to the revenue supporting the note
repayment.
In September 1998, we filed a shelf registration statement to increase
accessible securities from $300 million to $3.0 billion. The registration
statement, which was declared effective on October 30, 1998, provides for
issuance of equity, equity-like and debt securities and warrants.
As part of our effort to reduce our debt and extend the repayment period
for paying off such debt, we have consummated the following transactions.
On November 12, 1998, Hercules Trust V, a wholly owned subsidiary,
completed a private placement of $200 million Redeemable Hybrid Income Overnight
Shares ("RHINOS") to NMS Services, Inc., an affiliate of Banc of America
Securities LLC. RHINOS are short-term auction-rate reset preferred securities.
Hercules Trust V used the proceeds from the sale of the RHINOS to purchase our
junior subordinated notes. We pay interest on the junior subordinated notes, and
Hercules Trust V pays distributions on the RHINOS, at a floating rate which is
reset on a quarterly basis. We guarantee payments by Hercules Trust V with
respect to the RHINOS.
We used the proceeds from the sale of the RHINOS for the partial repayment
of a term loan under the credit facility. Pursuant to an amendment to the RHINOS
agreements, the RHINOS will be redeemed at the close of business on the date
three months following the closing of the separate common stock offering.
On March 17, 1999, Hercules Trust I, a wholly owned subsidiary, completed a
$362 million underwritten public offering of Trust Originated Preferred
Securities ("TOPrS"). Hercules Trust I used the proceeds from the sale of the
TOPrS to purchase our junior subordinated deferrable interest debentures. We
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pay interest on the junior subordinated deferrable interest debentures, and
Hercules Trust I pays distributions on the TOPrS, at an annual rate of 9.42%. We
guarantee payments by Hercules Trust I with respect to the TOPrS. Hercules Trust
I must redeem the TOPrS when the junior subordinated deferrable interest
debentures are redeemed or repaid at maturity on March 31, 2029.
We used the proceeds from the sale of the TOPrS for the partial repayment
of a term loan under the credit facility.
The issuance of the TOPrS, this offering of CRESTS Units and the
contemplated separate offering of our common stock, if consummated, will reduce
the amount of securities accessible under the shelf registration statement to
$ billion (assuming all of the underwriters' over-allotment options for this
offering and the contemplated separate common stock offering are exercised).
CAPITAL STRUCTURE AND COMMITMENTS
Total capitalization (stockholders' equity, guaranteed preferred beneficial
interests in Hercules' subordinated debentures and debt) increased to $4.4
billion at March 31, 1999 and at December 31, 1998, from $1.5 billion as of the
end of the first quarter in 1998. The debt-to-total capitalization ratio was 75%
at March 31, 1999, and had increased to 83% at year-end 1998 from 50% at
year-end 1997 and 43% at year-end 1996. The reduction as of March 31, 1999 was a
result of debt refinancing. The significant increase in the ratio in 1998 was
from debt financing of acquisitions. The increase in 1997 was from lower
stockholders' equity as a result of our stock repurchase program combined with
an increase in total debt. Over the next several years, we plan to reduce our
debt-to-total capitalization ratio to pre-acquisition levels. We have maintained
an investment grade rating on our outstanding senior debt.
We have paid a quarterly dividend without interruption since 1913, our
first year of operation. The annual dividend of $1.08 per share during 1998
represents a total pay-out for the year of $104 million. This reflects an 8%
increase from the prior year.
Capital expenditures during the first quarter of 1999 were $38 million and
were $157 million during 1998, with 27% of the 1998 expenditures related to
increased production capacity, compared with 38% in 1997 and 29% in 1996. The
remainder primarily related to cost-savings projects, capacity maintenance and
regulatory requirements. The increase in 1998 capital expenditures of
approximately $38 million over 1997 and 1996 is primarily from companies
acquired in 1998 and higher spending in Functional Products. Capital
expenditures are expected to approximate $240 million during 1999. This includes
funds for continuing or completing existing projects and new expansion projects,
including the methylcellulose expansion in Doel, Belgium, and the pectin
expansion in Grossenbrode, Germany.
YEAR 2000 READINESS DISCLOSURE
READINESS
We have recognized the need to ensure that our operations and relationships
with our business partners will not be adversely affected by the Year 2000
("Y2K") problem, and thus we have developed and implemented a comprehensive
project that addresses those areas of vulnerability. We have created a cross-
functional Y2K Program Office at the corporate level to coordinate and provide
policies, guidance and support for our Y2K initiatives. Site compliance teams
have been formed at all major sites worldwide.
The areas addressed by the Y2K Program Office include:
- corporate and plant computer systems;
- desktop and telecommunications systems;
- safety, environmental and quality systems;
- process control systems and plant floor equipment and devices with
embedded chips;
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- equipment manufactured by or for BetzDearborn and sold to customers; and
- business partner and supply chain risk management.
We have developed a risk management plan for our business partners,
including suppliers, shippers, financial institutions and service providers,
involving direct communications with them and feedback analysis to assess their
Y2K readiness as it relates to their potential impact on our business.
Contingency plans are being developed in those cases where we appear to be at
risk.
We are engaged in a major project to implement SAP R/3(TM) software. All
vendor supplied SAP code is Y2K compliant. The resulting systems comprise our
core business systems, including sales and distribution, inventory and
purchasing, finance and control, product costing, human resources and payroll
and fixed assets. Other internally developed programs are still in the process
of being tested for Y2K compliance. The systems are in the process of being
rolled out in North America and Europe. The most critical applications are
already operational. Overall, the project is on schedule to be completed in
1999.
In other regions of the world, only minor changes are required to make our
core business systems Y2K compliant. BetzDearborn is also in the process of
implementing SAP R/3(TM) software and completed its program in North America in
the second quarter of 1999. BetzDearborn's Information Technology (IT) systems
in other regions are also Y2K compliant.
For all plants and departments, inventories have been taken of equipment
that may have embedded chips. Assessments of the compliance status and potential
impact on our operations and remediation plans are being completed.
Additionally, suppliers of raw materials and other critical services have been
identified. Questionnaires requesting Y2K status have been sent to all
identified major suppliers. Identification of the most critical suppliers is in
progress and, where necessary, additional research is being conducted.
Contingency plans are being developed or alternate suppliers identified in those
cases where we appear to be at risk.
BetzDearborn sells chemical feed equipment which is installed at customer
sites. Earlier versions of this equipment were not Y2K compliant. A kit which
makes this equipment Y2K compliant has been designed and tested. Affected
equipment is being updated through both regular and Y2K specific service visits
by our field technicians.
Some customers may be unable to place orders or conduct business due to
their potential inability to cope with Y2K matters. However, because of the
broad dispersion of sales among our customer base, we currently have no plans to
conduct any customer readiness assessments.
During the second quarter of 1999, our Y2K activities included:
- refinement of Y2K plan;
- refinement of methodology and documentation for Y2K efforts, including
inventory, assessment, remediation, testing and contingencies;
- continuation of development of detailed project plans, contingency plans
and schedules;
- continuation of comprehensive risk assessment of crucial business
functions, including intensive site reviews and evaluation of
manufacturing and other facilities;
- presentation to customers and business partners of information about our
Y2K efforts;
- continuation of assessment of remediation of embedded devices and systems
in our manufacturing operations; and
- commencement of an active testing program to test Y2K affected systems
and the contingency plans for such systems.
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COSTS
The primary strategy for achieving Y2K compliance is the replacement of our
core business systems through the installation of SAP R/3(TM) software. For
non-IT systems, operational staff conducted departmental inventories under the
direction of an outside consulting firm. We are in the process of identifying
the costs associated with any necessary process control equipment upgrades or
replacements. We have also engaged outside consultants specializing in Y2K
readiness programs to provide support to our Y2K Program Office in the final
stages of Y2K readiness and compliance.
The total cost of the Y2K project is currently estimated to be
approximately $11 million and we have spent approximately $6 million as of March
31, 1999. This cost estimate does not include the cost to upgrade or replace
process control equipment. These costs are expensed as incurred and are being
funded through operating cash flow. The cost of implementing the SAP R/3(TM)
replacement system also is not included in the Y2K project cost estimate.
RISKS AND CONTINGENCY PLANS
Failure to complete implementation of the SAP R/3(TM) system by the end of
1999 would represent the worst case Y2K scenario for us. At the present time, we
believe that our Y2K readiness implementation efforts will be completed as
scheduled so that the risks of material adverse consequences to our business,
results of operations, liquidity or financial condition should be reduced. Some
of our production facilities are similar in nature and products could be
manufactured and shipped from alternate locations. At these locations, there are
feasible manual procedures that can be implemented in the case of a Y2K related
failure. For cases where products cannot be made in multiple locations or where
manual procedures are not available, appropriate contingency plans are being
developed and are targeted for completion in the third quarter of 1999.
We believe that we are unlikely to experience a material adverse effect on
our business, results of operations, liquidity or financial condition as a
result of Y2K-related failures.
CONVERSION TO THE EURO CURRENCY
On January 1, 1999, the Euro was adopted as the common legal currency for
11 European Union member nations. The Euro will coexist with the national
currencies of European Union members until January 1, 2002, after which the Euro
will become the sole legal currency for the 11 member states. We started our
preparations for conversion to the Euro in early 1997 with internal awareness
training and the formation of a multi-functional project team. Since then our
Euro team has developed and implemented a strategic action plan that positioned
us for use of the Euro by mid-1998.
Our plan consisted of a project portfolio that was implemented in the
second half of 1998. We made the necessary adjustments to our IT systems to
ensure the compliance of all business transactions with Euro requirements and we
are preparing our IT systems for the withdrawal of the national currencies by
January 1, 2002. We will be prepared to do business within any European Union
nation that adopts the Euro.
We have communicated our strategy for dealing in the Euro to our business
partners in Euro-participating countries and will continuously reconcile our
strategy with our business partners to maintain our competitive position. Our
employees have been trained to comply with the significant legal and tax
implications of the Euro. We do not expect major differences in our exchange
rate and interest rate risk from the Euro.
We do not expect the Euro adoption to have a material adverse impact on our
financial condition or results of operations.
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BUSINESS
HERCULES INCORPORATED
We are a diversified, global producer of specialty chemicals used in a
variety of home, office and industrial products. We produce a large number of
high-margin specialty chemicals and have leadership positions in our principal
product lines. Our principal products are performance and process paper
chemicals, water treatment chemicals, water-soluble polymers, food ingredients,
resins and polypropylene and polyethylene fibers. The primary markets we serve
include pulp and paper, petroleum refineries, food processors and manufacturers,
paint manufacturers, construction materials, adhesives, pharmaceutical companies
and personal care product manufacturers.
Prior to 1998, we had five established franchises in pulp and paper, food
gums, the physical modification of aqueous systems, resins and fibers. The
October 1998 acquisition of BetzDearborn added our sixth global franchise, water
and process treatment programs used in a wide variety of industrial and
commercial applications, and extended our existing pulp and paper franchise. We
sell our products worldwide directly to customers from our plants and
warehouses, as well as, in some cases (particularly in markets outside the
U.S.), to and through distributors.
GENERAL INFORMATION ABOUT HERCULES
FACILITIES
Our corporate headquarters and major research center are located in
Wilmington, Delaware, while the administrative headquarters of BetzDearborn is
located in Trevose, Pennsylvania. We also own a number of plants and facilities
worldwide, in locations strategic to the source of raw materials or to our
customers. Process Chemical and Services currently operates 58 plants and
facilities located in 24 countries; Functional Products currently operates 12
plants and facilities in ten countries; and Chemical Specialties currently
operates 17 plants and facilities in nine countries.
We have initiated the following major expansion projects designed to
strengthen our market position in key growth areas while continuing to improve
our manufacturing efficiencies:
- a 15,000 metric ton capacity expansion of long spin staple fiber in
China;
- a 7,000 metric ton methylcellulose capacity increase in Belgium;
- a 2,200 metric ton pectin capacity increase in Germany;
- a 400 metric ton hydroxypropylcellulose capacity increase in Virginia;
- a 2,400 metric ton carrageenan plant in the Philippines that, using new
cost-saving gel press technology, increased Food Gums capacity for
carrageenan by a net 600 metric tons; and
- a 700 metric ton capacity plant for the manufacture of high-performance
paper chemicals in China.
RAW MATERIALS AND ENERGY SUPPLY
We purchase raw materials and supplies from a variety of sources, including
the agricultural, forestry, mining, petroleum and chemical industries. Major
requirements for key raw materials and fuels typically are generally purchased
pursuant to multi-year contracts. We are not dependent on any one supplier for a
material amount of our raw material or fuel requirements, but certain important
raw materials are obtained from sole-source or a few major suppliers.
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INTELLECTUAL PROPERTY
Patents covering a variety of products and processes have been issued to us
and our assignees. We are licensed under certain other patents held by other
parties covering our products and processes. Our rights under these patents and
licenses constitute a valuable asset.
We or our wholly owned subsidiaries also have many global trademarks
covering our products. Some of the more significant trademarks include:
Aquapel(R) sizing agent, Hercon(R) sizing emulsions, Kymene(R) resin,
Regalrez(R) resin, Aqualon(R) water-soluble polymers, Slendid(R) fat replacer,
Natrosol(R) hydroxyethylcellulose, Culminal(R) methylcellulose, Klucel(R)
hydroxypropylcellulose, Natrosol FPS(R) water-soluble polymer suspension,
Precis(R) sizing agent, Novus(R) polymer, Dianodic(R) cooling water products,
Continuum(R) cooling water products and Herculon(R) fiber.
We do not consider any individual patent, license or trademark to be of
material importance to Hercules taken as a whole.
RESEARCH AND DEVELOPMENT
Research and development efforts are directed toward the discovery and
development of new products and processes, the improvement and refinement of
existing products and processes, the development of new applications for
existing products and cost improvement initiatives.
COMPETITION
The specialty chemicals industry is highly fragmented and its participants
offer a broad array of product lines and categories, representing many different
products designed to meet specific customer requirements. Individual product or
service offerings compete on a global, regional and local level due to the
nature of the businesses and products, as well as the end-markets and customers
served. The industry has become increasingly global as participants focus on
establishing and maintaining leadership positions in relatively narrow market
niches. Many of our businesses face the competitive pressures discussed above,
including industry consolidation, pricing pressures and competing technologies.
In Pulp and Paper, for example, our end-markets are consolidating and many of
our competitors are attempting to enhance their product offerings on a worldwide
basis through alliances and distributor arrangements. In addition, certain of
our businesses are subject to intense pricing pressures in various product
lines, such as fibers in our hygiene products line and carrageenan and agar in
our food ingredients line. FiberVisions, as a fibers manufacturer for carded
applications, faces competition from spunbond/melt blown/spunbond technology
(SB/SMS). SB/SMS products offer cost savings compared to the products of
FiberVisions; however, FiberVisions believes that its carded products provide
improved softness and acquisition and distribution properties preferred by
certain segments of the disposable diaper and other hygiene products markets.
LITIGATION
We are a defendant in numerous lawsuits that arise out of, and are
incidental to, the conduct of our business. In these legal proceedings, no
specifically identified director, officer or affiliate is a party or a named
defendant. These suits concern issues such as product liability, contract
disputes, labor-related matters, patent infringement, environmental proceedings,
property damage and personal injury matters.
Please refer to the discussion on pages A-28 through A-31 and in "Risk
Factors -- We have significant indebtedness" on page S-15 for a description of
our material litigation.
In connection with the second qui tam lawsuit described on page A-30, the
60-day period during which the Department of Justice (the "DOJ") could appeal
the judgment expired on April 12, 1999. On April 20,
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1999, the DOJ filed a Motion to Extend Time for Filing Notice of Appeal. We and
the plaintiffs in the action opposed the motion, arguing that the DOJ had not
made the showing of excusable neglect required by the rules for such an
extension. On May 4, 1999, the court denied the DOJ's motion. On May 21, 1999,
the DOJ determined that it would not appeal further and the court's judgment
dismissing the lawsuit became final on May 28, 1999.
In connection with the third qui tam lawsuit described on page A-30, on
March 23, 1999, the DOJ filed a Notice of Appeal. We and Alliant Techsystems
Inc. ("Alliant"), the company which purchased our aerospace business in 1995,
have offered to amend the settlement agreement to include provisions preventing
Alliant from recovering certain costs under its government contracts, and we
have been advised by counsel for the DOJ that it intends to accept such offer
and withdraw its appeal. We expect that the DOJ's withdrawal of the appeal
should occur in July 1999. As part of this settlement, we have agreed to pay
Alliant $212,000 to partially compensate Alliant for its agreement to forego
such cost recovery.
PROCESS CHEMICALS AND SERVICES
Products and services in this segment are designed to enhance the
manufacturing processes, reduce the operating costs or improve the quality of
the end products of our customers. At the same time, we help our customers meet
their environmental objectives and regulatory requirements.
The two divisions in this segment are Pulp and Paper and BetzDearborn. For
this segment's contribution to net sales and profit from operations, see
"Management's Discussion and Analysis -- Results of Operations" beginning on
page S-26.
BUSINESS STRATEGY
The mission of Process Chemicals and Services is to be the preferred,
single-source supplier of performance, process and water treatment chemicals and
related on-site services. This strategy was developed in response to
consolidation trends affecting many of our global customers, and the expressed
desire of these customers to do business with a full-service supplier able to
provide complete performance, process and water treatment chemical solutions. We
implement this strategy by:
- consolidating performance and process chemicals and water treatment
programs for the pulp and paper industry;
- maintaining and improving our commitment to responsive customer service;
- focusing on the needs of end-users of our customers;
- cross-selling our products;
- locating manufacturing and distribution plants strategically;
- striving for technical innovation, including new product development
through research and development;
- reducing costs; and
- enhancing our applications expertise.
On-site service is a key element to our ability to satisfy the requirements
of our customers. Process Chemicals and Services has a front-line field force
that works closely with customers to sell products and provide services to meet
the specifications of our customers. Our field force is comprised of chemical
engineers, chemists and trained technicians. In the first quarter of 1999, we
identified a new role in our sales organization for our pulp and paper
customers -- site managers. These individuals are responsible for coordinating
"a total systems approach" that simplifies the business relationship for the
customer and also offers the technical specialization needed in each area of the
customer facility. Regional applications engineers, global technical consultants
and our research and development industry specialists provide additional support
around the world.
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RESEARCH AND DEVELOPMENT
Process Chemicals and Services currently focuses its research and
development efforts on growth (innovative new product development), technical
sales and services (incremental improvements to existing products and services)
and cost reduction programs to meet diverse customer needs worldwide. Our
state-of-the-art facilities located in Europe and the U.S. are large and
sophisticated research and development laboratories with pilot plant
capabilities that simulate actual operating conditions in our customer
facilities. This allows an accurate assessment of the potential impact of new
products on plant performance.
New product development for performance chemicals is focused on improving
end-use properties. Understanding the product end uses is a critical step in the
development of strength additives and internal and surface sizes, as well as in
the design of products for tissue creping, release and softeners.
In five regional operations centers located in Europe, Asia Pacific, South
America, Canada and the U.S., our scientists conduct research and customer
optimization studies focused on solving water and process treatment challenges
by using sophisticated techniques and equipment to provide high level analytical
testing and advanced technical support to customers worldwide.
PULP AND PAPER
Pulp and Paper is a global supplier of performance, process and water
treatment chemicals for the pulp and paper industry. We believe Pulp and Paper
has the most complete specialty chemicals product and service offerings for the
pulp and paper industry. The division's strengths include its advanced chemical
technology and services, systems and applications expertise and experience in
helping customers reduce operating costs while improving product quality.
Through the capabilities of our front-line field force, we are able to provide
innovative solutions to problems identified by our customers and increase
productivity for our customers.
PRODUCT PROFILE
Performance Chemicals are integral components of papermaking that provide
essential chemical and physical properties to paper. These performance chemicals
include:
- sizing additives to control water absorbency and print quality (including
both internal and surface sizing additives and products for hard-to-size
pulps, high filler loadings and new printing technologies);
- wet- and dry-strength additives to manage paper and paperboard strength
variables, increase filler loading and improve paper machine efficiency
and basis weight reduction;
- versatile Yankee dryer creping and release additives, as well as
softeners to improve productivity, softness and absorbency in tissue
paper; and
- an extensive line of cellulose-based, water-soluble polymers in both dry
and liquid suspensions to control viscosity and water retention in paper
coating applications.
Process Chemicals are designed to improve and optimize the production
process, reduce operating costs or reduce sheet breaks and other defects that
arise in the papermaking system. These process chemicals include:
- a wide spectrum of products that eliminate the detrimental effects of
microbiological growth in an environmentally safe way;
- technologies designed to eliminate problems occurring in a papermaking
system associated with contaminants, such as detackification,
microfixation and stabilization of pitch;
- preventive treatment programs that are applied directly to the surface of
machine clothing and rolls to ensure trouble-free paper production;
- customer-designed boilouts, foam cleaners and felt and dryer fabric
cleaners for machine surface and fabric cleaning;
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- specialty products for corrosion control;
- products to remove surface foam and air from papermaking systems;
- powders, emulsions and solution polymers that optimize mill performance
by enhancing retention, drainage, formation and deinking process
clarification across a wide variety of paper grades;
- pulp mill digester additives for enhanced pulp yield, wash aids for
increased contaminant removal and scale control programs for improved
pulp production; and
- deinking and fiber recovery products for problems associated with using
recycled fiber.
Water Treatment Chemicals are designed to optimize water usage and/or
improve water quality, maintain the integrity and extend the usefulness of the
utility plant and assist customers in complying with environmental requirements.
These treatment chemicals include:
- boiler deposit and corrosion control programs to control corrosion in
feedwater, steam and condensate systems and additives to control boiler
fireside problems;
- cooling water treatment programs to control corrosion, deposits and
microbiological fouling;
- influent treatments, such as coagulants and flocculents, for removing
turbidity and color from fresh water; and
- effluent treatment programs for sludge conditioning and odor control,
defoamers for treatment plant applications and specialized microorganisms
for improved biological treatment.
MARKETS AND CUSTOMERS SERVED
Pulp and Paper offers its products and services to the global pulp and
paper industry. We believe our sales force reaches 95% of the customers in our
target global markets. Key customers include makers of tissue, towel, packaging,
beverage containers, newsprint, magazine and book papers, printing and writing
paper, labels, envelopes and virgin and deinked market pulps. These customers
are located worldwide, with their product mix dependent, in part, on the
availability of natural resources, including wood species, and end-use market
demand.
We believe the current industry conditions provide us with an opportunity
to pursue a growth strategy by focusing on rapidly emerging markets (such as
certain countries in Asia and Latin America) and technological innovation and
margin improvement in mature markets (such as certain countries in Europe and
North America).
BETZDEARBORN
BetzDearborn is a global supplier of advanced engineered chemical water
treatment and process treatment programs. Water treatment programs are available
for boilers, cooling towers and influent and wastewater systems. Process
treatment programs facilitate production in petroleum refining, chemical
processing, metals and plastics, sugar and alcohol, food and beverage and other
industries.
PROCESS PROFILE
Water treatment applications are designed to control corrosion, scale,
deposit formation and microbiological growth, conserve energy and improve
process efficiency. Water treatment applications include:
- boiler water applications used to create safe and reliable steam
production by integrating advanced chemical treatments with highly
sophisticated feed, monitoring and control systems;
- cooling water applications used to control corrosion, scaling and mineral
and microbiological fouling in closed, open evaporative and once-through
cooling systems; and
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- influent and wastewater applications that use specialty chemicals,
including our revolutionary Novus(R) polymers, designed for removing
pollutants, minimizing sludge handling and disposal costs, improving
wastewater quality, promoting water savings and recycling and improving
safe chemical handling.
Process treatment applications are designed to maintain capital equipment,
maximize operating efficiency, minimize process and utility operating expense
and address environmental factors. Process treatment applications include:
- hydrocarbon process applications to prevent corrosion, control fouling,
save energy, reduce downtime and maintain finished product quality;
- metals and plastics finishing applications to provide a full range of
cleaning, passivation and conversion coating treatments to help metals
and plastics producers improve production efficiency, profitability and
quality and achieve environmental compliance; and
- a wide range of specialized products and services to optimize the unique
processes of various industrial process applications.
MARKETS AND CUSTOMERS SERVED
Primary customers of BetzDearborn are petroleum refineries, chemical, steel
and food manufacturers, electric utilities, light industries, commercial and
institutional establishments, petrochemical, gas production and secondary
markets for finished product additives, steel, aluminum and plastic producers
and the related transportation, machinery, appliances, fabricated parts and coil
industries.
Compliance with environmental regulations continues to be a major driving
force in water treatment. Water shortages, the rising price of water, the cost
of treating effluent and the environmental restrictions on wastewater discharge
are some of the factors that drive the trend towards greater water reuse and
conservation in industrial applications. This requires a systematic approach
involving a multiplicity of procedures that will optimize boiler and cooling
water operations, reduce contamination of process waters and control scale,
corrosion and microorganisms.
In this climate, the demand is growing for advanced water treatment
technologies. Plants are altering standard operating practices to reduce
wastewater volume, recover reusable wastes and reuse wastewater. Customers are
also improving the safety and effectiveness of their water treatment programs
through the use of automatic equipment for feeding chemicals and computerized
equipment for real-time system monitoring and control.
Controlling operating costs and maximizing productivity and profitability
in the use of water and energy resources are key customer objectives. At the
same time, innovative solutions must be found for complex environmental problems
to ensure compliance with increasingly stringent regulations.
FUNCTIONAL PRODUCTS
Products in this segment modify the physical properties of aqueous
(water-based) and non-aqueous systems, are principally derived from natural
resources and are sold as key ingredients to other manufacturers. A broad range
of industries use our products for a variety of applications, including the
world's processed food industry (to stabilize and gel foods), construction
materials manufacturers (for tile cement) and paint manufacturers (to thicken
paints).
The two divisions in this segment are Aqualon and Food Gums. For this
segment's contribution to net sales and profit from operations, see
"Management's Discussion and Analysis -- Results of Operations" beginning on
page S-26.
BUSINESS STRATEGY
Aqualon's strategy is to grow by continuously improving its product
offerings for added functionality, enhanced quality and reduced customer in use
costs. Aqualon focuses its new product development efforts in
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<PAGE> 40
products with water-based applications. Growth drivers are the increased use of
water-based systems, including the replacement of solvent-based systems, and
geographic expansion globally.
We have a leading position in the worldwide pectin market. Food Gums has a
growth strategy that includes investments in facilities and research and
development. The main drivers of this growth strategy are the natural quality of
our products (which meet the market demand for low fat, nutritional and natural
food ingredients), the variety of our product applications, the demand for
processed foods and lower-cost end-products and our long-term, stable customer
base necessary to sustain such growth strategy. As a result, Food Gums focuses
much of its resources on expanding pectin product lines. In carrageenan and
agar, we expect to invest selectively in products with high value in use to the
customer.
RESEARCH AND DEVELOPMENT
Aqualon focuses its research and development efforts on targeted,
market-oriented technology programs, process technology and responsive technical
service to customers.
Food Gums focuses its advanced process technology programs on pectin and
carrageenan extraction yield improvement, cheaper peel sources for pectin, lower
cost processes for carrageenan and faster quality control methods.
We have a number of Applications and Development Laboratories positioned in
Europe, Asia and the Americas that provide technical support to our major
customers. At these laboratories, teams work as a network to develop products,
identify new product applications and solve customer problems.
AQUALON
PRODUCT PROFILE
Most of Aqualon's products are derived primarily from natural materials
such as cellulose. Aqualon products are used in a wide variety of industries
where any of the following functional properties are desired: thickening and
flow properties control; water retention; adhesive strength; binding power; film
formation; or protective colloid, suspending and emulsifying actions.
MARKETS AND CUSTOMERS SERVED
Key worldwide customers of Aqualon's products include manufacturers of
interior and exterior water-based paints, producers of construction materials,
oilfield service companies for oil and gas exploration, paper mills and makers
of oral hygiene products, cosmetics, dairy and bakery products, furniture
lacquer, printing inks and aviation fluids.
FOOD GUMS
PRODUCT PROFILE
Pectin is a natural product obtained from the peel of citrus fruits. Pectin
is used to impart a gelled texture to foods, mainly fruit-based foods, and is
also used as a thickening agent. Pectin can also be used to add viscosity and
stabilize emulsions and suspensions in a number of liquid pharmaceutical
preparations and has other pharmaceutical applications. Pectin has recently
played an expanding role in fat-free and low-fat foods. Food applications
account for substantially all of pectin sales with the remainder in
pharmaceuticals and personal care products.
Carrageenan is a natural, water-soluble polymer that comes from a variety
of red seaweeds. It serves as a thickening agent and binder in food
applications. Carrageenan is used in foods such as dairy products, processed
meats and fruit dessert jellies. Dairy foods are a large market because
carrageenan interacts favorably with milk proteins. Carrageenan also has
non-food applications such as being a thickener in toothpaste and an ingredient
in air freshener gels.
Agar is also a natural product from seaweed. Agar is used primarily in
icings (to prevent stickiness), confectionary gels and water jelly. We own a
majority share in a large agar producer located in Chile.
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<PAGE> 41
MARKETS AND CUSTOMERS SERVED
Food Gums products are used by food manufacturers in the following major
food segments: fruit fillings; toppings; jams; preserves; fruit beverages;
processed dairy foods; processed meats; and water desserts. In addition, its
products are used in several specialty applications in the pharmaceutical and
personal care markets. Many of our customers have long-term relationships with
the division, some for as long as 30 years. In addition, Food Gums sells Aqualon
products to its food industry customers while Aqualon sells Food Gums product
offerings to the pharmaceutical and personal care markets.
CHEMICAL SPECIALTIES
In this segment, we manufacture hydrocarbon and rosin-based resins. We are
the only global manufacturer to make both of these resins. We are also the
largest manufacturer of thermal bond polypropylene staple fibers used in
products such as disposable diapers.
The two divisions in this segment are Resins and FiberVisions. For this
segment's contribution to net sales and profit from operations, see
"Management's Discussion and Analysis -- Results of Operations" beginning on
page S-26.
BUSINESS STRATEGY
Resins continues to examine the needs of its customers and worldwide market
trends to determine appropriate uses for its products and to guide new product
development in order to sustain its position as one of the largest and the most
diverse global resins supplier. To support the needs of the market, the Resins
strategy is focused on the following elements: internal innovation, geographic
growth, redefining each Resins business unit to ensure a strong market position
and excellent applications knowledge.
Resins markets rosin and hydrocarbon resins worldwide. It is committed to
offering state-of-the-art rosin and hydrocarbon resin technology and product
improvement and applications innovations in its peroxy chemicals and terpene
specialties units to the industries it serves.
FiberVisions' strategy is to grow its market share in mature markets
through global pricing initiatives and new product offerings while adding
capacity in emerging countries in order to profitably participate in these
growth markets. FiberVisions also focuses on markets where it can differentiate
its product offerings, such as automotive, upholstery and drapery markets.
Day-to-day efforts focus on bringing customers fiber know-how and competitive
products, a high level of technical and commercial service and delivery
reliability and punctuality.
FiberVisions also intends to maximize its utilization of available assets
to reduce production costs, improve the use of such assets strategically to meet
market demand and position the division to be responsive to growth trends in the
market. For example, FiberVisions plans to convert a line in its Athens, Georgia
plant so that it will produce bicomponent fibers for North American customers on
a more regional basis.
RESEARCH AND DEVELOPMENT
Resins focuses a significant portion of its research and development
efforts primarily on cost improvement techniques in production processes and the
procurement of raw materials. It also engages in new product development (such
as resins for new adhesive polymers) and modifying existing products for new
applications.
FiberVisions' major focus in its hygiene product unit is to improve fiber
strength while enhancing product properties for loft, softness and stretch,
thereby creating a competitive platform that is equal to or better than
spunbond. Other research is directed toward the binding, dusting and bonding
functions of bicomponent fibers. The textile product unit is investigating the
use of specific fibers for new applications in the upholstery, automotive,
industrial and decorative fabric industries. The research and development effort
is primarily geared toward the development of new fibers and new applications
for existing markets.
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<PAGE> 42
FiberVisions has research and development facilities in the U.S. and Europe
designed to serve the business needs of its customers. Pilot spinning and
processing lines are used to examine new polymer systems and process concepts
such as monocomponent or bicomponent fibers from single filament spinning to
full-scale production facilities.
RESINS
Resins is among the oldest and largest suppliers of resins in the world.
Resins is the only U.S. producer of refined wood rosin and it produces and
markets a broad product line, including hydrocarbon resins, wood, gum and tall
oil rosin-based resins and terpene resins. Resins also makes specialty terpene
products for the aroma chemicals industry. The division focuses on global
growth, product development and cost improvements to provide customers with
solutions to meet their needs.
PRODUCT PROFILE
A resin is a solid or viscous liquid which can come from a natural source,
such as rosin, or can be made synthetically, such as hydrocarbon resins. The
products of this division are low molecular weight and amorphous, which means
that they have softening points rather than sharp melting points, similar to
materials such as wax, salt and sugar.
Combinations of resins and various polymers, waxes and additives are used
to produce adhesives. These adhesives are used in the manufacturing of tapes and
labels. Box sealing and product assembly are other applications for these
adhesives. Specific properties in the manufacturing of plastic films are
improved through the use of resins. Paints and other coatings use resins to
promote film forming and drying. Combinations of resins with rubber and fillers
compose the base material for chewing gum. Peroxy chemicals are used as a
primary cross-linking agent in the manufacture of insulation layers for high
voltage wire and cable. Specialty terpene products are used in the manufacture
of fragrance and flavors, as well as household and industrial strength cleaners.
MARKETS AND CUSTOMERS SERVED
Major customers for hydrocarbon resins are producers of adhesives,
industrial rubber and plastic film. The trends in the adhesive industry toward
environmentally-friendly products, such as solid hot melt systems (hot glue
guns) and the growth of adhesive fasteners, require sophisticated resins to meet
flow and adhesion requirements.
Rosins can be used in many applications. Adhesives are the most important
rosin application within Resins. Chewing gum is a significant market for
wood-resin esters. Alkyd coating systems use rosin-based modifiers and fatty
acids. Rosin chemicals are also used as emulsifiers in synthetic rubber
compounding and processing.
The major end uses for organic peroxides are underground power cable
insulation and rubber parts used in automotive engine compartments.
Cross-linking polymers with peroxides provide products with improved resistance
to high temperatures.
The terpene specialties products are used to create household and
industrial fragrance products, aroma chemicals, cleaning liquids and food
additives.
FIBERVISIONS
FiberVisions was originally formed in 1997 as a joint venture between our
Fibers Division and Jacob Holm & Sons' Danaklon Group. In July 1998, we acquired
our partner's 49% interest. Our product range includes high-quality
polypropylene and polyethylene monocomponent fibers and bicomponent fibers.
These fibers are used in cover stock (e.g., the inner and outer linings) in
disposable diapers, the hygiene product industries (i.e., feminine hygiene and
adult incontinence products) and the decorative fabric and automotive trim
markets. The division is a major supplier of fine-denier staple fibers to the
hygiene product industry.
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<PAGE> 43
PRODUCT PROFILE
FiberVisions manufactures fibers that deliver good cardability, bondability
and consistent quality. It sells its products to nonwovens manufacturers, who
convert the fibers into rolls of carded nonwoven fabrics which are then sold to
the manufacturer who produces the end product for consumers. The uses of such
fibers include:
Hygiene Products:
- Carded, thermal bonded nonwovens -- the stable fibers demonstrate
excellent liquid management properties without compromising softness and
strength. When used in disposable diapers and sanitary napkins, our
fibers provide a soft and elastic material. Nonwoven cover stock is used
in the top sheet, leg cuff and back sheet in disposable, absorbent
products.
- Airlaid materials -- bicomponent fibers are used to serve as binders in
blends with other fibers, to allow cost-effective and outstanding product
performance in absorbent materials. Uses include the sublayers and
absorbent cores in hygiene products.
- Hydroentangled nonwovens -- these fibers are used for hydroentangled
nonwovens (wet wipes, medical or filtration) and offer environmental and
cost advantages.
Textile Products:
- Decorative fabrics -- natural and pigmented staple fibers and yarns for
binder yarn applications used in the decorative fabrics market, such as
drapes and upholstery.
- Automotive textile fabrics -- proprietary pigmented staple fibers for use
in automotive trim, such as door panels and trunk liners, which are
engineered to yield excellent color performance, consistency and minimal
fade.
- Other industrial uses -- a variety of our fibers are used to reinforce
and increase the long-term durability of asphalt and concrete, to enhance
paper products, to perform beverage filtration and for use in geotextiles
and other applications.
MARKETS AND CUSTOMERS SERVED
FiberVisions sells its fibers to global, regional and local nonwovens
manufacturers. Following a period of over-capacity and slowed demand, for the
first time in many years the nonwovens industry is in the process of
establishing new manufacturing lines. FiberVisions anticipates demand to
increase in the underdeveloped regions of Asia Pacific and Latin America and is
positioned to service such markets. The division is also positioning itself to
perform bicomponent fiber manufacturing in the U.S. to meet anticipated new line
demand.
FiberVisions produces fibers for the North American fabricated textile
markets, including the residential upholstery, decorative fabric, apparel,
automotive trim and industrial markets.
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MANAGEMENT
The tables and related biographical summaries set forth below contain
certain information with respect to directors, executive officers and certain
other key executives of Hercules and its subsidiaries as of July 1, 1999.
DIRECTORS OF HERCULES
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
R. Keith Elliott..................... 57 Chairman of the Board of Directors
Vincent J. Corbo..................... 56 Director, President, Chief Executive Officer and Chief
Operating Officer
John G. Drosdick..................... 55 Director
Richard M. Fairbanks, III............ 58 Director
Alan R. Hirsig....................... 59 Director
Edith E. Holiday..................... 47 Director
Robert G. Jahn....................... 69 Director
Gaynor N. Kelley..................... 68 Director
Ralph L. MacDonald, Jr............... 57 Director
H. Eugene McBrayer................... 67 Director
Peter McCausland..................... 49 Director
John A. H. Shober.................... 65 Director
Paula A. Sneed....................... 51 Director
</TABLE>
R. Keith Elliott. Director since 1991. Mr. Elliott has been chairman of
the board of directors since January 1997. Mr. Elliott was chief executive
officer from January 1997 until July 1, 1999 and he will step down as chairman
of the board of directors effective March 31, 2000. In October 1995, Mr. Elliott
was named president and chief operating officer and he remained president until
February 1997. Prior to that, he was executive vice president and chief
financial officer. Mr. Elliott joined Hercules in 1991 as senior vice president
and chief financial officer, positions he held until January 1995. Prior to
1991, Mr. Elliott was with Engelhard Corporation. Mr. Elliott is also a director
of Computer Task Group, PECO Energy Company, and Wilmington Trust Company.
Vincent J. Corbo. Director since 1997. Dr. Corbo became chief executive
officer on July 1, 1999 and has been president and chief operating officer since
1997. Previously, Dr. Corbo held positions in research engineering and business
management, including senior vice president for Technology and the Paper
Technology and Fibers businesses in 1995 and executive vice president in 1996.
He became group vice president and president of Food & Functional Products in
1993. Dr. Corbo serves on the following: the Advisory Board of the College of
Sciences, Georgia Institute of Technology; the Advisory Council of the
Department of Engineering, Princeton University; the Engineering College
Advisory Council of the University of Delaware; Trustee of Delaware Symphony
Orchestra and The Grand Opera House; and President of Opera Delaware.
John G. Drosdick. Director since 1998. Mr. Drosdick is president and chief
operating officer of Sunoco, Inc., an independent petroleum refiner-marketer in
the U.S. Mr. Drosdick was president of Ultramar Corporation from 1992 to 1996.
He is also a director of Sunoco, Inc. and serves on the Board of Trustees of the
Philadelphia Museum of Art and of Villanova University.
Richard M. Fairbanks, III. Director since 1993. Mr. Fairbanks is managing
director for Domestic and International Issues, Center for Strategic &
International Studies. He was Ambassador-at-Large under President Reagan. He is
a member of the board of directors of SEACOR Smit, Inc. and GATX Corporation;
vice chairman of the U.S. National Committee of the Pacific Economic Cooperation
Council; member, Council on Foreign Relations, Council of American Ambassadors;
and founder, The American Refugee Committee of Washington.
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<PAGE> 45
Alan R. Hirsig. Director since 1998. Mr. Hirsig is retired president and
chief executive officer of ARCO Chemical Company which was bought by Lyondell
Chemical Company. He is a director of Philadelphia Suburban Corporation and
Checkpoint Systems Corporation. Additionally, he is chairman, Prime Advisory
Board, and director or trustee of Bryn Mawr College, Curtis Institute of Music,
Rosenbach Museum and Library and YMCA of Philadelphia. Mr. Hirsig served as past
chairman of the Chemical Manufacturers Association.
Edith E. Holiday. Director since 1993. Ms. Holiday is an attorney. She was
Assistant to the President of the United States and Secretary of the Cabinet
from 1990 until early 1993 and served as General Counsel of the U.S. Treasury
Department from 1989 through 1990. She served as Counselor to the Secretary of
the Treasury and Assistant Secretary for Public Affairs and Public Liaison, U.S.
Treasury Department from 1988 to 1989. Ms. Holiday is a director of Amerada Hess
Corporation, H. J. Heinz Company and Beverly Enterprises, Inc. and director or
trustee of various investment companies in the Franklin Templeton Group of
Funds.
Robert G. Jahn. Director since 1985. Professor Jahn has taught at
Princeton University, Department of Mechanical and Aerospace Sciences since
1962. He was Dean of the School of Engineering and Applied Science at Princeton,
1971-1986. Professor Jahn is a trustee, fellow and a member of several academic
and professional societies. He is vice president and a founding member of the
Society for Scientific Exploration.
Gaynor N. Kelley. Director since 1989. Mr. Kelley is the retired chairman
and chief executive officer of The Perkin-Elmer Corporation, a manufacturer of
analytical and biotechnology instrumentation. He is a member of the board of
directors of Alliant Techsystems Inc. and Prudential Insurance Co. of America.
He is on the advisory board of the Center for Management Development at
Northeastern University.
Ralph L. MacDonald, Jr. Director since 1989. Mr. MacDonald is a principal
in Amelia Investment Corp. (AIC), a private investment firm dedicated to the
acquisition and development of small- to medium-sized industrial manufacturing
and distribution companies. Prior to AIC, he was a principal in Island Capital
Corporation, a similar firm, and managing director, Global Corporate Finance,
Bankers Trust Company. He is also a director of Gaylord Container Corporation.
H. Eugene McBrayer. Director since 1992. Mr. McBrayer retired as president
of Exxon Chemical Company in January 1992, after 37 years of service. He is a
former chairman of the board of the Chemical Manufacturers Association and is
currently a director of American Air Liquide, Inc. and Air Liquide
International. He is also a member of the Advisory Committee for the Pacific
Northwest National Laboratory.
Peter McCausland. Director since 1997. Mr. McCausland is chairman and
chief executive officer of Airgas, Inc. (a distributor of industrial, medical,
and specialty gases and related equipment), a company he founded in 1987. He
served as general counsel for MG Industries, Inc., an industrial gas producer,
and was a partner in the law firm of McCausland, Keen & Buckman which
specializes in mergers, acquisitions and financings. He is a director of the Fox
Chase Cancer Center and the Independence Seaport Museum.
John A. H. Shober. Director since 1998. Mr. Shober is a private investor.
He served as vice chairman of the board of directors of Penn Virginia
Corporation, a natural resources company, from 1992 to 1996. Mr. Shober is a
director of Airgas, Inc., Anker Coal Company, C&D Technologies, Ensign Bickford
Industries, Inc., First Reserve Corporation, MIBRAG mgH, Penn Virginia
Corporation and several other organizations, including The Eisenhower Exchange
Fellowships.
Paula A. Sneed. Director since 1994. Ms. Sneed is senior vice president,
Marketing Services, Kraft Foods, Inc., the nation's largest packaged foods
company. She joined General Foods in 1977 and has held a variety of management
positions, including vice president, Consumer Affairs; senior vice president and
president, Foodservice Division; executive vice president and general manager,
Desserts Division; and executive vice president and general manager, Dinners and
Enhancers Division.
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<PAGE> 46
OFFICERS OF HERCULES
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS:
R. Keith Elliott................... 57 Chairman of the Board of Directors
Vincent J. Corbo................... 56 Chief Executive Officer, Chief Operating Officer and
President
George MacKenzie................... 50 Senior Vice President and Chief Financial Officer
Dominick W. DiDonna................ 50 Senior Vice President and General Manager, Pulp and
Paper
Larry V. Rankin.................... 56 Senior Vice President and General Manager,
BetzDearborn
Harry J. Tucci..................... 59 Senior Vice President, Corporate Development
June B. Barry...................... 48 Vice President, Human Resources and Administration
Thomas A. Ciconte, Jr.............. 52 Vice President, External Affairs and International
Richard G. Dahlen.................. 60 Vice President, Law and General Counsel
Israel J. Floyd.................... 52 Corporate Secretary and Assistant General Counsel
Bruce W. Jester.................... 47 Vice President, Taxes
Vikram Jog......................... 43 Vice President and Controller
Jan M. King........................ 50 Vice President and Treasurer
Michael J. Scott................... 47 Vice President, Business Analysis and Assistant
Controller
David L. Chester................... 47 Assistant Controller
Stuart C. Shears................... 48 Assistant Treasurer
OTHER KEY EXECUTIVES:
Thomas W. Fredericks............... 46 Vice President and General Manager, Resins
Hans H. Hjorth..................... 53 Vice President and General Manager, Food Gums
Monika Riese-Martin................ 42 Vice President and General Manager, Aqualon
John P. Murta...................... 46 President and Chief Executive Officer, FiberVisions,
Inc.
J. Frank Raboud.................... 54 Vice President and Chief Information Officer,
Information Technology
David A. Simpson................... 56 Vice President, Technology
Robert E. Gallant.................. 50 Vice President, Marketing
Matthias Sonneveld................. 54 Vice President, Manufacturing
</TABLE>
George MacKenzie joined Hercules in 1979 and has held his current position
since 1996. He was vice president and chief financial officer from 1995 to 1996,
vice president, Finance in 1995 and vice president and treasurer from 1991 to
1995.
Dominick W. DiDonna joined Hercules in 1980 and has held his current
position since 1998. He was senior vice president and general manager, Paper
Technology from 1997 to 1998, vice president and general manager, Paper
Technology from 1995 to 1997 and vice president and general manager, Aqualon
Company from 1992 to 1995.
Larry V. Rankin joined Betz Laboratories in 1970 and has held his current
position since 1998. He was executive vice president of BetzDearborn in 1998 and
senior vice president, Betz Laboratories from 1988 to 1998.
Harry J. Tucci joined Hercules in 1986 and has held his current position
since 1997. He was vice president, Corporate Development from 1996 to 1997 and
vice president and general manager, Composite Products Group from 1992 to 1996.
June B. Barry joined Betz Laboratories in 1991 and has held her current
position since 1998. She was vice president, Human Resources from 1991 to 1998
and also assumed responsibility for Administration in 1995.
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<PAGE> 47
Thomas A. Ciconte, Jr. joined Hercules in 1976 and has held his current
position since 1998. He was vice president, Information Management from 1995 to
1998 and vice president and controller, Hercules from 1991 to 1995.
Richard G. Dahlen joined Hercules in 1996 and has held his current position
since then.
Israel J. Floyd joined Hercules in 1973 and has held his current position
since 1992.
Bruce W. Jester joined Hercules in 1980 and has held his current position
since 1997. He was assistant treasurer and director, Taxes from 1994 to 1997.
Vikram Jog joined Hercules in 1992 and has held his current position since
1996. He was controller from 1995 to 1996 and director, Corporate Analysis from
1994 to 1995.
Jan M. King joined Hercules in 1974 and has held her current position since
1996. She was treasurer from 1995 to 1996 and vice president, Finance & Control,
Food & Functional Products from 1992 to 1995.
Michael J. Scott joined Hercules in 1980 and has held his current position
since 1997. He was vice president, Business Analysis from 1996 to 1997 and vice
president, Finance & Control, Hercules Chemical Specialties Company from 1994 to
1996.
David L. Chester joined Betz Laboratories in 1978 and has held his current
position since 1999. He was corporate controller from 1992 to 1999.
Stuart C. Shears joined Hercules in 1978 and has held his current position
since 1997. He was director, Finance & Credit from 1991 to 1997.
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<PAGE> 48
DESCRIPTION OF CRESTS UNITS
The CRESTS Units will be issued pursuant to a unit agreement, dated as of
July , 1999 (the "unit agreement"), among Hercules, the Trust and Chase Mellon
Shareholder Services L.L.C., as unit agent. The preferred security constituting
part of each CRESTS Unit will be issued under an amended and restated trust
agreement, dated as of July , 1999 (the "trust agreement"), among Hercules and
The Chase Manhattan Bank, as property trustee, Chase Manhattan Bank Delaware, as
Delaware trustee, three administrative trustees and the holders of undivided
beneficial interests in the assets of the Trust. The warrant constituting part
of each CRESTS Unit will be issued pursuant to a warrant agreement, dated as of
July , 1999 (the "warrant agreement") between Hercules and Chase Mellon
Shareholder Services L.L.C., as warrant agent.
The following summaries of certain provisions of the unit agreement, the
trust agreement and the warrant agreement do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, the detailed
provisions of the preferred securities and the warrants and the unit agreement,
the trust agreement and the warrant agreement, as the case may be, copies of
each of which will be available for inspection at the office of Chase Mellon
Shareholder Services, located at 450 West 33rd Street, New York, New York 10001,
and should be read in conjunction with the accompanying prospectus.
Each CRESTS Unit offered hereby will consist of (i) a preferred security of
the Trust with a scheduled liquidation amount payable on June 30, 2029 equal to
$1,000, subject to adjustment in the event that the preferred securities are
remarketed upon the occurrence of a reset event as described under "-- Certain
Terms of the Preferred Securities -- Remarketing" beginning on page S-50 and
(ii) a warrant to purchase shares of common stock of Hercules at
an exercise price initially equal to $1,000 (equivalent to $ per share),
subject to anti-dilution adjustments and to reduction upon the occurrence of a
reset event, each as described below. See "-- Certain Terms of the
Warrants -- Anti-Dilution Adjustments" and "-- Certain Terms of the
Warrants -- Acceleration of Expiration Date" beginning on pages S-57 and S-56,
respectively. The initial offering price for each CRESTS Unit will be $1,000,
$ of which will represent the purchase price of the preferred security
component of such CRESTS Unit and $ of which will represent the purchase
price of the warrant component of such CRESTS Unit. At any time after issuance,
the preferred security and warrant components of each CRESTS Unit may be
separated by the holder thereof and thereafter transferred separately. See
"-- Book-Entry-Only Issuance -- DTC" beginning on page S-59.
CERTAIN TERMS OF THE PREFERRED SECURITIES
The preferred securities will be issued by the Trust under the trust
agreement and will represent undivided beneficial interests in the assets of the
Trust. The only assets of the Trust will be the debentures.
DISTRIBUTIONS
Distributions on the preferred securities will be cumulative and will
accumulate from July , 1999 until the preferred securities are redeemed.
Distributions on the preferred securities will be payable at the annual rate of
% of the scheduled liquidation amount of $1,000 per security, except that
on and after a reset date, if any, distributions on the preferred securities
will be payable at the annual rate determined in accordance with the provisions
described under "-- -- Remarketing" beginning on page S-50. Distributions will
be payable quarterly in arrears on March 31, June 30, September 30 and December
31 of each year, beginning September 30, 1999. Distributions not paid when due
will themselves accumulate distributions at the then applicable annual rate.
When we refer to any payment of distributions, such payment shall be deemed to
include any such additional distributions. The amount of distributions payable
for any period will be computed on the basis of a 360-day year of twelve 30-day
months.
If a distribution payment date falls on a date that is not a business day,
the required payment will be made on the next business day (and without any
interest or other payment in respect of such delay). However, if the next
business day is in the next calendar year, the required payment will be made on
the preceding business day. A "business day" means each day except Saturday,
Sunday or any other day on which banking
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institutions in The City of New York or Wilmington, Delaware are authorized or
required by law, regulation or executive order to close.
DEFERRAL OF DISTRIBUTIONS
So long as no event of default has occurred and is continuing in respect of
the debentures, Hercules may, on one or more occasions, defer interest payments
on the debentures to the Trust for up to 20 consecutive quarterly periods. A
deferral of interest payments cannot extend beyond the maturity of the
debentures. If Hercules defers interest payments on the debentures, the Trust
will also defer quarterly distributions to holders of the preferred securities.
During a deferral period, the amount of distributions due to holders of the
preferred securities will continue to accumulate and such deferred distributions
will themselves accumulate distributions at the then applicable annual rate.
Once Hercules makes all deferred interest payments on the debentures, with
accrued interest, if no event of default has then occurred and is continuing in
respect of the debentures, Hercules may again defer interest payments on the
debentures, and the Trust will defer the related distributions on the preferred
securities.
Hercules has no current intention to defer interest payments on the
debentures. If Hercules defers interest payments on the debentures, Hercules
will be subject to certain restrictions relating to the payments of dividends on
or redemption of its capital stock, payments on its debt securities that rank
equal with or junior to the debentures and payments on its guarantees of debt
securities of subsidiaries if such guarantees rank equal with or junior to the
debentures. See "-- Certain Terms of the Debentures -- Option to Extend Interest
Payment Dates" on page S-54.
PAYMENT OF DISTRIBUTIONS
Distributions on the preferred securities will be payable on the applicable
payment date to holders named on the securities register of the Trust on the
related record date. So long as all of the preferred securities are represented
by a global security, the record date for the payment of distributions will be
one business day before the applicable payment date. If the preferred securities
are ever issued in certificated form, the record date for the payment of
distributions will be the fifteenth day of the month in which the applicable
distribution payment date falls, even if that day is not a business day.
So long as all of the preferred securities are represented by a global
security, payments on the preferred securities will be made in immediately
available funds to DTC, as the depositary for the preferred securities. See
"-- Book-Entry-Only Issuance -- DTC" beginning on page S-59. If the preferred
securities are ever issued in certificated form, payment of distributions on the
preferred securities will be made by check mailed to the holders thereof on the
related record date.
REDEMPTION
The Trust will redeem all of the preferred securities when the debentures
mature and are paid on June 30, 2029 or on such other date determined in
accordance with the provisions described under "-- -- Remarketing" beginning on
page S-50. The redemption price for the preferred securities will be:
- in the absence of a remarketing, their scheduled liquidation amount of
$1,000 per security; or
- in the event of a remarketing prior to June 30, 2029, their accreted
liquidation amount (as defined below), plus, in each case, accumulated
distributions, if any, to the date of redemption.
"Accreted liquidation amount" means, at any date, the sum of the initial
purchase price of the preferred security component of each CRESTS Unit plus
accrual of the discount (i.e. the difference between the scheduled liquidation
amount of $1,000 payable in respect of such preferred security on June 30, 2029
and such initial purchase price), calculated from July , 1999 to the date of
calculation at the rate of % per annum on a quarterly bond equivalent yield
basis using a 360-day year of twelve 30-day months until such sum equals $1,000
on June 30, 2029. However, in the event that the preferred securities are
remarketed, then,
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at all times on and after the reset date, the term "accreted liquidation amount"
shall mean the accreted liquidation amount, calculated pursuant to the preceding
sentence, as of the reset date.
REMARKETING
If a reset event occurs, the preferred securities will be remarketed on the
reset date by a nationally recognized investment banking firm selected by
Hercules (the "remarketing agent") at the annual distribution rate that would
result in a resale of the preferred securities at a price equal to at least
100.5% of the accreted liquidation amount thereof plus accumulated
distributions, if any. On and after the reset date, if any, distributions on the
preferred securities, and interest on the debentures, will be payable at the
rate established in the remarketing. In addition, the maturity of the
debentures, and the redemption date of the preferred securities, will be
accelerated to the date which is one year following the reset date.
A "reset event" shall occur if:
- on any date after July , 2004, the closing price of Hercules common
stock on the New York Stock Exchange (or, if not then listed on such
exchange, any other national securities exchange) has exceeded $ per
share, subject to adjustment as described under "-- Certain Terms of the
Warrants -- Anti-Dilution Adjustments" beginning on page S-57, for at
least 20 trading days within the immediately preceding 30 trading days;
and
- Hercules elects, at its option, to cause the remarketing of the preferred
securities to occur and to accelerate the expiration date of the
warrants, and gives written notice of any such election to the holders of
the CRESTS Units, the preferred securities and the warrants.
Upon the occurrence of a reset event, if any, Hercules shall select a date,
not less than 30 nor more than 60 days after the date notice is given to the
holders of the CRESTS Units, the preferred securities and the warrants, on which
the remarketing shall occur and modifications to the terms of the preferred
securities and the debentures referred to above and the modifications to the
terms of the warrants shall become effective (the "reset date"). See also
"-- Certain Terms of the Warrants -- Acceleration of Expiration Date" beginning
on page S-56.
In addition, if there has not previously been a successful remarketing,
then a "reset event" shall be deemed to have occurred if, on January 31, 2029,
the closing price of Hercules common stock on the New York Stock Exchange (or,
if not then listed on such exchange, any other national securities exchange) has
exceeded $ per share, subject to adjustment as described under "-- Certain
Terms of the Warrants -- Anti-Dilution Adjustments" beginning on page S-57, for
at least 20 trading days within the immediately preceding 30 trading days, and
the date 15 business days prior to the expiration date of the warrants will
automatically be designated a "reset date." Except for this automatic
designation, Hercules will have no obligation to cause a remarketing of the
preferred securities and the related modifications to the terms of the preferred
securities and the warrants, regardless of the price of Hercules common stock.
A "trading day" means any day on which shares of Hercules common stock are
traded on the New York Stock Exchange or, if such shares are not listed or
admitted for trading on the New York Stock Exchange, on the principal national
securities exchange on which such shares are listed or admitted or, if such
shares are not listed or admitted for trading on any national securities
exchange, on the Nasdaq National Market or, if such shares are not quoted on the
Nasdaq National Market, in the applicable securities market in which such shares
are traded.
In order for any preferred securities to be remarketed and resold as
described above, prior to the close of business on the fifth business day
preceding the reset date, the holder thereof must (i) notify the remarketing
agent of its election to resell the desired number of preferred securities and
(ii) tender such preferred securities to the remarketing agent. Proceeds from
such resales shall be disbursed by the remarketing agent to holders of the
related preferred securities, subject to certain circumstances described under
"-- Certain Terms of the Warrants -- Acceleration of Expiration Date" beginning
on page S-56 in which a portion of such proceeds will automatically be applied
toward payment of the exercise price of the warrants, less, in each case, the
remarketing agent's fee of 0.25% of the sum of the accreted liquidation amount
thereof plus
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<PAGE> 51
accumulated distributions, if any. However, holders who do not satisfy the
conditions specified in clauses (i) and (ii) above will be deemed to have
elected to retain their preferred securities upon the new terms referred to
above, which will become effective on the reset date.
The remarketing agent will use its reasonable efforts to remarket all of
the preferred securities to be remarketed in accordance with the preceding
paragraph. However, there will not be a remarketing or there will not be any
proceeds from resales of the preferred securities in the remarketing, as the
case may be, and the new terms of the preferred securities and the debentures
referred to above shall be rescinded (in the case of a failed remarketing
referred to below) and the original terms of the preferred securities and the
debentures shall be deemed to have been in effect at all times since their
original issuance (and, hence, there shall not be a "reset date") if:
- an event of default under the trust agreement or a deferral of
distributions to holders of the preferred securities has occurred and is
continuing;
- the closing price of Hercules common stock on the New York Stock Exchange
(or, if not then listed on such exchange, any other national securities
exchange) as of the fifth business day preceding the reset date or as of
the reset date is less than the per share exercise price of the warrants;
- a shelf registration statement covering the issuance and sale of Hercules
common stock to the holders of warrants upon exercise of such warrants is
not effective under the Securities Act of 1933 or a then current
prospectus is not delivered to such holders, as the case may be, as of
the reset date; or
- the remarketing agent is unable to remarket all of the preferred
securities to be remarketed at the minimum price referred to above prior
to the close of business on the fifth business day following the reset
date or all of the conditions precedent to the remarketing have not been
fulfilled (a "failed remarketing").
The administrative trustees will give notice of a failed remarketing to all
holders of preferred securities prior to the close of business on the sixth
business day following the reset date. Following a failed remarketing (or the
absence of a remarketing due to a failure to satisfy one of the other conditions
stated above), the preferred securities may be remarketed again, and the terms
of the preferred securities and the debentures adjusted, in the manner described
under this section if another reset event occurs.
DISTRIBUTION OF DEBENTURES
Hercules will have the right at any time to dissolve the Trust and cause
the debentures to be distributed to the holders of the preferred securities and
the common securities in liquidation of the Trust after satisfaction of
liabilities to creditors of the Trust as required by applicable law. This right
is subject to Hercules having received an opinion of counsel to the effect that
the distribution will not be a taxable event to holders of the preferred
securities. In the event that Hercules distributes the debentures as described
in this prospectus supplement, the provisions described under
"-- -- Remarketing" beginning on page S-50 will apply to the debentures.
LIQUIDATION
The Trust shall automatically dissolve upon the first to occur of:
(i) certain events of bankruptcy, dissolution or liquidation of Hercules;
(ii) the distribution of the debentures to the holders, if Hercules, as
sponsor, has given written direction to the property trustee to
dissolve the Trust (which direction is optional and, except as
described under "-- -- Distribution of Debentures" on this page S-51,
wholly within the discretion of Hercules, as sponsor);
(iii) the redemption of all of the preferred securities of the Trust;
(iv) expiration of the term of the Trust; or
(v) the entry of an order for the dissolution of the Trust by a court of
competent jurisdiction.
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If a dissolution of the Trust occurs as described in the immediately
preceding paragraph under clause (i), (ii), (iv) or (v), the Trust shall be
liquidated by the administrative trustees as expeditiously as the administrative
trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law, the
debentures to the holders, unless the distribution is determined by the property
trustee not to be practicable. In that circumstance, the Trust will be obligated
to pay in cash the accreted liquidation amount of each preferred security plus
accumulated distributions, if any, to the date such payment is made. However,
the Trust will be able to make this liquidation distribution only if Hercules
has made a corresponding payment in respect of the debentures.
SUBORDINATION OF COMMON SECURITIES
Payment of distributions on, the redemption price for, and the accreted
liquidation amount of, the preferred securities and the common securities will
be made pro rata based on the aggregate purchase prices of the preferred
securities and the common securities. However, if an event of default under the
trust agreement as described under "Description of Trust Preferred
Securities -- Events of Default; Notice" in the accompanying prospectus has
occurred and is continuing, no payments may be made on the common securities
unless all unpaid amounts payable on the preferred securities have been paid or
provided for in full.
If an event of default under the trust agreement has occurred and is
continuing, the common securities holder will be deemed to have waived any right
to take any action with respect to such event of default until such event of
default has been cured, waived or eliminated. Until such event of default has
been cured, waived or eliminated, the property trustee will act solely on behalf
of the holders of the preferred securities, and such holders will have the right
to direct the property trustee to act on their behalf.
CERTAIN TERMS OF THE DEBENTURES
Hercules will issue the debentures as a series of debt securities under the
junior subordinated debentures indenture, dated as of March 17, 1999 (the
"indenture"), between Hercules and The Chase Manhattan Bank, as indenture
trustee.
SUBORDINATION
The debentures will be unsecured obligations of Hercules that are junior in
right of payment to all of Hercules' senior indebtedness. This means that no
payment on the debentures may be made if:
- any senior indebtedness is not paid when due and such default has not
been cured or waived or ceased to exist; or
- if the maturity of any senior indebtedness has been accelerated because
of a default and such acceleration has not been rescinded.
On any distribution of assets of Hercules to creditors upon any
dissolution, winding-up or liquidation, whether voluntary or involuntary or in
bankruptcy, insolvency, receivership, reorganization or other similar
proceedings, all principal, premium, if any, and interest due or to become due
on all senior indebtedness must be paid in full before the holders of the
debentures will be entitled to receive or retain any payment. Upon payment in
full of senior indebtedness, the holders of the debentures will assume rights
similar to the holders of senior indebtedness to receive payments or
distributions applicable to senior indebtedness until all amounts owing on the
debentures are paid in full.
The debentures will rank equal with all other subordinated debt securities
of Hercules initially issued to the other trusts referred to in the accompanying
prospectus, including the 9.42% Junior Subordinated Deferrable Interest
Debentures due 2029 of Hercules issued to Hercules Trust I, or to other trusts,
partnerships or other entities affiliated with Hercules in connection with an
issuance of securities similar to the preferred securities.
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<PAGE> 53
In this prospectus supplement, "senior indebtedness" means:
- principal, premium and interest Hercules owes on indebtedness for money
borrowed by Hercules or indebtedness evidenced by notes, debentures,
bonds or similar evidences of indebtedness issued by Hercules;
- all reimbursement obligations of Hercules with respect to letters of
credit, banker's acceptances or similar facilities issued for the account
of Hercules;
- all capital lease obligations of Hercules;
- all obligations of Hercules for the deferred purchase price of property
or services;
- all indebtedness of Hercules for claims in respect of derivative
products, including interest rate, foreign exchange rate and commodity
forward contracts, options, swaps and similar arrangements;
- all obligations of the type referred to in the bullet points above of
persons other than Hercules the payment of which Hercules is responsible
or liable for as obligor or guarantor; and
- all obligations of the type referred to in the bullet points above of
persons other than Hercules secured by any lien on any property or assets
of Hercules.
However, senior indebtedness does not include:
- any indebtedness that, by its terms, is junior to or equal with the
debentures;
- trade accounts payable or accrued liabilities arising in the ordinary
course of business; and
- any series of subordinated debt securities initially issued to the other
Hercules trusts referred to in the accompanying prospectus or to other
trusts, partnerships or other entities affiliated with Hercules in
connection with an issuance of securities similar to the preferred
securities.
The debentures will not limit the ability of Hercules and its subsidiaries
to incur additional indebtedness, including senior indebtedness. At March 31,
1999, on a pro forma basis, as if on that date Hercules and the Trust had issued
and sold the CRESTS Units offered hereby and Hercules had issued and sold
approximately $175 million of its common stock in a separate offering and, in
each case, applied the estimated net proceeds thereof as described in this
prospectus supplement, the total amount of senior indebtedness would have been
approximately $3.2 billion. See "Capitalization" and "Use of Proceeds" on pages
S-22 and S-20, respectively.
INTEREST AND MATURITY
The debentures will mature on June 30, 2029 and will bear interest,
accruing from July , 1999, at the annual rate of % of their principal
amount until maturity, subject to adjustment as described under "-- Certain
Terms of the Preferred Securities -- Remarketing" beginning on page S-50, upon
the occurrence of a reset event, if any. Interest on the debentures will be
payable quarterly in arrears on March 31, June 30, September 30 and December 31
of each year, beginning September 30, 1999. Interest payments not paid when due
will themselves accrue additional interest at the then applicable annual rate.
When we refer to any payment of interest, such payment shall be deemed to
include such additional interest and any additional sums (as defined under
"-- -- Additional Sums" on page S-54). The interest and maturity provisions for
the debentures correspond to the distribution and redemption provisions of the
preferred securities.
If an event of default has occurred and is continuing in respect of the
debentures, a principal amount of debentures equal to the accreted liquidation
amount of the preferred securities at such time may be accelerated by the
holders of at least 25% in aggregate principal amount of the debentures or the
trustee or, if such event of default relates to certain events in bankruptcy,
insolvency or reorganization of Hercules, shall automatically be accelerated
without further action.
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ADDITIONAL SUMS
If the Trust is required to pay any taxes, duties, assessments or
governmental charges of whatever nature (other than withholding taxes) imposed
by the U.S. or any other taxing authority (collectively, "taxes"), then Hercules
will be required to pay additional amounts ("additional sums") on the debentures
so that after the Trust pays the taxes the Trust will be in the same position it
would have been if it were not obligated to pay the taxes.
OPTION TO EXTEND INTEREST PAYMENT DATES
Hercules may, on one or more occasions, defer interest payments on the
debentures for up to 20 consecutive quarterly periods if no event of default has
occurred and is continuing in respect of the debentures. A deferral of interest
payments cannot extend beyond the maturity of the debentures. No interest will
be due and payable on the debentures until the end of the deferral period.
Hercules may pay at any time all or any portion of the interest accrued to
that point during a deferral period. At the end of the deferral period or at the
maturity of the debentures, Hercules will be obligated to pay all accrued and
unpaid interest.
After any such deferral period, so long as Hercules is current in respect
of all interest payments on the debentures and no event of default has then
occurred and is continuing in respect of the debentures, Hercules may again
defer interest payments on the debentures.
During any deferral period, Hercules will not be permitted to:
- declare or pay any dividend on, make any distributions with respect to,
or redeem, purchase, acquire or make a liquidation payment on, any shares
of its capital stock, other than certain situations, including stock
dividends paid by Hercules where the dividend stock is the same stock as
that on which the dividend is paid;
- make any payment of principal of, or premium, if any, or interest on, or
repay, repurchase or redeem, any debt securities issued by Hercules which
rank equal with or junior to the debentures; or
- make any guarantee payments with respect to any guarantee by Hercules of
the debt securities of any subsidiary of Hercules if such guarantee ranks
equal with or junior to the debentures.
Because the debentures to be issued to the Trust will rank equal with all
other series of subordinated debt securities of Hercules initially issued to the
other trusts referred to in the accompanying prospectus or to certain other
trusts, partnerships or other entities affiliated with Hercules, during a
deferral period, Hercules will not be permitted to make payments on such other
series of subordinated debt securities. Similarly, if Hercules defers interest
payments on any other of such series of subordinated debt securities, it is not
expected that Hercules will be permitted to make payments on the debentures.
Hercules will give the Trust, the administrative trustees and the property
trustee notice if it decides to defer interest payments on the debentures.
Hercules will give that notice at least five business days before the earlier of
(i) the next date distributions on the preferred securities are payable and (ii)
the date the Trust is required to give notice to holders of the preferred
securities of the record date or the date distributions are payable.
The administrative trustees will give notice to the holders of preferred
securities if Hercules decides to defer interest payments on the debentures.
The restrictions described in the bullet points above will also apply if
there occurs and is continuing a default or event of default under the indenture
or if Hercules defaults on its obligations under the preferred securities
guarantee.
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DISTRIBUTION OF DEBENTURES
If the property trustee distributes the debentures to holders of the
preferred securities and the common securities upon the dissolution and
liquidation of the Trust, the debentures will be issued in denominations of
$1,000 principal amount and integral multiples thereof. Hercules anticipates
that the debentures would be distributed in the form of one or more global
securities and DTC, or any successor depositary for the preferred securities,
would act as depositary for the debentures. The depositary arrangements for the
debentures would be substantially similar to those in effect for the preferred
securities. For a description of DTC and the terms of the depositary
arrangements with DTC, see "-- Book-Entry-Only Issuance -- DTC" beginning on
page S-59.
In the event that Hercules distributes the debentures as described in this
prospectus supplement, the provisions described under "-- Certain Terms of the
Preferred Securities -- Remarketing" beginning on page S-50 will apply to the
debentures.
CERTAIN TERMS OF THE WARRANTS
The warrants will be issued pursuant to the warrant agreement between
Hercules and Chase Mellon Shareholder Services L.L.C., as warrant agent.
GENERAL
Each warrant, when exercised, will entitle the holder to purchase
fully paid and non-assessable shares of Hercules common stock at an
exercise price initially equal to $1,000 (equivalent to $ per share).
However, the exercise price and the number of shares of Hercules common stock
issuable upon a holder's exercise of a warrant are subject to adjustment in
certain circumstances as described under "-- -- Acceleration of Expiration Date"
and "-- -- Anti-Dilution Adjustments" beginning on pages S-56 and S-57,
respectively.
EXERCISE OF WARRANTS
A holder may exercise warrants at any time prior to March 31, 2029 (the
"expiration date"). However, Hercules may accelerate the expiration date of the
warrants in certain circumstances as described under "-- -- Acceleration of
Expiration Date" beginning on page S-56.
The warrants will not be exercisable unless, at the time of the exercise,
(i) Hercules has a registration statement in effect under the Securities Act
covering the issuance and sale of the shares of common stock upon exercise of
the warrants or the sale of the shares upon exercise of the warrants is exempt
from the registration requirements of the Securities Act, (ii) the shares have
been registered, qualified or are deemed to be exempt under the securities laws
of the state of residence of the exercising holder of the warrants and (iii) a
then current prospectus is delivered to exercising holders of the warrants.
Hercules currently has an effective registration statement covering the common
stock issuable upon exercise of the warrants. Although Hercules has agreed to
use its best efforts to maintain the effectiveness of such a registration
statement until the expiration date of the warrants, to continue to have all the
shares of common stock issuable upon exercise of the warrants so registered or
qualified and to deliver a then current prospectus to the exercising holders of
the warrants, there can be no assurance that it will be able to do so.
Notwithstanding the originally scheduled expiration date of the warrants,
however, such date will be extended if Hercules was required to but did not
maintain an effective registration statement with respect to the shares of
common stock underlying the warrants or was required to but did not deliver a
then current prospectus to exercising holders of the warrants during the 90 days
immediately preceding such originally scheduled expiration date (or if Hercules
has not maintained the registration or qualification of the shares under
applicable state securities laws during the period). The expiration date will
extend to the first date after the originally scheduled expiration date for
which Hercules has maintained an effective registration statement (and the
registration or qualification of the shares of common stock under the applicable
state securities laws) and made a then current prospectus available to
exercising holders of the warrants for a 90-day period.
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In order to exercise a warrant, a holder must, prior to 9:00 a.m., New York
City time, on such day:
- surrender to the warrant agent the certificate representing such warrant
(in the case of a definitive warrant);
- comply with the procedures described in the warrant agreement;
- properly complete and execute a form of election to purchase; and
- pay in full the exercise price for each share of Hercules common stock to
be received upon exercise of such warrants.
In order to ensure timely exercise of a warrant, beneficial owners of
warrants held in book-entry form should consult their brokers or other
intermediaries as to applicable cut-off times they may have for accepting and
implementing exercise instructions from their customers and other exercise
mechanics. See "-- Book-Entry-Only Issuance -- DTC" beginning on page S-59.
Holders must pay the exercise price of their warrants in cash (including
the automatic application of a portion of the proceeds of any remarketing of
preferred securities as discussed under "-- -- Acceleration of Expiration Date"
beginning on this page S-56), by certified or official bank check or by wire
transfer to an account that Hercules has designated for that purpose.
Accordingly, holders of warrants may not tender their preferred securities
directly toward payment of the exercise price of the warrants.
If a holder has satisfied all of the conditions for exercising its
warrants, Hercules will deliver or cause to be delivered to such holder, or upon
such holder's written order, a certificate representing the requisite number of
shares of Hercules common stock to be received upon exercise of such warrants.
If a holder exercises less than all of the warrants evidenced by a definitive
warrant, a new definitive warrant will be issued to such holder for the
remaining number of warrants.
No fractional shares of Hercules common stock will be issued upon exercise
of a warrant. At the time of exercise of a warrant, Hercules will pay the holder
of such warrant an amount in cash equal to the then current market price (as
defined under "-- -- Anti-Dilution Adjustments" beginning on page S-57) of any
such fractional share of Hercules common stock.
Unless the warrants are exercised, the holders thereof will not be entitled
to receive dividends or other distributions, to vote, to receive notices for any
Hercules stockholders meeting for the election of directors or any other
purpose, or to exercise any other rights whatsoever as a Hercules stockholder.
In the event a bankruptcy or reorganization is commenced by or against
Hercules, a bankruptcy court may decide that unexercised warrants are executory
contracts that may be subject to Hercules' rejection with approval of the
bankruptcy court. As a result, a holder of warrants may not, even if sufficient
funds are available, be entitled to receive any consideration or may receive an
amount less than such holder would be entitled to receive if such holder had
exercised its warrants before the commencement of any such bankruptcy or
reorganization.
ACCELERATION OF EXPIRATION DATE
Upon the occurrence of a reset event, if any, Hercules shall select the
reset date, which shall not be less than 30 nor more than 60 days after the date
notice is given to the holders of warrants, on which the following modifications
to the terms of the warrants shall become effective:
- the expiration date of the warrants shall be accelerated to the date
which is 15 business days following the reset date; and
- the exercise price of the warrants on the reset date shall be reduced to
the accreted liquidation amount of the preferred securities plus
accumulated distributions, if any, to the reset date;
provided, however, that, notwithstanding the foregoing, (i) Hercules need not
select a reset date in connection with the deemed occurrence of a reset event on
January 31, 2029 and (ii) a "reset date" shall be deemed not to have occurred,
and modifications of the terms of the warrants (and the terms of the preferred
securities and
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<PAGE> 57
the debentures as discussed above under "-- Certain Terms of the Preferred
Securities -- Remarketing" beginning on page S-50) shall not become effective,
if:
- the closing price of Hercules common stock on the New York Stock Exchange
(or, if not then listed on such exchange, any other national securities
exchange) as of the fifth business day preceding the reset date or as of
the reset date is less than the per share exercise price of the warrants;
- a shelf registration statement covering the issuance and sale of Hercules
common stock to the holders of warrants upon exercise of such warrants is
not effective under the Securities Act of 1933 or a then current
prospectus is not delivered to such holders, as the case may be, as of
the reset date;
- an event of default under the trust agreement or a deferral of
distributions to holders of the preferred securities has occurred and is
continuing; or
- there is a failed remarketing of the preferred securities of the Trust as
described under "-- Certain Terms of the Preferred
Securities -- Remarketing" beginning on page S-50.
If (i) Hercules fails to specify a reset date when required to do so or a
reset date is deemed not to have occurred, (ii) a holder of preferred securities
of the Trust has not satisfied the conditions for remarketing such preferred
securities or (iii) holders exercising their warrants do not hold such warrants
as part of complete CRESTS Units on the reset date (i.e. the warrant and
preferred security components of a CRESTS Unit have been separated), then
holders of warrants will be required to tender cash in order to exercise such
warrants. If, however, (i) a reset date has occurred, (ii) a holder exercising
warrants holds such warrants as part of complete CRESTS Units on the reset date
and (iii) the holder has satisfied the conditions for remarketing of the
preferred securities held as part of such CRESTS Units, then the portion of the
proceeds of the remarketing equal to the exercise price of the warrants on the
reset date will automatically be applied by the remarketing agent to pay the
exercise price of the warrants delivered to the remarketing agent.
ANTI-DILUTION ADJUSTMENTS
The number of shares of Hercules common stock issuable upon the exercise of
the warrants and the exercise price will be subject to adjustment in certain
circumstances, including:
(i) the payment of dividends and other distributions on common stock
payable in common stock or other equity interests of Hercules;
(ii) subdivisions, splits, combinations and reclassifications of
Hercules common stock;
(iii) the issuance of shares of Hercules common stock for a
consideration per share that is less than the then current market price
thereof;
(iv) the issuance of securities convertible into or exercisable or
exchangeable for Hercules common stock for a conversion, exercise or
exchange price per share that is less than the then current market price
thereof;
(v) the issuance to all holders of Hercules common stock of rights,
options or warrants entitling them to subscribe for or purchase shares of
Hercules common stock or securities convertible into or exercisable or
exchangeable for shares of Hercules common stock at an offering price (or
with an initial conversion, exercise or exchange price plus such offering
price) that is less than the then current market price thereof;
(vi) distributions to all holders of Hercules common stock of
evidences of indebtedness, shares of capital stock, cash or other assets of
Hercules (excluding those rights, options and warrants referred to in
clause (v) above and cash dividends and other cash distributions from
retained earnings);
(vii) distributions (other than regular quarterly cash distributions)
consisting exclusively of cash to all holders of Hercules common stock in
an aggregate amount that, together with:
- all-cash distributions (other than regular quarterly cash
distributions) made within the preceding 12 months, and
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- any cash and the fair market value, as of the expiration of the tender
or exchange offer referred to below, of consideration payable in
respect of any tender or exchange offer by Hercules or a subsidiary of
Hercules for Hercules common stock concluded within the preceding 12
months,
exceeds 15% of the aggregate market capitalization of Hercules (i.e. the
product of the current market price of a share of Hercules common stock
multiplied by the number of shares of Hercules common stock then
outstanding on the date of that distribution); and
(viii) the successful completion of a tender or exchange offer made by
Hercules or a subsidiary of Hercules for Hercules common stock which
involves an aggregate consideration that, together with:
- any cash and the fair market value of consideration payable in respect
of any tender or exchange offer by Hercules or a subsidiary of
Hercules for Hercules common stock concluded within the preceding 12
months, and
- the aggregate amount of any all-cash distributions to all holders of
Hercules common stock (other than regular quarterly cash
distributions) made within the preceding 12 months,
exceeds 15% of the aggregate market capitalization of Hercules on the
expiration of the tender or exchange offer.
The "current market price" per share of Hercules common stock on any day
means the average of the daily closing prices for the five consecutive trading
days selected by Hercules commencing not more than 30 trading days before, and
ending not later than, the earlier of the day in question and the day before the
"ex date" with respect to the issuance or distribution requiring such
computation. For purposes of this paragraph, the term "ex date," when used with
respect to any issuance or distribution, shall mean the first date on which
Hercules common stock trades the regular way on such exchange or in such market
without the right to receive such issuance or distribution.
No adjustment in the exercise price will be required unless the adjustment
would result in an increase or decrease of at least 1% in the exercise price;
provided, however, that any adjustment that is not made as a result of this
paragraph will be carried forward and taken into account in any subsequent
adjustment.
In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions pursuant to which Hercules common
stock is converted into the right to receive other securities, cash or property,
each warrant will be exercisable for the right to receive the kind and amount of
securities, cash and other property receivable upon consummation of the
transaction by a holder of the number of shares of Hercules common stock which
would have been received by the holder of such warrant immediately prior to the
date of consummation of such transaction if such warrant had been exercised
immediately prior thereto.
GOVERNING LAW
The warrants and the warrant agreement will be governed by, and construed
in accordance with, the laws of the State of Delaware.
MODIFICATION AND AMENDMENT
THE UNIT AGREEMENT
The unit agreement may be amended by Hercules, the Trust and the unit
agent, without consent of the holders, for the purpose of curing any ambiguity,
or of curing, correcting or supplementing any defective or inconsistent
provision therein or in any other manner which Hercules and the Trust may deem
necessary or desirable and which will not adversely affect the interests of the
affected holders.
The unit agreement will contain provisions permitting Hercules, the Trust
and the unit agent, with the consent of the holders of a majority of the CRESTS
Units at the time outstanding, to modify the rights of the
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holders of the CRESTS Units and the terms of the unit agreement, except that no
modification may, without the consent of the holder of each outstanding CRESTS
Unit affected thereby:
- materially adversely affect the holders' rights under any CRESTS Unit; or
- reduce the aforesaid percentage of outstanding CRESTS Units the consent
of holders of which is required for the modification or amendment of the
provisions of the unit agreement.
THE TRUST AGREEMENT
Modification of preferred securities issued as part of CRESTS Units may
only be made in accordance with the trust agreement, as described under
"Description of Trust Preferred Securities -- Voting Rights; Amendment of a
Trust Agreement" beginning on page 38 of the accompanying prospectus.
THE WARRANT AGREEMENT
Modifications of warrants issued as part of CRESTS Units may only be made
in accordance with the terms of the warrant agreement. Hercules and the warrant
agent may amend or supplement the terms of the warrant and the warrant agreement
without the consent of holders of the warrants in order to:
- cure any ambiguity;
- cure, correct or supplement any defective or inconsistent provision; or
- amend such terms in any other manner that does not adversely affect the
rights of any holder of warrants.
Hercules and the warrant agent, with the consent of the holders of a
majority of the then outstanding unexercised warrants, may modify or amend the
warrants and the warrant agreement. However, Hercules and the warrant agent may
not make any of the following modifications or amendments without the consent of
each holder of warrants:
- change the exercise price of the warrants;
- reduce the number of shares of common stock issuable upon exercise of the
warrants other than as specified under "-- Certain Terms of the
Warrants -- Anti-Dilution Adjustments" beginning on page S-57;
- accelerate the expiration date of the warrants other than as permitted
above under "-- Certain Terms of the Warrants -- Acceleration of
Expiration Date" beginning on page S-56;
- materially and adversely affect the rights of any holder of warrants; or
- reduce the percentage of the outstanding unexercised warrants the consent
of whose holders is required for modifications and amendments.
BOOK-ENTRY-ONLY ISSUANCE -- DTC
GENERAL
The CRESTS Units and the preferred securities and warrants that are
components of the CRESTS Units will be represented by one or more global
securities that will be deposited with, and registered in the name of, DTC or
its nominee. This means that neither Hercules nor the Trust will issue
certificates for the CRESTS Units, preferred securities or warrants to you
except in the circumstances described under "-- -- Exchange of Global
Securities" on page S-61. Each global security will be issued to DTC, which will
keep a computerized record of its participants whose clients have purchased the
CRESTS Units, preferred securities or warrants. Each participant will then keep
a record of its clients. Unless a global security is exchanged in whole or in
part for a certificated security, a global security generally may not be
transferred. However, DTC, its nominees and their successors may transfer a
global security as a whole to one another.
Beneficial interests in a global security will be shown on, and transfers
of the global security will be made only through, records maintained by DTC and
its participants. DTC holds securities that its participants ("direct
participants") deposit with DTC. DTC also records the settlement among direct
participants of securities transactions, such as transfers and pledges, in
deposited securities through computerized records for
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direct participants' accounts. This eliminates the need to exchange
certificates. Direct participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. DTC's
book-entry system is also used by other organizations such as securities brokers
and dealers, banks and trust companies that work through a direct participant.
The rules that apply to DTC and its participants are on file with the Securities
and Exchange Commission.
DTC is owned by a number of its direct participants and by the New York
Stock Exchange, the American Stock Exchange and the National Association of
Securities Dealers, Inc. (the "NASD").
Purchases under the DTC System
When you purchase CRESTS Units, preferred securities or warrants through
the DTC system, the purchases must be made by or through a direct participant,
who will receive credit for the CRESTS Units, preferred securities or warrants,
as the case may be, on DTC's records. Because you actually own the security, you
are the beneficial owner. Your ownership interest will be recorded only on the
direct (or indirect) participants' records. DTC has no knowledge of your
individual beneficial ownership of the securities. DTC's records show only the
identity of the direct participants and the amount of the securities held by or
through them.
You will not receive a written confirmation of your purchase or sale or any
periodic account statement directly from DTC. You will receive these from your
direct (or indirect) participant. As a result, the direct (or indirect)
participants are responsible for keeping an accurate account of the holdings of
their customers, like you. Beneficial owners of any CRESTS Unit, preferred
security or warrant represented by a global security should consult their
brokers or other intermediaries as to applicable procedures for (i) separating
the CRESTS Unit into its component parts and (ii) exercising a warrant, whether
such warrant is held separately or as a component of a CRESTS Unit.
Payments under the DTC System
Hercules, the Trust and the property trustee will treat DTC's nominee as
the owner and holder of each global security representing CRESTS Units,
preferred securities or warrants for all purposes. The property trustee will
wire payments in respect of the CRESTS Units, preferred securities and warrants
to DTC's nominee. Accordingly, Hercules, the Trust and the property trustee will
have no direct responsibility or liability to pay amounts due in respect of a
global security to you or any other beneficial owners of any global security.
It is DTC's current practice, upon receipt of any payment of distributions,
remarketing proceeds or accreted liquidation amount applicable to the preferred
securities, to credit direct participants' accounts on the payment date based on
their beneficial ownership of the global security as shown on DTC's records. In
addition, it is DTC's current practice to assign any consenting or voting rights
to direct participants whose accounts are credited with securities on a record
date, by using an omnibus proxy. Payments by participants to beneficial owners
of the global security, and voting by participants, will be based on the
customary practices between the participants and beneficial owners, as is the
case with securities held for the account of customers registered in "street
name." However, payments will be the responsibility of the participants and not
of DTC, Hercules, the Trust or the property trustee.
Year 2000 Issues
DTC management is aware that some computer applications, systems, and the
like for processing data (the "Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that the Systems, as the same relate to the timely payments to
securityholders, book-entry deliveries, and settlement of trades within DTC,
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete. Additionally, DTC's plan
includes a testing phase, which it expects to be completed within appropriate
time frames.
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DTC's ability to perform properly its services is also dependent upon other
parties, including, but not limited to, issuers and their agents, as well as
DTC's direct and indirect participants and third party vendors from whom DTC
licenses software and hardware, and third party vendors on whom DTC relies for
information or the provision of services, including telecommunication and
electrical utility service providers, among others. DTC has informed the
Industry that it is contacting (and will continue to contact) third party
vendors from whom DTC acquires services to: (i) impress upon them the importance
of such services being Year 2000 compliant; and (ii) determine the extent of
their efforts for Year 2000 remediation (and, as appropriate, testing) of their
services. In addition, DTC is in the process of developing such contingency
plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty or contract modification of any kind.
EXCHANGE OF GLOBAL SECURITIES
Each of the CRESTS Units, preferred securities or warrants represented by a
global security will be exchangeable for certificated securities with the same
terms only if:
- DTC is unwilling or unable to continue as depositary or if DTC ceases to
be a clearing agency registered under the Securities Exchange Act of 1934
and a successor depositary is not appointed by the Trust within 90 days;
- Hercules decides to discontinue use of the system of book-entry transfer
through DTC (or any successor depositary); or
- a default under the trust agreement or the warrant agreement occurs and
is continuing.
If the book-entry-only system is discontinued, the unit agent, property
trustee and/or warrant agent, as the case may be, will keep the registration
books for the applicable securities at its corporate office and follow the
practices and procedures discussed below.
REPLACEMENT OF CERTIFICATES
A mutilated certificate evidencing a certificated CRESTS Unit, preferred
security or warrant will be replaced at the expense of the holder upon surrender
of the certificate to the unit agent, the property trustee or the warrant agent,
as the case may be. Certificates that have been destroyed, lost or stolen will
be replaced at the expense of the holder upon delivery to the unit agent, the
property trustee or the warrant agent, as the case may be, of evidence of the
destruction, loss or theft thereof satisfactory to the unit agent, the property
trustee or the warrant agent, as the case may be. In the case of a destroyed,
lost or stolen certificate, an indemnity satisfactory to the unit agent, the
property trustee or the warrant agent, as the case may be, may be required at
the expense of the holder of the relevant security evidenced by the certificate
before a replacement will be issued.
CERTIFICATED SECURITIES -- REGISTRATION AND TRANSFER
Certificated securities, if any are issued, will be registered in the name
of each holder of a CRESTS Unit (or any preferred security or warrant issued as
part of a CRESTS Unit). The securities may be transferred or exchanged, based on
administrative procedures in the unit agreement, the trust agreement, or the
warrant agreement, as the case may be, without the payment of any service charge
(other than any tax or other governmental charge) by contacting: in the case of
a CRESTS Unit, the unit agent, Chase Mellon Shareholder Services L.L.C., at 450
West 33rd Street, New York, New York 10001; in the case of a preferred security,
the property trustee, The Chase Manhattan Bank, Corporate Trust Services, at
1201 Main Street -- 180 MP, P.O. Box 2320, Dallas, Texas 75202; and, in the case
of a warrant, the warrant agent, Chase Mellon Shareholder Services L.L.C., at
450 West 33rd Street, New York, New York 10001. The transfer or exchange will be
effected only if the relevant agent or property trustee is satisfied with the
documents of title and indemnity of the person making the request.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In this section, we summarize certain of the material U.S. federal income
tax consequences of purchasing, holding and selling the preferred securities and
the warrants. Except where we state otherwise, this summary deals only with
preferred securities held as capital assets (as defined in the Internal Revenue
Code of 1986) by a U.S. Holder (as defined below) who purchases the CRESTS Units
consisting of the preferred securities and the warrants at their original
offering price when the Trust and Hercules originally issue them, respectively.
This summary is based on the Internal Revenue Code, Treasury regulations
(proposed and final) issued under the Internal Revenue Code, and administrative
and judicial interpretations thereof, all as they currently exist as of the date
of this prospectus supplement. These income tax laws and regulations, however,
may change at any time, possibly on a retroactive basis. Any such changes may
affect the income tax consequences summarized in this section.
The tax consequences to you of the ownership or sale of CRESTS Units will
be the combined consequences of the ownership or sale of the preferred security
component and the warrant component as described below.
We do not address all of the tax consequences that may be relevant to a
U.S. Holder. We also do not address, except as stated below, any of the tax
consequences to holders that are Non-U.S. Holders (as defined below) or to
holders that may be subject to special tax treatment including banks, thrift
institutions, real estate investment trusts, personal holding companies,
tax-exempt organizations, regulated investment companies, insurance companies
and brokers and dealers in securities or currencies. Further, we do not address:
- the U.S. federal income tax consequences to shareholders in, or partners
or beneficiaries of, an entity that is a holder of the preferred
securities and the warrants;
- the U.S. federal income tax consequences to persons who hold the
preferred securities and the warrants in a "straddle" or as part of a
"hedging," "conversion" or "constructive sale" transaction or whose
"functional currency" is not the U.S. dollar;
- the U.S. federal estate and gift or alternative minimum tax consequences
to a U.S. Holder of the purchase, ownership or sale of the preferred
securities and the warrants; or
- any state, local or foreign tax consequences of the purchase, ownership
and sale of preferred securities and the warrants.
Accordingly, you should consult your tax advisor regarding the tax
consequences of purchasing, owning and selling the preferred securities and the
warrants in light of your circumstances.
A "U.S. Holder" is a CRESTS Unit holder or beneficial owner who or which
is:
- a citizen or resident of the U.S.;
- a corporation or partnership created or organized in or under the laws of
the U.S., any state thereof or the District of Columbia (unless, in the
case of a partnership, Treasury regulations provide otherwise);
- an estate if its income is subject to U.S. federal income taxation
regardless of its source; or
- a trust if (1) a U.S. court can exercise primary supervision over its
administration and (2) one or more U.S. persons have the authority to
control all of its substantial decisions.
A "Non-U.S. Holder" is a preferred securities holder or beneficial owner
other than a U.S. Holder.
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CLASSIFICATION OF THE SUBORDINATED DEBT SECURITIES
In connection with the issuance of the debentures, Ballard Spahr Andrews &
Ingersoll, LLP, special tax counsel to Hercules and the Trust ("Tax Counsel"),
will render a legal opinion generally to the effect that under the current law
and assuming full compliance with the terms of the indenture and certain other
documents, and based on certain facts and assumptions described in the opinion,
the debentures that will be held by the Trust will be classified, for U.S.
federal income tax purposes, as indebtedness of Hercules.
CLASSIFICATION OF THE TRUST
In connection with the issuance of the preferred securities, Tax Counsel
will render a legal opinion generally to the effect that, under the current law
and assuming full compliance with the terms of the trust agreement, the
indenture, and certain other documents, and based on certain facts and
assumptions described in the opinion, the Trust will be classified for U.S.
federal income tax purposes as a grantor trust and will not be subject to tax as
a corporation. Accordingly, in the opinion of Tax Counsel, you will generally be
treated, for U.S. federal income tax purposes, as the owner of an undivided
interest in the debentures held by the Trust. You will be required to include in
ordinary income for U.S. federal income tax purposes your allocable share of
interest paid and OID accrued on the debentures.
COST BASIS OF THE PREFERRED SECURITIES AND THE WARRANTS
The initial cost basis of the preferred securities and the warrants will be
determined by allocating the amount paid by you for the CRESTS Units between the
preferred security component and the warrant component based on the relative
fair market value of each component. Hercules has determined that: (a) $
of the initial offering price of each CRESTS Unit should be allocated to the
preferred security component (and therefore to the related debentures held by
the Trust); and (b) $ should be allocated to the warrant component.
This allocation will be binding on you unless you explicitly disclose a
different allocation on your income tax return for the year in which you
purchase the CRESTS Units as prescribed by Treasury Regulation sec.
1.1273-2(h)(2). However, this allocation is not binding on the Internal Revenue
Service ("IRS"), which conceivably could seek to allocate the purchase price of
a CRESTS Unit between the preferred security component and the warrant component
on a different basis.
ORIGINAL ISSUE DISCOUNT AND INTEREST INCOME
Under the Treasury regulations relating to OID, a debt instrument is
treated as issued with OID if the initial offering price of the debt instrument
is less than the principal sum due at maturity. Under this rule the debentures
will be treated as issued at a discount because the portion of the initial
offering price of each CRESTS Unit allocable to the preferred security component
($ ) (and therefore to the related debentures) is less than the principal
amount ($1,000) due at maturity on the related debentures. Therefore, you will
be required to accrue OID as ordinary income for U.S. federal income tax
purposes over the period that you are deemed to hold the debentures, using the
constant yield method of accounting.
Under the Treasury regulations relating to OID, if there is more than a
"remote" contingency that periodic stated interest payments due on a debt
instrument will not be timely paid, all holders of the instrument, including
those who generally use the cash method of accounting, must recognize the stated
interest as it accrues, using a constant yield method of accounting. Because the
exercise by Hercules of its option to defer payments of stated interest on the
debentures would prevent Hercules from declaring dividends on any class of its
equity, Hercules believes that the likelihood of its exercising the option is
"remote" within the meaning of the Treasury regulations. As a result, Hercules
intends to take the position, based on the advice of Tax Counsel, that stated
interest payments on the debentures will be includible in your ordinary income
at the time that such payments are received or accrued in accordance with your
regular method of accounting. Because the IRS has not yet addressed the Treasury
regulations in any published rulings or other interpretations, it is possible
that the IRS could take a position contrary to the position taken by Hercules.
In that event, the IRS may, for example, require you to include interest on the
debentures in
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your taxable income as it accrues rather than when you receive payment even
though you use the cash method of accounting for federal income tax purposes.
EXERCISE OF DEFERRAL OPTION
If Hercules were to exercise its option to defer the payment of interest on
the debentures, the debentures would be treated as being "reissued" at the time
of deferral for purposes of determining your share of includable OID. Under
these rules you would be required to include in ordinary income, on a current
basis, over the period that you are deemed to hold the debentures, amounts
reflecting the accrual of deferred stated interest, even though Hercules would
not be making any actual cash payments during the extended interest payment
period. The amount of interest income includible in your taxable income on
account of the interest deferral would be determined on the basis of a constant
yield method over the remaining term of the debentures and the actual receipt of
future payments of stated interest on the debentures would no longer be
separately reported as taxable income. The amount of OID that would accrue, in
the aggregate, during the extended interest payment period on account of the
deferred interest would be approximately equal to the amount of the cash payment
due at the end of such period. Any OID included in income would increase your
adjusted tax basis in your preferred securities, and your actual receipt of cash
interest payments would reduce your basis in the preferred securities.
RECOGNITION OF ADDITIONAL OID ON THE DEBENTURES
The amount of interest income, including OID, you will be required to
include in your U.S. federal taxable income will exceed your share of cash
payments, if any, actually made by the Trust following payments made by
Hercules. Moreover, as discussed above, you will be required to accrue OID on
the debentures you are deemed to hold even if Hercules exercises its option to
defer the payment of interest on the debentures. Any OID included in income
would increase your adjusted tax basis in your preferred securities.
CORPORATE U.S. HOLDERS
Corporate U.S. Holders of the preferred securities will not be entitled to
a dividends-received deduction for any income derived from the preferred
securities.
SALES OF PREFERRED SECURITIES
If you sell your preferred securities, including a sale in connection with
a remarketing, you will recognize gain or loss in an amount equal to the
difference between your adjusted tax basis in the preferred securities and the
amount realized from the sale. Your adjusted tax basis in the preferred
securities generally will equal (1) the initial portion of the purchase price of
the CRESTS Units allocable to the preferred security component (as described
above) plus (2) the OID that you were required to accrue during the period you
owned the preferred securities.
Gain or loss on the sale of preferred securities generally should
constitute capital gain or loss. However, it is possible that the debentures
could be classified as contingent payment debt instruments as defined in
Treasury Regulation sec.1.1275-4. If the debentures were so classified, any gain
or loss you realized from a taxable disposition of the preferred securities
would be treated as ordinary income or loss. Tax Counsel is of the opinion that
the debentures should not be treated as contingent payment debt obligations.
However, you may wish to discuss this issue with your tax advisor.
The preferred securities may trade at a price that does not fully reflect
the amount of accrued but unpaid OID that you are required to include in income.
This income inclusion will increase your adjusted tax basis in the preferred
securities but may not be reflected in the sale price. To the extent the sale
price is less than your adjusted tax basis, you should recognize a capital loss.
Subject to certain limited exceptions, capital losses cannot be applied to
offset ordinary income for U.S. federal income tax purposes.
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RECEIPT OF DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
Tax Counsel is of the opinion that if Hercules dissolves the Trust and
causes the Trust to distribute the debentures on a pro rata basis to you, you
would not be subject to tax. Rather, you would have an adjusted tax basis in the
debentures received in the liquidation equal to the adjusted tax basis in your
preferred securities surrendered for the debentures. Your holding period for the
debentures would include the period during which you had held the preferred
securities. If, contrary to Tax Counsel's opinion, the Trust is classified, for
U.S. federal income tax purposes, as an association that is subject to tax as a
corporation at the time of the liquidation, the distribution of the debentures
would constitute a taxable event to you and you would acquire a new holding
period in the debentures received.
If the debentures are redeemed for cash and the proceeds of the redemption
are distributed to you in redemption of your preferred securities, the
redemption would be treated as a sale of the preferred securities, in which gain
or loss would be recognized, as described above.
INFORMATION REPORTING AND BACK-UP WITHHOLDING FOR NONCORPORATE HOLDERS
Generally, income on the preferred securities will be reported to you on an
IRS Form, which should be mailed to you by January 31 following each calendar
year. If you fail to supply your correct taxpayer identification number or
certain other information or it has been determined that you underreported
certain passive income, the IRS may require the property trustee or its agent to
withhold federal income tax at the rate of 31% from each interest payment. You
will be permitted to credit any withheld tax against your federal income tax
liability.
TAXATION OF THE WARRANTS
Neither the purchase of the warrant component of the CRESTS Units nor the
subsequent exercise of the warrants to purchase Hercules common stock will
constitute taxable events. Accordingly, you will not recognize gain or loss upon
your purchase or the subsequent exercise of the warrants. Rather, you will
recognize taxable gain or loss if and when you dispose of the Hercules common
stock in a taxable transaction.
Upon disposing of the Hercules common stock, you will recognize capital
gain or loss in an amount equal to the difference between the proceeds you
receive and your tax basis in the Hercules common stock. Your tax basis in the
Hercules common stock will be equal to the amount you paid to Hercules upon the
exercise of the warrants plus the portion of the initial offering price of the
CRESTS Units allocable to the warrant component (as described above). The
resulting gain or loss will be either short-term or long-term capital gain or
loss depending on your holding period for the Hercules common stock. The holding
period for the common stock will begin the day after you exercise the warrants.
The time that you held the warrants is not counted for this purpose. As noted
above, subject to certain limited exceptions, capital losses cannot be applied
to offset ordinary income for U.S. federal income tax purposes.
If you dispose of the warrants in a taxable transaction, you will recognize
capital gain or loss equal to the difference between the proceeds you receive
and your tax basis in the warrants. The resulting gain or loss will be either
short-term or long-term depending on whether you have held the warrants for more
than one year. If you do not exercise the warrants and they expire, you will
recognize a short-term or long-term loss when they expire equal to your tax
basis in the warrants. In either case, your tax basis in the warrants will be
equal to the portion of the initial offering price of the CRESTS Units allocable
to the warrant component (as described above) and your holding period for the
warrants will commence on the date that you purchase the CRESTS Units.
If at any time while you hold the warrants (1) Hercules makes a
distribution of property to stockholders that is taxable to the stockholders as
a dividend for U.S. federal income tax purposes (for example, distributions of
indebtedness or assets of Hercules, but generally not stock dividends or rights
to subscribe for Hercules common stock) and (2) pursuant to the anti-dilution
provisions of the warrants, the exercise price of
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the warrants is adjusted, that adjustment may be deemed to constitute the
payment of a taxable dividend to you.
NON-U.S. HOLDERS
Payments on the preferred securities to a Non-U.S. Holder will generally
not be subject to U.S. federal withholding tax, provided the Non-U.S. Holder:
- does not own (directly or indirectly, actually or constructively) 10% or
more of the total combined voting power of all classes of stock of
Hercules entitled to vote;
- is not a controlled foreign corporation that is related to Hercules
through stock ownership; and
- is not a bank receiving interest described in section 881(c)(3)(A) of the
Internal Revenue Code.
To qualify for this exemption from withholding, the last U.S. payer in the
chain of payment prior to payment to a Non-U.S. Holder (the "withholding agent")
must have received in the year in which a payment of interest or principal
occurs, or in either of the two preceding calendar years, a statement that:
- is signed by the Non-U.S. Holder under penalties of perjury;
- certifies that the holder of the preferred securities is a Non-U.S.
Holder; and
- provides the name and address of the Non-U.S. Holder.
The statement may be made on an IRS Form W-8 or a substantially similar
form, and the Non-U.S. Holder must inform the withholding agent of any change in
the information on the statement within 30 days of any change. If the preferred
securities are held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide a signed
statement to the withholding agent along with a copy of IRS Form W-8 or the
substitute form provided by the Non-U.S. Holder.
A Non-U.S. Holder will generally not be subject to U.S. federal withholding
or income tax on any gain realized upon the sale or other disposition of the
preferred securities, the warrants or the Hercules common stock acquired upon
the exercise of warrants. If, however, a Non-U.S. Holder holds the preferred
securities, the warrants or the Hercules common stock acquired upon the exercise
of the warrants in connection with a trade or business conducted in the U.S. or
is present in the U.S. for 183 days or more during the taxable year of
disposition and certain other conditions are met, the holder may be subject to
income tax on any recognized gain.
Hercules common stock acquired upon an exercise of a warrant will
constitute property located within the U.S. Consequently, if you own Hercules
common stock when you die, your estate may be subject to U.S. federal estate
tax. It is unclear whether the warrants could also be treated as property
located in the U.S. and therefore subject to U.S. federal estate tax.
NEW NON-U.S. HOLDER WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
2000, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
ERISA CONSIDERATIONS
Each of Hercules, the obligor with respect to the debentures held by the
Trust, its affiliates and the property trustee may be considered a "party in
interest" (within the meaning of ERISA) or a "disqualified person" (within the
meaning of Section 4975 of the Internal Revenue Code) with respect to many
employee benefit plans ("Plans") that are subject to ERISA. Any purchaser
proposing to acquire CRESTS Units with
S-66
<PAGE> 67
assets of any Plan should consult with its counsel. The purchase and/or holding
of CRESTS Units by a Plan that is subject to the fiduciary responsibility
provisions of ERISA or the prohibited transaction provisions of Section 4975 of
the Internal Revenue Code (including individual retirement arrangements and
other plans described in Section 4975(e)(1) of the Internal Revenue Code) and
with respect to which Hercules, the property trustee or any affiliate is a
service provider (or otherwise is a party in interest or a disqualified person)
may constitute or result in a prohibited transaction under ERISA or Section 4975
of the Internal Revenue Code, unless such CRESTS Units are acquired pursuant to
and in accordance with an applicable exemption, such as Prohibited Transaction
Class Exemption ("PTCE") 84-14 (an exemption for certain transactions determined
by an independent qualified professional asset manager), PTCE 91-38 (an
exemption for certain transactions involving bank collective investment funds),
PTCE 90-1 (an exemption for certain transactions involving insurance company
pooled separate accounts), PTCE 95-60 (an exemption for transactions involving
certain insurance company general accounts) or PTCE 96-23 (an exemption for
certain transactions determined by an in-house manager). In addition, a Plan
fiduciary considering the purchase of CRESTS Units should be aware that the
assets of the Trust may be considered "plan assets" for ERISA purposes.
Therefore, a Plan fiduciary should consider whether the purchase of CRESTS Units
could result in a delegation of fiduciary authority to the property trustee,
and, if so, whether such a delegation of authority is permissible under the
Plan's governing instrument or any investment management agreement with the
Plan. In making such determination, a Plan fiduciary should note that the
property trustee is a bank qualified to be an investment manager (within the
meaning of section 3(38) of ERISA) to which such a delegation of authority
generally would be permissible under ERISA. Further, prior to an event of
default with respect to the debentures, the property trustee will have only
limited custodial and ministerial authority with respect to Trust assets.
S-67
<PAGE> 68
UNDERWRITING
The underwriters named below (the "underwriters"), for whom Banc of America
Securities LLC, Salomon Smith Barney Inc., Chase Securities Inc., Deutsche Bank
Securities, Inc. and J.P. Morgan Securities Inc. are acting as representatives,
have severally agreed, subject to the terms and conditions set forth in an
underwriting agreement among the underwriters, Hercules and the Trust (the
"underwriting agreement"), to purchase the number of CRESTS Units indicated
below opposite their respective names at the public offering price less the
discounts and commissions to underwriters set forth on the cover page of this
prospectus supplement. The underwriting agreement provides that the obligations
of the underwriters are subject to certain conditions precedent, and that the
underwriters are committed to purchase all of such CRESTS Units if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
CRESTS
UNDERWRITER UNITS
----------- ---------
<S> <C>
Banc of America Securities LLC..............................
Salomon Smith Barney Inc....................................
Chase Securities Inc........................................
Deutsche Bank Securities, Inc. .............................
J.P. Morgan Securities Inc..................................
Janney Montgomery Scott Inc.................................
-------
Total .................................................. 350,000
=======
</TABLE>
The underwriters have advised Hercules and the Trust that the underwriters
propose initially to offer the CRESTS Units to the public on the terms set forth
on the cover page of this prospectus supplement. The underwriters may allow to
selected dealers a concession of not more than $ per CRESTS Unit, and the
underwriters may allow, and such dealers may reallow, a concession of not more
than $ per CRESTS Unit to certain other dealers. After the offering, the
offering price and other selling terms may be changed by the underwriters. The
CRESTS Units are offered subject to receipt and acceptance by the underwriters,
and to certain other conditions, including the right to reject an order in whole
or in part. The underwriters may offer the CRESTS Units through a selling group.
The underwriters have been granted an option, exercisable during the 30-day
period after the date of this prospectus supplement, to purchase up to a maximum
of 50,000 CRESTS Units to cover over-allotments, if any, at the same price as
the 350,000 CRESTS Units to be purchased by the underwriters. To the extent that
the underwriters exercise this option, each of the underwriters will be
committed, subject to certain conditions, to purchase such additional CRESTS
Units in approximately the same proportion as set forth in the table above. The
underwriters may purchase such CRESTS Units only to cover over-allotments made
in connection with the offering.
The underwriting agreement provides that Hercules and the Trust will
indemnify the underwriters and their controlling persons against certain
liabilities, including civil liabilities under the Securities Act of 1933, or
will contribute to payments the underwriters may be required to make in respect
thereof.
Certain of the underwriters and their affiliates have engaged in, and may
engage in, transactions with, have performed, and may perform, services for, or
have owned, currently own or may own, equity or equity-like securities of
Hercules or its subsidiaries in the ordinary course of their businesses. For a
discussion of certain of these matters, see "Management's Discussion and
Analysis -- Financial Condition -- Liquidity and Financial Resources" beginning
on page S-29.
Affiliates of Banc of America Securities LLC, Salomon Smith Barney Inc.,
Chase Securities Inc., Deutsche Bank Securities, Inc. and J.P. Morgan Securities
Inc. are lenders under the credit facility and will receive a portion of the
amounts repaid in respect of a term loan made under that facility with the net
proceeds received from the sale of the CRESTS Units. Because more than ten
percent of such net proceeds will be paid to members or affiliates of members of
the NASD participating in the offering, the offering will be conducted in
accordance with NASD Conduct Rule 2710(c)(8), which requires that the price of
an equity security be no higher, and the yield on a debt security be no lower,
than the price or yield, as the case may
S-68
<PAGE> 69
be, recommended by a qualified independent underwriter which has participated in
the preparation of the prospectus and performed its usual standard of due
diligence with respect thereto. Janney Montgomery Scott Inc. has agreed to act
as a qualified independent underwriter with respect to the offering, and the
price of the warrants will be no higher, and the yield on the preferred
securities will be no lower, than that recommended by Janney Montgomery Scott
Inc.
Because the NASD is expected to view the preferred security component of
the CRESTS Units offered hereby as interests in a direct participation program,
the offering is being made in compliance with NASD Conduct Rule 2810.
Accordingly, offers and sales of CRESTS Units will be made only to (i)
"qualified institutional buyers," as defined in Rule 144A under the Securities
Act of 1933, or (ii) institutional "accredited investors," as defined in Rule
501(a)(1), (2) or (3) of Regulation D under the Securities Act of 1933, for whom
an investment in the CRESTS Units is appropriate. The underwriters may not
confirm sales to any accounts over which they exercise discretionary authority
without the prior written approval of the transaction by the customer.
The directors and executive officers of Hercules have agreed that they will
not, without the prior written consent of Banc of America Securities LLC (which
consent may be withheld in its sole discretion), directly or indirectly, sell,
offer, contract or grant any option to sell (including, without limitation, any
short sale), pledge, transfer, establish an open "put equivalent position"
within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934
("Rule 16a-1(h)") or otherwise dispose of any shares of common stock, CRESTS
Units, preferred securities and warrants owned either of record or beneficially
by them, or publicly announce the intention to do any of the foregoing, for a
period commencing on the date of this prospectus supplement and continuing
through the close of trading on the date 90 days after such date. Banc of
America Securities LLC may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to those lock-up
agreements. In addition, Hercules and the Trust have agreed that for a period of
90 days after the date of this prospectus supplement, they will not, without the
prior written consent of Banc of America Securities LLC (which consent may be
withheld in its sole discretion), directly or indirectly, sell, offer, contract
or grant any option to sell, pledge, transfer or establish an open "put
equivalent position" within the meaning of Rule 16a-1(h), or otherwise dispose
of or transfer, or announce the offering of, or file any registration statement
under the Securities Act of 1933 in respect of, any shares of common stock,
options or warrants to acquire shares of common stock or securities exchangeable
or exercisable for or convertible into shares of common stock, the preferred
securities, any securities convertible into or exchangeable for the preferred
securities or any securities substantially similar to the preferred securities,
or any guarantee of such securities, or any subordinated debt securities, or any
securities convertible into or exchangeable for such subordinated debt
securities, that are substantially similar to the debentures (except the
preferred securities and debentures offered hereby), subject to the contemplated
separate sale of common stock and certain other exceptions, including granting
of options and sales of shares under Hercules' existing option plans.
Until the distribution of the CRESTS Units is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters to
bid for and purchase the CRESTS Units, the preferred securities and the
warrants. As an exception to these rules, the underwriters are permitted to
engage in certain transactions that stabilize the price of the CRESTS Units, the
preferred securities and the warrants. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of CRESTS
Units, the preferred securities and the warrants. If the underwriters create a
short position in CRESTS Units in connection with the offering, i.e., if they
sell more CRESTS Units than are set forth on the cover page of this prospectus
supplement, the underwriters may reduce that short position by purchasing CRESTS
Units in the open market. The underwriters may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The underwriters may also impose a penalty bid on certain selling group members.
This means that if the underwriters purchase CRESTS Units in the open market to
reduce the underwriters' short position or to stabilize the price of the CRESTS
Units, they may reclaim the amount of the selling concession from the selling
group members who sold those CRESTS Units as part of the offering.
S-69
<PAGE> 70
In general, purchase of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. None of Hercules, the Trust or any of the
underwriters makes any representations or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the CRESTS Units. In addition, none of Hercules, the Trust or any of
the underwriters makes any representations that the underwriters will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
LEGAL MATTERS
Certain legal matters in connection with the sale of the CRESTS Units will
be passed upon for Hercules by Israel J. Floyd, Esquire, Assistant General
Counsel of Hercules, and by Ballard Spahr Andrews & Ingersoll, LLP,
Philadelphia, Pennsylvania, and for the Trust by Richards, Layton & Finger,
P.A., Wilmington, Delaware. Certain legal matters in connection with the sale of
the CRESTS Units will be passed upon for the underwriters by Brown & Wood LLP,
New York, New York.
EXPERTS
The consolidated financial statements of Hercules and its subsidiaries
which are attached as Annex A have been audited and reported upon by
PricewaterhouseCoopers LLP, independent accountants. Such financial statements
are included herein in reliance on the report of PricewaterhouseCoopers LLP,
given on the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of BetzDearborn as of December 31,
1997 and 1996 and for each of the three years in the period ended December 31,
1997, appearing in our Current Report on Form 8-K dated October 15, 1998, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated by reference herein. Such
financial statements have been incorporated by reference herein in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.
S-70
<PAGE> 71
ANNEX A
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HERCULES INCORPORATED
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants......................... A-2
Consolidated Statement of Income for the Years Ended
December 31, 1998, 1997 and 1996....................... A-3
Consolidated Balance Sheet as of December 31, 1998 and
1997................................................... A-4
Consolidated Statement of Cash Flow for the Years Ended
December 31, 1998, 1997 and 1996....................... A-5
Consolidated Statement of Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996........... A-6
Consolidated Statement of Comprehensive Income for the
Years Ended December 31, 1998, 1997 and 1996........... A-7
Summary of Significant Accounting Policies................ A-8
Notes to Consolidated Financial Statements................ A-11
</TABLE>
A-1
<PAGE> 72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Hercules Incorporated and subsidiary companies at December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards that require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 23 to the financial statements, in 1997, the company
changed its method of accounting for costs incurred in connection with its
enterprise software installation.
/S/ PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
February 19, 1999
A-2
<PAGE> 73
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<S> <C> <C> <C>
Net sales................................................... $2,145 $1,866 $2,060
------ ------ ------
Cost of sales............................................... 1,287 1,169 1,320
Selling, general, and administrative expenses............... 399 251 262
Research and development.................................... 61 53 56
Purchased in-process research and development (Note 14)..... 130 -- --
Other operating expenses (income), net (Note 15)............ 76 165 (19)
------ ------ ------
Profit from operations...................................... 192 228 441
Equity in income of affiliated companies.................... 10 30 53
Interest and debt expense (Note 16)......................... 103 39 35
Other income (expense), net (Note 17)....................... (22) 374 26
------ ------ ------
Income before income taxes and effect of change in
accounting principle...................................... 77 593 485
Provision for income taxes (Note 18)........................ 68 269 160
------ ------ ------
Income before effect of change in accounting principle...... 9 324 325
Effect of change in accounting principle (Note 23).......... -- (5) --
------ ------ ------
Net income.................................................. $ 9 $ 319 $ 325
====== ====== ======
Earnings per share (Note 19)
Basic:
Earnings before effect of change in accounting
principle.............................................. $ .10 $ 3.27 $ 3.10
Effect of change in accounting principle.................. -- (.05) --
------ ------ ------
Earnings per share........................................ $ .10 $ 3.22 $ 3.10
====== ====== ======
Diluted:
Earnings before effect of change in accounting
principle.............................................. $ .10 $ 3.18 $ 2.98
Effect of change in accounting principle.................. -- (.05) --
------ ------ ------
Earnings per share........................................ $ .10 $ 3.13 $ 2.98
====== ====== ======
</TABLE>
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
A-3
<PAGE> 74
HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 68 $ 17
Accounts receivable, net (Note 2)......................... 663 389
Inventories (Note 3)...................................... 416 234
Deferred income taxes (Note 18)........................... 93 49
------ ------
Total current assets.............................. 1,240 689
Property, plant, and equipment, net (Note 12)............... 1,438 687
Investments (Note 4)........................................ 51 615
Goodwill (net of accumulated amortization -- 1998, $28;
1997, $12)................................................ 2,356 41
Other intangible assets (net of accumulated
amortization -- 1998, $22; 1997, $15)..................... 192 3
Prepaid pension (Note 13)................................... 218 216
Deferred charges and other assets........................... 338 160
------ ------
Total assets...................................... $5,833 $2,411
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 270 $ 116
Short-term debt (Note 5).................................. 566 275
Accrued expenses (Note 12)................................ 481 408
------ ------
Total current liabilities......................... 1,317 799
Long-term debt (Note 6)..................................... 3,096 419
Deferred income taxes (Note 18)............................. 225 160
Other postretirement benefits (Note 13)..................... 136 139
Deferred credits and other liabilities...................... 300 204
------ ------
Total liabilities................................. 5,074 1,721
Company-obligated preferred securities of subsidiary trust
(Note 7).................................................. 200 --
Stockholders' equity
Series preferred stock (Note 8)........................... -- --
Common stock, $25/48 par value (Note 9)................... 81 80
(shares issued: 1998 -- 154,823,496; 1997 -- 154,357,015)
Additional paid-in capital................................ 504 504
Unearned compensation (Note 10)........................... (130) --
Foreign currency translation adjustment................... (13) (2)
Retained earnings......................................... 2,068 2,163
------ ------
2,510 2,745
Reacquired stock, at cost (shares: 1998 -- 53,995,692;
1997 -- 58,289,376)....................................... 1,951 2,055
------ ------
Total stockholders' equity........................ 559 690
------ ------
Total liabilities and stockholders' equity........ $5,833 $2,411
====== ======
</TABLE>
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
A-4
<PAGE> 75
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
------- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income.................................................. $ 9 $ 319 $ 325
Adjustments to reconcile net income to net cash provided
from operations:
Depreciation.............................................. 86 73 106
Amortization.............................................. 22 3 2
Write-off in-process research and development............. 130 -- --
Nonoperating gain on disposals............................ (23) (398) (22)
Noncash charges (credits)................................. 38 92 (26)
Other..................................................... (6) 15 5
Accruals and deferrals of cash receipts and payments:
Affiliates' earnings in excess of dividends received.... (6) (25) (25)
Accounts receivable..................................... 26 (41) 6
Inventories............................................. (14) (6) (17)
Accounts payable and accrued expenses................... (72) 137 (83)
Noncurrent assets and liabilities....................... (9) 18 (46)
------- ----- -----
Net cash provided by operations...................... 181 187 225
------- ----- -----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (157) (119) (120)
Proceeds of investment and fixed asset disposals............ 600 295 196
Acquisitions, net of cash acquired.......................... (3,109) -- --
Other....................................................... (25) (34) (6)
------- ----- -----
Net cash (used in) provided by investing
activities........................................... (2,691) 142 70
------- ----- -----
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds..................................... 3,111 343 75
Long-term debt repayments................................... (247) (130) (27)
Change in short-term debt................................... (228) (35) 112
Payment of debt issuance costs and underwriting fees........ (66) -- --
Proceeds from trust preferred securities.................... 200 -- --
Common stock issued......................................... 10 38 15
Common stock reacquired..................................... (114) (458) (417)
Dividends paid.............................................. (104) (98) (95)
------- ----- -----
Net cash provided by (used in) financing
activities........................................... 2,562 (340) (337)
Effect of exchange rate changes on cash..................... (1) (2) (1)
------- ----- -----
Net increase (decrease) in cash and cash equivalents........ 51 (13) (43)
Cash and cash equivalents at beginning of year.............. 17 30 73
------- ----- -----
Cash and cash equivalents at end of year.................... $ 68 $ 17 $ 30
======= ===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized)...................... $ 100 $ 37 $ 30
Income taxes paid, net.................................... 117 152 190
Noncash investing and financing activities:
Conversion of notes and debentures........................ 8 31 1
ESOP and incentive plan stock issuances................... 196 15 14
Accounts payable for common stock acquisitions............ -- 5 8
Investment in unconsolidated affiliates................... -- -- 1
Investment in long-term notes............................. -- 504 --
Accounts receivable from sale of investment/asset
disposals............................................... -- 8 9
Assumed debt of acquired businesses....................... 307 -- --
</TABLE>
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
A-5
<PAGE> 76
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNEARNED
COMMON PAID-IN COMPEN- TRANSLATION RETAINED REACQUIRED
STOCK CAPITAL SATION ADJUSTMENT EARNINGS STOCK
------ ------- -------- ----------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996............. $79 $472 $ -- $ 75 $1,712 $1,256
(Common shares: issued 151,663,465;
reacquired, 43,176,841)
Net income.............................. -- -- -- -- 325 --
Cash dividends, $.92 per common share... -- -- -- -- (95) --
Foreign currency translation
adjustment............................ -- -- -- (30) -- --
Purchase of common stock, 7,970,784
shares................................ -- -- -- -- -- 425
Issuance of common stock:
Incentive plans, net, 844,751 shares
including 281,063 from reacquired
stock.............................. -- 20 -- -- -- (9)
Conversion of notes and debentures,
41,923 shares...................... -- 1 -- -- -- --
--- ---- ----- ---- ------ ------
Balances at December 31, 1996........... $79 $493 $ -- $ 45 $1,942 $1,672
(Common shares: issued 152,269,076;
reacquired, 50,866,562)
Net income.............................. -- -- -- -- 319 --
Cash dividends, $1.00 per common
share................................. -- -- -- -- (98) --
Foreign currency translation
adjustment............................ -- -- -- (47) -- --
Purchase of common stock, 9,536,619
shares................................ -- -- -- -- -- 455
Issuance of common stock:
Incentive plans, net, 2,113,805 shares
from reacquired stock.............. -- (19) -- -- -- (72)
Conversion of notes and debentures,
2,087,939 shares................... 1 30 -- -- -- --
--- ---- ----- ---- ------ ------
Balances at December 31, 1997........... $80 $504 $ -- $ (2) $2,163 $2,055
(Common shares: issued 154,357,015;
reacquired, 58,289,376)
Net income.............................. -- -- -- -- 9 --
Cash dividends, $1.08 per common
share................................. -- -- -- -- (104) --
Foreign currency translation
adjustment............................ -- -- -- (11) -- --
Purchase of common stock, 2,361,390
shares................................ -- -- -- -- -- 109
Issuance of common stock:
Incentive plans, net, 764,201 shares
from reacquired stock.............. -- (7) -- -- -- (27)
ESOP, 5,890,873 shares from reacquired
stock.............................. -- -- (130) -- -- (186)
Conversion of notes and debentures,
466,481 shares..................... 1 7 -- -- -- --
--- ---- ----- ---- ------ ------
Balances at December 31, 1998........... $81 $504 $(130) $(13) $2,068 $1,951
(Common shares: issued 154,823,496;
reacquired, 53,995,692)
</TABLE>
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
A-6
<PAGE> 77
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net Income.................................................. $ 9 $319 $325
Foreign currency translation, net of tax.................... (11) (47) (30)
---- ---- ----
Comprehensive income (loss)................................. $ (2) $272 $295
==== ==== ====
</TABLE>
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
A-7
<PAGE> 78
HERCULES INCORPORATED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Hercules
Incorporated and all majority-owned subsidiaries. Following the acquisition of
BetzDearborn, the company continued BetzDearborn's practice of using a November
30 fiscal year-end for all former BetzDearborn non-U.S. subsidiaries, excluding
Canada, to expedite the year-end closing process. Investments in affiliated
companies with a 20% or greater ownership interest are accounted for on an
equity basis and, accordingly, consolidated income includes Hercules' share of
their income.
USE OF ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that pertain to current operations or future
revenues are expensed or capitalized according to the company's capitalization
policy. Expenditures for remediation of an existing condition caused by past
operations that do not contribute to current or future revenues are expensed.
Liabilities are recognized for remedial activities when the cleanup is probable
and the cost can be reasonably estimated.
CASH AND CASH EQUIVALENTS
Cash in excess of operating requirements is invested in short-term,
income-producing instruments. Cash equivalents include commercial paper and
other securities with original maturities of 90 days or less. Book value
approximates fair value because of the short maturity of those instruments.
INVENTORIES
Inventories are stated at the lower of cost or market. Domestic inventories
are valued predominantly on the last-in, first-out (LIFO) method. Foreign and
certain domestic inventories, which in the aggregate represent 67% of total
inventories at December 31, 1998, are valued principally on the average-cost
method.
PROPERTY AND DEPRECIATION
Property, plant and equipment are stated at cost. The company changed to
the straight-line method of depreciation, effective January 1, 1991, for newly
acquired processing facilities and equipment. Assets acquired before then
continue to be depreciated by accelerated methods. The company believes
straight-line depreciation provides a better matching of costs and revenues over
the lives of the assets. The estimated useful lives of depreciable assets are as
follows: buildings -- 30 years; plant, machinery and equipment -- 15 years;
other machinery and equipment -- 3 to 15 years.
Maintenance, repairs and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is charged to income.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and Other intangible assets are amortized on a straight-line basis
over the estimated future periods to be benefited, generally 40 years for
goodwill and 5 to 15 years for other intangible assets.
A-8
<PAGE> 79
LONG-LIVED ASSETS
The company reviews its long-lived assets, including goodwill and other
intangibles, for impairment on an exception basis whenever events or changes in
circumstances indicate carrying amounts of the assets may not be recoverable
through future cash flows. If an impairment loss has occurred based on expected
future cash flows (undiscounted), the loss is recognized in the income
statement. The amount of the impairment loss is the excess of the carrying
amount of the impaired asset over the fair value of the asset. The fair value
represents expected future cash flows from the use of the assets, discounted at
the rate used to evaluate potential investments.
FOREIGN CURRENCY TRANSLATION
With the exception of operations in countries with highly inflationary
economies, the financial statements of Hercules' non-U.S. entities are
translated into U.S. dollars using current rates of exchange, with gains or
losses included in the foreign currency translation adjustment account in the
stockholders' equity section of the balance sheet. The related allocation for
income taxes is not significant. For operations in countries with highly
inflationary economies, financial statements are translated at either current or
historical exchange rates, as appropriate. These adjustments, along with gains
and losses on currency transactions (denominated in currencies other than local
currency), are reflected in net income.
FINANCIAL INSTRUMENTS AND HEDGING
Derivative financial instruments are used to hedge risk caused by
fluctuating currency and interest rates. The company enters into
forward-exchange contracts and currency swaps to hedge foreign currency
exposure. Decisions regarding hedging are made on a case-by-case basis, taking
into consideration the amount and duration of the exposure, market volatility,
and economic trends. The company uses the fair-value method of accounting,
recording realized and unrealized gains and losses on these contracts quarterly.
They are included in other income (expense), net, except for gains and losses on
contracts to hedge specific foreign currency commitments, which are deferred and
accounted for as part of the transaction. Gains or losses on contracts used to
hedge the value of investments in certain non-U.S. subsidiaries are accounted
for under the deferral method and are included in the foreign currency
translation adjustment account. It is the company's policy to match the term of
financial instruments with the term of the underlying designated item. If the
designated item is an anticipated transaction no longer likely to occur, gains
or losses from the instrument designated as a hedge are recognized in current
period earnings. The company does not hold or issue financial instruments for
trading purposes. In the Consolidated Statement of Cash Flow, the company
reports the cash flows resulting from its hedging activities in the same
category as the related item that is being hedged. Net investment hedges,
requiring cash receipts or payments from borrowed foreign currencies not
identified with any specific cash flows, are classified as financing activities.
The company uses interest rate swap agreements to manage interest costs and
risks associated with changing rates. The differential to be paid or received is
accrued as interest rates change and is recognized in interest expense over the
life of the agreements. Counterparties to the forward exchange, currency swap,
and interest rate swap contracts are major financial institutions. Credit loss
from counterparty nonperformance is not anticipated.
STOCK-BASED COMPENSATION
Compensation costs attributable to stock option and similar plans are
recognized based on any difference between the quoted market price of the stock
on the date of grant over the amount the employee is required to pay to acquire
the stock (the intrinsic-value method under Accounting Principles Board (APB)
Opinion 25). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard (SFAS) No. 123,
"Accounting for Stock-Based Compensation," requires companies electing to
continue to use the intrinsic-value method to make pro forma disclosures of net
income and earnings per share as if the fair-value-based method of accounting
had been applied.
A-9
<PAGE> 80
NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the company adopted SFAS, No. 130, "Reporting
Comprehensive Income." SFAS 130 establishes standards for reporting and display
of comprehensive income and its components in financial statements. This
statement requires all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in the financial
statements and displayed with the same prominence as other financial statements.
In 1998, the company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." (See Note 24).
PENDING ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is
effective for fiscal years beginning after June 15, 1999. SFAS 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction. For fair-value hedge transactions in
which the company is hedging changes in the fair value of an asset, liability,
or firm commitment, changes in the fair value of the derivative instrument will
generally be offset in the income statement by changes in the hedged item's fair
value. For cash-flow hedge transactions, in which the company is hedging the
variability of cash flows related to a variable-rate asset, liability, or a
forecasted transaction, changes in the fair value of the derivative instrument
will be reported in other comprehensive income. Gains and losses on the
derivative instrument that are reported in other comprehensive income will be
reclassified as earnings in periods in which earnings are impacted by the
variability of the cash flows of the hedged item. The ineffective portion of all
hedges will be recognized in current-period earnings.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides
guidance on the capitalization and amortization of costs of computer software
developed or obtained for internal use, and is effective for fiscal years
beginning after December 15, 1998. The company is currently capitalizing the
design and implementation costs of its ongoing enterprise-wide software
installation program.
The company is currently evaluating the impact that these statements will
have on its results of operations or financial position.
RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 consolidated financial statements and
notes have been reclassified to conform to the 1998 presentation.
A-10
<PAGE> 81
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACQUISITIONS
All acquisitions have been accounted for under the purchase method. The
results of operations of the acquired businesses are included in the
consolidated financial statements from the dates of acquisition.
BetzDearborn -- On October 15, 1998, the company acquired all of the
outstanding shares of BetzDearborn Inc., a global specialty chemical company
engaged in the treatment of water and industrial process systems, for $2,235
million in cash and $186 million in common stock exchanged for the shares held
by the BetzDearborn ESOP Trust. In addition, the company assumed debt with a
fair value of $117 million and repaid $557 million of other long-term debt held
by BetzDearborn. This acquisition was financed with borrowings under a $3,650
million credit facility with a syndicate of banks. (See Note 6.)
The purchase price was allocated to the estimated fair value of net assets
acquired, with the excess of $2,074 million recorded as goodwill, which is being
amortized over its estimated useful life of 40 years. Additionally, based on an
independent appraisal, approximately $130 million of the purchase price was
allocated to purchased in-process research and development and was charged to
expense at the date of acquisition. (See Note 14.)
As of the acquisition date, the company began to formulate plans to combine
the operations of BetzDearborn and Hercules. It formed a program office, engaged
outside consultants and established several functional integration teams to
formulate and implement the plan and capture anticipated synergies. At December
31, 1998, the company had identified and approved various actions such as
personnel reductions, consolidation of operations and support functions, closure
of redundant or inefficient offices and facilities, and relocation of former
BetzDearborn employees. Accordingly, the company has included a $94 million
liability as part of the purchase price allocation. The liability includes
approximately $78 million related to employee termination benefits for
approximately 850 BetzDearborn manufacturing, technical, sales and marketing,
administrative and support personnel worldwide. Also included is $16 million for
office and facility closures, relocation of BetzDearborn employees and other
related exit costs. Through December 31, 1998, the company paid $5 million of
termination benefits for approximately 130 redundancies, and the remaining
liability is $89 million.
The purchase price allocation for BetzDearborn is a preliminary allocation
and the goodwill recorded is subject to further adjustment resulting primarily
from the completion of the integration and exit plans, which could result in
additional liabilities; adjustments to the fair value of the net assets
acquired; and the resolution of pre-acquisition contingencies, primarily legal
matters and product liabilities, net of any related tax effects. The allocation
of the purchase price is expected to be completed in 1999.
FiberVisions L.L.C. -- In July 1998, the company completed the acquisition
of the 49% share of FiberVisions L.L.C. owned by its joint venture partner Jacob
Holm & Sons A/S for approximately $230 million in cash, plus assumed debt of
$188 million. The allocation of the purchase price resulted in $188 million of
goodwill, which is being amortized over its estimated useful life of 40 years.
A-11
<PAGE> 82
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma information presents a summary of
consolidated results of operations of the company as if the BetzDearborn and
FiberVisions acquisitions had occurred at the beginning of each of the periods
presented below:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1998 1997
------ ------
<S> <C> <C>
Net sales.................................................. $3,276 $3,366
Income (loss) before effect of change in accounting
principle................................................ (70) 237
Net income (loss).......................................... (70) 226
Net earnings per share:
Basic
Earnings before effect of change in accounting
principle............................................. $ (.69) $ 2.25
Earnings per share....................................... (.69) 2.15
Diluted
Earnings before effect of change in accounting
principle............................................. $ (.69) $ 2.21
Earnings per share....................................... (.69) 2.11
</TABLE>
The pro forma results of operations are for comparative purposes only and
reflect increased amortization and interest expense resulting from the
acquisitions described above, but do not include any potential cost savings from
combining the acquired businesses with the company's operations. Consequently,
the pro forma results do not reflect the actual results of operations had the
acquisitions occurred on the dates indicated, and are not intended to be a
projection of future results or trends.
Other -- The company also made three other acquisitions in 1998 for an
aggregate purchase price of approximately $105 million in cash. These
acquisitions included the worldwide paper chemicals group of Houghton
International, Inc. and Citrus Colloids Ltd., a pectin manufacturer, in April
1998, and Alliance Technical Products, Ltd., a rosin dispersions company, in
September 1998. Allocations of the purchase prices for these acquisitions
resulted in approximately $67 million of goodwill, which is being amortized over
estimated useful lives ranging from 30 to 40 years.
2. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Trade....................................................... $598 $285
Other....................................................... 78 107
---- ----
Total............................................. 676 392
Less allowance for doubtful accounts........................ 13 3
---- ----
$663 $389
==== ====
</TABLE>
At December 31, 1998, net trade accounts receivable from customers located
in the United States, Europe, the Americas and Asia were $404 million, $150
million, $24 million, and $7 million, respectively.
A-12
<PAGE> 83
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
The components of inventories are:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Finished products........................................... $218 $121
Materials, supplies, and work in process.................... 198 113
---- ----
$416 $234
==== ====
</TABLE>
Inventories valued on the LIFO method were lower than if valued under the
average-cost method, which approximates current cost, by $33 million and $37
million at December 31, 1998 and 1997, respectively.
4. INVESTMENTS
Total equity investments in affiliated companies were $9 million at
December 31, 1998, and $21 million at December 31, 1997. Dividends received from
affiliated companies were $0 in 1998 and 1997, and $11 million in 1996.
Other investments, at cost or less, were $42 million and $594 million at
December 31, 1998 and 1997, respectively. Included in these amounts are
non-current marketable securities aggregating $31 million and $81 million for
the corresponding years, classified as "available for sale." The value of these
investments, based on market quotes, approximates book values. At December 31,
1997, investments also included a $500 million 6.2% interest-bearing five-year
note (the Tastemaker note), which was sold in October 1998 for a $3 million net
loss as part of financing the BetzDearborn acquisition.
5. SHORT-TERM DEBT
A summary of short-term debt follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Commercial paper............................................ $ -- $195
Banks....................................................... 80 80
Current maturities of long-term debt........................ 486 --
---- ----
$566 $275
==== ====
</TABLE>
The commercial paper program was replaced by the debt syndication utilized
for the acquisition of BetzDearborn. Previously, commercial paper was 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, 1998, Hercules had $219 million of unused lines of credit
that may be drawn as needed, with interest at a negotiated spread over lenders'
cost of funds. Lines of credit in use at December 31, 1998, were $80 million.
Weighted-average interest rates on short-term borrowings at December 31, 1998
and 1997, were 5.10% and 5.40%, respectively.
A-13
<PAGE> 84
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
1998 1997
--------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C>
6.15% notes due 2000...................................... $ 100 $100
6.60% notes due 2027(a)................................... 100 100
7.85% notes due 2000...................................... 25 25
6.625% notes due 2003(b).................................. 125 125
8% convertible subordinated debentures due 2010(c)........ 3 10
Term loan tranche A due in varying amounts through
2003(d)................................................. 1,250 --
Term loan tranche B due 1999(d)........................... 470 --
Term loan tranche C due 2000(d)........................... 1,000 --
Revolving credit agreement due 2003(d).................... 288 --
ESOP debt(e).............................................. 110 --
Term notes at various rates from 5.11% to 9.60% due in
varying amounts through 2006(f)......................... 102 --
Commercial paper.......................................... -- 50
Variable rate loans....................................... -- 2
Other..................................................... 9 7
------ ----
3,582 419
Current maturities of long-term debt...................... (486) --
------ ----
Net long-term debt........................................ $3,096 $419
====== ====
</TABLE>
- ---------------
(a) 30-year debentures with a 10-year put option, exercisable by bondholder at a
redemption price equal to principal amount.
(b) Par value of $125 million issued June 1993.
(c) Subordinated debentures are convertible into common stock at $14.90 per
share and are redeemable at the option of the company at varying rates. The
annual sinking fund requirement of $5 million, beginning in 1996, has been
satisfied through conversions of debentures.
(d) The BetzDearborn acquisition was financed with borrowings under a $3,650
million credit facility with a syndicate of banks, and was consummated on
October 15, 1998. The syndication included three tranches of varying
maturity term loans totaling $2,750 million and a $900 million revolving
credit agreement. The facility bears interest at London Interbank Offered
Rate (LIBOR) plus 2% and may decrease to LIBOR plus .75% after six months
and after certain conditions are met, including repayments of term-loan
tranche B. Interest rates are reset for one, three or six-month periods at
the company's option. The company's debt agreement contains various
restrictive covenants that, among other things, require maintenance of
certain financial covenants: leverage, net worth and interest coverage, and
provides that the entry of a judgment or judgments involving aggregate
liabilities of $50 million or more be vacated, discharged, stayed or bonded
pending appeal within 60 days of entry. Issuance costs of $59 million
related to the financing are included in Deferred charges and other assets
and are being amortized over the term of the loans, using the effective
interest method. As of December 31, 1998, $612 million of the $900 million
revolver is available for use.
(e) The company assumed a loan with a fair market value of $110 million related
to the BetzDearborn ESOP Trust. The proceeds of the loan were used by the
ESOP Trust for the purchase of BetzDearborn preferred shares which, upon
acquisition by Hercules, were converted into equivalent shares of Hercules
common
A-14
<PAGE> 85
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock. The loan was recorded at fair market value at the date of
acquisition, and the $16 million fair value step-up is being amortized over
the term of the debt. The loan and guarantee mature in June 2009.
(f) Debt assumed in conjunction with the acquisition of FiberVisions L.L.C. (see
Note 1), less repayments through December 31, 1998.
Long-term debt maturities during the next five years are $486 million in
1999, $1,342 million in 2000, $318 million in 2001, $366 million in 2002, and
$831 million in 2003.
7. COMPANY-OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST
In the fourth quarter of 1998, Hercules Trust V (the Trust), the company's
wholly owned consolidated subsidiary trust created under the laws of the State
of Delaware, completed a private placement of units, consisting of Trust
Preferred Securities (the Securities) in the amount of $200 million and a
forward underwriting contract to purchase Hercules common stock. The proceeds of
the Securities were invested by the Trust in the company's newly issued Junior
Subordinated Debenture Notes (the Notes). Each Security will accrue and pay
distributions equal to LIBOR plus 175 basis points, compounded quarterly. The
obligations of the Trust are fully and unconditionally guaranteed by the
company.
The Securities are expected to be remarketed pursuant to their terms within
12 months from their issuance. The distribution rates will be reset to a fixed
rate in the remarketing based on bids received in a private auction to qualified
institutional buyers, and the maturity date will be reset to the one-year
anniversary of the successful remarketing. Hercules will be required to redeem
the Securities if remarketing does not occur within the established period. The
remarketing of the Securities may be accelerated under certain circumstances,
including the price of the company's common stock closing at or below $22.6875
(twenty-two and eleven-sixteenths). In addition, Hercules has agreed to offer
and sell, and a third party has agreed to underwrite $200 million of Hercules
common stock following the successful remarketing or redemption of the
Securities.
8. SERIES PREFERRED STOCK
The series preferred stock is without par value and is issuable in series.
There are 2,000,000 shares authorized for issuance, none of which have been
issued.
9. COMMON STOCK
Hercules common stock has a stated value of $25/48, and 300,000,000 shares
are authorized for issuance. At December 31, 1998, a total of 16,023,661 shares
were reserved for issuance for the following purposes: 879,999 shares for sales
to the Savings Plan Trustee; 11,382,530 shares for the exercise of awards under
the Stock Option Plan; 2,197,137 shares for awards under incentive compensation
plans; 337,440 shares for conversion of debentures and notes; and 1,226,555
shares for employee stock purchases.
For the company's stock repurchase program, from its start in 1991 through
year-end 1998, the Board authorized the repurchase of up to 74,650,000 shares of
company common stock. Of that total, 6,150,000 shares were intended to satisfy
requirements of various employee benefit programs. During this period, a total
of 66,490,592 shares of common stock were purchased in the open market at an
average price of $37.33 per share.
10. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
In connection with the acquisition of BetzDearborn, the company acquired
its ESOP and related trust as a long-term benefit for substantially all of
BetzDearborn's U.S. employees. The plan is a supplement to the company's
retirement plan. The ESOP trust has existing long-term debt of $94 million (fair
value of $110
A-15
<PAGE> 86
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million -- see Note 6) which is guaranteed by the company. The proceeds of the
original loan were used to purchase BetzDearborn convertible preferred stock,
which, at the date of the BetzDearborn acquisition, was converted into Hercules
common stock.
The BetzDearborn 401(k) program was previously integrated with the ESOP.
Eligible employees may invest 2% to 15% of eligible compensation. The company's
matching contributions equal to 50% of the first 6% of employees' investments,
fully vest to employees upon the completion of 5 years of service. The company's
matching contributions, which are made in the form of Hercules common stock, are
included in ESOP expense. After satisfying the 401(k) matching contributions and
the dividends on allocated shares, the remaining shares of ESOP stock are
allocated to each participant based on the ratio of participants' compensation
to total compensation of all participants.
The company contribution and dividends on the shares held by the ESOP trust
are used to repay the loan, and stock is allocated as the principal and interest
are paid. Long-term debt is reduced as payments are made on the third-party
financing. The loan and unearned compensation are recorded in the company's
Consolidated Balance Sheet as long-term debt and a reduction in shareholders'
equity, respectively.
The number of shares allocated and unallocated at December 31 are as
follows:
<TABLE>
<CAPTION>
1998
---------
<S> <C>
Allocated................................................. 1,776,338
Unallocated............................................... 4,052,556
---------
Total shares held by ESOP................................. 5,828,894
=========
</TABLE>
The company is required to make cash contributions to the Plan which enable
the trust to service its indebtedness. ESOP expense was $1 million for 1998
which was net of $2 million of dividends paid and charged to retained earnings.
11. LONG-TERM INCENTIVE COMPENSATION PLANS
The company's long-term incentive compensation plans provide for the grant
of stock options and the award of common stock and other market-based units to
certain key employees and nonemployee directors. Through 1994, shares of common
stock awarded under these plans normally were either restricted stock or
performance shares. During the restriction period, award holders have the rights
of stockholders, including the right to vote and receive cash dividends, but
they cannot transfer ownership.
In 1995, Hercules changed the structure of the long-term incentive
compensation plans to place a greater emphasis on shareholder value creation
through grants of regular stock options, performance-accelerated stock options,
and Cash Value Awards (performance-based awards denominated in cash and payable
in shares of common or restricted stock, subject to the same restrictions as
restricted stock). Restricted stock and other market-based units are awarded
with respect to certain programs. The number of awarded shares outstanding was
1,083,613; 873,627; and 1,881,946 at December 31, 1998, 1997, and 1996,
respectively.
Under the company's incentive compensation plans, 2,197,137 shares of
common stock were available for grant as stock awards or stock option awards.
Stock awards are limited to approximately 15% of the total authorizations.
Regular stock options are granted at the market price on the date of grant and
are exercisable at various periods from one to five years after date of grant.
Performance-accelerated stock options are also granted at the market price on
the date of grant and are normally exercisable at nine and one-half years.
Exercisability may be accelerated based upon the achievement of predetermined
performance goals. Both regular and performance-accelerated stock options expire
10 years after the date of grant.
A-16
<PAGE> 87
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to the company in the event of employment termination,
except in the case of death, disability, retirement, or other specified events.
The company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. The cost of stock awards and other market-based units, which are charged
to income over the restriction or performance period, amounted to $5 million for
1998; $4 million for 1997, and $9 million for 1996.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 1996, 1997, and 1998:
<TABLE>
<CAPTION>
REGULAR PERFORMANCE-ACCELERATED
----------------------------------- -----------------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES PRICE SHARES PRICE
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
January 1, 1996............. 3,883,184 $26.24 786,375 $48.54
Granted..................... 673,450 $55.40 2,303,750 $49.66
Exercised................... (646,247) $21.29 -- --
Forfeited................... (800) $47.25 (14,319) $48.29
---------- ------ ---------- ------
December 31, 1996........... 3,909,587 $32.49 3,075,806 $49.38
Granted..................... 1,708,100 $40.14 810,125 $41.07
Exercised................... (1,611,449) $20.97 -- --
Forfeited................... (4,950) $56.26 (10,534) $53.07
---------- ------ ---------- ------
December 31, 1997........... 4,001,288 $40.41 3,875,397 $47.63
Granted..................... 2,696,215 $32.75 1,170,890 $41.09
Exercised................... (279,795) $24.93 -- --
Forfeited................... (66,430) $41.58 (15,035) $46.09
---------- ------ ---------- ------
December 31, 1998........... 6,351,278 $37.83 5,031,252 $46.12
</TABLE>
The weighted-average fair value of regular stock options granted during
1996, 1997, and 1998 was $14.36, $10.13, and $8.53 respectively. The
weighted-average fair value of performance-accelerated stock options granted
during 1996, 1997, and 1998 was $10.20, $9.39, and $9.24 respectively.
Following is a summary of regular stock options exercisable at December 31,
1996, 1997, and 1998, and their respective weighted-average share prices:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Options exercisable December 31, 1996........ 2,636,457 $25.08
Options exercisable December 31, 1997........ 2,013,148 $38.54
Options exercisable December 31, 1998........ 3,300,628 $41.57
</TABLE>
There were no performance-accelerated stock options exercisable at December
31, 1996, 1997 and 1998.
A-17
<PAGE> 88
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of stock options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------------- EXERCISABLE OPTIONS
WEIGHTED- ---------------------------------
NUMBER AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
EXERCISE PRICE RANGE AT 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE 12/31/98 EXERCISE PRICE
-------------------- ----------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Regular Stock Options
$11 -- $20 257,263 2.58 $15.62 257,263 $15.62
$21 -- $30 1,915,600 9.31 $25.53 129,400 $25.00
$31 -- $40 1,912,695 7.82 $38.75 1,491,140 $38.68
$41 -- $60 2,265,720 7.79 $49.97 1,422,825 $50.79
--------- ---------
6,351,278 3,300,628
========= =========
Performance-Accelerated
Stock Options
$25 -- $40 1,094,733 9.01 $36.18 -- --
$41 -- $50 3,114,778 7.83 $47.10 -- --
$51 -- $61 821,741 7.08 $55.62 -- --
---------
5,031,252
=========
</TABLE>
The company estimates at December 31, 1998, 100% of performance-accelerated
stock options will eventually vest.
The company's Employee Stock Purchase Plan is a qualified noncompensatory
plan, which allows eligible employees to acquire shares of common stock through
systematic payroll deductions. The plan consists of three-month subscription
periods, beginning July 1 of each year. The purchase price is 85% of the fair
market value of the common stock on either the first or last day of that
subscription period, whichever is lower. Purchases may range from 2% to 15% of
an employee's base salary each pay period, subject to certain limitations.
Currently, 1,226,555 shares of Hercules common stock are registered for offer
and sale under the plan. Shares issued at December 31, 1998 and 1997, were
573,445 and 468,706, respectively. The company applies APB Opinion 25 and
related interpretations in accounting for its Employee Stock Purchase Plan.
Accordingly, no compensation cost has been recognized for the Employee Stock
Purchase Plan.
Had compensation cost for the company's Stock-Based Incentive Plans and
Employee Stock Purchase Plan been determined on the basis of fair value
according to SFAS No. 123, the fair value of each option granted or share
purchased would be estimated on the grant date using the Black-Scholes option
pricing model.
The following assumptions would be used in estimating fair value for 1998,
1997, and 1996:
<TABLE>
<CAPTION>
PERFORMANCE EMPLOYEE
ACCELERATED STOCK PURCHASE
ASSUMPTION REGULAR PLAN PLAN PLAN
- ---------- ------------ ----------- --------------
<S> <C> <C> <C>
Dividend yield....................................... 3.0% 3.0% 3.0%
Risk-free interest rate.............................. 5.84% 5.77% 5.32%
Expected life........................................ 7.4 yrs. 5 yrs. 3 mos.
Expected volatility.................................. 23.1% 21.9% 27.0%
</TABLE>
A-18
<PAGE> 89
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The company's net income and earnings per share for 1998, 1997, and 1996
would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<S> <C> <C> <C>
Net income
As reported.................................... $ 9 $ 319 $ 325
Pro forma...................................... $ (5) $ 308 $ 317
Basic earnings per share
As reported.................................... $ .10 $3.22 $3.10
Pro forma...................................... $(.06) $3.10 $3.02
Diluted earnings per share
As reported.................................... $ .10 $3.13 $2.98
Pro forma...................................... $(.06) $3.04 $2.92
</TABLE>
SFAS No. 123 does not apply to awards prior to 1995, and additional awards
in future years are anticipated.
12. ADDITIONAL BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Property, plant, and equipment
Land..................................................... $ 74 $ 18
Buildings and equipment.................................. 2,837 1,957
Construction in progress................................. 126 113
------ ------
Total.................................................... 3,037 2,088
Accumulated depreciation and amortization................ 1,599 1,401
------ ------
Net property, plant, and equipment....................... $1,438 $ 687
====== ======
Accrued expenses
Payroll and employee benefits............................ $ 63 $ 37
Income taxes payable..................................... 15 91
Accrued pension benefits................................. 29 --
Other.................................................... 374 280
------ ------
$ 481 $ 408
====== ======
</TABLE>
A-19
<PAGE> 90
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. PENSION AND OTHER POSTRETIREMENT BENEFITS
The company provides defined benefit pension and postretirement benefit
plans to employees. The pension and postretirement benefit plans for
BetzDearborn employees are included in the 1998 valuation. The following
provides a reconciliation of benefit obligations, plan assets, and funded status
of the plans.
<TABLE>
<CAPTION>
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------
1998 1997 1998 1997
------ ------ ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at January 1.......................... $1,114 $1,046 $ 141 $ 141
Service cost............................................. 20 17 1 1
Interest cost............................................ 83 78 10 10
Amendments............................................... -- 6 -- --
Assumption change........................................ 52 77 3 10
Divestiture.............................................. -- (4) -- --
Acquisition.............................................. 284 -- 9 --
Translation difference................................... 7 (13) -- --
Actuarial loss........................................... 28 12 10 --
Benefits paid from plan assets........................... (89) (105) (2) (2)
Benefits paid by Company................................. -- -- (18) (19)
------ ------ ----- -----
Benefit obligation at December 31........................ $1,499 $1,114 $ 154 $ 141
====== ====== ===== =====
Change in plan assets
Fair value of plan assets at January 1................... $1,237 $1,168 $ 9 $ 9
Actual return on plan assets............................. 182 187 1 2
Divestiture.............................................. -- (2) -- --
Acquisition.............................................. 256 -- -- --
Company contributions (refund)........................... (2) 4 -- --
Translation difference................................... 6 (15) -- --
Benefits paid from plan assets........................... (90) (105) (2) (2)
------ ------ ----- -----
Fair value of plan assets at December 31................. $1,589 $1,237 $ 8 $ 9
====== ====== ===== =====
Funded status of the plans............................... $ 90 $ 124 $(146) $(132)
Unrecognized actuarial loss.............................. 89 93 34 22
Unrecognized prior service cost (benefit)................ 35 39 (44) (50)
Unrecognized net transition obligation................... (25) (40) -- --
Amount included in accrued expenses -- other............. -- -- 20 21
------ ------ ----- -----
Prepaid (accrued) benefit cost........................... $ 189 $ 216 $(136) $(139)
====== ====== ===== =====
Amounts recognized in the statement of financial position
consist of:
Prepaid benefit cost..................................... 218 216 -- --
Accrued benefit liability................................ (29) -- (136) (139)
------ ------ ----- -----
$ 189 $ 216 $(136) $(139)
====== ====== ===== =====
Assumptions as of December 31
Weighted average discount rate........................... 7.00% 7.25% 7.00% 7.25%
Expected return on plan assets........................... 9.25% 9.25% 9.25% 9.25%
Rate of compensation increase............................ 4.50% 4.50% 4.50% 4.50%
</TABLE>
A-20
<PAGE> 91
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- -----------------------
1998 1997 1996 1998 1997 1996
----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Service cost................................... $ 20 $ 17 $ 19 $ 1 $ 1 $ 1
Interest cost.................................. 83 78 77 10 10 11
Return on plan assets (expected)............... (114) (103) (99) (1) (1) (1)
Amortization and deferrals..................... 12 5 6 (4) (5) (5)
Amortization of transition asset............... (14) (14) (14) -- -- --
----- ----- ---- --- --- ---
Benefit cost (credit).......................... $ (13) $ (17) $(11) $ 6 $ 5 $ 6
===== ===== ==== === === ===
</TABLE>
PENSION
During 1997, the company recognized a charge of approximately $8 million
for special termination benefits.
OTHER POSTRETIREMENT BENEFITS
The non-pension postretirement benefit plans are contributory health care
and life insurance plans. In August 1993, a Voluntary Employees' Beneficiary
Association (VEBA) Trust was established and funded with $10 million of company
funds. The company periodically obtains reimbursement for union retiree claims,
while other claims are paid from company assets. The participant contributions
are immediately used to cover claim payments, and for this reason do not appear
as contributions to plan assets.
The assumed health care cost trend rate at December 31, 1998 and 1997, was
5% for those under age 65 and 4.75% for those over age 65, decreasing to 4.5% in
subsequent years.
A one-percentage point increase or decrease in the assumed health care cost
trend rate would increase or decrease the postretirement benefit obligation by
$6 million or $7 million, respectively, and would not have a material effect on
aggregate service and interest cost components.
14. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
Purchased in-process research and development (IPR&D) represents the value
assigned in a purchase business combination to research and development projects
of the acquired business that were commenced but not yet completed at the date
of the acquisition, and which, if unsuccessful, have no alternative future use
in research and development activities or otherwise. Amounts assigned to
purchased IPR&D must be charged to expense at the date of consummation of the
purchase business combination. Accordingly, the company has charged
approximately $130 million to expense at the acquisition date for IPR&D related
to the BetzDearborn acquisition. (See Note 1.)
The IPR&D projects were principally included in the water treatment and
paper process divisions of the acquired business. The former Water Treatment
Group (WTG) provided specialty water and process treatment programs for boiler,
cooling, influent, and effluent applications to markets such as refining,
chemical, paper, electric utility, food, industrial, commercial and
institutional establishments. Overall, the products are used to control
corrosion, scale, deposit formation, and microbiological growth, conserve energy
and improve efficiency. Additionally, the former Paper Process Group (PPG)
brought to market custom-engineered programs for the process-related problems
associated with paper production. These problems include deposition, corrosion,
microbiological fouling, foam control, deinking and felt conditioning.
A-21
<PAGE> 92
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the significant projects and the values
assigned:
<TABLE>
<CAPTION>
ESTIMATED
PERCENT COST TO ESTIMATED PROJECTED IPR&D
PROJECT GROUP COMPLETE COMPLETE TOTAL COST LAUNCH DATE VALUE
- ------- ------- -------- --------- ---------- ----------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
New Blend of Actives(1)............ PPG 73% $ .3 $ 1.0 1999 $ 38
New Corrosion Inhibitor(2)......... WTG 31% 1.5 2.1 2002 26
Alkaline Drainage Aid(3)........... PPG 39% 1.6 2.7 2000 6
Other major projects............... WTG 54% Avg. 3.5 7.6 1999-2001 27
Other major projects............... PPG 80% Avg. .7 3.7 1999-2001 15
All other projects................. Various 29% Avg. 4.3 6.1 Various 18
--- ----- ----- ----
Total IPR&D........................ 49% $11.9 $23.2 $130
=== ===== ===== ====
</TABLE>
- ---------------
(1) This project will continuously screen new microbiocidal actives in order to
identify promising compounds that may improve current product mix of
offerings.
(2) This project involves the development of new corrosion control chemistry for
application in a range of water treatment systems.
(3) This project involves the development of advanced retention, drainage, and
formation systems for printing and writing paper.
Due to the uniqueness of each of the projects, the costs and effort
required are estimated based on the latest available information. Additionally,
the launch date reflects management's best estimate of the time that the company
will begin to benefit from cash inflow of the projects. However, there is a risk
that certain projects may not be completed successfully for a variety of reasons
including: change in strategies, inability to develop a cost efficient
treatment, and changes in market demand or customer requirements.
The IPR&D valuation charge was measured by the stage of completion method,
primarily calculated by dividing the costs incurred to date by the total
estimated costs. These percentages were applied to the results of
project-by-project discounted cash flow models that estimated the present value
of residual cash flows deemed attributable solely to the underlying IPR&D.
The projected revenues, costs, and margins in the cash flow forecasts are
consistent with projections by management based on available historical data.
The revenue projections are based on an opportunity analysis for each project,
which takes into account market and competitive conditions, potential customers,
and strategic goals. The weighted average cost of capital for the overall
business was estimated at 11% and the risk-adjusted discount rate used in the
IPR&D project valuation model was 13%.
15. OTHER OPERATING EXPENSES (INCOME), NET
As a result of the BetzDearborn acquisition in the fourth quarter of 1998,
Hercules began to formulate and implement a plan to merge the operations of
BetzDearborn with Hercules (see Note 1). Additionally, the company reviewed its
existing operations and support infrastructure and approved a plan to terminate
Hercules employees and exit activities to eliminate redundancies and
inefficiencies. As a result, the company incurred charges of approximately $76
million. These charges include employee termination benefits of $31 million;
exit costs related to facility closures of $10 million; write-downs of property,
plant and equipment of $24 million; and integration expenses of $11 million.
Employee termination benefits are for approximately 350 Hercules manufacturing,
sales and marketing, administration, technology and support personnel. Facility
closures and exit costs relate primarily to Process Chemicals and Services in
connection with the acquisition. Write-downs of property, plant and equipment
relate to asset impairments in Chemical Specialties and Functional Products
resulting from adverse business negotiations, the effects of the BetzDearborn
acquisition,
A-22
<PAGE> 93
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the loss of a customer. Integration expenses include consulting and legal
fees, integration bonuses, travel and training, and are expensed as incurred.
Other operating expenses in 1997 included charges of $146 million,
primarily associated with reorganization of management and the adoption of new
competitive strategies (announced in early 1997). The charges included $122
million related to asset rationalizations and impairment and $24 million related
to severance benefits. Included in the $122 million is an impairment loss of $95
million. Additionally, the company recognized approximately $27 million of
rationalization charges primarily associated with certain assets, which were no
longer being utilized, and lease abandonment costs. Concurrently, management
authorized and committed the company to a plan to reduce its work force by
approximately 270 employees and accrued $24 million of severance-related
benefits. The plan included reorganization of management, reductions in
operating personnel at certain domestic and foreign facilities, and the
consolidation of certain support functions. Other operating expenses in 1997
also include $13 million of net environmental cleanup costs, principally for
nonoperating sites and $8 million of executive retirement benefits.
In 1996, other operating expenses (income), net, included probable
recoveries related to environmental remediation of $13 million and reduction in
the estimated loss on the divestiture of the Composite Products Division of $5
million.
During 1998, the company paid $10 million of these liabilities. As of
December 31, 1998, the remaining liability for these charges is $36 million for
termination benefits representing approximately 370 employees and $10 million
for other exit costs. Reorganization in the foreign facilities has proceeded
slower than anticipated due to changes in the information system implementation
schedule, acquisition activity and other corporate initiatives. Management
expects to complete remaining actions under this plan during 2000.
16. INTEREST AND DEBT EXPENSE
Interest and debt costs are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Costs incurred.............................................. $114 $47 $40
Amount capitalized.......................................... 11 8 5
---- --- ---
Amount expensed............................................. $103 $39 $35
==== === ===
</TABLE>
17. OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Interest income............................................. $ 36 $ 29 $ 5
Net gains on dispositions................................... 23 398 22
Acquisition costs........................................... -- (20) --
Legal settlements and accruals.............................. (66) (41) --
Interest rate swap termination.............................. (13) -- --
Miscellaneous income (expense), net......................... (2) 8 (1)
---- ---- ---
$(22) $374 $26
==== ==== ===
</TABLE>
Interest income in 1998 and 1997 relates primarily to the $500 million note
received upon completion of the Tastemaker monetization. The note was sold
during the fourth quarter of 1998 with a net loss of $3
A-23
<PAGE> 94
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million reported in net gains on dispositions. Also, gains of $12 million and
$19 million in 1998 and 1997, respectively, were recorded from the sale of
Alliant Techsystems common stock held by Hercules. (See Note 21.) Additionally,
1997 includes a gain of $368 million on the completion of transactions that
monetized the company's investment in Tastemaker, a 50%-owned flavors joint
venture. Net gains on dispositions in 1996 reflect the sale of real estate and
the sale of a product line. Acquisition costs in 1997 represent a charge
primarily related to the company's unsuccessful bid for Allied Colloids. The
1998 legal settlements and accruals relate primarily to settlements of Qui Tam
("Whistle Blower") lawsuits. (See Note 22.) The 1998 loss from terminated
interest rate swaps is related to the company's financing effort upon the
acquisition of BetzDearborn. Miscellaneous income (expense), net, includes net
foreign currency gains of $5 million, $19 million, and $11 million in 1998,
1997, and 1996, respectively.
18. INCOME TAXES
The domestic and foreign components of income before taxes and effect of
change in accounting principle are presented below:
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Domestic.................................................... $(147) $396 $250
Foreign..................................................... 224 197 235
----- ---- ----
$ 77 $593 $485
===== ==== ====
</TABLE>
A summary of the components of the tax provision follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Currently payable
U.S. federal.............................................. $(26) $169 $ 33
Foreign................................................... 74 63 60
State..................................................... (4) 2 9
Deferred
Domestic.................................................. 17 30 41
Foreign................................................... 7 5 17
---- ---- ----
Provision for income taxes.................................. $ 68 $269 $160
==== ==== ====
</TABLE>
A-24
<PAGE> 95
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax liabilities (assets) at December 31 consist of:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Depreciation................................................ $ 153 $ 119
Prepaid pension............................................. 93 82
Inventory................................................... 6 15
Investments................................................. 84 84
Other....................................................... 46 22
----- -----
Gross deferred tax liabilities.............................. 382 322
----- -----
Postretirement benefits other than pensions................. (81) (66)
Accrued expenses............................................ (126) (110)
Loss carryforwards.......................................... (24) (15)
Other....................................................... (31) (32)
----- -----
Gross deferred tax assets................................... (262) (223)
----- -----
Valuation allowance......................................... 12 12
----- -----
$ 132 $ 111
===== =====
</TABLE>
A reconciliation of the U.S. statutory income tax rate to the effective
rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. statutory income tax rate.............................. 35% 35% 35%
Purchased in-process research and development (Note 14)..... 59 -- --
Goodwill amortization....................................... 7 -- --
Foreign dividends net of credits............................ -- 2 --
State taxes................................................. 2 -- 1
Utilization of operating losses............................. -- -- (2)
Reserves.................................................... (17) 7 --
Other....................................................... 2 1 (1)
--- -- --
Effective tax rate.......................................... 88% 45% 33%
=== == ==
</TABLE>
The company provides taxes on undistributed earnings of subsidiaries and
affiliates included in consolidated retained earnings to the extent such
earnings are planned to be remitted and not reinvested permanently.
The undistributed earnings of subsidiaries and affiliates on which no
provision for foreign withholding or U.S. income taxes has been made amounted to
approximately $400 million at December 31, 1998. 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.
A-25
<PAGE> 96
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share
and the effect on income and the weighted-average number of shares of dilutive
potential common stock:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ---------
(DOLLARS AND SHARES IN MILLIONS,
EXCEPT PER SHARE)
<S> <C> <C> <C>
Basic EPS computation:
Income before effect of change in accounting principle.... $ 9 $ 324 $ 325
Effect of change in accounting principle.................. -- (5) --
----- ----- ------
Net income................................................ $ 9 $ 319 $ 325
===== ===== ======
Weighted-average shares outstanding....................... 96.3 99.2 104.9
Earnings per share before effect of change in accounting
principle.............................................. $ .10 $3.27 $ 3.10
Effect of change in accounting principle.................. -- (.05) --
----- ----- ------
Earnings per share........................................ $ .10 $3.22 $ 3.10
===== ===== ======
Diluted EPS computation:
Income before effect of change in accounting principle.... $ 9 $ 324 $ 325
Interest on convertible debentures........................ -- 2 2
Effect of change in accounting principle.................. -- (5) --
----- ----- ------
Net Income................................................ $ 9 $ 321 $ 327
===== ===== ======
Weighted-average shares outstanding....................... 96.3 99.2 104.9
Options................................................... .6 1.1 1.9
Convertible debentures.................................... .5 2.1 2.9
----- ----- ------
Adjusted weighted-average shares.......................... 97.4 102.4 109.7
===== ===== ======
Earnings per share before effect of change in accounting
principle.............................................. $ .10 $3.18 $ 2.98
Effect of change in accounting principle.................. -- (.05) --
----- ----- ------
Earnings per share........................................ $ .10 $3.13 $ 2.98
===== ===== ======
</TABLE>
20. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Notional Amounts and Credit Exposure of Derivatives
The notional amounts of derivatives summarized below do not represent
amounts exchanged by the parties and, thus, are not a measure of the exposure of
the company through its use of derivatives. The amounts exchanged are calculated
on the basis of the notional amounts and the other terms of the derivatives,
which relate to interest rates or exchange rates.
Interest Rate Risk Management
During 1998, interest rate swaps which converted 6.02% average fixed-rate
debt to floating-rate debt expired. During the fourth quarter, a series of
interest rate swap agreements converting floating rate debt into fixed rate debt
ranging from 6.05% to 7.08% per year were terminated primarily in conjunction
with the sale of the Tastemaker note (see Note 4) and the BetzDearborn
acquisition. New interest rate swaps totaling $1.0 billion were added in the
fourth quarter 1998. This series of interest rate swap agreements, maturing from
1999 through December 2002, effectively converts floating-rate debt into debt
with a fixed rate ranging from 4.91% to 5.21% per year as a hedge against the
company's interest rate exposure on its variable rate debt
A-26
<PAGE> 97
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding. For the years 1998, 1997, and 1996, these contracts resulted in a
less than 1% change in the effective interest rate on the weighted-average
notional principal amounts outstanding. The aggregate notional principal amounts
at the end of 1998 and 1997 were $1.0 billion and $650 million, respectively.
The following table indicates the types of swaps used and their
weighted-average interest rates:
<TABLE>
<CAPTION>
1998 1997
--------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Pay fixed on swaps notional amount (at year-end).......... $1,000 $650
Average pay rate.......................................... 6.4% 6.4%
Average receive rate...................................... 5.5% 5.7%
</TABLE>
Foreign Exchange Risk Management
The company selectively uses foreign currency forward contracts and
currency swaps to offset the effects of exchange rate changes on reported
earnings, cash flow, and net asset positions. The primary exposures are
denominated in Danish kroner, Dutch guilder, Belgian franc, British pound
sterling, and the 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. At December 31, 1998
and 1997, the company had outstanding forward-exchange contracts to purchase
foreign currencies aggregating $117 million and $29 million and to sell foreign
currencies aggregating $320 million and $171 million, respectively. Non-U.S.
dollar cross-currency trades aggregated $380 million and $630 million at
December 31, 1998 and 1997, respectively. Currency swap agreements, used to
hedge net investment positions, totaled $512 million at December 31, 1998. The
forward-exchange contracts and currency swap agreements outstanding at December
31, 1998 will mature during 1999.
Fair Values
The following table presents the carrying amounts and fair values of the
company's financial instruments at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Investment securities (available for sale)........... $ 31 $ 31 $ 81 $ 81
Investment securities (held to maturity)............. -- -- 500 500
Long-term debt....................................... (3,096) (3,101) (419) (452)
Company-obligated preferred securities of subsidiary
trust.............................................. (200) (200) -- --
Foreign exchange contracts........................... 6* 6 2* 2
Currency swaps....................................... 8* 8 -- --
Interest rate swap contracts......................... -- 1 (1)* (12)
</TABLE>
- ---------------
* The carrying amount represents the net unrealized gain or net interest payable
associated with the contracts at the end of the period.
Fair values of derivative contracts are indicative of cash that would have
been required had settlement been December 31, 1998.
A-27
<PAGE> 98
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Basis of Valuation
Investment securities: Quoted market prices.
Long-term debt: Present value of expected cash flows related to existing
borrowings discounted at rates currently available to the company for long-term
borrowings with similar terms and remaining maturities.
Company obligated preferred securities of subsidiary trust: Year-end
interest rates and company common stock price.
Foreign exchange contracts: Year-end exchange rates.
Currency swaps: Year-end interest and exchange rates.
Interest rate swap contracts: Bank or market quotes or discounted cash
flows using year-end interest rates.
21. DIVESTITURES
In March 1997, the company completed transactions to monetize its
investment in Tastemaker for approximately $608 million, including $108 million
in cash and a $500 million, 6.2%, interest-bearing five-year note. Equity in
income of affiliated companies included Tastemaker earnings of $11 million in
1997 and $32 million in 1996.
In June 1997, the company completed a joint venture of its polypropylene
fiber business with Jacob Holm & Sons A/S (Denmark) in which Hercules owned 51%
of the joint venture, which was accounted for on the equity method at that time.
In July 1998, Hercules purchased its partner's 49% share of the joint venture,
with the operating results of FiberVisions being included in Hercules'
consolidated financial statements since the date of acquisition. (See Note 1.)
Pursuant to a 1997 agreement, Hercules sold its remaining shares of Alliant
Techsystems Inc. for $12 million in 1998.
In June 1996, the company sold its Composite Products Division for $141
million in cash. Net sales and operating profit of this business were $49
million and $8 million, respectively in 1996.
22. COMMITMENTS AND CONTINGENCIES
Leases
Hercules has operating leases (including office space, transportation, and
data processing equipment) expiring at various dates. Rental expense was $35
million in 1998, and $31 million in both 1997 and 1996.
At December 31, 1998, minimum rental payments under noncancelable leases
aggregated $317 million with subleases of $30 million. A significant portion of
these payments relates to a long-term operating lease for corporate office
facilities. The net minimum payments over the next five years are $39 million in
1999, $32 million in 2000, $24 million in 2001, $20 million in 2002, and $18
million in 2003.
Environmental
Hercules has been identified as a potentially responsible party (PRP) by
U.S. federal and state authorities, or has been sued for contribution by private
parties, for the cost of environmental investigation and/or cleanup at numerous
sites. The estimated range of the reasonably possible share of costs for
investigation and cleanup is between $63 million and $199 million. The actual
costs will depend upon numerous factors, including the number of parties found
responsible at each environmental site and their ability to pay, the actual
methods of remediation, outcomes of negotiations with regulatory authorities,
A-28
<PAGE> 99
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outcomes of litigation, changes in environmental laws and regulations,
technological developments, and the years of remedial activity required, which
could range up to 30 years.
In 1992, Hercules brought suit against its insurance carriers for past and
future costs for cleanup of certain environmental sites. In April 1998, the
trial regarding insurance recovery for the Jacksonville, Arkansas site (see
discussion below) was completed. The jury returned a "Special Verdict Form" with
findings that will, in conjunction with the court's other opinions, be used by
the Court to enter a judgment. The judgment will determine the amount of
Hercules recovery for past cleanup expenditures and will state that Hercules is
entitled to similar coverage for costs incurred since September 30, 1997 and in
the future. Hercules has not included any insurance recovery in the estimates
above.
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 agencies or
through correspondence with previously named PRPs requesting information on
Hercules' activities at sites under investigation. In addition, Hercules has
established procedures for identifying environmental issues at its respective
plant sites. Environmental coordinators, familiar with environmental laws and
regulations, are resources for identification of environmental issues. Further,
Hercules has environmental audit programs, which are designed to identify
environmental issues at operating plant sites. Through these programs and
information-gathering activities, 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).
Other defendants in this litigation have either settled with the government
or, in the case of the Department of Defense (DOD), have not been held liable.
Hercules appealed the Court's order finding the DOD not liable. On January 31,
1995, the 8th Circuit Court of Appeals upheld the Court's order. Hercules filed
a petition to the U.S. Supreme Court requesting review and reversal of the 8th
Circuit Court ruling. This petition was denied on June 26, 1995, and the case
was remanded to the District Court for further proceedings.
On May 21, 1997, the Court issued a ruling that Uniroyal is liable and that
Standard Chlorine is not liable to Hercules for contribution. A trial on
allocation and damages among Hercules, Uniroyal, and the United States was
scheduled to begin October 1998. Through the filing of separate summary judgment
motions, Hercules and Uniroyal raised a number of defenses to the United States'
ability to recover its costs. On October 23, 1998, the Court denied those
motions and granted the United States' summary judgment motion, ordering
Hercules and Uniroyal to pay the United States approximately $103 million plus
any additional response costs incurred or to be incurred after July 31, 1997.
Hercules expects that this amount will be reduced by approximately $7 million,
the amount received by the United States in previous settlements with other
parties. Trial testimony on the issue of allocation between Hercules and
Uniroyal was completed on November 6, 1998. Once a final judgment has been
entered, Hercules expects to appeal the Court's determination with respect to
its liability, the United States' costs, the divisibility of harm issue, and
Standard Chlorine's liability.
At December 31, 1998, 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 based on currently
available information, including the process of remedial investigations at each
site and the current status of negotiations with regulatory authorities
regarding the method and extent of apportionment of costs among other PRPs.
Hercules does not anticipate that its financial condition will be materially
affected by environmental
A-29
<PAGE> 100
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
remediation costs in excess of amounts accrued, although quarterly or annual
operating results could be materially affected.
Litigation
The company is a defendant in numerous lawsuits that arise out of, and are
incidental to, the conduct of its business. In these legal proceedings, no
specifically identified director, officer, or affiliate is a party or a named
defendant. These suits concern issues such as product liability, contract
disputes, labor-related matters, patent infringement, environmental proceedings,
property damage, and personal injury matters.
Hercules was a defendant in three Qui Tam (Whistle Blower) lawsuits brought
by former employees of the Aerospace business sold to Alliant Techsystems Inc.
in March 1995. Among the allegations made in the three lawsuits were allegations
relating to submission of false claims and records under various government
contracts, delivery of defective products, a deficient quality control program,
mischarging of work performed under government contracts, misuse of government
equipment, other acts of financial mismanagement, and wrongful termination
claims. The government, after investigation of the allegations, declined to
intervene in two of these lawsuits and partially intervened in the third. In May
1998, Hercules announced that it had agreed to settle the first lawsuit. The
settlement was approved by the court and the case was dismissed in July 1998.
In August 1998, the parties to the second lawsuit reached a tentative
settlement, subject to approval of the court. Although it did not intervene in
the case, the U.S. Department of Justice (DOJ) objected to approval of the
tentative settlement, arguing that Hercules should only be released from claims
that the government contended were actually investigated, and that the proposed
allocation of settlement proceeds between False Claims Act claims and wrongful
termination claims should be revised to attribute a higher percentage of
recovery to claims arising under the False Claims Act. On February 9, 1999, the
court entered a judgment approving the settlement and dismissing the lawsuit.
The DOJ has 60 days from that date in which to file a Notice of Appeal, if it
chooses to do so.
In February 1998, the parties to the third lawsuit reached a tentative
settlement, which has since been finalized, under which all claims alleging
mischarging to the Intermediate Nuclear Forces Contract were settled. Other
portions of the complaint were not resolved by the settlement. In August 1998,
the parties reached a tentative settlement of the remaining portions of the
complaint, subject to approval of the Court. The DOJ objected to approval of the
tentative settlement, arguing that Hercules should only be released from claims
that the government contended were actually investigated, and that the
settlement agreement should have contained certain provisions preventing Alliant
Techsystems Inc., which was also a defendant in the lawsuit, from recovering
certain costs under its government contracts. On February 17, 1999, the Court
entered a judgment approving the settlement and dismissing the lawsuit. The DOJ
has 60 days from that date in which to file a Notice of Appeal, if it chooses to
do so.
As a result of these settlements, the company recognized charges of $4
million and $62 million in 1997 and 1998, respectively.
In addition to the Jacksonville, Arkansas, site litigation described above,
two individuals have sued Hercules in a lawsuit captioned Jeffrey Shelton, Jr.,
et al. v. Hercules Incorporated, Civil No. LR-C-97-131 (E.D. Ark. 1997). These
individuals seek medical monitoring and damages for loss of recreational
opportunities. They have brought a Resource Conservation and Recovery Act (RCRA)
citizens suit against Hercules seeking an injunction which would require
Hercules to fund or perform various environmental and health studies and pay for
any required remediation to the Bayou Meto. Trial is presently scheduled for
August 1999. Further, 19 individuals have sued Hercules in a matter entitled
Gary Graham, et al. v. Vertac Chemical Corporation and Hercules Incorporated,
No. LR-C-98-678 (E.D. Ark. 1998). These individuals seek damages for personal
injuries and diminution of property value as a result of alleged dioxin
contamination
A-30
<PAGE> 101
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from the Jacksonville site. Trial is presently scheduled for August 1999.
Hercules denies liability in both actions, and Hercules intends to vigorously
defend itself.
BetzDearborn, along with Pacific Gas and Electric (PG&E), is a defendant in
four lawsuits involving in the aggregate approximately 2,350 plaintiffs pending
in the Superior Court of Los Angeles County, California (the Lawsuits).
Plaintiffs are comprised primarily of present and former PG&E employees, their
families, and residents living in the vicinity of the three PG&E facilities that
are the subject of the Lawsuits. Plaintiffs seek unspecified monetary damages
(including punitive damages) for personal injuries arising from alleged
exposures to chromate-based products sold or allegedly sold by Betz
Laboratories, Inc. (predecessor to BetzDearborn) to PG&E for use in the cooling
towers located at these facilities. The sales in question occurred or allegedly
occurred at various times between 1952 and the mid-1980s, depending upon the
facility. In the Acosta, Aguilar, and Aguayo cases, the parties have selected 20
plaintiffs and 2 alternates whose claims will be tried together, and prior to
the claims for the remaining plaintiffs in the Lawsuits. It is anticipated that
the 20 plaintiffs' claims will be tried in late 1999. BetzDearborn denies any
legal liability to plaintiffs, believes it has substantial defenses, and intends
to contest the claims vigorously. BetzDearborn further believes that any claim
for punitive damages is without any legitimate basis in fact or law. The
Lawsuits are captioned as follows: Acosta, et al. v. Betz Laboratories, et al.,
No. BC 161 669 (1996); Adams, et al. v. Betz Laboratories, et al., No. BC 113
000 (1994); Aguilar, et al. v. Betz Laboratories, et al., No. BC 158 588 (1996);
and Aguayo et al. v. Betz Laboratories, et al., No. BC 123 749 (1995).
Although both BetzDearborn and PG&E are named as defendants in each of the
Lawsuits, not all plaintiffs seek damages from both defendants. PG&E previously
settled a lawsuit brought by many of the same individuals who are plaintiffs in
the Adams lawsuit; as a result, PG&E will have no additional liability to those
plaintiffs.
In October 1998, BetzDearborn and PG&E settled a fifth lawsuit relating to
alleged exposure to chromate-based products sold or allegedly sold by Betz
Laboratories, Inc. to PG&E for use in cooling towers at one or more of the PG&E
facilities. That lawsuit was captioned Riep, et al. v. Betz Laboratories, et
al., No. 984695 (San Francisco County, 1997). The amount of the settlement was
not material.
BetzDearborn maintained insurance coverage for the purpose of securing
protection against alleged product and other liabilities, and certain of the
insurance carriers have undertaken to pay the cost of the defense of the
Lawsuits subject to various reservations of rights. BetzDearborn will pursue all
available insurance coverage to fund any damages payable to plaintiffs in
connection with the Lawsuits (excluding any punitive damages to the extent not
recoverable under BetzDearborn's insurance policies).
While it is not feasible to predict the outcome of all pending suits and
claims, the ultimate resolution of these matters could have a material effect
upon the financial position of Hercules, and the resolution of any of the
matters during a specific period could have a material effect on the quarterly
or annual operating results for that period.
23. CHANGE IN ACCOUNTING PRINCIPLE
In November 1997, FASB's Emerging Issues Task Force (EITF) reached a final
consensus on Issue 97-13, "Accounting for Costs Incurred in Connection With a
Consulting Contract That Combines Business Process Reengineering and Information
Technology Transformation." Activities deemed to be business process
reengineering include the following: current state assessments, configuring and
prototyping, process reengineering, and work force restructuring. The consensus
requires that the unamortized amounts of such costs previously capitalized as of
the beginning of the quarter, which includes November 20, 1997, be charged
during that quarter as the cumulative effect of a change in accounting
principle. The company adopted the consensus during the fourth quarter of 1997
and recorded a cumulative-effect adjustment of $5 million.
A-31
<PAGE> 102
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
24. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
In 1998, Hercules adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The statement establishes new standards for reporting information
about operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosure about products and services,
geographic area, and major customers. In compliance with SFAS 131 and with the
acquisition of BetzDearborn, the company has identified three reportable
segments and has restated prior years to conform with the 1998 presentation.
Process Chemicals and Services: (Pulp and Paper and BetzDearborn.) Products
and services in this segment are designed to enhance customers' processes and
improve their manufacturing costs or environmental impact. Principal products
and markets include performance additives and water and process treatment
chemicals and related on-site services for a wide variety of industrial and
commercial applications including pulp and paper mills, refineries, chemical
plants, metals manufacturers, automobile assembly plants and makers of food and
beverages.
Functional Products: (Aqualon and Food Gums.) Products from this segment
are principally derived from natural resources and are sold as key raw materials
to other manufacturers. Principal products and markets include water-soluble
polymers and natural gums, used as thickeners, emulsifiers and stabilizers for
water-based paints, oil and gas exploration, building materials, dairy and
bakery products and other processed food products such as jams, jellies and
meats.
Chemical Specialties: (Resins and FiberVisions.) Products in this segment
provide low-cost, technology driven solutions to meet customer needs and market
demands. Principal products and markets include rosin and hydrocarbon resins for
adhesives used in nonwoven fabrics, textile fibers, and adhesive tapes; thermal-
bond polypropylene staple fiber for disposable diapers and other hygienic
products; and automotive textiles.
The company evaluates performance and makes decisions based primarily on
"Profit from Operations" and "Capital Employed." Consolidated capital employed
represents the total resources employed in the company and is the sum of total
debt, trust preferred securities and stockholders' equity. Capital employed in
each reportable segment represents the net operating assets employed to conduct
business in that segment and generally includes working capital (excluding cash)
and property, plant and equipment. Other assets and liabilities, primarily
goodwill and other intangibles, not specifically allocated to business segments,
are reflected in "Reconciling Items" in the table below.
Hercules has no single customer representing greater than 10% of its
revenues.
A-32
<PAGE> 103
GEOGRAPHIC REPORTING
For geographic reporting, no single country, outside the United States, is
material for separate disclosure. However, because the company has significant
foreign operations, revenues and long-lived assets are disclosed by geographic
region.
Revenues are reported on a "customer basis," meaning that net sales are
included in the geographic area where the customer is located. Long-lived assets
are included in the geographic areas in which the producing entities are
located.
Intersegment sales are eliminated in consolidation.
<TABLE>
<CAPTION>
PROCESS
CHEMICALS
AND FUNCTIONAL CHEMICAL RECONCILING
INDUSTRY SEGMENTS SERVICES PRODUCTS SPECIALTIES ITEMS CONSOLIDATED
- ----------------- --------- ---------- ----------- ----------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1998
Net sales...................... $717 $863 $566 $ (1) $2,145
Profit (loss) from
operations.................. 131 215 75 (229)(a) 192
Equity in income of affiliated
companies................... 10
Interest and debt expense...... 103
Other income (expense), net.... (22)
------
Income before income taxes..... 77
Capital employed............... 756 392 388 2,885(d) 4,421
Capital expenditures........... 44 53 36 24 157
Depreciation and
amortization................ 22 32 19 35 108
---- ---- ---- ------ ------
1997
Net sales...................... $443 $898 $526 $ (1) $1,866
Profit (loss) from
operations.................. 100 224 67 (163)(b) 228
Equity in income of affiliated
companies................... 30
Interest and debt expense...... 39
Other income, net.............. 374
------
Income before income taxes..... 593
Capital employed............... 138 355 168 723(d) 1,384
Capital expenditures........... 22 47 30 20 119
Depreciation and
amortization................ 11 34 13 18 76
---- ---- ---- ------ ------
1996
Net sales...................... $452 $924 $633 $ 51(c) $2,060
Profit (loss) from
operations.................. 108 220 95 18(c) 441
Equity in income of affiliated
companies................... 21 32 53
Interest and debt expense...... 35
Other income, net.............. 26
------
Income before income taxes..... 485
Capital employed............... 137 398 268 742(d) 1,545
Capital expenditures........... 14 48 31 27 120
Depreciation and
amortization................ 13 49 20 26 108
</TABLE>
A-33
<PAGE> 104
<TABLE>
<CAPTION>
UNITED
GEOGRAPHIC AREAS STATES EUROPE AMERICAS (E) ASIA PACIFIC TOTAL
- ---------------- ------ ------ ------------ ------------ ------
<S> <C> <C> <C> <C> <C>
1998
Net sales.............................. $ 944 $785 $258 $158 $2,145
Long-lived assets(f)................... 3,083 681 125 97 3,986
1997
Net sales.............................. 826 655 212 173 1,866
Long-lived assets(f)................... 387 309 19 16 731
1996
Net sales.............................. 929 726 223 182 2,060
Long-lived assets(f)................... 529 339 39 9 916
</TABLE>
- ---------------
(a) Includes costs for purchased in-process research and development, facility
closure and contract termination, employee termination benefits, write-downs
of property, plant and equipment, other integration expenses, and
amortization of goodwill and intangibles. (See Notes 14 and 15.)
(b) Primarily includes asset rationalizations, impairments and severance costs.
(See Note 15.)
(c) Includes revenues and profits pertaining to the Composite Products business
sold in June 1996.
(d) Assets and liabilities not specifically allocated to business segments,
primarily goodwill, intangibles, and other long-term assets net of
liabilities.
(e) Ex-U.S.A.
(f) Long-lived assets include Property, plant and equipment, Goodwill and Other
intangible assets. In 1998, the goodwill and other intangible assets related
to the BetzDearborn acquisition are reflected in the United States region.
Once the purchase price allocation is completed, these assets will be
reported in the appropriate regions.
A-34
<PAGE> 105
PROSPECTUS
[HERCULES LOGO]
HERCULES INCORPORATED
HERCULES TRUST I
HERCULES TRUST II
HERCULES TRUST III
HERCULES TRUST IV
HERCULES PLAZA
1313 NORTH MARKET STREET
WILMINGTON, DELAWARE 19894-0001
(302) 594-5000
$3,000,000,000
HERCULES INCORPORATED
DEBT SECURITIES
PREFERRED STOCK
DEPOSITARY SHARES
COMMON STOCK
PURCHASE CONTRACTS
PURCHASE UNITS
WARRANTS
HERCULES TRUST I, HERCULES TRUST II,
HERCULES TRUST III & HERCULES TRUST IV
PREFERRED SECURITIES GUARANTEED BY HERCULES INCORPORATED
Hercules' Common Stock is listed on the New York Stock Exchange under the
ticker symbol "HPC."
------------------------
We will provide specific terms of these securities in supplements to this
prospectus. You should read this prospectus and any supplement carefully before
you invest. This prospectus may not be used to sell these securities without a
supplement.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This prospectus is dated October 30, 1998.
<PAGE> 106
AVAILABLE INFORMATION
Hercules Incorporated (the "Company" or "Hercules") is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the SEC at
Room 1024, 450 5th Street, N.W., Washington, DC 20549, and at the regional
offices of the SEC, which include: Chicago Regional Office, Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, IL 60661, and 7 World Trade Center,
Suite 1300, New York, NY 10048. Such material can also be inspected and copied
at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York,
NY 10005, on which certain of the Company's securities are listed. Copies can be
obtained from the SEC by mail, at prescribed rates, or from the SEC's internet
website at http://www.sec.gov.
The Company and the Hercules Trusts (as defined herein) have filed with the
SEC a registration statement on Form S-3 (together with all amendments and
exhibits, referred to as the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the securities
offered by this Prospectus. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto. In
addition, certain documents filed by the Company with the SEC have been
incorporated in this Prospectus by reference. See "Incorporation of Certain
Documents by Reference." Statements contained herein concerning the provisions
of any document do not purport to be complete and, in each instance, are
qualified in all respects by reference to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the SEC. Each such
statement is subject to, and qualified in its entirety by, such reference. For
further information with respect to the Company, the Hercules Trusts and the
securities offered hereby, reference is made to the Registration Statement,
including the exhibits thereto, and the documents incorporated herein by
reference.
No separate financial statements of any of the Hercules Trusts have been
included or incorporated by reference herein. The Company and the Hercules
Trusts do not consider that such financial statements would be material to
holders of the Trust Preferred Securities (as defined herein) because (i) all of
the voting securities of each Hercules Trust will be owned, directly or
indirectly, by the Company, a reporting company under the Exchange Act, (ii)
each of the Hercules Trusts is a special purpose entity, has no operating
history, has no independent operations and is not engaged in, and does not
propose to engage in, any activity other than issuing securities representing
undivided beneficial interests in the assets of such Hercules Trust and
investing the proceeds thereof in Junior Subordinated Debentures issued by the
Company and (iii) the Company's obligations described herein and in any
accompanying Prospectus Supplement under the Trust Agreement (as defined herein)
of a Hercules Trust, the Guarantee issued by the Company with respect to the
Trust Preferred Securities issued by such Hercules Trust, the Junior
Subordinated Debentures of the Company purchased by such Hercules Trust and the
Junior Subordinated Debenture Indenture (as defined herein) pursuant to which
such Junior Subordinated Debentures are issued, taken together, constitute
direct obligations of the Company and a full and unconditional guarantee of the
Trust Preferred Securities of each such Hercules Trust. See "The Hercules
Trusts," "Description of Junior Subordinated Debentures," "Description of Trust
Preferred Securities" and "Description of Guarantees."
2
<PAGE> 107
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the SEC are incorporated herein by
reference:
(i) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
(ii) The Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1998 and June 30, 1998;
(iii) The Company's Current Reports on Form 8-K dated July 24, 1998,
July 30, 1998 and October 15, 1998; and
(iv) The description of the Company's common stock in its registration
statement filed pursuant to Section 12 of the Exchange Act, and any
amendment or report filed for the purpose of updating any such description.
All documents filed pursuant to Sections 13(a), 13(c), 14, or 15(d) of the
Exchange Act after the date of this Prospectus and prior to the termination of
the offering of the securities offered pursuant to the applicable Prospectus
Supplement shall be deemed to be incorporated by reference into this Prospectus
and such Prospectus Supplement and to be a part hereof and thereof from the date
of filing of such documents. Any statement contained herein or therein or in a
document incorporated or deemed to be incorporated by reference herein or
therein shall be deemed to be modified or superseded for purposes of this
Prospectus and such Prospectus Supplement to the extent that a statement
contained therein or in any other subsequently filed document which also is
incorporated or deemed to be incorporated by reference herein and therein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus or such Prospectus Supplement.
The Company will provide without charge to each person to whom a copy of
this Prospectus and the applicable Prospectus Supplement is delivered, upon
written or oral request, a copy of any or all of the documents which have been
or may be incorporated by reference in this Prospectus or the applicable
Prospectus Supplement other than exhibits to such documents (unless exhibits are
specifically incorporated by reference in such documents). Requests should be
directed to: Israel J. Floyd, Esquire, Corporate Secretary, Hercules
Incorporated, Hercules Plaza, 1313 North Market Street, Wilmington, Delaware
19894-0001 (telephone: 302-594-5128; facsimile: 302-594-7252; Internet e-mail:
[email protected]).
3
<PAGE> 108
THE COMPANY
Hercules operates, both domestically and throughout the world, in two
industry segments: Chemical Specialties and Food & Functional Products. The
Chemical Specialties segment manufactures, markets and sells such products as
wet-strength resins and sizings to improve the properties of paper; resins for
inks and adhesives; and polypropylene fibers and textile yarns used in
disposable hygiene products and home furnishings. Major worldwide manufacturing
locations include Brunswick, Georgia; Franklin, Virginia; Jefferson,
Pennsylvania; Middelburg, the Netherlands; Milwaukee, Wisconsin; Paulinia,
Brazil; Portland, Oregon; Savannah, Georgia; and Zwijndrecht, the Netherlands.
The Food & Functional Products segment manufactures, markets and sells
natural food gums for the food industry and water-soluble polymers used as
thickeners and stabilizers in paints, personal care products, rubber and
coatings. Major worldwide manufacturing locations include Alizay, France; Doel,
Belgium; Hopewell, Virginia; Kenedy, Texas; Lille Skensved, Denmark; and Parlin,
New Jersey.
As of December 31, 1997, Hercules had 6,221 employees worldwide.
Approximately 3,600 were located in the United States.
ACQUISITION OF BETZDEARBORN
On July 30, 1998, Hercules entered into an agreement to acquire
BetzDearborn Inc. ("BetzDearborn"). The acquisition was approved by the
BetzDearborn shareholders on October 8, 1998, and the one-step cash merger
transaction was consummated on October 15, 1998. The purchase price was
approximately $2.4 billion in cash, and Hercules' assumption of approximately
$700 million in BetzDearborn debt.
BetzDearborn is engaged in the engineered specialty chemical treatment of
water and industrial process systems, operating in a wide variety of industrial
and commercial applications with particular emphasis on the chemical, petroleum
refining, paper, food processing, automotive, steel and power industries.
BetzDearborn develops, produces and markets a wide range of specialty chemical
products, and provides the technical expertise necessary to utilize these
products effectively. Chemical treatment programs are developed for use in
boilers, cooling systems, heat exchangers, paper and petroleum process streams
and both influent and effluent systems. BetzDearborn monitors changing water,
process and plant operating conditions so as to prescribe the appropriate
treatment programs to solve problems such as corrosion, scale, deposit formation
and a variety of process problems.
The merged enterprise will be a global specialty chemical company with a
premier paper chemical business that will operate under the Hercules name and be
headquartered in Wilmington, Delaware. The BetzDearborn water and industrial
process treatment businesses, excluding paper process, will continue to operate
under the BetzDearborn name. Other portions of the BetzDearborn business will be
integrated into Hercules' Pulp and Paper business unit.
The financial statements of BetzDearborn for each of the three years in the
period ended December 31, 1997 and for the six-month periods ended June 30, 1998
and 1997, respectively, and the Unaudited Pro Forma Condensed Combined Financial
Statements of the Company, assuming consummation of the acquisition of
BetzDearborn as of January 1, 1997, for the year ended December 31, 1997 and the
six-month period ended June 30, 1998, are incorporated by reference herein from
the Company's Current Report on Form 8-K dated October 15, 1998.
THE HERCULES TRUSTS
Each of Hercules Trust I, Hercules Trust II, Hercules Trust III and
Hercules Trust IV (collectively, the "Hercules Trusts") is a statutory business
trust created under Delaware law pursuant to (i) a trust agreement (each, as
amended from time to time, a "Trust Agreement") executed by the Company as
sponsor for such Hercules Trust (the "Sponsor") and by the initial trustees of
such Hercules Trust and (ii) the filing of a certificate of trust with the
Delaware Secretary of State on September 14, 1998. Each Hercules Trust exists
for the exclusive purposes of (i) issuing and selling preferred securities
representing undivided beneficial
4
<PAGE> 109
interests in the assets of such Hercules Trust (the "Trust Preferred
Securities") and common securities representing undivided beneficial interests
in the assets of such Hercules Trust (the "Trust Common Securities" and,
together with the Trust Preferred Securities, the "Trust Securities"), (ii)
using the proceeds from the sale of such Trust Securities to acquire the related
Junior Subordinated Debentures (as defined herein) of the Company and (iii)
engaging in only those other activities necessary, advisable or incidental
thereto. The Company's Junior Subordinated Debentures will be the sole assets of
each Hercules Trust and, accordingly, payments under the related Junior
Subordinated Debentures will be the sole revenues of such Hercules Trust. All of
the Trust Common Securities of each Hercules Trust will be owned by the Company
(the "Trust Common Securities Holder") and will rank pari passu, and payments
will be made thereon pro rata, with the Trust Preferred Securities of such
Hercules Trust, except that upon the occurrence and continuance of an Event of
Default (as defined herein) under the applicable Trust Agreement resulting from
an Event of Default under the Junior Subordinated Debenture Indenture (as
defined herein), the rights of the Company as the Trust Common Securities Holder
to payments in respect of distributions and payments upon liquidation,
redemption or otherwise will be subordinated to the rights of the holders of
Trust Preferred Securities of such Hercules Trust. See "Description of Trust
Preferred Securities -- Subordination of Trust Common Securities." The Company
will acquire Trust Common Securities of each Hercules Trust in an aggregate
Liquidation Amount (as defined in the applicable Trust Agreement) equal to at
least 3% of the total capital of such Hercules Trust. Each Hercules Trust has a
term of 35 years, but may dissolve earlier as provided in the applicable Trust
Agreement.
Each Hercules Trust's business and affairs are conducted by trustees (the
"Issuer Trustees") who are appointed by the Company as the Trust Common
Securities Holder. Unless otherwise specified in the applicable Prospectus
Supplement, the Issuer Trustees for each Hercules Trust will be The Chase
Manhattan Bank, as Property Trustee (the "Property Trustee"), Chase Manhattan
Bank Delaware, as Delaware Trustee (the "Delaware Trustee"), and three
individual trustees (the "Administrative Trustees") who are officers or other
employees of the Company. The Chase Manhattan Bank, as Property Trustee, will
act as sole indenture trustee under each Trust Agreement. The Chase Manhattan
Bank will also act as indenture trustee under the Guarantees and the Junior
Subordinated Debenture Indenture. See "Description of Guarantees" and
"Description of Debt Securities -- Description of Junior Subordinated
Debentures." The Trust Common Securities Holder of a Hercules Trust or, if an
Event of Default under the applicable Trust Agreement has occurred and is
continuing, the holders of a majority in Liquidation Amount of the Trust
Preferred Securities of such Hercules Trust will be entitled to appoint, remove
or replace such Hercules Trust's Property Trustee and/or the Delaware Trustee.
In no event will the holders of Trust Preferred Securities have the right to
vote to appoint, remove or replace the Administrative Trustees; such voting
rights will be vested exclusively in the Company as the Trust Common Securities
Holder. The duties and obligations of each Issuer Trustee will be governed by
the applicable Trust Agreement.
The Company, as issuer of the Junior Subordinated Debentures, will pay all
fees, expenses, debts and obligations (other than payments in respect of Trust
Securities) related to the Hercules Trusts and the offering of the Trust
Preferred Securities and will pay, directly or indirectly, all ongoing costs,
expenses and liabilities of the Hercules Trusts (other than payments in respect
of Trust Securities).
The principal executive office of each Hercules Trust is c/o Hercules
Incorporated, Hercules Plaza, 1313 North Market Street, Wilmington, Delaware
19894-0001.
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<PAGE> 110
USE OF PROCEEDS
Unless otherwise indicated in a supplement or supplements to this
Prospectus (a "Prospectus Supplement"), the net proceeds received by the Company
from the sale of the Offered Securities (as defined herein) are expected to be
used for general corporate purposes, which may include repayment of indebtedness
to be incurred to finance the Company's proposed acquisition of BetzDearborn.
The proceeds from the sale of Trust Preferred Securities by the Hercules Trusts
will be invested in the Junior Subordinated Debentures of the Company. Except as
may otherwise be described in the Prospectus Supplement relating to such Trust
Preferred Securities, the Company expects to use the net proceeds from the sale
of such Junior Subordinated Debentures to the Hercules Trusts for general
corporate purposes. Any specific allocation of the proceeds to a particular
purpose that has been made at the date of any Prospectus Supplement will be
described therein.
RATIO OF EARNINGS TO FIXED CHARGES
The following are the Company's consolidated ratios of earnings to fixed
charges for each of the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1998 ------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges(1)....... 5x 10x 10x 12x 9x 6x
</TABLE>
- ---------------
(1) The ratio of earnings to combined fixed charges and preferred stock
dividends for the identified periods are identical to the ratios of earnings
to fixed charges in the table because the Company had no issued and
outstanding preferred stock in any of such periods.
For the purpose of determining earnings in the calculation of the ratio of
earnings to fixed charges, consolidated pre-tax income has been adjusted to
reflect the distributed income of less than 50 percent owned subsidiaries,
increased by the amount of previously capitalized interest amortized during the
period, and increased by the amount of fixed charges, excluding capitalized
interest expense. Fixed charges consist of interest expense on borrowings
(including capitalized interest) and one-third (the proportion deemed
representative of the interest portion) of rent expense.
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<PAGE> 111
DESCRIPTION OF THE SECURITIES TO BE OFFERED
Hercules may offer and sell from time to time (i) its unsecured senior debt
securities ("Senior Debt Securities") or unsecured subordinated debt securities
("Subordinated Debt Securities"), consisting of debentures, notes or other
evidences of indebtedness, or its unsecured junior subordinated debentures
("Junior Subordinated Debentures"), (ii) shares of its common stock, without par
value ($25/48 stated value) (the "Common Stock"), (iii) shares of its series
preferred stock, without par value (the "Preferred Stock"), which may be
represented by depositary shares ("Depositary Shares"), (iv) warrants to
purchase Senior Debt Securities, Subordinated Debt Securities, Junior
Subordinated Debentures, Common Stock, Preferred Stock or Depositary Shares (the
"Warrants"), (v) purchase contracts ("Purchase Contracts") to purchase any of
Senior Debt Securities, Subordinated Debt Securities, Junior Subordinated
Debentures, Common Stock, Preferred Stock, Depositary Shares, Warrants and Trust
Preferred Securities (collectively, the "Purchase Contract Securities") or (vi)
purchase units ("Purchase Units"), each representing ownership of a Purchase
Contract and any of (x) Senior Debt Securities, Subordinated Debt Securities or
Junior Subordinated Debentures, (y) debt obligations of third parties, including
U.S. Treasury Securities, or (z) Trust Preferred Securities of a Hercules Trust,
securing the holder's obligation to purchase the applicable Purchase Contract
Securities under the Purchase Contract. Such securities may be offered in one or
more separate classes or series, in amounts, at prices and on terms to be
determined by market conditions at the time of sale and to be set forth in a
Prospectus Supplement. Such securities may be sold for U.S. dollars, foreign
denominated currency or currency units. Amounts payable with respect to any such
securities may likewise be payable in U.S. dollars, foreign denominated currency
or currency units.
Each of the Hercules Trusts may offer and sell, from time to time, its
Trust Preferred Securities. The payment of periodic cash distributions
("distributions") with respect to Trust Preferred Securities of each of the
Hercules Trusts out of monies held by the Property Trustee of each of the
Hercules Trusts and payments on liquidation of each Hercules Trust and on
redemption of the Trust Preferred Securities of such Hercules Trust will be
guaranteed by the Company as and to the extent described herein (each, a
"Guarantee"). See "Description of Guarantees." The Company's obligation under
each Guarantee will be an unsecured obligation of the Company and will rank (i)
subordinate and junior in right of payment to all other liabilities of the
Company, including the Senior Debt Securities, the Subordinated Debt Securities
and the Junior Subordinated Debentures, except those liabilities made pari passu
or subordinate by their terms, and (ii) senior to all capital stock now or
hereafter issued by the Company and to any guarantee now or hereafter entered
into by the Company in respect of any of its capital stock. Junior Subordinated
Debentures may be issued and sold from time to time in one or more series by the
Company to a Hercules Trust or a trustee of such Hercules Trust in connection
with the investment of the proceeds from the offering of Trust Preferred
Securities and Trust Common Securities of such Hercules Trust. The Junior
Subordinated Debentures purchased by a Hercules Trust may be subsequently
distributed pro rata to holders of Trust Preferred Securities and Trust Common
Securities under certain circumstances described herein and in an accompanying
Prospectus Supplement.
The Senior Debt Securities, Subordinated Debt Securities, Junior
Subordinated Debentures, Common Stock, Preferred Stock, Depositary Shares,
Warrants, Purchase Contracts, Purchase Units and Trust Preferred Securities
described herein are collectively referred to as the "Offered Securities." The
Offered Securities may be offered in amounts, at prices and on terms to be
determined at the time of offering; provided, however, that the aggregate
initial public offering price of the Offered Securities will be limited to
$3,000,000,000. Specific terms of the Offered Securities will be set forth in an
accompanying Prospectus Supplement or Supplements, together with the terms of
the offering of the Offered Securities and the net proceeds from the sale
thereof.
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<PAGE> 112
DESCRIPTION OF DEBT SECURITIES
DESCRIPTION OF THE SENIOR DEBT SECURITIES AND SUBORDINATED DEBT SECURITIES
The Company's Senior Debt Securities and Subordinated Debt Securities
(collectively, for purposes of this section of the Prospectus, the "Debt
Securities"), consisting of notes, debentures or other evidences of
indebtedness, may be issued from time to time in one or more series, in the case
of Senior Debt Securities, under a Senior Debt Indenture (the "Senior Debt
Indenture") between the Company and The Chase Manhattan Bank, as Trustee, and in
the case of Subordinated Debt Securities, under a Subordinated Debt Indenture
(the "Subordinated Debt Indenture") between the Company and The Chase Manhattan
Bank, as Trustee. The Senior Debt Indenture and the Subordinated Debt Indenture
are sometimes hereinafter referred to individually as an "Indenture" and
collectively as the "Indentures." The Chase Manhattan Bank, in its capacity as
trustee under either or both of the Indentures, is referred to hereinafter as
the "Trustee."
Each of the Indentures has been qualified under the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act") and is subject to, and governed by,
the Trust Indenture Act. The form of master Indentures are included as exhibits
to the Registration Statement of which this Prospectus is a part. The following
description summarizes the material terms of the Indentures and the Debt
Securities and is qualified in its entirety by reference to the detailed
provisions of the Debt Securities and the applicable Indenture, which contains
the full text of such provisions and other information regarding the Debt
Securities, including the definitions of certain terms used in this Prospectus,
and those terms made a part of each of the Indentures by the Trust Indenture
Act. Wherever particular sections or defined terms of the applicable Indenture
are referred to, such sections or defined terms are incorporated herein by
reference as part of the statement made, and the statement is qualified in its
entirety by such reference.
The Indentures are substantially identical except for provisions relating
to subordination. Any Debt Securities offered by this Prospectus and any
accompanying Prospectus Supplement are referred to herein as the "Offered Debt
Securities."
General
The Indentures do not limit the aggregate principal amount of Debt
Securities that may be issued thereunder and provide that Debt Securities may be
issued from time to time in one or more series and may be denominated and
payable in U.S. dollars, foreign currencies or units based on or related to
foreign currencies.
The specific terms of a series of Offered Debt Securities will be
established in or pursuant to a resolution of the Board of Directors of the
Company (a "Board Resolution") or in one or more indentures supplemental to an
Indenture (each, an "Indenture Supplement"). Pursuant to the Indentures, the
Company can establish different rights with respect to each series of Debt
Securities issued under such Indentures, including, pursuant to an Indenture
Supplement, different covenants and events of default.
The applicable Prospectus Supplement will provide information regarding the
specific terms of the Offered Debt Securities, including: (i) the classification
as senior or subordinated Debt Securities and the specific title and
designation, aggregate principal amount (including any limit thereon), purchase
price and denominations of such Offered Debt Securities; (ii) currency or units
based on or relating to currencies in which principal of, premium, if any, on
and/or any interest on such Offered Debt Securities will or may be payable;
(iii) the date or dates on which the principal of such Offered Debt Securities
is payable or the method of determining the same, if applicable; (iv) the rate
or rates (which may be fixed or variable) at which such Offered Debt Securities
will bear interest, if any, or the method of determining the same, if
applicable; (v) the date or dates from which such interest, if any, shall accrue
or the method of determining the same, if applicable, the interest payment
dates, if any, on which interest will be payable or the manner of determining
the same, if applicable, and the record dates for the determination of holders
to whom interest is payable on such Offered Debt Securities; (vi) the place or
places where the principal of and premium, if any, on and interest on the
Offered Debt Securities will be payable; (vii) any redemption, repayment or
sinking fund provisions; (viii) whether such Offered Debt Securities are
convertible into or exchangeable for Common
8
<PAGE> 113
Stock or other securities or rights of the Company or other issuers and, if so,
the applicable conversion or exchange terms and conditions; (ix) whether the
Offered Debt Securities will be issuable in registered form ("Registered Debt
Securities") or bearer form ("Bearer Debt Securities") or both and, if Bearer
Debt Securities are issuable, any restrictions applicable to the place of
payment of any principal of and premium, if any, on and interest on such Bearer
Debt Securities, to the exchange of one form for another and to the offer, sale
and delivery of such Bearer Debt Securities (except that under current United
States federal income tax law, Registered Debt Securities will not be
exchangeable into Bearer Debt Securities); (x) any applicable material United
States federal income tax consequences, including those related to Debt
Securities issued at a discount below their stated principal amount; (xi) the
proposed listing, if any, of the Offered Debt Securities on any securities
exchange; and (xii) any other specific terms pertaining to the Offered Debt
Securities, whether in addition to, or modification or deletion of, the terms
described herein.
Unless otherwise specified in a Prospectus Supplement, Registered Debt
Securities shall be issued only in denominations of U.S. $1,000 and any integral
multiple thereof.
Debt Securities will bear interest, if any, at a fixed rate or a floating
rate. Debt Securities bearing no interest or interest at a rate that at the time
of issuance is below the prevailing market rate will be sold at a discount below
their stated principal amount. Special United States federal income tax
considerations applicable to any such discounted Debt Securities or to certain
Debt Securities issued at par which are treated as having been issued at a
discount for United States federal income tax purposes will be described in the
relevant Prospectus Supplement.
Registration and Transfer
Debt Securities may be presented for exchange and Registered Debt
Securities may be presented for transfer in the manner, at the places and
subject to the restrictions described in the applicable Prospectus Supplement.
Such services will be provided without charge, other than any tax or other
governmental charge payable in connection therewith, but subject to the
limitations described in the applicable Prospectus Supplement. Bearer Debt
Securities and the related coupons, if any, will be transferable by delivery.
Global Debt Securities
Registered Debt Securities of a series may be issued in the form of one or
more global securities (a "Global Security") that will be deposited with, or on
behalf of, a depositary (a "Depositary") or with a nominee for a Depositary
identified in the Prospectus Supplement relating to such series. In such case,
one or more Global Securities will be issued in a denomination or aggregate
denominations equal to the portion of the aggregate principal amount of
outstanding Registered Debt Securities of the series to be represented by such
Global Security or Securities. Unless and until it is exchanged in whole for
Registered Debt Securities in definitive registered form, a Global Security may
not be transferred except as a whole by the Depositary for such Global Security
to a nominee of such Depositary or by a nominee of such Depositary to such
Depositary or another nominee of such Depositary or by such Depositary or any
such nominee to a successor of such Depositary or a nominee of such successor.
Bearer Debt Securities of a series may also be issued in the form of one or
more Global Securities (a "Bearer Global Security") that will be deposited with
a Depositary for Euroclear System and Cedel Bank, S.A., or with a nominee for
such Depositary identified in the Prospectus Supplement relating to such series.
The specific terms and procedures, including the specific terms of the
depositary arrangement and any specific procedures for the issuance of Debt
Securities in definitive form in exchange for a Bearer Global Security, with
respect to any portion of a series of Debt Securities to be represented by a
Bearer Global Security will be described in the Prospectus Supplement relating
to such series.
The specific terms of the depositary arrangement with respect to any
portion of a series of Debt Securities to be represented by a Global Security
will be described in the Prospectus Supplement relating to such series. However,
except for Offered Debt Securities issued in foreign currencies, unless
otherwise specified in the applicable Prospectus Supplement, The Depository
Trust Company ("DTC") will be the Depositary and the following depositary
arrangements will apply.
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<PAGE> 114
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
participating organizations (collectively, the "Participants") and to facilitate
the clearance and settlement of transactions in those securities between
Participants through electronic book-entry changes in accounts of its
Participants, thereby eliminating the need for physical movement of
certificates. The Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may beneficially
own securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interest and transfer of ownership interest
of each actual purchaser of each security held by or on behalf of DTC are
recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established
by it, (i) upon deposit of a Global Security representing Debt Securities, DTC
will credit the accounts of the designated Participants with the applicable
portions of the principal amount of such Debt Securities and (ii) ownership of
beneficial interests in a Global Security representing Debt Securities will be
shown on, and the transfer of ownership thereof will be effected only through,
records maintained by DTC (with respect to the Participants) or by the
Participants and the Indirect Participants (with respect to other owners of
beneficial interests).
Investors in a Global Security representing Debt Securities may hold their
interests therein directly through DTC if they are Indirect Participants or
indirectly through organizations that are Indirect Participants. All beneficial
interests in a Global Security representing Debt Securities will be subject to
the procedures and requirements of DTC. The laws of some states require that
certain persons take physical delivery of securities that they own in definitive
form. Consequently, the ability to transfer beneficial interests in a Global
Security representing Debt Securities to such persons will be limited to that
extent. Because DTC can act only on behalf of Participants, which in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having beneficial interests in a Global Security representing Debt Securities to
pledge such interests to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such interests, may be affected
by the lack of a physical certificate evidencing such interests.
Payments in respect of a Global Security representing Debt Securities will
be payable in same-day funds by the Trustee to Cede & Co. as nominee of DTC in
its capacity as the holder thereof under the applicable Indenture. Under the
terms of each Indenture, the Trustee will treat the persons in whose names the
Debt Securities, including a Global Security representing Debt Securities, are
registered as the owners thereof for the purpose of receiving such payments and
for any and all other purposes whatsoever. Consequently, neither the Trustee nor
any agent thereof has or will have any responsibility or liability for (i) any
aspect of DTC's records or any Participant's or Indirect Participant's records
relating to or payments made on account of beneficial interests in a Global
Security representing Debt Securities, or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect Participant's
records relating to the beneficial interests in a Global Security representing
Debt Securities or (ii) any other matter relating to the actions and practices
of DTC or any of its Participants or Indirect Participants. DTC has advised the
Company that its current practice, upon receipt of any payment in respect of
securities, such as a Global Security representing Debt Securities, is to credit
the accounts of the relevant Participants with the payment on the payment date,
in amounts proportionate to their respective holdings in principal amount of
beneficial interests in the relevant security as shown on the records of DTC
unless DTC has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to the owners
of beneficial interests in a Global Security representing Debt Securities will
be governed by standing instructions and customary practices and will be the
responsibility of the Participants or the Indirect Participants and will not be
the responsibility of DTC, the Trustee or the Company. Neither of the Company
nor the Trustee will be liable for any delay by DTC or any of its Participants
in identifying the owners of beneficial interests in a
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<PAGE> 115
Global Security representing Debt Securities, and the Company and the Trustee
may conclusively rely on and will be protected in relying on instructions from
DTC or its nominee for all purposes.
Beneficial interests in a Global Security representing Debt Securities will
trade in DTC's Same-Day Funds Settlement System and secondary market trading
activity in such interests will therefore settle in immediately available funds,
subject in all cases to the rules and procedures of DTC, the Participants and
the Indirect Participants.
Conveyance of notices and other communications by DTC to Participants, by
Participants to Indirect Participants and by Participants and Indirect
Participants to beneficial owners, and vice versa, will be governed by
arrangements among them, subject to statutory or regulatory requirements as may
be in effect from time to time. Neither the Company nor the Trustee will have
any responsibility or liability with respect thereto.
Prior to any redemption of Debt Securities covered by a Global Security,
the Company will provide DTC with notices of redemption containing all
information required by DTC's rules and procedures. Such notices will be
provided to DTC for distribution to Participants within the time periods
established by DTC. If less than the entire principal amount of Debt Securities
of a series represented by a Global Security is to be redeemed, DTC's practice
is to determine by lot the amount of the interest of each Participant to be
redeemed.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Debt Securities only at the direction of one or more
Participants to whose account with DTC interests in a Global Security
representing Debt Securities are credited and only in respect of such portion of
the principal amount of the Debt Securities as to which such Participant or
Participants has or have given such direction.
The foregoing information concerning DTC and its book-entry system has been
obtained from sources that the Company and the Trustee believe to be reliable,
but neither the Company nor the Trustee takes responsibility for the accuracy
thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of beneficial interests in a Global Security representing Debt Securities among
Participants in DTC, it is under no obligation to follow or to continue to
follow such procedures, and such procedures may be discontinued at any time.
Neither the Company nor the Trustee will have any responsibility for the
performance by DTC, the Participants or the Indirect Participants of their
respective obligations under the rules and procedures governing DTC's
operations.
Under the applicable Indenture, a Global Security representing Debt
Securities will be exchangeable for Debt Securities in definitive form if (i)
DTC (x) notifies the Company that it is unwilling or unable to continue as
depositary therefor or (y) has ceased to be a clearing agency registered under
the Exchange Act, and the Company thereupon fails to appoint a successor
depositary within 90 days, (ii) the Company in its sole discretion elects to
cause the issuance of its Debt Securities in definitive form or (iii) there
shall have occurred and be continuing an Event of Default under the applicable
Indenture or any event which after notice or lapse of time or both would be an
Event of Default under such Indenture.
Ranking
Senior Debt Securities. Payment of the principal of and premium, if any,
on and interest on Debt Securities issued under the Senior Debt Indenture will
rank pari passu with all other unsecured and unsubordinated debt of the Company.
Subordinated Debt Securities. Payment of the principal of and premium, if
any, on and interest on Debt Securities issued under the Subordinated Debt
Indenture will be subordinate and junior in right of payment, to the extent and
in the manner set forth in the Subordinated Debt Indenture, to all "Senior
Indebtedness" of the Company as defined in the Subordinated Debt Indenture (the
"Senior Indebtedness As Defined In the Subordinated Debt Indenture"). The Senior
Indebtedness As Defined In the Subordinated Debt Indenture is (i) the principal
of and premium, if any, on and interest on all of the Company's indebtedness for
money
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borrowed, other than the Subordinated Debt Securities, whether outstanding on
the date of execution of the Subordinated Debt Indenture or thereafter created,
assumed or incurred, except such indebtedness as is by its terms expressly
stated to be pari passu or subordinate in right of payment to the Subordinated
Debt Securities, (ii) any amounts payable under swap transactions and (iii) any
deferrals, renewals or extensions of the indebtedness referred to in clause (i)
or (ii) above. The term "indebtedness for money borrowed" as used in the
foregoing sentence shall include, without limitation, any obligation of, or any
obligation guaranteed by, the Company for the repayment of borrowed money,
whether or not evidenced by bonds, debentures, notes or other written
instruments, and any deferred obligation for the payment of the purchase price
of property or assets (excluding trade payables arising in the ordinary course
of business). Notwithstanding anything to the contrary in the Subordinated Debt
Indenture or the Subordinated Debt Securities, Senior Indebtedness As Defined In
the Subordinated Debt Indenture shall not include (i) any indebtedness of the
Company which, by its terms or the terms of the instrument creating or
evidencing it, is subordinate in right of payment to or pari passu with the
Subordinated Debt Securities or (ii) any indebtedness of the Company to a
subsidiary of the Company. As of June 30, 1998, the aggregate principal amount
of the Senior Indebtedness As Defined In the Subordinated Debt Indenture was
approximately $948,813,000. The Subordinated Debt Indenture does not contain any
limitation on the amount of Senior Indebtedness As Defined In the Subordinated
Debt Indenture that can be incurred by the Company. Indebtedness to be issued
pursuant to the Junior Subordinated Debenture Indenture between the Company and
The Chase Manhattan Bank, as Debenture Trustee, providing for the issuance of
Junior Subordinated Debentures of the Company, is subordinate in right of
payment to the Subordinated Debt Securities.
In the event (i) of any insolvency or bankruptcy proceedings, or any
receivership, liquidation, reorganization or other similar proceedings in
respect of the Company or its property, or (ii) that Subordinated Debt
Securities of any series are declared due and payable before their expressed
maturity because of the occurrence of an Event of Default under the Subordinated
Debt Indenture (under circumstances other than as set forth in clause (i)
above), then the holders of all Senior Indebtedness As Defined In the
Subordinated Debt Indenture shall first be entitled to receive payment of the
full amount due thereon, before the holders of any of such Subordinated Debt
Securities or related coupons are entitled to receive a payment on account of
the principal of and premium, if any, on or interest on such Subordinated Debt
Securities. In the event and during the continuation of any default in payment
of any Senior Indebtedness As Defined In the Subordinated Debt Indenture or if
any event of default shall exist under any Senior Indebtedness As Defined In the
Subordinated Debt Indenture, no payment of the principal or interest on the
Subordinated Debt Securities or related coupons shall be made.
Payment and Paying Agents
Unless otherwise indicated in an applicable Prospectus Supplement, payment
of principal of and premium, if any, on and interest on the Debt Securities will
be made at the office of the Trustee in the City of New York or at the office of
such Paying Agent or Paying Agents as the Company may designate from time to
time, except that at the option of the Company, payment of any interest may be
made, except in the case of a Global Security representing Debt Securities, by
(i) check mailed to the address of the Person entitled thereto as such address
shall appear in the applicable Securities Register or (ii) transfer to an
account maintained by the Person entitled thereto as specified in such
Securities Register, provided that proper transfer instructions have been
received by the relevant record date. Payment of any interest on any Debt
Securities will be made to the Person in whose name such Debt Securities are
registered at the close of business on the record date for such interest, except
in the case of defaulted interest. The Company may at any time designate
additional Paying Agents or rescind the designation of any Paying Agent;
provided, however, the Company will at all times be required to maintain a
Paying Agent in each place of payment for the Debt Securities.
Any moneys deposited with the Trustee or any Paying Agent, or then held by
the Company in trust, for the payment of the principal of and premium, if any,
on or interest on any Debt Securities and remaining unclaimed for two years
after such principal and premium, if any, or interest has become due and payable
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shall, at the request of the Company, be repaid to the Company and the holder of
such Debt Securities shall thereafter look, as a general unsecured creditor,
only to the Company for payment thereof.
Conversion Rights
The terms and conditions, if any, on which Offered Debt Securities are
convertible into or exchangeable for Common Stock or other securities of the
Company or other issuers will be set forth in the Prospectus Supplement relating
thereto. Such terms will include the conversion or exchange price, the
conversion or exchange date(s) or period(s), provisions as to whether conversion
or exchange will be at the option of the holder or the Company, the events
requiring an adjustment of the conversion or exchange price and provisions
affecting conversion or exchange in the event of the redemption of such Offered
Debt Securities.
Consolidation, Merger or Sale of Assets
The Company shall not consolidate with or merge into any other Person or
sell, convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety (either in one transaction or a series of
transactions) to any Person, and no Person shall consolidate with or merge into
the Company, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to the Company, unless: (i) in case the
Company consolidates with or merges into another Person or sells, conveys or
transfers its properties and assets as an entirety or substantially as an
entirety to any Person, the successor Person is organized and existing under the
laws of the United States or any State thereof or the District of Columbia, and
such successor Person expressly assumes all of the Company's obligations on the
applicable Debt Securities and any coupons and under the applicable Indenture;
(ii) immediately prior to and after giving effect thereto, no Event of Default
under the applicable Indenture, and no event which, after notice or lapse of
time or both, would become such an Event of Default, shall have occurred and be
continuing; and (iii) certain other conditions under the applicable Indenture
are met. Accordingly, any such consolidation, merger or transfer of assets as an
entirety or substantially as an entirety which meets the conditions described
above would not create any Event of Default which would entitle holders of the
Debt Securities, or the Trustee on their behalf, to take any of the actions
described below under the caption "-- Events of Default."
Certain Covenants of the Company
Restrictions on Creation of Secured Debt. The Company covenants that, so
long as any of the Debt Securities remain outstanding, it will not, nor will it
permit any Restricted Subsidiary (as defined below), to issue, assume or
guarantee any debt for money borrowed (herein referred to as "Debt") if such
Debt is secured by a mortgage, security interest, pledge, lien or other
encumbrance (any of such are hereinafter referred to as a "lien") on any
Principal Property (as defined below), or on any shares of stock or indebtedness
of any Restricted Subsidiary (whether such Principal Property, shares of stock
or indebtedness are now owned or acquired after the date of the Indentures),
without, in any such case, effectively providing concurrently with the issuance,
assumption of or guarantee of any such Debt that the Debt Securities (together
with, if the Company shall so determine, any other indebtedness of or guarantee
by the Company or such Restricted Subsidiary ranking equally with the Debt
Securities issued under the applicable Indenture and then existing or thereafter
created) shall be secured equally and ratably with such Debt. This restriction,
however, shall not apply to Debt secured by liens: (i) on property, shares of
stock or indebtedness of any corporation existing at the time such corporation
becomes a Restricted Subsidiary; (ii) on property existing at the time that it
is acquired or to secure Debt incurred for the purpose of financing the purchase
price of such property or improvements or construction on the property, which
Debt is incurred prior to or within one year after the later of such
acquisition, completion of such construction, or the commencement of commercial
operation of such property; provided, however, that in the case of any such
acquisition, construction or improvement the lien shall not apply to any
property theretofore owned by the Company or a Restricted Subsidiary, other
than, in the case of any such construction or improvement, any theretofore
unimproved real improvement, on which the property is constructed, or the
improvement is located; (iii) securing Debt owed by any Restricted Subsidiary to
the Company or another Restricted Subsidiary; (iv) on property of a corporation
existing at the time such corporation is merged into or consolidated with the
Company or a
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Restricted Subsidiary or at the time of a sale, lease or other disposition of
the properties of a corporation as an entirety or substantially as an entirety
to the Company or a Restricted Subsidiary; (v) paramount to all other liens on
advance, partial or progress payments pursuant to contracts with U.S. federal
and state governments for production, research or development, or on any
material or supplies in connection with the performance of such contracts in
order to secure such payments to such governments; and liens on equipment,
tools, machinery, land or buildings constructed or purchased by the Company or a
Restricted Subsidiary primarily for the purpose of manufacturing a product, or
performing any research or development work for such governments to secure
indebtedness incurred and owing to such governments for the construction,
installation or purchase of such equipment, tools, machinery, land and buildings
(including liens incurred in connection with pollution control, industrial
revenue or similar financings); (vi) existing at the date of the Indentures; or
(vii) on particular property (or any proceeds of the sale thereof) to secure all
or any part of the cost of exploration, drilling, mining or development thereof
(including construction of facilities for field processing of minerals) intended
to obtain or materially increase the production and sale or other disposition of
oil, gas, coal, uranium, copper or other minerals therefrom, or any indebtedness
created, issued, assumed or guaranteed to provide funds for any or all such
purposes; or (viii) any extension, renewal or replacement (or successive
extensions, renewals or replacements), in whole or in part, of any lien referred
to in the foregoing clauses (i) through (vii) inclusive; provided, however, that
the principal amount of Debt secured thereby shall not exceed the principal
amount of Debt so secured at the time of such extension, renewal or replacement
and that such extension, renewal or replacement shall be limited to all or a
part of the property which secured the lien so extended, renewed or replaced
(plus improvements on such property).
Notwithstanding the above, the Company and one or more Restricted
Subsidiaries may, without securing the Debt Securities, issue, assume or
guarantee secured Debt which would otherwise be subject to the foregoing
restrictions, provided that the aggregate amount of Debt secured by a lien then
outstanding (not including secured Debt permitted under the foregoing
exceptions) does not exceed 5% of the consolidated stockholders' equity of the
Company as of the end of the last preceding year.
For the purposes of the foregoing covenant, the following types of
transactions shall not be deemed to create Debt secured by a lien: the sale or
other transfer of (i) oil, gas, coal, uranium, copper or other minerals in place
for a period of time until, or in an amount such that, the purchaser will
realize therefrom a specified amount of money (however determined) or a specific
amount of such minerals; or (ii) any other interest in property of the character
commonly referred to as a "production payment."
Restrictions of Sale and Leaseback Transactions. Sale and leaseback
transactions by the Company or any Restricted Subsidiary of any Principal
Property are prohibited (except for a temporary lease for a term of not more
than three years and except for leases between the Company and a Restricted
Subsidiary or between Restricted Subsidiaries) unless (i) the Company or such
Restricted Subsidiary would be entitled to issue, assume or guarantee Debt
secured by a lien upon the property involved at least equal to the Attributable
Debt (defined below) in respect of such transaction without equally and ratably
securing the Debt Securities, provided that such Attributable Debt shall then be
deemed for all purposes under the Indentures and the provisions of this covenant
to be Debt subject to the covenant described above under "-- Restrictions on
Creation of Secured Debt," or (ii) an amount in cash equal to such Attributable
Debt is applied to the retirement of Debt then having a maturity of more than
one year.
Certain Definitions.
"Attributable Debt" means the present value (discounted as provided in the
Indentures) of the obligation of a lessee for rental payments during the
remaining term of any lease.
"Consolidated Net Tangible Assets" means as of any particular time the
aggregate amount of assets after deducting therefrom (a) all current liabilities
and (b) all goodwill, patents, copyrights, trademarks, tradenames, unamortized
debt discount and expense and other like intangibles, all as shown in the most
recent consolidated financial statements of the Company and its Subsidiaries
prepared in accordance with generally accepted accounting principles.
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"Principal Property" means any manufacturing plant or other facility of the
Company or any Restricted Subsidiary, whether owned as of the date of the
Indentures or acquired thereafter, which is located within the continental
United States and, in the opinion of the Board of Directors or an officer
designated by the Board of Directors, is of material importance to the total
business conducted by the Company and its Restricted Subsidiaries taken as a
whole.
"Restricted Subsidiary" means any Subsidiary all the property of which is
located within the continental United States, which owns a Principal Property or
in which the Company's investment, whether in the form of equity or debt, is in
excess of 10% of the Consolidated Net Tangible Assets of the Company as of the
end of the fiscal year preceding the date of determination, provided, however,
that the term "Restricted Subsidiary" shall not include any Subsidiary
principally engaged in financing exports from or operations outside the
continental United States.
Events of Default
An "Event of Default" is defined under each Indenture with respect to Debt
Securities of any series issued under such Indenture as being:
(i) default in payment of all or any part of the principal of or
premium, if any, on any Debt Securities of such series when due, whether at
maturity, upon any redemption, by declaration of acceleration of maturity
or otherwise; or
(ii) default for 30 days in payment of any interest on or any
additional amounts payable with respect to any Debt Securities of such
series when due; or
(iii) default in payment of any sinking fund installment when due by
the terms of the Debt Securities of such series; or
(iv) default for 90 days after written notice as provided in such
Indenture in the performance or breach of any covenant or agreement of the
Company in the Debt Securities of such series or such Indenture other than
a covenant or agreement included in such Indenture solely for the benefit
of a series of Debt Securities other than such series; or
(v) certain events of bankruptcy, insolvency or reorganization; or
(vi) any other events of default made applicable to the Debt
Securities of such series.
Each Indenture provides that, for each series of Debt Securities, if an
Event of Default other than an Event of Default referred to in clause (v) above
shall have occurred and be continuing, either the Trustee or the holders of not
less than 25% in principal amount of the Debt Securities of such series then
outstanding may then declare the principal of or, if any of the Debt Securities
of the series are original issue discount, such portion of the principal amount
of such Debt Securities as may be specified in the terms thereof, and any
accrued interest on all Debt Securities of such series then outstanding to be
due and payable immediately, which shall then result in the acceleration of such
series of Debt Securities. If an Event of Default referred to in clause (v)
above shall have occurred and be continuing, then the principal of and accrued
interest on all Debt Securities of any series shall ipso facto become and be due
and payable immediately without any declaration or other act on the part of the
Trustee or any holder thereof. The holders of a majority in aggregate
outstanding principal amount of the Debt Securities of any series may annul a
declaration of acceleration of maturity and waive any default in respect of such
Debt Securities if such default (other than the non-payment of the principal and
interest of the Debt Securities of such series which has become due solely by
such acceleration) has been cured and a sum sufficient to pay all matured
installments of interest (and premium, if any) and principal due otherwise than
by acceleration has been deposited with the Trustee.
Each Indenture contains a provision entitling the Trustee, subject to the
duty of the Trustee during a default to act with the required standard of care,
to be indemnified by the holders of Debt Securities issued under such Indenture
requesting the Trustee to exercise any right or power under such Indenture
before proceeding to exercise any such right or power at the request of such
holders. Subject to such provisions in each Indenture for the indemnification of
the Trustee and certain other limitations, the holders of a majority
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in principal amount of the outstanding Debt Securities of each series may, in
respect of such series of Debt Securities, direct the time, method and place of
conducting any proceedings for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee.
Each Indenture provides that no holder of Debt Securities issued under such
Indenture may institute any action against the Company under such Indenture
(except actions for payment of overdue principal, premium, if any, or interest
or for the conversion or exchange of such Debt Securities in accordance with
their terms) unless such holder previously shall have given to the Trustee
written notice of default and continuance thereof and unless the holders of not
less than 25% in principal amount of the Debt Securities of the applicable
series shall have requested the Trustee to institute such action and shall have
offered the Trustee reasonable indemnity, the Trustee shall not have instituted
such action within 60 days of such request and the Trustee shall not have
received any direction inconsistent with such written request by the holders of
a majority in principal amount of the Debt Securities of such series.
Each Indenture contains a covenant that the Company will file annually with
the Trustee a certificate of no default or a certificate specifying any default
that exists.
Discharge, Defeasance and Covenant Defeasance
The Company can discharge or defease its obligations under each Indenture
as set forth below.
Under terms satisfactory to the Trustee, the Company may discharge certain
obligations to holders of any series of Debt Securities issued under such
Indentures which have not already been delivered to the Trustee for cancellation
and which have either become due and payable or are by their terms due and
payable within one year (or scheduled for redemption within one year) by
irrevocably depositing with the Trustee cash or Government Obligations (as
defined in such Indenture), as trust funds in an amount certified to be
sufficient to pay when due, whether at maturity, upon redemption or otherwise,
the principal of and premium, if any, on and interest on such Debt Securities.
The Company may also discharge any and all of its obligations to holders of
any series of Debt Securities issued under an Indenture at any time
("defeasance"), but may not thereby avoid its duty to register the transfer or
exchange of such series of Debt Securities, to replace any temporary, mutilated,
destroyed, lost or stolen series of Debt Securities or to maintain an office or
agency in respect of such series of Debt Securities. Under terms satisfactory to
the Trustee, the Company also may be released with respect to any outstanding
series of Debt Securities issued under the relevant Indenture from the
obligations imposed by certain provisions of such Indenture (including covenants
described above limiting consolidations, mergers, and certain dispositions) and
omit to comply with such provisions without creating an Event of Default
("covenant defeasance"). Defeasance or covenant defeasance may be effected only
if, among other things: (i) the Company irrevocably deposits with the Trustee
cash or Government Obligations, as trust funds in an amount certified to be
sufficient to pay at maturity (or upon redemption) the principal of and premium,
if any, on and interest on all outstanding Debt Securities of such series issued
under such Indenture; (ii) the Company delivers to the Trustee an opinion of
counsel to the effect that the holders of such series of Debt Securities will
not recognize income, gain or loss for United States federal income tax purposes
as a result of such defeasance or covenant defeasance and that defeasance or
covenant defeasance will not otherwise alter such holders' United States federal
income tax treatment of principal, premium and interest payments on such series
of Debt Securities (it being understood that in the case of a defeasance such
opinion must be based on a ruling of the Internal Revenue Service or a change in
United States federal income tax law occurring after the date of such Indenture,
since such a result would not occur under current tax law); (iii) no Event of
Default or any event which after notice or lapse of time or both would be an
Event of Default has occurred; (iv) such defeasance or covenant defeasance shall
not result in a breach or violation of, or constitute a default under, the
Indenture or any other material agreement or instrument to which the Company is
a party or by which it is bound; (v) certain other provisions set forth in the
Indenture are met; (vi) the Company shall have delivered to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent to the defeasance or covenant defeasance have been complied
with; and (vii) in the case of the Subordinated Debt Indenture no event or
condition shall exist that, pursuant to certain provisions described under
"-- Ranking -- Subordinated Debt Securities" would
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prevent the Company from making payments of principal of and premium, if any, on
and interest on the Subordinated Debt Securities at the date of the irrevocable
deposit referred to above.
Modification of the Indentures
Each Indenture provides that the Company and the Trustee may enter into
Indenture Supplements without the consent of the holders of Debt Securities to:
(i) secure the Debt Securities, (ii) evidence the assumption by a successor
corporation of the obligations of the Company, (iii) add covenants or Events of
Default for the protection of the holders of all or any series of Debt
Securities, or surrender rights or powers of the Company, (iv) cure any
ambiguity or correct any inconsistency in such Indenture, provided that such
cure or correction does not adversely affect the holders of such Debt
Securities, (v) establish the forms or terms of Debt Securities of any series
and any related coupons, (vi) evidence the acceptance of appointment by a
successor trustee, (vii) make provisions with respect to the conversion or
exchange terms and conditions applicable to the Debt Securities of any series,
(viii) add to or change any provisions related to bearer securities, (ix) add
to, delete from or revise the conditions, limitations or restrictions on issue,
authentication and delivery of Debt Securities, (x) supplement any provisions to
permit or facilitate the defeasance and discharge of any series and (xi) change
or eliminate any provisions of the Indenture, provided that any such change or
elimination shall become effective only when there are no Debt Securities
outstanding of any series created prior to the execution of such supplemental
indenture which is entitled to the benefit of such provision.
Each Indenture also contains provisions permitting the Company and the
Trustee, with the consent of the holders of not less than a majority in
aggregate principal amount of Debt Securities of all series issued under such
Indenture then outstanding and affected (voting as one class), to add any
provisions to, or change in any manner or eliminate any of the provisions of,
such Indenture or modify in any manner the rights of the holders of the Debt
Securities of each series so affected; provided that the Company and the Trustee
may not, without the consent of the holder of each outstanding Debt Security
affected thereby, (i) extend the stated maturity of the principal of, or
premium, if any, or interest on, or any additional amounts with respect to any
Debt Security, or reduce the principal amount thereof or the rate (or change the
manner of calculating the rate) or extend the time of payment of interest
thereon or any additional amounts, or change any of the conversion, exchange or
redemption provisions thereof or change the currency in which the principal of
(including any amount in respect of original issue discount), premium, if any,
on or interest on any Debt Security is payable or reduce the amount of principal
of any original issue discount Debt Security that is payable upon acceleration
or provable in bankruptcy or alter provisions of such Indenture relating to the
Debt Securities issued thereunder not denominated in U.S. dollars or impair the
right to institute suit for the enforcement of any payment on any Debt Security
when due or for the conversion or exchange of any Debt Security in accordance
with its terms or (ii) reduce the aforesaid percentage in principal amount of
Debt Securities of any series issued under such Indenture the consent of the
holders of which is required for any such modification.
The Subordinated Debt Indenture may not be amended to alter the
subordination of any outstanding Subordinated Debt Securities without the
consent of each holder of Senior Indebtedness As Defined In the Subordinated
Debt Indenture then outstanding that would be adversely affected thereby.
Governing Law
The Indentures and the Debt Securities will be governed by, and construed
in accordance with, the laws of the State of Delaware.
Information Concerning the Trustee
The Chase Manhattan Bank is one of a number of banks with which the Company
and its subsidiaries maintain ordinary banking and trust relationships and is
also the Debenture Trustee under the Junior Subordinated Debenture Indenture.
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DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
General
The Junior Subordinated Debentures will be issued in one or more series
under a Junior Subordinated Debenture Indenture, as supplemented from time to
time (as so supplemented, the "Junior Subordinated Debenture Indenture"),
between the Company and The Chase Manhattan Bank as the Debenture Trustee. The
Junior Subordinated Debenture Indenture has been qualified under the Trust
Indenture Act and is subject to, and governed by, the Trust Indenture Act and is
included as an exhibit to the Registration Statement of which this Prospectus is
a part. This summary of certain terms and provisions of the Junior Subordinated
Debentures and the Junior Subordinated Debenture Indenture does not purport to
be complete and is subject to, and is qualified in its entirety by reference to,
all of the provisions of such Junior Subordinated Debentures and the Junior
Subordinated Debenture Indenture, including the definitions therein of certain
terms, and those terms made a part of the Junior Subordinated Debenture
Indenture by the Trust Indenture Act.
The applicable Prospectus Supplement will describe the specific terms of
the Junior Subordinated Debentures offered thereby, including: (i) the specific
title and designation, aggregate principal amount (including any limit thereon),
purchase price and denominations of such Junior Subordinated Debentures; (ii)
the date or dates on which the principal of such Junior Subordinated Debentures
is payable or the method of determining the same, if applicable; (iii) the rate
or rates (which may be fixed or variable) at which such Junior Subordinated
Debentures will bear interest, if any, or the method of determining the same, if
applicable; (iv) the date or dates from which such interest, if any, shall
accrue or the method of determining the same, if applicable, the interest
payment dates, if any, on which interest will be payable or the manner of
determining the same, if applicable, and the record dates for the determination
of holders to whom interest is payable on such Junior Subordinated Debentures;
(v) the duration of the maximum consecutive period that the Company may elect to
defer payments of interest on such Junior Subordinated Debentures; (vi) any
redemption, repayment or sinking fund provisions; (vii) whether such Junior
Subordinated Debentures are convertible into or exchangeable for Common Stock or
other securities or rights of the Company or other issuers, or a combination of
the foregoing, and, if so, the applicable conversion or exchange terms and
conditions; (viii) any applicable material United States federal income tax
consequences; and (ix) any other specific terms pertaining to such Junior
Subordinated Debentures, whether in addition to, or modification or deletion of,
the terms described herein.
Ranking
Each series of Junior Subordinated Debentures will rank pari passu with all
other Junior Subordinated Debentures (collectively, the "Other Debentures") to
be issued by the Company and sold to other trusts or other entities to be
established by the Company that are similar to the Hercules Trusts
(collectively, the "Other Hercules Trusts") and will be unsecured and will rank
subordinate and junior in right of payment, to the extent and in the manner set
forth in the Junior Subordinated Debenture Indenture to all Senior Indebtedness
of the Company as defined in the Junior Subordinated Debenture Indenture (the
"Senior Indebtedness As Defined In the Junior Subordinated Debenture
Indenture"). The Junior Subordinated Debenture Indenture will not limit the
amount of secured or unsecured debt, including Senior Indebtedness As Defined In
the Junior Subordinated Debenture Indenture, that may be incurred by the Company
or its subsidiaries. See "-- Subordination." As of June 30, 1998, the aggregate
principal amount of the Senior Indebtedness As Defined In the Junior
Subordinated Debenture Indenture was approximately $1,031,813,000.
Form, Registration and Transfer
The Junior Subordinated Debentures will be issued in fully registered form.
Until any dissolution of the applicable Hercules Trust, the Junior Subordinated
Debentures will be held in the name of the Property Trustee in trust for the
benefit of the holders of the related Trust Securities. If the Junior
Subordinated Debentures are distributed to the holders of the related Trust
Securities, the Junior Subordinated Debentures will be issued to such holders in
the same form as the Trust Securities were held. Accordingly, any
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depositary arrangements for such Junior Subordinated Debentures are expected to
be substantially similar to those in effect for the Trust Preferred Securities.
See "Description of Trust Preferred Securities -- Global Trust Preferred
Securities."
Payment and Paying Agents
Unless otherwise indicated in an applicable Prospectus Supplement, payment
of principal of and premium, if any, on and interest on the Junior Subordinated
Debentures will be made at the office of the Debenture Trustee in the City of
New York or at the office of such Paying Agent or Paying Agents as the Company
may designate from time to time, except that at the option of the Company
payment of any interest may be made, except in the case of a global certificate
representing Junior Subordinated Debentures, by (i) check mailed to the address
of the Person entitled thereto as such address shall appear in the applicable
Securities Register for Junior Subordinated Debentures or (ii) transfer to an
account maintained by the Person entitled thereto as specified in such
Securities Register, provided that proper transfer instructions have been
received by the relevant record date. Payment of any interest on any Junior
Subordinated Debenture will be made to the Person in whose name such Junior
Subordinated Debenture is registered at the close of business on the record date
for such interest, except in the case of defaulted interest. The Company may at
any time designate additional Paying Agents or rescind the designation of any
Paying Agent; provided, however, the Company will at all times be required to
maintain a Paying Agent in each place of payment for the Junior Subordinated
Debentures.
Any moneys deposited with the Debenture Trustee or any Paying Agent, or
then held by the Company in trust, for the payment of the principal of and
premium, if any, on or interest on any Junior Subordinated Debentures and
remaining unclaimed for two years after such principal and premium, if any, or
interest has become due and payable shall, at the request of the Company, be
repaid to the Company and the holder of such Junior Subordinated Debentures
shall thereafter look, as a general unsecured creditor, only to the Company for
payment thereof.
Option to Extend Interest Payment Date
So long as no Debenture Event of Default has occurred and is continuing,
the Company will have the right under the Junior Subordinated Debenture
Indenture to defer the payment of interest on the Junior Subordinated Debentures
at any time or from time to time up to the maximum period specified in the
applicable Prospectus Supplement for the deferral of interest (each deferral
period being referred to herein as an "Extension Period"), provided that an
Extension Period must end on an interest payment date and may not extend beyond
the stated maturity of such Junior Subordinated Debentures. At the end of an
Extension Period, the Company must pay all interest then accrued and unpaid
(together with interest thereon, to the extent permitted by applicable law).
During an Extension Period, interest will continue to accrue and holders of
Junior Subordinated Debentures (and holders of the related Trust Securities
while such Trust Securities are outstanding) will be required to accrue such
deferred interest income for United States federal income tax purposes prior to
the receipt of cash attributable to such income, regardless of the method of
accounting used by the Holders.
Prior to the termination of any Extension Period, the Company may extend
such Extension Period, provided that such extension does not cause such
Extension Period to exceed the maximum Extension Period, end on a date other
than an interest payment date or extend beyond the stated maturity of the
related Junior Subordinated Debentures. Upon the termination of any Extension
Period (or any extension thereof) and the payment of all amounts then due, the
Company may begin a new Extension Period, subject to the foregoing limitations.
No interest shall be due and payable during an Extension Period except at the
end thereof. The Company must give the Debenture Trustee notice of its election
to begin or extend an Extension Period at least five Business Days prior to the
earlier of (i) the date cash distributions on the related Trust Securities would
have been payable except for the election to begin or extend such Extension
Period or (ii) the date the applicable Hercules Trust is required to give notice
to any securities exchange or to holders of its Trust Preferred Securities of
the record date or the date cash distributions are payable, but in any event not
less than five Business Days prior to such record date. The Debenture Trustee
shall give notice of the Company's
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election to begin or extend an Extension Period to the holders of the Trust
Preferred Securities. Subject to the foregoing limitations, there is no
limitation on the number of times that the Company may begin or extend an
Extension Period.
Restrictions on Certain Payments
The Company will also covenant that if at any time (i) there shall have
occurred any event of which the Company has actual knowledge that is, or with
the giving of notice or the lapse of time, or both, would be, a Debenture Event
of Default, (ii) the Company shall be in default with respect to any of its
payment obligations under the Guarantee or (iii) the Company shall have given
notice of its election to exercise its right to begin or extend an Extension
Period as provided in the Junior Subordinated Debenture Indenture and shall not
have rescinded such notice, and such Extension Period, or any extension thereof,
shall have commenced and be continuing, then it will not (1) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or (2)
make any payment of principal of or premium, if any, on or interest on or repay
or repurchase or redeem any debt securities of the Company (including Other
Debentures) that rank pari passu with or junior in right of payment to the
Junior Subordinated Debentures or (3) make any guarantee payments with respect
to any guarantee by the Company of the debt securities of any subsidiary of the
Company (including under Other Guarantees (as defined herein)) if such guarantee
ranks pari passu or junior in right of payment to the Junior Subordinated
Debentures (other than (a) dividends or distributions in shares of, or options,
warrants or rights to subscribe for or purchase shares of, Common Stock of the
Company, (b) any declaration of a dividend in connection with the implementation
of a stockholders' rights plan, or the issuance of stock under any such plan in
the future, or the redemption or repurchase of any such rights pursuant thereto,
(c) payments under the applicable Guarantee, (d) as a result of a
reclassification of the Company's capital stock or the exchange or conversion of
one class or series of the Company's capital stock for another class or series
of the Company's capital stock, (e) the purchase of fractional interests in
shares of the Company's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged,
and (f) purchases of Common Stock related to the issuance of Common Stock or
rights under any of the Company's benefit plans for its directors, officers or
employees or any of the Company's dividend reinvestment plans).
So long as the Trust Securities remain outstanding, the Company also will
covenant (i) to maintain 100% direct or indirect ownership of the related Trust
Common Securities (it being understood that any permitted successor of the
Company under the Junior Subordinated Debenture Indenture may succeed to the
Company's ownership of such Trust Common Securities), (ii) to use its best
efforts to cause each Hercules Trust (a) to remain a business trust, except in
connection with the distribution of Junior Subordinated Debentures to the
holders of related Trust Securities in liquidation of such Hercules Trust, the
conversion, exchange or redemption of all of such Trust Securities, or certain
mergers, consolidations or amalgamations, each as permitted by the applicable
Trust Agreement, and (b) to otherwise continue to be classified as a grantor
trust for United States federal income tax purposes, (iii) to use its best
efforts to cause each holder of its Trust Securities to be treated as owning an
undivided beneficial interest in the related Junior Subordinated Debentures and
(iv) not to cause, as Sponsor of the Hercules Trusts, or to permit, as the Trust
Common Securities Holder, the dissolution, liquidation or winding-up of any
Hercules Trust, except as provided in the applicable Trust Agreement.
Modification of Junior Subordinated Debenture Indenture
From time to time, the Company and the Debenture Trustee may, without the
consent of the holders of the Junior Subordinated Debentures, amend, waive or
supplement the Junior Subordinated Debenture Indenture for specified purposes,
including, among other things, curing ambiguities or adding provisions (provided
that any such action does not materially adversely affect the interests of the
holders of the Junior Subordinated Debentures) and maintaining the qualification
of the Junior Subordinated Debenture Indenture under the Trust Indenture Act.
The Junior Subordinated Debenture Indenture will permit the Company and the
Debenture Trustee, with the consent of the holders of a majority in principal
amount of all outstanding
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Junior Subordinated Debentures affected thereby, to modify the Junior
Subordinated Debenture Indenture in a manner affecting the rights of the holders
of Junior Subordinated Debentures; provided, however, that no such modification
may, without the consent of the holder of each outstanding Junior Subordinated
Debenture so affected, (i) change the stated maturity or reduce the principal of
any such Junior Subordinated Debentures, (ii) change the interest rate (or the
manner of calculation of the interest rate) or extend the time of payment of
interest on any such Junior Subordinated Debentures except pursuant to the
Company's right under the Junior Subordinated Debenture Indenture to defer the
payment of interest as provided therein (see "-- Option to Extend Interest
Payment Date"), (iii) change any of the conversion, exchange or redemption
provisions applicable to any such Junior Subordinated Debentures, (iv) change
the currency in respect of which payments of principal of or any premium or
interest on any such Junior Subordinated Debentures are to be made, (v) change
the right of holders of Trust Securities to bring a Direct Action in respect of
any required payments or conversion or exchange rights, (vi) impair or affect
the right of any holder of any such Junior Subordinated Debentures to institute
suit for the payment of the principal thereof or premium, if any, or interest
thereon or for the conversion or exchange of any such Junior Subordinated
Debentures in accordance with their terms, (vii) change the subordination
provisions adversely to the holders of the Junior Subordinated Debentures, or
(viii) reduce the percentage of principal amount of Junior Subordinated
Debentures the holders of which are required to consent to any such modification
of the Junior Subordinated Debenture Indenture.
Debenture Events of Default
The following described events with respect to any series of Junior
Subordinated Debentures will constitute a "Debenture Event of Default" (whatever
the reason for such Debenture Event of Default and whether it shall be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body) unless such event is specifically deleted
or modified in or pursuant to the supplemental indenture, Board Resolution or
Officers' Certificate establishing the terms of such series pursuant to the
Junior Subordinated Debenture Indenture:
(i) failure for 30 days to pay any interest on that series of Junior
Subordinated Debentures when due (subject to any permitted deferral
thereof); provided that, during any Extension Period for such series of
Junior Subordinated Debentures, failure to pay interest on such series of
Junior Subordinated Debentures shall not constitute a Debenture Event of
Default; or
(ii) failure to pay any principal of or premium, if any, on that
series of Junior Subordinated Debentures when due, whether at maturity,
upon any redemption, by declaration of acceleration of maturity or
otherwise; or
(iii) if applicable, failure by the Company to deliver the required
securities or other rights upon an appropriate conversion or exchange
election by holders of that series of Junior Subordinated Debentures or the
related Trust Preferred Securities; or
(iv) failure to observe or perform any other agreement or covenant
contained in the Junior Subordinated Debenture Indenture in respect of that
series of Junior Subordinated Debentures for 90 days after written notice
to the Company from the Debenture Trustee or the holders of at least 25% in
aggregate outstanding principal amount of that series of Junior
Subordinated Debentures; or
(v) certain events in bankruptcy, insolvency or reorganization of the
Company.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures of any series have, subject to certain
exceptions, the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Debenture Trustee in respect of such
Junior Subordinated Debentures. The Debenture Trustee or the holders of at least
25% in aggregate outstanding principal amount of the Junior Subordinated
Debentures of any series may declare the principal of and any accrued interest
on such Junior Subordinated Debentures due and payable immediately upon a
Debenture Event of Default, other than a Debenture Event of Default referred to
in clause (v) above, which shall result in the immediate acceleration of the
Junior Subordinated Debentures. The holders of a majority in aggregate
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outstanding principal amount of the Junior Subordinated Debentures of any series
may annul such declaration and waive the default in respect of such Junior
Subordinated Debentures if the default (other than the non-payment of the
principal and interest of the Junior Subordinated Debentures which has become
due solely by such acceleration) has been cured and a sum sufficient to pay all
matured installments of interest (and premium, if any) and principal due
otherwise than by acceleration has been deposited with the Debenture Trustee.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures of any series may, on behalf of the holders of
all of the Junior Subordinated Debentures of such series, waive any past
default, except a default in the payment of the principal of or premium, if any,
on or interest on (unless such default has been cured and a sum sufficient to
pay all matured installments of interest (and premium, if any) and principal due
otherwise than by acceleration has been deposited with the Debenture Trustee) or
a default in respect of a covenant or provision which under the Junior
Subordinated Debenture Indenture cannot be modified or amended without the
consent of the holder of each outstanding Junior Subordinated Debenture of such
series.
Enforcement of Certain Rights by Holders of Trust Preferred Securities
To the extent any action under the Junior Subordinated Debenture Indenture
is entitled to be taken by the holders of at least a specified percentage of
Junior Subordinated Debentures, holders of the corresponding Trust Preferred
Securities may take such action if such action is not taken by the Property
Trustee of the related Hercules Trust. Notwithstanding the foregoing, if a
Debenture Event of Default has occurred and is continuing and is attributable
either to (i) the failure of the Company to pay the principal of or premium, if
any, on or interest on the Junior Subordinated Debentures on the due date or
(ii) the failure by the Company to deliver the required securities or other
rights upon an appropriate conversion or exchange right election, a holder of
the related Trust Preferred Securities may institute a legal proceeding directly
against the Company for enforcement of payment to such holder of the principal
of or premium, if any, on or interest on such Junior Subordinated Debentures
having a principal amount equal to the Liquidation Amount of the Trust Preferred
Securities held by such holder or for enforcement of such conversion or exchange
rights, as the case may be (a "Direct Action"). The Company may not amend the
Junior Subordinated Debenture Indenture to remove the foregoing right to bring a
Direct Action without the prior written consent of the holders of all of the
Trust Preferred Securities outstanding. If the right to bring a Direct Action is
removed, the applicable Hercules Trust may become subject to the reporting
obligations under the Exchange Act. Notwithstanding any payments made to a
holder of Trust Preferred Securities by the Company in connection with a Direct
Action, the Company shall remain obligated to pay the principal of and premium,
if any, on and interest on the related Junior Subordinated Debentures, and the
Company shall be subrogated to the rights of the holder of such Trust Preferred
Securities with respect to payments on the Trust Preferred Securities to the
extent of any payments made by the Company to such holder in any Direct Action.
The holders of the Trust Preferred Securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the related Junior Subordinated Debentures unless an
Event of Default has occurred and is continuing under the applicable Trust
Agreement. See "Description of Trust Preferred Securities -- Events of Default;
Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
The Company shall not consolidate with or merge into any other Person or
convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety to any Person, and no Person shall consolidate with
or merge into the Company or convey, transfer or lease its properties and assets
as an entirety or substantially as an entirety to the Company, unless: (i) in
case the Company consolidates with or merges into another Person or conveys or
transfers its properties and assets as an entirety or substantially as an
entirety to any Person, the successor Person is organized under the laws of the
United States or any State or the District of Columbia, and such successor
Person expressly assumes the Company's obligations under the Junior Subordinated
Debentures and the Guarantees; (ii) immediately after giving effect thereto, no
Debenture Event of Default, and no event which, after notice or lapse of time or
both, would become a
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Debenture Event of Default, shall have occurred and be continuing; and (iii)
certain other conditions as prescribed in the Junior Subordinated Debenture
Indenture are met.
Satisfaction and Discharge
The Junior Subordinated Debenture Indenture will cease to be of further
effect (except as to the Company's obligations to pay all other sums due
pursuant to the Junior Subordinated Debenture Indenture and to provide the
officers' certificates and opinions of counsel described therein), and the
Company will be deemed to have satisfied and discharged the Junior Subordinated
Debenture Indenture, when, among other things, all Junior Subordinated
Debentures not previously delivered to the Debenture Trustee for cancellation
(i) have become due and payable or (ii) will become due and payable at maturity
or upon redemption within one year, and the Company deposits or causes to be
deposited with the Debenture Trustee funds, in trust, for the purpose and in an
amount sufficient to pay and discharge the entire indebtedness on the Junior
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation, for the principal (and premium, if any) and interest to the date
of the deposit or to the stated maturity thereof, as the case may be.
Subordination
The Junior Subordinated Debentures will rank subordinate and junior in
right of payment to all Senior Indebtedness As Defined In the Junior
Subordinated Debenture Indenture to the extent provided in the Junior
Subordinated Debenture Indenture. Upon any payment or distribution of assets to
creditors upon any liquidation, dissolution, winding-up, reorganization,
assignment for the benefit of creditors, marshaling of assets or any bankruptcy,
insolvency, debt restructuring or similar proceedings in connection with any
insolvency or bankruptcy proceeding of the Company, the holders of Senior
Indebtedness As Defined In the Junior Subordinated Debenture Indenture will
first be entitled to receive payment in full of such Senior Indebtedness As
Defined In the Junior Subordinated Debenture Indenture before the holders of
Junior Subordinated Debentures will be entitled to receive or retain any payment
in respect thereof.
In the event of the acceleration of the maturity of Junior Subordinated
Debentures, the holders of all Senior Indebtedness As Defined In the Junior
Subordinated Debenture Indenture outstanding at the time of such acceleration
will first be entitled to receive payment in full of such Senior Indebtedness As
Defined In the Junior Subordinated Debenture Indenture before the holders of
Junior Subordinated Debentures will be entitled to receive or retain any payment
in respect of the Junior Subordinated Debentures.
No payments on account of principal or premium, if any, or interest in
respect of the Junior Subordinated Debentures may be made if there shall have
occurred and be continuing a default in any payment with respect to Senior
Indebtedness As Defined In the Junior Subordinated Debenture Indenture, or an
event of default with respect to any Senior Indebtedness As Defined In the
Junior Subordinated Debenture Indenture resulting in the acceleration of the
maturity thereof, or if any judicial proceeding shall be pending with respect to
any such default.
"Indebtedness" shall mean: (i) every obligation of the Company for money
borrowed; (ii) every obligation of the Company evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses; (iii) every
reimbursement obligation of the Company with respect to letters of credit,
banker's acceptances or similar facilities issued for the account of the
Company; (iv) every obligation of the Company issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts payable or
accrued liabilities arising in the ordinary course of business); (v) every
capital lease obligation of the Company; (vi) all indebtedness of the Company,
whether incurred on or prior to the date of the Junior Subordinated Debenture
Indenture or thereafter incurred, for claims in respect of derivative products,
including interest rate, foreign exchange rate and commodity forward contracts,
options and swaps and similar arrangements; (vii) every obligation of the type
referred to in clauses (i) through (vi) of another Person and all dividends of
another Person the payment of which, in either case, the Company has guaranteed
or is responsible or liable for, directly or indirectly, as obligor or
otherwise; and (viii) obligations of the type referred to in clauses
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(i) through (vii) of another Person secured by any lien on any property or asset
of the Company (whether or not such obligation is assumed by the Company); and
all deferrals, renewals, extensions and refundings of, and amendments,
modifications and supplements to, any of the foregoing obligations.
"Indebtedness Ranking on a Parity with the Junior Subordinated Debentures"
shall mean (i) Indebtedness, whether outstanding on the date of execution of the
Junior Subordinated Debenture Indenture or thereafter created, assumed or
incurred, to the extent such Indebtedness specifically by its terms ranks pari
passu with and not prior to the Junior Subordinated Debentures in the right of
payment upon the happening of the dissolution, winding-up, liquidation or
reorganization of the Company and (ii) all other debt securities, and guarantees
in respect of those debt securities, issued to any other trust, or a trustee of
such trust, partnership or other entity affiliated with the Company that is a
financing vehicle of the Company (a "financing entity") in connection with the
issuance by such financing entity of equity securities or other securities
guaranteed by the Company pursuant to an instrument that ranks pari passu with
or junior in right of payment to the Guarantee. The securing of any Indebtedness
otherwise constituting Indebtedness Ranking on a Parity with the Junior
Subordinated Debentures shall not be deemed to prevent such Indebtedness from
constituting Indebtedness Ranking on a Parity with the Junior Subordinated
Debentures.
"Indebtedness Ranking Junior to the Junior Subordinated Debentures" shall
mean any Indebtedness, whether outstanding on the date of execution of the
Junior Subordinated Debenture Indenture or thereafter created, assumed or
incurred, to the extent such Indebtedness by its terms ranks junior to and not
pari passu with or prior to the Junior Subordinated Debentures (and any other
Indebtedness Ranking on a Parity with the Junior Subordinated Debentures) in
right of payment upon the happening of the dissolution, winding-up, liquidation
or reorganization of the Company. The securing of any Indebtedness otherwise
constituting Indebtedness Ranking Junior to the Junior Subordinated Debentures
shall not be deemed to prevent such Indebtedness from constituting Indebtedness
Ranking Junior to the Junior Subordinated Debentures.
"Senior Indebtedness As Defined In the Junior Subordinated Debenture
Indenture" shall mean all Indebtedness, whether outstanding on the date of
execution of the Junior Subordinated Debenture Indenture or thereafter created,
assumed or incurred, except Indebtedness Ranking on a Parity with the Junior
Subordinated Debentures or Indebtedness Ranking Junior to the Junior
Subordinated Debentures.
Governing Law
The Junior Subordinated Debenture Indenture and the Junior Subordinated
Debentures will be governed by and construed in accordance with the laws of the
State of Delaware.
Information Concerning the Debenture Trustee
The Debenture Trustee shall be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to the foregoing, the Debenture Trustee will not be under
any obligation to exercise any of the powers vested in it by the Junior
Subordinated Debenture Indenture at the request of any holder of Junior
Subordinated Debentures, unless offered reasonable indemnity by such holder
against the costs, expenses and liabilities which might be incurred thereby. The
Debenture Trustee will not be required to expend or risk its own funds or
otherwise incur personal financial liability in the performance of its duties if
the Debenture Trustee reasonably believes that repayment or adequate indemnity
is not reasonably assured to it.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of
300,000,000 shares of Common Stock and 2,000,000 shares of Preferred Stock.
Preferred Stock may be issued from time to time in one or more classes or
series of preferred stock with such designations, powers, preferences and rights
of the shares of such class or series and the qualifications, limitations or
restrictions thereon, including, but not limited to, dividend rights, dividend
rate or rates, conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions) and the
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liquidation preference established by the Board of Directors, without approval
of the stockholders, pursuant to the provisions of the Restated Certificate of
Incorporation of the Company (the "Certificate of Incorporation").
At August 31, 1998, there were outstanding (i) 94,630,404 shares of Common
Stock and (ii) no shares of Preferred Stock.
As described under "Description of Depositary Shares," the Company may
issue Depositary Shares evidenced by depositary receipts ("Depositary
Receipts"), each representing a fractional interest (to be specified in the
Prospectus Supplement relating to the particular class or series of the
Preferred Stock) in a share of a particular class or series of the Preferred
Stock issued and deposited with a Preferred Stock Depositary (as defined
herein).
The following summary description of the capital stock of the Company is
qualified in its entirety by reference to the Certificate of Incorporation and
the By-Laws of the Company, as amended (the "By-Laws"), copies of which are
filed as exhibits to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 and to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK
Dividends. Subject to the rights of the holders of Preferred Stock,
holders of Common Stock are entitled to receive dividends and other
distributions in cash, stock or property of the Company, when, as and if
declared by the Board of Directors out of assets or funds of the Company legally
available therefor and shall share equally on a per share basis in all such
dividends and other distributions.
Voting Rights. At every meeting of stockholders, every holder of Common
Stock is entitled to one vote per share. Subject to any voting rights which may
be granted to holders of Preferred Stock, any action submitted to stockholders
is approved if the number of votes cast in favor of such action exceeds the
number of votes required by the provisions of the Certificate of Incorporation
or by law, subject to applicable quorum requirements. The Certificate of
Incorporation requires the affirmative vote of at least 80% of the voting power
of all of the stockholders with respect to certain fundamental corporate
transactions. The Certificate of Incorporation also precludes stockholders from
acting by written consent.
Liquidation Rights. In the event of any liquidation, dissolution or
winding-up of the business of the Company, whether voluntary or involuntary (any
such event, a "Liquidation"), the holders of Common Stock are entitled to share
equally in the assets available for distribution after payment of all
liabilities and provision for the liquidation preference of any shares of
Preferred Stock then outstanding.
Miscellaneous. The holders of Common Stock have no preemptive rights,
cumulative voting rights, subscription rights, or conversion rights and the
Common Stock is not subject to redemption.
The Company has a classified Board of Directors with three-year terms. The
directors are divided into three classes as equal in number as possible and the
term of one class expires each year.
The transfer agent and registrar with respect to the Common Stock is Chase
Mellon Shareholder Services.
All shares of Common Stock offered pursuant to a Prospectus Supplement, or
issuable upon conversion, exchange or exercise of Offered Securities, will, when
issued, be fully paid and non-assessable. The Common Stock is traded on the New
York Stock Exchange under the symbol "HPC."
Reference is made to the applicable Prospectus Supplement relating to the
Common Stock offered thereby for specific terms, including: (i) the number of
shares offered, (ii) the initial offering price, if any, and market price and
(iii) dividend information.
PREFERRED STOCK
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the
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Preferred Stock are in all respects subject to and qualified in their entirety
by reference to the applicable provisions of the Certificate of Incorporation
(including any future amendments thereto) and By-Laws, as amended.
General
Subject to limitations prescribed by Delaware law and the Certificate of
Incorporation, the Board of Directors is authorized to fix the number of shares
constituting each class or series of Preferred Stock and the designations and
powers, preferences and relative, participating, optional or other special
rights and qualifications, limitations or restrictions thereof, including such
provisions as may be desired concerning voting, redemption, dividends,
dissolution or the distribution of assets, conversion or exchange, and such
other subjects or matters as may be fixed by resolution of the Board of
Directors or duly authorized committee thereof. The Preferred Stock will, when
issued, be fully paid and non-assessable and will not have, or be subject to,
any preemptive or similar rights.
Reference is made to the Prospectus Supplement relating to the class or
series of Preferred Stock offered thereby for specific terms, including: (i) the
class or series, title and stated value, if any, of such Preferred Stock; (ii)
the number of shares of such Preferred Stock offered and the liquidation
preference per share and the initial offering price, if any, of such Preferred
Stock; (iii) the dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Stock; (iv) whether
dividends on such Preferred Stock shall be cumulative or not and, if cumulative,
the date from which dividends on such Preferred Stock shall accumulate; (v) any
voting rights granted to the holders of such Preferred Stock or required by law;
(vi) the procedures for any auction and remarketing, if any, for such Preferred
Stock; (vii) provisions for a sinking fund, if any, for such Preferred Stock;
(viii) provisions for redemption, if applicable, of such Preferred Stock; (ix)
any listing of such Preferred Stock on any securities exchange; (x) the terms
and conditions, if applicable, upon which such Preferred Stock will be
convertible into or exchangeable for other securities or rights, or a
combination of the foregoing, including the name of the issuer of such
securities or rights, the conversion or exchange price or rate (or manner of
calculation thereof) and the conversion or exchange date(s) or period(s); (xi)
whether interests in such Preferred Stock will be represented by Depositary
Shares, and, if so, the terms thereof; (xii) a discussion of certain material
U.S. federal income tax considerations applicable to such Preferred Stock; and
(xiii) any other material terms, preferences, rights, limitations or
restrictions of such Preferred Stock.
Rank
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to (as applicable) dividend rights and rights upon
liquidation, dissolution or winding-up of the Company, rank (i) senior to all
classes or series of Common Stock of the Company and to all equity securities of
the Company the terms of which provide that such equity securities are
subordinated to the Preferred Stock; (ii) on a parity with all equity securities
of the Company other than those referred to in clauses (i) and (iii); and (iii)
junior to all equity securities of the Company which the terms of such Preferred
Stock provide will rank senior to it.
Dividends
Holders of shares of the Preferred Stock of each class or series shall be
entitled to receive, when, as and if declared by the Board of Directors of the
Company, out of assets of the Company legally available for payment, cash
dividends at such rates and on such dates as will be set forth in the applicable
Prospectus Supplement. Each such dividend shall be payable to holders of record
as they appear on the stock transfer books of the Company on such record dates
as shall be fixed by the Board of Directors of the Company.
Dividends on any class or series of the Preferred Stock may be cumulative
or non-cumulative, as provided in the applicable Prospectus Supplement.
Dividends, if cumulative, will accumulate from and after the date set forth in
the applicable Prospectus Supplement. If the Board of Directors of the Company
fails to declare a dividend payable on a dividend payment date on any class or
series of the Preferred Stock for
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which dividends are non-cumulative, then the holders of such class or series of
the Preferred Stock will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and the Company will have
no obligation to pay the dividend accrued for such period, whether or not
dividends on such class or series are declared payable on any future dividend
payment date.
If any shares of the Preferred Stock of any class or series are
outstanding, no full dividends shall be declared or paid or set apart for
payment on the Preferred Stock of the Company of any other class or series
ranking, as to dividends, on a parity with or junior to the Preferred Stock of
such class or series for any period unless (i) if such class or series of
Preferred Stock has a cumulative dividend, full cumulative dividends on the
Preferred Stock of such class or series have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for payment for all past dividend periods and the then current dividend
period or (ii) if such class or series of Preferred Stock does not have a
cumulative dividend, full dividends on the Preferred Stock of such class or
series have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for such payment for the then
current dividend period ((i) and (ii) are hereinafter collectively referred to
as "all required dividends are paid"). When dividends are not paid in full (or a
sum sufficient for such full payment is not so set apart) upon the shares of
Preferred Stock of any class or series and the shares of any other class or
series of Preferred Stock ranking on a parity as to dividends with the Preferred
Stock of such class or series, all dividends declared upon shares of Preferred
Stock of such class or series and any other class or series of Preferred Stock
ranking on a parity as to dividends with such Preferred Stock shall be declared
pro rata so that the amount of dividends declared per share on the Preferred
Stock of such class or series and such other class or series of Preferred Stock
shall in all cases bear to each other the same ratio that accrued and unpaid
dividends per share on the shares of Preferred Stock of such class or series
(which shall not include any accumulation in respect of unpaid dividends for
prior dividend periods if such Preferred Stock does not have a cumulative
dividend) and such other class or series of Preferred Stock bear to each other.
No interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on Preferred Stock of such class or series
which may be in arrears.
Except as provided in the immediately preceding paragraph, unless all
required dividends are paid, no dividends (other than in Common Stock or other
stock ranking junior to the Preferred Stock of such class or series as to
dividends and upon liquidation, dissolution or winding-up of the Company) shall
be declared or paid or set aside for payment or other distribution shall be
declared or made upon the Common Stock or any other stock of the Company ranking
junior to or on a parity with the Preferred Stock of such class or series as to
dividends or upon liquidation, nor shall any Common Stock or any other capital
stock of the Company ranking junior to or on a parity with the Preferred Stock
of such class or series as to dividends or upon liquidation, dissolution or
winding-up of the Company be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking fund for
the redemption of any shares of any such stock) by the Company (except by
conversion into or exchange for other stock of the Company ranking junior to the
Preferred Stock of such class or series as to dividends and upon liquidation,
dissolution or winding-up of the Company).
Any dividend payment made on shares of a class or series of Preferred Stock
shall first be credited against the earliest accrued but unpaid dividend due
with respect to shares of such class or series which remains payable.
Redemption
If so provided in the applicable Prospectus Supplement, the shares of
Preferred Stock will be subject to mandatory redemption or redemption at the
option of the Company, as a whole or in part, in each case upon the terms, at
the times and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a class or series of Preferred Stock
that is subject to mandatory redemption will specify the number of shares of
such Preferred Stock that shall be redeemed by the Company in each year
commencing after a date to be specified, at a redemption price per share to be
specified, together with an amount equal to all accumulated and unpaid dividends
thereon (which shall not, if such Preferred
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Stock does not have a cumulative dividend, include any accumulation in respect
of unpaid dividends for prior dividend periods) to the date of redemption. The
redemption price may be payable in cash or other property, as specified in the
applicable Prospectus Supplement. If the redemption price for Preferred Stock of
any series is payable only from the net proceeds of the issuance of stock of the
Company, the terms of such Preferred Stock may provide that, if no such stock
shall have been issued or to the extent the net proceeds from any issuance are
insufficient to pay in full the aggregate redemption price then due, such
Preferred Stock shall automatically and mandatorily be converted into shares of
the applicable stock of the Company pursuant to conversion provisions specified
in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless provided otherwise for any class or
series of Preferred Stock, unless all required dividends are paid: (i) no shares
of the applicable class or series of Preferred Stock shall be redeemed unless
all outstanding shares of Preferred Stock of such class or series are
simultaneously redeemed and (ii) the Company shall not purchase or otherwise
acquire directly or indirectly any shares of the applicable class or series of
Preferred Stock (except by conversion into or exchange for stock of the Company
ranking junior to the Preferred Stock of such class or series as to dividends
and upon liquidation, dissolution or winding-up of the Company), provided,
however, that the foregoing shall not prevent the purchase or acquisition of
shares of Preferred Stock of such class or series pursuant to a purchase or
exchange offer made on the same terms to holders of all outstanding shares of
Preferred Stock of such class or series.
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, then, before any distribution or payment shall be made to the
holders of any Common Stock or any other class or series of stock of the Company
ranking junior to such class or series of Preferred Stock in the distribution of
assets upon any liquidation, dissolution or winding-up of the Company, the
holders of each class or series of Preferred Stock shall be entitled to receive
out of assets of the Company legally available for distribution to stockholders
liquidating distributions in the amount of the liquidation preference per share
(set forth in the applicable Prospectus Supplement), plus an amount equal to all
dividends accrued and unpaid thereon (which shall not include any accumulation
in respect of unpaid dividends for prior dividend periods if such class or
series of Preferred Stock does not have a cumulative dividend). After payment of
the full amount of the liquidating distributions to which they are entitled, the
holders of such class or series of Preferred Stock will have no right or claim
to any of the remaining assets of the Company. In the event that, upon any
voluntary or involuntary liquidation, dissolution or winding-up of the Company,
the legally available assets of the Company are insufficient to pay the amount
of the liquidating distributions on all outstanding shares of such class or
series of Preferred Stock and the corresponding amounts payable on all shares of
other classes or series of stock of the Company ranking on a parity with such
class or series of Preferred Stock in the distribution of assets upon any
liquidation, dissolution or winding-up of the Company, then the holders of such
class or series of Preferred Stock and all other such classes or series of stock
shall share ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
If liquidating distributions shall have been made in full to all holders of
shares of such class or series of Preferred Stock, the remaining assets of the
Company shall be distributed among the holders of any other classes or series of
stock ranking junior to such class or series of Preferred Stock upon any
liquidation, dissolution or winding-up of the Company, according to their
respective rights and preferences and in each case according to their respective
number of shares.
For such purposes, neither the consolidation or merger of the Company with
or into any other Company nor the sale, lease, transfer or conveyance of all or
substantially all of the property or business of the Company shall be deemed to
constitute a liquidation, dissolution or winding-up of the Company.
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Voting Rights
Holders of such class or series of Preferred Stock will not have any voting
rights, except as set forth below (unless otherwise specified in a Prospectus
Supplement) or as otherwise from time to time required by law or as indicated in
the applicable Prospectus Supplement.
If specified in the applicable Prospectus Supplement, or as long as the
Preferred Stock is listed on an exchange so requiring, whenever dividends on any
shares of such class or series of Preferred Stock shall be in arrears for six or
more quarterly periods, regardless of whether such quarterly periods are
consecutive, the holders of such shares of such class or series of Preferred
Stock (voting together as a class with all other classes or series of preferred
stock upon which like voting rights have been conferred and are exercisable)
will be entitled to vote for the election of two additional directors of the
Company at a special meeting called by an officer of the Company at the request
of a holder of such class or series of Preferred Stock or, if such special
meeting is not called by an officer of the Company within 30 days, at a special
meeting called by a holder of such class or series of Preferred Stock designated
by the holders of record of at least 10% of the shares of any such class or
series of Preferred Stock (unless such request is received less than 90 days
before the date fixed for the next annual or special meeting of the
stockholders), or at the next annual meeting of stockholders, and at each
subsequent annual meeting until (i) if such class or series of Preferred Stock
has a cumulative dividend, all dividends accumulated on such shares of Preferred
Stock for the past dividend periods and the then current dividend period shall
have been fully paid or declared and a sum sufficient for the payment thereof
set apart for payment or (ii) if such class or series of Preferred Stock does
not have a cumulative dividend, four consecutive quarterly dividends shall have
been fully paid or declared and a sum sufficient for the payment thereof set
apart for payment. In such case, the entire Board of Directors of the Company
will be increased by two directors.
Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock remain outstanding, the Company shall not, without the
affirmative vote or consent of the holders of at least two-thirds of the shares
of each class or series of Preferred Stock outstanding at the time, given in
person or by proxy, either in writing or at a meeting (such class or series
voting separately as a class), (i) authorize or create, or increase the
authorized or issued amount of, any class or series of stock ranking senior to
such class or series of Preferred Stock with respect to payment of dividends or
the distribution of assets upon liquidation, dissolution or winding-up of the
Company or reclassify any authorized stock of the Company into any such shares,
or create, authorize or issue any obligation or security convertible into or
exchangeable for, or evidencing the right to purchase, any such shares; or (ii)
amend, alter or repeal the provisions of the Certificate of Incorporation in
respect of such class or series of Preferred Stock, whether by merger,
consolidation or otherwise, so as to materially and adversely affect any right,
preference, privilege or voting power of such class or series of Preferred Stock
or the holders thereof; provided, however, that any increase in the amount of
the authorized Preferred Stock or the creation or issuance of any other class or
series of Preferred Stock, or any increase in the amount of authorized shares of
such class or series, in each case ranking on a parity with or junior to the
Preferred Stock of such class or series with respect to payment of dividends and
the distribution of assets upon liquidation, dissolution or winding-up, shall
not be deemed to materially and adversely affect such rights, preferences,
privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such class or series of Preferred Stock
shall have been redeemed or called for redemption upon proper notice and
sufficient funds shall have been irrevocably deposited in trust to effect such
redemption.
Conversion Rights
The terms and conditions, if any, upon which shares of any class or series
of Preferred Stock are convertible into or exchangeable for other securities or
rights of the Company or other issuers, including, without limitation, Common
Stock, Debt Securities or another series of Preferred Stock, or any combination
of the foregoing, will be set forth in the applicable Prospectus Supplement
relating thereto. Such terms will include the name of the issuer of such other
securities or rights and the number or principal amount of the
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securities or rights into which the Preferred Stock is convertible or
exchangeable, the conversion or exchange price or rate (or manner of calculation
thereof), the conversion or exchange date(s) or period(s), provisions as to
whether the conversion or exchange will be at the option of the holders of such
class or series of Preferred Stock or the Company or other issuer and the events
requiring an adjustment of the conversion or exchange price or rate.
DESCRIPTION OF DEPOSITARY SHARES
The description set forth below and in any Prospectus Supplement of certain
provisions of the Deposit Agreement (as defined below) and of the Depositary
Shares and Depositary Receipts summarizes the material terms of the Deposit
Agreement and of the Depositary Shares and Depositary Receipts, and is qualified
in its entirety by reference to the Deposit Agreement and the Depositary
Receipts evidencing the Depositary Shares.
General
The Company may issue shares of Preferred Stock represented by Depositary
Shares. The shares of any series of the Preferred Stock underlying the
Depositary Shares will be deposited under a separate deposit agreement (the
"Deposit Agreement") between the Company and a bank or trust company selected by
the Company (the "Preferred Stock Depositary"). The Prospectus Supplement
relating to Depositary Shares will set forth the name and address of the
Preferred Stock Depositary. Subject to the terms of the Deposit Agreement, each
holder of a Depositary Receipt evidencing Depositary Shares will be entitled,
proportionately, to all the rights, preferences and privileges of the Preferred
Stock represented by such Depositary Shares (including dividend, voting,
redemption, conversion, exchange and liquidation rights).
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the Deposit Agreement, each of which will represent the applicable
fractional interest in a share of a particular series of the Preferred Stock
described in the applicable Prospectus Supplement.
A holder of Depositary Receipts evidencing Depositary Shares will be
entitled to receive the shares of Preferred Stock (but only in whole shares of
Preferred Stock) underlying such Depositary Shares. If the Depositary Receipts
delivered by the holder evidence a number of Depositary Shares in excess of the
whole number of shares of Preferred Stock to be withdrawn, the Depositary will
deliver to such holder at the same time a new Depositary Receipt evidencing such
excess number of Depositary Shares. The Company may also deliver cash in lieu of
delivery of fractional interests in Preferred Stock.
Dividends and Other Distributions
The Preferred Stock Depositary will distribute all cash dividends or other
cash distributions in respect of the series of Preferred Stock represented by
the Depository Shares to the holders of Depositary Receipts in proportion to the
number of Depositary Receipts owned by such holders. The Preferred Stock
Depositary, however, will distribute only such amounts as can be distributed
without attributing to any Depositary Share a fraction of one cent, and any
balance not so distributed will be added to and treated as part of the next sum
received by that Preferred Stock Depositary for distribution to holders of
Depositary Receipts then outstanding.
In the event of a distribution other than in cash in respect to the
Preferred Stock, the Preferred Stock Depositary will distribute property
received by it to the holders of Depositary Receipts in proportion, insofar as
possible, to the number of Depositary Shares owned by such holders, unless the
Preferred Stock Depositary determines that it is not feasible to make such
distribution, in which case the Preferred Stock Depositary may, with the
approval of the Company, adopt such method as it deems equitable and practicable
for the purpose of effecting such distribution, including public or private sale
of such property and distribution of the net proceeds from such sale to such
holders.
The amounts so distributed in any of the foregoing cases will be reduced by
any amount required by law to be withheld by the Company or the Preferred Stock
Depositary on account of taxes.
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Conversion and Exchange
If any Preferred Stock underlying the Depositary Shares is subject to
provisions relating to its conversion or exchange as set forth in the applicable
Prospectus Supplement, each holder of Depositary Receipts will have the right or
obligation to convert or exchange the Depositary Shares represented by such
Depositary Receipts pursuant to the terms thereof.
Redemption
If any series of Preferred Stock underlying the Depositary Shares is
subject to redemption, the Depositary Shares will be redeemed from the proceeds
received by the Preferred Stock Depositary resulting from the redemption, in
whole or in part, of the related Preferred Stock held by the Preferred Stock
Depositary. The redemption price per Depositary Share will be equal to the
corresponding proportion of the redemption price payable with respect to the
number of shares of Preferred Stock underlying the Depositary Shares. Whenever
the Company redeems Preferred Stock from the Preferred Stock Depositary, the
Preferred Stock Depositary will redeem as of the same redemption date a
proportionate number of Depositary Shares representing the shares of Preferred
Stock that were redeemed. If less than all the Depositary Shares are to be
redeemed, the Depositary Shares to be redeemed will be selected by lot or pro
rata as may be determined by the Company.
After the date fixed for redemption, the Depositary Receipts evidencing
such Depositary Shares so called for redemption will no longer be deemed to be
outstanding and all rights of the holders of the Depositary Receipts evidencing
such Depositary Shares will cease, except the right to receive the redemption
price upon such redemption. Any funds deposited by the Company with the
Preferred Stock Depositary for any Depositary Shares which the holders of the
Depositary Receipts evidencing such Depositary Shares fail to redeem shall be
returned to the Company after a period of two years from the date such funds are
so deposited.
Voting
Upon receipt of notice of any meeting at which the holders of any shares of
Preferred Stock underlying the Depositary Shares are entitled to vote, the
Preferred Stock Depositary will mail the information contained in such notice to
the holders of the Depositary Receipts evidencing such Depositary Shares. Each
holder of such Depositary Receipts on the record date (which will be the same
date as the record date for such Preferred Stock) will be entitled to instruct
the Preferred Stock Depositary as to the exercise of the voting rights
pertaining to the number of shares of Preferred Stock underlying such Depositary
Shares. The Preferred Stock Depositary will endeavor, insofar as practicable, to
vote the number of shares of Preferred Stock underlying such Depositary Shares
in accordance with such instructions, and the Company will agree to take all
reasonable action which may be deemed necessary by the Preferred Stock
Depositary in order to enable the Preferred Stock Depositary to do so. The
Preferred Stock Depositary will abstain from voting the Preferred Stock to the
extent it does not receive specific written instructions from holders of
Depositary Receipts.
Record Date
Whenever (i) any cash dividend or other cash distribution shall become
payable, any distribution other than cash shall be made, or any rights,
preferences or privileges shall be offered with respect to the Preferred Stock,
or (ii) the Preferred Stock Depositary shall receive notice of any meeting at
which holders of Preferred Stock are entitled to vote or of which holders of
Preferred Stock are entitled to notice, or of the mandatory conversion or
redemption of, or any election on the part of the Company to call for the
redemption of, any Preferred Stock, the Preferred Stock Depositary shall in each
such instance fix a record date (which shall be the same as the record date for
the Preferred Stock) for the determination of the holders of Depositary Receipts
who (x) shall be entitled to receive such dividend, distribution, rights,
preferences or privileges or (y) shall be entitled to give instructions for the
exercise of voting rights at any such meeting or to receive
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notice of such meeting or of such redemption or conversion, subject to the
provisions of the Deposit Agreement.
Amendment and Termination of the Deposit Agreement
Any provision of the Deposit Agreement or any Depositary Receipt may at any
time be amended by agreement between the Company and the Preferred Stock
Depositary. However, any amendment which imposes or increases any fees, taxes or
other charges payable by the holders of Depositary Receipts (other than taxes
and other governmental charges, fees and other expenses payable by such holders
as stated under "-- Charges of Preferred Stock Depositary"), or which otherwise
materially and adversely affects any existing right of holders of Depositary
Receipts, will not take effect as to outstanding Depositary Receipts unless
approved by at least two-thirds of the holders of such outstanding Depositary
Receipts.
Whenever so directed by the Company, the Preferred Stock Depositary will
terminate the Deposit Agreement by mailing notice of such termination to the
holders of all Depositary Receipts then outstanding at least 30 days prior to
the date fixed in such notice for such termination, provided, however, that any
such termination that materially and adversely affects the holders of the
Depositary Receipts must be approved by at least two-thirds of the holders of
the outstanding Depositary Receipts. If any Depositary Receipts remain
outstanding after the date of termination of the Deposit Agreement, the
Preferred Stock Depositary will exchange the Depositary Receipts for shares of
the Preferred Stock underlying the Depositary Shares represented by such
Depositary Receipts, and, thereafter, will discontinue the transfer of
Depositary Receipts, suspend the distribution of dividends to the holders
thereof and not give any further notices (other than notice of such termination)
or perform any further acts under the Deposit Agreement.
Charges of Preferred Stock Depositary
The Company will pay all charges of the Preferred Stock Depositary,
including charges in connection with the initial deposit of the Preferred Stock,
the initial issuance of the Depositary Receipts, the distribution of information
to the holders of Depositary Receipts with respect to matters on which Preferred
Stock is entitled to vote, withdrawals of the Preferred Stock by the holders of
Depositary Receipts or redemption or conversion of the Preferred Stock, except
for taxes (including transfer taxes, if any) and other governmental charges and
such other charges as are expressly provided in the Deposit Agreement to be at
the expense of holders of Depositary Receipts or persons depositing Preferred
Stock.
Miscellaneous
The Preferred Stock Depositary will make available for inspection by
holders of Depositary Receipts at its corporate office and its New York office,
all reports and communications from the Company which are delivered to the
Preferred Stock Depositary as the holder of Preferred Stock.
Neither the Preferred Stock Depositary nor the Company will be liable if
prevented or delayed by law or any circumstance beyond its control in performing
its obligations under the Deposit Agreement. The obligations of the Preferred
Stock Depositary under the Deposit Agreement are limited to performing its
duties thereunder without negligence or bad faith. The obligations of the
Company under the Deposit Agreement are limited to performing its duties
thereunder without negligence and in good faith. Neither the Company nor the
Preferred Stock Depositary is obligated to prosecute or defend any legal
proceeding in respect of any Depositary Receipts, Depositary Shares or Preferred
Stock unless satisfactory indemnity is furnished. The Company and the Preferred
Stock Depositary are entitled to rely upon advice of or information from
counsel, accountants or other persons believed to be competent and on documents
believed to be genuine.
The Preferred Stock Depositary may resign at any time or be removed by the
Company, effective upon the acceptance by its successor of its appointment as
successor depositary. If a successor depositary shall not have been appointed
and accepted its appointment within 45 days after the giving of such notice of
resignation, the resigning Preferred Stock Depositary may petition any court of
competent jurisdiction for the
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appointment of a successor depositary with respect to outstanding Depositary
Receipts under the Deposit Agreement.
DESCRIPTION OF WARRANTS
The Company may issue Warrants to purchase Senior Debt Securities,
Subordinated Debt Securities, Preferred Stock, Depositary Shares or Common Stock
(collectively, the "Underlying Warrant Securities"), and such Warrants may be
issued independently or together with any such Underlying Warrant Securities and
may be attached to or separate from such Underlying Warrant Securities. Each
series of Warrants will be issued under a separate warrant agreement (each a
"Warrant Agreement") to be entered into between the Company and a warrant agent
("Warrant Agent"). The Warrant Agent will act solely as an agent of the Company
in connection with the Warrants of such series and will not assume any
obligation or relationship of agency for or with holders or beneficial owners of
Warrants.
The applicable Prospectus Supplement will describe the specific terms of
any Warrants offered thereby, including: (i) the title of such Warrants; (ii)
the aggregate number of such Warrants; (iii) the price or prices at which such
Warrants will be issued; (iv) the currency or currencies, including composite
currencies, in which the exercise price of such Warrants may be payable; (v) the
designation and terms of the Underlying Warrant Securities purchasable upon
exercise of such Warrants; (vi) the price at which the Underlying Warrant
Securities purchasable upon exercise of such Warrants may be purchased; (vii)
the date on which the right to exercise such Warrants shall commence and the
date on which such right shall expire; (viii) whether such Warrants will be
issued in registered form or bearer form; (ix) if applicable, the minimum or
maximum amount of such Warrants which may be exercised at any one time; (x) if
applicable, the designation and terms of the Underlying Warrant Securities with
which such Warrants are issued and the number of such Warrants issued with each
such Underlying Warrant Security; (xi) if applicable, the date on and after
which such Warrants and the related Underlying Warrant Securities will be
separately transferable; (xii) information with respect to book-entry
procedures, if any; (xiii) if applicable, a discussion of certain United States
federal income tax considerations; and (xiv) any other terms of such Warrants,
including terms, procedures and limitations relating to the exchange and
exercise of such Warrants.
DESCRIPTION OF TRUST PREFERRED SECURITIES
The Trust Preferred Securities will be issued by a Hercules Trust under the
applicable Trust Agreement and will represent beneficial interests in such
Hercules Trust. The holders of such beneficial interests will be entitled to a
preference over the Trust Common Securities of such Hercules Trust with respect
to the payment of distributions and amounts payable on redemption of the Trust
Preferred Securities or the liquidation of such Hercules Trust under the
circumstances described under "-- Subordination of Trust Common Securities."
Each Trust Agreement has been qualified under the Trust Indenture Act and is
subject to, and governed by, the Trust Indenture Act. This summary of certain
terms and provisions of the Trust Preferred Securities and the Trust Agreements
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all of the provisions of such Trust Preferred
Securities and such Trust Agreement, including the definitions therein of
certain terms, and those made a part of such Trust Agreement by the Trust
Indenture Act.
Reference is made to the applicable Prospectus Supplement for a description
of the specific terms of the Trust Preferred Securities offered thereby,
including (i) the particular Hercules Trust issuing such Trust Preferred
Securities; (ii) the specific designation, number and purchase price of such
Trust Preferred Securities; (iii) the annual distribution rate (or method of
calculation of the distribution rate) for such Trust Preferred Securities and,
if applicable, the dates from which and upon which such distributions shall
accumulate and be payable and the record dates therefor, and the maximum
Extension Period for which such distributions may be deferred; (iv) the
Liquidation Amount per Trust Preferred Security which shall be paid out of the
assets of such Hercules Trust to the holders thereof upon voluntary or
involuntary dissolution, winding-up and liquidation of such Hercules Trust; (v)
the obligation or right, if any, of such Hercules Trust to purchase or redeem
its Trust Preferred Securities and the price or prices at which, the date or
dates on
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which or period or periods within which and the terms and conditions upon which,
such Trust Preferred Securities shall or may be purchased or redeemed, in whole
or in part, pursuant to such obligation or right; (vi) the terms and conditions,
if any, upon which such Trust Preferred Securities may be converted or
exchanged, in addition to the circumstances described herein, into other
securities or rights, or a combination of the foregoing, including the name of
the issuer of such securities or rights, the initial conversion or exchange
price or rate per Trust Preferred Security and the date or dates on which or
period or periods within which such conversion or exchange may be effected;
(vii) if applicable, any securities exchange upon which such Trust Preferred
Securities shall be listed; (viii) whether such Trust Preferred Securities are
issuable in book-entry only form and, if so, the identity of the depositary and
disclosure relating to the depositary arrangements; and (ix) any other rights,
preferences, privileges, limitations or restrictions of such Trust Preferred
Securities consistent with the applicable Trust Agreement or with applicable law
(which may differ from those described herein). Certain material United States
federal income tax considerations applicable to any offering of Trust Preferred
Securities will also be described in the applicable Prospectus Supplement.
GENERAL
The Trust Preferred Securities of a Hercules Trust will rank pari passu,
and payments will be made thereon pro rata, with the Trust Common Securities of
such Hercules Trust except as described under "-- Subordination of Trust Common
Securities." The proceeds from the sale of Trust Preferred Securities and Trust
Common Securities by a Hercules Trust will be used by such Hercules Trust to
purchase an aggregate principal amount of Junior Subordinated Debentures of the
Company equal to the aggregate Liquidation Amount of such Trust Preferred
Securities and Trust Common Securities. Legal title to such Junior Subordinated
Debentures will be held by the Property Trustee of the Hercules Trust for the
benefit of the holders of the related Trust Securities. In addition, the Company
will execute a Guarantee for the benefit of the holders of the related Trust
Preferred Securities. The Guarantees will not guarantee payment of distributions
or amounts payable on redemption of the Trust Preferred Securities or
liquidation of a Hercules Trust when such Hercules Trust does not have funds
legally available for the payment thereof. See "Description of Guarantees."
The revenue of a Hercules Trust available for distribution to holders of
its Trust Preferred Securities will be limited to payments under the related
Junior Subordinated Debentures which such Hercules Trust purchased with the
proceeds from the sale of its Trust Securities. If the Company fails to make a
required payment in respect of such Junior Subordinated Debentures, the
applicable Hercules Trust will not have sufficient funds to make the related
payments, including distributions, in respect of its Trust Preferred Securities.
Each of the Hercules Trusts is a separate legal entity and the assets of one are
not available to satisfy the obligations of any other.
Deferral of Distributions
So long as no Debenture Event of Default has occurred and is continuing,
the Company will have the right under the Junior Subordinated Debenture
Indenture to defer the payment of interest on the Junior Subordinated Debentures
at any time or from time to time for up to the maximum Extension Period
specified in the applicable Prospectus Supplement, provided that an Extension
Period must end on an interest payment date and may not extend beyond the stated
maturity of such Junior Subordinated Debentures. If the Company elects to
exercise such right, distributions on the related Trust Preferred Securities
will be deferred during any such Extension Period. Distributions to which
holders of the Trust Preferred Securities are entitled during any Extension
Period will continue to accumulate additional distributions thereon. The Company
has no current intention to exercise its right to defer payments of interest on
the Junior Subordinated Debentures it may issue and, accordingly, distributions
on the related Trust Preferred Securities.
Redemption
Upon the repayment at the stated maturity or redemption (in whole or in
part) prior to the stated maturity of the Junior Subordinated Debentures, the
proceeds from such repayment or redemption shall be applied by the Property
Trustee to redeem an aggregate liquidation amount of the related Trust
Securities
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equal to the aggregate principal amount of such Junior Subordinated Debentures
so repaid or redeemed, upon not less than 30 nor more than 60 days' prior
written notice, at a redemption price equal to such aggregate liquidation amount
plus accumulated distributions to the redemption date. Any redemption of Trust
Securities shall be made and the applicable redemption price shall be payable on
the redemption date only to the extent that the applicable Hercules Trust has
funds legally available for the payment thereof. See "-- Subordination of Trust
Common Securities."
If less than all of the Junior Subordinated Debentures are to be redeemed
prior to the stated maturity thereof, then the proceeds of such redemption shall
be used to redeem the related Trust Securities on a pro rata basis among the
Trust Preferred Securities and the Trust Common Securities of the applicable
Hercules Trust except as described under "-- Subordination of Trust Common
Securities." If less than all of the Trust Preferred Securities held in
book-entry form, if any, are to be redeemed, such Trust Preferred Securities
will be redeemed in accordance with the procedures of DTC. See "-- Global Trust
Preferred Securities."
Redemption Procedures
If a Hercules Trust gives a notice of redemption in respect of its Trust
Preferred Securities, then, by 12:00 noon, New York City time, on the redemption
date, to the extent funds are legally available, (i) with respect to Trust
Preferred Securities held by DTC or its nominee, the Property Trustee will
deposit, or cause the Paying Agent (as defined herein) to deposit, irrevocably
with DTC funds sufficient to pay the applicable redemption price and (ii) with
respect to Trust Preferred Securities held in certificated form, the Property
Trustee will irrevocably deposit with the Paying Agent funds sufficient to pay
the applicable redemption price and will give such Paying Agent irrevocable
instructions and authority to pay the applicable redemption price to the holders
thereof upon surrender of their certificates evidencing the Trust Preferred
Securities. If notice of redemption shall have been given and funds irrevocably
deposited as required, then, upon the date of such deposit, all rights of the
holders of the Trust Preferred Securities called for redemption will cease,
except the right of such holders to receive the applicable redemption price, but
without interest thereon, and such Trust Preferred Securities will cease to be
outstanding. In the event that any redemption date is not a Business Day, then
the applicable redemption price payable on such date will be paid on the next
succeeding day that is a Business Day (and without any interest or other payment
in respect of any such delay), with the same force and effect as if made on such
date. In the event that payment of the applicable redemption price is improperly
withheld or refused and not paid either by the applicable Hercules Trust or by
the Company pursuant to the applicable Guarantee as described under "Description
of Guarantees," (i) distributions on the related Trust Preferred Securities will
continue to accumulate from the redemption date originally established by such
Hercules Trust to the date such applicable redemption price is actually paid and
(ii) the actual payment date will be the redemption date for purposes of
calculating the applicable Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Trust Preferred Securities by tender, in
the open market or by private agreement.
Liquidation of a Hercules Trust and Distribution of Junior Subordinated
Debentures
The Company will have the right at any time to dissolve a Hercules Trust
and cause the related Junior Subordinated Debentures to be distributed to the
holders of the Trust Securities of such Hercules Trust in liquidation of such
Hercules Trust after satisfaction of liabilities to creditors of such Hercules
Trust as required by applicable law. Such right is subject to the Company having
received an opinion of counsel to the effect that such distribution will not be
a taxable event to holders of the Trust Preferred Securities of such Hercules
Trust.
Each Hercules Trust shall automatically dissolve upon the first to occur
of: (i) certain events of bankruptcy, dissolution or liquidation of the Company;
(ii) the distribution of the related Junior Subordinated Debentures to the
holders of the Trust Securities of such Hercules Trust, if the Company, as
Sponsor, has given written direction to the Property Trustee to dissolve such
Hercules Trust (which direction is optional and, except as described above,
wholly within the discretion of the Company, as Sponsor); (iii) the
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conversion, exchange or redemption of all of the Trust Securities of such
Hercules Trust; (iv) expiration of the term of such Hercules Trust and (v) the
entry of an order for the dissolution of such Hercules Trust by a court of
competent jurisdiction.
If a dissolution occurs as described in clause (i), (ii), (iv) or (v)
above, the applicable Hercules Trust shall be liquidated by the Issuer Trustees
as expeditiously as the Issuer Trustees determine to be possible by
distributing, after satisfaction of liabilities to creditors of such Hercules
Trust as provided by applicable law, to the holders of the Trust Securities the
related Junior Subordinated Debentures, unless such distribution is determined
by the Property Trustee not to be practicable, in which event such holders will
be entitled to receive out of the assets of such Hercules Trust legally
available for distribution to holders, after satisfaction of liabilities to
creditors of such Hercules Trust as provided by applicable law, an amount equal
to the aggregate of the Liquidation Amount per Trust Security specified in the
applicable Prospectus Supplement plus accumulated distributions thereon to the
date of payment (such amount being referred to herein as the "Liquidation
Distribution"). If the Liquidation Distribution can be paid only in part because
the applicable Hercules Trust has insufficient assets legally available to pay
in full the aggregate Liquidation Distribution, then the amounts payable
directly by such Hercules Trust on its Trust Securities shall be paid on a pro
rata basis, except that if a Debenture Event of Default has occurred and is
continuing, the Trust Preferred Securities of such Hercules Trust shall have a
priority over the Trust Common Securities of such Hercules Trust in respect of
such amounts. See "-- Subordination of Trust Common Securities."
After a date is fixed for any distribution of Junior Subordinated
Debentures to holders of the related Trust Securities, (i) such Trust Securities
will no longer be deemed to be outstanding, (ii) each registered global
certificate, if any, representing such Trust Securities will be exchanged for a
registered global certificate representing the Junior Subordinated Debentures to
be delivered upon such distribution and (iii) any Trust Securities in
certificated form will be deemed to represent Junior Subordinated Debentures
having a principal amount equal to the liquidation amount of such Trust
Securities, and bearing accrued interest in an amount equal to the accumulated
distributions on such Trust Securities until such certificates are presented to
the Administrative Trustees or their agent for cancellation, whereupon the
Company will issue to such holder, and the Debenture Trustee will authenticate,
Junior Subordinated Debentures in certificated form.
There can be no assurance as to the market prices for the Trust Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for such Trust Preferred Securities if a dissolution and liquidation of
the applicable Hercules Trust were to occur. Accordingly, the Trust Preferred
Securities that an investor may purchase, or the Junior Subordinated Debentures
that the investor may receive on dissolution and liquidation of the applicable
Hercules Trust, may trade at a discount to the price that the investor paid to
purchase such Trust Preferred Securities.
Subordination of Trust Common Securities
Payment of distributions on, and the applicable redemption price of, Trust
Securities shall be made pro rata among the Trust Preferred Securities and the
Trust Common Securities of the applicable Hercules Trust based on their
respective Liquidation Amounts; provided, however, that if on any distribution
date or redemption date a Debenture Event of Default has occurred and is
continuing, no payment of any distribution on, or applicable redemption price
of, any of the Trust Common Securities of the applicable Hercules Trust, and no
other payment on account of the redemption, liquidation or other acquisition of
such Trust Common Securities, shall be made unless payment in full in cash of
all accumulated distributions on all of the outstanding Trust Preferred
Securities of such Hercules Trust for all distribution periods terminating on or
prior thereto, or in the case of payment of the applicable redemption price, the
full amount of such redemption price, shall have been made or provided for, and
all funds available to the Property Trustee shall first be applied to the
payment in full in cash of all distributions on, or applicable redemption price
of, such Trust Preferred Securities then due and payable.
Upon the occurrence and continuance of an Event of Default under the
applicable Trust Agreement, the Company, as the Trust Common Securities Holder
of the applicable Hercules Trust, will be deemed to have waived any right to act
with respect to such Event of Default until the effect of such Event of Default
shall
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have been cured, waived or otherwise eliminated. Until any such Event of Default
has been so cured, waived or otherwise eliminated, the Property Trustee shall
act solely on behalf of the holders of the Trust Preferred Securities of such
Hercules Trust and not on behalf of the Company as the Trust Common Securities
Holder, and only the holders of such Trust Preferred Securities will have the
right to direct the Property Trustee to act on their behalf.
Events of Default; Notice
The occurrence of a Debenture Event of Default (see "Description of Junior
Subordinated Debentures -- Debenture Events of Default") will constitute an
"Event of Default" under the applicable Trust Agreement. Within ten Business
Days after the occurrence of an Event of Default under the applicable Trust
Agreement actually known to the Property Trustee, the Property Trustee shall
transmit notice of such Event of Default to the holders of the Trust Preferred
Securities of the applicable Hercules Trust, the Administrative Trustees and the
Company, as Sponsor, unless such Event of Default shall have been cured or
waived.
For a discussion of the limited circumstances in which holders of Trust
Preferred Securities may bring a Direct Action against the Company, see
"Description of Junior Subordinated Debentures -- Enforcement of Certain Rights
by Holders of Trust Preferred Securities."
Removal of Issuer Trustees
Unless a Debenture Event of Default has occurred and is continuing, any
Issuer Trustee may be removed at any time by the Company as the Trust Common
Securities Holder of the applicable Hercules Trust. If a Debenture Event of
Default has occurred and is continuing, the Property Trustee and the Delaware
Trustee may be removed at such time only by the holders of a majority in
liquidation amount of the outstanding Trust Preferred Securities of the
applicable Hercules Trust. In no event will the holders of the Trust Preferred
Securities have the right to vote to appoint, remove or replace the
Administrative Trustees, which voting rights are vested exclusively in the
Company as the Trust Common Securities Holder. No resignation or removal of an
Issuer Trustee, and no appointment of a successor trustee, shall be effective
until the acceptance of appointment by the successor trustee in accordance with
the provisions of the applicable Trust Agreement.
Merger or Consolidation of Issuer Trustees
Any Person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Issuer Trustee shall be a party, or
any Person succeeding to all or substantially all the corporate trust business
of such Issuer Trustee, shall be the successor of such Issuer Trustee under the
applicable Trust Agreement, provided such Person shall be otherwise qualified
and eligible.
Mergers, Conversions, Consolidations, Amalgamations or Replacements of a
Hercules Trust
A Hercules Trust may not merge with or into, convert into, consolidate,
amalgamate, or be replaced by, or convey, transfer or lease its properties and
assets as an entirety or substantially as an entirety to any corporation or
other Person, except as described below or as otherwise described under
"-- Liquidation of a Hercules Trust and Distribution of Junior Subordinated
Debentures." A Hercules Trust may, at the request of the Company, as Sponsor,
with the consent of the Administrative Trustees but without the consent of the
holders of its Trust Preferred Securities, merge with or into, convert into,
consolidate, amalgamate, or be replaced by or convey, transfer or lease its
properties and assets as an entirety or substantially as an entirety to a trust
organized as such under the laws of any State; provided, that (i) such successor
entity either (a) expressly assumes all of the obligations of such Hercules
Trust with respect to the Trust Securities of such Hercules Trust or (b)
substitutes for the Trust Securities of such Hercules Trust other securities
having substantially the same terms as such Trust Securities (the "Successor
Securities") so long as the Successor Securities rank the same as such Trust
Securities rank in priority with respect to distributions and payments
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upon liquidation, redemption and otherwise, (ii) the Company expressly appoints
a trustee of such successor entity possessing the same powers and duties as the
Property Trustee with respect to the related Junior Subordinated Debentures,
(iii) the Successor Securities are listed, or any Successor Securities will be
listed upon notification of issuance, on each national securities exchange or
other organization on which the Trust Securities of such Hercules Trust are then
listed, if any, (iv) such merger, conversion, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not cause the Trust Securities
(including any Successor Securities) of such Hercules Trust or the related
Junior Subordinated Debentures to be downgraded or placed under surveillance or
review by any nationally recognized statistical rating organization, (v) such
merger, conversion, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not adversely affect the rights, preferences and
privileges of the holders of the Trust Securities (including any Successor
Securities) of such Hercules Trust in any material respect (other than any
dilution of such holders' interests in the new entity), (vi) such successor
entity has a purpose substantially identical to that of such Hercules Trust,
(vii) prior to such merger, conversion, consolidation, amalgamation,
replacement, conveyance, transfer or lease, the Company has received an opinion
from independent counsel to such Hercules Trust experienced in such matters to
the effect that (a) such merger, conversion, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the Trust Securities (including any
Successor Securities) of such Hercules Trust in any material respect (other than
any dilution of such holders' interests in the new entity), and (b) following
such merger, conversion, consolidation, amalgamation, replacement, conveyance,
transfer or lease, neither such Hercules Trust nor such successor entity will be
required to register as an investment company under the Investment Company Act
of 1940, as amended (the "Investment Company Act") and (viii) the Company or any
permitted successor or assignee owns all of the common securities of such
successor entity and guarantees the obligations of such successor entity under
the Successor Securities at least to the extent provided by the applicable
Guarantee and the applicable guarantee for the benefit of the owner of the
Common Securities of such Hercules Trust. Notwithstanding the foregoing, a
Hercules Trust shall not, except with the consent of each holder of its Trust
Securities, consolidate, amalgamate, merge with or into, or be replaced by or
convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety to any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause such Hercules Trust or the successor entity not to be classified as
a grantor trust for United States federal income tax purposes.
Voting Rights; Amendment of a Trust Agreement
Except as provided below and under "-- Mergers, Conversions,
Consolidations, Amalgamations or Replacements of a Hercules Trust" and
"Description of Guarantees -- Amendments and Assignment" and as otherwise
required by law and the applicable Trust Agreement, the holders of Trust
Preferred Securities will have no voting rights.
Each Trust Agreement may be amended from time to time by the Company, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Trust Securities of the applicable Hercules Trust, (i) to cure
any ambiguity, correct or supplement any provisions in such Trust Agreement that
may be inconsistent with any other provision, or to make any other provisions
with respect to matters or questions arising under such Trust Agreement, which
shall not be inconsistent with the other provisions of such Trust Agreement, or
(ii) to modify, eliminate or add to any provisions of such Trust Agreement to
such extent as shall be necessary to ensure that such Hercules Trust will be
classified for United States federal income tax purposes as a grantor trust at
all times that any of its Trust Securities are outstanding or to ensure that
such Hercules Trust will not be required to register as an "investment company"
under the Investment Company Act; provided, however, that in each case, such
action shall not adversely affect in any material respect the interests of the
holders of such Trust Securities. A Trust Agreement may be amended by the Issuer
Trustees and the Company (i) with the consent of holders of a majority in
Liquidation Amount of the outstanding Trust Securities of the applicable
Hercules Trust, and (ii) upon receipt by the Issuer Trustees of an opinion of
counsel experienced in such matters to the effect that such amendment or the
exercise of any power granted to the Issuer Trustees in accordance with such
amendment will not affect such Hercules Trust's status as a grantor trust for
United States federal income tax purposes or such Hercules Trust's
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exemption from status as an "investment company" under the Investment Company
Act; provided, however, that, without the consent of each holder of such Trust
Securities, such Trust Agreement may not be amended to (i) change the
distribution rate (or manner of calculation of the distribution rate), amount,
timing or currency or otherwise adversely affect the method of any required
payment, (ii) change the purpose of the applicable Hercules Trust, (iii)
authorize the issuance of any additional beneficial interests in such Hercules
Trust, (iv) change the conversion, exchange or redemption provisions, (v) change
the conditions precedent for the Company to elect to dissolve such Hercules
Trust and distribute the related Junior Subordinated Debentures to the holders
of such Trust Securities, (vi) change the Liquidation Distribution or other
provisions relating to the distribution of amounts payable upon the dissolution
and liquidation of such Hercules Trust, (vii) affect the limited liability of
any holder of such Trust Securities or (viii) restrict the right of a holder of
such Trust Securities to institute suit for the enforcement of any required
payment on or after the due date therefor or for the conversion or exchange of
such Trust Securities in accordance with their terms.
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Issuer Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to such Debenture Trustee, or
execute any trust or power conferred on the Debenture Trustee, with respect to
the Junior Subordinated Debentures, (ii) waive certain past defaults under the
Junior Subordinated Debenture Indenture, (iii) exercise any right to rescind or
annul a declaration of acceleration of the maturity of the principal of such
Junior Subordinated Debentures or (iv) consent to any amendment, modification or
termination of the Junior Subordinated Debenture Indenture or such Junior
Subordinated Debentures where such consent shall be required, without, in each
case, obtaining the prior approval of the holders of a majority in Liquidation
Amount of all outstanding Trust Preferred Securities of the applicable Hercules
Trust; provided, however, that where a consent under the Junior Subordinated
Debenture Indenture would require the consent of each holder of Junior
Subordinated Debentures affected thereby, no such consent shall be given by the
Property Trustee without the prior approval of each holder of the related Trust
Preferred Securities. The Issuer Trustees shall not revoke any action previously
authorized or approved by a vote of the holders of Trust Preferred Securities
except by subsequent vote of such holders. The Property Trustee shall notify
each holder of Trust Preferred Securities of any notice of default with respect
to the related Junior Subordinated Debentures. In addition to obtaining
approvals of holders of Trust Preferred Securities referred to above, prior to
taking any of the foregoing actions, the Issuer Trustees shall obtain an opinion
of counsel experienced in such matters to the effect that the applicable
Hercules Trust will not be classified as an association taxable as a corporation
for United States federal income tax purposes on account of such action.
Any required approval of holders of Trust Preferred Securities may be given
at a meeting of such holders convened for such purpose or pursuant to written
consent. The Property Trustee will cause a notice of any meeting at which
holders of Trust Preferred Securities are entitled to vote to be given to each
holder of record of Trust Preferred Securities in the manner set forth in the
applicable Trust Agreement.
Notwithstanding that holders of Trust Preferred Securities are entitled to
vote or consent under any of the circumstances referred to above, any Trust
Preferred Securities that are owned by the Company or any affiliate of the
Company shall, for purposes of such vote or consent, be treated as if they were
not outstanding.
Global Trust Preferred Securities
If specified in the applicable Prospectus Supplement, Trust Preferred
Securities may be represented by one or more global certificates deposited with,
or on behalf of, DTC (or other Depositary identified in such Prospectus
Supplement) or a nominee thereof, in each case for credit to an account of a
participant in DTC (or other Depositary). The identity of the Depositary and the
specific terms of the depositary arrangements with respect to the Trust
Preferred Securities to be represented by one or more global certificates will
be described in the applicable Prospectus Supplement. However, unless otherwise
specified in the applicable Prospectus Supplement, DTC will be the Depositary
and the depositary arrangements described with respect to the Debt Securities
will apply to such Trust Preferred Securities as well, except all references to
the Company shall include the Hercules Trusts and all references to the
applicable Indenture will refer to the
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applicable Trust Agreement. See "Description of Debt Securities -- Description
of the Senior Debt Securities and Subordinated Debt Securities -- Global Debt
Securities."
Payment and Paying Agent
Payments in respect of any global certificate representing Trust Preferred
Securities shall be made to Cede & Co. as nominee of DTC (or other applicable
Depositary or its nominee), which shall credit the relevant accounts at DTC (or
such other Depositary) on the applicable payment dates, while payments in
respect of Trust Preferred Securities in certificated form shall be made by
check mailed to the address of the holder entitled thereto as such address shall
appear on the register. The Paying Agent shall initially be the Property Trustee
and any co-paying agent chosen by the Property Trustee and acceptable to the
Administrative Trustees and the Company. The Paying Agent shall be permitted to
resign as Paying Agent upon 30 days' prior written notice to the Property
Trustee, the Administrative Trustees and the Company. In the event that the
Property Trustee shall no longer be the Paying Agent, the Administrative
Trustees shall appoint a successor (which shall be a bank or trust company
acceptable to the Administrative Trustees and the Company) to act as Paying
Agent.
Registrar and Transfer Agent
The Property Trustee will act as registrar and transfer agent for the Trust
Preferred Securities.
Registration of transfers of Trust Preferred Securities will be effected
without charge by or on behalf of the applicable Hercules Trust, but upon
payment of any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. A Hercules Trust will not be required
to register or cause to be registered the transfer of its Trust Preferred
Securities after they have been converted, exchanged, redeemed or called for
redemption.
Information Concerning the Property Trustee
The Property Trustee, other than during the occurrence and continuance of
an Event of Default under the applicable Trust Agreement, will undertake to
perform only such duties as are specifically set forth in such Trust Agreement
and, during the continuance of such Event of Default, must exercise the same
degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Subject to the foregoing, the Property
Trustee will not be under any obligation to exercise any of the powers vested in
it by such Trust Agreement at the request of any holder of the related Trust
Securities unless it is offered reasonable indemnity against the costs, expenses
and liabilities that might be incurred thereby. If no such Event of Default has
occurred and is continuing and the Property Trustee is required to decide
between alternative causes of action, construe ambiguous provisions in such
Trust Agreement or is unsure of the application of any provision of such Trust
Agreement, and the matter is not one on which holders of Trust Preferred
Securities or Trust Common Securities are entitled under such Trust Agreement to
vote, then the Property Trustee shall take such action as is directed by the
Company and if not so directed, shall take such action as it deems advisable and
in the best interests of the holders of the related Trust Securities and will
have no liability except for its own bad faith, negligence or willful
misconduct.
Miscellaneous
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate each Hercules Trust in such a way that (i) such
Hercules Trust will not be deemed to be an "investment company" required to be
registered under the Investment Company Act, (ii) such Hercules Trust will be
classified as a grantor trust for United States federal income tax purposes and
(iii) the related Junior Subordinated Debentures will be treated as indebtedness
of the Company for United States federal income tax purposes. The Company and
the Administrative Trustees are authorized to take any action, not inconsistent
with applicable law, the certificate of trust of the applicable Hercules Trust
or the applicable Trust Agreement, that the Administrative Trustees determine in
their discretion to be necessary or desirable for such purposes, as
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long as such action does not materially adversely affect the interests of the
holders of the related Trust Securities.
Holders of Trust Preferred Securities will not have any preemptive or
similar rights.
A Hercules Trust may not borrow money, issue debt, execute mortgages or
pledge any of its assets.
DESCRIPTION OF GUARANTEES
A Guarantee will be executed and delivered by the Company concurrently with
the issuance by a Hercules Trust of its Trust Preferred Securities for the
benefit of the holders from time to time of such Trust Preferred Securities and
will be held for such holders by The Chase Manhattan Bank, as trustee (the
"Guarantee Trustee"). Each Guarantee has been qualified as an indenture under
the Trust Indenture Act and is subject to, and governed by, the Trust Indenture
Act. This summary of certain terms and provisions of a Guarantee does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all of the provisions of such Guarantee, including the definitions
therein of certain terms, and those made a part of such Guarantee by the Trust
Indenture Act.
GENERAL
The Company will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the related Trust Preferred Securities, as and when due, regardless
of any defense, right of set-off or counterclaim that the applicable Hercules
Trust may have or assert other than the defense of payment. The following
payments (the "Guarantee Payments") with respect to Trust Preferred Securities,
to the extent not paid by or on behalf of the applicable Hercules Trust, will be
subject to the applicable Guarantee: (i) any accumulated distributions required
to be paid on such Trust Preferred Securities, to the extent that such Hercules
Trust has funds legally available therefor at such time, (ii) the applicable
redemption price with respect to such Trust Preferred Securities called for
redemption, to the extent that such Hercules Trust has funds legally available
therefor at such time, or (iii) upon a voluntary or involuntary dissolution and
liquidation of such Hercules Trust (other than in connection with the
distribution of the related Junior Subordinated Debentures to holders of such
Trust Preferred Securities or the redemption, conversion or exchange of such
Trust Preferred Securities), the lesser of (a) the amounts due upon the
dissolution and liquidation of such Hercules Trust, to the extent that such
Hercules Trust has funds legally available therefor at the time and (b) the
amount of assets of such Hercules Trust remaining available for distribution to
holders of its Trust Preferred Securities after satisfaction of liabilities to
creditors of such Hercules Trust as required by applicable law. The Company's
obligation to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by the Company to the holders of the Trust Preferred Securities
entitled thereto or by causing the applicable Hercules Trust to pay such amounts
to such holders.
The Company will, through the applicable Guarantee, the applicable Trust
Agreement, the related Junior Subordinated Debentures and the Junior
Subordinated Debenture Indenture, taken together, fully, irrevocably and
unconditionally guarantee all of the applicable Hercules Trust's obligations
under its Trust Preferred Securities. No single document standing alone or
operating in conjunction with fewer than all of the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable and unconditional guarantee of a
Hercules Trust's obligations under its Trust Preferred Securities.
Ranking
Each Guarantee will constitute an unsecured obligation of the Company and
will rank (i) subordinate and junior in right of payment to all other
liabilities of the Company, including the Senior Debt Securities, the
Subordinated Debt Securities and the Junior Subordinated Debentures, except
those made pari passu or subordinate by their terms, and (ii) senior to all
capital stock now or hereafter issued by the Company and to any guarantee now or
hereafter entered into by the Company in respect of any of its capital stock.
The Trust
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Agreements provide that each holder of Trust Preferred Securities by acceptance
thereof agrees to the subordination provisions and other terms of the related
Guarantee. Each Guarantee will rank pari passu with all other guarantees
(collectively, the "Other Guarantees") to be issued by the Company with respect
to securities of Other Hercules Trusts.
The Guarantees will not limit the amount of secured or unsecured debt,
including Senior Indebtedness As Defined In the Junior Subordinated Debenture
Indenture, that may be incurred by the Company or any of its subsidiaries.
Guarantee of Payment
Each Guarantee will constitute a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Company to enforce its rights under such Guarantee without first instituting
a legal proceeding against any other person or entity). A Guarantee will not be
discharged except by payment of the related Guarantee Payments in full to the
extent not paid by the applicable Hercules Trust or upon distribution of its
Trust Preferred Securities to the holders of the related Junior Subordinated
Debentures.
Amendments and Assignment
Except with respect to any changes that do not materially adversely affect
the rights of holders of the related Trust Preferred Securities (in which case
no approval will be required), the applicable Guarantee may not be amended
without the prior approval of the holders of a majority of the Liquidation
Amount of such outstanding Trust Preferred Securities. The manner of obtaining
any such approval will be as set forth under "Description of Trust Preferred
Securities -- Voting Rights; Amendment of a Trust Agreement." All guarantees and
agreements contained in a Guarantee shall bind the successors, assigns,
receivers, trustees and representatives of the Company and shall inure to the
benefit of the holders of the related Trust Preferred Securities then
outstanding.
Events of Default
An event of default under a Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder, provided
that, except with respect to a default in respect of any Guarantee Payment, the
Company shall have received notice of such default and shall not have cured such
default within 60 days of such receipt. The holders of a majority in Liquidation
Amount of the related Trust Preferred Securities will have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the Guarantee Trustee in respect of the applicable Guarantee or to direct the
exercise of any trust or power conferred upon the Guarantee Trustee under such
Guarantee.
If the Guarantee Trustee fails to enforce a Guarantee, any holder of the
related Trust Preferred Securities may institute a legal proceeding directly
against the Company to enforce its rights under such Guarantee without first
instituting a legal proceeding against the applicable Hercules Trust, the
Guarantee Trustee or any other person or entity.
Termination
A Guarantee will terminate and be of no further force and effect upon full
payment of the applicable redemption price of the related Trust Preferred
Securities, upon full payment of all amounts due upon the dissolution and
liquidation of the applicable Hercules Trust or upon the conversion or exchange
of all of the related Trust Preferred Securities (whether upon distribution of
Junior Subordinated Debentures to the holders of such Trust Preferred Securities
or otherwise). A Guarantee will continue to be effective or will be reinstated,
as the case may be, if at any time any holder of the related Trust Preferred
Securities must restore payment of any sums paid under such Trust Preferred
Securities or such Guarantee.
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Governing Law
The Guarantees will be governed by and construed in accordance with the
laws of the State of New York.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance of
a default by the Company in performance of a Guarantee, will undertake to
perform only such duties as are specifically set forth in the Guarantees and,
during the continuance of such default, must exercise the same degree of care
and skill as a prudent person would exercise or use in the conduct of his or her
own affairs. Subject to the foregoing, the Guarantee Trustee will not be under
any obligation to exercise any of the powers vested in it by a Guarantee at the
request of any holder of the related Trust Preferred Securities unless it is
offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
Limited Purpose of the Hercules Trusts
The Trust Preferred Securities will represent preferred beneficial
interests in the applicable Hercules Trust, and each Hercules Trust exists for
the sole purpose of issuing and selling its Trust Securities, using the proceeds
from the sale of its Trust Securities to acquire the related Junior Subordinated
Debentures of the Company and engaging in only those other activities necessary,
advisable or incidental thereto.
Rights Upon Dissolution
Unless the Junior Subordinated Debentures are distributed to holders of the
related Trust Securities, upon any voluntary or involuntary dissolution and
liquidation of the applicable Hercules Trust, after satisfaction of the
liabilities of creditors of such Hercules Trust as required by applicable law,
the holders of such Trust Securities will be entitled to receive, out of assets
held by such Hercules Trust, the Liquidation Distribution in cash. See
"Description of Trust Preferred Securities -- Liquidation of a Hercules Trust
and Distribution of Junior Subordinated Debentures." Upon any voluntary or
involuntary liquidation or bankruptcy of the Company, the Property Trustee, as
holder of the Junior Subordinated Debentures, would be a creditor of the
Company, subordinated in right of payment to all Senior Indebtedness As Defined
In the Junior Subordinated Debenture Indenture as set forth in the Junior
Subordinated Debenture Indenture, but entitled to receive payment in full of
principal and premium, if any, and interest in respect of such Junior
Subordinated Debentures, before any stockholders of the Company receive payments
or distributions.
DESCRIPTION OF PURCHASE CONTRACTS
AND PURCHASE UNITS
The Company may issue Purchase Contracts, representing contracts obligating
holders to purchase from the Company, and the Company to sell to the holders,
Purchase Contract Securities at a future date or dates. The price per Purchase
Contract Security may be fixed at the time the Purchase Contracts are issued or
may be determined by reference to a specific formula set forth in the Purchase
Contracts. The Purchase Contracts may be issued separately or as a part of units
("Purchase Units") consisting of a Purchase Contract and either (i) Senior Debt
Securities, Subordinated Debt Securities or Junior Subordinated Debentures, (ii)
debt obligations of third parties, including U.S. Treasury securities, or (iii)
Trust Preferred Securities of a Hercules Trust, securing the holder's
obligations to purchase the Purchase Contract Security under the Purchase
Contract. The Purchase Contracts may require the Company to make periodic
payments to the holders of the Purchase Units or vice versa and such payments
may be unsecured or prefunded on some basis. The Purchase Contracts may require
holders to secure their obligations thereunder in a specified manner and in
certain circumstances the Company may deliver newly issued prepaid purchase
contracts ("Prepaid Securities") upon transfer by a holder to the Company of any
collateral securing such holder's obligations under the original Purchase
Contract.
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<PAGE> 148
The applicable Prospectus Supplement will describe the terms of any
Purchase Contracts or Purchase Units and, if applicable, Prepaid Securities.
PLAN OF DISTRIBUTION
The Company and/or the Hercules Trusts may sell the Offered Securities (i)
through underwriters or dealers; (ii) through agents; (iii) directly to
purchasers; or (iv) through a combination of any such methods of sale. Any such
underwriter, dealer or agent may be deemed to be an underwriter within the
meaning of the Securities Act. The Prospectus Supplement relating to a series of
the Offered Securities will set forth its offering terms, including the name or
names of any underwriters, dealers or agents, the purchase price of the Offered
Securities and the proceeds to the Company and/or the Hercules Trusts from such
sale, any underwriting discounts, commissions and other items constituting
underwriters' compensation, any initial public offering price and any
underwriting discounts, commissions and other items allowed or reallowed or paid
to dealers or agents and any securities exchanges on which the Offered
Securities may be listed.
If underwriters are used in the sale, the Offered Securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed price or prices, which may be changed, or at market prices prevailing at
the time of sale, or at prices related to such prevailing market prices, or at
negotiated prices. The Offered Securities may be offered to the public either
through underwriting syndicates represented by one or more managing underwriters
or directly by one or more of such firms. Unless otherwise set forth in a
Prospectus Supplement, the obligations of the underwriters to purchase the
Offered Securities will be subject to certain conditions precedent and the
underwriters will be obligated to purchase all the Offered Securities if any are
purchased. Any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers may be changed from time to time.
Any agent involved in the offer or sale of the Offered Securities in
respect of which this Prospectus is delivered will be named, and any commissions
payable by the Company to such agent will be set forth, in a Prospectus
Supplement. Unless otherwise indicated in a Prospectus Supplement, any such
agent will be acting on a reasonable efforts basis for the period of its
appointment.
If so indicated in a Prospectus Supplement, the Company will authorize
underwriters, dealers or agents to solicit offers by certain specified
institutions to purchase Offered Securities from the Company and/or the Hercules
Trusts at the public offering price set forth in such Prospectus Supplement
pursuant to delayed delivery contracts providing for payment and delivery on a
specified date in the future. Such contracts will be subject to any conditions
set forth in a Prospectus Supplement and the Prospectus Supplement will set
forth the commission payable for solicitation of such contracts. The
underwriters and other persons soliciting such contracts will have no
responsibility for the validity or performance of any such contracts.
Offered Securities may also be offered and sold, if so indicated in the
Prospectus Supplement, in connection with a remarketing upon their purchase, in
accordance with a redemption or repayment pursuant to their terms, or otherwise,
by one or more firms ("marketing firms"), acting as principals for their own
accounts or as agents for the Company and/or a Hercules Trust. Any remarketing
firm will be identified and the terms of its agreement, if any, with the Company
and/or a Hercules Trust and its compensation will be described in the Prospectus
Supplement. Remarketing firms may be deemed to be underwriters in connection
with their remarketing of Offered Securities.
Underwriters, dealers, remarketing firms and agents may be entitled under
agreements entered into with the Company and/or the Hercules Trusts to
indemnification by the Company and/or the Hercules Trusts against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
by the Company and/or the Hercules Trusts to payments they may be required to
make in respect thereof, and may be customers of, engage in transactions with or
perform services for the Company in the ordinary course of business.
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LEGAL MATTERS
Certain legal matters in connection with the Offered Securities being
offered hereby will be passed upon for the Company by Richard G. Dahlen,
Esquire, Vice President and General Counsel of the Company, and by Ballard Spahr
Andrews & Ingersoll, LLP, Philadelphia, Pennsylvania, and for the Hercules
Trusts by Richards, Layton & Finger, P.A., Wilmington, Delaware, unless
otherwise specified in a Prospectus Supplement. Mr. Dahlen owned beneficially,
as of September 30, 1998, 15,333 shares of restricted stock under the Hercules
Incorporated Long Term Incentive Compensation Plan (the "LTICP"), 244 shares of
Common Stock under the Hercules Incorporated Savings and Investment Plan, and
the right to acquire within 60 days hereof 25,200 shares under options held
pursuant to the LTICP.
EXPERTS
The consolidated financial statements of the Company and its subsidiaries
which are incorporated by reference in the Company's most recent Annual Report
on Form 10-K have been audited and reported upon by PricewaterhouseCoopers LLP,
independent accountants, and are incorporated by reference in this Prospectus.
Such financial statements are incorporated herein in reliance on the report of
PricewaterhouseCoopers LLP, given on the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of BetzDearborn as of December 31,
1997 and 1996 and for each of the three years in the period ended December 31,
1997, appearing in the Company's Current Report on Form 8-K dated October 15,
1998, have been audited by Ernst & Young LLP, independent auditors, as set forth
in their report thereon included therein and incorporated herein by reference.
Such financial statements have been incorporated by reference herein in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
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350,000 CRESTS(SM) UNITS
CONSISTING OF PREFERRED SECURITIES OF HERCULES TRUST II
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
HERCULES INCORPORATED
AND
WARRANTS TO PURCHASE SHARES OF COMMON STOCK OF
HERCULES INCORPORATED
-------------------------
Prospectus Supplement
July , 1999
-------------------------
BANC OF AMERICA SECURITIES LLC
SALOMON SMITH BARNEY CHASE SECURITIES INC.
DEUTSCHE BANC ALEX. BROWN J.P. MORGAN & CO.
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