<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------
Commission file number 1-496
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HERCULES INCORPORATED
A Delaware Corporation
I.R.S. Employer Identification No. 51-0023450
Hercules Plaza
1313 North Market Street
Wilmington, Delaware 19894-0001
Telephone: 302-594-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of July 30, 1999, 106,056,644 shares of registrant's common stock were
outstanding.
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PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF INCOME
(Dollars in millions, except per share)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ............................................. $ 817 $ 445 $1,608 $ 875
Cost of sales ......................................... 440 267 863 529
Selling, general, and administrative expenses ......... 193 67 390 127
Research and development .............................. 20 12 41 25
Goodwill and intangible asset amortization ............ 20 1 40 2
Other operating expenses (income), net ................ 6 (3) 13 (3)
------ ------ ------ ------
Profit from operations ................................ 138 101 261 195
Equity in income of affiliated companies .............. -- 5 1 10
Interest and debt expense ............................. 47 13 107 24
Preferred security distributions of subsidiary trusts.. 12 -- 17 --
Other income (expense), net ........................... 4 16 7 (28)
------ ------ ------ ------
Income before income taxes ............................ 83 109 145 153
Provision for income taxes ............................ 27 35 51 51
------ ------ ------ ------
Net income ............................................ $ 56 $ 74 $ 94 $ 102
====== ====== ====== ======
Earnings per share:
Basic ......................................... $ 0.56 $ 0.78 $ 0.93 $ 1.07
====== ====== ====== ======
Diluted ....................................... $ 0.56 $ 0.77 $ 0.93 $ 1.06
====== ====== ====== ======
Dividends per share ................................... $ 0.27 $ 0.27 $ 0.54 $ 0.54
====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
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HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents..................................... $ 78 $ 68
Accounts and notes receivable, net............................ 675 663
Inventories
Finished products............................................. 208 218
Materials, supplies, and work in process...................... 196 198
Deferred income taxes.................................................. 91 93
------ ------
Total current assets.......................................... 1,248 1,240
Property, plant, and equipment......................................... 2,957 3,037
Accumulated depreciation and amortization.............................. 1,594 1,599
------ ------
Net property, plant, and equipment..................................... 1,363 1,438
Goodwill and other intangible assets (net of accumulated
amortization - 1999, $89; 1998, $50).......................... 2,538 2,548
Other assets........................................................... 646 607
------ ------
Total assets.................................................. $5,795 $5,833
====== ======
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable.............................................. $ 221 $ 270
Accrued expenses.............................................. 437 466
Short-term debt............................................... 207 566
Income taxes payable.......................................... 38 15
------ ------
Total current liabilities.............................. 903 1,317
Long-term debt......................................................... 3,056 3,096
Deferred income taxes.................................................. 233 225
Postretirement benefits and other liabilities.......................... 428 436
Guaranteed preferred beneficial interests in Company's
subordinated debentures....................................... 562 200
Stockholders' equity
Common stock (shares issued: 1999-154,936,704;
1998-154,823,496)...................................... 81 81
Additional paid-in capital.................................... 509 504
Unearned compensation......................................... (129) (130)
Foreign currency translation adjustment....................... (10) (13)
Retained earnings............................................. 2,108 2,068
------ ------
2,559 2,510
Reacquired stock, at cost (shares: 1999-53,897,850;
1998-53,995,692)....................................... 1,946 1,951
------ ------
Total stockholders' equity...................................... 613 559
------ ------
Total liabilities and stockholders' equity...................... $5,795 $5,833
====== ======
</TABLE>
See accompanying notes to financial statements.
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HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW
(Dollars in millions)
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Net cash provided by operations ................................. $ 61 $ 38
----- -----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures ............................................ (79) (58)
Proceeds of investment and fixed asset disposals ................ 8 54
Acquisitions , net of cash acquired ............................. -- (95)
Other, net ...................................................... (6) (16)
----- -----
Net cash used in investing activities .................... (77) (115)
----- -----
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds ......................................... 218 72
Long-term debt repayments ....................................... (560) (27)
Change in short-term debt ....................................... 61 198
Payment of underwriting fees .................................... (11) --
Proceeds from issuance of subsidiary trust preferred securities.. 362 --
Common stock issued ............................................. 4 8
Common stock reacquired ......................................... (3) (105)
Proceeds from issuance of subsidiary preferred stock ............ 12 --
Dividends paid .................................................. (54) (52)
----- -----
Net cash provided by financing activities ................ 29 94
----- -----
Effect of exchange rate changes on cash ......................... (3) (2)
----- -----
Net increase in cash and cash equivalents ....................... 10 15
Cash and cash equivalents - beginning of period ................. 68 17
----- -----
Cash and cash equivalents - end of period ....................... $ 78 $ 32
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) ..................... $ 102 $ 26
Distributions on trust preferred securities .............. 7 --
Income taxes paid, net ................................... 29 74
Noncash investing and financing activities:
Incentive plan stock issuances ........................... 8 4
Conversion of notes and debentures ....................... 1 4
Accounts payable for common stock acquisitions ........... -- 4
</TABLE>
See accompanying notes to financial statements.
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HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in millions)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income ................................................... $ 56 $ 74 $ 94 $102
Foreign currency translation, net of tax...................... 13 (1) 3 (8)
---- ---- ---- ----
Comprehensive income.......................................... $ 69 $ 73 $ 97 $ 94
==== ==== ==== ====
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. These condensed financial statements are unaudited, but in the opinion of
management include all adjustments necessary to present fairly Hercules
financial position and results of operations for interim periods. These
condensed financial statements should be read in conjunction with the accounting
policies, financial statements, and notes included in our annual report for
1998. Certain prior period amounts have been reclassified to conform with the
current period presentation.
2. Revenue Recognition - Revenue is recognized generally upon shipment of goods
and passage of title. Service revenue is recognized as services are performed.
3. The following table shows the amounts used in computing earnings per share
(EPS) and the effect on income and the weighted-average number of shares of
dilutive potential common stock:
<TABLE>
<CAPTION>
(Amounts are in millions, except Three Months Ended June 30, Six Months Ended June 30,
per share data): --------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic
Net income...................................... $ 56 $ 74 $ 94 $ 102
Weighted-average shares outstanding............. 100.9 94.8 100.9 95.3
----- ----- ----- -----
EPS............................................. $0.56 $0.78 $0.93 $1.07
===== ===== ===== =====
Diluted
Net Income...................................... $ 56 $ 74 $ 94 $ 102
Interest on convertible debentures.............. -- -- -- --
----- ----- ----- -----
Net income for EPS calculation.................. $ 56 $ 74 $ 94 $ 102
===== ===== ===== =====
Weighted-average shares outstanding............. 100.9 94.8 100.9 95.3
Options......................................... .3 .7 .3 .7
Debentures...................................... .3 .6 .3 .7
----- ----- ----- -----
Adjusted weighted-average shares................ 101.5 96.1 101.5 96.7
----- ----- ----- -----
EPS............................................. $0.56 $0.77 $0.93 $1.06
===== ===== ===== =====
</TABLE>
4. Cost and expenses include depreciation as follows:
(Dollars in millions) June 30,
-----------------
1999 1998
---- ----
Three months ended............................... $34 $16
Six months ended................................. 68 32
5. Other operating expenses (income), net for the quarter and six months ended
June 30, 1999 include integration charges of $3 million and $10 million,
respectively, primarily for employee retention, consulting, legal, and other
costs associated with the BetzDearborn acquisition. Additionally, the quarter
and six months ended June 30, 1999 include environmental charges of $3 million
and $4 million, respectively, while the comparable periods for 1998 primarily
reflect a favorable settlement of an environmental insurance claim.
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6. Interest and debt costs are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in millions) June 30,
-----------------
1999 1998
---- ----
<S> <C> <C>
Three Months Ended:
Costs incurred.............................. $ 50 $ 15
Amount capitalized.......................... 3 2
---- ----
Interest expense............................ $ 47 $ 13
==== ====
Six Months Ended:
Costs incurred.............................. $113 $ 29
Amount capitalized.......................... 6 5
---- ----
Interest expense............................ $107 $ 24
==== ====
</TABLE>
7. Other income (expense), net for the quarter and six months ended June 30,
1998 includes legal settlements and accruals, primarily related to the
settlement of a Qui Tam (Whistle Blower) lawsuit (see Note 13) of $1 million and
$64 million, respectively, and a $2 million write-off of a claim related to a
divested business during the six-month period. Additionally, the quarter and six
months include interest income of $10 million and $19 million, respectively,
primarily related to the $500 million note obtained upon completion of
transactions that monetized the Tastemaker investment (sold during the fourth
quarter of 1998) and gains on sale of investments of $6 million and $17 million,
respectively.
8. Pursuant to the plans in place to merge the operations of BetzDearborn with
Hercules and to rationalize the support infrastructure and other existing
operations, 424 employees were terminated and several facilities were closed
during the six months ended June 30, 1999. Cash payments during 1999 include $16
million for severance benefits and $3 million for other exit costs. A
reconciliation of activity with respect to the liabilities established for these
plans is as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of year......................... $130 $15
Cash payments................................. (19) (3)
---- ---
Balance at end of period............................. $111 $12
==== ===
</TABLE>
Severance benefit payments are based on service and generally continue for 3
months to 24 months subsequent to termination. To date through June 30, 1999,
approximately 804 of the planned 1,470 employee terminations have occurred. The
remaining accrued liability at June 30, 1999 is expected to be adequate to
complete the BetzDearborn integration plans. Cash flows from operations and
available financing sources are expected to be sufficient to meet these
obligations. We expect to substantially complete remaining actions under the
plans during 2000.
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9. A summary of short-term and long-term debt follows:
<TABLE>
<CAPTION>
(Dollars in millions) June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
SHORT-TERM:
Banks.................................................................. $ 65 $ 80
Current maturities..................................................... 142 486
---- ----
$207 $566
==== ====
</TABLE>
At June 30, 1999, Hercules had $212 million of unused lines of credit that
may be drawn as needed. Lines of credit in use at June 30, 1999 were $45
million.
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars in millions) 1999 1998
---- ----
<S> <C> <C>
LONG-TERM:
6.15% notes due 2000................................................. $ 100 $ 100
6.60% notes due 2027................................................. 100 100
7.85% notes due 2000................................................. 25 25
6.625% notes due 2003................................................ 125 125
8% convertible subordinated debentures due 2010...................... 3 3
Term loan tranche A due in varying amounts through 2003.............. 1,222 1,250
Term loan tranche B due 1999......................................... -- 470
Term loan tranche C due 2000......................................... 1,000 1,000
Revolving credit agreement due 2003.................................. 415 288
ESOP debt due in varying amounts through 2009........................ 107 110
Term notes at various rates from 3.55% to 9.60% due
in varying amounts through 2006................................. 89 102
Other................................................................ 12 9
------ ------
3,198 3,582
Current maturities of long-term debt................................. (142) (486)
------ ------
Net long-term debt................................................... $3,056 $3,096
====== ======
</TABLE>
Our credit agreement for the $3,650 million credit facility with a
syndicate of banks was amended in April 1999 to allow borrowings in euros, as
well as U.S. dollars. Approximately U.S. $950 million of term loan tranche A
domestic borrowings were converted into indebtedness denominated in euros during
the second quarter 1999. In addition, a Canadian subsidiary of ours can borrow
up to U.S. $100 million from select lenders in Canada in Canadian dollars.
10. Guaranteed Preferred Beneficial Interests in Company's Subordinated
Debentures consists of:
<TABLE>
<CAPTION>
(Dollars in millions) June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
9.42% Trust Originated Preferred Securities.............................. $362 $ --
Redeemable Hybrid Income Overnight Shares................................ 200 200
---- ----
$562 $200
==== ====
</TABLE>
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Trust Originated Preferred Securities
- -------------------------------------
In March 1999, Hercules Trust I, our wholly owned subsidiary trust
("Trust I"), completed a $362 million underwritten public offering of 14,500,000
shares of 9.42% Trust Originated Preferred Securities. Trust I invested the
proceeds from the sale of the Preferred Securities in an equal principal amount
of 9.42% Junior Subordinated Deferrable Interest Debentures of Hercules due
March 2029. We used these proceeds for the partial repayment of a term loan
under our existing credit facility.
Trust I will distribute quarterly cash payments it receives from
Hercules on the debentures to Preferred Security holders at an annual rate of
9.42% on the liquidation amount of $25 per Preferred Security. We may defer
interest payments on the Debentures at any time, for up to 20 consecutive
quarters. If this occurs, Trust I will also defer distribution payments on the
Preferred Securities. The deferred distributions, however, will accumulate
distributions at a rate of 9.42% per annum.
Trust I will redeem the Preferred Securities when the Debentures are
repaid at maturity on March 31, 2029. Hercules may redeem the Debentures, in
whole or, on or after March 17, 2004, in part, before their maturity at a price
equal to 100% of the principal amount of the Debentures redeemed, plus accrued
interest. When Hercules redeems any Debentures before their maturity, Trust I
will use the cash it receives to redeem Preferred Securities and common
securities as provided in the trust agreement. Hercules guarantees the
obligations of Trust I on the Preferred Securities.
Redeemable Hybrid Income Overnight Shares
- -----------------------------------------
In November 1998, Hercules Trust V, our wholly-owned subsidiary ("Trust
V"), completed a private placement of $200 million Redeemable Hybrid Income
Overnight Shares (RHINOS). RHINOS are short-term auction-rate reset Preferred
Securities of Trust V, which used the proceeds from the RHINOS sale to purchase
junior subordinated notes of Hercules. We used these proceeds to partially repay
loans under our credit facility. Hercules pays interest on the junior
subordinated notes, and Trust V pays distributions on the RHINOS at a floating
rate equal to LIBOR plus 175 basis points, which is reset on a quarterly basis.
The RHINOS are guaranteed by Hercules.
We expected to remarket the RHINOS within twelve months of their
issuance; however, we amended the RHINOS agreement in July 1999 to eliminate
this requirement. The RHINOS will be redeemed in October 1999. Additionally in
July 1999, we issued $175 million of our common stock in a firm commitment
underwritten public offering; in partial satisfaction of our obligation to issue
$200 million of common stock as set forth in this forward underwriting
agreement, entered into at the same time as the private placement of the Rhinos
(see Note 11).
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11. COMMON STOCK AND CRESTS UNITS OFFERINGS
Common Stock Offering
---------------------
On July 27, 1999, we completed a public offering of 5,000,000 shares of
our common stock, which provided us with proceeds of $171.5 million, net of
underwriting fees of $3.5 million. The underwriters have the option to purchase
up to 750,000 additional shares of common stock to cover any over-allotments.
These options may be exercised on or prior to August 20, 1999. If this
over-allotment option is exercised in full, the proceeds to us from the common
stock offering will be $197.2 million, net of underwriting fees of $4 million.
CRESTS Units Offering
---------------------
On the same date, we also completed a public offering of 350,000
CRESTS Units with Hercules Trust II, a wholly owned subsidiary trust ("Trust
II"). This transaction provided net proceeds to Hercules and Trust II of $340.4
million. In the CRESTS Units offering, the underwriters have the option to
purchase up to 50,000 additional CRESTS Units to cover any over-allotments.
These options may be exercised on or prior to August 20, 1999. If this
over-allotment option is exercised in full, the net proceeds to Hercules and
Trust II from the CRESTS Units offering will be $389 million.
Each CRESTS Unit consists of one preferred security of Trust II and
one warrant to purchase 23.4192 shares of Hercules common stock at an initial
exercise price of $1,000 (equivalent to $42.70 per share). The warrants may be
exercised, subject to certain conditions, at any time before March 31, 2029,
unless there is a reset and remarketing event. No reset and remarketing event
will occur before July 27, 2004 unless all of our common stock is acquired in a
transaction that includes cash for a price above a predetermined level. Trust II
used the proceeds from the sale of its preferred securities to purchase junior
subordinated deferrable interest debentures of Hercules ("debentures").
We pay interest on the debentures, and Trust II pays distributions on
its preferred securities. Both are paid quarterly at an annual rate of 6 1/2% of
the scheduled liquidation amount of $1,000 per debenture and/or preferred
security until the scheduled maturity date and redemption date of June 30, 2029,
unless there is a reset and remarketing event. We guarantee payments by Trust II
on its preferred securities. Trust II must redeem the preferred securities when
the debentures are redeemed or repaid at maturity.
We used the proceeds from both offerings, and intend to use proceeds
from over-allotment exercises, if any, for the partial repayment of a term loan
under the credit facility.
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12. The Board of Directors has authorized the repurchase of up to 74,650,000
shares of our common stock. Of this amount, 6,150,000 shares are intended for
various employee benefit programs. Through June 30, 1999, 66,592,958 shares
(including 6,150,000 shares for employee benefit programs) had been purchased in
the open market at an average price of $37.31 per share.
13. COMMITMENTS AND CONTINGENCIES
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 $60 million and $223 million. The
actual costs will depend upon numerous factors, including:
o the number of parties found responsible at each environmental site and
their ability to pay,
o the actual methods of remediation, outcomes of negotiations with
regulatory authorities,
o outcomes of litigation,
o changes in environmental laws and regulations,
o technological developments, and
o the number of years of remedial activity required, which could range up
to 30 years.
In 1992, we brought suit against our insurance carriers for past and
future costs for cleanup of certain environmental sites. In April 1998, the
trial regarding insurance recovery for the Jacksonville, Arkansas site (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 our
recovery for past cleanup expenditures and will state that we are entitled to
similar coverage for costs incurred since September 30, 1997 and in the future.
We have not included any insurance recovery in the estimates above.
We become aware of sites in which we may be named a PRP principally
through our knowledge of investigation of sites by the U.S. Environmental
Protection Agency, other government agencies or through correspondence with
previously named PRPs requesting information on our activities at sites under
investigation. We have established procedures for identifying environmental
issues at our plant sites. In addition to environmental audit programs, we have
environmental coordinators who are familiar with environmental laws and
regulations and act as resources for identifying environmental issues.
Litigation over liability at Jacksonville, Arkansas (the most
significant site) has been pending since 1980. The lawsuit is captioned United
States v. Vertac Chemical Corporation, USDA No. LR-C-92-137 (E.D. Ark.). As a
result of a pretrial court ruling in October 1993, we have
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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 Eighth Circuit Court of Appeals upheld the Court's order.
We filed a petition to the U.S. Supreme Court requesting review and reversal of
the Eighth Circuit Court ruling. This petition was denied on June 26, 1995, and
the case was remanded to the District Court for further proceedings.
On May 21, 1997, the Court issued a ruling that Uniroyal is liable and
that Standard Chlorine is not liable to Hercules for contribution. Through the
filing of separate summary judgment motions, Hercules and Uniroyal raised a
number of defenses to the United States' ability to recover its costs. On
October 23, 1998, the Court denied those motions and granted the United States'
summary judgment motion, ordering Hercules and Uniroyal to pay the United States
approximately $103 million plus any additional response costs incurred or to be
incurred after July 31, 1997. Trial testimony on the issue of allocation between
Hercules and Uniroyal was completed on November 6, 1998. The Court has not yet
ruled on the allocation issue. On August 6, 1999, the Court finalized its 1993
and 1997 non-final orders concerning past and future remediation costs at the
site by entering a final judgment in which Hercules and Uniroyal were found
jointly and severally liable for $89.1 million plus any additional response
costs incurred, or to be incurred, after May 31, 1998. We were found solely
liable for an additional $11.5 million, bringing the total adjudged liability to
$100.6 million. The Court reduced the $103 million from its previous ruling on
summary judgment by approximately $7 million (the amount received by the United
States in previous settlements with other parties) and added applicable interest
to reach a final total of $100.6 million. The August 6, 1999 judgment has not
changed our outlook on the potential outcome of this matter. We previously
disclosed that depending upon the Court's judgment, we might choose to appeal to
the Eighth Circuit on any of the previous rulings on liability, allocation or
damages. We now intend to file that appeal and post the bond required by the
procedural rules by the end of the third quarter 1999. We anticipate the cost to
post this bond will be approximately $175,000.
At June 30, 1999, the consolidated balance sheet reflects a liability
of $60 million for environmental investigation and clean up costs. This amount
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 factors identified above. We do not
anticipate that our financial condition will be materially affected by
environmental remediation costs in excess of amounts accrued, although quarterly
or annual operating results could be materially affected.
LITIGATION
We are a defendant in numerous lawsuits resulting from the conduct of
our business. In these legal proceedings, no director, officer, or affiliate is
a party or a named defendant. These lawsuits 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. ("Alliant") in March 1995. Among the allegations were
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. After
investigation of the allegations, the government declined to intervene in two of
these lawsuits and partially intervened in the third. The first lawsuit (United
States of America ex. rel. Katherine A. Colunga v. Hercules Incorporated, et
al., Civil No. 89-C-954B) was dismissed in July 1998.
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The parties to the second lawsuit (United States of America ex. rel.
Benny D. Hullinger, et al., Civil No. 92-CV-085) reached a tentative settlement,
subject to approval of the Court, in August 1998. Although it did not intervene
in the case, the U.S. Department of Justice ("DOJ") objected to approval of the
tentative settlement, arguing that Hercules should only be released from claims
that the government contended were actually investigated. The DOJ further argued
that the proposed allocation of settlement proceeds between False Claims Act
claims and wrongful termination claims should be revised to attribute a higher
percentage of recovery to claims arising under the False Claims Act. On February
9, 1999, the Court entered a judgment to approve the settlement and dismiss the
lawsuit. On April 12, 1999 the DOJ's 60-day period to appeal the judgment
expired without the DOJ having filed a Notice of Appeal. Eight days later, on
April 20, 1999, the DOJ filed a Motion to Extend Time for Filing Notice of
Appeal. Hercules and the plaintiffs opposed the motion, arguing that the DOJ had
not made the showing of excusable neglect required by the rules for such an
extension. On May 4, 1999, the Court denied the DOJ's motion. On May 21, 1999,
the DOJ determined that they would not appeal further. The Court's judgment
dismissing the lawsuit became final on May 28, 1999.
In the third lawsuit [United States of America ex. rel. P. Robert Pratt
v. Alliant Techsystems, Inc. and Hercules Incorporated, Civil No. 95-4812
SVW(JGx)], all claims alleging mischarging to the Intermediate Nuclear Forces
Contract were settled in February 1998. Other portions of the complaint were not
resolved by the settlement. The parties reached a tentative settlement of the
remaining portions of the complaint, subject to approval of the Court, in August
1998. 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. The DOJ further argued that the settlement agreement
should have contained certain provisions preventing Alliant, 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. On March 23, 1999, the DOJ filed a Notice of Appeal. In
subsequent discussions with DOJ's counsel, Hercules and Alliant agreed to amend
the settlement agreement to include provisions that prevent Alliant from
recovering under its government contracts the costs that had been the subject of
prior discussions with the DOJ. Following such agreement, the DOJ withdrew its
appeal. At this point, the dismissal of the lawsuit became final. The amendment
to the settlement agreement was submitted to the Court for its approval on
August 2, 1999, and the parties are awaiting the Court's order approving the
amendment.
In addition to our Jacksonville, Arkansas, site litigation described in
the environmental section above, Hercules is a defendant in two lawsuits brought
by individuals. The first lawsuit, Jeffrey Shelton Jr., et al. v. Hercules
Incorporated, Civil No. LR-C-97-131 (E.D. Ark. 1997), involves two individuals
seeking medical monitoring and damages for loss of recreational opportunities.
They have brought a Resource Conservation and Recovery Act (RCRA) citizens suit
against us seeking an injunction which would require us to fund or perform
various environmental and health studies and pay for any required remediation to
the Bayou Meto. Plaintiffs and Hercules have filed motions for summary judgment
which are awaiting decision by the Court. No trial date is currently scheduled.
The second lawsuit, Gary Graham, et al. v. Vertac Chemical Corporation and
Hercules Incorporated, No. LR-C-98-678 (E.D. Ark. 1998), was filed by a group of
19 individuals seeking damages for personal injuries and diminution of property
value as a result of alleged dioxin contamination from the Jacksonville site.
This case has been dismissed without prejudice. We deny liability in both
actions, and intend to vigorously defend both actions.
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<PAGE> 14
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 three of the cases, the parties selected 20 plaintiffs and
two alternates whose claims will be tried together, before the claims for the
remaining plaintiffs in the Lawsuits. We anticipate 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 one of the Lawsuits; as a result, PG&E will have no additional
liability to those plaintiffs.
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).
In June 1998, Hercules, along with Georgia-Pacific and AlliedSignal,
were sued in Georgia State Court by 423 plaintiffs for alleged personal injuries
and property damage. This litigation is captioned Coley, et al. v. Hercules
Incorporated, et al., No. 98VSO 140933 B (Fulton County, GA 1998). Plaintiffs
allege that they were damaged by the discharge of hazardous waste from the
companies' plants. Hercules and the other defendants removed the case to Federal
Court and requested that it be transferred to the Brunswick Division. The
Federal Court in Atlanta transferred the case to the Federal Court in Brunswick
to decide the removal issue. The Court denied the motion and, as a result, the
case was remanded to the State Court in Atlanta.
Along with the other defendants, we have filed motions to dismiss
certain claims, to sever the individual plaintiffs' claims, and to sever the
claims against the defendants. All are awaiting decision. The case is in the
early stages of motions and discovery. We deny liability and intend to
vigorously defend this action.
At June 30, 1999, the consolidated balance sheet reflects a liability
of approximately $10 million for litigation and claims. This amount represents
management's best estimate of the probable and reasonably estimable losses
related to litigation or claims. The extent of the liability is evaluated
quarterly. No insurance recoveries for litigation are reflected in the
consolidated balance sheet. While it is not feasible to predict the outcome of
all pending lawsuits and claims, the ultimate resolution of these matters could
have a material effect upon our financial position. Any resolution during a
specific period could have a material effect on our quarterly or annual
operating results for that period.
14
<PAGE> 15
14. SEGMENT INFORMATION
<TABLE>
<CAPTION>
(Dollars in millions) Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales:
Process Chemicals and Services................ $427 $113 $ 839 $217
Functional Products........................... 221 219 429 434
Chemical Specialties.......................... 169 113 340 224
---- ---- ------ ----
Consolidated........................... $817 $445 $1,608 $875
==== ==== ====== ====
Profit (Loss) from Operations:
Process Chemicals and Services................ $89 $25 $167 $47
Functional Products........................... 57 58 111 114
Chemical Specialties.......................... 23 18 49 33
Reconciling Items............................. (31) (a) -- (66) (a) 1
---- ---- ---- ----
Consolidated........................... $138 $101 $261 $195
==== ==== ==== ====
</TABLE>
(a) Reconciling items for the quarter and six months ended June 30, 1999
include goodwill and intangible asset amortization of $20 million and
$40 million, respectively, integration costs of $3 million and $10
million, respectively, and corporate research and development and other
corporate items not specifically allocated to business segments.
15
<PAGE> 16
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
RESULTS OF OPERATIONS
Within the following discussion, unless otherwise stated, "quarter" and
"six-month period" refer to the second quarter of 1999 and the six months ended
June 30, 1999. All comparisons are with the corresponding periods in the
previous year, unless otherwise stated.
The table below reflects sales and profit from operations for the
quarter and six months ended June 30, 1998 on a pro forma basis, and operating
profit for the quarter and six months ended June 30, 1999 excluding integration
costs. For the quarter and six-month period, integration charges were $3 million
and $12 million, respectively, and are reported primarily in other operating
expenses (see Note 5). Integration costs for travel, consulting, employee
incentives and other related items are expected to continue through the
remainder of 1999.
Acquisitions during 1998, which were accounted for using the purchase
method, significantly impact the comparability of results for the quarter and
six-month period. Accordingly, pro forma sales and profit from operations for
the 1998 periods are provided to facilitate comparisons. The pro forma results
include 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 dates indicated, and are not
intended to be a projection of future results or trends.
<TABLE>
<CAPTION>
(Dollars in millions) Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales by Industry Segment:
Process Chemicals and Services................ $427 $434 $ 839 $ 837
Functional Products........................... 221 219 429 434
Chemical Specialties.......................... 169 179 340 356
---- ---- ------ ------
Total.................................. $817 $832 $1,608 $1,627
==== ==== ====== ======
Profit (Loss) from Operations:
Process Chemicals and Services................ $89 $72 $169 $ 136
Functional Products........................... 57 58 111 114
Chemical Specialties.......................... 23 29 49 54
Reconciling Items............................. (28) (a) (18) (b) (56) (a) (35) (b)
---- ---- ---- -----
Total.................................. $141 $141 $273 $ 269
==== ==== ==== ======
</TABLE>
(a) Reconciling items include the following for the quarter and six-month
period ended June 30, 1999, respectively: goodwill and intangible asset
amortization of $20 million and $40 million, corporate research and
development costs of $2 million and $4 million and
16
<PAGE> 17
corporate environmental accruals of $3 million and $4 million.
(b) Reconciling items include the following for the quarter and six-month
period ended June 30, 1998, respectively: goodwill and intangible asset
amortization of $19 million and $38 million, corporate research and
development costs of $2 million and $5 million, partially offset by a
favorable settlement of an environmental insurance claim of $2 million
in both periods. Additionally, the six months ended June 30, 1998
includes $4 million from sale of technology.
The discussion that follows speaks to comparisons in the table through
profit from operations.
Consolidated net sales decreased $15 million, or 2%, for the quarter,
and $19 million, or 1%, for the six-month period. Weaker foreign currencies
relative to the dollar, primarily as a result of the devaluation of the
Brazilian Real, had a negative impact on sales of $9 million and $6 million for
the quarter and six-month period, respectively. During the quarter, lower
selling prices in the Process Chemicals and Services and Chemical Specialties
segments also negatively impacted sales. For the six-month period, the decline
is primarily from lower pricing in Chemical Specialties and lower sales volumes
in Functional Products.
Consolidated profit from operations was relatively flat for the quarter
and six-month period. Improved profit from operations in the Process Chemicals
and Services segment from cost improvements (resulting from integrating the
BetzDearborn businesses) were offset by lower profitability in Chemicals
Specialties (primarily the result of pricing pressure) and higher corporate
charges (principally environmental costs). Consequently, operating margins
increased for the quarter to 17.3%, compared with 16.9%, and improved to 17.0%
for the six months compared with 16.5% during the same period last year.
Process Chemicals and Services sales were down $7 million, or 2%, for
the quarter primarily from the Brazilian currency devaluations and the
competitive pricing environment in the hydrocarbon and paper processing markets
in North America and Europe, which was partly offset by volume improvements.
Sales were relatively flat for the six months, as the volume improvements were
offset by weaker pricing and the currency devaluation. During the quarter and
six months, operating profit increased $17 million and $33 million,
respectively. The improvement in operating profit and operating margin is
primarily the result of cost improvements, as well as, lower selling, general
and administrative expenses resulting from the integration of BetzDearborn.
Functional Product sales were relatively flat for the quarter and six
months as improved pectin pricing, along with volume improvements (partially
from improvements in Asian markets), offset volume declines (primarily from
weakness in oilfield markets) and pricing pressure in other specialty products.
Operating profit was down $1 million, or 2%, during the quarter and $3 million,
or 3% for the six months. This shortfall is primarily from the weakness in the
oilfield markets, which was partially offset by the improvements in the pectin
business noted above.
Chemical Specialties sales were down $10 million, or 6%, during the
quarter and $16 million, or 4%, for the six-month period. Revenue declined from
the pass-through effects of lower polypropylene raw material prices, continued
competitive pricing for resin products, and an unfavorable sales mix,
particularly in Europe, for rosin resins. Operating profit declined $6 million,
or 21%, during the quarter, and $5 million, or 9% for the six months. This
decline in both periods is primarily due to the unfavorable pricing and product
mix in resins products noted above, partly offset by lower polypropylene raw
material costs. We do not anticipate any significant improvement in market
conditions for resins for the remainder of the year.
17
<PAGE> 18
Equity in income of affiliated companies decreased $5 million and $9
million for the quarter and six-month period because FiberVisions results are
consolidated in Hercules financial statements in 1999. Prior to Hercules
purchasing the remaining 49% share of FiberVisions in July 1998, results were
accounted for on the equity method.
Interest and debt expense increased $34 million for the quarter and $83
million for the six-month period as a result of the additional financial
leverage resulting from the 1998 acquisitions.
Preferred security distributions of subsidiary trusts are the quarterly
distributions to the holders of the trust preferred securities issued by
Hercules (see Note 10).
Other income, net decreased $12 million for the quarter and increased
$35 million for the six-month period. The decrease during the quarter is
primarily from lower interest income. The increase for the six months is
primarily due to a first quarter 1998 charge of $63 million for legal
settlements and accruals, offset by lower interest income (see Note 7).
The effective tax rate for the first six months of 1999 was 35%,
compared to 88% for the full year 1998. The second quarter 1999 tax provision
reflects the benefit of utilizing a capital loss carryback. Both rates reflect
the effect of nondeductible goodwill and intangible amortization. Additionally,
the 1998 tax rate reflects the effect of the non-deductible charge for purchased
in-process research and development. The effective tax rate for 1999 is
estimated at approximately 38%, assuming no additional benefit from tax planning
initiatives. However, we continue to pursue planning initiatives and expect to
show some improvement in the effective rate during the remainder of 1999.
FINANCIAL CONDITION
Cash provided by operations was $61 million compared to $38 million in
1998. The increase reflects higher profit from operations, primarily from
businesses acquired in 1998, and lower tax payments, offset by higher interest
payments, cash outlays for termination benefits, other exit costs and
integration expenses, and higher working capital requirements.
Short term liquidity has improved since year-end 1998, primarily from
refinancing $470 million of current maturity debt existing under our $3.65
billion credit facility with long-term Trust Originated Preferred Securities
issued during the first quarter of 1999 (see Note 10). As a result, we were able
to reduce our interest rate by 1.25% on the $3.15 billion balance remaining
under the credit facility. Current and quick ratios have improved to 1.4 and .9,
respectively, at June 30, 1999, compared with .9 and .6, respectively, at
December 31, 1998. As of June 30, 1999, we had $485 million available under the
revolving credit agreement and $212 million of short-term lines of credit (see
Note 9).
During the second quarter of 1999, we amended our credit agreement to
allow for borrowing in euros, as well as in U.S. dollars. Approximately $950
million of U.S. dollar denominated debt was converted to euro indebtedness. Also
during the six-month period, we entered into a financing agreement with a bank,
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 Hercules under which the bank purchases
promissory notes
18
<PAGE> 19
denominated in a number of foreign currencies in exchange for U.S. dollars. The
notes are repayable only to the extent of future revenue of certain foreign
subsidiaries. Neither Hercules nor the bank can cancel their obligations under
the agreement. Transaction gains and losses related to the notes are deferred
and recognized as an adjustment to the revenue supporting the note repayment.
In the fourth quarter 1998, Hercules Trust V, a wholly owned
subsidiary, completed a private placement of $200 million Redeemable Hybrid
Income Overnight Shares (RHINOS). The RHINOS are guaranteed by Hercules (see
Note 10). We expected to remarket the RHINOS within twelve months of their
issuance; however, we amended the RHINOS agreement in July 1999 to eliminate
this requirement. The RHINOS will be redeemed in October 1999. In addition, we
agreed to publicly offer and sell, and a third party agreed to underwrite $200
million of our common stock.
On July 27, 1999, we completed a public offering of 5,000,000 shares of
our common stock, which provided us with net proceeds of $171.5 million (see
Notes 10 and 11). On the same date, we also completed a public offering of
350,000 CRESTS Units with Hercules Trust II, a wholly owned subsidiary trust
(Trust II). This transaction provided net proceeds to Hercules and Trust II of
$340.4 million.
In the common stock offering, the underwriters have the option to
purchase up to 750,000 additional shares of common stock to cover any
over-allotments. In the CRESTS Units offering, the underwriters have the option
to purchase up to 50,000 additional CRESTS Units to cover any over-allotments.
These options may be exercised on or prior to August 20, 1999. If these
over-allotment options are exercised in full, the net proceeds to us from the
common stock offering will be $197.2 million, and the net proceeds to Hercules
and Trust II from the CRESTS Units offering will be $389.0 million. We used the
proceeds from the offerings, and intend to use proceeds from over-allotment
exercises, if any, for the partial repayment of a term loan under the credit
facility.
Each CRESTS Unit consists of one preferred security of Trust II and one
warrant to purchase 23.4192 shares of Hercules common stock at an initial
exercise price of $1,000 (equivalent to $42.70 per share). The warrants may be
exercised, subject to certain conditions, at any time before March 31, 2029,
unless there is a reset and remarketing event (see Note 11). Trust II used the
proceeds from the sale of its preferred securities to purchase junior
subordinated deferrable interest debentures of Hercules. Hercules will pay
interest on the debentures while Trust II will pay distributions on its
preferred securities. Both are paid quarterly at an annual rate of 6-1/2% of
the scheduled liquidation amount of $1,000 per debenture and/or preferred
security (see Note 11).
The ratio of debt-to-total capitalization (stockholders' equity,
guaranteed preferred beneficial interests on Hercules' subordinated debentures
and debt) decreased to 74% at June 30, 1999 from 83% at year-end 1998 as a
result of the first quarter Trust Originated Preferred Securities offering.
Following the July 1999 issuance of CRESTS units and common stock, the amount
accessible under our shelf registration is $1,636 million (includes all of the
underwriters' over-allotment options for the CREST Units and common stock
offerings).
19
<PAGE> 20
MARKET RISK
Hercules derivative and other financial instruments subject to interest
rate risk consist of debt instruments, equity-like securities, and interest rate
swaps. At June 30, 1999, net market value of these combined instruments was a
liability of $3.6 billion. The following sensitivity analysis assumes an
instantaneous 100-basis point move in interest rates from their levels at June
30, 1999, with all other variables held constant. A 100-basis point increase in
interest rates would result in an $80 million decrease in the net market value
of the liability, while a 100-basis point decrease would result in a $65 million
increase. The change in the sensitivity level from year-end 1998 is primarily
from the fixed distribution rate associated with the Trust Originated Preferred
Securities issued during the first quarter 1999 (see Note 10) and an increase in
the notional amount of interest rate swaps during the second quarter 1999.
Our financial instruments subject to foreign currency exchange risk
consist of foreign currency forwards, options, and foreign currency debt and
represent a net liability position of $910 million at June 30, 1999. The
following sensitivity analysis assumes an instantaneous 10% change in foreign
currency exchange rates from the June 30, 1999 levels, with all other variables
held constant. A 10% strengthening of the U.S. dollar versus other currencies
would result in a $100 million decrease in the net liability position, while a
10% weakening of the dollar versus all the currencies would result in a $102
million increase. The change in the sensitivity level from year-end 1998 is
primarily from replacing cross currency swaps with foreign currency debt to
hedge exposure to increased investments in foreign subsidiaries, primarily as a
result of the BetzDearborn acquisition.
Our sensitivity to changes in equity price risk is not significantly
different from December 31, 1998.
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 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:
o corporate and plant computer systems;
o desktop and telecommunications systems;
o safety, environmental and quality systems;
o process control systems and plant floor equipment and devices with
embedded chips;
o equipment manufactured by or for BetzDearborn and sold to customers;
and
o business partner and supply chain risk management.
20
<PAGE> 21
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 ready. 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.
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.
During the second quarter of 1999, our Y2K activities included:
o refinement of Y2K plan;
o refinement of methodology and documentation for Y2K efforts,
including inventory, assessment, remediation, testing and
contingencies;
o continuation of development of detailed project plans,
contingency plans and schedules;
o continuation of comprehensive risk assessment of crucial business
functions, including intensive site reviews and evaluation of
manufacturing and other facilities;
o presentation to customers and business partners of information
about our Y2K efforts;
o continuation of assessment of remediation of embedded devices and
systems in our manufacturing operations; and
o commencement of an active testing program to test Y2K affected
systems and the contingency plans for such systems.
21
<PAGE> 22
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 $14 million and we have spent approximately $8 million as of June
30, 1999. These costs are expensed as incurred and are being funded through
operating cash flow. The cost estimate does not include the cost to upgrade or
replace process control equipment and desktop computers. 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.
Forward-looking Statement
This Y2K discussion includes forward-looking statements of Hercules'
efforts and management's expectations relating to Y2K readiness. Our ability to
achieve Y2K readiness and the level of incremental associated costs could be
adversely affected by the availability and cost of remediation and testing
resources, vendors' and customers' abilities to install or modify IT and non-IT
systems, and unanticipated problems identified in the ongoing Y2K readiness
review.
The costs of the Y2K project and the dates that we plan to complete the
Y2K modifications are based on management's best estimates. We used numerous
assumptions of future events including the continued availability of certain
resources, third parties' remediation plans and other factors. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially. Specific factors that might cause material differences
include the availability and cost of personnel trained to perform Y2K
modifications; our ability to locate and correct all non-compliant computer
codes and embedded controls; the ability of material customers, suppliers, and
business partners to successfully complete their own Y2K remediation projects;
the accuracy of information received from third parties concerning their Y2K
compliance and business risk assessments; and similar uncertainties.
22
<PAGE> 23
Forward-looking Statement
This quarterly report includes forward-looking statements, as defined in the
Private Securities Litigation Reform Act of 1995, reflecting management's
current analysis and expectations, based on reasonable assumptions. Results
could differ materially depending on such factors as business climate, economic
and competitive uncertainties, higher manufacturing costs, reduced level of
customer orders, ability to integrate BetzDearborn, changes in strategies, risks
in developing new products and technologies, the ability of Hercules' 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. Accordingly, there can be no assurance that the Company will
meet analysts' earnings estimates. As appropriate, additional factors are
contained in reports filed with the Securities and Exchange Commission. This
paragraph is included to provide safe harbor for forward-looking statements,
which are not required to be publicly revised as circumstances change.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
For discussion of quantitative and qualitative disclosure about market
risk, see the caption "Market Risk" under Item 2, Management's Discussion and
Analysis of Results of Operations and Financial Condition.
23
<PAGE> 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
For information related to Legal Proceedings, see notes to financial
statements.
Item 4. Submission of Matters to a Vote of Security Holders.
Our Annual Meeting of Shareholders was held April 29, 1999. Voting
results were disclosed on our Form 10-Q for the period ended March 31,
1999.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
4-A Second Supplemental Indenture, dated July 6, 1999,
between Hercules Incorporated and The Chase Manhattan
Bank, as Trustee.
4-B Amendment dated as of July 6, 1999 to the Amended and
Restated Trust Agreement of Hercules Trust V, dated
November 12, 1998.
4-C Termination Agreement, dated as of July 6, 1999,
among Hercules Incorporated, Hercules Trust V and
Banc of America Securities LLC.
4-D Officers' Certificate, dated as of July 27, 1999,
pursuant to the Junior Subordinated Debenture
Indenture between Hercules Incorporated and The Chase
Manhattan Bank, as trustee. (Incorporated by
reference to Exhibit 4.1 to our Current Report on
Form 8-K dated July 27, 1999.)
4-E Amended and Restated Trust Agreement of Hercules
Trust II dated as of July 27, 1999, together with
Annex I thereto. (Incorporated by reference to
Exhibit 4.2 to our Current Report on Form 8-K dated
July 27, 1999.)
4-F Unit Agreement, dated July 27, 1999, among Hercules
Incorporated, Hercules Trust II and The Chase
Manhattan Bank, as unit agent. (Incorporated by
reference to Exhibit 4.3 to our Current Report on
Form 8-K dated July 27, 1999.)
4-G Warrant Agreement, dated July 27, 1999, between
Hercules Incorporated and The Chase Manhattan Bank,
as warrant agent. (Incorporated by reference to
Exhibit 4.4 to our Current Report on Form 8-K dated
July 27, 1999.)
4-H Form of Series A Junior Subordinated Deferrable
Interest Debentures. (Incorporated by reference to
Exhibit 4.5 to our Current Report on Form 8-K dated
July 27, 1999.)
24
<PAGE> 25
4-I Form of Trust II Preferred Securities. (Incorporated
by reference to Exhibit 4.6 to our Current Report on
Form 8-K dated July 27, 1999.)
4-J Form of CRESTS Unit. (Incorporated by reference to
Exhibit 4.7 to our Current Report on Form 8-K dated
July 27, 1999.)
4-K Form of Warrant. (Incorporated by reference to
Exhibit 4.8 to our Current Report on Form 8-K dated
July 27, 1999.)
10.1 Amended and Restated Credit Agreement, dated April
19, 1999, among Hercules Incorporated, NationsBank,
N.A., as Administrative Agent, and the lenders party
thereto. (Incorporated by reference to our Form 8-K
dated April 19, 1999.)
27 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K dated July 27, 1999 relating to two offerings: (1) a
public offering of 5,000,000 shares of Hercules common stock
on July 27, 1999, and (2) an offering on the same date of
350,000 CRESTS Units by Hercules and Hercules Trust II.
Form 8-K filed April 19, 1999 to report changes to our Amended
and Restated Credit Agreement, dated April 19, 1999, among
Hercules Incorporated, NationsBank, N.A., as Administrative
Agent, and the lenders party thereto.
25
<PAGE> 26
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hercules Incorporated
by /s/ GEORGE MACKENZIE
---------------------------------
George MacKenzie
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer
and duly authorized signatory)
August 16, 1999
by /s/ MICHAEL J. SCOTT
---------------------------------
Michael J. Scott
Vice President, Business Analysis
and Assistant Controller
(Principal Accounting Officer)
August 16, 1999
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description Incorporated by Reference to
- ------ ----------- ----------------------------
<S> <C> <C>
4-A Second Supplemental Indenture, dated July 6, 1999,
between Hercules Incorporated and The Chase Manhattan
Bank, as Trustee.
4-B Amendment dated as of July 6, 1999 to the Amended and
Restated Trust Agreement of Hercules Trust V, dated
November 12, 1998.
4-C Termination Agreement, dated as of July 6, 1999, among
Hercules Incorporated, Hercules Trust V and Banc of
America Securities LLC.
4-D Officers' Certificate, dated as of July 27, 1999, Exhibit 4.1, Current Report on Form 8-K
pursuant to the Junior Subordinated Debenture dated July 27, 1999
Indenture between Hercules Incorporated and The Chase
Manhattan Bank, as trustee.
4-E Amended and Restated Trust Agreement of Hercules Trust Exhibit 4.2, Current Report on Form 8-K
II dated as of July 27, 1999, together with Annex I dated July 27, 1999
thereto.
4-F Unit Agreement, dated July 27, 1999, among Hercules Exhibit 4.3, Current Report on Form 8-K
Incorporated, Hercules Trust II and The Chase dated July 27, 1999
Manhattan Bank, as unit agent.
4-G Warrant Agreement, dated July 27, 1999, between Exhibit 4.4, Current Report on Form 8-K
Hercules Incorporated and The Chase Manhattan Bank, as dated July 27, 1999
warrant agent
4-H Form of Series A Junior Subordinated Deferrable Exhibit 4.5, Current Report on Form 8-K
Interest Debentures. dated July 27, 1999
4-I Form of Trust II Preferred Securities Exhibit 4.6, Current Report on Form 8-K
dated July 27, 1999
4-J Form of CRESTS Unit Exhibit 4.7, Current Report on Form 8-K
dated July 27, 1999
4-K Form of Warrant Exhibit 4.8, Current Report on Form 8-K
dated July 27, 1999
10.1 Amended and Restated Credit Agreement, dated April 19, Exhibit 10.2, Current Report on Form
1999, among Hercules Incorporated, NationsBank, N.A., 8-K, dated April 19, 1999
as Administrative Agent, and the lenders party thereto
27 Financial Data Schedule
</TABLE>
27
<PAGE> 1
EXHIBIT 4-A
--------------------------------------
SECOND SUPPLEMENTAL INDENTURE
between
HERCULES INCORPORATED,
as Issuer
and
THE CHASE MANHATTAN BANK,
as Trustee
Dated as of July 6, 1999
--------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE 1
<S> <C>
SECTION 1.01. Application of Articles 1 and 2..................................................2
SECTION 1.02. Amendment of Interest Rate Calculation on the Subordinated Notes.................2
SECTION 1.03. Certain Definitions..............................................................3
SECTION 1.04. Amendment of the Subordinated Notes..............................................3
ARTICLE 2
SECTION 2.01. Elimination of Remarketing.......................................................4
ARTICLE 3
SECTION 3.01. Ratification of Base Indenture and First Supplemental Indenture:
Second Supplemental Indenture Controls............................................4
SECTION 3.02. Trustee Not Responsible for Recitals..............................................5
SECTION 3.03. Governing Law.....................................................................5
SECTION 3.04. Severability......................................................................5
SECTION 3.05. Counterparts......................................................................5
SECTION 3.06. Terms Defined.....................................................................5
</TABLE>
<PAGE> 3
SECOND SUPPLEMENTAL INDENTURE, dated as of July 6, 1999 (the "SECOND
SUPPLEMENTAL INDENTURE"), between Hercules Incorporated, a Delaware corporation
(the "Company"), and The Chase Manhattan Bank, a New York banking corporation,
as trustee (the "TRUSTEE").
WHEREAS, the Company and the Trustee are parties to the Junior Subordinated
Debentures Indenture dated as of November 12, 1998 between the Company and the
Trustee (the "BASE INDENTURE"), as supplemented by a First Supplemental
Indenture dated as of November 12, 1998 between the Company and the Trustee (the
"FIRST SUPPLEMENTAL INDENTURE" and together with the Base Indenture and this
Second Supplemental Indenture, the "INDENTURE");
WHEREAS, the Company executed and delivered the Base Indenture to the
Trustee to provide for the issuance of the Company's unsecured junior
subordinated debentures (the "DEBENTURES") to be issued from time to time in one
or more series as might be determined by the Company under the Indenture, in an
unlimited aggregate principal amount which may be authenticated and delivered as
provided in the Base Indenture;
WHEREAS, pursuant to the terms of the Indenture in the First Supplemental
Indenture, the Company provided for the establishment of a new series of its
Debentures known as its Auction Rate Reset Junior Subordinated Notes Series A
(the "SUBORDINATED NOTES");
WHEREAS, the Indenture provides that the Company and the Trustee may amend
the Indenture, with the consent of each Holder of any Debenture affected
thereby, to provide for, among other things, a change in the rate of interest or
the manner of calculation thereof;
WHEREAS, the Company and the Trustee desire to modify certain provisions of
the Indenture to reflect a modification in the amount of calculation of the rate
of interest on the Subordinated Notes and to provide that no Remarketing of the
Subordinated Notes shall occur;
WHEREAS, all things necessary to make this Second Supplemental Indenture a
valid indenture and agreement according to its terms have been done;
NOW THEREFORE, in consideration of the purchase and acceptance of the
Subordinated Notes by the Holder thereof, and for the purpose of amending and
restating certain terms of the Indenture relating to the manner of calculation
of the rate of interest on the Subordinated Notes, and relating to the
Remarketing, the Company covenants and agrees with the Trustee as follows:
<PAGE> 4
ARTICLE 1
SECTION 1.01. Application of Articles 1 and 2. The provisions of Articles
One and Two hereof shall apply to the Subordinated Notes and the certificates
therefor shall be appropriately amended.
SECTION 1.02. Amendment of Interest Rate Calculation on the Subordinated
Notes. Section 2.05 of the First Supplemental Indenture is hereby amended to
read in its entirety as follows:
"Section 2.05. Interest. (a) Interest on the principal amount of each
Subordinated Note will accrue and be payable at a rate (the "INTEREST
RATE") per annum equal to from and including the date of issuance to but
excluding the date each principal amount is paid, LIBOR plus 175 basis
points, compounded quarterly; provided that, notwithstanding the foregoing,
if the Company fails to pay the principal amount on the date such amount
becomes due, then from and including such due date to but excluding the
date such principal amount is paid, interest shall be paid at the Default
Rate, compounded quarterly, but only to the extent permitted by applicable
law.
(b) Interest that is not paid when due will bear additional interest
thereon compounded quarterly at the applicable periodic Interest Rate
specified above (to the extent permitted by applicable law). The term
"INTEREST", as used herein, includes any such additional interest and
Additional Interest unless otherwise stated.
(c) Interest on the Subordinated Notes will be cumulative, will be
payable quarterly in arrears on February 12, May 12, August 12 and November
12 of each year, commencing February 12, 1999, and on the Maturity Date
(each an "INTEREST PAYMENT DATE"), will accumulate from and including the
most recent date to which interest has been paid or, if no interest has
been paid, from November 12, 1998, to but excluding the related Interest
Payment Date, except as otherwise described below.
The Interest Rate in effect for the period from and including November
12, 1998 to but excluding February 12, 1999 shall be the rate determined by
the Calculation Agent two London Banking Days prior to November 12, 1998
and shall equal LIBOR plus 175 basis points. The Interest Rate in effect
thereafter, for each quarterly period from and including the immediately
preceding Interest Payment Date to but excluding the applicable Interest
Payment Date, shall be determined by the Calculation Agent two London
Banking Days prior to such immediately preceding Interest Payment Date and
shall equal LIBOR plus 175 basis points. The amount of interest payable for
any quarterly period shall be computed on the basis of a year of 360 days
and paid for the actual number of days elapsed (including the first day but
excluding the last day). Except as provided in the last sentence of this
paragraph, the amount of interest payable for any period shorter than a
full quarterly period for which interest is computed will be computed on
the basis of the actual number of days elapsed per 30-day month. If an
2
<PAGE> 5
Interest Payment Date is not a Business Day, then such Interest Payment
Date will be the next succeeding Business Day, except if such Business Day
is in the next succeeding calendar month, such Interest Payment Date will
be the immediately preceding Business Day.
(d) Interest shall be paid to the Person in whose name the
Subordinated Note or any predecessor Subordinated Note is registered on the
books and records of the Company, at the close of business on the Regular
Record Date for such interest installment, which, in respect of
Subordinated Notes of which the Property Trustee is the Holder and the
related Preferred Securities are in book-entry only form or a Global
Subordinated Note, shall be the close of business on the Business Day next
preceding that Interest Payment Date (the "REGULAR RECORD DATE"). If the
Subordinated Notes are not represented by a Global Subordinated Note, the
Regular Record Date for such interest installment shall be fifteen (15)
days prior to that Interest Payment Date.
(e) If at any time while the Property Trustee is the Holder of any
Subordinated Notes, the Trust or the Property Trustee is required to pay
any taxes, duties, assessments or governmental charges of whatever nature
(other than withholding taxes) imposed by the United States, or any other
taxing authority, then, in any such case, the Company will pay as
additional interest ("ADDITIONAL INTEREST") on the Subordinated Notes held
by the Property Trustee, such additional amounts as shall be required so
that the net amounts received and retained by the Trust and the Property
Trustee after paying such taxes, duties, assessments or other governmental
charges will be equal to the amounts the Trust and the Property Trustee
would have received had no such taxes, duties, assessments or other
government charges been imposed."
SECTION 1.03. Certain Definitions. Section 1.01 of the First Supplemental
Indenture is hereby amended by:
(a) changing the reference to Section 2.05(d) in the definition of
"Interest Payment Date" to Section 2.05(c);
(b) changing the reference to Section 2.05(e) in the definition of
"Regular Record Date" to Section 2.05(d); and
(c) deleting the definitions of "Pre-Remarketing Interest Payment Date"
and "Pre-Remarketing Regular Record Date". Any and all remaining references to
such terms in the First Supplemental Indenture shall be deemed to be references
to "Interest Payment Date" and "Regular Record Date", respectively.
SECTION 1.04. Amendment of the Subordinated Notes. The Company shall
execute replacement Subordinated Notes in the form attached hereto as Exhibit A
to reflect the amended terms provided for in this Second Supplemental Indenture,
and the Trustee shall authenticate and make such new Subordinated Notes
available for delivery to the Holders of the Subordinated
3
<PAGE> 6
Notes upon surrender of the prior certificates therefor. The surrendered prior
certificates representing the Subordinated Notes shall be canceled by the
Trustee and shall no longer be outstanding.
ARTICLE 2
SECTION 2.01. Elimination of Remarketing: (a) The definition of "Maturity
Date" contained in Section 1.01 of the First Supplemental Indenture is hereby
amended to read in its entirety as follows:
""MATURITY DATE" means the earlier to occur of: (i) November 10,
1999 and (ii) the ninetieth day following the issuance by the
Company of shares of Common Stock in a public offering occurring
after the date hereof, underwritten by Banc of America
Securities, LLC and generating gross proceeds from sales to the
public of not less than $150 million. The Company shall promptly
notify the Trustees of an event specified in clause (ii),
specifying the date thereof and the Maturity Date."
(b) Article 10 of the First Supplemental Indenture is hereby
amended by:
(i) inserting as the first section thereof the following new
Section 10.01A:
"Notwithstanding anything contained herein or in any Subordinated
Note to the contrary, no Remarketing shall occur, no Reset Date
shall be established or shall occur and the Company shall repay
the Subordinated Notes on the Maturity Date in accordance with
their terms."
(ii) deleting each of Sections 10.02, 10.03, 10.04, 10.05
and 10.06 in its entirety.
ARTICLE 3
SECTION 3.01. Ratification of Base Indenture and First Supplemental
Indenture: Second Supplemental Indenture Controls. The Base Indenture, as
supplemented by the First Supplemental Indenture and this Second Supplemental
Indenture, is in all respects ratified and confirmed, and this Second
Supplemental Indenture shall be deemed part of the Base Indenture in the manner
and to the extent herein and therein provided. The provisions of this Second
Supplemental Indenture shall supersede the provisions of the Base Indenture and
the First
4
<PAGE> 7
Supplemental Indenture to the extent the Base Indenture or the First
Supplemental Indenture is inconsistent herewith.
SECTION 3.02. Trustee Not Responsible for Recitals. The recitals herein
contained are made by the Company and not by the Trustee, and the Trustee
assumes no responsibility for the correctness thereof. The Trustee makes no
representation as to the validity or sufficiency of this Second Supplemental
Indenture.
SECTION 3.03. Governing Law. This Second Supplemental Indenture shall be
governed by and construed in accordance with the laws of the State of New York,
as applied to contracts made and performed within the State of New York, without
regard to its principles of conflicts of laws.
SECTION 3.04. Severability. If any provision in the Base Indenture, the
First Supplemental Indenture, this Second Supplemental Indenture or in the
Subordinated Notes shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
SECTION 3.05. Counterparts. The parties may sign any number of copies of
this Second Supplemental Indenture. Each signed copy shall be an original, but
all of them together represent the same agreement. Any signed copy shall be
sufficient proof of this Second Supplemental Indenture.
SECTION 3.06. Terms Defined. All terms defined elsewhere in the Indenture
shall have the same meanings when used herein.
5
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental
Indenture to be duly executed as of the day and year first above written.
HERCULES INCORPORATED,
as Issuer
By: /s/ George MacKenzie
---------------------------------
Name: George MacKenzie
Title: Senior Vice President and
Chief Financial Officer
THE CHASE MANHATTAN BANK,
as Trustee
By: /s/ J.C. Progar
---------------------------------
Name: Joseph C. Progar
Title: Authorized Officer
6
<PAGE> 9
EXHIBIT A
[FORM OF SUBORDINATED NOTE]
THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS
ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (2)
AGREES THAT IT WILL NOT PRIOR TO THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE
TO SALES OF THE SECURITY EVIDENCED HEREBY UNDER RULE 144(K) UNDER THE SECURITIES
ACT (OR ANY SUCCESSOR PROVISION) RESELL OR OTHERWISE TRANSFER THE SECURITY
EVIDENCED HEREBY EXCEPT (A) TO HERCULES INCORPORATED OR ANY SUBSIDIARY THEREOF
OR (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE
SECURITIES ACT, (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE
SECURITY EVIDENCED HEREBY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF
THIS LEGEND AND (4) AGREES WITH RESPECT TO ANY TRANSFER OTHER THAN TO THE
PROPERTY TRUSTEE, TO PROVIDE TO THE INDENTURE TRUSTEE A DULY EXECUTED
CERTIFICATE SUBSTANTIALLY TO THE EFFECT OF CLAUSES (1), (2) AND (3), ABOVE. AT
THE REQUEST OF THE HOLDER, THIS LEGEND WILL BE REMOVED AFTER THE EXPIRATION OF
THE HOLDING PERIOD APPLICABLE TO THE SALE OF THE SECURITY EVIDENCED HEREBY UNDER
RULE 144(K) UNDER THE SECURITIES ACT.
THIS SECURITY WAS ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR UNITED STATES FEDERAL
INCOME TAX PURPOSES. THE ISSUE PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE
DATE AND YIELD TO MATURITY WILL BE PROMPTLY MADE AVAILABLE UPON REQUEST TO THE
VICE PRESIDENT - TAXES (AT (302) 594-5887) OR THE SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER (AT (302) 594-5175), HERCULES INCORPORATED, HERCULES
PLAZA, 1313 NORTH MARKET STREET, WILMINGTON, DE 19894-0001.
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<PAGE> 10
No. CUSIP NO. 427056 AS 5
--------
HERCULES INCORPORATED
AUCTION RATE RESET JUNIOR SUBORDINATED NOTE SERIES A
Hercules Incorporated, a Delaware corporation (the "COMPANY", which term
includes any successor corporation under the Indenture hereinafter referred to),
for value received, hereby promises to pay the principal sum of _________
Dollars ($ ) on November 10, 1999, or such other date as may be provided
pursuant to the terms of the Indenture.
Interest on the principal amount of this Subordinated Note will accrue and
be payable at a rate (the "INTEREST RATE") per annum equal to from and including
the date of issuance to but excluding the date each principal amount is paid,
LIBOR plus 175 basis points, compounded quarterly; provided that,
notwithstanding the foregoing, if the Company fails to pay the principal amount
on the date such amount becomes due, then from and including such due date to
but excluding the date such principal amount is paid, interest shall be paid at
the Default Rate, compounded quarterly, but only to the extent permitted by
applicable law.
Interest that is not paid when due will bear additional interest thereon
compounded quarterly at the applicable periodic Interest Rate specified above
(to the extent permitted by applicable law). The term "INTEREST", as used
herein, includes any such additional interest and Additional Interest unless
otherwise stated.
Interest on this Subordinated Note will be cumulative, will be payable
quarterly in arrears on February 12, May 12, August 12 and November 12 of each
year, commencing February 12, 1999, and on the Maturity Date (each an "INTEREST
PAYMENT DATE"), will accumulate from and including the most recent date to which
interest has been paid or, if no interest has been paid, from November 12, 1998,
to but excluding the related Interest Payment Date, except as otherwise
described below.
The Interest Rate in effect for the period from and including November 12,
1998 to but excluding February 12, 1999 shall be the rate determined by the
Calculation Agent two London Banking Days prior to November 12, 1998 and shall
equal LIBOR plus 175 basis points. The Interest Rate in effect thereafter, for
each quarterly period from and including the immediately preceding Interest
Payment Date to but excluding the applicable Interest Payment Date, shall be
determined by the Calculation Agent two London Banking Days prior to such
immediately preceding Interest Payment Date and shall equal LIBOR plus 175 basis
points. The amount of interest payable for any quarterly period shall be
computed on the basis of a year of 360 days and paid for the actual number of
days elapsed (including the first day but excluding the last day). Except as
provided in the last sentence of this paragraph, the amount of interest payable
for any period shorter than a full quarterly period for which interest is
computed will be computed on the
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<PAGE> 11
basis of the actual number of days elapsed per 30-day month. If an Interest
Payment Date is not a Business Day, then such Interest Payment Date will be the
next succeeding Business Day, except if such Business Day is in the next
succeeding calendar month, such Interest Payment Date will be the immediately
preceding Business Day.
Interest shall be paid to the Person in whose name this Subordinated Note
or any predecessor Subordinated Note is registered on the books and records of
the Company, at the close of business on the Regular Record Date for such
interest installment, which, so long as the Holder of this Subordinated Note is
the Property Trustee and the related Preferred Securities are in book-entry only
form or a Global Subordinated Note, shall be the close of business on the
Business Day next preceding that Interest Payment Date (the "REGULAR RECORD
DATE"). If this Subordinated Note is not represented by a Global Subordinated
Note, the Regular Record Date for such interest installment shall be fifteen
(15) days prior to that Interest Payment Date.
The indebtedness evidenced by this Subordinated Note is, to the extent
provided in the Indenture, subordinate and junior in right of payment to the
prior payment in full of all existing and future Senior Indebtedness, and this
Subordinated Note is issued subject to the provisions of the Indenture with
respect thereto. Each Holder of this Subordinated Note, by accepting the same,
(a) agrees to and shall be bound by such provisions, (b) authorizes and directs
the Trustee on his or her behalf to take such action as may be necessary or
appropriate to acknowledge or effectuate the subordination so provided and (c)
appoints the Trustee his or her attorney-in-fact for any and all such purposes.
Each Holder hereof, by his or her acceptance hereof, hereby waives all notice of
the acceptance of the subordination provisions contained herein and in the
Indenture by each holder of Senior Indebtedness, whether now outstanding or
hereafter incurred, and waives reliance by each such holder upon said
provisions.
This Subordinated Note shall not be entitled to any benefit under the
Indenture hereinafter referred to, be valid or become obligatory for any purpose
until the Certificate of Authentication hereon shall have been signed by or on
behalf of the Trustee.
The provisions of this Subordinated Note are continued on the reverse side
hereof and such continued provisions shall for all purposes have the same effect
as though fully set forth at this place.
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<PAGE> 12
IN WITNESS WHEREOF, the Company has caused this instrument to be executed.
HERCULES INCORPORATED
By:
-------------------------------
Name:
Title
Attest:
By:
-----------------------------
Name:
Title:
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<PAGE> 13
[FORM OF CERTIFICATE OF AUTHENTICATION]
CERTIFICATE OF AUTHENTICATION
This is one of the Subordinated Notes of the series of Debentures described in
the within-mentioned Indenture.
Dated:
THE CHASE MANHATTAN BANK,
as Trustee or as Authentication Agent
By By
----------------------- ------------------------
Authorized Signatory Authorized Signatory
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<PAGE> 14
[FORM OF REVERSE OF NOTE]
This Subordinated Note is one of a duly authorized series of Debentures of
the Company (herein sometimes referred to as the "DEBENTURES"), specified in the
Indenture, all issued or to be issued in one or more series under and pursuant
to a Junior Subordinated Debenture Indenture dated as of November 12, 1998, duly
executed and delivered between the Company and The Chase Manhattan Bank, as
Trustee (the "TRUSTEE"), as supplemented by the First Supplemental Indenture
dated as of November 12, 1998, between the Company and the Trustee and the
Second Supplemental Indenture dated as of July 6, 1999, between the Company and
the Trustee (the Indenture as so supplemented, the "INDENTURE"), to which
Indenture and all indentures supplemental thereto reference is hereby made for a
description of the rights, limitations of rights, obligations, duties and
immunities thereunder of the Trustee, the Company and the Holders of the
Subordinated Notes. By the terms of the Indenture, the Debentures are issuable
thereunder in series that may vary as to amount, date of maturity, rate of
interest and in other respects as provided in the Indenture. This series of
Debentures is limited in aggregate principal amount as specified in said First
Supplemental Indenture and herein sometimes referred to as the "SUBORDINATED
NOTES."
Because of the occurrence and continuation of a Special Event, in certain
circumstances, this Subordinated Note may become due and payable at the
principal amount together with any interest accrued thereon (the "REDEMPTION
PRICE"). The Redemption Price shall be paid prior to 12:00 noon, New York City
time, on the date of such redemption or at such earlier time as the Company
determines.
In case an Event of Default, as defined in the Indenture, shall have
occurred and be continuing, the principal of all of the Subordinated Notes may
be declared, and upon such declaration shall become, due and payable, in the
manner, with the effect and subject to the conditions provided in the Indenture.
The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the Holders of at least a majority in aggregate principal
amount of the Debentures of each series affected thereby then outstanding (and,
in the case of any series of Debentures held as assets of a Trust and with
respect to which a Dissolution Event has not theretofore occurred, such consent
of holders of the Preferred Securities and the Common Securities of such Trust
as may be required under the Trust Agreement), as defined in the Indenture, to
reduce the principal amount of such Debentures; reduce the percentage of the
principal amount of such Debentures the Holders of which must consent to an
amendment of this Indenture or a waiver; change (i) the stated maturity of the
principal of or the interest on such Debentures, or (ii) the rate of interest
(or the manner of calculation thereof) on such Debentures, change adversely to
the Holders the redemption, conversion or exchange provisions applicable to such
Debentures, if any; change the currency in respect of which the payments on such
Debentures are to be made; make any change in the Subordination provisions of
the Indenture (Article 10) that adversely affects the rights of the Holders of
the Debentures or any change to any other Section hereof that adversely affects
their rights; or change the direct action rights of holders of Preferred
Securities; provided that, in
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<PAGE> 15
the case of the outstanding Debentures of a series then held by a Trust, no such
amendment shall be made that adversely affects the holders of the Preferred
Securities of that Trust, and no waiver of any Event of Default with respect to
the Debentures of that series or compliance with any covenant under this
Indenture shall be effective, without the prior consent of the holders of at
least a majority of the aggregate liquidation amount of the outstanding
Preferred Securities of that Trust or the holder of each such Preferred
Security, as applicable.
A supplemental indenture that changes or eliminates any covenant or other
provision of this Indenture that has expressly been included solely for the
benefit of one or more particular series of Debentures, or which modifies the
rights of the Holders of Debentures of such series with respect to such covenant
or other provision, shall be deemed not to affect the rights under this
Indenture of the Holders of Debentures of any other series.
No reference herein to the Indenture and no provision of this Subordinated
Note or of the Indenture shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of and premium, if
any, and interest on this Subordinated Note at the time and place and at the
rate or rates and in the currency herein prescribed.
As provided in the Indenture and subject to certain limitations herein and
therein set forth, this Subordinated Note is transferable by the registered
Holder hereof on the Register of the Company, upon surrender of this
Subordinated Note for registration of transfer at the office or agency of the
Trustee in the City and State of New York accompanied by a written instrument or
instruments of transfer in form satisfactory to the Company or the Trustee duly
executed by the registered Holder hereof or his attorney duly authorized in
writing, and thereupon one or more new Subordinated Notes of authorized
denominations and for the same aggregate principal amount and series will be
issued to the designated transferee or transferees. No service charge will be
made for any such transfer, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in relation
thereto.
Prior to due presentment for registration of transfer of this Subordinated
Note, the Company, the Trustee, any paying agent and the Registrar may deem and
treat the registered holder hereof as the absolute owner hereof (whether or not
this Subordinated Note shall be overdue and notwithstanding any notice of
ownership or writing hereon made by anyone other than the Registrar) for the
purpose of receiving payment of or on account of the principal hereof and
premium, if any, and interest due hereon and for all other purposes, and neither
the Company nor the Trustee nor any paying agent nor any Registrar shall be
affected by any notice to the contrary.
No recourse shall be had for the payment of the principal of or the
interest on this Subordinated Note, or for any claim based hereon, or otherwise
in respect hereof, or based on or in respect of the Indenture, against any
incorporator, stockholder, officer or director, past, present or future, as
such, of the Company or of any predecessor or successor corporation, whether by
virtue of any constitution, statute or rule of law, or by the enforcement of any
assessment or
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<PAGE> 16
penalty or otherwise, all such liability being, by the acceptance hereof and as
part of the consideration for the issuance hereof, expressly waived and
released.
The Subordinated Notes of this series are issuable only in registered form
without coupons in denominations of $1,000 and any integral multiple of $1,000
thereof. The Subordinated Notes may be transferred or exchanged only in minimum
denominations of $100,000 and integral multiples of $1,000 in excess thereof,
and any attempted transfer, sale or other disposition of Subordinated Notes in a
denomination of less than $100,000 shall be deemed void and of no legal effect
whatsoever.
All terms used in this Subordinated Note that are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
THE INDENTURE AND THE DEBENTURES SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS
PRINCIPLES OF CONFLICTS OF LAWS.
AI-8
<PAGE> 1
EXHIBIT 4-B
AMENDMENT TO THE AMENDED AND RESTATED TRUST
AGREEMENT
This AMENDMENT (the "AMENDMENT") is made as of July 6, 1999, by Israel J.
Floyd, Jan M. King, Stuart C. Shears (collectively, the "ADMINISTRATIVE
TRUSTEES"), The Chase Manhattan Bank, as Property Trustee ("Chase"), Hercules
Incorporated, a Delaware corporation (the "SPONSOR"), and by the Holders, from
time to time, of undivided beneficial interests in the assets of Hercules Trust
V (the "TRUST"), a business trust created pursuant to a Trust Agreement dated as
of October 14, 1998, as amended by the Amended and Restated Trust Agreement
dated as of November 12, 1998 (as amended, the "TRUST AGREEMENT").
WHEREAS, the Trustees and the Sponsor have established the Trust pursuant
to the Trust Agreement for the sole purpose of issuing and selling certain
securities representing undivided beneficial interests in the assets of the
Trust and investing the proceeds thereof in the Auction Rate Reset Junior
Subordinated Notes Series A (the "SUBORDINATED NOTES") and engaging in only
those activities necessary, advisable or incidental thereto;
WHEREAS, the Trust Agreement provides for the issuance of one class of
preferred securities representing undivided beneficial interests in the assets
of the Trust (the "PREFERRED SECURITIES") having such terms as are set forth in
Annex I thereto ("ANNEX I");
WHEREAS, the Trust Agreement and Annex I provide for amendment of the Trust
Agreement and the Preferred Securities, subject to satisfaction of certain
requirements;
WHEREAS, the parties hereto desire to modify certain provisions of the
Preferred Securities to reflect a modification in the manner of calculation in
the Distribution Rate on the Preferred Securities and to provide that no
Remarketing (as defined in the Trust Agreement) of the Preferred Securities
shall occur;
WHEREAS, this Amendment does not affect the rights, powers, duties,
obligations or immunities of the Property Trustee or of the Delaware Trustee;
WHEREAS, all things necessary to make this Amendment a valid amendment and
agreement according to its terms have been done;
NOW THEREFORE, in consideration of their mutual covenants contained herein
and in the Trust Agreement, the parties hereto, intending to be legally bound,
hereby mutually covenant and agree as follows:
<PAGE> 2
Article 1
Section 1.01. Application of Articles 1 and 2. The provisions of Article
One and Article Two hereof shall apply to the Preferred Securities and the
Common Securities and the certificates thereto shall be appropriately amended.
Section 1.02. Amendment of Distribution Rate Calculation on the Preferred
Securities. Section 2 of Annex I is hereby amended to read in its entirety as
follows:
"2. Distributions.
(a) Distributions with respect to the Liquidation Amount of
$1,000 per Security (the "LIQUIDATION AMOUNT") of each Security
will accrue and be payable at a rate (the "DISTRIBUTION RATE")
(such rate being the rate of interest payable on the Subordinated
Notes to be held by the Property Trustee) per annum, from and
including the date of issuance to but excluding the date such
Securities are redeemed, equal to LIBOR plus 175 basis points,
compounded quarterly; provided that, notwithstanding the
foregoing, if the Securities are not redeemed because the Sponsor
fails to pay the principal amount of the Subordinated Notes on
the date such amount becomes due, then from and including such
due date to but excluding the date the Securities are redeemed,
the Distribution Rate shall equal the Default Rate, compounded
quarterly, but only to the extent permitted by applicable law.
(b) Distributions that are not paid when due will bear
additional distributions thereon compounded quarterly at the
applicable periodic Distribution Rate specified above (to the
extent permitted by applicable law). Distributions are payable if
and to the extent the Subordinated Note Issuer makes a payment of
Additional Interest (as defined in the Indenture) upon the
occurrence of certain events specified in the Indenture. The term
"DISTRIBUTIONS", as used herein, includes any such additional
distributions unless otherwise stated. A Distribution is payable
only to the extent that payments are made in respect of the
Subordinated Notes held by the Property Trustee and to the extent
the Property Trustee has funds on hand legally available
therefor.
(c) Distributions on the Securities will be cumulative, will
be payable quarterly in arrears on February 12, May 12, August 12
and November 12 of each year, commencing February 12, 1999, and
on the Mandatory Redemption Date (each a "DISTRIBUTION Date"),
will accumulate from and including the most recent date to which
Distributions have been paid or, if no Distributions have been
paid, from November 12, 1998, to but excluding the related
Distribution Date, except as otherwise described below.
The Distribution Rate in effect for the period from and
including November 12, 1998 to but excluding February 12, 1999
shall be the rate determined by the Calculation Agent two London
Banking Days prior to November 12, 1998 and shall
2
<PAGE> 3
equal LIBOR plus 175 basis points. The Distribution Rate in
effect thereafter, for each quarterly period from and including
the immediately preceding Distribution Date to but excluding the
applicable Distribution Date, shall be determined by the
Calculation Agent two London Banking Days prior to such
immediately preceding Distribution Date and shall equal LIBOR
plus 175 basis points. The amount of Distributions payable for
any quarterly period shall be computed on the basis of year of
360 days and paid for the actual number of days elapsed
(including the first day but excluding the last day). Except as
provided in the last sentence of this paragraph, the amount of
Distributions payable for any period shorter than a full
quarterly period for which Distributions are computed will be
computed on the basis of the actual number of days elapsed per
30-day month. If a Distribution Date is not a Business Day, then
such Distribution Date will be the next succeeding Business Day,
except if such Business Day is in the next succeeding calendar
month, such Distribution Date will be the immediately preceding
Business Day.
As used herein, "LONDON BANKING DAY" means any day on which
dealings in deposits in U.S. Dollars are transacted in the London
interbank market.
(d) Distributions on the Securities will be payable to the
Holders thereof as they appear on the books and records of the
Trust on the fifteenth day prior to each Distribution Date.
Subject to any applicable laws and regulations and the provisions
of the Agreement, each such payment in respect of the Preferred
Securities will be made in respect of any global certificate
representing Securities, to the Depository (or other applicable
Depository), which shall credit the relevant accounts at the
Depository (or such other Depository) on the applicable payment
dates, or in respect of Securities in certified form, by check
mailed to the address of the Holder entitled thereto as such
address shall appear on the register; provided, however, that at
the written request of any Holder of at least $10,000,000
aggregate Liquidation Amount of Preferred Securities received by
the Property Trustee not later than the fifteenth day prior to
the applicable Distribution Date, Distributions accrued on such
Preferred Securities will be payable by wire transfer within the
continental United States in immediately available funds to the
bank account number of such Holder specified in such request. The
relevant record dates for the Common Securities shall be the same
as the record dates for the Preferred Securities. Distributions
payable on any Securities that are not punctually paid on any
Distribution Date, as a result of the Subordinated Note Issuer
having failed to make a payment under the Subordinated Notes,
will cease to be payable to the Holder on the relevant record
date, and such defaulted Distributions will instead be payable to
the Person in whose name such Securities are registered on the
special record date or other specified date determined in
accordance with the Indenture.
(e) In the event that there is any money or other property
held by or for the Trust that is not accounted for hereunder,
such property shall be distributed Pro Rata (as defined herein)
among the Holders of the Securities."
3
<PAGE> 4
Section 1.03. Certain Definitions. Section 1.01 of the Trust Agreement is
hereby amended by deleting the definitions of "Pre-Remarketing Distribution
Date." Any and all remaining references to such term in the Trust Agreement
shall be deemed to refer to "DISTRIBUTION DATE."
Section 1.04. Amendment of Securities. The Holder of the Common Securities
and the Holder of the Preferred Securities (by signing separate consents to this
Amendment) agree to surrender the certificates representing the Securities to
the Property Trustee in exchange for new certificates reflecting the amended
terms provided for in this Amendment in the forms set forth as Exhibits A-1 and
A-2 attached hereto. Such replacement certificates shall be executed by an
Administrative Trustee, and authenticated and delivered by the Property Trustee
to such Holders upon surrender of the old certificates. The surrendered
certificates shall be canceled by the Property Trustee and shall no longer be
outstanding.
Article 2
Section 2.01. Elimination of Remarketing. (a) The definition of "Mandatory
Redemption Date" contained in Section 1.01 of the Trust Agreement is hereby
amended to read in its entirety as follows:
""MANDATORY REDEMPTION DATE" means the earlier to occur of: (i)
November 10, 1999 and (ii) the ninetieth day following the
issuance of the Sponsor of shares of Common Stock in a public
offering occurring after the date hereof, underwritten by Banc of
America Securities, LLC and generating gross proceeds from sales
to the public of not less than $150 million. The Sponsor shall
promptly notify the Trustees of an event specified in clause
(ii), specifying the date thereof."
(b) Section 4.03(e) of the Trust Agreement is hereby amended to
read in its entirety as follows:
"(e) to negotiate the terms of, execute, enter into, sign on
behalf of the Trust and deliver the Purchase Agreement, in the
form of Exhibit C, providing for the sale of the Preferred
Securities."
(c) Article 6 of the Trust Agreement is hereby amended by:
(i) inserting as the first section thereof the following new
Section 6.01A:
"Notwithstanding anything contained herein to the contrary,
no Remarketing shall occur, no Reset Settlement Date shall
be designated or shall occur and the Securities shall be
redeemed at the Mandatory
4
<PAGE> 5
Redemption Price on the Mandatory Redemption Price."
(ii) deleting each of Sections 6.02, 6.03, 6.04, 6.05, 6.06
and 6.07 in its entirety.
(d) The Trust Agreement is further amended by deleting Section 3
of Annex I in its entirety.
Article 3
Section 3.01. Ratification of the Trust Agreement; this Amendment. The
Trust Agreement is in all respects ratified and confirmed, and this Amendment
shall be deemed part of the Trust Agreement in the manner and to the extent
herein and therein provided. The provisions of this Amendment shall supersede
the provisions of the Trust Agreement to extent the Trust Agreement is
inconsistent herewith.
Section 3.02. Trustees Not Responsible for Recitals. The recitals herein
contained are made by the Sponsor and not by the Trustees, and the Trustees
assumes no responsibility for the correctness thereof. The Trustees make no
representation as to the validity or sufficiency of this Amendment.
Section 3.03. Governing Law. This Amendment and the rights of the parties
hereunder shall be governed by and construed in accordance with the laws of the
State of Delaware, and all rights and remedies shall be governed by such laws,
without regard to its principles of conflicts of laws.
Section 3.04. Severability. If any provision in the Trust Agreement or this
Amendment shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
Section 3.05. Counterparts. The parties may sign any number of copies of
this Amendment. Each signed copy shall be an original, but all of them together
represent the same agreement. Any signed copy shall be sufficient proof of this
Amendment.
Section 3.06. Terms Defined. All terms defined elsewhere in the Trust
Agreement shall have the same meanings when used herein.
Section 3.07. Waiver of Tax Opinion.. The parties hereto (including the
Holder of the Preferred Securities by its separate consent to this Amendment)
waive the requirement set out in Section 8 of Annex I to the Trust Agreement for
a reasoned Opinion of Counsel of independent tax counsel.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties have signed this Amendment as of the date
and year first above written.
/s/ Israel J. Floyd
-----------------------------------------
Israel J. Floyd, not in his individual
capacity but solely as
Administrative Trustee of the Trust
/s/ Jan M. King
-----------------------------------------
Jan M. King, not in her individual
capacity but solely as
Administrative Trustee of the Trust
/s/ Stuart C. Shears
-----------------------------------------
Stuart C. Shears, not in his individual
capacity but solely as
Administrative Trustee of the Trust
HERCULES INCORPORATED,
as Sponsor and Holder of the
Common Securities
By: /s/ George MacKenzie
--------------------------------------
Name: George MacKenzie
Title: Senior Vice President and Chief
Financial Officer
THE CHASE MANHATTAN BANK, not
in its individual capacity, but solely as
Property Trustee of the Trust
By: /s/ Joseph C. Progar
-------------------------------------
Name: Joseph C. Progar
Title: Authorized Officer
<PAGE> 7
EXHIBIT A-1
[FORM OF PREFERRED SECURITY CERTIFICATE]
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY
NOT BE OFFERED OR SOLD EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS
ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (2)
AGREES THAT IT WILL NOT PRIOR TO THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE
TO SALES OF THE SECURITIES EVIDENCED HEREBY UNDER RULE 144(K) UNDER THE
SECURITIES ACT (OR ANY SUCCESSOR PROVISION) RESELL OR OTHERWISE TRANSFER THE
SECURITIES EVIDENCED HEREBY EXCEPT (A) TO HERCULES INCORPORATED OR ANY
SUBSIDIARY THEREOF OR (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH
RULE 144A UNDER THE SECURITIES ACT (3) AGREES THAT IT WILL DELIVER TO EACH
PERSON TO WHOM THE SECURITIES EVIDENCED HEREBY ARE TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND AND (4) AGREES, WITH RESPECT TO ANY
TRANSFER, TO PROVIDE TO THE PROPERTY TRUSTEE A DULY EXECUTED CERTIFICATE
SUBSTANTIALLY TO THE EFFECT OF CLAUSES (1), (2) AND (3), ABOVE. THIS LEGEND WILL
BE REMOVED AFTER THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO THE SALES OF
THE SECURITIES EVIDENCED HEREBY UNDER RULE 144(K) UNDER THE SECURITIES ACT.
<PAGE> 8
Certificate Number Number of Preferred Securities
- ------------------ ------------------------------
CUSIP NO. 427099 20 5
Certificate Evidencing Preferred Securities
of
HERCULES TRUST V
Auction Rate Reset Preferred Securities
(Liquidation Amount $1,000 per Preferred Security)
HERCULES TRUST V, a statutory business trust created under the laws of the
State of Delaware (the "TRUST"), hereby certifies that ______________ (the
"HOLDER") is the registered owner of __________ securities of the Trust
representing undivided beneficial interests in the assets of the Trust
designated the Auction Reset Rate Preferred Securities (Liquidation Amount
$1,000 per Preferred Security) (the "PREFERRED SECURITIES"). This Preferred
Security is transferable on the books and records of the Trust, in person or by
a duly authorized attorney, upon surrender of this certificate duly endorsed and
in proper form for transfer. The designation, rights, privileges, restrictions,
preferences and other terms and provisions of the Preferred Securities
represented hereby are issued and shall in all respects be subject to the
provisions of the Amended and Restated Trust Agreement of the Trust dated as of
November 12, 1998, as the same may be amended from time to time, including the
designation of the terms of the Preferred Securities as set forth in Annex I to
the Agreement (the "AGREEMENT"). Capitalized terms used but not defined herein
shall have the meaning given them in the Agreement. The Sponsor will provide a
copy of the Agreement, the Preferred Securities Guarantee and the Indenture to a
Holder without charge upon written request to the Trust at its principal place
of business.
Upon receipt of this certificate, the Holder is bound by the Agreement and
is entitled to the benefits thereunder and to the benefits of the Preferred
Securities Guarantee to the extent provided therein.
By acceptance, the Holder agrees to treat, for United States Federal income
tax purposes, the Subordinated Notes as indebtedness and the Preferred
Securities as evidence of indirect beneficial ownership in the Subordinated
Notes.
A1-2
<PAGE> 9
IN WITNESS WHEREOF, the Trust has executed this certificate this ___ day of
___________, ____.
HERCULES TRUST V
By:
---------------------------
Name:
Title: Administrative Trustee
PROPERTY TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Preferred Securities referred to in the
within-mentioned Agreement.
Dated: __________, ____
THE CHASE MANHATTAN BANK,
as Property Trustee
By:
--------------------------
Authorized Signatory
A1-3
<PAGE> 10
[FORM OF REVERSE OF SECURITY]
Distributions with respect to the Liquidation Amount of $1,000 per
Preferred Security (the "LIQUIDATION AMOUNT") will accrue and be payable at a
rate (the "DISTRIBUTION RATE") (such rate being the rate of interest payable on
the Subordinated Notes to be held by the Property Trustee) per annum, from and
including the date of issuance to but excluding the date such Securities are
redeemed, equal to LIBOR plus 175 basis points, compounded quarterly; provided
that, notwithstanding the foregoing, if the Securities are not redeemed because
the Sponsor fails to pay the principal amount of the Subordinated Notes on the
date such amount becomes due, then from and including such due date to but
excluding the date the Securities are redeemed, the Distribution Rate shall
equal the Default Rate, compounded quarterly, but only to the extent permitted
by applicable law.
Distributions that are not paid when due will bear additional distributions
thereon compounded quarterly at the applicable periodic Distribution Rate
specified above (to the extent permitted by applicable law). Distributions are
payable if and to the extent the Subordinated Note Issuer makes a payment of
Additional Interest (as defined in the Indenture) upon the occurrence of certain
events specified in the Indenture. The term "DISTRIBUTIONS", as used herein,
includes any such additional distributions unless otherwise stated. A
Distribution is payable only to the extent that payments are made in respect of
the Subordinated Notes held by the Property Trustee and to the extent the
Property Trustee has funds on hand legally available therefor.
Distributions on this Preferred Security will be cumulative, will be
payable quarterly in arrears on February 12, May 12, August 12 and November 12
of each year, commencing February 12, 1999, and on the Mandatory Redemption Date
(each a "DISTRIBUTION DATE"), will accumulate from and including the most recent
date to which Distributions have been paid or, if no Distributions have been
paid, from November 12, 1998, to but excluding the related Distribution Date,
except as otherwise described below.
The Distribution Rate in effect for the period from and including November
12, 1998 to but excluding February 12, 1999 shall be the rate determined by the
Calculation Agent two London Banking Days prior to November 12, 1998 and shall
equal LIBOR plus 175 basis points. The Distribution Rate in effect thereafter,
for each quarterly period from and including the immediately preceding
Distribution Date to but excluding the applicable Distribution Date, shall be
determined by the Calculation Agent two London Banking Days prior to such
immediately preceding Distribution Date and shall equal LIBOR plus 175 basis
points. The amount of Distributions payable for any quarterly period shall be
computed on the basis of year of 360 days and paid for the actual number of days
elapsed (including the first day but excluding the last day). Except as provided
in the last sentence of this paragraph, the amount of Distributions payable for
any period shorter than a full quarterly period for which Distributions are
computed will be computed on the basis of the actual number of days elapsed per
30-day month. If a Distribution Date is not a Business Day, then such
Distribution Date will be the next succeeding Business Day, except if such
Business Day is in the
A1-4
<PAGE> 11
next succeeding calendar month, such Distribution Date will be the immediately
preceding Business Day.
As used herein, "LONDON BANKING DAY" means any day on which dealings in
deposits in U.S. Dollars are transacted in the London interbank market.
Subject to other conditions set forth in the Agreement and the Indenture,
the Property Trustee may, at the direction of the Sponsor, at any time dissolve
the Trust and cause the Subordinated Notes to be distributed to the Holders of
the Securities in liquidation of the Trust or, simultaneously with any
redemption of the Subordinated Notes, cause a Like Amount of the Securities to
be redeemed by the Trust.
This Preferred Security shall be redeemable as provided in the Agreement.
A1-5
<PAGE> 12
---------------------
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers this Preferred
Security Certificate to:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Insert assignee's social security or tax identification number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Insert address and zip code of assignee)
and irrevocably appoints
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
to transfer this Preferred Security Certificate on the books of the Trust. The
agent may substitute another to act for him or her.
Date:
------------------------
Signature:
-------------------
(Sign exactly as your name appears on the other side of this Preferred Security
Certificate)
Signature Guarantee(1):
--------------------------------------
- ---------------------
(1) Signature must be guaranteed by an "eligible guarantor institution" that is
a bank, stockbroker, savings and loan association or credit union meeting
the requirements of the Registrar, which requirements include membership or
participation in the Securities Transfer Agents Medallion Program ("STAMP")
or such other "signature guarantee program" as may be determined by the
Registrar in addition to, or in substitution for, STAMP, all in accordance
with the Securities and Exchange Act of 1934, as amended.
A1-6
<PAGE> 13
EXHIBIT A-2
[FORM OF COMMON SECURITY CERTIFICATE]
THIS CERTIFICATE IS NOT TRANSFERABLE EXCEPT IN COMPLIANCE WITH APPLICABLE LAW
AND THE PROVISIONS OF THE AMENDED AND RESTATED TRUST AGREEMENT OF HERCULES TRUST
V DATED AS OF NOVEMBER 12, 1998, AS AMENDED FROM TIME TO TIME.
A2-1
<PAGE> 14
Certificate Number Number of Common Securities
- ------------------ 6,200
Certificate Evidencing Common Securities
of
HERCULES TRUST V
Auction Rate Reset Common Securities
(Liquidation Amount $1,000 per Common Security)
HERCULES TRUST V, a statutory business trust created under the laws of the
State of Delaware (the "TRUST"), hereby certifies that Hercules Incorporated
(the "HOLDER") is the registered owner of __________ securities of the Trust
representing undivided beneficial interests in the assets of the Trust
designated the Auction Rate Reset Common Securities (Liquidation Amount $1,000
per Common Security) (the "COMMON SECURITIES"). Except as set forth in the
Agreement (as defined herein), the Common Securities are not transferable. The
designation, rights, privileges, restrictions, preferences and other terms and
provisions of the Common Securities represented hereby are issued and shall in
all respects be subject to the provisions of the Amended and Restated Trust
Agreement of the Trust dated as of November 12, 1998, as the same may be amended
from time to time, including the designation of the terms of the Common
Securities as set forth in Annex I to the Agreement (the "AGREEMENT").
Capitalized terms used but not defined herein shall have the meaning given them
in the Agreement. The Sponsor will provide a copy of the Agreement, the Common
Securities Guarantee and the Indenture to a Holder without charge upon written
request to the Trust at its principal place of business.
Upon receipt of this certificate, the Holder is bound by the Agreement and
is entitled to the benefits thereunder and to the benefits of the Common
Securities Guarantee to the extent provided therein.
By acceptance, the Holder agrees to treat, for United States Federal income
tax purposes, the Subordinated Notes as indebtedness and the Common Securities
as evidence of indirect beneficial ownership in the Subordinated Notes.
A2-2
<PAGE> 15
IN WITNESS WHEREOF, the Trust has executed this certificate this ___ day of
___________, ____.
HERCULES TRUST V
By:
-------------------------------
Name:
Title: Administrative Trustee
A2-3
<PAGE> 16
[FORM OF REVERSE OF COMMON SECURITY]
Distributions with respect to the Liquidation Amount of $1,000 per common
Security (the "LIQUIDATION AMOUNT") will accrue and be payable at a rate (the
"DISTRIBUTION RATE") (such rate being the rate of interest payable on the
Subordinated Notes to be held by the Property Trustee) per annum, from and
including the date of issuance to but excluding the date such securities are
redeemed, equal to LIBOR plus 175 basis points, compounded quarterly; provided
that, notwithstanding the foregoing, if the securities are not redeemed because
the Sponsor fails to pay the principal amount of the Subordinated Notes on the
date such amount becomes due, then from and including such due date to but
excluding the date the Securities are redeemed, the Distribution Rate shall
equal the Default Rate, compounded quarterly, but only to the extent permitted
by applicable law.
Distributions that are not paid when due will bear additional distributions
thereon compounded quarterly at the applicable periodic Distribution Rate
specified above (to the extent permitted by applicable law). Distributions are
payable if and to the extent the Subordinated Note Issuer makes a payment of
Additional Interest (as defined in the indenture) upon the occurrence of certain
events specified in the indenture. The term "DISTRIBUTIONS", as used herein,
includes any such additional distributions unless otherwise stated. A
distribution is payable only to the extent that payments are made in respect of
The Subordinated Notes held by the Property Trustee and to the extent the
Property Trustee has funds on hand legally available therefor.
Distributions on this Common Security will be cumulative, will be payable
quarterly in arrears on February 12, May 12, August 12 and November 12 of each
year, commencing February 12, 1999, and on the Mandatory Redemption date (each a
"DISTRIBUTION DATE"), will accumulate from and including the most recent date to
which distributions have been paid or, if no Distributions have been paid, from
November 12, 1998, to but excluding the related Distribution Date, except as
otherwise described below.
The Distribution Rate in effect for the period from and including November
12, 1998 to but excluding February 12, 1999 shall be the rate determined by the
Calculation Agent two London Banking days prior to November 12, 1998 and shall
equal LIBOR plus 175 basis points. The Distribution Rate in effect thereafter,
for each quarterly period from and including the immediately preceding
Distribution Date to but excluding the applicable Distribution Date, shall be
determined by the Calculation Agent two London Banking days prior to such
immediately preceding Distribution Date and shall equal LIBOR plus 175 basis
points. The amount of Distributions payable for any quarterly period shall be
computed on the basis of year of 360 days and paid for the actual number of days
elapsed (including the first day but excluding the last day). Except as provided
in the last sentence of this paragraph, the amount of Distributions payable for
any period shorter than a full quarterly period for which Distributions are
computed will be computed on the basis of the actual number of days elapsed per
30-day month. If a Distribution Date is not a Business Day, then such
Distribution Date will be the next succeeding Business Day, except if such
Business Day is in the next succeeding calendar month, such Distribution Date
will be the immediately preceding Business Day.
A2-4
<PAGE> 17
As used herein, "LONDON BANKING DAY" means any day on which dealings iN
deposits in U.S. Dollars are transacted in the london interbank market.
Subject to other conditions set forth in the Agreement and the Indenture,
the Property Trustee may, at the direction of the Sponsor, at any time dissolve
the Trust and cause the Subordinated Notes to be distributed to the Holders to
the Securities in liquidation of the Trust or, simultaneously with any
redemption of the Subordinated Notes, cause a Like Amount of the Securities to
be redeemed by the Trust.
This Common Security shall be redeemable as provided in the Agreement.
A2-5
<PAGE> 1
EXHIBIT 4-C
TERMINATION AGREEMENT
TERMINATION AGREEMENT, dated as of July 6, 1999 (the "Termination
Agreement") among Hercules Incorporated ("Hercules"), Hercules Trust V (the
"Trust") and Banc of America Securities LLC (formerly known as, Nationsbanc
Montgomery Securities LLC) ("BancAmerica").
WHEREAS, the parties hereto have previously entered into a Remarketing
Agreement (the "Remarketing Agreement") dated as of November 12, 1998 relating
to the remarketing (the "Remarketing") of the Preferred Securities and
Subordinated Notes (as such terms are defined in the Remarketing Agreement);
WHEREAS, the parties hereto have determined to eliminate the requirement
for the Remarketing;
WHEREAS, the holders of the Preferred Securities and the Subordinated Notes
have consented to the elimination of such requirement; and
WHEREAS, the parties hereto accordingly wish to terminate and cancel the
Remarketing Agreement;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements hereinafter set forth, the parties hereto agree as follows:
1. Termination of the Remarketing Agreement. Upon execution of the
Termination Agreement by the parties hereto and the consent of the holders of
the Preferred Securities and Subordinated Notes, the Remarketing Agreement shall
be terminated, shall have no further force and effect and each of the parties
thereto shall be released from all of their obligations under the Remarketing
Agreement, including without limitation, the payment of the Remarketing Fee.
2. Payment of Expenses. The parties hereto agree that all fees and expenses
(including reasonable fees of counsel of BancAmerica) incurred in connection
with this Termination Agreement shall be paid by Hercules.
3. Governing Law. This Termination Agreement shall be governed by and
construed in accordance with the laws of the State of New York without reference
to the choice of law rules thereof.
4. Waivers and Amendments. This Termination Agreement shall not be waived,
or amended or otherwise modified except in writing, duly executed by all of
<PAGE> 2
the parties hereto and with the consent of all the holders of the Preferred
Securities and Subordinated Notes.
5. Counterparts. This Termination Agreement may be executed in
counterparts, each of which shall be regarded as an original, and all of which
shall constitute one and the same document.
IN WITNESS WHEREOF, each of the parties hereto has caused this Termination
Agreement to be executed in its name and on behalf by one of its duly authorized
officers as of the date first above written.
HERCULES INCORPORATED
By: /s/ George MacKenzie
----------------------------------
Name: George MacKenzie
Title: Senior Vice President and
Chief Financial Officer
HERCULES TRUST V
By: /s/ Stuart C. Shears
---------------------------------
Name: Stuart C. Shears
Title: Administrative Trustee
BANC OF AMERICA SECURITIES LLC,
as Remarketing Agent
By: /s/ R. Kevin Beauregard
---------------------------------
Name: R. Kevin Beauregard
Title:
Consented to as of the dated first
above written
NMS SERVICES, INC.
By: /s/ R. Kevin Beauregard
-------------------------------
Name: R. Kevin Beauregard
Title:
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HERCULES
INCORPORATED'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 78,000
<SECURITIES> 0
<RECEIVABLES> 690,000
<ALLOWANCES> 15,000
<INVENTORY> 404,000
<CURRENT-ASSETS> 1,248,000
<PP&E> 2,957,000
<DEPRECIATION> 1,594,000
<TOTAL-ASSETS> 5,795,000
<CURRENT-LIABILITIES> 903,000
<BONDS> 0
0
0
<COMMON> 81,000
<OTHER-SE> 532,000
<TOTAL-LIABILITY-AND-EQUITY> 5,795,000
<SALES> 1,608,000
<TOTAL-REVENUES> 1,608,000
<CGS> 863,000
<TOTAL-COSTS> 484,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107,000
<INCOME-PRETAX> 145,000
<INCOME-TAX> 51,000
<INCOME-CONTINUING> 94,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 94,000
<EPS-BASIC> .93
<EPS-DILUTED> .93
</TABLE>
