SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HERCULES, INCORPORATED
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid:
------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
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(3) Filing party:
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(4) Date filed:
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[HERCULES INC. LOGO]
2002
PROXY STATEMENT
INVITATION TO 2002
ANNUAL MEETING
OF SHAREHOLDERS
Hercules Incorporated, Hercules Plaza, 1313 North Market Street
Wilmington, DE 19894-0001 (302) 594-5000
[HERCULES LOGO] HERCULES INCORPORATED
Hercules Plaza
1313 North Market Street
Wilmington, DE 19894-0001
William H. Joyce
Chairman and
Chief Executive Officer
May 15, 2002
Dear Shareholder:
We are pleased to invite you to attend the 2002 Annual Meeting of
Shareholders of Hercules Incorporated, which is scheduled to be held on
Thursday, June 27, 2002, at 9:00 a.m., local time, at the First USA Riverfront
Arts Center, 800 South Madison Street, Wilmington, Delaware 19801. Directions to
the Arts Center are listed on the back of this letter.
The items to be considered and voted on at the Annual Meeting are described
in the notice of the 2002 Annual Meeting of Shareholders and Proxy Statement
accompanying this letter. We encourage you to carefully read all of these
materials and the copy of our Annual Report previously mailed to you.
It is important that your shares be represented at the Annual Meeting even
if you cannot attend the meeting and vote your shares in person. Please give
careful consideration to the items to be voted upon, complete, sign and date the
proxy card and return it in the enclosed, postage-prepaid envelope at your
earliest convenience to ensure that your shares will be duly represented and
voted at the Annual Meeting. You may also vote your shares by using the Internet
or the telephone, following the instructions set forth on your proxy card. The
Board of Directors of the Company recommends that you re-elect the four
directors nominated by the Board of Directors and that you vote "FOR" each of
the proposals listed in the Notice and Proxy Statement.
If you need any assistance in the voting of your proxy, please contact
MacKenzie Partners, Inc. at (800) 322-2885 (call toll-free) or (212) 929-5500
(call collect).
We appreciate your continued interest and support of the Company.
Sincerely,
/s/ William H. Joyce
---------------------
William H. Joyce
DIRECTIONS TO THE FIRST USA RIVERFRONT ARTS CENTER
FROM THE SOUTH:
Travel North on I-95 to Delaware Exit 6 (Martin Luther King Blvd.). Bear right
at the bottom of the ramp. Staying in the right lane, travel approximately 1/10
of a mile to South Madison. If you reach the traffic light, you have gone too
far.
Turn right and go to stop sign. (It is a very short street.) Turn right at the
stop sign - this is South Madison. Travel on South Madison to the First USA
Riverfront Arts Center, which will be on the right side. You will be approaching
the rear of the building. Drive past the building, turning right at the front of
the building for parking.
FROM THE NORTH:
Travel South on I-95 to Delaware Exit 6 (Martin Luther King Blvd./Riverfront
Attractions). Stay in the right lane, which will become a center lane. (Look for
the brown Riverfront signs for proper lane.)
At the fourth traffic light, turn left (Martin Luther King Blvd./Route 4). Stay
in the right lane.
At the third traffic light, turn right. This is South Madison. Travel on South
Madison to the First USA Riverfront Arts Center, which will be on the right
side. You will be approaching the rear of the building. Drive past the building,
turning right at the front of the building for parking.
FROM THE WILMINGTON TRAIN (AMTRAK) STATION:
The Wilmington train station is located in downtown Wilmington at Martin Luther
King Blvd. and French St. Taxis are usually available. If you are traveling to
Wilmington by train, it is advisable that you arrange suitable transportation to
the meeting before hand.
SIGNS: RIVERFRONT ARTS CENTER, RIVERFRONT ATTRACTIONS AND FRAWLEY STADIUM. ANY
OF THESE SIGNS BRING YOU TO THE FIRST USA RIVERFRONT ARTS CENTER. AREA IS WELL
MARKED.
HOTEL ACCOMMODATIONS:
Wilmington has numerous hotels and motels in both the downtown and surrounding
areas. For a listing you may want to refer to the Wilmington area website at
http://www.wilmcvb.org/accomm.html
[HERCULES LOGO] HERCULES INCORPORATED
Hercules Plaza
1313 North Market Street
Wilmington, DE 19894-0001
May 15, 2002
To: Our Shareholders
Subject: Notice of 2002 Annual Meeting of Shareholders
The 2002 Annual Meeting of Shareholders of Hercules Incorporated is
scheduled to be held on Thursday, June 27, 2002, at 9:00 a.m., local time, at
the First USA Riverfront Arts Center, 800 South Madison Street, Wilmington,
Delaware 19801, to consider and take action on the following proposals:
1. Re-election of four directors: William H. Joyce, Robert D. Kennedy,
Jeffrey M. Lipton and Peter McCausland, each for a term of three
years;
2. Ratification of the appointment of PricewaterhouseCoopers LLP as
independent public accountants for 2002;
3. Approval of the extension of the expiration date of the Hercules
Incorporated Long Term Incentive Compensation Plan and change in the
limit for stock options awarded to any individual;
4. Approval of the continued use of the Hercules Incorporated
Non-Employee Director Stock Accumulation Plan and the conversion of
unused stock options into available shares of restricted common stock;
and
5. Transaction of such other business as may properly come before the
Annual Meeting or at any adjournments or postponements thereof.
Shareholders of record as of the close of business on May 10, 2002, will be
entitled to vote at the Annual Meeting. We encourage you, nevertheless, to vote
by proxy. You may attend the meeting and change your vote at that time if you
wish to do so. Please be sure to bring identification with you in order to gain
admission to the meeting. If your shares are held in the name of a bank, broker
or other holder of record and you plan to attend the Annual Meeting, we also
encourage you to vote by proxy. Please be sure to bring evidence of your
ownership of Hercules shares, such as a copy of your broker statement or a copy
of the proxy mailed to you by your bank or broker, if you wish to attend the
meeting. If you have any questions about the admission procedures, please
contact MacKenzie Partners, Inc. at (800) 322-2885 (call toll-free) or (212)
929-5500 (call collect). Cameras, cell phones, recording equipment and other
electronic devices will not be permitted at the meeting.
By order of the Board of Directors,
/s/ Israel J. Floyd
--------------------------------------------
Israel J. Floyd
Corporate Secretary and General Counsel
This Proxy Statement and the accompanying proxy card are being distributed on or
about May 17, 2002. Hercules' 2001 Annual Report was distributed on or about
April 15, 2002. Shareholders of record who did not receive an Annual Report may
request a copy by writing to Mr. John S. Riley, Director of Public Affairs,
Hercules Incorporated, 1313 North Market Street, Wilmington, DE 19894-0001, or
by telephoning Ms. Helen Calhoun at (302) 594-5129.
TABLE OF CONTENTS
PROXY STATEMENT...................................................................................................1
THE ANNUAL MEETING................................................................................................1
ELECTION OF DIRECTORS.............................................................................................3
RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR 2002..........9
APPROVAL OF THE EXTENSION OF THE EXPIRATION DATE OF THE HERCULES INCORPORATED LONG TERM INCENTIVE
COMPENSATION PLAN AND CHANGE IN THE LIMIT FOR STOCK OPTIONS AWARDED TO ANY INDIVIDUAL...................10
APPROVAL OF THE CONTINUED USE OF THE HERCULES INCORPORATED NON-EMPLOYEE DIRECTOR STOCK ACCUMULATION PLAN AND THE
CONVERSION OF UNUSED STOCK OPTIONS INTO AVAILABLE SHARES OF RESTRICTED COMMON STOCK.....................18
OTHER MATTERS....................................................................................................22
AUDIT COMMITTEE REPORT...........................................................................................22
COMPENSATION COMMITTEE REPORT....................................................................................24
FIVE YEAR PERFORMANCE COMPARISON.................................................................................27
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION......................................................27
BENEFICIAL OWNERSHIP OF COMMON STOCK.............................................................................28
COMPENSATION OF EXECUTIVE OFFICERS...............................................................................30
METHOD AND COST OF PROXY SOLICITATION............................................................................37
ANNEX I - AUDIT COMMITTEE CHARTER
i
PROXY STATEMENT
Hercules Incorporated
Hercules Plaza
1313 North Market Street
Wilmington, DE 19894-0001
May 15, 2002
INTRODUCTION
The accompanying proxy is solicited on behalf of the Board of Directors of
Hercules Incorporated for use at the 2002 Annual Meeting of Shareholders to be
held on June 27, 2002, and at any adjournment or postponement thereof.
THE ANNUAL MEETING
WHO IS ENTITLED TO VOTE
Shareholders of record as of the close of business on May 10, 2002, will be
entitled to one vote for each share of common stock registered in the
shareholder's name. As of May 10, 2002, there were 109,080,171 shares of
Hercules common stock outstanding.
HOW YOU MAY VOTE
You may vote by completing and returning a proxy card by mail, by using the
Internet or by telephone. To vote your proxy by mail, mark your selections on
the enclosed proxy card, date and sign your name exactly as it appears on your
proxy card and return your proxy card. To vote your proxy using the Internet,
follow the instructions on the proxy card which you must have available when you
access the Internet website. Once you have accessed the Internet website you
will be prompted to enter the control number set forth on your proxy card, to
mark your selections and to register your vote. You may also vote your proxy by
telephone as described on the proxy card.
IF YOU SIGN YOUR PROXY CARD BUT DO NOT MAKE ANY SELECTIONS, YOU WILL GIVE
AUTHORITY TO WILLIAM H. JOYCE, OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER; ROBERT
C. FLEXON, OUR VICE PRESIDENT OF CORPORATE AFFAIRS, STRATEGIC PLANNING AND WORK
PROCESSES; AND ISRAEL J. FLOYD, OUR CORPORATE SECRETARY AND GENERAL COUNSEL, TO
VOTE ON THE PROPOSALS AND ANY OTHER MATTER THAT MAY ARISE AT THE ANNUAL MEETING.
DR. JOYCE, MR. FLEXON AND MR. FLOYD INTEND TO USE THAT AUTHORITY TO VOTE FOR THE
ELECTION OF ALL OF THE DIRECTOR NOMINEES, FOR THE RATIFICATION OF THE
APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY'S 2002 INDEPENDENT
PUBLIC ACCOUNTANTS, FOR THE APPROVAL OF THE EXTENSION OF THE EXPIRATION DATE OF
THE HERCULES INCORPORATED LONG TERM INCENTIVE COMPENSATION PLAN AND CHANGE IN
THE LIMIT FOR STOCK OPTIONS AWARDED TO ANY INDIVIDUAL AND FOR THE APPROVAL OF
THE CONTINUED USE OF THE HERCULES INCORPORATED NON-EMPLOYEE DIRECTOR STOCK
ACCUMULATION PLAN AND THE CONVERSION OF UNUSED STOCK OPTIONS INTO AVAILABLE
SHARES OF RESTRICTED COMMON STOCK.
VOTE REQUIRED AND VOTING PROCEDURES
According to the Company bylaws, a majority of the shares entitled to vote,
present in person or represented by proxy, constitutes a quorum. Votes will be
counted by the inspectors of election. Pursuant to the SEC's rules, boxes and a
designated blank space are provided on the proxy card for you to mark if
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you wish to vote "for" or "withhold" authority for one or more of the nominees
for director or to vote "for" or "against" or to "abstain" from voting on the
proposals concerning the Company's 2002 independent public accountants, the
Hercules Incorporated Long Term Incentive Compensation Plan and the Hercules
Incorporated Non-Employee Director Stock Accumulation Plan.
Pursuant to the Company bylaws, directors are elected by a majority vote of
all issued and outstanding Hercules shares. Votes withheld in connection with
the election of one or more nominees for director, abstentions and broker
non-votes will not be counted as votes cast for those individuals and therefore
will have the same effect as not voting for director nominees.
Ratification of the appointment of PricewaterhouseCoopers LLP as
independent public accountants for 2002, approval of the extension of the
expiration date of the Hercules Incorporated Long Term Incentive Compensation
Plan and change in the limit for stock options awarded to any individual, and
approval of the continued use of the Hercules Incorporated Non-Employee Director
Stock Accumulation Plan and the conversion of unused stock options into
available shares of restricted common stock will require the affirmative vote of
the holders of a majority of the shares present in person or by proxy and
entitled to vote at the 2002 Annual Meeting. Abstentions and broker non-votes
will be counted in determining whether a quorum is present but will not be
counted in determining the votes cast for or against the ratification of the
appointment of PricewaterhouseCoopers LLP or for or against the approval of the
proposals concerning the Hercules Incorporated Long Term Incentive Compensation
Plan and the Hercules Incorporated Non-Employee Director Stock Accumulation
Plan.
A person giving any proxy has the power to revoke it at any time before the
voting by submitting to the Company a written revocation or duly executed proxy
bearing a later date. (A written revocation must be received by the Corporate
Secretary to the Company no later than the beginning of voting at the Annual
Meeting.) In addition, any shareholder who attends the Annual Meeting in person
may vote by ballot at the meeting, thereby canceling any proxy previously given.
EMPLOYEE SAVINGS PLANS
If you are a plan participant, your proxy card will include full shares
credited to your savings plan as of May 10, 2002. Fractional shares are not
included. The plan trustee will vote your shares after consideration of your
preferences as indicated on your proxy card. If you do not vote, the plan
trustee will vote your shares in proportion to the other proxies received from
plan participants.
SHAREHOLDER PROPOSALS
To be included in Hercules' 2003 Proxy Statement, shareholder proposals
must be submitted in writing and received by Israel J. Floyd, Esquire, Corporate
Secretary, Hercules Incorporated, Hercules Plaza, 1313 North Market Street,
Wilmington, Delaware 19894-0001, no later than January 17, 2003 (or, if the date
of the 2003 Annual Meeting is changed by more than 30 days from the date of the
2002 Annual Meeting, a reasonable time before the Company begins to print and
mail its proxy materials). Upon receipt of a proposal, the Company will
determine whether or not to include the proposal in Hercules' 2003 Proxy
Statement in accordance with applicable law.
If any shareholder wishes to present a proposal to the Company's 2003
Annual Meeting that is not included in the Company's Proxy Statement for that
meeting and fails to submit such proposal on or before April 2, 2003, then the
persons named as proxies in the Company's proxy card accompanying the Proxy
Statement for the 2003 Annual Meeting will be allowed to use their discretionary
voting authority when the proposal is raised at the Annual Meeting, without any
discussion of the matter in the Company's Proxy Statement for the 2003 Annual
Meeting.
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SHAREHOLDER NOMINATION OF DIRECTORS
Shareholders may submit written recommendations with respect to director
nominees (accompanied by a notarized statement from the nominee indicating
willingness to serve if elected and principal occupations or employment over the
past five years) to the Chair of the Nominating Committee, c/o Israel J. Floyd,
Esquire, Corporate Secretary, Hercules Incorporated, Hercules Plaza, 1313 North
Market Street, Wilmington, Delaware 19894-0001.
ELECTION OF DIRECTORS
The Company's restated certificate of incorporation and bylaws provide for
three classes of directors, with the term of one class expiring at each Annual
Meeting of Shareholders. Pursuant to the authority granted to the Board of
Directors in Article Six of the restated certificate of incorporation, the Board
of Directors has fixed the number of directors at 13: four in the class whose
term expires in 2003, five in the class whose term expires in 2004 and four in
the class whose term expires in 2005. At the 2002 Annual Meeting, four directors
are to be elected, all of whom will constitute the class whose term will expire
in 2005. The Board of Directors has nominated Dr. William H. Joyce (director
since 2001), Mr. Robert D. Kennedy (director since 2001), Mr. Jeffrey M. Lipton
(director since 2001) and Mr. Peter McCausland (director since 1997), who
currently are serving as directors. Each nominee has consented to serve as a
director.
It is intended that the shares represented by the accompanying proxy will
be voted for the election of Dr. Joyce and Messrs. Kennedy, Lipton and
McCausland. If for any reason any nominee should be unavailable to serve as a
director at the time of the Annual Meeting, a contingency which the Board of
Directors does not expect as of the date of this Proxy Statement, the shares
represented by the accompanying proxy may be voted for the election in his stead
of such person as may be determined by the holders of the proxy, unless the
proxy withholds authority to vote for all director nominees. Pursuant to the
Company's bylaws, a majority vote of the outstanding shares of common stock
entitled to vote at the Annual Meeting is required to elect each director. We
recommend a vote "FOR" each of the nominees.
The following information relates to the Company's nominees for reelection
at the 2002 Annual Meeting, and the other directors who are not standing for
election at the 2002 Annual Meeting. There are no family relationships among the
directors and executive officers of the Company. The Board of Directors held
thirteen meetings in 2001.
NOMINEES FOR DIRECTORS
WILLIAM H. JOYCE-- Director since 2001
Dr. Joyce, age 66, joined Hercules as Chief Executive Officer in May 2001.
Dr. Joyce had been Chairman, President and Chief Executive Officer of Union
Carbide Corporation from 1996 through May 2001. From 1995 to 1996, Dr. Joyce was
President and Chief Executive Officer and from 1993 to 1995, he was President.
Prior to that, he had been Chief Operating Officer since 1992. Dr. Joyce holds a
B.S. degree in Chemical Engineering from Penn State University and a M.B.A. and
a Ph.D. from New York University. He received the National Medal of Technology
Award in 1993 and the Plastics Academy's Industry Achievement Award in 1994 and
Lifetime Achievement Award in 1997. In 1997, he was inducted into the National
Academy of Engineering. Dr. Joyce is a director of CVS Corporation. He is also a
trustee of the Universities Research Association, Inc. and Co-Chairman of the
Council of Government-University-Industry Research of the National Academies.
Dr. Joyce was Chairman of the
3
Board of Society of Plastics Industry and on the Executive Committee of the
American Chemical Council.
ROBERT D. KENNEDY-- Director since 2001
Mr. Kennedy, age 69, held a number of executive and senior management positions
with Union Carbide Corporation, including Chairman, Chief Executive Officer and
President. He retired as Chairman from Union Carbide in 1995 after a career that
spanned 40 years. He is a member of the Boards of Directors of Sunoco Inc.,
Kmart Corporation, International Paper Company and Chase Industries, Inc.
JEFFREY M. LIPTON-- Director since 2001
Mr. Lipton, age 59, is President and Chief Executive Officer and a Director of
NOVA Chemicals Corporation. He joined NOVA in 1993 after retiring from a 28-year
career with the DuPont Company, where he held a number of management and
executive positions. He is a Chairman and Director of Methanex Corporation and
Trimeris, Inc., a member of the Board of Directors and Executive Committee of
the American Chemistry Council, and a member of the Board of Directors and
Business Council on National Issues - Canada.
PETER MCCAUSLAND-- Director since 1997
Mr. McCausland, age 52, has been the Chairman and Chief Executive Officer of
Airgas, Inc. (a distributor of industrial, medical and specialty gases and
related equipment), a company he founded in 1982, since 1987. He served as
general counsel for MG Industries, Inc., an industrial gas producer. He was a
partner in the firm of McCausland, Keen & Buckman that specialized in mergers,
acquisitions and financings. He is a director of the Independence Seaport Museum
and The Eisenhower Exchange Fellowships.
DIRECTORS CONTINUING IN OFFICE
Terms expiring in 2003:
RICHARD FAIRBANKS-- Director since 1993
Mr. Fairbanks, age 61, has been a Counselor at the Center for Strategic &
International Studies since April 2000. He was named Senior Counsel at the
Center for Strategic and International Studies in February 1992, became Managing
Director of Domestic and International Issues in March 1994, and was President
and Chief Executive Officer from May 1999 through April 2000. He was
Ambassador-at-Large under President Reagan. He is a member of the boards of
directors of SEACOR Smit, Inc., GATX Corporation, and SPACEHAB, Inc.; member,
Council on Foreign Relations, Council of American Ambassadors; and founder, The
American Refugee Committee of Washington.
ALAN R. HIRSIG-- Director since 1998
Mr. Hirsig, age 62, was President and Chief Executive Officer of ARCO Chemical
Company, which was bought by Lyondell Chemical Company, from 1991 until he
retired in 1998. He is a director of Philadelphia Suburban Corporation, Celanese
A.G. and Checkpoint Systems Corporation. Additionally, he is a director or
trustee of Bryn Mawr College, Curtis Institute of Music, Rosenbach Museum and
Library and the YMCA of Philadelphia. Mr. Hirsig served as past chairman of the
Chemical Manufacturers Association.
4
EDITH E. HOLIDAY-- Director since 1993
Ms. Holiday, age 50, is an attorney. She was Assistant to the President of the
United States and Secretary of the Cabinet from 1990 until early 1993 and served
as General Counsel of the U.S. Treasury Department from 1989 through 1990. She
served as counselor to the Secretary of the Treasury and Assistant Secretary for
Public Affairs and Public Liaison, U.S. Treasury Department from 1988 to 1989.
Ms. Holiday is a director of Amerada Hess Corporation, Canadian National
Railway, Digex Incorporated, H. J. Heinz Company, Beverly Enterprises, Inc., RTI
International Metals, Inc., and director or trustee of various investment
companies in the Franklin Templeton Group of Funds.
JOE B. WYATT-- Director since 2001
Mr. Wyatt, age 66, is Chancellor Emeritus of Vanderbilt University in Nashville,
Tennessee. He served as Vanderbilt's sixth Chancellor and Chief Executive
Officer for 18 years, beginning in 1982. From 1972 to 1982, he was a member of
the faculty and administration at Harvard University. He is Chairman of the
Board of Directors of the Universities Research Association Inc. of Washington,
D.C., Chairman of a panel on Strategic Education Research for the National
Research Council of the National Academies, a director of New American Schools,
Inc., Advanced Network and Services, Inc., the EAA Aviation Foundation, Ingram
Micro, Inc., where he is Chairman of the Audit Committee, El Paso Corporation,
the Aerostructures Company and ASD.com and he is a Principal of the Washington
Advisory Group, LLC in Washington, D.C.
Terms expiring in 2004:
SAMUEL J. HEYMAN-- Director since 2001
Mr. Heyman, age 63, has been a director and Chairman of the Board of
International Specialty Products Inc. ("ISP") since its formation and served as
its Chief Executive Officer from its formation until June 1999. He also has been
a director of G-I Holdings Inc., or its predecessor GAF Corporation, for more
than five years and was Chairman, President and Chief Executive Officer of G-I
Holdings and some of its subsidiaries for more than five years until September
2000. In January 2001, G-I Holdings filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code due to its
asbestos-related claims. Mr. Heyman was a director and Chairman of the Board of
Building Materials Corporation of America ("BMCA") from its formation until
September 2000 and served as Chief Executive Officer of BMCA from June 1996 to
January 1999 and from June 1999 to September 2000. He is also the Chief
Executive Officer, Manager and General Partner of a number of closely held real
estate development companies and partnerships whose investments include
commercial real estate and a portfolio of publicly traded securities.
SUNIL KUMAR - Director since 2001
Mr. Kumar, age 52, has been director, President and Chief Executive Officer of
ISP since June 1999 and a director, President and Chief Executive Officer of
certain subsidiaries of ISP since June 2001 and June 1999, respectively. Mr.
Kumar was a director, President and Chief Executive Officer of BMCA from May
1995, July 1996 and January 1999, respectively, until June 1999. He was Chief
Operating Officer of BMCA from March 1996 to January 1999. He was also a
director and Vice-Chairman of the Board of G-I Holdings from January 1997 to
June 1999. In January 2001, G-I Holdings filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code due to its
asbestos-related claims.
5
GLORIA SCHAFFER-- Director since 2001
Ms. Schaffer, age 71, served as a Commissioner of the Department of Consumer
Protection of the State of Connecticut from 1991 to 1995, as a member of the
Civil Aeronautics Board from 1978 to 1984 and as the Secretary of State of the
State of Connecticut from 1970 to 1978. Ms. Schaffer also previously served on
the Board of Directors of Amity Bank and Amity Bancorp, Motto's Inc. and Emery
Air Worldwide and, since 1996, has served as a partner at C.A. White, Inc., a
real estate development firm. Ms. Schaffer is a director of MP 63 Fund Inc.
PAULA A. SNEED-- Director from 1994 to May 2001 and since June 2001
Ms. Sneed, age 54, is group vice president, president e-Commerce and Marketing
Services, Kraft Foods, Inc., the nation's largest packaged foods company. She
joined General Foods (which later merged with Kraft Foods) in 1977 and has held
a variety of management positions, including vice president, Consumer Affairs;
senior vice president and president, Foodservice Division; executive vice
president and general manager, Desserts Division; executive vice president and
general manager, Dinners and Enhances Division; senior vice president, Marketing
Services and chief marketing officer; and executive vice president, president
e-Commerce Division. She is also a director of Airgas, Inc. and Charles Schwab &
Co. Inc.
RAYMOND S. TROUBH-- Director since 2001
Mr. Troubh, age 76, has been a financial consultant for more than five years.
Prior to that he was a general partner of Lazard Freres & Co., an investment
banking firm, and a governor of the American Stock Exchange. Mr. Troubh is a
director of ARIAD Pharmaceuticals, Inc., a biopharmaceutical company, Diamond
Offshore Drilling, Inc., a contract drilling company, Enron Corp., an energy,
trading and distribution company, General American Investors Company, an
investment trust company, Gentiva Health Services, Inc., a healthcare provider,
Health Net, Inc., a managed healthcare company, Starwood Hotels & Resorts, Inc.,
a hotel operating company, Triarc Companies, Inc., a holding company, and WHX
Corporation, a steel products company. He is also a trustee of Petrie Stores
Liquidating Trust.
BOARD OF DIRECTORS
The members of our Board of Directors are: R. Fairbanks, S. J. Heyman, A.
R. Hirsig, E. E. Holiday, W. H. Joyce, R. D. Kennedy, S. Kumar, J. M. Lipton, P.
McCausland, G. Schaffer, P. A. Sneed, R. S. Troubh and J. B. Wyatt. Messrs.
Heyman, Kumar and Troubh were elected as directors at the 2001 Annual Meeting of
shareholders, on May 24, 2001. Dr. Joyce was appointed a director by the Board
of Directors on May 8, 2001 and is the Chairman of the Board. Ms. Schaffer was
appointed as a director and Ms. Sneed was reappointed as a director by the Board
of Directors on June 28, 2001. Messrs. Lipton and Wyatt were appointed directors
by the Board on August 23, 2001. Mr. Kennedy was appointed a director by the
Board of Directors on October 29, 2001.
The Board of Directors is responsible for supervision of the overall
affairs of the Company. To assist it in carrying out its duties, the Board of
Directors has delegated certain authority to several committees of the Board of
Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT-- Reviews and discusses auditing, accounting, financial reporting and
internal control functions with management. Recommends the appointment of the
Company's independent public accountants, reviews their services and receives
written disclosures from them. The Audit Committee is governed by a charter. All
members are independent (as "independence" is defined in the New York
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Stock Exchange listing standards). The members of the Audit Committee are: A. R.
Hirsig, R. Fairbanks, R. D. Kennedy, J. M. Lipton and R. S. Troubh. Mr. Hirsig
is the Chairman of the Audit Committee. The Audit Committee held eight meetings
in 2001.
COMPENSATION-- Administers executive compensation programs, policies and
practices. Acts in an advisory role on employee compensation. All members are
non-employee directors. The members of the Compensation Committee are: P.
McCausland, E. E. Holiday, J. M. Lipton, P. A. Sneed and R. S. Troubh. Mr.
McCausland is the Chairman of the Compensation Committee. The Compensation
Committee held seven meetings in 2001.
EMERGENCY-- Has limited powers to act on behalf of the Board of Directors
whenever the Board of Directors is not in session. Meets only as needed and acts
only by unanimous vote. If any non-employee director wants a matter to be
addressed by the Board of Directors rather than the Emergency Committee, then
such matter is submitted to the Board of Directors. The members of the Emergency
Committee are: W. H. Joyce, S. J. Heyman, A. R. Hirsig, P. McCausland and G.
Schaffer. Dr. Joyce is the Chairman of the Emergency Committee. The Emergency
Committee held no meetings in 2001.
FINANCE-- Reviews Hercules' financial affairs. Has full and final authority
on certain financial matters. Serves as the named fiduciary for all of Hercules'
employee benefit plans. The members of the Finance Committee are: R. D. Kennedy,
S. J. Heyman, A. R. Hirsig, E. E. Holiday, W. H. Joyce, S. Kumar and P. A.
Sneed. Mr. Kennedy is the Chairman of the Finance Committee. The Finance
Committee held three meetings in 2001.
INTERNATIONAL-- Reviews Hercules' international business, programs and
activities with a focus on opportunities for expansion. The members of the
International Committee are: R. Fairbanks, S. J. Heyman, W. H. Joyce, S. Kumar,
G. Schaffer and J. B. Wyatt. Mr. Fairbanks is the Chairman of the International
Committee. The International Committee held no meetings in 2001.
NOMINATING-- Considers and recommends nominees for election as directors
and officers. Conducts evaluations of the Board of Directors. All members are
non-employee directors. The members of the Nominating Committee are: E. E.
Holiday, R. D. Kennedy, P. McCausland and J. B. Wyatt. Ms. Holiday is the Chair
of the Nominating Committee. The Nominating Committee held twelve meetings in
2001.
SAFETY, HEALTH, ENVIRONMENT AND REGULATORY AFFAIRS (SHERA) - Reviews,
advises and provides oversight on the policies and performance on the Safety,
Health, Environment and Regulatory Affairs programs for Hercules. The members of
the SHERA Committee are: J. M. Lipton, A. R. Hirsig, W. H. Joyce and S. Kumar.
Mr. Lipton is the Chairman of the SHERA Committee. The SHERA Committee held two
meetings in 2001.
SOCIAL RESPONSIBILITY-- Reviews Hercules' policies, programs and practices
on equal employment opportunity, ethics and community affairs. The members of
the Social Responsibility Committee are: P. A. Sneed, R. Fairbanks, G. Schaffer,
R. S. Troubh and J. B. Wyatt. Ms. Sneed is the Chair of the Social
Responsibility Committee. The Social Responsibility Committee held no meetings
in 2001.
During 2001, each of the directors attended at least 75% of the aggregate
number of meetings of the Board of Directors and at least 75% of the aggregate
number of meetings of the committees of the Board of Directors on which he or
she served during the time for which he or she served.
7
COMPENSATION OF DIRECTORS
Employee directors receive no additional compensation other than their
normal compensation for serving on the Board of Directors or its committees.
Non-employee directors receive a $16,000 annual fee, $1,000 for each
meeting attended, $3,000 for chairing a committee, $1,000 per day for special
assignments and reimbursement for out-of-pocket expenses. The annual fee was
reduced from $23,000 to $16,000 by the Board of Directors in August 2001.
NON-EMPLOYEE DIRECTOR STOCK ACCUMULATION PLAN. In 2001, as in past years,
non-employee directors had the right to elect to receive restricted stock or
equivalent options in lieu of part or all of their fees under Hercules'
Non-Employee Director Stock Accumulation Plan (the "NEDSAP"), which expired on
April 30, 2001. Restricted stock issued pursuant to the NEDSAP is restricted
until the director's retirement from the Board of Directors and is valued at 85%
of the fair market value of the Company's common stock. Options issued pursuant
to the NEDSAP are valued using the Black-Scholes formula.
After April 30, 2001, elections by directors under the NEDSAP were made
subject to shareholder approval of the continued use of the NEDSAP. See below
"Approval of the Continued Use of the Hercules Incorporated Non-Employee
Director Stock Accumulation Plan and the Conversion of Unused Stock Options into
Available Shares of Restricted Common Stock."
Under the NEDSAP, each director also receives annually a nonqualified stock
option to purchase 3,000 shares of common stock. The option exercise price is
the fair market value of Hercules' common stock on the date of grant. As each
non-employee director received an accelerated grant of 9,000 stock options in
1998 for the next three years, the only grants made during 2001 were grants to
the newly elected directors, who received 3,000 options each, subject to
shareholder approval of the continued use of the NEDSAP. Vesting occurs one year
from the grant date.
EQUITY AWARD. Each director has a one-time opportunity to purchase 750
Hercules common shares at fair market value when first elected to the Board of
Directors. Upon the purchase, Hercules awards an additional 1,500 Hercules
common shares that cannot be transferred until retirement or resignation from
the Board of Directors.
RESTRICTED STOCK UNITS. Upon being elected to the Board of Directors, each
director receives 1,100 restricted stock units. The units are placed in an
unfunded account and accrue dividend equivalents, to the extent any dividends
are paid on the Company's common stock. Each restricted stock unit represents
the right to receive one Hercules common share at retirement. Restricted stock
units do not carry any voting rights. Of the 1,100 units, 200 vest immediately.
Thereafter, for every year served on the Board of Directors, 100 additional
units vest. Upon retirement from the Board of Directors, all vested restricted
stock units are paid in Hercules common shares, in a lump sum or spread over a
period not to exceed ten years.
TERMINATION OF THE DIRECTORS CHARITABLE AWARD PROGRAM. In 2001, the
Compensation Committee recommended that the Board of Directors terminate the
Directors Charitable Award Program. The program, funded by life insurance
policies on the lives of directors, envisioned, upon the death or retirement of
a director, that Hercules would deliver common stock having a present value at
retirement or death of $1 million dollars to one or more educational
institutions over a ten-year period. Following such recommendation, the Board of
Directors terminated the program on October 25, 2001. No decision was made by
the Board of Directors as to whether or how payments, if any, should be made to
institutions in the future.
8
SECTION 16(A) BENEFICIAL REPORTING COMPANY COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers and holders of more than 10% of the
Company's common stock to file with the SEC and the New York Stock Exchange
reports of beneficial ownership and changes in beneficial ownership of the
common stock and other equity securities of the Company. These persons are
required by SEC rules to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on a review of the copies of those reports
furnished to the Company, the Company believes that, during 2001, its directors,
executive officers and holders of more than 10% of the Company's common stock
complied with all applicable Section 16(a) filing requirements.
RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS
INDEPENDENT PUBLIC ACCOUNTANTS FOR 2002
The Board of Directors has appointed the firm of PricewaterhouseCoopers
LLP, independent public accountants, to be the Company's auditors for the year
2002 and UNANIMOUSLY RECOMMENDS TO SHAREHOLDERS THAT THEY VOTE FOR RATIFICATION
OF THAT APPOINTMENT. PricewaterhouseCoopers served in this capacity for the year
2001. The Audit Committee and the Board of Directors believe that
PricewaterhouseCoopers has invaluable knowledge about Hercules. Partners and
employees of PricewaterhouseCoopers are periodically changed, providing Hercules
with new expertise and experience. Representatives of PricewaterhouseCoopers
have direct access to the Audit Committee and regularly attend the Audit
Committee's meetings. Representatives of PricewaterhouseCoopers will attend the
Annual Meeting to answer questions and may make a statement if they choose to do
so. The affirmative vote of the majority of shares present in person or by proxy
and entitled to vote at the Annual Meeting is required to ratify the appointment
of PricewaterhouseCoopers as independent public accountants for 2002.
The appointment of independent public accountants is approved annually by
the Board of Directors and subsequently submitted to the shareholders for
ratification. The decision of the Board of Directors is based on the
recommendation of the Audit Committee, which reviews and approves in advance the
audit scope, the types of non-audit services, and the estimated fees for the
coming year. The committee also reviews and approves non-audit services to
ensure that they will not impair the independence of the accountants. Before
making its recommendation to the Board of Directors for appointment of
PricewaterhouseCoopers, the Audit Committee carefully considered that firm's
qualifications as independent public accountants for the Company. This included
a review of its performance in prior years, as well as its reputation for
integrity and competence in the fields of accounting and auditing. The committee
has expressed its satisfaction with PricewaterhouseCoopers in all of these
respects. For more information, see the "Fees of Independent Public Accountants"
section in the Audit Committee Report.
9
APPROVAL OF THE EXTENSION OF THE EXPIRATION DATE OF THE HERCULES INCORPORATED
LONG TERM INCENTIVE COMPENSATION PLAN AND CHANGE IN THE LIMIT FOR STOCK OPTIONS
AWARDED TO ANY INDIVIDUAL
The Hercules Incorporated Long Term Incentive Compensation Plan (the "LTIC
Plan") authorizes the Company, at its discretion, to grant incentive awards to
selected officers and key employees (including employee directors) in the form
of stock options, stock appreciation rights, restricted stock, performance
shares, phantom shares and other market-based and performance-based awards or
any combination of the foregoing.
Set forth below is a brief description of the major features of the LTIC
Plan and of the proposed amendments, which description is qualified in its
entirety by reference to the text of the LTIC Plan. A copy of the LTIC Plan has
been filed with the Securities and Exchange Commission. Any shareholder desiring
a copy of the LTIC Plan may obtain it by writing to Hercules Incorporated, 1313
North Market Street, Wilmington, DE 19894-0001, Attention: Corporate Secretary.
EFFECTIVE DATE AND EXPIRATION
The term of the LTIC Plan expired on April 30, 2002 and, by its terms,
cannot be extended without shareholder approval. The proposed amendment would
extend the termination date for the LTIC Plan to June 27, 2012. Although no
awards may be made under the LTIC Plan after its termination date, awards made
prior to the termination date may have a distribution or payout date after such
termination date.
NUMBER OF SHARES AVAILABLE
Under the LTIC Plan, up to 15,000,000 shares of common stock were
authorized for awards during the period from October 1, 1996 through April 30,
2002, but no more than 8,200,000 shares could be granted for awards which were
not options. On April 30, 2002, 1,599,335 of the authorized shares, which
include shares forfeited due to expiration, remained available for awards. The
proposed amendment would continue to make these shares, and shares forfeited in
the future, available for awards until June 27, 2012. The number of shares
authorized for awards other than stock options would not change. The limitation
on the number of shares that can be awarded under the plan is subject to
adjustment to reflect stock splits, stock dividends and other changes in
capitalization of the Company.
INDIVIDUAL LIMIT
The LTIC Plan limits to 1,500,000 the number of stock options (including
performance accelerated stock options) that can be awarded to any individual
during the period from April 29, 1999 to April 30, 2002. The proposed amendment
would change the limit for the number of stock options that can be awarded to
any individual to 1,000,000 stock options per year for the period through June
27, 2012. This individual limit allows the Company to meet the exception for
performance-based compensation under Section 162(m) of the Internal Revenue Code
and any compensation received by certain senior officers as a result of the
exercise of stock options or performance accelerated stock options granted under
the LTIC Plan will not be subject to that section's $1,000,000 deduction limit.
10
ADMINISTRATION
The LTIC Plan is administered by the Compensation Committee of the Board of
Directors which consists entirely of non-employee directors as defined for
purposes of Section 162(m) of the Internal Revenue Code. The Compensation
Committee has full authority to interpret the LTIC Plan and to establish rules
for its administration.
ELIGIBILITY FOR AWARDS
Awards can be made to any employee of the Company and of certain specified
subsidiaries. It is not possible to determine the exact number of persons who
will be eligible under the LTIC Plan during its term because the selection of
participants depends on discretionary decisions of the Chief Executive Officer
and the Compensation Committee.
AWARDS
The LTIC Plan, as amended, provides for the award of stock options (both
incentive stock options and nonqualified stock options), stock appreciation
rights, performance shares, restricted stock and phantom units, performance
accelerated stock options ( "PASOs") and cash value awards. Each of these awards
is described more fully below. The form of each award, and the number of shares
of common stock or the amount of cash subject to each award, is determined by
the Compensation Committee for all LTIC Plan participants who are subject to
Section 16 of the Securities Exchange Act of 1934 and by the Chief Executive
Officer for all participants who are not subject to Section 16. In this Section,
we refer to the Compensation Committee and the Chief Executive Officer,
whichever may be appropriate in a given circumstance, as the "Plan
Administrator".
STOCK OPTIONS. Options granted pursuant to the LTIC Plan may be either in
the form of incentive stock options (which are options that meet the
requirements of Section 422 of the Internal Revenue Code) or in the form of
nonqualified stock options. A stock option gives the holder the right to
purchase, during the term of the option, a number of shares of common stock at a
price determined on the date the option is granted. The option exercise price
and the time or times at which the option may be exercised are determined at the
time of grant. The option price may not be less than 100% of the fair market
value ($12.20 on April 30, 2002) of the common stock on the date of grant. The
option price may be paid in cash or, with the Plan Administrator's permission,
in the form of common stock under such rules as the Plan Administrator may
impose, based on the fair market value of such common stock on the date of
exercise, or a combination of cash and common stock. Where the Plan
Administrator permits payment in the form of common stock, it is the intention
of the Plan Administrator to allow only such exercises using shares that have
been held by the optionee for more than six months. No shares are issued upon
exercise of an option until full payment of the option price has been made.
Stock options may be exercised at such time or times as may be specified at the
time of grant, but in no event more than ten years after the date of grant. The
permissible vesting period for stock options may be up to 9 1/2 years.
STOCK APPRECIATION RIGHTS ("SARS"). SARs may only be granted in connection
with a stock option granted under the LTIC Plan. SARs entitle the holder, upon
exercise of the SAR, to receive an amount equal to the difference between the
fair market value of the shares of common stock with respect to which the SAR is
being exercised and the option price. Payment may be made in cash, in shares of
common stock, or a combination of the two, as the Plan Administrator determines.
PERFORMANCE SHARES. Performance Shares give the holder the right to receive
shares of common stock at the end of a specified performance period if specified
performance goals are met. These are established for each performance period at
minimum, target, maximum and intermediate levels of
11
attainment of the performance goals. A performance period may be from one to
five years. Performance goals are typically corporate objectives and include
specified levels of earnings per share, return on investment, return on
shareholder equity and other goals related to the performance of the Company, a
particular business unit, corporate staff or individual performance. When
circumstances occur that cause predetermined performance objectives to be an
inappropriate measure of performance, the Plan Administrator, in its discretion,
may adjust the performance goals. Performance Shares representing achievement of
the target performance goals are issued in the grantee's name at the time of the
award, but held in custody by the Company during the performance period. The
grantee is generally entitled to vote the shares and to receive dividends
payable in respect of the shares, but may not transfer them. If the target
performance goals are met during the specified period, all shares held in
custody are released and delivered to the participant. If above target
performance goals are met, the portion of the award in excess of target is paid
in the form of cash or the Company's common stock as determined by the Plan
Administrator.
RESTRICTED STOCK. In a Restricted Stock award, shares of common stock are
granted to an employee for no consideration, but will be forfeited to the
Company if the recipient ceases to be an employee of the Company or its
subsidiaries (for any reason other than death, disability, transfer to a related
entity, reduction in force or normal retirement) during a restricted period
specified at the time of grant. The restricted period may be from one to five
years. Like Performance Shares, Restricted Stock is issued in the employee's
name at the time of grant, but is held in custody by the Company until the end
of the restricted period. While the shares are held in custody, the employee is
entitled to vote the shares and to receive dividends (if any) paid on such
shares.
PHANTOM OR RESTRICTED STOCK UNITS. A Phantom Unit does not give the holder
the right to receive any shares of common stock, but instead involves the
creation of an unfunded account for the participant, the value of which is
measured by reference to the value of the common stock. Units vest and are
payable at the end of the vesting period specified at the time of grant, or
sooner if the participant retires, dies or becomes disabled. The vesting period
may be from one to five years. The Plan Administrator, in its discretion, may
also grant Phantom Units payable in common stock at the time each unit vests.
Such Phantom Units are referred to as Restricted Stock Units. During the vesting
period the Restricted Stock Units are treated in the same way and are subject to
the same rules as are Phantom Units. However, once vested, payment for the
Restricted Stock Units is made in an equivalent number of shares of common stock
as contrasted to cash.
PERFORMANCE ACCELERATED STOCK OPTIONS ("PASOS"). PASOs are identical in all
respects to stock options, except that the vesting of PASOs may be accelerated
if certain specified performance goals are met during the term of the PASOs.
CASH VALUE AWARDS. Cash Value Awards are payable in cash or stock if
specified performance goals are met by the end of a specified performance
period. The performance goals applicable to Cash Value Awards are generally
similar to those applicable to Performance Shares.
OTHER MARKET-BASED OR PERFORMANCE-BASED AWARDS. The LTIC Plan also permits
the Plan Administrator to grant any other type of award that is valued in whole
or in part by reference to the value of common stock, on such terms and
conditions as the Plan Administrator may determine.
TERMINATION OF EMPLOYMENT
Awards made under the LTIC Plan which have not previously been exercised or
vested are generally forfeited if the holder ceases to be an employee of the
Company or its subsidiaries except in the
12
case of the participant's retirement, death or disability, or termination of
employment due to a reduction in force.
NONQUALIFIED STOCK OPTIONS. If a holder of nonqualified options ceases to
be employed by the Company or its subsidiaries for any of the foregoing reasons,
all of the holder's outstanding nonqualified options become immediately
exercisable and may be exercised for one year (in the case of a reduction in
force), or in the case of a participant's death or disability the period
determined by the Plan Administrator or three years (in the case of retirement,
transfer to a related entity or a decrease in the Company's ownership of a
subsidiary), but not beyond the expiration date of the option. In the case of a
participant's retirement, the exercise period for options granted after April
30, 1994 is the lesser of five years or the expiration date of the options, or
as otherwise determined by the Plan Administrator.
INCENTIVE STOCK OPTIONS. The LTIC Plan does not provide for the
acceleration of the exercisability of incentive stock options under any
circumstances, but does allow the holder of exercisable incentive stock options
to exercise them for a period of three months following termination of
employment, or in the case of a participant's death or disability the period
determined by the Plan Administrator, but not beyond the expiration date of the
option.
PERFORMANCE ACCELERATED STOCK OPTIONS. If the holder of PASOs retires, any
PASO not exercisable at the date of the holder's retirement becomes exercisable
at the earlier of (i) the achievement of performance goals, (ii) 4 1/2 years
after the holder's retirement, regardless of performance, or (iii) 9 1/2 years
after the date of the award. Any PASOs that become exercisable pursuant to the
preceding sentence and any PASOs exercisable on the date of the holder's
retirement may be exercised for a period of five years, but not beyond the
expiration date of the PASO. If the holder of PASOs dies or becomes disabled,
the exercise period is determined by the Plan Administrator. In the event of a
reduction in force, a transfer to a related entity or a decrease in the
Company's ownership of a subsidiary, the Plan Administrator will determine the
timing, terms and conditions for the exercise of the PASO, but not beyond the
expiration date of the PASO.
RESTRICTED STOCK AND PHANTOM OR RESTRICTED STOCK UNIT AWARDS. If a
participant retires, dies, becomes disabled or is terminated as a result of a
reduction in force, all restrictions applicable to his or her Restricted Stock
and Phantom or Restricted Stock Units lapse. If the participant's employment is
terminated due to a transfer to a related entity or a decrease in the Company's
ownership of a subsidiary, all restrictions will remain in effect until the end
of the applicable restricted period.
PERFORMANCE SHARES AND CASH VALUE AWARDS. A holder who retires is entitled
to his or her Performance Shares or Cash Value Awards at the end of the
applicable performance period, to the extent that the applicable performance
goals were met during the period. If the holder of Performance Shares or a Cash
Value Award terminates employment due to a reduction in force, he or she is
entitled to receive, at the end of the applicable performance period, the
minimum payout provided under his or her award, prorated to reflect the portion
of the performance period during which he or she was an employee. Upon
termination of employment due to death or disability, the holder is entitled to
receive his or her Performance Shares or Cash Value Awards (paid in cash) at the
target award level on the date of termination. If the holder's employment
terminates due to a transfer to a related entity or a decrease in the Company's
ownership of a subsidiary, all restrictions applicable to his or her Performance
Shares and Cash Value Awards remain in effect.
The Plan Administrator generally has discretion to provide for earlier
vesting or to waive restrictions applicable to awards, to the extent such
modifications are deemed to be in the best interests of the Company.
13
CHANGE IN CONTROL
In the event of an unsolicited "change in control" of the Company (as
defined in the LTIC Plan), all outstanding stock options, SARs and PASOs become
immediately exercisable for a period of 60 days and all other awards become
fully payable within 30 days at the maximum level of performance.
AMENDMENT
The Board of Directors can amend, suspend or terminate the LTIC Plan at any
time but cannot, without shareholder approval, increase the benefits accruing to
LTIC Plan participants, modify the requirements for eligibility, extend the term
of the LTIC Plan or increase the number of shares of common stock that may be
issued under the LTIC Plan.
FEDERAL INCOME TAX CONSEQUENCES
The LTIC Plan is not qualified under Section 401(a) of the Internal Revenue
Code. The following brief description, which is based on existing laws, sets
forth certain of the federal income tax consequences of the grant of options and
other awards under the LTIC Plan. This description may differ from the actual
tax consequences incurred by any individual participant in the Plan. Moreover,
existing law is subject to change by new legislation, by new regulations,
administrative pronouncements and court decisions or by new or clarified
interpretations or applications of existing regulations, administrative
pronouncements and court decisions. Any such change may affect the federal
income tax consequences described below.
STOCKS OPTIONS AND PASOS. There is no tax incurred by the participant (or
expense deduction for the Company) upon the grant of stock options and PASOs,
assuming that such awards do not have a readily ascertainable fair market value.
At the time of exercise of a nonqualified stock option or PASO, the difference
between the option price and the fair market value of common stock on the date
of exercise will constitute ordinary income. The Company will be allowed a
deduction equal to the amount of ordinary income realized by the participant. In
the case of incentive stock options, although no income is realized upon
exercise and the Company is not entitled to a deduction, the excess of the fair
market value on the date of exercise over the option price is treated by the
participant as an item of tax preference for alternative minimum tax purposes.
If the participant does not dispose of the shares acquired on the exercise of an
incentive stock option within one year after their receipt or within two years
after the grant of the stock option, gain or loss realized on the subsequent
disposition of the shares will be treated as long-term capital gain or loss. In
the event of an earlier disposition, the participant may realize ordinary income
and the Company will be entitled to a deduction, equal to the amount of such
income, at the time such income is realized by the participant.
SARS. The participant will not realize any income at the time of grant of
an SAR. Upon the exercise of an SAR, any cash received and the fair market value
on the exercise date of any shares of common stock received will constitute
ordinary income to the participant. The Company will be entitled to a deduction
in the amount of such income at the time of exercise.
RESTRICTED STOCK AND RESTRICTED STOCK UNITS. A participant normally will
not realize taxable income upon an award of Restricted Stock, and the Company
will not be entitled to a deduction, until the termination of the restrictions,
except with respect to the dividends, if any, or dividend equivalents, if any,
received by the participant. Upon termination of the restrictions, the
participant will realize ordinary income in an amount equal to the fair market
value of the common stock at that time and the Company will be entitled to a
deduction in the same amount. However, a participant may elect to realize
ordinary income in the year the Restricted Stock is awarded in an amount equal
to the fair market value at the time
14
of the award, determined without regard to the restrictions. In this event, the
Company will be entitled to a deduction in such year in the same amount, and any
gain or loss realized by the participant upon subsequent disposition of the
stock will be capital gain or loss. If, after making this election, any
Restricted Stock is forfeited, or if the market value at vesting is lower than
the amount on which the participant was taxed, the participant cannot then claim
a deduction for the loss.
PHANTOM OR RESTRICTED STOCK UNITS, PERFORMANCE AWARDS, CASH VALUE AWARDS
AND OTHER MARKET OR PERFORMANCE-BASED AWARDS. A participant normally will not
realize taxable income upon the award of Phantom or Restricted Stock Units,
Performance Awards, Cash Value Awards or other Market-Based Awards or
Performance-Based Awards. Subsequently, when the conditions and requirements
established with respect to the grants have been satisfied and the payment
amount determined, any cash and the fair market value of any shares of common
stock received, or not subject to a substantial risk of forfeiture, whichever
occurs earlier, will constitute ordinary income to the participant in the year
in which paid or when no longer subject to a substantial risk of forfeiture, and
the Company will be entitled to a deduction in the same amount. Performance
Awards up to target level are subject to the same tax consequences as Restricted
Stock described above.
The Company has the right to reduce the number of shares of common stock
deliverable pursuant to the LTIC Plan by an amount which would have a fair
market value equal to the minimum amount of all federal, state, or local taxes
required to be withheld, or to deduct the amount of such taxes from any cash
payment to be made to the participant pursuant to the LTIC Plan or otherwise.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Service Code ("Section 162(m)")
disallows a tax deduction to publicly held companies for compensation paid to
certain of their executive officers, to the extent that total compensation
exceeds $1 million per covered officer in any fiscal year. The limitation
applies only to compensation which is not considered to be performance-based.
Compensation deemed paid by the Company in connection with disqualifying
dispositions of incentive stock option shares or exercises of non-statutory
stock options granted under the LTIC Plan qualifies as performance-based
compensation for purposes of Section 162(m) if the grants were made by a
committee of "outside directors" as defined under Section 162(m). The Company
anticipates that any compensation deemed paid by it in connection with
disqualifying dispositions of incentive stock option shares or exercises of
non-statutory options will qualify as performance-based compensation for
purposes of Section 162(m) and will not have to be taken into account for
purposes of the $1 million limitation. Accordingly, all compensation deemed paid
with respect to those options should be deductible by the Company without
limitation under Section 162(m).
CERTAIN ACCOUNTING CONSEQUENCES
Under current generally accepted accounting principles, neither the grant
nor the exercise of stock options or PASOs will result in a charge to the
Company's earnings. The award of SARs requires a charge against earnings for the
appreciation on the SARs which have become exercisable and which it is
anticipated will be exercised; the amount of such charge is dependent upon the
amount, if any, by which the fair market value of the Company's common stock
exceeds the option price provided for in the related option. As to Phantom
Units, a charge against earnings over the vesting period is required for the
fair market value of equivalent shares of common stock at the time of grant
adjusted for changes in stock price. With respect to awards of Performance
Shares, periodic estimates of the compensation expense will be charged against
the Company's earnings over the performance period based on the likelihood that
performance goals will be achieved and the movement in common stock price; the
aggregate compensation expense will equal the number of shares ultimately earned
multiplied by the market price of
15
the Company's common stock at the end of the performance period. The fair market
value of the shares of Restricted Stock Awards or Restricted Stock Units on the
date of award will be charged ratably against earnings as compensation expense
over the restriction period.
COMPLIANCE WITH LAWS
The LTIC Plan and the grant of awards under such plan are subject to all
applicable Federal and state laws, rules and regulations and to such approvals
by any government or regulatory agency as may be required. It is intended that
the LTIC Plan be applied and administered in compliance with Rule 16b-3
(exempting transactions between an issuer, including an employee benefit plan
sponsored by the issuer, and an officer or director of the issuer that involves
issuer equity securities from the application of Section 16(b)). If any
provision of the LTIC Plan would be in violation of Rule 16b-3, if applied as
written, such provision will not have effect as written and will be given effect
so as to comply with Rule 16b-3, as determined by the Plan Administrator. The
Board of Directors is authorized to amend the LTIC Plan and to make any such
modifications to Award Commitments necessary to comply with Rule 16b-3, and to
make any such other amendments or modifications as it deems necessary or
appropriate to better accomplish the purposes of the LTIC Plan in light of any
amendments made to Rule 16b-3.
16
NEW PLAN BENEFITS
The following table lists the number of securities which will be
allocated to listed participants under the LTIC Plan for 2002. The number,
amount and type of awards to be received by or allocated to eligible
participants beyond 2002 under the LTIC Plan, as amended by this proposal,
cannot be determined at this time. Future awards under the LTIC Plan will be
made based on decisions made by the Plan Administrator at such time.
NAME AND POSITION DOLLAR VALUE ($) (1) (2) NUMBER OF NON-QUALIFIED
STOCK OPTIONS (2)
----------------- ------------------------- ------------------------
William H. Joyce, Chief Executive Officer and Chairman $ 2,249,460 600,000
Israel J. Floyd, Corporate Secretary and General Counsel 93,728 25,000
Craig A. Rogerson, Vice President, Hercules Incorporated and 187,455 50,000
President, FiberVisions, Rosin & Terpenes
Matthias Sonneveld, Vice President, Work Processes 133,093 35,500
Robert C. Flexon, Vice President, Corporate Affairs, Strategic 187,455 50,000
Planning and Work Processes
Executive Group 2,039,510 544,000
Non-Executive Director Group (3) 0 0
--------- ---------
Non-Executive Officer Group 4,482,049 1,195,500
(1) The Black-Scholes option-pricing model was used to determine the fair value
of employee stock options in the table above as of the date of the grant.
No adjustments for risk of forfeiture have been made. Significant
assumptions are as follows:
NON-QUALIFIED
STOCK OPTIONS
-------------
Dividend yield 2.0%
Risk free interest rate 4.75%
Expected life 6.0 years
Expected volatility 31.2%
These assumptions differ from those used in the table of Option Grants in
Last Fiscal Year appearing on page 32 of this Proxy Statement, although
they are identical to the assumptions referred to in footnote (3) to that
table. The Company made the calculations, and used the assumptions shown
above, in accordance with SFAS No. 123.
(2) The number, amount and type of awards to be received by or allocated to
eligible participants beyond 2002 under the LTIC Plan, as amended by the
proposal, is not determinable at this date.
(3) Non-employee directors are not eligible to participate in the LTIC Plan.
17
PROPOSED ACTION
It is proposed that shareholders approve the continued use of the LTIC
Plan, as amended to extend the expiration date to June 27, 2012 and to change
the limit for the number of stock options that can be awarded to any individual
to 1,000,000 stock options per year for the period through June 27, 2012.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF
THE AMENDMENTS TO THE LTIC PLAN.
An affirmative vote of the holders of the majority of the outstanding
shares of common stock represented at the meeting is required in order to
approve and adopt the amendments to the Hercules Incorporated Long Term
Incentive Compensation Plan.
APPROVAL OF THE CONTINUED USE OF THE HERCULES INCORPORATED NON-EMPLOYEE
DIRECTOR STOCK ACCUMULATION PLAN AND THE CONVERSION OF UNUSED STOCK OPTIONS
INTO AVAILABLE SHARES OF RESTRICTED COMMON STOCK
The following summary of the material features of the Hercules Incorporated
Non-Employee Director Stock Accumulation Plan (the "NEDSAP") is qualified in its
entirety by reference to the text of the NEDSAP. A copy of the NEDSAP has been
filed with the Securities and Exchange Commission. Any shareholder desiring a
copy of the NEDSAP may obtain it by writing to Hercules Incorporated, 1313 North
Market Street, Wilmington, DE 19894-0001, Attention: Corporate Secretary.
The purpose of the NEDSAP is to afford the Company's non-employee directors
an opportunity to acquire a greater proprietary interest in the Company and
thereby create an increased interest in, and concern for, the welfare of the
Company and its shareholders. Through the NEDSAP, the Company seeks to encourage
qualified individuals to consider favorably requests to serve as directors and
to remain as directors once they are elected.
The NEDSAP is administered by a Committee of the Board of Directors.
However, the Committee's administrative functions are generally ministerial in
nature given the NEDSAP's explicit provisions, including those relating to
eligibility for option grants and predetermination of the timing and amounts of
such grants. The Committee does not have authority to (i) determine which
directors are entitled to receive options, (ii) grant options other than as
provided in the NEDSAP, (iii) determine the number of options that may be
granted to any optionee, (iv) modify the number of shares for which options
granted to any optionee may be exercised, (v) modify the time or times at which
options may be granted or (vi) alter or amend the NEDSAP.
Under the NEDSAP, nonstatutory options to purchase shares of common stock
are granted only to directors who, as of the date of grant, (i) are not, and
have not been, employees of the Company or any of its subsidiaries, and (ii) are
otherwise not eligible for selection to participate in any NEDSAP of the Company
or any of its subsidiaries that entitles any participant other than non-employee
directors to acquire securities or derivative securities of the Company. At
present, there are twelve non-employee directors. Option grants to non-employee
directors are in addition to, and not in lieu of, the other compensation for
their services as directors described elsewhere in this Proxy Statement.
18
The NEDSAP provides for an option to purchase 3,000 shares of common stock
to be granted automatically each year, as of the third business day following
the date on which the Company releases for publication its third-quarter
statement of earnings, to each person who is serving as an eligible director of
the Company on such date. Special provisions are applicable to newly elected
directors.
Each option is subject to all of the terms and conditions provided in the
NEDSAP and such other terms and conditions, if any, as may be specified by the
Committee at or after the time of grant. The purchase price for each share of
common stock subject to an option may not be less than the fair market value
($12.20 on April 30, 2002) per share at the date of option grant. Generally,
options are not exercisable prior to the expiration of one year from the date of
grant and expire 10 years from the date of grant. An option may be exercised
only during the period beginning on the third business day following the date on
which the Company releases for publication its quarterly or annual summary
statements of earnings and ending on the twelfth business day following such
date. Options are not transferable otherwise than by will or the laws of descent
and distribution and will be exercisable during the optionee's lifetime only by
the optionee, or his or her guardian or legal representative. If an optionee's
service as a non-employee director terminates by retirement, his or her options
may be exercised for up to three years following retirement. If an optionee's
service terminates because of death or disability, his or her options may be
exercised for up to one year after the termination, and, if his or her service
terminates for any other reason, his or her options will terminate upon the date
of termination.
The NEDSAP also provides each director with the choice of electing to
receive restricted common stock or equivalent options in lieu of part or all of
the director's fees anticipated to be earned in the calendar year following the
election. If this election is made, it is referred to as a director's fee
exchange transaction.
Option prices and the number and kinds of shares covered by the NEDSAP and
by options under the NEDSAP are subject to adjustment in the event of a merger,
consolidation, reorganization, recapitalization, stock dividend, stock split,
split-up, split-off, spin-off, combination of shares, exchange of shares or
other like changes in the Company's capital structure. In addition, the right to
exercise all options remaining unexercised under the NEDSAP accelerates, so that
such options become immediately exercisable, upon a "change of control" of the
Company as defined in the NEDSAP.
The NEDSAP expired on April 30, 2001. At that time, 201,000 shares remained
available for the grant of options and less than 10,000 shares remained
available for use as restricted common stock.
The amended NEDSAP which covers grants made in 2001 subject to shareholder
approval will become effective on the date it is approved by the shareholders at
the 2002 Annual Meeting and will terminate June 27, 2012. Options may not be
granted after the NEDSAP terminates. The Board of Directors may at any time
amend, suspend or terminate the NEDSAP in any respect, provided that no further
amendment may be made without the approval of the Company's shareholders that
will increase the total number of shares available for options under the NEDSAP,
change the manner of determining the option exercise price, increase the 10-year
maximum term of the options, modify the NEDSAP's eligibility provisions or
materially increase the benefits accruing to participants, unless such
shareholder approval is not required in order for options granted under the
NEDSAP to continue to be exempt from the operation of Section 16(b) of the
Securities Exchange Act of 1934. It is intended that the NEDSAP comply with any
rule under Section 16 of the Securities Exchange Act of 1934, and the Board of
Directors will make any amendment it deems necessary so to comply.
19
FEDERAL INCOME TAX CONSEQUENCES
The NEDSAP is not qualified under Section 401(a) of the Internal Revenue
Code. The following brief description, which is based on existing laws, sets
forth certain of the federal income tax consequences of the grant of options
under the NEDSAP. This description may differ from the actual tax consequences
incurred by any individual participant in the NEDSAP. Moreover, existing law is
subject to change by new legislation, by new regulations, administrative
pronouncements and court decisions or by new or clarified interpretations or
applications of existing regulations, administrative pronouncements and court
decisions. Any such change may affect the federal income tax consequences
described below.
A director who receives an option does not recognize taxable income on the
grant of the option, assuming that it does not have a readily ascertainable fair
market value. Upon the receipt of shares for the exercise of an option, a
director generally has ordinary income in an amount equal to the excess of the
fair market value of the shares at the time of exercise over the option price of
the shares. However, if the optionee does not make a Section 83 election under
the Internal Revenue Code and receives shares upon the exercise of an option at
any time, in the case of an option that is out-of-the-money on the date of
exercise, the optionee does not recognize income upon the receipt of shares.
Instead, the recognition of income (and the determination of the amount of
income) is deferred until the earlier of (i) six months after the shares are
acquired or (ii) the earliest date on which the optionee could sell the shares
at a profit without being subject to suit under Section 16(b) of the Securities
Exchange Act of 1934 (generally, six months after the option is granted). If the
optionee makes a Section 83 election, income is not deferred. Rather, income is
recognized on the date of exercise, in an amount equal to the excess of the fair
market value of the shares on such date, over the option price. A Section 83
election must be filed with the Internal Revenue Service within 30 days after
receipt of the shares.
An optionee's tax basis in shares received upon the exercise of an option
is equal to the amount of ordinary income recognized on the receipt of the
shares plus the amount of cash, if any, paid upon exercise. The holding period
for the shares begins just after the shares are received.
A deduction for Federal income tax purposes is allowed to the Company in an
amount equal to the ordinary income taxable to an optionee upon exercise of an
option, provided that such amount constitutes an ordinary and necessary business
expense of the Company and that such amount is reasonable.
If an optionee exercises an option by delivering previously held shares in
payment of the exercise price, the optionee does not recognize gain or loss on
the exchange of the delivered shares, even if their then fair market value is
different from the optionee's tax basis in the shares. However, the exercise of
the option is taxed, and the Company generally is entitled to a deduction, in
the same way that it would be if the optionee had paid the exercise price in
cash. Provided the optionee receives a separate identifiable stock certificate
therefor, his or her tax basis in the number of shares received that is equal to
the number of shares surrendered on exercise will be equal to his or her tax
basis in the shares surrendered. His or her holding period for such number of
shares will include his or her holding period for the shares surrendered. The
optionee's tax basis and holding period for the additional shares received upon
exercise of an option in whole or in part with shares will be the same as it
would be if the participant had exercised solely for cash.
If an optionee receives shares upon the exercise of an option and
thereafter disposes of the shares in a taxable transaction, the difference
between the amount realized on the disposition and the participant's tax basis
in the shares is taxed as capital gain or loss (provided the shares are held as
a capital asset on the date of disposition), which is long term or short term
depending on the optionee's holding period for the shares.
20
NEW PLAN BENEFITS
The following table lists the dollar value and number of securities
allocated to listed participants in 2001 under the NEDSAP. The following
non-employee directors elected or appointed to the Board of Directors in 2001
received 3,000 shares of common stock: S. J. Heyman, R. D. Kennedy, S. Kumar, J.
M. Lipton, G. Schaffer, R. S. Troubh and J. B. Wyatt. As previously discussed
under "Compensation of Directors", these grants were made subject to shareholder
approval of the continued use of the NEDSAP. The exercise price per share is
$8.52, the closing price of common stock on the third business day following the
release of the Company's third quarter 2001 statement of earnings. Only
non-employee directors are eligible to participate in the NEDSAP.
NAME AND POSITION (1) DOLLAR VALUE ($) NUMBER OF NON-QUALIFIED
STOCK OPTIONS
--------------------- ---------------- -----------------------
William H. Joyce, Chief Executive Officer and Chairman 0 0
Israel J. Floyd, Corporate Secretary and General Counsel 0 0
Craig A. Rogerson, Vice President, Hercules Incorporated and 0 0
President, FiberVisions, Rosin & Terpenes
Matthias Sonneveld, Vice President, Work Processes 0 0
Robert C. Flexon, Vice President, Corporate Affairs, Strategic 0 0
Planning and Work Processes
Executive Group 0 0
Non-Executive Director Group $313,169 (2) 50,539 (3)
Non-Executive Officer Group 0 0
(1) Only non-employee directors are eligible to participate in the NEDSAP.
(2) Stock options were valued using the Black-Scholes formula.
(3) Includes 29,539 shares of restricted stock at a value of $224,969 credited
in exchange for regular director fees.
PROPOSED ACTION
It is proposed that shareholders approve the continued use of the expired
NEDSAP with a new expiration date of June 27, 2012.
It is also proposed that, in order to more closely align the inventory of
shares available for grants of stock options and available to be transferred as
restricted common stock in connection with the
21
directors' fee exchanges, 150,000 of the authorized shares remaining in
inventory from the expired NEDSAP be converted to 50,000 shares of restricted
common stock which can be provided in connection with the directors' fee
exchange transactions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL AND
ADOPTION OF THE AMENDMENTS TO THE NON-EMPLOYEE DIRECTOR STOCK ACCUMULATION PLAN.
An affirmative vote of the holders of a majority of the outstanding shares
of common stock represented at the meeting is required in order to approve and
adopt the amendments to the Non-Employee Director Stock Accumulation Plan.
OTHER MATTERS
The Board of Directors is not aware of any matters, other than those
described above, that will be presented for consideration at the Annual Meeting.
If other matters properly come before the Annual Meeting, it is the intention of
the persons named in the enclosed proxy card to vote thereon in accordance with
their best judgment. Moreover, the Board of Directors reserves the right to
adjourn or postpone the Annual Meeting, depending on circumstances and the Board
of Directors's belief that such adjournments or postponements would be in the
best interests of the Hercules shareholders.
AUDIT COMMITTEE REPORT
The Board of Directors has charged the Audit Committee with a number of
responsibilities, including review of the adequacy of the Company's financial
reporting and accounting systems and controls. The Audit Committee has a direct
line of communication with the Company's independent public accountants and the
internal Director, Auditing Services. The Audit Committee is composed entirely
of independent directors as defined by the listing standards of the New York
Stock Exchange. The Board of Directors has adopted and reviews at least annually
a written Audit Committee charter, a copy of which is included as Annex I to
this Proxy Statement.
The Audit Committee has received from the independent public accountants
written disclosures and a letter concerning the independent public accountants'
independence from Hercules, as required by Independence Standards Board Standard
No. 1, "Independence Discussions with Audit Committees." These disclosures have
been reviewed by the Audit Committee and discussed with the independent public
accountants. The Audit Committee has also considered whether the provision of
other services by the independent public accountants is compatible with
maintaining the principal accountant's independence.
In the discharge of its responsibilities, the Audit Committee has reviewed
and discussed with management and the independent public accountants the audited
consolidated financial statements for fiscal 2001. In addition, the Audit
Committee has discussed with the independent public accountants matters such as
the quality (in addition to acceptability), clarity, consistency and
completeness of the Company's financial reporting, as required by Statement on
Auditing Standards No. 61, "Communication with Audit Committees."
Based on these reviews and discussions, the Audit Committee recommended to
the Board of Directors that the audited consolidated financial statements be
included in the Hercules 2001 Annual Report on Form 10-K for filing with the
SEC.
22
FEES OF INDEPENDENT PUBLIC ACCOUNTANTS
AUDIT FEES. Fees billed by our independent public accountants for
professional services rendered to us in connection with the audit of the
Company's financial statements for the year ended December 31, 2001 and the
review conducted by the independent public accountants of the financial
statements included in the quarterly reports on Form 10-Q that we were required
to file during 2001 were approximately $2.0 million, of which an aggregate
amount of $1.9 million was billed through December 31, 2001.
In November 2000, the Company amended its senior credit facility and ESOP
credit facility (the "Facilities"). The Facilities, as amended, were secured by
liens on the Company's property and assets (and those of the Company's Canadian
subsidiaries), a pledge of stock of substantially all of the Company's domestic
subsidiaries and 65% of the stock of foreign subsidiaries directly owned by the
Company and a pledge of intercompany indebtedness. As a result of the guarantees
and the stock pledges, the Company was required to prepare financial disclosures
of Guarantor Subsidiaries (the "Guarantor Footnotes") and financial statements
for certain collateral subsidiaries (the "Collateral Audits") pursuant to SEC
Regulation S-X, Rules 3-10 and 3-16. Fees billed during 2001 by our independent
public accountants for professional services rendered in connection with the
Guarantor Footnotes and the Collateral Audits for the year ended December 31,
2000 and December 31, 2001 were approximately $8.0 million and $.2 million,
respectively.
Total audit fees for 2001 were approximately $10.2 million compared to
total fees billed by the independent public accountants in 2001 for all services
of approximately $18.9 million.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES. Our
independent public accountants did not render financial information systems
design and implementation services to us during fiscal year 2001.
ALL OTHER FEES. The aggregate fees billed by our independent public
accountants for professional services rendered to us during 2001, other than the
audit services referred to above, were approximately $8.7 million, primarily for
the following services:
Tax planning and compliance $3.8 million
Audit-related services (1) $3.7 million
Other (2) $1.2 million
(1) Includes fees for professional services related to carve-out audits of
divested businesses, statutory audits of foreign subsidiaries and audits of
the Company's benefit plans and services in connection with registration
statements.
(2) Includes fees for professional services related to the Company's conversion
to the EURO, and other non-financial information system consulting.
23
The foregoing report of the Audit Committee does not constitute soliciting
material and should not be deemed filed or incorporated by reference into any
other of our filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, except to the extent we
specifically incorporate this report by reference therein.
AUDIT COMMITTEE
A. R. Hirsig (Chair)
R. Fairbanks
R. D. Kennedy
J. M. Lipton
R. S. Troubh
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors approves compensation
objectives and policies for all employees and sets compensation for the
Company's executive officers, including individuals named in the Summary
Compensation Table. The policies and plans developed by the Compensation
Committee are approved by the Board of Directors. Administration of the plans is
the responsibility of the Compensation Committee. None of the members of the
Compensation Committee is an officer, employee or former officer or employee of
the Company or its subsidiaries. Compensation matters relating to the Chief
Executive Officer and executive officers named in the Summary Compensation Table
are reported to the Board of Directors for separate approval.
The Hercules Executive Compensation Policy, as established by the
Compensation Committee, is designed to provide a competitive base salary
component adjusted for individual performance and links annual incentive
compensation to the achievement of specific corporate goals which are identified
as necessary components to achieve or exceed the business plan of the Company.
The Executive Compensation Policy also includes a long-term incentive component
that is directly linked to shareholder interest through grants of stock-based
awards. The total potential value of these components is then benchmarked
against competitive norms for our industry group. Additionally, it is the policy
of the Compensation Committee to recognize extraordinary achievements through
special stock-based awards. In arriving at its compensation decisions for 2001,
the Compensation Committee considered the adverse financial performance of the
Company during such year. The Compensation Committee did not act unanimously in
all matters during 2001.
BASE SALARY
As provided in his Agreement with Hercules, Mr. Thomas L. Gossage,
Hercules' former Chief Executive Officer, received no base salary in 2001 (other
than a nominal $1.00 per week for benefit participation purposes). Mr. Gossage
retired as Chief Executive Officer effective May 8, 2001.
Dr. William H. Joyce was named Chief Executive Officer on May 8, 2001 and
Chairman of the Board on July 1, 2001. Effective May 8, 2001, Hercules entered
into an employment agreement with Dr. Joyce under which he receives a base
salary of $1,000,000 per year. This amount was determined from competitive
analysis of chemical and related industries' chief executive officers who were
in positions encompassing the required competencies to address the different
issues confronting Hercules, including Company performance, debt management
issues and strategic initiatives.
24
In 2001, the Compensation Committee reviewed the salaries of other named
executive officers and determined that, based on Hercules financial condition,
size, competitive practices and internal consistency review, the base salaries
of certain named executive officers required downward adjustment, and such
executive officers' base salaries were adjusted accordingly.
ANNUAL INCENTIVES
The Management Incentive Compensation Plan ("MICP") is based upon the
achievement of predetermined financial, corporate, business unit and individual
goals. For 2001, corporate and business unit performance was measured by
earnings before interest and taxes (weighted 33.33%), cash flow (weighted
33.33%) and cost savings (weighted 33.33%) against business plan goals
established at the beginning of the year. Individual performance is measured
primarily by performance against goals established at the beginning of the year.
For the Chief Executive Officer, the Compensation Committee also reviews his
individual objectives versus results achieved, and determines his MICP payout
accordingly. A similar review process also takes place for the other executive
officers of the Company named below. MICP awards are paid in cash up to the
target bonus level and in cash, restricted stock or stock options if performance
warrants payouts above the target level. No payouts occur under this plan unless
minimum performance levels are exceeded. The maximum payout under the plan is
200% of the target pool at outstanding levels of performance. It is a goal of
the Compensation Committee that payouts at target levels result in competitive
executive compensation.
The Compensation Committee approved the overall corporate 2001 bonus pool
at 133% of the target level reflecting the significant savings delivered against
plan and the improved level of cash flow, debt repayment and progress towards
achieving strategic initiatives.
In view of Dr. Joyce's significant accomplishment in stabilizing the
financial situation of the Company, reducing expenses and returning Hercules to
positive cash flow position for 2001, the Compensation Committee approved a
bonus payable to Dr. Joyce of $997,500, which was prorated from a full bonus
amount to reflect less than a full year of service.
The final 2001 bonuses granted to Messrs. Floyd, Sonneveld, Flexon and
Rogerson totaled $678,474. Of this total, Messrs. Floyd and Sonneveld were paid
a total of $61,474 in connection with their contribution to the integration of
BetzDearborn into Hercules. Mr. Gossage had agreed not to be eligible for any
MICP award.
LONG-TERM INCENTIVES
The Long Term Incentive Compensation Plan ("LTIC Plan"), described above
under "Approval of the Extension of the Expiration Date of the Hercules
Incorporated Long Term Incentive Compensation Plan and change in the limit for
stock options awarded to any individual" is designed to place pay at risk and to
align its value directly with shareholder value.
In 2001, the Compensation Committee granted stock options to Dr. Joyce and
Messrs. Flexon, Floyd, Rogerson and Sonneveld, as listed in the Summary
Compensation Table. In determining the above grants, the Compensation Committee
considered each individual executive's responsibilities, accountabilities and
position in the Company, and competitive compensation data provided by an
outside consulting firm.
In lieu of receiving a fixed salary or annual incentive award (other than
the previously referenced salary of one dollar per week), Mr. Gossage was
granted restricted stock and stock options in 2000, listed in the Summary
Compensation Table, as his total compensation package.
25
IRS LIMITS ON THE DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the Internal Revenue Code of 1986, as amended, provides
that compensation in excess of $1 million paid to named executives is not
deductible unless it is performance-based compensation and satisfies the
conditions of the available exemption. Base salary does not qualify as
performance-based compensation for purposes of Section 162(m), while variable
compensation as administered by Hercules and option grants made to the Chief
Executive Officer and other named executives qualify as performance-based
compensation under Section 162(m).
STOCK OWNERSHIP GUIDELINES
In 1997, Hercules established stock ownership guidelines for executives.
The guidelines reinforce the practice of encouraging executives to hold Hercules
stock and to closely link their interests with those of shareholders.
COMPENSATION COMMITTEE
P. McCausland (Chair)
E. E. Holiday
J. M. Lipton
P. A. Sneed
R. S. Troubh
26
FIVE YEAR PERFORMANCE COMPARISON
The following graph shows the performance of an initial investment of $100
in the Company's common stock compared to equal investments in the S&P 500
Index, the S&P Specialty Chemicals Index and the S&P Chemical Index over the
five-year period beginning December 31, 1996 and ending December 31, 2001. The
graph reflects reinvestment of all dividends paid.
The total shareholder return shown on the graph below is not necessarily
indicative of future returns on the Company's common stock.
[LINE GRAPH]
1996 1997 1998 1999 2000 2001
------- ------ ------ ------ ------ ------
HERCULES INCORPORATED 100.00 118.22 66.36 70.41 50.04 26.25
S&P 500 100.00 133.36 171.48 207.56 188.66 166.24
S&P SPECIALTY CHEMICALS INDEX 100.00 123.83 105.46 116.73 103.84 97.31
S&P CHEMICAL INDEX 100.00 122.91 111.95 146.43 122.49 119.52
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The Compensation Committee is composed of five members: Messrs. Lipton,
McCausland (Chairman) and Troubh and Mss. Holiday and Sneed. None of the members
of the Compensation Committee is an officer, employee or former officer or
employee of the Company or its subsidiaries. In 2001, none of the members of the
Compensation Committee had any relationship requiring disclosure in accordance
with Item 402(j)(3) of Regulation S-K of the SEC.
27
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth information, as of April 30, 2002, with
respect to the beneficial ownership of Hercules common shares by:
o beneficial owners of more than five percent of Hercules common stock,
o each Hercules director and nominee for director,
o each of the executive officers named in the Summary Compensation Table
set forth below, and
o all directors, nominees and executive officers of Hercules as a group.
This beneficial ownership is reported in accordance with the rules of the
SEC, under which a person may be deemed to be the beneficial owner of shares if
that person has or shares the power to vote or dispose of those shares or has
the right to acquire beneficial ownership of those shares within 60 days (for
example, through the exercise of an option). Accordingly, the shares shown in
the table as beneficially owned by certain individuals may include shares owned
by certain members of their respective families. Because of these rules, more
than one person may be deemed to be the beneficial owner of the same shares. The
inclusion of the shares shown in the table is not necessarily an admission of
beneficial ownership of those shares by the person indicated.
OPTIONS
SHARES EXERCISABLE
BENEFICIALLY WITHIN 60 RESTRICTED PERCENT OF
NAME OWNED (1) DAYS STOCK UNITS SHARES (2)
-------------------------------------------- ---------- --------- ----------- ----------
DIRECTORS AND OFFICERS
W. H. Joyce, Director and Officer (3) 24,509 0 0 *
R. Fairbanks, Director 21,059 24,000 1,253 *
R. C. Flexon, Officer 10,770 12,280 0 *
I. J. Floyd, Officer 65,163 123,000 0 *
T. L. Gossage, Director and Officer (4) 129,003 1,000,000 0 1.0%
S. J. Heyman, Director 9,895,950 (5) 0 1,100 9.1%
A. R. Hirsig, Director 6,554 9,000 1,100 *
E. E. Holiday, Director 3,999 21,000 1,376 *
R. D. Kennedy, Director 10,000 0 1,100 *
S. Kumar, Director 17,108 0 1,100 *
J. M. Lipton, Director 16,039 0 1,100 *
P. McCausland, Director 17,234 12,000 1,100 *
C. A. Rogerson, Officer 7,805 36,400 0 *
G. Schaffer, Director 2,750 0 1,100 *
P. A. Sneed, Director 11,925 21,000 1,253 *
M. Sonneveld, Officer 9,615 115,900 0 *
R. S. Troubh, Director 14,870 0 1,100 *
J. B. Wyatt, Director 4,350 0 1,100 *
All directors and executive officers as a group 10,391,205 1,853,000 13,782 11.2%
28
5% SHAREHOLDERS
International Specialty Products, Inc. 9,893,700 0 0 9.1%
C/o ISP Management Company, Inc.
1361 Alps Road
Wayne, New Jersey 07670
Mario J. Gabelli and related entities (6) 10,395,000 0 0 9.5%
C/o Gabelli Asset Management Inc.
One Corporate Center
Rye, New York 10580
T. Rowe Price Associate, Inc. (7) 7,643,260 0 0 7.0%
100 E. Pratt Street
Baltimore, Maryland 21202
* Less than 1% of the outstanding Hercules common shares.
(1) Includes shares, as of April 30, 2002, in the Hercules Savings and
Investments Plan as follows: R. C. Flexon, 799; I. J. Floyd, 1,944; C. A.
Rogerson, 849; and M. Sonneveld, 2,902; and all directors and officers as a
group, 32,139. Includes shares with restrictions and forfeiture risks as
specified under the Long Term Incentive Compensation Plan; W. H. Joyce,
24,509; R. C. Flexon, 9,971; I. J. Floyd, 38,000; C. A. Rogerson, 6,956;
and M. Sonneveld, 1,683; and all directors and officers as a group,
118,766. Owners have the same voting and dividend rights as other
shareholders of Hercules, but no right to sell or transfer. Included in the
non-employee directors' totals is a one-time equity award.
(2) Based on 109,242,740 shares outstanding on April 30, 2002.
(3) Named Chief Executive Officer effective May 8, 2001 and Chairman effective
July 1, 2001.
(4) Retired as Chief Executive Officer effective May 8, 2001 and as Chairman
effective July 1, 2001. As of May 9, 2002, all of Mr. Gossage's rights to
exercise options have expired.
(5) Includes 9,893,700 shares held by International Specialty Products, Inc.
("ISP"). Mr. Heyman beneficially owns (as defined in Rule 13d-3 of the
Exchange Act) approximately 81% of the capital stock of ISP and therefore
may be deemed to beneficially own (solely for purposes of Rule 13d-3) the
Hercules common stock owned by ISP.
(6) Share holding as of November 19, 2001, as reported on Amendment No. 5 to
the Schedule 13D filed by such shareholder.
(7) Share holding as of February 14, 2002, as reported on Amendment No. 3 to
the Schedule 13G filed by such shareholder.
29
COMPENSATION OF EXECUTIVE OFFICERS
The following table contains information concerning compensation paid or to
be paid to those serving as Chief Executive Officer and the other most highly
compensated executive officers of the Company for services rendered to the
Company and its subsidiaries during the past three completed fiscal years.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS ALL OTHER
SALARY BONUS RESTRICTED OPTIONS INCENTIVE COMPENSATION
YEAR ($) ($) OTHER ($) STOCK(4)($) (SHARES) PAYOUTS($) (5)($)
--- --- --------- ----------- -------- ---------- ------
W. H. Joyce(1) 2001 $666,667 $997,500 $5,662 1,250,000 $ 10,126
Chief Executive Officer and 2000 -- -- -- -- --
Chairman 1999 -- -- -- -- --
T. L. Gossage (2) 2001 97,742
Former Chief Executive 2000 27,995 $1,848,043 1,000,000 63,588
Officer and Chairman 1999 -- -- -- --
R. C. Flexon,Vice 2001 248,000 175,000 35,500 5,100
President, Corporate 2000 138,182 -- 58,181(3) 93,750 30,700 3,000
Affairs, Strategic Planning 1999 -- -- -- -- -- --
and Work Processes
I. J. Floyd 2001 383,340 125,186 35,500 13,242
Corporate Secretary and 2000 383,340 -- 24,029 256,000 50,000 9,926
General Counsel 1999 225,259 -- 3,110 517,000 9,375 10,647
C. A. Rogerson 2001 257,928 200,000 4,631 35,500 7,772
Vice President, Hercules 2000 157,614 -- 114,742(3) 45,500 4,375
Incorporated and President, 1999 -- -- -- -- --
FiberVisions, Rosin &
Terpenes
M. Sonneveld 2001 248,340 178,288 35,500 9,551
Vice President 2000 240,000 -- 10,653(3) 35,500 13,338
Work Processes 1999 240,000 -- -- 21,000 10,933
(1) Dr. Joyce became Chief Executive Officer effective May 8, 2001.
(2) Mr. Gossage received a nominal salary of $1.00/week for benefit
participation purposes. Mr. Gossage received no other cash compensation
(base or annual incentive). Mr. Gossage's other annual compensation
includes $37,353 for use of the Company plane which has since been sold.
Mr. Gossage retired as Chief Executive Officer effective May 8, 2001. As of
May 9, 2002, all of Mr. Gossage's rights to exercise options have expired.
(3) Includes taxes and relocation expenses paid by the Company.
(4) These values are determined by multiplying the number of shares of
restricted stock awarded by the closing market price of Hercules' common
stock on the date of grant and subtracting the consideration, if any, paid
by the executive officer. Dividends may be paid on a current basis or
accrued. Mr. Floyd's restricted stock grant for the year 2000 will vest
only if Hercules' stock price reaches $50 before November 4, 2002.
The number and value (determined by taking the number of shares of
restricted stock multiplied by the year-end closing market price, $10.00,
net of any consideration paid) of aggregate restricted stock holdings is
shown below. Included in the chart are restricted shares that each
executive officer purchased under the terms of the Hercules Long Term
Incentive Compensation Plan, as well as shares that have been granted
outright. The aggregate amount paid for restricted shares by executive
officers was $104,500.
30
Aggregate
Restricted
Shares Net Value
---------- ---------
W. H. Joyce 0 $ 0
T. L. Gossage 0 0
R. C. Flexon 5,000 50,000
I. J. Floyd 41,553 380,000
C. A. Rogerson 0 0
M. Sonneveld 0 0
(5) Major components of "All Other Compensation" are listed below.
Company
Match
(Defined Interest Credits
Contribution On Stock
Plans) Options
------------ ----------------
W. H. Joyce $10,126
T. L. Gossage 0
R. C. Flexon 5,100
I. J. Floyd 13,242
C. A. Rogerson 7,772
M. Sonneveld 8,294 $ 1,257
31
OPTION GRANTS IN LAST FISCAL YEAR
The following table discloses information concerning individual grants of
stock options made during the last completed fiscal year to the executive
officers named in the Summary Compensation Table.
PERCENT OF
NO. OF TOTAL EXERCISE
SECURITIES OPTIONS OR
UNDERLYING GRANTED TO BASE PRICE EXPIRATION GRANT VALUE GRANT DATE
---------- ---------- ---------- ---------- ----------- ----------
NAME OPTIONS GRANTED EMPLOYEES ($/SHARE) DATE DATE VALUE(1)
---- --------------- --------- --------- ---- ---- --------
W. H. Joyce 1,250,000 (2) 44.9% $ 12.00 5/9/2011 5/8/2001 $7,704,000(3)
T. L. Gossage 0
R. C. Flexon 35,500 (4) 1.3% $11.28 8/23/2011 8/23/2001 $202,769(3)
I. J. Floyd 35,500 (4) 1.3% $11.28 8/23/2011 8/23/2001 $202,769(3)
C. A. Rogerson 35,500 (4) 1.3% $11.28 8/23/2011 8/23/2001 $202,769(3)
M. Sonneveld 35,500 (4) 1.3% $11.28 8/23/2011 8/23/2001 $202,769(3)
(1) The Black-Scholes option-pricing model was used to determine the fair value
of employee stock options in the table above as of the date of the grant.
In the fourth quarter of 2000, the Board of Directors approved the
suspension of Hercules common stock dividend. Had the historical rate of
dividend continued to be valued in the Black-Scholes option-pricing model,
the value of Dr. Joyce's grant hereunder would have been $4,220,665. Other
grants reported herein would be similarly adjusted downward.
No adjustments for risk of forfeiture have been made. Significant
assumptions are as follows:
REGULAR OPTIONS
---------------
Dividend yield 0.0%
Risk free interest rate 5.3%
Expected life 8.0 years
Expected volatility 35.6%
(2) Vesting date is the earliest of April 30, 2003, any "change in control",
death, disability, retirement, or termination other than for cause.
(3) The fair value of options is estimated at the grant date, and at that time
the termination of the dividend and significant decline in the share price
caused by a lack of liquidity gave an unusually high calculated value to
the options. With the sale of the Water Treatment Business and assuming the
new improved cost structure, a calculation made today using the
Black-Scholes method with reasonable assumptions for Hercules going forward
yields a value of $4,721,750 for the options shown for Dr. Joyce. The
assumptions used in this calculation are consistent with the average of
other peer specialty chemical companies; specifically an average dividend
of 2%, an average volatility of 31.2%, a risk-free interest rate of 4.75%
and an expected life of 6 years. A similar calculation made for the options
granted to Messrs. Floyd, Rogerson, Sonneveld and Flexon would yield a
value of $126,050 for each.
(4) Vesting schedule is as follows: 40% on 8/23/2002; 40% on 8/25/2003; 20% on
8/23/2004.
32
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2001 concerning
the number of shares of common stock to be issued upon the exercise of
outstanding options, warrants and rights issued under all of the Company's
existing equity compensation plans, including the Hercules Incorporated
Long-Term Incentive Compensation Plan and the Hercules Incorporated Non-Employee
Director Stock Accumulation Plan; and the weighted average exercise price of
such options, warrants and rights and the number of securities remaining
available for future issuance under such plans. All of the Company's equity
compensation plans have been approved by the Company's shareholders.
(a) (b) (c)
Number of securities
remaining available for
Number of securities to be Weighted-average exercise future issuance under equity
issued upon exercise of price of outstanding compensation plans (excluding
outstanding options, options, warrants and securities reflected in
Plan Category warrants and rights rights column (a))
------------- ------------------- ------ -----------
Equity compensation plans 9,471,983 (1) $33.04 1,488,896
approved by security holders
Equity compensation plans not N/A N/A N/A
approved by security holders(2)
Total 9,471,983 $33.04 1,488,896
(1) Includes 5,271,270 options with exercise prices in excess of the weighted
average price of $33.04.
(2) There are no equity compensation plans that have not been approved by the
Company's shareholders.
33
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The table set forth below discloses certain information concerning the
exercise of stock options (exercised and unexercised) during the last completed
fiscal year by the executive officers named in the Summary Compensation Table as
well as certain information concerning the number and value of unexercised
options as of December 31, 2001. The value of options is calculated using the
difference between the option exercise price and $10.00 (year-end stock price)
multiplied by the number of shares underlying the option.
No. of No. of Securities Value of Unexercised
Shares Value Underlying Unexercised In-The-Money Options
Acquired on Realized Options at Year-End At Year-End
Name Exercise ($) Exercisable Unexercisable Exercisable ($) Unexercisable ($)
---- -------- --- ----------- ------------- --------------- -----------------
W. H. Joyce 0 $0 0 1,250,000 $0 $0
T. L. Gossage(1) 0 0 1,438,000 0 0 0
R. C. Flexon 0 0 12,280 53,920 0 0
I. J. Floyd 4,500 900 103,000 112,375 0 0
C. A. Rogerson 0 0 18,200 62,800 0 0
M. Sonneveld 0 0 101,700 142,050 0 0
(1) Mr. Gossage retired from the Company effective May 8, 2001. As of May 9,
2002, all of Mr. Gossage's rights to exercise options have expired.
34
PENSION PLANS
The following table shows the estimated annual pension benefits payable to
a covered participant at normal retirement age under Hercules' qualified
benefits pension plan, as well as nonqualified supplemental benefits, based on
the stated remuneration and years of service with Hercules and its subsidiaries.
REMUNERATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
-------------- ---------- ----------- ----------- ----------- -------------
$ 200,000 $ 45,588 $ 60,784 $ 75,980 $ 91,176 $ 106,372
250,000 57,588 76,784 95,980 115,176 134,372
300,000 69,588 92,784 115,980 139,176 162,372
350,000 81,588 108,784 135,980 163,176 190,372
400,000 93,588 124,784 155,980 187,176 218,372
450,000 105,588 140,784 175,980 211,176 246,372
500,000 117,588 156,784 195,980 235,176 274,372
600,000 141,588 188,784 235,980 283,176 330,372
700,000 165,588 220,784 275,980 331,176 386,372
800,000 189,588 252,784 315,980 379,176 442,372
900,000 213,588 284,784 355,980 427,176 498,372
1,000,000 237,588 316,784 395,980 475,176 554,372
1,500,000 357,588 476,784 595,980 715,176 834,372
2,000,000 477,588 636,784 795,980 955,176 1,114,372
Annual contributions by Hercules to its qualified pension plan, if any are
required, are determined statistically by an independent actuary, and no amount
is attributed to an individual employee. Due to the funded status of the Pension
Plan, there was no Hercules contribution to the Pension Plan in 2001.
Except in special cases, the aggregate retirement benefit, under both the
qualified and nonqualified plans, is an amount determined by taking the sum of
(i) 1.2% of the employee's average annual earnings (based on the highest five
consecutive years during the last 10 years of employment) up to one-half the
Social Security Tax Base ($40,200 in 2001) and (ii) 1.6% of the employee's
average annual earnings (as determined above) in excess of one-half of the
Social Security Tax Base, multiplied by the employee's total years and months of
credited service. For this purpose, "average annual earnings" consist of salary
plus annual incentive or bonus compensation.
For Dr. Joyce and Messrs. Flexon, Floyd, Gossage, Rogerson and Sonneveld,
compensation used for calculating retirement income benefits consists of the
highest 5 consecutive years of average monthly earnings. These amounts for 2001
are shown under the "Salary" and "Bonus" columns of the Summary Compensation
Table. The estimated credited years of service as of December 31, 2001 for Dr.
Joyce and Messrs. Flexon, Floyd, Gossage, Rogerson and Sonneveld are 0, 1, 28,
36, 19 and 34, respectively.
35
EMPLOYMENT CONTRACTS
On May 8, 2001, Hercules entered into a written employment agreement with
Dr. Joyce which provides for him to serve as Chairman and Chief Executive
Officer. Under the agreement, Dr. Joyce's initial compensation consists of (i) a
base annual salary of $1,000,000, (ii) target annual variable compensation of
$1,000,000 and (iii) a grant of stock options to acquire 1,250,000 shares of
common stock at a per share exercise price of $12.00 (the price of Hercules'
common stock on the date of grant). The stock options have ten-year terms and
vest at the earliest of April 30, 2003, a "change in control", death, disability
or termination other than for cause. The stock options also vest upon
retirement. Dr. Joyce's employment agreement also provides for further grants of
stock options for each calendar year after 2001, at such times as Hercules
generally makes stock option grants to other employees and in amounts and with
terms and conditions consistent with his position. In the event Dr. Joyce's
employment is terminated other than for cause, Hercules would be required to pay
him an amount equal to the base salary and variable compensation he would have
received had he remained employed through April 30, 2003, but not less than
$2,000,000.
CHANGE IN CONTROL AGREEMENTS
Since 1986, Hercules has entered into change in control agreements with its
senior executives. These agreements seek to ensure the stability of Hercules'
management during a period of transition within Hercules and only become
effective upon a change in control event. Hercules' Compensation Committee
periodically reviews these agreements and revises them, if necessary, to reflect
contemporary business practices in change in control situations.
Change in Control Agreements are in force for Dr. Joyce and Messrs. Flexon,
Floyd, Rogerson and Sonneveld. These Agreements provide that a change in control
occurs:
o if any individual, entity or group (with certain exceptions) becomes
the beneficial owner of 20% or more of the outstanding shares of Hercules common
stock;
o if there is a change in a majority of the Board of Directors other than
by election or nomination by a vote of the majority of directors comprising the
incumbent Board of Directors;
o upon approval by the shareholders of a reorganization, merger,
consolidation or sale that results in Hercules' shareholders owning less than
60% of the combined voting power of the surviving corporation following the
transaction; or
o if Hercules' shareholders approve a complete liquidation of the
Company.
Under the terms of these agreements, upon a change in control, Hercules or
its successor is required to continue to employ the above named executives, in
substantially the same position and level of compensation (including benefits)
as that executive held immediately before the change in control, for a period of
three years following the change in control.
Under the terms of these agreements, as amended in 2001 to reduce the
payout, if Hercules or its successor terminates the executive (within the three
year period following a change in control) for any reason other than cause,
death or disability, or if Hercules or its successor takes actions which permit
the executive to terminate his or her employment for good reason, such as
diminishing the executive's responsibilities or requiring the executive to
relocate, during such three year period, the executive is entitled to the
following:
36
o a lump sum cash payment equal to:
- any unpaid prorated portion of the executive's target bonus or,
if greater, the most recent bonus received by the executive;
- any monthly salary earned but unpaid as of the date of
termination;
- three times the executive's base salary and bonus; and
- the difference between the amount the executive would be entitled
to if Hercules or its successor contributed to the executive's
retirement plan for up to three additional years of service (in
addition to the years of service credited during the employment
period) and three additional years of age and that amount the
executive was actually entitled to under this plan on the date of
termination;
o three years of continued welfare benefits and perquisites;
o outplacement services at a cost of up to $50,000;
o full vesting of all stock options and restricted stock held by or
previously granted to the executive; and
o payment for any Internal Revenue Service excise taxes for "excess
parachute payments" (as defined under the Internal Revenue Code).
Dr. Joyce's change in control agreement also provides that if he terminates
his employment on at least 180 days' advance notice after a change of control
and, in the case of a change in control triggered by shareholder approval of a
reorganization, merger, consolidation or sale described above, after
consummation of that transaction, the termination will be treated as a
termination for good reason, giving rise to the severance pay and benefits
described above. The agreement entered into with Dr. Joyce does not provide for
the additional pension service or age credits described above.
METHOD AND COST OF PROXY SOLICITATION
Proxies may be solicited, without additional compensation, by directors,
officers or employees of the Company by mail, telephone, telegram, in person or
otherwise. The Company will bear the costs of the solicitation of proxies, which
may include the cost of preparing, printing and mailing the proxy materials. In
addition, the Company will request banks, brokers and other custodians, nominees
and fiduciaries to forward proxy materials to the beneficial owners of common
stock and obtain their voting instructions. The Company will reimburse those
firms for their expenses in accordance with the rules of the SEC and the New
York Stock Exchange. In addition, the Company has retained MacKenzie Partners,
Inc., 156 Fifth Avenue, New York, NY 10010, to assist in soliciting proxies, for
which services the Company will pay a fee expected not to exceed $15,000, plus
out-of-pocket expenses. If you have any questions about executing your proxy or
require assistance, please contact:
MacKenzie Partners, Inc.
105 Madison Avenue
New York, New York 10016
Call Toll Free: (800) 322-2885
or Call Collect: (212) 929-5500
37
ANNEX I
HERCULES INCORPORATED
AUDIT COMMITTEE CHARTER
ORGANIZATION
MEMBERSHIP
The Committee is composed of non-employee members of the Board of
Directors. Membership is determined by the Board of Directors on the
recommendation of the Nominating Committee. As needed, the Audit Committee
should consider training and education programs to ensure that its
membership has the proper background and knowledge base and stays current
as to relevant developments in accounting and finance. At least one member
of the Audit Committee should have accounting or related financial
management expertise.
MEETINGS
The Committee generally meets once a quarter, or more frequently as
circumstances require. Regular meetings are scheduled in accordance with
the annual schedule approved by the Board of Directors. Minutes are
recorded by the Secretary to the Committee. The Chairman and Chief
Executive Officer, the other Senior Officers of the Company, the Director
of Auditing Services (internal auditors), and representatives of the
Company's independent public accountant (PricewaterhouseCoopers) attend
meetings at the invitation of the Committee.
BASIC FUNCTION AND PURPOSE
The Audit Committee oversees the Company's financial reporting process on
behalf of the Board of Directors. The Committee reviews and discusses the
adequacy of the Company's internal controls; accounting practices;
financial reports; and the scope, specific plans, and effectiveness of the
audits performed by the internal auditors and the independent accountants.
The Audit Committee should conduct candid discussions with management, the
internal auditors, and outside auditors regarding issues implicating
judgment and impacting quality.
At least annually, the Audit Committee should consider the relevance of
this Charter.
RESPONSIBILITIES
INDEPENDENT PUBLIC ACCOUNTANTS
The Committee shall:
1. Recommend to the Board of Directors the selection and retention of
independent public accountants, subject to ratification by
shareholders, to perform the annual audit of financial statements and
the appropriate fees to compensate the independent public accountant.
In this regard, the outside auditor is ultimately accountable to the
Board of Directors and the Audit Committee.
2. Consider, in consultation with the independent public accountant and
management, the planned scope of the annual audit
A-1
of financial statements, including a review of coordination of audit
efforts between the independent public accountant and Auditing
Services Division (internal auditors), and reliance of the independent
public accountant on the work of Auditing Services.
3. Ensure that the independent accountants submit, at least annually, to
the Audit Committee a formal, written statement delineating all
relationships between the independent accountants and the Company. The
Audit Committee is responsible for actively engaging in a dialogue with
the independent accountants with respect to any disclosed relationships
or services that may impact the objectivity and independence of the
independent accountants. As appropriate, the Audit Committee shall
recommend that the Board of Directors take appropriate action in
response to the independent accountants' report to satisfy itself of
their independence.
4. Consider and review with the independent public accountant and
management: a) the adequacy of the Company's internal controls; b) the
Company's annual financial statements and related footnotes including
the quality of accounting principles as applied and the Company's
compliance with "Generally Accepted Accounting Principles" in all
material respects; c) emerging accounting standards and issues
affecting the Company; d) any significant and related findings and
recommendations of the independent public accountant, together with
management's response.
5. At least annually, at a regularly scheduled meeting of the Committee,
meet privately with the independent public accountant without members
of management in attendance to discuss any necessary matters.
6. Prior to public release of quarterly earnings, require that the outside
auditor, in conjunction with SAS 71 Interim Financial Review related to
the Company's future filing of its form 10-Q, discuss with the
Committee whenever possible or with the chair of the Audit Committee or
his/her designee if not possible with the Committee, and a
representative of financial management, in person or by telephone
conference call, the matters described in AU Section 380,
Communications with the Audit Committee.
INTERNAL AUDITING
The Committee shall:
1. Consider and review with management the annual work plan and planned
activities of Auditing Services, the budget and staffing for the
internal audit function, and the charter of Auditing Services.
2. Consider and review the coordination of audit efforts between Auditing
Services and the independent public accountant to ensure completeness
of coverage and efficient use of audit resources, including internal
audit assistance to the independent public accountant.
3. Consider and review with management and Auditing Services significant
internal auditing findings and recommendations related to the adequacy
of internal controls, compliance with policies and procedures, and
effective and efficient use of Company resources; also consider and
review management's response.
4. Meet privately with Auditing Services as required, but at least
annually, at a regularly scheduled meeting of the Committee.
A-2
OFFICERS AND DIRECTORS EXPENSES AND SIGNIFICANT MANAGEMENT ESTIMATES
The Committee shall:
1. Review policies and procedures with respect to expense accounts and
perquisites of officers and directors, including their use of
corporate assets; and consider the results of an annual review of
expenses and perquisites of officers and directors by Auditing
Services or the independent public accountant.
2. Review policies and procedures with respect to the adequacy of
significant management estimates particularly with respect to
recognition of contingent liabilities, such as those resulting from
identified environmental problems, and legal matters, including the
use of outside counsel.
REPORTING RESPONSIBILITY
All action taken by the Audit Committee shall be reported to the Board of
Directors at its next meeting succeeding such action.
A-3
EXHIBIT I
HERCULES INCORPORATED
LONG TERM INCENTIVE COMPENSATION PLAN
(AS AMENDED AND RESTATED)
AMENDMENT 2002-1
WHEREAS, Hercules Incorporated, a Delaware corporation (hereinafter
called the "Company"), maintains the Hercules Incorporated Long Term Incentive
Compensation Plan (As Amended and Restated) (hereinafter called the "LTIC
Plan"); and
WHEREAS, pursuant to Section 19.1 the Company's Board of Directors has
reserved the right to amend the LTIC Plan and now desires to do so in order to
extend the term of the LTIC Plan for another ten years and to change the maximum
award that can be made to any person;
NOW THEREFORE, the LTIC Plan is hereby amended as follows:
1. The next-to-last sentence in Section 4.1.2 is hereby amended to
read as follows:
"Unless this Plan is extended, no Awards shall be granted or exchanges
effected under the Plan after June 27, 2012, but any then current
restrictions applicable to any Awards theretofore granted or exchanges
theretofore effected shall extend beyond that date in accordance with
their provisions and any shares of Common Stock used in payment of
Cash Value Awards and/or Performance Shares originally granted before
June 27, 2012, may be delivered after June 27, 2012, in accordance
with the provisions of the applicable Award."
2. Section 5.1.4 is hereby amended to read as follows:
"5.1.4 Maximum Award to an Individual. During the term of this Plan,
no person shall be granted or receive more than 1,000,000 Options
and/or Performance Accelerated Stock Options during any single year
commencing on June 27, 2002 and on each anniversary of that date prior
to the expiration date of the Plan."
3. The first two sentences of Article XVII are hereby amended to
read as follows:
"The Plan was originally effective as of April 1, 1991, and was
amended and restated thereafter as of June 30, 1993, April 27, 1995,
April 24, 1997 and April 29, 1999 and is being further amended as of
April 25, 2002 subject to shareholder approval. The termination date
of the Plan shall be June 27, 2012."
4. This Amendment 2002-1 shall be effective upon its approval by the
holders of at least a majority of the shares of the Company's issued and
outstanding common stock present or represented and entitled to vote at the 2002
Annual Meeting of Stockholders. Upon such effective date, all of the other terms
and conditions of the LTIC Plan shall continue in full force and effect.
TO RECORD the adoption of this Amendment 2002-1 by the Company's Board
of Directors, the Chairman has caused this document to be executed on this 13th
day of May, 2002.
HERCULES INCORPORATED
By: /s/ William H. Joyce
------------------------------------
William H. Joyce
Chairman
EXHIBIT II
HERCULES INCORPORATED
NON-EMPLOYEE DIRECTOR
STOCK ACCUMULATION PLAN
AMENDMENT 2002-1
WHEREAS, Hercules Incorporated, a Delaware corporation (hereinafter
called the "Company"), maintains the Hercules Incorporated Non-Employee Director
Stock Accumulation Plan (hereinafter called the "Director Plan"); and
WHEREAS, pursuant to Section 9.1 the Company's Board of Directors has
reserved the right to amend the Director Plan and now desires to do so in order
to extend the term of the Director Plan for another ten years and to convert a
portion of the remaining authorized shares so that they will be available to be
issued as restricted stock;
NOW THEREFORE, the Director Plan is hereby amended as follows:
1. Article II is hereby amended in its entirety to read as follows:
"II. EFFECTIVE DATE AND TERM
This Plan expired on April 30, 2001. Notwithstanding the
foregoing, the term of the Plan shall be continued beyond that
expiration date, effective as of the date the extension is approved by
the holders of at least a majority of the shares of the Company's
issued and outstanding common stock present or represented and
entitled to vote at the 2002 Annual Meeting of Stockholders
("Effective Date"). Upon such stockholder approval the Plan shall have
a new expiration date of June 27, 2012."
2. Section 5.2 is hereby amended in its entirety to read as follows:
"5.2 Subject to adjustments as provided in Section 5.4, the maximum
aggregate number of shares of Common Stock for which options may be
granted under Article VI ("Options") shall be fifty-one thousand
(51,000) shares and the maximum aggregate number of shares of Common
Stock that may be exchanged pursuant to Section 7.4 for director fees
under Article VIII ("Deferral Exchanges") shall be fifty thousand
(50,000) shares plus the shares that were authorized and available for
Deferral Exchanges on April 30, 2002."
3. This Amendment 2002-1 shall be effective upon its approval by the
holders of at least a majority of the shares of the Company's issued and
outstanding common stock present or represented and entitled to vote at the 2002
Annual Meeting of Stockholders. Upon such effective date, all of the other terms
and conditions of the Director Plan shall continue in full force and effect.
TO RECORD the adoption of this Amendment 2002-1 by the Company's Board
of Directors, the Chairman has caused this document to be executed on this 13th
day of May, 2002.
HERCULES INCORPORATED
By: /s/ William H. Joyce
------------------------------------
William H. Joyce
Chairman
HERCULES INCORPORATED
2002 ANNUAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE HERCULES BOARD OF DIRECTORS
FOR THE 2002 ANNUAL MEETING OF SHAREHOLDERS ON JUNE 27, 2002
The undersigned hereby appoints William H. Joyce, Israel J. Floyd, and
Robert C. Flexon, and each of them, as proxies, acting jointly and severally and
with full power of substitution, for and in the name of the undersigned to vote
all shares of common stock of Hercules Incorporated that the undersigned is
entitled to vote at the Annual Meeting of Shareholders to be held on Thursday,
June 27, 2002, at 9:00 A.M., local time, at the First USA Riverfront Arts
Center, 800 South Madison Street, Wilmington, Delaware 19801, or at any
adjournments or postponements thereof, as directed, upon the matters set forth
in the Hercules Proxy Statement and upon such other matters as may properly come
before the Annual Meeting.
Signing and dating Hercules' proxy card will have the effect of revoking
any proxy card you signed on an earlier date, and will constitute a revocation
of any previously granted authority to vote for every proposal included on any
proxy card. This card further provides voting instructions for shares held for
the undersigned in the Hercules' Dividend Reinvestment Plan and the employee
savings plans sponsored by Hercules or any of its subsidiaries.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN. IF NO CHOICE IS SPECIFIED AND THE PROXY IS RETURNED WITH THE
STOCKHOLDER'S SIGNATURE(S), THEN THE PROXY WILL BE VOTED FOR APPROVAL OF EACH OF
PROPOSALS 1, 2, 3 AND 4, AND IN THE DISCRETION OF THE PROXIES ON ANY OTHER
MATTERS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING.
(CONTINUED AND TO BE MARKED, DATED AND SIGNED ON REVERSE SIDE)
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o FOLD AND DETACH HERE o
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2, 3 AND 4. PLEASE MARK
YOUR VOTES AS [X]
INDICATED IN
THIS EXAMPLE
1. Election of the following Nominees are: 01 William H. Joyce, 2. Ratification of FOR AGAINST ABSTAIN
director nominees 02 Robert D. Kennedy, PricewaterhouseCoopers LLP
for a three-year term 03 Jeffrey M. Lipton, and as independent accountants [ ] [ ] [ ]
04 Peter McCausland
FOR WITHHOLD Withhold vote only from: 3. Approval of the extension FOR AGAINST ABSTAIN
of the expiration date
[ ] [ ] --------------------------------- of the Hercules Incorporated [ ] [ ] [ ]
Long Term Incentive
Compensation Plan and
PLEASE MARK, DATE, SIGN Mark here if your address has change in the limit for stock
AND RETURN THIS PROXY changed. Please provide us with [ ] options awarded to any
IN THE ENCLOSED PROXY your new address in the space individual.
RETURN ENVELOPE. provided below:
4. Approval of the continued FOR AGAINST ABSTAIN
PLEASE SIGN THIS PROXY New Address: use of the Hercules
AND RETURN PROMPTLY WHETHER ------------------- Incorporated Non-Employee [ ] [ ] [ ]
OR NOT YOU PLAN TO Director Stock Accumulation
ATTEND THE ANNUAL MEETING. ------------------------------- Plan and the conversion
of unused stock options
into available shares of
restricted common stock. Mark here if you [ ]
plan to attend
Annual Meeting
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SIGNATURE SIGNATURE DATE
---------------------------------------------------- ---------------------------------------- ------------------
NOTE: PLEASE SIGN EXACTLY AS NAME APPEARS ON THIS PROXY. JOINT OWNERS SHOULD EACH SIGN PERSONALLY. WHEN SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE YOUR FULL TITLE AS SUCH. WHEN SIGNING AS A CORPORATION OR A PARTNERSHIP,
PLEASE SIGN IN THE NAME OF THE ENTITY BY AN AUTHORIZED PERSON.
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o FOLD AND DETACH HERE o
VOTE BY INTERNET OR TELEPHONE OR MAIL
24 HOURS A DAY, 7 DAYS A WEEK
INTERNET AND TELEPHONE VOTING IS AVAILABLE THROUGH 4PM EASTERN TIME
THE BUSINESS DAY PRIOR TO ANNUAL MEETING DAY.
YOUR INTERNET OR TELEPHONE VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR SHARES IN THE SAME MANNER
AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY CARD.
INTERNET TELEPHONE MAIL
HTTP://WWW.EPROXY.COM/HPC 1-800-435-6710
Use the Internet to vote your Use any touch-tone telephone to Mark, sign and date
proxy. Have your proxy card in OR vote your proxy. Have your proxy OR your proxy card
hand when you access the web card in hand when you call. You will and
site. You will be prompted to enter be prompted to enter your control return it in the
your control number, located in number, located in the box below, enclosed postage-paid
the box below, to create and and then follow the directions given. envelope.
submit an electronic ballot.
IF YOU VOTE YOUR PROXY BY INTERNET OR BY TELEPHONE,
YOU DO NOT NEED TO MAIL BACK YOUR PROXY CARD.