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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission file number 1-496
HERCULES INCORPORATED
A DELAWARE CORPORATION
I.R.S. EMPLOYER IDENTIFICATION NO. 51-0023450
HERCULES PLAZA
1313 NORTH MARKET STREET
WILMINGTON, DELAWARE 19894-0001
TELEPHONE: 302-594-5000
Securities registered pursuant to Section 12(b) of the Act
(Each class is registered on the New York Stock Exchange, Inc.)
Title of each class
Common Stock ($25/48 Stated Value)
8% Convertible Subordinated Debentures due August 15, 2010
9.42% Trust Originated Preferred Securities ($25
liquidation amount), issued by Hercules Trust I
and guaranteed by Hercules Incorporated
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
___ ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
As of March 15, 2000, registrant had outstanding 106,951,188 shares of
common stock, $25/48 stated value ("Common Stock"), which is registrant's only
class of common stock.
The aggregate market value of registrant's Common Stock held by
non-affiliates based on the closing price on March 15, 2000 was approximately
$1.5 billion.
DOCUMENTS INCORPORATED BY REFERENCE
(SPECIFIC PAGES INCORPORATED ARE IDENTIFIED UNDER THE
APPLICABLE ITEM HEREIN.)
Portions of the registrant's definitive Proxy Statement dated March 24,
2000 (the "Proxy Statement") are incorporated by reference in Part III of this
Report. Other documents incorporated by reference in this report are listed in
the Exhibit Index (see page 62).
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PART I
ITEM 1. BUSINESS:
Hercules Incorporated manufactures chemical specialties used in a variety
of home, office and industrial products. We are focused on sustaining long-term
growth in shareholder value, driven by new product development, continuous
improvement in manufacturing costs and responsive customer service. Our
principal products are performance (also referred to as functional) and process
paper chemicals, water treatment chemicals, water-soluble polymers, food
ingredients, resins and polypropylene and polyethylene fibers. The primary
markets we serve include pulp and paper, petroleum refineries, food processors
and manufacturers, paint manufacturers, construction materials, adhesives,
pharmaceutical companies and personal care product manufacturers.
Our products have a low cost impact on the end-users but frequently possess
characteristics important to the functionality of the finished product or the
efficient operation of the manufacturing process. Examples of our products in
consumer end uses include the paper coating and strengthener in writing paper,
the tackifier (which provides stickiness) in adhesive for labels and tapes, the
fibers in inner and outer linings of disposable diapers and the thickeners in
products such as jams, jellies, toothpaste, shampoos and water-based paints.
Examples of our products in industrial end uses include chemicals that improve
manufacturing processes, chemicals that improve the water quality in
manufacturing processes, tile cements used in building materials and resins used
in industrial adhesives. Industrial and commercial uses for our fibers include
decorative fabrics and automotive trim.
In the early 1990s, we were focused primarily on increasing our return on
equity and reducing our costs of operations. Although these objectives are still
important, growth has become our primary deliverable. Accordingly, since 1995,
we have implemented internal and external initiatives to achieve growth and have
disposed of a number of businesses that did not fit our portfolio and acquired
other businesses that better fit our strategy and our current businesses.
Internally, we have committed substantial resources to our research and
development efforts. Through these efforts, since 1995, we have increased sales
of products which are less than five years old. Externally, we consummated five
acquisitions in 1998, the largest of which was the acquisition of BetzDearborn
Inc. These businesses added approximately $1.5 billion of revenue in 1999.
Additionally, the integration of these acquisitions resulted in significant
synergies for us in 1999.
RECENT EVENTS
On February 22, 2000, we announced a new corporate strategy focused on cash
generation, debt reduction and growth of the core businesses: Pulp and Paper,
BetzDearborn and Aqualon. As part of this strategy, we will monetize our
investment in our Food Gums business through the formation of a joint venture
with Lehman Brothers Merchant Banking Partners II L.P. This new venture has
entered into an agreement to acquire the Kelco biogums business from Monsanto.
The Lehman Brothers partnership will own approximately 72% of the new entity and
we will own approximately 28%. We expect that the new entity will have annual
revenues of approximately $450 million.
Further, we have expressed our intention to monetize our Resins business
and we are beginning to explore alternatives regarding our FiberVisions
business. There can be no assurance that we will successfully consummate the
monetization of Food Gums, Resins or FiberVisions.
The Food Gums, Resins and FiberVisions businesses account for approximately
$900 million of our 1999 revenues.
In addition to monetizing assets, we will be concentrating on improving our
asset utilization, working capital management and reducing debt and corporate
overhead costs. These actions may result in restructuring charges in 2000 as
exit plans are finalized.
We are also investigating the possibility of joining a consortium of
chemical and energy companies in a new online network, to be called Envera
Corp., that would provide its members access to business-to-business Internet
commerce. Our possible participation could range from an equity investment to
trading member status.
REPORTABLE SEGMENTS
Our reportable segments are: Process Chemicals and Services (comprised of
Pulp and Paper and BetzDearborn); Functional Products (comprised of Aqualon and
Food Gums); and Chemical Specialties (comprised of Resins and FiberVisions).
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The financial information regarding our segments, which includes net sales and
profit from operations for each of the three years ended December 31, 1999 and
capital employed as of December 31, 1999, 1998 and 1997, is provided in Note 26
to the Consolidated Financial Statements. See Part II, Item 8.
PROCESS CHEMICALS AND SERVICES (PULP AND PAPER AND BETZDEARBORN)
Products and services in this segment are designed to enhance the
manufacturing processes, reduce the operating costs or improve the quality of
the end products of our customers. At the same time, we help our customers meet
their environmental objectives and regulatory requirements. Pulp and Paper and
BetzDearborn sell each other's products to their customers and Pulp and Paper
also sells Aqualon's products to its customers.
In August 1999, we completed the acquisition of the Scriptset water soluble
polymer resin business from Solutia Inc. Since 1991, Hercules had an exclusive
license to sell Solutia's products in North America to the paper industry.
In January 2000, this segment and United States Filter Corporation, a
Vivendi Water Company, a global provider of commercial, industrial, municipal
and residential water and wastewater systems, entered into an alliance to sell
jointly USFilter's capital and chemical feed equipment and Hercules' water and
process treatment chemicals.
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS
- -------- ------------------ ---------------
PULP AND PAPER Performance chemicals: Makers of tissues,
Wet strength, dry strength and sizing paper towels,
packaging, beverage
Process treatment chemicals: containers, newsprint,
Deposit control, biofouling control, papers for magazines and
foam control, clarification, retention/drainage, books, printing and
felt conditioning, deinking, fiber recovery, water writing paper and
closure and crepe and release aids other stationery items
such as labels and
Water treatment chemicals: envelopes
Influent water, effluent water, cooling towers
and boiler systems
BETZDEARBORN Water treatment: Industrial, commercial
Influent water, boilers, cooling towers and and institutional
wastewater establishments;
petroleum refineries,
Process treatment: chemical plants,
Petroleum refining, chemical processing, metals manufacturers of metals,
processing and finishing, automotive assembly, automobile assembly
sugar and alcohol production and mineral plants and makers of food
processing and beverages
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FUNCTIONAL PRODUCTS (AQUALON AND FOOD GUMS)
Products in this segment modify the physical properties of aqueous
(water-based) and non-aqueous systems, are principally derived from natural
resources and are sold as key ingredients to other manufacturers. A broad range
of industries use our products for a variety of applications, including the
world's processed food industry (to stabilize and gel foods), construction
materials manufacturers (for tile cement) and paint manufacturers (to thicken
paints). Aqualon sells products produced by Food Gums to Aqualon's personal care
product customers, while Pulp and Paper and Food Gums sell Aqualon products to
their customer bases.
On December 10, 1999, we announced our intention to close our
nitrocellulose operations due to economic conditions brought on by a persistent
worldwide over-supply. Since that time, we have entered into a non-binding
letter of intent to sell this product line to an undisclosed buyer. We cannot
assure you that the sale of this product line will be consummated.
In December 1999, we sold our 70% interest in Algas Marinas, our Chilean
agar business.
On February 22, 2000, we announced our intention to contribute our Food
Gums division to a newly organized business venture with Lehman Brothers
Merchant Banking Partners II L.P. See "Recent Events" on page 1.
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS
- -------- ------------------ ---------------
AQUALON Water-soluble polymers: Manufacturers of interior and
Hydroxyethylcellulose (HEC), exterior water-based paints,
Carboxymethylcellulose (CMC), oilfield service companies for
Methylcellulose (MC) and derivatives oil and gas exploration, paper
and Hydroxypropylcellulose (HPC) mills, construction material
manufacturers and makers of
oral hygiene products, cosmetics
and dairy and bakery products
Solvent-soluble polymers: Producers of furniture lacquer,
Pentaerythritol (PE) and printing inks and aviation
Ethylcellulose (EC) and fluids
Nitrocellulose (NC)
FOOD GUMS Pectin: ingredient for jams and jellies, Multi-national and regional
yogurt fruit preparations, confectionery, manufacturers and processors
dairy applications, bakery products and of food products
low-fat and no-fat foods
Carrageenan: ingredient for dairy, meat,
poultry and fish products, bakery glazings
and toothpaste
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CHEMICAL SPECIALTIES (RESINS AND FIBERVISIONS)
In this segment, we manufacture hydrocarbon and rosin-based resins. We are
the only global manufacturer to make both of these resins. We are also the
largest manufacturer of thermal bond polypropylene staple fibers used in
products like disposable diapers.
In August 1999, Hercules acquired the water soluble polymer resin business
of Solutia Inc. In addition, to its use in the paper industry, these products
are sold in the adhesive and other industrial specialty markets.
In September 1999, FiberVisions and Chisso Corporation announced their
plans to establish a joint venture to develop and market bicomponent fibers for
use in hygienic and other applications.
In the fourth quarter of 1999, Hercules announced its intention to
discontinue manufacture of pure dicumyl peroxide at the Beringen, Belgium
facility.
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS
- -------- ------------------ ---------------
RESINS Hydrocarbon resins: for adhesives and Makers of consumer
graphic arts and industrial products
such as masking,
Rosin resins: for adhesives, food, packaging, arts and duct
rubber and plastics tape, construction
materials, beverages,
Terpene resins: for chewing gum chewing gum, wire and
and adhesives cables, plastics,
fragrances and flavors,
Peroxides: for wire and cable insulation, printing inks and copier
plastics and rubber toner
Terpene specialties: for flavor and fragrance
in household and industrial products
FIBER VISIONS Polypropylene and polyethylene Makers of disposable
Monocomponent fibers and bicomponent products, feminine care
(PE/PP) fibers: for disposable hygiene products products, upholstered
fabrics, automotive
Textile fibers: for automotive, decorative textiles and
and industrial applications agricultural fabrics
RAW MATERIALS AND ENERGY SUPPLY
Raw materials and supplies are purchased from a variety of industry
sources, including agricultural, forestry, mining, petroleum, and chemical
industries.
Important raw materials for the Process Chemicals and Services segment
are cationic and anionic polyacrylarnides and emulsions, biocides, amines,
surfactants, rosin, adipic acid, epichlorohydrin, fumaric acid, stearic acid,
diethylenetriamine, phosphorus trichloride, wax and starch.
Raw materials important to the Functional Products segment are
acetaldehyde, fatty acids, chemical cotton, woodpulp, ethyl chloride, alcohols,
chlorine, ethylene oxide, propylene oxide, monochloroacetic acid, methyl
chloride, caustic, inorganic acids, guar splits, seaweed, terpenes and citrus
peel.
The important raw materials for the Chemical Specialties segment are
ketones, alcohols, phenol, adipic acid, epichlorohydrin, fumaric acid, stearic
acid, diethylenetriamine, phosphorus trichloride, wax, casein, starch, pigments,
antioxidants, d-limonene, turpentine, crude tall oil, rosin, pine wood stumps,
aromatic and aliphatic resin fonners, cumene, catalysts, pure monomers, toluene,
clay, process oils, polyethylene resin and polypropylene resin.
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Major requirements for key raw materials and fuels are typically
purchased pursuant to multi-year contracts. Hercules is not dependent on any one
supplier for a material amount of its raw material or fuel requirements, but
certain important raw materials are obtained from sole-source or a few major
suppliers.
While temporary shortages of raw materials and fuels may occur
occasionally, these items are currently readily available. However, their
continuing availability and price are subject to domestic and world market and
political conditions as well as to the direct or indirect effect of governmental
action or regulations. The impact of any future raw material and energy
shortages on our business as a whole or in specific world areas cannot be
accurately predicted. Operations and products may, at times, be adversely
affected by governmental action, shortages or international or domestic events.
COMPETITION
The specialty chemicals industry is highly fragmented and its
participants offer a broad array of product lines and categories, representing
many different products designed to meet specific customer requirements.
Individual product or service offerings compete on a global, regional and local
level due to the nature of the businesses and products, as well as the
end-markets and customers served. The industry has become increasingly global as
participants focus on establishing and maintaining leadership positions in
relatively narrow market niches. Many of our businesses face the competitive
pressures discussed above, including industry consolidation, pricing pressures
and competing technologies. In Pulp and Paper, for example, our end-markets are
consolidating and many of our competitors are attempting to enhance their
product offerings on a worldwide basis through alliances and distributor
arrangements. In addition, certain of our businesses are subject to intense
pricing pressures in various product lines, such as fibers in our hygiene
products line and carrageenan in our food ingredients line. FiberVisions, as a
fibers manufacturer for carded applications, faces competition from spunbond
(SB) and spunbond/melt blown/spunbond (SMS) technologies. SB/SMS products may
offer cost savings compared to the products of FiberVisions; however,
FiberVisions believes that its carded products provide improved softness and
acquisition and distribution properties preferred by certain segments of the
disposable diaper and other hygiene products markets.
PATENTS AND TRADEMARKS
Patents covering a variety of products and processes have been issued
to us and our assignees. We are licensed under certain other patents held by
other parties covering our products and processes. Our rights under these
patents and licenses constitute a valuable asset.
We or our wholly owned subsidiaries also have many global trademarks
covering our products. Some of the more significant trademarks include:
Aquapel(R) sizing agent, Hercon(R) sizing emulsions, Aqualon(R) water-soluble
polymers, Natrosol(R) hydroxyethylcellulose, Culminal(R) methylcellulose,
Klucel(R) hydroxypropylcellulose, Natrosol FPS(R) water-soluble polymer
suspension, Precis(R) sizing agent, Novus(R) polymer, Dianodic(R) cooling water
products, Continuum(R) cooling water products, Kymene(R) resin, Regalrez(R)
resin, Slendid(R) fat replacer and Herculon(R) fiber.
We do not consider any individual patent, license or trademark to be of
material importance to Hercules taken as a whole.
RESEARCH AND DEVELOPMENT
Research and development efforts are directed toward the discovery and
development of new products and processes, the improvement and refinement of
existing products and processes, the development of new applications for
existing products and cost improvement initiatives. For example, in 1999 we
entered into an agreement with a biotechnology research and development company
to develop new proprietary industrial enzymes for use in new product and process
development. We spent $85 million on research activities during 1999, as
compared to $61 million in 1998 and $53 million in 1997.
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Process Chemicals and Services currently focuses its research and
development efforts on growth (innovative new product development), technical
sales and services (incremental improvements to existing products and services)
and cost reduction programs to meet diverse customer needs worldwide. Our
state-of-the-art facilities located in Europe and the U.S. are large and
sophisticated research and development laboratories with pilot plant
capabilities that simulate actual operating conditions in our customer
facilities. This allows an accurate assessment of the potential impact of new
products on plant performance.
New product development for performance chemicals is focused on
improving end-use properties. Understanding the product end uses is a critical
step in the development of strength additives and internal and surface sizes, as
well as in the design of products for tissue creping, release and softeners.
In four regional operations centers located in Europe, Asia Pacific,
South America and the U.S., our scientists conduct research and customer
optimization studies focused on solving water and process treatment challenges
by using sophisticated techniques and equipment to provide high level analytical
testing and advanced technical support to customers worldwide.
Aqualon focuses its research and development efforts on targeted,
market-oriented technology programs, process technology and responsive technical
service to customers.
Food Gums focuses its advanced process technology programs on pectin
and carrageenan extraction yield improvement, cheaper peel sources for pectin,
lower cost processes for carrageenan and faster quality control methods.
We have a number of Applications and Development Laboratories
positioned in Europe, Asia and the Americas that provide technical support to
our major customers. At these laboratories, teams work as a network to develop
products, identify new product applications and solve customer problems.
Resins focuses a significant portion of its research and development
efforts primarily on cost improvement techniques in production processes and the
procurement of raw materials. It also engages in new product development (such
as resins for new adhesive systems) and modifying existing products for new
applications.
FiberVisions' major focus in its hygiene product unit is to improve
fiber strength while enhancing product properties for loft, softness and
stretch, thereby creating a competitive platform that is equal to or better than
spunbond. Other research is directed toward the binding, dusting and bonding
functions of bicomponent fibers. The textile product unit is investigating the
use of specific fibers for new applications in the upholstery, automotive,
industrial and decorative fabric industries. The research and development effort
is primarily geared toward the development of new fibers and new applications
for existing markets.
FiberVisions has research and development facilities in the U.S. and
Europe designed to serve the business needs of its customers. Pilot spinning and
processing lines are used to examine new polymers and processing concepts
such as monocomponent or bicomponent fibers from single filament spinning to
full-scale production facilities.
ENVIRONMENTAL MATTERS
We believe that we are in compliance in all material respects with
applicable federal, state, and local environmental laws and regulations.
Expenditures relating to environmental cleanup costs have not materially
affected, and are not expected to materially affect, capital expenditures or
competitive position. Additional information regarding environmental matters is
provided in Item 3.
EMPLOYEES
As of December 31, 1999, we had 11,347 employees worldwide.
Approximately 6,600 were located in the United States, and, of these employees,
about 14% were represented by various local or national unions.
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INTERNATIONAL OPERATIONS
Information on net sales and long-lived assets by geographic areas, for
each of the three years ended December 31, 1999, appears in Note 26 to the
Consolidated Financial Statements. See Part II, Item 8. Direct export sales from
the United States to unaffiliated customers were $342 million, $319 million, and
$309 million for 1999, 1998, and 1997, respectively. Our operations outside the
United States are subject to the usual risks and limitations related to
investments in foreign countries, such as fluctuations in currency values,
exchange control regulations, wage and price controls, employment regulations,
effects of foreign investment laws, governmental instability (including
expropriation or confiscation of assets) and other potentially detrimental
domestic and foreign governmental policies affecting United States companies
doing business abroad.
ITEM 2. PROPERTIES:
Our corporate headquarters and major research center are located in
Wilmington, Delaware, while the administrative headquarters of BetzDearborn is
located in Trevose, Pennsylvania. We also own a number of plants and facilities
worldwide, in locations strategic to the source of raw materials or to our
customers.
All of our principal properties are owned by us, except for our
corporate headquarters, which is leased.
The following are our major worldwide plants:
Process Chemicals and Services - BETZDEARBORN - Addison, Illinois;
Bakersfield, California; Beaumont, Texas; Buenos Aires, Argentina;
Chalon, France; Crissey, France; Edmonton, Alberta, Canada;
Ferentino, Italy; Garland, Texas; Helsingborg, Sweden; Herentals,
Belgium; Houston, Texas; Hsin Chu Hsien, Taiwan; Iksan City, Korea;
Ingelburn, Australia; Jurong Town, Singapore; Kilafors, Sweden;
Langhorne, Pennsylvania; Macon, Georgia; Mississauga, Ontario,
Canada; New Philadelphia, Ohio; Orange, Texas; Point-Claire, Quebec,
Canada; Pudahuel, Santiago, Chile; Qualiano, Italy; Reserve,
Louisiana; Santafe de Bogota, Colombia; Santiago, Chile; Sara,
Mexico; Sorocaba, Brazil; Stonehouse, Gloucester, United Kingdom;
Surabaya, Indonesia; Valencia, Venezuela; Washougal, Washington;
Widnes, Cheshire, United Kingdom; and PULP AND PAPER - Aberdeen,
Scotland; Beringen, Belgium; Burlington, Ontario, Canada; Busnago,
Italy; Chicopee, Massachusetts; Franklin, Virginia; Hattiesburg,
Mississippi; Kalamazoo, Michigan; Kim Cheon, Korea; Lilla Edet,
Sweden; Mexico City, Mexico; Milwaukee, Wisconsin; Nantou, Taiwan;
Pandaan, Indonesia; Paulinia, Brazil; Pendlebury, England; Portland,
Oregon; St. Jean, Quebec, Canada; Sandarne, Sweden; Savannah,
Georgia; Shanghai, China; Sobernheim, Germany; Tampere, Finland;
Tarragona, Spain; Traun, Austria; Voreppe, France; and Zwijndrecht,
The Netherlands.
Functional Products - AQUALON - Alizay, France; Doel, Belgium;
Hopewell, Virginia; Kenedy, Texas; Louisiana, Missouri; Parlin, New
Jersey; Zwijndrecht, The Netherlands; and FOOD GUMS - Cebu, The
Philippines; Grossenbrode, Germany; Lille Skensved, Denmark; and
Limeira, Brazil.
Chemical Specialties - FIBERVISIONS L.L.C. - Athens, Georgia;
Covington, Georgia; Suzhou, China; and Varde, Denmark; and RESINS -
Beringen, Belgium; Brunswick, Georgia; Burlington, Ontario, Canada;
Franklin, Virginia; Gibbstown, New Jersey; Hattiesburg, Mississippi;
Jefferson, Pennsylvania; Middelburg, The Netherlands; Portland,
Oregon; San Juan del Rio, Mexico; Savannah, Georgia; Tokushima,
Japan; and Uruapan, Mexico.
Our plants and facilities, which are continually added to and
modernized, are generally considered to be in good condition and adequate for
business operations. From time to time we discontinue operations at, or dispose
of, facilities that have for one reason or another become unsuitable. For
example, we have decided to close our nitrocellulose operations due to economic
conditions brought on by a persistent worldwide over-supply.
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We have initiated the following major expansion projects designed to
strengthen our market position in key growth areas, while continuing to improve
our manufacturing efficiencies:
- a 15,000 metric ton capacity expansion of long spin staple
fiber in China;
- a 7,000 metric ton methylcellulose capacity increase in
Belgium;
- a 2,200 metric ton pectin capacity increase in Germany;
- a 400 metric ton hydroxypropylcellulose capacity increase in
Virginia; and
- a 700 metric ton capacity plant for the manufacture of
high-performance paper chemicals in China.
ITEM 3. LEGAL PROCEEDINGS:
ENVIRONMENTAL
General
Hercules has been identified as a potentially responsible party (PRP) by
U.S. federal and state authorities, or by private parties seeking contribution,
for the cost of environmental investigation and/or cleanup at numerous sites.
The estimated range of the reasonably possible share of costs for the
investigation and cleanup is between $60 million and $230 million. The actual
costs will depend upon numerous factors, including the number of parties found
responsible at each environmental site and their ability to pay; the actual
methods of remediation required or agreed to; outcomes of negotiations with
regulatory authorities; outcomes of litigation; changes in environmental laws
and regulations; technological developments; and the amount of time of remedial
activity required, which could range from 0 to 30 years.
Hercules becomes aware of sites in which it may be named a PRP in
investigatory and/or remedial activities through correspondence from the U.S.
Environmental Protection Agency, or other government agencies, or through
correspondence from previously named PRPs, who either request information or
notify us of our potential liability. We have established procedures for
identifying environmental issues at our plant sites. In addition to
environmental audit programs, we have environmental coordinators who are
familiar with environmental laws and regulations and act as a resource for
identifying environmental issues.
United States v. Vertac Corporation, USDA No. LR-C-92-137 (E.D. Ark.)
Litigation over liability at Jacksonville, Arkansas, the most significant
site, has been pending since 1980. As a result of a pretrial Court ruling in
October 1993, Hercules has been held jointly and severally liable for costs
incurred, and for future remediation costs, at the Jacksonville site by the
District Court, Eastern District of Arkansas (the Court).
Other defendants in this litigation have either settled with the government
or, in the case of the Department of Defense (DOD), have not been held liable.
We appealed the Court's order finding the DOD not liable. On January 1, 1995,
the Eighth Circuit Court of Appeals upheld the Court's order. We filed a
petition to the U.S. Supreme Court requesting review and reversal of the Eighth
Circuit Court ruling. This petition was denied on June 26, 1995, and the case
was remanded to the District Court for further proceedings.
On May 21, 1997, the Court issued a ruling that Uniroyal is liable and that
Standard Chlorine is not liable to Hercules for contribution. Through the filing
of separate summary judgment motions, Hercules and Uniroyal raised a number of
defenses to the United States' ability to recover its costs. On October 23,
1998, the Court denied those motions and granted the United States' summary
judgment motion, ordering Hercules and Uniroyal to pay the United States
approximately $103 million plus any additional response costs incurred or to be
incurred after July 31,
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1997. Trial testimony on the issue of allocation between Hercules and Uniroyal
was completed on November 6, 1998.
On August 6, 1999, the Court issued a final judgment in which it reduced
the $103 million from the previous ruling on summary judgment by approximately
$7 million (the amount received by the United States in previous settlements
with other parties) and added applicable interest to reach a final total
adjudged liability of approximately $100.5 million. This final judgment was
based on the Court's findings that (a) Hercules and Uniroyal were jointly and
severally liable for approximately $89 million plus any additional response
costs incurred or to be incurred after May 31, 1998, and (b) Hercules was solely
liable for an additional amount of approximately $11 million. This judgment
finalizes the Court's 1993 and 1997 non-final orders in which Hercules and
Uniroyal were held jointly and severally liable for past and future remediation
costs at the site. Hercules appealed these rulings to the United States Court of
Appeals for the Eighth Circuit on December 16, 1999.
On February 8, 2000, the Court issued a final judgment on the allocation
between Uniroyal and Hercules, finding Uniroyal liable for 2.6 percent and
Hercules liable for 97.4 percent of the costs at issue. Hercules appealed that
judgment on February 10, 2000. That appeal has been docketed and consolidated
with the earlier mentioned appeal. Oral argument before the United States Court
of Appeals for the Eighth Circuit is presently scheduled for mid-2000. Neither
of the Court's final judgments has changed our outlook on the potential outcome
of this matter.
Hercules Incorporated v. Aetna Casualty & Surety Company, et al.,
Del. Super., C.A. No. 92C-10-105 and 90C-FE-195-1-CV (consolidated)
In 1992, Hercules brought suit against its insurance carriers for past and
future costs for cleanup of certain environmental sites. In April 1998, the
trial regarding insurance recovery for the Jacksonville, Arkansas site (see
discussion above) was completed. The jury returned a "Special Verdict Form" with
findings that, in conjunction with the Court's other opinions, were used by the
Court to enter a judgment in August 1999. The judgment determined the amount of
Hercules' recovery for past cleanup expenditures and stated that Hercules is
entitled to similar coverage for costs incurred since September 30, 1997 and in
the future. Hercules has not included any insurance recovery in the estimated
range of costs above. Since entry of the Court's August 1999 order, Hercules has
entered into settlement agreements with several of its insurance carriers and
has recovered certain settlement monies. Pursuant to the settlement agreements,
the terms of those settlements and amounts recovered are confidential.
Brunswick, Georgia Consent Order and Related Matters
In December 1997, Hercules received notice of an enforcement action by the
State of Georgia, Environmental Protection Department (EPD). In the notice, EPD
requested that Hercules enter into a proposed Consent Order, alleged violations
of the Resource Conservation and Recovery Act (RCRA) and sought a civil penalty
of $250,000. Hercules, without admitting liability, entered into a Consent Order
with the State of Georgia settling those claims. The Consent Order was finalized
and became effective in January 1999. The Consent Order requires Hercules to pay
a fine of $80,000, install 3 aquaria in the Brunswick, Georgia community,
maintain the aquaria for 10 years and remediate certain soils that are located
at Hercules Brunswick, Georgia plant. That penalty was timely paid, and Hercules
is currently in compliance with that Consent Order. In February 1999, the
Brunswick, Georgia plant was subject to a multi-media inspection conducted
jointly by the U.S. Environmental Protection Agency (EPA) and EPD. As a result
of that inspection, several potential areas of non-compliance with applicable
environmental laws were identified. We have already addressed many of these
potential areas of non-compliance, and are working with both EPA and EPD to
address the others. In March 2000, EPD sent a proposed Consent Order to Hercules
which included a proposed penalty of $330,000. We are presently in negotiations
with EPD regarding the terms of the proposed Consent Order and the amount of the
proposed penalty.
In addition to the multi-media inspection at the Brunswick, Georgia plant
referred to above, the Hattiesburg, Mississippi plant was also subject to a
multi-media inspection. As a result of that inspection several potential areas
of non-compliance with applicable environmental laws were identified. We have
already addressed many of these potential areas of non-compliance, and are
working with both EPA and the Mississippi Department of Environmental Quality
(DEQ) to address others. In March 2000, DEQ sent a proposed Consent Order to
Hercules which included a proposed penalty of $232,500. We are presently in
negotiations with DEQ regarding the terms of the proposed Consent Order and the
amount of the proposed penalty.
******
At December 31, 1999, the accrued liability of $60 million for
environmental remediation represents management's best estimate of the probable
and reasonably estimable costs related to environmental remediation. The extent
of liability is evaluated quarterly. The measurement of the liability is
evaluated based on currently available information, including the process of
remedial investigations at each site and the current status of negotiations with
regulatory authorities regarding the method and extent of apportionment of costs
among other PRPs. Hercules does not anticipate that its financial condition will
be materially affected by environmental
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remediation costs in excess of amounts accrued, although quarterly or annual
operating results could be materially affected.
Litigation
Current Litigation
Hercules is a defendant in numerous lawsuits that arise out of, and are
incidental to, the conduct of its business. In these legal proceedings, no
specifically identified director, officer, or affiliate is a party or a named
defendant. These suits concern issues such as product liability, contract
disputes, labor-related matters, patent infringement, environmental proceedings
(discussed above), property damage, and personal injury matters.
Hercules is a defendant in numerous asbestos-related personal injury
lawsuits and claims which typically arise from alleged exposure to products
which were sold by a former subsidiary of Hercules, or from alleged exposure to
asbestos contained in facilities owned or operated by Hercules. In December
1999, Hercules entered into a settlement agreement to resolve the majority of
these matters. In connection with that settlement, Hercules entered into an
agreement with several of its insurance carriers pursuant to which a majority of
the amounts paid will be insured. The terms of both agreements are confidential.
In June 1998, Hercules, along with Georgia-Pacific and AlliedSignal, were
sued in Georgia State Court by 423 plaintiffs for alleged personal injuries and
property damage. This litigation is captioned Coley, et al. v. Hercules
Incorporated, et al., No. 98 VSO 140933 B (Fulton County, Georgia). Plaintiffs
allege they were damaged by the discharge of hazardous waste from the companies'
plants. This case is in the early stages of motion practice and discovery. We
have denied liability and intend to vigorously defend.
In August 1999, Hercules was sued in an action styled as Cape Composites,
Inc. v. Mitsubishi Rayon Co., Ltd., Case No. 99-08260 (U.S. District Court,
Central District of California), one of a series of similar class action
lawsuits brought on behalf of purchasers of carbon fiber and carbon prepreg in
the United States (excluding the government) from the named defendants from
January 1, 1993 through January 31, 1999. In these lawsuits, plaintiffs allege
violations of Section 1 of the Sherman Antitrust Act for alleged price fixing.
In September 1999, these lawsuits were consolidated by the Court into a case
captioned Thomas & Thomas Rodmakers v. Newport Adhesives and Composites, Case
No. CV-99-07796-GHK (U.S. District Court, Central District of California), with
all related cases ordered dismissed. This lawsuit is in the early stages of
motion practice and discovery. Hercules, which is named in connection with its
former Composites Products Division, which division was sold to Hexcel
Corporation in 1996, has denied the material allegations set forth in the
consolidated complaint. Hercules intends to vigorously defend this action.
In December 1999, an action was filed in the U.S. District Court for the
Eastern District of Pennsylvania on behalf of two classes of individuals: (1)
veterans of the South Korean military who claim they were exposed to Agent
Orange and other chemical defoliants used in the demilitarized zone between
North and South Korea between 1967 and 1970 and (2) veterans of the United
States military who also claim to have been similarly exposed. This case is
captioned Chank Ok-Lee, Individually and as Representative of a Class, and
Thomas Wolfe, Individually and as Representative of a Class v. Dow Chemical Co.,
et al., Civil Action No. 99-6127 (U.S. District Court, Eastern District of
Pennsylvania). The case is in the earliest stages of motion practice, including
a motion to transfer venue to the Eastern District of New York, where Agent
Orange related lawsuits have previously been consolidated.
Litigation Resolved in 1999
Hercules was a defendant in three Qui Tam (Whistle Blower) lawsuits in the
U.S. District Court for the Central District of Utah, brought by former
employees of the Aerospace business sold to Alliant Techsystems Inc. in March
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1995. The first suit (United States of America ex. rel. Katherine A. Colunga v.
Hercules Incorporated, et al., Civil No. 89-C-954B(U.S. District Court, Central
District of Utah) was dismissed in July 1998.
United States of America ex. rel. Benny D. Hullinger, et al., Civil No.
92-CV-085 (U.S. District Court, Central District Utah)
The parties to this second lawsuit reached a tentative settlement, subject
to approval of the Court, in August 1998. Although it did not intervene in the
case, the U.S. Department of Justice ("DOJ") objected to approval of the
tentative settlement, arguing that we should only be released from claims that
the government contended were actually investigated. The DOJ further argued that
the proposed allocation of settlement proceeds between False Claims Act claims
and wrongful termination claims should be revised to attribute a higher
percentage of recovery to claims arising under the False Claims Act. On February
9, 1999, the Court entered a judgment to approve the settlement and dismiss the
lawsuit. On April 12, 1999 the DOJ's 60-day period to appeal the judgment
expired without the DOJ having filed a Notice of Appeal. Eight days later, on
April 20, 1999, the DOJ filed a Motion to Extend Time for Filing Notice of
Appeal. We and the plaintiffs opposed the motion, arguing that the DOJ had not
made the showing of excusable neglect required by the rules for such an
extension. On May 4, 1999, the Court denied the DOJ's motion. On May 21, 1999,
the DOJ determined that they would not appeal further. The Court's judgment
dismissing the lawsuit became final on May 28, 1999.
United States of America ex. rel. P. Robert Pratt v. Alliant Techsystems,
Inc. and Hercules Incorporated, Civil No. 95-4812 SVW (U.S. District Court,
Central District of California)
In March 1995, we sold our Aerospace business to Alliant Techsystems, Inc.
As part of the sale, we received an ownership interest in Alliant. In March
1997, Alliant and Hercules received a partially unsealed complaint that named
both as defendants, initiated on an unknown date, and filed in an undisclosed
federal court, in a Qui Tam action by a former employee alleging violations of
the False Claims Act. The action was subsequently identified as United States of
America ex. rel. P. Robert Pratt v. Alliant Techsystems, Inc and Hercules
Incorporated. The action alleged labor mischarging at Alliant's Bacchus Works
facility in Magna, Utah, and contained a claim for wrongful termination. Damages
were not specified, and Alliant and Hercules agreed to share equally the cost of
defense until such time as a determination was made as to the applicability of
the indemnification provisions of the Purchase and Sale Agreement between
Alliant and Hercules. In February 1998, the parties reached a tentative
settlement, which has since been finalized, under which all claims alleging
mischarging to the Intermediate Nuclear Forces Contract were settled. The
settlement was recognized in the fourth quarter 1997. Other portions of the
complaint, which included allegations of mischarging to other government
contracts and claims for wrongful termination of employment were not resolved by
the settlement. The government did not intervene in these other matters. In
August 1998, the parties reached a tentative settlement of the remaining
portions of the complaint, subject to approval of the Court. The DOJ objected to
approval of the tentative settlement, arguing that we should only be released
from claims that the government contended were actually investigated, and that
the settlement agreement should have contained certain provisions preventing
Alliant from recovering certain costs under its government contracts. On
February 17, 1999, the Court entered a judgment approving the settlement and
dismissing the lawsuit. On March 23, 1999, the DOJ filed a Notice of Appeal. In
subsequent discussions with DOJ's counsel, Hercules and Alliant agreed to amend
the settlement agreement to include provisions that prevent Alliant from
recovering under its government contracts the costs that had been the subject of
prior discussions with the DOJ. Following such agreement, the DOJ withdrew its
appeal. At this point, the dismissal of the lawsuit became final. The amendment
to the settlement agreement was submitted to the Court for its approval on
August 2, 1999. The Court subsequently approved the amendment to the settlement
agreement.
Jeffrey Shelton Jr., et al. v. Hercules Incorporated, Civil No. LR-C-97-131
(E.D. Ark. 1997)
This lawsuit involved two individuals seeking medical monitoring and
damages for loss of recreational opportunities. They brought a Resource
Conservation and Recovery Act (RCRA) citizens suit against us seeking an
injunction which would require us to fund or perform various environmental and
health studies and pay for any required remediation to the Bayou Meto.
Plaintiffs and Hercules filed motions for summary judgment. In October 1999, the
Court granted Hercules' motion for summary judgment and the time for any appeal
by the plaintiffs has expired.
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Gary Graham, et al. v. Vertac Chemical Corporation and Hercules
Incorporated, Civil No. LR-C-98-678 (U.S. District Court, Eastern District
of Arkansas).
In addition to the Vertac litigation described above in this Item 3 under
"Environmental," this lawsuit was filed by a group of 19 individuals seeking
damages for personal injuries and diminution of property value as a result of
alleged dioxin contamination from the Jacksonville, Arkansas site. This case was
dismissed without prejudice on technical grounds on August 2, 1999. The time to
appeal has run.
Acosta, et al. v. Betz Laboratories, et al., No. BC 161 669 (1996); Adams,
et al. v. Betz Laboratories, et al., No. BC 113 000 (1994); Aguilar, et al.
v. Betz Laboratories, et al., No. BC 158 588 (1996); and Aguayo et al. v.
Betz Laboratories, et al., No. BC 123 749 (1995).
BetzDearborn, along with Pacific Gas and Electric (PG&E), is a defendant in
these four lawsuits involving in the aggregate approximately 2,350 plaintiffs
pending in the Superior Court of Los Angeles County, California (the lawsuits).
BetzDearborn maintained insurance coverage for the purpose of securing
protection against alleged product and other liabilities, and certain of the
insurance carriers have undertaken to pay the cost of the defense of the
lawsuits subject to various reservations of rights.
In October 1999, BetzDearborn, several of its insurance carriers, and
plaintiffs engaged in a mediation, which led to a settlement of plaintiffs'
claims against BetzDearborn, which settlement was approved by the court in
February 2000. BetzDearborn also reached a settlement with many of its insurance
carriers with respect to these cases. All of these settlement agreements are
confidential.
******
At December 31, 1999, the consolidated balance sheet reflects a current
liability of approximately $101 million for litigation and claims. Estimated
insurance recoveries of approximately $46 million have been reflected in current
assets. These amounts represent management's best estimate of the probable and
reasonably estimable losses and recoveries related to litigation or claims. The
extent of the liability and recovery is evaluated quarterly. While it is not
feasible to predict the outcome of all pending suits and claims, the ultimate
resolution of these matters could have a material effect upon the financial
position of Hercules, and the resolution of any of the matters during a specific
period could have a material effect on the quarterly or annual operating results
for that period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matter was submitted to a vote of security holders during the fourth
quarter of 1999, through the solicitations of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR HERCULES' COMMON STOCK AND RELATED STOCKHOLDER MATTERS:
Our common stock is listed on the New York Stock Exchange (ticker symbol
HPC), The Stock Exchange, London, and the Swiss Stock Exchange. It is also
traded on the Philadelphia, Midwest, and Pacific Exchanges.
The approximate number of holders of record of common stock ($25/48 stated
value) as of March 15, 2000, was 19,434.
Period High Low
------ ---- ---
1998
First Quarter............................................... 51 3/8 45 3/16
Second Quarter.............................................. 50 1/2 40 1/2
Third Quarter............................................... 41 1/4 24 5/8
Fourth Quarter.............................................. 35 1/2 24 15/16
1999
First Quarter............................................... 29 3/8 25 1/4
Second Quarter.............................................. 40 11/16 24
Third Quarter............................................... 40 3/8 27 1/16
Fourth Quarter.............................................. 29 1/16 22 3/8
On December 31, 1999, the closing price of the common stock was $27 7/8.
Hercules has declared quarterly dividends as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
1998 ................................. $0.27 $0.27 $0.27 $0.27
1999 ................................. $0.27 $0.27 $0.27 $0.27
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ITEM 6. SELECTED FINANCIAL DATA:
A summary of selected financial data for Hercules for the years and year
ends specified is set forth in the table below.
(Dollars and shares in millions, except per share)
- --------------------------------------------------------------------------------------------------------------------
FOR THE YEAR 1999 1998* 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Net sales $3,248 $2,145 $1,866 $2,060 $2,427
Profit from operations 480 192 228 441 363
Income before effect of change in
accounting principle 168 9 324 325 333
Net income 168 9 319 325 333
Dividends 111 104 98 95 95
Per share of common stock
Basic:
Earnings before effect of change in
accounting principle 1.63 .10 3.27 3.10 2.98
Earnings 1.63 .10 3.22 3.10 2.98
Diluted:
Earnings before effect of change in
accounting principle 1.62 .10 3.18 2.98 2.87
Earnings 1.62 .10 3.13 2.98 2.87
Dividends 1.08 1.08 1.00 .92 .84
Total assets 5,896 5,833 2,411 2,386 2,493
Long-term debt 1,777 3,096 419 345 298
Company-obligated preferred securities of
subsidiary trust 992 200 -- -- --
* 1998 includes significant acquisitions (see Note 1.)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
This discussion should be read in connection with the information
contained in the Consolidated Financial Statements and Notes thereto. All
references to individual Notes refer to Notes to the Consolidated Financial
Statements.
ACQUISITIONS, DIVESTITURES, AND UNUSUAL ITEMS
In 1999, we incurred $39 million of integration charges ($3 million
reflected in cost of sales), primarily for employee incentive and retention,
consulting, legal and other costs associated with the BetzDearborn Inc.
acquisition, partly offset by a $4 million restructuring charge reversal (see
Note 13). Integration charges are not anticipated to be significant in 2000.
During the fourth quarter of 1999, we decided to exit the nitrocellulose
business, part of the Functional Products segment, and to take steps to address
the performance of some of our specialty product lines in the Chemical
Specialties segment. As a result of these decisions, we incurred $28 million of
pre-tax costs, consisting of $25 million of asset write-downs and disposal costs
($9 million related to the Functional Products segment and $16 million related
to the Chemical Specialties segment), and $3 million of severance benefits for
approximately 20 manufacturing employees at a Chemical Specialties segment plant
(see
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Notes 13 and 16). The 1999 Profit from operations also includes a net $5 million
charge related to legal and environmental matters (see Notes 16 and 24).
Additionally, a production facility fire, a works accident, and the impact of
Hurricane Floyd added approximately $8 million to cost of sales, and an
executive transition agreement increased selling, general and administrative
expense by $8 million. In 1999, we sold our Chilean Agar business, part of the
Functional Products segment, for a pre-tax gain of $16 million (see Notes 16 and
23).
In 1998, Hercules made five major acquisitions for an aggregate purchase
price of approximately $3,620 million, primarily in cash and assumed debt. These
acquisitions were accounted for using the purchase method of accounting, and
were financed with borrowed funds (see Note 1).
The largest of these acquisitions was the purchase of BetzDearborn, a
global specialty chemical company providing water and process treatment to a
variety of commercial and industrial processes. Additionally, the company
acquired Houghton International's paper chemicals group; Citrus Colloids, a
pectin manufacturer; Alliance Technical Products, a manufacturer of resins
serving the water-based adhesives industry; and the 49% share of FiberVisions
owned by Hercules' joint venture partner, making it a wholly owned subsidiary of
Hercules. This business is the world's largest producer of thermal-bond fiber
for disposable diapers and other hygienic products.
The results of operations of the acquired businesses are included in the
Consolidated Financial Statements from the dates of acquisition. In 1999 and
1998, these businesses added approximately $1,537 million and $363 million of
revenue, respectively. Selling, general and administrative expenses increased in
1999 and 1998 as a result of the amortization of goodwill and intangible assets
acquired, while interest and debt expense increased in both years as a result of
increased debt required to fund the acquisitions.
As a result of the 1998 acquisitions, Hercules incurred charges of $232
million before taxes ($197 million net of income taxes) in the fourth quarter of
1998; $215 million is reflected in Profit from operations and $17 million,
primarily related to termination costs of interest rate swaps on extinguished
debt, is reflected in Other income (expense) (see Note 18). The largest portion
of the charges reflected in Profit from operations was $130 million for
purchased in-process research and development related to the acquisition of
BetzDearborn (see Note 15). The remainder of the charges are primarily related
to the company's plans and actions to integrate the operations of BetzDearborn
and improve the efficiencies of its existing operations and support activities.
The charges include $31 million of employee termination benefits ($12 million
related to the Process Chemicals and Services segment, $7 million related to the
Functional Products segment, $5 million related to the Chemical Specialties
segment and $7 million related to corporate infrastructure), $5 million of exit
costs primarily related to facility closures in the Process Chemicals and
Services segment and $29 million of asset write-downs ($15 million related to
the Functional Products segment, $8 million related to the Chemical Specialties
segment and $6 million related to the Process Chemicals and Services segment)
resulting from adverse business negotiations, the BetzDearborn acquisition, and
the loss of a customer (see Notes 13 and 16). Additionally, we incurred
approximately $11 million of integration expenses related to the acquisition and
other expenses of $9 million. These actions are anticipated to yield cost
savings and productivity improvements of approximately $165 million before taxes
on an annual basis. Other income (expense) in 1998 also included a $62 million
charge from the settlements of long-standing "whistle-blower" lawsuits related
to the divested Aerospace business (see Notes 18 and 24).
The acquisition of BetzDearborn also resulted in the inclusion of a $94
million liability, subsequently adjusted to $98 million, as part of the purchase
price allocation. The adjustment reflects $8 million in additional exit costs,
net of a $4 million reduction in employee severance benefits. This liability
included approximately $74 million related to employee termination benefits and
$24 million for office and facility closures, relocation of BetzDearborn
employees and other related exit costs, all of which relate to the Process
Chemicals and Services segment (see Notes 1 and 13).
With respect to the termination benefits and exit costs incurred in 1998
($31 million in termination benefits and $5 million in exit costs charged to
other operating expenses and $98 million in termination benefits and exit costs
charged to goodwill), cumulative cash payments totaled $59 million through 1999
(see Notes 13 and 16).
Other operating expenses in 1997 reflected charges of $167 million
primarily associated with reorganization of management and the adoption of new
competitive strategies, and other costs (see Note 16). Included in these charges
were $24 million of termination benefits ($3 million in the Chemical Specialties
segment, $7 million in the
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Functional Products segment and $14 million for corporate infrastructure), asset
write-offs and other charges of $27 million ($3 million in Process Chemicals and
Services, $4 million in Functional Products, $13 million in Chemical Specialties
and $7 million related to corporate items), and asset impairments of $95 million
($66 million in the Chemicals Specialties segment, $24 million in the Functional
Products segment and $5 million in the Process Chemicals and Services segment).
The remaining $21 million is related to environmental expenses and executive
retirement benefits. Cash payments for termination benefits totaling $21 million
have been made through 1999 and the remaining $3 million is expected to be paid
in 2000 (see Notes 13 and 16). The asset impairments were the result of changes
in the marketplace and the implementation of alternative strategies which
culminated in the realignment of assets in order to reduce costs. Additionally,
Other income (expense) in 1997 reflects the following items: a $20 million
charge related to acquisition activity; a $32 million charge for legal
settlements; and a $368 million gain from the monetization of Hercules'
investment in Tastemaker (see Notes 18 and 23).
The impairment losses recognized in all three years are calculated
pursuant to our policy for accounting for long-lived assets (see Summary of
Significant Accounting Policies).
The above mentioned unusual items, excluding the $98 million
BetzDearborn purchase price allocation, are primarily included in Reconciling
items in each of the respective years in the segment footnote disclosure (see
Note 26).
In June 1997, we completed a joint venture of our polypropylene fibers
business (see Note 23).
SUBSEQUENT EVENTS
On February 22, 2000, we announced a new corporate strategy focused on cash
generation, debt reduction and growth of the core businesses: Pulp and Paper,
BetzDearborn, and Aqualon. As part of this strategy, we will monetize our
investment in our Food Gums business through the formation of a joint venture
with Lehman Brothers Merchant Banking Partners II L.P. This new venture will
subsequently acquire the Kelco biogums business from Monsanto. The Lehman
Brothers partnership will own approximately 72% of the new entity and we will
own approximately 28%. We expect that the new entity will have annual revenues
of approximately $450 million (see Note 22).
Further, we have entered into discussions with a third party to monetize
our Resins business and we are beginning to explore alternatives regarding our
FiberVisions business (see Note 22).
These three businesses account for approximately $900 million of our 1999
revenues.
In addition to monetizing assets, we will be concentrating on improving our
asset utilization, working capital management and reducing corporate overhead
costs. The above actions may result in restructuring charges in 2000 as exit
plans are finalized.
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RESULTS OF OPERATIONS
(All comparisons are with the previous year, unless otherwise stated.)
1999 VS. 1998:
Consolidated revenues increased $1,103 million or 51% primarily from the
full year revenue impact of the 1998 acquisition of BetzDearborn and
FiberVisions, as well as year-over-year volume improvements in all three
segments. These improvements were partially offset by pricing declines in all
segments due to competitive pressure and the negative effects of a stronger
dollar relative to foreign currencies. Consolidated profit from operations
increased $288 million or 150%. However, after adjusting for the unusual items
described in the previous section, consolidated profit from operations increased
$136 million or 34%. This increase is due to the full year operating profit
impact of the acquired businesses along with synergies realized, manufacturing
cost improvements and volume gains. Offsetting these increases were the negative
impact of pricing declines and the full year impact of goodwill and intangible
amortization expense.
Process Chemicals and Services segment revenues increased $988 million
or 138% primarily due to the full year impact of the acquired BetzDearborn
revenues and higher volumes, partly offset by lower pricing due to competitive
pressure and consolidation within the paper industry. A relatively stronger
dollar, particularly versus the Brazilian real, also negatively impacted the
revenue comparison. Profit from operations increased $207 million or 158%
reflecting a full year of BetzDearborn results in 1999, synergies realized and
manufacturing cost improvements. These improvements were offset by lower pricing
and higher supply chain costs.
Functional Products segment revenues were flat compared to 1998 as food
gums volume and pectin pricing improvements were offset by lower pricing due to
competitive pressure and over-capacity in various other markets and also by weak
demand in the oilfield markets. Profit from operations increased $3 million or
1%. However, excluding the costs primarily associated with a production facility
fire at the Parlin, New Jersey plant, operating profit increased $10 million or
5% primarily due to the recovery of the Asian currencies, particularly the
Japanese yen, relative to the dollar and manufacturing cost improvements.
Chemical Specialties segment revenues increased $119 million or 21%
primarily due to the full year effect of the FiberVisions acquisition and resins
volume improvements, partly offset by lower pricing due to competitive pricing
pressure and lower polymer costs, along with a stronger dollar relative to
foreign currencies. Profit from operations rose $14 million or 19%. Excluding
the third quarter 1999 impact of Hurricane Floyd on our resins production
facilities, operating profit increased $16 million or 21%. The increase in
operating profit is primarily due to the inclusion of FiberVisions results for
the full year 1999 and lower polymer cost offset by lower pricing.
1998 VS. 1997:
Consolidated revenues increased $279 million or 15% as the increase in
revenues from acquisitions was partially offset by the effects of the economic
crisis in Southeast Asia, the strength of the U.S. dollar, and competitive
pricing pressures. Consolidated profit from operations declined $36 million or
16%. However, after adjusting for the impact of the unusual items described in
the previous section, profit from operations increased $12 million or 3%, while
operating margins decreased from 21% in 1997 to 19% in 1998. These results are
due to the operating profit impact of the revenue variance noted above, coupled
with manufacturing cost improvement initiatives, partly offset by higher
selling, general, and administrative expenses.
Process Chemicals and Services segment revenues increased 62%, resulting
from acquisitions. Excluding acquisitions, revenues in this segment were
negatively impacted by competitive pricing pressures, the impact of the economic
crisis in Southeast Asia, and the weakness of foreign currencies relative to the
dollar. Profit from operations increased 31% as the favorable impact of
acquisitions was partly offset by the adverse revenue impacts described above,
higher raw material costs used in the production of wet strength products in
Europe, and higher selling, general, and administrative expenses.
Functional Products segment revenues declined 4% on lower volumes,
particularly in Asia and Eastern Europe, and also the U.S. oilfield markets,
along with the negative impact of weaker foreign currencies relative to
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the dollar, partly offset by acquired revenues and improved pectin pricing.
Profit from operations declined 4%. This was the result of volume declines and
the negative impact of the weaker foreign currencies offset by improved
manufacturing costs and pectin pricing.
Chemical Specialties segment revenues increased 8% as the additional
revenues from acquisitions were partly offset by lower pricing across the major
Resins product lines both in the U.S. and in Europe. Profit from operations rose
12% as the profit from acquisitions was partly offset by the pricing declines in
Resins.
Interest and debt expense and preferred security distributions of
subsidiary trusts increased as a result of the increased debt used to fund the
1998 acquisitions, amortization of debt issue costs and the subsequent
refinancing of this debt with equity-like securities (see Notes 6 and 7).
Equity in income of affiliated companies declined over the three year
period as a result of the monetization of Hercules' investment in Alliant
Techsystems in 1997 and 1998 and Hercules' investment in Tastemaker in 1997 (see
Note 23).
The provision for income taxes reflects effective tax rates of 31% in
1999, 88% in 1998, and 45% in 1997 (see Note 19). The 1999 rate was favorably
impacted by the utilization of a capital loss and other adjustments related to
prior years' assessments. Both the 1998 and 1997 rates are significantly higher
than the federal statutory income tax rate of 35%. The 1998 rate is high because
the charges for purchased in-process research and development and goodwill
amortization are not deductible for income tax purposes. The impact of these
nondeductible items was reduced by favorable state tax settlements relating to a
prior year's sale of an investment and favorable federal tax adjustments related
to prior years' assessments. The 1997 rate reflects the relatively higher tax
rate on the monetization of the Tastemaker and Alliant Techsystems investments,
along with required increases to tax reserves related to anticipated assessments
from federal, state, and foreign authorities. The 2000 tax rate is anticipated
to be approximately 36%.
FINANCIAL CONDITION
Liquidity and financial resources: Net cash flow from operations was
$280 million in 1999, $181 million in 1998, and $187 million in 1997. The 1999
increase reflects higher profit from operations, primarily from businesses
acquired and lower tax payments offset by higher interest payments, cash
expenditures for integration, termination benefits and other exit costs, along
with higher working capital requirements. 1998 included higher interest payments
related to increased debt and higher payments of legal settlements, offset by
lower income tax payments and cash flow from acquired businesses.
As noted above, during 1998, the company completed five acquisitions for
approximately $3,620 million, primarily in cash and assumed debt (see Notes 1
and 6). The company financed the acquisitions and refinanced existing debt with
borrowings under a $3,650 million credit facility with a syndicate of banks. The
company's debt agreement contains restrictive covenants that require maintenance
of certain financial covenants, including leverage, net worth, and interest
coverage, and provides that the entry of a judgment or judgments involving
aggregate liabilities of $50 million or more be vacated, discharged, stayed, or
bonded within 60 days of entry of such judgment or judgments.
During the second quarter of 1999, we amended our credit agreement to
allow for borrowing in euros, as well as in U.S. dollars. Approximately $950
million of U.S. dollar denominated debt was converted to euro indebtedness.
In September 1998, we filed a shelf registration to increase accessible
securities from $300 million to $3,000 million. The registration allowed for
issuance of equity, equity-like, and debt securities.
In November 1998, Hercules Trust V, a wholly owned subsidiary trust of
Hercules, completed a private placement of $200 million Redeemable Hybrid INcome
Overnight Shares (RHINOS). The RHINOS are guaranteed by Hercules (see Note 7).
Pursuant to amendments to the RHINOS agreements executed on February 9, 2000:
(I) the interest rate on the RHINOS was reduced to London Interbank Offered Rate
(LIBOR) plus 1.5%, and (2) the RHINOS can be remarketed at any time at the
option of the holder. If the holder elects to initiate a remarketing,
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Hercules has the right to redeem the RHINOS. Upon a successful remarketing, the
redemption date of the RHINOS will be extended for an additional year. If the
RHINOS are not remarketed, they will be redeemed by Hercules on February 9, 2002
(see Note 7).
In March 1999, another wholly owned subsidiary trust commenced a public
offering, under the registration statement noted above, and sold $362 million of
Trust Originated Preferred Securities (TOPrS) (see Note 7). Proceeds of the
offering were used to repay long-term debt. The Trust's obligations are
guaranteed by Hercules.
In July 1999, we completed a public offering of 5,000,000 shares of our
common stock, which provided us with net proceeds of $171.5 million (see Note
9). On the same date, we also completed a public offering of 350,000 CRESTS
Units with Hercules Trust II, a wholly owned subsidiary trust (see Note 7). This
transaction provided net proceeds to Hercules and Trust II of $340.4 million. We
used the proceeds from both offerings to repay long-term debt.
Each CRESTS Unit consists of one preferred security of Trust II and one
warrant to purchase 23.4192 shares of Hercules common stock at an initial
exercise price of $1,000 (equivalent to $42.70 per share). The warrants may be
exercised, subject to certain conditions, at any time before March 31, 2029,
unless there is a reset and remarketing event. Trust II used the proceeds from
the sale of its preferred securities to purchase junior subordinated deferrable
interest debentures of Hercules. Hercules will pay interest on the debentures
while Trust II will pay distributions on its preferred securities. Both are paid
quarterly at an annual rate of 6 1/2% of the scheduled liquidation amount of
$1,000 per debenture and/or preferred security.
On December 23, 1999, we completed a private placement of 170,000
Floating Rate Preferred Securities (Floating Rate Preferred) with Hercules Trust
VI, a wholly owned subsidiary trust (see Note 7). The Floating Rate Preferred
are guaranteed by Hercules. This transaction provided net proceeds to Hercules
and Trust VI of approximately $170 million. We used the proceeds to repay
long-term debt.
During the second quarter of 1999, we entered into a financing
agreement with a bank, which provided for the sale of promissory notes in the
principal amount of up to $20 million at any one time. The agreement, which
expired in December 1999, provided for commitments by the bank and Hercules
under which the bank purchased promissory notes denominated in a number of
foreign currencies in exchange for U.S. dollars. The notes were repayable only
to the extent that Hercules had sufficient foreign currency revenue. Neither
Hercules nor the bank could cancel their obligations under the agreement.
Transaction gains and losses related to the notes were deferred and recognized
as an adjustment to the revenue supporting the note repayment.
As of December 31, 1999, the company has $564 million available under
the revolving credit agreement and $254 million of short-term lines of credit.
Capital Structure and Commitments: Total capitalization (stockholders'
equity, company obligated preferred securities of subsidiary trusts, and debt)
decreased to $4.3 billion at December 31, 1999, from $4.4 billion in the prior
year. The ratio of debt-to-total capitalization decreased to 57% at December 31,
1999 from 83% at December 31, 1998 as a result of the Floating Rate Preferred
offering in December 1999, the CRESTS Units and common stock offerings during
the third quarter and the TOPrS offering during the first quarter. The amount
accessible under our shelf registration is $1,763 million.
As noted earlier, in February 2000 we announced a new strategy that will
be focused on cash generation and debt reduction primarily through monetization
of assets and better asset utilization. We expect to generate in excess of $1
billion of cash through these actions. The cash will be used to pay down debt,
reduce interest expense by approximately $75 million annually and reduce the
ratio of debt to total capitalization to approximately 40%.
A quarterly dividend has been paid without interruption since 1913, the
company's first year of operation. The annual dividend was $1.08 per share
during 1999 and 1998.
Capital expenditures during 1999 were $196 million, with 28% of the
expenditures related to increased production capacity, compared with 27% in 1998
and 38% in 1997. The remainder mostly relates to cost-savings projects, capacity
maintenance, and regulatory requirements. The increase in capital expenditures
of $39 million in
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21
1999 over 1998 is primarily due to higher spending in the Functional Products
segment due to the methylcellulose expansion in Doel, Belgium and the pectin
expansion in Grossenbrode, Germany. The increase in 1998 capital expenditures of
approximately $38 million over 1997 is primarily from companies acquired in 1998
and higher spending in the Functional Products segment. Capital expenditures are
expected to approximate $185 million during 2000. This includes funds for
continuing or completing existing projects, including the methylcellulose
expansion in Doel, Belgium mentioned earlier and to fund new projects.
YEAR 2000
The company recognized the need to ensure that its operations and
relationships with its business partners would not be adversely affected by the
Year 2000 problem, and thus developed and implemented a comprehensive project
that addressed those areas of vulnerability. A cross-functional Year 2000
Program Office was created by the company at the corporate level to coordinate
and provide policies, guidance, and support for its Year 2000 initiatives. Site
compliance teams were formed at all major sites worldwide.
In addition to its other Year 2000 activities, the company is engaged in
a major project to implement SAP R/3(TM) software. All vendor-supplied SAP code
is Year 2000 compliant. The resulting systems comprise the company's core
business systems, including sales and distribution, inventory and purchasing,
finance and control, product costing, human resources and payroll, and fixed
assets.
The company believes that the Year 2000 problem has been successfully
addressed through its Year 2000 initiatives.
The company did not experience any difficulties related to the Year
2000 problem on December 31, 1999 and has not experienced any such difficulties
that the company is aware of since that date. The company's operations have not,
to date, been adversely affected by any difficulties experienced by any of our
suppliers or customers in connection with the Year 2000 problem, and the company
will continue to monitor its systems for potential difficulties through the
remainder of calendar year 2000.
The total cost of the company's Year 2000 project was approximately $12
million. These costs do not include the cost to upgrade or replace process
control equipment. These costs were expensed as incurred and were funded through
operating cash flow.
RISK FACTORS
Market Risk - Fluctuations in interest and foreign currency exchange
rates affect the company's financial position and results of operations. The
company uses several strategies to actively hedge interest rate and foreign
currency exposure and minimize the effect of such fluctuations on reported
earnings and cash flow. (See "Foreign Currency Translation" and "Financial
Instruments and Hedging" in the Summary of Significant Accounting Policies and
Notes 18 and 21.) Sensitivity of the company's financial instruments to selected
changes in market rates and prices, which are reasonably possible over a
one-year period, are described below. Market values are the present value of
projected future cash flows based on the market rates and prices chosen. The
market values for interest rate risk are calculated by the company utilizing a
third-party software model that utilizes standard pricing models to determine
the present value of the instruments based on the market conditions as of the
valuation date.
The company's derivative and other financial instruments subject to
interest rate risk consist of debt instruments, interest rate swaps, and
currency swaps. At December 31, 1999 and 1998, net market value of these
combined instruments was a liability of $3.32 billion and $3.66 billion,
respectively. The sensitivity analysis assumes an instantaneous 100-basis point
move in interest rates from their levels, with all other variables held
constant. A 100-basis point increase in interest rates at December 31, 1999 and
1998 would result in an $80 million and $36 million decrease in the net market
value of the liability, respectively. A 100-basis point decrease in interest
rates at December 31, 1999 and 1998 would result in a $92 million and $45
million increase in the net market value of the liability, respectively. The
change in the sensitivity level from year-end 1998 is primarily from the fixed
distribution rate associated with the Trust Originated Preferred Securities
issued in 1999 (see Note 7).
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22
Our financial instruments, subject to changes in equity price risk
including the warrants component of the CRESTS Units issued in 1999 (see Note
7), represent a net obligation of $29 million, and an asset of $22 million at
December 31, 1999 and 1998, respectively. The sensitivity analysis assumes an
instantaneous 10% change in valuation with all other variables held constant. A
10% increase in market values at December 31, 1999 and 1998 would increase the
net obligation by $15 million, and the asset portion by $2 million, while a 10%
decrease would reduce the net obligation by $12 million and the asset portion by
$2 million, respectively. The change in equity price risk from year-end 1998 is
primarily from the warrants component of the CRESTS unit issued in 1999.
Our financial instruments, subject to foreign currency exchange risk,
consist of foreign currency forwards, options, and foreign currency debt and
represent a net liability position of $885 million, and a net asset position of
$6 million at December 31, 1999 and 1998, respectively. The following
sensitivity analysis assumes an instantaneous 10% change in foreign currency
exchange rates from year-end levels, with all other variables held constant. A
10% strengthening of the U.S. dollar versus other currencies at December 31,
1999 and 1998 would result in an $89 million decrease in the net liability
position, and a $63 million increase in the net asset position, while a 10%
weakening of the dollar versus all currencies would result in an $88 million
increase in the net liability and a $78 million decrease in the net asset
position, respectively. The change in the sensitivity level from year-end 1998
is primarily from replacing cross currency swaps with foreign currency debt to
hedge exposure to increased investments in foreign subsidiaries, primarily as a
result of the BetzDearborn acquisition.
Foreign exchange forward and option contracts are used to hedge the
company's firm and anticipated foreign currency cash flows. Thus, there is
either an asset or cash flow exposure related to all the financial instruments
in the above sensitivity analysis for which the impact of a movement in exchange
rates would be in the opposite direction and substantially equal to the impact
on the instruments in the analysis. There are presently no significant
restrictions on the remittance of funds generated by the company's operations
outside the United States.
Environmental - Hercules has been identified by U.S. federal and state
authorities as a "potentially responsible party" for environmental cleanup at
numerous sites. The estimated range of reasonably possible costs for remediation
is between $60 million and $230 million. The company does not anticipate that
its financial condition will be materially affected by environmental remediation
costs in excess of amounts accrued, although quarterly or annual operating
results could be materially affected (see Note 24).
Environmental remediation expenses are funded from internal sources of
cash. Such expenses are not expected to have a significant effect on the
company's ongoing liquidity. Environmental cleanup costs, including capital
expenditures for ongoing operations, are a normal, recurring part of operations
and are not significant in relation to total operating costs or cash flows.
Litigation - Hercules is a defendant in numerous lawsuits that arise out
of, and are incidental to, the conduct of its business. These suits concern
issues such as product liability, contract disputes, labor-related matters,
patent infringement, environmental proceedings, property damage, and personal
injury matters. While it is not feasible to predict the outcome of all pending
suits and claims, the ultimate resolution of these matters could have a material
effect upon the financial position of Hercules, and the resolution of any of the
matters during a specific period could have a material effect on the quarterly
or annual operating results for that period (see Note 24).
FORWARD-LOOKING STATEMENT
This Annual Report on Form 10-K includes forward-looking statements, as defined
in the Private Securities Litigation Reform Act of 1995, reflecting management's
current analysis and expectations, based on reasonable assumptions. Results
could differ materially depending on such factors as Hercules' inability to
generate cash and reduce debt, business climate, economic and competitive
uncertainties, Hercules' inability to monetize certain of its identified
businesses, higher manufacturing costs, reduced level of customer orders,
ability to integrate BetzDearborn, changes in strategies, risks in developing
new products and technologies, environmental and safety regulations and clean-up
costs, foreign exchange rates, adverse legal and regulatory developments, and
adverse changes in economic and political climates around the world.
Accordingly, there can be no assurance that the company will meet analysts'
earnings estimates. As appropriate, additional factors are contained in reports
filed with the Securities and Exchange Commission. This paragraph is included to
provide safe harbor for forward-looking statements, which are not required to be
publicly revised as circumstances change.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
For discussion of quantitative and qualitative disclosures about
market risk, see the caption "Risk Factors" under Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
REQUIRED SUPPLEMENTARY DATA
HERCULES INCORPORATED
CONSOLIDATED FINANCIAL STATEMENTS Page
----
Report of Independent Accountants................................................................ 23
Consolidated Statement of Income for the Years Ended December 31, 1999, 1998, and
1997.......................................................................................... 24
Consolidated Balance Sheet as of December 31, 1999 and 1998...................................... 25
Consolidated Statement of Cash Flow for the Years Ended December 31, 1999, 1998, and
1997.......................................................................................... 26
Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 1999,
1998, and 1997................................................................................ 27
Consolidated Statement of Comprehensive Income (Loss) for the Years Ended December 31,
1999, 1998, and 1997.......................................................................... 28
Accounting Policies and Notes to Consolidated Financial Statements............................... 29
SUPPLEMENTARY DATA
Summary of Quarterly Results (Unaudited)......................................................... 55
Subsidiaries of Registrant....................................................................... 56
22
24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the consolidated financial statements listed in the foregoing
index present fairly, in all material respects, the financial position of
Hercules Incorporated and subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14(a)(2)
on page 60 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 25 to the financial statements, in 1997, the Company
changed its method of accounting for costs incurred in connection with its
enterprise software installation.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 24, 2000
23
25
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF INCOME (Dollar in millions, except per share)
1999 1998 1997
---- ---- ----
Net sales ............................................................. $ 3,248 $ 2,145 $ 1,866
------- ------- -------
Cost of sales ......................................................... 1,770 1,287 1,169
Selling, general, and administrative expenses ......................... 787 377 248
Research and development .............................................. 85 61 53
Goodwill and intangible asset amortization ............................ 79 22 3
Purchased in-process research and development (Note 15) ............... -- 130 --
Other operating expenses, net (Note 16) ............................... 47 76 165
------- ------- -------
Profit from operations ................................................ 480 192 228
Equity in income of affiliated companies .............................. 1 10 30
Interest and debt expense (Note 17) ................................... 185 101 39
Preferred security distributions of subsidiary trusts ................. 51 2 --
Other income (expense), net (Note 18) ................................. (2) (22) 374
------- ------- -------
Income before income taxes and effect of change in accounting principle 243 77 593
Provision for income taxes (Note 19) .................................. 75 68 269
------- ------- -------
Income before effect of change in accounting principle ................ 168 9 324
Effect of change in accounting principle (Note 25) .................... -- -- (5)
------- ------- -------
Net income ............................................................ $ 168 $ 9 $ 319
======= ======= =======
Earnings per share (Note 20)
Basic:
Earnings before effect of change in accounting principle ........ $ 1.63 $ .10 $ 3.27
Effect of change in accounting principle ........................ -- -- (.05)
------- ------- -------
Earnings per share .............................................. $ 1.63 $ .10 $ 3.22
======= ======= =======
Diluted:
Earnings before effect of change in accounting principle ........ $ 1.62 $ .10 $ 3.18
Effect of change in accounting principle ........................ -- -- (.05)
------- ------- -------
Earnings per share .............................................. $ 1.62 $ .10 $ 3.13
======= ======= =======
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
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26
HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET (Dollars in millions)
December 31,
1999 1998
---- ----
ASSETS
Current assets
Cash and cash equivalents ................................................. $ 63 $ 68
Accounts receivable, net (Note 2) ......................................... 766 663
Inventories (Note 3) ...................................................... 380 416
Deferred income taxes (Note 19) ........................................... 129 93
------- -------
Total current assets ...................................................... 1,338 1,240
Property, plant, and equipment, net (Note 12) ................................... 1,321 1,438
Investments (Note 4) ............................................................ 47 51
Goodwill (net of accumulated amortization - 1999, $91; 1998, $28) ............... 2,390 2,356
Other intangible assets (net of accumulated amortization - 1999, $39;
1998, $22) ................................................................... 180 192
Prepaid pension (Note 14) ....................................................... 217 218
Deferred charges and other assets ............................................... 403 338
------- -------
Total assets .............................................................. $ 5,896 $ 5,833
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable .......................................................... $ 320 $ 270
Short-term debt (Note 5) .................................................. 678 566
Accrued expenses (Note 12) ................................................ 561 481
------- -------
Total current liabilities ................................................. 1,559 1,317
Long-term debt (Note 6) ......................................................... 1,777 3,096
Deferred income taxes (Note 19) ................................................. 287 225
Other postretirement benefits (Note 14) ......................................... 129 136
Deferred credits and other liabilities .......................................... 289 300
------- -------
Total liabilities ......................................................... 4,041 5,074
Company-obligated preferred securities of subsidiary trusts (Note 7) ............ 992 200
Stockholders' equity
Series preferred stock (Note 8) ........................................... -- --
Common stock, $25/48 par value (Note 9) ................................... 83 81
(shares issued: 1999 - 159,976,730; 1998 - 154,823,496)
Additional paid-in capital ................................................ 757 504
Unearned compensation (Note 10) ........................................... (123) (130)
Other comprehensive losses ................................................ (44) (13)
Retained earnings ......................................................... 2,125 2,068
------- -------
2,798 2,510
Reacquired stock, at cost (shares: 1999 - 53,587,365; 1998 - 53,995,692) ........ 1,935 1,951
------- -------
Total stockholders' equity ................................................ 863 559
------- -------
Total liabilities and stockholders' equity ................................ $ 5,896 $ 5,833
======= =======
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
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27
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW (Dollars in millions)
1999 1998 1997
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
NET INCOME .............................................................................. $ 168 $ 9 $ 319
Adjustments to reconcile net income to net cash provided from
operations:
Depreciation ..................................................................... 144 86 73
Amortization ..................................................................... 106 22 3
Write-off in-process research and development .................................... -- 130 --
Nonoperating gain on disposals ................................................... (23) (23) (398)
Noncash charges (credits) ........................................................ (13) 38 92
Other ............................................................................ -- (6) 15
Accruals and deferrals of cash receipts and payments:
Affiliates' earnings in excess of dividends received ...................... (1) (6) (25)
Accounts receivable ....................................................... (69) 26 (41)
Inventories ............................................................... (7) (14) (6)
Accounts payable and accrued expenses ..................................... (27) (72) 137
Noncurrent assets and liabilities ......................................... 2 (9) 18
------- ------- -----
Net cash provided by operations ....................................... 280 181 187
------- ------- -----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures .................................................................... (196) (157) (119)
Proceeds of investment and fixed asset disposals ........................................ 50 600 295
Acquisitions, net of cash acquired ...................................................... (10) (3,109) --
Other, net .............................................................................. (37) (25) (34)
------- ------- -----
Net cash (used in) provided by investing activities ................... (193) (2,691) 142
------- ------- -----
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds ................................................................. 279 3,111 343
Long-term debt repayments ............................................................... (1,360) (247) (130)
Change in short-term debt ............................................................... 22 (228) (35)
Payment of debt issuance costs and underwriting fees .................................... (19) (66) --
Proceeds from issuance of subsidiary trusts' preferred securities ....................... 792 200 --
Proceeds from issuance of warrants ...................................................... 90 -- --
Common stock issued ..................................................................... 182 10 38
Common stock reacquired ................................................................. (3) (114) (458)
Proceeds from issuance of subsidiary preferred stock .................................... 12 -- --
Dividends paid .......................................................................... (83) (104) (98)
------- ------- -----
Net cash (used in) provided by financing activities ................... (88) 2,562 (340)
Effect of exchange rate changes on cash ................................................. (4) (1) (2)
------- ------- -----
Net increase (decrease) in cash and cash equivalents .................................... (5) 51 (13)
Cash and cash equivalents at beginning of year .......................................... 68 17 30
------- ------- -----
Cash and cash equivalents at end of year ................................................ $ 63 $ 68 $ 17
======= ======= =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) ............................................. $ 184 $ 100 $ 37
Distributions on trust preferred securities ...................................... 36 -- --
Income taxes paid, net ........................................................... 79 117 152
Noncash investing and financing activities:
Conversion of notes and debentures ............................................... 2 8 31
ESOP and incentive plan stock issuances .......................................... 8 196 15
Accounts payable for common stock acquisitions ................................... -- -- 5
Investment in long-term notes .................................................... -- -- 504
Accounts receivable from sale of investment/asset disposals ...................... -- -- 8
Assumed debt of acquired businesses .............................................. -- 307 --
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
26
28
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Dollars in millions)
Other
Compre-
Unearned hensive
Common Paid-in Compen- Income Retained Reacquired
Stock Capital sation (Loss) Earnings Stock
- --------------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 1997 $79 $493 $ -- $45 $1,942 $1,672
(Common shares: issued 152,269,076;
reacquired, 50,866,562)
Net income -- -- -- -- 319 --
Common dividends, $1.00 per common share -- -- -- -- (98) --
Foreign currency translation adjustment -- -- -- (47) -- --
Purchase of common stock, 9,536,619 shares -- -- -- -- -- 455
Issuance of common stock:
Incentive plans, net, 2,113,805 shares
From reacquired stock -- (19) -- -- -- (72)
Conversion of notes and debentures,
2,087,939 shares 1 30 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 $80 $504 $ -- $(2) $2,163 $2,055
(Common shares: issued 154,357,015;
reacquired, 58,289,376)
Net income -- -- -- -- 9 --
Common dividends, $1.08 per common share -- -- -- -- (104) --
Foreign currency translation adjustment -- -- -- (11) -- --
Purchase of common stock, 2,361,390 shares -- -- -- -- -- 109
Issuance of common stock:
Incentive plans, net, 764,201 shares
From reacquired stock -- (7) -- -- -- (27)
ESOP, 5,890,873 shares from reacquired
Stock -- -- (130) -- -- (186)
Conversion of notes and debentures,
466,481 shares 1 7 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 $81 $504 $(130) $(13) $2,068 $1,951
(Common shares: issued 154,823,496;
reacquired, 53,995,692)
Net income -- -- -- -- 168 --
Common dividends, $1.08 per common share -- -- -- -- (111) --
Foreign currency translation adjustment -- -- -- (31) -- --
Impact of allocation of shares held by ESOP -- -- 7 -- -- --
Purchase of common stock, 126,893 shares -- -- -- -- -- 3
Warrants issued in connection with CRESTS
Units offering (Note 7) -- 88 -- -- -- --
Issuance of common stock:
Incentive plans, net, 535,220 shares
From reacquired stock -- -- -- -- -- (19)
Conversion of notes and debentures,
153,234 shares -- 2 -- -- -- --
Public offering, 5,000,000 shares 2 163 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 $83 $757 $(123) $(44) $2,125 $1,935
(Common shares: issued 159,976,730
reacquired, 53,587,365)
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
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29
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Dollars in millions)
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Net Income $168 $ 9 $319
Foreign currency translation, net of tax (31) (11) (47)
------ ---- ------
Comprehensive income (loss) $137 $ (2) $272
==== ===== ====
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
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30
HERCULES INCORPORATED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of Hercules
Incorporated and all majority-owned subsidiaries where control exists. Following
the acquisition of BetzDearborn, the company continued BetzDearborn's practice
of using a November 30 fiscal year-end for certain former BetzDearborn non-U.S.
subsidiaries, excluding Canada, to expedite the year-end closing process.
Investments in affiliated companies with a 20% or greater ownership interest are
accounted for using the equity method of accounting and, accordingly,
consolidated income includes Hercules' share of their income.
USE OF ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized generally upon shipment of goods and passage of title.
Service revenue is recognized as services are performed.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that pertain to current operations or future revenues
are expensed or capitalized according to the company's capitalization policy.
Expenditures for remediation of an existing condition caused by past operations
that do not contribute to current or future revenues are expensed. Liabilities
are recognized for remedial activities when the cleanup is probable and the cost
can be reasonably estimated.
CASH AND CASH EQUIVALENTS
Cash in excess of operating requirements is invested in short-term,
income-producing instruments. Cash equivalents include commercial paper and
other securities with original maturities of 90 days or less. Book value
approximates fair value because of the short maturity of those instruments.
INVENTORIES
Inventories are stated at the lower of cost or market. Domestic inventories are
valued predominantly on the last-in, first-out (LIFO) method. Foreign and
certain domestic inventories, which in the aggregate represent 59% of total
inventories at December 31, 1999, are valued principally on the average-cost
method.
PROPERTY AND DEPRECIATION
Property, plant, and equipment are stated at cost. The company changed to the
straight-line method of depreciation, effective January 1, 1991, for newly
acquired processing facilities and equipment. Assets acquired before then
continue to be depreciated by accelerated methods. The company believes
straight-line depreciation provides a better matching of costs and revenues over
the lives of the assets. The estimated useful lives of depreciable assets are as
follows: buildings - 30 years; plant, machinery and equipment - 15 years; other
machinery and equipment - 3 to 15 years.
Maintenance, repairs, and minor renewals are charged to income; major renewals
and betterments are capitalized. Upon normal retirement or replacement, the cost
of property (less proceeds of sale or salvage) is charged to income.
29
31
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and Other intangible assets are amortized on a straight-line basis over
the estimated future periods to be benefited, generally 40 years for goodwill
and 5 to 15 years for other intangible assets.
LONG-LIVED ASSETS
The company reviews its long-lived assets, including goodwill and other
intangibles, for impairment on an exception basis whenever events or changes in
circumstances indicate carrying amounts of the assets may not be recoverable
through undiscounted future cash flows. If an impairment loss has occurred based
on expected future cash flows (undiscounted), the loss is recognized in the
income statement. The amount of the impairment loss is the excess of the
carrying amount of the impaired asset over the fair value of the asset. The fair
value represents expected future cash flows from the use of the assets,
discounted at the rate used to evaluate potential investments.
FOREIGN CURRENCY TRANSLATION
With the exception of operations in countries with highly inflationary
economies, the financial statements of Hercules' non-U.S. entities are
translated into U.S. dollars using current rates of exchange, with gains or
losses included in the Other comprehensive income (loss) component of the
stockholders' equity section of the balance sheet. The related allocation for
income taxes is not significant. For operations in countries with highly
inflationary economies, financial statements are translated at either current or
historical exchange rates, as appropriate. These adjustments, along with gains
and losses on currency transactions (denominated in currencies other than local
currency), are reflected in net income.
FINANCIAL INSTRUMENTS AND HEDGING
Derivative financial instruments are used to hedge risk caused by fluctuating
currency and interest rates. The company enters into forward-exchange contracts
and currency swaps to hedge foreign currency exposure. Decisions regarding
hedging are made on a case-by-case basis, taking into consideration the amount
and duration of the exposure, market volatility, and economic trends. The
company uses the fair-value method of accounting, recording realized and
unrealized gains and losses on these contracts quarterly. They are included in
other income (expense), net, except for gains and losses on contracts to hedge
specific foreign currency commitments, which are deferred and accounted for as
part of the transaction. Gains or losses on instruments used to hedge the value
of investments in certain non-U.S. subsidiaries are accounted for under the
deferral method and are included in the foreign currency translation adjustment.
It is the company's policy to match the term of financial instruments with the
term of the underlying designated item. If the designated item is an anticipated
transaction no longer likely to occur, gains or losses from the instrument
designated as a hedge are recognized in current period earnings. The company
does not hold or issue financial instruments for trading purposes. In the
Consolidated Statement of Cash Flow, the company reports the cash flows
resulting from its hedging activities in the same category as the related item
that is being hedged. Net investment hedges, requiring cash receipts or payments
from borrowed foreign currencies not identified with any specific cash flows,
are classified as financing activities.
The company uses interest rate swap agreements to manage interest costs and
risks associated with changing rates. The differential to be paid or received is
accrued as interest rates change and is recognized in interest expense over the
life of the agreements. Counterparties to the forward exchange, currency swap,
and interest rate swap contracts are major financial institutions. Credit loss
from counterparty nonperformance is not anticipated.
STOCK-BASED COMPENSATION
Compensation costs attributable to stock option and similar plans are recognized
based on any difference between the quoted market price of the stock on the date
of grant in excess of the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board (APB)
Opinion 25). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard (SFAS) No. 123,
"Accounting for Stock-Based Compensation," requires companies electing to
continue to use the intrinsic-value method to make pro forma disclosures of net
income and earnings per share as if the fair-value-based method of accounting
had been applied.
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NEW ACCOUNTING STANDARDS
Effective January 1, 1999, we adopted the American Institute of Certified Public
Accountants Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). As a result of this
adoption, such costs will be amortized over a period of 5 to 10 years.
PENDING ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
This statement, as amended by Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The company has not yet determined the impact
that the adoption of SFAS 133 will have on its earnings or statement of
financial position.
RECLASSIFICATIONS
Certain amounts in the 1998 and 1997 consolidated financial statements and notes
have been reclassified to conform to the 1999 presentation.
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33
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ACQUISITIONS
All acquisitions have been accounted for under the purchase method. The results
of operations of the acquired businesses are included in the Consolidated
Financial Statements from the dates of acquisition.
BetzDearborn - On October 15, 1998, the company acquired all of the
outstanding shares of BetzDearborn Inc., a global specialty chemical company
engaged in the treatment of water and industrial process systems, for $2,235
million in cash and $186 million in common stock exchanged for the shares held
by the BetzDearborn ESOP Trust. The shares were valued using the quoted market
price of the stock at the time of exchange. In addition, the company assumed
debt with a fair value of $117 million and repaid $557 million of other
long-term debt held by BetzDearborn. This acquisition was financed with
borrowings under a $3,650 million credit facility with a syndicate of banks (see
Note 6).
During 1999, we completed the BetzDearborn purchase price allocation and
increased goodwill by $96 million, to $2,170 million. The increase to goodwill
results from adjustments to the fair value of net tangible assets acquired,
completion of the evaluation of pre-acquisition contingencies related to
litigation and claims, finalization of plans to exit BetzDearborn activities and
foreign currency translation adjustments, net of related tax effects. Goodwill
is determined as follows:
(Dollars in millions)
Cash paid, including transaction costs $2,235
Common stock exchanged for ESOP trust shares 186
Fair value of debt assumed 117
Payment of BetzDearborn long-term debt 557
------
$3,095
Less: Fair value of net tangible assets acquired 650
Fair value of identifiable intangible assets acquired 145
Purchased in-process research and development 130
------
BetzDearborn goodwill as of the date of acquisition $2,170
======
In accordance with the purchase method of accounting, the adjusted
purchase price was allocated to the estimated fair value of net assets acquired,
with the excess recorded as goodwill. Goodwill is amortized over 40 years on a
straight line basis. Identified intangibles are amortized over 10 to 12 years,
on a straight line basis. Additionally, approximately $130 million of the
purchase price was allocated to purchased in-process research and development
and was charged to expense at the date of acquisition (see Note 15).
As of the acquisition date, the company began to formulate plans to
combine the operations of BetzDearborn and Hercules. We formed a program office,
engaged outside consultants and established several functional integration teams
to formulate and implement the plan and capture anticipated synergies. At
December 31, 1998, the company had identified and approved various actions such
as personnel reductions, consolidation of operations and support functions,
closure of redundant or inefficient offices and facilities, and relocation of
former BetzDearborn employees. Accordingly, the company included a $98 million
liability as part of the purchase price allocation. The liability included
approximately $74 million related to employee termination benefits and $24
million for office and facility closures, relocation of BetzDearborn employees
and other related exit costs (see Note 13).
FiberVisions L.L.C. - In July 1998, the company completed the
acquisition of the 49% share of FiberVisions L.L.C. owned by its joint venture
partner Jacob Holm & Sons A/S for approximately $230 million in cash, plus
assumed debt of $188 million. The allocation of the purchase price resulted in
$188 million of goodwill, which is being amortized over its estimated useful
life of 40 years.
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The following unaudited pro forma information presents a summary of
consolidated results of operations of the company as if the BetzDearborn and
FiberVisions acquisitions had occurred at the beginning of each of the periods
presented below:
Years Ended December 31,
1998 1997
---- ----
Net sales $3,276 $3,366
Income (loss) before effect of change in accounting
Principle (70) 237
Net income (loss) (70) 226
Net earnings per share:
Basic
Earnings before effect of change in accounting
Principle $(.69) $2.25
Earnings per share (.69) 2.15
Diluted
Earnings before effect of change in accounting
Principle $(.69) $2.21
Earnings per share (.69) 2.11
The pro forma results of operations are for comparative purposes only
and reflect increased amortization and interest expense resulting from the
acquisitions described above, but do not include any potential cost savings from
combining the acquired businesses with the company's operations. Consequently,
the pro forma results do not reflect the actual results of operations had the
acquisitions occurred on the dates indicated, and are not intended to be a
projection of future results or trends.
Other - The company also made three other acquisitions in 1998 for an
aggregate purchase price of approximately $105 million in cash. These
acquisitions included the worldwide paper chemicals group of Houghton
International, Inc. and Citrus Colloids Ltd., a pectin manufacturer, in April
1998, and Alliance Technical Products, Ltd., a rosin dispersions company, in
September 1998. Allocations of the purchase prices for these acquisitions
resulted in approximately $67 million of goodwill, which is being amortized over
estimated useful lives ranging from 30 to 40 years.
2. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of: (Dollars in millions)
1999 1998
---- ----
Trade $639 $598
Other 143 78
---- ----
Total 782 676
Less allowance for doubtful accounts 16 13
---- ----
$766 $663
==== ====
At December 31, 1999, net trade accounts receivable from customers
located in the United States, Europe, the Americas, and Asia were $426 million,
$151 million, $35 million, and $11 million, respectively.
3. INVENTORIES
The components of inventories are: (Dollars in millions)
1999 1998
---- ----
Finished products $187 $218
Materials, supplies, and work in process 193 198
---- ----
$380 $416
==== ====
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Inventories valued on the LIFO method were lower than if valued under the
average-cost method, which approximates current cost, by $31 million and $33
million at December 31, 1999 and 1998, respectively.
4. INVESTMENTS
Total equity investments in affiliated companies were $10 million at December
31, 1999, and $9 million at December 31, 1998.
Other investments, at cost or less, were $37 million and $42 million at
December 31, 1999 and 1998, respectively. Included in these amounts are
non-current marketable securities aggregating $32 million and $31 million for
the corresponding years, classified as "available for sale." The value of these
investments, based on market quotes, approximates book values.
5. SHORT-TERM DEBT
A summary of short-term debt follows: (Dollars in millions)
1999 1998
---- ----
Banks $26 $80
Current maturities of long-term debt 652 486
---- ----
$678 $566
==== ====
Bank borrowings represent primarily foreign overdraft facilities and
short-term lines of credit, which are generally payable on demand with interest
at various rates. Book values of bank borrowings approximate market value
because of their short maturity period.
At December 31, 1999, Hercules had $254 million of unused lines of
credit that may be drawn as needed, with interest at a negotiated spread over
lenders' cost of funds. Lines of credit in use at December 31, 1999, were $26
million. Weighted-average interest rates on short-term borrowings at December
31, 1999 and 1998, were 6.04% and 5.61%, respectively.
6. LONG-TERM DEBT
A summary of long-term debt follows: (Dollars in millions)
1999 1998
---- ----
6.15% notes due 2000 $ 100 $ 100
6.60% notes due 2027 (a) 100 100
7.85% notes due 2000 25 25
6.625% notes due 2003 (b) 125 125
8% convertible subordinated debentures due 2010 (c) 3 3
Term loan tranche A due in varying amounts through 2003 (d) 1,187 1,250
Term loan tranche B due 1999 (d) -- 470
Term loan tranche C due 2000 (d) 318 1,000
Revolving credit agreement due 2003 (d) 336 288
ESOP debt (e) 106 110
Term notes at various rates from 4.44% to 9.60% due in varying
amounts through 2006 (f) 80 102
Variable rate loans 41 --
Other 8 9
------ ------
2,429 3,582
Current maturities of long-term debt (652) (486)
------ ------
Net long-term debt $1,777 $3,096
====== ======
(a) 30-year debentures with a 10-year put option, exercisable by
bondholder at a redemption price equal to principal amount.
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(b) Par value of $125 million issued June 1993.
(c) Subordinated debentures are convertible into common stock at $14.90
per share and are redeemable at the option of the company at varying rates. The
annual sinking fund requirement of $5 million, beginning in 1996, has been
satisfied through conversions of debentures.
(d) The BetzDearborn acquisition was financed with borrowings under a
$3,650 million credit facility with a syndicate of banks, and was consummated on
October 15, 1998. The syndication included three tranches of varying maturity
term loans totaling $2,750 million, of which $1,505 million is outstanding at
year end 1999, and a $900 million revolving credit agreement of which $336
million is outstanding at year end 1999. On April 19, 1999, a revised and
amended credit agreement was issued to allow borrowings in euros, as well as
U.S. dollars. Approximately U.S. $950 million of term loan tranche A domestic
borrowings were converted into indebtedness denominated in euros during the
second quarter 1999. The facility currently bears interest at London Interbank
Offered Rate (LIBOR) plus .75%. In addition, a Canadian subsidiary of ours can
borrow up to U.S. $100 million from select lenders in Canada in Canadian dollars
that currently bears interest at Bankers' Acceptances Rate plus .75%. Interest
rates are reset for one, three, or six months periods at the company's option.
The company's debt agreement contains various restrictive covenants that, among
other things, require maintenance of certain financial covenants: leverage, net
worth, and interest coverage, and provides that the entry of judgment or
judgments involving aggregate liabilities of $50 million or more be vacated,
discharged, stayed, or bonded pending appeal within 60 days of entry. Issuance
costs related to the financing are included in Deferred charges and other assets
and are being amortized over the term of the loans, using the effective interest
method. As of December 31, 1999, $564 million of the $900 million multicurrency
revolver is available for use.
(e) The company assumed a $94 million loan related to the BetzDearborn
ESOP Trust. The proceeds of the loan were originally used by the ESOP Trust for
the purchase of BetzDearborn preferred shares which, upon acquisition by
Hercules, were converted into equivalent shares of Hercules common stock (see
Note 10). The loan was recorded at a fair market value of $110 million at the
date of acquisition, and the $16 million fair value step-up is being amortized
over the term of the debt. The loan and guarantee, which bears interest at
8.96%, matures in June 2009.
(f) Debt assumed in conjunction with the acquisition of FiberVisions
L.L.C. (see Note 1), less repayments through December 31, 1999.
Long-term debt maturities during the next five years are $652 million in
2000, $344 million in 2001, $348 million in 2002, $863 million in 2003, and $22
million in 2004.
7. COMPANY-OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST
Redeemable Hybrid Income Overnight Shares
In November 1998, Hercules Trust V, our wholly owned subsidiary ("Trust
V"), completed a private placement of $200 million Redeemable Hybrid INcome
Overnight Shares (RHINOS). At the same time as the private placement of the
RHINOS, we entered into a forward underwriting agreement to issue $200 million
of our common stock upon remarketing of the RHINOS. RHINOS are short-term
auction-rate reset Preferred Securities of Trust V, which used the proceeds from
the RHINOS sale to purchase junior subordinated notes of Hercules. We used these
proceeds to partially repay loans under our credit facility. Hercules pays
interest on the junior subordinated notes, and Trust V pays distributions on the
RHINOS at a floating rate, initially equal to LIBOR plus 1.75%, which is reset
on a quarterly basis. The RHINOS are guaranteed by Hercules.
We expected to remarket the RHINOS within twelve months of their
issuance; however, we amended the RHINOS agreements in July 1999 to eliminate
this requirement. Additionally in July 1999, we issued $175 million of our
common stock in an underwritten public offering. In October 1999, the RHINOS
agreements were amended to extend the redemption date to January 2000.
Pursuant to amendments to the RHINOS agreements executed on February 9,
2000: (1) the interest rate on the RHINOS was reduced to LIBOR plus 1.5%, and
(2) the RHINOS will be remarketed at any time at the option of the holder. If
the holder elects to initiate a remarketing, Hercules has the right to redeem
the RHINOS. Upon a successful remarketing, the redemption date of the RHINOS
will be extended for an additional year. If the RHINOS are not remarketed, they
will be redeemed by Hercules on February 9, 2002.
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37
Trust Originated Preferred Securities
In March 1999, Hercules Trust I, our wholly owned subsidiary trust
("Trust I"), completed a $362 million underwritten public offering of 14,500,000
shares of 9.42% Trust Originated Preferred Securities. Trust I invested the
proceeds from the sale of the Preferred Securities in an equal principal amount
of 9.42% Junior Subordinated Deferrable Interest Debentures of Hercules due
March 2029. We used these proceeds to repay long-term debt.
Trust I distributes quarterly cash payments it receives from Hercules on
the Debentures to Preferred Security holders at an annual rate of 9.42% on the
liquidation amount of $25 per Preferred Security. We may defer interest payments
on the Debentures at any time, for up to 20 consecutive quarters. If this
occurs, Trust I will also defer distribution payments on the Preferred
Securities. The deferred distributions, however, will accumulate distributions
at a rate of 9.42% per annum.
Trust I will redeem the Preferred Securities when the Debentures are
repaid at maturity on March 31, 2029. Hercules may redeem the Debentures, in
whole or, on or after March 17, 2004, in part, before their maturity at a price
equal to 100% of the principal amount of the Debentures redeemed, plus accrued
interest. When Hercules redeems any Debentures before their maturity, Trust I
will use the cash it receives to redeem Preferred Securities and common
securities as provided in the trust agreement. Hercules guarantees the
obligations of Trust I on the Preferred Securities.
CRESTS Units
In July 1999, we completed a public offering of 350,000 CRESTS Units
with Hercules Trust II, a wholly owned subsidiary trust ("Trust II"). This
transaction provided net proceeds to Hercules and Trust II of $340.4 million.
The preferred security component of the CRESTS Units was initially valued at
$741.46 per unit and the warrant component of the CRESTS Units was initially
valued at $258.54 per warrant. Each CRESTS Unit consists of one preferred
security of Trust II and one warrant to purchase 23.4192 shares of Hercules
common stock at an initial exercise price of $1,000 (equivalent to $42.70 per
share). The preferred security and warrant components of each CRESTS Unit may be
separated and transferred independently. The warrants may be exercised, subject
to certain conditions, at any time before March 31, 2029, unless there is a
reset and remarketing event. No reset and remarketing event will occur before
July 27, 2004, unless all of our common stock is acquired in a transaction that
includes cash for a price above a predetermined level. Trust II used the
proceeds from the sale of its preferred securities to purchase junior
subordinated deferrable interest debentures of Hercules ("debentures"). As of
December 31, 1999, no warrants had been exercised.
We pay interest on the debentures, and Trust II pays distributions on
its preferred securities. Both are paid quarterly at an annual rate of 6-1/2% of
the scheduled liquidation amount of $1,000 per debenture and/or preferred
security until the scheduled maturity date and redemption date of June 30, 2029,
unless there is a reset and remarketing event. We guarantee payments by Trust II
on its preferred securities. Trust II must redeem the preferred securities when
the debentures are redeemed or repaid at maturity.
We used the proceeds from the CRESTS Units offering to repay long-term
debt. Issuance costs related to the preferred security component of the CRESTS
Units are being amortized over the life of the security and costs related to the
warrants were charged to additional paid-in capital.
Floating Rate Preferred Securities
In December 1999, Hercules Trust VI, our wholly owned subsidiary trust
("Trust VI"), completed a $170 million private offering of 170,000 shares of
Floating Rate Preferred Securities. Trust VI invested the proceeds from the sale
of the preferred securities in an equal principal amount of Floating Rate Junior
Subordinated Deferrable Interest Debentures due 2000 of Hercules. We used these
proceeds to repay long-term debt.
Trust VI will distribute quarterly cash payments it receives from
Hercules on the debentures to preferred security holders at an annual rate of
LIBOR plus 2.45%, which is reset on a quarterly basis, on the liquidation amount
of $1,000 per preferred security. We may defer interest payments on the
debentures at any time during the
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38
term of the preferred securities. If this occurs, Trust VI will also defer
distribution payments on the preferred securities. The deferred distributions,
however, will accumulate distributions at a rate of LIBOR plus 2.45%.
Trust VI will redeem the preferred securities when the debentures are
repaid at maturity on December 29, 2000. Hercules guarantees the obligations of
Trust VI on the preferred securities.
8. SERIES PREFERRED STOCK
The series preferred stock is without par value and is issuable in series. There
are 2,000,000 shares authorized for issuance, none of which have been issued.
9. COMMON STOCK
Hercules common stock has a stated value of $25/48, and 300,000,000 shares are
authorized for issuance. At December 31, 1999, a total of 29,848,667 shares were
reserved for issuance for the following purposes: 773,784 shares for sales to
the Savings Plan Trustee; 13,814,399 shares for the exercise of awards under the
Stock Option Plan; 6,028,836 shares for awards under incentive compensation
plans; 184,206 shares for conversion of debentures and notes; 850,722 shares for
employee stock purchases; and 8,196,720 shares for exercise of the warrant
component of the CRESTS Units.
For the company's stock repurchase program, from its start in 1991
through year-end 1999, the Board authorized the repurchase of up to 74,650,000
shares of company common stock. Of that total, 6,150,000 shares were intended to
satisfy requirements of various employee benefit programs. During this period, a
total of 66,617,485 shares of common stock were purchased in the open market at
an average price of $37.31 per share.
In July 1999, we completed a public offering of 5,000,000 shares of our
common stock, which provided us with proceeds of $171.5 million, net of
underwriting fees of $3.5 million. We used the proceeds from the common stock
offering for the partial repayment of a term loan under our credit facility.
Issuance costs associated with the stock offering were charged to additional
paid-in capital.
10. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
In connection with the acquisition of BetzDearborn in 1998, the company acquired
its ESOP and related trust as a long-term benefit for substantially all of
BetzDearborn's U.S. employees. The plan is a supplement to BetzDearborn's 401(k)
plan. The ESOP trust had long-term debt of $93 million and $94 million at
December 31, 1999 and 1998, respectively, which is guaranteed by Hercules. Upon
acquisition, the debt had a fair value in excess of its recorded amount for
which a step-up was recorded to be amortized over the remaining term of the
debt. The fair value, included in long-term debt, was $106 million and $110
million at December 31, 1999 and 1998, respectively. The proceeds of the
original loan were used to purchase BetzDearborn convertible preferred stock,
which, at the date of acquisition, was converted into Hercules common stock.
Under the provisions of the BetzDearborn 401(k) program, employees may
invest 2% to 15% of eligible compensation. The company's matching contributions,
made in the form of Hercules common stock, are equal to 50% of the first 6% of
employee contributions, and fully vest to employees upon the completion of 5
years of service. The amount of the company's matching contributions are
included in ESOP expense. After satisfying the 401(k) matching contributions and
the dividends on allocated shares, all remaining shares of ESOP stock are
allocated to each eligible participant's account based on the ratio of each
eligible participant's compensation to total compensation of all participants.
The company's contributions and dividends on the shares held by the trust
are used to repay the loan, and the shares are allocated to participants as the
principal and interest are paid. Long-term debt is reduced as payments are made
on the third party financing. In addition, unearned compensation is also reduced
as the shares are allocated to employees. The unallocated shares held by the
trust are reflected in unearned compensation as a reduction in stockholders'
equity on the balance sheet for $123 million and $130 million at December 31,
1999 and 1998, respectively.
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1999 1998
---- ----
Allocated 1,807,976 1,776,338
Unallocated 3,814,749 4,052,556
--------- ---------
Total shares held by ESOP 5,622,725 5,828,894
========= =========
The ESOP expense is calculated using the shares-allocated method and
includes net interest incurred on the debt of $5 million and $1 million for 1999
and 1998, respectively. The company is required to make quarterly contributions
to the plan which enable the trust to service its indebtedness. Net ESOP expense
is comprised of the following elements:
1999 1998
---- ----
ESOP expense $13 $ 3
Common stock dividends (charged to retained
earnings) (6) (2)
--- ---
Net ESOP expense $ 7 $ 1
=== ===
ESOP Contributions $ 9 $ 2
=== ===
11. LONG-TERM INCENTIVE COMPENSATION PLANS
The company's long-term incentive compensation plans provide for the grant of
stock options and the award of common stock and other market-based units to
certain key employees and non-employee directors. Through 1994, shares of common
stock awarded under these plans normally were either restricted stock or
performance shares. During the restriction period, award holders have the rights
of stockholders, including the right to vote and receive cash dividends, but
they cannot transfer ownership.
In 1995, Hercules changed the structure of the long-term incentive
compensation plans to place a greater emphasis on shareholder value creation
through grants of regular stock options, performance-accelerated stock options,
and Cash Value Awards (performance-based awards denominated in cash and payable
in shares of common or restricted stock, subject to the same restrictions as
restricted stock). Restricted stock and other market-based units are awarded
with respect to certain programs. The number of awarded shares outstanding was
926,689, 1,083,613, and 873,627 at December 31, 1999, 1998, and 1997,
respectively.
Under the company's incentive compensation plans, 6,028,836 shares of
common stock were available for grant as stock awards or stock option awards.
Stock awards are limited to approximately 15% of the total authorizations.
Regular stock options are granted at the market price on the date of grant and
are exercisable at various periods from one to five years after date of grant.
Performance-accelerated stock options are also granted at the market price on
the date of grant and are normally exercisable at nine and one-half years.
Exercisability may be accelerated based upon the achievement of predetermined
performance goals. Both regular and performance-accelerated stock options expire
10 years after the date of grant.
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to the company in the event of employment termination,
except in the case of death, disability, retirement, or other specified events.
The company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. The cost of stock awards and other market-based units, which are charged
to income over the restriction or performance period, amounted to $3 million for
1999, $5 million for 1998, and $4 million for 1997.
Below is a summary of outstanding stock option grants under the
incentive compensation plans during 1997, 1998, and 1999:
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Regular Performance-Accelerated
Weighted-average Weighted-average
Number of Shares Price Number of Shares Price
---------------- ----- ---------------- -----
January 1, 1997 3,909,587 $32.49 3,075,806 $49.38
Granted 1,708,100 $40.14 810,125 $41.07
Exercised (1,611,449) $20.97 -- --
Forfeited (4,950) $56.26 (10,534) $53.07
- ----------------------------------------------------------------------------------------------------------------
December 31, 1997 4,001,288 $40.41 3,875,397 $47.63
Granted 2,696,215 $32.75 1,170,890 $41.09
Exercised (279,795) $24.93 -- --
Forfeited (66,430) $41.58 (15,035) $46.09
- ----------------------------------------------------------------------------------------------------------------
December 31, 1998 6,351,278 $37.83 5,031,252 $46.12
Granted 1,705,335 $37.49 1,079,455 $36.52
Exercised (94,275) $22.07 -- --
Forfeited (158,780) $37.80 (99,866) $44.41
- ----------------------------------------------------------------------------------------------------------------
December 31, 1999 7,803,558 $37.94 6,010,841 $44.42
The weighted-average fair value of regular stock options granted during
1997, 1998, and 1999 was $10.13, $8.53, and $8.18 respectively. The
weighted-average fair value of performance-accelerated stock options granted
during 1997, 1998, and 1999 was $9.39, $9.24, and $7.82 respectively.
Following is a summary of regular stock options exercisable at December
31, 1997, 1998, and 1999, and their respective weighted-average share prices:
Weighted-average
Number of Shares Exercise Price
---------------- --------------
Options exercisable
December 31, 1997 2,013,148 $38.54
Options exercisable
December 31, 1998 3,300,628 $41.57
Options exercisable
December 31, 1999 4,651,273 $39.95
There were no performance-accelerated stock options exercisable at
December 31, 1997, 1998 and 1999.
Following is a summary of stock options outstanding at December 31,
1999:
Outstanding Options Exercisable Options
Number Weighted-average Weighted- Number Weighted-
Exercise Price Outstanding Remaining average Exercisable at average
Range at 12/31/99 Contractual Life Exercise Price 12/31/99 Exercise Price
----- ----------- ---------------- -------------- -------- --------------
Regular Stock Options
- ---------------------
$11 - $20 225,013 1.84 $15.66 225,013 $15.66
$21 - $30 1,810,700 8.30 $25.52 751,305 $25.47
$31 - $40 3,553,945 8.06 $38.19 1,870,540 $38.63
$41 - $60 2,213,900 6.79 $49.97 1,804,415 $50.38
--------- ---------
7,803,558 4,651,273
========= =========
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Outstanding Options Exercisable Options
Number Weighted-average Weighted- Number Weighted-
Exercise Price Outstanding Remaining average Exercisable at average
Range at 12/31/99 Contractual Life Exercise Price 12/31/99 Exercise Price
----- ----------- ---------------- -------------- -------- --------------
Performance-Accelerated Stock Options
- -------------------------------------
$25 - $40 2,125,621 8.69 $36.31 -- --
$41 - $50 3,081,420 6.83 $47.09 -- --
$51 - $61 803,800 6.08 $55.63 -- --
---------
6,010,841
=========
The company estimates at December 31, 1999, 100% of
performance-accelerated stock options will eventually vest.
The company's Employee Stock Purchase Plan is a qualified
non-compensatory plan, which allows eligible employees to acquire shares of
common stock through systematic payroll deductions. The plan consists of
three-month subscription periods, beginning July 1 of each year. The purchase
price is 85% of the fair market value of the common stock on either the first or
last day of that subscription period, whichever is lower. Purchases may range
from 2% to 15% of an employee's base salary each pay period, subject to certain
limitations. Currently, 850,722 shares of Hercules common stock are registered
for offer and sale under the plan. Shares issued at December 31, 1999 and 1998,
were 949,464 and 573,445, respectively. The company applies APB Opinion 25 and
related interpretations in accounting for its Employee Stock Purchase Plan.
Accordingly, no compensation cost has been recognized for the Employee Stock
Purchase Plan.
Had compensation cost for the company's Stock-Based Incentive Plans and
Employee Stock Purchase Plan been determined on the basis of fair value
according to SFAS No. 123, the fair value of each option granted or share
purchased would be estimated on the grant date using the Black-Scholes option
pricing model.
The following weighted-average assumptions would be used in estimating
fair value for 1999, 1998, and 1997:
Performance Accelerated Employee Stock Purchase
Assumption Regular Plan Plan Plan
---------- ------------ ----------------------- -----------------------
Dividend yield 3.4% 3.5% 3.5%
Risk-free interest rate 5.84% 5.61% 5.02%
Expected life 7.4 yrs. 5 yrs. 3 mos.
Expected volatility 23.9% 25.5% 35.9%
The company's net income and earnings per share for 1999, 1998, and 1997
would approximate the pro forma amounts below:
(Dollars in millions, except per share) 1999 1998 1997
---- ---- ----
Net income
As reported $ 168 $ 9 $319
Pro forma $ 149 $ (5) $308
Basic earnings per share
As reported $1.63 $ .10 $3.22
Pro forma $1.45 $(.06) $3.10
Diluted earnings per share
As reported $1.62 $ .10 $3.13
Pro forma $1.44 $(.06) $3.04
SFAS No. 123 does not apply to awards prior to 1995, and additional
awards in future years are anticipated.
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12. ADDITIONAL BALANCE SHEET DETAIL
(Dollars in millions) 1999 1998
------ ----
Property, plant, and equipment
Land $ 58 $ 74
Buildings and equipment 2,785 2,837
Construction in progress 135 126
------ ------
Total 2,978 3,037
Accumulated depreciation and amortization 1,657 1,599
------ ------
Net property, plant, and equipment $1,321 $1,438
====== ======
Accrued expenses
Payroll and employee benefits $ 63 $ 63
Income taxes payable 35 15
Current portion of restructuring liability 66 119
Accrued interest payable 44 49
Legal accrual 101 15
Environmental accrual 29 18
Dividends payable 28 --
Other 195 202
------ ------
$ 561 $ 481
====== ======
13. RESTRUCTURING
Pursuant to the plans in place to merge the operations of BetzDearborn with
Hercules and to rationalize the support infrastructure and other existing
operations, approximately 600 employees were terminated and several facilities
were closed during 1999. Cash payments during 1999 include $42 million for
severance benefits and $14 million for other exit costs. As a result of the
completion of plans to exit former BetzDearborn activities, additional exit
costs related to facility closures of $8 million and a $4 million reduction in
employee severance benefits were reflected in the finalization of the purchase
price allocation (see Note 1). We lowered the estimate of severance benefits
related to the termination of Hercules employees by $4 million. The lower than
planned severance benefits are the result of higher than anticipated attrition,
with such voluntary resignations not requiring the payment of termination
benefits. Additionally in 1999, we incurred $3 million in severance charges
related to a reduction in work force of approximately 20 manufacturing employees
within the Chemical Specialties segment (see Note 16). We estimate approximately
1,300 (approximately 1,000 related to the 1998 BetzDearborn acquisition)
employees will be terminated, of which approximately 990 employee terminations
have occurred since the inception of the plans.
In 1998, Hercules incurred restructuring liabilities of $130 million in
connection with the acquisition of BetzDearborn (see Notes 1 and 16). These
liabilities included charges of $31 million for employee termination benefits
and $5 million for exit costs related to facility closures. In addition, a $94
million liability was charged to goodwill as part of the purchase price
allocation related to the acquisition of BetzDearborn and included $78 million
for employee termination benefits and $16 million for office and facility
closures, relocation of BetzDearborn employees and other related exit costs.
Cash payments during 1998 included $15 million of severance benefits.
In 1997, we incurred $24 million in severance benefits related to the
reorganization of management and the adoption of new competitive strategies (see
Note 16). Cash payments of $2 million and $10 million are reflected in the table
below in 1999 and 1998, respectively. Remaining amounts to be paid, with respect
to this plan are $3 million at the end of 1999.
Severance benefits payments are based on years of service and generally
continue for 3 months to 24 months subsequent to termination. We expect to
substantially complete remaining actions under the plans in 2000. A
reconciliation of activity with respect to the liabilities established for these
plans is as follows:
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(Dollars in millions) 1999 1998
----- -----
Balance at beginning of year $ 130 $ 15
Acquisition-related accrual -- 130
Cash payments (56) (15)
Additional termination benefits and exit costs 11 --
Reversals (8) --
----- -----
Balance at end of year $ 77 $ 130
===== =====
14. PENSION AND OTHER POSTRETIREMENT BENEFITS
The company provides a defined benefit pension and postretirement benefit plans
to employees. The following chart lists benefit obligations, plan assets, and
funded status of the plans.
(Dollars in millions) Other Postretirement
Pension Benefits Benefits
1999 1998 1999 1998
------- ------- ----- -----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1 $ 1,499 $ 1,114 $ 154 $ 141
Service cost 30 20 2 1
Interest cost 97 83 13 10
Amendments 6 -- 20 --
Assumption change (147) 52 (9) 3
Acquisition -- 284 -- 9
Translation difference (19) 8 -- --
Actuarial loss (gain) (8) 28 22 10
Benefits paid from plan assets (115) (90) (2) (2)
Benefits paid by company -- -- (19) (18)
------- ------- ----- -----
Benefit obligation at December 31 $ 1,343 $ 1,499 $ 181 $ 154
======= ======= ===== =====
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 $ 1,589 $ 1,237 $ 8 $ 9
Actual return on plan assets 275 182 1 1
Acquisition -- 256 -- --
Company contributions (refund) 2 (2) -- --
Translation difference (19) 6 -- --
Benefits paid from plan assets (115) (90) (2) (2)
------- ------- ----- -----
Fair value of plan assets at December 31 $ 1,732 $ 1,589 $ 7 $ 8
======= ======= ===== =====
Funded status of the plans $ 389 $ 90 $(174) $(146)
Unrecognized actuarial loss (gain) (197) 89 44 34
Unrecognized prior service cost (benefit) 36 35 (19) (44)
Unrecognized net transition obligation (11) (25) -- --
Amount included in accrued expenses- other -- -- 20 20
------- ------- ----- -----
Prepaid (accrued) benefit cost $ 217 $ 189 $(129) $(136)
======= ======= ===== =====
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL
POSITION CONSIST OF:
Prepaid benefit cost $ 217 $ 218 -- --
Accrued benefit liability -- (29) (129) (136)
------- ------- ----- -----
$ 217 $ 189 $(129) $(136)
======= ======= ===== =====
ASSUMPTIONS AS OF DECEMBER 31
Weighted-average discount rate 8.00% 7.00% 8.00% 7.00%
Expected return on plan assets 9.25% 9.25% 9.25% 9.25%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
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Other Postretirement
Pension Benefits Benefits
1999 1998 1997 1999 1998 1997
----- ----- ----- ---- ---- ----
Service cost $ 30 $ 20 $ 17 $ 2 $ 1 $ 1
Interest cost 97 83 78 13 10 10
Return on plan assets (expected) (134) (114) (103) (1) (1) (1)
Amortization and deferrals 3 12 5 (2) (4) (5)
Amortization of transition asset (14) (14) (14) -- -- --
----- ----- ----- ---- ---- ----
Benefit cost (credit) $ (18) $ (13) $ (17) $ 12 $ 6 $ 5
===== ===== ===== ==== ==== ====
Pension
During 1997, the company recognized a charge of approximately $8 million
for special termination benefits.
Other Postretirement Benefits
The nonpension postretirement benefit plans are contributory health care
and life insurance plans. The assumed participation rate in these plans for
future eligible retirees was 60% for health care and 100% for life insurance. In
August 1993, a Voluntary Employees' Beneficiary Association (VEBA) Trust was
established and funded with $10 million of company funds. The company
periodically obtains reimbursement for union retiree claims, while other claims
are paid from company assets. The participant contributions are immediately used
to cover claim payments, and for this reason do not appear as contributions to
plan assets.
The assumed health care cost trend rate was 4.5% at December 31, 1999,
and was 5% for those under age 65 and 4.75% for those over age 65 at December
31, 1998. The assumed health care cost trend rate will be 8% in 2000 to reflect
recent experience, decreasing to 4.5% by 2004 and for all subsequent years.
A one-percentage point increase or decrease in the assumed health care
cost trend rate would increase or decrease the postretirement benefit obligation
by $7 million or $8 million, respectively, and would not have a material effect
on aggregate service and interest cost components.
15. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
Purchased in-process research and development (IPR&D) represents the value
assigned in a purchase business combination to research and development projects
of the acquired business that were commenced but not yet completed at the date
of the acquisition, and which, if unsuccessful, have no alternative future use
in research and development activities or otherwise. Amounts assigned to
purchased IPR&D must be charged to expense at the date of consummation of the
purchase business combination. Accordingly, the company charged approximately
$130 million to expense during 1998 for IPR&D related to the BetzDearborn
acquisition (see Note 1).
The IPR&D projects were principally included in the water treatment and
paper process divisions of the acquired business. The former Water Management
Group (WMG) provided specialty water and process treatment programs for boiler,
cooling, influent, and effluent applications to markets such as refining,
chemical, paper, electric utility, food, industrial, commercial and
institutional establishments. Overall, the products are used to control
corrosion, scale, deposit formation, and microbiological growth, conserve energy
and improve efficiency. Additionally, the former Paper Process Group (PPG)
brought to market custom-engineered programs for the process-related problems
associated with paper production. These problems include deposition, corrosion,
microbiological fouling, foam control, deinking and felt conditioning.
Due to the uniqueness of each of the projects, the costs and effort required
were estimated based on the information available at the date of acquisition.
However, there is a risk that certain projects may not be completed successfully
for a variety of reasons, including change in strategies, inability to develop a
cost-efficient treatment, and changes in market demand or customer requirements.
The IPR&D valuation charge was measured by the stage of completion method,
primarily calculated by dividing the costs incurred to the date of acquisition
by the total estimated costs. These percentages were applied to
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the results of project-by-project discounted cash flow models that estimated the
present value of residual cash flows deemed attributable solely to the
underlying IPR&D.
The projected revenues, costs, and margins in the cash flow forecasts were
consistent with projections by management based on available historical data.
The revenue projections were based on an opportunity analysis for each project,
which takes into account market and competitive conditions, potential customers,
and strategic goals. The weighted-average cost of capital for the overall
business was estimated at 11% and the risk-adjusted discount rate used in the
IPR&D project valuation model was 13%.
16. OTHER OPERATING EXPENSES (INCOME), NET
Other operating expenses (income), net, in 1999 include integration charges of
$36 million, primarily for employee incentive and retention, consulting, legal
and other costs associated with the BetzDearborn acquisition. During 1999, the
company recognized charges of approximately $36 million related to a legal
settlement (see Note 24) and asset write-downs and disposal costs including
impairment losses of approximately $10 million in the Chemical Specialties
segment. Additionally, we recognized an additional $3 million of severance
benefits under a plan to terminate approximately 20 employees, primarily
manufacturing personnel (see Note 13). The asset write-down and severance
charges were incurred primarily as a result of our decisions to exit the
nitrocellulose business and rationalize assets in our resins business, which
will no longer be utilized. Also during 1999, we realized a $16 million gain on
the sale of our Agar business, a $6 million net environmental insurance
recovery, and a $4 million reversal of restructuring charges (see Note 13).
Other operating expenses in 1998 included $65 million in restructuring
charges and $11 million in integration charges associated with the acquisition
of BetzDearborn (see Note 1). The restructuring charges include employee
termination benefits of $31 million for approximately 350 employees, facility
closure costs of $5 million (see Note 13) and asset write-downs of $29 million
including impairment losses of $15 million in the Functional Products segment
and $6 million in the Chemical Specialties segment. The termination benefits,
exit costs, and facility closure costs relate primarily to the acquisition of
BetzDearborn during 1998 (see Note 1). Asset impairments in the Chemical
Specialties and Functional Products segments resulted from adverse business
negotiations, the BetzDearborn acquisition, and the loss of a customer.
Other operating charges in 1997 include $146 million, primarily
associated with the reorganization of management and the adoption of new
competitive strategies. The charges included $95 million in impairment losses
($66 million in the Chemical Specialties segment, $24 million in the Functional
Products segment, and $5 million in the Process Chemicals and Services segment)
and $27 million in rationalization charges primarily associated with certain
assets, which were no longer being utilized, and lease abandonment costs. Also
included was $24 million in severance benefits associated with a plan to
eliminate approximately 270 employees. There have been no significant
adjustments to this plan and cash payments of $9 million, $10 million and $2
million were made in 1997, 1998, and 1999, respectively (see Note 13). The plan
included reorganization of management, reductions in operating personnel at
certain domestic and foreign facilities, and the consolidation of certain
support functions. Other operating expenses in 1997 also include $13 million of
net environmental cleanup costs, principally for non-operating sites, and $8
million of executive retirement benefits.
17. INTEREST AND DEBT EXPENSE
Interest and debt costs are summarized as follows:
(Dollars in millions) 1999 1998 1997
---- ---- ---
Costs incurred $197 $112 $47
Amount capitalized 12 11 8
---- ---- ---
Amount expensed $185 $101 $39
==== ==== ===
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18. OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following:
(Dollars in millions) 1999 1998 1997
---- ----- -----
Net gains on dispositions $ 10 $ 23 $ 398
Interest income 8 36 29
Acquisition costs -- -- (20)
Legal settlements and accruals (6) (66) (41)
Interest rate swap termination -- (13) --
Minority interests (2) -- --
Bank charges (2) (1) (2)
Miscellaneous income (expense), net (10) (1) 10
---- ----- -----
$ (2) $ (22) $ 374
==== ===== =====
Net gains on dispositions include gains on the sale of real estate and
other investments of $10 million in 1999 and $11 million in 1998 and 1997,
respectively. Also, gains of $12 million and $19 million in 1998 and 1997,
respectively, were recorded from the sale of Alliant Techsystems common stock
held by Hercules (see Note 23). Additionally, 1997 includes a gain of $368
million on the completion of transactions that monetized the company's
investment of Tastemaker, a 50%-owned flavors joint venture. Interest income in
1998 and 1997 relates primarily to the $500 million note received upon
completion of the Tastemaker monetization. Acquisition costs in 1997 represent a
charge primarily related to the company's unsuccessful bid for Allied Colloids.
The 1998 legal settlements and accruals relate primarily to settlements of Qui
Tam ("Whistle Blower") lawsuits (see Note 24). The 1998 loss from terminated
interest rate swaps is related to the company's financing effort upon the
acquisition of BetzDearborn. Miscellaneous income (expense), net, includes a
foreign currency loss of $1 million in 1999 and foreign currency gains of $5
million and $19 million in 1998 and 1997, respectively.
19. INCOME TAXES
The domestic and foreign components of income before taxes and effect of change
in accounting principle are presented below:
(Dollars in millions) 1999 1998 1997
----- ----- ----
Domestic $ 4 $(147) $396
Foreign 239 224 197
----- ----- ----
$ 243 $ 77 $593
===== ===== ====
A summary of the components of the tax provision follows:
(Dollars in millions) 1999 1998 1997
----- ----- ----
Currently payable
U.S. federal $ (25) $ (26) $169
Foreign 82 74 63
State (4) (4) 2
Deferred
Domestic 15 17 30
Foreign 7 7 5
----- ----- ----
Provision for income taxes $ 75 $ 68 $269
===== ===== ====
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Deferred tax liabilities (assets) at December 31 consist of:
(Dollars in millions) 1999 1998
----- -----
Depreciation $ 235 $ 153
Prepaid pension 84 76
Inventory 8 6
Investments 83 84
Other 51 46
----- -----
Gross deferred tax liabilities 461 365
----- -----
Postretirement benefits other than pensions (59) (64)
Accrued expenses (165) (126)
Loss carryforwards (24) (24)
Other (71) (31)
----- -----
Gross deferred tax assets (319) (245)
----- -----
Valuation allowance 16 12
----- -----
$ 158 $ 132
===== =====
A reconciliation of the U.S. statutory income tax rate to the effective
rate follows:
1999 1998 1997
---- ---- ----
U.S. statutory income tax rate 35% 35% 35%
Purchased in-process research and development (Note 15) -- 59 --
Goodwill amortization 9 7 --
Foreign dividends net of credits 3 -- 2
State taxes (2) 2 --
Utilization of capital losses (7) -- --
Reserves (6) (17) 7
Other (1) 2 1
---- ---- ----
Effective tax rate 31% 88% 45%
==== ==== ====
The net operating losses have indefinite carryforward periods, but may be
limited in their use in any given year.
The company provides taxes on undistributed earnings of subsidiaries and
affiliates included in consolidated retained earnings to the extent such
earnings are planned to be remitted and not reinvested permanently.
The undistributed earnings of subsidiaries and affiliates on which no
provision for foreign withholding or U.S. income taxes has been made amounted to
approximately $505 million at December 31, 1999. U.S. and foreign income taxes
that would be payable if such earnings were distributed may be lower than the
amount computed at the U.S. statutory rate because of the availability of tax
credits.
20. EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share and
the effect on income and the weighted-average number of shares of dilutive
potential common stock:
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(Dollars and shares in millions, except per share) 1999 1998 1997
-------- -------- -------
Basic EPS computation:
Income before effect of change in accounting principle $ 168 $ 9 $ 324
Effect of change in accounting principle -- -- (5)
-------- -------- -------
Net income $ 168 $ 9 $ 319
======== ======== =======
Weighted-average shares outstanding 103.2 96.3 99.2
Earnings per share before effect of change in
Accounting principle $ 1.63 $ .10 $ 3.27
Effect of change in accounting principle -- -- (.05)
-------- -------- -------
Earnings per share $ 1.63 $ .10 $ 3.22
======== ======== ========
Diluted EPS computation:
Income before effect of change in accounting principle $ 168 $ 9 $ 324
Interest on convertible debentures -- -- 2
Effect of change in accounting principle -- -- (5)
-------- -------- -------
Net Income $ 168 $ 9 $ 321
======== ======== =======
Weighted-average shares outstanding 103.2 96.3 99.2
Options .4 .6 1.1
Convertible debentures .3 .5 2.1
-------- -------- -------
Adjusted weighted-average shares 103.9 97.4 102.4
======== ======== =======
Earnings per share before effect of change in
Accounting principle $ 1.62 $ .10 $ 3.18
Effect of change in accounting principle -- -- (.05)
-------- -------- -------
Earnings per share $ 1.62 $ .10 $ 3.13
======== ======== ========
21. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Notional Amounts and Credit Exposure of Derivatives
The notional amounts of derivatives summarized below do not represent amounts
exchanged by the parties and, thus, are not a measure of the exposure of the
company through its use of derivatives. The amounts exchanged are calculated on
the basis of the notional amounts and the other terms of the derivatives, which
relate to interest rates or exchange rates.
Interest Rate Risk Management
During 1999, the interest rate swap portfolio went through a series of
adjustments to reflect the replacement of U.S. dollar debt with a variable euro
debt. The series of outstanding interest rate swap agreements at year end,
maturing from 2001 through September 2003, effectively converts floating-rate
debt into debt with a fixed rate ranging from 5.36% to 5.63% per year for U.S.
dollar debt and 2.76% to 3.18% per year for euro debt. These swaps act as a
hedge against the company's interest rate exposure on its outstanding variable
rate debt. For the years 1999 and 1998, these contracts resulted in a less than
1% change in the effective interest rate on the weighted-average notional
principal amounts outstanding. The aggregate notional principal amounts at the
end of 1999 and 1998 were $1.2 billion and $1.0 billion, respectively.
The following table indicates the types of swaps used and their weighted-average
interest rates:
(Dollars in millions) 1999 1998
-------- --------
Pay fixed on swaps notional amount (at year-end) $ 1,160 $ 1,000
Average pay rate 4.0% 6.4%
Average receive rate 3.9% 5.5%
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Foreign Exchange Risk Management
The company selectively uses foreign currency forward contracts and currency
swaps to offset the effects of exchange rate changes on reported earnings, cash
flow, and net asset positions. The primary exposures are denominated in euro,
Danish kroner, and the British pound sterling. Some of the contracts involve the
exchange of two foreign currencies, according to local needs in foreign
subsidiaries. The term of the currency derivatives is rarely more than one year.
At December 31, 1999 and 1998, the company had outstanding forward-exchange
contracts to purchase foreign currencies aggregating $59 million and $117
million and to sell foreign currencies aggregating $72 million and $320 million,
respectively. Non-U.S. dollar cross-currency trades aggregated $410 million and
$380 million at December 31, 1999 and 1998, respectively. Currency swap
agreements, used to hedge net investment positions, totaled $512 million at
December 31, 1998. The foreign exchange contracts outstanding at December 31,
1999 will mature during 2000.
Fair Values
The following table presents the carrying amounts and fair values of the
company's financial instruments at December 31, 1999 and 1998:
(Dollars in millions)
1999 1998
---- ----
Carrying Carrying
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Investment securities (available for sale) $ 32 $ 32 $ 31 $ 31
Long-term debt (1,777) (1,759) (3,096) (3,101)
Company-obligated preferred securities of subsidiary trusts (992) (908) (200) (200)
Foreign exchange contracts 2 2 6* 6
Currency swaps -- -- 8* 8
Interest rate swap contracts -- 28 -- 1
*The carrying amount represents the net unrealized gain or net interest payable
associated with the contracts at the end of the period.
Fair values of derivative contracts are indicative of cash that would
have been required had settlement been December 31, 1999.
Basis of Valuation
Investment securities: Quoted market prices.
Long-term debt: Present value of expected cash flows related to existing
borrowings discounted at rates currently available to the company for long-term
borrowings with similar terms and remaining maturities.
Company obligated preferred securities of subsidiary trusts: Year-end interest
rates and company common stock price.
Foreign exchange contracts: Year-end exchange rates.
Currency swaps: Year-end interest and exchange rates.
Interest rate swap contracts: Bank or market quotes or discounted cash flows
using year-end interest rates.
22. PENDING TRANSACTIONS
In February 2000, we announced plans to form a new business venture with Lehman
Brothers Merchant Banking Partners II L.P. The new business will include our
food gums division, along with the Kelco biogums unit, which will be purchased
from Monsanto by the new venture. The Lehman Brothers partnership will own 72%
of the new entity, and we will own the remaining 28%. We expect that the new
venture will have revenues of approximately $450 million.
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Further, we have entered into discussions with a third party to
monetize our resins business and we are beginning to explore alternatives
regarding our FiberVisions business. These three businesses account for
approximately $900 million of our 1999 revenues.
23. DIVESTITURES
In December 1999, we sold our 70% interest in Algas Marinas, our Chilean Agar
business, for approximately $27 million. The transaction resulted in a pre-tax
gain of approximately $16 million. This unit was included in the Functional
Products segment and contributed approximately $24 million of revenue to this
segment in 1999.
In March 1997, the company completed transactions to monetize its
investment in Tastemaker for approximately $608 million, including $108 million
in cash and a $500 million, 6.2% interest-bearing five-year note. This note was
subsequently sold in 1998. Equity in income of affiliated companies included
Tastemaker earnings of $11 million in 1997.
In June 1997, the company completed a joint venture of its
polypropylene fiber business with Jacob Holm & Sons A/S (Denmark) in which
Hercules owned 51% of the joint venture, which was accounted for on the equity
method at that time. In July 1998, Hercules purchased its partner's 49% share of
the joint venture, with the operating results of FiberVisions being included in
Hercules' consolidated financial statements since the date of acquisition (see
Note 1).
Pursuant to a 1997 agreement, Hercules sold its remaining shares of
Alliant Techsystems Inc. for $12 million in 1998.
24. COMMITMENTS AND CONTINGENCIES
Leases
Hercules has operating leases (including office space, transportation, and data
processing equipment) expiring at various dates. Rental expense was $55 million
in 1999, $35 million in 1998, and $31 million in 1997.
At December 31, 1999, minimum rental payments under noncancelable
leases aggregated $282 million with subleases of $24 million. A significant
portion of these payments relates to a long-term operating lease for corporate
office facilities. The net minimum payments over the next five years are $39
million in 2000, $30 million in 2001, $22 million in 2002, $18 million in 2003,
and $17 million in 2004.
Environmental
Hercules has been identified as a potentially responsible party (PRP)
by U.S. federal and state authorities, or by private parties seeking
contribution, for the cost of environmental investigation and/or cleanup at
numerous sites. The estimated range of the reasonably possible share of costs
for the investigation and cleanup is between $60 million and $230 million. The
actual costs will depend upon numerous factors, including the number of parties
found responsible at each environmental site and their ability to pay; the
actual methods of remediation; outcomes of negotiations with regulatory
authorities; outcomes of litigation; changes in environmental laws and
regulations; technological developments; and the years of remedial activity
required, which could range from 0 to 30 years.
Hercules becomes aware of sites in which it may be named a PRP in
investigatory and/or remedial activities through correspondence from the U.S.
Environmental Protection Agency, or other government agencies, or through
correspondence from previously named PRPs, who either request information or
notify us of our potential liability. We have established procedures for
identifying environmental issues at our plant sites. In addition to
environmental audit programs, we have environmental coordinators who are
familiar with environmental laws and regulations and act as a resource for
identifying environmental issues.
Litigation over liability at Jacksonville, Arkansas, the most
significant site, has been pending since 1980. As a result of a pretrial Court
ruling in October 1993, Hercules has been held jointly and severally liable for
costs
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incurred, and for future remediation costs, at the Jacksonville site by the
District Court, Eastern District of Arkansas (the Court). The case is captioned
United States v. Vertac Corporation, USDA No. LR-C-92-137 (E.D. Ark.)
Other defendants in this litigation have either settled with the
government or, in the case of the Department of Defense (DOD), have not been
held liable. We appealed the Court's order finding the DOD not liable. On
January 31, 1995, the Eighth Circuit Court of Appeals upheld the Court's order.
We filed a petition to the U.S. Supreme Court requesting review and reversal of
the Eighth Circuit Court ruling. This petition was denied on June 26, 1995, and
the case was remanded to the District Court for further proceedings.
On May 21, 1997, the Court issued a ruling that Uniroyal is liable and
that Standard Chlorine is not liable to Hercules for contribution. Through the
filing of separate summary judgment motions, Hercules and Uniroyal raised a
number of defenses to the United States' ability to recover its costs. On
October 23, 1998, the Court denied those motions and granted the United States'
summary judgment motion, ordering Hercules and Uniroyal to pay the United States
approximately $103 million plus any additional response costs incurred or to be
incurred after July 31, 1997. Trial testimony on the issue of allocation between
Hercules and Uniroyal was completed on November 6, 1998.
On August 6, 1999, the Court issued a final judgment in which it
reduced the $103 million from the previous ruling on summary judgment by
approximately $7 million (the amount received by the United States in previous
settlements with other parties) and added applicable interest to reach a final
total of approximately $100.5 million. This final judgment was based on the
Court's findings that (a) Hercules and Uniroyal were jointly and severally
liable for approximately $89 million plus any additional response costs incurred
or to be incurred after May 31, 1998, and (b) Hercules was solely liable for an
additional amount of approximately $11 million. This judgment finalizes the
Court's 1993 and 1997 non-final orders in which Hercules and Uniroyal were held
jointly and severally liable for past and future remediation costs at the site.
Hercules appealed these rulings to the United States Court of Appeals for the
Eighth Circuit on December 16, 1999.
On February 8, 2000, the Court issued a final judgment on the
allocation between Uniroyal and Hercules, finding Uniroyal liable for 2.6
percent and Hercules liable for 97.4 percent of the costs at issue. Hercules
appealed that judgment on February 10, 2000. That appeal has been docketed and
consolidated with the earlier mentioned appeal. Oral argument before the United
States Court of Appeals for the Eighth Circuit is presently scheduled for early
April 2000. Neither of the Court's final judgments has changed our outlook on
the potential outcome of this matter.
In 1992, Hercules brought suit against its insurance carriers for past
and future costs for cleanup of certain environmental sites (Hercules
Incorporated v. The Aetna Casualty & Surety Company, et al., Del. Super., C.A.
No. 92C-10-105 and 90C-FE-195-CV (consolidated)). In April 1998, the trial
regarding insurance recovery for the Jacksonville, Arkansas site (see discussion
above) was completed. The jury returned a "Special Verdict Form" with findings
that, in conjunction with the Court's other opinions, were used by the Court to
enter a judgment in August 1999. The judgment determined the amount of Hercules'
recovery for past cleanup expenditures and stated that Hercules is entitled to
similar coverage for costs incurred since September 30, 1997, and in the future.
Hercules has not included any insurance recovery in the estimated range of costs
above. Since entry of the Court's August 1999 order, Hercules has entered into
settlement agreements with several of its insurance carriers and has recovered
certain settlement monies. The terms of those settlements and amounts recovered
are confidential.
At December 31, 1999, the accrued liability of $60 million for
environmental remediation represents management's best estimate of the probable
and reasonably estimable costs related to environmental remediation. The extent
of liability is evaluated quarterly. The measurement of the liability is
evaluated based on currently available information, including the process of
remedial investigations at each site and the current status of negotiations with
regulatory authorities regarding the method and extent of apportionment of costs
among other PRPs. Hercules does not anticipate that its financial condition will
be materially affected by environmental remediation costs in excess of amounts
accrued, although quarterly or annual operating results could be materially
affected.
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Litigation
Hercules is a defendant in numerous lawsuits that arise out of, and are
incidental to, the conduct of its business. In these legal proceedings, no
specifically identified director, officer, or affiliate is a party or a named
defendant. These suits concern issues such as product liability, contract
disputes, labor-related matters, patent infringement, environmental proceedings,
property damage, and personal injury matters.
Hercules was a defendant in three Qui Tam (Whistle Blower) lawsuits in
the U.S. District Court for the Central District of Utah, brought by former
employees of the Aerospace business sold to Alliant Techsystems Inc. in March
1995. All of these actions were settled in 1999. We recognized a $62 million
charge in 1998 related to these settlements. There will be no future impacts to
our results of operations or financial condition as a result of these
settlements.
In addition to the Vertac litigation described above, two individuals
sued Hercules in a lawsuit captioned Jeffrey Shelton Jr., et al. v. Hercules
Incorporated, Civil No. LR-C-97-131 (E.D. Ark. 1997). These individuals sought
medical monitoring and damages for loss of recreational opportunities. They
brought a Resource Conservation and Recovery Act (RCRA) citizens suit against us
seeking an injunction which would require us to fund or perform various
environmental and health studies and pay for any required remediation to the
Bayou Meto. Plaintiffs and Hercules filed motions for summary judgment. In
October 1999, the Court granted Hercules' motion for summary judgment and the
time for any appeal by the plaintiffs has expired. Further, 19 individuals sued
Hercules in a matter entitled Gary Graham, et al. v. Vertac Chemical Corporation
and Hercules Incorporated, Civil No. LR-C-98-678 (U.S. District Court, Eastern
District of Arkansas). These individuals sought damages for personal injuries
and diminution of property value as a result of alleged dioxin contamination
from the Jacksonville, Arkansas site. This case was dismissed without prejudice
on technical grounds on August 2, 1999. The time to appeal has run out.
BetzDearborn, along with Pacific Gas and Electric (PG&E), is a
defendant in four lawsuits involving in the aggregate approximately 2,350
plaintiffs pending in the Superior Court of Los Angeles County, California (the
Lawsuits). BetzDearborn maintained insurance coverage for the purpose of
securing protection against alleged product and other liabilities, and certain
of the insurance carriers have undertaken to pay the cost of the defense of the
Lawsuits subject to various reservations of rights. The lawsuits are captioned
as follows: Acosta, et al. v. Betz Laboratories, et al., No. BC 161 669 (1996);
Adams, et al. v. Betz Laboratories, et al., No. BC 113 000 (1994); Aguilar, et
al. v. Betz Laboratories, et al., No. BC 158 588 (1996); and Aguayo et al. v.
Betz Laboratories, et al., No. BC 123 749 (1995).
In October 1999, BetzDearborn, several of its insurance carriers, and
plaintiffs engaged in a mediation, which led to a settlement of plaintiffs'
claims against BetzDearborn, which settlement was approved by the court in
February 2000. BetzDearborn also reached a settlement with many of its insurance
carriers with respect to these cases. The impact of the settlements resulted in
an adjustment to the BetzDearborn purchase price allocation. All of these
settlement agreements are confidential.
Hercules is a defendant in numerous asbestos-related personal injury
lawsuits and claims which typically arise from alleged exposure to products
which were sold by a former subsidiary of Hercules, or from alleged exposure to
asbestos contained in facilities owned or operated by Hercules. In December
1999, Hercules entered into a Settlement Agreement to resolve the majority of
these matters. In connection with that settlement, Hercules entered into an
agreement with several of its insurance carriers pursuant to which a majority of
the amounts paid will be insured. The net impact of these settlements was
reflected in the 1999 results of operations. The terms of both agreements are
confidential.
At December 31, 1999, the consolidated balance sheet reflects a current
liability of approximately $101 million for litigation and claims. Estimated
insurance recoveries of approximately $46 million have been reflected in current
assets. These amounts represent management's best estimate of the probable and
reasonably estimable losses and recoveries related to litigation or claims. The
extent of the liability and recovery is evaluated quarterly. While it is not
feasible to predict the outcome of all pending suits and claims, the ultimate
resolution of these matters could have a material effect upon the financial
position of Hercules, and the resolution of any of the matters during a specific
period could have a material effect on the quarterly or annual operating results
for that period.
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53
25. CHANGE IN ACCOUNTING PRINCIPLE
In November 1997, FASB's Emerging Issues Task Force (EITF) reached a
final consensus on Issue 97-13, "Accounting for Costs Incurred in Connection
With a Consulting Contract That Combines Business Process Reengineering and
Information Technology Transformation." Activities deemed to be business process
reengineering include the following: current state assessments, configuring and
prototyping, process reengineering, and work force restructuring. The consensus
requires that the unamortized amounts of such costs previously capitalized as of
the beginning of the quarter which includes November 20, 1997, be charged during
that quarter as the cumulative effect of a change in accounting principle. The
company adopted the consensus during the fourth quarter of 1997 and recorded a
cumulative-effect adjustment of $5 million.
26. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
In 1998, Hercules adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The statement establishes new standards for reporting information
about operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosure about products and services,
geographic area, and major customers. In compliance with SFAS 131 and with the
acquisition of BetzDearborn, the company has identified three reportable
segments and has restated prior years to conform with the 1998 presentation.
Process Chemicals and Services: (Pulp and Paper and BetzDearborn.)
Products and services in this segment are designed to enhance customers'
processes and improve their manufacturing costs or environmental impact.
Principal products and markets include performance additives and water and
process treatment chemicals and related on-site services for a wide variety of
industrial and commercial applications including pulp and paper mills,
refineries, chemical plants, metals manufacturers, automobile assembly plants,
and makers of food and beverages.
Functional Products: (Aqualon and Food Gums.) Products from this segment
are principally derived from natural resources and are sold as key raw materials
to other manufacturers. Principal products and markets include water-soluble
polymers and natural gums, used as thickeners, emulsifiers and stabilizers for
water-based paints, oil and gas exploration, building materials, dairy and
bakery products, and other processed food products such as jams, jellies, and
meats.
Chemical Specialties: (Resins and FiberVisions.) Products in this
segment provide low-cost, technology driven solutions to meet customer needs and
market demands. Principal products and markets include rosin and hydrocarbon
resins for adhesives used in nonwoven fabrics, textile fibers, and adhesive
tapes; thermal-bond polypropylene staple fiber for disposable diapers and other
hygienic products; and automotive textiles.
The company evaluates performance and makes decisions based primarily on
"Profit from Operations" and "Capital Employed." Consolidated capital employed
represents the total resources employed in the company and is the sum of total
debt, trust preferred securities, and stockholders' equity. Capital employed in
each reportable segment represents the net operating assets employed to conduct
business in that segment and generally includes working capital (excluding cash)
and property, plant and equipment. Other assets and liabilities, primarily
goodwill and other intangibles, not specifically allocated to business segments,
are reflected in "Reconciling Items" in the table below.
Hercules has no single customer representing greater than 10% of its
revenues.
GEOGRAPHIC REPORTING
For geographic reporting, no single country, outside the United States,
is material for separate disclosure. However, because the company has
significant foreign operations, revenues and long-lived assets are disclosed by
geographic region.
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54
Revenues are reported on a "customer basis," meaning that net sales are
included in the geographic area where the customer is located. Long-lived assets
are included in the geographic areas in which the producing entities are
located.
Intersegment sales are eliminated in consolidation.
(Dollars in millions)
PROCESS
CHEMICALS
INDUSTRY SEGMENTS AND FUNCTIONAL CHEMICAL RECONCILING
SERVICES PRODUCTS SPECIALTIES ITEMS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------
1999
Net sales $1,705 $861 $685 $ (3) $3,248
Profit (loss) from operations 338 218 89 (165) (a) 480
Equity in income of affiliated companies 1
Interest and debt expense 185
Preferred security distributions of subsidiary
trusts 51
Other expense, net (2)
---- ---- ---- ------ ------
Income before income taxes 243
Capital employed (g) 735 372 379 2,824 (d) 4,310
Capital expenditures 51 74 39 38 202
Depreciation and amortization 66 33 30 121 250
- ------------------------------------------------------------------------------------------------------------------------------
1998
Net sales $717 $863 $566 $ (1) $2,145
Profit (loss) from operations 131 215 75 (229) (b) 192
Equity in income of affiliated companies 10
Interest and debt expense 101
Preferred security distributions of subsidiary
trusts 2
Other expense, net (22)
---- ---- ---- ------ ------
Income before income taxes 77
Capital employed (g) 756 392 388 2,885 (d) 4,421
Capital expenditures 44 53 36 24 157
Depreciation and amortization 22 32 19 35 108
- ------------------------------------------------------------------------------------------------------------------------------
1997
Net sales $443 $898 $526 $ (1) $1,866
Profit (loss) from operations 100 224 67 (163) (c) 228
Equity in income of affiliated companies 30
Interest and debt expense 39
Other income, net 374
---- ---- ---- ------ ------
Income before income taxes 593
Capital employed (g) 138 355 168 723 (d) 1,384
Capital expenditures 22 47 30 20 119
Depreciation and amortization 11 34 13 18 76
- ------------------------------------------------------------------------------------------------------------------------------
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UNITED
GEOGRAPHIC AREAS STATES EUROPE AMERICAS (e) ASIA PACIFIC TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
1999
Net sales $1,711 $1,052 $216 $269 $3,248
Long-lived assets (f) 2,264 948 529 150 3,891
1998
Net sales 944 785 258 158 2,145
Long-lived assets (f) 3,083 681 125 97 3,986
1997
Net sales 826 655 212 173 1,866
Long-lived assets (f) 387 309 19 16 731
(a) Includes integration expenses, severance costs, asset write-downs, and
other charges net of litigation and insurance settlements, partially offset
by a gain on the sale of a subsidiary and the reversal of restructuring
charges (see Notes 13 and 16). Also included are amortization of goodwill
and intangibles, corporate research and development and other corporate
items not specifically allocated to business segments.
(b) Includes costs for purchased in-process research and development, facility
closures and contract terminations, employee termination benefits,
write-downs of property, plant and equipment, and other integration
expenses (see Notes 15 and 16). Also included are amortization of goodwill
and intangibles, corporate research and development and other corporate
items not specifically allocated to business segments.
(c) Primarily includes asset write-downs, impairments and severance costs (see
Note 16). Also included are amortization of goodwill and intangibles,
corporate research and development and other corporate items not
specifically allocated to business segments.
(d) Assets and liabilities not specifically allocated to business segments,
primarily goodwill, intangibles, and other long-term assets net of
liabilities.
(e) Ex-U.S.A.
(f) Long-lived assets include Property, plant and equipment, Goodwill, and
Other intangible assets. In 1998, the goodwill and other intangible assets
related to the BetzDearborn acquisition are reflected in the United States
region.
(g) Represents total segment assets net of operating liabilities.
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56
Hercules Incorporated
Summary of Quarterly Results (Unaudited) (Dollars in millions, except per share)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
---- ----- ---- ----- ----- ----- ----- ----- ------- -------
OPERATING RESULTS
Net sales $791 $ 430 $817 $ 445 $ 813 $ 510 $ 827 $ 760 $ 3,248 $ 2,145
Cost of sales 423 262 440 267 445 323 462 435 1,770 1,287
Selling, general and administrative expenses 197 60 193 67 188 68 209 182 787 377
Research and development 21 13 20 12 21 17 23 19 85 61
Purchased in-process research and development -- -- -- -- -- -- -- 130 -- 130
Goodwill and intangible asset amortization 20 1 20 1 20 3 19 17 79 22
Other operating expenses (income), net 7 -- 6 (3) 1 (2) 33 81 47 76
---- ----- ---- ----- ----- ----- ----- ----- ------- -------
Profit (loss) from operations 123 94 138 101 138 101 81 (104) 480* 192*
Equity income 1 5 -- 5 -- -- -- -- 1 10
Interest and debt expense 60 11 47 13 38 18 40 59 185 101
Preferred security distributions of subsidiary 5 -- 12 -- 16 -- 18 2 51 2
trusts
Other income (expense), net 3 (44) 4 16 (2) 18 (7) (12) (2) (22)
---- ----- ---- ----- ----- ----- ----- ----- ------- -------
Income (loss) before income taxes 62 44 83 109 82 101 16 (177) 243 77
Income taxes 24 16 27 35 25 30 (1) (13) 75 68
---- ----- ---- ----- ----- ----- ----- ----- ------- -------
Net income (loss) $ 38 $ 28 $ 56 $ 74 $ 57 $ 71 $ 17 $(164) $ 168 $ 9
==== ===== ==== ===== ===== ===== ===== ===== ======= =======
Earnings per share**
Basic
Earnings (loss) per share $.37 $ .29 $.56 $ .78 $ .54 $ .75 $ .17 $(1.64) $ 1.63 $ .10
==== ===== ==== ===== ===== ===== ===== ===== ======= =======
Diluted:
Earnings (loss) per share $.37 $ .29 $.56 $ .77 $ .54 $ .74 $ .16 $(1.64) $ 1.62 $ .10
==== ===== ==== ===== ===== ===== ===== ===== ======= =======
* Includes unusual charges of $62 million in 1999 (see Note 16) and $215
million in 1998 (see Notes 15 and 16).
** Earnings per share calculations for each of the quarters are based on the
weighted-average number of shares outstanding for each period. The sum of
the quarters may not necessarily be equal to the full year's earnings per
share amounts.
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57
PRINCIPAL CONSOLIDATED SUBSIDIARIES
ARGENTINA
BetzDearborn Argentina S.A.
AUSTRALIA
BetzDearborn Australia Pty Ltd.
AUSTRIA
BetzDearborn Ges.m.b.H.
BAHAMAS
Hercules International Trade Corporation Limited
BELGIUM
Hercules Beringen B.V.B.A.
Hercules Doel B.V.B.A.
Hercules Europe B.V.B.A.
Hercules Holding B.V./B.V.B.A.
BERMUDA
Curtis Bay Insurance Co. Ltd.
BRAZIL
Hercules do Brasil Produtos Quimicos Ltda.*
Hercules Limeira S.A.
CANADA
BetzDearborn Canada, Inc.
Hercules Canada Inc.
Hercules Canada (partnership)
CHILE
Hercules Quimica Chile Ltda
CHINA
FiberVisions (Suzhou) Nonwovens Products Co. Ltd.
FiberVisions (China) Textile Products Ltd.*
COLOMBIA
Hercules de Colombia S.A.
CURACO
BetzDearborn Caribbean N.V.
CZECH (REPUBLIC)
Hercules CZ S.R.O.
DENMARK
Hercules Copenhagen A/S
FiberVisions, A/S
Hercules Holding ApS
ECUADOR
BetzDearborn de Ecuador S.A.
FINLAND
BetzDearborn OY
FRANCE
Aqualon France B.V.
GERMANY
Abieta Chemie, GmbH*
Hercules Deutschland GmbH
Hercules GmbH
Pomosin GmbH
HONG KONG
Hercules China Limited
HUNGARY
BetzDearborn Hungary Kft
INDIA
Hercules Specialty Chemicals India Private Limited
INDONESIA
P.T. Hercules Mas Indonesia
IRELAND
BetzDearborn Ireland Limited
ITALY
BetzDearborn Srl
JAPAN
Hercules Japan Ltd.
Nippon BetzDearborn K.K.*
KOREA
BetzDearborn Korea, Ltd.
Hercules Korea Chemical Co. Ltd.
LIECHTENSTEIN
Organa Trust
LUXEMBOURG
Hercules Investment s.a.r.l.
MALAYSIA
Hercules Chemicals (Malaysia) Sdn. BHD
MEXICO
Quimica Hercules, S.A. de C.V.
Taloquimia S.A.*
MOZAMBIQUE
Genu Mozambique
NETHERLANDS
Aqualon France B.V.
Hercules B.V.
Hercules Holding B.V./B.V.B.A.
NORWAY
BetzDearborn Norge A/S
PAKISTAN
Pakistan Gum Industries Ltd.*
PERU
Hercules del Peru S.A.
PHILIPPINES
Genu Philippines Inc.*
Hercules Cebu, Inc.
POLAND
Hercules Polska Sp. Zo.o
PORTUGAL
BetzDearborn Portuguesa, Ltda.
SINGAPORE
Hercules Chemicals Singapore Pte Ltd.
SOUTH AFRICA
Hercules Chemicals South Africa (Pty) Ltd.
SPAIN
Hercules Quimica, S.A.
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58
SWEDEN
BetzDearborn AB
SWITZERLAND
Fibervisions A.G./Fibervisions Ltd.
TAIWAN
Hercules Chemicals (Taiwan) Co., Ltd.
TANZANIA
Zanea Seaweed Company Limited*
THAILAND
Hercules Chemicals (Thailand) Co., Ltd.
UNITED KINGDOM
Hercules GB Holding Ltd.
Hercules Investments Global
Hercules Limited
Hercules GB Holdings Limited
URUGUAY
BetzDearborn de Uruguay S.A.
UNITED STATES
Aqualon Company, Delaware
BetzDearborn Europe, Inc., Delaware
BetzDearborn Inc., Pennsylvania
BetzDearborn International, Inc., Pennsylvania
BL Technologies, Inc., Delaware
BLI Holdings, Inc., Delaware
DRC, Ltd., Delaware
East Bay Realty Services, Inc., Delaware
FiberVisions Incorporated, Delaware
FiberVisions, L.L.C., Delaware
FiberVisions Products, Inc., Georgia
Hercules Credit Inc., Delaware
Hercules Finance Company, Delaware
Hercules Flavor, Inc., Delaware
Hercules International Limited, Delaware
Hercules Shared Services Corporation, Delaware*
WSP, Inc., Delaware
VENEZUELA
BetzDearborn Venezuela C.A.
VIRGIN ISLANDS
Hercules Islands Corporation*
Hercules Overseas Corp.
* This entity is owned in part by Hercules with the remaining interest held by a
third party.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
None.
57
59
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
Information regarding directors and nominees for directors of Hercules is
included under the caption entitled "Re-election of Directors" on page 8 of the
Proxy Statement and is incorporated herein by reference. Information regarding
executive officers begins on page 16 of that report.
Disclosure of information for directors, officers and other persons not
meeting the timely reporting requirements under Section 16(a) of the Exchange
Act is contained in the Proxy Statement under the caption entitled "Compliance
with Section 16(a) Reporting" on page 21 and is incorporated herein by
reference.
EXECUTIVE OFFICERS OF THE REGISTRANT:
The name, age, and current position of each executive officer (as defined
by SEC rules) of Hercules as of March 15, 2000 are listed below. Each of the
officers has served in one or more executive capacities with Hercules and/or its
affiliates during the past five years. There are no family relationships among
executive officers.
NAME AGE CURRENT POSITION
R. Keith Elliott(1) 58 Chairman
Vincent J. Corbo 56 President and Chief Executive Officer
Dominick W. DiDonna 51 Executive Vice President and President, Process Chemicals and Services
Segment
George MacKenzie 50 Executive Vice President, President, Chemical Specialties Segment and
Chief Financial Officer
Larry V. Rankin(2) 56 Executive Vice President and President, Functional Chemicals Segment
Harry J. Tucci(3) 59 Executive Vice President
June B. Barry 48 Executive Vice President and Chief Administrative Officer
Israel J. Floyd(4) 53 Executive Vice President, Secretary and General Counsel
Michael J. Scott 48 Vice President and Controller
Stuart C. Shears 49 Vice President and Treasurer
- -----------------------
(1) Mr. Elliot is retiring from Hercules and will resign as Chairman on March
31, 2000.
(2) Mr. Rankin is retiring from Hercules on April 1, 2000.
(3) Mr. Tucci will retire from Hercules at the time the Food Gums divestiture is
consummated.
(4) Mr. Floyd is also responsible for strategic planning and corporate
development.
ITEM 11. EXECUTIVE COMPENSATION:
Information regarding executive compensation of Hercules' directors and
executive officers is included in the Proxy Statement under the caption entitled
"Board of Directors - Highlights" on page 13 and the caption entitled "Report of
the Compensation Committee" on pages 19 and 20, and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
Information regarding beneficial ownership of the Common Stock by certain
beneficial owners and by management of Hercules is included under the caption
entitled "Stock Ownership of Directors and Officers" on page 21 of the Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
In 1999, no director or officer had an involvement in such transactions of a
nature or magnitude to require disclosure under the applicable SEC thresholds.
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60
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a) Documents filed as part of this Report:
1. Financial Statements
See Item 8 for an Index to the Consolidated Financial
Statements of Hercules Incorporated.
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts ..................... 60
All other schedules are omitted because they are not applicable,
not required, or the information required is either presented in the
Notes to Financial Statements or has not changed materially from that
previously reported.
3. Exhibits:
A complete listing of exhibits required is given in the
Exhibit Index which precedes the exhibits filed with this
Report.
(b) Reports on Form 8-K.
None.
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61
HERCULES INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (Dollars in millions)
Col. A. Col. B Col. C Col. D Col. E
- -------------------------------------------------------------------------------------------------------------------
Additions
--------------------------------
Balance at
beginning of Charged to costs Charged to Balance at end
Description period and expenses other accounts Deductions of period
- -------------------------------------------------------------------------------------------------------------------
Year 1999
- ---------
Allowance for doubtful accounts $ 13 -- $ 3 (a) -- $ 16
Tax valuation allowance 12 -- 4 (a) -- 16
Year 1998
- ---------
Allowance for doubtful accounts $ 3 -- $ 10 (a) -- $13
Tax valuation allowance 12 -- -- -- 12
Year 1997
- ---------
Allowance for doubtful accounts $ 4 -- -- 1 (b) $ 3
Tax valuation allowance 15 -- -- 3 (c) 12
(a) Primarily a result of 1998 acquisitions, including subsequent purchase
price allocation adjustments.
(b) Write-off of uncollectible accounts, net or recoveries.
(c) Utilization of net operating loss carryforwards.
60
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 29, 2000.
HERCULES INCORPORATED
By: /s/ George MacKenzie
___________________________________
George MacKenzie, Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 29, 2000.
PRINCIPAL EXECUTIVE DIRECTOR:
/s/ R. Keith Elliott
Chairman _________________________________
R. Keith Elliott
PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR:
/s/ Vincent J. Corbo
President and Chief Executive Office _________________________________
Vincent J. Corbo
PRINCIPAL FINANCIAL OFFICER:
Executive Vice President and /s/ George MacKenzie
Chief Financial Officer _________________________________
George MacKenzie
PRINCIPAL ACCOUNTING OFFICER: /s/ Michael J. Scott
Vice President and Controller _________________________________
Michael J. Scott
DIRECTORS:
/s/ R. Keith Elliott
___________________________________
R. Keith Elliott
/s/ Vincent J. Corbo
___________________________________ ___________________________________
Vincent J. Corbo Gaynor N. Kelley
/s/ John G. Drosdick /s/ Ralph L. MacDonald, Jr.
___________________________________ ___________________________________
John G. Drosdick Ralph L. MacDonald, Jr.
/s/ Richard M. Fairbanks, III
___________________________________ ___________________________________
Richard M. Fairbanks, III H. Eugene McBrayer
/s/ Peter McCausland
___________________________________ ___________________________________
Alan R. Hirsig Peter McCausland
/s/ John A. H. Shober
___________________________________ ___________________________________
Edith E. Holiday John A. H. Shober
/s/ Robert G. Jahn
___________________________________ ___________________________________
Robert G. Jahn Paula A. Sneed
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63
EXHIBIT INDEX
Number Description Incorporated by Reference To
2-A Agreement and Plan of Merger among Hercules, Water Exhibit 2.1, BetzDearborn Inc. Current Report
Acquisition Company and BetzDearborn Inc., dated July 30, on Form 8-K, filed July 30, 1998
1998
3-A.1 Restated Certificate of Incorporation of Hercules, as Exhibit 3-A, Annual Report on form 10-K
revised and amended July 6, 1988 filed March 26, 1993
3-A.2 Certificate of Amendment to Hercules' Restated Exhibit 4.1a, Registration Statement on Form
Certificate of Incorporation as revised and amended S-3, filed September 15, 1998
October 24, 1995
3-B By-Laws of Hercules, as revised and amended October 30, Exhibit 3-B, Annual Report on Form 10-K filed
1991 March 26, 1993
4-A Junior Subordinated Debentures Indenture, dated November Exhibit 4-C, Annual Report on Form 10-K filed
12, 1998, between Hercules and The Chase Manhattan Bank, March 30, 1999
as trustee ("Chase")
4-B First Supplemental Indenture, dated November 12, 1998, Exhibit 4-D, Annual Report on Form 10-K, filed
between Hercules and Chase March 30, 1999
4-C Preferred Securities Guarantee Agreement, dated November Exhibit 4-E, Annual Report on form 10-K, filed
12, 1998, executed by Hercules and Chase, with respect to March 30, 1999
Hercules Trust V
4-D Amended and Restated Trust Agreement of Hercules Trust V, Exhibit 4-F, Annual Report on Form 10-K, filed
dated November 12, 1998 March 30, 1999
4-E Remarketing Agreement, dated November 12, 1998, among Exhibit 4-G, Annual Report on Form 10-K, filed
Hercules, Hercules Trust V and NationsBanc Montgomery March 30, 1999
Securities LLC
4-F Form of Junior Subordinated Debentures Indenture between Exhibit 4.4, Amendment No. 1 to Registration
Hercules, and Chase Statement on Form S-3, filed October 29, 1998
4-G Officers' Certificate, dated as of March 17, 1999, Exhibit 4.1, Current Report on Form 8-K dated
pursuant to the Junior Subordinated Debentures Indenture March 17, 1999
between Hercules and Chase
4-H Form of Preferred Securities Guarantee by Hercules and Exhibit 4.28, Amendment No. 1 to Registration
Chase, with respect to Hercules Trust I Statement on Form S-3, filed October 29, 1998
4-I Form of Amended and Restated Trust Agreement of Hercules Exhibit 4.13, Amendment No. 1 to Registration
Trust I Statement on Form S-3, filed October 29, 1998
4-J Form of 9.42% Trust Originated Preferred Securities of Exhibit 4.2, Current Report on Form 8-K, dated
Hercules Trust I March 17, 1999
62
64
Number Description Incorporated by Reference To
4-K Form of 9.42% Junior Subordinated Deferrable Interest Exhibit 4.3, Current Report on Form 8-K, dated
Debentures due 2029 March 17, 1999
4-L Second Supplemental Indenture, dated July 6, 1999, to the Exhibit 4-A, Quarterly Report on Form 10-Q,
Junior Subordinated Debentures Indenture between Hercules filed August 16, 1999
and Chase
4-M Amendment dated as of July 6, 1999 to the Amended and Exhibit 4-B, Quarterly Report on Form 10-Q,
Restated Trust Agreement of Hercules Trust V filed August 16, 1999
4-N Termination Agreement, dated as of July 6, 1999, among Exhibit 4-C, Quarterly Report on Form 10-Q,
Hercules, Hercules Trust V and Banc of America Securities filed August 16, 1999
LLC
4-O Officer's Certificate, dated as of July 27, 1999, Exhibit 4.1, Current Report on Form 8-K, dated
pursuant to the Junior Subordinated Debentures Indenture July 27, 1999
between Hercules and Chase, dated as of November 12, 1998
4-P Amended and Restated Trust Agreement of Hercules Trust II Exhibit 4.2, Current Report on Form 8-K, dated
dated as of July 27, 1999, together with Annex I thereto July 27, 1999
4-Q Unit Agreement, dated July 27, 1999, among Hercules, Exhibit 4.3, Current Report on Form 8-K, dated
Hercules Trust II and The Chase Manhattan Bank, as unit July 27, 1999
agent
4-R Warrant Agreement, dated July 27, 1999, between Hercules Exhibit 4.4, Current Report on Form 8-K, dated
and The Chase Manhattan Bank, as warrant agent July 27, 1999
4-S Form of Series A Junior Subordinated Deferrable Interest Exhibit 4.5, Current Report on Form 8-K, dated
Debentures July 27, 1999
4-T Form of Trust II Preferred Securities Exhibit 4.6, Current Report on Form 8-K, dated
July 27, 1999
4-U Form of CRESTS Unit Exhibit 4.7, Current Report on Form 8-K, dated
July 27, 1999
4-V Form of Warrant Exhibit 4.8, Current Report on Form 8-K, dated
July 27, 1999
4-W Amendment No. 2, dated as of October 25, 1999, to the Exhibit 4-A, Quarterly Report on Form 10-Q,
Amended and Restated Trust Agreement of Hercules Trust V, filed November 15, 1999
as amended
4-X Third Supplemental Indenture, dated as of October 25, Exhibit 4-B, Quarterly Report on Form 10-Q,
1999, to the Junior Subordinated Debentures Indenture, as filed November 16, 1999
supplemented, between Hercules and Chase, dated as of
November 12, 1998
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65
Number Description Incorporated by Reference To
4-Y Fourth Supplemental Indenture, dated as of December 23,
1999, to the Junior Subordinated Debentures Indenture, as
supplemented, between Hercules and Chase, dated as of
November 12, 1998
4-Z Form of Amended and Restated Trust Agreement of Hercules
Trust VI
4-AA Form of Preferred Securities Guarantee by Hercules and
Chase, with respect to Hercules Trust VI
4-AB Form of Floating Rate Preferred Securities of Hercules Included as Exhibit A-1 to Exhibit 4-Z
Trust VI
4-AC Form of Floating Rate Junior Subordinated Deferrable Included as Exhibit A to Exhibit 4-Y
Interest Debentures due 2000
4-AD Amendment No. 3 dated as of January 24, 2000, to the
Amended and Restated Trust Agreement of Hercules Trust V,
as amended
4-AE Fifth Supplemental Indenture, dated as of January 24,
2000, to the Junior Subordinated Debentures Indenture, as
supplemented, between Hercules and Chase, dated
November 12, 1998
4-AF Amendment No. 4 dated as of February 9, 2000, to the
Amended and Restated Trust Agreement of Hercules Trust V,
as amended
4-AG Sixth Supplemental Indenture, dated as of February 9,
2000, to the Junior Subordinated Debentures Indenture, as
supplemented, between Hercules and Chase, dated
November 12, 1998
4-AH Remarketing and Contingent Purchase Agreement, dated as of
February 9, 2000, among and Banc of America Securities LLC
Hercules is party to several long-term debt instruments under which in each case
the total amount of securities Authorized does not exceed 10% of the total
assets of Hercules. Hercules agrees to furnish a copy of such instruments to the
Securities and Exchange Commission upon request.
10-A Hercules Executive Survivor Benefit Plan Exhibit 10-D, Annual Report on Form 10-K,
filed March 27, 1981*
10-B Hercules Phantom Stock Plan Exhibit E, Notice Annual Meeting and Proxy
Statement, dated February 14, 1986*
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66
Number Description Incorporated by Reference To
10-C Hercules Deferred Compensation Plan Exhibit 10-I, Annual Report on Form 10-K,
filed March 29, 1988*
10-D Hercules Annual Management Incentive Compensation Plan Exhibit 10-H, Annual Report on Form 10-K,
filed March 26, 1993
10-E Hercules 1993 Nonemployee Director Stock Accumulation Plan Exhibit 4.1, Registration Statement on Form
S-8, filed July 16, 1993
10-F Hercules Deferred Compensation Plan for Nonemployee Exhibit 10-J, Annual Report Form 10-K, filed
Directors March 26, 1993
10-G Hercules Employee Pension Restoration Plan Exhibit 10-L, Annual Report on Form 10-K,
filed March 26, 1993
10-H Form of Employment Contract between Hercules and certain Exhibit 10-J, Annual Report on Form 10-K,
of its officers filed March 29, 1988*
10-I Form of Indemnification Agreement between Hercules and Annex II, Notice of Annual Meeting and Proxy
certain officers and directors of Hercules Statement, dated February 19, 1987*
10-J Employment Agreement effective August 1, 1998, between Exhibit 10-T, Annual Report on Form 10-K,
Hercules and Vincent J. Corbo filed March 30, 1999
10-K Hercules Amended and Restated Long Term Incentive
Compensation Plan
10-L BetzDearborn Inc. Employee Stock Ownership and 401(k) Plan
10-M Amended and Restated Credit Agreement, dated April 19, Exhibit 10.2, Current Report on Form 8-K dated
1999, among Hercules, NationsBank, N.A., as April 19, 1999
Administrative Agent, and the lenders party thereto
10-N Forward Underwriting Agreement, dated November 12, 1998, Exhibit 10-R, Annual Report on Form 10-K,
between NationsBanc Montgomery Securities and Hercules filed March 30, 1999
10-O Underwriting Agreement, dated March 12, 1999, among Exhibit 1.1, Current Report on Form 8-K, dated
Hercules, Hercules Trust I and the Underwriters named March 17, 1999
therein
10-P CRESTS Underwriting Agreement, dated July 21, 1999, among Exhibit 1.1, Current Report on Form 8-K, dated
Hercules, Hercules Trust II and the Underwriters named July 27, 1999
therein
10-Q Common Stock Underwriting Agreement, dated July 21, 1999, Exhibit 1.2, Current Report on Form 8-K, dated
among Hercules and the Underwriters named therein July 27, 1999
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67
Number Description Incorporated by Reference To
21 Subsidiaries of Registrant See Part II, Item 8 on page 56 of this 1999
Form 10-K
23-A Consent of Independent Accountants
27 Financial Data Schedule
* Previously filed as indicated and incorporated herein by reference. Exhibits
incorporated by reference should be located in SEC File No. 1-496.
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