0000893220-01-500827.txt : 20011106
0000893220-01-500827.hdr.sgml : 20011106
ACCESSION NUMBER: 0000893220-01-500827
CONFORMED SUBMISSION TYPE: 424B3
PUBLIC DOCUMENT COUNT: 1
FILED AS OF DATE: 20011101
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: WSP INC
CENTRAL INDEX KEY: 0000822275
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 411575136
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-29
FILM NUMBER: 1772969
MAIL ADDRESS:
STREET 1: 1313 N MARKET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AQUALON CO
CENTRAL INDEX KEY: 0001157007
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 23244147
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-28
FILM NUMBER: 1772998
BUSINESS ADDRESS:
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HERCULES INC
CENTRAL INDEX KEY: 0000046989
STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS CHEMICAL PRODUCTS [2890]
IRS NUMBER: 510023450
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210
FILM NUMBER: 1772968
BUSINESS ADDRESS:
STREET 1: 1313 N MARKET ST
STREET 2: HERCULES PLZ
CITY: WILMINGTON
STATE: DE
ZIP: 19894
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: HERCULES PLAZA
STREET 2: RM 8151 NW
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FORMER COMPANY:
FORMER CONFORMED NAME: HERCULES POWDER CO
DATE OF NAME CHANGE: 19680321
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HISPAN CORP
CENTRAL INDEX KEY: 0001157022
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 510310259
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-01
FILM NUMBER: 1772970
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: 1313 N MARKET STREET
STREET 2: C/O HERCULES PLAZA
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HERCULES SHARED SERVICES CORP
CENTRAL INDEX KEY: 0001157059
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 510099408
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-02
FILM NUMBER: 1772971
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HERCULES INVESTMENTS LLC
CENTRAL INDEX KEY: 0001157058
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 522071249
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-03
FILM NUMBER: 1772972
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HERCULES INTERNATIONAL LTD LLC
CENTRAL INDEX KEY: 0001157057
STANDARD INDUSTRIAL CLASSIFICATION: []
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-04
FILM NUMBER: 1772973
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HERCULES INTERNATIONAL LTD
CENTRAL INDEX KEY: 0001157056
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 510367297
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-05
FILM NUMBER: 1772974
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HERCULES FLAVOR INC
CENTRAL INDEX KEY: 0001157054
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 510339950
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-06
FILM NUMBER: 1772975
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HERCULES FINANCE CO
CENTRAL INDEX KEY: 0001157053
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 311342715
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-07
FILM NUMBER: 1772976
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HERCULES EURO HOLDINGS LLC
CENTRAL INDEX KEY: 0001157049
STANDARD INDUSTRIAL CLASSIFICATION: []
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-08
FILM NUMBER: 1772977
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HERCULES CREDIT INC
CENTRAL INDEX KEY: 0001157047
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 510261785
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-09
FILM NUMBER: 1772978
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HERCULES COUNTRY CLUB INC
CENTRAL INDEX KEY: 0001157045
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 510333273
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-10
FILM NUMBER: 1772979
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HERCULES CHEMICAL CORP
CENTRAL INDEX KEY: 0001157043
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 510099407
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-11
FILM NUMBER: 1772980
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: FIBERVISIONS PRODUCTS INC
CENTRAL INDEX KEY: 0001157042
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 582131693
STATE OF INCORPORATION: GA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-12
FILM NUMBER: 1772982
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: FIBERVISIONS LP
CENTRAL INDEX KEY: 0001157040
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 510387251
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-13
FILM NUMBER: 1772983
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: FIBERVISIONS LLC
CENTRAL INDEX KEY: 0001157039
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 512044047
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-14
FILM NUMBER: 1772984
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: FIBERVISIONS INC
CENTRAL INDEX KEY: 0001157037
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 522043124
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-15
FILM NUMBER: 1772985
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: EAST BAY REALTY SERVICES INC
CENTRAL INDEX KEY: 0001157035
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 510333230
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-16
FILM NUMBER: 1772986
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: D R C LTD
CENTRAL INDEX KEY: 0001157032
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 510363246
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-17
FILM NUMBER: 1772987
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: COVINGTON HOLDINGS INC
CENTRAL INDEX KEY: 0001157031
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 510384615
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-18
FILM NUMBER: 1772988
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CHEMICAL TECHNOLOGIES INDIA LTD
CENTRAL INDEX KEY: 0001157029
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 510363245
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-19
FILM NUMBER: 1772989
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BLI HOLDING INC
CENTRAL INDEX KEY: 0001157021
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 510363245
STATE OF INCORPORATION: PA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-20
FILM NUMBER: 1772990
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BL TECHNOLOGIES INC
CENTRAL INDEX KEY: 0001157025
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 510363245
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-21
FILM NUMBER: 1772991
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BL CHEMICALS INC
CENTRAL INDEX KEY: 0001157019
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 510264309
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-22
FILM NUMBER: 1772992
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BETZDEARBORN INTERNATIONAL INC
CENTRAL INDEX KEY: 0001157017
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 231720942
STATE OF INCORPORATION: PA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-23
FILM NUMBER: 1772993
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BETZDEARBORN EUROPE INC
CENTRAL INDEX KEY: 0001157016
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 232157907
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-24
FILM NUMBER: 1772994
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BETZDEARBORN CHINA LTD
CENTRAL INDEX KEY: 0001157015
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 980171857
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-25
FILM NUMBER: 1772995
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BETZDEARBORN INC
CENTRAL INDEX KEY: 0000011884
STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS CHEMICAL PRODUCTS [2890]
IRS NUMBER: 231503731
STATE OF INCORPORATION: PA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-26
FILM NUMBER: 1772996
BUSINESS ADDRESS:
STREET 1: 4636 SOMERTON RD
CITY: TREVOSE
STATE: PA
ZIP: 19053
BUSINESS PHONE: 2153553300
MAIL ADDRESS:
STREET 1: 4636 SOMERTON ROAD
CITY: TREVOSE
STATE: PA
ZIP: 19053
FORMER COMPANY:
FORMER CONFORMED NAME: BETZ LABORATORIES INC
DATE OF NAME CHANGE: 19920703
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ATHENS HOLDINGS INC
CENTRAL INDEX KEY: 0001157008
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 510387251
STATE OF INCORPORATION: DE
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67210-27
FILM NUMBER: 1772997
BUSINESS ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
BUSINESS PHONE: 3025945000
MAIL ADDRESS:
STREET 1: C/O HERCULES PLAZA
STREET 2: 1313 NORTH MARKET STREET
CITY: WILMINGTON
STATE: DE
ZIP: 19894-0001
424B3
1
w51743bbe424b3.txt
HERCULES INCORPORATED
PROSPECTUS Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-67210
HERCULES INCORPORATED
Hercules Plaza
1313 North Market Street [HERCULES LOGO]
Wilmington, Delaware 19894-0001
302-594-5000
HERCULES INCORPORATED
EXCHANGE OFFER
for $400,000,000 of its
11 1/8% Senior Notes Due 2007
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON DECEMBER 7, 2001, UNLESS EXTENDED.
If all of the conditions to the exchange offer are satisfied, we will
exchange all of our 11 1/8% Senior Notes due 2007 issued on November 14, 2000,
which we refer to as the old notes, that are validly tendered and not withdrawn
prior to the expiration of the exchange offer, for 11 1/8% Senior Notes due
2007, which we refer to as the new notes.
You may withdraw your tender of old notes at any time before the expiration
of this exchange offer.
The new notes that we issue to you in exchange for your old notes will be
substantially identical to your old notes except that, unlike your old notes,
the new notes will not have certain transfer restrictions or registration
rights.
The new notes that we issue to you in exchange for your old notes are new
securities with no established market for trading.
YOU SHOULD CONSIDER CERTAIN RISKS BEFORE DECIDING WHETHER TO TENDER YOUR OLD
NOTES.
SEE "RISK FACTORS" BEGINNING ON PAGE 9.
Each broker-dealer that receives new notes for its own account pursuant to
this exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of new notes. The letter of transmittal accompanying
this prospectus states that by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for old notes where the old notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities. We have agreed that, for a period of up to one year
after the consummation of this exchange offer, we will make this prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
Neither the SEC nor any state securities commission has approved or
disapproved of the new notes or determined that this prospectus is adequate or
accurate. Any representation to the contrary is a criminal offense.
This prospectus is dated October 31, 2001.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Risk Factors................................................ 9
Use of Proceeds............................................. 16
Capitalization.............................................. 17
Selected Historical Financial Data.......................... 18
Unaudited Pro Forma Financial Data.......................... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Description of Senior Credit Facility....................... 35
Business.................................................... 36
Management.................................................. 48
Principal Stockholders...................................... 60
The Exchange Offer.......................................... 62
Description of Notes........................................ 69
Certain Federal Income Tax Consequences..................... 103
Plan of Distribution........................................ 107
Legal Matters............................................... 107
Experts..................................................... 107
Available Information....................................... 108
Index to Financial Statements............................... F-1
------------------------
FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" including, in
particular, the statements about our plans, strategies and prospects under the
headings "Prospectus Summary," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," and in the
Unaudited Pro Forma Financial Information and the related notes thereto.
Although we believe that our plans, intentions and expectations reflected in or
suggested by such forward-looking statements are reasonable, we can give no
assurance that such plans, intentions or expectations will be achieved.
Important factors that could cause actual results to differ materially from the
forward-looking statements we make in this prospectus are set forth in the
prospectus, including under the headings "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." All forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the cautionary
statements and risk factors contained throughout this prospectus.
------------------------
This prospectus incorporates important business and financial information
about us that is not included or delivered with this prospectus. This
information is available without charge to you upon written or oral request to
Israel J. Floyd, Esquire, Secretary and General Counsel, Hercules Incorporated,
Hercules Plaza, 1313 North Market Street, Wilmington, Delaware 19894-0001,
Telephone: 302-594-5128. TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST THE
INFORMATION NO LATER THAN NOVEMBER 30, 2001, WHICH IS FIVE BUSINESS DAYS PRIOR
TO THE TERMINATION OF THE EXCHANGE OFFER.
i
PROSPECTUS SUMMARY
The following summary contains information about Hercules and this exchange
offer. It does not contain all of the information that may be important to you
in making a decision to tender your notes pursuant to the exchange offer. For a
more complete understanding of Hercules and the exchange offer, we urge you to
read this entire prospectus carefully, including the "Risk Factors" section and
our consolidated financial statements and the notes to those statements.
THE COMPANY
Hercules Incorporated is a leading, diversified, global manufacturer and
marketer of specialty chemicals and related services for a broad range of
business, consumer and industrial applications. We are focused on maximizing
cash flow, reducing debt, improving return on capital and delivering stockholder
value by concentrating on the performance of our businesses, as well as ongoing
improvements throughout all of our operations. Our performance will continue to
be driven by superior service to our customers and development of new products,
including products that improve our customers' manufacturing costs and
processes.
Our principal products are chemicals used by the paper industry to increase
product performance and enhance the manufacturing process; water treatment and
industrial process chemicals; water-soluble polymers; and polypropylene and
polyethylene fibers. These products impart such qualities as durability,
water-resistance and improved aesthetics to everyday consumer goods such as
writing paper, toothpaste and diapers. The primary markets we serve include pulp
and paper, personal care, petroleum refining, oil and gas drilling and recovery,
paints and coatings, construction materials and pharmaceuticals.
While our products have a low cost impact on our customers' total product
costs, they frequently possess characteristics important to the functionality
and aesthetics of the finished product or the efficient operation of the
manufacturing process. Examples of our products in consumer end-uses include
strength additives for tissue and toweling, sizing agents for milk and juice
cartons, fibers that comprise the inner and outer linings of disposable diapers
and hygiene products, thickeners in products such as toothpaste, shampoos and
water-based paints and water control additives for building products such as
tile cements, grouts, stuccos, plasters and joint compounds. We also offer
products and related services that improve and reduce the cost of a variety of
manufacturing processes, including water management programs that control
corrosion and improve water quality.
Although price is important to our competitive strategy, we primarily
compete on the basis of the performance and quality of our products. We strive
to continually improve our products by investing in technology and research and
development. We have committed substantial resources to our research and
development efforts. Research and development expenditures totaled approximately
$80 million in 2000. Such expenditures enable us to consistently bring to market
products which have improved functional properties or which offer similar
properties at a lower cost. This area has become increasingly important, as our
customers have come to rely more on us to provide new solutions to improve their
product offerings and processes. Additionally, we strive to make our products
more price-competitive by effectively managing our production costs and sharing
savings with our customers. In addition to developing products internally, we
also selectively enter into strategic partnerships and alliances that add to the
breadth of our products and services.
We continually review our corporate strategy in order to compete most
effectively in our changing markets. Starting in 2000, we implemented a program
designed to refocus our business by monetizing certain assets, thereby
generating cash to reduce our debt, while concentrating on improving the
efficiency, profitability and growth potential of our remaining businesses. In
the fourth quarter of 2000, we announced our intention to pursue a merger or
sale of the company or one or more of its businesses in the belief that, over
the long term, becoming part of a larger enterprise is the best strategic path
for the company. If a sale of the company occurs, it would most likely be in a
two-step process, with the sale of our BetzDearborn division constituting the
first step. We are currently pursuing a disposition, in whole or in part, of our
BetzDearborn division and are in discussions with potential buyers in that
regard. We continue to pursue a merger or sale of the company or our businesses.
There can be no assurance that any of these parties will be prepared to pay a
1
price that is acceptable to us or that any transaction will occur. In June 2001,
we announced a comprehensive cost reduction program to improve our return on
capital. This cost reduction program is being implemented while we continue to
explore strategic alternatives, including the merger or sale of the company or
one or more of our businesses.
After the sale of our Food Gums division in September 2000 and the bulk of
our Resins division in May 2001, our reporting segments are Process Chemicals
and Services (comprised of Pulp and Paper and BetzDearborn), Functional Products
(comprised of Aqualon) and Chemical Specialties (comprised of the remainder of
Resins and FiberVisions).
We are a publicly traded company and our common stock is listed on the New
York Stock Exchange under the symbol "HPC." As of September 30, 2001, we had a
common equity market capitalization of approximately $896 million, based on
108,602,426 shares outstanding and a share price of $8.25 on September 28, 2001.
RECENT DEVELOPMENTS
In July 2001 and August 2001, respectively, our senior credit facility and
our ESOP credit facility were amended to modify certain covenants.
On July 1, 2001, George MacKenzie, Vice Chairman and Chief Financial
Officer, retired from Hercules and resigned from the Board of Directors. On
August 23, 2001, we announced the election of two new members to our Board of
Directors. Jeffrey M. Lipton replaced George MacKenzie and Joe B. Wyatt replaced
H. Eugene McBrayer, who also resigned. On October 29, 2001, we announced the
election of Robert D. Kennedy to the Board of Directors and the resignation of
Gaynor N. Kelley from the Board of Directors. Mr. Kennedy's election and Mr.
Kelley's resignation are effective October 31, 2001.
On September 5, 2001, we announced the first steps in our previously
announced comprehensive cost reduction plan, including an initial reduction in
our workforce of 300 employees, excluding Europe, as well as the release of
non-critical outside contractors by September 30, 2001.
On October 31, 2001, we reported results of operations for the third
quarter ended September 30, 2001. Our net sales and profit from operations were
approximately $637 million and $31 million, respectively. Our corresponding
results for the third quarter of 2000 were approximately $815 million and $207
million, respectively.
2
THE EXCHANGE OFFER
We are offering to exchange $400,000,000 aggregate principal amount of our
old notes for a like aggregate principal amount of our new notes. In order to
exchange your old notes, you must properly tender them and we must accept your
tender. We will exchange all outstanding old notes that are validly tendered and
not validly withdrawn.
The Exchange Offer............ We will exchange our old notes for a like
aggregate principal amount of our new notes.
Expiration Date............... This exchange offer will expire at 5:00 p.m.,
New York City time, on December 7, 2001, unless
we decide to extend it.
Conditions to the Exchange
Offer......................... We will complete this exchange offer only if:
- there is no litigation or threatened
litigation which would impair our ability to
proceed with this exchange offer;
- there is no change in the laws and
regulations which would impair our ability to
proceed with this exchange offer;
- there is no change in the current
interpretation of the staff of the SEC which
permits resales of the new notes;
- there is no stop order issued by the SEC
which would suspend the effectiveness of the
registration statement which includes this
prospectus or the qualification of the new
notes under the Trust Indenture Act of 1939;
and
- we obtain all the governmental approvals we
deem necessary to complete this exchange
offer.
See "The Exchange Offer -- Conditions to the
Exchange Offer."
Procedures for Tendering Old
Notes......................... To participate in this exchange offer, you must
complete, sign and date the letter of
transmittal and transmit it, together with your
old notes to be exchanged and all other
documents required by the letter of
transmittal, to Wells Fargo Bank Minnesota,
N.A., as exchange agent, at its address
indicated in this prospectus. See "The Exchange
Offer -- Exchange Agent." In the alternative,
you can tender your old notes by book-entry
delivery following the procedures described in
this prospectus. If your old notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other
nominee, you should contact that person
promptly to tender your old notes in this
exchange offer. See "The Exchange
Offer -- Procedures for Tendering Old Notes."
Guaranteed Delivery
Procedures.................... If you wish to tender your old notes and you
cannot get the required documents to the
exchange agent on time, you may tender your old
notes by using the guaranteed delivery
procedures described in this prospectus. See
"The Exchange Offer -- Procedures for Tendering
Old Notes -- Guaranteed Delivery Procedure."
Withdrawal Rights............. You may withdraw the tender of your old notes
at any time before 5:00 p.m., New York City
time, on the expiration date of the exchange
offer. To withdraw, you must send a written
notice of withdrawal to the exchange agent at
the address or facsimile number indicated in
this prospectus before 5:00 p.m., New York City
time, on the expiration date of the exchange
offer.
3
Acceptance of Old Notes and
Delivery of New Notes......... If all of the conditions to the completion of
this exchange offer are satisfied, we will
accept any and all old notes that are properly
tendered in this exchange offer on or before
5:00 p.m., New York City time, on the
expiration date. We will return any old notes
that we do not accept for exchange to you
without expense as promptly as practicable
after the expiration date. We will deliver the
new notes to you as promptly as practicable
after the expiration date and acceptance of
your old notes for exchange. See "The Exchange
Offer -- Acceptance of Old Notes for Exchange;
Delivery of New Notes."
Federal Income Tax
Considerations Relating to the
Exchange Offer.............. Exchanging your old notes for new notes will
not be a taxable event to you for United States
federal income tax purposes. See "Certain
Federal Income Tax Consequences."
Exchange Agent................ Wells Fargo Bank Minnesota, N.A. is serving as
exchange agent in the exchange offer.
Fees and Expenses............. We will pay all expenses related to this
exchange offer. See "The Exchange Offer -- Fees
and Expenses."
Use of Proceeds............... We will not receive any proceeds from the
issuance of the new notes. We are making this
exchange offer solely to satisfy certain of our
obligations under a registration rights
agreement entered into in connection with the
offering of the old notes. See "Use of
Proceeds."
Consequences to Holders Who Do
Not Participate in the
Exchange Offer.............. If you do not participate in this exchange
offer:
- you will not necessarily be able to require
us to register your old notes under the
Securities Act;
- you will not be able to resell, offer to
resell or otherwise transfer your old notes
unless they are registered under the
Securities Act or unless you resell, offer to
resell or otherwise transfer them under an
exemption from the registration requirements
of, or in a transaction not subject to, the
Securities Act; and
- the trading market for your old notes will
become more limited to the extent other
holders of old notes participate in the
exchange offer.
See "Risk Factors -- Risks Related to the
Exchange Offer -- Failure to exchange old notes
may have negative consequences."
Resales....................... It may be possible for you to resell the new
notes issued in the exchange offer without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
subject to some conditions. See "Risk
Factors -- Risks Related to the Exchange
Offer -- Some broker-dealers who participate in
the exchange offer must deliver a prospectus in
connection with resales of the new notes" and
"Plan of Distribution."
4
THE OFFERING
Issuer........................ Hercules Incorporated.
Notes Offered................. $400 million aggregate principal amount of
11 1/8% Senior Notes due 2007. The form and
terms of the new notes are the same as the form
and terms of the old notes except that, because
the issuance of the new notes is registered
under the Securities Act, the new notes will
not bear legends restricting their transfer
and, upon the effectiveness of the registration
statement which includes this prospectus, will
not be entitled to registration rights under
the registration rights agreement. The new
notes will evidence the same debt as the old
notes, and the old notes and the new notes will
be governed by the same indenture.
Maturity Date................. November 15, 2007.
Interest Payment Dates........ The new notes will bear interest semi-annually
in cash in arrears on May 15 and November 15 of
each year, commencing May 15, 2002.
Optional Redemption........... Upon a change of control, as defined herein, we
will have the option, at any time before
November 15, 2001, to redeem all of the new
notes at a redemption price equal to 111.125%
of their principal amount plus accrued and
unpaid interest. See "Description of Notes."
In addition, on or before November 15, 2003, we
may redeem up to 35% of the aggregate principal
amount of the new notes originally issued at a
redemption price of 111.125% with the proceeds
of public equity offerings within 45 days of
the closing of a public equity offering. We may
make that redemption only if, after the
redemption, at least 65% of the aggregate
principal amount of new notes originally issued
remains outstanding.
Change of Control............. If a change of control occurs, we will be
required to make an offer to purchase the new
notes. Prior to November 15, 2001, the purchase
price will equal 111.125% of the principal
amount of the new notes on the date of
purchase, plus accrued and unpaid interest to
the date of repurchase. On or after November
15, 2001, the purchase price will equal 101% of
the principal amount of the new notes on the
date of purchase, plus accrued and unpaid
interest to the date of repurchase.
Subsidiary Guarantees......... The new notes will be jointly and severally
guaranteed on an unsecured, senior basis by
certain of our wholly owned domestic
subsidiaries.
Ranking....................... The new notes will be our general unsecured
senior obligations. The new notes will
effectively rank junior to all of our secured
obligations to the extent of the value of the
assets securing those obligations. At June 30,
2001, our total debt was $2.2 billion, of which
$1.4 billion was outstanding under our senior
credit facility. Total debt does not include
$622 million of company-obligated preferred
securities of subsidiary trusts.
5
Certain Covenants............. The terms of the new notes will restrict our
ability and the ability of our restricted
subsidiaries to, among other things:
- Pay dividends or make other equity
distributions;
- Purchase or redeem capital stock;
- Make investments;
- Incur additional indebtedness;
- Sell assets;
- Engage in transactions with affiliates;
- Create liens;
- Engage in sale-leaseback transactions; or
- Effect a consolidation or merger.
However, these limitations will be subject to a
number of important qualifications and
exceptions.
Use of Proceeds............... We will not receive any proceeds from the
exchange offer. We are making this exchange
offer solely to satisfy our obligations under
the registration rights agreement that we
entered into in connection with the offering of
the old notes. We used the net proceeds from
the sale of the old notes to repay certain
preferred securities of subsidiary trusts and
to reduce term loan tranche A.
6
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth selected historical and unaudited pro forma
financial information for Hercules. The year-end financial information has been
derived from our audited financial statements. The interim financial information
has been derived from our unaudited financial statements. We believe that the
financial statements reflect all normal adjustments necessary for a fair
presentation of the financial information. The results for the six months ended
June 30, 2001 do not necessarily indicate the results to be expected for the
full year. You should read the financial information below in conjunction with
our financial statements and the related notes, and the other financial and
operating data included elsewhere herein. The pro forma financial information
for the year ended December 31, 2000 and the six month period ended June 30,
2000 gives effect to the sale of our Food Gums division and the offering of the
old notes, borrowings under term loan tranche D, the third amendment to our
senior credit facility and the applications of the proceeds therefrom (together,
the "Refinancing") as if they had occurred at the beginning of the fiscal years
presented. The unaudited pro forma financial information presented is for
informational purposes only and does not purport to be indicative of our results
of operations or financial position.
PRO FORMA
SIX MONTHS -------------------------
YEAR ENDED ENDED SIX MONTHS
DECEMBER 31, JUNE 30, YEAR ENDED ENDED
------------------------ --------------- DECEMBER 31, JUNE 30,
2000 1999 1998 2001 2000 2000 2000
------ ------ ------ ------ ------ ------------ ----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN MILLIONS)
STATEMENT OF INCOME DATA:
Net sales(a)........................ $3,152 $3,309 $2,145 $1,372 $1,620 $2,995 $1,515
Operating costs and expenses:
Cost of sales(a).................. 1,784 1,831 1,287 784 912 1,696 854
Selling, general and
administrative expenses(b)...... 810 787 377 385 403 793 391
Research and development.......... 80 85 61 36 41 75 38
Purchased in-process research and
development..................... -- -- 130 -- -- -- --
Goodwill and intangible asset
amortization(b)................. 80 79 22 38 40 82 41
Other operating expenses (income),
net(c).......................... (46) 47 76 (62) 22 (50) 20
------ ------ ------ ------ ------ ------ ------
Profit from operations.............. 444 480 192 191 202 399 171
Equity in income (loss) of
affiliated companies.............. (2) 1 10 (4) -- (10) (4)
Interest and debt expense........... 164 185 101 108 74 211 100
Preferred security distributions of
subsidiary trusts................. 96 51 2 29 46 68 31
Other income (expense), net......... (18) (2) (22) 1 (1) (17) (1)
------ ------ ------ ------ ------ ------ ------
Income before income taxes.......... 164 243 77 51 81 93 35
Provision for income taxes.......... 66 75 68 38 29 44 14
------ ------ ------ ------ ------ ------ ------
Net income.......................... $ 98 $ 168 $ 9 $ 13 $ 52 $ 49 $ 21
====== ====== ====== ====== ====== ====== ======
RATIO OF EARNINGS TO FIXED
CHARGES(d)........................ 1.6x 1.9x 1.5x 1.4x 1.6x 1.3x 1.3x
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 54 $ 63 $ 68 $ 41 $ 65
Working capital (deficit)........... 100 (221) (77) (98) (115)
Property, plant and equipment,
net............................... 1,104 1,321 1,438 933 1,303
Total assets........................ 5,309 5,896 5,833 4,862 5,773
Total debt.......................... 2,603 2,455 3,662 2,217 2,568
Company-obligated preferred
securities of subsidiary trusts... 622 992 200 622 992
Stockholders' equity................ 816 863 559 784 809
7
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------ ----------------
2000 1999 1998 2001 2000
------ ------ ------ ------- ------
(UNAUDITED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
PER SHARE DATA:
Net income -- basic.............. $ 0.91 $ 1.63 $ 0.10 $ 0.12 $ 0.49
Net income -- diluted............ 0.91 1.62 0.10 0.12 0.49
Cash dividend per common share... 0.62(e) 1.08 1.08 -- 0.54(e)
OTHER DATA:
Net cash provided by
operations..................... $ 70 $ 280 $ 181 $ 54 $ 23
Proceeds of investment and fixed
asset disposals................ 418 50 600 346 12
Capital expenditures............. 187 196 157 43 109
Depreciation..................... 132 144 86 53 67
Amortization..................... 114 106 22 57 54
---------------
(a) Net sales and cost of sales for the year 1999 have been reclassified to
reflect a change in policy regarding the classification of shipping and
handling. Costs for shipping and handling that were previously reported as a
direct reduction of sales revenues are now being reported as a component of
cost of sales. Accordingly, net sales and cost of sales for the year 1999
were increased by $60 million. There is no impact on operating profits as a
result of this change. Annual periods prior to 1999 have not been
reclassified for this change as the overall impact is deemed to be
immaterial.
(b) Annual selling, general and administrative expenses for 1998 have been
reclassified to conform with the 1999 and 2000 presentation for goodwill and
intangible asset amortization.
(c) Included in other operating expenses (income), net for the year 2000 is a
$(168) million gain for the sale of the Food Gums division.
(d) For the purposes of determining earnings in the calculation of the "Ratio of
Earnings to Fixed Charges," consolidated pre-tax income from continuing
operations has been adjusted for minority interests in consolidated
subsidiaries and income or loss from equity investees, increased by the
amount of previously capitalized interest amortization during the period and
increased by the amount of fixed charges, excluding capitalized interest
expense. Fixed charges consist of interest and debt expense on borrowings
(including capitalized interest), preferred security distributions of
subsidiary trusts and one-third (the proportion deemed representative of the
interest portion) of rent expense.
(e) In August 2000, the Board of Directors reduced the quarterly dividend to
$0.08 per share, which was paid in September 2000. In November 2000, the
Board of Directors suspended the payment of quarterly dividends. In
addition, payment of dividends is significantly restricted by the senior
credit facility, the ESOP credit facility and the indenture governing the
notes.
8
RISK FACTORS
You should carefully consider the following discussion of risks, and the
other information in this prospectus, before deciding whether to tender your old
notes in the exchange offer.
RISKS RELATED TO THE NOTES
WE HAVE SUBSTANTIAL INDEBTEDNESS, WHICH MAKES US MORE VULNERABLE TO ECONOMIC AND
INDUSTRY CONDITIONS AND COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH OR PREVENT
US FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES.
We have now and will continue to have a significant amount of indebtedness.
As of June 30, 2001, our total debt was approximately $2.2 billion. Total debt
does not include $622 million of company-obligated preferred securities of
subsidiary trusts.
Our substantial indebtedness has significant consequences. For example, it
could:
- make it more difficult for us to satisfy all of our obligations under the
notes and our other indebtedness;
- increase our vulnerability to economic downturns and competitive
pressures;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, research and development efforts and other general
corporate purposes;
- reduce our cash flow due to increased interest expense in times of rising
interest rates;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industries in which we operate or in pursuing attractive
business opportunities requiring debt financing;
- place us at a disadvantage to our competitors that have less debt;
- limit our ability to borrow additional funds due to restrictive
covenants; and
- make it more difficult for us to achieve the merger or sale of the
company or one or more of our businesses.
Any of the foregoing consequences could have a material adverse effect on
us.
Our ability to pay the principal of, and interest on, our indebtedness as
it comes due will depend upon our current and future performance. Our
performance is affected by general economic conditions and by financial,
competitive, political, business and other factors. Many of these factors are
beyond our control. We believe that the cash generated from our business,
together with the proceeds from the sale of certain assets, will be sufficient
to enable us to make our debt payments, including payments on the notes, as they
become due. If, however, we do not generate enough cash or are unable to sell
assets, we may be required to refinance some or all of our indebtedness, incur
additional indebtedness or sell equity. No assurance can be given that any
refinancings, additional borrowings or sales of equity will be possible when
needed or that we will be able to negotiate acceptable terms. In addition, our
access to capital is affected by prevailing conditions in the financial and
equity capital markets, as well as our financial condition (including leverage
levels), financial performance and prospects. See "Capitalization."
DESPITE CURRENT INDEBTEDNESS LEVELS, WE MAY INCUR MORE INDEBTEDNESS, WHICH COULD
EXACERBATE THE RISKS DESCRIBED ABOVE.
We and our subsidiaries may incur additional indebtedness in the future. As
of June 30, 2001, we had a $1.9 billion senior credit facility with a syndicate
of banks and an $85 million credit facility related to the BetzDearborn ESOP
Trust. Under the senior credit facility, we have a $900 million revolving credit
agreement, which permits certain additional borrowings. If new indebtedness is
added to our and our subsidiaries' current indebtedness levels, the risks
described above that we and they face could increase. See "Capitalization" and
"Selected Historical Financial Data."
9
OUR SENIOR CREDIT FACILITY, OUR ESOP CREDIT FACILITY AND THE INDENTURE GOVERNING
OUR NOTES CONTAIN COVENANTS WHICH LIMIT THE DISCRETION OF OUR MANAGEMENT IN THE
OPERATION OF OUR BUSINESS.
The senior credit facility, the ESOP credit facility and the indenture
governing the notes, which together account for a large portion of our debt,
contain numerous restrictive covenants, including, among other things, covenants
that limit our ability to:
- borrow money and incur contingent liabilities;
- make dividend or other restricted payments;
- use assets as security in other transactions;
- enter into transactions with affiliates;
- enter into new lines of business;
- issue and sell stock of restricted subsidiaries; and
- sell assets or merge with or into other companies.
In addition, the senior credit facility and the ESOP credit facility limit
our ability to make capital expenditures and require us to meet financial ratios
and tests, including maximum leverage, minimum net worth and interest coverage
levels. These restrictions could limit our ability to plan for or react to
market conditions or meet extraordinary capital needs and could otherwise
restrict corporate activities.
Our ability to comply with the covenants and other terms of the senior
credit facility, the ESOP credit facility and the indenture governing the notes
and to satisfy these and our other debt obligations will depend on our future
operating performance and our ability to sell assets. If we fail to comply with
such covenants and terms, we will be in default and the maturity of related debt
could be accelerated and any underlying security could be enforced. From time to
time, we have been required to obtain waivers from our lenders in order to
maintain compliance under our senior credit facility and our ESOP credit
facility, including waivers with respect to our compliance with certain
financial covenants. While we have been successful in obtaining waivers in the
past, we believe that it will be more difficult to do so in the future.
Accordingly, there can be no guarantee that we will be able to obtain future
waivers. If we are unable to do so, we may be in default under our senior credit
facility and other debt instruments, which would have a material adverse effect
on us.
A default under the indenture governing the notes would also constitute an
event of default under our senior credit facility and the ESOP credit facility
and would give our lenders the ability to accelerate the repayment of borrowings
under these credit facilities. If we were unable to repay borrowings under these
credit facilities, the lenders could enforce the underlying security. We cannot
assure you that, if the repayment of borrowings under these credit facilities or
the notes were accelerated, we would be able to pay these amounts in full from
internally generated funds, from the proceeds of debt or equity financings or
from the proceeds of asset sales. See "Description of Notes."
ALTHOUGH THE NOTES CONSTITUTE SENIOR INDEBTEDNESS, THEY AND THE GUARANTEES
THEREOF WILL BE EFFECTIVELY SUBORDINATED TO OUR AND THE GUARANTORS' SECURED
OBLIGATIONS AND THE OBLIGATIONS OF ANY OF OUR NONGUARANTOR SUBSIDIARIES.
The notes and the guarantees are unsecured and therefore will be
effectively subordinated to any secured obligations we or the guarantors may
incur to the extent of the value of the assets securing such obligations. In the
event of a bankruptcy or similar proceeding involving us or a guarantor, the
assets which serve as collateral will be available to satisfy the related
secured obligations before any payments are made on the notes or the guarantees.
Borrowings under our senior credit facility and our ESOP credit facility are
secured by liens on our property and assets, pledges of the stock of
substantially all of our domestic subsidiaries and 65% of the stock of foreign
subsidiaries directly owned by us and a pledge of intercompany indebtedness. As
of June 30, 2001, these borrowings totaled approximately $1.5 billion. Our 6.60%
notes due 2027 and our 6.625% notes due 2003 are similarly secured. In addition,
we derive substantially all of our operating income from our operating
subsidiaries. If any of our nonguarantor subsidiaries becomes insolvent,
liquidates, reorganizes, dissolves or
10
otherwise winds up, the assets of that subsidiary will be used first to satisfy
the claims of its creditors, including its trade creditors. Consequently, your
claims will be effectively subordinated to all of the liabilities of our non-
guarantor subsidiaries. At June 30, 2001, our total debt was $2.2 billion, of
which $1.4 billion was outstanding under our senior credit facility.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE GOVERNING THE NOTES OR TO REPAY
INDEBTEDNESS AS A RESULT OF THE CHANGE OF CONTROL, WHICH MAY PREVENT US FROM
ENTERING INTO CERTAIN BUSINESS COMBINATIONS.
Upon the occurrence of certain change of control events, including a
merger, consolidation or sale of all or substantially all of our properties or
assets, we must make an offer to purchase all of the outstanding notes at a
premium equal to 111.125% of the principal amount of the notes plus accrued
interest, if any, prior to November 15, 2001, and 101% of the principal amount
of the notes plus accrued interest, if any, on or after November 15, 2001. We
may not have sufficient funds to pay the purchase price for all of the notes
tendered by holders seeking to accept the offer to purchase. In addition, we may
be required to repay our senior credit facility and our ESOP credit facility
upon a change of control and these credit facilities prohibit us from repaying
the notes prior to their stated maturity, including, if required, upon a change
of control. Our failure to purchase all validly tendered notes upon a change of
control would result in an event of default under the indenture governing the
notes, which in turn would be an event of default under the senior credit
facility and the ESOP credit facility with the previously described
consequences. See "Description of Notes -- Repurchase at the Option of
Holders -- Change of Control."
THE NOTES AND THE GUARANTEES ARE SUBJECT TO THE PROVISIONS OF FEDERAL BANKRUPTCY
LAW AND COMPARABLE PROVISIONS OF STATE LAW WITH RESPECT TO FRAUDULENT
CONVEYANCES.
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, we or any
guarantor, at the time we incurred the indebtedness evidenced by the notes or a
guarantee, (i) (a) were or was insolvent or rendered insolvent by reason of such
occurrence, (b) were or was engaged in a business or transaction for which the
assets remaining with us or such guarantor constituted unreasonably small
capital or (c) intended to incur, or believed that we or such guarantor would
incur, debts beyond our or such guarantor's ability to pay such debts as they
mature, and (ii) we or such guarantor received less than reasonably equivalent
value or fair consideration for the incurrence of such indebtedness, then the
notes and the guarantees, and any pledge or other security interest securing
such indebtedness, could be voided, or claims in respect of the notes or the
guarantees could be subordinated to all other debts of us or such guarantor, as
the case may be. In addition, the payment of interest and principal by us
pursuant to the notes or the payment of amounts by a guarantor pursuant to a
guarantee could be voided and required to be returned to the person making such
payment, or to a fund for the benefit of the creditors of us or such guarantor,
as the case may be.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, we or a guarantor would be considered insolvent
if (i) the sum of our or such guarantor's debts, including contingent
liabilities, were greater than the saleable value of all of our or such
guarantor's assets at a fair valuation or if the present fair saleable value of
our or such guarantor's assets were less than the amount that would be required
to pay our or such guarantor's probable liability on our or such guarantor's
existing debts, including contingent liabilities, as they become absolute and
mature or (ii) we or such guarantor could not pay our or such guarantor's debts
as they become due.
On the basis of historical financial information, recent operating history
and other factors, we and each guarantor believe that, after giving effect to
the indebtedness incurred in connection with the offering of the notes, we were
not insolvent, did not have unreasonably small capital for the business in which
we were engaged and did not incur debts beyond our ability to pay such debts as
they mature. There can be no assurance, however, as to what standard a court
would apply in making such determinations or that a court would agree with our
or the guarantors' conclusions in this regard.
11
WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THESE NOTES.
The old notes have not been registered under the Securities Act or any
state securities law and, unless so registered, may not be offered or sold
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and any applicable state
securities laws.
Although the new notes will be registered and may be resold or otherwise
transferred by the holders who are not affiliates (as defined under Rule 405 of
the Securities Act) of Hercules, they will be new securities for which there is
currently no established trading market. We do not intend to apply for listing
of the new notes on a national securities exchange or for quotation of the new
notes on an automated dealer quotation system. Although the initial purchasers
in the offering of the old notes have informed Hercules that they currently
intend to make a market in the new notes, they are not obligated to do so, and
any such market-making, if initiated, may be discontinued at any time without
notice. The liquidity of any market for the new notes will depend upon the
number of holders of the new notes, the interest of securities dealers in making
a market in the new notes and other factors. Accordingly, there can be no
assurance as to the development or liquidity of any market for the new notes. If
an active trading market for the new notes does not develop, the market price
and liquidity of the new notes may be adversely affected. If the new notes are
traded, they may trade at a discount from their face value, depending upon
prevailing interest rates, the market for similar securities, our performance
and certain other factors. The liquidity of, and trading markets for, the new
notes may also be adversely affected by general declines in the market for
non-investment grade debt. Such declines may adversely affect the liquidity of,
and trading markets for, the new notes independent of our financial performance
or prospects.
Notwithstanding the registration of the new notes in the exchange offer,
holders who are affiliates (as defined under Rule 405 of the Securities Act) of
Hercules may publicly offer for sale or resell the new notes only in compliance
with provisions of Rule 144 under the Securities Act.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the new notes. There can be no assurance that the market, if any, for
the new notes will not be subject to similar disruptions. Any such disruptions
may have an adverse effect on the holders of the new notes.
WE ARE REQUIRED TO PAY LIQUIDATED DAMAGES TO THE EXTENT THAT WE DO NOT COMPLY
WITH THE TERMS OF THE REGISTRATION RIGHTS AGREEMENT THAT WE ENTERED INTO WITH
RESPECT TO THE NOTES.
In connection with the issuance and sale of the old notes, we and the
guarantors entered into a registration rights agreement. Under the registration
rights agreement, we are required to meet certain deadlines with respect to the
filing and effectiveness of the exchange offer registration statement which
includes this prospectus and the consummation of the exchange offer or the
filing and effectiveness of a shelf registration statement relating to the
resale of the old notes by certain holders. The filing and effectiveness
deadlines for the exchange offer registration statement which includes this
prospectus were August 11, 2001 and October 10, 2001, respectively. We are also
required to use our best efforts to maintain the effectiveness of any
registration statements for a certain period of time. During any period of time
in which we do not comply with the terms of the registration rights agreement,
we are required to pay liquidated damages increasing over time from $20,000 to
$200,000 per week. See "Description of Notes -- Registration Rights; Liquidated
Damages."
RISKS RELATED TO THE EXCHANGE OFFER
FAILURE TO EXCHANGE OLD NOTES MAY HAVE NEGATIVE CONSEQUENCES.
The old notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case in
compliance with certain other conditions and restrictions. Old notes which
remain outstanding after consummation of the exchange offer will continue to
bear a legend
12
reflecting such restrictions on transfer. In addition, upon consummation of the
exchange offer, holders of old notes which remain outstanding will not be
entitled to any rights to have such old notes registered under the Securities
Act or to any similar rights under the registration rights agreement (subject to
certain limited exceptions). Hercules does not intend to register under the
Securities Act any old notes which remain outstanding after consummation of the
exchange offer (subject to such limited exceptions, if applicable). To the
extent that old notes are tendered and accepted in the exchange offer, a
holder's ability to sell untendered old notes could be adversely affected.
The new notes and any old notes which remain outstanding after consummation
of the exchange offer will vote together as a single class for purposes of
determining whether holders of the requisite percentage in outstanding principal
amount thereof have taken certain actions or exercised certain rights under the
indenture.
FAILURE TO COMPLY WITH EXCHANGE OFFER PROCEDURES MAY PRECLUDE EXCHANGE OF OLD
NOTES.
Subject to the conditions set forth in this prospectus, delivery of new
notes in exchange for old notes tendered and accepted for exchange pursuant to
the exchange offer will be made only after timely receipt by the exchange agent
of (i) certificates for old notes or a book-entry confirmation of a book-entry
transfer of old notes into the exchange agent's account at The Depository Trust
Company ("DTC"), (ii) a completed and signed letter of transmittal with any
required signature guarantees or, in the case of a book-entry transfer, an
agent's message in lieu of the letter of transmittal and (iii) any other
documents required by the letter of transmittal. Therefore, holders of old notes
desiring to tender such old notes in exchange for new notes should allow
sufficient time to ensure timely delivery. We have no duty to give notification
of defects or irregularities with respect to the tenders of old notes for
exchange. See "The Exchange Offer -- Conditions to the Exchange Offer."
SOME BROKER-DEALERS WHO PARTICIPATE IN THE EXCHANGE OFFER MUST DELIVER A
PROSPECTUS IN CONNECTION WITH RESALES OF THE NEW NOTES.
Based on certain no-action letters issued by the staff of the SEC, we
believe that you may offer for resale, resell or otherwise transfer the new
notes without further compliance with the registration and prospectus delivery
requirements of the Securities Act. However, in some instances described in this
prospectus, you may remain obligated to comply with the registration and
prospectus delivery requirements of the Securities Act to transfer your new
notes. See "Plan of Distribution." In these cases, if you transfer any new notes
without delivering a prospectus meeting the requirements of the Securities Act
or without an exemption from registration of your new notes under the Securities
Act, you may incur liability under the Securities Act. We do not and will not
assume, or indemnify you against, this liability.
RISKS RELATED TO THE BUSINESS
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY EFFORTS TO MERGE OR SELL THE COMPANY
OR ONE OR MORE OF OUR BUSINESSES AND WE MAY NOT SUCCEED IN OUR EFFORTS TO MERGE
OR SELL THE COMPANY OR ONE OR MORE OF OUR BUSINESSES.
We have determined to and have previously announced that we will consider
the full range of strategic alternatives available to us, including the possible
merger or sale of the company or one or more of our businesses. Efforts to merge
or sell a company or business typically divert the attention of management from
running the company and a merger or sale may divert management's attention and
otherwise have an adverse effect on our business. While the merger or sale of
the company or one or more of our businesses may ultimately benefit us and our
stockholders, there can be no assurance that the merger or sale of the company
or one or more of our businesses will occur or that it will be on terms
favorable to us or to our stockholders. In addition, there can be no assurance
that an attempted sale of the company or one or more of our businesses will not
divert management's attention to the detriment of the company and our
stockholders.
13
OUR COMPREHENSIVE COST REDUCTION PROGRAM MAY BE UNSUCCESSFUL.
We recently announced a comprehensive cost reduction program to improve our
return on capital. Cost reduction programs can have an adverse effect on a
company's operations. While a cost reduction program may ultimately benefit us
and our stockholders, there can be no assurance that such a program will be
successful.
WE HAVE POTENTIAL ENVIRONMENTAL LIABILITIES.
In the ordinary course of our business, we are subject to numerous
environmental laws and regulations covering compliance matters or imposing
liability for the costs of, and damages resulting from, cleaning up sites, past
spills, disposals and other releases of hazardous substances. Changes in these
laws and regulations may have a material adverse effect on our financial
position and results of operations. Any failure by us to adequately comply with
such laws and regulations could subject us to significant future liabilities.
We have been identified by United States federal and state authorities as a
potentially responsible party for environmental cleanup at numerous sites. As of
June 30, 2001, the estimated range of reasonably possible costs for remediation
was between $85 million and $274 million. These cost estimates are based upon
the facts and circumstances as they are presently known to us and are updated
quarterly based upon new information that we receive. Although not presently
anticipated, actual remediation-related liabilities may exceed the current
estimates. We do not anticipate that our overall financial condition or
liquidity will be materially affected by environmental remediation costs in
excess of amounts accrued, which, in accordance with generally accepted
accounting principles, totaled $85 million at June 30, 2001, although quarterly
or annual operating results could be materially affected.
Environmental remediation expenses are funded from internal sources of
cash. Such expenses are not expected to have a significant effect on our 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.
WE ARE SUBJECT TO LITIGATION.
We are a defendant in numerous lawsuits that arise out of, and are
incidental to, the current and past conduct of our business. In addition to
environmental matters, these suits concern issues such as product liability,
contract disputes, labor-related matters, intellectual property, 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 our financial position, and the resolution of any
matters during a specific period could have a material effect on the quarterly
or annual operating results for that period.
WE ARE SUBJECT TO COMPETITION FOR CUSTOMERS.
The global specialty chemicals industry is highly competitive. Some of our
competitors have greater financial, technical, marketing and other resources and
less debt, which could provide them with a competitive advantage over us. Also,
our competitors have in the past caused, and could in the future cause, a
reduction in the prices for some of our products as a result of intensified
price competition.
Additionally, although we do not compete primarily on the basis of price,
our customers are price sensitive. Accordingly, in periods where we are not able
to pass on increased production costs, including costs associated with the
increasing prices of our raw materials, our gross margins may deteriorate.
WE ARE SUBJECT TO TECHNOLOGICAL CHANGE AND INNOVATION.
Many of our products could be affected by rapid technological change and
new product introductions and enhancements. We believe we must continue to
enhance our existing products, develop and manufacture new products with
improved capabilities and make improvements in our productivity in order to
maintain our
14
competitive position. Our inability to anticipate, respond to or utilize
changing technologies could have a material adverse effect on our business and
results of operations.
FOREIGN CURRENCY EXCHANGE RATE FLUCTUATIONS IMPACT OUR FINANCIAL PERFORMANCE.
Our products are sold around the world and, as a result, currency
fluctuations impact our financial performance. Our revenues in foreign countries
are largely generated in foreign currencies, while costs incurred to generate
those revenues are only partly incurred in the same currencies. Because our
financial statements are denominated in U.S. dollars, changes in currency
exchange rates between the U.S. dollar and other currencies have an impact on
our results of operations. We sometimes enter into hedging transactions to
reduce this currency exchange risk, but such transactions cannot eliminate all
of the risks associated with currency fluctuations.
OUR INTERNATIONAL OPERATIONS ARE AFFECTED BY GLOBAL AND REGIONAL CONDITIONS.
Our international operations are subject to risks, such as currency
exchange controls, labor unrest, regional economic uncertainty, political
instability, restrictions on the transfer of funds into or out of a country,
export duties and quotas, domestic and foreign customs and tariffs and current
and changing regulatory environments. These events could have an adverse effect
on our international operations in the future by reducing the demand for our
products, increasing our costs or otherwise having an adverse affect on our
results of operations. In recent years, many economies, including some in Asia,
have been highly volatile and, at times, recessionary, resulting in significant
fluctuations in local currencies and other instabilities. These instabilities
may continue or worsen, which could have an adverse impact on our results of
operations.
OUR PRODUCTION FACILITIES ARE SUBJECT TO OPERATING HAZARDS.
We are dependent on the continued operation of our production facilities.
Such production facilities are subject to hazards associated with the
manufacture, handling, storage and transportation of chemical materials and
products, including pipeline leaks and ruptures, explosions, fires, inclement
weather and natural disasters, mechanical failure, unscheduled downtime, labor
difficulties, transportation interruptions, remediation complications, chemical
spills, discharges or releases of toxic or hazardous substances or gases,
storage tank leaks and other environmental risks. These hazards can cause
personal injury and loss of life, severe damage to or destruction of property
and equipment and environmental damage and could have a material adverse effect
on us.
WE MAY NOT HAVE READY ACCESS AT ALL TIMES TO RAW MATERIALS.
While we may occasionally experience temporary shortages in raw materials
and fuels, these items are currently readily available. However, their
continuing availability and price are subject to domestic and world market and
political conditions as well as to the direct or indirect effect of governmental
regulations. The impact of any future raw material and energy shortages on our
business as a whole or in specific world areas cannot be accurately predicted.
MANY OF OUR CUSTOMERS ARE IN CYCLICAL INDUSTRIES.
Many of our customers are in industries and businesses that are cyclical in
nature and sensitive to changes in general economic conditions. The demand for
our products depends, in part, upon the general economic conditions of the
markets of our customers. Downward economic cycles in our customers' industries
may reduce sales of our products.
15
USE OF PROCEEDS
We will not receive any of the proceeds from the exchange offer. We are
making this exchange offer solely to satisfy our obligations under the
registration rights agreement that we entered into in connection with the
offering of the old notes. In consideration for issuing the new notes in
exchange for the old notes as described in this prospectus, we will receive old
notes in like principal amount. The old notes surrendered in exchange for the
new notes will be retired and cancelled.
The net proceeds from the offering of the old notes were used to repay
certain preferred securities of subsidiary trusts and to reduce term loan
tranche A.
16
CAPITALIZATION
The following table sets forth the historical capitalization of Hercules as
of June 30, 2001, the date of our most recent balance sheet.
AS OF
JUNE 30,
2001
--------
(DOLLARS IN MILLIONS)
SHORT-TERM DEBT:
Bank debt................................................... $ 24
Current maturities of long-term debt........................ 278
-------
Total short-term debt....................................... 302
-------
LONG-TERM DEBT:
Revolving credit agreement due 2003(a)...................... 410
Term loan tranche A due in varying amounts through 2003..... 633
Term loan tranche D due 2005................................ 374
ESOP debt(b)................................................ 85
6.625% notes due 2003....................................... 125
6.60% notes due 2027........................................ 100
8% convertible subordinated debentures due 2010............. 3
11.125% notes due 2007...................................... 400
Term notes at various rates from 5.23% to 9.60% due in
varying amounts through 2006(c)........................... 58
Other....................................................... 5
-------
Total long-term debt.............................. $ 2,193
Current maturities of long-term debt.............. (278)
-------
Net long-term debt................................ $ 1,915
-------
COMPANY-OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS(D):
9.42% Trust Originated Preferred Securities................. 362
6.5% CRESTS Units (preferred securities component).......... 260
-------
Total Company-obligated preferred securities of
subsidiary trusts................................ 622
-------
STOCKHOLDERS' EQUITY:
Common stock (shares issued: 159,984,444)................... 83
Additional paid-in capital.................................. 709
Unearned compensation....................................... (110)
Other comprehensive losses.................................. (209)
Retained earnings........................................... 2,169
Reacquired stock, at cost (shares: 51,639,880).............. (1,858)
-------
Total stockholders' equity........................ 784
-------
Total Capitalization........................................ $ 3,623
=======
---------------
(a) Represents the $900 million revolving credit agreement, of which
approximately $410 million was outstanding at June 30, 2001. The facility
also includes a multi-currency revolver of which $416 million was available
as of June 30, 2001. However, actual availability under the revolving credit
agreement is constrained by our ability to meet certain covenants in our
senior credit facility. Our incremental borrowing capacity at June 30, 2001
was approximately $93 million.
(b) We assumed a $94 million loan guarantee related to the BetzDearborn ESOP
Trust. The loan was recorded at fair market value of $110 million at the
date of the acquisition.
(c) Represents term notes related to the July 1998 acquisition of the remaining
49% share of FiberVisions L.L.C. from a former joint venture partner.
(d) The $362 million of Trust Originated Preferred Securities matures on March
31, 2029 and the $260 million of CRESTS Units (preferred securities
component) matures on June 30, 2029.
17
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical information for
Hercules. The year-end financial information has been derived from our audited
financial statements. The interim financial information has been derived from
our unaudited financial statements. We believe that the financial statements
reflect all normal adjustments necessary for a fair presentation of the
financial information. The results for the six months ended June 30, 2001 do not
necessarily indicate the results to be expected for the full year. You should
read the financial information below in conjunction with our financial
statements and the related notes, and the other financial and operating data
included elsewhere herein.
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------- ----------------------------------------------
2001 2000 2000 1999 1998 1997 1996
------ ------ ------ ------ ------ ------ ------
(UNAUDITED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Net sales(a)......................... $1,372 $1,620 $3,152 $3,309 $2,145 $1,866 $2,060
Operating costs and expenses:
Cost of sales(a)................... 784 912 1,784 1,831 1,287 1,169 1,320
Selling, general and administrative
expenses(b)...................... 385 403 810 787 377 248 260
Research and development........... 36 41 80 85 61 53 56
Purchased in-process research and
development...................... -- -- -- -- 130 -- --
Goodwill and intangible asset
amortization(b).................. 38 40 80 79 22 3 2
Other operating expenses (income),
net(c)........................... (62) 22 (46) 47 76 165 (19)
------ ------ ------ ------ ------ ------ ------
Profit from operations............... 191 202 444 480 192 228 441
Equity in income of affiliated
companies.......................... (4) -- (2) 1 10 30 53
Interest and debt expense............ 108 74 164 185 101 39 35
Preferred security distributions of
subsidiary trusts.................. 29 46 96 51 2 -- --
Other income (expense), net.......... 1 (1) (18) (2) (22) 374 26
------ ------ ------ ------ ------ ------ ------
Income before income taxes........... 51 81 164 243 77 593 485
Provision for income taxes........... 38 29 66 75 68 269 160
------ ------ ------ ------ ------ ------ ------
Income before effect of change in
accounting principle............... 13 52 98 168 9 324 325
Effect of change in accounting
principle.......................... -- -- -- -- -- (5) --
------ ------ ------ ------ ------ ------ ------
Net income........................... $ 13 $ 52 $ 98 $ 168 $ 9 $ 319 $ 325
====== ====== ====== ====== ====== ====== ======
RATIO OF EARNINGS TO FIXED
CHARGES(d)......................... 1.4x 1.6x 1.6x 1.9x 1.5x 10.8x 9.7x
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 41 $ 65 $ 54 $ 63 $ 68 $ 17 $ 30
Working capital (deficit)............ (98) (115) 100 (221) (77) (110) 45
Property, plant and equipment, net... 933 1,303 1,104 1,321 1,438 687 865
Total assets......................... 4,862 5,773 5,309 5,896 5,833 2,411 2,386
Total debt........................... 2,217 2,568 2,603 2,455 3,662 694 658
Company-obligated preferred
securities of subsidiary trusts.... 622 992 622 992 200 0 0
Stockholders' equity................. 784 809 816 863 559 690 887
18
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------- ----------------------------------------------
2001 2000 2000 1999 1998 1997 1996
------ ------ ------ ------ ------ ------ ------
(UNAUDITED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
CASH FLOW DATA:
Net cash provided by operations...... $ 54 $ 23 $ 70 $ 280 $ 181 $ 187 $ 225
Proceeds of investment and fixed
asset disposals.................... 346 12 418 50 600 295 196
Capital expenditures................. 43 109 187 196 157 119 120
Depreciation......................... 53 67 132 144 86 73 106
Amortization......................... 57 54 114 106 22 3 4
PER SHARE DATA:
Net Income before effect of change in
accounting principle -- basic...... $ 0.12 $ 0.49 $ 0.91 $ 1.63 $ 0.10 $ 3.27 $ 3.10
Effect of change in accounting
principle.......................... -- -- -- -- -- (.05) --
Net income -- basic.................. 0.12 0.49 0.91 1.63 0.10 3.22 3.10
Net income before effect of change in
accounting principle -- diluted.... 0.12 0.49 0.91 1.62 0.10 3.18 2.98
Effect of change in accounting
principle.......................... -- -- -- -- -- (.05) --
Net Income -- diluted................ 0.12 0.49 0.91 1.62 0.10 3.13 2.98
Cash dividend per common share....... -- 0.54(e) 0.62(e) 1.08 1.08 1.00 0.92
---------------
(a) Net sales and cost of sales for the year 1999 have been reclassified to
reflect a change in policy regarding the classification of shipping and
handling. Costs for shipping and handling that were previously reported as a
direct reduction of sales revenues are now being reported as a component of
cost of sales. Accordingly, net sales and cost of sales for the year 1999
were increased by $60 million. There is no impact on operating profits as a
result of this change. Annual periods prior to 1999 have not been
reclassified for this change as the overall impact is deemed to be
immaterial.
(b) Annual selling, general and administrative expenses for 1996, 1997 and 1998
have been reclassified to conform with the 1999 and 2000 presentation for
goodwill and intangible asset amortization.
(c) For purposes of comparison, the following is a brief summary of significant
operating expense (income) items recorded herein.
Year 2000 -- Includes a gain of $(168) million from the sale of our Food
Gums division. This gain was partially offset by $66 million in asset
impairments and write-offs. Also included in the year were $18 million in
restructuring charges and $25 million associated with the sale of the
nitrocellulose business.
Year 1999 -- Includes $36 million related to a legal settlement, asset
write-offs and disposal costs and $36 million in costs associated with the
BetzDearborn acquisition. These charges were partially offset by a $(16)
million gain recognized on the sale of our Agar business.
Year 1998 -- Includes $65 million in restructuring charges and $11 million
in integration charges associated with the acquisition of BetzDearborn.
Year 1997 -- Includes a $146 million charge associated with management
organizational changes.
Year 1996 -- Includes probable recoveries of $(13) million related to
environmental remediation, which were subsequently recovered.
(d) For the purposes of determining earnings in the calculation of the "Ratio of
Earnings to Fixed Charges," consolidated pre-tax income from continuing
operations has been adjusted for minority interests in consolidated
subsidiaries and income or loss from equity investees, increased by the
amount of previously capitalized interest amortization during the period and
by the amount of fixed charges, excluding capitalized interest expense.
Fixed charges consist of interest and debt expense on borrowings (including
capitalized interest), preferred security distributions of subsidiary trusts
and one-third (the proportion deemed representative of the interest portion)
of rent expense.
(e) In August 2000, the Board of Directors reduced the quarterly dividend to
$.08 per share, which was paid in September 2000. In November 2000, the
Board Directors suspended the payment of quarterly dividends. In addition,
payment of dividends is significantly restricted by the senior credit
facility, the ESOP credit facility and the indenture governing the notes.
19
UNAUDITED PRO FORMA FINANCIAL DATA
The following Unaudited Pro Forma Consolidated Statements of Income of
Hercules for the year ended December 31, 2000 and the six month period ended
June 30, 2000 reflect the sale of our Food Gums division and the offering of the
old notes, borrowings under term loan tranche D, the third amendment to our
senior credit facility and the application of the proceeds therefrom (together,
the "Refinancing") as if they had occurred at the beginning of the fiscal years
presented. The Unaudited Pro Forma Financial Information reflects assumptions
and adjustments deemed appropriate by management, which are described in the
accompanying notes.
The Unaudited Pro Forma Financial Information presented is for
informational purposes only and does not purport to be indicative of our results
of operations or financial position had the sale of our Food Gums division and
the Refinancing actually occurred on the date assumed nor is it necessarily
indicative of our future results of operations or financial position. The
Unaudited Pro Forma Financial Information should be read in conjunction with our
audited consolidated financial statements and the related notes included in this
prospectus.
HERCULES INCORPORATED
PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
YEAR ENDED DECEMBER 31, 2000
FOOD GUMS
FOOD PRO FORMA REFINANCING PRO
HERCULES GUMS(a) ADJUSTMENTS ADJUSTMENTS FORMA
-------- ------------ ----------- ----------- ---------
(IN MILLIONS EXCEPT FOR PER SHARE AMOUNTS)
Net sales........................ $3,152 $157 $2,995
Cost of sales.................... 1,784 88 1,696
Selling, general and
administrative expenses........ 810 31 $ 14(b) 793
Research and development......... 80 5 75
Goodwill and intangible asset
amortization................... 80 -- 2(c) 82
Other operating expenses
(income), net.................. (46) 2 (2)(c) (50)
------ ---- ---- ---- ------
Profit from operations........... $ 444 $ 31 $(14) $ -- $ 399
------ ---- ---- ---- ------
Equity (loss) of affiliated
companies...................... (2) -- (8)(d) (10)
Interest and debt expense........ 164 4 (17)(e) 68(h) 211
Preferred security distributions
of subsidiary trusts........... 96 -- (28)(h) 68
Other income (expense), net...... (18) (1) (17)
------ ---- ---- ---- ------
Income before income taxes....... $ 164 $ 26 $ (5) $(40) $ 93
Provision for income taxes....... 66 8 1(f) (15)(f) 44
------ ---- ---- ---- ------
Net income....................... $ 98 $ 18 $ (6) $(25) $ 49
====== ==== ==== ==== ======
Earnings Per Share
Per share -- basic............. $ .91 $ 0.46
Weighted average shares
outstanding -- basic........ 107.2 107.2
Per share -- assuming
dilution.................... $ .91 $ 0.46
Weighted average shares
outstanding -- assuming
dilution.................... 107.4 107.4
The accompanying notes are an integral part of the Unaudited Pro Forma Financial
Information.
20
HERCULES INCORPORATED
PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000
FOOD GUMS
FOOD PRO FORMA REFINANCING PRO
HERCULES GUMS(a) ADJUSTMENTS ADJUSTMENTS FORMA
-------- ------------ ----------- ----------- ---------
(IN MILLIONS EXCEPT FOR PER SHARE AMOUNTS)
Net sales........................ $1,620 $105 $1,515
Cost of sales.................... 912 58 854
Selling, general and
administrative expenses........ 403 21 $ 9(b) 391
Research and development......... 41 3 38
Goodwill and intangible asset
amortization................... 40 -- 1(c) 41
Other operating expenses
(income), net.................. 22 1 (1)(c) 20
------ ---- --- ---- ------
Profit from operations........... $ 202 $ 22 $(9) $ -- $ 171
------ ---- --- ---- ------
Equity in (loss) of affiliated
companies...................... -- -- (4)(d) (4)
Interest and debt expense........ 74 3 (9)(g) $ 38(h) 100
Preferred security distributions
of subsidiary trusts........... 46 -- (15)(h) 31
Other income (expense), net...... (1) -- (1)
------ ---- --- ---- ------
Income before income taxes....... $ 81 $ 19 $(4) $(23) 35
Provision for taxes on income.... 29 6 --(f) (9)(f) 14
------ ---- --- ---- ------
Net income....................... $ 52 $ 13 $(4) $(14) 21
====== ==== === ==== ======
Earnings Per Share
Per share -- basic............. $ 0.49 $ 0.20
Weighted average shares
outstanding -- basic........ 106.9 106.9
Per share -- assuming
dilution.................... $ 0.49 $ 0.20
Weighted average shares
outstanding -- assuming
dilution.................... 107.1 107.1
The accompanying notes are an integral part of the Unaudited Pro Forma Financial
Information.
21
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(a) Eliminates the results of operations of the Food Gums division as if
the divestiture had been completed as of the beginning of the period
presented.
(b) Reflects the adjustment for corporate allocations that had been
included in the Food Gums division.
(c) Reclassifies this item to the appropriate category to be consistent
with the consolidated financial statement presentation.
(d) Gives effect to equity in the pro forma loss of $28 million, net of
tax, for December 31, 2000 and $14 million for June 30, 2000 of CP
Kelco ApS at 28.57%.
(e) Reflects a reduction in interest expense of approximately $21 million
from the application of $318 million in proceeds from the divestiture
of the Food Gums division to reduce long-term debt, which had variable
interest rates ranging from 6.85% to 9.5%. This reduction was offset by
an adjustment of approximately $4 million for corporate allocated
interest expense included in the Food Gums division.
(f) Reflects income tax effect of pro forma adjustments (excluding equity
in (loss) of affiliated companies which is not tax deductible) at a
statutory rate of 37%, including state income taxes.
(g) Reflects a reduction in interest expense of approximately $11 million
from the application of the proceeds from the divestiture of the Food
Gums division to the reduction in long-term debt, offset by an
adjustment of approximately $2 million for corporate allocated interest
expense included in the Food Gums division.
(h) Adjusted for the issuance of the 11.125% notes of $400 million and
borrowings under the term loan tranche D of $375 million and the
application of the net proceeds. Pro forma interest expense reflects an
interest rate of 11.125% on the notes and an interest rate of LIBOR +
2.75% on term loan tranche D. Effective November 14, 2000, we entered
into an amendment to our senior credit facility which included an
increase in the interest rate related to the revolving credit agreement
and term loan tranche A to LIBOR + 2.25%. This 1.5% increase in the
rate has also been reflected in pro forma interest expense. The costs
of issuing the notes of $20 million and the costs of borrowings under
term loan tranche D of $9 million are amortized and reflected in the
respective periods. An increase of 1/8 of 1% relating to financing that
is not fixed would increase interest expense by approximately $.5
million and $.2 million for the year ended December 31, 2000 and the
six month period ended June 30, 2000, respectively.
(i) The Company recorded a loss of approximately $3 million to write off
deferred financing costs not amortized related to the debt and
company-obligated preferred securities of subsidiary trusts which were
paid down using the proceeds of the notes and the borrowing under term
loan tranche D. The write off of unamortized financing costs of
approximately $5 million related to these facilities has not been
reflected in the unaudited pro forma statement of income for the period
ended June 30, 2000.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and unaudited pro forma financial information, including the related
notes, which are contained elsewhere in this prospectus.
ACQUISITIONS, DIVESTITURES AND UNUSUAL ITEMS
During 2000, we completed the divestiture of our Food Gums and
nitrocellulose businesses. Additionally, in June 2000, one of our joint venture
partners exercised a right of first refusal to purchase the ink toner portion of
our Resins division and, in September 2000, we signed a letter of intent
relating to the sale of our hydrocarbon resins division and select portions of
our rosin resins business to a subsidiary of Eastman Chemical Company. We closed
the Resins transactions in the second quarter of 2001. In May 2000, we acquired
the paper chemicals business of Quaker Chemical Corporation. In September 2000,
we announced that we had formed a strategic marketing alliance with National
Starch and Chemical Company for the sale of over 300 million pounds of National
Starch's papermaking chemicals starch product line. These transactions were
consistent with our announced strategy to monetize certain businesses and grow
other businesses. In the fourth quarter of 2000, we announced our intention to
pursue a merger or sale of the company or one or more of its businesses in the
belief that, over the long term, becoming part of a larger enterprise is the
best strategic path for the company. To that end, we retained Goldman, Sachs &
Co. and Credit Suisse First Boston to assist the Board of Directors in its
identification and evaluation of various alternatives. If a sale of the company
occurs, it would most likely be in a two-step process, with the sale of our
BetzDearborn division constituting the first step. We are currently pursuing a
disposition, in whole or in part, of our BetzDearborn division and are in
discussions with potential buyers in that regard. We continue to pursue a merger
or sale of the company or our businesses. There can be no assurance that any of
these parties will be prepared to pay a price that is acceptable to us or that
any transaction will occur.
We incurred a loss of $25 million, including $4 million for termination
benefits, in connection with the June 2000 sale of the nitrocellulose business.
We completed the sale of our Food Gums division to CP Kelco, a joint venture
with Lehman Brothers Merchant Banking II, L.P., in the third quarter 2000,
realizing a net gain on the sale of approximately $168 million. We received
approximately $395 million in cash proceeds, recorded certain selling and tax
expenses of approximately $77 million and retained a 28.6% equity position in CP
Kelco. CP Kelco simultaneously acquired the Kelco biogums business of Pharmacia
Corporation (formerly Monsanto Company). During the fourth quarter of 2000,
Lehman Brothers made an additional capital contribution to CP Kelco, thereby
reducing our equity position.
During 2000, we recognized $66 million in asset impairment charges and
write-offs, primarily in the FiberVisions business. Restructuring charges of $18
million, including $4 million related to the nitrocellulose divestiture, were
incurred for 2000 restructuring plans, primarily relating to severance and
termination benefits for approximately 410 employee terminations in our Process
Chemicals & Services segment and corporate realignment due to the divestitures
of certain of our businesses (Food Gums and nitrocellulose). Offsetting these
restructuring charges was $4 million of reversals relating to prior year plans.
Environmental charges of $8 million were incurred, offset by $11 million in
recoveries of insurance and environmental claims. Profit from operations also
includes $16 million in severance benefits and compensation expense not
associated with restructuring plans. Additionally, we incurred $5 million of
integration charges, primarily for consulting and other costs associated with
the acquisition of BetzDearborn Inc., and $1 million for other items. The asset
impairments were triggered by significantly higher raw material costs and the
loss of a facility's major customer. Selling, general and administrative
expenses increased in 2000 as a result of a $21 million increase to our reserve
for doubtful accounts.
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 acquisition,
partly offset by a $4 million restructuring charge reversal. 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
23
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. The 1999 profit
from operations also includes a net $5 million charge related to legal and
environmental matters. 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.
In 1998, we 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.
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, we acquired
Houghton International's paper chemicals group; Citrus Colloids, a pectin
manufacturer; Alliance Technical Products, a manufacturer of resins serving the
water-based adhesives industry; and the 49% share of FiberVisions owned by our
joint venture partner, making it a wholly owned subsidiary. FiberVisions 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 2000, 1999
and 1998, these businesses added approximately $1,492 million, $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 all
years as a result of increased debt required to fund the acquisitions.
As a result of the 1998 acquisitions, we 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). 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. The
remainder of the charges is primarily related to our 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.
Additionally, we incurred approximately $11 million of integration expenses
related to the acquisition and other expenses of $9 million. 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.
The acquisition of BetzDearborn also resulted in the inclusion of a $98
million liability as part of the purchase price allocation. 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.
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 $95 million through 2000.
The impairment losses recognized in all three years are calculated pursuant
to our policy for accounting for long-lived assets. See the notes to our
financial statements included elsewhere herein.
24
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.
RESULTS OF OPERATIONS
THREE MONTHS
ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
------------- ----------------- ----------------------------
2001 2000 2001 2000 2000 1999 1998
---- ---- ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
NET SALES BY INDUSTRY SEGMENT:
Process Chemicals and
Services.................... $414 $433 $ 821 $ 849 $1,717 $1,725 $ 717
Functional Products(a)........ 146 209 277 415 742 875 863
Chemical Specialties(b)....... 110 180 274 357 695 711 566
Reconciling Items............. -- -- -- (1) (2) (2) (1)
---- ---- ------ ------ ------ ------ ------
Consolidated.................. $670 $822 $1,372 $1,620 $3,152 $3,309 $2,145
==== ==== ====== ====== ====== ====== ======
PROFIT FROM OPERATIONS:
Process Chemicals and
Services.................... $ 66 $ 81 $ 129 $ 158 $ 297 $ 338 $ 131
Functional Products(a)........ 37 53 61 105 176 218 215
Chemical Specialties(b)....... 9 17 26 33 59 89 75
Reconciling Items............. 17(c) (55)(d) (25)(c) (94)(d) (88) (165)(e) (229)(f)
---- ---- ------ ------ ------ ------ ------
Consolidated.................. $129 $ 96 $ 191 $ 202 $ 444 $ 480 $ 192
==== ==== ====== ====== ====== ====== ======
---------------
(a) Net sales and profit from operations in 2001 reflect the divestitures of the
Food Gums and nitrocellulose businesses in 2000.
(b)Net sales and Profit from operations in 2001 reflect the divestiture of the
hydrocarbon resins, select rosins resins and peroxy chemicals businesses.
(c)Includes the following for the quarter and six-month period ended June 30,
2001, respectively: goodwill and intangible asset amortization of $19 million
and $38 million, environmental charges of $1 million and $4 million,
non-recurring fees associated with the 2001 proxy contest and other matters
of $2 million and $3 million, capitalized interest of $1 million and $3
million and other corporate items not specifically allocated to the business
segments of $28 million and $46 million. In addition, $74 million in net
gains relating to the divestiture of the hydrocarbon resins, select rosins
resins and peroxy chemicals businesses, partially offset by $5 million in
executive severance charges and $1 million in project abandonment costs are
included for both periods.
(d)Includes the following for the quarter and six-month period ended June 30,
2000 respectively: goodwill and intangible asset amortization of $20 million
and $40 million, integration costs of $1 million and $3 million,
environmental charges of $4 million and $6 million, corporate research and
development costs of $3 million and $6 million and other corporate items not
specifically allocated to the business segments of $14 million and $26
million. Additionally, $24 million of charges associated with the sale of the
nitrocellulose business, partially offset by $11 million of recoveries of
insurance and environmental claims, are included for both periods.
(e) 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.
Also included are amortization of goodwill and intangibles, corporate
research and development and other corporate items not specifically
allocated to business segments.
(f) 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.
Also included are amortization of goodwill and intangibles, corporate
research and development and other corporate items not specifically
allocated to business segments.
The discussion that follows speaks to comparisons in the table through net
sales and profit from operations.
25
QUARTER AND SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO QUARTER AND SIX MONTHS
ENDED JUNE 30, 2000
Within the following discussion, unless otherwise stated, "quarter" and
"six-month period" refer to the second quarter of 2001 and the six months ended
June 30, 2001. All comparisons are with the corresponding periods in the
previous year, unless otherwise noted.
Consolidated net sales were $670 million for the second quarter and $1,372
million for the six-month period. This compares with $822 million and $1,620
million for the corresponding periods in 2000. Total volumes decreased 20% and
13%, respectively, for the quarter and six-month period versus the comparable
periods in 2000, reflecting the effects of businesses divested in June and
September 2000 and May 2001, coupled with economic slowdown in the Pulp and
Paper sector. Excluding divested businesses, consolidated net sales were $639
million for the quarter and $1,259 million for the six-month period, a decrease
of 6% and 5%, respectively, from the same periods last year, principally
reflecting volume declines in Pulp & Paper and FiberVisions. The stronger U.S.
dollar, relative to foreign currencies, continues to negatively impact sales and
profits. Consolidated profit from operations was $129 million for the quarter,
an increase of 34% over 2000, and $191 million for the six-month period, a
decrease of 5% from 2000. Profit from operations in 2001 includes $66 million,
pre-tax, of non-recurring gains. The gains result from the sales of the
hydrocarbon resins, select portions of the rosin resins business and the peroxy
chemicals business. Profit from operations in 2000 was unfavorably impacted by
non-recurring losses associated with the divestiture of the nitrocellulose
business. Excluding divested businesses and non-recurring items, profit from
operations was $60 million and $91 million, respectively, for the quarters, and
$117 million and $178 million, respectively, for the six-month periods ended
June 30, 2001 and 2000. Higher costs for raw materials, freight, and energy,
coupled with lower volumes, significantly impacted margins in the quarter and
for the six-month period. Additionally, the stronger dollar negatively affected
profit from operations for the quarter and six-month periods by approximately 6%
and 4%, respectively, in 2001.
In the Process Chemicals and Services segment, net sales were down $19
million or 4% and profit from operations declined $15 million or 19% versus the
same quarter in 2000. Net sales for the six-month period decreased $28 million
or 3% and profit from operations decreased $29 million or 18%. The Pulp and
Paper Division continues to be impacted by weak demand in the European, Asian
and North American markets. Volumes for the Pulp and Paper Division were off 3%
from last year's second quarter and six-month periods. Additionally, profit from
operations was negatively impacted by an approximately $4 million charge in the
second quarter 2001 to increase Pulp and Paper business bad debt reserves. In
the BetzDearborn Division, net sales were flat for the quarter and up slightly
for the six month period, while profit from operations improved 5% for the
quarter and was flat for the six-month period. Second quarter and year-to-date
2001 net sales improved in all regions of the world, except Europe, compared to
the same periods in 2000.
Functional Products segment net sales declined $63 million or 30% for the
quarter and $138 million or 33% for the six-month period versus the
corresponding periods in 2000. Profit from operations for the quarter and
six-month period decreased $16 million, or 30%, and $44 million or 42%
respectively, compared to the same periods in 2000. Declines in both net sales
and profit from operations reflect the effects of the divestitures of the Food
Gums and nitrocellulose businesses in 2000. On a comparable basis, net sales
were down 3% for the quarter and six-month period, and profit from operations
declined 14% for the quarter and 27% for the six-month period. Higher raw
material and energy costs coupled with higher costs associated with the new
methylcellulose facility negatively impacted profit from operations in 2001. Net
sales increased 11% and profit from operations increased 54% compared to the
first quarter 2001. The improvement in second quarter 2001 performance versus
the first quarter 2001 was driven by strong oilfield and construction sales and
improved sales in the paint segment. Excluding divested businesses, volumes
decreased less than 1% in the quarter versus the same period last year and
increased nearly 11% versus the first quarter 2001.
Chemical Specialties segment net sales declined $70 million or 39% for the
quarter and $83 million or 23% for the six-month period, and profit from
operations decreased $8 million or 47% and $7 million or 21% versus the
corresponding periods in 2000. In May 2001, the Company sold its hydrocarbon
resins, select portions of its rosin resins business, its peroxy chemicals
business and its 50% interest in the ink toner joint venture. Excluding divested
businesses, net sales were down 16% for the quarter and 14% for the six-month
26
period, while profit from operations was off $1 million for the quarter and
improved by $3 million for the six-month period. FiberVisions profit from
operations improved significantly in the quarter and year-to-date from the same
periods in 2000. The improved performance was driven by lower polymer cost and
cost containment initiatives. Volumes for FiberVisions declined 13% and 14%,
respectively, from the second quarter and six-month period 2000 and were up 3%
versus the first quarter 2001.
Equity in income (loss) of affiliated companies represents Hercules' equity
in CP Kelco, which ceased to be a wholly owned subsidiary beginning September
28, 2000.
Interest and debt expense increased $11 million for the quarter and $34
million for the six-month period reflecting higher borrowing costs, offset
partially by lower debt as a result of the application of proceeds from the sale
of businesses. Preferred security distributions of subsidiary trusts decreased
$9 million for the quarter and $17 million for the six-month period reflecting
the repayment of $370 million of these securities in 2000.
Other income (expense), net, decreased $10 million and $2 million for the
quarter and six months ended June 30, 2001, respectively. The decline is
primarily attributable to increased charges for litigation and lower gains on
the disposition of non-operating properties and investments during the
respective periods. In addition, the quarter reflects foreign currency losses as
compared to foreign currency gains in the prior year quarter.
The effective tax rate for the quarter was 65%. The anticipated effective
tax rate for 2001 is approximately 140% and reflects the effect of
non-deductible goodwill and intangible asset amortization on a lower pre-tax
earnings base. The effective tax rate of 36% for the second quarter of 2000
included the utilization of research and development credits.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Within the following discussion, all comparisons are with the previous
year, unless otherwise stated.
Consolidated revenues were $3,152 million for 2000, a decrease of $157
million or 5% from 1999. Approximately $135 million of this decrease is
attributable to the strength of the U.S. dollar in 2000, principally versus the
Euro, which weakened dramatically throughout the year. Excluding the impact of
the stronger dollar, consolidated revenues decreased approximately $22 million
or 1%. Additionally, consolidated revenues decreased approximately $111 million
when compared to 1999 as a result of revenues attributable to the divested Food
Gums, nitrocellulose and agar businesses. Revenues relating to our ongoing
businesses (excluding Food Gums, nitrocellulose and agar) increased by
approximately $89 million in 2000 after adjusting for currency effects.
Consolidated profit from operations decreased $36 million or 8%. Excluding
divested businesses, consolidated profit from operations decreased $140 million.
The Euro adversely impacted operating profit by approximately $36 million. Raw
material and energy costs escalated significantly in 2000 and were difficult to
recover in a timely manner. As 2000 ended, demand slowed in several of our key
markets. Excluding the foreign currency effects, consolidated profit from
operations decreased approximately $104 million or 21%.
Process Chemicals and Services segment revenues were down $8 million or
less than 1%. Excluding the impact of the stronger dollar, revenues were up $51
million or 3%, reflecting a 2% increase in volumes over 1999. Profit from
operations decreased $41 million or 12%. Excluding the impact of the stronger
dollar, profit from operations was down $26 million or 8%. During 2000, we
increased our reserve for doubtful accounts by $21 million.
Functional Products segment revenues were down $133 million or 15% and
profit from operations decreased $42 million or 19%. Excluding the divested Food
Gums and nitrocellulose businesses, segment revenues were down $22 million or
4%, and profit from operations decreased $33 million or 18%. The strengthening
U.S. dollar vis-a-vis the Euro was the primary variant in year on year operating
results. Excluding the impact of the stronger dollar, revenues were up $16
million or 3% and profit from operations was down $16 million or 9%. Higher raw
material and energy costs, combined with unfavorable product mix changes,
negatively impacted operating profit towards the end of the year. While demand
in the paint and construction markets normally slows at year-end, we saw a more
significant slowdown in demand than is
27
typical in these markets. Business in the oilfield industry remained strong in
the fourth quarter. Volumes for this segment were up almost 7% year over year.
Chemical Specialties segment revenues were down $16 million or 2% and
profit from operations decreased $30 million or 34%. Excluding the impact of the
stronger dollar, revenues were up $22 million or 3%, and profit from operations
was down $27 million or 30%. Operating performance was negatively impacted by
significantly higher polypropylene feed stock costs and lower volumes. Volumes
for this segment were down just under 1%. The slowdown in the adhesives end
market was a primary driver in lower volumes.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Within the following discussion, all comparisons are with the previous
year, unless otherwise stated.
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 above, consolidated profit from operations increased $141 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% in 1999,
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 in 1999 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% in 1999. However, excluding the costs primarily associated with a
production facility fire at the Parlin, New Jersey, plant operating profit
increased $10 million or 5% in 1999, 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% in
1999, 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.
INTEREST AND DEBT EXPENSE AND PREFERRED SECURITY DISTRIBUTIONS; EQUITY INCOME;
PROVISION FOR INCOME TAXES
Interest and debt expense and preferred security distributions of
subsidiary trusts increased $24 million or 10% in 2000 versus 1999. Amortization
of debt issuance costs had a significant effect on current year interest
expense. Additionally, our debt was downgraded by the major rating agencies
during 2000, with a corresponding increase in our borrowing costs.
Equity in income of affiliated companies declined over the three-year
period ended December 31, 2000, principally as a result of the monetization of
our investment in Alliant Techsystems; 2000 was negatively impacted by an equity
loss in CP Kelco in the fourth quarter.
28
The provision for income taxes reflects effective tax rates of 40% in 2000,
31% in 1999 and 88% in 1998. The primary cause of the increase in the effective
tax rate for the year 2000 was the effect of non-deductible goodwill
amortization on a lower pre-tax income base, offset by the benefit of the
utilization of research and development credits, favorable audit settlements and
utilization of a capital loss. The 1999 rate was favorably impacted by the
utilization of a capital loss and other adjustments related to prior years'
assessments. The 1998 rate is significantly higher than the federal statutory
income tax rate of 35% because the charges for purchased in-process research and
development and goodwill amortization related to BetzDearborn were 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.
FINANCIAL CONDITION
Liquidity and Financial Resources
Net cash provided by operations was $54 million for the six-month period
ended June 30, 2001, as compared to $23 million for the same period in 2000. The
increase primarily reflects lower working capital requirements. Current and
quick ratios have decreased to .9 and .65, respectively, at June 30, 2001,
compared with 1.1 and .78, respectively, at December 31, 2000. As of June 30,
2001, we have $416 million available under our revolving credit agreement and
$124 million available in short-term lines of credit. Our incremental borrowing
capacity was approximately $93 million. We expect to meet short-term cash
requirements from operating cash flow and availability under lines of credit.
However, actual availability is constrained by our ability to meet covenants in
our senior credit facility. While we expect to remain in compliance with our
debt covenants, future compliance is dependent upon generating sufficient EBITDA
and cash flow which are, in turn, impacted by business performance, economic
climate, competitive uncertainties and possibly the resolution of contingencies.
Net cash flow from operations was $70 million in 2000, $280 million in 1999
and $181 million in 1998. The 2000 decrease reflects lower net income, the
payment of legal settlements, net of insurance recoveries, and higher working
capital requirements. The 1999 increase reflects higher profit from operations,
primarily from acquired businesses, 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 increased payments for
legal settlements, offset by lower income tax payments and cash flow from
acquired businesses.
Net cash provided by (used in) investing activities was $213 million in
2000, ($193) million in 1999 and ($2,691) million in 1998. In September 2000, we
sold our Food Gums Division for which we received approximately $395 million in
cash proceeds. After recording certain selling and tax expenses of $77 million,
the net proceeds of approximately $318 million were applied to repay term loan
tranche C.
Capital expenditures during 2000, 1999 and 1998 were $179 million, $196
million and $157 million, respectively. The decrease of $17 million in capital
expenditures for 2000 was primarily due to stringent capital spending controls
instituted during the year. The increase of $39 million in capital expenditures
for 1999 was 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.
As noted above, during 1998, we completed five acquisitions for
approximately $3,620 million, primarily in cash and assumed debt. We financed
the acquisitions and refinanced existing debt with borrowings under a $3,650
million senior credit facility with a syndicate of banks. The senior credit
facility contains restrictive covenants that require maintenance of certain
financial ratios, 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.
In September 1998, we filed a shelf registration statement to increase
accessible securities from $300 million to $3,000 million. The registration
statement allowed for issuance of equity, equity-like and debt securities.
29
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"). We repaid the RHINOS on November 14, 2000 with a
portion of the proceeds of the 11 1/8% senior notes offering.
In March 1999, Hercules Trust I, a wholly owned subsidiary trust of
Hercules, completed a public offering of $362 million of Trust Originated
Preferred Securities ("TOPrS"). We used the proceeds of the offering to repay
long-term debt. Hercules Trust I's obligations are guaranteed by us.
During the second quarter of 1999, we amended our senior credit facility 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 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. On the same
date, Hercules and Hercules Trust II, a wholly owned subsidiary trust of
Hercules, completed a public offering of 350,000 CRESTS Units, which provided us
with net proceeds 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
Hercules 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).
Hercules Trust II's obligations are guaranteed by us. The warrants may be
exercised, subject to certain conditions, at any time before March 31, 2029,
unless there is a reset and remarketing event.
On December 23, 1999, Hercules Trust VI, a wholly owned subsidiary trust of
Hercules, completed a private placement of 170,000 Floating Rate Preferred
Securities ("Floating Rate Preferred Securities"). We repaid the Floating Rate
Preferred Securities on December 29, 2000 with a portion of the proceeds of the
11 1/8% senior notes offering.
On November 14, 2000, we completed a refinancing and modification of our
existing debt as part of an overall program to obtain a financial structure that
will appropriately support the organization. In conjunction with and conditioned
upon the effectiveness of amendments to our credit facilities, we borrowed $375
million under the senior credit facility (term loan tranche D) and also issued
$400 million of 11 1/8% senior notes due 2007. Our senior credit facility and
ESOP credit facility were amended to: (i) modify our financial covenants; (ii)
change the mandatory prepayment provisions; and (iii) provide for security,
among other things.
Term loan tranche D initially bore interest at LIBOR + 2.75%, matures on
November 15, 2005 and will require only nominal principal payments prior to
maturity. The notes accrue interest at 11 1/8% per annum, payable semi-annually
commencing May 15, 2001. The notes are guaranteed by certain of our current and
future wholly owned domestic restricted subsidiaries. At any time prior to
November 15, 2003, we may on any one or more occasions redeem up to 35% of the
aggregate principal amount of the notes issued at a redemption price of 111.125%
of the principal amount, plus accrued and unpaid interest and liquidated
damages, if any, to the redemption date, with the net cash proceeds of one or
more public equity offerings, provided that (i) at least 65% of the aggregate
principal amount of the notes issued under the indenture remains outstanding,
immediately after the occurrence of such redemption (excluding notes held by us
and our subsidiaries); and (ii) the redemption occurs within 45 days of the date
of the closing of such public equity offering. At any time prior to November 15,
2001, we may also redeem all of the notes upon the occurrence of a change of
control at a redemption price equal to 111.125% of the principal amount of the
notes redeemed, plus accrued and unpaid interest and liquidated damages, if any,
to the date of redemption. Except as described above, the notes will not be
redeemable at our option prior to maturity. We are not required to make any
mandatory redemption or sinking fund payment with respect to the notes. The
notes are subject to a registration rights agreement that requires us to file
the exchange offer registration statement which includes this prospectus with
the SEC within 270 days (on or before August 11, 2001) and to use our best
efforts to have the registration statement declared effective prior to 330 days
from November 14, 2000 (on or before October 10, 2001).
The proceeds of term loan tranche D and the notes were used to reduce
borrowings under our revolving credit agreement, repay the RHINOS and the
Floating Rate Preferred Securities and reduce the current portion of term loan
tranche A.
30
Both our senior credit facility and our ESOP credit facility require
quarterly compliance with certain financial covenants, including a leverage
ratio ("debt/EBITDA ratio"), an interest coverage ratio and minimum net worth.
In addition, we are required to deliver our annual audited consolidated
financial statements to the lenders within 90 days of our fiscal year end.
Due to the delay in closing the Eastman transaction, which in turn delayed
the pay down of the debt, our debt as of March 31, 2001 was significantly higher
than expected. As a result, we would have been out of compliance with the
debt/EBITDA ratio covenant of our credit facilities as of March 31, 2001. In
addition, due to the fact that we had extended the filing date for our 10-K, our
annual audited financial statements were not provided to the lenders by March
31, 2001.
On April 5, 2001, in consideration for the payment of a fee, our lenders
granted waivers with respect to: (1) compliance with the debt/EBITDA ratio as of
March 31, 2001 and (2) an extension of time to deliver the December 31, 2000
audited financial statements to April 17, 2001. These statements were completed
and delivered by April 17, 2001.
With respect to the covenant regarding the debt/EBITDA ratio, the waivers
required that the Eastman transaction be consummated on or before May 31, 2001.
In addition, we were required to demonstrate, as of the last day of the month in
which the Eastman transaction closed, that the leverage ratio did not exceed
4.75 to 1.00 after giving affect to the application of the net cash proceeds
from the Eastman transaction to prepay term loan tranche A and the ESOP credit
facility. We closed the Eastman transaction on May 1, 2001 and achieved this
leverage ratio.
A breach of any of the terms and conditions of the waivers would have given
lenders the right to accelerate repayment of substantially all of our
indebtedness if they chose to do so. Upon any such acceleration, the debt would
have become immediately due and payable and any loan commitments terminated.
While, as indicated above, we satisfied all conditions of the waiver and remain
in compliance with our debt covenants, current and future compliance is
dependent upon generating sufficient EBITDA and cash flow which are, in turn,
impacted by business performance, economic climate, competitive uncertainties
and possibly the resolution of contingencies. Although no assurances can be
given in this regard, we expect that we will be in compliance with all debt
covenants during the remainder of the term of the debt.
In the event we are not in compliance with the debt covenants in the
future, we will pursue various alternatives, which may include, among other
things, refinancing of debt, debt covenant amendments or debt covenant waivers.
While we believe we would be successful in pursuing these alternatives, there
can be no assurance that we would be. We have been successful in obtaining
waivers in the past. However, we believe that it will be more difficult to do so
in the future. Accordingly, there can be no guarantee that we will be able to
obtain future waivers. If we are unable to do so, we may be in default under our
senior credit facility and other debt instruments, which would have a material
adverse effect on us.
Capital Structure and Commitments
Total capitalization (stockholders' equity, company obligated preferred
securities of subsidiary trusts and debt) decreased to $3.6 billion at June 30,
2001, from $4.0 billion at year-end 2000. The ratio of debt-to-total
capitalization decreased to 61% at June 30, 2001 from 64% at December 31, 2000.
On May 1, 2001 we completed the sale of our hydrocarbon resins business and
select portions of our rosin resins business to a subsidiary of Eastman Chemical
Company, receiving gross proceeds of approximately $244 million. On May 31,
2001, we completed the sale of our peroxy chemicals business to GEO Specialty
Chemicals, Inc., receiving gross proceeds of approximately $92 million. We used
the proceeds from these divestitures to permanently reduce long-term debt.
Total capitalization decreased to $4.0 billion at December 31, 2000, from
$4.3 billion in the prior year. The ratio of debt-to-total capitalization
increased to 64% at December 31, 2000 from 57% at December 31, 1999, as a result
of the repayment of the RHINOS and the Floating Rate Preferred Securities in the
fourth quarter. The current ratio increased to 1.1 at December 31, 2000,
compared to .86 at December 31, 1999. The quick ratio increased to .78 at
December 31, 2000, compared to .61 at December 31, 1999.
31
On October 4, 2000, Moody's Investors Service, Inc., downgraded our senior
unsecured credit rating to Ba1 with a stable outlook. On October 19, 2000,
Standard & Poor's Ratings Services downgraded our corporate credit rating to BB+
and placed us on Credit Watch with "developing" implications. On November 9,
2000, Moody's Investors Service, Inc. assigned a Ba1 rating to term loan tranche
D and a Ba2 rating to the 11 1/8% senior notes due 2007. Also on November 9,
2000, Standard & Poor's Ratings Services assigned a BB+ rating to term loan
tranche D and a BB- rating to the notes. Both ratings were placed on CreditWatch
with "developing" implications. On January 23, 2001, Standard & Poor's Ratings
Services downgraded our corporate credit rating to BB, which initiated a 50
basis point increase in the interest rates of term loan tranche A and term loan
tranche D. On January 25, 2001, Standard & Poor's Ratings Services assigned a B+
rating to the notes. These actions and future adverse actions, if any, by the
rating agencies are likely to result in us incurring higher interest costs in
future periods.
In August 2000, the Board of Directors reduced our quarterly dividend
payment to $.08 per share, which was paid in September 2000 for the third
quarter of 2000. On November 13, 2000, the Board of Directors determined to
suspend the payment of the quarterly dividend beginning with the fourth quarter
of 2000, subject to reconsideration of the policy by the Board, in its
discretion, when warranted under appropriate circumstances. In addition, payment
of future dividends is significantly restricted by the senior credit facility,
the ESOP credit facility and the indenture governing the notes. Quarterly
dividends of $0.27 per share were declared and paid for the first two quarters
of 2000. The annual dividend was $.62 and $1.08 per share during 2000 and 1999,
respectively.
Capital expenditures are expected to be approximately $70 million during
2001. This includes funds for continuing or completing existing projects and for
implementing new projects.
NEW 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, as amended by
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133" and Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
requires that all derivative instruments be recorded on the balance sheet at
their fair value. SFAS 133, as amended, is effective for all fiscal quarters of
fiscal years beginning after December 31, 2000. We adopted SFAS 133 effective
January 1, 2001. During 2000, we converted substantially all of our foreign
currency denominated borrowings to fixed rate U.S. dollar denominated borrowings
and closed most of our outstanding interest rate swaps. Based on these actions
and a review of our contracts and agreements, we believe that the adoption of
SFAS 133 will not have a material effect on our earnings or statement of
financial position. However, due to certain provisions in our debt agreements,
our results of operations could be materially affected in 2001 if it becomes
more likely that a change of control will occur before November 15, 2001.
In June 2001, FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), and
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). For us, these statements will generally become
effective January 1, 2002, although business combinations initiated on or after
July 1, 2001 are subject to the non-amortization and purchase accounting
provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. We are currently in the
process of conducting an assessment of the actual impact of the non-amortization
provision of SFAS 142 on our earnings. The assessment of goodwill for impairment
is a complex issue in which a company must determine, among other things, the
fair value of each defined component of its operating segments. It is,
therefore, not possible at this time to predict the impact, if any, that the
impairment assessment provisions of SFAS 142 will have on our financial
statements.
32
In addition, in June 2001, FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assets. SFAS 143 will become effective for us January 1,
2003 and requires recognition of a liability for an asset retirement obligation
in the period in which it is incurred. Management is in the process of
evaluating the impact this standard will have on our financial statements.
In October 2001, FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. The provisions of this statement are effective
for financial statements issued for fiscal years beginning after December 15,
2001. Management is in the process of evaluating the impact that this standard
will have on our financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Fluctuations in interest and foreign currency exchange rates affect our
financial position and results of operations. We use several strategies from
time to time to actively hedge interest rate and foreign currency exposure and
minimize the effect of such fluctuations on reported earnings and cash flow.
Sensitivity of our 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 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.
Our derivative and other financial instruments subject to interest rate
risk consist of debt instruments, interest rate swaps and currency swaps. At
June 30, 2001, net market value of these combined instruments was a liability of
$2.7 billion. At December 31, 2000 and 1999, net market value of these combined
instruments, substantially all of which were debt at December 31, 2000, was a
liability of $3.08 billion and $3.32 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 June 30, 2001 would result in a $60 million decrease in the
net market value of the liability. A 100-basis point decrease in interest rates
at June 30, 2001 would result in a $66 million increase in the net market value
of the liability. The change in the sensitivity level from year-end 2000 is
primarily due to the partial repayment of both syndicated and revolving debt as
well as the current interest rate environment. During 2000, the interest rate
swap portfolio was substantially terminated. A 100-basis point increase in
interest rates at December 31, 2000 and 1999 would result in a $70 million and
$80 million decrease in the net market value of the liability, respectively. A
100-basis point decrease in interest rates at December 31, 2000 and 1999 would
result in a $78 million and $92 million increase in the net market value of the
liability, respectively.
Our financial instruments subject to changes in equity price risk,
including the warrants component of the CRESTS Units issued in 1999, represented
a net obligation of $61 million. These instruments represented net obligations
of $72 million and $29 million at December 31, 2000 and 1999, respectively. The
increase in the net obligation is primarily a result of the effect of the
depressed stock price on the market value of the warrant component of the CRESTS
Units and a decrease in securities held by our captive insurance company. The
sensitivity analysis assumes an instantaneous 10% change in valuation with all
other variables held constant. A 10% increase in market values at June 30, 2001
would increase the net obligation by $7 million, while a 10% decrease would
reduce the net obligation by $7 million. The change in equity price risk from
year-end 2000 is primarily from the impact of the reduction in our stock price
on the warrants component of the CRESTS units. A 10% increase in market value at
December 31, 2000 and 1999 would increase the net obligation by $9 million and
$15 million, respectively, while a 10% decrease would reduce the net obligation
by $9 million and $12 million, respectively.
Our financial instruments subject to foreign currency exchange risk consist
of foreign currency forwards and options and represented a net liability
position of $1 million at June 30, 2001. These instruments represented net
liabilities of $1 million and $885 million at December 31, 2000 and 1999,
respectively. The
33
decrease in the net liability position was due to the termination of our foreign
exchange position in multi-currency denominated debt. 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 June 30, 2001 would
result in a $5 million decrease in the net liability position, while a 10%
weakening of the dollar versus all currencies would result in a $5 million
increase in the net liability position. The change in the sensitivity level from
year-end 2000 is primarily due to the strengthening of the U.S. dollar in the
first six months. A 10% strengthening of the U.S. dollar versus other currencies
at December 31, 2000 and 1999 would result in a $2 million decrease and an $89
million decrease in the net liability position, respectively, while a 10%
weakening of the dollar versus all currencies would result in a $3 million
increase and an $88 million increase in the net liability position,
respectively.
Foreign exchange forward and option contracts have been used to hedge our
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 our operations outside the United States.
We have not designated any derivative as a hedge instrument under SFAS 133
and, accordingly, changes in the fair value of derivatives are recorded each
period in earnings.
During 2000, the interest rate swap portfolio was substantially terminated
due to the conversion of foreign denominated debt to U.S. dollar denominated
debt in the first half of 2000 and the November 2000 debt restructuring which
replaced variable rate debt with fixed rate debt.
34
DESCRIPTION OF SENIOR CREDIT FACILITY
In October 1998, we financed our acquisition of BetzDearborn with
borrowings under a $3.65 billion senior credit facility and the assumption of
$94 million loan related to the BetzDearborn ESOP Trust. As of June 30, 2001,
the senior credit facility consisted of a $900 million revolving credit
agreement, of which $410 million was outstanding, and varying maturity term
loans totaling $1.0 billion. The principal amounts outstanding and maturities of
the revolving credit agreement and the term loans were as follows:
PRINCIPAL
AMOUNT
ITEM OUTSTANDING MATURITY
---- ------------ --------
Revolving credit agreement................................ $410 million October 15, 2003
Term loan tranche A....................................... $633 million October 15, 2003
Term loan tranche D....................................... $374 million November 14, 2005
As of June 30, 2001, the revolving credit agreement, term loan tranche A
and term loan tranche D bore interest at LIBOR + 2.75%, LIBOR + 2.75% and LIBOR
+ 3.25%, respectively, which are also the current rates.
Under the existing covenant provisions of the senior credit facility, we
have agreed to, among other things, maintain certain specified financial ratios
and consolidated net worth, not make certain distributions with respect to our
capital stock, not make certain investments and not allow our subsidiaries to
incur certain types and amounts of debt. During the second quarter of 2001, we
were granted a waiver of one of the financial covenants in our senior credit
facility. The senior credit facility was amended in July 2001 to modify certain
financial covenants.
The senior credit facility is secured by our property and assets, a pledge
of the stock of substantially all of our domestic subsidiaries and 65% of the
stock of foreign subsidiaries directly owned by us and a pledge of intercompany
indebtedness.
35
BUSINESS
OVERVIEW
Hercules Incorporated is a leading, diversified, global manufacturer and
marketer of specialty chemicals and related services for a broad range of
business, consumer and industrial applications. We are focused on maximizing
cash flow, reducing debt, improving return on capital and delivering stockholder
value by concentrating on the performance of our businesses, as well as ongoing
improvements throughout all of our operations. Our performance will continue to
be driven by superior service to our customers and development of new products,
including products that improve our customers' manufacturing costs and
processes.
Our principal products are chemicals used by the paper industry to increase
product performance and enhance the manufacturing process; water treatment and
industrial process chemicals; water-soluble polymers; and polypropylene and
polyethylene fibers. These products impart such qualities as durability,
water-resistance and improved aesthetics to everyday consumer goods such as
writing paper, toothpaste and diapers. The primary markets we serve include pulp
and paper, personal care, petroleum refining, oil and gas drilling and recovery,
paints and coatings, construction materials and pharmaceuticals.
While our products have a low cost impact on our customers' total product
costs, they frequently possess characteristics important to the functionality
and aesthetics of the finished product or the efficient operation of the
manufacturing process. Examples of our products in consumer end-uses include
strength additives for tissue and toweling, sizing agents for milk and juice
cartons, fibers that comprise the inner and outer linings of disposable diapers
and hygiene products, thickeners in products such as toothpaste, shampoos and
water-based paints and water control additives for building products such as
tile cements, grouts, stuccos, plasters and joint compounds. We also offer
products and related services that improve and reduce the cost of a variety of
manufacturing processes, including water management programs that control
corrosion and improve water quality.
Although price is important to our competitive strategy, we primarily
compete on the basis of the performance and quality of our products. We strive
to continually improve our products by investing in technology and research and
development. We have committed substantial resources to our research and
development efforts. Research and development expenditures totaled approximately
$80 million in 2000. Such expenditures enable us to consistently bring to market
products which have improved functional properties or which offer similar
properties at a lower cost. This area has become increasingly important, as our
customers have come to rely more on us to provide new solutions to improve their
product offerings and processes. Additionally, we strive to make our products
more price-competitive by effectively managing our production costs and sharing
savings with our customers. In addition to developing products internally, we
also selectively enter into strategic partnerships and alliances that add to the
breadth of our products and services.
We continually review our corporate strategy in order to compete most
effectively in our changing markets. Starting in 2000, we implemented a program
designed to refocus our business by monetizing certain assets, thereby
generating cash to reduce our debt, while concentrating on improving the
efficiency, profitability and growth potential of our remaining businesses. In
the fourth quarter of 2000, we announced our intention to pursue a merger or
sale of the company or one or more of its businesses in the belief that, over
the long term, becoming part of a larger enterprise is the best strategic path
for the company. If a sale of the company occurs, it would most likely be in a
two-step process, with the sale of our BetzDearborn division constituting the
first step. We are currently pursuing a disposition, in whole or in part, of our
BetzDearborn division and are in discussions with potential buyers in that
regard. We continue to pursue a merger or sale of the company or our businesses.
There can be no assurance that any of these parties will be prepared to pay a
price that is acceptable to us or that any transaction will occur. In June 2001,
we announced a comprehensive cost reduction program to improve our return on
capital. This cost reduction program is being implemented while we continue to
explore strategic alternatives, including the merger or sale of the company or
one or more of our businesses.
36
Our reportable segments are Process Chemicals and Services (comprised of
Pulp and Paper and BetzDearborn); Functional Products (comprised of Aqualon);
and Chemical Specialties (comprised of Resins and FiberVisions).
PROCESS CHEMICALS AND SERVICES (PULP AND PAPER AND BETZDEARBORN)
We believe that our Pulp and Paper division is one of the largest and most
complete suppliers of functional and process improvement products and related
services to the global pulp and paper industry. In addition, we believe that our
BetzDearborn division is among the world's leading providers of advanced-
engineered chemical treatment programs for water, wastewater and process systems
across a wide range of industries. Products and services in this segment are
designed to enhance our customers' profitability by improving production yields
and overall product quality, and better enable them to meet their environmental
objectives and regulatory requirements.
In August 1999, we completed the acquisition of the Scripset(R)
water-soluble polymer resin business from Solutia Inc. Since 1991, we had an
exclusive license to sell Solutia's Scripset(R) products in North America to the
paper industry.
In January 2000, BetzDearborn 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 United States Filter's capital and chemical feed equipment and our water
and process treatment chemicals.
In May 2000, we acquired the Pulp and Paper Division of Quaker Chemical
Corporation, which provided specialty chemicals designed for application in the
tissue papermaking process and the pulping process. Key product technologies
including softeners, debonders and lotions used in the manufacture of tissue and
towel and specialized products for the pulping industry were added to the
products offered by Pulp and Paper.
In September 2000, we announced that we had formed a strategic marketing
alliance with National Starch and Chemical Company for the sale of over 300
million pounds of National Starch's papermaking chemicals starch product line.
At June 30, 2001, the principal products and primary markets of this
segment were:
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS
-------- ------------------ ---------------
Pulp and Paper Performance chemicals:
Wet strength, dry strength,
sizing and surface treatments,
creping adhesives and release.
Process treatment chemicals:
Deposit, contaminant, Makers of tissues, paper towels,
microbiological and foam packaging, beverage containers,
control, clarification, newsprint, papers for magazines
retention/drainage, felt and books, printing and writing
conditioning, deinking, fiber paper and other stationery items
recovery and water closure. such as labels and envelopes.
Water treatment chemicals:
Influent water, effluent water,
cooling towers and utility
systems.
37
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS
-------- ------------------ ---------------
BetzDearborn Water treatment:
Influent water, boilers, cooling Industrial, commercial and
systems and wastewater. institutional establishments.
Process treatment:
Antifoulants, emulsion breakers, Petroleum refineries, chemical
antifoams, finished additives, plants, manufacturers of metals,
polymerization inhibitors, automobile assembly plants,
deposit and corrosion control, mineral processors and makers of
cleaners and sterilizers, food and beverages.
clarifying aids, leaching and
agglomeration aids, polymers,
dust control, membrane cleaners,
conversion coatings, sealers,
paint detackifiers, strippers
and grate cleaners.
We are currently pursuing a disposition, in whole or in part, of our
BetzDearborn division and are in discussions with potential buyers in that
regard.
FUNCTIONAL PRODUCTS (AQUALON)
We believe that our Aqualon division is a world leader in manufacturing
products that manage the properties of water-based systems. Products in this
segment modify the physical properties of aqueous (water-based) and non-aqueous
systems. These products are principally derived from renewable natural raw
materials and are sold as key ingredients to other manufacturers, including
makers of oral hygiene and personal care products, construction materials and
latex paints, and are used in the oil and gas industry for drilling and
recovery.
In June 2000, we completed the sale of our nitrocellulose business, which
we had decided to exit in December 1999 due to economic conditions brought on by
a persistent worldwide over-supply. Since the divestiture of the nitrocellulose
business, we have determined that the polyols business lacks strategic fit and
are pursuing alternative strategies for this unit.
Prior to September 28, 2000, this segment also included our Food Gums
Division. On September 28, 2000, we sold our Food Gums Division to CP Kelco ApS,
a joint venture that we entered into with Lehman Brothers Merchant Banking
Partners II, L.P. As of June 30, 2001, we retained a minority equity position in
CP Kelco.
At June 30, 2001, the principal products and primary markets of this
segment were:
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS
-------- ------------------ ---------------
Aqualon Water-soluble polymers: Manufacturers of interior and
Hydroxyethylcellulose (HEC), exterior architectural paints,
Carboxymethylcellulose (CMC), oilfield service companies for
Methylcellulose (MC) and oil and gas drilling and
derivatives, recovery, paper mills,
Hydroxypropylcellulose (HPC) and construction material
Guar derivatives. manufacturers and makers of oral
hygiene products, cosmetics,
personal care products and dairy
and bakery products.
Solvent-soluble polymers: Producers of coating resins,
Pentaerythritol (PE) and printing inks and aviation
Ethylcellulose (EC). fluids.
38
CHEMICAL SPECIALTIES (RESINS AND FIBERVISIONS)
In this segment, we manufacture wood rosin resins and terpene resins and
specialties. Product applications include adhesives, rubber and plastic
modifiers, food and beverages and aroma chemicals. Additionally, we believe that
we are the largest manufacturer of thermal-bond polyolefin fine denier staple
fibers used in products like disposable diapers. We also produce olefin fiber
and yarn for the domestic textile and industrial markets used in fabrics,
residential upholstery and geotextiles, carpets and asphalt.
At June 30, 2001, the principal products and primary markets of this
segment were:
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS
-------- ------------------ ---------------
Resins Rosin resins:
for adhesives, food, rubber and
plastics.
Terpene resins: Makers of consumer and
for chewing gum and adhesives. industrial products such as
masking, packaging, arts and
Terpene specialties: duct tape, construction
for flavor and fragrance in materials, beverages, chewing
household and industrial gum, plastics, fragrances and
products. flavors and printing inks.
FiberVisions Polypropylene and polyethylene
fibers:
for disposable hygiene and other Makers of disposable hygiene
products. products, upholstered and
geotextile fabrics, carpets and
asphalt.
Textile fibers:
for decorative and industrial
applications.
On May 1, 2001, we completed the sale of our hydrocarbons resins business
and select portions of our rosin resins business to a subsidiary of Eastman
Chemical Company. On May 31, 2001, we completed the sale of our peroxides
business to GEO Specialty Chemicals, Inc. Additionally, on May 25, 2001, we
completed the sale of our interest in Hercules-Sanyo, Inc., a toner resin joint
venture, to a wholly owned subsidiary of Sanyo Chemical Industries, Ltd., our
joint venture partner. We have been unable to sell the remaining portion of the
Resins division on terms acceptable to us.
RAW MATERIALS AND ENERGY SUPPLY
Raw materials and supplies are purchased from a variety of industry
sources, including agricultural, forestry, mining and petroleum and chemical
industries.
Important raw materials for the Process Chemicals and Services segment are
cationic and anionic polyacrylamides and emulsions, biocides, amines,
surfactants, rosin, adipic acid, epichlorohydrin, fumaric acid, stearic acid,
diethylenetriamine, phosphorus trichloride, wax, casein, starch, fatty acids and
tall oil rosin.
Raw materials important to the Functional Products segment are
acetaldehyde, fatty acids, chemical cotton, wood pulp, ethyl chloride, alcohols,
chlorine, ethylene oxide, propylene oxide, monochloroacetic acid, methyl
chloride, caustic, inorganic acids and guar splits.
The important raw materials for the Chemical Specialties segment are
ketones, alcohols, antioxidants, d-limonene, turpentine, rosin, pine wood
stumps, catalysts, toluene, polyethylene resins and polypropylene resins.
39
Major requirements for key raw materials and fuels are typically purchased
pursuant to multi-year contracts. We are not dependent on any one supplier for a
material amount of our raw material or fuel requirements, but certain important
raw materials are obtained from sole-source or a few major suppliers.
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 domestic and international
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. 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, we believe that FiberVisions' carded products provide
improved softness, uniformity and liquid management 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 currently have over 3,500 patents
worldwide covering our products.
We and 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, Herculon(R)
fiber, Presstige(R) deposit control additives, Spectrum(R) microbiocides,
Ultra-pHase(R) sizing agent, Hercobond(R) dry strength resin, Chromaset(R)
surface size, ProSoft(R) tissue softeners and Zenix(R) contaminant control.
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 manufacturing cost improvement initiatives. For example,
in 2000 we entered into an agreement with a biotechnology research and
development company to develop new proprietary industrial enzymes for creating
new products and improving our manufacturing processes. We spent $80 million on
research activities during 2000, as compared to $85 million in 1999 and $61
million in 1998.
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Process Chemicals and Services currently focuses its research and
development efforts on growth (innovative high-value product development),
technical sales and services (incremental improvements to existing products and
services) and process cost reduction programs to meet diverse customer needs
worldwide. Its state-of-the-art facilities located in Europe and the United
States 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 United States, Process Chemicals and Services 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.
Aqualon has a number of Applications and Development Laboratories
positioned in Europe, Asia and the Americas that provide technical support to
its major customers. At these laboratories, teams work as a network to develop
products, identify new product applications and solve customer problems.
Resins does some research and development work at its Brunswick plant in
support of the remaining rosin resin and terpene specialities businesses. This
work includes process development to support cost reduction initiatives and to
alter the chemical properties of specialty resins to increase sales to
customers.
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 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.
The FiberVisions Division has research and development facilities in the
United States 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
Our businesses are subject to various environmental laws and regulations.
We believe that we are in compliance in all material respects with applicable
federal, state and local environmental laws and regulations. These laws are
subject to change. There can be no assurance that we will continue to be in
compliance with these laws and regulations or that we will be able to comply
with the laws and regulations if they change. Expenditures relating to
environmental cleanup costs have not materially affected, and are not expected
to materially affect, capital expenditures or competitive position. See
"-- Legal Proceedings -- Environmental."
EMPLOYEES
As of June 30, 2001, we had approximately 10,787 employees worldwide,
including approximately 5,653 in the United States. As of September 30, 2001, we
had approximately 9,970 employees worldwide, including approximately 5,381 in
the United States.
INTERNATIONAL OPERATIONS
Direct export sales from the United States to unaffiliated customers were
$376 million, $342 million and $319 million for 2000, 1999 and 1998,
respectively. Our operations outside the United States are subject to the
41
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.
PROPERTIES
Our corporate headquarters and major research center are located in
Wilmington, Delaware, while the administrative headquarters and primary research
center of BetzDearborn are located in Trevose, Pennsylvania. We also own a
number of plants and facilities worldwide, in locations strategic to the sources
of our raw materials or to our customers. All of our principal properties are
owned by us, except for our corporate headquarters, which is leased. Our major
worldwide plants are listed below.
Process Chemicals and Services
BetzDearborn
Addison, Illinois; Bakersfield, California; Bangalore, India; Beaumont,
Texas; Buenos Aires, Argentina; Chalon, France; Edmonton, Alberta, Canada;
Ferentino, Italy; Garland, Texas; Helsingborg, Sweden; Herentals, Belgium; Iksan
City, Korea; Ingelburn, Australia; Jurong Town, Singapore; Langhorne,
Pennsylvania; Macon, Georgia; New Philadelphia, Ohio; Orange, Texas;
Point-Claire, Quebec, Canada; Pudahuel, Santiago, Chile; Santa Fe de Bogota,
Colombia; Sorocaba, Brazil; Valencia, Venezuela; Washougal, Washington; and
Widnes, Cheshire, United Kingdom.
Pulp and Paper
Aberdeen, Scotland; Beringen, Belgium; Burlington, Ontario, Canada;
Busnago, Italy; Chicopee, Massachusetts; Franklin, Virginia; Hattiesburg,
Mississippi; Kalamazoo, Michigan; Kimcheon, Korea; Milwaukee, Wisconsin; Nantou,
Taiwan; Pandaan, Indonesia; Paulinia, Brazil; Pendlebury, United Kingdom;
Portland, Oregon; St. Jean, Quebec, Canada; Sandarne, Sweden; Sara, Mexico;
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; and Zwijndrecht, The Netherlands.
Chemical Specialties
FiberVisions
Athens, Georgia; Covington, Georgia; Suzhou, China; and Varde, Denmark.
Resins
Beringen, Belgium; Brunswick, Georgia; Burlington, Ontario, Canada;
Franklin, Virginia; Hattiesburg, Mississippi; Portland, Oregon; San Juan del
Rio, Mexico; and Savannah, Georgia.
Our plants and facilities, which are continually added to and modernized,
are generally considered to be in good condition with adequate capacity for
projected business operations. From time to time we discontinue operations at,
or dispose of, facilities that have for one reason or another become unsuitable.
42
During 2000, we initiated and/or completed 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
Denmark;
- A 7,000 metric ton methylcellulose capacity increase in Belgium;
- A 1,000 metric ton expansion of the Kenedy, Texas, facility to
manufacture a newly developed rheology modifier; and
- A 400 metric ton hydroxypropylcellulose capacity increase in Virginia.
LEGAL PROCEEDINGS
Environmental
We have been identified as a potentially responsible party ("PRP") by
United States federal and state authorities, or by private parties seeking
contribution, for the cost of environmental investigation and/or cleanup at
numerous sites. As of June 30, 2001, the estimated range of the reasonably
possible share of costs for the investigation and cleanup was between $85
million and $274 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 years of remedial activity required, which could range from 0 to 30 years.
We become aware of sites in which we may be named a PRP in investigatory
and/or remedial activities through correspondence from the United States
Environmental Protection Agency (the "EPA"), 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, et al. v. Vertac Corporation, et al., USDC No. LR-C-80-109
and LR-C-80-110 (E.D. Ark.)
This case, a cost-recovery action based upon the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA," or the
"Superfund statute"), as well as other statutes, has been pending since 1980,
and involves liability for costs expended and to be expended in connection with
the investigation and remediation of the Vertac Chemical Company ("Vertac") site
in Jacksonville, Arkansas. We owned and operated the site from December 1961
until 1971. The site was used for the manufacture of certain herbicides and, at
the order of the United States, Agent Orange. In 1971, the site was leased to
Vertac's predecessor. In 1976, we sold the site to Vertac. The site was
abandoned by Vertac in 1987, and Vertac was subsequently placed into
receivership. Both prior to and following the abandonment of the site, the EPA
and the Arkansas Department of Pollution Control and Ecology (the "ADPC&E") were
involved in the investigation and remediation of contamination at and around the
site. Pursuant to several orders issued under CERCLA, we actively participated
in many of these activities. The cleanup is essentially complete, except for
certain on-going maintenance and monitoring activities. This litigation
primarily concerns the responsibility for and the allocation of liability for
the costs incurred in connection with these activities.
Although initially involving many parties, as a result of various United
States District Court rulings and decisions, as well as a trial, Hercules and
Uniroyal were held jointly and severally liable by the District Court for the
approximately $100 million in costs allegedly incurred by the EPA and ADPC&E, as
well as costs incurred in the future. That decision was made final by the
District Court on September 13, 1999. Both Hercules and Uniroyal timely appealed
that judgment to the United States Court of Appeals for the Eighth Circuit. On
February 8, 2000, the District 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.
43
We timely appealed that judgment. Oral argument in both appeals was held before
the Eighth Circuit on June 12, 2000.
On April 10, 2001, the United States Court of Appeals for the Eighth
Circuit issued an opinion in the consolidated appeals described above. In that
opinion, the Appeals Court reversed the District Court's decision, which had
held us jointly and severally liable for costs incurred and to be incurred at
the Jacksonville site, among other things, and remanded the case back to the
District Court for a determination of whether the harms at the site giving rise
to the government's claims are divisible. The Appeals Court also vacated the
District Court's allocation decision finding us liable for 97.4% of the costs at
issue, ordering that these issues be revisited following further proceedings
with respect to divisibility. Finally, the Appeals Court affirmed the judgment
of liability against Uniroyal.
As a result of the rulings described above, we will be allowed to present
both facts and law to the District Court in support of our belief that we should
not be liable under CERCLA for some or all of the costs incurred by the
government in connection with the site because those harms are divisible. Should
we prevail on remand, any liability to the government will be either eliminated
or reduced. Trial commenced on October 8, 2001.
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, we sued our insurance carriers for past and future costs for
cleanup of certain environmental sites. In April 1998, the trial regarding
insurance recovery for the Jacksonville, Arkansas site 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 our recovery for past cleanup
expenditures and stated that we are entitled to similar coverage for costs
incurred since September 30, 1997 and in the future. We have not included any
insurance recovery in the estimated range of possible investigation and cleanup
costs above. Since entry of the Court's August 1999 order, we have entered into
settlement agreements with several of our insurance carriers and have recovered
certain settlement monies. The terms of those settlements and the amounts
recovered are confidential. We appealed certain of the trial court's rulings to
the Delaware Supreme Court. On August 15, 2001, the Delaware Supreme Court
issued a decision in 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
its decision, the Delaware Supreme Court affirmed the trial court in part,
reversed the trial court in part and remanded the case for further proceedings.
The specific basis upon which the Delaware Supreme Court reversed the trial
court was the trial court's application of pro rata allocation to determine the
extent of the insurers' liability. At this time, proceedings at the trial court
have not yet commenced.
Brunswick, Georgia Consent Order and Related Matters
In December 1997, we received notice of an enforcement action by the State
of Georgia, Environmental Protection Department (the "EPD"). In the notice, the
EPD requested that we enter into a proposed Consent Order, alleged violations of
the Resource Conservation and Recovery Act ("RCRA") and sought a civil penalty
of $250,000. Without admitting liability, we 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 us to pay a fine of
$80,000, install three aquaria in the Brunswick, Georgia community, maintain the
aquaria for ten years and remediate certain soils that are located at our
Brunswick, Georgia plant. That penalty was paid, and we are 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 EPA and
the EPD. As a result of that inspection, several potential areas of
non-compliance with applicable environmental laws were identified. In March
2000, the EPD sent us a proposed Consent Order, which included a proposed
penalty of $330,000. Following negotiations, in August 2000, we entered into a
consent order with the EPD to resolve these potential areas of non-compliance
and to pay a penalty of $160,000.
In addition to the inspection at the Brunswick, Georgia plant addressed in
the above paragraph, the Hattiesburg, Mississippi plant was also subject to a
multi-media inspection. As a result of that inspection,
44
several potential areas of non-compliance with applicable environmental laws
were identified. In March 2000, the Department of Environmental Quality (the
"DEQ") sent us a proposed Consent Order, which included a proposed penalty of
$232,500. Following negotiations in December 2000, we entered into a consent
order with the DEQ in which the proposed penalty was reduced to $26,800 plus
$57,200 in Supplemental Environmental Projects.
At June 30, 2001, the accrued liability of $85 million for environmental
remediation represented 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. While it is not feasible to predict the outcome of all pending
suits and claims, the ultimate resolution of these environmental matters could
have a material effect upon our results of operations and financial position.
Other
We are a defendant in numerous lawsuits that arise out of, and are
incidental to, the conduct of our business. In these legal proceedings, no
specifically identified director, officer or affiliate is a party or a named
defendant. These suits concern issues such as product liability, contract
disputes, labor-related matters, patent infringement, environmental proceedings,
property damage and personal injury matters.
We are a defendant in numerous asbestos-related personal injury lawsuits
and claims which typically arise from alleged exposure to asbestos fibers from
resin-encapsulated pipe and tank products which were sold by a former subsidiary
of Hercules to a limited industrial market, or from alleged exposure to asbestos
contained in facilities owned or operated by us. Lawsuits are received and
matters settled on a regular basis. In December 1999, we entered into a
settlement agreement to resolve the majority of the matters then pending. In
connection with that settlement, we entered into an agreement with several of
our insurance carriers pursuant to which a majority of the amounts paid will be
insured. The terms of both agreements are confidential. During 2000 and 2001, we
entered into additional settlement agreements, the terms of which are also
confidential. In accordance with the terms of the previously mentioned agreement
with several of our insurance carriers, the majority of the amounts paid and to
be paid pursuant to the various settlement agreements will be insured. Further,
we continue to pursue additional insurance coverage from carriers who were not
part of the previously mentioned agreement.
In June 1998, Hercules and David T. Smith Jr., a former Hercules employee
and former plant manager of the Brunswick plant, along with Georgia-Pacific
Corporation and AlliedSignal Inc., 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. On February 11, 2000, the Court
dismissed Georgia-Pacific Corporation and AlliedSignal Inc. without prejudice.
In September 2000, David T. Smith was dismissed by the Court with prejudice.
This case is in the early stages of motion practice and discovery. We have
denied liability and intend to vigorously defend this case. On July 18, 2000, we
were served with a complaint in a case captioned Erica Nicole Sullivan, et al.
v. Hercules Incorporated and David T. Smith, Jr., Civil Action File No.
00-1-05463-99 (Cobb County, Georgia). Based on the allegations contained in the
complaint, this matter is very similar to the Coley litigation, and is brought
on behalf of approximately 700 plaintiffs for alleged personal injury and
property damage arising from the discharge of hazardous waste from our plant.
This case is in the early stages of motion practice and discovery. Venue has
been removed to the United States District Court for the Northern District of
Georgia, Atlanta Division, Civil Action No. 1-00-CV-2121 CMA. We deny any
liability to plaintiffs, and we will vigorously defend this case.
In August 1999, we were sued in a case captioned 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 purported 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. The
45
lawsuits were brought following published reports of a Los Angeles federal grand
jury investigation of the carbon fiber and carbon prepreg industries. In these
lawsuits, the 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 (CTx) (United States
District Court, Central District of California), with all related cases ordered
dismissed. This lawsuit is in the early stages of motion practice and discovery.
We are named in connection with our former Composites Products Division, which
was sold to Hexcel Corporation in 1996, and have denied liability and will
vigorously defend this action.
In addition to the foregoing, in September 2001, Hercules, along with the
other defendants in the Thomas & Thomas Rodmakers action described above, was
sued in four California state court purported class actions brought on behalf of
indirect purchasers of carbon fiber. These actions, all brought in the Superior
Court of California, Los Angeles County, are captioned Todd Simon, on behalf of
himself and all others similarly situated, v. Newport Adhesives and Composite,
Inc., et al., Case No. BC258404; Perry Proiette, on behalf of himself and all
others similarly situated, v. Newport Adhesives and Composite, Inc., et al.,
Case No. BC257764; Jonathan Yolles, on behalf of himself and all others
similarly situated, v. Newport Adhesives and Composite, Inc., et al., Case No.
BC258671; and Gary Regier, on behalf of himself and all others similarly
situated, v. Newport Adhesives and Composite, Inc., et al., Case No. BC258961.
These actions allege violations of the California Business and Professions Code
relating to alleged price fixing of carbon fiber and unfair competition. We will
deny liability and vigorously defend each of these actions.
In connection with the grand jury investigation noted above, in January
2000, the United States Department of Justice (the "DOJ"), Antitrust Division,
served a grand jury subpoena duces tecum upon us seeking information relating to
our former Composite Products Division. We have been advised that we are one of
several manufacturers of carbon fiber and carbon prepreg that have been served
with such a subpoena and we have responded to the subpoena.
In December 1999, an action was filed in the United States 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 claim to have been similarly exposed. This case is
captioned Chang 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 (United States District Court, Eastern District
of Pennsylvania). During 2000, this case was transferred by the Multi-District
Litigation ("MDL") Panel to the United States District Court for the Eastern
District of New York, where Agent Orange cases have previously been
consolidated. There has been little activity in this case since the transfer by
the MDL Panel to the Eastern District of New York. The parties have agreed to
dismiss this action without prejudice, but the Court has not yet entered an
order to that effect.
In 1999, we were sued by Hexcel Corporation in a case captioned Hexcel
Corporation v. Hercules Incorporated, Index No. 602293/99, Supreme Court of New
York, County of New York. In this case, Hexcel sought recovery of a total of
approximately $8,422,000 (plus interest) in "post-closing" adjustments to the
purchase price paid by Hexcel for our former Composite Products Division. The
basis for these alleged "adjustments" is the Sale and Purchase Agreement between
Hercules and Hexcel dated as of April 15, 1996. In June 2000, the Court granted
Hexcel's motion for summary judgment as to liability, finding Hercules liable to
Hexcel on technical grounds, but reserved ruling on the amount of damages. The
Court then referred the damages determination to a Special Referee. In January
2001, the Special Referee issued a report recommending that Hercules be found
liable to Hexcel for a total of approximately $7,300,000 plus interest. In
February 2001, Hexcel moved to confirm the Special Referee's report and Hercules
cross-moved to confirm in part and reject in part the Special Referee's report.
We have specifically challenged the majority of the Special Referee's findings,
and we have argued that a $2,000,000 indemnity "basket" established by the terms
of the Sale and Purchase Agreement should apply, reducing any award to Hexcel by
$2,000,000. In May 2001, the Court accepted the Special Referee's Report and
rejected our position. We believe that the Court's decision is incorrect, at
least in part, and we have appealed that decision. In addition to the foregoing,
in
46
October 2000, Hexcel brought an action against Hercules to compel arbitration to
determine the proper "Working Capital Adjustment" under the terms of the Sale
and Purchase Agreement. Hexcel claims it is owed approximately $1,500,000, while
we believe we are owed approximately $129,000. We have agreed to arbitrate the
matter, an arbitrator has been selected and both sides have submitted papers to
the arbitrator, who has not yet rendered a decision. We believe Hexcel's claims
in this latter action are without merit.
In December 1999, BetzDearborn Inc. and Bill Blythe, an employee of
BetzDearborn, were sued by M.C. Dixon Lumber Company, Inc. ("M.C. Dixon") (M.C.
Dixon Lumber Company, Inc. v. BetzDearborn and Bill Blythe, Circuit Court of
Barbour County, Alabama, Case No. 99-0177). In that lawsuit, M.C. Dixon sought
recovery for alleged damage to wood drying kilns and other equipment, as well as
damages for lost production and other consequential damages. M.C. Dixon alleged
that these damages were caused by BetzDearborn's negligence and breach of
contract in the administration of the water treatment program at M.C. Dixon's
plant. On September 4, 2001, this case went to trial. During the course of the
trial, we agreed to settle this case for an amount which is confidential, but
which was in excess of $1.75 million. In connection with that settlement, we
reached an agreement with one of BetzDearborn's insurance carriers whereby
BetzDearborn paid $1.75 million of the settlement amount (that amount being the
total of BetzDearborn's deductibles under certain insurance policies) and that
carrier paid the rest. As a condition of that settlement, BetzDearborn and that
carrier agreed that all amounts above $1 million each may be subject to
reallocation based on the possible contribution to the settlement amount by one
of BetzDearborn's other insurance carriers, as well as various potential
coverage issues. While the outcome of the reallocation process will not be known
until it occurs, it is possible that BetzDearborn could receive a partial refund
of the amount it has paid to date, thereby reducing its contribution to below
$1.75 million; under no circumstances, however, will BetzDearborn's total share
of the settlement be less than $1 million or greater than $3.5 million.
On September 28, 2000, we sold our Food Gums Division to CP Kelco ApS, a
joint venture that we entered into with Lehman Brothers Merchant Banking
Partners II, L.P. CP Kelco also acquired the biogums business of Pharmacia
Corporation (formerly Monsanto Company). In April 2001, CP Kelco U.S., Inc., a
wholly-owned subsidiary of CP Kelco, sued Pharmacia (CP Kelco U.S., Inc. v.
Pharmacia Corporation, United States District Court for the District of
Delaware, Case No. 01-240-RRM) alleging federal securities fraud, common law
fraud, breach of warranties and representations and equitable fraud. In essence,
the lawsuit alleges that Pharmacia misrepresented the value of the biogums
business, resulting in damages to CP Kelco U.S., including the devaluation of CP
Kelco U.S.'s senior debt by the securities markets. The complaint seeks over
$430 million in direct damages, as well as punitive damages. In June 2001,
Pharmacia filed a third-party complaint against Lehman Brothers and Hercules.
That complaint seeks contribution and indemnification from Lehman Brothers and
Hercules, jointly and severally, for any damages that may be awarded to CP Kelco
U.S. in its action against Pharmacia. This lawsuit is in early discovery. We
believe that the third-party lawsuit against Lehman Brothers and us is without
merit. We have denied any liability to Pharmacia and will vigorously defend this
action.
At June 30, 2001, the consolidated balance sheet reflects a current
liability of approximately $29 million for litigation and claims. 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 our financial position 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.
47
MANAGEMENT
DIRECTORS
The directors of Hercules as of September 30, 2001 are listed below.
NAME AGE POSITION
---- --- --------
William H. Joyce.................................. 65 Chairman and Chief Executive Officer
John G. Drosdick.................................. 58 Director
Richard Fairbanks................................. 60 Director
Samuel J. Heyman.................................. 62 Director
Alan R. Hirsig.................................... 62 Director
Edith E. Holiday.................................. 49 Director
Gaynor N. Kelley.................................. 70 Director
Sunil Kumar....................................... 52 Director
Jeffrey M. Lipton................................. 59 Director
Peter McCausland.................................. 51 Director
Gloria Schaffer................................... 70 Director
Paula A. Sneed.................................... 53 Director
Raymond Troubh.................................... 75 Director
Joe B. Wyatt...................................... 66 Director
William H. Joyce. Chairman and Chief Executive Officer since July 2001.
Dr. Joyce joined Hercules as Chief Executive Officer in May 2001. Dr. Joyce had
been Chairman, President and Chief Executive Officer of Union Carbide
Corporation since 1996. From 1995 to 1996, Dr. Joyce was President and Chief
Executive Officer and from 1993 to 1995, he was President. Prior to that, Dr.
Joyce had been Chief Operating Officer since 1992. Dr. Joyce holds a B.S. degree
in Chemical Engineering from Penn State University and an M.B.A. and a Ph.D.
from New York University. Dr. Joyce received the National Medal of Technology
Award in 1993 and the Plastics Academy's Industry Achievement Award in 1994 and
Lifetime Achievement Award in 1997. In 1997, he was inducted into the National
Academy of Engineering. Dr. Joyce is a director of CVS Corporation. Dr. Joyce is
also a trustee of the Universities Research Association, Inc. and Co-Chairman of
the Council of Government-University-Industry Research of The National
Academies.
John G. Drosdick. Director since 1998. Mr. Drosdick is Chairman, Chief
Executive Officer and President of Sunoco, Inc., an independent petroleum
refiner-marketer in the United States. He was president and Chief Operating
Officer of Sunoco from 1996 to 2000. Mr. Drosdick was president of Ultramar
Corporation from 1992 to 1996. He is a director of Sunoco, Inc. and serves on
the board of Lincoln National Corporation.
Richard Fairbanks. Director since 1993. Mr. Fairbanks has been a managing
director or a counselor at the Center for Strategic & International Studies
since 1992. He was Ambassador-at-Large under President Reagan. He is a member of
the boards of directors of SEACOR Smit, Inc., GATX Corporation and SPACEHAB,
Inc.; member, Council on Foreign Relations, Council of American Ambassadors; and
founder, The American Refugee Committee of Washington.
Samuel J. Heyman. Director since 2001. Mr. Heyman has been a director and
Chairman of ISP since its formation and served as its Chief Executive Officer
from its formation until June 1999. Mr. Heyman also has been a director of G-I
Holdings Inc., an affiliate of the ISP, or of its predecessor GAF Corporation,
for more than five years and was Chairman, President and Chief Executive Officer
of G-I Holdings for more than five years until September 2000. In January 2001,
G-I Holdings filed a voluntary petition for reorganization under Chapter 11 of
the United States Bankruptcy Code due to its asbestos-related claims. Mr. Heyman
was a director and Chairman of the Board of Building Materials Corporation of
America, an indirect wholly owned
48
subsidiary of G-I Holdings, from its formation to September 2000 and served as
Chief Executive Officer of BMCA and certain of its subsidiaries from June 1999
to September 2000, which position he also held from June 1996 to January 1999.
He is also the Chief Executive Officer, Manager and General Partner of a number
of closely held real estate development companies and partnerships whose
investments include commercial real estate and a portfolio of publicly traded
securities.
Alan R. Hirsig. Director since 1998. Mr. Hirsig retired as President and
Chief Executive Officer of ARCO Chemical Company, which was bought by Lyondell
Chemical Company, in 1998. He is a director of Philadelphia Suburban
Corporation, Celanese A.G. and Checkpoint Systems Corporation. Additionally, he
is a director or trustee of Bryn Mawr College, the Curtis Institute of Music and
the Rosenbach Museum and Library, as well as a chairman of the YMCA of
Philadelphia. Mr. Hirsig served as past chairman of the Chemical Manufacturers
Association.
Edith E. Holiday. Director since 1993. Ms. Holiday is an attorney. She was
assistant to the President of the United States and Secretary of the Cabinet
from 1990 until early 1993 and served as General Counsel of the United States
Treasury Department from 1989 through 1990. She served as counselor to the
Secretary of the Treasury and Assistant Secretary for Public Affairs and Public
Liaison, United States Treasury Department from 1988 to 1989. Ms. Holiday is a
director of Amerada Hess Corporation, H.J. Heinz Company, Beverly Enterprises,
Inc. and RTI International Metals, Inc. and a director or trustee of various
investment companies in the Franklin Templeton Group of Funds.
Gaynor N. Kelley. Director since 1989. Mr. Kelley retired as Chairman and
Chief Executive Officer of The Perkin-Elmer Corporation (now Applera
Corporation), a manufacturer of biotechnology instrumentation and systems, in
June 1996. He is a member of the boards of directors of Alliant Techsystems Inc.
and Prudential Insurance Co. of America.
Sunil Kumar. Director since 2001. Mr. Kumar has been director, President
and Chief Executive Officer of ISP since June 1999. Mr. Kumar was a director,
President and Chief Executive Officer of BMCA from May 1995, July 1996 and
January 1999, respectively, until June 1999. He was also Chief Operating Officer
of BMCA from March 1996 to January 1999. Mr. Kumar also was President,
Commercial Roofing Products Division, and Vice President of BMCA from February
1995 to March 1996. He was also a director and Vice-Chairman of the Board of G-I
Holdings from January 1999 to June 1999. In January 2001, G-I Holdings filed a
voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code due to its asbestos-related claims.
Jeffrey M. Lipton. Director since 2001. Mr. Lipton has been President and
Chief Executive Officer and a director of NOVA Chemicals Corporation, a Canadian
chemical company since 1998. From 1996 to 1998, he was President and a director.
Prior to that, he had been President since 1994. He joined NOVA in 1994 after
retiring from a 28-year career with E. I. du Pont de Nemours and Company
(DuPont), where he held a number of management and executive positions. Mr.
Lipton is Chairman of the Boards of Directors of Methanex Corporation and
Trimeris, Inc., Past Chairman of the Board of Directors and a director of the
American Plastics Council, a director and a member of the Executive Committee of
the American Chemistry Council, a director of the Business Council on National
Issues -- Canada and the United Way of Allegheny County and a member of the
Executive Committee of the Society of Chemical Industry and the University of
Pittsburgh Cancer Institute Council.
Peter McCausland. Director since 1997. Mr. McCausland is Chairman and
Chief Executive Officer of Airgas, Inc. (a distributor of industrial, medical,
and specialty gases and related equipment), a company he founded in 1982. He
served as General Counsel for MG Industries, Inc., an industrial gas producer.
He was a partner in the firm of McCausland, Keen & Buckman that specialized in
mergers, acquisitions and financings. He is a director of the Independence
Seaport Museum and The Eisenhower Exchange Fellowships.
Gloria Schaffer. Director since 2001. Ms. Schaffer served as a
Commissioner of the Department of Consumer Protection of the State of
Connecticut from 1991 to 1995, as a member of the Civil Aeronautics Board from
1978 to 1984 and as the Secretary of State of the State of Connecticut from 1970
to 1978. Ms. Schaffer also previously served on the Board of Directors of Amity
Bank and Amity Bankcorp, Mott's
49
Inc. and Emery Air Worldwide and, since 1996, has served as a partner at C.A.
White, Inc., a real estate development firm.
Paula A. Sneed. Director since 1994. Ms. Sneed is Group Vice President,
President e-Commerce and Marketing Services of Kraft Foods, Inc., the nation's
largest packaged foods company. She joined General Foods (which later merged
with Kraft Foods) in 1977 and has held a variety of management positions,
including Vice President, Consumer Affairs; Senior Vice President and President,
Foodservice Division; Executive Vice President and General Manager, Desserts
Division; Executive Vice President and General Manager, Dinners and Enhancers
Division; Senior Vice President, Marketing Services and Chief Marketing Officer;
and Executive Vice President, President e-Commerce Division. She is also a
director of Airgas, Inc.
Raymond S. Troubh. Director since 2001. Mr. Troubh has been a financial
consultant for more than five years. Prior to that he was a general partner of
Lazard Freres & Co., an investment banking firm, and a governor of the American
Stock Exchange. Mr. Troubh has served as a director of the following public
companies: Time Warner, Inc., Becton, Dickinson and Company and America West
Airlines, Inc., and is a director of ARIAD Pharmaceuticals, Inc., a
biopharmaceutical company, Diamond Offshore Drilling, Inc., a contract drilling
company, General American Investors Company, an investment trust company,
Gentiva Health Services, Inc., a healthcare provider, Health Net, Inc., a
managed healthcare company, Starwood Hotels & Resorts, Inc., a hotel operating
company, Triarc Companies, Inc., a holding company, and WHX Corporation, a steel
products company. He is also a trustee of Corporate Renaissance Group
Liquidating Trust, Inc., MicroCap Liquidating Trust and Petrie Stores
Liquidating Trust.
Joe B. Wyatt. Director since 2001. Mr. Wyatt is Chancellor Emeritus of
Vanderbilt University in Nashville, Tennessee. He served as Vanderbilt's sixth
Chancellor and Chief Executive Officer for 18 years, beginning in 1982. From
1972 to 1982, he was a member of the faculty and administration at Harvard
University. Mr. Wyatt is Chairman of the Board of Directors of the Universities
Research Association Inc. of Washington, D.C., Chairman of a panel on Strategic
Education Research for the National Research Council of the National Academies,
a director of New American Schools, Inc., Advanced Network and Services, Inc.,
the EAA Aviation Foundation, Ingram Micro, Inc., where he is Chairman of the
Audit Committee, El Paso Corporation, the Aerostructures Company and ASD.com and
he is a Principal of the Washington Advisory Group, LLC in Washington, D.C.
NEW DIRECTOR
Robert D. Kennedy. Mr. Kennedy has served on various Boards of Directors
since September 1999. Prior to that, he had been Chairman of UCAR International,
Inc. since June 1998 and Chairman and Chief Executive Officer from March 1998 to
June 1998. From 1995 to 1998, Mr. Kennedy served on various Boards of Directors.
Prior to that, from 1986 to 1995 he served as Chairman, Chief Executive Officer
and President of Union Carbide Corporation, where he had held various positions
since 1955. He is a director of Sunoco, Inc., Kmart Corporation, International
Paper Co. and Chase Industries and a member of the Advisory Boards of Blackstone
Group, Sullivan Associates and RFE Investment Partners. Mr. Kennedy is also a
member of the Boards of Trustees of the New Hampton School and Cornell
University. Mr. Kennedy is 68 years old.
On October 29, 2001, we announced the election of Mr. Kennedy to the Board
of Directors and the resignation of Mr. Kelley from the Board of Directors. Mr.
Kennedy's election and Mr. Kelley's resignation are effective October 31, 2001.
50
OFFICERS
The executive officers of Hercules as of September 30, 2001 are listed
below. There are no family relationships among executive officers.
NAME AGE CURRENT POSITION
---- --- ----------------
William H. Joyce................ 65 Chairman and Chief Executive Officer
Fred G. Aanonsen................ 54 Vice President and Controller
Edward V. Carrington............ 58 Vice President, Human Resources and Corporate Resources
Richard G. Dahlen............... 62 Chief Legal Officer
Robert C. Flexon................ 43 Vice President, Work Processes
Israel J. Floyd................. 55 Corporate Secretary and General Counsel
Bruce W. Jester................. 50 Vice President, Taxes
Stuart C. Shears................ 50 Vice President and Treasurer
Allen A. Spizzo................. 43 Vice President, Corporate Affairs and Strategic
Planning
Fred G. Aanonsen joined Hercules in July 2001. Prior to joining Hercules,
he spent 25 years at Union Carbide Corporation, where most recently he had been
the Director of Accounting and Financial Processing since 1998. Mr. Aanonsen is
a Certified Public Accountant and a member of the American Institute of
Certified Public Accountants, the New York State Society of Certified Public
Accountants and the Financial Executives Institute.
Edward V. Carrington originally joined Hercules when it acquired Radiant
Color in 1969 and assumed his current position in June 2001. Prior to that, he
had served in a consulting role since October 2000. From 1997 until 2000, he was
Vice President of Buttonwood Cottages, Inc., a vacation resort complex, and
President of Rentals in Paradise, Inc., a vacation home rental business. From
1992 until his retirement from Hercules in 1997, he was Vice President, Human
Resources.
Richard G. Dahlen originally joined Hercules in 1996. Mr. Dahlen assumed
his current position in June 2001. Prior to that, he had served in a consulting
role since October 2000. From 1999 until 2000, he was retired and from 1996
until his retirement in 1999, he served as Vice President, Law and General
Counsel. Mr. Dahlen is a member of the Finance Committee and Board of Directors
of the Delaware Theatre Company.
Robert C. Flexon joined Hercules in 2000 and has held his current position
since June 2001. He had been Vice President, Business Analysis and Controller
since 2000. Previously, he was with Atlantic Richfield Company for more than ten
years, serving in several capacities that included: general auditor, ARCO, from
1998 to 2000; franchise manager, ARCO Products Company, from 1996 to 1998; and
controller, ARCO Products Company, from 1995 to 1996.
Israel J. Floyd joined Hercules in 1973 and has held his current position
since 2001. From 2000 to 2001, he was Executive Vice President, Secretary and
General Counsel. He had been Vice President, Secretary and General Counsel since
1999 and, prior to that, was Secretary and Assistant General Counsel from 1992
to 1999.
Bruce W. Jester joined Hercules in 1980 and has held his current position
since 1997. He was assistant treasurer and director, Taxes from 1994 to 1997.
Stuart C. Shears joined Hercules in 1978 and has held his current position
since 1999. He was assistant treasurer from 1997 to 1999 and, prior to that, was
director, Finance & Credit from 1991 to 1997.
Allen A. Spizzo originally joined Hercules in 1979. He returned to Hercules
in 1997 and has held his current position since April 2001. From 2000 to 2001,
he was Vice President, Investor Relations and Strategic Planning. Prior to that,
he was director of corporate development from 1997 to 2000. Previously, he was a
group vice president of Metton America, Incorporated, in Atlanta, Georgia, from
1995 to 1997.
51
EXECUTIVE COMPENSATION
The following table contains information concerning compensation paid or to
be paid to those serving as Chief Executive Officer and the other most highly
compensated executive officers of the company as of the end of 2000 for services
rendered to the company and our subsidiaries during the past three completed
fiscal years.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------- ------------------------------------ ALL OTHER
SALARY BONUS OTHER RESTRICTED OPTIONS INCENTIVE COMPENSATION
YEAR ($) ($) ($) STOCK($)(6) (SHARES) PAYOUTS($) ($)(7)
---- ------- ------- ------- ----------- --------- ---------- ------------
T. L. Gossage(1)...................... 2000 27,995 1,848,043 1,000,000 63,588(8)
Chief Executive Officer and 1999
Chairman 1998
V. J. Corbo(2)........................ 2000 687,500 281,217 387,500 2,718,000 6,181,087
Chairman, President 1999 721,878 160,679 3,548,500 112,500 102,116
and Chief Executive Officer 1998 494,273 320,000 90,493 2,367,602 93,048
J. B. Barry(3)........................ 2000 400,000 18,167 50,000 12,447
Executive Vice President 1999 323,519 9,824 893,000 39,000 5,536
Corporate Resources
Executive Vice President 1998 56,466 20,000
Corporate Development
D. W. DiDonna......................... 2000 400,008 22,029 142,000 5,100
Vice President Corporate 1999 357,420 27,508 893,000 33,375 9,669
Development 1998 260,402 120,000 11,260 181,375 7,855
I. J. Floyd........................... 2000 383,340 24,029 256,000 50,000 9,926
Secretary and General 1999 225,259 3,110 517,000 9,375 10,647
Counsel 1998 165,328 33,000 50,375 7,274
G. MacKenzie(4)
Vice Chairman....................... 2000 500,004 17,601 639,375 50,000 29,649
1999 359,170 20,910 893,000 37,470
1998 271,670 200,000 19,514 160,000 37,581
H. J. Tucci(5)........................ 2000 400,006 31,566 50,000 16,355
Executive Vice President and 1999 341,670 72,618 893,000 33,000 29,966
Chief Development Officer 1998 245,850 185,000 18,707 50,083 175,000 27,369
---------------
(1) Effective October 17, 2000, Mr. Gossage succeeded Dr. Corbo as Chief
Executive Officer and Chairman of Hercules. Mr. Gossage received a nominal
salary of $1.00/week for benefit participation purposes. Mr. Gossage
received no other cash compensation (base or annual incentive). Mr. Gossage
retired as Chief Executive Officer on May 8, 2001. William H. Joyce became
Chief Executive Officer on May 8, 2001 and Chairman on July 1, 2001.
(2) Dr. Corbo resigned his positions as Chairman of the Board, President and
Chief Executive Officer of Hercules on October 17, 2000, and retired from
Hercules effective November 1, 2000. His base salary reflects the period
through October 31, 2000. The "Other" column includes $90,272 for use of the
company plane for Dr. Corbo. Arrangements with respect to the termination of
Dr. Corbo's employment are described more fully below under "Employment
Contracts." Dr. Corbo's "All Other Compensation" includes, pursuant to the
severance agreement outlined under "Employment Contracts," 48 semi-monthly
payments of $65,312.50 each, totaling $3,135,000, plus a cash payment of
$2,832,754. Amounts also included in this column are $22,250, the total
value of the annual company contributions to the defined contribution plans
plus earnings thereon, $47,096, the dividends and interest on stock options,
and $143,987, dividends on restricted stock units.
(3) Ms. Barry became a Hercules employee on October 15, 1998. Salary and bonus
for 1998 reflect period from October 15, 1998, to December 31, 1998. Ms.
Barry retired from Hercules on June 30, 2001.
(4) Mr. MacKenzie retired from Hercules on June 30, 2001.
52
(5) Mr. Tucci retired from Hercules on December 1, 2000. His base salary
reflects the period through November 30, 2000.
(6) These values are determined by multiplying the number of shares of
restricted stock awarded by the closing market price of Hercules common
stock on the date of grant and subtracting the consideration, if any, paid
by the executive officer. Dividends may be paid on a current basis or
accrued. Mr. Floyd's restricted stock grant for the year 2000 will vest only
if Hercules' stock price reaches $50 before November 4, 2002. The number and
value (determined by taking the number of shares of restricted stock
multiplied by the year-end closing market price, $19.0625, net of any
consideration paid) of aggregate restricted stock holdings is shown below.
Included in the table are restricted shares that each executive officer
purchased under the terms of the Hercules Long-Term Incentive Compensation
Plan as well as shares that have been granted outright. The aggregate amount
paid for restricted shares by executive officers was $1,071,907.
(7) Major components of "All other compensation" are listed below in addition to
components indicated in notes 2 and 8:
AGGREGATE COMPANY MATCH DIVIDEND AND
RESTRICTED (DEFINED INTEREST CREDITS
NAME SHARES NET VALUE CONTRIBUTION PLAN) ON STOCK OPTIONS
---- ---------- ---------- ------------------ ----------------
T. L. Gossage............... 128,003 $2,440,057 0 0
V. J. Corbo................. 0 0 22,250 47,096
G. MacKenzie................ 99,492 1,542,175 18,334 11,314
D. W. DiDonna............... 39,747 724,375 5,100 0
H. J. Tucci................. 0 0 11,846 4,509
I. J. Floyd................. 42,910 741,531 9,926 0
J. B. Barry................. 38,000 724,375 12,447 0
(8) When Mr. Gossage first retired from Hercules effective January 1, 1997, as
reported in Hercules' 1997 proxy statement, he was granted a special pension
benefit to be paid over the period from his retirement through the end of
2001. In connection with his return to Hercules effective October 17, 2000,
the remaining 14 monthly payments under this arrangement were paid in a lump
sum, as reflected below. The value to Mr. Gossage of this lump sum payment
without discount was $63,588, as shown in the table above.
53
OPTION GRANTS IN LAST FISCAL YEAR
The following table discloses information concerning individual grants of
stock options made during the last completed fiscal year to the executive
officers named in the summary compensation table.
NO. OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS EXERCISE OF
OPTIONS GRANTED TO BASE PRICE EXPIRATION GRANT DATE
NAME GRANTED EMPLOYEES ($/SH) DATE GRANT DATE VALUE(1)
---- ---------- ---------- ----------- ---------- ----------- ----------
T. L. Gossage........ 500,000(2) 13.9% 14.4375 (2) 10/17/2000 $2,130,500
500,000(2) 13.9% 17.325 (2) 10/17/2000 1,636,550
V. J. Corbo.......... 200,000(3) 5.5% 17.25 10/17/2005 2/18/2000 1,469,580
187,500(4) 5.2% 14.0625 10/17/2005 6/30/2000 1,097,888
G. MacKenzie......... 50,000(3) 1.4% 17.25 2/18/2010 2/18/2000 442,385
D. W. DiDonna........ 50,000(3) 1.4% 17.25 2/18/2010 2/18/2000 442,385
92,000(5) 2.5% 16.00 4/27/2010 4/27/2000 746,442
H. J. Tucci.......... 50,000(3) 1.4% 17.25 12/1/2005 2/18/2000 367,395
I. J. Floyd.......... 40,000(3) 1.1% 17.25 2/18/2010 2/18/2000 353,908
10,000(5) 0.3% 16.00 4/27/2010 4/27/2000 81,135
J. B. Barry.......... 50,000(3) 1.4% 17.25 2/18/2010 2/18/2000 442,385
---------------
(1) The Black-Scholes option-pricing model was used to determine the fair value
of employee stock options in the table above as of the date of the grant.
No adjustments for risk of forfeiture have been made. Significant
assumptions are as follows:
REGULAR OPTIONS PASOS
--------------- -------
Dividend yield.............................................. 0.0% 0.0%
Risk free interest rate..................................... 5.9% 6.2%
Expected life............................................... 3.6 years 5 years
Expected volatility......................................... 41.3% 35.6%
(2) Vesting date is the earlier of October 15, 2001, or retirement, death or
termination because of disability, or a change of control. The expiration
date is the first anniversary of retirement, death or termination because of
disability.
(3) Vesting schedule is as follows: 40% on February 19, 2001; 40% on February
18, 2002; and 20% on February 18, 2003.
(4) Performance-accelerated stock options ("PASOs") become exercisable upon the
achievement of predetermined performance goals. If goals are not achieved,
the options become exercisable at 9.5 years and expire at 10 years; however,
due to retirement, the expiration date for this award is October 17, 2005.
(5) Vesting schedule is as follows: 40% on April 27, 2001; 40% on April 29,
2002; and 20% on April 28, 2003.
54
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The table set forth below discloses certain information concerning the
exercise of stock options (exercised and unexercised) during the last completed
fiscal year by the executive officers named in the summary compensation table as
well as certain information concerning the number and value of unexercised
options. The value of options is calculated using the difference between the
option exercise price and $19.0625 (year-end stock price) multiplied by the
number of shares underlying the option.
NO. OF SECURITIES VALUE OF UNEXERCISED
NO. OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR-END AT YEAR-END
ACQUIRED ON VALUE --------------------------- -----------------------------------
NAME EXERCISE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE ($) UNEXERCISABLE ($)
---- ----------- ------------ ----------- ------------- --------------- -----------------
T. L. Gossage......... 0 264,000 1,174,000 0 3,181,250
V. J. Corbo(1)........ 0 462,700 619,500 1,381,876 0
G. MacKenzie.......... 0 170,820 353,500 3,231 90,625
D. W. DiDonna......... 0 148,100 331,175 0 372,375
H. J. Tucci........... 9,900 33,825 322,400 120,000 176,975 0
I. J. Floyd........... 0 71,800 112,575 35,812 103,125
J. B. Barry........... 0 7,200 81,800 0 90,625
---------------
(1) Dr. Corbo resigned his positions as Chairman of the Board, President and
Chief Executive Officer of Hercules on October 17, 2000, and retired from
Hercules effective on November 1, 2000. As a result of his retirement,
187,500 of Dr. Corbo's options became exercisable as of November 1, 2000.
PENSION PLANS
The following table shows the estimated annual pension benefits payable to
a covered participant at normal retirement age under Hercules' qualified
benefits pension plan, as well as nonqualified supplemental benefits, based on
the stated remuneration and years of service with Hercules and its subsidiaries.
REMUNERATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
------------ -------- -------- -------- ---------- ----------
$ 200,000........................ $ 45,714 $ 60,952 $ 76,190 $ 91,428 $ 106,666
250,000....................... 57,714 76,952 96,190 115,428 134,666
300,000....................... 69,714 92,952 116,190 139,428 162,666
350,000....................... 81,714 108,952 136,190 163,428 190,666
400,000....................... 93,714 124,952 156,190 187,428 218,666
450,000....................... 105,714 140,952 176,190 211,428 246,666
500,000....................... 117,714 156,952 196,190 235,428 274,666
600,000....................... 141,714 188,952 236,190 283,428 330,666
700,000....................... 165,714 220,952 276,190 331,428 386,666
750,000....................... 177,714 236,952 296,190 355,428 414,666
800,000....................... 189,714 252,952 316,190 379,428 442,666
900,000....................... 213,714 284,952 356,190 427,428 498,666
1,000,000....................... 237,714 316,952 396,190 475,428 554,666
1,500,000....................... 357,714 476,952 596,190 715,428 834,666
2,000,000....................... 477,714 636,952 796,190 955,428 1,114,666
Annual contributions by Hercules to its qualified pension plan, if any are
required, are determined statistically by an independent actuary, and no amount
is attributed to an individual employee. Due to the funded status of the
qualified pension plan, Hercules did not make a contribution to it in 2000.
Except in special cases, the aggregate retirement benefit, under both the
qualified and nonqualified plans, is an amount determined by taking the sum of
(i) 1.2% of the employee's average annual earnings (based on the highest 60
consecutive months during the last 10 years of employment) up to one-half the
Social Security
55
Tax Base ($76,200 in 2000), and (ii) 1.6% of the employee's average annual
earnings (as determined above) in excess of one-half of the Social Security Tax
Base, multiplied by the employee's total years and months of credited service.
For this purpose, "average annual earnings" consist of salary plus annual
incentive or bonus compensation.
For Ms. Barry, who participates in the former BetzDearborn Retirement Plan,
the aggregate retirement benefit is determined by taking the sum of (i) 1.2% of
the employee's average annual earnings (based on the highest three consecutive
calendar years during the last 10 calendar years of employment) up to the Social
Security Covered Compensation (average of 35 years of the Social Security
Taxable Wage Base), and (ii) 1.8% of the employee's average annual earnings (as
determined above) in excess of the Social Security Covered Compensation,
multiplied by the employee's total years of credited service.
For Ms. Barry, Dr. Corbo, Mr. DiDonna, Mr. Floyd, Mr. Gossage, Mr.
MacKenzie and Mr. Tucci, the compensation amounts used for average annual
earnings for 2000 are shown under the "Salary" and "Bonus" columns of the
summary compensation table. The estimated credited years of service for Messrs.
Gossage, Corbo, MacKenzie, DiDonna, Tucci and Floyd and Ms. Barry are 35, 31,
21, 20, 23, 27 and 9, respectively.
EMPLOYMENT CONTRACTS
On October 17, 2000, Hercules entered into a written agreement with Mr.
Gossage which provided for him to suspend his regular Hercules retirement
benefits and serve as Chairman and Chief Executive Officer. Mr. Gossage's
compensation consisted of (i) a nominal salary of $1.00 per week to cover
employee benefit participation requirements plus employment-related benefits
available to other salaried employees, (ii) reimbursement of all
employment-related expenses, including temporary living expenses, and (iii) the
grant under the terms of our Long-Term Incentive Compensation Plan of (a) a
stock option to purchase 1,000,000 shares of common stock, half at a per share
exercise price of $14.4375 (the price of our common stock on the date of grant)
and the balance at a per share exercise price of $17.325, and (b) 128,003 shares
of restricted stock. The stock options and restricted stock vest at the earlier
of October 15, 2001, or Mr. Gossage's retirement, death or termination because
of disability or a change in control and the stock options will remain
exercisable until the first anniversary of his retirement, death or termination
because of disability. Hercules also agreed to accelerate payment of the balance
of a special pension benefit of $1,300,000 per year over 5 years, which became
effective January 1, 1997. This special pension was reported in our 1997 proxy
statement. Mr. Gossage retired as Chief Executive Officer on May 8, 2001.
On May 8, 2001, Hercules entered into a written agreement with Dr. Joyce
which provides for him to serve as Chairman and Chief Executive Officer. Dr.
Joyce's compensation consists of (i) a base annual salary of $1,000,000, (ii)
target annual variable compensation of $1,000,000 and (iii) stock options to
acquire 1,250,000 shares of common stock at a per share exercise price of $12.00
(the price of our common stock on the date of grant). The stock options have
ten-year terms and vest at the earlier of a change of control, termination other
than for cause, death or disability or April 30, 2003. Dr. Joyce's employment
agreement also provides for further grants of stock options for each calendar
year after 2001, at such times as Hercules generally makes stock option grants
to other employees and in amounts and with terms and conditions consistent with
his position. In the event Dr. Joyce's employment is terminated other than for
cause, Hercules would be required to pay him an amount equal to the base salary
and variable compensation he would have received had he remained employed
through April 30, 2003, but not less than $2,000,000.
CHANGE IN CONTROL AGREEMENTS
Since 1986, Hercules has entered into change in control agreements with its
senior executives. These agreements seek to ensure the stability of Hercules'
management during a period of transition within Hercules and only become
effective upon a change in control event. Hercules' Compensation Committee
periodically reviews these agreements and revises them, if necessary, to reflect
contemporary business practices in change in control situations.
56
During fiscal year 2000, Hercules entered into change in control agreements
with Ms. Barry, Dr. Corbo, Mr. DiDonna, Mr. Floyd, Mr. MacKenzie and Mr. Tucci.
Under the terms of the agreements, a change in control occurs:
- if any individual, entity or group (with certain exceptions) becomes the
beneficial owner of 20% or more of the outstanding shares of Hercules
common stock;
- if there is a change in a majority of the board of directors other than
by election or nomination by a vote of the majority of directors
comprising the incumbent board;
- upon approval by the stockholders of a reorganization, merger,
consolidation or sale that results in Hercules' stockholders owning less
than 60% of the combined voting power of the surviving corporation
following the transaction; or
- if Hercules' stockholders approve a complete liquidation of the Company.
Under the terms of these agreements, upon a change in control, Hercules is
required to continue to employ the above named executives, in substantially the
same position and level of compensation (including benefits) as that executive
held immediately before the change in control, for a period of three years
following the change in control.
If Hercules terminates the executive (within the three year period
following a change in control) for any reason other than cause, death or
disability, or if Hercules takes actions which permit the executive to terminate
his or her employment for good reason, such as diminishing the executive's
responsibilities or requiring the executive to relocate, during such three year
period, the executive is entitled to the following:
- a lump sum cash payment equal to:
- any unpaid prorated portion of the executive's bonus;
- any monthly salary earned but unpaid as of the date of termination;
- three times the executive's base salary and bonus; and
- the difference between the amount the executive would be entitled to
if Hercules contributed for up to an additional six years of service
(including years of service credited during the employment period)
and five years of age to the executive's retirement plan and that
amount the executive was actually entitled to under this plan on the
date of termination;
- three years of continued welfare benefits and perquisites;
- outplacement services at a cost of up to $50,000;
- full vesting of all stock options held by or previously granted to the
executive; and
- payment for any Internal Revenue Service excise taxes for "excess
parachute payments" (as defined under the Internal Revenue Code).
In 2001, Hercules entered into similar change in control agreements with
Dr. Joyce, Mr. Aanonsen, Mr. Carrington and Mr. Dahlen. The 2001 change in
control agreements are the same as the 2000 change in control agreements, except
as described below.
The change in control agreements with Dr. Joyce and Mr. Aanonsen provide
for additional special payments of up to $3,000,000 and $125,000, respectively,
if a change in control occurs on or before April 30, 2002, and in connection
therewith, all or substantially all of the common stock of the company is
purchased for cash and all or substantially all of the then-outstanding employee
stock options are cancelled in exchange for cash or no consideration without
being replaced by comparable new stock options.
Dr. Joyce, Mr. Carrington and Mr. Dahlen's change in control agreements
provide that if the executive terminates his employment on at least 180 days'
advance notice after a change in control and, in the case of a change in control
triggered by stockholder approval of a reorganization, merger, consolidation or
sale described
57
above, after consummation of that transaction, the termination will be treated
as a termination for good reason, giving rise to the severance pay and benefits
described above.
The change in control agreements with Mr. Carrington and Mr. Dahlen provide
for cash payments consisting in part of two, rather than three, times their base
salaries and bonuses and two, rather than three, years of continued welfare
benefits and perquisites.
The agreements entered into with Dr. Joyce and Messrs. Aanonsen, Carrington
and Dahlen do not provide for the additional pension service or age credits
described above.
SEVERANCE, RESIGNATION, TERMINATION AND SEPARATION AGREEMENTS
On October 17, 2000, Dr. Corbo resigned from all of his positions at
Hercules and its subsidiaries including his positions as Chief Executive Officer
and Chairman of the Board. Dr. Corbo has received and he (or in the event in his
death, his estate or named beneficiary) is entitled to receive certain severance
payments and continuing benefits pursuant to a resignation agreement between Dr.
Corbo and Hercules dated October 17, 2000. Specifically, Dr. Corbo received a
lump sum cash payment of $2,832,753.83 upon his resignation and Dr. Corbo (or in
the event of his death, his estate or named beneficiary) will receive (i) two
times his then current salary and target annual bonus (or a total of
$3,135,000), which amount is paid over 48 semi-monthly equal installments
beginning November 1, 2000, (ii) certain continuing rights and accelerated
vesting schedules under Hercules' various stock option plans and long-term
compensation plans, (iii) certain continuing pension benefits based on granting
three additional years of service credits plus elimination of early retirement
reduction and (iv) certain one-time perquisites, such as, reimbursement for
legal fees incurred in connection with the resignation agreement and
reimbursement for tax return preparation and advice. Additionally, Dr. Corbo and
his immediate family will receive medical, dental and vision benefits until the
earlier of his death or December 31, 2002 and life insurance benefits payable at
his death. Many of the above listed items are contingent upon Dr. Corbo's
adherence to certain covenants in the resignation agreement regarding
confidentiality, non-competition and non-disparagement.
On December 1, 2000, Mr. Tucci retired from Hercules. He served as the
Chairman, Chief Executive Officer and President of CP Kelco, a joint venture in
which Hercules holds a minority interest, until June 30, 2001. In conjunction
with Mr. Tucci's retirement from Hercules, Hercules agreed to make certain
severance payments to Mr. Tucci. Mr. Tucci will receive (i) 120 consecutive
monthly payments of $7,000, (ii) an additional four full years of pension
service credit as well as additional pension payments based upon number of years
of service to CP Kelco, (iii) reimbursement for certain equity interests in
Hercules held by Mr. Tucci, which were forfeited upon his retirement, and (iv)
reimbursement for certain other perquisites. Additionally, Hercules will pay, in
the event of Mr. Tucci's death, his named beneficiary or estate an amount equal
to two times his final twelve-month salary plus the average of his last two
calendar year MICP awards.
On June 30, 2001, Ms. Barry retired from Hercules. In connection with Ms.
Barry's retirement, she and Hercules entered into a separation agreement
pursuant to which she has received or will receive certain severance payments
and continuing benefits. Specifically, Ms. Barry has received or will receive,
among other things, (i) a lump sum payment of $1,320,000, (ii) a special
lifetime pension benefit and (iii) health and dental coverage for herself, her
spouse and her children until December 31, 2001. In exchange for such payments
and benefits, Ms. Barry covenanted not to sue Hercules and agreed to release and
forever discharge Hercules from any claims against Hercules, other than claims
relating to the validity or enforceability of the separation agreement, claims
for legally mandated benefits and vested benefits under any qualified or non-
qualified savings and pension plans or welfare plans in which she may have
participated or will continue to participate and any other rights or claims that
may arise after the date of execution the separation agreement. In addition to
the payments and benefits provided for in the separation agreement, in
connection with Ms. Barry's previous participation in a BetzDearborn executive
pension plan, she was entitled to and received a lump sum payment of $833,693
upon her retirement.
On June 30, 2001, Mr. MacKenzie retired from Hercules. In connection with
Mr. MacKenzie's retirement, he and Hercules entered into a separation agreement
pursuant to which he has received or will receive certain severance payments and
continuing benefits. Specifically, Mr. MacKenzie has received or will
58
receive, among other things, (i) a lump sum payment of $1,650,000 and (ii)
special pension benefits, including a special pension benefit derived by adding
five and a half years to his age and three years to his credited service which,
together with benefits earned under all Hercules pension plans, amounts to a
total lifetime benefit of $14,376 per month payable as a single life annuity and
a special pension benefit of $16,677 per year for ten years. In exchange for
such payments and benefits, Mr. MacKenzie covenanted not to sue Hercules and
agreed to release and forever discharge Hercules from any claims against
Hercules, other than claims relating to the validity or enforceability of the
separation agreement, claims for legally mandated benefits and vested benefits
under any qualified or non-qualified savings and pension plans or welfare plans
in which he may have participated or will continue to participate and any other
rights or claims that may arise after the date of execution the separation
agreement.
59
PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of September 30, 2001, with
respect to the beneficial ownership of Hercules common stock by (i) each of our
directors, (ii) each of those serving as Chief Executive Officer and our most
highly compensated executive officers for fiscal 2000, (iii) all of our current
directors and executive officers as a group and (iv) each beneficial owner of
more than 5% of the outstanding shares of our common stock.
This beneficial ownership is reported in accordance with the rules of the
SEC, under which a person may be deemed to be the beneficial owner of shares if
that person has or shares the power to vote or dispose of those shares or has
the right to acquire beneficial ownership of those shares within 60 days (for
example, through the exercise of an option). Accordingly, the shares shown in
the table as beneficially owned by certain individuals may include shares owned
by certain members of their respective families. Because of these rules, more
than one person may be deemed to be the beneficial owner of the same shares. The
inclusion of the shares shown in the table is not necessarily an admission of
beneficial ownership of those shares by the person indicated.
SHARES OPTIONS
BENEFICIALLY EXERCISABLE RESTRICTED PERCENT OF
NAME OWNED(1) WITHIN 60 DAYS STOCK UNITS SHARES(2)
---- ------------ -------------- ----------- ----------
DIRECTORS AND OFFICERS
W. H. Joyce, Chairman(3)........................ -- -- -- --
J. G. Drosdick, Director........................ 9,423 6,000 1,100 *
R. M. Fairbanks, III, Director.................. 15,545 21,000 1,253 *
I. J. Floyd, Officer............................ 65,211 103,000 -- *
S. J. Heyman, Director(4)....................... 10,719,200 -- -- 9.9 %
A. R. Hirsig, Director.......................... 6,554 6,000 1,100 *
E. E. Holiday, Director......................... 3,999 21,000 1,376 *
G. N. Kelley, Director(5)....................... 9,744 27,000 2,185 *
R. D. Kennedy, Director(5)...................... -- -- -- --
S. Kumar, Director.............................. -- -- -- --
J. M. Lipton, Director.......................... 10,000 -- -- *
P. McCausland, Director......................... 11,326 9,000 1,100 *
G. Schaffer, Director........................... 500 -- -- *
P. A. Sneed, Director........................... 11,925 18,000 1,253 *
R. S. Troubh, Director.......................... 7,500 -- -- *
J. B. Wyatt, Director........................... -- -- -- --
J. Barry(6)..................................... 34,187 38,000 -- *
V. J. Corbo(7).................................. 109,119 245,200 -- *
D. W. DiDonna................................... 44,199 266,900 -- *
T. L. Gossage(8)................................ 129,003 264,000 -- *
G. MacKenzie(9)................................. 82,761 252,820 -- *
H. J. Tucci(10)................................. 53,231 209,200 -- *
All Directors and Executive Officers as a
Group(11)..................................... 10,910,152 479,280 9,367 10.4 %
60
SHARES OPTIONS
BENEFICIALLY EXERCISABLE RESTRICTED PERCENT OF
NAME OWNED(1) WITHIN 60 DAYS STOCK UNITS SHARES(2)
---- ------------ -------------- ----------- ----------
5% STOCKHOLDERS
International Specialty Products, Inc.(12)...... 10,719,200 9.9 %
ISP Investments Inc.
ISP Opco Holdings Inc.
c/o ISP Management Company, Inc.
1361 Alps Road
Wayne, New Jersey 07670
T. Rowe Price Associates, Inc.(13).............. 7,198,428 6.6 %
100 E. Pratt Street
Baltimore, Maryland 21202
Mario J. Gabelli and related entities(14)....... 9,220,120 8.5 %
c/o Gabelli Asset Management Inc.
One Corporate Center
Rye, New York 10580
---------------
* Less than 1% of the outstanding shares of Hercules common stock.
(1) Includes shares, as of September 30, 2001, in the Savings and Investments
Plan as follows: E. V. Carrington, 195; R. G. Dahlen, 2,225; R. C. Flexon,
595; I. J. Floyd, 1,695; B. W. Jester, 1,376; S. C. Shears, 1,549; A. A.
Spizzo, 1,526; J. B. Barry, 2,630; D. W. DiDonna, 1,587; and G. MacKenzie,
3,733. Includes shares with restrictions and forfeiture risks as specified
under the Long-Term Incentive Compensation Plan as follows: R. C. Flexon,
5,000; I. J. Floyd, 44,553; B. W. Jester, 1,575; S. C. Shears, 4,000; A. A.
Spizzo, 1,055; J. B. Barry, 38,000; D. W. DiDonna, 38,000; and G.
MacKenzie, 81,652. Owners have the same voting and dividend rights as do
other stockholders of Hercules, except for the right to sell or transfer.
Included in the nonemployee directors' totals are one-time equity awards.
Mr. Kelley's total includes 1,594 shares that he holds jointly with his
spouse.
(2) Based on 108,602,426 shares outstanding on September 30, 2001.
(3) Named Chief Executive Officer on May 8, 2001 and Chairman on July 1, 2001.
(4) Includes 10,719,200 shares held indirectly through International Specialty
Products, Inc. ("ISP"). Mr. Heyman is the majority stockholder of ISP.
(5) On October 29, 2001, we announced the election of Mr. Kennedy to the Board
of Directors and the resignation of Mr. Kelley from the Board of Directors.
Mr. Kennedy's election and Mr. Kelley's resignation are effective October
31, 2001.
(6) Retired on June 30, 2001.
(7) Resigned on October 17, 2000.
(8) Retired on May 8, 2001.
(9) Retired on June 30, 2001.
(10) Retired on December 1, 2000.
(11) Consists of the following individuals: W. H. Joyce, F. G. Aanonsen, E. V.
Carrington, R. G. Dahlen, J. G. Drosdick, R. M. Fairbanks, III, R. C.
Flexon, I. J. Floyd, S. J. Heyman, A. R. Hirsig, E. E. Holiday, B. W.
Jester, G. N. Kelley, R. D. Kennedy, S. Kumar, J. M. Lipton, P. McCausland,
G. Schaffer, S. C. Shears, P. A. Sneed, A. A. Spizzo, R. S. Troubh and J.
B. Wyatt.
(12) Share holding as of September 30, 2001, as reported on Amendment No. 12 to
the Schedule 13D filed by such stockholder.
(13) Share holding as of September 30, 2001, as reported on Schedule 13G most
recently filed by such stockholder.
(14) Share holding as of September 30, 2001, as reported on Amendment No. 4 to
the Schedule 13D filed by such stockholder.
61
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
We are offering to exchange our new notes for a like aggregate principal
amount of our old notes.
The new notes that we propose to issue in this exchange offer will be
substantially identical to our old notes except that, unlike our old notes, the
new notes will not have certain transfer restrictions or registration rights.
See "Description of Notes."
We reserve the right in our sole discretion to purchase or make offers for
any old notes that remain outstanding following the expiration or termination of
this exchange offer and, to the extent permitted by applicable law, to purchase
old notes in the open market or privately negotiated transactions, one or more
additional tender or exchange offers or otherwise. The terms and prices of these
purchases or offers could differ significantly from the terms of this exchange
offer. In addition, nothing in this exchange offer will prevent us from
exercising our right to discharge our obligations on the old notes by depositing
certain securities with the trustee and otherwise.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
This exchange offer will expire at 5:00 p.m., New York City time, on
December 7, 2001, unless we extend it in our reasonable discretion. The
expiration date of this exchange offer will be at least 20 business days after
the commencement of the exchange offer in accordance with Rule 14e-1(a) under
the Securities Exchange Act of 1934.
We expressly reserve the right to delay acceptance of any old notes, extend
or terminate this exchange offer and not accept any old notes that we have not
previously accepted if any of the conditions described below under
"-- Conditions to the Exchange Offer" have not been satisfied or waived by us.
We will notify the exchange agent of any extension by oral notice promptly
confirmed in writing or by written notice. We will also notify the holders of
the old notes by mailing an announcement or by a press release or other public
announcement communicated before 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date, unless applicable
laws require us to do otherwise.
We also expressly reserve the right to amend the terms of this exchange
offer in any manner. If we make any material change, we will promptly disclose
this change in a manner reasonably calculated to inform the holders of our old
notes of the change, including making a public announcement or giving oral or
written notice to these holders. A material change in the terms of this exchange
offer could include a change in the timing of the exchange offer, a change in
the exchange agent and other similar changes in the terms of this exchange
offer. If we make any material change to this exchange offer, we will disclose
this change by means of a post-effective amendment to the registration statement
which includes this prospectus and will distribute an amended or supplemented
prospectus to each registered holder of old notes. In addition, we will extend
this exchange offer for an additional five to ten business days as required by
the Exchange Act or the rules promulgated thereunder, depending on the
significance of the amendment, if the exchange offer would otherwise expire
during that period. We will promptly notify the exchange agent by oral notice,
promptly confirmed in writing, or written notice of any delay in acceptance,
extension, termination or amendment of this exchange offer.
PROCEDURES FOR TENDERING OLD NOTES
Proper Execution and Delivery of Letters of Transmittal
To tender your old notes in this exchange offer, you must use ONE OF THE
THREE alternative procedures described below:
(1) Regular Delivery Procedure: Complete, sign and date the letter of
transmittal. Have the signatures on the letter of transmittal guaranteed if
required by the letter of transmittal. Mail or otherwise deliver the letter
of transmittal together with the certificates representing the old notes
being tendered
62
and any other required documents to the exchange agent on or before 5:00
p.m., New York City time, on the expiration date.
(2) Book-Entry Delivery Procedure: Send a timely confirmation of a
book-entry transfer of your old notes, if this procedure is available, into
the exchange agent's account at The Depository Trust Company ("DTC") in
accordance with the procedures for book-entry transfer on or before 5:00
p.m., New York City time, on the expiration date. See "-- Book-Entry
Delivery Procedure."
(3) Guaranteed Delivery Procedure: If time will not permit you to
complete your tender by using the procedures described in (1) or (2) above
before the expiration date and this procedure is available, comply with the
guaranteed delivery procedures. See "-- Guaranteed Delivery Procedure."
The method of delivery of the old notes, the letter of transmittal and all
other required documents is at your election and risk. Instead of regular mail,
we recommend that you use an overnight or hand-delivery service. If you choose
the mail, we recommend that you use registered or certified mail, properly
insured, with return receipt requested. IN ALL CASES, YOU SHOULD ALLOW
SUFFICIENT TIME TO ASSURE TIMELY DELIVERY. You should not send any letters of
transmittal or old notes to us. You must deliver all documents to the exchange
agent at the address provided below. You may also request your broker, dealer,
commercial bank, trust company or nominee to tender your old notes on your
behalf.
Only a holder of old notes may tender old notes in this exchange offer. A
holder is any person in whose name old notes are registered on our books or any
other person who has obtained a properly completed bond power from the
registered holder.
If you are the beneficial owner of old notes that are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
you wish to tender your old notes, you must contact that registered holder
promptly and instruct that registered holder to tender your old notes on your
behalf. If you wish to tender your old notes on your own behalf, you must,
before completing and executing the letter of transmittal and delivering your
old notes, either make appropriate arrangements to register the ownership of the
old notes in your name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership may take considerable
time.
You must have any signatures on a letter of transmittal or a notice of
withdrawal guaranteed by:
(1) a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc.;
(2) a commercial bank or trust company having an office or
correspondent in the United States; or
(3) an eligible guarantor institution within the meaning of Rule
17Ad-15 under the Exchange Act, unless the old notes are tendered:
(a) by a registered holder or by a DTC participant whose name
appears on a security position listing as the owner and who has not
completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the letter of transmittal and the new notes
are being issued directly to this registered holder or deposited into
this participant's account at DTC, or
(b) for the account of a member firm of a registered national
securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an eligible guarantor institution
within the meaning of Rule 17Ad-15 under the Exchange Act.
If the letter of transmittal or any bond powers are signed by:
(1) the recordholder(s) of the old notes tendered: the signature must
correspond with the name(s) written on the face of the old notes without
alteration, enlargement or any change whatsoever.
(2) a DTC participant: the signature must correspond with the name as
it appears on the security position listing as the holder of the old notes.
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(3) a person other than the registered holder of any old notes: these
old notes must be endorsed or accompanied by bond powers and a proxy that
authorize this person to tender the old notes on behalf of the registered
holder, in form satisfactory to us as determined in our sole discretion, in
each case, as the name of the registered holder or holders appears on the
old notes.
(4) trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity: these persons should so indicate when signing. Unless waived by
us, evidence satisfactory to us of their authority to so act must also be
submitted with the letter of transmittal.
Book-Entry Delivery Procedure
Any financial institution that is a DTC participant may make book-entry
deliveries of old notes by causing DTC to transfer these old notes into the
exchange agent's account at DTC in accordance with DTC's procedures for
transfer. To effectively tender notes through DTC, the financial institution
that is a DTC participant will electronically transmit its acceptance through
the Automatic Tender Offer Program. DTC will then edit and verify the acceptance
and send an agent's message to the exchange agent for its acceptance. An agent's
message is a message transmitted by DTC to the exchange agent stating that DTC
has received an express acknowledgment from the DTC participant tendering the
notes that this participant has received and agrees to be bound by the terms of
the letter of transmittal, and that we may enforce this agreement against this
participant. The exchange agent will make a request to establish an account for
the old notes at DTC for purposes of the exchange offer within two business days
after the date of this prospectus.
A delivery of old notes through a book-entry transfer into the exchange
agent's account at DTC will only be effective if an agent's message or the
letter of transmittal or a facsimile of the letter of transmittal with any
required signature guarantees and any other required documents is transmitted to
and received by the exchange agent at the address indicated below under
"-- Exchange Agent" on or before the expiration date unless the guaranteed
delivery procedures described below are complied with. DELIVERY OF DOCUMENTS TO
DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Guaranteed Delivery Procedure
If you are a registered holder of old notes and desire to tender your old
notes and (1) your old notes are not immediately available, (2) time will not
permit your old notes or other required documents to reach the exchange agent
before the expiration date or (3) the procedures for book-entry transfer,
including delivery of an agent's message, cannot be completed on a timely basis,
you may still tender in this exchange offer if:
(1) you tender through a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent
in the United States or an eligible guarantor institution within the
meaning of Rule 17Ad-15 under the Exchange Act,
(2) on or before the expiration date, the exchange agent receives a
properly completed and duly executed letter of transmittal or a facsimile
of the letter of transmittal, and a notice of guaranteed delivery,
substantially in the form provided by us, with your name and address as
holder of the old notes and the amount of old notes tendered, stating that
the tender is being made by that letter and notice and guaranteeing that,
within three New York Stock Exchange trading days after the expiration
date, the certificates for all of the old notes tendered, in proper form
for transfer, or a book-entry confirmation with an agent's message, as the
case may be, and any other documents required by the letter of transmittal
will be deposited by the eligible institution with the exchange agent, and
(3) the certificates for all of your tendered old notes in proper form
for transfer or a book-entry confirmation, as the case may be, and all
other documents required by the letter of transmittal are received by the
exchange agent within three New York Stock Exchange trading days after the
expiration date.
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ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Your tender of old notes will constitute an agreement between you and us
governed by the terms and conditions provided in this prospectus and in the
related letter of transmittal.
We will be deemed to have received your tender as of the date when your
duly signed letter of transmittal accompanied by your old notes tendered, a
timely confirmation of a book-entry transfer of the old notes into the exchange
agent's account at DTC with an agent's message or a notice of guaranteed
delivery from an eligible institution is received by the exchange agent.
All questions as to the validity, form and eligibility, including time of
receipt, acceptance and withdrawal of tenders, will be determined by us in our
sole discretion. Our determination will be final and binding.
We reserve the absolute right to reject any and all old notes not properly
tendered or any old notes which, if accepted, would, in our opinion or our
counsel's opinion, be unlawful. We also reserve the absolute right to waive any
conditions of this exchange offer or irregularities or defects in tender as to
particular old notes. Our interpretation of the terms and conditions of this
exchange offer, including the instructions in the letter of transmittal, will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of old notes must be cured within such time as we
shall determine. Neither we, the exchange agent nor any other person will be
under any duty to give notification of defects or irregularities with respect to
tenders of old notes. Neither we, the exchange agent nor any other person will
incur liability for any failure to give notification of these defects or
irregularities. Tenders of old notes will not be deemed to have been made until
such irregularities have been cured or waived. The exchange agent will return
without cost to their holders any old notes that are not properly tendered and
as to which the defects or irregularities have not been cured or waived as
promptly as practicable following the expiration date.
If all the conditions to the exchange offer are satisfied or waived on the
expiration date, we will accept all old notes properly tendered and will issue
the new notes promptly thereafter. See "-- Conditions to the Exchange Offer."
For purposes of this exchange offer, old notes will be deemed to have been
accepted as validly tendered for exchange when, as and if we give oral or
written notice of acceptance to the exchange agent.
We will issue the new notes in exchange for the old notes tendered pursuant
to a notice of guaranteed delivery by an eligible institution only against
delivery to the exchange agent of the letter of transmittal, the tendered old
notes and any other required documents, or the receipt by the exchange agent of
a timely confirmation of a book-entry transfer of old notes into the exchange
agent's account at DTC with an agent's message, in each case, in form
satisfactory to us and the exchange agent.
If any tendered old notes are not accepted for any reason provided by the
terms and conditions of this exchange offer or if old notes are submitted for a
greater principal amount than the holder desires to exchange, the unaccepted or
non-exchanged old notes will be returned without expense to the tendering
holder, or, in the case of old notes tendered by book-entry transfer procedures
described above, will be credited to an account maintained with the book-entry
transfer facility, as promptly as practicable after withdrawal, rejection of
tender or the expiration or termination of the exchange offer.
By tendering into this exchange offer, you will irrevocably appoint our
designees as your attorneys-in-fact and proxies with full power of substitution
and resubstitution to the full extent of your rights on the old notes tendered.
This proxy will be considered coupled with an interest in the tendered old
notes. This appointment will be effective only when and to the extent that we
accept your old notes in this exchange offer. All prior proxies on the old notes
will then be revoked and you will not be entitled to give any subsequent proxy.
Any proxy that you may give subsequently will not be deemed effective. Our
designees will be empowered to exercise all voting and other rights of the
holders as they may deem proper at any meeting of note holders or otherwise. The
old notes will be validly tendered only if we are able to exercise full voting
rights on the old notes, including voting at any meeting of the note holders,
and full rights to consent to any action taken by the note holders.
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WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw tenders
of old notes at any time before 5:00 p.m., New York City time, on the expiration
date.
For a withdrawal to be effective, you must send a written notice of
withdrawal to the exchange agent before 5:00 p.m., New York City time, on the
expiration date at the address provided below under "-- Exchange Agent" and
before acceptance of your tendered old notes for exchange by us.
Any notice of withdrawal must:
(1) specify the name of the person having tendered the old notes to be
withdrawn,
(2) identify the old notes to be withdrawn, including, if applicable,
the certificate number or numbers and total principal amount of the old
notes,
(3) be signed by the person having tendered the old notes to be
withdrawn in the same manner as the original signature on the letter of
transmittal by which these old notes were tendered, including any required
signature guarantees, or be accompanied by documents of transfer sufficient
to permit the trustee for the old notes to register the transfer of these
old notes into the name of the person withdrawing the tender,
(4) specify the name in which any of the old notes to be withdrawn are
to be registered, if this name is different from that of the person having
tendered such old notes, and
(5) if applicable because the old notes to be withdrawn have been
tendered through the book-entry procedure, specify the name and number of
the participant's account at DTC to be credited, if different than that of
the person having tendered such old notes.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of all notices of withdrawal and our determination
will be final and binding on all parties. Old notes that are withdrawn will be
deemed not to have been validly tendered for exchange in this exchange offer.
The exchange agent will return without cost to their holders all old notes
that have been tendered for exchange and are not exchanged for any reason, as
promptly as practicable after withdrawal, rejection of tender or expiration or
termination of this exchange offer.
You may retender properly withdrawn old notes in this exchange offer by
following one of the procedures described under "-- Procedures for Tendering Old
Notes" above at any time on or before the expiration date.
CONDITIONS TO THE EXCHANGE OFFER
We will complete this exchange offer only if:
(1) there is no action or proceeding instituted or threatened in any
court or before any governmental agency or body that in our judgment would
reasonably be expected to prohibit, prevent or otherwise impair our ability
to proceed with this exchange offer,
(2) there is no change in the laws and regulations which, in our
judgment, would reasonably be expected to impair our ability to proceed
with this exchange offer,
(3) there is no change in the current interpretation of the staff of
the SEC which permits resales of the new notes,
(4) there is no stop order issued by the SEC or any state securities
authority suspending the effectiveness of the registration statement which
includes this prospectus or the qualification of the indenture for our new
notes under the Trust Indenture Act of 1939 and there are no proceedings
initiated or, to our knowledge, threatened for that purpose, and
(5) we obtain all governmental approvals that we deem in our sole
discretion necessary to complete this exchange offer.
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These conditions are for our sole benefit. We may assert any one of these
conditions regardless of the circumstances giving rise to it and may also waive
any one of them, in whole or in part, at any time and from time to time, if we
determine in our reasonable discretion that it has not been satisfied, subject
to applicable law. We will not be deemed to have waived our rights to assert or
waive these conditions if we fail at any time to exercise any of them. Each of
these rights will be deemed an ongoing right which we may assert at any time and
from time to time.
If we determine that we may terminate this exchange offer because any of
these conditions is not satisfied, we may:
(1) refuse to accept and return to their holders any old notes that
have been tendered,
(2) extend the exchange offer and retain all notes tendered before the
expiration date, subject to the rights of the holders of the old notes to
withdraw their tenders, or
(3) waive any condition that has not been satisfied and accept all
properly tendered old notes that have not been withdrawn or otherwise amend
the terms of this exchange offer in any respect. See "-- Expiration Date;
Extensions; Amendments; Termination."
ACCOUNTING TREATMENT
We will record the new notes at the same carrying value as the old notes as
reflected in our accounting records on the date of the exchange. Accordingly, we
will not recognize any gain or loss for accounting purposes. We will amortize
the costs of the exchange offer and the unamortized expenses related to the
issuance of the new notes over the term of the new notes.
EXCHANGE AGENT
We have appointed Wells Fargo Bank Minnesota, N.A. as exchange agent for
this exchange offer. You should direct all questions and requests for assistance
on the procedures for tendering old notes and all requests for additional copies
of this prospectus or the letter of transmittal to the exchange agent as
follows:
By registered and certified mail:
Wells Fargo Bank Minnesota, N.A.
MAC #N9303-121
Corporate Trust Operations
P.O. Box 1517
Minneapolis, Minnesota 55480-1517
By regular mail or overnight delivery:
Wells Fargo Bank Minnesota, N.A.
MAC #N9303-121
Corporate Trust Operations
6th & Marquette Avenues
Minneapolis, Minnesota 55479
By hand:
Wells Fargo Bank Minnesota, N.A.
Corporate Trust Operations, 12th Floor
608 Second Avenue South
Minneapolis, Minnesota 55402
Facsimile:
(612) 667-4927
Telephone:
(800) 344-5128
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FEES AND EXPENSES
We will bear the expenses of soliciting tenders in this exchange offer,
including fees and expenses of the exchange agent and trustee and accounting,
legal, printing and related fees and expenses.
We will not make any payments to brokers, dealers or other persons
soliciting acceptances of this exchange offer. However, we will pay the exchange
agent reasonable and customary fees for its services and will reimburse the
exchange agent for its reasonable out-of-pocket expenses in connection with this
exchange offer. We will also pay brokerage houses and other custodians, nominees
and fiduciaries their reasonable out-of-pocket expenses for forwarding copies of
the prospectus, letters of transmittal and related documents to the beneficial
owners of the old notes and for handling or forwarding tenders for exchange to
their customers.
We will pay all transfer taxes, if any, applicable to the exchange of old
notes in accordance with this exchange offer. However, tendering holders will
pay the amount of any transfer taxes, whether imposed on the registered holder
or any other persons, if:
(1) certificates representing new notes or old notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or
are to be registered or issued in the name of, any person other than the
registered holder of the old notes tendered;
(2) tendered old notes are registered in the name of any person other
than the person signing the letter of transmittal; or
(3) a transfer tax is payable for any reason other than the exchange
of the old notes in this exchange offer.
If you do not submit satisfactory evidence of the payment of any of these
taxes or of any exemption from this payment with the letter of transmittal, we
will bill you directly for the amount of these transfer taxes.
YOUR FAILURE TO PARTICIPATE IN THE EXCHANGE OFFER WILL HAVE ADVERSE CONSEQUENCES
The old notes were not registered under the Securities Act or under the
securities laws of any state and you may not resell them, offer them for resale
or otherwise transfer them unless they are subsequently registered or resold
under an exemption from the registration requirements of the Securities Act and
applicable state securities laws. If you do not exchange your old notes for new
notes in accordance with this exchange offer, or if you do not properly tender
your old notes in this exchange offer, you will not be able to resell, offer to
resell or otherwise transfer the old notes unless they are registered under the
Securities Act or unless you resell them, offer to resell or otherwise transfer
them under an exemption from the registration requirements of, or in a
transaction not subject to, the Securities Act. In addition, you will not
necessarily be able to require us to register the old notes under the Securities
Act.
DELIVERY OF PROSPECTUS
Each broker-dealer that receives new notes for its own account in exchange
for old notes, where such old notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such new
notes. See "Plan of Distribution."
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DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions." In this description, the word
"Hercules" refers only to Hercules Incorporated and not to any of its
subsidiaries.
Hercules issued the old notes and will issue the new notes under an
indenture among itself, the Guarantors and Wells Fargo Bank Minnesota, N.A., as
trustee. The terms of the new notes are identical in all material respects to
the respective terms of the old notes except that (i) the new notes have been
registered under the Securities Act, and therefore will not be subject to
certain restrictions on transfer applicable to the old notes, and (ii) holders
of the new notes generally will not be entitled to certain rights, including the
payment of Liquidated Damages, pursuant to the registration rights agreement.
The terms of the new notes include those stated in the indenture and those made
part of the indenture by reference to the Trust Indenture Act of 1939. Any old
notes which remain outstanding after consummation of the exchange offer and the
new notes issued in the exchange offer will vote together as a single class for
purposes of determining whether holders of the requisite percentage of
outstanding principal amount thereof have taken certain actions or exercised
certain rights under the Indenture.
The following description is a summary of the material provisions of the
indenture and the registration rights agreement. It does not restate those
agreements in their entirety. We urge you to read the indenture and the
registration rights agreement themselves because they, and not this description,
define your rights as holders of the notes. Copies of the indenture and the
registration rights agreement are available as set forth below under
"-- Additional Information." Certain defined terms used in this description but
not defined below under "-- Certain Definitions" have the meanings assigned to
them in the indenture.
The registered Holder of a note will be treated as the owner of it for all
purposes. Only registered Holders will have rights under the indenture.
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES
The Notes
The notes will be:
- general unsecured obligations of Hercules;
- pari passu in right of payment with all existing and future unsecured
senior Indebtedness of Hercules;
- senior in right of payment to any future subordinated Indebtedness of
Hercules; and
- unconditionally guaranteed by the Guarantors.
However, the notes will be effectively subordinated to all borrowings under
the senior credit facility, which is secured by substantially all of the assets
of Hercules and the Guarantors. See "Risk Factors -- Risks Related to the
Notes -- Although the notes constitute senior indebtedness, they and the
guarantees thereof will be effectively subordinated to our and the guarantors'
secured obligations and the obligations of any of our non-guarantor
subsidiaries." All references to notes herein includes the old notes and the new
notes.
The Guarantees
The notes are guaranteed by all of Hercules' wholly-owned Domestic
Restricted Subsidiaries.
Each guarantee of the notes:
- is a general unsecured obligation of the Guarantor;
- is equal in right of payment to all existing and future senior
Indebtedness of that Guarantor, and
- is senior in right of payment with any future subordinated Indebtedness
of that Guarantor.
69
Not all of Hercules' subsidiaries have guaranteed the notes. In the event
of a bankruptcy, liquidation or reorganization of any of these non-guarantor
subsidiaries, the non-guarantor subsidiaries will pay the holders of their debt
and their trade creditors before they will be able to distribute any of their
assets to Hercules. The guarantees of the notes are unsecured and, therefore,
will be effectively subordinated to any secured debt of the Guarantors. See
"Risk Factors -- Risks Related to the Notes -- Although the notes constitute
senior indebtedness, they and the guarantees thereof will be effectively
subordinated to our and the guarantors' secured obligations and the obligations
of our non-guarantor subsidiaries."
As of the date of the indenture, essentially all of Hercules' domestic
subsidiaries were "Restricted Subsidiaries." However, under the circumstances
described below under the subheading "-- Certain Covenants -- Designation of
Restricted and Unrestricted Subsidiaries," Hercules will be permitted to
designate certain of its subsidiaries as "Unrestricted Subsidiaries." The
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants in the indenture. The Unrestricted Subsidiaries will not guarantee the
notes.
PRINCIPAL, MATURITY AND INTEREST
Hercules may issue notes with a maximum aggregate principal amount of $500
million, of which $400 million old notes were issued on November 14, 2000.
Hercules may issue additional notes from time to time after this exchange offer.
Any offering of additional notes is subject to the covenant described below
under the caption "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock." The notes and any additional notes subsequently
issued under the indenture will be treated as a single class for all purposes
under the indenture, including, without limitation, waivers, amendments,
redemptions and offers to purchase. Hercules will issue notes in denominations
of $1,000 and integral multiples of $1,000. The notes will mature on November
15, 2007.
Interest on the notes will accrue at the rate of 11.125% per annum and will
be payable semi-annually in arrears on May 15 and November 15, commencing on May
15, 2001. Hercules will make each interest payment to the Holders of record on
the immediately preceding May 1 and November 1.
Interest on the notes will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a Holder has given wire transfer instructions to Hercules, Hercules will
pay all principal, interest and premium and Liquidated Damages, if any, on that
Holder's notes in accordance with those instructions. All other payments on
notes will be made at the office or agency of the paying agent and registrar
within the City and State of New York unless Hercules elects to make interest
payments by check mailed to the Holders at their address set forth in the
register of Holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee will initially act as paying agent and registrar. Hercules may
change the paying agent or registrar without prior notice to the Holders of the
notes, and Hercules or any of its Subsidiaries may act as paying agent or
registrar.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a Holder to furnish appropriate
endorsements and transfer documents in connection with a transfer of notes.
Holders will be required to pay all taxes due on transfer. Hercules is not
required to transfer or exchange any note selected for redemption. Also,
Hercules is not required to transfer or exchange any note for a period of 15
days before a selection of notes to be redeemed.
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SUBSIDIARY GUARANTEES
The notes are guaranteed by each of Hercules' current and future
wholly-owned Domestic Restricted Subsidiaries. These Subsidiary Guarantees are
joint and several obligations of the Guarantors. The obligations of each
Guarantor under its Subsidiary Guarantee are limited as necessary to prevent
that Subsidiary Guarantee from constituting a fraudulent conveyance under
applicable law. See "Risk Factors -- Risks Related to the Notes -- The notes and
the guarantees are subject to the provisions of federal bankruptcy law and
comparable provisions of state law with respect to fraudulent conveyances."
A Guarantor may not sell or otherwise dispose of all or substantially all
of its assets to, or consolidate with or merge with or into (whether or not such
Guarantor is the surviving Person), another Person, other than Hercules or
another Guarantor, unless:
(1) immediately after giving effect to that transaction, no Default or
Event of Default exists; and
(2) either:
(a) the Person acquiring the property in any such sale or
disposition or the Person formed by or surviving any such consolidation
or merger assumes all the obligations of that Guarantor under the
indenture, its Subsidiary Guarantee and the registration rights
agreement pursuant to a supplemental indenture satisfactory to the
trustee; or
(b) the Net Proceeds of such sale or other disposition are applied
in accordance with the applicable provisions of the indenture.
The Subsidiary Guarantee of a Guarantor will be released:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of that Guarantor (including by way of
merger or consolidation) to a Person that is not (either before or after
giving effect to such transaction) a Subsidiary of Hercules, if the sale or
other disposition complies with the "Asset Sale" provisions of the
indenture;
(2) in connection with any sale of all of the Capital Stock of a
Guarantor to a Person that is not (either before or after giving effect to
such transaction) a Subsidiary of Hercules, if the sale complies with the
"Asset Sale" provisions of the indenture; or
(3) if Hercules designates any Restricted Subsidiary that is a
Guarantor as an Unrestricted Subsidiary in accordance with the applicable
provisions of the indenture.
See "-- Repurchase at the Option of Holders -- Asset Sales."
OPTIONAL REDEMPTION
At any time prior to November 15, 2003, Hercules may on any one or more
occasions redeem up to 35% of the aggregate principal amount of notes issued
under the indenture at a redemption price of 111.125% of the principal amount,
plus accrued and unpaid interest and Liquidated Damages, if any, to the
redemption date, with the net cash proceeds of one or more Public Equity
Offerings; provided that:
(1) at least 65% of the aggregate principal amount of notes issued
under the indenture remains outstanding immediately after the occurrence of
such redemption (excluding notes held by Hercules and its Subsidiaries);
and
(2) the redemption occurs within 45 days of the date of the closing of
such Public Equity Offering.
At any time prior to November 15, 2001, Hercules may also redeem all or a
part of the notes upon the occurrence of a Change of Control, upon not less than
30 nor more than 60 days prior notice (but in no event may any such redemption
occur more than 90 days after the occurrence of such Change of Control) mailed
by first-class mail to each Holder's registered address, at a redemption price
equal to 111.125% of the principal amount of notes redeemed plus accrued and
unpaid interest and Liquidated Damages, if any, to the date of redemption (the
"Redemption Date").
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Except pursuant to the preceding paragraphs, the notes will not be
redeemable at Hercules' option prior to maturity.
MANDATORY REDEMPTION
Hercules is not required to make mandatory redemption or sinking fund
payments with respect to the notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
If a Change of Control occurs, each Holder of notes will have the right to
require Hercules to repurchase all or any part (equal to $1,000 or an integral
multiple of $1,000) of that Holder's notes pursuant to a Change of Control Offer
on the terms set forth in the indenture. In the Change of Control Offer,
Hercules will offer a Change of Control Payment in cash equal to (i) 111.125% of
the aggregate principal amount of notes repurchased if such Change of Control is
prior to November 15, 2001 and (ii) 101% of the aggregate principal amount of
notes repurchased if such Change of Control is on or after November 15, 2001
plus, in each case, accrued and unpaid interest and Liquidated Damages, if any,
on the notes repurchased, to the date of purchase. Within ten days following any
Change of Control, Hercules will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase notes on the Change of Control Payment Date specified in the
notice, which date will be no earlier than 30 days and no later than 60 days
from the date such notice is mailed, pursuant to the procedures required by the
indenture and described in such notice. Hercules will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent those laws and regulations are
applicable in connection with the repurchase of the notes as a result of a
Change of Control. To the extent that the provisions of any securities laws or
regulations conflict with the Change of Control provisions of the indenture,
Hercules will comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under the Change of Control
provisions of the indenture by virtue of such conflict.
On the Change of Control Payment Date, Hercules will, to the extent lawful:
(1) accept for payment all notes or portions of notes properly
tendered pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all notes or portions of notes properly
tendered; and
(3) deliver or cause to be delivered to the trustee the notes properly
accepted together with an officers' certificate stating the aggregate
principal amount of notes or portions of notes being purchased by Hercules.
The paying agent will promptly mail to each Holder of notes properly
tendered the Change of Control Payment for such notes, and the trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new note equal in principal amount to any unpurchased portion of
the notes surrendered, if any; provided that each new note will be in a
principal amount of $1,000 or an integral multiple of $1,000.
Hercules will publicly announce the results of the Change of Control Offer
on or as soon as practicable after the Change of Control Payment Date.
The provisions described above that require Hercules to make a Change of
Control Offer following a Change of Control will be applicable whether or not
any other provisions of the indenture are applicable. Except as described above
with respect to a Change of Control, the indenture does not contain provisions
that permit the Holders of the notes to require that Hercules repurchase or
redeem the notes in the event of a takeover, recapitalization or similar
transaction.
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Hercules will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the indenture applicable to a Change of Control Offer made by Hercules and
purchases all notes properly tendered and not withdrawn under the Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the
direct or indirect sale, lease, transfer, conveyance or other disposition of
"all or substantially all" of the properties or assets of Hercules and its
Subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
Holder of notes to require Hercules to repurchase its notes as a result of a
sale, lease, transfer, conveyance or other disposition of less than all of the
assets of Hercules and its Subsidiaries taken as a whole to another Person or
group may be uncertain.
Asset Sales
Hercules will not, and will not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless:
(1) Hercules (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of the Asset Sale at least equal to the
fair market value of the assets or Equity Interests issued or sold or
otherwise disposed of;
(2) the fair market value is determined by (i) in the case of property
valued at less than $5.0 million, Hercules' principal financial or
accounting officer and evidenced by an Officers' Certificate delivered to
the trustee and (ii) in the case of property valued at $5.0 million or
more, Hercules' Board of Directors and evidenced by a resolution of the
Board of Directors set forth in an officers' certificate delivered to the
trustee; and
(3) at least 75% of the consideration received in the Asset Sale by
Hercules or such Restricted Subsidiary is in the form of cash. For purposes
of this provision, each of the following will be deemed to be cash:
(a) any liabilities, as shown on Hercules' or such Restricted
Subsidiary's most recent balance sheet, of Hercules or any Restricted
Subsidiary (other than contingent liabilities and liabilities that are
by their terms subordinated to the notes or any Subsidiary Guarantee)
that are assumed by the transferee of any such assets pursuant to a
customary novation or an assignment agreement that releases Hercules or
such Restricted Subsidiary from further liability; and
(b) any securities, notes or other obligations received by Hercules
or any such Restricted Subsidiary from such transferee that are
contemporaneously, subject to ordinary settlement periods, converted by
Hercules or such Restricted Subsidiary into cash, to the extent of the
cash received in that conversion.
Notwithstanding the foregoing, Hercules and its Restricted Subsidiaries may
engage in Asset Swaps; provided that, (1) immediately after giving effect to
such Asset Swap, Hercules would be permitted to incur at least $1.00 of
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described below under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock" and (2)
Hercules' or the Restricted Subsidiary's Board of Directors, as the case may be,
determines that such Asset Swap is fair to Hercules or such Restricted
Subsidiary, as the case may be, from a financial point of view and such
determination is (A) in the case of Asset Swaps valued at less than $5.0
million, Hercules' principal financial or accounting officer and evidenced by an
Officers' Certificate delivered to the trustee, (B) for Asset Swaps valued at
$5.0 million or more but less than $10.0 million, evidenced by a resolution of
such Board of Directors set forth in an Officer's Certificate delivered to the
Trustee and (C) for Asset Swaps valued at $10.0 million or more, evidenced by an
opinion or appraisal issued by an accounting, appraisal or investment banking
firm of national standing.
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Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
Hercules may apply those Net Proceeds:
(1) to repay Indebtedness and/or other Obligations under a Credit
Facility and, if the Indebtedness repaid is revolving credit Indebtedness,
to correspondingly reduce commitments with respect thereto;
(2) to acquire all or substantially all of the assets of, or a
majority of the Voting Stock of, another Permitted Business; or
(3) to acquire or obtain other long-term assets that are used or
useful in a Permitted Business.
Pending the final application of any Net Proceeds, Hercules may temporarily
reduce revolving credit borrowings or otherwise invest the Net Proceeds in any
manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $10.0 million, Hercules will make an
Asset Sale Offer to all Holders of notes and all holders of other Indebtedness
that is pari passu with the notes containing provisions similar to those set
forth in the indenture with respect to offers to purchase or redeem with the
proceeds of sales of assets to purchase the maximum principal amount of notes
and such other pari passu Indebtedness that may be purchased out of the Excess
Proceeds. The offer price in any Asset Sale Offer will be equal to 100% of
principal amount plus accrued and unpaid interest and Liquidated Damages, if
any, to the date of purchase, and will be payable in cash. If any Excess
Proceeds remain after consummation of an Asset Sale Offer, Hercules may use
those Excess Proceeds for any purpose not otherwise prohibited by the indenture.
If the aggregate principal amount of notes and other pari passu Indebtedness
tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds, the
trustee will select the notes and such other pari passu Indebtedness to be
purchased on a pro rata basis. Upon completion of each Asset Sale Offer, the
amount of Excess Proceeds will be reset at zero.
Hercules will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent those
laws and regulations are applicable in connection with each repurchase of notes
pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sale provisions of the
indenture, Hercules will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
Asset Sale provisions of the indenture by virtue of such conflict.
The agreements governing Hercules' other Indebtedness contain prohibitions
of certain events, including events that would constitute a Change of Control or
an Asset Sale. In addition, the exercise by the Holders of notes of their right
to require Hercules to repurchase the notes upon a Change of Control or an Asset
Sale could cause a default under these other agreements, even if the Change of
Control or Asset Sale itself does not, due to the financial effect of such
repurchases on Hercules. Finally, Hercules' ability to pay cash to the Holders
of notes upon a repurchase may be limited by Hercules' then existing financial
resources. See "Risk Factors -- Risks Related to the Notes -- We may not have
the ability to raise the funds necessary to finance the Change of Control offer
required by the indenture governing the notes or to repay indebtedness as a
result of the Change of Control, which may prevent us from entering into certain
business combinations."
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed on any national securities exchange, in
compliance with the requirements of the principal national securities
exchange on which the notes are listed; or
(2) if the notes are not listed on any national securities exchange,
on a pro rata basis.
No notes of $1,000 or less can be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of notes to be redeemed at its registered
address, except that redemption notices may be mailed more than 60 days prior to
a
74
redemption date if the notice is issued in connection with a defeasance of the
notes or a satisfaction and discharge of the indenture. Notices of redemption
may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount of that note
that is to be redeemed. A new note in principal amount equal to the unredeemed
portion of the original note will be issued in the name of the Holder of notes
upon cancellation of the original note. Notes called for redemption become due
on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on notes or portions of them called for redemption.
CERTAIN COVENANTS
Restricted Payments
Hercules will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of Hercules' or any of its Restricted Subsidiaries'
Equity Interests (including, without limitation, any payment in connection
with any merger or consolidation involving Hercules or any of its
Restricted Subsidiaries) or to the direct or indirect holders of Hercules'
or any of its Restricted Subsidiaries' Equity Interests in their capacity
as such (other than dividends or distributions payable in Equity Interests
(other than Disqualified Stock) of Hercules or to Hercules or a Restricted
Subsidiary of Hercules);
(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving Hercules) any Equity Interests of Hercules or any
direct or indirect parent of Hercules;
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value, any Indebtedness that is
subordinated to the notes or the Subsidiary Guarantees, except a payment of
interest or principal at the Stated Maturity thereof; or
(4) make any Restricted Investment (all such payments and other
actions set forth in these clauses (1) through (4) above being collectively
referred to as "Restricted Payments"), unless, at the time of and after
giving effect to such Restricted Payment:
(a) no Default or Event of Default has occurred and is continuing
or would occur as a consequence of such Restricted Payment; and
(b) Hercules would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have
been permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described below under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of
all other Restricted Payments made by Hercules and its Restricted
Subsidiaries after the date of the indenture (excluding Restricted
Payments permitted by clauses (2), (3) and (4) of the next succeeding
paragraph), is less than the sum, without duplication, of:
(i) 50% of the Consolidated Net Income of Hercules for the
period (taken as one accounting period) from the beginning of the
first fiscal quarter commencing after the date of the indenture to
the end of Hercules' most recently ended fiscal quarter for which
internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such
period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate Qualified Proceeds received by
Hercules since the date of the indenture as a contribution to its
common equity capital or from the issue or sale of Equity Interests
of Hercules (other than Disqualified Stock) or from the issue or sale
of convertible or exchangeable Disqualified Stock or convertible or
exchangeable debt securities of Hercules that
75
have been converted into or exchanged for such Equity Interests
(other than Equity Interests (or Disqualified Stock or debt
securities) sold to a Subsidiary of Hercules), plus
(iii) to the extent that any Restricted Investment that was made
after the date of the indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (x) the cash return of
capital with respect to such Restricted Investment (less the cost of
disposition, if any) and (y) the initial amount of such Restricted
Investment.
So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of the dividend, if at the date of declaration the dividend
payment would have complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness of Hercules or any Guarantor
or of any Equity Interests of Hercules in exchange for, or out of the net
cash proceeds of the substantially concurrent sale (other than to a
Restricted Subsidiary of Hercules) of, Equity Interests of Hercules (other
than Disqualified Stock); provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement,
defeasance or other acquisition will be excluded from clause (4)(c)(ii) of
the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of Hercules or any Guarantor with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of Hercules
to the holders of its Equity Interests on a pro rata basis;
(5) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of Hercules or any Restricted Subsidiary of
Hercules held by any member of Hercules' (or any of its Restricted
Subsidiaries') management pursuant to any management equity subscription
agreement, stock option agreement, employee benefit plan or similar
agreement; provided that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests may not exceed $10.0 million
in any twelve-month period; and
(6) other Restricted Payments in an aggregate amount not to exceed
$100.0 million.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by Hercules or such Restricted Subsidiary,
as the case may be, pursuant to the Restricted Payment. The fair market value of
any assets or securities that are required to be valued by this covenant and
have a fair market value that exceeds (i) $5.0 million will be evidenced by a
certificate issued by the chief executive officer, chief financial officer or
general counsel and will be delivered to the trustee or (ii) $20.0 million will
be approved by a majority of disinterested members of the Board of Directors
whose resolution with respect thereto will be delivered to the trustee. The
approval by a majority of disinterested members of the Board of Directors' must
be based upon an opinion or appraisal issued by an accounting, appraisal or
investment banking firm of national standing. A copy of any fairness opinion or
appraisal required by the indenture, together with the resolution of the Board
of Directors, must be delivered to the trustee no later than the date of making
any Restricted Payment.
Incurrence of Indebtedness and Issuance of Preferred Stock
Hercules will not, and will not permit any of its Subsidiaries to, directly
or indirectly, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), and Hercules
will not issue any Disqualified Stock and will not permit any of its
Subsidiaries to issue any shares of preferred stock; provided, however, that
Hercules may incur Indebtedness (including Acquired Debt) or issue Disqualified
Stock, and the Guarantors may incur Indebtedness or issue preferred stock, if
the Fixed Charge Coverage Ratio for Hercules' most recently ended four full
fiscal quarters for which internal financial statements are available
76
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock or preferred stock is issued would have been at least
2.0 to 1 for any incurrence on or prior to November 15, 2002 and 2.5 to 1 any
time thereafter, in each case, determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred or the preferred stock or Disqualified Stock had
been issued, as the case may be, at the beginning of such four-quarter period.
The first paragraph of this covenant will not prohibit the incurrence of
any of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by Hercules and any of its Subsidiaries of
additional Indebtedness and letters of credit under Credit Facilities in an
aggregate principal amount at any one time outstanding under this clause
(1) (with letters of credit being deemed to have a principal amount equal
to the maximum potential liability of Hercules and its Subsidiaries
thereunder) not to exceed the greater of (i) $2.2 billion and (ii) the
Borrowing Base less the aggregate amount of all repayments, optional or
mandatory, of the principal of any term Indebtedness under a Credit
Facility that have been made by Hercules or any of its Subsidiaries since
the date of the indenture and less the aggregate amount of all commitment
reductions with respect to any revolving credit borrowings under a Credit
Facility that have been made by Hercules or any of its Subsidiaries since
the date of the indenture;
(2) the incurrence by Hercules and its Subsidiaries of the Existing
Indebtedness;
(3) the incurrence by Hercules and the Guarantors of Indebtedness
represented by the notes and the related Subsidiary Guarantees to be issued
on the date of the indenture and the new notes and the related Subsidiary
Guarantees to be issued pursuant to the registration rights agreement;
(4) the incurrence by Hercules or any of its Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case, incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of
Hercules or such Subsidiary or in a Permitted Business, in an aggregate
principal amount, including all Permitted Refinancing Indebtedness incurred
to refund, refinance or replace any Indebtedness incurred pursuant to this
clause (4), not to exceed $25.0 million at any time outstanding;
(5) the incurrence by Hercules or any of its Subsidiaries of Permitted
Refinancing Indebtedness in exchange for, or the net proceeds of which are
used to refund, refinance or replace Indebtedness (other than intercompany
Indebtedness) that was permitted by the indenture to be incurred under the
first paragraph of this covenant or clauses (2), (3), (4), (5), (10) or
(12) of this paragraph;
(6) the incurrence by Hercules or any of its Subsidiaries of
intercompany Indebtedness between or among Hercules and any of its
Restricted Subsidiaries; provided, however, that:
(a) if Hercules or any Guarantor is the obligor on such
Indebtedness, such Indebtedness must be expressly subordinated to the
prior payment in full in cash of all Obligations with respect to the
notes, in the case of Hercules, or the Subsidiary Guarantee, in the case
of a Guarantor; and
(b) (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than
Hercules or a Subsidiary of Hercules and (ii) any sale or other transfer
of any such Indebtedness to a Person that is not either Hercules or a
Restricted Subsidiary of Hercules will be deemed, in each case, to
constitute an incurrence of such Indebtedness by Hercules or such
Subsidiary, as the case may be, that was not permitted by this clause
(6);
(7) the incurrence by Hercules or any of its Subsidiaries of Hedging
Obligations that are incurred for the purpose of fixing or hedging interest
rate risk with respect to any floating rate Indebtedness that is permitted
by the terms of the indenture to be outstanding;
77
(8) the guarantee by Hercules or any of the Guarantors of Indebtedness
of Hercules or a Subsidiary of Hercules that was permitted to be incurred
by another provision of this covenant;
(9) the accrual of interest, the accretion or amortization of original
issue discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of dividends
on Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock will not be deemed to be an incurrence of Indebtedness
or an issuance of Disqualified Stock for purposes of this covenant;
provided, in each such case, that the amount thereof is included in Fixed
Charges of Hercules as accrued;
(10) the incurrence by Hercules' Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event will be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of Hercules that was not permitted by this clause (10);
(11) Indebtedness in respect of performance and surety bonds,
terminable guarantees and completion guarantees or other similar forms of
Indebtedness provided by Hercules or a Restricted Subsidiary in the
ordinary course of business; and
(12) the incurrence by Hercules or any of its Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (12), not to exceed $100.0
million.
Hercules will not incur any Indebtedness (including Permitted Debt) that is
contractually subordinated in right of payment to any other Indebtedness of
Hercules unless such Indebtedness is also contractually subordinated in right of
payment to the notes on substantially identical terms; provided, however, that
no Indebtedness of Hercules will be deemed to be contractually subordinated in
right of payment to any other Indebtedness of Hercules solely by virtue of being
unsecured.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (12) above, or is
entitled to be incurred pursuant to the first paragraph of this covenant,
Hercules will be permitted to classify such item of Indebtedness on the date of
its incurrence, or later reclassify all or a portion of such item of
Indebtedness, in any manner that complies with this covenant. Indebtedness under
Credit Facilities outstanding on the date on which notes are first issued and
authenticated under the indenture will be deemed to have been incurred on such
date in reliance on the exception provided by clause (1) of the definition of
Permitted Debt.
Liens
Hercules will not, and will not permit any of its Subsidiaries to, directly
or indirectly, create, incur, assume or suffer to exist any Lien of any kind
securing Indebtedness, Attributable Debt or trade payables on any asset now
owned or hereafter acquired, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
Hercules will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock
to Hercules or any of its Restricted Subsidiaries, or with respect to any
other interest or participation in, or measured by, its profits, or pay any
indebtedness owed to Hercules or any of its Restricted Subsidiaries;
(2) make loans or advances to Hercules or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to Hercules or any of its
Restricted Subsidiaries.
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However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) agreements governing Existing Indebtedness and Credit Facilities
as in effect on the date of the indenture and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings of those agreements, provided that the
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacement or refinancings are no more restrictive, taken as a
whole, with respect to such dividend and other payment restrictions than
those contained in those agreements on the date of the indenture;
(2) the indenture, the notes and the Subsidiary Guarantees;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by Hercules or any of its Restricted Subsidiaries as in effect at
the time of such acquisition (except to the extent such Indebtedness or
Capital Stock was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired, provided that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of the
indenture to be incurred;
(5) customary non-assignment provisions in leases entered into in the
ordinary course of business;
(6) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on that property of the nature
described in clause (3) of the preceding paragraph;
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by that Restricted Subsidiary
pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
(9) Liens securing Indebtedness otherwise permitted to be incurred
under the provisions of the covenant described above under the caption
"-- Liens" that limit the right of the debtor to dispose of the assets
subject to such Liens;
(10) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements, assets sale agreements,
stock sale agreements and other similar agreements entered into in the
ordinary course of business; and
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business.
Merger, Consolidation or Sale of Assets
Hercules may not, directly or indirectly: (1) consolidate or merge with or
into another Person (whether or not Hercules is the surviving corporation); or
(2) sell, assign, transfer, convey or otherwise dispose of all or substantially
all of the properties or assets of Hercules and its Restricted Subsidiaries
taken as a whole, in one or more related transactions, to another Person;
unless:
(1) either: (a) Hercules is the surviving corporation; or (b) the
Person formed by or surviving any such consolidation or merger (if other
than Hercules) or to which such sale, assignment, transfer, conveyance or
other disposition has been made is a corporation organized or existing
under the laws of the United States, any state of the United States or the
District of Columbia;
(2) the Person formed by or surviving any such consolidation or merger
(if other than Hercules) or the Person to which such sale, assignment,
transfer, conveyance or other disposition has been made assumes all the
obligations of Hercules under the notes, the indenture and the registration
rights agreement pursuant to agreements reasonably satisfactory to the
trustee;
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(3) immediately after such transaction no Default or Event of Default
exists; and
(4) Hercules or the Person formed by or surviving any such
consolidation or merger (if other than Hercules), or to which such sale,
assignment, transfer, conveyance or other disposition has been made:
(a) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of
Hercules immediately preceding the transaction; and
(b) will, on the date of such transaction after giving pro forma
effect thereto and any related financing transactions as if the same had
occurred at the beginning of the applicable four quarter period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described above under the caption "-- Incurrence of
Indebtedness and Issuance of Preferred Stock."
In addition, Hercules may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among Hercules and any of its Wholly
Owned Restricted Subsidiaries which are Guarantors.
Transactions with Affiliates
Hercules will not, and will not permit any of its Restricted Subsidiaries
to, make any payment to, or sell, lease, transfer or otherwise dispose of any of
its properties or assets to, or purchase any property or assets from, or enter
into or make or amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each, an
"Affiliate Transaction"), unless:
(1) the Affiliate Transaction is on terms that are no less favorable
to Hercules or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction by Hercules or such
Restricted Subsidiary with an unrelated Person; and
(2) Hercules delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, a certificate issued by the chief executive officer, chief
financial officer or general counsel certifying that such Affiliate
Transaction complies with this covenant; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$25.0 million, a resolution by the Board of Directors, that is approved
by a majority of disinterested members, accompanied by an opinion issued
by an accounting, appraisal or investment banking firm of national
standing, as to the fairness to the Holders of such Affiliate
Transaction from a financial point of view.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement entered into by Hercules or any of its
Restricted Subsidiaries in the ordinary course of business;
(2) transactions between or among Hercules and/or its Restricted
Subsidiaries;
(3) transactions with a Person that is an Affiliate of Hercules solely
because Hercules owns an Equity Interest in, or controls, such Person;
(4) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of Hercules;
(5) sales of Equity Interests (other than Disqualified Stock) to
Affiliates of Hercules; and
(6) Restricted Payments that are permitted by the provisions of the
indenture described above under the caption "-- Restricted Payments."
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Additional Subsidiary Guarantees
If Hercules or any of its Subsidiaries acquires or creates another
wholly-owned Restricted Domestic Subsidiary after the date of the indenture,
then that newly acquired or created Domestic Subsidiary will become a Guarantor
and execute a supplemental indenture and deliver an opinion of counsel
satisfactory to the trustee within 15 Business Days of the date on which it was
acquired or created; provided, however, that this covenant shall not apply to
any Subsidiary that has properly been designated as an Unrestricted Subsidiary
in accordance with the indenture for so long as it continues to constitute an
Unrestricted Subsidiary.
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate
fair market value of all outstanding Investments owned by Hercules and its
Restricted Subsidiaries in the Subsidiary properly designated will be deemed to
be an Investment made as of the time of the designation and will reduce the
amount available for Restricted Payments under the first paragraph of the
covenant described above under the caption "-- Restricted Payments" or Permitted
Investments, as determined by Hercules. That designation will only be permitted
if the Investment would be permitted at that time and if the Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The
Board of Directors may redesignate any Unrestricted Subsidiary to be a
Restricted Subsidiary if the redesignation would not cause a Default.
Sale and Leaseback Transactions
Hercules will not, and will not permit any of its Restricted Subsidiaries
to, enter into any sale and leaseback transaction; provided that Hercules or any
Guarantor may enter into a sale and leaseback transaction if:
(1) Hercules or that Guarantor, as applicable, could have (a) incurred
Indebtedness in an amount equal to the Attributable Debt relating to such
sale and leaseback transaction under the Fixed Charge Coverage Ratio test
in the first paragraph of the covenant described above under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock" and (b)
incurred a Lien to secure such Indebtedness pursuant to the covenant
described above under the caption "-- Liens";
(2) the gross cash proceeds of that sale and leaseback transaction are
at least equal to the fair market value of the property that is the subject
of that sale and leaseback transaction, as determined in good faith by, (i)
in the case of property valued at less than $5.0 million, Hercules'
principal financial or accounting officer and evidenced by an Officers'
Certificate delivered to the trustee and (ii) in the case of property
valued at $5.0 million or more, the Board of Directors and set forth in an
officers' certificate delivered to the trustee; and
(3) the transfer of assets in that sale and leaseback transaction is
permitted by, and Hercules applies the proceeds of such transaction in
compliance with, the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales."
Business Activities
Hercules will not, and will not permit any Restricted Subsidiary to, engage
in any business other than Permitted Businesses, except to such extent as would
not be material to Hercules and its Restricted Subsidiaries taken as a whole.
Payments for Consent
Hercules will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, pay or cause to be paid any consideration to or for
the benefit of any Holder of notes for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the indenture or the
notes unless such
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consideration is offered to be paid and is paid to all Holders of the notes that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
REPORTS
Whether or not required by the SEC, so long as any notes are outstanding,
Hercules will furnish to the Holders of notes, within the time periods specified
in the SEC's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms 10-Q and 10-K
(including exhibits thereto) if Hercules were required to file such Forms,
including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information
only, a report on the annual financial statements by Hercules' certified
independent accountants; and
(2) all current reports that would be required to be filed with the
SEC on Form 8-K if Hercules were required to file such reports.
If Hercules has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph will include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," of the financial condition and results of operations of Hercules
and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of Hercules.
In addition, following the consummation of the exchange offer contemplated
by the registration rights agreement, whether or not required by the SEC,
Hercules will file a copy of all of the information and reports referred to in
clauses (1) and (2) above with the SEC for public availability within the time
periods specified in the SEC's rules and regulations (unless the SEC will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request. In addition, Hercules and the Subsidiary
Guarantors have agreed that, for so long as any notes remain outstanding, they
will furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the notes;
(2) default in payment when due of the principal of, or premium, if
any, on the notes;
(3) failure by (i) Hercules or any of its Subsidiaries to comply with
the provisions described under the captions "-- Repurchase at the Option of
Holders -- Change of Control," "-- Repurchase at the Option of
Holders -- Asset Sales," "-- Certain Covenants -- Restricted Payments,"
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock" or "-- Certain Covenants -- Merger, Consolidation or Sale
of Assets;" or (ii) any of Hercules' wholly owned Domestic Restricted
Subsidiaries to provide a Subsidiary Guarantee of the notes by February 15,
2001.
(4) failure by Hercules or any of its Subsidiaries for 60 days after
notice to comply with any of the other agreements in the indenture;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Hercules or any of its
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Subsidiaries (or the payment of which is guaranteed by Hercules or any of
its Subsidiaries) whether such Indebtedness or guarantee now exists, or is
created after the date of the indenture, if that default:
(a) is caused by a failure to pay when due (including any grace
period set forth in writing in the instruments governing such
Indebtedness) principal of, or interest or premium, if any, on such
Indebtedness (a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
express maturity, and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $50.0 million or
more;
(6) failure by Hercules or any of its Subsidiaries to pay final
judgments aggregating in excess of $50.0 million, which judgments are not
paid, discharged or stayed for a period of 60 days; and
(7) except as permitted by the indenture, any Subsidiary Guarantee
shall be held in any judicial proceeding to be unenforceable or invalid or
shall cease for any reason to be in full force and effect or any Guarantor,
or any Person acting on behalf of any Guarantor, shall deny or disaffirm
its obligations under its Subsidiary Guarantee; and
(8) certain events of bankruptcy or insolvency described in the
indenture with respect to Hercules or any of its Subsidiaries.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to Hercules, any Subsidiary that is a
Significant Subsidiary or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding notes will become due and
payable immediately without further action or notice. If any other Event of
Default occurs and is continuing, the trustee or the Holders of at least 25% in
principal amount of the then outstanding notes may declare all the notes to be
due and payable immediately.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from Holders of the
notes notice of any continuing Default or Event of Default if it determines that
withholding notice is in their interest, except a Default or Event of Default
relating to the payment of principal or interest or Liquidated Damages.
The Holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the Holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
interest or Liquidated Damages on, or the principal of, the notes.
Hercules is required to deliver to the trustee annually a statement
regarding compliance with the indenture. Upon becoming aware of any Default or
Event of Default, Hercules is required to deliver to the trustee a statement
specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of Hercules or
any Guarantor, as such, will have any liability for any obligations of Hercules
or the Guarantors under the notes, the indenture, the Subsidiary Guarantees or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder of notes by accepting a note waives and releases all
such liability. The waiver and release are part of the consideration for
issuance of the notes. The waiver may not be effective to waive liabilities
under the federal securities laws.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Hercules may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes and all obligations
of the Guarantors discharged with respect to their Subsidiary Guarantees ("Legal
Defeasance") except for:
(1) the rights of Holders of outstanding notes to receive payments in
respect of the principal of, or interest or premium and Liquidated Damages,
if any, on such notes when such payments are due from the trust referred to
below;
(2) Hercules' obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or
stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee,
and Hercules' and the Guarantor's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, Hercules may, at its option and at any time, elect to have the
obligations of Hercules and the Guarantors released with respect to certain
covenants that are described in the indenture ("Covenant Defeasance") and
thereafter any omission to comply with those covenants will not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "-- Events
of Default and Remedies" will no longer constitute Events of Default with
respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Hercules must irrevocably deposit with the trustee, in trust, for
the benefit of the Holders of the notes, cash in U.S. dollars, non-callable
Government Securities, or a combination of cash in U.S. dollars and
non-callable Government Securities, in amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, or interest and premium and
Liquidated Damages, if any, on, the outstanding notes on the stated
maturity or on the applicable redemption date, as the case may be, and
Hercules must specify whether the notes are being defeased to maturity or
to a particular redemption date;
(2) in the case of Legal Defeasance, Hercules has delivered to the
trustee an opinion of counsel reasonably acceptable to the trustee
confirming that (a) Hercules has received from, or there has been published
by, the Internal Revenue Service a ruling or (b) since the date of the
indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel will confirm that, the Holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Hercules has delivered to the
trustee an opinion of counsel reasonably acceptable to the trustee
confirming that the Holders of the outstanding notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default has occurred and is continuing on
the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit);
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under, any material
agreement or instrument (other than the indenture) to which Hercules or any
of its Subsidiaries is a party or by which Hercules or any of its
Subsidiaries is bound;
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(6) Hercules must deliver to the trustee an officers' certificate
stating that the deposit was not made by Hercules with the intent of
preferring the Holders of notes over the other creditors of Hercules with
the intent of defeating, hindering, delaying or defrauding creditors of
Hercules or others; and
(7) Hercules must deliver to the trustee an officers' certificate and
an opinion of counsel, each stating that all conditions precedent relating
to the Legal Defeasance or the Covenant Defeasance have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next three succeeding paragraphs, the indenture
or the notes may be amended or supplemented with the consent of the Holders of
at least a majority in principal amount of the notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, notes), and any existing default or
compliance with any provision of the indenture or the notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting Holder):
(1) reduce the principal amount of notes whose Holders must consent to
an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note
or alter the provisions with respect to the redemption of the notes (other
than provisions relating to the covenants described above under the caption
"-- Repurchase at the Option of Holders");
(3) reduce the rate of or change the scheduled time for payment of
interest on any note;
(4) waive a Default or Event of Default in the payment of principal
of, or interest or premium, or Liquidated Damages, if any, on, the notes
(except a rescission of acceleration of the notes by the Holders of at
least a majority in aggregate principal amount of the notes and a waiver of
the payment default that resulted from such acceleration);
(5) make any note payable in money other than that stated in the
notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of Holders of notes to receive
payments of principal of, or interest or premium or Liquidated Damages, if
any, on, the notes;
(7) waive a redemption payment with respect to any note (other than a
payment required by one of the covenants described above under the caption
"-- Repurchase at the Option of Holders");
(8) release any Guarantor from any of its obligations under its
Subsidiary Guarantee or the indenture, except in accordance with the terms
of the indenture; or
(9) make any change in the preceding amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any Holder of notes,
Hercules, the Guarantors and the trustee may amend or supplement the indenture
or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of Hercules' obligations to Holders
of notes in the case of a merger or consolidation or sale of all or
substantially all of Hercules' assets;
(4) to make any change that would provide any additional rights or
benefits to the Holders of notes or that does not adversely affect the
legal rights under the indenture of any such Holder;
85
(5) to comply with requirements of the SEC in order to effect or
maintain the qualification of the indenture under the Trust Indenture Act;
(6) to provide for the issuance of additional notes in accordance with
the limitations set forth in the indenture; or
(7) to allow any Guarantor to execute a supplemental indenture and/or
a Note Guarantee with respect to the notes.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated, except lost, stolen or
destroyed notes that have been replaced or paid and notes for whose
payment money has been deposited in trust and thereafter repaid to
Hercules, have been delivered to the trustee for cancellation; or
(b) all notes that have not been delivered to the trustee for
cancellation have become due and payable by reason of the mailing of a
notice of redemption or otherwise or will become due and payable within
one year and Hercules or any Guarantor has irrevocably deposited or
caused to be deposited with the trustee as trust funds in trust solely
for the benefit of the Holders, cash in U.S. dollars, non-callable
Government Securities, or a combination of cash in U.S. dollars and non-
callable Government Securities, in amounts as will be sufficient without
consideration of any reinvestment of interest, to pay and discharge the
entire indebtedness on the notes not delivered to the trustee for
cancellation for principal, premium and Liquidated Damages, if any, and
accrued interest to the date of maturity or redemption;
(2) no Default or Event of Default has occurred and is continuing on
the date of the deposit or will occur as a result of the deposit and the
deposit will not result in a breach or violation of, or constitute a
default under, any other instrument to which Hercules or any Guarantor is a
party or by which Hercules or any Guarantor is bound;
(3) Hercules or any Guarantor has paid or caused to be paid all sums
payable by it under the indenture; and
(4) Hercules has delivered irrevocable instructions to the trustee
under the indenture to apply the deposited money toward the payment of the
notes at maturity or the redemption date, as the case may be.
In addition, Hercules must deliver an officers' certificate and an opinion
of counsel to the trustee stating that all conditions precedent to satisfaction
and discharge have been satisfied.
CONCERNING THE TRUSTEE
If the trustee becomes a creditor of Hercules or any Guarantor, the
indenture limits its right to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security or
otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such conflict
within 90 days, apply to the SEC for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
occurs and is continuing, the trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
Holder of notes, unless such Holder has offered to the trustee security and
indemnity satisfactory to it against any loss, liability or expense.
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ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain copies of the indenture and
registration rights agreement without charge by writing to Hercules
Incorporated, Hercules Plaza, 1313 North Market Street, Wilmington, DE
19894-0001, Attention: General Counsel.
BOOK-ENTRY, DELIVERY AND FORM
Except as described in the next paragraph, the new notes will initially be
issued in the form of one or more Global Notes (the "Global Notes"). The Global
Notes will be deposited on the date of the closing of this exchange offer with,
or on behalf of, The Depository Trust Company ("DTC") and registered in the name
of Cede & Co., as nominee of DTC (such nominee being referred to herein as the
"Global Note Holder").
Notes that are issued as described below under "-- Certificated Notes" will
be issued in the form of registered definitive certificates (the "Certificated
Notes"). Upon the transfer of Certificated Notes, Certificated Notes may, unless
all Global Notes have previously been exchanged for Certificated Notes, be
exchanged for an interest in the Global Note representing the principal amount
of notes being transferred, subject to the transfer restrictions set forth in
the indenture.
DTC has advised Hercules that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Access to DTC's system is also available to
other entities such as securities brokers and dealers, banks and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly (collectively, the "Indirect Participants").
Persons who are not Participants may beneficially own securities held by or on
behalf of DTC only through the Participants or the Indirect Participants. The
ownership interests in, and transfers of ownership interests in, each security
held by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
Investors in the Global Notes may also hold their interest in the Global
Notes through the Euroclear System or Clearstream Banking, S.A. if they are
direct participants in those systems or indirectly through organizations that
are direct participants in those systems. Euroclear and Clearstream will hold
omnibus positions in the Global Notes on behalf of the Euroclear participants
and the Clearstream participants, respectively, through customers' securities
accounts in Euroclear's and Clearstream's names on the books of their respective
depositories. These depositories, in turn, will hold these positions in their
names on the books of DTC. Interests held through Euroclear or Clearstream may
be subject to the procedures and requirements of DTC, as well as the procedures
and requirements of those systems.
DTC has also advised Hercules that, pursuant to procedures established by
it:
(1) upon deposit of the Global Notes, DTC will credit the accounts of
Participants with portions of the principal amount of the Global Notes; and
(2) ownership of these interests in the Global Notes will be shown on,
and the transfer of ownership of these interests will be effected only
through, records maintained by DTC (with respect to the Participants) or by
the Participants and the Indirect Participants (with respect to other
owners of beneficial interest in the Global Notes).
The laws of some states require that certain Persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Note to such Persons will be limited
to such extent.
So long as the Global Note Holder is the registered owner of any notes, the
Global Note Holder will be considered the sole Holder under the indenture of any
notes evidenced by the Global Notes. Beneficial owners of notes evidenced by the
Global Notes will not be considered the owners or Holders of the notes under the
87
indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the trustee thereunder. Neither
Hercules nor the trustee will have any responsibility or liability for any
aspect of the records of DTC or for maintaining, supervising or reviewing any
records of DTC relating to the notes.
Payments in respect of the principal of, and interest and premium and
Liquidated Damages, if any, on, a Global Note registered in the name of the
Global Note Holder on the applicable record date will be payable by the trustee
to or at the direction of the Global Note Holder in its capacity as the
registered Holder under the indenture. Under the terms of the indenture,
Hercules and the trustee will treat the Persons in whose names the notes,
including the Global Notes, are registered as the owners of the notes for the
purpose of receiving payments and for all other purposes. Consequently, neither
Hercules, the trustee nor any agent of Hercules or the trustee has or will have
any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Global Notes or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Notes; or
(2) any other matter relating to the actions and practices of DTC or
any of its Participants or Indirect Participants.
DTC has advised Hercules that its current practice, upon receipt of any
payment in respect of securities such as the notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date unless DTC has reason to believe it will not receive
payment on such payment date. Each relevant Participant is credited with an
amount proportionate to its beneficial ownership of an interest in the principal
amount of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the trustee or Hercules. Neither Hercules nor the
trustee will be liable for any delay by DTC or any of its Participants in
identifying the beneficial owners of the notes, and Hercules and the trustee may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee for all purposes.
CERTIFICATED NOTES
Subject to certain conditions, any Person having a beneficial interest in a
Global Note may, upon prior written request to the trustee, exchange such
beneficial interest for notes in the form of Certificated Notes. Upon any such
issuance, the trustee is required to register such Certificated Notes in the
name of, and cause the same to be delivered to, such Person or Persons (or their
nominee). In addition, if:
(1) DTC (a) notifies Hercules that it is unwilling or unable to
continue as depositary for the Global Notes and Hercules fails to appoint a
successor depositary or (b) has ceased to be a clearing agency registered
under the Exchange Act;
(2) Hercules, at its option, notifies the trustee in writing that it
elects to cause the issuance of the Certificated Notes; or
(3) there has occurred and is continuing a Default or Event of Default
with respect to the notes;
then, upon surrender by the Global Note Holder of its Global Note, notes in such
form will be issued to each person that the Global Note Holder and DTC identify
as being the beneficial owner of the related notes.
Neither Hercules nor the trustee will be liable for any delay by the Global
Note Holder or DTC in identifying the beneficial owners of notes and Hercules
and the trustee may conclusively rely on, and will be protected in relying on,
instructions from the Global Note Holder or DTC for all purposes.
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SAME DAY SETTLEMENT AND PAYMENT
Hercules will make payments in respect of the notes represented by the
Global Notes (including principal, premium, if any, interest and Liquidated
Damages, if any) by wire transfer of immediately available funds to the accounts
specified by the Global Note Holder. Hercules will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, with
respect to Certificated Notes by wire transfer of immediately available funds to
the accounts specified by the Holders of Certificated Notes or, if no such
account is specified, by mailing a check to each such Holder's registered
address. The notes represented by the Global Notes are expected to be eligible
to trade in DTC's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such notes will, therefore, be required by DTC to be
settled in immediately available funds. Hercules expects that secondary trading
in any Certificated Notes will also be settled in immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a global note from a
Participant will be credited, and any such crediting will be reported to the
relevant Euroclear or Clearstream participant, during the securities settlement
processing day (which must be a business day for Euroclear and Clearstream)
immediately following the DTC settlement date. DTC has advised us that cash
received in Euroclear or Clearstream as a result of sales of interests in a
Global Note by or through a Euroclear or Clearstream participant to a
Participant will be received with value on the DTC settlement date but may not
be available in the relevant Euroclear or Clearstream cash account until the
business day for Euroclear or Clearstream following the DTC settlement date.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The following description is a summary of the material provisions of the
registration rights agreement. It does not restate that agreement in its
entirety. We urge you to read the registration rights agreement itself because
it, and not this description, defines your rights as holders of these notes. See
"--Additional Information."
Hercules, the Guarantors and the initial purchasers entered into the
registration rights agreement on November 14, 2000. Pursuant to the registration
rights agreement, Hercules and the Guarantors agreed to file with the SEC an
exchange offer registration statement on the appropriate form under the
Securities Act with respect to the new notes. Hercules and the Guarantors are
offering to the Holders of Transfer Restricted Securities pursuant to the
exchange offer who are able to make certain representations the opportunity to
exchange their Transfer Restricted Securities for new notes.
If:
(1) Hercules and the Guarantors are not
(a) required to file the exchange offer registration statement; or
(b) permitted to consummate the exchange offer because the exchange
offer is not permitted by applicable law or SEC policy; or
(2) any Holder of Transfer Restricted Securities notifies Hercules
prior to the 20th business day following the consummation deadline for the
exchange offer that:
(a) it is prohibited by law or SEC policy from participating in the
exchange offer; or
(b) that it may not resell the new notes acquired by it in the
exchange offer to the public without delivering a prospectus and the
prospectus contained in the exchange offer registration statement is not
appropriate or available for such resales; or
(c) that it is a broker-dealer and owns notes acquired directly
from Hercules or an affiliate of Hercules,
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Hercules and the Guarantors will file with the SEC a Shelf Registration
Statement to cover resales of the notes by the Holders of the notes who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement.
Hercules and the Guarantors will use their best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the SEC.
For purposes of the preceding, "Transfer Restricted Securities" means each
note until:
(1) the date on which such note has been exchanged by a Person other
than a broker-dealer for a new note in the exchange offer;
(2) following the exchange by a broker-dealer in the exchange offer of
a note for a new note, the date on which such new note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of
such sale a copy of the prospectus contained in the exchange offer
Registration Statement;
(3) the date on which such note has been effectively registered under
the Securities Act and disposed of in accordance with the Shelf
Registration Statement; or
(4) the date on which such note is distributed to the public pursuant
to Rule 144 under the Securities Act.
The registration rights agreement provides that:
(1) Hercules and the Guarantors will file an exchange offer
Registration Statement with the SEC on or prior to August 11, 2001;
(2) Hercules and the Guarantors will use their best efforts to have
the exchange offer Registration Statement declared effective by the SEC on
or prior to October 10, 2001;
(3) unless the exchange offer would not be permitted by applicable law
or SEC policy, Hercules and the Guarantors will
(a) commence the exchange offer; and
(b) use their best efforts to issue on or prior to 30 business
days, or longer, if required by the federal securities laws, after the
date on which the exchange offer Registration Statement was declared
effective by the SEC, new notes in exchange for all old notes tendered
prior thereto in the exchange offer, and
(4) if obligated to file the Shelf Registration Statement, Hercules
and the Guarantors will use their best efforts to file the Shelf
Registration Statement with the SEC on or prior to 30 days after such
filing obligation arises and to cause the Shelf Registration to be declared
effective by the SEC on or prior to 90 days after such obligation arises.
If:
(1) Hercules and the Guarantors fail to file any of the registration
statements required by the registration rights agreement on or before the
date specified for such filing; or
(2) any of such registration statements is not declared effective by
the SEC on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"); or
(3) Hercules and the Guarantors fail to consummate the exchange offer
within 30 business days of the effective date with respect to the exchange
offer Registration Statement; or
(4) the Shelf Registration Statement or the exchange offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities during the periods specified in the registration rights
agreement (each such event referred to in clauses (1) through (4) above, a
"Registration Default"),
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then Hercules and the Guarantors will pay Liquidated Damages to each Holder of
notes, with respect to the first 90-day period immediately following the
occurrence of the first Registration Default in an amount equal to $.05 per week
per $1,000 principal amount of notes held by such Holder.
The amount of the Liquidated Damages will increase by an additional $.05
per week per $1,000 principal amount of notes with respect to each subsequent
90-day period until all Registration Defaults have been cured, up to a maximum
amount of Liquidated Damages for all Registration Defaults of $.50 per week per
$1,000 principal amount of notes.
All accrued Liquidated Damages will be paid by Hercules and the Guarantors
on each Damages Payment Date to the Global Note Holder by wire transfer of
immediately available funds or by federal funds check and to Holders of
Certificated Notes by wire transfer to the accounts specified by them or by
mailing checks to their registered addresses if no such accounts have been
specified.
Following the cure of all Registration Defaults, the accrual of Liquidated
Damages will cease.
Holders of notes will be required to make certain representations to
Hercules (as described in the registration rights agreement) in order to
participate in the exchange offer and will be required to deliver certain
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the registration rights agreement in order to have their notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above. By acquiring Transfer Restricted
Securities, a Holder will be deemed to have agreed to indemnify Hercules and the
Guarantors against certain losses arising out of information furnished by such
Holder in writing for inclusion in any Shelf Registration Statement. Holders of
notes will also be required to suspend their use of the prospectus included in
the Shelf Registration Statement under certain circumstances upon receipt of
written notice to that effect from Hercules.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is incurred in connection with, or
in contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person will be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" have correlative meanings.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights, other than sales of inventory in the ordinary course of business;
provided that the sale, conveyance or other disposition of all or
substantially all of the assets of Hercules and its Subsidiaries taken as a
whole will be governed by the provisions of the indenture described above
under the caption "-- Repurchase at the Option of Holders -- Change of
Control" and/or the provisions described above under the caption
"-- Certain
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Covenants -- Merger, Consolidation or Sale of Assets" and not by the
provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests by any of Hercules' Restricted
Subsidiaries or the sale of Equity Interests in any of its Subsidiaries.
Notwithstanding the preceding, the following items will not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that
involves assets having a fair market value of less than $5.0 million;
(2) a transfer of assets between or among Hercules and its
Subsidiaries,
(3) an issuance of Equity Interests by a Subsidiary to Hercules or to
another Subsidiary;
(4) the sale or lease of equipment, inventory, accounts receivable or
other assets in the ordinary course of business;
(5) the sale or other disposition of cash or Cash Equivalents; and
(6) a Restricted Payment or Permitted Investment that is permitted by
the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments."
"Asset Swap" means an exchange of assets by Hercules or one or more of its
Restricted Subsidiaries for:
(1) one or more Permitted Businesses;
(2) a controlling interest in any Person whose assets consist
primarily of one or more Permitted Businesses; and/or
(3) long-term assets that are used in a Permitted Business in a
like-kind exchange pursuant to Section 1031 of the Internal Revenue Code or
any similar or successor provision to the Internal Revenue Code.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction including any period for which such lease has
been extended or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" will be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms
"Beneficially Owns" and "Beneficially Owned" have a corresponding meaning.
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the board of directors of the
general partner of the partnership; and
(3) with respect to any other Person, the board or committee of such
Person serving a similar function.
"Borrowing Base" means, as of any date, an amount equal to:
(1) 85% of the face amount of all accounts receivable owned by
Hercules and its Subsidiaries as of the end of the most recent fiscal
quarter preceding such date that were not more than 90 days past due; plus
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(2) 50% of the book value of all inventory (whether raw material,
in-process finished product or other) owned by Hercules and its
Subsidiaries as of the end of the most recent fiscal quarter preceding such
date; minus
(3) the aggregate amount of trade payables of Hercules and its
Subsidiaries outstanding as of the end of the most recent fiscal quarter
preceding such date to the extent that such amount is incurred to acquire
inventory, all calculated on a consolidated basis and in accordance with
GAAP.
"Capital Lease Obligation" means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(1) U.S. dollars;
(2) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality of the United
States government (provided that the full faith and credit of the United
States is pledged in support of those securities) having maturities of not
more than six months from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case, with any lender party to the Credit Agreement or
with any domestic commercial bank having capital and surplus in excess of
$500.0 million or a Thomson Bank Watch Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Rating Services and in each
case maturing within six months after the date of acquisition; and
(6) money market funds at least 90% of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Change of Control" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the proper-
ties or assets of Hercules and its Restricted Subsidiaries taken as a whole
to any "person" (as that term is used in Section 13(d)(3) of the Exchange
Act);
(2) the adoption of a plan relating to the liquidation or dissolution
of Hercules;
(3) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), becomes the Beneficial Owner, directly
93
or indirectly, of more than 50% of the Voting Stock of Hercules, measured
by voting power rather than number of shares; or
(4) the first day on which a majority of the members of the Board of
Directors of Hercules are not Continuing Directors.
"Consolidated Cash Flow" means, with respect to any specified Person for
any period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss
realized by such Person or any of its Restricted Subsidiaries in connection
with an Asset Sale, to the extent such losses were deducted in computing
such Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net Income;
plus
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of
all payments associated with Capital Lease Obligations, imputed interest
with respect to Attributable Debt, commissions, discounts and other fees
and charges incurred in respect of letter of credit or bankers' acceptance
financings, and net of the effect of all payments made or received pursuant
to Hedging Obligations), to the extent that any such expense was deducted
in computing such Consolidated Net Income; plus
(4) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash expenses (excluding any
such non-cash expense to the extent that it represents an accrual of or
reserve for cash expenses in any future period or amortization of a prepaid
cash expense that was paid in a prior period) of such Person and its
Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income; minus
(5) non-cash items increasing such Consolidated Net Income for such
period, other than the accrual of revenue in the ordinary course of
business, in each case, on a consolidated basis and determined in
accordance with GAAP.
"Consolidated Lease Expense" means, with respect to any specified Person
for any period, the aggregate rental obligations of the specified Person and its
consolidated Restricted Subsidiaries determined on a consolidated basis in
accordance with GAAP payable in respect of such period under leases of real
and/or personal property (net of income from subleases of such properties, but
including taxes, insurance, maintenance and similar expenses that the lessee is
obligated to pay under the terms of such leases), whether or not such
obligations are reflected as liabilities or commitments on a consolidated
balance sheet of the specified Person and its Restricted Subsidiaries or in the
notes thereto.
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting will be included only to the extent of the amount of dividends
or distributions paid in cash to the specified Person or a Wholly Owned
Restricted Subsidiary of the Person;
(2) the Net Income of any Restricted Subsidiary will be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been
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obtained) or, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted Subsidiary or
its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition will be
excluded;
(4) the cumulative effect of a change in accounting principles will be
excluded;
(5) the Net Income (but not loss) of any Unrestricted Subsidiary will
be excluded, whether or not distributed to the specified Person or one of
its Subsidiaries.
"Consolidated Net Worth" means, with respect to any specified Person as of
any date, the sum of:
(1) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date; plus
(2) the respective amounts reported on such Person's balance sheet as
of such date with respect to any series of preferred stock (other than
Disqualified Stock) that by its terms is not entitled to the payment of
dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only
to the extent of any cash received by such Person upon issuance of such
preferred stock.
"Consolidated Tangible Assets" means, as of any date of determination, the
total assets, less goodwill, deferred financing costs and other intangibles (in
each case net of accumulated amortization) shown on the balance sheet of
Hercules and its Restricted Subsidiaries as of the most recent date for which
such balance sheet is available, determined on a consolidated basis in
accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of Hercules who:
(1) was a member of such Board of Directors on the date of the
indenture; or
(2) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
"Credit Agreement" means that certain Amended and Restated Credit
Agreement, dated as of April 19, 1999, by and among Hercules, the subsidiaries
of Hercules as may from time to time be borrowers and/or guarantors thereunder
in accordance with the provisions thereof, the several banks and other financial
institutions from time to time parties thereto, Bank of America, N.A., as
administrative agent for the lenders, Bank of America Canada, as Canadian
administrative agent for the lenders, and The Chase Manhattan Bank, Morgan
Guaranty Trust Company of New York and Citibank, N.A., as Co-Syndication Agents,
providing for term and revolving credit borrowings, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced or refinanced from time to time.
"Credit Facilities" means one or more debt facilities (including, without
limitation, the Credit Agreement) or commercial paper facilities, in each case
with banks or other institutional lenders providing for revolving credit loans,
term loans, receivables financing (including through the sale of receivables to
such lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder of the Capital Stock), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or redeemable at the option of the
holder of the Capital Stock, in whole or in part, on
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or prior to the date that is 91 days after the date on which the notes mature.
Notwithstanding the preceding sentence, any Capital Stock that would constitute
Disqualified Stock solely because the holders of the Capital Stock have the
right to require Hercules to repurchase such Capital Stock upon the occurrence
of a change of control or an asset sale will not constitute Disqualified Stock
if the terms of such Capital Stock provide that Hercules may not repurchase or
redeem any such Capital Stock pursuant to such provisions unless such repurchase
or redemption complies with the covenant described above under the caption
"-- Certain Covenants -- Restricted Payments."
"Domestic Subsidiary" means any Subsidiary of Hercules that was formed
under the laws of the United States or any state of the United States or the
District of Columbia or that guarantees or otherwise provides direct credit
support for any Indebtedness of Hercules.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means the Indebtedness of Hercules and its
Subsidiaries (other than Indebtedness under the Credit Agreement) in existence
on the date of the indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any specified Person for any period,
the sum, without duplication, of:
(1) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued,
including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component
of any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings,
and net of the effect of all payments made or received pursuant to Hedging
Obligations; plus
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period; plus
(3) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries,
whether or not such Guarantee or Lien is called upon; plus
(4) the product of (a) all dividends, whether paid or accrued and
whether or not in cash, on any series of preferred stock of such Person or
any of its Restricted Subsidiaries, other than dividends on Equity
Interests payable solely in Equity Interests of Hercules (other than
Disqualified Stock) or to Hercules or a Restricted Subsidiary of Hercules,
times (b) a fraction, the numerator of which is one and the denominator of
which is one minus the then current combined federal, state and local
statutory tax rate of such Person and its Restricted Subsidiaries,
expressed as a decimal, in each case, on a consolidated basis and in
accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any specified Person
for any period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the specified
Person or any of its Restricted Subsidiaries incurs, assumes, Guarantees,
repays, repurchases or redeems any Indebtedness (other than ordinary working
capital borrowings) or issues, repurchases or redeems preferred stock subsequent
to the commencement of the period for which the Fixed Charge Coverage Ratio is
being calculated and on or prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio will be calculated giving pro forma effect
to such incurrence, assumption, Guarantee, repayment, repurchase or redemption
of Indebtedness, or such issuance, repurchase or redemption of preferred stock,
and the use of the proceeds therefrom as if the same had occurred at the
beginning of the applicable four-quarter reference period.
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In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions that have been made by the specified Person or any of
its Restricted Subsidiaries, including through mergers or consolidations
and including any related financing transactions, during the four-quarter
reference period or subsequent to such reference period and on or prior to
the Calculation Date will be given pro forma effect as if they had occurred
on the first day of the four-quarter reference period and Consolidated Cash
Flow for such reference period will be calculated on a pro forma basis
under the Securities Act, but without giving effect to clause (3) of the
proviso set forth in the definition of Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, will be excluded; and
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, will be excluded, but only to the extent
that the obligations giving rise to such Fixed Charges will not be
obligations of the specified Person or any of its Restricted Subsidiaries
following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entities as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Guarantors" means each of:
(1) the wholly owned Domestic Restricted Subsidiaries of Hercules; and
(2) any other subsidiary that executes a Subsidiary Guarantee in
accordance with the provisions of the indenture;
and their respective successors and assigns.
"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
"Indebtedness" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) representing the balance deferred and unpaid of the purchase price
of any property, except any such balance that constitutes an accrued
expense or trade payable; or
(6) representing any Hedging Obligations,
97
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the Guarantee
by the specified Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date will be:
(1) the accreted value of the Indebtedness, in the case of any
Indebtedness issued with original issue discount; and
(2) the principal amount of the Indebtedness, together with any
interest on the Indebtedness that is more than 30 days past due, in the
case of any other Indebtedness.
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the forms
of loans (including Guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If Hercules or
any Subsidiary of Hercules sells or otherwise disposes of any Equity Interests
of any direct or indirect Subsidiary of Hercules such that, after giving effect
to any such sale or disposition, such Person is no longer a Subsidiary of
Hercules, Hercules will be deemed to have made an Investment on the date of any
such sale or disposition equal to the fair market value of the Equity Interests
of such Subsidiary not sold or disposed of in an amount determined as provided
in the final paragraph of the covenant described above under the caption
"-- Certain Covenants -- Restricted Payments." The acquisition by Hercules or
any Subsidiary of Hercules of a Person that holds an Investment in a third
Person will be deemed to be an Investment by Hercules or such Subsidiary in such
third Person in an amount equal to the fair market value of the Investment held
by the acquired Person in such third Person in an amount determined as provided
in the final paragraph of the covenant described above under the caption
"-- Certain Covenants -- Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain or loss, together with any related provision for taxes on
such gain or loss, realized in connection with: (a) any Asset Sale; or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or
any of its Restricted Subsidiaries; and
(2) any extraordinary gain or loss, together with any related
provision for taxes on such extraordinary gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by Hercules or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale, including, without limitation, legal, accounting
and investment banking fees and sales commissions and any relocation expenses
incurred as a result of the Asset Sale, taxes paid or payable as a result of the
Asset Sale, in each case, after taking into account any available tax credits or
deductions and any tax sharing arrangements, and amounts required to be applied
to the repayment of Indebtedness, other than senior Indebtedness under a Credit
Facility, secured by a Lien on the asset or assets that were the subject of
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such Asset Sale and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither Hercules nor any of its Restricted
Subsidiaries (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute Indebtedness),
(b) is directly or indirectly liable as a guarantor or otherwise, or (c)
constitutes the lender;
(2) no default with respect to which (including any rights that the
holders of the Indebtedness may have to take enforcement action against an
Unrestricted Subsidiary) would permit upon notice, lapse of time or both
any holder of any other Indebtedness of Hercules or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment of the Indebtedness to be accelerated or payable prior to its
stated maturity; and
(3) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or assets of Hercules or any of its
Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means the research, development, distribution,
manufacturing, sales and/or marketing of chemicals and/or related products,
services and businesses.
"Permitted Investments" means:
(1) any Investment in Hercules or in a Restricted Subsidiary of
Hercules;
(2) any Investment in Cash Equivalents;
(3) any Investment by Hercules or any Subsidiary of Hercules in a
Person, if as a result of such Investment:
(a) such Person becomes a Subsidiary of Hercules; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, Hercules or a Subsidiary of Hercules that is a
Guarantor;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales";
(5) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of Hercules;
(6) any Investments received in compromise of obligations of such
persons incurred in the ordinary course of trade creditors or customers
that were incurred in the ordinary course of business, including pursuant
to any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of any trade creditor or customer;
(7) Investments made after the original issuance of the notes in a
Permitted Business in the form of joint ventures, operating agreements,
partnership agreements or other similar or customary agreements, interests
or arrangements with unaffiliated third parties, the aggregate outstanding
amount of which does not exceed 5.0% of Consolidated Tangible Assets at any
time;
(8) Hedging Obligations; and
(9) other Investments in any Person that is not also a Subsidiary of
Hercules having an aggregate fair market value (measured on the date each
such Investment was made and without giving effect to subsequent changes in
value), when taken together with all other Investments made pursuant to
this clause (9) since the date of the indenture not to exceed $50.0
million.
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"Permitted Liens" means:
(1) Liens securing Indebtedness and other Obligations under Credit
Facilities that were permitted by clause (1) of the definition of
"Permitted Debt" to be incurred;
(2) Liens securing Indebtedness outstanding with respect to (a) that
certain Indenture dated May 15, 1993 evidencing 6.625% Notes due 2003
issued by Hercules in the original face amount of $125 million and
evidencing 6.60% Notes due 2007 issued by Hercules in the face amount of
$100 million and (b) that certain Note Purchase Agreement dated as of June
19, 1989 evidencing 9.48% Guaranteed ESOT Notes due June 19, 2009 issued by
The Betz Laboratories, Inc. Employee Stock Ownership Trust established by
The Betz Laboratories, Inc. Employee Stock Ownership Plan and guaranteed by
Betz Laboratories, Inc., in the original face amount of $100,000,000.
(3) Liens in favor of Hercules or the Guarantors;
(4) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with Hercules or any Subsidiary of
Hercules; provided that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with
Hercules or the Subsidiary;
(5) Liens on property existing at the time of acquisition of the
property by Hercules or any Subsidiary of Hercules, provided that such
Liens were in existence prior to the contemplation of such acquisition;
(6) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(7) Liens to secure Indebtedness (including Capital Lease Obligations)
permitted by clause (4) and (12) of the second paragraph of the covenant
entitled "-- Certain Covenants -- Incurrence of Indebtedness and Issuance
of Preferred Stock" covering only the assets acquired with such
Indebtedness;
(8) Liens existing on the date of the indenture;
(9) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as is required in
conformity with GAAP has been made therefor;
(10) Liens incurred in the ordinary course of business of Hercules or
any Subsidiary of Hercules with respect to obligations that do not exceed
$5.0 million at any one time outstanding; and
(11) Liens on assets of Unrestricted Subsidiaries that secure
Non-Recourse Debt of Unrestricted Subsidiaries.
"Permitted Refinancing Indebtedness" means any Indebtedness of Hercules or
any of its Restricted Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of Hercules or any of its Restricted Subsidiaries (other than
intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount (or
accreted value, if applicable) of the Indebtedness extended, refinanced,
renewed, replaced, defeased or refunded (plus all accrued interest on the
Indebtedness and the amount of all expenses and premiums incurred in
connection therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes, such
Permitted Refinancing Indebtedness has a final
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maturity date later than the final maturity date of, and is subordinated in
right of payment to, the notes on terms at least as favorable to the
Holders of notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and
(4) such Indebtedness is incurred either by Hercules or by the
Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Qualified Proceeds" means cash, Cash Equivalents and other property, the
fair market value of which will be determined by, (A) for property valued at
less than $5.0 million, the Board of Directors, which determination shall be
evidenced by a resolution of the Board of Directors set forth in an Officer's
Certificate delivered to the Trustee, and, (B) for property valued at $5.0
million or more, an accounting, appraisal or investment banking firm of national
standing and evidenced by an opinion or appraisal issued by such accounting,
appraisal or investment banking firm.
"Related Party" means:
(1) any controlling stockholder, 80% (or more) owned Subsidiary, or
immediate family member (in the case of an individual) of any Principal; or
(2) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding an 80% or more controlling interest of which consist of any one or
more Principals and/or such other Persons referred to in the immediately
preceding clause (1).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary, other than
Hercules Trust I, Hercules Trust II, Hercules Trust III or Hercules Trust IV, of
the referent Person that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and will not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees of the corporation, association
or other business entity is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are that Person or one or more
Subsidiaries of that Person (or any combination thereof).
"Unrestricted Subsidiary" means any Subsidiary of Hercules that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with Hercules or any Restricted Subsidiary of Hercules unless
the terms of any such agreement, contract, arrangement or
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understanding are no less favorable to Hercules or such Restricted
Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of Hercules;
(3) is a Person with respect to which neither Hercules nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of Hercules or any of its Restricted
Subsidiaries; and
(5) has at least one director on its Board of Directors that is not a
director or executive officer of Hercules or any of its Restricted
Subsidiaries and has at least one executive officer that is not a director
or executive officer of Hercules or any of its Restricted Subsidiaries.
Any designation of a Subsidiary of Hercules as an Unrestricted Subsidiary
will be evidenced to the trustee by filing with the trustee a certified copy of
the Board Resolution giving effect to such designation and an officers'
certificate certifying that such designation complied with the preceding
conditions and was permitted by the covenant described above under the caption
"-- Certain Covenants -- Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it will thereafter cease to be an Unrestricted Subsidiary for
purposes of the indenture and any Indebtedness of such Subsidiary will be deemed
to be incurred by a Restricted Subsidiary of Hercules as of such date and, if
such Indebtedness is not permitted to be incurred as of such date under the
covenant described under the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock," Hercules will be in default of
such covenant. The Board of Directors of Hercules may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation will be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of Hercules of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation will only be permitted if (1) such Indebtedness
is permitted under the covenant described under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock,"
calculated on a pro forma basis as if such designation had occurred at the
beginning of the four-quarter reference period; and (2) no Default or Event of
Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect of the Indebtedness, by (b) the number of years (calculated to the
nearest one-twelfth) that will elapse between such date and the making of
such payment; by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any specified Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which (other than directors' qualifying shares)
will at the time be owned by such Person or by one or more Wholly Owned
Restricted Subsidiaries of such Person.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion summarizes certain United States federal income
tax considerations associated with the exchange of old notes for new notes and
the ownership and disposition of new notes. This summary applies only to
beneficial owners of old notes who acquired such old notes at the initial
offering from initial purchasers for the original offering price therefor and
who acquire new notes pursuant to the exchange offer. This summary does not
purport to be a complete analysis of all of the potential United States federal
income tax consequences relating to the purchase, ownership and disposition of
the new notes, nor does this summary describe any federal estate or gift tax
consequences. There can be no assurance that the Internal Revenue Service
("IRS") will take a similar view of the tax consequences described herein.
Furthermore, this discussion does not address all aspects of taxation that might
be relevant to particular purchasers in light of their individual circumstances.
For instance, this discussion does not address the alternative minimum tax
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), or
special rules applicable to certain categories of purchasers (including dealers
in securities or foreign currencies, insurance companies, regulated investment
companies, financial institutions, tax-exempt entities, holders whose functional
currency is not the U.S. dollar and, except to the extent discussed below,
Foreign holders (as defined below)) or to purchasers who hold the new notes as
part of a hedge, straddle, conversion, constructive ownership or constructive
sale transaction or other risk reduction transaction. This discussion is based
on the provisions of the Code, the Treasury Regulations promulgated thereunder
and administrative and judicial interpretations thereof, all as in effect as of
the date hereof and all of which are subject to change (possibly on a
retroactive basis). The discussion below assumes that the old notes are held as
capital assets within the meaning of Code Section 1221.
EACH HOLDER IS URGED TO CONSULT SUCH HOLDER'S TAX ADVISOR AS TO THE
SPECIFIC TAX CONSEQUENCES OF THE EXCHANGE OF AN OLD NOTE FOR A NEW NOTE IN LIGHT
OF SUCH HOLDER'S PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT
OF THE CODE, AS WELL AS STATE, LOCAL AND FOREIGN INCOME TAX, ESTATE AND GIFT TAX
AND OTHER TAX LAWS.
EXCHANGE OFFER
The exchange of old notes for new notes pursuant to the exchange offer will
not be treated as an exchange or other taxable event for United States federal
income tax purposes because, under United States Treasury regulations, the new
notes will not be considered to differ materially in kind or extent from the old
notes. As a result, the holders of old notes (1) will not recognize taxable gain
or loss upon the exchange of old notes for new notes and (2) will have the same
tax basis and holding period in the new notes as they had in the old notes
immediately before the exchange.
UNITED STATES HOLDERS
The following summary is a general description of certain United States
federal income tax consequences applicable to a "United States holder." For the
purpose of this discussion, the term "United States holder" means a holder of an
old note that is for United States federal income tax purposes: (1) a citizen or
resident of the United States, (2) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof, (3) an estate, the income of which is subject to
United States federal income taxation regardless of its source, or (4) a trust,
the administration of which is subject to the primary supervision of a court
within the United States and which has one or more United States persons with
authority to control all substantial decisions, or a trust that was in existence
on August 20, 1996 and has elected to continue to be treated as a United States
trust.
Interest payable on the new notes will be includible in the income of a
United States holder at the time accrued or received in accordance with such
holder's regular method of accounting for United States federal income tax
purposes.
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A United States holder will recognize capital gain or loss upon the sale or
other taxable disposition of a new note in an amount equal to the difference
between the amount realized from such disposition (exclusive of any accrued
interest not previously included in income, which amount will be taxable as
ordinary income) and the holder's adjusted tax basis in the new note. Such
capital gain or loss will be long-term capital gain or loss if the holder has
held the old note and the new note for a combined holding period of more than
one year at the time of disposition. Holders of new notes (other than
corporations) are generally entitled to claim a preferential tax rate for net
long-term capital gains.
NON-UNITED STATES HOLDERS
The following summary is a general description of certain United States
federal income tax consequences to a "Foreign holder" (which, for the purpose of
this discussion, means a holder that is not a United States holder). Special
rules not discussed in this summary may apply to a holder that is a "controlled
foreign corporation," "passive foreign investment company," "expatriate," a
corporation that accumulates earnings to avoid United States federal income tax
or a "foreign personal holding company." The following summary is subject to the
discussion below concerning backup withholding.
(a) Assuming that a Foreign holder's income and gain on a new note are
not effectively connected with the conduct by such holder of a trade or
business in the United States or attributed to a United State's permanent
establishment, payments of interest on a new note by us or our paying agent
to a Foreign holder will not be subject to United States federal income tax
or withholding tax, provided that:
- such holder does not own, actually or constructively, 10% or more of
the total combined voting power of all classes of our stock entitled
to vote;
- such holder is not, for United States federal income tax purposes, a
controlled foreign corporation related, directly or indirectly, to us
through stock ownership;
- such holder is not a bank receiving interest described in Code Section
881(c)(3)(A); and
- the certification requirements under Code Section 871(h) or 881(c) and
Treasury Regulations thereunder (summarized below) are met.
Payments of interest on a new note that do not satisfy all of the foregoing
requirements are generally subject to United States federal income tax and
withholding tax at a flat rate of 30% (or a lower applicable treaty rate,
provided certain certification requirements are met). Except to the extent
otherwise provided under an applicable tax treaty, a Foreign holder
generally will be subject to United States federal income tax in the same
manner as a United States holder with respect to interest on a new note if
such interest is effectively connected with the conduct of a United States
trade or business by, or if a treaty applies, is attributable to a United
States permanent establishment of, the Foreign holder. Effectively
connected interest income received by a corporate Foreign holder may also,
under certain circumstances, be subject to an additional "branch profits
tax" at a 30% rate, or, if applicable, a lower treaty rate. Such
effectively connected interest income will not be subject to withholding
tax if the Foreign holder delivers an IRS Form W-8ECI to the payor.
(b) In general, a Foreign holder of a new note will not be subject to
United States federal withholding tax on the receipt of payments of
principal on the new note and will not be subject to United States federal
income tax on any gain recognized on the sale, exchange, redemption,
retirement or other taxable disposition of such note, unless:
- such Foreign holder is a nonresident alien individual who is present
in the United States for 183 or more days in the taxable year of
disposition and certain other conditions are met;
- the Foreign holder is required to pay tax pursuant to the provisions
of United States tax law applicable to certain United States
expatriates; or
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- the gain is effectively connected with the conduct of a United States
trade or business by, or if a tax treaty applies, is attributable to a
United States permanent establishment of, the Foreign holder.
Under applicable law, in order to obtain the exemption from withholding tax
described in paragraph (a) above, either (1) a Foreign holder of a new note must
provide its name and address, and certify, under penalties of perjury, to us or
our paying agent, that such holder is a Foreign holder or (2) a securities
clearing organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "Financial
Institution") and holds a new note on behalf of the Foreign holder must certify,
under penalties of perjury, to us or our paying agent that such certificate has
been received from the holder by it or by any intermediary Financial
Institution. A certificate described in this paragraph is effective only with
respect to payments of interest made to the certifying Foreign holder after
issuance of the certificate in the calendar year of its issuance and the two
immediately succeeding calendar years. Under Treasury Regulations, the foregoing
certification may be provided by the Foreign holder of a new note on IRS Form
W-8BEN, W-8IMY or W-8EXP, as applicable.
Federal withholding tax is not an additional tax. Rather, any amounts
withheld from a payment to a holder are generally allowed as a credit against
such Foreign holder's United States federal income tax liability and may entitle
such Foreign holder to a refund provided that certain required information is
provided to the IRS.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under current United States federal income tax law, a 30.5% (30% after
December 31, 2001) backup withholding tax and information reporting requirements
apply to certain payments of principal and interest made to, and to the proceeds
of sale before maturity by, certain holders of the new notes.
In the case of a noncorporate United States holder, information reporting
requirements will apply to payments of principal or interest made by us or our
paying agent on a new note. We will be required to withhold backup withholding
tax if:
- a holder fails to furnish its Taxpayer Identification Number ("TIN")
(which, for an individual, is the individual's Social Security number) to
us in the manner required;
- a holder furnishes an incorrect TIN and the payor is so notified by the
IRS;
- the payor is notified by the IRS that such holder has failed to properly
report payments of interest or dividends; or
- under certain circumstances, a holder fails to certify, under penalties
of perjury, that such holder has furnished a correct TIN and has not been
notified by the IRS that such holder is subject to backup withholding for
failure to report interest or dividend payments.
United States Holders
Backup withholding and information reporting does not apply with respect to
payments made to certain exempt recipients, including a corporation. United
States holders should consult their tax advisors regarding their qualification
for exemption from backup withholding and information reporting, and the
procedure for obtaining such an exemption if applicable. The amount of any
backup withholding imposed upon a payment to a United States holder will be
allowed as a credit against such holder's United States federal income tax
liability and may entitle such holder to a refund, provided that certain
required information is furnished to the IRS.
Foreign Holders
In the case of a Foreign holder, under currently applicable Treasury
Regulations, backup withholding and information reporting will not apply to
payments of principal or interest made by us or our paying agent on a new note
(absent actual knowledge that the holder is actually a United States holder) if
the holder has
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provided the required certification under penalties of perjury that it is not a
United States holder or has otherwise established an exemption. If the Foreign
holder provides the required certification, such holder may nevertheless be
subject to withholding of United States federal income tax as described above
under "-- Non-United States Holders." Foreign holders should consult their tax
advisors regarding the application of information reporting and backup
withholding in their particular situations, the availability of an exemption
therefrom, and the procedure for obtaining such an exemption, if available. Any
amounts withheld from a payment to a Foreign holder under the backup withholding
rules will be allowed as a credit against such holder's United States federal
income tax liability and may entitle such holder to a refund, provided that
certain required information is furnished to the IRS.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer in exchange for old notes acquired by such broker-dealer as a
result of market making or other trading activities may be deemed to be an
"underwriter" within the meaning of the Securities Act and, therefore, must
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales, offers to resell or other transfers of the new
notes received by it in connection with the exchange offer. Accordingly, each
such broker-dealer must acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such new
notes. The letter of transmittal states that by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of new notes received in exchange
for old notes where such old notes were acquired as a result of market-making
activities or other trading activities. We have agreed that, for a period of up
to one year after the consummation of this exchange offer, we will make this
prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the new notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such new notes. Any profit on resales
or distributions by any broker-dealer of new notes that were received by it for
its own account pursuant to the exchange offer, or commissions or concessions
received by any such persons, may be deemed to be underwriting compensation
under the Securities Act.
For a period of one year after the consummation of this exchange offer, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to
this exchange offer other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the validity of the new notes and
the guarantees will be passed upon for us by Ballard Spahr Andrews & Ingersoll,
LLP, Philadelphia, Pennsylvania.
EXPERTS
The consolidated financial statements of Hercules Incorporated as of
December 31, 2000 and 1999 and for each of the three years in the period ended
December 31, 2000 and the financial statement schedule included in this
prospectus have been so included in reliance on the report (which contains an
emphasis of a matter paragraph relating to Hercules Incorporated's future debt
covenant compliance and plans as described in Note 23 to the consolidated
financial statements) of PricewaterhouseCoopers LLP, independent accountants,
given on the authority on the of said firm as experts in auditing and
accounting.
The financial statements of Hercules International Limited, LLC as of
December 31, 2000 and 1999 and for each of the three years in the period ended
December 31, 2000 included in this prospectus have been so included in reliance
on the report (which contains an emphasis of a matter paragraph relating to
Hercules International Limited, LLC, which has ceased to act as a reseller of
two of its three business lines and the current activities of which are being
reviewed by Hercules Incorporated as described in Note 18 to the
107
financial statements) of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements as of December 31, 2000 and 1999 and for each of
the three years in the period ended December 31, 2000 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements as of December 31, 2000 and 1999 and for each of
the two years in the period ended December 31, 2000 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and file reports, proxy statements and other
information with the SEC. We have also filed with the SEC a registration
statement on Form S-4 to register the new notes. This prospectus, which forms
part of the registration statement, does not contain all of the information
included in that registration statement. For further information about us and
the new notes offered in this prospectus, you should refer to the registration
statement and its exhibits. You may read and copy any document we file with the
SEC at the SEC's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of the reports, proxy statements and information that we file with
the SEC may be obtained at prescribed rates from the Public Reference Section of
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC
at 1-800-SEC-0330 for further information on the operation of the Public
Reference Room. In addition, the SEC maintains a web site that contains reports,
proxy statements and other information regarding registrants, such as us, that
file electronically with the SEC. The address of this web site is
http://www.sec.gov.
Anyone who receives a copy of this prospectus may obtain a copy of the
indenture or the registration rights agreement without charge by writing to
Hercules Incorporated, Hercules Plaza, 1313 North Market Street, Wilmington,
Delaware 19894-0001, Attention: Israel J. Floyd, Esquire, Secretary and General
Counsel.
108
INDEX TO FINANCIAL STATEMENTS
HERCULES INCORPORATED
PAGE
-----
CONSOLIDATED ANNUAL FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-2
Consolidated Statement of Income for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-3
Consolidated Balance Sheet as of December 31, 2000 and
1999...................................................... F-4
Consolidated Statement of Cash Flow for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-5
Consolidated Statement of Stockholders' Equity for the Years
Ended December 31, 2000, 1999 and 1998.................... F-6
Consolidated Statement of Comprehensive Income (Loss) for
the Years Ended December 31, 2000, 1999 and 1998.......... F-7
Summary of Significant Accounting Policies and Notes to
Consolidated Financial Statements......................... F-8
Summary of Quarterly Results (unaudited).................... F-48
Principal Consolidated Subsidiaries......................... F-49
Financial Statement Schedule II -- Valuation and Qualifying
Accounts.................................................. F-53
CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statement of Income (unaudited) for the six
month periods ended June 30, 2001 and June 30, 2000....... F-54
Consolidated Balance Sheet (unaudited) as of June 30, 2001
and December 31, 2000..................................... F-55
Consolidated Statement of Cash Flow (unaudited) for the six
month periods ended June 30, 2001 and June 30, 2000....... F-56
Consolidated Statement of Comprehensive Income (Loss)
(unaudited) for the six month periods ended June 30, 2001
and June 30, 2000......................................... F-57
Notes to Financial Statements (unaudited)................... F-58
SUBSIDIARIES
Aqualon Company............................................. F-73
BetzDearborn Canada, Inc. .................................. F-88
BetzDearborn Europe, Inc. .................................. F-104
BetzDearborn Inc. .......................................... F-124
BetzDearborn International, Inc. ........................... F-146
BL Technologies, Inc. ...................................... F-165
FiberVisions A/S............................................ F-175
FiberVisions Incorporated................................... F-193
FiberVisions, L.L.C. ....................................... F-208
FiberVisions L.P. .......................................... F-225
FiberVisions Products, Inc. ................................ F-233
Hercules Canada, Inc. ...................................... F-246
Hercules Chemicals (Taiwan) Co., Limited ................... F-255
Hercules Credit, Inc. ...................................... F-271
Hercules GB Holdings Limited ............................... F-287
Hercules International Limited.............................. F-305
Hercules International Limited, LLC......................... F-327
Hercules International Trade Corporation Limited............ F-343
Hercules Investments Sarl................................... F-351
WSP, Inc. .................................................. F-374
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of Hercules Incorporated and
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing on page F-53 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 of America, 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 our opinion.
As discussed in Note 23, on April 5, 2001 the Company received waivers from
certain of its lenders of debt covenant violations at March 31, 2001. The debt
covenant violations, conditions of the waivers, management's outlook as to
future debt covenant compliance and plans should they not be in compliance in
the future are discussed in Note 23.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
April 10, 2001
F-2
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF INCOME
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE)
Net sales................................................... $3,152 $3,309 $2,145
------ ------ ------
Cost of sales............................................... 1,784 1,831 1,287
Selling, general and administrative expenses................ 810 787 377
Research and development.................................... 80 85 61
Goodwill and intangible asset amortization.................. 80 79 22
Purchased in-process research and development (Note 16)..... -- -- 130
Other operating (income) expenses, net (Note 17)............ (46) 47 76
------ ------ ------
Profit from operations...................................... 444 480 192
Equity in income (loss) of affiliated companies............. (2) 1 10
Interest and debt expense (Note 18)......................... 164 185 101
Preferred security distributions of subsidiary trusts....... 96 51 2
Other income (expense), net (Note 19)....................... (18) (2) (22)
------ ------ ------
Income before income taxes.................................. 164 243 77
Provision for income taxes (Note 20)........................ 66 75 68
------ ------ ------
Net income.................................................. $ 98 $ 168 $ 9
====== ====== ======
Earnings per share (Note 21)
Basic:.................................................... $ 0.91 $ 1.63 $ 0.10
Diluted:.................................................. $ 0.91 $ 1.62 $ 0.10
The accompanying accounting policies and notes are an integral part of
the consolidated financial statements.
F-3
HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 54 $ 63
Accounts receivable, net (Note 2)......................... 626 766
Inventories (Note 3)...................................... 305 380
Deferred income taxes (Note 20)........................... 37 129
------ ------
Total current assets...................................... 1,022 1,338
Property, plant, and equipment, net (Note 12)............... 1,104 1,321
Investments (Note 4)........................................ 53 47
Goodwill and other intangible assets, net (Note 13)......... 2,391 2,570
Prepaid pension (Note 15)................................... 246 217
Deferred charges and other assets........................... 493 403
------ ------
Total assets.............................................. $5,309 $5,896
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 259 $ 320
Short-term debt (Note 5).................................. 261 678
Accrued expenses (Note 12)................................ 402 561
------ ------
Total current liabilities................................. 922 1,559
Long-term debt (Note 6)..................................... 2,342 1,777
Deferred income taxes (Note 20)............................. 187 287
Other postretirement benefits (Note 15)..................... 122 129
Deferred credits and other liabilities...................... 298 289
------ ------
Total liabilities......................................... 3,871 4,041
Commitments and contingencies (Note 25)..................... -- --
Company-obligated preferred securities of subsidiary trusts
(Note 7).................................................. 622 992
Stockholders' equity
Series preferred stock (Note 8)........................... -- --
Common stock, $25/48 par value (Note 9)................... 83 83
(shares issued: 2000 -- 159,984,444;
1999 -- 159,976,730)
Additional paid-in capital................................ 726 757
Unearned compensation (Note 10)........................... (115) (123)
Other comprehensive losses................................ (143) (44)
Retained earnings......................................... 2,157 2,125
------ ------
2,708 2,798
Reacquired stock, at cost (shares: 2000 -- 52,442,393;
1999 -- 53,587,365)....................................... 1,892 1,935
------ ------
Total stockholders' equity.................................. 816 863
------ ------
Total liabilities and stockholders' equity.................. $5,309 $5,896
====== ======
The accompanying accounting policies and notes are an integral part of
the consolidated financial statements.
F-4
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income.................................................. $ 98 $ 168 $ 9
Adjustments to reconcile net income to net cash provided
from operations:
Depreciation.............................................. 132 144 86
Amortization.............................................. 114 106 22
Write-off of in-process research and development.......... -- -- 130
Gain on disposals......................................... (142) (23) (23)
Noncash charges (credits)................................. 105 (13) 38
Other..................................................... -- -- (6)
Accruals and deferrals of cash receipts and payments:
Affiliates' earnings in excess of dividends received.... 2 (1) (6)
Accounts receivable..................................... 48 (69) 26
Inventories............................................. (3) (7) (14)
Accounts payable and accrued expenses................... (190) (27) (72)
Noncurrent assets and liabilities....................... (94) 2 (9)
------- ------- -------
Net cash provided by operations...................... 70 280 181
------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (187) (196) (157)
Proceeds of investment and fixed asset disposals............ 418 50 600
Acquisitions, net of cash acquired.......................... (6) (10) (3,109)
Other, net.................................................. (12) (37) (25)
------- ------- -------
Net cash (used in) provided by investing
activities........................................... 213 (193) (2,691)
------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds..................................... 1,889 279 3,111
Long-term debt repayments................................... (1,790) (1,360) (247)
Change in short-term debt................................... 92 22 (228)
Payment of debt issuance costs and underwriting fees........ (28) (19) (66)
Proceeds from issuance of subsidiary trusts preferred
securities................................................ -- 792 200
Repayment of subsidiary trust preferred securities.......... (370) -- --
Proceeds from issuance of warrants.......................... -- 90 --
Common stock issued......................................... 13 182 10
Common stock reacquired..................................... (2) (3) (114)
Proceeds from issuance of subsidiary preferred stock........ -- 12 --
Dividends paid.............................................. (94) (83) (104)
------- ------- -------
Net cash (used in) provided by financing
activities........................................... (290) (88) 2,562
------- ------- -------
Effect of exchange rate changes on cash..................... (2) (4) (1)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (9) (5) 51
Cash and cash equivalents at beginning of year.............. 63 68 17
------- ------- -------
Cash and cash equivalents at end of year.................... $ 54 $ 63 $ 68
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized)...................... $ 164 $ 184 $ 100
Distributions on trust preferred securities............... 85 36 --
Income taxes paid, net.................................... 29 79 117
Noncash investing and financing activities:
Conversion of notes and debentures........................ -- 2 8
ESOP and incentive plan stock issuances................... 8 8 196
Assumed debt of acquired businesses....................... -- -- 307
Acquisition of minority interest.......................... (11) -- --
The accompanying accounting policies and notes are an integral part of
the consolidated financial statements.
F-5
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
OTHER
COMPREHENSIVE
COMMON PAID-IN UNEARNED INCOME RETAINED REACQUIRED
STOCK CAPITAL COMPENSATION (LOSS) EARNINGS STOCK
------ ------- ------------ ------------- -------- ----------
(DOLLARS IN MILLIONS)
Balances at January 1, 1998............................. $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)
Net income.............................................. -- -- -- -- 98 --
Common dividends, $0.62 per common share................ -- -- -- -- (66) --
Foreign currency translation adjustment................. -- -- -- (99) -- --
Impact of allocation of shares held by ESOP............. -- -- 8 -- -- --
Purchase of common stock, 174,547 shares................ -- -- -- -- -- 5
Issuance of common stock:
Incentive plans, net, 1,319,519 shares, from
reacquired stock.................................... -- (31) -- -- -- (48)
Conversion of notes and debentures, 7,714 shares...... -- -- -- -- -- --
--- ---- ----- ----- ------ ------
Balances at December 31, 2000........................... $83 $726 $(115) $(143) $2,157 $1,892
(Common shares: issued,159,984,444; reacquired,
52,442,393)
The accompanying accounting policies and notes are an integral part of
the consolidated financial statements.
F-6
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Net income.................................................. $ 98 $168 $ 9
Foreign currency translation, net of tax.................... (99) (31) (11)
---- ---- ----
Comprehensive income (loss)................................. $ (1) $137 $ (2)
==== ==== ====
The accompanying accounting policies and notes are an integral part of
the consolidated financial statements.
F-7
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 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 consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the company's experience. The corresponding shipping and handling costs are
included in cost of sales.
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 represented 62% of total
inventories at December 31, 2000, 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.
F-8
Maintenance, repairs and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is charged to income.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are amortized on a straight-line basis
over the estimated future periods to be benefited, generally 40 years for
goodwill, customer relationships and trademarks and tradenames 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
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). The related allocation for income taxes
is not significant.
DERIVATIVE INSTRUMENTS AND HEDGING
Derivative financial instruments have been 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 monthly.
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 which
have been used to hedge the value of investments in certain non-U.S.
subsidiaries 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.
The Company used 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. Counter parties to the forward exchange, currency swap,
and interest rate swap contracts are major financial institutions. Credit loss
from counter party nonperformance is not anticipated. During 2000 the interest
rate swap portfolio was terminated due to the conversion of foreign denominated
debt to U.S. dollar denominated debt in the first half of 2000; and the debt
restructing in November 2000 that replaced variable rate debt with fixed rate
debt.
STOCK-BASED COMPENSATION
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25). Such
F-9
amount, if any, is accrued over the related vesting period, as appropriate.
Statement of Financial Accounting Standard 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.
COMPUTER SOFTWARE COSTS
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). Our prior
accounting was generally consistent with the requirements of SOP 98-1 and,
accordingly, adoption of SOP 98-1 had no material effect. Computer software
costs are being amortized over a period of 5 to 10 years.
NEW 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, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133," and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. SFAS 133, as amended, is effective for all
fiscal quarters of fiscal years beginning after December 31, 2000. The Company
adopted SFAS 133 effective January 1, 2001. As discussed in Notes 6 and 22,
during 2000, the Company converted substantially all of its foreign currency
denominated borrowings to fixed rate U.S. dollar denominated borrowings and
closed most of its outstanding interest rate swaps. Based on these actions and a
review of our contracts and agreements, the Company believes that the adoption
of SFAS No. 133 will not have a material effect on its earnings or statement of
financial position. However, due to certain provisions of our debt agreements,
the results of operations could be materially affected in 2001 if it becomes
more likely that a change of control will occur before November 15, 2001.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by Staff Accounting Bulletin Nos. 101A and 101B,
was effective October 1, 2000. Adoption of SAB 101 did not have a material
effect.
RECLASSIFICATIONS
Certain amounts in the 1999 and 1998 consolidated financial statements and
notes have been reclassified to conform to the 2000 presentation.
F-10
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..... 725
Purchased in-process research and development............. 130
------
BetzDearborn goodwill as of the date of acquisition....... $1,590
======
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 40 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 16).
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 14).
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.
F-11
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma information presents a summary of
consolidated results of operations of the company as if the BetzDearborn and
FiberVisions acquisitions had occurred at the beginning of the year ended
December 31, 1998:
1998
----------------
(DOLLARS IN
MILLIONS, EXCEPT
PER SHARE)
Net sales................................................... 3,276
Income (loss) before effect of change in accounting
principle................................................. (70)
Net income (loss)........................................... (70)
Net earnings per share:
Basic
Earnings before effect of change in accounting
principle............................................ (0.69)
Earnings per share..................................... (0.69)
Diluted
Earnings before effect of change in accounting
principle............................................ (0.69)
Earnings per share..................................... (0.69)
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 five other acquisitions; three in 1998, one
in 1999 and one in 2000, for an aggregate purchase price of approximately $121
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; Alliance Technical Products, Ltd., a rosin dispersions Company,
in September 1998; the Scripset(R) water-soluble polymer resin business of
Solutia Inc. in July 1999; and Quaker Chemical Corporation's paper chemicals
business in May 2000. Allocations of the purchase prices for these acquisitions
resulted in approximately $75 million of goodwill, which is being amortized over
estimated useful lives ranging from 30 to 40 years. Citrus Colloids Ltd. was
subsequently divested in September 2000 as part of the Food Gums transaction.
2. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
Trade....................................................... $562 $639
Other....................................................... 91 143
---- ----
Total....................................................... 653 782
Less allowance for doubtful accounts........................ 27 16
---- ----
$626 $766
==== ====
At December 31, 2000, net trade accounts receivable from customers located
in the United States, Europe, the Americas and Asia were $284 million, $170
million, $51 million and $30 million, respectively. 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.
F-12
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
The components of inventories are:
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
Finished products........................................... $171 $187
Materials, supplies and work in process..................... 134 193
---- ----
$305 $380
==== ====
Inventories valued on the LIFO method were lower than if valued under the
average-cost method, which approximates current cost, by $31 million at both
December 31, 2000 and 1999.
4. INVESTMENTS
Total equity investments in affiliated companies were $40 million at
December 31, 2000, and $10 million at December 31, 1999.
On September 29, 2000, we sold our Food Gums Division to CP Kelco, a joint
venture with Lehman Brothers Merchant Banking Partners II, L.P. We retained a
28.6% equity position with a historical cost basis of $30 million in CP Kelco.
During the fourth quarter of 2000, Lehman Brothers made an additional capital
contribution to CP Kelco thereby reducing our equity position to approximately
23%.
Other investments, at cost or less, were $13 million and $37 million at
December 31, 2000 and 1999, respectively. Included in these amounts are
non-current marketable securities aggregating $12 million and $32 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:
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
Banks....................................................... $118 $ 26
Current maturities of long-term debt........................ 143 652
---- ----
$261 $678
==== ====
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, 2000, Hercules had $182 million of unused short-term 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, 2000, were $118
million. Weighted-average interest rates on short-term borrowings at December
31, 2000 and 1999 were 5.88% and 6.04%, respectively.
F-13
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
A summary of long-term debt follows:
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
6.15% notes due 2000....................................... $ -- $ 100
6.60% notes due 2027(a).................................... 100 100
7.85% notes due 2000....................................... -- 25
6.625% notes due 2003(b)................................... 125 125
11.125% senior notes due 2007(c)........................... 400 --
8% convertible subordinated debentures due 2010(d)......... 3 3
Term loan tranche A due in varying amounts through
2003(e).................................................. 875 1,187
Term loan tranche C due 2000(e)............................ -- 318
Term loan tranche D due 2005(e)............................ 375 --
Revolving credit agreement due 2003(e)..................... 437 336
ESOP debt(f)............................................... 101 106
Term notes at various rates from 5.23% to 9.72% due in
varying amounts through 2006(g).......................... 65 80
Variable rate loans........................................ -- 41
Other...................................................... 4 8
------ ------
$2,485 $2,429
Current maturities of long-term debt....................... (143) (652)
------ ------
Net long-term debt......................................... $2,342 $1,777
====== ======
---------------
(a) 30-year debentures with a 10-year put option, exercisable by bondholder at a
redemption price equal to principal amount.
(b) Par value of $125 million issued June 1993.
(c) The senior notes accrue interest at 11 1/8% per annum, payable semi-annually
commencing May 15, 2001. The senior notes are guaranteed by each of
Hercules' current and future wholly owned domestic restricted subsidiaries.
At any time prior to November 15, 2003, Hercules may on any one or more
occasions, redeem up to 35% of the aggregate principal amount of the senior
notes issued at a redemption price of 111.125% of the principal amount, plus
accrued and unpaid interest and liquidated damages, if any, to the
redemption date, with the net cash proceeds of one or more public equity
offerings; provided that (i) at least 65% of the aggregate principal amount
of the senior notes issued under the indenture remains outstanding
immediately after the occurrence of such redemption (excluding notes held by
Hercules and its Subsidiaries); and (ii) the redemption occurs within 45
days of the date of the closing of such public equity offering. At any time
prior to November 15, 2001, Hercules may also redeem all or part of the
senior notes upon the occurrence of a change of control at a redemption
price equal to 111.125% of the principal amount of the senior notes
redeemed, plus accrued and unpaid interest and liquidated damages, if any,
to the date of redemption. Except as described above, the senior notes will
not be redeemable at Hercules' option prior to maturity. Hercules is not
required to make mandatory redemption or sinking fund payments with respect
to senior notes. If a change of control occurs, each holder of the notes
will have the right to require Hercules to repurchase all or any part of
that Holder's notes pursuant to a change of control offer on the terms set
forth in the indenture. In the change of control offer, Hercules will offer
a change of control payment in cash equal to (i) if such change of control
is prior to November 15, 2001, 111.125% of the aggregate principal amount of
notes repurchased and (ii) if such
F-14
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
change of control is after November 15, 2001, 101% of the aggregate
principal amount of the notes repurchased plus, in each case, accrued and
unpaid interest and Liquidated Damages, if any, on the notes repurchased, to
the date of purchase. The 11 1/8% senior notes are subject to a registration
rights agreement that requires Hercules to file an Exchange Offer
registration statement with the Securities and Exchange Commission within
270 days (August 11, 2001) and to use its best efforts to have the
registration statement declared effective within 330 days (see Note 23).
(d) 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.
(e) 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 $875 million was
outstanding at year end 2000, and a $900 million revolving credit agreement
of which $437 million was outstanding at year end 2000. On April 19, 1999,
the credit agreement was amended to allow borrowings in euros, as well as
U.S. dollars. Approximately U.S. $950 million of term loan tranche A
domestic borrowings were converted into indebtedness denominated in euros
during the second quarter 1999. In addition, a Canadian subsidiary of ours
can borrow up to U.S. $100 million from select lenders in Canada in Canadian
dollars that bears interest at Bankers' Acceptances Rate plus 2.25% at
December 31, 2000. Interest rates are reset for one, three, or six month
periods at the company's option. The company's credit 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, 2000, $459 million of the $900 million multi-currency
revolver is available for use. However, the actual availability under the
revolving credit agreement is constrained by our ability to meet covenants
in our senior credit facility. In July 2000, the credit agreement was
amended to modify the maximum leverage ratio, defined as debt/EBITDA, for
the period April 1, 2000 through June 30, 2000. During the third quarter of
2000, we were granted waivers of some of the financial covenants in our
senior credit facility and our ESOP credit facility through November 15,
2000. Effective November 14, 2000, our senior credit facility and our ESOP
credit facility were amended to (i) modify certain financial covenants; (ii)
change the mandatory prepayment provisions; and (iii) provide for security,
among other things. The senior credit facility amendments were conditioned
upon, among other things, the issuance by us of the 11 1/8% senior notes and
term loan tranche D (described below). The amendment to the senior credit
facility increased the interest rate on amounts outstanding under the
revolving credit agreement, term loan tranche A and term loan tranche C to
LIBOR + 2.25% (8.90% at December 31, 2000). The senior credit facility and
ESOP credit facility, as amended, are secured by liens on our property and
assets (and those of our Canadian Subsidiaries), a pledge of the stock of
substantially all of our domestic subsidiaries and 65% of the stock of
foreign subsidiaries directly owned by us and a pledge of domestic
intercompany indebtedness. In connection with the amendments to the senior
credit facility and the ESOP credit facility, our 6.60% notes due 2027 and
our 6.625% notes due 2003 were also secured as required by the indenture
under which such notes were issued. As a result of the amendments, the
Company was in compliance with all of the covenants. On November 14, 2000,
in conjunction with and conditioned upon the effectiveness of the third
amendment, we borrowed $375 million under the senior credit facility (term
loan tranche D) and we issued $400 million of 11 1/8% senior notes due 2007.
Term loan tranche D initially bore interest at LIBOR + 2.75% (9.47% at
December 31, 2000), matures on November 15, 2005, and will require only
nominal principal payments prior to maturity. On January 23, 2001, our
corporate credit rating was downgraded by Standard & Poor's Rating Services
to BB which
F-15
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
resulted in an increase to the interest rates on the term loan tranche A and
term loan tranche D to LIBOR + 2.75% and LIBOR + 3.25%, respectively (see
Note 23).
(f) 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 that, 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 mature in June
2009. During the third quarter of 2000, we were granted waivers of some of
the financial covenants in our senior credit facility and our ESOP credit
facility through November 15, 2000. Effective November 14, 2000, our senior
credit facility was permanently amended. The senior credit facility and ESOP
credit facility, as amended, are secured by liens on our property and assets
(and those of our Canadian Subsidiaries), a pledge of the stock of
substantially all of our domestic subsidiaries and 65% of the stock of
foreign subsidiaries directly owned by us and a pledge of domestic
intercompany indebtedness. Effective with the November 14, 2000 amendment,
the rate was increased to 11.95%. Effective January 23, 2001, as a result of
the lowered credit rating, the interest rate on the loan and guarantee
increased to 12.95% (see Note 23).
(g) Debt assumed in conjunction with the acquisition of FiberVisions L.L.C. (see
Note 1), net of repayments through December 31, 2000.
Long-term debt maturities during the next five years are $143 million in
2001, $328 million in 2002, $859 million in 2003, $25 million in 2004 and $385
million in 2005.
7. COMPANY-OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST
Redeemable Hybrid Income Overnight Shares
In November 1998, Hercules Trust V, our wholly owned subsidiary, completed
a private placement of $200 million Redeemable Hybrid INcome Overnight Shares
(RHINOS). We repaid the RHINOS with a portion of the proceeds from the offering
of 11 1/8% senior notes on November 14, 2000.
TRUST ORIGINATED PREFERRED SECURITIES
In March 1999, Hercules Trust I ("Trust I"), our wholly owned subsidiary
trust, 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.
F-16
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2000, 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. We repaid the debentures with a portion of
the proceeds from the offering of 11 1/8% senior notes on December 29, 2000.
8. SERIES PREFERRED STOCK
There are 2,000,000 shares of series preferred stock without par value
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, 2000, a total of 27,960,812 shares
were reserved for issuance for the following purposes: 402,253 shares for sales
to the Savings Plan Trustee; 17,135,353 shares for the exercise of awards under
the Stock Option Plan; 1,847,855 shares for awards under incentive compensation
plans; 176,492 shares for conversion of debentures and notes; 202,139 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 2000, 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 66,792,032 shares of common stock were purchased in the open market at an
average price of $37.29 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
F-17
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $91 million and $93 million at
December 31, 2000 and 1999, 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 $101 million and $106
million at December 31, 2000 and 1999, 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 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. The company's common stock dividends were
suspended during the fourth quarter of 2000. 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 $115 million and $123
million at December 31, 2000 and 1999, respectively.
2000 1999
--------- ---------
Allocated............................................. 1,858,459 1,807,976
Unallocated........................................... 3,582,334 3,814,749
--------- ---------
Total shares held by ESOP............................. 5,440,793 5,622,725
========= =========
The ESOP expense is calculated using the shares-allocated method and
includes net interest incurred on the debt of $6 million and $5 million for 2000
and 1999, 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:
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
ESOP expense................................................ $13 $13
Common stock dividends (charged to retained earnings)....... (3) (6)
--- ---
Net ESOP expense............................................ $10 $ 7
--- ---
ESOP Contributions.......................................... $10 $ 9
=== ===
F-18
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
491,488 at December 31, 2000, and 926,689 and 1,083,613 at December 31, 1999 and
1998, respectively.
At December 31, 2000, under the company's incentive compensation plans,
1,847,855 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 $1 million for
2000, $3 million for 1999 and $5 million for 1998.
F-19
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 1998, 1999 and 2000:
REGULAR PERFORMANCE-ACCELERATED
------------------------------ -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES PRICE SHARES PRICE
---------- ---------------- --------- ----------------
January 1, 1998..................... 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
Granted............................. 3,418,275 $16.75 187,500 $14.06
Exercised........................... (28,500) $11.83 -- --
Forfeited........................... (217,405) $34.30 (38,916) $42.31
---------- ------ --------- ------
December 31, 2000................... 10,975,928 $31.49 6,159,425 $43.51
The weighted-average fair value of regular stock options granted during
1998, 1999 and 2000 was $8.53, $8.18 and $7.19 respectively. The
weighted-average fair value of performance-accelerated stock options granted
during 1998, 1999 and 2000 was $9.24, $7.82 and $5.86 respectively.
Following is a summary of regular stock options exercisable at December 31,
1998, 1999, and 2000, and their respective weighted-average share prices:
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISABLE SHARES EXERCISE PRICE
------------------- --------- ----------------
December 31, 1998................................. 3,300,628 $41.57
December 31, 1999................................. 4,651,273 $39.95
December 31, 2000................................. 6,237,147 $38.43
At December 31, 2000, there were 50,000 performance-accelerated stock
options exercisable at a weighted average exercise price of $47.00 per share.
There were no performance-accelerated stock options exercisable at December 31,
1998 and 1999.
F-20
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
EXERCISE OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
PRICE RANGE AT 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/00 EXERCISE PRICE
---------------------------- ----------- ---------------- ---------------- ----------- ----------------
Regular Stock Options
$12 - $20 3,565,188 8.91 $16.72 301,363 $16.56
$20 - $30 1,778,275 7.31 $25.52 1,326,820 $25.51
$30 - $40 3,475,865 7.09 $38.20 2,573,914 $38.41
$40 - $50 1,436,400 6.07 $47.43 1,332,350 $47.41
$50 - $60 720,200 5.18 $55.09 702,700 $55.22
---------- ---------
10,975,928 6,237,147
========== =========
Performance-Accelerated
Stock Options
$14 - $40 2,289,405 7.84 $34.47 -- --
$40 - $50 3,068,770 5.83 $47.09 50,000 $47.00
$50 - $61 801,250 5.08 $55.63 -- --
---------- ---------
6,159,425 50,000
========== =========
The Company currently expects that 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, 202,139 shares of Hercules common stock are registered for offer and
sale under the plan. Shares issued at December 31, 2000 and 1999, were 1,597,861
and 949,464, 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 2000, 1999 and 1998:
REGULAR PERFORMANCE EMPLOYEE STOCK
ASSUMPTION PLAN ACCELERATED PLAN PURCHASE PLAN
---------- --------- ---------------- --------------
Dividend yield.............................. 2% 3.4% 0.0%
Risk-free interest rate..................... 5.88% 5.38% 5.41%
Expected life............................... 7.1 yrs.. 5 yrs. 3 mos.
Expected volatility......................... 29.20% 27.31% 44.86%
F-21
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The company's net income and earnings per share for 2000, 1999 and 1998
would approximate the pro forma amounts below:
2000 1999 1998
----- ----- ------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE)
Net income
As reported............................................ $ 98 $ 168 $ 9
Pro forma.............................................. $ 74 $ 149 $ (5)
Basic earnings per share
As reported............................................ $0.91 $1.63 $ 0.10
Pro forma.............................................. $0.69 $1.45 $(0.06)
Diluted earnings per share
As reported............................................ $0.91 $1.62 $ 0.10
Pro forma.............................................. $0.69 $1.44 $(0.06)
12. ADDITIONAL BALANCE SHEET DETAIL
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
Property, plant, and equipment
Land...................................................... $ 44 $ 58
Buildings and equipment................................... 2,394 2,785
Construction in progress.................................. 126 135
------- -------
Total..................................................... 2,564 2,978
Accumulated depreciation and amortization................. (1,460) (1,657)
------- -------
Net property, plant, and equipment........................ $ 1,104 $ 1,321
======= =======
Accrued expenses
Payroll and employee benefits............................. $ 78 $ 63
Income taxes payable...................................... 17 35
Current portion of restructuring liability................ 34 66
Current portion of postretirement benefits................ 20 20
Accrued interest payable.................................. 30 44
Legal accrual............................................. 25 101
Environmental accrual..................................... 24 29
Dividends payable......................................... -- 28
Other..................................................... 174 175
------- -------
$ 402 $ 561
======= =======
F-22
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2000 and 1999, the goodwill and other intangible assets
were:
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
Goodwill.................................................... $1,856 $1,915
Customer relationships...................................... 314 322
Trademarks and tradenames................................... 238 244
Other intangibles........................................... 193 219
------ ------
Total....................................................... 2,601 2,700
Less accumulated amortization............................... (210) (130)
------ ------
Net goodwill and other intangible assets.................. $2,391 $2,570
====== ======
14. RESTRUCTURING
The consolidated balance sheet reflects liabilities for employee severance
benefits and other exit costs, primarily related to the plans initiated upon the
acquisition of BetzDearborn in 1998. In addition, we terminated approximately
100 employees in connection with the sale of our nitrocellulose business (see
Note 17). This resulted in the addition of approximately $4 million in severance
benefits to the accrued liability. In the third quarter of 2000, we committed to
plans relating to the restructuring of our Process Chemicals & Services segment
and corporate realignment due to the divestiture of our non-core businesses.
This resulted in the addition of approximately $13 million in severance benefits
to the accrued liability (see Note 17). In the fourth quarter of 2000, we
committed to a plan relating to the restructuring of several foreign entities in
our Process Chemicals & Services segments. This resulted in the addition of
approximately $1 million in severance benefits to the accrued liability. We
estimate approximately 310 employees will be terminated in connection with the
third and fourth quarter 2000 plans. As a result of these plans, we estimate
approximately 1,705 employees will be terminated, of which approximately 1,360
employee terminations have occurred since inception of the aforementioned plans.
Approximately 375 employees were terminated during the year ended December
31, 2000. Cash payments during 2000 included $36 million for severance benefits
and $9 million for other exit costs. We lowered the estimate for severance
benefits and other exit costs related to the termination of both legacy Hercules
and BetzDearborn employees by $4 million and $12 million, respectively.
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 included $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, an $8 million
increase in exit costs related to facility closures 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 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 17).
In 1998, Hercules incurred restructuring liabilities of $130 million in
connection with the acquisition of BetzDearborn (see Notes 1 and 17). 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,
F-23
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
including $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.
Cash payments of $1 million and $2 million for the 1997 Restructuring Plan
are reflected in the table below in 2000 and 1999, respectively. Remaining
amounts to be paid, with respect to this plan are $2 million at the end of 2001.
A reconciliation of activity with respect to the liabilities established
for these plans is as follows:
2000 1999
-------- --------
(DOLLARS IN MILLIONS)
Balance at beginning of year................................ $ 77 $130
Cash payments............................................... (45) (56)
Additional termination benefits and exit costs.............. 18 11
Reversals against goodwill.................................. (12) (4)
Reversals against earnings.................................. (4) (4)
---- ----
Balance at end of year...................................... $ 34 $ 77
==== ====
Severance benefits payments are based on years of service and generally
continue for 3 to 24 months subsequent to termination. Actions under the 1998
restructuring plans are substantially complete as of December 31, 2000. We
anticipate that actions under the 1999 and 2000 restructuring plans will be
substantially completed by the end of 2001.
15. 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.
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------
2000 1999 2000 1999
------ ------ ----- -----
(DOLLARS IN MILLIONS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1........................ $1,343 $1,499 $ 181 $ 154
Service cost........................................... 26 30 1 2
Interest cost.......................................... 101 97 14 13
Amendments............................................. -- 6 (7) 20
Assumption change...................................... 71 (147) 8 (9)
Settlements............................................ (6) -- -- --
Translation difference................................. (16) (19) -- --
Actuarial loss (gain).................................. 11 (8) 15 22
Benefits paid from plan assets......................... (103) (115) (4) (2)
Benefits paid by Company............................... -- -- (20) (19)
------ ------ ----- -----
Benefit obligation at December 31........................ $1,427 $1,343 $ 188 $ 181
====== ====== ===== =====
F-24
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------
2000 1999 2000 1999
------ ------ ----- -----
(DOLLARS IN MILLIONS)
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1................. $1,732 $1,589 $ 7 $ 8
Actual return on plan assets........................... (44) 275 -- 1
Asset transfers and receivables........................ 4 -- -- --
Settlements............................................ (4) -- -- --
Company contributions (refund)......................... 2 2 -- --
Translation difference................................. (19) (19) -- --
Benefits paid from plan assets......................... (103) (115) (4) (2)
------ ------ ----- -----
Fair value of plan assets at December 31................. $1,568 $1,732 $ 3 $ 7
====== ====== ===== =====
Funded status of the plans............................... $ 142 $ 389 $(186) $(174)
Unrecognized actuarial loss (gain)....................... 71 (197) 66 44
Unrecognized prior service cost (benefit)................ 32 36 (22) (19)
Unrecognized net transition obligation................... 1 (11) -- --
Amount included in accrued expenses -- other............. -- -- 20 20
------ ------ ----- -----
Prepaid (accrued) benefit cost........................... $ 246 $ 217 $(122) $(129)
====== ====== ===== =====
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
Prepaid benefit cost................................... $ 246 $ 217 $ -- $ --
Accrued benefit liability.............................. -- -- (122) (129)
------ ------ ----- -----
$ 246 $ 217 $(122) $(129)
====== ====== ===== =====
ASSUMPTIONS AS OF DECEMBER 31
Weighted-average discount rate......................... 7.50% 8.00% 7.50% 8.00%
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%
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------------- --------------------
2000 1999 1998 2000 1999 1998
----- ----- ----- ---- ---- ----
Service cost................................. $ 26 $ 30 $ 20 $ 1 $ 2 $1
Interest cost................................ 101 97 83 14 13 10
Return on plan assets (expected)............. (142) (134) (114) (1) (1) (1)
Amortization and deferrals................... 3 3 12 (2) (2) (4)
Amortization of transition asset............. (11) (14) (14) -- -- --
----- ----- ----- --- --- --
Benefit cost (credit)........................ $ (23) $ (18) $ (13) $12 $12 $6
===== ===== ===== === === ==
Other Postretirement Benefits
The non-pension 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 Trust was
established and funded with $10 million of Company funds. The Company
periodically obtains reimbursement for union retiree
F-25
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 8.0% for the year ended
December 31, 2000. The assumed health care cost trend rate was 4.5% for the year
ended December 31, 1999, and was 5% for those under age 65 and 4.75% for those
over age 65 for the year ended December 31, 1998. The assumed health care cost
trend rate will be 7% in 2001, 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
$6 million or $4 million, respectively, and would not have a material effect on
aggregate service and interest cost components.
16. 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 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 and foam control, fouling, 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 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 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 took 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%.
17. OTHER OPERATING EXPENSES (INCOME), NET
Other operating expenses (income), net, in 2000 include a gain of $168
million from the sale of the Food Gums division. On September 28, 2000, we sold
our Food Gums division to CP Kelco, a joint venture with Lehman Brothers
Merchant Banking Partners II, L.P., which contributed approximately $300 million
in equity. We received approximately $395 million in cash proceeds, recorded
certain selling and tax expenses of
F-26
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $77 million initially retaining a 28.6% equity position in CP
Kelco. CP Kelco simultaneously acquired Kelco biogums business of Pharmacia
Corporation (formerly Monsanto Corporation).
Partially offsetting the gain from the sale of the Food Gums Division is
$66 million of charges for asset impairments and write-offs, primarily in the
FiberVisions business. Restructuring charges of $18 million, including $4
million (below) related to the nitrocellulose divestiture, were incurred for
2000 plans, primarily relating to severance and termination benefits for
approximately 410 employee terminations in our Process Chemicals & Services
segment and corporate realignment due to the divestitures of our non-core
businesses (Food Gums, Resins, nitrocellulose). Offsetting these restructuring
charges was $4 million of reversals relating to prior year plans. Environmental
charges of $8 million were incurred, offset by $11 million in recoveries of
insurance for environmental claims. Additionally, we incurred a loss of $25
million, including $4 million for severance and termination benefits (Note 14),
associated with the sale of the nitrocellulose business, and $5 million
associated with the integration of the BetzDearborn acquisition were incurred.
Also reflected in 2000 are $16 million severance benefits and compensation
expense not associated with restructuring plans and $1 million for other items.
The asset impairments were triggered by significantly higher raw material costs
and the loss of a facility's major customer.
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 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 14). 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 14).
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 14) 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.
18. INTEREST AND DEBT EXPENSE
Interest and debt costs are summarized as follows:
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Costs incurred.............................................. $175 $197 $112
Amount capitalized.......................................... 11 12 11
---- ---- ----
Amount expensed............................................. $164 $185 $101
==== ==== ====
F-27
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following:
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Net gains (losses) on dispositions.......................... $ (1) $10 $ 23
Interest income, net........................................ 5 7 36
Legal settlements and accruals, net......................... (10) (7) (66)
Bank charges................................................ (3) (2) (1)
Minority interests.......................................... -- (2) --
Interest rate swap termination.............................. -- -- (13)
Miscellaneous expense, net.................................. (9) (8) (1)
---- --- ----
$(18) $(2) $(22)
==== === ====
Net gains (losses) on dispositions include a loss of $1 million from the
sale of non-operating real estate and other investments in 2000, and gains of
$10 million in 1999 and $11 million in 1998. Also, a gain of $12 million in 1998
was recorded from the sale of Alliant Techsystems common stock held by Hercules
(see Note 24). Interest income in 1998 relates primarily to the $500 million
note received upon completion of the Tastemaker monetization. The 1998 legal
settlements and accruals relate primarily to settlements of Qui Tam ("Whistle
Blower") lawsuits. Legal settlements and accruals in 2000 and 1999 primarily
represent certain other legal expenses and settlements associated with former
operations of the Company. The 1998 loss from terminated interest rate swaps is
related to the company's financing effort upon the acquisition of BetzDearborn.
20. INCOME TAXES
The domestic and foreign components of income before taxes and effect of
change in accounting principle are presented below:
2000 1999 1998
---- ---- -----
(DOLLARS IN MILLIONS)
Domestic.................................................... $(17) $ 4 $(147)
Foreign..................................................... 181 239 224
---- ---- -----
$164 $243 $ 77
==== ==== =====
A summary of the components of the tax provision follows:
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Currently payable
U.S. federal.............................................. $ 14 $(25) $(26)
Foreign................................................... 70 82 74
State..................................................... 4 (4) (4)
Deferred
Domestic.................................................. (21) 15 17
Foreign................................................... (1) 7 7
---- ---- ----
Provision for income taxes.................................. $ 66 $ 75 $ 68
==== ==== ====
F-28
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax liabilities (assets) at December 31 consisted of:
2000 1999
-------- --------
(DOLLARS IN MILLIONS)
Depreciation.............................................. $ 232 $ 235
Prepaid pension........................................... 68 84
Inventory................................................. 11 8
Investments............................................... 88 83
Other..................................................... 79 51
----- -----
Gross deferred tax liabilities............................ $ 478 $ 461
----- -----
Postretirement benefits other than pensions............... $ (70) $ (59)
Accrued expenses.......................................... (172) (165)
Loss carryforwards........................................ (10) (24)
Other..................................................... (104) (71)
----- -----
Gross deferred tax assets................................. (356) (319)
----- -----
Valuation allowance....................................... 28 16
----- -----
$ 150 $ 158
===== =====
A reconciliation of the U.S. statutory income tax rate to the effective
rate follows:
2000 1999 1998
---- ---- ----
U.S. statutory income tax rate.............................. 35% 35% 35%
Purchased in-process research and development (Note 16)..... -- -- 59
Goodwill amortization....................................... 14 9 7
Valuation allowances........................................ 8 -- --
Research and development credits............................ (6) -- --
Tax rate differences on subsidiary earnings................. (5) -- --
Incremental tax on cash repatriations from non-US
subsidiaries.............................................. 2 3 --
State taxes................................................. 2 (2) 2
Utilization of capital losses............................... (5) (7) --
Reserves.................................................... (6) (6) (17)
Other....................................................... 1 (1) 2
-- -- ---
Effective tax rate.......................................... 40% 31% 88%
== == ===
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
$246 million and $505 million at December 31, 2000 and 1999, respectively. 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.
F-29
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. 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:
2000 1999 1998
--------- --------- --------
(DOLLARS AND SHARES IN MILLIONS,
EXCEPT PER SHARE)
Basic EPS computation:
Net income................................................ $ 98 $ 168 $ 9
====== ====== =====
Weighted-average shares outstanding....................... 107.2 103.2 96.3
------ ------ -----
Earnings per share........................................ $ 0.91 $ 1.63 $0.10
====== ====== =====
DILUTED EPS COMPUTATION:
Net income................................................ $ 98 $ 168 $ 9
====== ====== =====
Weighted-average shares outstanding....................... 107.2 103.2 96.3
Options................................................... 0.0 0.4 0.6
Convertible debentures.................................... 0.2 0.3 0.5
------ ------ -----
Adjusted weighted-average shares.......................... 107.4 103.9 97.4
====== ====== =====
Earnings per share........................................ $ 0.91 $ 1.62 $0.10
====== ====== =====
22. DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company enters into forward-exchange contracts and currency swaps to
hedge currency exposure. The Company used interest rate swap agreements to
manage interest costs and risks associated with changing rates.
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 2000, the interest rate swap portfolio, which replaced variable rate
debt with fixed rate debt, was substantially terminated due to the conversion of
foreign denominated debt to U.S. dollar denominated debt in the first half of
2000 and the November 2000 debt restructuring.
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 December 31,
1999, with maturities from 2001 through September 2003, effectively converted
floating-rate debt into debt with a fixed rate ranging from 5.36% to 6.23% per
year for U.S. dollar debt and 2.76% to 3.18% per year for euro debt. These swaps
acted as a hedge against the company's interest rate exposure on its outstanding
variable rate debt. For the years 2000 and 1999, 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 2000 and 1999 were $20 million and $1.2 billion, respectively.
F-30
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table indicates the types of swaps used and their
weighted-average interest rates:
2000 1999
---- ------
(DOLLARS IN
MILLIONS)
Pay fixed on swaps notional amount (at year-end)............ $ 20 $1,160
Average pay rate............................................ 3.8% 4.0%
Average receive rate........................................ 4.3% 3.9%
Foreign Exchange Risk Management
The Company has selectively used 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 the euro, Danish kroner and 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 three months. At December 31, 2000 and 1999, the Company had
outstanding forward-exchange contracts to purchase foreign currencies
aggregating $19 million and $59 million and to sell foreign currencies
aggregating $39 million and $72 million, respectively. Non-U.S. dollar
cross-currency trades aggregated $188 million and $410 million at December 31,
2000 and 1999, respectively. The foreign exchange contracts outstanding at
December 31, 2000 will mature during 2001.
Fair Values
The following table presents the carrying amounts and fair values of the
company's financial instruments at December 31, 2000 and 1999:
2000 1999
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(DOLLARS IN MILLIONS)
Investment securities (available for
sale)................................... $ 11 $ 11 $ 32 $ 32
Long-term debt............................ (2,342) (2,325) (1,777) (1,759)
Company-obligated preferred securities of
subsidiary trusts....................... (622) (492) (992) (908)
Foreign exchange contracts................ (1) (1) 2 2
Interest rate swap contracts.............. -- -- -- 28
Fair values of derivative contracts are indicative of cash that would have
been required had settlement been made at December 31, 2000 and 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.
F-31
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Interest rate swap contracts: Bank or market quotes or discounted cash
flows using year-end interest rates.
23. SUBSEQUENT EVENTS
During March 2001, definitive purchase and sale agreements were signed for
the sale of our hydrocarbon resins division and select portions of our rosin
resins divisions (the "Eastman transaction") to Eastman Chemical Resins, Inc., a
subsidiary of Eastman Chemical Company ("Eastman"). Also in March 2001, we
entered into an agreement to sell the Peroxides portion of our Resins division
(the "Peroxide transaction"). We anticipate closing both transactions prior to
May 31, 2001.
Both our senior credit facility and our ESOP Trust loan (Note 6) require
quarterly compliance with certain financial covenants, including leverage ratio
("debt/EBITDA ratio"), an interest coverage ratio and minimum net worth. In
addition, we are required to deliver our annual audited consolidated financial
statements to the lenders within 90 days of the Company's fiscal year end.
Due to the delay in closing the Eastman transaction, which in turn delayed
the pay down of the debt, our debt as of March 31, 2001 was significantly higher
than planned. As a result, the Company would have been out of compliance with
the debt/EBITDA ratio covenant of its senior credit facility as of March 31,
2001. In addition, due to the fact that the Company has extended the filing date
for this 10-K, the Company's annual audited financial statements were not
provided to the lenders by March 31, 2001.
On April 5, 2001, in consideration for the payment of a fee, our senior
credit facility bank syndicate and ESOP lender granted waivers with respect to:
(1) compliance with the debt/EBITDA ratio as of March 31, 2001, and (2) an
extension of time to deliver the December 31, 2000 audited financial statements
to April 17, 2001. These statements have now been completed.
With respect to the covenant regarding the debt/EBITDA ratio, the waiver
requires that the Eastman transaction be consummated on or before May 31, 2001.
In addition, the Company must demonstrate, as of the last day of the month in
which the Eastman transaction closes, that the leverage ratio does not exceed
4.75 to 1.00 after giving affect to the application of the net cash proceeds
from the Eastman transaction to prepay the Tranche A Term loan and the ESOP
Trust loan. The Company expects to achieve this leverage ratio, although it may
be necessary to close the Peroxide transaction prior to or in the same month as
the Eastman transaction.
A breach of any of the terms and conditions of the waiver would give the
lenders the right to accelerate repayment of substantially all of our
indebtedness if they choose to do so. Upon any such acceleration, the debt would
become immediately due and payable and any loan commitments terminated. Although
no assurances can be given in this regard, we anticipate closing the Eastman and
Peroxides transactions prior to May 31, 2001. Using the net proceeds for
repayment of debt, we expect that we will be in compliance with all debt
covenants during the second quarter 2001 as well as the remainder of the year.
While, as indicated above, we expect to satisfy all conditions of the
waiver and remain in compliance with our debt covenants, current and future
compliance is dependent upon generating sufficient EBITDA and cash flow which
are, in turn, impacted by business performance, economic climate, competitive
uncertainties and possibly the resolution of contingencies, including those set
forth in Note 25 to the consolidated financial statements.
In the event the Company is not in compliance with the debt covenants at
the conditional date or thereafter, we would pursue various alternatives, which
may include, among other things, refinancing of debt, debt covenant amendments,
or debt covenant waivers. While we believe we would be successful in pursuing
these alternatives, there can be no assurance that we would be successful.
F-32
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On April 10, 2001, the United States Court of Appeals for the Eighth
Circuit issued an opinion in the United States, et al. v. Vertac Corporation, et
al., as described in Item 3. In that opinion, the Appeals Court reversed the
Court's October 12, 1993 grant of partial summary judgment, which had held
Hercules jointly and severally liable for costs incurred and to be incurred at
the Jacksonville site, and remanded the case back to the U.S. District Court for
the Eastern District of Arkansas for a determination of whether the harms at the
site giving rise to the government's claims are divisible. The Appeals Court
also vacated the Court's October 23, 1998 order granting the United States'
summary judgment motion and the February 8, 2000 judgment finding Hercules
liable for 97.4% of the costs at issue, ordering that these issues be revisited
following further proceedings with respect to divisibility. Finally, the Appeals
Court affirmed the judgment of liability against Uniroyal.
As a result of the Appellate rulings described above, Hercules will be
allowed to present both facts and law to the Court in support of Hercules'
belief that it should not be liable under CERCLA for some or all of the costs
incurred by the government in connection with the site because those harms are
divisible. Should Hercules prevail on remand, any liability to the government
will be either eliminated or reduced (see Note 25).
24. 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.
On September 28, 2000, we sold our Food Gums division to CP Kelco, a joint
venture we entered into with Lehman Brothers Merchant Banking Partners II, L.P.,
which contributed approximately $300 million in equity. We received
approximately $395 million in cash proceeds, recorded certain selling and tax
expenses of approximately $77 million and retained a 28.6% equity position in CP
Kelco. CP Kelco simultaneously acquired Pharmacia's Kelco biogums business. The
net proceeds from the sale of the Food Gums division have been used to
permanently reduce borrowings under our senior credit facility. Food Gums had
net sales of approximately $208 million in 1999.
In November 2000, the Company announced it was exploring strategic
alternatives for all or parts of the Company with the assistance of Goldman
Sachs & Co. and Credit Suisse First Boston. Since this process is ongoing, any
potential sale of all or part of the business may have a material impact on the
estimates and assumptions used to prepare the amounts reported in the
consolidated financial statements and accompanying notes. There can be no
assurance that a transaction will occur.
The majority of the remaining portions of the Resins division, including
the ink toner portion that one of our joint venture partners exercised a right
of first refusal to purchase in June 2000, are expected to be sold during 2001.
The Resins division, including those portions associated with the Eastman and
Peroxides transactions, had approximately $450 million in net sales in 2000.
25. COMMITMENTS AND CONTINGENCIES
Leases
Hercules has operating leases (including office space, transportation and
data processing equipment) expiring at various dates. Rental expense was $57
million in 2000, $55 million in 1999 and $35 million in 1998.
At December 31, 2000, minimum rental payments under noncancelable leases
aggregated $289 million with subleases of $20 million. A significant portion of
these payments relates to a long-term operating lease for
F-33
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
corporate office facilities. The net minimum payments over the next five years
are $43 million in 2001, $36 million in 2002, $29 million in 2003, $23 million
in 2004 and $19 million in 2005.
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 $64 million and $240 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 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
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, et al, v. Vertac Corporation, et al, USDC No. LR-C-80-109 and
LR-C-80-110 (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 been held not 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 Court for further proceedings.
On May 21, 1997, the Court issued a ruling that Uniroyal was liable and
that Standard Chlorine was 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
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.
F-34
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 was held on June 12, 2000.
On April 10, 2001, the United States Court of Appeals for the Eighth
Circuit issued an opinion in the consolidated appeals described above. In that
opinion, the Appeals Court reversed the Court's October 12, 1993 grant of
partial summary judgment, which had held Hercules jointly and severally liable
for costs incurred and to be incurred at the Jacksonville site, and remanded the
case back to the U.S. District Court for the Eastern District of Arkansas for a
determination of whether the harms at the site giving rise to the government's
claims are divisible. The Appeals Court also vacated the Court's October 23,
1998 order granting the United States' summary judgment motion and the February
8, 2000 judgment finding Hercules liable for 97.4% of the costs at issue,
ordering that these issues be revisited following further proceedings with
respect to divisibility. Finally, the Appeals Court affirmed the judgment of
liability against Uniroyal.
As a result of the Appellate rulings described above, Hercules will be
allowed to present both facts and law to the Court in support of Hercules'
belief that it should not be liable under CERCLA for some or all of the costs
incurred by the government in connection with the site because those harms are
divisible. Should Hercules prevail on remand, any liability to the government
will be either eliminated or reduced.
In 1992, Hercules brought suit against its insurance carriers for past and
future costs for cleanup of certain environmental sites (Hercules Incorporated
v. 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. Hercules has appealed certain of the trial court's rulings to
the Delaware Supreme Court. Oral argument was held on February 13, 2001 before
the Delaware Supreme Court, but no ruling has been issued.
At December 31, 2000, the accrued liability of $64 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. While it is not feasible to predict the outcome of all pending
suits and claims, the ultimate resolution of these environmental matters could
have a material effect upon the results of operations and the financial position
of Hercules.
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.
F-35
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Hercules is a defendant in numerous asbestos-related personal injury
lawsuits and claims which typically arise from alleged exposure to asbestos
fibers from resin-encapsulated pipe and tank products which were sold by a
former subsidiary of Hercules to a limited industrial market, or from alleged
exposure to asbestos contained in facilities owned or operated by Hercules.
Lawsuits are received and matters settled on a regular basis. In December 1999,
Hercules entered into a Settlement Agreement to resolve the majority of these
matters then pending. 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. During 2000 and 2001, Hercules entered into additional settlement
agreements. The terms of these settlements are also confidential. In accordance
with the terms of the previously mentioned agreement with several of Hercules'
insurance carriers, the majority of the amounts paid and to be paid pursuant to
these various settlement agreements will be insured. Further, Hercules continues
to pursue additional insurance coverage from carriers who were not part of the
previously mentioned agreement.
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.
At December 31, 2000, the consolidated balance sheet reflects a current
liability of approximately $25 million for litigation and claims. 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.
Other
At December 31, 2000, Hercules had $21 million in letters of credit
outstanding with lenders, $4 million of which were issued under the senior
credit facility (Note 6).
26. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
In 1998, Hercules adopted Statement of Financial Accounting Standards No.
131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information." The statement established new standards for reporting information
about operating segments in annual financial statements and required selected
information about operating segments in interim financial reports. It also
established standards for related disclosure about products and services,
geographic area, and major customers. In compliance with SFAS 131, the Company
has identified three reportable segments.
Process Chemicals and Services: (Pulp and Paper and BetzDearborn.)
Products and services in this segment are designed to enhance customers'
processes and products, 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.) 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
solvent-soluble polymers, used as thickeners, emulsifiers and stabilizers for
water-based paints, oil and gas exploration, building materials, dairy and
bakery products, cosmetic and oral hygiene
F-36
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
products and producers of lacquers, inks and aviation fluids. Prior to September
28, 2000, this segment also included our Food Gums Division, which was sold to
CP Kelco, a joint venture we entered with Lehman Brothers Merchant Banking
Partners II, L.P.
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 yarns for decorative fabrics.
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, Company-obligated preferred securities of subsidiary trusts 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.
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.
PROCESS
CHEMICALS FUNCTIONAL CHEMICAL RECONCILING
INDUSTRY SEGMENT AND SERVICES PRODUCTS SPECIALTIES ITEMS CONSOLIDATED
---------------- ------------ ---------- ----------- ----------- ------------
2000
Net sales........................... $1,717 $ 742 $695 $ (2) $3,152
Profit (loss) from operations....... 297 176 59 (88) 444
Equity in income of affiliated
companies......................... (2)
Interest and debt expense........... 164
Preferred security distributions of
subsidiary trusts................. 96
Other expense, net.................. (18)
------
Income before income taxes.......... 164
------
Capital employed(a)................. 632 219 308 2,882(b) 4,041
Capital expenditures................ 39 76 36 28 179
Depreciation and amortization....... 51 26 25 144 246
F-37
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROCESS
CHEMICALS FUNCTIONAL CHEMICAL RECONCILING
INDUSTRY SEGMENT AND SERVICES PRODUCTS SPECIALTIES ITEMS CONSOLIDATED
---------------- ------------ ---------- ----------- ----------- ------------
1999
Net sales........................... $1,725 $ 875 $711 $ (2) $3,309
Profit (loss) from operations....... 338 218 89 (165)(c) 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(a)................. 735 372 379 2,824(b) 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)(d) 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(a)................. 756 392 388 2,885(b) 4,421
Capital expenditures................ 44 53 36 24 157
Depreciation and amortization....... 22 32 19 35 108
UNITED ASIA
GEOGRAPHIC AREAS STATES EUROPE AMERICAS(E) PACIFIC TOTAL
---------------- ------------ ---------- ----------- ----------- ------------
(DOLLARS IN MILLIONS)
2000
Net sales........................... $1,702 $ 964 $215 $ 271 $3,152
Long-lived assets(f)................ 2,267 748 382 98 3,495
1999
Net sales........................... $1,742 $1,074 $220 $ 273 $3,309
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
---------------
(a) Represents total segment assets net of operating liabilities.
(b) Assets and liabilities not specifically allocated to business segments,
primarily goodwill, intangibles, and other long-term assets net of
liabilities.
(c) 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
F-38
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
charges (see Notes 14 and 17). Also included are amortization of goodwill
and intangibles, corporate research and development and other corporate
items not specifically allocated to business segments.
(d) 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 16 and 17). Also included are amortization of goodwill and
intangibles, corporate research and development and other corporate items
not specifically allocated to business segments.
(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.
27. CONSOLIDATING CONDENSED FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES
One of the amendments to our senior credit facility effective November 14,
2000 (see Note 6) included a guarantee by each of our current and future wholly
owned domestic restricted subsidiaries (each, a "Guarantor Subsidiary"). The
guarantee of each Guarantor Subsidiary is full and unconditional and joint and
several. The indenture under which our registered 6.6% notes due 2027 and 6.625%
notes due 2003 were issued requires the holders of such notes to be on the same
basis as the holders of any other subsequently issued debt that provides either
guarantees or pledges of collateral. As a result, the following wholly-owned
domestic restricted subsidiaries jointly and severally, and full and
unconditionally guarantee the senior credit facility, our registered 6.6% notes
dues 2027, 6.625% notes due 2003 and our 11.125% notes due 2007.
Aqualon Company
Athens Holding Inc.
BetzDearborn China, Inc.
BetzDearborn Europe, Inc
BetzDearborn International, Inc
BetzDearborn Inc.
BL Chemicals Inc.
BL Technologies, Inc
BLI Holdings, Inc
Chemical Technologies India, Ltd.
Covington Holdings, Inc.
DRC, Ltd
East Bay Realty Services, Inc.
FiberVisions Incorporated
FiberVisions Products, Inc
FiberVisions, L.L.C.
FiberVisions L.P.
Hercules Chemical Corporation
Hercules Country Club, Inc.
Hercules Credit, Inc
Hercules Euro Holdings, Inc.
Hercules Finance Company
Hercules Flavor, Inc.
Hercules International Limited
Hercules International Limited, L.L.C.
Hercules Investments L.L.C.
Hercules Shared Services Corp
HISPAN Corporation
WSP, Inc
The non-guarantor subsidiaries (the "Non-Guarantor Subsidiaries") include
all of the Company's foreign subsidiaries and certain domestic subsidiaries. The
Company conducts much of its business through and derives much of its income
from its subsidiaries. Therefore the Company's ability to make required payments
with respect to its indebtedness and other obligations depends on the financial
results and condition of its subsidiaries and its ability to receive funds from
its subsidiaries. There are no restrictions on the ability of any of the
Guarantor Subsidiaries to transfer funds to the Company, however there may be
restrictions for certain foreign Non-Guarantor Subsidiaries.
The following condensed consolidating financial information for the Company
presents the financial information of Hercules, the Guarantor Subsidiaries and
the Non-Guarantor Subsidiaries based on the Company's understanding of
Securities and Exchange Commission's interpretation and application of
F-39
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rule 3-10 under the Securities and Exchange Commission's Regulation S-X. The
financial information may not necessarily be indicative of results of operations
or financial position had the Guarantor Subsidiaries or Non-Guarantor
Subsidiaries operated as independent entities.
In this presentation, Hercules consists of parent Company operations.
Guarantor Subsidiaries and Non-Guarantor Subsidiaries of Hercules are reported
on an equity basis. For companies acquired during 1998, the goodwill and fair
values of the assets and liabilities acquired have been presented on a
"push-down" accounting basis.
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
DECEMBER 31, 2000
UNCONSOLIDATED
---------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------ ------------ ------------- -------------- ------------
(MILLIONS OF DOLLARS)
Net sales...................... $606 $1,532 $1,701 $(687) $3,152
Cost of sales.................. 432 995 1,050 (693) 1,784
Selling, general, and
administrative expenses...... 84 338 388 810
Research and development....... 33 35 12 80
Goodwill and intangible asset
amortization................. 7 48 25 80
Other operating expenses
(income), net................ 38 92 (176) (46)
---- ------ ------ ----- ------
Profit from operations......... 12 24 402 6 444
Equity in income (loss) from
affiliated companies, net of
tax.......................... -- -- (2) (2)
Equity in income from
consolidated subsidiaries,
net of tax................... 350 48 4 (402) --
Interest and debt expense...... 283 (129) 10 164
Preferred security
distributions of subsidiary
trusts....................... -- -- 96 96
Other income (expense), net.... (17) (9) 8 (18)
---- ------ ------ ----- ------
Income (loss) before income
taxes........................ 62 192 306 (396) 164
Provision for income taxes..... (58) 68 54 2 66
---- ------ ------ ----- ------
Net income (loss).............. $120 $ 124 $ 252 $(398) $ 98
==== ====== ====== ===== ======
F-40
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
DECEMBER 31, 1999
UNCONSOLIDATED
---------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------ ------------ ------------- -------------- ------------
(MILLIONS OF DOLLARS)
Net sales..................... $ 584 $1,570 $1,827 $(672) $3,309
Cost of sales................. 424 974 1,100 (667) 1,831
Selling, general, and
administrative expenses..... 118 365 304 787
Research and development...... 28 13 44 85
Goodwill and intangible asset
amortization................ 9 53 17 79
Other operating expenses,
net......................... 23 23 1 47
----- ------ ------ ----- ------
Profit (loss) from
operations.................. (18) 142 361 (5) 480
Equity in income (loss) from
affiliated companies, net of
tax......................... 2 -- (1) 1
Equity in income from
consolidated subsidiaries,
net of tax.................. 331 143 6 (480) --
Interest and debt expense..... 261 (51) (25) 185
Preferred security
distributions of subsidiary
trusts...................... -- -- 51 51
Other income (expense), net... (3) (1) 4 (2) (2)
----- ------ ------ ----- ------
Income (loss) before income
taxes....................... 51 335 344 (487) 243
Provision for income taxes.... (121) 89 110 (3) 75
----- ------ ------ ----- ------
Net income (loss)............. $ 172 $ 246 $ 234 $(484) $ 168
===== ====== ====== ===== ======
F-41
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
DECEMBER 31, 1998
UNCONSOLIDATED
---------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------ ------------ ------------- -------------- ------------
(MILLIONS OF DOLLARS)
Net sales...................... $558 $963 $1,309 $(685) $2,145
Cost of sales.................. 400 707 859 (679) 1,287
Selling, general, and
administrative expenses...... 80 119 178 377
Research and development....... 27 24 10 61
Purchased in-process research
and development.............. -- 130 -- 130
Goodwill and intangible asset
amortization................. 14 5 3 22
Other operating expenses,
net.......................... 40 24 12 76
---- ---- ------ ----- ------
Profit (loss) from
operations................... (3) (46) 247 (6) 192
Equity in income of affiliated
companies, net of tax........ 10 -- 10
Equity in income from
consolidated subsidiaries,
net of tax................... 119 67 6 (192) --
Interest and debt expense
(income)..................... 121 (32) 12 101
Preferred security
distributions of subsidiary
trusts....................... -- -- 2 2
Other income (expense), net.... (70) 36 10 2 (22)
---- ---- ------ ----- ------
Income (loss) before income
taxes........................ (65) 89 249 (196) 77
Provision for income taxes..... (75) 59 85 (1) 68
---- ---- ------ ----- ------
Net income (loss).............. $ 10 $ 30 $ 164 $(195) $ 9
==== ==== ====== ===== ======
F-42
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 2000
UNCONSOLIDATED
-------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------ ------------ ------------- -------------- ------------
(MILLIONS OF DOLLARS)
ASSETS
Current assets
Cash and cash equivalents....... $ 1 $ 7 $ 46 $ -- $ 54
Accounts receivable, net........ 110 183 333 626
Intercompany receivables........ 37 81 79 (197) --
Inventories..................... 63 124 128 (10) 305
Deferred income taxes........... 28 2 7 37
------ ------- ------ ------- ------
Total current assets............ 239 397 593 (207) 1,022
Property, plant, and equipment,
net............................. 264 359 481 1,104
Investments in subsidiaries....... 4,357 1,578 69 (6,004) --
Goodwill and other intangible
assets, net..................... 35 1,471 885 2,391
Deferred charges and other
assets.......................... 648 36 108 792
------ ------- ------ ------- ------
Total assets.................... $5,543 $ 3,841 $2,136 $(6,211) $5,309
====== ======= ====== ======= ======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Accounts payable................ 121 14 122 2 259
Accrued expenses................ 132 130 140 402
Intercompany payables........... 45 68 84 (197) --
Short-term debt................. 127 5 129 261
------ ------- ------ ------- ------
Total current liabilities....... 425 217 475 (195) 922
Long-term debt.................... 2,063 97 182 2,342
Deferred income taxes............. 82 48 57 187
Other postretirement benefits and
other liabilities............... 210 169 41 420
Company-obligated preferred
securities of subsidiary
trusts.......................... -- -- 622 622
Intercompany notes
payable/(receivable)............ 1,947 (2,656) 719 (10) --
Stockholders' equity.............. 816 5,966 40 (6,006) 816
------ ------- ------ ------- ------
Total liabilities and
stockholders' equity......... $5,543 $ 3,841 $2,136 $(6,211) $5,309
====== ======= ====== ======= ======
F-43
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1999
UNCONSOLIDATED
-------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------- ------------ ------------
(MILLIONS OF DOLLARS)
ASSETS
Current assets
Cash and cash equivalents......... $ 2 $ 23 $ 38 $ -- $ 63
Accounts receivable, net.......... 99 278 389 766
Intercompany receivable........... 22 24 78 (124) --
Inventories....................... 63 147 184 (14) 380
Deferred income taxes............. 119 10 129
------ ------- ------ ------- ------
Total current assets.............. 305 472 699 (138) 1,338
Property, plant, and equipment,
net............................... 251 436 634 1,321
Investments in subsidiaries......... 4,190 1,776 68 (6,034) --
Goodwill and other intangible
assets, net....................... 45 1,536 989 2,570
Deferred charges and other assets... 517 44 106 667
------ ------- ------ ------- ------
Total assets...................... $5,308 $ 4,264 $2,496 $(6,172) $5,896
====== ======= ====== ======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.................. 48 125 147 320
Accrued expenses.................. 148 250 163 561
Intercompany payable.............. 31 57 36 (124) --
Short-term debt................... 641 2 35 678
------ ------- ------ ------- ------
Total current liabilities......... 868 434 381 (124) 1,559
Long-term debt...................... 1,611 107 59 1,777
Deferred income taxes............... 77 119 91 287
Other postretirement benefits and
other liabilities................. 159 203 56 418
Company-obligated preferred
securities of subsidiary trusts... -- -- 992 992
Intercompany notes payable
(receivable)...................... 1,730 (1,189) (541) -- --
Stockholders' equity................ 863 4,590 1,458 (6,048) 863
------ ------- ------ ------- ------
Total liabilities and
stockholders' equity........... $5,308 $ 4,264 $2,496 $(6,172) $5,896
====== ======= ====== ======= ======
F-44
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
DECEMBER 31, 2000
UNCONSOLIDATED
--------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(MILLIONS OF DOLLARS)
NET CASH PROVIDED BY (USED IN)
OPERATIONS........................... $ (91) $(24) $ 234 $(49) $ 70
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures................. (37) (38) (112) -- (187)
Proceeds of investment and fixed
asset disposals................... -- 14 404 -- 418
Acquisitions, net of cash acquired... (6) -- -- -- (6)
Other, net........................... (19) (1) 8 -- (12)
------- ---- ----- ---- -------
Net cash (used in) provided by
investing activities.............. (62) (25) 300 -- 213
------- ---- ----- ---- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds.............. 1,858 27 4 -- 1,889
Long-term debt repayments............ (1,756) (27) (7) -- (1,790)
Change in short-term debt............ -- -- 92 -- 92
Payment of debt issuance costs and
underwriting fees................. (28) -- -- -- (28)
Repayment of subsidiary trust
preferred securities.............. -- -- (370) -- (370)
Change in intercompany, noncurrent... 161 33 (194) -- --
Common stock issued.................. 13 -- -- -- 13
Common stock reacquired.............. (2) -- -- -- (2)
Dividends paid....................... (94) -- (49) 49 (94)
------- ---- ----- ---- -------
Net cash (used in) provided by
financing activities.............. 152 33 (524) 49 (290)
------- ---- ----- ---- -------
Effect of exchange rate changes on
cash................................. -- -- (2) -- (2)
------- ---- ----- ---- -------
Net increase (decrease) in cash and
cash equivalents..................... (1) (16) 8 -- (9)
Cash and cash equivalents at beginning
of year.............................. 2 23 38 -- 63
------- ---- ----- ---- -------
Cash and cash equivalents at end of
year................................. $ 1 $ 7 $ 46 $ -- $ 54
======= ==== ===== ==== =======
F-45
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
DECEMBER 31, 1999
UNCONSOLIDATED
--------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(MILLIONS OF DOLLARS)
NET CASH PROVIDED BY (USED IN)
OPERATIONS........................... $ (59) $ 198 $ 243 $(102) $ 280
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures................. (42) (66) (88) -- (196)
Proceeds of investment and fixed
asset disposals................... 2 28 20 -- 50
Acquisitions, net of cash acquired... (10) -- -- -- (10)
Other, net........................... (24) (15) 2 -- (37)
------- ----- ----- ----- -------
Net cash (used in) provided by
investing activities.............. (74) (53) (66) -- (193)
------- ----- ----- ----- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds.............. 274 5 -- -- 279
Long-term debt repayments............ (1,344) (16) -- -- (1,360)
Change in short-term debt............ 99 (17) (60) -- 22
Payment of debt issuance costs and
underwriting fees................. -- -- (19) -- (19)
Proceeds from issuance of subsidiary
trusts' preferred securities...... -- -- 792 -- 792
Change in intercompany, noncurrent... 915 (112) (804) 1 --
Proceeds from issuance of warrants... 90 -- -- -- 90
Common stock issued.................. 182 -- -- -- 182
Common stock reacquired.............. (3) -- -- -- (3)
Proceeds from issuance of subsidiary
preferred stock................... -- 12 -- -- 12
Dividends paid....................... (83) -- (101) 101 (83)
------- ----- ----- ----- -------
Net cash (used in) provided by
financing activities.............. 130 (128) (192) 102 (88)
------- ----- ----- ----- -------
Effect of exchange rate changes on
cash................................. -- -- (4) -- (4)
------- ----- ----- ----- -------
Net increase (decrease) in cash and
cash equivalents..................... (3) 17 (19) -- (5)
Cash and cash equivalents at beginning
of year.............................. 5 6 57 -- 68
------- ----- ----- ----- -------
Cash and cash equivalents at end of
year................................. $ 2 $ 23 $ 38 $ -- $ 63
======= ===== ===== ===== =======
F-46
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
DECEMBER 31, 1998
UNCONSOLIDATED
--------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(MILLIONS OF DOLLARS)
NET CASH PROVIDED BY (USED IN)
OPERATIONS........................... $ 119 $ 32 $119 $(89) $ 181
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures................. (39) (52) (66) -- (157)
Proceeds of investment and fixed
asset disposals................... 77 522 1 -- 600
Acquisitions, net of cash acquired... (3,109) -- -- -- (3,109)
Other, net........................... (14) (11) -- -- (25)
------- ----- ---- ---- -------
Net cash (used in) provided by
investing activities.............. (3,085) 459 (65) -- (2,691)
------- ----- ---- ---- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds.............. 2,960 151 -- -- 3,111
Long-term debt repayments............ (175) (72) -- -- (247)
Change in short-term debt............ (212) 7 (23) -- (228)
Payment of debt issuance costs and
underwriting fees................. (59) -- (7) -- (66)
Change in intercompany, noncurrent... 665 (573) (92) -- --
Proceeds from trust preferred
securities........................ -- -- 200 -- 200
Common stock issued.................. 10 -- -- -- 10
Common stock reacquired.............. (114) -- -- -- (114)
Dividends paid....................... (104) -- (89) 89 (104)
------- ----- ---- ---- -------
Net cash (used in) provided by
financing activities.............. 2,971 (487) (11) 89 2,562
------- ----- ---- ---- -------
Effect of exchange rate changes on
cash................................. -- -- (1) -- (1)
------- ----- ---- ---- -------
Net increase (decrease) in cash and
cash equivalents..................... 5 4 42 -- 51
Cash and cash equivalents at beginning
of year.............................. -- 2 15 -- 17
------- ----- ---- ---- -------
Cash and cash equivalents at end of
year................................. $ 5 $ 6 $ 57 $ -- $ 68
======= ===== ==== ==== =======
F-47
HERCULES INCORPORATED
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER YEAR
------------- ------------- ------------- -------------- ---------------
2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
----- ----- ----- ----- ----- ----- ------ ----- ------ ------
Operating Results
Net sales..................... $ 798 $ 806 $ 822 $ 833 $ 815 $ 828 $ 717 $ 842 $3,152 $3,309
Cost of sales................. 450 438 462 456 463 460 409 477 1,784 1,831
Selling, general, and
administrative expenses..... 197 197 206 193 210 188 197 209 810 787
Research and development...... 21 21 20 20 20 21 19 23 80 85
Goodwill and intangible asset
amortization................ 20 20 20 20 20 20 20 19 80 79
Other operating expenses
(income), net............... 4 7 18 6 (105) 1 37 33 (46) 47
----- ----- ----- ----- ----- ----- ------ ----- ------ ------
Profit (loss) from
operations.................. $ 106 $ 123 $ 96 $ 138 $ 207 $ 138 $ 35 $ 81 $ 444 $ 480*
Equity income................. -- 1 -- -- -- -- (2) -- (2) 1
Interest and debt expense..... 32 60 42 47 42 38 48 40 164 185
Preferred security
distributions of subsidiary
trusts...................... 23 5 23 12 23 16 27 18 96 51
Other income (expense), net... 5 3 (6) 4 (13) (2) (4) (7) (18) (2)
----- ----- ----- ----- ----- ----- ------ ----- ------ ------
Income (loss) before income
taxes....................... $ 56 $ 62 $ 25 $ 83 $ 129 $ 82 $ (46) $ 16 $ 164 $ 243
Income taxes.................. 20 24 9 27 54 25 (17) (1) 66 75
----- ----- ----- ----- ----- ----- ------ ----- ------ ------
Net income (loss)............. $ 36 $ 38 $ 16 $ 56 $ 75 $ 57 $ (29) $ 17 $ 98 $ 168
===== ===== ===== ===== ===== ===== ====== ===== ====== ======
Earnings per share**
Basic:
Earnings (loss) per share... $0.34 $0.37 $0.15 $0.56 $0.70 $0.54 $(0.28) $0.17 $ 0.91 $ 1.63
Diluted:
Earnings (loss) per share... $0.34 $0.37 $0.15 $0.56 $0.70 $0.54 $(0.28) $0.16 $ 0.91 $ 1.62
---------------
* Includes net unusual credits of $56 million in 2000 and unusual charges of
$62 million in 1999 (see Note 17).
** 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.
NOTE: Net sales and cost of sales for the year 1999, the quarters therein and
the first quarter of 2000 have been reclassified to reflect a change in
policy regarding the classification of shipping and handling. Costs for
shipping and handling that were previously recorded as a direct reduction
of sales revenues are now being reported as a component of cost of sales.
Accordingly, net sales and cost of sales for the year 1999 were increased
by approximately $60 million. The 1999 quarters were affected by
approximately $15 million per quarter. The reclassification for the first
quarter of 2000 increased sales and cost of sales by $13 million.
F-48
HERCULES INCORPORATED
PRINCIPAL CONSOLIDATED SUBSIDIARIES
ARGENTINA
Hercules Argentina S.A.
AUSTRALIA
BetzDearborn Australia Pty, Ltd.
Little H Pty Ltd.
AUSTRIA
Hercules Austria GmbH.
BAHAMAS
Hercules International Trade Corporation Limited
BELGIUM
BetzDearborn N.V.
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 BetzDearborn Brasil Ltda.
Hercules do Brasil Produtos Quimicos Ltda.
CANADA
BetzDearborn Canada, Inc.
Hercules Canada Inc.
Hercules Canada (partnership)
CHILE
Hercules Quimica Chile Ltda
CHINA
Beijing Hercules Chemical Co. Ltd.*
BetzDearborn China, Ltd.
FiberVisions (Suzhou) Nonwovens Products Co. Ltd.
FiberVisions (China) Textile Products Ltd.
Shanghai Hercules Chemical Co., Ltd.*
COLOMBIA
Hercules de Colombia S.A.
CROATIA
BetzDearborn d.o.o.
CURACAO
BetzDearborn Caribbean N.V.
CZECH (REPUBLIC)
Hercules CZ s.r.o.
F-49
DENMARK
Hercules Denmark A/S
FiberVisions, A/S
Hercules Investment ApS
ECUADOR
BetzDearborn de Ecuador S.A.
FINLAND
Hercules Finland OY
FRANCE
Aqualon France B.V.
BetzDearborn SA
Hercules SA
GERMANY
Abieta Chemie, GmbH*
BetzDearborn Gmbh
Hercules Deutschland GmbH
Hercules GmbH
HONG KONG
Hercules China Limited
HUNGARY
BetzDearborn Hungary Kft
INDIA
Hercules Specialty Chemicals (India) Private Limited
INDONESIA
P.T. BetzDearborn Persada
P.T. Hercules Mas Indonesia
IRELAND
BetzDearborn Ireland Limited
ITALY
Hercules Italia SpA
JAPAN
Hercules Japan Ltd.
Nippon BetzDearborn K.K.*
KOREA
BetzDearborn Korea, Ltd.
Hercules Korea Chemical Co. Ltd.
LIECHTENSTEIN
Organa Trust
LUXEMBOURG
Hercules Investments S.a.r.l.
Hercules Luxembourg S.a.r.l.
Hercules European Participations S.a.r.l.
MALAYSIA
Hercules Chemicals (Malaysia) Sdn. BHD
F-50
MEXICO
BetzDearborn de Mexico S.A. de C.V.
Hercules Inc. Mexico, S.A. de C.V.
Hercules Mexico, S.A. de C.V.
Taloquimia S.A. de C.V.*
NETHERLANDS
Aqualon France B.V.
Betz Chemical Technologies B.V.
BetzDearborn B.V.
Hechem B.V.
Hercules B.V.
NORWAY
Hercules Norway A/S
PAKISTAN
Pakistan Gum Industries PVT Ltd.*
PERU
Hercules del Peru S.A.
POLAND
Hercules Polska Sp. zo.o
PORTUGAL
Misan Portuguesa, Ltda.
SINGAPORE
Hercules Chemicals Singapore Pte Ltd.
SOUTH AFRICA
Hercules Chemicals South Africa (Pty) Ltd.
SPAIN
Hercules Quimica, S.A.
SWEDEN
Betz KEMI AB
BetzDearborn AB
Hercules AB
SWITZERLAND
Fibervisions A.G./Fibervisions Ltd.
TAIWAN
Hercules Chemicals (Taiwan) Co., Ltd.
THAILAND
Hercules Chemicals (Thailand) Co., Ltd.
UNITED KINGDOM
BetzDearborn Limited
Hercules Investments Global Ltd.
Hercules Limited
Hercules GB Holdings Limited
URUGUAY
BetzDearborn de Uruguay S.A.
F-51
UNITED STATES
Aqualon Company, Delaware
Athens Holding Inc., Delaware
BetzDearborn China, Ltd., Delaware
BetzDearborn Europe, Inc., Delaware
BetzDearborn Inc., Pennsylvania
BetzDearborn International, Inc., Pennsylvania
BL Chemicals Inc., Delaware
BL Technologies, Inc., Delaware
BLI Holdings, Inc., Delaware
Chemical Technologies India, Ltd., Delaware
Covington Holdings Inc., Delaware
DRC., Ltd. Delaware
East Bay Realty Services, Inc., Delaware
FiberVisions Incorporated, Delaware
FiberVisions, L.L.C., Delaware
FiberVisions L.P., Delaware
FiberVisions Products, Inc., Georgia
Hercules Chemical Corporation, Delaware
Hercules Country Club, Inc., Delaware
Hercules Credit Inc., Delaware
Hercules Euro Holdings, L.L.C., Delaware
Hercules Finance Company, Delaware
Hercules Flavor, Inc., Delaware
Hercules International Limited, Delaware
Hercules International Limited, L.L.C., Delaware
Hercules Investments L.L.C., Delaware
HISPAN Corporation, Delaware
Hercules Shared Services Corporation, Delaware*
WSP, Inc., Delaware
VENEZUELA
Hercules BetzDearborn 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
F-52
HERCULES INCORPORATED
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
--------------------------------- ------------ ---------------------------- ---------- ----------
ADDITIONS
----------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND CHARGED TO END OF
DESCRIPTION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- -------------- ---------- ----------
(DOLLARS IN MILLIONS)
YEAR 2000
Allowance for doubtful
accounts....................... $16 $21 (10) $27
Tax valuation allowance.......... 16 12 28
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
---------------
(a) Primarily a result of 1998 acquisitions, including subsequent purchase price
allocation adjustments.
F-53
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- ----------------
2001 2000 2001 2000
----- ----- ------ ------
(UNAUDITED)
Net sales................................................. $ 670 $ 822 $1,372 $1,620
Cost of sales............................................. 375 462 784 912
Selling, general, and administrative expenses............. 195 206 385 403
Research and development.................................. 17 20 36 41
Goodwill and intangible asset amortization................ 19 20 38 40
Other operating (income) expenses, net.................... (65) 18 (62) 22
----- ----- ------ ------
Profit from operations.................................... 129 96 191 202
Equity in loss of affiliated companies.................... (1) -- (4) --
Interest and debt expense................................. 53 42 108 74
Preferred security distributions of subsidiary trusts..... 14 23 29 46
Other income (expense), net............................... 4 (6) 1 (1)
----- ----- ------ ------
Income before income taxes................................ 65 25 51 81
Provision for income taxes................................ 42 9 38 29
----- ----- ------ ------
Net income................................................ $ 23 $ 16 $ 13 $ 52
===== ===== ====== ======
Earnings per share:
Basic................................................... $0.21 $0.15 $ 0.12 $ 0.49
===== ===== ====== ======
Diluted................................................. $0.21 $0.15 $ 0.12 $ 0.49
===== ===== ====== ======
Dividends per share....................................... $ -- $0.27 $ -- $ 0.54
===== ===== ====== ======
See accompanying notes to financial statements.
F-54
HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
JUNE 30, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents................................. $ 41 $ 54
Accounts and notes receivable, net........................ 450 550
Other current assets...................................... 91 76
Inventories
Finished products...................................... 133 171
Materials, supplies, and work in process............... 110 134
Deferred income taxes..................................... 41 37
------- -------
Total current assets................................... 866 1,022
Property, plant, and equipment.............................. 2,225 2,564
Accumulated depreciation and amortization................... (1,292) (1,460)
------- -------
Net property, plant, and equipment.......................... 933 1,104
Goodwill and other intangible assets, net................... 2,303 2,391
Other assets................................................ 760 792
------- -------
Total assets........................................... $ 4,862 $ 5,309
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 218 $ 259
Accrued expenses.......................................... 401 385
Short-term debt........................................... 302 261
Income taxes payable...................................... 43 17
------- -------
Total current liabilities................................. 964 922
Long-term debt.............................................. 1,915 2,342
Deferred income taxes....................................... 187 187
Postretirement benefits and other liabilities............... 390 420
Commitments and contingencies............................... -- --
Company-obligated preferred securities of subsidiary
trusts.................................................... 622 622
Stockholders' equity
Common stock (shares issued: 2001 -- 159,984,444;
2000 -- 159,984,444)................................... 83 83
Additional paid-in capital................................ 709 726
Unearned compensation..................................... (110) (115)
Other comprehensive losses................................ (209) (143)
Retained earnings......................................... 2,169 2,157
------- -------
2,642 2,708
Reacquired stock, at cost (shares: 2001 -- 51,639,880;
2000 -- 52,442,393).................................... (1,858) (1,892)
------- -------
Total stockholders' equity................................ 784 816
------- -------
Total liabilities and stockholders' equity................ $ 4,862 $ 5,309
======= =======
See accompanying notes to financial statements.
F-55
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW
(DOLLARS IN MILLIONS)
SIX MONTHS ENDED
JUNE 30,
----------------
2001 2000
------ ------
(UNAUDITED)
Net cash provided by operations............................. $ 54 $ 23
----- -----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (43) (109)
Proceeds of investment and fixed asset disposals............ 346 12
Acquisitions, net of cash acquired.......................... -- (5)
Other, net.................................................. (1) (21)
----- -----
Net cash provided by (used in) investing activities....... 302 (123)
----- -----
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds..................................... 147 384
Long-term debt repayments................................... (434) (253)
Change in short-term debt................................... (92) 23
Common stock issued......................................... 12 6
Common stock reacquired..................................... -- (1)
Dividends paid.............................................. -- (57)
----- -----
Net cash (used in) provided by financing activities....... (367) 102
----- -----
Effect of exchange rate changes on cash..................... (2) --
----- -----
Net (decrease) increase in cash and cash equivalents........ (13) 2
Cash and cash equivalents -- beginning of period............ 54 63
----- -----
Cash and cash equivalents -- end of period.................. $ 41 $ 65
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized)...................... $ 64 $ 75
Preferred security distributions of subsidiary trusts..... 32 40
Income taxes.............................................. 10 33
Noncash investing and financing activities:
Incentive and other employee benefit plan stock
issuances.............................................. 7 10
Acquisition of minority interest.......................... -- (11)
See accompanying notes to financial statements.
F-56
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN MILLIONS)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
(UNAUDITED)
Net income.................................................. $ 23 $ 16 $ 13 $ 52
Foreign currency translation, net of tax.................... (21) (61) (66) (65)
---- ---- ---- ----
Comprehensive income (loss)................................. $ 2 $(45) $(53) $(13)
==== ==== ==== ====
See accompanying notes to financial statements.
F-57
HERCULES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. These condensed consolidated financial statements are unaudited, but in the
opinion of management include all adjustments necessary to present fairly
Hercules' financial position and results of operations for interim periods. The
condensed consolidated financial statements should be read in conjunction with
the accounting policies, financial statements and notes included in our annual
report on Form 10-K for the year ended December 31, 2000. Certain prior period
amounts have been reclassified to conform to the current period presentation.
Pursuant to Securities and Exchange Commission ("SEC") Regulation S-X, Rule
3-10, the Company is required to provide condensed consolidating financial
information on the Company and its subsidiaries in a prescribed format in all
periodic reports filed with the SEC. The information necessary to present the
required disclosure was not available in time to be included in the Form 10-Q
filed on August 14, 2001 for the quarterly period ended June 30, 2001. The
Company has now completed the preparation of the required condensed
consolidating financial information which is included in this Form 10-Q/A in
Note 16 to the Financial Statements.
2. Revenue Recognition -- The Company recognizes revenue when the earnings
process is complete. This generally occurs when products are shipped to the
customer or services are performed in accordance with terms of the agreement,
title and risk of loss have been transferred, collectibility is probable and
pricing is fixed and determinable. Accruals are made for sales returns and other
allowances based on the Company's experience. The corresponding shipping and
handling costs are included in cost of sales.
3. Derivatives Instruments and Hedging -- On January 1, 2001, the Company
adopted Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended ("SFAS 133"). The new
standard requires that all derivative instruments be reported on the balance
sheet at their fair values. The Company has not designated any derivative as a
hedge instrument and accordingly, changes in fair value of derivatives are
recorded each period in earnings. The adoption of SFAS 133 did not result in a
pre or post tax cumulative-effect-type adjustment to income, and did not result
in a change to other comprehensive losses.
Under procedures and controls established by the Company's risk management
policies, the Company strategically enters into contractual arrangements
(derivatives) in the ordinary course of business to reduce the exposure to
foreign currency and interest rates.
The policies have established a variety of approved derivative instruments
to be utilized in each risk management program and the level of exposure
coverage based on the assessment of risk factors. Derivative instruments
utilized during the period include forwards, swaps, and options. The Company has
not designated any non-derivatives as hedging instruments.
The Company uses forward exchange contracts and options, generally no
greater than three months in term, to reduce its net currency exposure. The
objective of this program is to maintain an overall balanced position in foreign
currencies so that exchange gains and losses resulting from exchange rate
changes, net of related tax effect, are minimized.
The Company has used interest rate swap agreements to manage interest costs
and risks associated with changing rates. Counterparties to the forward
exchange, currency swap and interest swap contracts are major financial
institutions. Credit loss from counterparty nonperformance is not anticipated.
During 2000, the interest rate swap portfolio was substantially terminated.
4. Business Combinations and Intangible Assets -- In June 2001, the Financial
Accounting Standards Board approved the issuance of Statement of Financial
Accounting Standards No. 141 ("SFAS 141"), "Business Combinations" and Statement
of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets." For Hercules, these statements will generally become
effective January 1, 2002, although business combinations initiated on or after
July 1, 2001 are subject to the non-amortization and purchase accounting
provisions.
F-58
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. Hercules is currently in
the process of conducting an assessment of the actual impact of the
non-amortization provision of SFAS 142 on its diluted earnings per share. The
assessment of goodwill for impairment is a complex issue in which the Company
must determine, among other things, the fair value of each defined component of
its operating segments. It is, therefore, not possible at this time to predict
the impact, if any, that the impairment assessment provisions of SFAS 142 will
have on Hercules' financial statements.
5. The following table shows the amounts used in computing earnings per share
(EPS) and the effect on income and the weighted-average number of shares of
dilutive potential common stock:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA):
Basic
Net income............................ $ 23 $ 16 $ 13 $ 52
Weighted-average shares outstanding... 108.1 107.1 108.0 106.9
------ ------ ------ ------
EPS................................... $ 0.21 $ 0.15 $ 0.12 $ 0.49
====== ====== ====== ======
Diluted
Net income............................ $ 23 $ 16 $ 13 $ 52
Interest on convertible debentures.... -- -- -- --
------ ------ ------ ------
Net income for EPS calculation........ $ 23 $ 16 $ 13 $ 52
====== ====== ====== ======
Weighted-average shares outstanding... 108.1 107.1 108.0 106.9
Options............................... -- -- -- --
Debentures............................ .2 .2 .2 .2
------ ------ ------ ------
Adjusted weighted-average shares...... 108.3 107.3 108.2 107.1
------ ------ ------ ------
EPS................................... $ 0.21 $ 0.15 $ 0.12 $ 0.49
====== ====== ====== ======
6. Cost and expenses include depreciation of $26 million and $34 million for the
three months ended June 30, 2001 and 2000, respectively, and $53 million and $67
million for the six months ended June 30, 2001 and 2000, respectively.
7. Other operating (income) expenses for the three and six months ended June 30,
2001 includes $74 million of net gains relating to the sale of the hydrocarbon
resins and select portions of the rosin resins business, the peroxy chemicals
business and the 50% interest in Hercules -- Sanyo, Inc. These gains are
partially offset by $5 million of executive severance charges for the three and
six months ended June 30, 2001. The three and six months ended June 30, 2001
also include environmental charges of $1 million and $4 million, respectively,
and non-recurring fees associated with the proxy contest and other matters of $2
million and $3 million, respectively. In addition, the three and six months
ended June 30, 2001 include $1 million of costs relating to the abandonment of a
capital project.
Other operating expenses for the three and six months ended June 30, 2000
includes $24 million of charges for both periods associated with the sale of the
nitrocellulose business, of which $3 million is for severance benefits for
approximately 100 employees. This is partially offset by $11 million of
recoveries of insurance and environmental claims for both periods. The three and
six months ended June 30, 2000 also include integration costs of $1 million and
$3 million, respectively, primarily for employee retention, consulting, legal
and other costs associated with the BetzDearborn acquisition. Additionally,
environmental charges of $4 million and $6 million, respectively, were also
incurred during the corresponding periods.
F-59
8. Interest and debt costs are summarized as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
2001 2000 2001 2000
----- ----- ----- -----
(DOLLARS IN MILLIONS)
Costs incurred.............................. $55 $45 $112 $79
Amount capitalized.......................... 2 3 4 5
--- --- ---- ---
Interest expense............................ $53 $42 $108 $74
=== === ==== ===
9. Other income (expense), net, for the three and six months ended June 30, 2001
includes approximately $1 million and $3 million, respectively, for litigation
costs. Foreign currency gains of approximately $6 million and $5 million,
respectively, are also included in the three and six month periods. Interest
income of $1 million and $3 million, respectively, are included for the three
and six months ended June 30, 2001, partially offset by rental expense of $1
million for both periods and miscellaneous discounts of $1 million and $3
million, respectively, for the same periods. Other income (expense), net, for
the three and six months ended June 30, 2000 includes $2 million in charges for
litigation. Additionally, the three months ended June 30, 2000 includes foreign
currency losses of $2 million, while the six months ended June 30, 2000 includes
net foreign currency gains of $1 million. The three and six months ended June
30, 2000 include rental expense of $2 million and gains from the sale of assets
of $2 million for both periods. These gains were partially offset by interest
income of $2 million and $4 million, respectively, for the three and six months
ended June 30, 2000.
10. The consolidated balance sheet reflects liabilities for employee severance
benefits and other exit costs. Primarily, these are related to the 1998 plans
initiated upon the acquisition of BetzDearborn and additional plans that we
committed to in 2000 relating to the restructuring of our Process Chemicals &
Services segment and corporate realignment due to the divestiture of our
non-core businesses. As a result of these plans, we now estimate that a total of
approximately 1,570 employees will be terminated. Approximately 1,392 employee
terminations have occurred since the inception of the plans.
Pursuant to the plans in place, approximately 31 employees were terminated
during the six months ended June 30, 2001. Cash payments during this period
included $7 million for severance benefits and $1 million for other exit costs.
Severance benefits paid during the year represent the continuing benefit streams
of previously terminated employees as well as those terminated in the current
year. During the second quarter 2001, we completed an assessment of the
remaining expenditures for the 1998 BetzDearborn plan and other plans. As a
result of this assessment, the estimates for severance benefits and other exit
costs were lowered by $12 million, with corresponding reductions to goodwill and
earnings of $10 million and $2 million, respectively. The lower than planned
severance benefits are the result of higher than anticipated attrition, with
voluntary resignations not requiring the payment of termination benefits. A
reconciliation of activity with respect to the liabilities established for these
plans is as follows:
SIX MONTHS
ENDED JUNE 30,
--------------
2001 2000
----- -----
(DOLLARS IN
MILLIONS)
Balance at beginning of year................................ $ 34 $ 77
Additional termination benefits............................. -- 4
Cash payments............................................... (8) (30)
Reversals................................................... (12) --
---- ----
Balance at end of period.................................... $ 14 $ 51
==== ====
The reserve balance at the end of the quarter represents severance benefits
and other exit costs of which $5 million pertains to the 1998 BetzDearborn plan
and $9 million relates to other restructuring plans initiated in 2000.
F-60
11. A summary of short-term and long-term debt follows:
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
(DOLLARS IN MILLIONS)
SHORT-TERM:
Banks.................................................. $ 24 $118
Current maturities of long-term debt................... 278 143
---- ----
$302 $261
==== ====
At June 30, 2001, we had $124 million of unused lines of credit that may be
drawn as needed. Lines of credit in use at June 30, 2001 were $23 million.
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
(DOLLARS IN MILLIONS)
LONG-TERM:
6.60% notes due 2027........................................ $ 100 $ 100
6.625% notes due 2003....................................... 125 125
11.125% senior notes due 2007............................... 400 400
8% convertible subordinated debentures due 2010............. 3 3
Term loan tranche A due in varying amounts through 2003..... 633 875
Term loan tranche D due 2005................................ 374 375
Revolving credit agreement due 2003......................... 410 437
ESOP debt................................................... 85 101
Term notes at various rates from 5.23% to 9.60% due in
varying amounts through 2006.............................. 58 65
Other....................................................... 5 4
------ ------
$2,193 $2,485
Current maturities of long-term debt........................ (278) (143)
------ ------
Net long-term debt.......................................... $1,915 $2,342
====== ======
In 1998, we entered into a $3,650 million credit facility with a syndicate
of banks which includes varying maturity term loans totaling $2,750 million, of
which $633 million is still outstanding at June 30, 2001. In addition, the
facility includes a $900 million revolving credit agreement, of which $410
million is outstanding at June 30, 2001. Through this revolving credit facility,
a Canadian subsidiary of ours can borrow up to U.S. $100 million from select
lenders in Canada in Canadian dollars. As of June 30, 2001, $69 million was
outstanding under this facility. As of June 30, 2001, $416 million of the
multi-currency revolver is available for use. However, actual availability under
the revolving credit agreement is constrained by our ability to meet covenants
in our senior credit facility.
On January 23, 2001, our corporate credit rating was downgraded by Standard
& Poor's Rating Services to BB which resulted in an increase to the interest
rates on the term loan tranche A to LIBOR + 2.75%, on term loan tranche D to
LIBOR + 3.25% and on the ESOP loan and guarantee to 12.95%.
Both our senior credit facility and our ESOP Trust loan require quarterly
compliance with certain financial covenants, including a debt/EBITDA ratio
("leverage ratio"), an interest coverage ratio and minimum net worth. Due to a
delay in closing the Eastman Transaction, which in turn delayed the pay down of
debt, our debt as of March 31, 2001, was significantly higher than planned. As a
result, we would have been out of compliance with the leverage ratio covenant of
our senior credit facility and ESOP credit facility as of that date. On April 5,
2001, our senior credit facility bank syndicate and ESOP lender granted waivers
with respect to compliance with the leverage ratio as of March 31, 2001, and one
other covenant. In July 2001, our senior credit facility was amended to modify
certain covenants.
F-61
While we expect to remain in compliance with our debt covenants, future
compliance is dependent upon generating sufficient EBITDA and cash flow which
are, in turn, impacted by business performance, economic climate, competitive
uncertainties and possibly the resolution of contingencies, including those set
forth in Note 13.
In the event the Company is not in compliance with the debt covenants in
the future, we would pursue various alternatives, which may include, among other
things, refinancing of debt, debt covenant amendments or debt covenant waivers.
While we believe we would be successful in pursuing these alternatives, there
can be no assurance that we would be successful.
12. Guaranteed Preferred Beneficial Interests in Company's Subordinated
Debentures consists of:
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
(DOLLARS IN MILLIONS)
9.42% Trust Originated Preferred Securities............ $362 $362
6 1/2% CRESTS Units.................................... 260 260
---- ----
$622 $622
==== ====
13. Commitments and Contingencies
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 $85 million and $274 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 years of remedial activity
required, which could range from 0 to 30.
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.
On April 10, 2001, the United States Court of Appeals for the Eighth
Circuit issued an opinion in the United States, et al., v. Vertac Corporation,
et al. In that opinion, the Appeals Court reversed the Court's October 12, 1993
grant of partial summary judgment, which had held Hercules jointly and severally
liable for costs incurred and to be incurred at the Jacksonville site, and
remanded the case back to the U.S. District Court for the Eastern District of
Arkansas for a determination of whether the harms at the site giving rise to the
government's claims are divisible. The Appeals Court also vacated the District
Court's October 23, 1998 order granting the United States' summary judgment
motion and the February 8, 2000 judgment finding Hercules liable for 97.4% of
the costs at issue, ordering that these issues be revisited following further
proceedings with respect to divisibility. Finally, the Appeals Court affirmed
the judgment of liability against Uniroyal.
As a result of the Appeals Court's rulings described above, Hercules will
be allowed to present both facts and law to the District Court in support of
Hercules' belief that it should not be liable under CERCLA for some or all of
the costs incurred by the government in connection with the site because those
harms are divisible. Should Hercules prevail on remand, any liability to the
government will be either eliminated or reduced.
F-62
In 1992, Hercules brought suit against its insurance carriers for past and
future costs for cleanup of certain environmental sites (Hercules Incorporated
v. 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 trial court's findings, were used by the trial 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 trial 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. Hercules has appealed certain of the trial court's
rulings to the Delaware Supreme Court. Oral argument was held on February 13,
2001 before the Delaware Supreme Court, but no ruling has been issued.
In connection with the sales of the Resins businesses, the Company retained
certain responsibilities for potential future remediation activities relating to
the divested businesses. Concurrent with the recognition of the sale of the
respective businesses, the Company recorded an accrual for its estimated future
remediation liability.
At June 30, 2001, the accrued liability of $85 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. While it is not feasible to predict the outcome of all pending
suits and claims, the ultimate resolution of these environmental matters could
have a material effect upon the results of operations and the financial position
of Hercules.
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 is a defendant in numerous asbestos-related personal injury
lawsuits and claims which typically arise from alleged exposure to asbestos
fibers from resin-encapsulated pipe and tank products which were sold by a
former subsidiary of Hercules to a limited industrial market, or from alleged
exposure to asbestos contained in facilities owned or operated by Hercules.
Lawsuits are received and matters settled on a regular basis. In December 1999,
Hercules entered into a Settlement Agreement to resolve the majority of these
matters then pending. 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. During 2000 and 2001, Hercules entered into additional settlement
agreements. The terms of these settlements are also confidential. In accordance
with the terms of the previously mentioned agreement with several of Hercules'
insurance carriers, the majority of the amounts paid and to be paid pursuant to
these various settlement agreements will be insured. Further, Hercules continues
to pursue additional insurance coverage from carriers who were not part of the
previously mentioned agreement.
In May 2001, the Supreme Court of New York accepted a Special Referee's
Report and rejected our position in a case captioned Hexcel Corporation v.
Hercules Incorporated. In February 2001, Hexcel moved to confirm the Special
Referee's Report and Hercules crossmoved to confirm in part and reject in part
the Special Referee's Report. The Special Referee's Report, issued in January
2001, recommended that Hercules be found liable to Hexcel for a total of
approximately $7.3 million plus interest. As a result, a judgment was entered
against us in the amount of approximately $10 million. We believe the court's
decision is incorrect, at least in part, as a matter of law and we will appeal
the court's decision.
F-63
At June 30, 2001, the consolidated balance sheet reflects a current
liability of approximately $29 million for litigation and claims. 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.
14. Segment Information
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- ------------------
2001 2000 2001 2000
---- ---- ------ ------
(DOLLARS IN MILLIONS)
Net Sales:
Process Chemicals and Services..... $414 $433 $ 821 $ 849
Functional Products(a)............. 146 209 277 415
Chemical Specialties(b)............ 110 180 274 357
Reconciling Items.................. -- -- -- (1)
---- ---- ------ ------
Consolidated.................... $670 $822 $1,372 $1,620
==== ==== ====== ======
Profit from Operations:
Process Chemicals and Services..... $ 66 $ 81 $ 129 $ 158
Functional Products(a)............. 37 53 61 105
Chemical Specialties(b)............ 9 17 26 33
Reconciling Items.................. 17(c) (55)(d) (25)(c) (94)(d)
---- ---- ------ ------
Consolidated.................... $129 $ 96 $ 191 $ 202
==== ==== ====== ======
---------------
(a) Net sales and Profit from operations in 2001 reflect the divestitures of the
food gums and nitrocellulose businesses in 2000.
(b) Net sales and Profit from operations in 2001 reflect the divestiture of the
hydrocarbon resins, select rosins resins and the peroxy chemicals
businesses.
(c) Includes the following for the quarter and six-month period ended June 30,
2001, respectively: goodwill and intangible asset amortization of $19
million and $38 million, environmental charges of $1 million and $4 million,
$2 million and $3 million of non-recurring fees associated with the proxy
and other matters, $1 million and $3 million of capitalized interest, and
$28 million and $46 million of other corporate items not specifically
allocated to the business segments. In addition, $74 million in net gains
relating to the sale of the hydrocarbon resins, select rosins resins and
peroxy chemicals businesses, partially offset by $5 million in executive
severance charges and $1 million in project abandonment costs are included
for both periods.
(d) Includes the following for the quarter and six-month period ended June 30,
2000, respectively: goodwill and intangible asset amortization of $20
million and $40 million, integration costs of $1 million and $3 million,
environmental charges of $4 million and $6 million, corporate research and
development costs of $3 million and $6 million, and $14 million and $26
million of other corporate items not specifically allocated to the business
segments. Additionally, $24 million of charges associated with the sale of
the nitrocellulose business, partially offset by $11 million of recoveries
of insurance and environmental claims are included for both periods.
15. Dispositions
On May 1, 2001, we completed the sale of our hydrocarbon resins business
and select portions of our rosin resins business to a subsidiary of Eastman
Chemical Company, receiving proceeds of approximately $244 million. On May 31,
2001, we completed the sale of our peroxy chemicals business to GEO Specialty
F-64
Chemicals, Inc., receiving proceeds of approximately $92 million. Additionally,
on May 25, 2001, we completed the sale of our interest in Hercules - Sanyo,
Inc., a toner resin joint venture, to Sanam Corporation, a wholly owned
subsidiary of Sanyo Chemicals Industries, Ltd., our joint venture partner. The
Resins division, including those businesses sold in the Eastman and Peroxides
transactions, had approximately $450 million in net sales in 2000. We are
actively pursuing the sale of the remaining portion of the Resins division.
16. Financial Information of Guarantor Subsidiaries
The following condensed consolidating financial information for the Company
presents the financial information of Hercules, the Guarantor Subsidiaries and
the Non-Guarantor Subsidiaries based on the Company's understanding of the
Securities and Exchange Commission interpretation and application of Rule 3-10
under the Securities and Exchange Commission's Regulation S-X. The financial
information may not necessarily be indicative of results of operations or
financial position had the Guarantor Subsidiaries or Non-Guarantor Subsidiaries
operated as independent entities.
In this presentation, Hercules consists of parent company operations.
Guarantor Subsidiaries and Non-Guarantor Subsidiaries of Hercules are reported
on an equity basis.
F-65
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001
UNCONSOLIDATED
-------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------ ------------ ------------- -------------- ------------
(UNAUDITED)
(MILLIONS OF DOLLARS)
Net sales.............................. $105 $306 $323 $(64) $670
Cost of sales.......................... 71 183 189 (68) 375
Selling, general, and administrative
expenses............................. 15 85 95 -- 195
Research and development............... 9 6 2 -- 17
Goodwill and intangible asset
amortization......................... -- 14 5 -- 19
Other operating expenses (income),
net.................................. (78) 17 (4) -- (65)
---- ---- ---- ---- ----
Profit (loss) from operations.......... 88 1 36 4 129
Equity in income (loss) of affiliated
companies............................ -- -- (1) (1)
Equity in income (loss) from
consolidated subsidiaries............ 25 30 1 (56) --
Interest and debt expense (income)..... 81 (47) 19 -- 53
Preferred security distributions of
subsidiary trusts.................... -- -- 14 -- 14
Other income (expense), net............ 2 (55) 57 -- 4
---- ---- ---- ---- ----
Income (loss) before income taxes...... 34 23 60 (52) 65
Provision for income taxes............. 11 18 13 -- 42
---- ---- ---- ---- ----
Net income (loss)...................... $ 23 $ 5 $ 47 $(52) $ 23
==== ==== ==== ==== ====
F-66
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000
UNCONSOLIDATED
-------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------ ------------ ------------- -------------- ------------
(UNAUDITED)
(MILLIONS OF DOLLARS)
Net sales.............................. $164 $394 $452 $(188) $822
Cost of sales.......................... 116 261 276 (191) 462
Selling, general, and administrative
expenses............................. 25 79 102 -- 206
Research and development............... 8 8 4 -- 20
Goodwill and intangible asset
amortization......................... -- 15 5 -- 20
Other operating expenses (income),
net.................................. (8) 25 1 -- 18
---- ---- ---- ----- ----
Profit (loss) from operations.......... 23 6 64 3 96
Equity in income (loss) from
consolidated subsidiaries............ 49 36 -- (85) --
Interest and debt expense (income)..... 72 (23) (7) 42
Preferred security distributions of
subsidiary trusts.................... -- -- 23 -- 23
Other income (expense), net............ (5) (1) -- -- (6)
---- ---- ---- ----- ----
Income (loss) before income taxes...... (5) 64 48 (82) 25
Provision for income taxes............. (21) 8 22 -- 9
---- ---- ---- ----- ----
Net income (loss)...................... $ 16 $ 56 $ 26 $ (82) $ 16
==== ==== ==== ===== ====
F-67
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001
UNCONSOLIDATED
-------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------ ------------ ------------- -------------- ------------
(UNAUDITED)
(MILLIONS OF DOLLARS)
Net sales.............................. $244 $642 $654 $(168) $1,372
Cost of sales.......................... 172 400 381 (169) 784
Selling, general, and administrative
expenses............................. 34 169 182 -- 385
Research and development............... 18 14 4 -- 36
Goodwill and intangible asset
amortization......................... 1 26 11 -- 38
Other operating expense (income),
net.................................. (75) 17 (4) -- (62)
---- ---- ---- ----- ------
Profit (loss) from operations.......... 94 16 80 1 191
Equity in income (loss) of affiliated
companies............................ -- -- (4) -- (4)
Equity in income (loss) from
consolidated subsidiaries............ 72 94 1 (167) --
Interest and debt expense (income)..... 172 (103) 39 -- 108
Preferred security distributions of
subsidiary trusts.................... -- -- 29 -- 29
Other income (expense), net............ 1 (127) 127 -- 1
---- ---- ---- ----- ------
Income (loss) before income taxes...... (5) 86 136 (166) 51
Provision for income taxes............. (18) 35 21 -- 38
---- ---- ---- ----- ------
Net income (loss)...................... $ 13 $ 51 $115 $(166) $ 13
==== ==== ==== ===== ======
F-68
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
UNCONSOLIDATED
-------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------ ------------ ------------- -------------- ------------
(UNAUDITED)
(MILLIONS OF DOLLARS)
Net sales.............................. $304 $782 $896 $(362) $1,620
Cost of sales.......................... 218 511 547 (364) 912
Selling, general, and administrative
expenses............................. 38 168 197 -- 403
Research and development............... 15 18 8 -- 41
Goodwill and intangible asset
amortization......................... 1 27 12 -- 40
Other operating expenses (income),
net.................................. (5) 26 1 -- 22
---- ---- ---- ----- ------
Profit (loss) from operations.......... 37 32 131 2 202
Equity in income (loss) from
consolidated subsidiaries............ 107 71 2 (180) --
Interest and debt expense (income)..... 131 (44) (13) -- 74
Preferred security distributions of
subsidiary trusts.................... -- -- 46 -- 46
Other income (expense), net............ (5) (1) 5 -- (1)
---- ---- ---- ----- ------
Income (loss) before income taxes...... 8 146 105 (178) 81
Provision for income taxes............. (44) 27 46 -- 29
---- ---- ---- ----- ------
Net income (loss)...................... $ 52 $119 $ 59 $(178) $ 52
==== ==== ==== ===== ======
F-69
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2001
UNCONSOLIDATED
-------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------ ------------ ------------- -------------- ------------
(UNAUDITED)
(MILLIONS OF DOLLARS)
ASSETS
Current assets
Cash and cash equivalents........... $ 4 $ 6 $ 31 $ -- $ 41
Accounts and notes receivable,
net.............................. 80 175 286 -- 541
Intercompany receivables............ 192 39 128 (359) --
Inventories......................... 43 99 111 (10) 243
Deferred income taxes............... 28 1 12 -- 41
------ ------- ------ ------- ------
Total current assets............. 347 320 568 (369) 866
Property, plant, and equipment, net... 196 342 395 -- 933
Investments in subsidiaries........... 4,220 1,501 51 (5,772) --
Goodwill and other intangible assets,
net................................. 34 1,440 829 -- 2,303
Other assets.......................... 645 28 87 -- 760
------ ------- ------ ------- ------
Total assets..................... $5,442 $ 3,631 $1,930 $(6,141) $4,862
====== ======= ====== ======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.................... 93 9 116 -- 218
Accrued expenses.................... 180 135 129 -- 444
Intercompany payables............... 84 83 192 (359) --
Short-term debt..................... 263 5 34 -- 302
------ ------- ------ ------- ------
Total current liabilities........ 620 232 471 (359) 964
Long-term debt........................ 1,831 80 4 -- 1,915
Deferred income taxes................. 82 48 57 -- 187
Postretirement benefits and other
liabilities......................... 205 147 38 -- 390
Company-obligated preferred securities
of subsidiary trusts................ -- -- 622 -- 622
Intercompany notes
payable/(receivable)................ 1,920 (2,774) 863 (9) --
Stockholders' equity.................. 784 5,898 (125) (5,773) 784
------ ------- ------ ------- ------
Total liabilities and
stockholders' equity........... $5,442 $ 3,631 $1,930 $(6,141) $4,862
====== ======= ====== ======= ======
F-70
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001
UNCONSOLIDATED
-------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------- ------------ ------------
(UNAUDITED)
(MILLIONS OF DOLLARS)
Net Cash (used in) Provided by
Operations............................ $(249) $101 $ 209 $(7) $ 54
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures.................. (10) (13) (20) -- (43)
Proceeds of investment and fixed asset
disposals.......................... 223 1 122 346
Other, net............................ -- -- (1) -- (1)
----- ---- ----- --- -----
Net cash provided by (used in)
investing activities............... 213 (12) 101 -- 302
----- ---- ----- --- -----
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds............... 147 -- -- -- 147
Long-term debt repayments............. (402) (15) (17) -- (434)
Change in short-term debt............. -- -- (92) -- (92)
Change in intercompany, noncurrent.... 282 (76) (206) -- --
Common stock issued................... 12 -- -- -- 12
Dividends paid........................ -- 1 (8) 7 --
----- ---- ----- --- -----
Net cash provided by (used in)
financing activities............... 39 (90) (323) 7 (367)
----- ---- ----- --- -----
Effect of exchange rate changes on
cash.................................. -- -- (2) -- (2)
----- ---- ----- --- -----
Net increase (decrease) in cash and cash
equivalents........................... 3 (1) (15) -- (13)
Cash and cash equivalents at beginning
of period............................. 1 7 46 -- 54
----- ---- ----- --- -----
Cash and cash equivalents at end of
period................................ $ 4 $ 6 $ 31 $-- $ 41
===== ==== ===== === =====
F-71
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000
UNCONSOLIDATED
-------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------- ------------ ------------
(UNAUDITED)
(MILLIONS OF DOLLARS)
Net Cash (used in) Provided by
Operations............................ $(168) $ 177 $ 39 $(25) $ 23
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures.................. (26) (21) (62) -- (109)
Proceeds of investment and fixed asset
disposals.......................... 1 6 5 -- 12
Acquisitions, net of cash acquired.... (5) -- -- -- (5)
Other, net............................ (8) (9) (4) -- (21)
----- ----- ---- ---- -----
Net cash (used in) provided by
investing activities............... (38) (24) (61) -- (123)
----- ----- ---- ---- -----
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds............... 380 2 2 -- 384
Long-term debt repayments............. (236) (13) (4) -- (253)
Change in short-term debt............. 16 1 6 -- 23
Change in intercompany, noncurrent.... 98 (162) 64 -- --
Common stock issued................... 6 -- -- -- 6
Common stock reacquired............... (1) -- -- -- (1)
Dividends paid........................ (57) -- (25) 25 (57)
----- ----- ---- ---- -----
Net cash provided by (used in)
financing activities............... 206 (172) 43 25 102
----- ----- ---- ---- -----
Effect of exchange rate changes on
cash.................................. -- -- -- -- --
----- ----- ---- ---- -----
Net increase (decrease) in cash and cash
equivalents........................... -- (19) 21 -- 2
Cash and cash equivalents at beginning
of period............................. 2 23 38 63
----- ----- ---- ---- -----
Cash and cash equivalents at end of
period................................ $ 2 $ 4 $ 59 $ -- $ 65
===== ===== ==== ==== =====
F-72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and of cash flows present fairly, in
all material respects, the financial position of Aqualon Company, a subsidiary
of Hercules Incorporated, and its subsidiaries at December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 10, 2001
F-73
AQUALON COMPANY
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Sales to third parties..................................... $274,775 $295,473 $349,179
Sales to Hercules Group.................................... 63,033 62,657 57,528
-------- -------- --------
337,808 358,130 406,707
Cost of sales.............................................. 227,272 250,066 278,091
Selling, general, and administrative expenses.............. 48,069 53,775 47,606
Research and development................................... 11,780 12,078 11,588
Goodwill and intangible asset amortization................. 1,014 1,014 1,014
Other operating expenses, net (Note 12).................... 22,259 3,554 10,245
-------- -------- --------
Profit from operations..................................... 27,414 37,643 58,163
Interest and debt expense.................................. 415 545 438
Other (income) expense, net................................ (1,199) 127 24
-------- -------- --------
Net income................................................. $ 28,198 $ 36,971 $ 57,701
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-74
AQUALON COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 2,494 $ 1,313
Accounts receivable, net (Note 3)......................... 35,743 46,045
Notes receivable (Note 4)................................. 3,600 --
Inventories (Note 5)...................................... 45,409 52,493
Other current assets...................................... 4,691 4,492
-------- --------
Total current assets.............................. 91,937 104,343
-------- --------
Property, plant, and equipment, net (Note 8)................ 91,742 92,062
Notes receivable (Note 4)................................... 3,000 --
Goodwill, net (Note 9)...................................... 28,550 29,564
Deferred charges and other assets........................... 5,256 5,548
-------- --------
Total assets...................................... $220,485 $231,517
======== ========
LIABILITIES AND NET PARTNERS' (HERCULES GROUP) INVESTMENT
Current liabilities
Accounts payable.......................................... $ 17,724 $ 24,323
Short-term debt (Note 6).................................. -- 1,650
Accrued expenses (Note 8)................................. 24,172 25,277
-------- --------
Total current liabilities......................... 41,896 51,250
-------- --------
Pension and other postretirement benefits (Note 11)......... 110 (17)
Environmental and other liabilities......................... 22,526 9,825
-------- --------
Total liabilities......................................... 64,532 61,058
-------- --------
Commitments and contingencies (Note 16)..................... -- --
Net partners' (Hercules Group) investment (Note 14)....... 155,953 170,459
-------- --------
Total liabilities and net partners' (Hercules
Group) investment................................ $220,485 $231,517
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-75
AQUALON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income.................................................. $ 28,198 $ 36,971 $ 57,701
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation.............................................. 9,757 11,009 11,896
Amortization.............................................. 1,014 1,014 1,014
Loss on disposal (Note 15)................................ 6,854 6,500 --
Loss on impairment of fixed assets (Note 12).............. -- 2,000 15,300
Corporate and other cost allocations...................... 15,313 21,444 16,424
Accruals and deferrals of cash receipts and payments:
Accounts receivable and other assets................... 10,103 4,531 5,982
Inventories............................................ 7,084 5,112 (7,483)
Accounts payable and accrued expenses.................. (8,659) (3,389) (5,662)
Environmental and other assets and liabilities......... 800 3,743 3,719
-------- -------- --------
Net cash provided by operations...................... 70,464 88,935 98,891
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (9,437) (12,133) (20,856)
Investment in affiliate..................................... (179) 254 (63)
-------- -------- --------
Net cash used in investing activities................ (9,616) (11,879) (20,919)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of debt........................................... (1,650) -- (13)
Transfers to partners' (Hercules Group)..................... (58,017) (79,877) (74,040)
-------- -------- --------
Net cash used in financing activities................ (59,667) (79,877) (74,053)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 1,181 (2,821) 3,919
Cash and cash equivalents at beginning of year.............. 1,313 4,134 215
-------- -------- --------
Cash and cash equivalents at end of year............. $ 2,494 $ 1,313 $ 4,134
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ 415 $ 545 $ 438
Noncash financing activities
Issuance of note receivable............................... 6,600 -- --
Corporate and other cost allocations...................... 15,313 21,444 16,424
The accompanying notes are an integral part of
the consolidated financial statements.
F-76
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Aqualon Company (Aqualon) is a U.S. partnership which is owned 99.4182% by
Hercules Credit, Inc., a U.S. holding company and 0.5818% by WSP, Inc., a U.S.
holding company. Hercules Credit, Inc. and WSP, Inc. are wholly owned
subsidiaries of Hercules Incorporated (Hercules). Aqualon is engaged in
providing products and services to manage the properties of aqueous
(water-based) and non-aqueous systems. These products are principally derived
from renewable natural raw materials and are sold as thickeners, emulsifiers,
and stabilizers to other manufacturers, including makers of oral hygiene and
personal care products, construction materials and latex paints, and are used in
the oil and gas industry for drilling and recovery.
In June 2000, Aqualon sold its nitrocellulose operation in Parlin, NJ to
Greentree Chemical Technologies, Inc.
Historically, separate company stand-alone financial statements were not
prepared for Aqualon. In November 2000, Hercules amended its senior credit
facility and ESOP credit facility (the "Facilities"). The Facilities, as
amended, are secured by liens on Hercules' property and assets (and those of
Hercules' Canadian Subsidiaries), a pledge of the stock and partnership
interests of substantially all of Hercules' domestic subsidiaries (including
Aqualon) and 65% of the stock of foreign subsidiaries directly owned by
Hercules, and a pledge of Hercules' domestic intercompany indebtedness. These
financial statements present the financial information on Aqualon, a collateral
party to the Hercules debt, based on Hercules' understanding of Securities and
Exchange Commission's interpretation and application of Rule 3-16 under the
Securities and Exchange Commission's Regulation S-X. These statements were
derived from historical accounting records.
Aqualon participates in Hercules' centralized cash management system.
Accordingly, cash received from Aqualon operations is transferred to Hercules on
a periodic basis, and Hercules funds all operational and capital requirements.
The financial statements of Aqualon reflect certain allocated support costs
incurred by other entities in the Hercules group. These costs include executive,
legal, accounting, tax, auditing, cash management, purchasing, human resources,
safety, health and environmental, information management, investor relations and
other corporate services. Allocations and charges included in Aqualon's
financial statements were based on either a direct cost pass-through for items
directly identified as related to Aqualon's activities; a percentage allocation
for such services provided based on factors such as sales, net assets, or cost
of sales; or a relative weighting of geographic activity. Management believes
that the allocation methods are reasonable.
During 1989, Hercules acquired the 50% shareholding held by Henkel [its
joint venture partner] to make Aqualon a wholly owned subsidiary. These
financial statements include the push-down of fair value adjustments to assets
and liabilities, including goodwill, other intangible assets and property,
plant, and equipment and their related amortization and depreciation
adjustments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Aqualon and
its wholly-owned subsidiary, Organa Trust. All intercompany transactions and
profits have been eliminated.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America 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.
F-77
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Aqualon recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
Aqualon's experience. The corresponding shipping and handling costs are included
in cost of sales.
Environmental Expenditures
Environmental expenditures that pertain to current operations or future
revenues are expensed or capitalized according to Aqualon'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 can be reasonably estimated.
Cash and Cash Equivalents
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. Inventories are
valued at standard cost which approximates the average cost method.
Property and Depreciation
Property, plant, and equipment are stated at cost and depreciated using the
straight-line method. The estimated useful lives of depreciable assets are as
follows: buildings -- 30 years; plant, machinery and equipment -- 15 years;
other machinery and equipment -- 3 to 15 years.
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is charged to income.
Goodwill
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, customer relationships, and trademarks and tradenames and 5 to 15
years for other intangible assets.
Long-lived Assets
Aqualon 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.
F-78
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentrations of Credit Risk
Financial instruments that potentially subject Aqualon to concentrations of
credit risk consist principally of trade receivables. Concentrations of credit
risk with respect to trade receivables are limited due to the Company's large
number of customers and their dispersion across many different industries and
locations.
Financial Instruments
Aqualon uses various non-derivative financial instruments, including
letters of credit, and generally does not require collateral to support its
financial instruments.
Stock-based Compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25)). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard 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 as if the
fair-value-based method of accounting had been applied.
Computer Software Costs
Effective January 1, 1999, Aqualon 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).
Our prior accounting was generally consistent with the requirements of SOP
98-1 and, accordingly, adoption of SOP 98-1 had no material effect. Computer
software costs are being amortized over a period of 5 to 10 years.
Research and Development
Research and development expenditures are expensed as incurred.
Income Taxes
Income taxes have not been provided in the accompanying financial
statements, as the tax effects of the operating partnership's operations accrue
directly to the partners.
Net Partners' (Hercules Group) Investment
The net partners' (Hercules Group) investment account reflects the balance
of Aqualon's historical earnings, intercompany amounts, post-employment
liabilities and other transactions between Aqualon and the partners/Hercules
Group.
New 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, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. This statement, as amended, is effective for
all
F-79
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
fiscal quarters of fiscal years beginning after December 31, 2000. Aqualon
adopted SFAS 133 effective January 1, 2001. The adoption of SFAS No. 133 did not
have a material effect on its earnings or statement of financial position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was to be effective
October 1, 2000. Adoption of SAB 101 did not have a material effect on the
Company's profit from operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). For Aqualon, these statements will generally become
effective January 1, 2002, although business combinations initiated after June
30, 2001 are subject to the non-amortization and purchase accounting provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. Aqualon is currently in
the process of conducting an assessment of the actual impact of the
non-amortization provision of SFAS 142. The assessment of goodwill for
impairment is a complex issue in which the Company must determine, among other
things, the fair value of each defined reporting unit. It is, therefore, not
possible at this time to predict the impact, if any, that the impairment
assessment provisions of SFAS 142 will have on Aqualon's financial statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assets. SFAS 143 will become effective for Aqualon in
January 1, 2003 and requires recognition of a liability for an asset retirement
obligation in the period in which it is incurred. Management is in the process
of evaluating the impact this standard will have on the Company's financial
statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Trade.................................................... $36,413 $46,865
Less allowance for doubtful accounts..................... (670) (820)
------- -------
Total.......................................... $35,743 $46,045
======= =======
4. NOTE RECEIVABLE
Notes receivable as of December 31, 2000, consist of a $6,600 thousand
30-day demand note from Greentree Chemical Technologies, Inc. (Greentree),
related to the divestiture of the Nitrocellulose business in June 2000. On
January 8, 2001, Aqualon received $3,600 thousand in cash from Greentree and
issued a new
F-80
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
unsecured demand note to Greentree for $3,000 thousand, due June 30, 2005. The
new note carries an interest rate of 13.5% until May 1, 2001; thereafter, the
interest rate is equal to Prime +7.5% for the remaining duration of the note.
5. INVENTORIES
The components of inventories are:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Finished products........................................ $27,754 $34,330
Raw material and supplies................................ 15,613 14,594
Work in process.......................................... 2,042 3,569
------- -------
Total.......................................... $45,409 $52,493
======= =======
6. SHORT-TERM DEBT
Short-term debt of $1,650 thousand at December 31, 1999 consists of an
Industrial Revenue Bond from the Industrial Development Authority of the city of
Hopewell, Virginia. This debt carried an interest rate of 8%. The principal and
interest was paid in June 2000.
7. LONG-TERM INCENTIVE COMPENSATION PLANS
Aqualon participates in long-term incentive compensation plans sponsored by
Hercules. These 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.
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
491,488 at December 31, 2000, and 926,689 and 1,083,613 at December 31, 1999 and
1998, respectively.
At December 31, 2000, under the Company's incentive compensation plans,
1,847,855 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. There were no charges to income for the cost of stock awards over the
restriction or performance period for 2000, 1999 and 1998, respectively.
F-81
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 2000, 1999 and 1998:
REGULAR PERFORMANCE-ACCELERATED
----------------------------- -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES PRICE SHARES PRICE
--------- ---------------- --------- ----------------
January 1, 1998........................ 195,870 $42.18 72,000 $45.91
Granted................................ 145,225 $35.84 64,645 $47.29
Exercised.............................. -- -- -- --
Forfeited.............................. (3,690) $39.50 -- --
------- ------ ------- ------
December 31, 1998...................... 337,405 $39.48 136,645 $46.56
Granted................................ 71,875 $37.73 69,980 $37.58
Exercised.............................. (1,050) $16.21 -- --
Forfeited.............................. (3,910) $39.50 -- --
------- ------ ------- ------
December 31, 1999...................... 404,320 $39.23 206,625 $43.52
Granted................................ 129,800 $17.20 -- --
Exercised.............................. -- -- -- --
Forfeited.............................. (39,250) $39.50 -- --
------- ------ ------- ------
December 31, 2000...................... 494,870 $33.43 206,625 $43.52
The weighted-average fair value of regular stock options granted during
2000, 1999 and 1998 was $8.85, $8.26 and $9.20 respectively. The
weighted-average fair value of performance-accelerated stock options granted
during 1999 and 1998 was $8.01 and $11.01, respectively. There were no
performance-accelerated stock options granted during 2000.
Following is a summary of regular stock options exercisable at December 31,
2000, 1999, and 1998, and their respective weighted-average share prices:
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISABLE SHARES EXERCISE PRICE
------------------- --------- ----------------
December 31, 1998................................. 95,194 $43.18
December 31, 1999................................. 224,230 $40.49
December 31, 2000................................. 293,370 $39.20
There were no performance-accelerated stock options exercisable at December
31, 2000, 1999 and 1998.
F-82
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
EXERCISE OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
PRICE RANGE AT 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/00 EXERCISE PRICE
----------------------------- ----------- ---------------- ---------------- ----------- ----------------
Regular Stock Options
$12 - $20 129,800 9.14 $17.20 2,950 $17.25
$20 - $30 76,475 7.67 $25.56 63,700 $25.56
$30 - $40 174,025 7.23 $38.77 130,900 $39.11
$40 - $50 85,970 6.73 $47.27 74,720 $47.29
$50 - $60 28,600 5.56 $54.03 21,100 $55.39
------- -------
494,870 293,370
======= =======
Performance-Accelerated Stock
Options
$14 - $40 104,655 7.69 $38.16 -- --
$40 - $50 81,270 6.70 $47.40 -- --
$50 - $61 20,700 5.18 $55.40 -- --
------- -------
206,625 --
======= =======
The Company currently expects that 100% of performance-accelerated stock
options will eventually vest.
Aqualon employees may also participate in the Hercules Employee Stock
Purchase Plan ("ESPP"). The ESPP 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, 202,139
shares of Hercules common stock are registered for offer and sale under the
plan. Shares issued at December 31, 2000 and 1999, were 1,597,861 and 949,464,
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 Hercules' 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 2000, 1999 and 1998:
REGULAR PERFORMANCE EMPLOYEE STOCK
ASSUMPTION PLAN ACCELERATED PLAN PURCHASE PLAN
---------- -------- ---------------- --------------
Dividend yield............................... 2% 3.4% 0.0%
Risk-free interest rate...................... 5.88% 5.38% 5.41%
Expected life................................ 7.1 yrs. 5 yrs. 3 mos.
Expected volatility.......................... 29.20% 27.31% 44.86%
F-83
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's net income for 2000, 1999 and 1998 would approximate the pro
forma amounts below:
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Net income
As reported......................................... $28,198 $36,971 $57,701
Pro forma........................................... $26,573 $35,422 $56,386
8. ADDITIONAL BALANCE SHEET DETAIL
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Property, plant, and equipment
Land...................................................... $ 527 $ 527
Buildings and equipment................................... 363,737 516,440
Construction in progress.................................. 11,909 5,503
-------- --------
Total..................................................... 376,173 522,470
Accumulated depreciation and amortization................. 284,431 430,408
-------- --------
Net property, plant, and equipment........................ $ 91,742 $ 92,062
======== ========
Accrued expenses
Payroll and employee benefits............................. $ 4,685 $ 4,298
Nitrocellulose inventory disposal cost reserve............ 6,478 6,500
Current environmental reserve............................. 4,686 4,670
Other..................................................... 8,323 9,809
-------- --------
Total..................................................... $ 24,172 $ 25,277
======== ========
9. GOODWILL
Goodwill relates to Hercules' 1989 purchase of Henkel's 50% ownership
interest in Aqualon. At December 31, 2000 and December 31, 1999, goodwill was
$28,550 thousand and $29,564 thousand, respectively, (net of accumulated
amortization of $11,994 thousand and $10,980 thousand respectively). The
amortization period for goodwill is 40 years.
10. RESTRUCTURING
In 2000 and 1999, Aqualon incurred $1,662 thousand and $1,912 thousand,
respectively, related to employee reductions at Parlin, NJ, Louisiana, MO, and
Hopewell, VA, manufacturing sites. There are no remaining amounts to be paid.
Severance benefits payments are based on years of service. A reconciliation
of activity with respect to the liabilities established for these plans is as
follows:
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of year................................ $ -- $1,466
Additional termination benefits and other exit costs........ 1,662 446
Cash payments............................................... (1,662) (1,912)
------- ------
Balance at end of year...................................... $ -- $ --
======= ======
F-84
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. PENSION AND OTHER POSTRETIREMENT BENEFITS
Aqualon participates in a defined benefit pension plan sponsored by
Hercules, which covers substantially all employees of Hercules in the U.S.
Benefits under this plan are based on the average final pay and years of
service. Hercules also provides post-retirement health care and life insurance
benefits to eligible retired employees and their dependents.
Information on the actuarial present value of the benefit obligation and
fair value of the plan assets is not presented as Hercules manages its U.S.
employee benefit plans on a consolidated basis and such information is not
maintained separately for the U.S. employees of the Company. The Company's
statement of operations includes an allocation of the costs of the U.S. benefits
plans. The pension costs were allocated based on percentage of pensionable
wages, for each of the years presented, post-retirement benefit costs were
allocated using factors derived from the relative net assets and revenues. Net
pension income of Hercules allocated to the Company was $3,367 thousand, $3,810
thousand, and $4,069 thousand for the years ended December 31, 2000, 1999 and
1998, respectively, and post-retirement benefit expense was $2,462 thousand,
$1,774 thousand, and $1,813 thousand for the years ended December 31, 2000, 1999
and 1998, respectively.
12. OTHER OPERATING EXPENSES, NET
Other operating expenses, net, consists of the following:
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Loss on disposal of Nitrocellulose.................... $25,241 $ 6,500 $ --
Asset impairments..................................... -- 2,000 15,300
Environmental charges................................. 2,617 3,020 2,151
Restructuring charges................................. 1,662 446 1,466
Royalties............................................. (7,613) (8,474) (8,734)
Other................................................. 352 62 62
------- ------- -------
Total....................................... $22,259 $ 3,554 $10,245
======= ======= =======
In 1998, the Nitrocellulose fixed assets at Parlin, NJ were deemed to be
impaired; Nitrocellulose capital expenditures in 1999 were also impaired.
13. OTHER FINANCING ARRANGEMENTS
Hercules manages Aqualon's cash and indebtedness. The majority of the cash
provided by or used by Aqualon is provided through this consolidated cash and
debt management system. As a result, the amount of domestic cash or debt
historically related to Aqualon is not determinable. For purposes of Aqualon's
historical financial statements all of Aqualon's positive or negative cash flows
have been treated as cash transferred to or from its partners (Hercules Group).
F-85
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. NET PARTNERS' (HERCULES GROUP) INVESTMENT
Changes in net partners' (Hercules Group) investment were as follows:
(DOLLARS IN
THOUSANDS)
Balance, January 1, 1998.................................... $191,836
Net income................................................ 57,701
Intercompany transactions, net............................ (57,615)
--------
Balance, December 31, 1998.................................. 191,922
Net income................................................ 36,971
Intercompany transactions, net............................ (58,434)
--------
Balance, December 31, 1999.................................. 170,459
Net income................................................ 28,198
Intercompany transactions, net............................ (42,704)
--------
Balance, December 31, 2000.................................. $155,953
========
15. DIVESTITURES
In June 2000, Aqualon divested its Nitrocellulose operation at Parlin, NJ
to Greentree Chemical Technologies, Inc. As a result of the transaction, Aqualon
received a $6,600 thousand note (see note 4) and recorded a one-time pre-tax
loss of $25,241 thousand, primarily for employee termination benefits, inventory
transfer and disposal, environmental liabilities, and other miscellaneous
expenses, of which $18,387 thousand has been expended. Aqualon terminated
approximately 100 employees associated with the Nitrocellulose operation at
Parlin, NJ, which resulted in severance payments of $4 million. Nitrocellulose
revenues were $23,503 thousand, $58,526 thousand, and $59,944 thousand in 2000,
1999, and 1998, respectively.
16. COMMITMENTS AND CONTINGENCIES
Leases
Aqualon has operating leases (including office space, transportation, and
data processing equipment) expiring at various dates. Rental expense was $528
thousand in 2000, $661 thousand in 1999, and $629 thousand in 1998.
At December 31, 2000, minimum rental payments under noncancelable leases
aggregated $771 thousand. The net minimum payments over the next five years are
$306 thousand in 2001, $250 thousand in 2002, $158 thousand in 2003, $36
thousand in 2004, and $20 thousand in 2005.
Litigation
Aqualon currently and from time to time is involved in litigation
incidental to the conduct of its business. In the opinion of Aqualon's
management, none of such litigation as of December 31, 2000 is likely to have a
material adverse effect on the financial position and results of operations of
Aqualon.
Environmental
Aqualon has established accruals for the estimated cost of environmental
remediation and/or cleanup at various sites. The estimated range of the
reasonable possible share of costs for investigation and cleanup is between $25
million and $46 million. The actual costs will depend upon numerous factors,
including the number of parties found to be responsible at each environmental
site and their ability to pay; the actual methods of remediation required or
agreed to; the outcomes of negotiations with regulatory authorities;
F-86
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
outcomes of litigation; changes in environmental laws and regulations;
technological developments; and the number of years of remedial activity
required, which could range from 0 to 30 years. As of December 31, 2000, the
accrued liability of $25 million for environmental remediation represents
management's best estimate of the probable and reasonably estimable costs
related to environmental remediation. Aqualon estimates that these liabilities
will be paid over the next five years. 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
potentially responsible parties. Aqualon is unaware of any unasserted claims and
has not reflected them in the reserve. While it is not feasible to predict the
outcome of all pending suits and claims, the ultimate resolution of these
environmental matters could have a material effect upon the results of
operations and the financial position of Aqualon.
Other
As of December 31, 2000, Aqualon had $4.3 million in letters of credit
outstanding with lenders.
17. RELATED PARTY TRANSACTIONS
Aqualon has entered into certain agreements with affiliated entities. These
agreements were developed in the context of parent/subsidiary relationship and
therefore may not necessarily reflect the result of arms-length negotiations
between independent parties. Aqualon records sales with affiliates based on a
cost-plus formula developed and agreed-upon by both parties.
Corporate and other cost allocations: As discussed in Note 1, the financial
statements of Aqualon reflect certain allocated support costs incurred by other
entities in Hercules group. These costs include executive, legal, accounting,
tax, auditing, cash management, purchasing, human resources, safety, health and
environmental, information management, research & development overhead, investor
relations and other corporate services. Allocations and charges included in
Aqualon's financial statements were based on either a direct cost pass-through
for items directly identified as related to Aqualon's activities; a percentage
allocation for such services provided based on factors such as revenues, net
assets, costs of sales or a relative weighting of geographic activity. These
allocations are reflected in the selling, general and administrative line item
in our statement of operations. Such allocations and corporate charges totaled
$15,313 thousand, $21,444 thousand, and $16,424 thousand in 2000, 1999 and 1998,
respectively.
Royalties: Aqualon entered into a license agreement in respect of the use
of manufacturing formulations and specifications by affiliated companies which
are developed and owned by Aqualon. Aqualon received royalties in respect of
this agreement of $7,613 thousand, $8,474 thousand, and $8,734 thousand in 2000,
1999 and 1998, respectively. The royalties are included as reductions to other
operating expenses in the financial statements.
Purchases from affiliates: Aqualon purchases a broad range of products in
the normal course of business from affiliated companies. Aqualon's purchases
from affiliated companies were $23,457 thousand, $23,598 thousand, and $50,022
thousand in 2000, 1999 and 1998, respectively.
F-87
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income (loss)
and of cash flows present fairly, in all material respects, the financial
position of BetzDearborn Canada, Inc., a subsidiary of Hercules Incorporated,
and its subsidiary at December 31, 2000 and 1999 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Mississauga, Ontario
June 15, 2001, except for note 2, New accounting pronouncements, which is as of
October 19, 2001
F-88
BETZDEARBORN CANADA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(THOUSANDS OF
U.S. DOLLARS)
Sales to third parties...................................... $167,668 $158,833
Sales to Hercules Group..................................... 10,844 7,033
-------- --------
Net sales................................................. 178,512 165,866
Cost of sales............................................... 107,811 94,629
Selling, general and administrative expenses................ 40,979 48,114
Goodwill and intangible asset amortization.................. 8,137 8,056
Other operating expense..................................... 6,487 5,203
-------- --------
Profit from operations.................................... 15,098 9,864
Interest and debt expense................................... 5,075 7,717
Interest income............................................. (1,090) (529)
Other expense (income) (note 12)............................ 540 (1,266)
-------- --------
Income before income taxes................................ 10,573 3,942
Provision for income tax (note 13).......................... 5,362 2,685
-------- --------
Income before minority interest........................... 5,211 1,257
Minority interest -- held by affiliate...................... 4,003 3,221
-------- --------
Net income (loss)......................................... 1,208 (1,964)
Translation adjustments..................................... (8,897) 16,261
-------- --------
Comprehensive (loss) income............................... $ (7,689) $ 14,297
======== ========
The accompanying accounting policies and notes are an integral part of
the consolidated financial statements.
F-89
BETZDEARBORN CANADA, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------
2000 1999
-------- --------
(THOUSANDS OF
U.S. DOLLARS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 4 $ 2,113
Accounts receivable -- net (note 3)....................... 28,896 25,647
Inventories (note 4)...................................... 13,465 14,585
Income taxes receivable................................... -- 1,100
-------- --------
Total current assets................................... 42,365 43,445
Property, plant and equipment -- net (note 8)............... 21,595 22,380
Goodwill and other intangible assets -- net (note 9)........ 288,307 305,748
Pension and other post-retirement benefits (note 11)........ 5,095 4,851
Deferred charges and other assets........................... 773 215
-------- --------
Total assets........................................... $358,135 $376,639
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Bank overdraft (note 5)................................... $ 1,351 $ 2,321
Accounts payable.......................................... 10,272 4,175
Accrued expenses (note 8)................................. 4,415 5,993
-------- --------
Total current liabilities.............................. 16,038 12,489
Long-term debt (note 6)..................................... 83,434 86,174
Deferred income taxes (note 13)............................. 2,449 1,729
-------- --------
Total liabilities...................................... 101,921 100,392
-------- --------
Commitments and contingencies (note 16)..................... -- --
-------- --------
Minority interest -- held by affiliate...................... 11,874 14,713
-------- --------
Net Hercules Group investment (note 15)
Accumulated other comprehensive income.................... 4,842 13,739
Intercompany transactions (note 14)....................... 239,498 247,795
-------- --------
Net Hercules Group investment.......................... 244,340 261,534
-------- --------
Total liabilities and net Hercules Group investment.... $358,135 $376,639
======== ========
The accompanying accounting policies and notes are an integral part of
the consolidated financial statements.
F-90
BETZDEARBORN CANADA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(THOUSANDS OF
U.S. DOLLARS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 1,208 $ (1,964)
Adjustments to reconcile net income (loss) to net cash
provided from operations:
Minority interest -- held by affiliate.................... 4,003 3,221
Depreciation.............................................. 2,492 2,175
Amortization.............................................. 8,137 8,056
Loss on disposals of property, plant and equipment........ -- 9
Write-off of property, plant and equipment................ 21 --
Deferred tax expense...................................... 776 1,902
Pension and other post-retirement benefits expense........ 496 895
Corporate and other cost allocations...................... 3,067 5,738
Accruals and deferrals of cash receipts and payments
Accounts receivables...................................... (3,445) (2,261)
Income taxes receivable/payable........................... 2,888 (2,510)
Inventories............................................... 973 (1,797)
Prepaid expenses.......................................... -- 320
Pension and other post-retirement benefit contributions... (902) (785)
Accounts payable and accrued expenses..................... 1,312 (1,453)
Non-current assets and liabilities........................ (558) (11)
Transfers to/from Hercules Group.......................... 2,793 (3,517)
-------- --------
Net cash provided by operations........................ 23,261 8,018
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (2,424) (3,493)
Software expenditures....................................... (114) --
Proceeds of disposals of property, plant and equipment...... -- 295
-------- --------
Net cash used in investing activities.................. (2,538) (3,198)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Transfers to/from Hercules Group............................ (13,566) 80,796
Long-term debt repayments................................... (54) (87,510)
Payments to minority interest -- affiliated company......... (7,904) --
Increase (decrease) in bank overdraft....................... (970) 1,677
-------- --------
Net cash used in financing activities.................. (22,494) (5,037)
-------- --------
Effect of exchange rate changes on cash..................... (338) 138
-------- --------
Net decrease in cash and cash equivalents................... (2,109) (79)
Cash and cash equivalents -- Beginning of year.............. 2,113 2,192
-------- --------
Cash and cash equivalents -- End of year............... $ 4 $ 2,113
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ 5,256 $ 7,698
Income taxes.............................................. 1,747 3,051
Non-cash financing activities:
Corporate and other cost allocations...................... $ 3,067 $ 5,738
The accompanying accounting policies and notes are an integral part of
the consolidated financial statements.
F-91
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
BetzDearborn Canada, Inc. (BDCI or the Company) is 100% owned by
BetzDearborn Inc., which in turn is 100% owned by Hercules Incorporated
(Hercules). BDCI is engaged in providing products and services in the areas of
process chemicals and services, functional products, and chemical specialties to
the Canadian marketplace.
Historically, separate company stand-alone financial statements were not
prepared for BDCI. In November 2000, Hercules amended its senior credit facility
and ESOP credit facility (the Facilities). The Facilities, as amended, are
secured by liens on Hercules' property and assets (and those of Hercules'
Canadian subsidiaries, including BDCI), a pledge of the stock and partnership
and member interests of substantially all of Hercules' U.S.A. subsidiaries and
65% of the stock of non-U.S.A. subsidiaries directly owned by Hercules,
including BDCI, and a pledge of Hercules' U.S. intercompany indebtedness. These
financial statements present the financial information on BDCI, a collateral
party to the Hercules debt, based on Hercules' understanding of Securities and
Exchange Commission's interpretation and application of Rule 3-16 under the
Securities and Exchange Commission's Regulation S-X. These statements were
derived from historical accounting records.
When Hercules acquired all of the outstanding shares of BetzDearborn Inc.
on October 15, 1998, it paid $2,235 million in cash and $186 million in common
stock exchanged for the shares held by the BetzDearborn ESOP Trust. As a result
of this acquisition, Hercules initiated a global process of internal
reorganization, in which the Company entered into an agreement with Hercules
Canada, Inc. to transfer its business to a newly created partnership, Hercules
Canada Partnership (HCP or the partnership). The Company has a 71.92% share of
future profits from the partnership. Since this reorganization is under the
common control of Hercules, the transactions have been accounted for in a manner
similar to pooling of interest. The purchase price allocated to the Company and
its subsidiary was approximately $295 million. During 1999, Hercules completed
the purchase price allocation and the final determination of goodwill was $1,822
million of which the amount attributable to the Company was approximately $300
million. These financial statements include the push down of fair value
adjustments to assets and liabilities, including goodwill, other intangible
assets and property, plant and equipment and their related amortization and
depreciation adjustments.
The financial statements of BDCI reflect certain allocated support costs
incurred by other entities in the Hercules group. These costs include executive,
legal, accounting, tax, auditing, cash management, purchasing, human resources,
safety, health and environmental, information management, investor relations and
other corporate services. Allocations and charges included in BDCI's financial
statements were based on either a direct cost pass-through for items directly
identified as related to BDCI's activities; a percentage allocation for such
services provided based on factors such as sales, net assets, or cost of sales;
or a relative weighting of geographic activity. Management believes that the
allocation methods are reasonable.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of BetzDearborn
Canada, Inc. and its majority controlled partnership, Hercules Canada
Partnership. This partnership is located in Mississauga, Ontario, Canada. All
material intercompany transactions and profits have been eliminated.
Use of estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
F-92
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue recognition
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Company's experience. The corresponding shipping and handling costs are
included in cost of sales.
Cash and cash equivalents
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. Cost includes the
cost of raw materials, direct labor and an allocation of overhead. Inventories
are valued on the standard cost method, which approximates average cost.
Property and depreciation
Property, plant and equipment are stated at cost and depreciated using the
straight-line method. The estimated useful lives of depreciable assets are as
follows: buildings -- 30 years; plant, machinery and equipment -- 15 years;
other machinery and equipment -- 3 to 15 years.
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is charged to income.
Goodwill and other intangible assets
Goodwill and other intangible assets are amortized on a straight-line basis
over the estimated future periods to be benefited, generally 40 years for
goodwill and 5 to 15 years for other intangible assets.
Long-lived assets
The Company reviews its long-lived assets, including goodwill and other
intangibles, for impairment 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 statement of income.
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.
Income taxes
The provisions for income taxes have been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
income taxes represent the future tax consequences expected to occur when the
reported amounts of assets and liabilities are recovered or paid. The provision
for income taxes represents income taxes paid or payable for the current year
plus the change in deferred taxes during the year. Deferred income taxes result
from differences between the financial and tax basis of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when
F-93
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
changes are enacted. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit will not be realized.
Foreign currency translation and transactions
The accompanying consolidated financial statements are reported in U.S.
dollars. The Canadian dollar is the functional currency for the Company and the
partnership. The translation of the functional currency into U.S. dollars
(reporting currency) is performed for assets and liabilities using the current
exchange rates in effect at the balance sheets dates, and for revenues, costs
and expenses using average exchange rates prevailing during the reporting
periods. Adjustments resulting from the translation of functional currency
financial statements to reporting currency are accumulated and reported as other
comprehensive income, a component of net Hercules Group investment.
Transactions in foreign currency are recorded at the exchange rate
prevailing on the date of transaction. Monetary assets and liabilities
denominated in foreign currencies are expressed in the functional currency at
the exchange rates in effect at the balance sheets dates. Revenues, costs and
expenses are recorded using average exchange rates prevailing during the
reporting periods. Gains or losses resulting from foreign currency transactions
are included in the statements of operations.
Concentration of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the Company's large number of customers and their dispersion across many
different industries and locations.
Financial instruments
The Company uses various non-derivative financial instruments, including
letters of credit, and generally does not require collateral to support its
financial instruments.
Stock-based compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25)). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard 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 as if the
fair value based method of accounting had been applied.
Net Hercules Group investment
The net Hercules Group investment account reflects the balance of BDCI's
historical earnings, intercompany amounts, foreign currency translation and
other transactions between BDCI and the Hercules Group.
New 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, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138,
F-94
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
requires that all derivative instruments be recorded on the balance sheets at
their fair value. SFAS 133, as amended, is effective for all fiscal quarters of
fiscal years beginning after December 31, 2000. The Company adopted SFAS 133
effective January 1, 2001. The adoption of SFAS No. 133 did not have a material
effect on the Company's earnings or financial position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was effective October
1, 2000. Adoption of SAB 101 did not have a material effect on the Company's
profit from operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" (SFAS 141) and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). For BDCI, these statements will generally become effective
January 1, 2002, although business combinations initiated after June 30, 2001
are subject to the non-amortization and purchase accounting provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. BDCI is currently in the
process of conducting an assessment of the actual impact of the non-amortization
provision of SFAS 142. The assessment of goodwill for impairment is a complex
issue in which the Company must determine, among other things, the fair value of
each defined reporting unit. It is, therefore, not possible at this time to
predict the impact, if any, that the impairment assessment provisions of SFAS
142 will have on BDCI's financial statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assets. SFAS 143 will become effective for BDCI from
January 1, 2003 and requires recognition of a liability for an asset retirement
obligation in the period in which it is incurred. Management is in the process
of evaluating the impact this standard will have on the Company's financial
statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.
3 ACCOUNTS RECEIVABLE -- NET
Accounts receivable -- net consists of:
2000 1999
------- -------
(THOUSANDS OF
U.S. DOLLARS)
Trade....................................................... $27,225 $24,503
Other....................................................... 2,672 2,085
------- -------
Gross accounts receivable................................. 29,897 26,588
Less: Allowance for doubtful accounts....................... 1,001 941
------- -------
Total..................................................... $28,896 $25,647
======= =======
F-95
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4 INVENTORIES
The components of inventories are:
2000 1999
------- -------
(THOUSANDS OF
U.S. DOLLARS)
Finished products........................................... $ 7,224 $ 8,286
Materials, supplies and work-in-process..................... 6,241 6,299
------- -------
Total.................................................. $13,465 $14,585
======= =======
5 BANK OVERDRAFT
Bank borrowings represent primarily overdraft facilities and short-term
lines of credit, which are 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, 2000, the Company had $5 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 unused at December 31, 1999 totalled $6.8
million. Weighted average interest rates on short-term borrowings at December
31, 2000 and 1999 were 7.5% and 6.5%, respectively. Lines of credit are
repayable in Canadian funds.
6 LONG-TERM DEBT
The Company's bank loan facility of up to the equivalent of US$100 million
from select lenders in Canada is a component of the Hercules' $3,650 million
credit facility with a syndicate of banks, which is due in 2003. The bank loan
facility is drawn in the form of bankers' acceptances, is repayable in Canadian
funds and bears interest at bankers' acceptance rates plus 2.25%. The interest
prepaid on the bankers' acceptances is included in the net payable amount. The
Company's assets and 65% of its common shares are pledged as collateral on the
Hercules' credit facility.
The Company believes that the carrying value of other borrowings
approximates fair market value, based on discounting future cash flows using
rates currently available for debt of similar terms and remaining maturities.
Interest expense for the year on long-term debt was $5,256 thousand
(1999 -- $7,698 thousand).
7 LONG-TERM INCENTIVE COMPENSATION PLANS
BDCI participates in long-term incentive compensation plans sponsored by
Hercules. These 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.
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
491,488 at December 31, 2000 and 926,689 at December 31, 1999.
At December 31, 2000, under Hercules' incentive compensation plans,
1,847,855 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
F-96
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Hercules 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 plans participated in
by BDCI employees. Accordingly, no compensation cost has been recognized for the
stock option plans. There were no charges to income for the cost of stock awards
over the restriction or performance period for 2000 or 1999.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 2000 and 1999, which relate to stock options held by
BDCI employees:
REGULAR
----------------------------
NUMBER WEIGHTED-AVERAGE
OF SHARES PRICE
--------- ----------------
January 1, 1999............................................. 20,100 $39.71
Granted................................................... 33,850 37.75
Exercised................................................. -- --
Forfeited................................................. -- --
December 31, 1999........................................... 53,950 38.48
Granted................................................... -- --
Exercised................................................. -- --
Forfeited................................................. -- --
December 31, 2000........................................... 53,950 $38.48
There were no performance-accelerated stock options granted or outstanding
during 2000 and 1999.
The weighted-average fair value of regular stock options granted to BDCI
employees during 2000 and 1999 was $nil and $8.26, respectively.
Following is a summary of regular stock options exercisable at December 31,
2000 and 1999 and their respective weighted-average share prices:
NUMBER WEIGHTED-AVERAGE
OPTIONS EXERCISABLE OF SHARES EXERCISE PRICE
------------------- --------- ----------------
December 31, 1999........................................... 15,880 $39.60
December 31, 2000........................................... 33,540 38.89
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------------------------- ---------------------------------
NUMBER NUMBER
OUTSTANDING AT WEIGHTED-AVERAGE EXERCISABLE AT
DECEMBER 31, REMAINING WEIGHTED-AVERAGE DECEMBER 31, WEIGHTED-AVERAGE
EXERCISE PRICE RANGE 2000 CONTRACTUAL LIFE EXERCISE PRICE 2000 EXERCISE PRICE
-------------------- -------------- ---------------- ---------------- -------------- ----------------
REGULAR STOCK OPTIONS
$30 - $40............. 53,450 7.74 $38.39 33,140 $38.78
$40 - $50............. 500 7.35 47.81 400 47.81
------ ------
53,950 33,540
====== ======
F-97
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BDCI employees may also participate in the Hercules Employee Stock Purchase
Plan (ESPP). The ESPP 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, 202,139
shares of Hercules common stock are registered for offer and sale under the
plan. Shares issued at December 31, 2000 and 1999 were 1,597,861 and 949,464,
respectively. BDCI applies APB Opinion 25 and related interpretations in
accounting for the ESPP of Hercules. Accordingly, no compensation cost has been
recognized for the ESPP.
Had compensation cost for Hercules' Stock-Based Incentive Plans and ESPP
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 2000 and 1999:
PERFORMANCE- EMPLOYEE
ACCELERATED STOCK PURCHASE
ASSUMPTION REGULAR PLAN PLAN PLAN
---------- ------------ ------------ --------------
Dividend yield................................. 2.00% 3.40% --
Risk-free interest rate........................ 5.88% 5.38% 5.41%
Expected life.................................. 7.1 years 5 years 3 months
Expected volatility............................ 29.20% 27.31% 44.86%
The Company's net income for 2000 and 1999 would approximate the pro forma
amounts below:
2000 1999
------ -------
(THOUSANDS OF
U.S. DOLLARS)
Net income
As reported............................................... $1,208 $(1,964)
Pro forma................................................. 1,130 (2,028)
8 ADDITIONAL BALANCE SHEET DETAIL
2000 1999
------- -------
(THOUSANDS OF
U.S. DOLLARS)
Property, plant and equipment
Land...................................................... $ 1,632 $ 1,685
Buildings and equipment................................... 32,134 31,302
Construction-in-progress.................................. 1,838 1,172
------- -------
Total.................................................. 35,604 34,159
Less: Accumulated depreciation and amortization............. 14,009 11,779
------- -------
Net property, plant and equipment...................... $21,595 $22,380
======= =======
Accrued expenses
Payroll and employees benefits............................ $ 934 $ 686
Income taxes payable...................................... 3,104 --
Restructuring liability (note 10)......................... 212 2,562
Other..................................................... 165 2,745
------- -------
Total.................................................. $ 4,415 $ 5,993
======= =======
F-98
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9 GOODWILL AND OTHER INTANGIBLE ASSETS -- NET
At December 31, 2000 and 1999, the goodwill and other intangible assets
were:
2000 1999
-------- --------
(THOUSANDS OF
U.S. DOLLARS)
Goodwill.................................................... $298,734 $308,346
Other intangibles........................................... 6,672 6,821
-------- --------
Total....................................................... 305,406 315,167
Less: Accumulated amortization.............................. 17,099 9,419
-------- --------
Net goodwill and other intangible assets.................... $288,307 $305,748
======== ========
10 RESTRUCTURING
The consolidated balance sheets reflect liabilities for employee severance
benefits and other exit costs, primarily related to the plans initiated upon the
acquisition of BetzDearborn in 1998. In 1998 and 1999, BDCI incurred
restructuring liabilities of $3.8 million in connection with the acquisition of
BetzDearborn. These liabilities included $3.3 million for employee termination
benefits and $0.5 million for exit costs related to facility closures. Thirty
employees were terminated during the year ended December 31, 2000. Cash payments
during 2000 included $2.3 million for severance benefits. Pursuant to the plans
in place to merge the operations of BetzDearborn with Hercules and to
rationalize the support infrastructure and other existing operations, nineteen
employees were terminated during 1999. Cash payments during 1999 included $1.3
million for severance benefits.
A reconciliation of activity with respect to the liabilities established
for these plans is as follows:
2000 1999
------- -------
(THOUSANDS OF
U.S. DOLLARS)
Balance -- Beginning of year................................ $ 2,562 $ 883
Cash payments............................................... (2,317) (1,322)
Additional termination benefits and exit costs.............. -- 2,915
Translation adjustment...................................... (33) 86
------- -------
Balance -- End of year...................................... $ 212 $ 2,562
======= =======
Severance benefit payments are based on years of service and generally
continue for 3 to 24 months subsequent to termination. Actions under the 1998
restructuring plans are substantially complete as of December 31, 2000. The
Company anticipates that actions under the 1999 restructuring plan will be
substantially completed by the end of 2001.
F-99
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11 PENSION AND OTHER POST-RETIREMENT BENEFITS
The Company provides defined benefit pension and post-retirement benefit
plans to employees. The following chart lists benefit obligations, plan assets,
and funded status of the plans:
OTHER POST-RETIREMENT
PENSION BENEFITS BENEFITS
------------------ ----------------------
2000 1999 2000 1999
------- ------- --------- ---------
(THOUSANDS OF U.S. DOLLARS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1................... $25,426 $24,858 $ 1,652 $ 1,634
Service cost...................................... 1,086 1,027 42 45
Interest cost..................................... 1,994 1,800 115 112
Assumption change................................. 1,371 1,493 -- --
Translation difference............................ (876) (2,731) (52) 102
Actuarial gain.................................... (20) -- (61) (183)
Benefits paid from plan assets.................... (889) (1,021) (61) (58)
------- ------- ------- -------
Benefit obligation at December 31................... $28,092 $25,426 $ 1,635 $ 1,652
======= ======= ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1............ $34,825 $27,959 $ -- $ --
Actual return on plan assets...................... 1,856 5,605 -- --
Company contributions............................. 841 727 61 58
Translation difference............................ (1,128) 1,555 -- --
Benefits paid from plan assets.................... (889) (1,021) (61) (58)
------- ------- ------- -------
Fair value of plan assets at December 31............ $35,505 $34,825 $ -- $ --
======= ======= ======= =======
Funded status of the plans.......................... $ 7,413 $ 9,399 $(1,635) $(1,652)
Unrecognized actuarial gain......................... (1,922) (4,107) (292) (240)
Unrecognized prior service cost..................... 269 -- -- --
Unrecognized net transition obligation.............. (26) -- 1,288 1,451
------- ------- ------- -------
Prepaid (accrued) benefit cost...................... $ 5,734 $ 5,292 $ (639) $ (441)
======= ======= ======= =======
Assumptions as of December 31
Weighted-average discount rate.................... 7% 7% 7% 6.5%
Expected return on plan assets.................... 7% 7.5% N/A N/A
Rate of compensation increase..................... 4% 4% 4% 4%
Health-care trend rate............................ N/A N/A 4% 4%
Funded status of plans in deficit position.......... (855) (544) (1,635) (1,652)
OTHER POST-RETIREMENT
PENSION BENEFITS BENEFITS
------------------ ----------------------
2000 1999 2000 1999
------- ------- --------- ---------
(THOUSANDS OF U.S. DOLLARS)
Service cost........................................ $ 1,086 $ 1,027 $ 42 $ 45
Interest cost....................................... 1,994 1,800 115 112
Return on plan assets (expected).................... (2,688) (2,132) -- --
Amortization and deferrals.......................... 16 112 -- --
Amortization of transition asset.................... (189) (187) 120 118
------- ------- ------- -------
Benefit cost........................................ $ 219 $ 620 $ 277 $ 275
======= ======= ======= =======
F-100
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other post-retirement benefits
The nonpension post-retirement benefit plans are contributory health-care
and life insurance plans. The assumed participation rate in these plans for
future eligible retirees was 95% for health care and 95% for life insurance. A
one-percentage point increase or decrease in the assumed health-care cost trend
rate would increase or decrease the post-retirement benefit obligation by $172
thousand or $152 thousand, respectively, and would not have a material effect on
aggregate service and interest cost components.
12 OTHER EXPENSE (INCOME)
Other expense (income) consists of the following:
2000 1999
---- -------
(THOUSANDS OF
U.S. DOLLARS)
Foreign exchange loss (gain)................................ $226 $ (927)
Miscellaneous expense (income).............................. 314 (339)
---- -------
$540 $(1,266)
==== =======
13 INCOME TAXES
A summary of the components of the tax provision follows:
2000 1999
------ ------
(THOUSANDS OF
U.S. DOLLARS)
Current..................................................... $4,586 $ 783
Deferred.................................................... 776 1,902
------ ------
Provision for income taxes.................................. $5,362 $2,685
====== ======
The deferred income tax liability at December 31 is comprised of:
2000 1999
------ ------
(THOUSANDS OF
U.S. DOLLARS)
Accrued expenses............................................ $ 90 $ 741
------ ------
Gross deferred tax assets................................. 90 741
------ ------
Depreciation................................................ 906 990
Prepaid pension and post-retirement benefits................ 1,599 1,402
Other....................................................... 34 78
------ ------
Gross deferred tax liabilities............................ 2,539 2,470
------ ------
Total deferred income tax liability....................... $2,449 $1,729
====== ======
A reconciliation of the Canadian statutory income tax rate to the effective
rate is as follows:
2000 1999
------ ------
Statutory income tax rate................................... 40.14% 40.54%
Minority interest in income................................. (15.20) (33.12)
Goodwill amortization....................................... 22.36 53.73
Non-deductible expenses..................................... 1.76 5.07
Large corporations tax...................................... 1.64 3.43
Other....................................................... 0.01 (1.54)
------ ------
Effective tax rate.......................................... 50.71% 68.11%
====== ======
F-101
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14 INTERCOMPANY NOTES RECEIVABLE
In addition to current receivables and payables with the Hercules Group,
BDCI has intercompany notes receivable from the Hercules Group in the amount of
$23.088 million (1999 -- $12.614 million), which is included in the net Hercules
Group investment balance as of December 31, 2000 and 1999. The weighted average
rate on the intercompany notes receivable was 10% in 2000 and 1999. The notes
receivable are due on demand. Interest income earned on intercompany notes
receivable for the year was $1,090 thousand (1999 -- $529 thousand).
15 NET HERCULES GROUP INVESTMENT
Changes in net Hercules Group investment were as follows:
(THOUSANDS OF
U.S. DOLLARS)
Balance -- January 1, 1999.................................. $170,317
Net loss.................................................. (1,964)
Other comprehensive income................................ 16,261
Intercompany transactions -- net.......................... 76,920
--------
Balance -- December 31, 1999................................ 261,534
Net income................................................ 1,208
Other comprehensive loss.................................. (8,897)
Intercompany transactions -- net.......................... (9,505)
--------
Balance -- December 31, 2000................................ $244,340
========
The Company includes accumulated other comprehensive income (loss) in net
Hercules Group investment. At December 31, 2000 and 1999, accumulated other
comprehensive income included $4,842 thousand and $13,739 thousand,
respectively, of foreign currency translation adjustments.
16 COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases (including facilities, transportation, and
data processing equipment) expiring at various dates. Rental expense was $2,474
thousand in 2000 and $2,379 thousand in 1999.
At December 31, 2000, minimum rental payments under noncancelable leases
aggregated $4,938, less subleases of $335. A significant portion of these
payments relates to facilities and vehicles. The net minimum payments over the
next five years are $2,188 thousand in 2001, $1,328 thousand in 2002, $798
thousand in 2003, $289 thousand in 2004 and $nil in 2005.
Litigation
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business. In the opinion of the Company's
management, none of such litigation as of December 31, 2000 is likely to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
17 RELATED PARTY TRANSACTIONS
BDCI has entered into certain agreements with affiliated entities. These
agreements were developed in the context of parent/subsidiary relationship and,
therefore, may not necessarily reflect the result of arm's
F-102
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
length negotiations between independent parties. BDCI records sales with
affiliates based on a cost-plus formula developed and agreed upon by both
parties.
Corporate and other cost allocations
As discussed in note 1, the financial statements of BDCI reflect certain
allocated support costs incurred by other entities in Hercules Group. These
costs include executive, legal, accounting, tax, auditing, cash management,
purchasing, human resources, safety, health and environmental, information
management, research and development overhead, investor relations and other
corporate services. Allocations and charges included in BDCI's financial
statements were based on either a direct cost pass-through for items directly
identified as related to BDCI's activities, a percentage allocation for such
services provided based on factors such as revenues, net assets, cost of sales
or a relative weighting of geographic activity. These allocations are reflected
in the selling, general and administrative line item in the statements of
operations. Such allocations and corporate charges totalled $3,067 thousand and
$5,738 thousand in 2000 and 1999, respectively.
Royalties
BDCI entered into a licence agreement in respect of the use of
manufacturing formulations and specifications, which are developed and owned by
affiliated companies. BDCI paid royalties in respect of this agreement of $5,998
thousand and $4,937 thousand in 2000 and 1999, respectively. The royalties are
reflected in the other operating expense line item in the consolidated
statements of operations.
Purchases
BDCI purchases products for resale in the normal course of business from
affiliated companies. BDCI's purchases from affiliated companies were $7,056
thousand and $12,502 thousand in 2000 and 1999, respectively.
Other
BDCI reimburses affiliated companies for charges incurred on its behalf.
These costs are reflected in the selling, general and administrative line item
in the consolidated statements of income. The amount paid was $874 thousand and
$58 thousand in 2000 and 1999, respectively. BDCI receives commissions for sales
made on behalf of affiliated companies, which are reflected as a decrease to
selling, general and administrative costs in the consolidated statements of
operations. Total commissions earned from affiliates amounted to $422 thousand
and $291 thousand in 2000 and 1999, respectively.
18 SUBSEQUENT EVENTS
On May 1, 2001, Hercules completed the sale of the hydrocarbon resins
business and select portions of the rosin resins business to a subsidiary of
Eastman Chemical Company for which Hercules received proceeds of approximately
$244 million. On May 31, 2001, Hercules completed the sale of the peroxides
business to GEO Specialty Chemicals, Inc. for which Hercules received proceeds
of approximately $92 million. BDCI had third party sales of $12.3 million in the
resins businesses and $265 thousand in the peroxide business during the year
ended December 31, 2000.
F-103
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND THE BOARD OF DIRECTORS OF
HERCULES INCORPORATED
WILMINGTON, DELAWARE
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive loss and of cash
flows present fairly, in all material respects, the financial position of
BetzDearborn Europe, Inc., a subsidiary of Hercules Incorporated, and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 22, 2001
F-104
BETZDEARBORN EUROPE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED DECEMBER 31,
------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Sales to third parties...................................... $160,386 $176,145
Sales to Hercules Group..................................... 60,782 64,952
-------- --------
221,168 241,097
Cost of sales............................................... 134,438 142,608
Selling, general, and administrative expenses............... 55,405 63,242
Research and development.................................... 2,782 3,931
Goodwill and intangible asset amortization.................. 6,126 6,696
Other operating expenses, net (Note 13)..................... 12,432 13,814
-------- --------
Profit from operations...................................... 9,985 10,806
Equity in income of affiliated companies.................... 3,716 3,104
Interest and debt expense (Note 14)......................... 9,438 9,277
Other income (expense), net (Note 15)....................... 998 1,666
-------- --------
Income before income taxes.................................. 5,261 6,299
Provision for income taxes (Note 16)........................ 2,300 6,609
-------- --------
Net income.................................................. 2,961 (310)
Translation adjustments..................................... (28,564) (11,658)
-------- --------
Comprehensive loss.......................................... $(25,603) $(11,968)
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-105
BETZDEARBORN EUROPE INC
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 2,406 $ 3,113
Accounts receivable, net (Note 3)......................... 44,476 47,247
Inventories (Note 4)...................................... 16,224 22,765
Deferred income taxes (Note 16)........................... 1,716 5,481
-------- --------
Total current assets................................... 64,822 78,606
-------- --------
Property, plant, and equipment, net (Note 9).............. 53,382 62,749
Investments in affiliates (Note 5)........................ 152,468 145,921
Goodwill and other intangible assets, net (Note 10)....... 182,927 214,671
Prepaid pension (Note 12)................................. 7,785 6,011
Deferred charges and other assets......................... 1,289 700
-------- --------
Total assets...................................... $462,673 $508,658
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable.......................................... $ 17,511 $ 18,487
Short-term debt (Note 6).................................. 5,730 10,382
Accrued expenses (Note 9)................................. 21,477 23,599
-------- --------
Total current liabilities.............................. 44,718 52,468
Deferred income taxes (Note 16)............................. 5,411 11,197
Deferred credits and other liabilities...................... 30 48
-------- --------
Total liabilities................................. 50,159 63,713
Commitments and Contingencies (Note 17)
Net Hercules Group investment (Note 19)
Accumulated other comprehensive losses.................... (54,068) (25,504)
Intercompany transactions................................. 466,582 470,449
-------- --------
Net Hercules Group investment..................... 412,514 444,945
-------- --------
Total liabilities and net Hercules Group
investment...................................... $462,673 $508,658
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-106
BETZDEARBORN EUROPE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss)........................................... $ 2,961 $ (310)
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Depreciation and amortization of property, plant and
equipment.............................................. 7,037 6,538
Amortization of goodwill and other intangible assets...... 6,126 6,696
Deferred Income Tax....................................... (372) 1,869
Loss on disposals......................................... 84 --
Equity in income of affiliates............................ (3,716) (3,104)
Dividends from equity method investments.................. -- 1,666
Corporate and other cost allocations...................... 3,940 7,530
Accruals and deferrals of cash receipts and payments:
Accounts receivable.................................... (1,215) 2,332
Inventories............................................ 4,638 1,912
Accounts payable and accrued expenses.................. 584 (7,881)
Noncurrent assets and liabilities...................... (2,850) 3,199
Net transfers from (to) Hercules Group................. 38,809 (13,632)
-------- --------
Net cash provided by operations........................ 56,026 6,815
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures, net of proceeds from sale............. (3,123) 2,590
-------- --------
Net cash (used in) provided by investing activities.... (3,123) 2,590
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Change in short-term debt................................... (4,341) 9,843
Net transfers to Hercules Group............................. (49,096) (27,957)
-------- --------
Net cash used in financing activities.................. (53,437) (18,114)
-------- --------
Effect of exchange rate changes on cash..................... (173) (747)
-------- --------
Net decrease in cash and cash equivalents................... (707) (9,456)
Cash and cash equivalents at beginning of year.............. 3,113 12,569
-------- --------
Cash and cash equivalents at end of year.................... $ 2,406 $ 3,113
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized)...................... $ 9,439 $ 9,215
Income taxes, net......................................... 4,622 6,948
Noncash investing and financing activities:
Corporate and other cost allocations...................... 3,940 7,530
Corporate and other asset allocations..................... 4,609 3,551
The accompanying notes are an integral part of the consolidated financial
statements.
F-107
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
BetzDearborn Europe Inc. (the "Company") is a wholly owned subsidiary of
BetzDearborn Inc. (immediate parent) ("BetzDearborn") and Hercules Incorporated
(ultimate parent) ("Hercules"). Hercules and its wholly owned subsidiaries
comprise the Hercules Group. The Company supplies engineered chemical treatment
programs for water and process systems in industrial, commercial and
institutional establishments, offering a range of products and services for
preserving or enhancing productivity, reliability and efficiency in plant
operations and in complying with environmental regulations.
When Hercules acquired all of the outstanding shares of BetzDearborn Inc.
on October 15, 1998 it paid $2,235 million in cash and $186 million in common
stock exchanged for the shares held by the BetzDearborn ESOP Trust. The purchase
price allocated to the Company and its subsidiaries was approximately $810
million. During 1999, Hercules completed the purchase price allocation and the
final determination of goodwill was $1,822 million of which the amount
attributable to the Company was approximately $204 million. These financial
statements include the push down of fair value adjustments to assets and
liabilities, including goodwill, other intangible assets and property, plant and
equipment and their related amortization and depreciation adjustments.
As a result of this acquisition, the Company, as a part of an effort by
Hercules, entered into several internal reorganization transactions during 2000
and 1999. The transactions included the Company selling several of its
investments in subsidiaries to Hercules affiliates, purchasing several
investments in subsidiaries from Hercules affiliates, merging companies, and
acquiring certain investments in Hercules group companies that are valued at
cost. As all investments in this reorganization are under the common control of
Hercules, these transactions have been accounted for in a manner similar to
pooling of interests.
Historically, separate company stand-alone financial statements were not
prepared for the Company. In November 2000, Hercules amended its senior credit
facility and ESOP credit facility (the "Facilities"). The Facilities, as
amended, are secured by liens on Hercules' property and assets (and those of
Hercules' Canadian Subsidiaries), a pledge of the stock of substantially all of
Hercules' domestic subsidiaries (including the Company) and 65% of the stock of
foreign subsidiaries directly owned by Hercules, and a pledge of Hercules'
domestic intercompany indebtedness. These consolidated financial statements
present the financial information of the Company, a collateral party to the
Hercules debt, based on the Hercules' understanding of the Securities and
Exchange Commission's interpretation and application of Rule 3-16 under the
Securities and Exchange Commission's Regulation S-X. These statements were
derived from historical accounting records.
The consolidated financial statements of the Company reflect certain
allocated support costs incurred by the Hercules Group. These costs include
executive, legal, accounting, tax, auditing, cash management, purchasing, human
resources, safety, health and environmental, information management, investor
relations and other corporate services. Allocations and charges included in the
Company's consolidated financial statements were based on either a direct cost
pass-through for items directly identified as related to the Company's
activities; a percentage allocation for such services provided based on factors
such as sales, net assets, or cost of sales; or a relative weighting of
geographic activity. Management believes that the allocation method is
reasonable. (See Note 18)
A number of the Company's operating companies participate in Hercules
Holding BV/BVBA's (a Hercules Group affiliate) centralized cash management
system. Accordingly, cash received from operations may be transferred to
Hercules on a periodic basis, and Hercules funds operational and capital
requirements upon request.
F-108
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries where control exists. Following the
acquisition of BetzDearborn by Hercules in 1998, the Company continued
BetzDearborn's practice of using a November 30 fiscal year end for certain
former BetzDearborn non-U.S. subsidiaries to expedite the year end closing
process. All intercompany transactions and profits have been eliminated.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America 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
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Company's experience. The corresponding shipping and handling costs are
included in cost of sales.
Research and Development Expenditures
Research and development expenditures are expensed as incurred.
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 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-term maturity of those instruments.
Inventories
Inventories are stated at the lower of cost or market. Inventories are
valued 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.
F-109
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Investments
Investments in affiliated companies with a 20% or greater ownership
interest in which the Company has significant influence are accounted for using
the equity method of accounting. Accordingly, these investments are included in
investments in affiliates on the Company's balance sheet and the income or loss
from these investments is included in equity in (loss) income of affiliated
companies in the Company's statement of income.
Investments in affiliated companies in which the Company does not have a
controlling interest, or an ownership and voting interest so large as to exert
significant influence, are accounted for using the cost method of accounting.
Accordingly, these investments are included in investments in affiliates on the
Company's balance sheet.
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.
Income Taxes
Income tax expense in the accompanying consolidated financial statements
has been computed assuming the Company filed separate income tax returns.
The provisions for income taxes have been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax basis of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
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 re-invested permanently. The
undistributed earnings of subsidiaries and affiliates on which no provision for
foreign withholding or US income taxes has been made amounted to approximately
$5,290 thousand and $1,853 thousand at December 31, 2000 and 1999, respectively.
US and foreign income taxes that would be payable if such
F-110
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
earnings were distributed may be lower than the amount computed at the US
statutory rate because of the availability of tax credits.
Foreign Currency Translation and Transactions
The accompanying consolidated financial statements are reported in U.S.
dollars. The U.S. dollar is the functional currency for the Company. The
translation of the functional currencies of the Company's subsidiaries into U.S.
dollars (reporting currency) is performed for assets and liabilities using the
current exchange rates in effect at the balance sheet date, and for revenues,
costs and expenses using average exchange rates prevailing during the reporting
periods. Adjustments resulting from the translation of functional currency
financial statements to reporting currency are accumulated and reported as other
comprehensive income, a separate component of net Hercules Group investment.
Transactions in foreign currency are recorded at the exchange rate
prevailing on the date of transaction. Monetary assets and liabilities
denominated in foreign currencies are expressed in the functional currency at
the exchange rates in effect at the balance sheet date. Revenues, costs and
expenses are recorded using average exchange rates prevailing during the
reporting periods. Gains or losses resulting from foreign currency transactions
are included in the statement of income.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables and
receivables from affiliated companies, which are included in the net Hercules
Group investment in the consolidated balance sheet. Concentrations of credit
risk with respect to trade receivables are limited due to the Company's large
number of customers and their dispersion across many different industries and
locations.
Stock-based Compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25)). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standards 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 as if the
fair-value-based method of accounting had been applied.
Net Hercules Group Investment
The Net Hercules Group Investment account reflects the balance of the
Company's historical earnings, intercompany amounts, foreign currency
translation and other transactions between the Company and the Hercules Group.
New 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, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. SFAS 133, as amended, is effective for all
fiscal quarters of fiscal years beginning after December 31, 2000. The Company
adopted SFAS 133 effective
F-111
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
January 1, 2001. The Company believes that the adoption of SFAS No. 133, as
amended by SFAS 137 and 138, did not have a material effect on its earnings or
statement of financial position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was effective October
1, 2000. Adoption of SAB 101 did not have a material effect on profit from
operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" (SFAS 141) and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). For the Company, these statements will generally become
effective January 1, 2002, although business combinations initiated after June
30, 2001 are subject to the non-amortization and purchase accounting provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. The assessment of
goodwill for impairment is a complex issue in which the Company must determine,
among other things, the fair value of each defined reporting unit. It is,
therefore, not possible at this time to predict the impact, if any, that the
impairment assessment provisions of SFAS 142 will have on the Company's
financial statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assts. SFAS 143 will become effective for the Company on
January 1, 2003 and requires recognition of a liability for an asset retirement
obligation in the period in which it is incurred. Management is currently in the
process of evaluating the impact this standard will have on the Company's
financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Trade....................................................... $39,830 $44,933
Other....................................................... 7,413 4,157
------- -------
47,243 49,090
Less allowance for doubtful accounts........................ (2,767) (1,843)
------- -------
Total............................................. $44,476 $47,247
======= =======
Other accounts receivable mainly comprise VAT receivable.
F-112
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES
The components of inventories are:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Finished products........................................... $ 9,876 $14,422
Materials, supplies, and work in process.................... 6,348 8,343
------- -------
Total............................................. $16,224 $22,765
======= =======
5. INVESTMENTS
The Company has various equity investments in companies, as described
below. Summarized financial information for these equity affiliates at December
31, and for the years then ended is as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Current assets.............................................. $ 26,497 $ 32,009
Non-current assets.......................................... 210,711 214,308
Current liabilities......................................... $ 23,481 $ 35,630
Non-current liabilities..................................... 25,113 31,622
Net sales................................................... $ 62,348 $ 62,860
Gross profit................................................ 18,142 17,930
Net earnings................................................ 8,393 6,699
At December 31, 2000, the Company's equity investments consist of a 38.97%
ownership of Hercules Quimica S.A., a Hercules affiliate, a 50% ownership of BL
Technologies, a Hercules affiliate and a 19.75% ownership of Hercules de
Colombia S.A., a Hercules affiliate. The Company's carrying value for these
investments at December 31, 2000 and 1999 equals its share of the underlying
equity in net assets of the respective affiliates. Dividends paid to the Company
from its equity investees were $1,666 thousand during 1999. No dividends were
received by the Company from equity investees in 2000. Each of these entities
operates in lines of business similar to the Company, supplying engineered
chemical treatment programs for water and process systems in industrial,
commercial and institutional establishments. The Company's cost investment
consists of a 7.5% ownership of Hercules International Limited, a Hercules
affiliate.
6. SHORT-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Short-term debt of $5,730 thousand and $10,382 thousand at December 31,
2000 and 1999, respectively, consists of bank borrowings primarily representing
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.
Short-term debt with affiliates of $26,856 thousand and $31,668 thousand at
December 31, 2000 and 1999, respectively, is recorded in Net Hercules Group
Investment in the consolidated balance sheet and is generally payable on demand
with interest at various rates.
At December 31, 2000 and 1999, the Company had $28,300 thousand and $7,500
thousand, respectively, of unused lines of credit that may be drawn as needed,
with interest at a negotiated spread over lenders' cost of funds.
F-113
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Weighted-average interest rates on all third party and affiliate short-term
borrowings at December 31, 2000 and 1999 were 6.3% and 6.8%, respectively.
7. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt with affiliates at December 31, 2000 and 1999, which is
recorded in Net Hercules Group Investment in the consolidated balance sheet, is
summarized as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSAND)
7.11% variable rate affiliate note.......................... $ 45,195 $ 51,558
4.81% variable rate affiliate note.......................... 27,063 30,724
6.00% variable rate affiliate note.......................... 26,278 31,220
7.56% variable rate affiliate note.......................... 5,022 5,729
7.99% variable rate affiliate note.......................... 2,196 2,442
4.81% variable rate affiliate note.......................... 1,766 1,947
8.47% variable rate affiliate note.......................... -- 1,131
3.70% variable rate affiliate note.......................... -- 804
10.00% variable rate affiliate note......................... -- 77
-------- --------
Less current maturities..................................... -- --
-------- --------
Total.................................................. $107,520 $125,632
======== ========
All of the long-term debt with the Hercules Group has maturity dates after
2005. The fair values of the Company's long-term debt was $107,520 at December
31, 2000, and $125,632 and at December 31, 1999. The Company believes that the
carrying value of long-term debt borrowings approximates fair value, based on
discounting future cash flows using rates currently available for debt of
similar terms and remaining maturities.
8. LONG-TERM INCENTIVE COMPENSATION PLANS
The Company participates in long-term incentive compensation plans
sponsored by Hercules. These 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.
The Hercules long-term incentive compensation plans place a great 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 491,488 and 926,689 at December 31,
2000 and 1999, respectively.
At December 31, 2000, under Hercules' incentive compensation plans,
1,847,855 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.
F-114
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to Hercules 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. There were no charges to income for the cost of stock awards over the
restriction or performance period for 2000 and 1999.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 2000 and 1999:
REGULAR PERFORMANCE-ACCELERATED
----------------------------- -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES PRICE SHARES PRICE
--------- ---------------- --------- ----------------
January 1, 1999................ 17,750 $40.27 -- --
Granted...................... 25,250 $37.73 1,350 $37.56
Exercised.................... -- -- -- --
Forfeited.................... -- -- -- --
------ ------ ----- ------
December 31, 1999.............. 43,000 $38.78 1,350 $37.56
Granted...................... 3,850 $17.25 -- --
Exercised.................... -- -- -- --
Forfeited.................... -- -- -- --
------ ------ ----- ------
December 31, 2000.............. 46,850 $37.01 1,350 $37.56
The weighted-average fair value of regular stock options granted during
2000 and 1999 was $8.85 and $8.26, respectively. The weighted-average fair value
of performance-accelerated stock options granted during 1999 was $8.01.
Following is a summary of regular stock options exercisable at December 31,
2000 and 1999, and their respective weighted-average share prices:
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISABLE SHARES EXERCISE PRICE
------------------- --------- ----------------
December 31, 1999......................................... 13,540 $39.91
December 31, 2000......................................... 27,520 $39.25
There were no performance-accelerated stock options exercisable at December
31, 2000 and 1999.
F-115
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS
---------------------------------------------------- EXERCISABLE OPTIONS
WEIGHTED- --------------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE RANGE 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/00 EXERCISE PRICE
-------------------- -------------- ---------------- -------------- -------------- --------------
REGULAR STOCK OPTIONS
$12 - $20.............. 3,850 9.13 $17.25 -- --
$30 - $40.............. 41,350 7.67 $38.42 26,200 $38.82
$40 - $50.............. 1,650 7.35 $47.81 1,320 $47.81
------ ------
46,850 27,520
====== ======
PERFORMANCE-ACCELERATED
STOCK OPTIONS
$14 - $40.............. 1,350 8.34 $37.56 -- --
====== ======
The Company currently expects that 100% of performance-accelerated stock
options will eventually vest.
The Company's employees may also participate in the Hercules Employee Stock
Purchase Plan ("ESPP"). The ESPP 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, 202,139
shares of Hercules common stock are registered for offer and sale under the
plan. Shares issued at December 31, 2000 and 1999, were 1,597,861 and 949,464,
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 Hercules' 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 2000 and 1999:
PERFORMANCE EMPLOYEE STOCK
ASSUMPTION REGULAR PLAN ACCELERATED PLAN PURCHASE PLAN
---------- ------------ ---------------- --------------
Dividend yield............................ 2% 3.4% 0.0%
Risk-free interest rate................... 5.88% 5.38% 5.41%
Expected life............................. 7.1 yrs... 5 yrs. 3 mos.
Expected volatility....................... 29.20% 27.31% 44.86%
The Company's net income for 2000 and 1999 would approximate the pro forma
amounts below:
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Net income
As reported............................................... $2,961 $ (310)
Pro forma................................................. $2,885 $ (370)
F-116
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ADDITIONAL BALANCE SHEET DETAIL
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Property, plant, and equipment
Land...................................................... $ 5,221 $ 6,037
Buildings and equipment................................... 77,036 79,905
Construction in progress.................................. -- 1,717
-------- --------
Total............................................. 82,257 87,659
Accumulated depreciation and amortization................... (28,875) (24,910)
-------- --------
Net property, plant, and equipment........................ $ 53,382 $ 62,749
======== ========
Accrued expenses
Payroll and employee benefits............................. $ 1,432 $ 6,256
Income taxes payable...................................... 6,386 1,372
Restructuring............................................. 2,989 4,353
Other..................................................... 10,670 11,618
-------- --------
$ 21,477 $ 23,599
======== ========
10. GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2000 and 1999, the goodwill and other intangible assets
were:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Goodwill.................................................... $191,224 $217,419
Other intangibles........................................... 6,882 7,532
-------- --------
Total....................................................... 198,106 224,951
Less accumulated amortization............................... (15,179) (10,280)
-------- --------
Net goodwill and other intangible assets............... $182,927 $214,671
======== ========
Goodwill and other intangible assets primarily represent amounts
capitalized from the Hercules acquisition of BetzDearborn (Note 1).
11. RESTRUCTURING
The consolidated balance sheet reflects liabilities for employee severance
benefits and other exit costs, primarily related to the plans initiated upon the
creation of the European Shared Service Center in 1997 and the acquisition of
BetzDearborn in 1998. In the fourth quarter of 2000, we committed to a plan
relating to the restructuring of several entities. This resulted in the addition
in severance benefits to the accrued liability. As a result of these plans, we
estimate approximately 113 employees will be terminated, of which approximately
96 employee terminations have occurred since inception of the aforementioned
plans. These employees come from various parts of the business, including but
not limited to manufacturing, support functions and research.
Pursuant to the plans in place to merge the operations of BetzDearborn with
Hercules and to rationalize the support infrastructure and other existing
operations, facilities were closed and approximately 82 employees were
terminated during 1999. Cash payments for the year included $9.0 million for
severance benefits and other exit costs. At the same time, we lowered the
estimates of severance benefits related to the implementation of the shared
service center by $304 thousand due to a suspension of implementations.
F-117
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 2000, 14 employees were terminated and $2.5 million of cash was paid in
severance benefits and other exit costs. The estimate for the remaining plans
was decreased by $444 thousand against goodwill due to lower than planned
severance benefits as the result of higher than anticipated attrition, with
voluntary resignations not requiring the payment of termination benefits. The
estimate for the plans related to the shared services center were decreased by
$626 thousand against operating expense.
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 2001. A
reconciliation of activity with respect to the liabilities established for these
plans, which is included in accrued expenses in the consolidated balance sheet,
is as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of year................................ $ 4,353 $11,721
Cash payments............................................... (2,459) (9,028)
Additional termination benefits and exit costs.............. 2,165 1,964
Reversals against goodwill.................................. (444) --
Reversals against earnings.................................. (626) (304)
------- -------
Balance at end of year...................................... $ 2,989 $ 4,353
======= =======
12. PENSIONS
The Company has a number of defined benefit pension plans in Europe,
covering substantially all employees. The following chart lists benefit
obligations, plan assets, and funded status of the plans.
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1........................... $75,968 $78,457
Service cost.............................................. 2,092 2,313
Interest cost............................................. 4,189 4,326
Amendments................................................ 12 --
Employee contributions.................................... 760 624
Translation difference.................................... (6,872) (2,855)
Actuarial loss (gain)..................................... 3,154 (4,532)
Benefits paid from plan assets............................ (1,992) (2,365)
------- -------
Benefit obligation at December 31........................... $77,311 $75,968
======= =======
F-118
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1.................... 89,389 80,011
Actual return on plan assets.............................. 5,143 13,622
Employee contributions.................................... 760 624
Company contributions (refund)............................ 1,789 446
Actuarial loss (gain)..................................... (1,748) --
Translation difference.................................... (6,112) (2,949)
Benefits paid from plan assets............................ (1,992) (2,365)
------- -------
Fair value of plan assets at December 31.................. $87,229 $89,389
======= =======
Funded status of the plans.................................. 9,918 13,421
Unrecognized actuarial gain................................. (2,176) (7,316)
Unrecognized prior service cost............................. 217 76
Unrecognized net transition obligation...................... -- (170)
Plan amendments............................................. (174) --
------- -------
Prepaid benefit cost........................................ $ 7,785 $ 6,011
======= =======
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
------- -------
Prepaid benefit cost...................................... $ 7,785 $ 6,011
======= =======
ASSUMPTIONS AS OF DECEMBER 31
Weighted-average discount rate............................ 6.50% 6.00%
Expected return on plan assets............................ 7.00% 7.00%
COMPONENTS OF NET PERIOD PENSION COST
PENSION BENEFITS
------------------
2000 1999
------- -------
Service cost................................................ $ 2,092 $ 2,313
Interest cost............................................... 4,189 4,326
Return on plan assets (expected)............................ (6,291) (5,912)
Amortization and deferrals.................................. (384) 269
Amortization of transition asset............................ (160) (185)
------- -------
Benefit (credit) cost....................................... $ (554) $ 811
======= =======
During 1999 and up to March 1, 2000, the Company's Belgian employees
participated in a multi-employer pension fund, which was administered by an
affiliated company. Contribution amounts for this fund were $63 thousand and
$427 thousand in 2000 and 1999, respectively and were allocated to the Company
by the Plan administrator.
On March 1, 2000, the Company terminated its participation in the
multi-employer pension fund and primarily all Belgian employees were transferred
into a Company sponsored defined contribution plan on that date. The Company's
cost of the defined contribution plan for the period March 1, 2000 through
December 31, 2000 was $248 thousand.
F-119
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. OTHER OPERATING EXPENSES, NET
Other operating expenses, net, in 2000 include Hercules Group affiliate
royalty costs totaling $10,993 thousand, restructuring costs totaling $1,539
thousand, and foreign currency gains totaling $100 thousand.
Other operating expenses, net, in 1999 include Hercules Group affiliate
royalty costs totaling $11,764 thousand, restructuring costs totaling $1,660
thousand and foreign currency losses totaling $390 thousand.
14. INTEREST AND DEBT EXPENSE
No interest and debt costs were capitalized during 1999 and 2000. The costs
incurred are presented separately in the consolidated statement of income.
15. OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following:
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Interest income, net........................................ $ 359 $1,629
Miscellaneous income, net................................... 639 37
------ ------
$ 998 $1,666
====== ======
16. INCOME TAXES
The domestic and foreign components of income before taxes are presented
below:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Domestic.................................................... $(3,779) $(1,816)
Foreign..................................................... 9,040 8,115
------- -------
$ 5,261 $ 6,299
======= =======
A summary of the components of the tax provision follows:
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Current
Domestic.................................................. $ -- $1,478
Foreign................................................... 2,672 3,262
Deferred
Domestic.................................................. (1,357) --
Foreign................................................... 985 1,869
------- ------
Provision for income taxes.................................. $ 2,300 $6,609
======= ======
F-120
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax (liabilities) assets at December 31 consist of:
2000 1999
--------- ----------
(DOLLARS IN THOUSANDS)
Depreciation................................................ $(4,678) $ (5,029)
Intangible asset revaluation................................ (1,357) (1,548)
Fixed asset revaluation..................................... (1,181) (1,442)
Pension..................................................... (2,061) (1,708)
Other....................................................... -- (707)
------- --------
Gross deferred tax liabilities.............................. (9,277) (10,434)
------- --------
Loss carryforwards.......................................... $ 2,057 $ 1,140
Business transfer revenue................................... -- 1,542
Restructuring expenses...................................... 1,580 2,050
Intangible asset............................................ 1,385 --
Other....................................................... 737 349
------- --------
Gross deferred tax assets................................... 5,759 5,081
------- --------
Valuation allowance......................................... (177) (363)
------- --------
$(3,695) $ (5,716)
======= ========
A reconciliation of the statutory income tax rate to the effective rate
follows:
2000 1999
----- -----
Statutory income tax rate................................... 35.0% 35.0%
Goodwill amortization....................................... 39.7% 47.2%
Nondeductible expenses...................................... 7.2% 7.4%
Tax rate differences on subsidiary earnings................. (5.5)% (9.1)%
Income from equity investments in affiliates................ (24.7)% (17.3)%
Cash dividends received from equity investments in
affiliates................................................ -- 9.3%
Change in tax contingency accrual........................... (8.9)% (2.5)%
Foreign dividends, net of credits........................... 0.0% 33.5%
Other....................................................... 0.9% 1.4%
----- -----
Effective tax rate.......................................... 43.7% 104.9%
===== =====
The net operating losses have carryforward periods ranging from 10 years to
indefinite, but may be limited in their use in any given year.
17. COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases (including office space, transportation,
and data processing equipment) expiring at various dates. Rental expense was
$4,267 thousand in 2000 and $6,043 thousand in 1999.
At December 31, 2000, minimum rental payments under noncancelable leases
aggregated $5,588 thousand. The net minimum payments over the next five years
are $2,396 thousand in 2001, $1,931 thousand in 2002, $906 thousand in 2003,
$354 thousand in 2004, and $1 thousand in 2005.
F-121
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Litigation
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business. In the opinion of the Company's
management, none of such litigation as of December 31, 2000 is likely to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
Environmental
The Company has potential liability in connection with obligations to
authorities of various EU countries in which it has manufacturing facilities,
and to private parties pursuant to contract, for the cost of environmental
investigation and/or cleanup at several sites. Potential costs will depend upon
numerous factors, including the actual methods of remediation required or agreed
to; outcomes of negotiations with regulatory authorities and private parties;
changes in environmental laws and regulations; technological developments; and
the years of remedial activity required, which could range from 0 to 30 years.
The Company becomes aware of its obligations relating to sites in which it
may have liability for the costs of environmental investigations and/or remedial
activities through correspondence from government authorities, or through
correspondence from companies with which the Company has contractual
obligations, 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.
Testing performed at the Herentals plant in Belgium in December 2000 for
soil pollution, indicated that the soil is polluted. The Company will
potentially be responsible for remediation activities. Testing is currently
being performed to determine the extent of remediation activities required, if
any.
At this moment no accrual is included in the balance sheet as of December
31, 2000, as a reliable estimate of the remediation costs cannot be made.
18. RELATED PARTY TRANSACTIONS
The Company has entered into certain agreements with affiliated entities.
These agreements were developed in the context of a Hercules Group/subsidiary
relationship and therefore may not necessarily reflect the result of
arm's-length negotiations between independent parties. All transactions
described below are eliminated on consolidation of Hercules.
Intercompany borrowing and interest: The Company has intercompany loans
with Hercules affiliated entities. The loans with affiliates are presented in
Net Hercules Group Investment in the consolidated balance sheet. Interest paid
to affiliated entities was $8,490 thousand and $8,924 thousand in 2000 and 1999,
respectively.
Corporate, regional and other allocations: As discussed in Note 1, the
consolidated financial statements of the Company reflect certain allocated
support costs incurred by other entities in the Hercules group. These costs
include executive, legal, accounting, tax, auditing, cash management,
purchasing, human resources, safety, health and environmental, information
management, investor relations and other corporate services. Allocations and
charges included in the Company's consolidated financial statements were based
either on a direct cost pass-through for items directly identified as related to
the Company's activities; a percentage allocation for such services provided
based on factors such as sales, net assets, cost of sales; or a relative
weighting of geographic activity. These allocations are reflected in the
selling, general and administrative line item in the consolidated statement of
income. Such allocations and corporate charges totaled approximately $9,494
thousand and $12,295 thousand in 2000 and 1999, respectively.
F-122
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Sales to affiliates: The Company sells raw material and finished goods
inventory in the normal course of business to affiliated companies. The
Company's revenues from sales to affiliated companies are presented separately
in the consolidated statement of income.
Purchases from affiliates: The Company purchases in the normal course of
business raw material and finished goods inventory from affiliated companies.
The Company's purchases of inventory from affiliated companies is reflected in
costs of sales in the consolidated statement of income and totaled $34,688
thousand and $40,153 thousand in 2000 and 1999, respectively.
Royalties: The Company entered into a license agreement in respect of the
use of manufacturing formulations and specifications developed and owned by an
affiliated entity. Total royalties accrued in respect of this agreement are
included in the other operating expense line item in the consolidated statement
of income and totaled $10,993 thousand and $11,764 thousand in 2000 and 1999,
respectively.
19. NET HERCULES GROUP INVESTMENT
Changes in Net Hercules Group Investment were as follows:
(DOLLARS IN THOUSANDS)
Balance, December 31, 1998.................................. $483,857
Net loss.................................................. (310)
Other comprehensive loss.................................. (11,658)
Intercompany transactions, net............................ (26,944)
--------
Balance, December 31, 1999.................................. 444,945
Net income................................................ 2,961
Other comprehensive loss.................................. (28,564)
Intercompany transactions, net............................ (6,828)
--------
Balance, December 31, 2000.................................. 412,514
The Company includes accumulated other comprehensive income in Net Hercules
Group Investment. At December 31, 2000 and 1999, accumulated other comprehensive
income consisted only of foreign currency translation adjustments.
20. SUBSEQUENT EVENTS
On May 1, 2001, Hercules completed the sale of its hydrocarbon resins
divisions and select portions of its rosin resins divisions to Eastman Chemical
Company. In addition, on May 31, 2001, Hercules completed the sale of its peroxy
chemicals business to GEO Specialty Chemicals, Inc.
F-123
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and comprehensive loss and of cash
flows present fairly, in all material respects, the financial position of
BetzDearborn Inc., a subsidiary of Hercules Incorporated, and its subsidiaries
at December 31, 2000 and 1999, and the results of their operations and their
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 24, 2001
F-124
BETZDEARBORN INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE LOSS
YEAR ENDED
DECEMBER 31,
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
Sales to third parties...................................... $1,170 $1,203
Sales to Hercules Group..................................... 108 69
------ ------
1,278 1,272
Cost of sales............................................... 632 588
Selling, general, and administrative expenses............... 404 423
Corporate and other cost allocations........................ 27 19
Research and development.................................... 20 36
Goodwill and intangible asset amortization.................. 71 70
Other operating expenses, net (Note 14)..................... 22 11
------ ------
Profit from operations...................................... 102 125
Equity income (loss) of affiliated companies................ -- --
Interest expense, net....................................... 30 37
Other expense, net (Note 16)................................ 2 --
------ ------
Income before income taxes and minority interest............ 70 88
Provision for income taxes (Note 19)........................ 40 51
------ ------
Income before minority interest............................. 30 37
Minority interest........................................... 5 4
------ ------
Net income.................................................. 25 33
Translation adjustments..................................... (46) (47)
------ ------
Comprehensive loss.......................................... $ (21) $ (14)
====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
F-125
BETZDEARBORN INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 21 $ 32
Accounts receivable, net (Note 3)......................... 215 259
Miscellaneous receivable.................................. 15 70
Inventories (Note 4)...................................... 91 121
Deferred income taxes (Note 19)........................... 20 53
------ ------
Total current assets................................... 362 535
------ ------
Property, plant, and equipment, net (Note 9)................ 304 370
Investments in affiliates (Note 5).......................... 156 156
Goodwill and other intangible assets, net (Note 10)......... 2,102 2,238
Prepaid pension (Note 13)................................... 13 11
Deferred charges and other assets........................... 57 28
------ ------
Total assets........................................... $2,994 $3,338
====== ======
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Current income tax liability.............................. $ 62 $ 73
Accounts payable.......................................... 69 71
Short-term debt (Note 6).................................. 26 27
Accrued expenses (Note 9)................................. 93 195
------ ------
Total current liabilities.............................. 250 366
Long term debt (Note 7)..................................... 181 188
Deferred income taxes (Note 19)............................. 262 277
Pension and other postretirement benefits (Note 13)......... 34 31
Deferred credits and other liabilities...................... 8 17
------ ------
Total liabilities...................................... 735 879
Commitments and contingencies (Note 17)..................... -- --
Minority Interest........................................... 23 26
Net Hercules Group Investment (Note 15)
Accumulated other comprehensive loss...................... (77) (31)
Intercompany transactions, net............................ 2,313 2,464
------ ------
Total Net Hercules Group Investment.................... 2,236 2,433
------ ------
Total liabilities and Net Hercules Group Investment.... $2,994 $3,338
====== ======
The accompanying notes are an integral part of
the consolidated financial statements
F-126
BETZDEARBORN INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED
DECEMBER 31,
----------------------
2000 1999
-------- --------
(DOLLARS IN MILLIONS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income.................................................. $ 25 $ 33
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation.............................................. 48 45
Amortization.............................................. 71 70
Loss on disposal.......................................... 3 --
Deferred income taxes..................................... 19 9
Minority Interest......................................... 5 4
Corporate and other cost allocations...................... 27 19
Other noncash charges (income)............................ 5 (2)
Accruals and deferrals of cash receipts and payments:
Accounts and miscellaneous receivables.................. 91 (65)
Inventories............................................. 30 8
Accounts payable and accrued expenses................... (66) 12
Noncurrent assets and liabilities....................... (67) (6)
Transfers to/from Hercules Group from operations........ (97) 12
----- -----
Net cash provided by operations...................... 94 139
----- -----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (27) (28)
Proceeds from fixed asset disposals......................... 13 9
Other, net.................................................. (13) (10)
----- -----
Net cash used in investing activities................ (27) (29)
----- -----
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds..................................... 6 --
Long-term debt repayments................................... (9) (82)
Changes in short-term debt.................................. (2) 16
Transfers to/from Hercules Group............................ (75) (33)
----- -----
Net cash used in financing activities................ (80) (99)
----- -----
Effect of exchange rate changes on cash..................... 2 (4)
----- -----
Net (decrease) increase in cash and cash equivalents........ (11) 7
Cash and cash equivalents at beginning of year.............. 32 25
----- -----
Cash and cash equivalents at end of year.................... $ 21 $ 32
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ 29 $ 37
Income taxes, net......................................... 34 14
Non-cash financing activities:
Corporate and other lost allocations...................... 27 19
The accompanying notes are an integral part of the consolidated financial
statements.
F-127
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
BetzDearborn Inc. ("BetzDearborn" or the "Company") is a wholly owned
subsidiary of Hercules Incorporated ("Hercules"). The Company is a global
engineered specialty chemical company engaged in the treatment of water and
industrial process systems operating in a wide variety of industrial and
commercial applications with particular emphasis on the chemical, petroleum
refining, paper, food processing, automotive, steel and power industries.
On October 15, 1998, Hercules acquired all of the outstanding shares of the
Company 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,
Hercules assumed debt with a fair value of $117 million and repaid $557 million
of other long-term debt held by the Company.
During 1999, Hercules completed the purchase price allocation and the final
determination of goodwill was $1,822 million. 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 identifiable net assets acquired........ 1,143
Purchased in-process research and development......... 130
------
BetzDearborn goodwill as of the date of acquisition... $1,822
======
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 40 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.
As of the acquisition date, Hercules began to formulate plans to combine
the operations of the Company and Hercules. Hercules 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, Hercules had identified and approved various actions such as
personnel reductions, consolidation of operations and support functions, closure
of redundant 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 former BetzDearborn employees and other related exit
costs (see Note 11).
As a result of this acquisition the Company, as a part of a effort by
Hercules, entered into several internal reorganization transactions during 1999
and 2000. The transactions included the Company selling several of its
investments in subsidiaries to Hercules affiliates, purchasing several
investments in subsidiaries from Hercules affiliates, merging companies, and
acquiring certain investments in Hercules group companies that are valued at
cost. As all investments in this reorganization are under the common control of
Hercules, these transactions have been accounted for in a manner similar to
pooling of interests.
F-128
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Separate company stand-alone financial statements were not prepared for the
Company since its acquisition and subsequent reorganization within Hercules. In
November 2000, Hercules amended its senior credit facility and ESOP credit
facility (the "Facilities"). The Facilities, as amended, are secured by liens on
Hercules' property and assets (and those of Hercules' Canadian Subsidiaries), a
pledge of the stock and partnership and member interests of substantially all of
Hercules' domestic subsidiaries (including the Company) and 65% of the stock of
foreign subsidiaries directly owned by Hercules, and a pledge of Hercules'
domestic intercompany indebtedness. These financial statements present the
financial information on the Company, a collateral party to the Hercules debt,
based on Hercules' understanding of Securities and Exchange Commission's
interpretation and application of Rule 3-16 under the Securities and Exchange
Commission's Regulation S-X. These statements were derived from historical
accounting records.
The Company participates in Hercules' centralized cash management system.
Accordingly, cash received from Company operations is transferred to Hercules on
a periodic basis, and Hercules funds all operational and capital requirements.
The consolidated financial statements of the Company reflect certain
allocated support costs incurred by other entities in the Hercules group. These
costs include executive, legal, accounting, tax, auditing, cash management,
purchasing, human resources, safety, health and environmental, information
management, investor relations and other corporate services. Allocations and
charges included in the Company's financial statements were based on either a
direct cost pass-through for items directly identified as related to the
Company's activities; a percentage allocation for such services provided based
on factors such as sales, net assets, or cost of sales; or a relative weighting
of geographic activity. Management believes that the allocation methods are
reasonable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries where control exists. Following the
acquisition of the Company by Hercules, the Company continued its practice of
using a November 30 fiscal year-end for certain non-U.S. subsidiaries to
expedite the year-end closing process. All intercompany transactions and profits
have been eliminated.
USE OF ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America 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
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Company's experience. The corresponding shipping and handling costs are
included in cost of sales.
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 can be reasonably estimated.
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BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
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 45% of total
inventories at December 31, 2000, are valued principally at standard cost, which
approximates the average cost method.
PROPERTY AND DEPRECIATION
Property, plant, and equipment are stated at cost and depreciated using the
straight-line method. 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.
INVESTMENTS
Investments in affiliated companies with a greater than 20% or 50% or less
ownership interest are accounted for using the equity method of accounting.
Accordingly, these investments are included in investments in affiliates on the
Company's balance sheet and the income or loss from these investments is
included in equity income (loss) of affiliated companies in the Company's
statement of income.
Investments in affiliated companies in which the Company does not have a
controlling interest, or an ownership and voting interest so large as to exert
significant influence, are accounted for using the cost method of accounting.
Accordingly, these investments are included in investments in affiliates on the
Company's balance sheet.
GOODWILL
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, customer relationships, and trademarks and tradenames 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.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
F-130
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to the Company's large number of customers and their dispersion across many
different industries and locations.
DERIVATIVE INSTRUMENTS AND HEDGING
Derivative financial instruments have been 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 monthly.
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 which
have been used to hedge the value of investments in certain non-U.S.
subsidiaries 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.
The Company used 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. Counter parties to the forward exchange, currency swap,
and interest rate swap contracts are major financial institutions. Credit loss
from counter party nonperformance is not anticipated. During 2000 the interest
rate swap portfolio was terminated due to the conversion of foreign denominated
debt to U.S. dollar denominated debt and a debt restructing that replaced
variable rate debt with fixed rate debt.
STOCK-BASED COMPENSATION
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25)). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard 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 as if the
fair-value-based method of accounting had been applied.
COMPUTER SOFTWARE COSTS
Effective January 1, 1999, the Company 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).
The Company's prior accounting was generally consistent with the requirements of
SOP 98-1 and, accordingly, adoption of SOP 98-1 had no material effect. Computer
software costs are being amortized over a period of 5 to 10 years.
INCOME TAXES
The Company's operations have since acquisition been included in the
consolidated income tax returns filed by its parent. Income tax expense in the
accompanying financial statements has been computed assuming the Company filed
separate income tax returns. Differences between this calculation of income
taxes currently payable and consolidated amounts reported in the consolidated
financial statements of the parent have been reflected as net Hercules Group
investment.
F-131
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed as incurred.
NET HERCULES GROUP INVESTMENT
The net Hercules Group investment account reflects the balance of the
Company's historical earnings, intercompany amounts, income taxes, taxes accrued
and deferred, post-employment liabilities, foreign currency translation and
other transactions between the Company and the Hercules Group.
NEW 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, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. This statement, as amended, is effective for
all fiscal quarters of fiscal years beginning after December 31, 2000. The
Company adopted SFAS 133 effective January 1, 2001. The adoption of SFAS No. 133
did not have a material effect on its earnings or statement of financial
position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was to be effective
October 1, 2000. Adoption of SAB 101 did not have a material effect on our
profit from operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). For The Company, these statements will generally become
effective January 1, 2002, although business combinations initiated after June
30, 2001 are subject to the non-amortization and purchase accounting provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. The Company is currently
in the process of conducting an assessment of the actual impact of the
non-amortization provision of SFAS 142. The assessment of goodwill for
impairment is a complex issue in which the Company must determine, among other
things, the fair value of each defined component of its reporting units. It is,
therefore, not possible at this time to predict the impact, if any, that the
impairment assessment provisions of SFAS 142 will have on the Company's
financial statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assts. SFAS 143 will become effective for the Company in
January 1, 2003 and requires recognition of a liability for an asset retirement
obligation in the period in which it is incurred. Management is in the process
of evaluating the impact this standard will have on the Company's financial
statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement
F-132
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are effective for financial statements issued for fiscal years beginning after
December 15, 2001. Management is in the process of evaluating the impact this
standard will have on the Company's financial statements.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
Trade....................................................... $233 $269
Less allowance for doubtful accounts........................ (18) (10)
---- ----
Total....................................................... $215 $259
==== ====
4. INVENTORIES
The components of inventories are:
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
Finished products........................................... $54 $ 74
Materials, supplies and work in process..................... 37 47
--- ----
Total....................................................... $91 $121
=== ====
Inventories valued on the LIFO method were the same as if valued under the
average-cost method, which approximates current cost, at December 31, 2000, and
were lower than if valued under the average cost method at December 31, 1999 by
$1 million.
5. INVESTMENTS
Total investments in affiliated companies were as follows:
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
Investment in Hercules International Limited................ $137 $137
Investment in Hercules Quimica SA........................... 19 19
---- ----
Total....................................................... $156 $156
==== ====
At December 31, 2000 the Company's equity investment consist of a 38.97%
ownership of Hercules Quimica S.A., a Hercules affiliate, and a 16% ownership of
Hercules International Limited, a Hercules affiliate. The Company's carrying
value for these investments at December 31, 2000 and 1999 equals its share of
the underlying equity in net assets of the affiliates. Each of these entities
operates in lines of business similar to the Company, supplying engineered
chemical treatment programs for water and process systems in industrial,
commercial and institutional establishments.
F-133
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SHORT-TERM DEBT
A summary of short-term debt follows:
2000 1999
---- ----
(DOLLARS IN
MILLIONS)