-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GpWqZTzh7vPplpbBEblEJXQO8zD4KrfKK8JivGhh5XG4nuYVHdSNDvZ9SYxcKhKv oZYIHjQTR1k3hU6EQuigmA== 0000930413-03-001938.txt : 20030625 0000930413-03-001938.hdr.sgml : 20030625 20030625112808 ACCESSION NUMBER: 0000930413-03-001938 CONFORMED SUBMISSION TYPE: DFAN14A PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 20030625 EFFECTIVENESS DATE: 20030625 SUBJECT COMPANY: 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: DFAN14A SEC ACT: 1934 Act SEC FILE NUMBER: 001-00496 FILM NUMBER: 03756031 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 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: HERCULES SHAREHOLDERS COMMITTEE FOR NEW MANAGEMENT CENTRAL INDEX KEY: 0001223694 FILING VALUES: FORM TYPE: DFAN14A BUSINESS ADDRESS: STREET 1: C/O INTERNATIONAL SPECIALTY PRODUCTS INC STREET 2: 1361 ALPS RD. CITY: WAYNE STATE: NJ ZIP: 07470 BUSINESS PHONE: 2128211600 MAIL ADDRESS: STREET 1: C/O INTERNATIONAL SPECIALTY PRODUCTS INC STREET 2: 1361 ALPS RD. CITY: WAYNE STATE: NJ ZIP: 07470 DFAN14A 1 c28573_dfan14a.txt AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 2003 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO.) Filed by the Registrant [ ] Filed by a Party other than the Registrant |X| Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [ ] Definitive Proxy Statement |X| Definitive Additional Materials [ ] Soliciting Material Pursuant to Rule 14a-12 HERCULES INCORPORATED (Name of Registrant as Specified in Its Charter) THE HERCULES SHAREHOLDERS' COMMITTEE FOR NEW MANAGEMENT (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): |X| No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: ================================================================================ THE HERCULES SHAREHOLDERS' COMMITTEE FOR NEW MANAGEMENT 17 State Street, New York, NY 10004 June 24, 2003 Sender's Direct Dial# (212) 821-1601 Ms. Florentina Marinescu, Senior Analyst, U.S. Research Mr. Rajeev Kumar, Senior Analyst, U.S. Research Institutional Shareholder Services 2099 Gaither Road, Suite 501 Rockville, MD 20850 Dear Florentina and Rajeev: In response to your request in connection with our telephone conference yesterday afternoon, we are forwarding the following information: (1) A copy of our June 24th letter to shareholders which is being sent today (Ex. A); (2) Details concerning Hercules refinancing options, including copies of a presentation from a major money center bank (Ex. B, name of bank redacted) outlining these options at a December 12, 2001 Board meeting, presentations made by the Company itself at the February 11, 2002 Board meeting regarding refinancing proposals by money center banks, and term sheets outlining the refinancing available to the Company (Ex. C, names of banks redacted); (3) A minority directors' presentation ("Analysis of Strategic Alternatives") made to the December 12, 2001 Board meeting, indicating our view that as a result of the BetzDearborn sale the Company's stock was estimated to have a value between $8.10 and $12.45 per share, depending upon whether the Company was able to sell its remaining businesses (Ex. D). As to the BetzDearborn retention option, the minority directors estimated that the stock could be worth upwards of approximately $10 per share more than the sale option. Parenthetically, we believe that this has proven not far from the mark given the earnings projections for Hercules had it retained BetzDearborn, as referred to in #4 below; (4) Based upon GE's 2003 projections, as referred to further in our June 24th letter, we estimate that, with the retention of the BetzDearborn business, earnings per share at Hercules this year would have been approximately $1.39 vs. $0.72 as per Wall Street consensus estimates (See Ex. E)(1); (5) The BetzDearborn story is not only relevant to illustrate how improvident the sale of the business to GE was, but so also it strongly bears on the issue of Joyce's operating strategies for Hercules' businesses. We spent a portion of the call yesterday on our contention that Joyce is not operating Hercules' businesses as one would expect for high value-added, specialty chemicals businesses. While it is often difficult for a third party observer to assess the relative merits of two parties' contentions regarding operating strategies for the running of a business, the BetzDearborn example offers an almost unique case study dramatically illustrating the difference between how Hercules' largest and most attractive business was run under Joyce prior to the April 29, 2002 sale and how it has been operated under GE's management in just the past 14 months. As can be seen from the Board information presented at our February 11, 2002 Board meeting, Joyce estimated BetzDearborn's future revenue as increasing from $1.042 billion in 2002 to only $1.176 billion in 2006 - an average annual increase of 3.1% - (p. 33, February 11, 2002 Board book, Ex. G). In addition Joyce estimated BetzDearborn's EBITDA to be almost flat over the four year period, increasing from $262 million in 2002 to $286 million in 2006 - or an average annual increase of 2.2% (p. 33, February 11, 2002 Board book, Ex. G). Now under GE management only 14 months later, we have a business that's the linchpin for a platform for future growth that will be creating shareholder value for GE shareholders. See GE's "Water Technologies" June 20th investor conference slide presentation (Ex. H) and analyst reports in the wake of the investor conference (Exs. L, M, N). I would call your attention to the following pertinent excerpts from these analyst reports (Exs. I, J, K). See also p. 13 of the "Water Technologies" GE investor presentation (Ex. H), which indicates that GE's water technologies business, of which BetzDearborn comprises approximately 80% ($1.1 billion of sales out of a total of $1.4 billion in sales) is projected to have internally generated revenue growth of an additional $800 million by 2006 - an increase of approximately 15% per annum. As illustrated at the same page, operating margins for the business are projected to increase from 15% in 2002 to 20% in 2006. Also confirming Sunil Kumar's comments yesterday concerning the opportunities for growth, please see p. 10 of the "Water Technologies" GE investor presentation (Ex. H) regarding opportunities for growth in China and - ---------- (1) We are enclosing Ex. F from the Board's February 11, 2002 presentation indicating that the Company's own estimate for 2002 earnings, had it retained BetzDearborn, would have been $0.41 per share higher - or an increase of 55%. 2 capital investment in field resources and research centers to fuel this growth. We realize that this is a lot of material to absorb, and if you would like us to take you through this on another call, we would be happy to do so. In addition, if there is any further information that we can provide you, please let us know. Sincerely, /s/ Samuel J. Heyman -------------------- Samuel J. Heyman enclosures Note: Permission to use included material was neither sought not obtained. EX-99.A 3 c28573_ex-a.txt Exhibit A THE HERCULES SHAREHOLDERS' COMMITTEE FOR NEW MANAGEMENT 17 State Street, New York, NY 10004 June 24, 2003 Fellow Hercules Shareholder: Joyce's June 20th letter to shareholders fails to respond to the literally hundreds of well-substantiated FACTS we have cited in our materials concerning his record and conduct at Hercules and Union Carbide. Instead, he continues to rehash the same "red herring" claims as before: (1) It is for some reason inappropriate for the Hercules Shareholders' Committee for NEW Management to be elected to a majority of the Board seats, without a "control premium," as a result of TWO SEPARATE PROXY CONTESTS REFLECTING THE WILL OF THE MAJORITY OF THE COMPANY'S SHAREHOLDERS, while it was perfectly acceptable for Joyce to acquire control of the Hercules Board as a result of his APPOINTMENT to the Board and his subsequent SELECTION of five handpicked directors, ALL WITHOUT SHAREHOLDER APPROVAL;(1) and (2) The Hercules Shareholders' Committee for NEW Management and Mr. Heyman cannot somehow be trusted because as major Hercules shareholders they have a "conflict of interest" - a contention for which he has never offered the slightest substantiation. We do agree with Joyce on one matter - and that is that the most critical question in this proxy contest is - WHOM CAN HERCULES SHAREHOLDERS TRUST TO MANAGE THE AFFAIRS OF OUR COMPANY IN YOUR OWN BEST INTERESTS? SO THAT YOU CAN MAKE YOUR OWN INFORMED JUDGMENT, WE ASK YOU TO REVIEW THE FOLLOWING FACTS, WHICH JOYCE HAS NEVER DISCLOSED TO SHAREHOLDERS AS IS CONSISTENT IN OUR VIEW WITH HIS PRACTICE OF TELLING SHAREHOLDERS ONLY WHAT HE WANTS US TO KNOW. AFTER DOING SO, WE URGE YOU TO MAKE UP YOUR MIND WHETHER JOYCE HAS ACTED WITH YOUR OWN BEST INTERESTS AT HEART. No sooner had he concluded the sale of BetzDearborn to GE on April 29, 2002 DID JOYCE UNDERTAKE AN EFFORT TO ACQUIRE HERCULES IN A LEVERAGED BUYOUT TRANSACTION WITH A FINANCIAL PARTNER. Shortly after the BetzDearborn sale, Joyce retained, without the knowledge of the Board, one of the Company's investment bankers to find a financial buyer for Hercules. To this end, Joyce and his banker initiated discussions with a number of LBO firms, all of which firms typically partner with existing managements. - -------- (1) As Hercules shareholders may recall, Joyce was appointed CEO during the 2002 proxy contest only two weeks before the Annual Meeting, in an effort by incumbent directors we believe to deflect our criticism that the Company was being operated on "autopilot" by a "caretaker" CEO. Joyce was the sixth CEO in six years at Hercules. On October 24, 2002, Joyce informed the Board for the first time that several LBO firms had expressed preliminary interest in acquiring the Company in a management-led buyout. Joyce acknowledged at the same time that the LBO buyers wanted management to stay and that he was considering participating as a buyer in the LBO. At the Company's next Board meeting, on December 12th, Joyce reported that one of the firms had expressed a strong interest in moving forward with a management-led buyout transaction and conducting due diligence. BY WAY OF BACKGROUND, THROUGHOUT THE PROCESS BEGINNING IN OCTOBER, THE MINORITY DIRECTORS TOOK THE POSITION THAT THEY WOULD SUPPORT ANY TRANSACTION DEEMED ADVANTAGEOUS TO HERCULES SHAREHOLDERS, INCLUDING A SALE OF THE COMPANY. BASED UPON THEIR OWN FINANCIAL ANALYSIS, HOWEVER, THE MINORITY DIRECTORS EXPRESSED A HIGH DEGREE OF SKEPTICISM THAT A FINANCIAL BUYER WOULD BE ABLE TO JUSTIFY AN ACCEPTABLE PRICE AND FURTHER POINTED OUT THE ENORMOUS DAMAGE BEING DONE TO THE COMPANY AS A RESULT OF THE 2-1/2 YEAR OLD "SALE PROCESS." After Joyce reported at the December 12th Board meeting that he believed there to be a 75% chance that a transaction would materialize at an attractive price for Hercules shareholders, the Board unanimously authorized the due diligence process requested by the LBO firm. While the LBO firm made it clear that it required management continuity, Joyce continued to insist that he had had no discussions with the buyer with regard to his own role. Joyce further argued that, since his participation in the management-led buyout had not been specifically discussed, he should continue to be involved in the ongoing process representing the interests of the Company. In view of the virtual certainty that he would be participating in any ultimate transaction as a buyer and after the minority directors objected to Joyce's "sitting on both sides of the table," on February 21st, the outside Board members, excluding Joyce, assumed responsibility for overseeing the process. SEVERAL WEEKS LATER, AFTER THREE MONTHS OF INTENSIVE DUE DILIGENCE, THE LBO FIRM MADE A "TAKEUNDER" PROPOSAL TO ACQUIRE THE COMPANY FOR $9 PER SHARE IN A LEVERAGED BUYOUT TRANSACTION TO BE LED BY JOYCE AND OTHER UNSPECIFIED MEMBERS OF SENIOR MANAGEMENT. THE PROPOSAL WAS MADE SUBJECT TO FURTHER DUE DILIGENCE, WITH PROVISIONS FOR THE COMPANY'S REIMBURSEMENT OF THE BUYERS' EXPENSES AND A "BREAK-UP" FEE OF $60 MILLION. FORTUNATELY, EVEN FOR THE MAJORITY DIRECTORS, THIS WAS A "BRIDGE TOO FAR," AND THEY JOINED OUR MINORITY DIRECTORS IN UNANIMOUSLY REJECTING THE PROPOSAL ON MARCH 14TH. You should know that, without the sale of BetzDearborn, a leveraged buyout transaction could not have been even contemplated in our view because of the amount of equity which would have been required for such a transaction - raising serious question we believe as to the motivation behind JOYCE'S SINGLE-MINDED EFFORT TO ENGINEER THE BETZDEARBORN SALE. While on the subject of the BetzDearborn sale, if there was any doubt as to the extraordinary mistake that Joyce and the majority directors made in selling that business, it 2 was eliminated when, at a GE investor conference last week (June 20) on the subject of the Company's "new growth platforms," leading GE executives reaffirmed how well they were doing with BetzDearborn. For they informed investors at the conference that operating profits for BetzDearborn for the last eight months of 2002 under GE's ownership had been up 20% over the same period in the prior year, and that they are currently projecting a further 15%-20% year-over-year increase in 2003. Assuming the low end of this projection, had Hercules retained BetzDearborn, we estimate that Hercules' earnings this year would have been an estimated $1.39 per share, more than 90% higher than the current Wall Street consensus estimate for Hercules of $0.72 per share. A GE executive further observed that one of the reasons for the dramatic turnaround was that GE had made the requisite commitment -- which Joyce apparently had not - -- to the business in terms of investing in growth, technology, and people. KNOWING WHAT YOU NOW KNOW ABOUT HIS ROLE IN THE PROPOSED "TAKEUNDER" OF OUR COMPANY AT A PRICE OF $9 PER SHARE, WHAT DO YOU THINK ABOUT JOYCE, HIS CONTINUED PURSUIT OF HIS OWN SELF-INTEREST, AND WHETHER HE CAN BE TRUSTED TO REPRESENT THE INTERESTS OF HERCULES SHAREHOLDERS? When Joyce packed the Hercules Board with his handpicked directors without seeking shareholder approval - WAS HE ACTING IN HIS INTERESTS OR YOURS? When Joyce engineered the BetzDearborn sale without seeking shareholder approval - WAS HE ACTING IN HIS INTERESTS OR YOURS? When Joyce refused to consider a voluntary cut in his compensation to match the financial sacrifices asked of thousands of other Hercules employees, including even the Company's directors for a short period of time - WAS HE ACTING IN HIS INTERESTS OR YOURS? When Joyce opposed the effort of the minority directors last year to redeem, or relax the provisions of, the poison pill unless the minority directors agreed to endorse his re-election to the Board - WAS HE ACTING IN HIS INTERESTS OR YOURS? When Joyce, with the assistance of his "enablers," the majority directors, gave himself two golden parachute agreements, outlandish bonuses, and other compensation which would entitle him, had he completed the $9 per share LBO or should he be repudiated in this proxy contest, to almost $30 million for his two years on the job - WAS HE ACTING IN HIS INTERESTS OR YOURS? When Joyce attempted with a financial partner to take over the Company from its shareholders at a price of $9 per share - WAS HE ACTING IN HIS INTERESTS OR YOURS? FINALLY, ASK YOURSELF: WHAT IS IT ABOUT JOYCE, HIS ACTIONS OR HIS RECORD THAT WOULD WARRANT YOUR WANTING TO ENTRUST THE AFFAIRS OF THE COMPANY TO HIM? As major Hercules shareholders, the interests of our Committee members, as well as Mr. Heyman and his affiliates, are fully aligned with yours, and we would never 3 countenance conduct similar to that of Joyce. IN ORDER TO LAY TO REST FOR ALL TIME JOYCE'S "RED HERRING" CLAIMS AND TO AVOID THE SLIGHTEST POSSIBILITY OR EVEN APPEARANCE OF A CONFLICT OF INTEREST, WE HAVE RECEIVED A COMMITMENT FROM MR. HEYMAN AND HIS AFFILIATES, AS SHOWN ON THE FOLLOWING PAGE, THAT THE INTERESTS OF HERCULES SHAREHOLDERS WILL BE SAFEGUARDED WITH RESPECT TO ANY CORPORATE TAKEOVER TRANSACTION. While it should be underscored that neither Mr. Heyman nor his affiliates intend to acquire Hercules, this commitment provides concrete assurance that under new management there will not be a repeat of Joyce's outrageous self-dealing. If elected, the Committee members pledge to have Hercules promptly enter into an agreement with Mr. Heyman and his affiliates, as outlined in the commitment letter. IN YOUR OWN BEST INTEREST, WE URGE YOU TO SUPPORT THE COMMITTEE'S NOMINEES FOR ELECTION AS HERCULES DIRECTORS. PLEASE SIGN, DATE AND RETURN OUR WHITE PROXY CARD TODAY! Sincerely, THE HERCULES SHAREHOLDERS' COMMITTEE FOR NEW MANAGEMENT /s/Samuel J. Heyman /s/Harry Fields /s/Anthony T. Kronman /s/Sunil Kumar - ------------------- --------------- --------------------- -------------- Samuel J. Heyman Harry Fields Anthony T. Kronman Sunil Kumar /s/Gloria Schaffer /s/Vincent Tese /s/Raymond S. Troubh /s/Gerald Tsai, Jr. - ------------------ --------------- -------------------- ------------------- Gloria Schaffer Vincent Tese Raymond S. Troubh Gerald Tsai, Jr. 4 EXHIBIT A June 24, 2003 To The Hercules Shareholders' Committee for NEW Management 17 State Street New York, NY 10004 While we have no intention of making a proposal to acquire Hercules, in order to avoid any possible conflict of interest or even the appearance of a possible conflict, the undersigned and our respective affiliates (the "Heyman parties"), hereby agree, subject to the Committee's nominees being elected to Hercules' Board of Directors, to support and abide by the following procedural safeguards in connection with any future acquisition proposal made for the Company. o In the event that any acquisition proposal is made for Hercules by the Heyman parties: o The Heyman parties would support the formation of a Special Committee to respond to and, if appropriate, negotiate any acquisition proposal. The Special Committee would consist of solely independent and disinterested directors, represented by independent financial advisors and legal counsel. o The Heyman parties would not pursue any acquisition proposal for Hercules that is not recommended by the Special Committee. o The Heyman parties would only proceed with an acquisition transaction for Hercules if approved by two-thirds of the shares (excluding those shares owned by the Heyman parties). o The Heyman parties would support a competing proposal by a third party if the Special Committee decides the third party proposal is superior. o In the event a third party makes an acquisition proposal for Hercules and the Heyman parties have not: o The Heyman parties would tender all shares beneficially owned by them into any tender or exchange offer, if Hercules' disinterested and independent directors recommend that shareholders accept such offer; and A-1 o If any vote of Hercules shareholders is held in connection with a third party acquisition proposal, the Heyman parties would vote all shares beneficially owned by them in the same proportion as the votes of the other Hercules shareholders. Sincerely, International Specialty Products Inc. By: /s/ Sunil Kumar /s/Samuel J. Heyman ----------------------- ------------------- Sunil Kumar Samuel J. Heyman Chief Executive Officer A-2 (This Page Intentionally Left Blank) - -------------------------------------------------------------------------------- IMPORTANT PLEASE RETURN YOUR WHITE PROXY CARD AND DO NOT RETURN ANY OF THE COMPANY'S GOLD PROXY CARDS, EVEN AS A PROTEST VOTE AGAINST HERCULES. ONLY YOUR LATEST DATED, SIGNED PROXY CARD WILL BE COUNTED, AND ANY GOLD PROXY CARD YOU SIGN FOR ANY REASON COULD INVALIDATE PREVIOUS WHITE PROXY CARDS SENT BY YOU TO SUPPORT THE COMMITTEE. Your vote is important. If you have any questions or need assistance in voting your shares, please call: GEORGESON SHAREHOLDER COMMUNICATIONS INC. 17 State Street, 10th Floor New York, New York 10004 (866) 288-2190 (TOLL FREE) Banks and Brokerage Firms please call: (212) 440-9800 - -------------------------------------------------------------------------------- EX-99.B 4 c28573_ex-b.txt Exhibit B [LOGO] HERCULES - -------------------------------------------------------------------------------- HERCULES INCORPORATED Presentation to the Board of Directors December 12, 2001 [GRAPHIC] [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- AGENDA Introduction Current conditions in the debt capital markets Recent performance of Hercules' debt vs. comparables Refinancing strategies Positioning [LOGO] HERCULES 2 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- INTRODUCTION [LOGO] HERCULES 3 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- INTRODUCTION o Absent a substantial asset sale, Hercules must execute a refinancing by the end of 2002 o Debt markets have been volatile, with notable improvement since 2Q01 (despite market weakness after 09/11) o Hercules' debt has responded particularly well since the Company gave guidance around improving performance in 2002 - lenders focused on merits of credit as opposed to "asset sale story" o Original bank lenders fatigued in absence of strong bank group leadership and protracted under-performance relative to plan - loan classified as "Substandard" by SNC o Today, Hercules has full access to the capital markets to pursue a complete or partial refinancing [LOGO] HERCULES 4 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- SCHEDULED MATURITIES AND AMORTIZATION Hercules currently faces substantial refinancing risk in 2003, which should be addressed in any partial refinancing [The following table was depicted as a bar chart in the printed materials.] [BAR CHART] YEARLY MATURITIES - -------------------------------------------------------------------------------- ($ in millions) 2001 2002 2003 2004 2005 2006 2007 2008 $53.1 $234.2 $909.0 $3.8 $356.8 $58.0 $400.0 $0.0 [LOGO] HERCULES 5 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- CURRENT CONDITIONS IN THE DEBT CAPITAL MARKETS [LOGO] HERCULES 6 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- CURRENT SENIOR DEBT MARKET CONDITIONS o Substantial liquidity currently in the institutional loan market - investors flush with uninvested cash / new issue volume off sharply - secondary market levels up over 200 bps over the past 6 weeks o Traditional bank loan market continues to shrink and remains weak o Current credit problems tempering investors' appetite for new issues o Flight to quality: investors favoring larger, higher-rated issuers o Refocus on asset values to complement cash flows o 6-month LIBOR of 1.98% represents lowest benchmark level in over 40 years o Credit spreads, while currently higher than 1H01, are still attractive [LOGO] HERCULES 7 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- AVERAGE BB/BB- BANK DEBT RATING NEW ISSUE SPREAD MONTH MONTH ENDED ENDED 2Q01 3Q01 11/08/01 12/06/01 Pro rata spread L+278.0 L+277.0 L+341.7 L+333.3 Weighted avg. institutional spread L+318.0 L+329.0 L+416.7 L+354.2 Pro forma debt/EBITDA 4.0x 3.8x 3.3x 3.5x Pro forma senior debt/EBITDA 2.5x 3.4x 2.5x 2.3x HERCULES' CURRENT CREDIT STATISTICS 2001E 2002E Sr. Secured Debt/EBITDA 4.0x 3.0x Total Debt/EBITDA 4.9x 3.7x Total Financings/EBITDA 6.3x 4.7x [LOGO] HERCULES 8 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- BOND MARKET CONDITIONS o Substantial liquidity in the market o Current trading levels price in a very robust economic recovery o Primary use of proceeds has been for bank debt refinancing o BB rated, industrial issuers are in the sweetspot of the current market o Significant volatility in 2001 - despite market weakness post September 11th, today's market is as strong as ever [LOGO] HERCULES 9 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- RECENT PERFORMANCE OF HERCULES' DEBT VS. COMPARABLES [LOGO] HERCULES 10 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- HERCULES' DEBT TRADING PERFORMANCE 11 1/8% SR. UNSECURED NOTES HERCULES 11 1/8% SPREAD-TO-WORST HERCULES 11 1/8% DOLLAR PRICE -------------------------------- ----------------------------- Graph omitted reflecting Graph omitted reflecting Hercules 11 1/8% Sr. Unsecured Hercules 11 1/8% Sr. Unsecured Notes spread-to-worst range of Notes dollar price range of approximately 550 bps to 850 bps approximately 92 to 104 per for dates from 11/23/00 to 12/05/01. $100 face value for dates from 11/23/00 to 12/05/01. [LOGO] HERCULES 11 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- HERCULES' DEBT TRADING PERFORMANCE (continued) TERM LOAN D HERCULES TERM LOAN D TRADING PERFORMANCE - -------------------------------------------------------------------------------- Graph omitted reflecting Bid Level with range of approximately 92 to 100 per $100 face value between 03/26/01 to 11/30/01 for Hercules Term Loan D. [LOGO] HERCULES 12 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- HERCULES' RELATIVE SPREADS CURRENT VS AT ISSUE RELATIVE VALUE: INSTITUTIONAL TERM LOAN VS SR. UNSECURED DEBT - -------------------------------------------------------------------------------- [The following table was depicted as a bar chart in the printed materials.] [BAR CHART] [BAR CHART] AT ISSUE (11/09/00) CURRENT (12/07/01) Bond 529 Bond 550 Term loan 333 Term loan 383 AT ISSUE CURRENT ----------------------------- ----------------------------- PRICE ABSOLUTE YIELDS PRICE ABSOLUTE YIELDS Bonds 100.00 11.125% Bonds 104.00 10.21% Bank 99.75 10.02% Bank 98.25 5.81% [LOGO] HERCULES 13 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- REFINANCING STRATEGIES [LOGO] HERCULES 14 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- TRANSACTION SUMMARY SCENARIO I -- PARTIAL REFINANCING - BALANCE SHEET AS OF 09/30/01 SOURCES USES - ---------------------------------- --------------------------------------- ($ in millions) Term Loan E $500.0 Revolver(1) $227.0 Senior Unsecured Notes 350.0 Term Loan A 543.0 ESOP 60.0 Fees 20.0 - ---------------------------------- --------------------------------------- TOTAL SOURCES $850.0 TOTAL USES $850.0 - ---------------------------------- --------------------------------------- (1) Commitment reduced to $800 million. [LOGO] HERCULES 15 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- LIQUIDITY ANALYSIS SCENARIO I Even after making the 2002 tax payment, the revolving credit facility provides roughly $300 million of liquidity ($ in millions) Revolver (09/30/01) $517 Letter of credit 100 TOTAL USAGE $617 Taxes due in 2002 120 PROJECTED USAGE $737 Refinancing payment 227 PRO FORMA USAGE $510 Total availability 800 - -------------------------------------------------------------------------------- AVAILABLE LIQUIDITY $290 - -------------------------------------------------------------------------------- [LOGO] HERCULES 16 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- 2003 REFINANCING RISK Refinancing will smooth maturities while limiting refinancing risk to the Revolving Credit Facility and Notes due in 2003 [The following tables were depicted as bar charts in the printed materials.] [BAR CHART] SCHEDULED MATURITIES - PRE REFINANCING - -------------------------------------------------------------------------------- ($ in millions) 2001 2002 2003 2004 2005 2006 2007 2008 $53.1 $234.2 $909.0 $3.8 $356.8 $58.0 $400.0 $0.0 [BAR CHART] SCHEDULED MATURITIES - POST REFINANCING - -------------------------------------------------------------------------------- ($ in millions) 2001 2002 2003 2004 2005 2006 2007 2008 2009 $0.0 $3.8 $418.8 $3.8 $356.8 $58.0 $400.0 $500.0 $389.0 [LOGO] HERCULES 17 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- PROJECTED CREDIT STATISTICS AND PROPOSED COVENANT LEVELS Immediately following a transaction, covenants would be set at 5.5x, stepping down to a level between 5.00x and 5.25x after a year ($ in millions) FYE 2002 SUMMARY PRO FORMA CREDIT STATISTICS Sr. Secured debt / EBITDA 2.53x Total debt / EBITDA 3.93x Total financings / EBITDA 4.82x PROPOSED COVENANT LEVELS EBITDA $599 Total debt $2,357 Total debt / EBITDA 3.93x Proposed test 5.00x EBITDA cushion 115 MINIMUM EBITDA FOR COMPLIANCE 485 [LOGO] HERCULES 18 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- TRANSACTION SUMMARY SCENARIO II - COMPREHENSIVE REFINANCING We believe that the Company could also embark upon a comprehensive refinancing SOURCES USES - ------------------------------------ ------------------------------------ ($ in millions) ($ in millions) $300 million Revolver $0 Revolver $517 Additional Term Loans 913 Term Loan A 543 Senior Unsecured Notes 400 ESOP 103 Tax payment 120 Fees and expenses 30 - ------------------------------------ ------------------------------------ TOTAL SOURCES $1,313 TOTAL USES $1,313 - ------------------------------------ ------------------------------------ [LOGO] HERCULES 19 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- POSITIONING [LOGO] HERCULES 20 [REDACTED] Presentation to Board of Directors - -------------------------------------------------------------------------------- POSITIONING o Diverse business - products - end markets - geography o Strong market positions o Limited downside/significant upside o Defined cost cutting plan o Well respected CEO with proven track record o Diminimis refinancing risk o Stable earnings performance in challenging environment o Scale [LOGO] HERCULES 21 [REDACTED] [LOGO] HERCULES CHEMICAL INDUSTRY DEBT MARKET CONDITIONS APPENDIX I -------------------------------------------------------- APPENDIX I Chemical industry debt market conditions 1 [REDACTED] [LOGO] HERCULES CHEMICAL INDUSTRY DEBT MARKET CONDITIONS APPENDIX I -------------------------------------------------------- CURRENT DEBT MARKET CONDITIONS o The debt capital markets are extremely liquid with managers looking to invest substantial amounts of cash o While the market is as strong as ever, investors' appetite favors larger, higher-rated issuers - BB rated, industrial issuers are in the sweet-spot of the market o Chemical issuers have not been overlooked, as current trading levels reflect investors' belief in a V-shaped recovery HIGH-YIELD RETURNS - -------------------------------------------------------------------------------- 2Q2001 3Q2001 QTD 4Q2001 High-yield composite (2.30%) (1.99%) 6.63% BB composite 1.30% 5.24% 5.14% Basic materials composite 0.87% 4.49% 4.60% Wireless Telecom composite (6.85%) (17.14%) 18.01% Wireline Telecom composite (23.38%) (42.70%) 5.68% - -------------------------------------------------------------------------------- CHEMICAL COMPOSITE (1.14%) 1.01% 4.60% - -------------------------------------------------------------------------------- 2 [REDACTED] [LOGO] HERCULES CHEMICAL INDUSTRY DEBT MARKET CONDITIONS APPENDIX I -------------------------------------------------------- RECENT HIGH YIELD MARKET DYNAMICS KEY ECONOMIC INDICATORS 12/07/01: Unemployment rate for the month of November came in at 5.7% vs. 5.6% 12/06/01: US initial jobless claims was 475k vs. 456k est. 11/27/01: US consumer confidence was 82.2 vs. 86.5 est. 11/19/01: Housing starts for the month of October were 1,552k vs. 1,500k [The following table was depicted as a combination bar and line chart in the printed materials.] [BAR CHART] WEEKLY NEW ISSUE VOLUME ($ MILLIONS) - -------------------------------------------------------------------------------- ($ IN MILLIONS)
1-Oct 8-Oct 15-Oct 22-Oct 29-Oct 5-Nov 12-Nov 19-Nov 26-Nov 3-Dec 10-Dec Volume $0.0 $0.6 $0.2 $0.9 $1.0 $0.8 $1.2 $1.3 $0.5 $2.0 $2.2 ($ IN BILLIONS) Visible forward calendar [Chart omitted reflecting range of values for visable forward calendar of approximately $0.25 B to $3.5 B from October 2001 to December 2001]
[BAR CHART] ANNUAL NEW ISSUE VOLUME BY RATING - -------------------------------------------------------------------------------- NEW ISSUANCE ($ BN) [all numbers in chart as summarized below are approximations based on review of hard copy of chart] 1995 1996 1997 1998 1999 2000 2001 4 B's [Chart omitted reflecting range of new issuances approximately $8 b to $30 b from 1995 to 2001] 3 B's [Chart omitted reflecting range of new issuances approximately $5 b to $20 b from 1995 to 2001] 2 B's and below [Chart omitted reflecting range of new issuances approximately $20 b to $100 b from 1995 to 2001] Emerging markets [Chart omitted reflecting range of new issuances approximately $0 b to $12 b from 1995 to 2001] MARKET SIZE [Chart omitted reflecting range of approximately $250 b to $600 b from 1995 to 2001] Note: Data as of December 7, 2001. SECONDARY SPREADS BY CREDIT RATINGS - CORPORATE INDUSTRIALS - -------------------------------------------------------------------------------- RATINGS MOODY'S S&P SPREAD OVER 5.01% TREASURY ABSOLUTE YIELD Baa3 BBB- 249 bps 7.50% - -------------------------------------------------------------------------------- Bal BB+ 364 bps 8.65% Ba2 BB 437 bps 9.38% Ba3 BB- 487 bps 9.88% - -------------------------------------------------------------------------------- B1 B+ 517 bps 10.18% B2 B 636 bps 11.37% B3 B- 784 bps 12.85% 3 [REDACTED] [LOGO] HERCULES CHEMICAL INDUSTRY DEBT MARKET CONDITIONS APPENDIX I -------------------------------------------------------- MUTUAL FUNDS FLOW ACTIVITY IN ADDITION TO MUTUAL FUNDS, INSURANCE AND PENSION FUNDS ARE INCREASING EXPOSURE TO HIGH YIELD HIGH YIELD MUTUAL VS. EQUITY FUNDS FLOW (FIGURES IN $ MILLIONS) - -------------------------------------------------------------------------------- Graph omitted reflecting High Yield mutual (approximately -600 to 900) versus Equity Funds flow (approximately -5,000 to 8,000) between Jan 01 and Dec 01. Source: HIGH YIELD MUTUAL FUND LIQUID ASSETS AS A PERCENTAGE OF TOTAL ASSETS (AS OF OCTOBER 31, 2001) - -------------------------------------------------------------------------------- Graph omitted reflecting mutual fund liquid assets as a percentage of total assets ranging from approximately 4.3% to 9.0% between Feb 2000 and Oct 2001. Source: 4 [REDACTED] [LOGO] HERCULES CHEMICAL INDUSTRY DEBT MARKET CONDITIONS APPENDIX I -------------------------------------------------------- LEVERAGED LOAN MARKET ACTIVITY MARKET SUPPLY/DEMAND DYNAMICS CONTINUE TO FAVOR NEW ISSUERS AS NEW ISSUE VOLUME CONTINUES TO BE LIGHT WITH ONLY $1.7 BILLION OF INSTITUTIONAL PAPER PLACED SINCE OCTOBER AND VERY LITTLE DEAL FLOW EXPECTED FOR THE REMAINDER OF THIS YEAR RECENT LEVERAGED LOAN MARKET ACTIVITY - -------------------------------------------------------------------------------- [BAR CHART] Recent leveraged loan market activity Dates: 4-Oct 11-Oct 18-Oct 25-Oct 1-Nov 8-Nov 15-Nov 21-Nov Volume $8.0 $8.0 $6.0 $7.0 $7.0 $7.0 $5.0 $5.0 Number of Deals 29 22 21 27 28 27 22 22 Dates: 29-Nov 6-Dec Volume $4.0 $6.0 Number of Deals 21 32 5 [REDACTED] [LOGO] HERCULES CHEMICAL INDUSTRY DEBT MARKET CONDITIONS APPENDIX I -------------------------------------------------------- DEAL STRUCTURE TRENDS WHILE INVESTORS CONTINUE TO BE VERY CAUTIOUS AND EXTREMELY CREDIT-FOCUSED WHEN COMMITTING TO LEVERAGED LOANS, THEY REMAIN WILLING TO COMMIT CAPITAL TO LARGER SIZED ISSUERS WITH A STRONG CREDIT STORY AVERAGE DEBT MULTIPLE OF HIGHLY LEVERAGED LOANS - -------------------------------------------------------------------------------- [The following table was depicted as a bar chart in the printed materials.] [BAR CHART]
MULTIPLE OF EBITDA 1989 1990 1992 1993 1994 1995 1996 1997 1998 1999 2000 3Q01 ME 12/6/01 Bank debt/EBITDA 3.39 3.35 2.58 2.68 2.81 3.25 3.50 3.62 3.50 3.25 2.87 2.46 1.83 Non-bank debt/EBITDA 3.28 1.99 2.37 2.46 2.52 1.91 2.25 2.05 1.70 1.20 1.16 1.23 1.87 Total 6.67 5.34 4.95 5.14 5.33 5.16 5.75 5.67 5.20 4.45 4.03 3.69 3.70
Note: 1991 is excluded due to lack of data. Criteria pre-1996: L+250 and higher; 1996 to date: L+225 and higher. Media loans excluded. Source: AVERAGE EQUITY CONTRIBUTION TO LEVERAGED BUYOUTS - -------------------------------------------------------------------------------- [The following table was depicted as a bar chart in the printed materials.] [BAR CHART]
EQUITY AS A % OF TOTAL SOURCES 1989 1990 1992 1993 1994 1995 1996 1997 1998 1999 2000 1Q01 2Q01 3Q01 Rollover equity 3.3% 3.5% 4.1% 3.9% 5.1% 9.6% 0.5% Continued equity 13.4% 20.7% 22.0% 25.2% 26.2% 23.7% 22.9% 30.0% 31.6% 35.7% 37.8% 39.6% 38.9% 39.1%
Note: 1991 is excluded due to lack of data. Equity includes: common equity and preferred stock as well as holding company debt and seller note proceeds downstreamed to the operating company as common equity. Source: 6 [REDACTED] [LOGO] HERCULES CHEMICAL INDUSTRY DEBT MARKET CONDITIONS APPENDIX I -------------------------------------------------------- CURRENT BOND TRADING LEVELS SPECIALTY AND COMMODITY
------------ --------- INEOS ISP ACRYLICS HI GEO HERCULES RESOLUTION NOVEON CHEMCO AVERAGE - ---------------------------------------------------------------------------------------------------------------------------------- ($ in millions except where noted) Coupon 10.25% 10.125% 10.125% 11.125% 13.50% 11.00% 10.25% 10.91% Issue Sr. Uns Sr. Sub Sr. Sub Sr. Uns Sr. Sub Sr. Sub Sr. Sub -- Maturity May 10 July 07 Aug-08 Nov-07 Nov-10 Feb-11 Jul-11 -- Amount (euro)200 $600 120 400.0 75.0 275.0 200.0 -- Price 87.0 93.0 86.0 104.0 110.0 107.0 103.0 98.6 Yield-to-worst 12.81% 11.54% 13.36% 10.20% 11.37% 9.63% 9.68% 11.22% Spread 842 671 867 575 662 484 485 655 Yield-to-maturity 12.81% 11.54% 13.36% 10.20% 11.66% 9.82% 9.76% 11.31% Rating (Moody/S&P) B3/B+ B2/B B3/B- Ba2/B+ B2/B B3/B B2/B+ -- FINANCIALS (LTM 09/30/01) Revenue (euro)939 $3,537 $193 $2,726 $913 $1,093 $785 -- EBITDA 119 564 41 429 147 177 182 -- Interest expense 66 227 16 202 70 84 55 -- CapEx 48 244 9 88 22 39 38 -- Total debt 619 3,154 225 2,208 601 906 610 -- CREDIT STATISTICS EBITA/interest expense 1.8x 2.5x 2.5x 2.0x 2.1x 2.1x 3.3x 2.3x EBITDA - CapEx/interest expense 1.1x 1.9x 2.3x 1.6x 1.8x 1.6x 2.6x 1.9x Debt/EBITDA 5.2x 5.6x 5.5x 5.1x 4.1x 5.1x 3.4x 5.0x ------------ ---------
7 [REDACTED] [LOGO] HERCULES CHEMICAL INDUSTRY DEBT MARKET CONDITIONS APPENDIX I -------------------------------------------------------- COMPARABLE YIELDS [The following table was depicted as a bar chart in the printed materials.] [BAR CHART] YIELD TO WORST Sovereign Specialty/11.75% 12.26% Huntsman International/10.125% 11.53% Acetex/10.875% 11.17% Hercules/11.125% 10.21% Equistar/10.125% 9.91% ISP/10.25% 9.68% Noveon/11.0% 9.63% Lyondell/9.500% 9.50% IMC Global/10.875% 9.41% OM Group/9.25% 9.25% Georgia Gulf/10.375% 9.08% Millennium/9.25% 8.81% 8 [REDACTED] [LOGO] HERCULES CHEMICAL INDUSTRY DEBT MARKET CONDITIONS APPENDIX I -------------------------------------------------------- COMPARABLE LEVERAGE LTM 09/30/2001 [The following table was depicted as a combination bar and line chart in the printed materials.] [BAR CHART] TOTAL DEBT/EBITDA YIELD TO WORST % Sovereign Specialty 6.1x Chart omitted Huntsman International 5.4x reflecting Acetex 3.9x % of yield-to- Hercules 5.1x worst range Equistar 11.0x of approximately ISP 3.4x 8.75% to 12.0% Noveon 5.1x for companies in Lyondell 6.3x chart. IMC Global 6.5x OM Group 4.5x Georgia Gulf 5.9x Millennium 4.7x 9 [REDACTED] [LOGO] HERCULES CHEMICAL INDUSTRIES DEBT MARKET CONDITIONS APPENDIX I -------------------------------------------------------- HIGH YIELD TRADING PERFORMANCE 10/22/01 - 12/10/01 [The following table was depicted as a bar chart in the printed materials.] [BAR CHART] BID PRICE October 22 Today Hercules/11.125% $96.5 $104.0 ISP/10.25% $95.5 $103.0 Noveon/11.00% $100.0 $107.0 Acetex/10.875% $93.0 $98.5 Georgia Gulf/10.375% $102.0 $105.0 Geo Specialty/10.125% $85.0 $86.0 NL Industries/11.75% $98.0 $98.0 Avecia Group/11.00% $95.0 $96.0 10 [REDACTED] [LOGO] HERCULES CHEMICAL INDUSTRY DEBT MARKET CONDITIONS APPENDIX I -------------------------------------------------------- COMPARABLE YIELDS 10/22/01-- 12/10/01 [The following table was depicted as a bar chart in the printed materials.] [BAR CHART] YIELD TO WORST October 22 Today Hercules/11.125% 11.95% 10.20% ISP/10.25% 11.01% 9.68% Noveon/11.00% 11.00% 9.63% Acetex/10.875% 12.29% 11.17% Georgia Gulf/10.375% 10.37% 9.08% Geo Specialty/10.125% 13.56% 13.36% NL Industries/11.75% 12.90% 12.97% Avecia Group/11.00% 12.00% 11.81% 11 [REDACTED] [LOGO] HERCULES CHEMICAL INDUSTRY DEBT MARKET CONDITIONS APPENDIX I -------------------------------------------------------- COMPARABLE SPREADS 10/22/01 - 12/10/01 [The following table was depicted as a bar chart in the printed materials.] [BAR CHART] SPREAD TO TREASURY (BPS) October 22 Today Hercules/11.125% 813 575 ISP/10.25% 720 485 Noveon/11.00% 719 484 Acetex/10.875% 811 631 Georgia Gulf/10.375% 656 467 Geo Specialty/10.125% 983 867 NL Industries/11.75% 1,073 1,000 Avecia Group/11.00% 820 697 12 [REDACTED] [LOGO] HERCULES CHEMICAL INDUSTRY DEBT MARKET CONDITIONS APPENDIX I -------------------------------------------------------- NON-INVESTMENT GRADE BOND ISSUANCE YTD 2001 VS 2000
OFFER DATE ISSUER ISSUE SIZE COUPON MATURITY - ---------------------------------------------------------------------------------------------------------------------------- 12/07/2001 OM Group Sr. Sub. Notes (144 A) 400,000 9.250 2011 11/30/2001 Lyondell Chemicals Sr. Sec. Notes 393,000 9.500 2008 11/15/2001 COMPASS MINERALS SR. SUB. NOTES (144A) 250,000 10.000 2011 11/08/2001 Resolution Performance Products Sr. Sub. Notes (144A) -- add-on 75,000 13.500 2010 11/07/2001 ISP Chem Co Sr. Sub. Notes (144A) -- add-on 100,000 10.250 2011 10/30/2001 IMC Global Inc. Sr. Notes (144A) -- add-on 100,000 11.250 2001 10/03/2001 Terra Capital Inc. Sr. Sec. Notes 200,000 12.875 2008 08/16/2001 Equistar Sr. Notes 700,000 10.125 2008 08/01/2001 ACETEX CORP. SR. NOTES 190,000 10.875 2009 07/24/2001 International Specialty Products (ISP) Sr. Sub. Notes (144A) -- add-on 100,000 10.250 2011 07/11/2001 Ineos Plc Sr. Notes (144A) 223,782 10.500 2010 06/20/2001 INTERNATIONAL SPECIALTY PRODUCTS (ISP) SR. SUB. NOTES (144A) 200,000 10.250 2011 06/13/2001 Millenium America Inc. Senior Notes 275,000 9.250 2008 06/15/2001 Macdermid Inc. Sr. Sub. Notes (144A) 301,500 9.125 2011 05/11/2001 Messer Griesheim Sr. Notes (144A) -- EURO 481,580 10.375 2011 05/08/2001 IMC Global Inc. Sr. Notes (144A) 200,000 11.250 2011 05/08/2001 IMC Global Inc. Sr. Notes (144A) 400,000 10.875 2008 04/24/2001 HUNTSMAN INTERNATIONAL LLC SR. SUB. NOTES -- ADD ON -- EURO 44,725 10.125 2009 03/06/2001 HUNTSMAN INTERNATIONAL LLC SR. NOTES (144A) -- EURO 185,500 10.125 2009 02/23/2001 NOVEON (BF GOODRICH) SR. SUB. NOTES 275,000 11.000 2011 TOTAL: 5,095,087 - ---------------------------------------------------------------------------------------------------------------------------- 11/09/2000 Hercules Sr. Notes (144A) 400,000 11.125 2007 11/08/2000 Resolution Performance Products Sr. Sub. Notes (144A) 200,000 13.500 2010 09/22/2000 CP Kelco (Europe) Sr. Sub. Notes (144A) -- EURO 219,428 11.875 2010 08/21/2000 Neste Chemicals (Europe) Sr. Notes (144A) -- EURO 9,022 12.250 2010 08/03/2000 Neste Chemicals (Europe) Sr. Notes (144A) -- EURO 217,584 12.250 2010 07/25/2000 Vantico (Europe) Sr. Notes (144A) -- EURO 234,650 12.000 2010 04/27/2000 INEOS ACRYLICS PLC (UK) SR. NOTES (144A) -- EURO 182,260 10.250 2010 03/24/2000 Sovereign Specialty Chemical Inc. Sr. Sub. Notes (144A) 150,000 11.875 2010 TOTAL: 1,612,944 OFFER ISSUE DATE CALL MOODY'S S&P PRICE YIELD SPREAD - -------------------------------------------------------------------------------------- 12/07/2001 NC5 B2 B+ 100.000 9.250 419 11/30/2001 NC4 B3 BB 100.000 9.500 493 11/15/2001 NC5 B3 B 100.000 10.000 542 11/08/2001 NC4 B2 B 106.791 12.000 799 11/07/2001 NC5 B2 BB- 101.500 9.960 575 10/30/2001 NC5 Ba1 BB- 100.690 11.047 659 10/03/2001 make-whole B3 BB- 99.430 13.000 874 08/16/2001 MW -- Call Ba1 BBB- 100.000 10.125 531 08/01/2001 NC4 B2 B+ 100.000 10.875 580 07/24/2001 NC5 B2 BB- 99.50 10.328 521 07/11/2001 NC3 B2 B+ 100.000 10.500 548 06/20/2001 NC5 B2 BB- 98.470 10.500 530 06/13/2001 MW-Call Ba1 BBB+ 100.000 9.250 409.5 06/15/2001 NC5 BA3 BB- 99.505 9.200 400 05/11/2001 NC5 B2 B+ 100.000 10.375 548 05/08/2001 NC5 BA1 BB 97.799 11.625 640 05/08/2001 NC BA1 BB 98.790 11.125 590 04/24/2001 NC5 B2 B 102.500 9.570 489 03/06/2001 NC5 B2 B 102.500 9.582 501 02/23/2001 NC5 B3 B 100.000 11.000 589 - -------------------------------------------------------------------------------------- 11/09/2000 NC BA2 BB- 100.000 11.125 529 11/08/2000 NC5 B2 B 98.661 13.750 790 09/22/2000 NC5 B3 B 100.000 11.875 655 08/21/2000 make-whole B3 B 100.000 12.246 647 08/03/2000 NC5 B3 B 100.000 12.250 705 07/25/2000 NC5 B3 B- 100.000 12.000 679 04/27/2000 NC5 B3 B+ 100.000 10.250 200 03/24/2000 NC5 B3 B- 99.288 12.000 587
Note: Bold indicates [ILLEGIBLE] nvolvement, $ in thousands. 13 [REDACTED] [LOGO] HERCULES CHEMICAL INDUSTRY DEBT MARKET CONDITIONS APPENDIX I -------------------------------------------------------- INSTITUTIONAL LOAN TRADING LEVELS
INSTITUTIONAL TRANCHE TERM LOANS - TRADING PERFORMANCE AS OF DECEMBER 10, 2001 - ---------------------------------------------------------------------------------------------------- INTEREST DISCOUNT DISCOUNT LOAN BID OFFER MATURITY SPREAD RATE SPREAD YIELD OM Group 99.3 99.8 May-08 300 5.00% 325 5.25% Compass Minerals 100.5 100.9 Nov-09 350 5.50% 333 5.33% GEO 95.5 96.5 Dec-07 375 5.75% 525 7.25% Hercules - D 98.3 98.8 Nov-05 325 5.25% 383 5.81% Huntsman International 97.5 98.0 Jun-07 300 5.00% 383 5.83% Ineos Acrylics 99.5 100.0 Oct-07 250 4.50% 267 4.67% Noveon 99.8 100.1 Aug-08 375 5.75% 383 5.83% ISP 99.5 100.0 Jun-08 300 5.00% 317 5.17% Resolution 99.9 100.5 Oct-08 375 5.75% 379 5.79% - ---------------------------------------------------------------------------------------------------- MEAN 98.9 99.4 328.6 5.28% 368.0 5.68 MEDIAN 99.5 100.0 325.0 5.25% 379.0 5.79 - ----------------------------------------------------------------------------------------------------
Note: Assumes three month LIBOR spread of 2.00%. 14 [REDACTED] [LOGO] HERCULES CHEMICAL INDUSTRY DEBT MARKET CONDITIONS APPENDIX I -------------------------------------------------------- NON-INVESTMENT GRADE SENIOR DEBT
DATE ISSUER ISSUE AMOUNT COUPON MATURITY S&P/Moody's - ------------------------------------------------------------------------------------------------------------------------------------ 11/2001 COMPASS MINERALS RC, T/LB 135, 225 L+350 6.5 YR, 8 YR BB-/B1 09/2001 Terra Industries RC 175 L+275 3.75 yr BB/B1 08/2001 Equistar Chemicals RC, T/LB 500, 500 L+250, L+300 5 yr, 6 yr BBB/Ba3 07/2001 Ferro Corp. RC 200, 400 L+200, L+200 364, 5yr BBB-/Ba3 06/2001 ISP RC, T/LB 225, 225 L+250, L+300 5 YR, 7 YR BB+/Ba1 06/2001 Millennium Chemicals RC, T/LB 175, 225 L+200, L+250 5 yr, 5 yr BBB-/Ba3 05/2001 GEO SPECIALTY CHEMICALS RC, T/LB 40, 105 L+325, L+375 4 YR, 6.5 YR B+/B1 05/2001 OM Group RC, T/LB 350, 300 L+300, L+300 9 mo, 7 yr BB/Ba3 05/2001 Messer Gresheim RC, T/LA, B, C (EURO)310, 370,170,115 L+225, L+225 7yr/7 yr, 8yr/9yr BB/Ba3(pound) 04/2001 IMC Global RC,T/LB 210, 290 L+300, L+375 5 yr/5.5 yr BB+/Baa3 04/2001 Buckeye Technologies RC 215 L+300, L+375 4 yr NR 03/2001 Millennium Chemicals RC, T/LA 100, 400 L+137.5 1 yr, 5 yr NR/NR 02/2001 NOVEON RC, T/LA, T/LB 125, 125, 510 L+300, L+300, L+350 6 YR, 6 YR, 7.5 YR BB-/B1 01/2001 RK Polymers RC, T/LA, T/LB 50,30,270 L+300, L+300, L+425 6 yr, 6 yr, 8 yr BB-/B1
Note: Bold indicates [ILLEGIBLE] nvolvement. 15 [REDACTED] [LOGO] HERCULES CHEMICAL INDUSTRY DEBT MARKET CONDITIONS APPENDIX I -------------------------------------------------------- RECENT TRANSACTION PROFILES CHEMICAL SECTOR
GEO LYONDELL COMPASS SPECIALTY ($ in millions) CHEMICALS MINERALS EQUISTAR CHEMICALS IMC GLOBAL MILLENNIUM NOVEON - ------------------------------------------------------------------------------------------------------------------------------------ TRANSACTION DATA Rating (S&P/Moody's) Ba3/BB B1/BB- Baa3/BBB- B+/B2 BB/Ba1 BBB-/Ba1 BB-/B1 Transaction date November 2001 November 2001 August 2001 May 2001 April 2001 June 2001 February 2001 Transaction size $393 million $630 million $1,065 million $145 million $1.1 billion $675 million $1,437 million PRO FORMA OPERATING DATA $ $ $ $ $ $ ------------- ------------- -------------- ------------ ------------ ------------- -------------- LTM Revenue $3,345 $ 398 $7,111 $ 225 $2,884 $1,814 $1,149 LTM EBITDA 611 120 $ 354 54 496 311 212 % REVENUE 18.2% 30.0% 5.0% 24.0% 17.2% 17.1% 18.4% LTM CapEx 69 44 136 11 213 117 63.8 % EBITDA 11.2% 36.7% 38.4% 21.0% 42.9% 37.6% 30.0% CAPITALIZATION Cash $ 3 $ 57 $ 14 $ 85 $ 58 $ 5 Bank debt 636 225 365 105 500 152 635 Senior Notes 2,717 -- 2,038 -- 600 1,025 -- Subordinated Notes 500 250 -- 120 -- 0 275 Total debt 3,855 $ 475 2,403 225 1,100 1,117 910 Equity 1,125 155 3,430 187 675 924 527 ------------- ------------- -------------- ------------ ------------ ------------- -------------- TOTAL CAPITALIZATION 4,980 $ 630 $5,833 $ 412 $1,775 $2,101 $1,437 CREDIT STATISTICS Senior secured/EBITDA 5.4x 1.9x 1.0x 1.8x 1.0x 0.1x 3.0x Total debt/EBITDA 6.3x 5.1x 6.8x 4.1x 2.2x 3.8x 4.3x EBITDA/Cash interest 1.6x 3.lx l.9x 2.7x 2.8x 3.5x 2.4x EBITDA-CapEx/Cash 1.4x 2.0x 1.2x 2.1x 1.6x 2.2x 1.7x interest Total debt/Capitalization 77.4% 75.4% 41.0% 54.0% 62.0% 56.0% 63.3% Equity/Capitalization 22.5% 24.6% 59.0% 45.0% 38.0% 44.0% 36.7% TOTAL DEBT/ENTERPRISE VALUE 77.4% 75.4% 41.0% 54.0% 48.8% 39.3% 63.3%
16 [REDACTED] [LOGO] HERCULES CHEMICAL INDUSTRY DEBT MARKET CONDITIONS APPENDIX I -------------------------------------------------------- RECENT TRANSACTION PROFILES CHEMICAL SECTOR (continued)
GEO LYONDELL COMPASS SPECIALTY ($ in millions) CHEMICALS MINERALS EQUISTAR CHEMICALS IMC GLOBAL MILLENNIUM NOVEON - ------------------------------------------------------------------------------------------------------------------------------ BANK DEBT TERMS Revolver $135 $500 $40 $210 $175 $125 Coupon, tenor L+350, 6.5 L+250,5 L+325, 4 L+300, 5 L+200, 5 L+300, 6 Term Loan A -- -- -- -- -- 125 Coupon, tenor -- -- -- -- -- 300.6 Term Loan B 225 300 105 290 225 510 Coupon, tenor L+350, 8.0 L+300, 6 L+375, 6 L+375, 5.5 L+250, 5 L+350, 7.5 HIGH YIELD TERMS Type of issue Sr. Sec. Sr. Sub. Sr. Unsec. Sr. Sub. Sr. Notes Sr. Notes Sr. Sub. Amount of issue $393 $250 $700 $120 $200, $400 $275 $275 Maturity 2008 2011 2008 2008 2011, 2008 2008 2011 11.250%, Coupon 9.500% 10.000% 10.125% 10.125% 10.875% 9.25% 11.00% 11,625%, Yield at issue 9.500% 10.000% 10.125% 10.125% 11.125% 9.25% 11.00% Spread at issue 493 542 531 468 640, 590 409.5 589
17 [REDACTED] EX-99.C 5 c28573_ex-c.txt Exhibit C PRELIMINARY DRAFT MANAGEMENT PRESENTATION TO THE [LOGO] HERCULES - -------------------------------------------------------------------------------- BOARD OF DIRECTORS 11-FEB-2002 PRELIMINARY DRAFT II. OVERVIEW OF REFINANCING - -------------------------------------------------------------------------------- Overview of Refinancing 16 PRELIMINARY DRAFT CONSOLIDATED DEBT POSITION ACTUAL AND PRO FORMA FOR IMMEDIATE DEBT RESTRUCTURING OF $800MM (US$ IN MILLIONS) - -------------------------------------------------------------------------------- AS OF DECEMBER 31, 2001 -------------------------- ACTUAL PRO FORMA 1 ================================================================================ Bank Debt Tranche A $ 494 $ 0 - -------------------------------------------------------------------------------- Bank Debt Tranche D 371 371 - -------------------------------------------------------------------------------- New Bank Debt Tranche E -- 400 - -------------------------------------------------------------------------------- Bank Revolver 566 280 - -------------------------------------------------------------------------------- $1,431 $1,051 - -------------------------------------------------------------------------------- 11.125% Senior Notes Due 2007 400 400 - -------------------------------------------------------------------------------- New Senior Notes Due 2009 -- 400 - -------------------------------------------------------------------------------- 6.625% Senior Notes Due 2003 125 125 - -------------------------------------------------------------------------------- 6.60% Debentures Due 2027 100 100 - -------------------------------------------------------------------------------- $ 625 $1,025 - -------------------------------------------------------------------------------- FiberVision Debt 58 58 - -------------------------------------------------------------------------------- ESOP 84 84 - -------------------------------------------------------------------------------- Sundry Bank Debt 15 15 - -------------------------------------------------------------------------------- 8% Convertible Debenture 2010 3 3 - -------------------------------------------------------------------------------- $ 160 $ 160 - -------------------------------------------------------------------------------- $2,216 $2,236 - -------------------------------------------------------------------------------- Trust Preferred Retail Issue 2029 363 363 - -------------------------------------------------------------------------------- Convertible Trust Preferred 2029 261 261 - -------------------------------------------------------------------------------- $ 624 $ 624 - -------------------------------------------------------------------------------- TOTAL DEBT AND PREFERRED $2,840 $2,860 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Overview of Refinancing 17 PRELIMINARY DRAFT INDICATIVE TERM SHEET $400MM SENIOR UNSECURED NOTES - -------------------------------------------------------------------------------- Borrower: Hercules Incorporated Lead Arranger: [REDACTED] Co-Arrangers: [REDACTED] Distribution: 144A with Registration Rights Estimated Pricing: +-10.5% Maturity: 7 Years No Call 4 Covenants: Similar to Existing Senior Notes Use of Proceeds: Repayment of Tranche A Bank Debt & Irrevocable Reduction of Revolving Credit Facility NOTE: ASSUMES CURRENT CREDIT RATINGS OF HERCULES REMAIN CONSTANT THROUGH REFINANCING - -------------------------------------------------------------------------------- Overview of Refinancing 22 PRELIMINARY DRAFT INDICATIVE TERM SHEET $400MM (UNDERWRITTEN) INSTITUTIONAL LOAN TRANCHE E - -------------------------------------------------------------------------------- Borrower: Hercules Incorporated Lead Arranger: [REDACTED] Estimated Pricing: LIBOR + 375 bps Maturity: February 2006 Call Premium: 101 First Year Guarantors: Same as Existing Agreement Collateral: Same as Existing Agreement Amortization: Minimal Covenants Reps. & Warranties: Same as (to be amended) Existing Agreement Use of Proceeds: Repayment of Tranche A Bank Debt Conditions Precedent: 1) Issuance of $350MM Senior Unsecured Notes 2) Deflection of Term Loan D Prepayment NOTE: ASSUMES CURRENT CREDIT RATINGS OF HERCULES REMAIN CONSTANT THROUGH REFINANCING - -------------------------------------------------------------------------------- Overview of Refinancing 23 PRELIMINARY DRAFT PROPOSED CHANGES TO BANK DEBT COVENANTS - -------------------------------------------------------------------------------- o Leverage covenants set at 5.5x for year 1, decreasing 0.25x per quarter thereafter to 4.0x o Interest coverage permanently lowered to 1.75x o $125mm restructuring carve-out allowance o Change use of proceeds to reflect Tranche D paydown o Allow future refinancings o Increase pricing grid for revolver and Tranche D o Amendment fee o Limit on capital expenditures - -------------------------------------------------------------------------------- Overview of Refinancing 24 EX-99.D 6 c28573_ex-d.txt Exhibit D ANALYSIS OF STRATEGIC ALTERNATIVES HERCULES BOARD MEETING DECEMBER 12-13, 2001 ANALYSIS OF STRATEGIC ALTERNATIVES OPTION 1 - No Debt Refinancing; IMMEDIATE sale of Betz Dearborn and prompt follow-on sales of remaining business units OPTION 2 - Debt Refinancing; LATER sale of Betz Dearborn and remaining business units ASSUMPTIONS (MILLIONS) o EBITDA per Business Plan --------------------------------- 2002 2003 ---- ---- BDD $283 $291 OTHER $316 $369 ----- ---- ---- TOTAL $599 $660 --------------------------------- o Capital Expenditures per Business Plan --------------------------------- 2002 2003 ---- ---- BDD $20 $25 OTHER $40 $50 ----- ---- ---- TOTAL $60 $75 --------------------------------- o Betz Dearborn Sales Price - Immediate Sale (General Electric transaction) Gross Proceeds $1,800 (6.4x 2002 EBITDA) Net Proceeds $1,665 (5.9x 2002 EBITDA) VALUE TO HERCULES SHAREHOLDERS OPTION 1 Sell Betz Dearborn to GE for $1.8 Billion and immediately sell remaining businesses at 8.0x EBITDA $12.45 (1) OPTION 2 Sell all businesses in 12 months at 8.0x EBITDA $22.35 (2) - ---------- (1) If fo11ow-on sale does not materialize, value of Hercules stock at current trading multiple of 6.5x is $8.10 per share. If trading multiple increase to 8.0x, value of Hercules stock increases to $12.45 per share. (2) Excludes after tax cost of unwinding new financing estimated at $0.25 - $0.50 per share. SPECIALTY CHEMICAL PRIVATE SALE MULTIPLES [The following table was depicted as a line chart in the printed materials.] EBITDA Multiples
---------------------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 1997 1998 1999 2000 YTD - ------------------------------------------------------------------------------------------------------------------------------------ Private Sale Transaction Multiples 8.3x 9.9x 10.7x 8.4x 9.6x 9.5x 10.0x 11.0x 8.1x 7.6x - ------------------------------------------------------------------------------------------------------------------------------------
SPECIALTY CHEMICAL PRIVATE SALE MULTIPLES VS. PUBLIC STOCK MULTIPLES [The following table was depicted as a line chart in the printed materials.] EBITDA Multiples
---------------------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 1997 1998 1999 2000 YTD - ------------------------------------------------------------------------------------------------------------------------------------ Private Sale Transaction Multiples 8.3x 9.9x 10.7x 8.4x 9.6x 9.5x 10.0x 11.0x 8.1x 7.6x - ------------------------------------------------------------------------------------------------------------------------------------ Public Stock Multiples 6.4x 6.9x 6.7x 6.4x 6.6x 6.7x 6.5x 6.6x 6.4x 6.7x - ------------------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF STRATEGIC ALTERNATIVES o Immediate sale of Betz Dearborn to General Electric is dilutive, not only to earnings but to shareholder value as measured by Hercules stock price. Hercules currently trades at 6.5x EBITDA versus the GE transaction at 5.9x EBITDA, after taxes and transaction costs. o Significant refinancing opportunities exist today. ANALYSIS OF STRATEGIC ALTERNATIVES Timing of sale of Betz Dearborn inopportune o Potential for significant increase in operating income/EBITDA > Cost takeouts > Other operating improvements > Strong cash flow generator for debt paydown o Low transaction multiples > Historic low point > Transaction multiples barely exceed market multiples o Perception of being a distressed seller - only distressed sellers have been selling in this environment ANALYSIS OF STRATEGIC ALTERNATIVES o Major shareholders are against a sale at this time o Costs and risks of refinancing more than outweighed by significant potential for substantial increase in shareholder value EX-99.E 7 c28573_ex-e.txt Exhibit E DILUTION OF HERCULES EARNINGS DUE TO BETZDEARBORN 2001 2002 2003 ---- ---- ---- BETZDEARBORN EBITDA 217 Depreciation & Amortization (83) ---- EBIT 134 Amortization 35 ---- EBIT (Related to exclude GW) 169 203 233 VS. PRIOR YEAR +20% +15% HPC savings because of Betz (25) (25) (25) Interest (83) (90) (90) ---- ---- ---- Earning before taxes 61 88 118 Tax at 38% (23) (33) (45) ---- ---- ---- Net Income 38 54 73 ==== ==== ==== EPS 0.35 0.50 0.67 ONGOING BUSINESS RECURRING, PRO-FORMA EARNINGS 0.63 0.72 F TOTAL COMPANY TOTAL EARNINGS 1.13 1.39 % Change 79% 93% EX-99.F 8 c28573_ex-f.txt Exhibit F PRELIMINARY DRAFT MANAGEMENT PRESENTATION TO THE [LOGO] HERCULES BOARD OF DIRECTORS 11-FEB-2002 PRELIMINARY DRAFT SUMMARY HERCULES INCOME STATEMENT Status Quo and Pro Forma for the Sale of the Water Business (US$ in millions) - --------------------------------------------------------------------------------
SALES Strategic Plan Bank Plan Historical Trend Plan --------------- ------------------ --------------------- 2001A 2002F 2003F 2002F 2003F 2002F 2003F ------- --------------- ------------------ --------------------- Status Quo $2,507 $2,554 [REDACTED] $2,500 [REDACTED] $2,434 [REDACTED] Water Business (2) 844 863 [REDACTED] 863 [REDACTED] 839 [REDACTED] - ---------------------------------- --------------- ------------------ -------------------- Pro Forma $1,663 $1,691 [REDACTED] $1,637 [REDACTED] $1,595 [REDACTED] - ---------------------------------- --------------- ------------------ -------------------- EBITDA 2001A 2002F 2003F 2002F 2003F 2002F 2003F ------------------------ ------------------ --------------------- Status Quo $440 $598 [REDACTED] $558 [REDACTED] $479 [REDACTED] - - Water Business (3) (217) (262) [REDACTED] (262) [REDACTED] (236) [REDACTED] + Incr. Cost Reductions 25 25 [REDACTED] 25 [REDACTED] 25 [REDACTED] - - Incr. Corporate Indirect (1) (1) [REDACTED] (1) [REDACTED] (1) [REDACTED] - ---------------------------------- --------------- ------------------ --------------------- Pro Forma $248 $360 [REDACTED] $320 [REDACTED] $267 [REDACTED] - ---------------------------------- --------------- ------------------ --------------------- EPS 2001A 2002F 2003F 2002F 2003F 2002F 2003F ------- --------------- ------------------ --------------------- Status Quo $(0.02) $1.15 [REDACTED] $0.91 [REDACTED] $0.48 [REDACTED] - ---------------------------------- --------------- ------------------ --------------------- Pro Forma $ 0.05 $0.74 [REDACTED] $0.50 [REDACTED] $0.23 [REDACTED] - ---------------------------------- --------------- ------------------ ---------------------
(1) HISTORICAL AND PROJECTED FINANCIAL INFORMATION AS PER HERCULES MANAGEMENT. (2) EXCLUDES REVENUE FROM TOLLING AND DISTRIBUTION ARRANGEMENTS WITH PULP & PAPER. (3) INCLUDES $9.1MM OF ALLOCATED INDIRECT COSTS IN 2001-2003. - -------------------------------------------------------------------------------- Management Review of Projections 12 EX-99.G 9 c28573_ex-g.txt Exhibit G PRELIMINARY DRAFT MANAGEMENT PRESENTATION TO THE [LOGO] HERCULES BOARD OF DIRECTORS 11-FEB-2002 PRELIMINARY DRAFT HISTORICAL AND PROJECTED WATER BUSINESS FINANCIALS(1) (US$ IN MILLIONS) - --------------------------------------------------------------------------------
1999A 2000A 2001A 2002F 2003F 2004F ------------------------------------------------------------------------------ REVENUE Base Business $ 845.6 $ 849.1 $ 843.8 $ 863.2 $ 897.2 $ 924.1 PPD Tolling Arrangement 95.5 107.1 110.1 113.2 116.4 119.7 Paper Water 60.4 60.9 61.7 62.5 63.3 64.1 Affiliated Subs 2.2 3.5 3.5 3.5 3.5 3.5 Other (5.3) (1.1) 0.0 0.0 0.0 0.0 ------------------------------------------------------------------------------ Total Revenue $ 998.4 $ 1,019.5 $ 1,019.1 $ 1,042.4 $ 1,080.4 $ 1,111.4 GROWTH RATE NA 2.1% (0.0)% 2.3% 3.6% 2.9% GROSS PROFIT Base Business 519.5 516.1 512.9 536.8 560.0 572.9 PPD Tolling Arrangement 0.0 0.0 0.0 0.0 0.0 0.0 Paper Water 36.3 36.4 37.0 37.5 38.0 38.5 Affiliated Subs 0.3 0.5 0.5 0.5 0.5 0.5 Other 0.0 0.2 0.0 0.0 0.0 0.0 ------------------------------------------------------------------------------ Total Gross Profit $ 556.1 $ 553.2 $ 550.4 $ 574.8 $ 598.5 $ 611.9 GROSS MARGIN 55.7% 54.3% 54.0% 55.1% 55.4% 55.1% GROSS MARGIN W/O TOLLING 61.6% 60.6% 60.6% 61.9% 62.1% 61.7% EBITDA $ 216.3 $ 209.7 $ 216.6 $ 262.1 $ 270.6 $ 273.8 EBITDA MARGIN 21.7% 20.6% 21.3% 25.1% 25.0% 24.6% EBITDA MARGIN W/O TOLLING 24.0% 23.0% 23.8% 28.2% 28.1% 27.6% GROWTH RATE NA (3.1)% 3.3% 21.0% 3.2% 1.2% DISTRIBUTOR AGREEMENT $ 7.9 $ 7.2 $ 8.4 $ 9.1 $ 9.5 $ 9.8 EBIT $ 178.7 $ 173.1 $ 184.6 $ 229.8 $ 239.8 $ 244.2 EBIT MARGIN 17.9% 17.0% 18.1% 22.0% 22.2% 22.0% EBIT MARGIN W/O TOLLING 19.8% 19.0% 20.3% 24.7% 24.9% 24.6% ALLOCATED INDIRECT COSTS $ 24.0 $ 10.0 $ 9.1 $ 9.1 $ 9.1 $ 9.4 AS A % OF REVENUE 2.4% 1.0% 0.9% 0.9% 0.8% 0.8% CAPITAL EXPENDITURES $ 22.8 $ 25.2 $ 15.0 $ 20.8 $ 21.6 $ 22.2 AS A % OF REVENUE 2.3% 2.5% 1.5% 2.0% 2.0% 2.0%
CAGR ----------------------- 2005F 2006F 1999-2001 2002-2006 ------------------------------------------------------ REVENUE Base Business $ 951.8 $ 980.4 PPD Tolling Arrangement 123.1 126.5 Paper Water 64.9 65.7 Affiliated Subs 3.5 3.5 Other 0.0 0.0 ------------------------ Total Revenue $ 1,143.3 $ 1,176.1 GROWTH RATE 2.9% 2.9% 1.4% 3.1% GROSS PROFIT Base Business 590.1 607.8 PPD Tolling Arrangement 0.0 0.0 Paper Water 38.9 39.4 Affiliated Subs 0.5 0.5 Other 0.0 0.0 ------------------------ Total Gross Profit $ 629.5 $ 647.7 1.1% 3.0% GROSS MARGIN 55.1% 55.1% GROSS MARGIN W/O TOLLING 61.7% 61.7% EBITDA $ 279.7 $ 286.0 EBITDA MARGIN 24.5% 24.3% EBITDA MARGIN W/O TOLLING 27.4% 27.2% GROWTH RATE 2.2% 2.3% 6.6% 2.2% DISTRIBUTOR AGREEMENT $ 10.0 $ 10.3 EBIT $ 251.0 $ 258.1 EBIT MARGIN 22.0% 21.9% EBIT MARGIN W/O TOLLING 24.6% 24.6% ALLOCATED INDIRECT COSTS $ 9.7 $ 9.9 AS A % OF REVENUE 0.8% 0.8% CAPITAL EXPENDITURES $ 22.9 $ 23.5 AS A % OF REVENUE 2.0% 2.0% (3.0)% 3.1%
- -------------------------------------------------------------------------------- Supplementary Information 33 (1) HISTORICAL AND PROJECTED FINANCIAL INFORMATION AS PER HERCULES MANAGEMENT. EX-99.H 10 c28573_ex-h.txt EXHIBIT H [GE LOGO] - -------------------------------------------------------------------------------- GE UPDATE & NEW GROWTH PLATFORMS Keith Sherin CFO June 20, 2003 THIS PRESENTATION INCLUDES CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE BASED ON MANAGEMENT'S CURRENT EXPECTATIONS AND ARE SUBJECT TO UNCERTAINTY AND CHANGES IN CIRCUMSTANCES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THESE EXPECTATIONS DUE TO CHANGES IN GLOBAL POLITICAL, ECONOMIC, BUSINESS, COMPETITIVE, MARKET AND REGULATORY FACTORS. MORE DETAILED INFORMATION ABOUT THESE FACTORS IS CONTAINED IN GE'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. [GE LOGO] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MEETING OVERVIEW - -------------------------------------------------------------------------------- o SECOND QUARTER HIGHLIGHTS - Economic Environment - Orders / Asset Quality / Key Wins - NBC Upfront and Olympics - Labor o REAFFIRM EARNINGS GUIDANCE - Second Quarter at 37-39(cents) EPS - Total Year EPS Within $1.55 - 1.70 Range, +3-13% - Tighten Total Year Outlook at 2Q Earnings Call o GE EXECUTING CLEAR GROWTH AGENDA X Technology X Globalization X Services X Portfolio Transformation o TODAY'S FOCUS: NEW GROWTH PLATFORMS - Water - Security - Healthcare IT ------------- GE PERFORMING ------------- - -------------------------------------------------------------------------------- 1 - -------------------------------------------------------------------------------- ENVIRONMENT - -------------------------------------------------------------------------------- CHALLENGES [CLIP ART] CONTINUED SLOW ECONOMIC GROWTH - Europe/Japan Remain Sluggish [CLIP ART] SARS IMPACT ... DIMINISHING [CLIP ART] UNEMPLOYMENT GROWING - More in System [CLIP ART] EXCESS CAPACITY - Price [DOWN ARROW] and Weak Investment [CLIP ART] ENERGY COST INFLATION - Oil & Natural Gas [CLIP ART] PLASTICS CYCLE - Volume Soft - Inflation Stubborn MOMENTUM [CLIP ART] GREAT NBC UPFRONT - Leading Indicator - Broad-Based Strength [CLIP ART] SERVICE + TECHNOLOGY STRONG - Winning Big Campaigns [CLIP ART] STRONG DEAL PIPELINE - U.S. & Global [CLIP ART] CAPITAL MARKETS STRONG - Low Interest Rates [CLIP ART] AIRLINES STABILIZING [CLIP ART] U.S. STIMULUS PACKAGE - Helps Consumers --------------------------------- X ENVIRONMENT REMAINS CHALLENGING --------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECOND QUARTER 2003 - OPERATIONS - -------------------------------------------------------------------------------- NO CHANGE TO Q2 GUIDANCE [BAR CHART] Net Income 37-39(cents) o SEGMENT PERFORMANCE LARGELY CONSISTENT WITH Q1 OUTLOOK + NBC & Power Systems Better - Plastics (Volume) & Equipment Mgt. (Utilization) Worse o MAKING PROGRESS ON TRANSACTIONS ... RANGE CONSIDERS POTENTIAL IMPACT OF PORTFOLIO TRANSFORMATION ACTIONS ------------------ SOLID GE EXECUTION ------------------ - -------------------------------------------------------------------------------- 2 - -------------------------------------------------------------------------------- ORDER TRENDS - -------------------------------------------------------------------------------- TOTAL SHORT CYCLE V% [BAR CHART] 2002 2003 -------------------------- ----------- 1Q 2Q 3Q 4Q 1Q 2QE 1% 9% 14% 14% 7% 0-5% + Growth Platforms Continue Double-Digit V% + Services Performances Solid o +15-20% Ex. GEAE o GEAE Spares ADOR ~ $10MM, +3-5% NBC SCATTER PRICING STRONG [LINE CHART] 2002 2003 QTD ------------------ ------------------- 2Q 3Q 4Q 1Q 2QE 3QE 8% 12% 18% 37% 25% 24% - -------------------------------------------------------------------------------- PLASTICS V% (EX. FX) o 2Q Volume ~350 MMT o Price & Cost Stabilizing [BAR CHART] 2002 2003 -------------------------- ----------- 1Q 2Q 3Q 4Q 1Q 2QE ~FLAT SEQUENTIALLY 9 14 6 10 (2) ~(15) [CLIP ART] OTHER SHORT CYCLE V% (EX. FX) [BAR CHART] 2002 2003 -------------------------- ----------- 1Q 2Q 3Q 4Q 1Q 2QE (1) 9 13 13 7 5-10 EX. ACQ'N (4) 4 (1) -- (4) ~FLAT & FX ----------------------------------- GE CREATING GROWTH IN TOUGH ECONOMY ----------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FINANCIAL SERVICES - ASSET QUALITY - -------------------------------------------------------------------------------- % 30+ DAYS PAST DUE EQUIPMENT FINANCE $85B [BAR CHART]
2002 2003 - ------------------------------------------------------------ ------------------------------------ May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May 2.37 2.36 2.33 2.33 2.33 2.03 1.93 1.71 1.87 2.05 1.92 1.92 1.90
CONSUMER $75B [BAR CHART]
2002 2003 - ------------------------------------------------------------ ------------------------------------ May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May 5.27 5.37 5.50 5.56 5.56 5.72 5.61 5.58 5.75 5.86 5.84 5.81 5.82
DRIVERS o BROAD SPREAD OF RISK ... DIVERSE ASSET BASE o DISCIPLINED UNDERWRITING & UNIQUE REMARKETING SKILLS o STRONG RISK MANAGEMENT - Intense Collection Effort - 3,500 Risk Professionals, 7,000 Collectors o AIRLINE CREDITS STABILIZING - <10 Aircraft on Ground o US IMPROVING ... INTERNATIONAL FLAT --------------------------- ASSET QUALITY REMAINS SOLID --------------------------- - -------------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- Q2 "WINS" - -------------------------------------------------------------------------------- o GE CONSUMER FINANCE ... LOWE'S Seven-Year Private Label Credit Card Extension & GAP Five-Year Extension o GE OIL & GAS ... $94MM OMAN LNG Plant Expansion o GE TRANSPORTATION ... $600MM BNSF: 415 Units ('03-'08) Including 300 Evolution Series; KAZAKHSTAN $40MM Kits & Spares in '03 (Option for $150MM More) o AIRCRAFT ENGINES ... EMIRATES AIRLINES Leasing 26 (14 from GECAS) Boeing 777-3000ER Aircraft with GE90-115B Engines & 12 Year Service Agreement Valued at $1B+ o JET BLUE ... 100 Embraer 190 Regional Jets Powered by GE CF34-10 Engines (Option for 100 More) o OSi SPECIALTIES Acquisition and GE Specialty Chemicals Disposition o LABOR ... Reached Tentative Four-Year Agreement with Unions (IUE-CWA & UE) o NBC ... Great Up-front; OLYMPICS U.S. Rights to 2010 Winter & 2012 Summer Games -------------------------------------- GE CONTINUES TO WIN IN THE MARKETPLACE -------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NBC UPFRONT TRADITIONAL STRENGTH [GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC] 03/04 UPFRONT HIGHLIGHTS X RECORD NBC VOLUME ($4.8B) [UP ARROW] [UP ARROW] [UP ARROW] +13% +15% +22% PRIME TIME NON-PRIME TIME TV CABLE X STRONG PERFORMANCE VS. OTHER NETWORKS (% SHARE OF TOTAL $) [UP ARROW] [UP ARROW] [UP ARROW] 32% 50%+ 50%+ PRIME TIME LATE NIGHT EARLY AM X THIRD-HIGHEST PRICING IN NBC HISTORY [UP ARROW] [UP ARROW] 15% 10% PRIME TIME FOUR DAYPARTS NEW PROGRAMS [GRAPHIC] LAS VEGAS [GRAPHIC] LYON'S DEN [GRAPHIC] MISS MATCH [GRAPHIC] WHOOPI [GRAPHIC] COUPLING [GRAPHIC] HAPPY FAMILY ---------------------- NBC STRENGTH CONTINUES ---------------------- - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- NBC OLYMPICS [NBC LOGO] - -------------------------------------------------------------------------------- WON US BROADCAST RIGHTS TO 2010 WINTER & 2012 SUMMER OLYMPICS ... CEMENTS NBC AS "OFFICIAL" OLYMPICS NETWORK TV RIGHTS X $2B for Rights X GE Can Leverage Multiple "Owned" Distribution Platforms - Network - Cable - Stations - Hispanic Media X Real Upside Opportunity on New Media Platforms EXISTING NEW - Free TV - Closed Circuit - Basic Cable - Pay/On Demand TV - Satellite - Wireless - Video - Streaming/Downloading - Radio - Theatrical GE TOP SPONSORSHIP IN THE WORKS o $160-$200MM for Worldwide TOP Sponsor - 4 Games '06-'12 - Great Infrastructure Play for GE o Global Sponsorship & Marketing of IOC - 200 National Olympic Teams o Preferred Supplier to Host Cities - Power Systems - Commercial Finance - Security - Logistics Mgmt. - Water - Modular Space - Plastics - Appliances - Lighting & Electrical ---------------------- A TERRIFIC DEAL FOR GE ---------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LABOR UPDATE - -------------------------------------------------------------------------------- o TENTATIVE AGREEMENTS REACHED JUNE 15 - UE 3,500 Employees (Erie/Transportation, Ontario/Engines) - IUE-CWA 13,000 Employees (Louisville/Appliances, Lynn/Engines, Schenectady/Power Systems) - IAM 2,600 Employees (Milwaukee/Medical, Evendale/Engines) - Other Local GE Unions ~4,000 Employees (IBEW, UAW, IFPTE, etc.) o RATIFICATION VOTES WEEK OF JUNE 23 o HIGHLIGHTS - Historic 4-Year Deal - Compromises Reached on Key Terms - Wages (3%, 2.5%, 2.5%, 3%) - Affordable Healthcare - Pensions ... Attractive Increases -------------------------------- OPTIMISTIC WILL WIN RATIFICATION -------------------------------- - -------------------------------------------------------------------------------- 5 - -------------------------------------------------------------------------------- 2003 FOCUS - -------------------------------------------------------------------------------- HIT FINANCIAL COMMITMENTS [BAR CHART] '03 EPS $1.55-1.70 X Manage Environment X Manage Dispositions X Broad Based Growth DELIVERING ON "CONTROLLABLES" + Service Growth in Great Shape + New Platforms with Build Out Potential + Strong Financial Services ... Asset Growth with Risk Management + Power Systems "Normalizing" + Positioned for Economic Rebound ... Strong Leverage + Strong Cash Generation + Portfolio Action ... ... Expand Capacity ---------------------------------- GOOD EXECUTION ON CLEAR PRIORITIES ---------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GE STRATEGY - -------------------------------------------------------------------------------- CONSISTENT + RELIABLE GROWTH THROUGH THE CYCLES [UP ARROW] [UP ARROW] GE S&P 500 TARGETS: X Organic Growth 2x GDP X Earnings Growth 10%+ X ROTC 20%+ STRATEGIC IMPERATIVES 1 SUSTAIN A STRONG BUSINESS MODEL - Consistent Cash Generation - Leaner + Faster + High Integrity Culture - World's Best Team 2 ACCELERATE ORGANIC GROWTH - Achieve Technical Excellence - Accelerate Service Growth - Build Enduring Customer Relationships - Win Globally 3 STRENGTHEN GE BUSINESSES - Improve Technology, Services, Financial Core ----------------------------------- - BUILD STRONG GROWTH PLATFORMS ----------------------------------- - Generate Cash from Low Return Businesses ---------------------------------------------------- NEW GROWTH PLATFORMS KEY ELEMENT OF FOCUSED STRATEGY ---------------------------------------------------- - -------------------------------------------------------------------------------- 6 - -------------------------------------------------------------------------------- GROWTH PLATFORMS - -------------------------------------------------------------------------------- USED COMPREHENSIVE PROCESS TO IDENTIFY NEW GROWTH PLATFORMS SENIOR TEAM X CEO + Vice Chairmen X Senior Staff X Corporate Audit X GE BD Team X Ouside Consultants X GE Board SCREENED AGAINST GENERIC ATTRIBUTES X High Growth Rates & Large Markets X Capital Efficient X "Infrastructure" Industries X Opp'y for Competitive Advantage -------------------------------- GE SPECIFIC STRENGTHS + CAPABILITY X Global Reach X Financing Expertise X Healthcare, Energy & Media Domain Knowledge X Customer Synergy X Near-Neighbor Technology X Strong Distribution X Service Models X Cost & Risk Management -------------------------------- BEST IDEAS WATER ... SECURITY & SENSORS ... HEALTHCARE IT ... HISPANIC MEDIA ... OIL & GAS ... US CONSUMER FINANCE ------------------------------------------------ HIGH RETURN GROWTH FRANCHISES THAT FIT GE SKILLS ------------------------------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GROWTH PLATFORMS - -------------------------------------------------------------------------------- NEW MARKETS GROWING @ 3X GDP ($B) [BAR CHART] ~$175B ~10% AAGR SIZE GROWTH DEMOGRAPHIC HEALTHCARE IT ~$60 ~10% o 2-5000 New Hospitals Over 15 Years o Information = Quality + Cost WATER TECHNOLOGY ~40 ~8 o Outsourcing Trend o Shortage EXPLORATION TECHNOLOGY ~40 ~8 o Fast LNG Growth o Exploration Tougher SECURITY & SENSORS ~32 ~10 o Technology o 9/11 Impact HISPANIC TV ~$3 ~15% o Demographics GE REVENUE TODAY <4% PENETRATED [BAR CHART] ~$7B X TECHNOLOGY X SERVICES X GLOBAL X MULTIPLE REVENUE STREAMS X CAPITAL EFFICIENT ------------------------------------------------------- X FOCUS ON GLOBAL INFRASTRUCTURE MARKETS + GE SKILL SET ... IMPROVING GE'S GROWTH RATE AND RETURNS ------------------------------------------------------- - -------------------------------------------------------------------------------- 7 - -------------------------------------------------------------------------------- INDUSTRIAL GROWTH PLATFORMS - -------------------------------------------------------------------------------- SALES [BAR CHART] '03 ~$7B '06 >$12B ~20% CAGR MARGINS ~20+% DRIVERS o Strong Underlying Demand o Share Gains Through Global Distribution & New Products o Product Leadership with GE Technology o Expand Service Offerings o Consolidated Acquisitions in Fragmented Industries --------------------------------------- GE BUILD OUT PROCESS X STEP #1 ... DEFINE MARKET & LAUNCH X STEP #2 ... RESHAPE THE GE WAY X STEP #3 ... DISCIPLINED BUILD OUT --------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GROWTH PLATFORMS - -------------------------------------------------------------------------------- TODAY'S AGENDA WATER - BILL WOODBURN TECHNOLOGIES - GEORGE OLIVER SECURITY - LLOYD TROTTER - KEN BOYDA HEALTHCARE IT - JOE HOGAN --------------------------------- THREE GREAT NEW GROWTH BUSINESSES --------------------------------- - -------------------------------------------------------------------------------- 8 - -------------------------------------------------------------------------------- [GE LOGO] - -------------------------------------------------------------------------------- GE WATER TECHNOLOGIES Bill Woodburn CEO, GE Specialty Materials George Oliver CEO, GE Water Technologies June 20, 2003 THIS PRESENTATION INCLUDES CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE BASED ON MANAGEMENT'S CURRENT EXPECTATIONS AND ARE SUBJECT TO UNCERTAINTY AND CHANGES IN CIRCUMSTANCES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THESE EXPECTATIONS DUE TO CHANGES IN GLOBAL POLITICAL, ECONOMIC, BUSINESS, COMPETITIVE, MARKET AND REGULATORY FACTORS. MORE DETAILED INFORMATION ABOUT THOSE FACTORS IS CONTAINED IN GE'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. [GE LOGO] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GE SPECIALTY MATERIALS - -------------------------------------------------------------------------------- WHERE WE STARTED 2001 / 2 - ---------------- - ---------------- SILICONES - ---------------- REDEFINE FOR GROWTH QUARTZ - ---------------- SUPER- ABRASIVES - ---------------- LIMIT INVESTMENT SPECIALTY CHEMICALS - ---------------- REVENUE $1.8B GROWTH RATE ~FLAT OP PROFIT ~10% TRANSFORMING THE BUSINESS o Focus on Business Driven by Technology and Services o Create Platforms That Own Customer Interface o Globalize Winning Business Models o Divest Under-performing Businesses o Improve Cash Performance and ROTC ---------------------------------- REORGANIZED FOR CLEAR GROWTH FOCUS ---------------------------------- - -------------------------------------------------------------------------------- 1 - -------------------------------------------------------------------------------- GE SPECIALTY MATERIALS - -------------------------------------------------------------------------------- WHERE WE STARTED WHAT WE'VE DONE 2001 / 2 ---------------- ---------------- ACQUIRED BETZ & SILICONES OSMONICS ---------------- ---------------- QUARTZ ---------------- ---------------- SUPER- ACQUIRING OSi ABRASIVES ---------------- ---------------- ACQUIRED ADV. SPECIALTY CERAMICS CHEMICALS ---------------- ---------------- -- Divesting -- REVENUE $1.8B GROWTH RATE ~FLAT OP PROFIT ~10% [CLIP ART] WHERE WE'RE GOING ------------------ WATER TECHNOLOGIES ------------------ ------------------ ADVANCED MATERIALS ------------------ REVENUE $3.0+B GROWTH RATE 5-10% OP PROFIT 15-20% CASH >1.5XNI X TECHNOLOGY X SERVICES X CUSTOMER CENTRIC X GLOBAL X BIG, GROWING MARKETS ------------------------------------------------ CREATING 2 MULTI-BILLION DOLLAR GROWTH PLATFORMS ------------------------------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SILICONES & OSi - -------------------------------------------------------------------------------- PURCHASE OF OSi SPECIALTIES ANNOUNCED IN APRIL... EXPECT 3Q'03 CLOSE [BAR CHART] '03 '04 SILICONES WITH FULL TODAY YEAR OF OSi REVENUE ~$1.3 $1.8 ~$2.0 0.5 [BAR CHART] SILICONES WITH FULL TODAY YEAR OF OSi W/ SYNERGIES OP PROFIT ~$125 $250 ~$300 125 OP % ~10% 15+% X STRONG OSi TECHNOLOGY PORTFOLIO o Leader in Organofunctional Silanes o 80% Specialty Applications o ~300 Patents o Application Expertise X SIGNIFICANTLY EXPANDED OFFERINGS o Higher Margins: 2x Commodities X SIGNIFICANT SYNERGIES o Cost-Out Straight-Forward o Sourcing Benefits X CONSISTENT WITH STRATEGY o Fix Silicones Returns & Growth o Monetize Specialty Chemical Unit ---------------------------------------- LOW-RISK BOLT-ON WITH POWERFUL SYNERGIES ---------------------------------------- - -------------------------------------------------------------------------------- 2 - -------------------------------------------------------------------------------- BUSINESS SYNERGIES - -------------------------------------------------------------------------------- TWO GROWTH PLATFORMS ACROSS MATERIALS AND FLUID TECHNOLOGIES ------------------ ------------------ WATER TECHNOLOGIES ADVANCED MATERIALS ------------------ ------------------ - ------------------------------------ -------------------------------------- END MARKET EXAMPLE PRODUCT EXAMPLE Electronics PERSONAL CARE [GRAPHIC] $3B ELECTRONIC MAT'LS GROWING 10+% [GRAPHIC] - SILICONE GROWING 17% AAGR LEADING COMPETENCY IN 4 OF 6 ULTRAPURE WATER SECTOR INGREDIENTS CATEGORIES [GRAPHIC] $1B AND GROWING AT 12% PER YEAR - ------------------------------------ -------------------------------------- --------------------------------------------------- COMPLEMENTARY TECHNOLOGY, CHANNELS, AND END MARKETS --------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WHY WATER? - -------------------------------------------------------------------------------- o Water Integral to Virtually $360B MARKET Every industrial Process [GRAPHIC] o Very Fragmented Industry o Increasing Demand o Decreasing Supply o Increasing Regulatory Requirements o Application Intensity and Process Rigor Driving Higher Purity Needs o Attractive Segments Growing 2-3X GDP... Technology and Recurring Services -------------------------------------------------- DYNAMICS PLAY TO GE TECHNOLOGY & SERVICE STRENGTHS -------------------------------------------------- - -------------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- BUILDING GE WATER TECHNOLOGIES - -------------------------------------------------------------------------------- DEFINE & --> RESHAPE --> BUILD-OUT LAUNCH o DEFINE THE SEGMENTS ... $40B, 2-3X GDP Growth, High ROTC o LAUNCH THE PLATFORM ... BetzDearborn Aquisition o RESHAPE THE GE WAY ... Integrate Efficiently, Transfer GE Technology, Transform Service Model o DISCIPLINED BUILD-OUT ... Organic and Inorganic --------------------------------------------- PROVEN GE APPROACH TO BUILD GROWTH BUSINESSES --------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DEFINE & WATER & PROCESS MARKET LAUNCH - -------------------------------------------------------------------------------- MODALITIES ---------- Waste Services $ 1B [PIE CHART] Total Market: $360B Environmental Services $ 1 Smart Services $ 1 Priority Segments $40B Contractual Services $ 3 Chemicals & Services $11 Filtration Consumables $ 9 Modular Equipment $ 8 DISCIPLINED CRITERIA -------------------- Custom Equipment $ 5 + Technology + Low EHS Maintenance $ 1 + Value Service + High ROTC --- + High Application + 2-3x GDP Growth $40B --------------------------------------------- DISCIPLINED FOCUS ON $40B ATTRACTIVE SEGMENTS --------------------------------------------- - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- Define & WATER & PROCESS PLAYING FIELD Launch - -------------------------------------------------------------------------------- Waste Services [LOGO] ChemTreat, Inc. [LOGO] BWT Best Water Technology Environmental Services [LOGO] ONDEO [LOGO] PALL Smart Services Nalco Contractual Services [LOGO] IONICS [LOGO] USFilter Chemicals & Services [LOGO] ASHLAND [LOGO] DOW ASHLAND SPECIALTY FILMTEC(SM) Membranes Filtration Consumables CHEMICAL COMPANY Modular Equipment [LOGO] BAKER [LOGO] CUNO HUGHES Custom Equipment Maintenance - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & LAUNCH -- PLATFORM ACQUISITIONS Launch - -------------------------------------------------------------------------------- [BAR CHART] THE THE PLATFORM MODALITIES $1.4B Chemicals & ------------ Services GE Betz Filtration $1.1B Sales Consumables 2Q '02 ------------ Modular Osmonics Equipment $0.3B Sales 1Q '03 Custom ------------ Equipment ~15% OP THE OPPORTUNITY... o World-class Industrial Channel - 2,200+ Sales and Service Engineers - Application Expertise - Very Broad Served Industries... Tremendous Alignment with GE o GE "Value-Add" Matters ... 1 + 1 > 2 - Six Sigma - HR Processes - Operating Rhythm & Practices - Sourcing & Productivity Initiatives - Technology Transfer / Enhancements ---------------------------------------------------------- TERRIFIC OPERATING PLATFORM... SOLID FOUNDATION FOR GROWTH ---------------------------------------------------------- - -------------------------------------------------------------------------------- 5 - -------------------------------------------------------------------------------- Define & INDUSTRIES THAT WE SERVE Launch - -------------------------------------------------------------------------------- [GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC] Food and Primary Metals Power Transportation Beverage --------------------------------- [GRAPHIC] Providing Solutions To The Entire [GRAPHIC] Pharmaceuticals GE Customer Base ...And Beyond C&I/Health Care --------------------------------- [GRAPHIC] [GRAPHIC] [GRAPHIC] Mining Hydrocarbon Processing Chemical Processing - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & WHAT WE DO TODAY Launch - -------------------------------------------------------------------------------- "Pure Water" Systems Process Additives Cooling Treatment [GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC] Clarification & Filtration Wastewater Treatment Boiler Treatment [GRAPHIC] [GRAPHIC] [GRAPHIC] ------------------------------------------------------------- CARING FOR "INDUSTRY'S LIFEBLOOD" WITH TECHNOLOGY AND SERVICE ------------------------------------------------------------- - -------------------------------------------------------------------------------- 6 - -------------------------------------------------------------------------------- Define & WHAT WE DO TODAY Launch - -------------------------------------------------------------------------------- Corn Milling Plant, Nebraska X City Water Capacity Constraint Avoided RO System for Feed Water Pretreatment --> X Chemicals Usage [DOWN ARROW], Savings $300K X Water Usage [DOWN ARROW] 42 million gallons Petrochemical Plant, Texas X Sludge Reduction [DOWN ARROW] 475 tons Automated Feed System for Lime Softening --> X Chemicals Usage [DOWN ARROW], Savings $300K X Water Usage [DOWN ARROW] 2+ million gallons Pharmaceuticals Plant, New Jersey X Chemicals Usage [DOWN ARROW] Automated Cooling Tower Treatment --> X Savings $50K X Water Usage [DOWN ARROW] 3+ million gallons Steel Mill, Brazil X Solid Waste [DOWN ARROW] 38 tons Central Manufacturing Cooling System --> X Maintenance/Downtime [DOWN ARROW], Savings $1MM X Water Usage [DOWN ARROW] 46 million gallons Auto Assembly Plant, Missouri X Natural Gas Consumption [DOWN ARROW] $1MM Boiler Operations Improvement Program --> X Chemicals Usage [DOWN ARROW] $150K X Water Usage [DOWN ARROW] 4 million gallons
------------------------------------------------------ GOOD FOR CUSTOMERS, THE ENVIRONMENT, AND PROFITABILITY ------------------------------------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & THE "COST OF FAILURE"... Launch - -------------------------------------------------------------------------------- CUSTOMER PROBLEM: GE SOLUTION: SITUATION ACTIONS o Refinery Treated By a o Refinery Solutions Team Deployed GEWT Competitor o GE Metallurgical Experts Complete o Catastrophic Failures in Key Analyses Overnight Equipment System o Chemical, Equipment, and Membrane o Incumbent Suppliers Incorrectly Solution to Refinery Management Diagnose the Root Cause [DOWN ARROW] [DOWN ARROW] CUSTOMER IMPACT RESULTS o $20MM Lost Production o New GE Customer ... $200K Per Day o Filtration Membranes Upgrades o $1MM Fixed Asset Repair o Working New Services Contracts --------------------------------------------------------------- WATER IS "MISSION CRITICAL"... NEED HIGH-CONFIDENCE RELIABILITY --------------------------------------------------------------- - -------------------------------------------------------------------------------- 7 Define & HOW WE DO IT TODAY Launch - -------------------------------------------------------------------------------- WHAT OUR 2,200 SERVICE REPS DO... o Perform Field Analytics o Troubleshoot Plant Systems o Prescribe Treatment Solutions o Live on the Customer Site WHAT OUR CUSTOMERS GET... o Expert Technical Service, 24 X 7 o Continuous Performance Monitoring o Detailed Performance Reporting o Optimized Performance of Costly Fixed Assets ---------------------------------------------------- GE WATER TECHNOLOGIES ~$1.4B Revenue in 2003 [PIE CHART] 80% Recurring [PIE CHART] 5% Contractual Services 35% Annual Purchase Agreement Transactional o Typical Contracts ~1 year o Customer Pays on Chem Usage ... Average $60K/Year o Limited Cross Sell Opportunity ---------------------------------------------------- ----------------------------------------------------- THE CROSS-MODALITY INDUSTRIAL WATER & PROCESS EXPERTS ----------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & -> Reshape AQUISITION INTEGRATION Launch - -------------------------------------------------------------------------------- $MM Integration Strategy Some Key Results o Actions ... Day 1 CUSTOMER - Launched New Organization CHURN - Infused GE Leadership Talent 10%(X) 3% [BAR CHART] - Huge Celebration - Set Expectations ... GROWTH! SALES REP OP PROFIT TURNOVER '02 10%(X) 2% '03E [UP ARROW] 15% o Actions ... First 100 Days - 25+ Global Road Shows GROWTH - Re-energize Corporate Sales 4%(X) 5%+ - GE Operating Rigor - Personnel Assessments ----------------------------------------------- COMBINATION OF TACTICAL AND STRATEGIC EXECUTION ----------------------------------------------- - -------------------------------------------------------------------------------- 8 - -------------------------------------------------------------------------------- Define & -> Reshape EXECUTE THE GE WAY Launch - -------------------------------------------------------------------------------- Process Water Outsourcing One Company... Product & One Solution Service Offerings Engineered 2,200 Sales Force Filtration Chemical & GE Interlinkages Life Cycle Mechanical Services and Consumables Management Solutions "Water by Integrated the Gallon" Approach Global Reach KEY ENABLERS o GE Verticals o Globalization o Contractual Services o New Technologies ----------------------------------------------- Strategy Enables 2,200 Field Force to Sell More Products & Services With Greater Efficiency ----------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & -> Reshape GE VERTICALS Launch - -------------------------------------------------------------------------------- Global Power Company o Customer Problem: Scaling and Reduced Efficiency in Cooling System o Cost of Failure: $1MM per Hour o General Electric Solution: [LOGO] GE BETZ [LOGO] Power Systems [GRAPHIC] o Water Treatment Services o Supplier of Turbines JOINT EFFORT AVERTED Supplier COSTLY CUSTOMER o On-site Blackbelts SHUTDOWN o Coordinated Efforts of GE Companies o Analyzed Key Variables, Shared Global Energy Expertise --------------------------------- GROWTH FROM FOCUS ON GE VERTICALS --------------------------------- - -------------------------------------------------------------------------------- 9 - -------------------------------------------------------------------------------- Define & -> Reshape GLOBALIZATION Launch - -------------------------------------------------------------------------------- EASTERN EUROPEAN & MIDDLE EAST GROWTH RATE INVESTING IN FIELD RESOURCES [BAR CHART] o Up 18% in Growth Regions Base 5% Current 15% UPGRADING CHINA PRESENCE o New Shanghai Plant ... On Line in 2004 [MAP] o New Shanghai Research Center ASIAN GROWTH RATE RESULTS...GROWTH o China Growing 30%+... Up 20 points [BAR CHART] o E. Europe / ME Growing 15%... Up 10 points o Mexico Growing 10%+... Up 5 points Base 10% Current 25%+ ------------------------------------------------ RESOURCING FOR GLOBAL GROWTH... AND ACHIEVING IT ------------------------------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & -> Reshape CONTRACTUAL SERVICES Launch - -------------------------------------------------------------------------------- GE AIRCRAFT ENGINES GE WATER TECHNOLOGIES Sell Contractual Service Agreements to Sell Technology-Based Solutions Drive Down the Total Cost of Operation Applied by On-site Engineers, Backed Utilizing World Class Engine Technology By Performance Commitments ENGINE TECHNOLOGY FIELD ENGINEER - $/Hr - $/Gallon - Performance - Performance - ----- ------- -------- ------- --------- --------- -------- ------- Parts Repairs Upgrades Service Membranes Chemicals Services Filters & NDT - ----- ------- -------- ------- --------- --------- -------- ------- ------------------------------------------------------- WE KNOW HOW TO CREATE DIFFERENTIATED SERVICE BUSINESSES ------------------------------------------------------- - -------------------------------------------------------------------------------- 10 - -------------------------------------------------------------------------------- Define & -> Reshape CONTRACTUAL SERVICES Launch - -------------------------------------------------------------------------------- PROCESS VARIABILITY SUCCESS FACTORS GE CAPABILITY o Inexpert System Engineering o Water Chemistry Expertise X o Inexpert Operation & Maintenance o Modular Equipment Design X o Likely Performance Failures: --> o Field Reps X - Boiler Derating ($20K/Hr) o Application Know-How X - Contamination ($100K) o 24 x 7 Remote Monitoring X
REDUCE VARIATION ... AND COST PER GALLON [line chart omitted reflecting system capability and cost per gallon] ----------------------------------------------------- BUILDING CAPABILITY TO DELIVER FIXED-PRICE PURE WATER ----------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & -> Reshape CONTRACTUAL SERVICES -- EXAMPLE Launch - -------------------------------------------------------------------------------- CUSTOMER: WHAT WE ARE SELLING... o Reverse Osmosis Plant (5 mm gallon/day) ----------- Smart o Membrane Monitoring GEWT COVERAGE: Services o Field Rep ----------- o Analytical Lab Services o Technical Support Specialists ----------- o GE Global Research Chemists Contractual o Fixed Price - CSA Services HOW IT WORKS: ----------- o Fixed Fee o Long-Term Agreement ----------- o Performance Commitments Chemicals & o Water Treatment Services Chemicals GEWT AND CUSTOMER ON ----------- o Membrane Treatments THE SAME SIDE ----------- Filtration o Cartridge Filters Consumables o Depth filters ----------- ----------- Modular o Reverse Osmosis Equipment Equipment ----------- ----------------------------------------- TRANSLATING THE GE SERVICE MODEL TO WATER ----------------------------------------- - -------------------------------------------------------------------------------- 11 - -------------------------------------------------------------------------------- Define & -> Reshape NEW TECHNOLOGY Launch - -------------------------------------------------------------------------------- REMOTE MONITORING & DIAGNOSTICS AUTOMATION WITH OPTIMAL PREDICTABILITY AND CONTROL PROCESSES FOR CUSTOMERS [GRAPHIC] ... HUGE PRODUCTIVITY OPPORTUNITY FOR GEWT & OUR CUSTOMERS BETZ / OSMONICS SILICONES / OSi CORPORATE GE o Process Sensors & o Electronics Packaging o GRC Combustion Analytical Chemistry Chemistry o Corrosion Science & o Electronics & Material Monitoring Science Lab Capabilities ------------------------------------------------------------- A UNIQUE CAPABILITY... LEARNING FROM OTHER SERVICE BUSINESSES ------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & -> Reshape NEW TECHNOLOGY Launch - -------------------------------------------------------------------------------- NON-DESTRUCTIVE TESTING... AN ENTIRELY NEW SERVICE OPPORTUNITY FINDING A PIPE READY TO FAIL GE DIGITAL RADIOGRAPHY OPPORTUNITY Internal Pipe Corrosion Under Corrosion Insulation [GRAPHIC] --> [GRAPHIC] [GRAPHIC] TODAY: POINT-BY POINT SEARCH |X| Expensive |X| Slow X QUANTUM DATA INCREASE |X| High Labor X SPEED AND LOWER COST |X| Low Data X SAFETY -------------------------------------------------------- GEMS TECHNOLOGY PLAY... BASIS TO ENTER $1B+ NDT INDUSTRY -------------------------------------------------------- - -------------------------------------------------------------------------------- 12 - -------------------------------------------------------------------------------- Define & -> Reshape "TO BE" SERVICES MODEL Launch - -------------------------------------------------------------------------------- - -------------------------------- ----------------------------------- "Current" GE Water Technologies "To Be" GE Water Technologies [PIE CHART] [PIE CHART] 80% Recurring 90% Recurring [PIE CHART] [PIE CHART] --> 5% Contractual Services 25% Contractual Services 35% Annual Purchase Agreement 50% Annual Purchase Agreement Transactional Transactional o TYPICAL CONTRACTS ~1 YEAR o TYPICAL CONTRACTS ~3-5 YEARS o CUSTOMER PAYS ON CHEM USAGE o CUSTOMER PAYS A FIXED FEE ... AVERAGE $60K / YEAR ... AVERAGE $150K / YEAR o Limited Cross Sell Opportunity o HIGH PENETRATION OF NEW SERVICES - -------------------------------- ----------------------------------- ----------------------------------------------------- THE CROSS-MODALITY INDUSTRIAL WATER & PROCESS EXPERTS ----------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & -> Reshape -> Build-Out GROWTH PLAN Launch - -------------------------------------------------------------------------------- REVENUE [BAR CHART] 21% CAGR + Acquisitions ~$3.0B -------- -------- + Market Growth +$0.8 --------- -------- + GE Capability +$0.4 -------- --------- +$0.4 ~$1.4B -------- --------- -------------------------------------------------------------------- '03 o 2-3x GDP Organic Growth '06 o ROTC 15%+ ~15% OP ... >50% EX-GOODWILL 20%+ OP o Low Capital Intensity o Cash >1.5X Net Income ------------------------------------------------------ CREATING A SCALABLE GLOBAL BUSINESS IN A GROWTH MARKET ------------------------------------------------------ - -------------------------------------------------------------------------------- 13 - -------------------------------------------------------------------------------- [GE LOGO] GE INDUSTRIAL SYSTEMS - -------------------------------------------------------------------------------- GE INTERLOGIX BUILDING A SECURITY GROWTH BUSINESS Lloyd Trotter CEO, GE Industrial Systems Ken Boyda CEO, GE Interlogix June 20, 2003 THIS PRESENTATION INCLUDES CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE BASED ON MANAGEMENT'S CURRENT EXPECTATIONS AND ARE SUBJECT TO UNCERTAINTY AND CHANGES IN CIRCUMSTANCES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THESE EXPECTATIONS DUE TO CHANGES IN GLOBAL POLITICAL, ECONOMIC, BUSINESS, COMPETITIVE, MARKET AND REGULATORY FACTORS. MORE DETAILED INFORMATION ABOUT THOSE FACTORS IS CONTAINED IN GE'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GE INDUSTRIAL SYSTEMS - -------------------------------------------------------------------------------- Heritage Segment $5.3B - ----------------- ---------------------------------------------------------- Electrical CHANNELS CUSTOMERS SERVED $B/GROWTH % Distribution -------- ---------------- ----------- & [GRAPHIC] o Distribution o Industrial $29 Control o Direct o Commercial 2-3% $2.2 o Residential - ----------------- ---------------------------------------------------------- Process Automation [GRAPHIC] o Distribution o Industrial $55 $1.9 o Direct o Utility 3-4% - ----------------- ---------------------------------------------------------- Transmission & [GRAPHIC] o Direct o Utility $18 Distribution o Distribution o Industrial 1-2% $0.8 - ----------------- ---------------------------------------------------------- Reliable Power [GRAPHIC] o Direct o Telecomm $19 $0.4 o VAR's o Datacomm 3-5% o Reps o Commercial - ----------------- ---------------------------------------------------------- o MARKET SIZE $100B, GDP GROWTH MODEL o MATURE MARKET o BROAD CHANNEL REACH ------------------------------------------------------ CONTINUED STEADY GROWTH FOR HERITAGE PRODUCT OFFERINGS ------------------------------------------------------ - -------------------------------------------------------------------------------- 1 - -------------------------------------------------------------------------------- GE INDUSTRIAL SYSTEMS - -------------------------------------------------------------------------------- New Business Segments $1B+ CHANNELS CUSTOMERS SERVED $B/GROWTH% - ----------------- ---------------------------------------------------------- Security [GRAPHIC] o Installers o Commercial $29 $1.0 o VAR's o Residential ~10% o Distribution o Industrial - ----------------- ---------------------------------------------------------- Sensors [GRAPHIC] o Direct o Pharmaceuticals $19 $0.3 o OEM o Aerospace 8-10% o Process Control - ----------------- ---------------------------------------------------------- o Market Size $53B o ~10% Growth o Patentable Technologies o High Contribution Margin - 55% o Fragmented Markets o Different Channels - Same End User -------------------------------------------- CREATING NEW, PROFITABLE HIGH-TECH PLATFORMS -------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WHY SECURITY? - -------------------------------------------------------------------------------- o Environment Driving Long Term $127B Market Market Growth and Innovation [GRAPHIC] o Insurance/Liability Risk Accelerating Penetration o Very Fragmented Industry o Security Becoming an Enterprise Challenge...not just "Facilities" ...Information AND Physical Security o Technology Revolution Coming... e.g. Digital Video ...Lots of Room to Change the Game o Huge Opportunities in New Detection Modalities ---------------------------------------------------- DYNAMICS PLAY TO GE TECHNOLOGY AND SERVICE STRENGTHS ---------------------------------------------------- - -------------------------------------------------------------------------------- 2 - -------------------------------------------------------------------------------- GLOBAL SECURITY INDUSTRY - -------------------------------------------------------------------------------- $127B GLOBAL SECURITY INDUSTRY $74B SERVICE FOCUS $53B PRODUCT FOCUS $24B $50B MONITORING GUARD/PROTECTION $29B ELECTRONICS $24B MECHANICAL SERVICES PRODUCTS PRODUCTS Growth 7-8% 2-3% 10+% 2-3% Profitability ~15% 0-5% ~15+% 5-10% ---------------------------------------- FOCUS ON HIGH GROWTH ELECTRONIC PRODUCTS ...AND DEVELOP NEW SERVICES MODEL ---------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & BUILDING GE SECURITY BUSINESS Launch - -------------------------------------------------------------------------------- DEFINE & LAUNCH --> RESHAPE --> BUILD-OUT o DEFINE THE SEGMENTS ... $29B, 2-3X GDP Growth, High ROTC o LAUNCH THE PLATFORM ... Interlogix and Ion Track Acquisitions o RESHAPE THE GE WAY ... Integrate Efficiently, Transfer GE Technology, Lead Key Industry Shifts, Develop Profitable Service Model o DISCIPLINED BUILD-OUT ... Organic and Inorganic --------------------------------------------- PROVEN GE APPROACH TO BUILD GROWTH BUSINESSES --------------------------------------------- - -------------------------------------------------------------------------------- 3 ELECTRONIC SECURITY MARKET Define & Launch - -------------------------------------------------------------------------------- MARKET ($ Billion/Growth Rate) $53B Access Control [GRAPHIC] Controlled Access for - ----------- $4B/+11% Workplace Safety Equipment Growth $29 Rates - ----------- 10-20% Intrusion [GRAPHIC] Property Protection Monitoring $9/+6% and Family Safety $24 - ----------- INDUSTRY Fire Services [GRAPHIC] Fire Protection and SALES -5% $5/+4% Prevention Video [GRAPHIC] Equipment for $4/+14% Surveillance and Intelligent Sensing Trace Detection/ [GRAPHIC] Explosive and Drug X-Ray/High Risk Detection $7/+20% ------------------------------------------------------------ AN INDUSTRY UP FOR GRABS ... FAST GROWTH AND VERY FRAGMENTED ...10,000+ COMPANIES PROVIDE/INTEGRATE EQUIPMENT ------------------------------------------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & ELECTRONIC SECURITY MARKET Launch - -------------------------------------------------------------------------------- MARKET ($ Billion/Growth Rate) $53B Access Control - ----------- $4B/+11% Equipment Growth $29 Rates OP 10-15% - ----------- 10-20% Intrusion Monitoring $9/+6% $24 - ----------- INDUSTRY Fire Services SALES -5% $5/+4% OP 20-25% Video $4/+14% Trace Detection/ X-Ray/High Risk $7/+20% ---------------------------------------------------------------- ATTRACTIVE, PROFITABLE GROWTH WHERE TECHNOLOGY CAN DIFFERENTIATE ---------------------------------------------------------------- - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- Define & LAUNCH - PLATFORM ACQUISITIONS Launch - -------------------------------------------------------------------------------- THE PLATFORM THE MODALITIES INTERLOGIX AND ION TRACK BRING: $1B+ Access Control o Broad Customer Offerings - ----------- Ion Track 4Q'02 Interlogix Intrusion o Strong Technology Portfolio 1Q'02 X Digital Video & Wireless X Trace Detection Video o Product Innovation Cultures X 38 new launches in '02 Trace X 52 scheduled launches '03 Detection o Geographic and End-market Balance o Strong Customer Relationships, Including 75% of Fortune 100 ------------------------------------------------------------- GE ALREADY A MEANINGFUL PLAYER -- PRODUCT, BRAND + REPUTATION ------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & LAUNCH -- PLATFORM ACQUISITIONS Launch - -------------------------------------------------------------------------------- ADDED KEY TECHNOLOGIES Organic Growth -------------- ~$160 -------------- Acquisitions ---------------- ------------ ~$1B Run Rate ~$100 ---------------- ------------ Interlogix X Kilsen - Fire & Ion Track X Infographics - Access Systems - ------------ X Fiber Solutions - Networking ~$740 X MAS - Monitoring, Productivity - ------------ - -------------------------------------------------------------------------------- '02 '03E -------------------------------------------- FROM CONCEPTION TO $1B BUSINESS IN 18 MONTHS -------------------------------------------- - -------------------------------------------------------------------------------- 5 - -------------------------------------------------------------------------------- Define & --> Reshape ACQUISITION INTEGRATION Launch - -------------------------------------------------------------------------------- o Integration Leader Appointed to GE BRINGS: each acquisition o Resources / People X Sourcing, Technology, BD, etc. o Team of functional experts X Global Research Center assigned full time X Acquisition Integration Expertise o Formal documented Integration o Transferable Technologies progress begins "Day 1"... X Video and Data Management X Advanced Sensors and Detection Science o Progress routinely pulsed by X Global Research Center Programs global leadership team and CFO o Brand, Channel Strength, Global Reach X Traditional GEA and GEIS Channels [GRAPHIC] X GE "Verticals" X Global Presence o Market-Back Customer Focus --------------------------- GE "SPRINGBOARD FOR GROWTH" --------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & --> Reshape EXECUTE THE GE WAY Launch - -------------------------------------------------------------------------------- KEY PRIORITIES o Customer Alignment - ----------------------------- THRIVE IN CHANGING o Globalization ENVIRONMENT X Transform the Enterprise o Advance Digital Video Position ... HUGE INNOVATION OPPORTUNITY X From Devices to Knowledge --> ... LEARN FROM GE MEDICAL EXPERIENCE X Convergence of Data o Lead the Enterprise Security Shift ... Build Systems and o New Technologies for High Risk Detection Service Franchise ...BUILD "MEDICAL-LIKE" SYSTEMS BUSINESS - ----------------------------- o Build-Out the Product Portfolio ------------------------------------------------------- HUGE GROWTH OPPORTUNITY ... SOLVING INDUSTRY CHALLENGES ------------------------------------------------------- - -------------------------------------------------------------------------------- 6 - -------------------------------------------------------------------------------- Define & --> Reshape CUSTOMER ALIGNMENT Launch - --------------------------------------------------------------------------------
------------------- ------------------- -------------------- ------------------ Residential Commercial Enterprise & Government Home Owner Small Business Corporate ------------------- ------------------- -------------------- ------------------ ------------------- ------------------- -------------------- ------------------ Customer Comfort, Property Protection Safety, Information Homeland Security, Requirements Safety Employee/Customer Integration Safety Safety ------------------- ------------------- -------------------- ------------------ ------------------- ------------------- -------------------- ------------------ Global Controls & Wireless Intrusion Detection Access & Full Inspection & Technology Web Enabled Video System Detection Centers Services Integration ------------------- ------------------- -------------------- ------------------ ------------------- ------------------- -------------------- ------------------ Vertical Home Assurance Retail, Gaming Banking/Automotive Homeland Security Segments Premise Mgt. Education Corporate 500 Cargo/Ports Healthcare Building Mgt. Cos. Airports/Utilities ------------------- ------------------- -------------------- ------------------ ------------------- ------------------- -------------------- ------------------ Channels to National Companies National Systems Integrators Contractors Market Mega Merchandisers [ILLEGIBLE] National Installers Local Dealers ------------------- ------------------- -------------------- ------------------
------------------------------------------------------------ SATISFY DISTINCT REQUIREMENTS FOR MULTIPLE CUSTOMER SEGMENTS ------------------------------------------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & --> Reshape VERTICAL INDUSTRY INITIATIVES Launch - -------------------------------------------------------------------------------- WATER / WASTEWATER [GRAPHIC] ENERGY [GRAPHIC] [GRAPHIC] OIL & GAS [GRAPHIC] HEALTHCARE ------------------------------------------------------------------------ DRIVING PARTNERSHIP OPPORTUNITIES ACROSS GE BUSINESSES... KEY INDUSTRIES ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- 7 - -------------------------------------------------------------------------------- Define & --> Reshape VERTICAL INDUSTRY INITIATIVES Launch - -------------------------------------------------------------------------------- GE HEALTHCARE IT: FUTURE OF HEALTHCARE X Better Patient Care X Better Caregiver Productivity Diagnostic Monitoring Images [GRAPHIC] Devices GE INTERLOGIX DIGITAL VIDEO Clinical IT Real Time Supervision ------------------------------------------ BRINGING TECHNOLOGY TO OTHER GE BUSINESSES ------------------------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & --> Reshape GLOBALIZATION Launch - -------------------------------------------------------------------------------- $29B Global Market GE INTERLOGIX $1B(X) REVENUES $4B [PIE CHART] [BAR GRAPHS] Asia - 4% Americas '03 '06 U.S. - 30% $8.7 $.6B $2.4B Europe - 35% $10.2 Asia - 20% $5.7 Americas '03 '06 Other - 15% $4.4 - $0.1B Europe '03 '06 ~$1B GE '03 Sales $.3B $1.0B [PIE CHART] Asia/Row 5% Europe '03 '06 U.S. 67% - $0.2B W. Europe 28% Asia '03 '06 $.1B $0.3B Asia '03 '06 - $0.1B --------------------------------------------- BUILD ON GE GLOBAL DISTRIBUTION CAPABILITIES --------------------------------------------- - -------------------------------------------------------------------------------- 8 - -------------------------------------------------------------------------------- Define & --> Reshape TECHNOLOGY REVOLUTION Launch - -------------------------------------------------------------------------------- o Environment Driving Accelerated Security Deployment o Video Systems Fastest Growing Technology o Digital Video Conversion is Inevitable - Only Viable Solution to Acquisition, Transmission, Review, Archiving Challenges - Represents an Explosion of "Data" to Be Reviewed o Intelligent Video Tools Critical to Effectiveness... Performance and Cost - More Guards Staring at More Screens Not the Answer - Enterprise Systems o Integration of Detection Technologies - Multiple Detection Systems within an Enterprise - Multiple Detection Technologies within an Integrated System ----------------------------------------------------------- TECHNOLOGY LEADERSHIP "UP FOR GRABS" ... GE WELL POSITIONED ----------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & --> Reshape WHY DIGITAL VIDEO? Launch - -------------------------------------------------------------------------------- MEDICAL SYSTEMS EXPERIENCE o Digital Imaging Modalities Provide Better o Rapid Digital Growth; Analog Shrinks Capabilities and Diagnostic Information vs. Film / Analog (VCR) --> [GRAPHIC] DIGITAL +40% AAGR ANALOG (8)% AAGR o Customers Drive Innovation and New --> o Software / Upgrades Aftermarket Grows Software / Visualization Capabilities [GRAPHIC] o Massive Amount of Data Challenges User o Smart Tools Improve User Performance (Physician) Effectiveness --> o Detection Rate Improved 25% DIGITAL X-RAY AND o Esp. in High Volume / Low "Findings" o 20 sec vs. 30 min Review CAD IN LUNG / Applications o 2nd Set of Eyes ... Never Gets Tired BREAST SCREENING o Expansion of Capabilities Drives --> o Fast Growing Healthcare IT Business Investment for Data Mgt. and Archiving o $2B business in 2003 from $0 in 1998
------------------------------------------------------ COMPELLING PRECEDENT ... LOTS OF GE WINNING EXPERIENCE ------------------------------------------------------ - -------------------------------------------------------------------------------- 9 - -------------------------------------------------------------------------------- Define & --> Reshape WHY DIGITAL VIDEO? Launch - -------------------------------------------------------------------------------- ONLY VIABLE SOLUTION TO ACQUISITION, ------------------------------ TRANSMISSION, REVIEW, ARCHIVING CHALLENGES VIDEO -- ~$18 B INSTALLED BASE ------------------------------ 1 DSR ARCHIVES > A MONTH OF FULLY [PIE CHART] [PIE CHART] SEARCHABLE 24x7 SURVEILLANCE VIDEO '03 '06E [GRAPHIC] Digital $ .5B $3.8B Analog 3.2B $2.5B Total $3.7B $6.3B NETWORKED VIDEO DELIVERS GREAT SUCCESS FACTORS MONITORING RESOURCE PRODUCTIVITY X Video Compression [GRAPHIC] X Smart Tools - Intelligence and Alerts X Networked -- Accessible "Open" Design ------------------------------------------ BUILD ON GE'S DIGITAL TECHNOLOGY STRENGTHS ------------------------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & --> Reshape COMPRESSION TECHNOLOGY Launch - -------------------------------------------------------------------------------- ETREPPID(TM) VIDEO COMPRESSION -- GE EXCLUSIVE - ----- ------ TODAY FUTURE - ----- ------ o Video storage requires lots of data o eTreppid storage requirements are space 1/10TH THE SIZE, when compared to current compression technology, [GRAPHIC] while improving video quality o Transmitting video requires lots of [GRAPHIC] data bandwidth o eTreppid reduces bandwidth [GRAPHIC] requirements to 1/10 THE SIZE, making it compatible with existing networks [GRAPHIC] ----------------------------- KEY ENABLER TO DIGITAL GROWTH ----------------------------- - -------------------------------------------------------------------------------- 10 - -------------------------------------------------------------------------------- INTELLIGENT VIDEO - -------------------------------------------------------------------------------- ---------------------------------------------------------------- VIDEOIQ(TM)--RECOGNIZING EVENTS FROM VIDEO PROBLEM: [GRAPHIC] o Number of guards scales linearly with number of cameras. o Each guard can only watch a limited number of screens. o Most video shows nothing of significance. ---------------------------------------------------------------- RESULT: o Delivers better security - always watching o Instructs guard on what to look for [GRAPHIC] o Fewer false alarms and more intelligent alerts o Guard productivity - can monitor more cameras ----------------------------------------- IMPROVE USER PRODUCTIVITY AND PERFORMANCE ----------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NETWORKED VIDEO - -------------------------------------------------------------------------------- ---------------------------------------------------------------- LINKING SITES TO REMOTE MONITORING PROBLEM: [GRAPHIC] o Cameras tied by cables to local monitors o Switching hardware scales with cameras o Monitoring must be done locally ---------------------------------------------------------------- RESULT: o Retrieve video from web world wide o Controls 1000's of cameras and users [GRAPHIC] o Saves equipment and installation costs o Based on open standards -------------------------- LOWERS INFRASTRUCTURE COST -------------------------- - -------------------------------------------------------------------------------- 11 - -------------------------------------------------------------------------------- INTEGRATION PLATFORM - -------------------------------------------------------------------------------- Facility Commander ... Bringing It All Together [GRAHIC] Industry Requires Full System Software Integration Platform o Open Platform - Freedom to choose best technologies o Single command and control console o Improved situational awareness and response o IT friendly based on industry standards - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- HIGH RISK DETECTION - -------------------------------------------------------------------------------- Existing Focus Future [GRAPHIC] TRACE DETECTION "MEDICAL-LIKE" SYSTEMS BUSINESS COORDINATED PASSENGER/ o ~$1B market BAGGAGE SECURITY CHECK POINT o 13-15% growth [GRAPHIC] o Ion Track --> INTEGRATED SYSTEMS - VIDEO Next Generation DETECTION & SCREENING [GRAPHIC] EDS/BULK DETECTION FROM GE GRC o New $1-2B market o 15% growth o TSA Contract ------------------------------------------------------- X MEDICAL/POWER SYSTEMS SENSOR TECHNOLOGY X GEC RESEARCH IN ADVANCED RECOGNITION TECHNOLOGIES ------------------------------------------------------- - -------------------------------------------------------------------------------- 12 - -------------------------------------------------------------------------------- HIGH RISK DETECTION - NEXT GENERATION - -------------------------------------------------------------------------------- COORDINATED PASSENGER / BAGGAGE SECURITY CHECK POINT [GRAPHIC] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & -> Reshape -> Build-Out BUILD OUT Launch - -------------------------------------------------------------------------------- MARKET ($ BILLION/GROWTH RATE) PIPELINE - DEALS UNDER REVIEW $53B - ---------- ACCESS CONTROL 6 FOCUS EQUIPMENT $4B/+11% $29 X ADVANCED SENSORS INTRUSION $9/+6% X FIRE POSITION GROWTH RATES FIRE SERVICES 4 X DIGITAL VIDEO $5/+4% 10-20% X HIGH RISK DETECTION VIDEO 7 $4/+14% TRACE DETECTION/ 3 X-RAY/HIGH RISK $7/+20% - ---------- MONITORING $24 -5% - ---------- INDUSTRY SALES ---------------------------------------------------------------- ATTRACTIVE, PROFITABLE GROWTH WHERE TECHNOLOGY CAN DIFFERENTIATE ---------------------------------------------------------------- - -------------------------------------------------------------------------------- 13 - -------------------------------------------------------------------------------- Define & -> Reshape -> Build-Out GE SECURITY Launch - -------------------------------------------------------------------------------- REVENUE [BAR CHART] MARKET GROWTH + GE CAPABILITIES + ACQUISITIONS $3-4B+ $1B ~$0.5 ~$0.5 $1-2B >20% MARGINS >15+% ROTC '03 '06 16% OP PROFIT >20% OP PROFIT ------------------------------------------------- GREAT GROWTH MARKET IN EARLY STAGES OF DEFINITION ... LOT'S OF OPPORTUNITY - TECHNOLOGY MATTERS ------------------------------------------------- - -------------------------------------------------------------------------------- 14 [LOGO] - -------------------------------------------------------------------------------- GE HEALTHCARE IT BUILDING A HEALTHCARE GROWTH BUSINESS Joe Hogan CEO, GE Medical Systems June 20, 2003 THIS PRESENTATION INCLUDES CERTAIN "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE BASED ON MANAGEMENT'S CURRENT EXPECTATIONS AND ARE SUBJECT TO UNCERTAINTY AND CHANGES IN CIRCUMSTANCES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THESE EXPECTATIONS DUE TO CHANGES IN GLOBAL POLITICAL, ECONOMIC, BUSINESS, COMPETITIVE, MARKET AND REGULATORY FACTORS. MORE DETAILED INFORMATION ABOUT THOSE FACTORS IS CONTAINED IN GE'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. [LOGO] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- HEALTHCARE INDUSTRY - -------------------------------------------------------------------------------- ($ in Billions) INCREDIBLE CHALLENGES ... GREAT CUSTOMERS [BAR CHART] $4T $1.5T $500B GLOBAL SPEND U.S. SPEND CUSTOMER REVENUE HOSPITAL CEO FOCUS... PATIENT ACCESS COMPETITIVE EXPANDING MARKETING SERVICES HOSPITAL PATIENT CAPACITY THROUGHPUT HOSPITAL CEO STAFF INCREASING RETENTION REIMBURSE PATIENT MAXIMIZING SAFETY REVENUE STAFF SECURING PRODUCTIVITY CAPITAL ----------------------------------------------------- HUGE GROWTH OPPORTUNITY ... SOLVING CUSTOMER PROBLEMS ----------------------------------------------------- - -------------------------------------------------------------------------------- 1 - -------------------------------------------------------------------------------- GEMS TODAY - -------------------------------------------------------------------------------- IMAGING SERVICES INFORMATION 10% 5-YR CAGR 15% 5-YR CAGR 20% 5-YR CAGR - ------------------------- ----------------- ---------------------- FOCUS FOCUS FOCUS o LEADING TECHNOLOGY o PARTNERSHIP o PHYSICIAN WORKFLOW o RAPID GLOBALIZATION o WHOLE HOSPITAL o CLINICAL BENCHMARKS o CLINICAL & PRODUCTIVITY o PERFORMANCE ROI o PAPERLESS, FILMLESS, WIRELESS - ------------------------- ----------------- ---------------------- FUNCTIONAL HOSPITAL CIS PRODUCTIVITY ^ ^ ^ | [GRAPHICS] | [GRAPHICS] | [GRAPHICS] | | | ANATOMICAL MAINTENANCE PACS --------------------------------------------------- HEALTHCARE GROWTH ENGINE... UNLIMITED OPPORTUNITIES --------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WHY HCIT? ... HOSPITAL TRANSFORMATION [GRAPHIC] [GRAPHIC] INDUSTRY DRIVERS GE FOCUS -> PAPER PAPERLESS o MAKE DATA MOVE X DEVICES/IT AS FAST AS PATIENT CONVERGENCE o INTEGRATE AT POC X RAPIDLY CREATING INTEGRATED ENTERPRISE SYSTEM - -------------------------------------------------------------------------------- [GRAPHIC] [GRAPHIC] -> FILM FILMLESS o MODALITY DATA X ADVANCED PACS EXPLOSION PROVIDER o RISE OF X LEADER IN TELERADIOLOGY WORKFLOW INTEGRATION (3D, RIS, HIS) - -------------------------------------------------------------------------------- [GRAPHIC] [GRAPHIC] -> WIRED WIRELESS o MOBILE CAREGIVING X TELEMETRY o NETWORKS X CAREGIVER CONVERGING COMMUNICATIONS ------------------------------------------------------------- GEMS TECHNOLOGY & SIX SIGMA DRIVE CARE QUALITY AND EFFICIENCY ------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 - -------------------------------------------------------------------------------- GE HEALTHCARE IT - -------------------------------------------------------------------------------- WHAT GE ADDS GE HCIT OFFERING o Integrated Products o Clinical Information Systems o Best Services Platform o Cardiology Information o Financing Portfolio Systems o Six Sigma Workflow o Radiology Information Systems o Leadership Training -> [GRAPHIC] <- o Patient Monitoring GE "DNA" Systems o Six Sigma o Diagnostic Cardiology Systems o Globalization o Clinical IT Networks o Process Rigor o Clinical IT o Digitization Implementation o Imaging Quality o Data Mining o Clinical Expertise o Industry Benchmarking & Credibility o Training/education IMPROVE HOSPITAL VITALITY BETTER CLINICAL OUTCOMES o JUST 4% PROFIT MARGINS o MEDICAL ERRORS #8 KILLER o REIMBURSEMENT [DOWN ARROW]; o LIMITED CARE QUALITY METRICS COSTS [UP ARROW] ... NO STANDARDS ------------------------------------------------------- TECHNOLOGY + GE "DNA" = IMPROVED HEALTHCARE PERFORMANCE ------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WHERE TO FOCUS? - -------------------------------------------------------------------------------- COMPOSITE OF SURGICAL PATIENT IN 2000 [Bar graph omitted regarding composite of surgical patient in 2000 which reflects cost and opportunity for error.] IDEAL OPPORTUNITY TO LEVERAGE SIX SIGMA ------------------------------------------------------------- OPPORTUNITY IS IN THE CLINICAL TRENCHES ... GE'S "SWEET SPOT" ------------------------------------------------------------- - -------------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- BUILDING GE HEALTHCARE IT - -------------------------------------------------------------------------------- Define & -> Reshape -> Build-Out Launch o DEFINE THE SEGMENTS ... $25B, 2-3X GDP Growth o LAUNCH THE PLATFORM ... PACS and Marquette o RESHAPE THE GE WAY ... Integrate Efficiently, Build on GE Clinical Expertise, Drive Technology Evolution o DISPLINED BUILD-OUT ... Organic and Inorganic --------------------------------------------- PROVEN GE APPROACH TO BUILD GROWTH BUSINESSES --------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & --> HEALTHCARE IT Launch - -------------------------------------------------------------------------------- THE MARKET $80B GROWTH RATES EMR INTEGRATION WHY WE LIKE THIS BUSINESS - ------ 10-15% OM X FAST GROWING $25 5-10% CARE-GIVER PRODUCTIVITY X GOOD MARGINS, ROTC 10% OM ---------------- X FRAGMENTED STRIKE ZONE X ESSENTIAL CLINICAL ELECTRONICS X IN THE GE "SWEET SPOT" 10-15% 25% OM - Customers CLINICAL NON-NEAR PATIENT - Products 20% OM - Clinical Expertise 5-10% CLINICAL NEAR PATIENT - Process & Digitization 25% OM - ------ ---------------- $55 HOSPITAL ADMIN 15% OM - ------ GROWING 10-15% ------------------------ GREAT GROWTH OPPORTUNITY ------------------------ - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- Define & --> CUSTOMER DIGITIZATION Launch - -------------------------------------------------------------------------------- GE PACS SOLUTION HELPS MANAGE CLINICAL DATA EXPLOSION BEST CLINICAL EFFICIENCY [GRAPHIC] --> [GRAPHIC] FILM FILMLESS o Workflow Integration (3D, RIS, HIS) o First Mammo PACS. o Integrated Radiology-Cardiology Systems... ----------------------------------- BEST IN IT INFRASTRUCTURE REVENUE ($MM) o Designed for 100% Uptime [BAR CHART] o Off Site Enterprise Repository Total $300 $415 ~$530 EXPERIENCED BUYERS CHOOSE GE Service 35 ~50 ~65 PACS Equipment 265 365 465 o Brigham & Woman's, Baylor ----------------------------------- University, UCLA, Loyola of Chicago, '01 '02 '03 Duke University, Stanford U o Tenet Healthcare, HCA <10% ADOPTION -------------------------------------------------------- RAPID GROWTH ... BUT EVEN BIGGER OPPORTUNITY BEYOND PACS -------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & --> Reshape IT/DEVICE CONVERGENCE STRATEGY Launch - -------------------------------------------------------------------------------- [GRAPHIC] INTELLIGENCE IN THE BOX o Traditional Best-in-Breed Approach ... Parameters, Intelligence Algorithms, User-Interface, Platform In Box o Information Convergence at the Point of Care Network Infrastucture NETWORK INFRASTRUCTURE ... MOVE DATA ... NOT PATIENTS Clinical Decision o Enterprise Monitoring ... New Information System Support Offerings o Next-Gen Wireless Infrastructure for Mobile Devices o Mission Criticial and Life Critical Networks [GRAPHIC] CLINICAL DECISION SUPPORT o Alerting Systems o Diagnostic Assistance o Therapy Critiquing and Planning o Image Recognition and Interpretation ------------------------------------------------------------- GE VISION ... BRINGING THE PIECES TOGETHER AROUND THE PATIENT ------------------------------------------------------------- - -------------------------------------------------------------------------------- 5 - -------------------------------------------------------------------------------- Define & --> Reshape INTELLIGENT DEVICES Launch - -------------------------------------------------------------------------------- OLD BOX TO "NEW" CLINICAL DEVICE "EXECUTION" [GRAPHIC] --> [GRAPHIC] TRADITIONAL FUTURE o Disparate Monitors o Enterprise Wide o Unconnected o Networked o Parameter Centric o Patient Centric o One-Way Info. Flow o Bi-Directional KEY ACTIONS o Embed Clinical Intelligence at POC in Monitor o Develop Specific Care Area Monitors o Every Patient Monitored $350M CONVERGENCE AT POINT OF CARE "GROWTH" [GRAPHIC] [GRAPHIC] MONITORING DEFIBRILLATORS $3.0B $0.7B ------- PATIENT ------- [GRAPHIC] PUMPS [GRAPHIC] $1.7B ANESTHESIA [GRAPHIC] $0.8B RESPIRATORY $2.9B KEY ACTIONS o Integrate for Real-Time Clinical Decision Support o Acquire/Partner Next Devices $7B MARKET --------------------------------------------------- GE CLINICAL EXPERTISE ADVANTAGE VS. PURE IT PLAYERS --------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ENTERPRISE WIRELESS Define & --> Reshape Launch - -------------------------------------------------------------------------------- GEMS WIRELESS GROWTH [BAR CHART] 60% AGR '00 $25 '03 $165 '06 $400 DRIVERS MARKET o Miniaturization o Clinical Data Moves as Fast as Patient o Wireless/Telemetry --> o Clinical Data Capture and Transfer o Network Reliability 24x7... Anywhere in Enterprise o Clinician Shortage o Continuous and Remote o Caregiver Productivity Monitoring o Workflow Flexibility and Design - -------------------------------------------------------------------------------- KEY PRODUCTS [GRAPHIC] WMTS 802.11g KEY ACTIONS [GRAPHIC] o Best Wireless Position [GRAPHIC] o Six Sigma Workflow Wearable o Monitor & Device Integration Monitors [GRAPHIC] [GRAPHIC] Voice over IP Mobile / Central and Waveforms Station Tablet ------------------------------------------------------------ SEAMLESS AVAILABILITY OF LIFE & MISSION CRITICAL INFORMATION ------------------------------------------------------------ - -------------------------------------------------------------------------------- 6 - -------------------------------------------------------------------------------- Define & --> Reshape SOLUTIONS PROVIDER Launch - -------------------------------------------------------------------------------- FIRST ALL-DIGITAL HEART HOSPITAL... [GRAPHIC] o Free-standing, 88-Beds, Brand New o Digitization for Better Patient Care $14M o No Nursing Stations GE REVENUE o No Medical Records Department IMPROVING QUALITY PEDIATRIC CARE... [GRAPHIC] o 373-Beds, $150MM Expansion o Digitizing the OR ... Tracking $25M Surgeries GE REVENUE o 500+ GE Patient Monitors GE DELIVERING: o Info Anytime, Anywhere... GE DELIVERING: o Lab Tests ... 3 Days -> 3 Secs [GRAPHIC] o OR "Mission Control"... o Medical Errors... [DOWN ARROW] 45% Paperless, Filmless o Report Turnaround... o More Certainty, Less Errors Hours to Secs o 25% [UP ARROW] Utilization ------------------------------------------------- TOTAL GE SOLUTION... "THE HOSPITAL OF THE FUTURE" ------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & --> Reshape --> Build-Out BUILD OUT - HEALTHCARE IT Launch - -------------------------------------------------------------------------------- WHERE WE WERE WHAT WE DID WHERE WE ARE MARKET '98 --------------- '03 ESTIMATE INORGANIC [BAR CHART] [BAR CHART] Multiple ~$18B Acquisitions REV. ~$1.7B --------------- OP ~$300MM X Fast Growing --> + --> X High Margins --------------- X Fragmented ORGANIC X Essential ------------------ Globalization X GE POSITION = $0 Services ------------------ Cost Integrated Growing 10-15% --------------- ---------------------------------------------------- DISCIPLINED BLEND OF ACQUISITIONS AND ORGANIC GROWTH ---------------------------------------------------- - -------------------------------------------------------------------------------- 7 - -------------------------------------------------------------------------------- Define & --> Reshape --> Build-Out BUILD OUT - HEALTHCARE IT Launch - -------------------------------------------------------------------------------- IT MARKET DATA ACQUISITION MARKET $15B... 15% AAGR $10B... 10% AAGR - -------------------------------- ------------------------------------ |_| Loral Hospital Administration/Clinic EMR Integration - -------------------------------- ------------------------------------ |_| Marquette Finance Admin Decision Support Web Data Real-Time - -------------------------------- Integration Model Information |_| MicroMedical Billing ADT ------------------------------------ - -------------------------------- ------------------------------------ |_| Prucka - -------------------------------- Caregiver Productivity Clinical Non-Near Patient ------------------------------------ |_| SEC - -------------------------------- Phone Pager Tablet 802.11B Pharmacy Lab ------------------------------------ |_| Critikon - -------------------------------- Clinical Electronics Clinical Near Patient ------------------------------------ |_| DataCritical - -------------------------------- Parameter Technology Scheduling MPI Charge Cap ------------------------------------ |_| iPath - -------------------------------- E A C P O C R Order Entry/Results D m r e B a a |_| Medicalogic - -------------------------------- b i r / r d E A C P O C R u t l N d i |_| Millbrook D m r e B a a l i o I i o b i r / r d a c p C o l |_| BDM u t l N d i t a U l o l i o I i o o l o g a c p C o l r g y t a U l o y C y o l o g a r g y r y C y e a ------------------------------------ r e - --------------------------------
------------------------------ $25B MARKET GROWING AT ~10-15% ------------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Define & --> Reshape --> Build-Out ACQUISITION INTEGRATION Launch Milwaukee SUCCESS FACTORS [GRAPHIC] o Guild on GE Distribution ... Deep Sales Cross-Training Barrington o Drive Product Integration ... Retain [GRAPHIC] Engineering Talent o Reduce Variable Costs ... LCC Mfg and - ----------------------------- Sourcing Crunch CONSOLIDATION INTO "HCIT CAMPUS" o Back Office Cost Out ... IT Integration - ----------------------------- ------------------------------------------ BENEFITS SHOW IN SOLID YEAR 1 RESULTS Rev Growth Profitability Loral 30% 2X iPath 45% (62%) -> 24% MedicaLogic 69% (150%) -> 11% Marquette QS 25% 1.5X ------------------------------------------ -------------------------------------------------- REPEATABLE PROCESS EXECUTED BY EXPERIENCED LEADERS -------------------------------------------------- - -------------------------------------------------------------------------------- 8 - -------------------------------------------------------------------------------- Define & --> Reshape --> Build-Out GROWTH PLAN Launch - -------------------------------------------------------------------------------- REVENUE + GE Capability ~$4.0B -------- -------- + Market Growth +$0.5 --------- -------- 30+% + Acquisitions +$1.0 AAGR -------- --------- +$1.0 ~$1.7B -------- --------- -------------------------------------------------------------------- '03 SOLID FINANCIAL PERFORMANCE '06 EMBRACED GLOBALIZATION ~18% OP o 15% Growth in Europe; China Up 100% ~25%+ OP BUILT CLINICAL IT PLATFORM o Centricity(TM) and Mercury Architecture o Best Image Management (Radiology & Cardio) EXPANDED DEVICES CAPABILITY ----------------------------------------------- GREAT PROGRESS SO FAR ... AN EVEN BETTER FUTURE ----------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INDUSTRIAL GROWTH PLATFORMS - -------------------------------------------------------------------------------- SALES DRIVERS [BAR CHART] o Strong Underlying Demand ~20% o Share Gains Through Global Distribution ~$7B >$12B CAGR & New Products '03 '06 Margins o Product Leadership with GE Technology ~20+% o Expand Service Offerings o Consolidating Acquisitions in Fragmented Industries ------------------------------------ GE BUILD OUT PROCESS X STEP #1 ... DEFINE MARKET & LAUNCH X STEP #2 ... RESHAPE THE GE WAY X STEP #3 ... DISCIPLINED BUILD OUT ------------------------------------ - -------------------------------------------------------------------------------- 9 EX-99.I 11 c28573_ex-i.txt Exhibit I BANC OF AMERICA SECURITIES - -------------------------------------------------------------------------------- Below we discuss GE's new growth platforms that were presented at the analyst meeting: Water Technologies - -------------------------------------------------------------------------------- GE Specialty Materials CEO Bill Woodburn and GE Water Technologies CEO George Oliver provided an overview of the business. Water Technologies is a leading provider of engineered chemical treatment of water and industrial and commercial process systems ($1.1B annual revenue, capabilities acquired with Betz in Q202), as well as a leading supplier of mechanical separation equipment for water purification and fluid filtration ($300mm revenue, capabilities acquired with Osmonics in Q103). Acquisition integration is proceeding smoothly. Compared to the period prior to being acquired, Betz customer churn has declined to 3% from 10%, sales rep turnover has declined to 2% from 10% and growth has increased to 5%+ from (4%). Operating profit margin is expected to be ~15% in '03, increasing to 20% by '06. GE's water businesses address fast growing segments of a $40B piece of the $360B global water & process market. Target segments include chemicals & services ($11B market), filtration consumables ($9B), modular equipment ($8B), as well as opportunities in waste & environmental services, smart & contractual services, custom equipment and maintenance. In aggregate, these businesses are growing at 2-3x GDP, have a high return on capital (15%+), and play to GE's strengths in technology, distribution and services. GE expects to leverage its global distribution capabilities and strong customer relationships to grow core revenue while it adds related businesses to fuel expected 21% annual growth- half organic / half acquired-through '06 (to $3.0B). GE recently had >$1B in the Water acquisition pipeline focusing on areas like services, water process and process chemistry. The business' service model is compelling with 80% of sales recurring, one- third of which are annual contracts. George Oliver (former VP & GM, GE Engine Services) is applying his GEAE experience to the Water platform where he is focusing the segment on GE's competitive strengths by further enhancing the service delivery component of the business. GE is also placing more of a focus on technological innovation-capX as a percentage of sales is expected to be ~4% in '03 and to increase to 6% in '04 vs. an estimated 2% at Betz prior to the acquisition which was not making the investments needed to spur growth. Heavy industry (metals & mining, petrochemical, hydrocarbon processing) represents the largest end market served (40-50% of sales). We estimate that power customers represent ~15% of sales. High purity process industries (food & beverage, pharma & medical) activity is being driven by regulatory changes. Middle market commercial and institutional business requires fairly narrow service requirements but add up to a significant portion of the business in aggregate. Geographically, revenue is ~67% in the Americas, 25% in Europe and 8% in Asia. The opportunity in Asia is driven by massive infrastructure build- out opportunities in China, which management estimates is a $500mm market growing at 15-20% annually. On the competitive landscape, GE is the #2 player in water management chemicals and services, with a ~15% share. Suez's Ondeo- Nalco is the global leader with ~25% of the market and Ashland's Drew Industrial business is #3. Other major competitors include ChemTreat ($150mm sales), Buckman Laboratories ($235mm sales in water treatment, mostly for pulp & paper) and Baker Petrolite (serves primarily refining & petrochemical plants). The remainder of the market is fairly fragmented. There is an excellent article in the May 21/28 issue of Chemical Week regarding the water treatment industry. If you would like a copy of the article, please contact us. General Electric Co. 2 Nicole M. Parent (212) 583-8047 EX-99.J 12 c28573_ex-j.txt Exhibit J [CITIGROUP SMITH BARNEY LOGO] ~$60k/year GE Water is also expanding it presence globally with new plants and investment in Eastern Europe, the Middle East and China. The business currently generates ~65% of revenues in the Americas, ~25% in Europe, and ~10% in the rest of the world. The attractiveness of the water industry has drawn the attention of several companies in our coverage list, including ITT Industries, Danaher, GE, and SPX Corp. These companies have been attracted by the fragmented nature of the industry, the growing supply/demand imbalance, increased regulatory requirements, and new applications requiring higher levels of purification. All of these factors suggest that the industry could provide sustainable growth well above GDP for the foreseeable future, in our view. GE Water currently targets a $40 billion sub-segment of the $360 billion water industry (see table below). GE views these markets as the most attractive in the industry, given their above-average growth rates (2-3X GDP), high technology base, value-added service component, and low capital intensity/high ROIC. However, we would not rule out a move into other adjacent markets in the water industry at some point in the future. GE's chief competitors in these markets include Ondeo Nalco, U.S. Filter, and Ionics. GE WATER TARGET MARKETS Waste Services $1B Environmental Services $1B Smart Services $1B Contractual Services $1B Chemicals & Services $11B Filtration Consumables $9B Modular Equipment $8B Customer Equipment $5B Maintenance $1B TOTAL TARGETED MARKETS $40B Source:GE GE SECURITY: SECURING A FOOTHOLD IN THE ATTRACTIVE SECURITY INDUSTRY Industrial Systems President and CEO Lloyd Trotter outlined the steps his business has taken to integrate technology into the portfolio. Historically, a focused product offering of steady growth industrial businesses has defined Industrial Systems. We believe Interlogix, acquired in Q102, has established a profitable high-tech platform with products that can be marketed through existing channels. Interlogix is a global leader in the electronic security technology industry. The focus of Interlogix is to provide customers with communication technology and security information that provides, life safety and lifestyle enhancements. The emergence of Homeland Security and web-enabled premises management has provided Interlogix with an opportunity to sell to residential and commercial end markets. The global security market is estimated at $127 billion and is divided into two segments: Service and Products. Service represents about $74 billion and Products represents about $53 billion of the global security market. The Products segment is divided into two segments: Electronics and Mechanical. GE is focusing on the $29 billion electronics segment. The company believes that the Electronics market can grow more than 10% and can deliver operating margins greater than 15%. GE's is targeting all of the major areas within the electronics segment of the security market, including Access Control, Intrusion, Fire Services, Video and Trace Detection/X-Ray. EX-99.K 13 c28573_ex-k.txt Exhibit K LEHMAN BROTHERS =================================================================EQUITY RESEARCH GE WATER TECHNOLOGIES TO BE A KEY PLATFORM IN SPECIALTY MATERIALS SEGMENT: GE defined the on-going evolution of its Specialty Materials business from four businesses (Silicones, Quartz, Super-abrasives, Specialty Chemicals) to two multi-billion dollar platforms (Water Technologies, Advanced Materials). On the Advanced Materials side, GE is limiting investment in Super-Abrasives and Specialty Chemicals (looking to monetize Specialty Chemicals) and focusing on Silicones and Quartz as the growth areas. GE expects the acquisition of OSi Specialties (supplier of specialty silicones) to close in 3Q03 ($450 million+ in annual sales) complementing the existing Silcones business. For 2004, GE is targeting revenue from Silicones & OSi combined of $2 billion with operating profit of $300 million based on operating margin expansion from 10% for Silicones in 2003 to 15% for the combined businesses in 2004. The main focus though was on the Water Technologies platform. Let`s take a look. GE`s Water Technologies platform currently generates $1.4 billion in revenue. The platform was launched via the 2Q02 acquisition of Betz Dearborn`s industrial water treatment services business which is now GE Betz and has $1.1 billion in revenue. The next major building block was the 1Q03 acquisition of Osmonics which currently has $300 million in revenue. Osmonics manufactures equipment and components for water purification and fluid filtration, separation, and handling. GE highlighted that water is integral to virtually every industrial process with industrial sites often requiring higher water quality than drinking water. Specifically GE has identified a $40 billion subsegment of the $360 billion Water & Process market as a target area with potential for 2-3X GDP organic growth, 15% ROTC, and free cash flow conversion of 150%. Our view is that this is an attractive market in general but particularly for GE because of its ability to sell to its large installed base of customers across industries and apply the GE services model to what is still a more transactions-based business. GE is targeting revenues for the Water Technologies platform to increase from $1.4 billion in 2003 to $3.0 billion in 2006 ($400 million from GE "capability", $400 million from market growth, and $800 million from acquisitions); operating margin is targeted to go from 15% in 2003 to 20% in 2006. SECURITY PLATFORM: FROM $0 IN 2001 TO $1 BILLION IN 2003 TO $3-4+ BILLION IN 2006: GE sizes the global security industry at $127 billion, of which GE targets the $29 billion electronics products segment. This particular segment grows at 10%+ and allows to have margins of 15%+. GE has no intention at this point to be a security services company (monitoring/guard/protection) choosing to focus on the product side. GE established its presence in the security market in 1Q02 with the acquisition of Interlogix, which we believe had annual sales of about $700 million at the time. The platform, named GE Interlogix, was augmented in 4Q02 with the acquisition of a smaller company Ion Track. In 2003, management expects the security platform to reach $1 billion sales run rate. In addition to Ion Track, GE made four other smallish acquisitions in the security space with combined sales of $100 million. Management is also counting on $160 million of organic growth in 2003. It appears that within the array of the security products, GE is especially well positioned in digital video and trace detection, which are arguably the sweetest spots of the security market right now. GE has ambitious plans to grow its security business from $1 billion in 2003 to $3-4+ billion in 2006 through a combination of overall market growth, GE`s incremental organic growth on top of the market, and acquisitions. GE noted it has about 20 potential acquisition deals in the pipeline. Longer- term operating margins could top 20%, management believes. Similar to other newly acquired businesses, GE Interlogix is benefiting from the ability to leverage GE`s huge customer base. Interlogix has also adopted GE`s voice of the customer philosophy. Management pointed to a stronger product innovation culture post-acquisition: 52 scheduled new product launches in 2003 versus 38 in 2002. HEALTHCARE IT: GREAT CONCEPT, BUT CAN HOSPITALS AFFORD IT? Building off the already strong Medical Systems business, GE has added acquisitions within the healthcare IT sector and forged into a $25B industry segment that is expected to grow at 10-15%. GE plans to integrate its eleven acquisitions in this sector into a holistic solution that enables data to move with the patient instead of the other way around. GE estimates that revenues from Healthcare IT will be $1.7 billion in 2003, growing to $4 billion by 2006. Management also aims to increase operating margins from around 18% to 25% over the same time period. GE has shown already that it can effectively increase margins: in its first year under GE ownership Loral revenues grew 30% and profitability doubled. GE aims to own the entire information collection, transmittal and storage process with a paperless, film-less, and wireless digital solution. We believe GE has a strong customer base in the medical services market and a reputation for solid technology, but it could still be a tough sell to hospital CEO`s in the near term. Fiscal pressures from shrinking reimbursements, new patient safety requirements and overcrowded facilities have pushed a third of US hospitals into the red. Health systems are looking for ways to increase productivity and increase clinical efficacy through more accurate data, but piecemeal investments seem to be the norm. While the solutions sell makes sense from a technology standpoint, the sales force will need to create a rock-solid case for hospitals to ante up for an IT overhaul. - -------------------------------------------------------------------------------- Analyst Certification: I, Robert Cornell, hereby certify (1) that the views expressed in this research note accurately reflect my personal views about any or all of the subject securities or issuers referred to in this note and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this note. EX-99.L 14 c28573_ex-l.txt EXHIBIT L EQUITY RESEARCH [BANC OF AMERICA SECURITIES LOGO] UNITED STATES Research Brief June 22, 2003 Electrical Equipment - ------------------------------------------ GENERAL ELECTRIC CO. Going for Growth (GE): $30.01 BUY Volatility: Low 12-Month Target: $35.00 Total Return to Target: 19.2% Nicole M. Parent (212) 583-8047 nparent@bofasecurities.com Paul A. Jacoby (212) 847-5715 paul.jacoby@bofasecurities.com * Co. confirmed guidance of $0.37-0.39 for Q2 & $1.55-1.70 for FY03. We remain at $0.37 & $1.58, respectively. Q2 has come in on plan with NBC & Power slightly better and Plastics & Equipment Mgmt slightly worse. Short cycle orders are expected to be up 0-5% in Q2 with Plastics down ~15% (flat sequentially) vs. tough comps. Co. reviewed 3 of its 6 growth platforms. * Water Technologies is $1.4B platform expected to grow 20%+ annually. Recently acquired Betz & Osmonics address $40B water & process market growing at 2-3x GDP. Biz service model is compelling with 80% of sales recurring, 1/3 of which are annual contracts. * Interlogix (security) relies on leveraging strength in software/ IT. FY03 sales est. ~$1B (+30%), op margin 16%. Co. expects $3-4B+ sales by '06 (~50% CAGR) due to tech investment, leveraging GE global distribution & acq. Intelligent Video represents big growth opportunity. Acq. in Fire likely. * Healthcare IT is $1.7B platform growing 30%+ annually. Biz is ~60% data acq. devices & networking, & 40% clinical IT. Goal is to create digital hospital (paperless/filmless/wireless). Mgmt targeting oppty in OR, ER, ICU. * Valuation and Target Price Analysis Reiterate Buy Rating. We do see room for the shares to move higher from current prices particularly as the company delivers on realistic plans for FY03/FY04. - -------------------------------------------------------------------------------- SECTOR VIEW: We favor stocks with stable or improving fundamentals and solid free cash flow that are leveraged to the domestic industrial recovery. SECTOR PRICE APPRECIATION POTENTIAL (MEDIAN OF TARGET PRICE): 2% - -------------------------------------------------------------------------------- Top Picks Ticker Rating Price Target - ------ ------ ----- ------ DHR B $70.36 $78.00 GE B $30.01 $35.00 Least Favorites NONE NONE B = Buy, N = Neutral, S = Sell, * = New Pick - ------------------------------------------------------------------------------- - ------------------------------- ----------------------------------------- Company Data FYE Dec 2002 A 2003 E 2004 E - ------------------------------- ----------------------------------------- 52-Week Range $33-21 EPS Secular Growth (EPS) 17% Q1 (Mar) $0.35 $0.32 A Market Cap. $301.0 BB Q2 (Jun) 0.44 0.37 Avg. Daily Vol. 20,116,265 Q3 (Sep) 0.41 0.41 Debt/Cap. (3/03) 6.0% Q4 (Dec) 0.31 0.48 Est. Dividend/Yield $0.76/2.5% ---------------------------------------- - ------------------------------- Fiscal Year $1.51 $1.58 $1.70 ---------------------------------------- - ------------------------------- ---------------------------------------- Index Data Calendar Yr $1.51 $1.58 $1.70 - ------------------------------- ---------------------------------------- DJIA 9201 P/E 19.9 19.0 17.7 S&P 500 996 P/E/G 117% 112% 104% - ------------------------------------------------------------------------------- Please see the important disclosures and analyst certification on page 7 of this report. Investors should assume that Banc of America Securities is seeking or will seek investment banking or other business from companies rated in this report. BANC OF AMERICA SECURITIES - -------------------------------------------------------------------------------- Company Confirms Q2 & '03 Guidance - -------------------------------------------------------------------------------- GE (GE, $30.01, Buy) management hosted an analyst meeting on June 20 in New York City featuring three of its new growth platforms-Water Technologies, Interlogix (security), and Healthcare IT. Management confirmed its prior guidance range of $0.37-0.39 for Q2 and $1.55-1.70 for FY03. We remain at $0.37 and $1.58 for Q2 and FY03, respectively. The company is expected to narrow its guidance range on its Q2 conference call July 11. Q2 appears to be coming in on plan with NBC and Power slightly better than expected and Plastics and Equipment Management slightly worse. Short cycle orders are expected to be up 0-5% for the quarter with Plastics down ~15% against difficult comps (orders were up 14% in Q202 on significant inventory replenishment), but flat sequentially. Excluding Plastics and the impact of acquisitions and F/X, short cycle orders are expected to be flat in Q2. (Please see our GE orders note dated 6/18/03 for a more detailed review of short cycle orders, especially Plastics.) Impact from SARS is diminishing, but its effects have been felt to a limited extent at Aircraft Engines and Plastics. SARS impact was also felt at Medical where revenue is expected to come in ~$30mm light in Q2 reflecting travel and sourcing disruption as well as mix shift to lower margin imaging like radiology which is favored in treatment of the disease. NBC '03/'04 upfront advertising revenue was a record $4.8B with the network taking impressive share of advertising spend (32% share of primetime spend at networks, 50%+ of both late night and early AM). Scatter pricing is up an estimated 25% in Q2. The '10 & '12 Olympics win not only includes comprehensive media rights (not just TV) and enhanced GE sponsorship of the event, but also represents $35-40B in total infrastructure spend in the host cities for which GE is considered a preferred supplier. At Capital, gross consumer delinquencies (30-day delinquencies before retailer risk-sharing on private-label credit cards) increased to 5.82% in May vs. 5.27% last year, but ticked down from 5.84% at the end of Q1. Commercial delinquencies were 1.90% in May, down from 2.37% year ago and 1.92% in March. Management is relatively pleased with the formal labor agreement reached on June 18 between GE and union leadership which employees are expected to ratify by June 24. GE's New Growth Platforms - -------------------------------------------------------------------------------- As GE looks to renew its business portfolio it is placing a lot of emphasis on building-out new growth platforms. Before embarking on the ambitious program of acquiring new platforms during the past 12-18 months, senior management performed a rigorous analysis to identify attractive new growth areas. The criteria for the businesses include: large infrastructure businesses with a significant technology component, high growth rates with large addressable markets, high contribution margin rates and low capital intensity, the ability to maintain customer contact (not reliant on distribution), and opportunity for service and financing components. The best ideas to come out of the screening process so far have been water quality, security & sensors and healthcare IT (each discussed below), as well as Hispanic media (Telemundo), oil & gas (we think GE would buy solid product and service companies up to $2B in revenues with margin expansion opportunities) and domestic consumer finance. Management has indicated that it intends to be disciplined with respect to future acquisition candidates, to target returns of 15% by year 5, and to focus on companies with revenue in the $100mm to $2B range. (At the same time the company will also be looking to sell pieces of lower return businesses both in Industrial ($1-5B) and Capital ($5-10B)). The company is on track to meet its goal of $8-10B in growth capital available this year ($4B at Industrial, $4-6B at Capital), and '04 is expected to be at a similar level. Nicole M. Parent (212) 583-8047 General Electric Co. 1 BANC OF AMERICA SECURITIES - -------------------------------------------------------------------------------- Below we discuss GE's new growth platforms that were presented at the analyst meeting: Water Technologies - -------------------------------------------------------------------------------- GE Specialty Materials CEO Bill Woodburn and GE Water Technologies CEO George Oliver provided an overview of the business. Water Technologies is a leading provider of engineered chemical treatment of water and industrial and commercial process systems ($1.1B annual revenue, capabilities acquired with Betz in Q202), as well as a leading supplier of mechanical separation equipment for water purification and fluid filtration ($300mm revenue, capabilities acquired with Osmonics in Q103). Acquisition integration is proceeding smoothly. Compared to the period prior to being acquired, Betz customer churn has declined to 3% from 10%, sales rep turnover has declined to 2% from 10% and growth has increased to 5%+ from (4%). Operating profit margin is expected to be ~15% in '03, increasing to 20% by '06. GE's water businesses address fast growing segments of a $40B piece of the $360B global water & process market. Target segments include chemicals & services ($11B market), filtration consumables ($9B), modular equipment ($8B), as well as opportunities in waste & environmental services, smart & contractual services, custom equipment and maintenance. In aggregate, these businesses are growing at 2-3x GDP, have a high return on capital (15%+), and play to GE's strengths in technology, distribution and services. GE expects to leverage its global distribution capabilities and strong customer relationships to grow core revenue while it adds related businesses to fuel expected 21% annual growth- half organic / half acquired-through '06 (to $3.0B). GE recently had >$1B in the Water acquisition pipeline focusing on areas like services, water process and process chemistry. The business' service model is compelling with 80% of sales recurring, one- third of which are annual contracts. George Oliver (former VP & GM, GE Engine Services) is applying his GEAE experience to the Water platform where he is focusing the segment on GE's competitive strengths by further enhancing the service delivery component of the business. GE is also placing more of a focus on technological innovation-capX as a percentage of sales is expected to be ~4% in '03 and to increase to 6% in '04 vs. an estimated 2% at Betz prior to the acquisition which was not making the investments needed to spur growth. Heavy industry (metals & mining, petrochemical, hydrocarbon processing) represents the largest end market served (40-50% of sales). We estimate that power customers represent ~15% of sales. High purity process industries (food & beverage, pharma & medical) activity is being driven by regulatory changes. Middle market commercial and institutional business requires fairly narrow service requirements but add up to a significant portion of the business in aggregate. Geographically, revenue is ~67% in the Americas, 25% in Europe and 8% in Asia. The opportunity in Asia is driven by massive infrastructure build- out opportunities in China, which management estimates is a $500mm market growing at 15-20% annually. On the competitive landscape, GE is the #2 player in water management chemicals and services, with a ~15% share. Suez's Ondeo- Nalco is the global leader with ~25% of the market and Ashland's Drew Industrial business is #3. Other major competitors include ChemTreat ($150mm sales), Buckman Laboratories ($235mm sales in water treatment, mostly for pulp & paper) and Baker Petrolite (serves primarily refining & petrochemical plants). The remainder of the market is fairly fragmented. There is an excellent article in the May 21/28 issue of Chemical Week regarding the water treatment industry. If you would like a copy of the article, please contact us. General Electric Co. Nicole M. Parent (212) 583-8047 2 BANC OF AMERICA SECURITIES - -------------------------------------------------------------------------------- Interlogix (Security) - -------------------------------------------------------------------------------- GE Industrial Systems CEO Lloyd Trotter and GE Interlogix CEO Ken Boyda provided an overview of the GE Interlogix security business. Interlogix is targeting the $32B security equipment market but has no plans to enter the $24B security monitoring market. Interlogix' strategy relies on leveraging the company's strength in advanced technologies (digital video, wireless components) and software in order to develop complete enterprise IT/software security solutions for customers. (See our BAS FIRE & SECURITY ROUNDTABLE note dated 5/14/03 for more industry & competitor details). The security electronic equipment market is growing 10%+ annually (vs. ~5% for monitoring). GE sizes the market opportunities for Interlogix as follows: Intrusion ($9B market), Fire Services ($5B), Access Control ($4B), Video Surveillance ($4B), Asset Surveillance ($4B), Inspection/Detection ($1-2B) and All Other ($4-5B). Interlogix is expected to have sales of ~$1B in FY03, up 30% from $700mm in 2002. Company sales by product category include Intrusion (39% of sales), Video Surveillance (19%), Inspection/Detection (14%), Access Controls (10%), Fire (7%) and Other (11%). Interlogix sales by end user are ~33% residential, 30% commercial, 20% institutional (government, non governmental organizations, universities, hospitals) and 17% industrial. ADT is Interlogix' #1 customer. Operating margin is estimated to be ~16%-Video, Inspection and Other segments enjoy operating margins of 20-25% while the rest have estimated margins of 10-15%. Interlogix appears to be benefiting from GE corporate resources in many respects-research centers, globalization, technology from other platforms like Medical, Power, Industrial; productivity initiatives, as well as acquisition and integration expertise. (Interlogix is itself a roll-up of 32 security companies that was still in the process of integrating its many pieces when GE bought it in Q102.) We expect the GE brand and distribution capability will be a major boon for the organization as it moves aggressively to produce a more robust offering. Management expects $3-4B+ sales by '06 (~50% CAGR) driven by technology investments, leveraging GE global distribution and acquisitions. Operating margin is forecast to exceed 20% by '06. On the acquisition front, the company has recently been working on 4 deals that would add a total of ~$1B in annual revenue. In addition to recent acquisitions in networked video (International Fiber) and advanced sensors (Ion Track) we would not be surprised to see Interlogix pursue a fairly large player in fire safety given Interlogix' relatively low exposure to that segment. Company is also currently focusing R&D spend and/or exploring acquisition targets in HVAC controls, biometrics, standalone keypads and card readers & badges. Company spends ~5% of annual sales on R&D in the Intrusion segment (other segment figures not available). Intelligent video represents one of the company's biggest growth opportunities and is expected to grow 28% in 2003. The total digital video market is expected to be $550mm in 2003 vs. $3.2B for more traditional analog technology. Digital market is expected to grow almost 7x to $3.8B by 2006 while analog is forecast to shrink to $2.5B, and Interlogix is well-positioned to take advantage of this technology upgrade. Digital video offers significant savings in media storage costs and maintenance & repair vs. traditional VCR technology. Digital equipment is also more reliable and offers greater functionality (e.g., to search, scan, zoom images). Wireless Intrusion technology is one of Interlogix' key strengths, and it is one of the fastest growing segments in Intrusion. Since ~40% of residential installations in the U.S. contain wireless components Interlogix' share represents a good installed base to add-on other products and services or the potential to upgrade to more advanced solutions. Interlogix is also making use of trace detection Nicole M. Parent (212) 583-8047 General Electric Co. 3 BANC OF AMERICA SECURITIES - -------------------------------------------------------------------------------- technology acquired with Ion Track earlier this year. Interlogix currently addresses the $1B trace detection market which is growing 13-15% annually but plans to expand its market to include the $1-2B bulk detection (for luggage, shipping containers) which is growing 15% annually. The business would make use of Medical Systems CT and Gamma camera imaging technologies. Healthcare IT - -------------------------------------------------------------------------------- GE Medical Systems CEO Joe Hogan provided an overview of the GE Healthcare IT growth platform. GE Healthcare IT is a $1.7B platform growing 30%+ annually. It is relatively further along the platform development progression than Water or Interlogix and is well into its build-out phase (having already passed through define & launch, and reshape phases). Management believes that the digital data revolution in healthcare is likely to turn the corner into widespread availability and use within the next few years, and GE has invested heavily in businesses to help lead the charge. Clinical information systems are aiming to remove the media that healthcare information currently travels on in order to create a digital hospital that is paperless, filmless and wireless. A recent Banc of America Securities Hospital CIO Survey points to accelerated healthcare IT market growth of approximately 12% in 2003 versus 10% in 2002 (and 5-7% in 2001). Growth in hospital IT spending is being driven by continued improvement in hospitals' financial condition and a clear focus by hospitals on clinical workflow efficiency and preventable medical errors, although other capital spending initiatives (facility expansion/ improvements, capital equipment) frequently get a higher priority. Cost reduction strategies as well as slowly improving managed care pricing and reimbursement rate give-backs are helping to drive IT sales. IT operating expenses at hospitals remain relatively small compared to other industries--spending on IT represents 2.7% of a typical hospital budget versus the corporate America average of 5-8% and the still higher average (10-12%) in transaction intensive industries like financial services. Clinical system installations (both large and expensive) should be among the leading drivers of growth, expected to be up 20% in 2003. Leading IT spending priorities (in order) have been identified as computerized physician order entry (CPOE) systems, handhelds for clinicians, PACS (Picture Archiving Communication System), ambulatory medical records, clinical data repositories, point-of-care computers and surgical information systems. GE's major healthcare IT competitors include Meditech, 3M Health Information Systems, SoftMed Systems, Misys/Sunquest, Cerner, Eclipsys, IDX Systems, McKesson and Siemens. GE Healthcare IT consists of data acquisition devices ($960mm '03E sales, +11% y/y), and networking and clinical IT ($540mm, +30% y/y). Devices are integrating and making accessible patient information at bedside or remotely. Opportunities are especially plentiful in the operating room. GEMS aims to capitalize on the trend to move beyond IT investment in peripheral medical functions of admissions, billing and hospital administration, by focusing on opportunities in the mission-critical, clinical activities (operating room, emergency room, intensive care unit). GEMS sees opportunities in further building out the platform into adjacent areas of the $25B healthcare IT market, especially in pharmacy IT and physician order entry and scheduling. The recent Millbrook acquisition (physician office administrative IT) is a good example. GEMS' Centricity PACS (Picture Archiving and Communication Systems) and RIS (Radiology Information System) technology are market leaders. Currently fewer than 10% of healthcare institutions use PACS and fewer than 20% of the ~6,500 U.S. hospitals use PACS on an enterprisewide basis. This represents a huge opportunity. GE PACS revenue is expected General Electric Co. Nicole M. Parent (212) 583-8047 4 BANC OF AMERICA SECURITIES - -------------------------------------------------------------------------------- to reach $500mm (+25%) in '03. We should note that the competition may not be far behind. Philips is positioning to be a big player in digital image management systems with >1,000 systems installed, 70% of which are in the U.S., but we believe the company may be having some difficulty integrating some of its recent acquisitions. GEMS is trying to close its deal to purchase Instrumentarium, a leader in anesthesia and critical care patient monitoring systems used principally in operating rooms and intensive care units. The vast majority (80-90%) of Instrumentarium that revolves around patient monitoring will be folded into GE Healthcare IT. This includes the major Instrumentarium critical care brands Datex-Ohmeda (anesthesia), Spacelabs (patient monitors and IT, acquired in September) and Deio (operating room IT). The Instrumentarium deal has received a second request by both the European Union and U.S. Department of Justice. Furthermore, it has recently been reported in the press that the European Commission is expected to demand disposals in patient monitoring, mobile x-ray machines and mammography equipment before approving the deal, but GE remains comfortable with the prospects for the deal closing in Q3. The E.U. Commission expects to complete its investigation of the deal by September 11 (which represents a delay compared to the original August 13 deadline set by the commission). Some Thoughts on Valuation - -------------------------------------------------------------------------------- Modest (and better quality) earnings growth at GE in the face of a more challenging economic environment where other companies are struggling to post growth we believe makes GE shares attractive particularly in light of a dividend yield of 2.5%. We do believe that investors will again gravitate toward the higher quality names in the space (GE, DHR) as managements come clean on Q2 conference calls. If we are honest, we'd argue that business trends at companies that we've seen so far in May are probably a bit worse on the margin. Clearly the market is looking ahead to 2004 but we stand firm that 2H03 estimates are too high for many of the names who have rallied sharply since March. This means 2004 estimates are driven off the wrong base, in our view, (and in many cases still don't fully reflect pension headwind or options expensing). GE shares have outperformed the S&P 500 by 1.4% vs. group average outperformance of 5.8% over the past month. Relative to several of the big 20%+ movers in our space, we'd argue GE's numbers probably have less room to come down (we'd argue there could now be upside to our $1.58). We believe chairman and CEO Jeff Immelt has a clear vision for the company. He has articulated his plan to divest some of the more volatile, slower growing businesses and to expand the company's healthcare IT, water technology and services, oil and gas, security and sensors, Hispanic broadcasting and U.S. consumer finance businesses. We are comfortable with our 2003 estimate of $1.58, which we believe is predicated on very realistic (and rather conservative) assumptions. Divestitures are quite likely and would be viewed positively. The formal agreement on June 18 between GE and IUE-CWA union leadership concerning a new contract, while expected, is a net positive for GE shares. Union members are expected to ratify the new agreement by June 24. Nicole M. Parent (212) 583-8047 General Electric Co. 5 BANC OF AMERICA SECURITIES - -------------------------------------------------------------------------------- BANC OF AMERICA SECURITIES - -------------------------------------------------------------------------------- General Electric Quarterly Earnings Model ($mm)
Q1A Q2A Q3A Q4A 2002A Q1A Q2E REVENUES MAR-02 JUN-02 SEP-02 DEC-02 ANNUAL MAR-03 JUN-03 Aircraft Engines 2,577 2,764 2,721 3,079 11,141 2,383 2,626 Consumer Products 1,968 2,152 2,116 2,220 8,456 1,838 2,109 Industrial Products and Systems 1,629 1,899 1,880 2,033 7,441 1,887 2,026 Medical Systems 1,863 2,212 2,130 2,750 8,955 2,140 2,367 NBC 1,998 1,987 1,370 1,794 7,149 1,471 1,888 Plastics 1,179 1,420 1,329 1,317 5,245 1,262 1,278 Power Systems 5,271 6,526 5,123 6,006 22,926 4,234 4,242 Specialty Materials 401 608 689 708 2,406 677 778 Transportation Systems 482 594 521 717 2,314 520 576 GE Manufacturing Subtotal 17,368 20,162 17,879 20,624 76,033 16,412 17,890 Global eXchange Services 105 104 102 0 311 0 0 Eliminations (725) (807) (595) (900) (3,027) (654) (537) ------ ------ ------ ------ ------ ------ ------ GE MFG TOTAL REVENUES 16,748 19,459 17,386 19,724 73,317 15,758 17,353 GECS Revenues 13,899 13,852 14,981 15,455 58,187 14,730 14,706 Total GE Revenues 30,647 33,311 32,367 35,179 131,504 30,488 32,059 Eliminations (126) (97) 218 199 194 (22) (160) ------ ------ ------ ------ ------ ------ ------ TOTAL GE REPORTED REVENUES 30,521 33,214 32,585 35,378 131,698 30,466 31,898 YR/YR REVENUE CHANGE Aircraft Engines -5.9% -9.5% -4.6% 12.2% -2.2% -7.5% -5.0% Consumer Products 1.1% 6.3% -1.7% -3.9% 0.2% -6.6% -2.0% Industrial Products and Systems -3.6% 5.1% 18.8% 22.2% 10.4% 15.8% 6.7% Medical Systems 1.9% 12.9% 6.9% 4.6% 6.5% 14.9% 7.0% NBC 47.9% 8.5% 30.5% 16.7% 23.9% -26.4% -5.0% Plastics -18.6% 4.2% 5.9% 11.0% -0.1% 7.0% -10.0% Power Systems 23.7% 26.9% 1.7% 4.1% 13.4% -19.7% -35.0% Specialty Materials -17.5% 23.3% 61.7% 71.8% 32.4% 68.8% 13.0% Transportation Systems -12.0% 3.8% -12.4% 12.0% -1.7% 7.9% -3.0% GE Manufacturing Subtotal 6.6% 10.5% 5.5% 9.2% 8.0% -5.5% -11.3% GE Mfg Total Revenues 5.7% 10.6% 6.3% 8.2% 7.8% -5.9% -10.8% GECS Revenues -5.6% -3.8% 12.7% -3.0% -0.3% 6.0% 6.0% Total GE Revenues 0.2% 4.1% 9.1% 3.0% 4.1% -0.5% 6.2% Eliminations -9.4% -41.6% -207.4% -208.2% -128.0% -82.5% -0.5% Total GE Reported 0.3% 4.4% 10.6% 4.1% 4.8% -0.2% -3.8% Eliminations as % of sales 4.2% 4.0% 3.3% 4.4% 4.0% 4.0% 3.0% Eliminations as % of op 1.5% 2.4% -4.2% 3.8% 1.2% 2.7% 3.0% Q1A Q2A Q3A Q4A 2002A Q1A Q2E OPERATING PROFIT MAR-02 JUN-02 SEP-02 DEC-02 ANNUAL MAR-03 JUN-03 Aircraft Engines 421 566 512 561 2,060 474 551 Consumer Products 1ll 148 97 139 495 113 155 Industrial Products and Systems 123 157 153 164 597 139 174 Medical Systems 266 401 347 532 1,546 306 438 NBC 313 545 330 470 1,658 343 594 Plastics 207 275 224 137 843 91 132 Power Systems 1,552 1,910 1,418 1,375 6,255 896 891 Specially Materials 47 94 56 8.5 282 59 132 ------ ------ ------ ------ ------ ------ ------ Transportation Systems 53 124 91 134 402 69 114 Total GE Manufacturing 3,093 4,220 3,228 3,597 4,138 2,490 3,182 Global eXchange Services 5 10 1 0 16 0 0 ------ ------ ------ ------ ------ ------ ------ Eliminations & other (45) (102) 134 (135) (164) (67) (95) ------ ------ ------ ------ ------ ------ ------ GE MFG TOTAL OPERATING PROFIT 3,048 4,118 3,362 3,462 13,990 2,423 3,086 GE Capital Net Income 1,657 1,327 1,551 91 4,626 1,670 1,605 ------ ------ ------ ------ ------ ------ ------ GE Total Segment Profit (incl. Mfg eliminations) 4,705 5,445 4,913 3,553 18,616 4,093 4,691 Other Income (JVs, etc.) 86 103 486 431 1,106 76 100 Minority Interest (42) (50) (45) (46) (183) (32) (50) GE Mfg OP Elimination (from above) (45) (102) 134 (135) (148) (67) (95) ------ ------ ------ ------ ------ ------ ------ Corporate Items & Eliminations (Sep '02) (1) (49) 575 250 775 (23) (45) GE MFG OP Elimination (from above) 45 102 (134) 135 148 67 95 GECS Goodwill Amortization (Sep '02) 0 0 0 0 0 0 0 ------ ------ ------ ------ ------ ------ ------ Interest and Other (157) (75) (212) (125) (569) (208) (300) Earnings, pre-tax 4,592 5,423 5,142 3,813 18,970 3,929 4,441 Taxes (1,074) (997) (1,055) (711) (3,837) (715) (766) ------ ------ ------ ------ ------ ------ ------ EARNINGS FROM CONTINUING OPERATIONS 3,518 4,426 4,087 3,102 15,133 3,214 3,675 Shares Outstanding 10,033 10,029 10,017 10,017 10,024 10,017 10,017 EPS FROM CONT. OPS ('02 & BEYOND ex. GW) $ 0.35 $ 0.44 $ 0.41 $ 0.31 $ 1.51 $ 0.32 $ 0.37 EPS-% CHANGE 17.0% 14.0% 24.9% -21.0% 7.4% -8.5% -16.9% Q3E Q4E 2003E 2004E REVENUES SEP-03 DEC-03 ANNUAL ANNUAL Aircraft Engines 2,721 3,064 10,794 10,414 Consumer Products 2,170 2,447 8,563 8,680 Industrial Products and Systems 2,005 2,536 8,333 8,867 Medical Systems 2,343 3,012 9,862 10,789 NBC 1,370 2,055 6,784 6,784 Plastics 1,329 1,340 5,209 5,711 Power Systems 4,611 5,952 19,038 18,357 Specialty Materials 758 598 2,812 2,980 Transportation Systems 531 756 2,384 2,503 GE Manufacturing Subtotal 17,838 21,761 73,779 75,086 Global eXchange Services 0 0 0 0 Eliminations (535) (488) (2,213) (2,253) ------ ------ ------ ------ GE MFG TOTAL REVENUES 17,303 21,274 71,566 72,833 GECS Revenues 16,148 18,370 63,873 70,100 Total GE Revenues 33,450 39,644 135,439 142,933 Eliminations (167) (57) (407) (368) ------ ------ ------ ------ TOTAL GE REPORTED REVENUES 33,283 39,586 135,032 142,565 YR/YR REVENUE CHANGE Aircraft Engines 0.0% -0.5% -3.1% -3.5% Consumer Products 2.5% 10.2% 1.3% 1.4% Industrial Products and Systems 6.6% 24.8% 12.0% 6.4% Medical Systems 10.0% 9.5% 10.1% 9.4% NBC 0.0% 14.5% -5.1% 0.0% Plastics 0.0% 1.8% -0.7% 9.6% Power Systems -10.0% -0.9% -17.0% -3.6% Specialty Materials 10.0% -15.5% 16.9% 6.0% Transportation Systems 2.0% 5.5% 3.0% 5.0% GE Manufacturing Subtotal -0.2% 5.5% -3.0% 1.8% GE Mfg Total Revenues -0.5% 7.9% -2.4% 1.8% GECS Revenues 21.7% 18.9% 9.8% 9.7% Total GE Revenues 7.8% 12.7% 3.0% 5.5% Eliminations -0.5% -128.7% -309.7% -9.5% Total GE Reported 3.3% 11.9% 2.5% 5.6% Eliminations as % of sales 3.0% 2.2% 3.0% 3.0% Eliminations as % of op 3.0% 1.5% 2.5% 1.2% Q3E Q4E 2003E 2004E OPERATING PROFIT SEP-03 DEC-03 ANNUAL ANNUAL Aircraft Engines 533 500 2,058 2,021 Consumer Products 153 185 606 663 Industrial Products and Systems 176 321 810 971 Medical Systems 391 612 1,747 1,941 NBC 382 606 1,926 2,108 Plastics 153 186 562 840 Power Systems 959 995 3,741 2,754 Specially Materials 129 96 416 498 ------ ------ ------ ------ Transportation Systems 101 162 446 476 Total GE Manufacturing 2,977 3,664 12,312 12,273 Global eXchange Services 0 0 0 0 ------ ------ ------ ------ Eliminations & other (89) (56) (308) (147) ------ ------ ------ ------ GE MFG TOTAL OPERATING PROFIT 2,888 3,608 12,004 12,125 GE CAPITAL NET INCOME 2,204 2,222 7,677 8,730 ------ ------ ------ ------ GE Total Segment Profit (incl. Mfg eliminations) 5,092 5,829 19,681 20,855 Other Income (JVs, etc.) 120 204 500 500 Minority Interest (45) (67) (194) (187) GE Mfg OP Elimination (from above) (89) (56) (308) (147) Corporate Items & Eliminations (Sep '02) (14) 81 (1) 166 GE MFG OP Elimination (from above) 89 56 308 (147) GECS Goodwill Amortization (Sep '02) 0 0 0 0 ------ ------ ------ ------ Interest and Other (300) (392) (1,200) (1,200) Earnings, pre-tax 4,867 5,575 18,811 19,968 Taxes (719) (800) (3,000) (2,978) ------ ------ ------ ------ EARNINGS FROM CONTINUING OPERATIONS 4,148 4,775 15,811 16,990 Shares Outstanding 10,017 10,017 10,017 10,017 EPS FROM CONT. OPS ('02 & BEYOND ex. GW) $ 0.41 $ 0.48 $ 1.58 $ 1.70 EPS-% CHANGE 1.5% 53.9% 4.6% 75%
Source: Banc of America Securities LLC estimates, company reports General Electric Co. Nicole M. Parent (212) 583-8047 6 BANC OF AMERICA SECURITIES - -------------------------------------------------------------------------------- REG AC - ANALYST CERTIFICATION The primary research analyst whose name appears in this research report certifies that: (1) all of the views expressed in this research report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research report. - -------------------------------------------------------------------------------- IMPORTANT DISCLOSURES Banc of America Securities LLC Stock Rating System The rating system is based on a stock's forward-12-month expected total return (price appreciation plus dividend yield). The prospective rates of return that help define the Buy, Neutral and Sell ranges are subject to change from time to time, corresponding with changes in prospective rates of return on competing investments. The specific volatility levels that divide our stocks into low, medium, high and extreme ranges are subject to change from time to time, corresponding with changes in the volatility of benchmark indexes and the companies that comprise them. Volatility Ratings ---------- ------- Buy Neutral Sell --- ------- ---- Low 0-30% 10%+ 9%-(6)% (7)% or worse Medium 31-40% 15%+ 14%-(10)% (11)% or worse High 41-70% 25%+ 24%-(15)% (16)% or worse Extreme 71%+ 50%+ 49%-(25)% (26)% or worse Source on volatility: Bloomberg - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Rating Distribution US Coverage Coverage Universe Companies Percent Investment Banking Clients Companies Percent* - ------------------------------ ------------------------------------------------ Buy 248 41 Buy 209 84 Hold 321 53 Hold 267 83 Sell 42 7 Sell 34 81 Diversified Industries Sector Coverage Universe Companies Percent Investment Banking Clients Companies Percent* - ----------------------------- ------------------------------------------------- Buy 9 30 Buy 7 78 Hold 20 67 Hold 15 75 Sell 1 3 Sell 0 0 * Percentage of companies in each rating group that are investment banking clients. As of 06/01/2003. - -------------------------------------------------------------------------------- The analysts and associates responsible for preparing this research report receive compensation that is based upon various factors, including Banc of America Securities' total revenues, a portion of which is generated by Banc of America Securities' investment banking business. They do not receive compensation based upon revenues from any specific investment banking transaction. Banc of America Securities prohibits analysts, their associates and members of their households from maintaining a financial interest in the securities or options of any company that the analyst covers or that fall within the analyst's coverage sector except in limited circumstances (for securities and options acquired prior to July 9, 2002) as permitted by the New York Stock Exchange and the National Association of Securities Dealers. Any such direct stock ownership by an analyst(s) preparing this report in his or her covered companies mentioned in this report is disclosed below. The absence of any such Nicole M. Parent (212) 583-8047 General Electric Co. 7 BANC OF AMERICA SECURITIES - -------------------------------------------------------------------------------- disclosure means the analyst(s) preparing this report does not have any such direct stock ownership in his or her covered companies mentioned in this report. Such persons may own diversified mutual funds. As of the date hereof, Banc of America Securities also permits analysts, their associates and members of their households to maintain financial interests in funds and other private investments that may include companies in a sector the analyst covers if the person acquired the financial interest prior to July 9, 2002. 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Banc of America Securities LLC and/or its affiliates has received compensation for investment banking services from this company, its subsidiaries or affiliates during the previous 12 months: DHR, GE. Banc of America Securities LLC and/or its affiliates expects to receive, or intends to seek, compensation during the next three months for investment banking services from this company, its subsidiaries or affiliates: DHR, GE. Banc of America Securities LLC and/or its affiliates was manager of a public offering of debt securities for this company in the previous 12 months: GE. Banc of America Securities LLC and/or its affiliates was comanager of a public offering of debt securities for this company in the previous 12 months: GE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- General Electric Co. (GE) - -------------------------------------------------------------------------------- Target Price, Valuation Method, Risk Factors Target Price: $35.00 Valuation Method Used To Reach Applying ~15% premium to the S&P '04 forward-P/E of 18X Target Price: to our 2004 EPS est. of $1.70. Risk Factors: 1. Delayed macroeconomic recovery could mute short cycle recovery and therefore contribution to earnings in near term. 2. Further erosion at key Power and Aircraft Engine customers could also pressure earnings over and above what we ve modeled. 3. GE's earnings guidance is dependent upon acquisitions which may not necessarily materialize. 4. Impact of SARS could disrupt company cost initiatives in Asia and slow sales growth there. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Danaher Corp (DHR) - -------------------------------------------------------------------------------- Target Price, Valuation Method, Risk Factors Target Price: $78.00 Valuation Method Used To Reach We assume stock trades at 30% premium to S&P 500 year TargetPrice: forward earnings. Risk Factors 1. Delayed macroeconomic recovery could mute short cycle revenue recovery. 2. Integration issues with recent acquisitions could negatively impact profitability. 3. Impact of SARS could disrupt company cost initiatives in Asia and slow sales growth there. - -------------------------------------------------------------------------------- General Electric Co. Nicole M. Parent (212) 583-8047 8 BANC OF AMERICA SECURITIES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GENERAL ELECTRIC CO. (GE) RATING SYSTEM AS OF JAN. 12, 2003 Stock Price Chart (rating and target New rating system: price changes indicated) Buy, Neutral and Sell U.S. Dollar (June 1, 2000 - May 30, 2003) Prior rating system: Current Analyst: Parent N. SB, B, MP, U and S [Chart omitted reflecting stock price of General Electric from approximately June 1, 2000 through May 30, 2003 incorporating Bank of America analyst ratings.] SB=Strong Buy, B=Buy, N=Neutral, MP=Market Performer, U=Underperform, S=Sell, CIT=Coverage in Transition (C)FactSet Research 2003 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DANAHER CORP. (DHR) RATING SYSTEM AS OF JAN. 12, 2003 Stock Price Chart (rating and target New rating system: price changes indicated) Buy, Neutral and Sell U.S. Dollar (June 1, 2000 - May 30, 2003) Prior rating system: Current Analyst: Parent N. SB, B, MP, U and S [Chart omitted reflecting stock price of Danaher Corp. from approximately June 1, 2000 through May 30, 2003 incorporating Bank of America analyst ratings.] SB=Strong Buy, B=Buy, N=Neutral, MP=Market Performer, U=Underperform, S=Sell, CIT=Coverage in Transition (C)FactSet Research 2003 - -------------------------------------------------------------------------------- 9 BANC OF AMERICA SECURITIES - -------------------------------------------------------------------------------- This report is issued in the U.S. by Banc of America Securities LLC, member NYSE, NASD and SIPC; in Europe by Banc of America Securities Limited; and in Asia by BA Asia Limited (referred to herein, collectively as 'Banc of America Securities') as part of its research activity and not in connection with any proposed offering of securities or as agent of the issuer of any securities. This report has been prepared independently of any issuer of securities mentioned herein. 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Parent (212) 583-8047 10 EX-99.M 15 c28573_ex-m.txt Exhibit M [CITIGROUP SMITH BARNEY LOGO] See Appendix A-1 for Analyst Certification and Important Disclosures GENERAL ELECTRIC (GE) GE: GE: MEETING HIGHLIGHTS GROWTH PLATFORMS, 1M (OUTPERFORM, MEDIUM RISK) AFFIRMS Q2 MKT CAP: $298,749.3 MIL. - -------------------------------------------------------------------------------- UNITED STATES - -------------------------------------------------------------------------------- June 20, 2003 SUMMARY * GE held an analyst mtg in NYC highlighting 3 MULTI-INDUSTRY of its new growth platforms: Water, Security and Jeffrey T. Sprague, CFA Healthcare IT. These platforms generate $7 +1-212-816-6699 billion in profitable revenues today and are jeffrey.sprague@citigroup.com expected to reach $12 billion by 2006. John M. Roselli, CFA * GE CFO Keith Sherin affirmed Q203 guidance, +1-212-816-2594 but did not narrow the full year range of Mark Wilterding $1.55-1.70. We believe the range will be +1-212-816-1910 narrowed downward when Q2 earnings are reported. However, given the recent weakness in Plastics orders, most of the Street has already nudged estimates to the lower half of the range, suggesting that a formal announcement will be a non-event. * Water is a $1.4B biz with an op margin of ~15%. GE's goal is to grow to it to $3B in revs by 06 through a combination of mkt growth, share gains, and acqs. * GE plans to grow its security biz to $3-4B by 06 from $1B today, driven by $1-2B in acqs, and a $1B in organic growth. We reiterate our Outperform (1M) rating and $35 target. Our group is rated Overweight. - -------------------------------------------------------------------------------- FUNDAMENTALS P/E (12/03E) ................... 18.8x P/E (12/04E) ................... 17.1x TEV/EBITDA (12/03E) ............ 12.7x TEV/EBITDA (12/04E) ............ 12.1x Book Value/Share (12/03E) ...... $6.64 Price/Book Value ................ 4.5x Dividend/Yield (12/03E) ........ $0.76/2.5% Revenue (12/03E) ................ $130,705.0 mil. Proj. Long-Term EPS Growth ...... 10% ROE (12/03E) ................... 21.1% Long-Term Debt to Capital(a) .... 14.3% GE is in the S&P 500(R) Index. - -------------------------------------------------------------------------------- (a) Data as of most recent quarter - -------------------------------------------------------------------------------- SHARE DATA RECOMMENDATION Price (6/19/03) ....... $29.86 Current Rating ............ 1M 52-Week Range ......... $32.89-$22.00 Prior Rating .............. 1M Shares Outstanding(a).. 10,005.0 mil. Current Target Price ...... $35.00 Convertible ..................... No Previous Target Price ..... $35.00 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EARNINGS PER SHARE - -------------------------------------------------------------------------------- FY ends 1Q 2Q 3Q 4Q Full Year - -------------------------------------------------------------------------------- 12/02A Actual $0.35A $0.44A $0.41A $0.31A $1.51A - -------------------------------------------------------------------------------- 12/03E Current $0.32A $0.38E $0.41E $0.48E $1.59E Previous $0.32A $0.38E $0.41E $0.48E $1.59E - -------------------------------------------------------------------------------- 12/04E Current NA NA NA NA $1.75E Previous NA NA NA NA $1.75E - -------------------------------------------------------------------------------- 12/05E Current NA NA NA NA NA Previous NA NA NA NA NA - -------------------------------------------------------------------------------- First Call Consensus EPS: 12/03E $1.60; 12/04E $1.74; 12/05E $1.91 - -------------------------------------------------------------------------------- OPINION GE held an analyst meeting in NYC highlighting 3 of its new growth platforms: Water, Security and Healthcare IT. Through a series of acquisitions and organic growth these business have grown substantially. The Healthcare IT initiative got under way in 1999 and the Security and Water initiatives are less than 18 months old but the company already has $7 billion in profitable revenues in these platforms today. GE projects that additional acquisitions and organic expansion will drive these business to $12 billion by 2006. Given the vast size of the relevant served markets that projection could prove conservative. GE CFO Keith Sherin affirmed the Q2 guidance of $0.37-0.39. He did not formally narrow the $1.55-1.70 guidance range for 2003. We believe the range will be narrowed with a Citigroup Global Markets [CITIGROUP SMITH BARNEY LOGO] downside bias when Q2 earnings are reported. However, given the recent weakness in Plastics orders, most of the Street (including our recent $0.03 reduction to $1.59) has already nudged estimates down to the lower half of the range, suggesting that GE's potential range narrowing will likely be a non- event. Economic conditions were characterized as sluggish, although they appear stable. Plastics orders for example are down 15% yr/yr against a tough comp, but are flat sequentially. Short cycle orders excluding Plastics (ex. acquisitions and F/X) are flat in Q2, improving from the Q1 decline of 4%. NBC scatter pricing remains very strong, up 25% in Q2. The company also indicated that SARS had some impact on Medical, Aircraft and Plastics in the quarter, but the impact is now diminishing. NBC and Power performed better than expected in the quarter offsetting the overall weakness in Plastics and any SARS impact across the businesses. Sherin reaffirmed comfort with the goal of divesting $1-5 billion of industrial businesses in 2003. We also believe the company is close to divesting FGIC from GE Capital which could go in the $2 billion +/- range. GE WATER: "TAPPING" A SIGNIFICANT LONG-TERM GROWTH OPPORTUNITY Water Technologies CEO George Oliver outlined the strategy and growth opportunities for GE's newly formed water business. GE entered the water industry through the $1.8 billion acquisition of BetzDearborn in April 2002 and followed it with the $250 million acquisition of Osmonics in February 2003. GE's Water Technology portfolio includes chemical and wastewater management products (including agents and reactants), monitoring and diagnostic devices, membrane separation systems and process treatment equipment. Chemical and wastewater management products include corrosion inhibitors and sterilizing equipment for use in industrial machinery, HVAC systems, and various flow control applications. The company's process treatment products are designed to maintain environmental standards for various end-users including food & beverage, chemical processing and power generation companies. The current water business generates $1.4 billion in revenues with an operating margin of ~15%. The company's goal is to reach $3 billion in revenues by 2006 (a 21% CAGR) through a combination of market growth, share gains, and acquisitions. Acquisitions are expected to account for half of the growth over the next few years. Areas targeted for acquisition include services, water and process chemistry, membranes and filtration and modular equipment. GE estimates that ~80% of current water revenues are recurring but only 5% are tied to contractual services. Ultimately, GE's goal is to generate 25% of Water Technologies top-line from contractual services and another 50% from annual purchase agreements. GE's strategy is to transform the water business into a fixed-price, total solutions model by bundling equipment, consumables and long-term service agreements. It is the same formula first implemented at GE Aircraft Engines. At Engines, the total solutions model substantially improved margins and accelerated organic growth and GE hopes to do the same with the water business. GE's goal is to extend the typical water customer contract to 3-5 years from 1 year currently and move to a fixed price contract which would generate ~$150K per customer per year on average, up from the current usage-based model which generates only 2 [CITIGROUP SMITH BARNEY LOGO] ~$60K/year. GE Water is also expanding it presence globally with new plants and investment in Eastern Europe, the Middle East and China. The business currently generates ~65% of revenues in the Americas, ~25% in Europe, and ~10% in the rest of the world. The attractiveness of the water industry has drawn the attention of several companies in our coverage list, including ITT Industries, Danaher, GE, and SPX Corp. These companies have been attracted by the fragmented nature of the industry, the growing supply/demand imbalance, increased regulatory requirements, and new applications requiring higher levels of purification. All of these factors suggest that the industry could provide sustainable growth well above GDP for the foreseeable future, in our view. GE Water currently targets a $40 billion sub-segment of the $360 billion water industry (see table below). GE views these markets as the most attractive in the industry, given their above-average growth rates (2-3X GDP), high technology base, value-added service component, and low capital intensity/high ROIC. However, we would not rule out a move into other adjacent markets in the water industry at some point in the future. GE's chief competitors in these markets include Ondeo Nalco, U.S. Filter, and Ionics. GE WATER TARGET MARKETS Waste Services $1B Environmental Services $1B Smart Services $1B Contractual Services $1B Chemicals & Services $11B Filtration Consumables $9B Modular Equipment $8B Customer Equipment $5B Maintenance $1B TOTAL TARGETED MARKETS $40B Source:GE GE SECURITY: SECURING A FOOTHOLD IN THE ATTRACTIVE SECURITY INDUSTRY Industrial Systems President and CEO Lloyd Trotter outlined the steps his business has taken to integrate technology into the portfolio. Historically, a focused product offering of steady growth industrial businesses has defined Industrial Systems. We believe Interlogix, acquired in Q102, has established a profitable high-tech platform with products that can be marketed through existing channels. Interlogix is a global leader in the electronic security technology industry. The focus of Interlogix is to provide customers with communication technology and security information that provides, life safety and lifestyle enhancements. The emergence of Homeland Security and web-enabled premises management has provided Interlogix with an opportunity to sell to residential and commercial end markets. The global security market is estimated at $127 billion and is divided into two segments: Service and Products. Service represents about $74 billion and Products represents about $53 billion of the global security market. The Products segment is divided into two segments: Electronics and Mechanical. GE is focusing on the $29 billion electronics segment. The company believes that the Electronics market can grow more than 10% and can deliver operating margins greater than 15%. GE's is targeting all of the major areas within the electronics segment of the security market, including Access Control, Intrusion, Fire Services, Video and Trace Detection/X-Ray. 3 [CITIGROUP SMITH BARNEY LOGO] ELECTRONIC SECURITY MARKET MKT SIZE GROWTH MARGIN Access Control $4B 11% 10-15% Intrusion $9B 6% 10-15% Fire Services $5B 4% 10-15% Video $4B 14% 20-25% Trace Detection/X-Ray $7B 20% 20-25% ELECTRONIC SECURITY MARKET $29B ~10% ~15% Source: GE GE purchased Ion-Track and Interlogix in 2002. Those companies provided the platform for the Access Control, Intrusion, Video and Trace Detection businesses. These businesses are generating $1 billion in run-rate sales in 2003 and sales are estimated to increase to $4 billion by 2006. In 2002, the Ion-Track and Interlogix acquisitions provided a $740 million sales base. Since then, Interlogix has been able to grow sales organically by ~21%. Organic growth has come from new product launches. Interlogix has launched 38 new products in 2002 and 52 in 2003 and plans to launch ~100 new products in 2004. Bolt-on acquisitions accounted for ~13% of the sales growth since conception. The company has a full pipeline of bolt on acquisitions under review, six in Access Control, four in Fire Services, seven in Video and three in Trace Detection. Trotter noted that Digital Video was the most attractive area within the electronics market. Currently, there is a movement away from analog towards digital video. Digital video represents ~13% of the $3.7 billion Video market, while Analog video represents~86% of the video market. Digital is growing at a 40% clip and analog is declining at an 8% rate. GE estimates that the Video market will increase to $6.3 billion by 2006 and that digital video will represent 60% of the market, while analog will represent 40% of the market. GE plans to gain a significant portion of the digital video market by launching its eTreppid video compression technology with in the next six months. eTreppid compresses video so that 1/10th of the normal storage capacity is needed to store data, while reducing bandwidth requirements and increasing video quality. Ultimately, digital video allows users to improve productivity and performance, while lowering infrastructure costs. HEALTHCARE IT: RESHAPING HOSPITAL COMMUNICATION AND OPERATION GE Medical Systems' (GEMS) CEO Joe Hogan provided an update on one of GE's more established "growth platforms", Healthcare IT. In addition to GEMS competitive advantage in imaging equipment, IT provides a significant long-term opportunity for the company. GEMS Healthcare IT business is expected to grow 20%+ in 2003 to $1.7 billion, helping drive the expected 10-12% growth for the entire segment. By 2006, management expects Healthcare IT to generate top-line of $4.0 billion with 25% operating margin (up from an estimated 18% in '03). Pressure on reimbursement fees has created a consolidation and rationalization of IT spending among healthcare providers. This bodes well for GEMS' networking businesses, which can be integrated with the company's digital imaging products to offer an integrated imaging solution, thereby reducing hospital costs significantly. GE's networking capability is an essential component of its product offering today, especially given the fact that procedures are viewed as profit centers for healthcare providers. Historically, most of the IT development in healthcare has been around traditional functions such as admissions, insurance processing, billing, etc., rather than in the actual practice of medicine and diagnostics. However, the largest cost and opportunity for error (with potential life or death implications) is in places like the radiology lab, OR, or ICU. GE noted that the #8 largest cause of death is medical error. The company is working to integrate these 4 [CITIGROUP SMITH BARNEY LOGO] functions and using the Six Sigma philosophy to eliminate opportunities for error. Examples would be automated procedures that ensure the proper (as low as possible) radiation doses for patients based on their size and weight or the ability of a radiologist to embed commentary in a digital image that the attending doctor or surgeon could reference at the time of treatment. GEMS PACS (picture archival communications system), which is a subset of the IT portfolio, is considered a key growth engine. As digital images proliferate, the opportunity to store, share, protect and interpret the images is exploding. GE believes it has about 30% share in this market and revenues are expected to grow ~25% to $530 million in 2003. GEMS remarked that only about 10% of hospitals have some type of image management system suggesting rapid growth drive by new penetration. - -------------------------------------------------------------------------------- VALUATION Trading at less than 17X our 2004 EPS estimate with a yield of 2.5%, we believe GE shares remain attractive. However in the near term uncertainty about key end markets and continued mixed economic news may keep GE in a relatively narrow trading range. GE's relative dividend yield is at ~150% of the market yield, which is near a 20-year high and well above its 20-year mean of 100%. Possible positive catalysts in the next 6-12 months include portfolio repositioning to enhance returns, possible pick-up in short cycle order trends, increasing visibility on the actual bottom for Power and Aerospace and accretion from acquisitions. Our 12-18 month price target remains $35. Our target assumes that GE can trade at a 15% premium to our target group target multiple of 17.5X forward earnings. Our group target multiple of 17.5X is based on our analysis of early cycle valuations (i.e., valuations of depressed earnings) during the early 1990s. Over the past 10 years, GE has averaged about a 20% premium to the group, but given the difficulties in several businesses such as Power and Aircraft and the higher contribution of earnings from Capital, we believe a slightly smaller premium is warranted. However, we continue to believe the stock deserves to trade at a premium based on its portfolio of world-class businesses, excellent management team and financial metrics (e.g. cash flow, ROIC, etc.). GE continues to execute well in a difficult economy and is methodically repositioning the portfolio for better future growth and higher returns. We reiterate our Outperform (1M) rating. - -------------------------------------------------------------------------------- RISKS GE is one of the world's largest companies and as a result has exposure to numerous global economic and political risks. Primary specific risks in the near term include the potential for a further fall-off in the Power business due to the distressed nature of GE's customers. GE is also exposed to the troubled airline industry through its engine business and leasing business. We believe it has managed its airline risks well, but the potential for further industry deterioration remains a risk. The company has also struggled with losses in its reinsurance business, which could result in charges against earnings to bolster reserves. Continued improvement in short cycle businesses (NBC and Lighting) is key to offsetting declining earnings in Power Systems. It is worth noting, however, that further deterioration in Plastics fundamentals could continue to pressure earnings. If the impact on the company from any of these factors proves to be greater than we anticipate, the stock will likely have difficulty achieving our target price. 5 [CITIGROUP SMITH BARNEY LOGO] ANALYST CERTIFICATION APPENDIX A-1 - -------------------------------------------------------------------------------- I, Jeff Sprague, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the subject issuer(s) or securities. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. - -------------------------------------------------------------------------------- IMPORTANT DISCLOSURES - -------------------------------------------------------------------------------- General Electric (GE) Ratings and Target Price History Analyst: Jeffrey Sprague [Graphic omitted reflecting ratings and target price history between January 2001 and June 2003. Graphic highlighted closing prices on dates set forth in table below. Graphic appears to indicate that the stock was covered during dates listed in table below.] - ----------------------------------------------- Target Closing Price Price # Date Rating (USD) (USD) - ----------------------------------------------- 1: 5 Sep 00 1L *70.00 58.75 2: 6 Aug 01 1L *60.00 41.39 3: 17 Sep 01 1L *50.00 35.15 4: 27 Jun 02 1L *40.00 29.90 5: 13 Aug 02 1L *38.00 30.95 6: 6 Sep 02 Stock rating system changed 7: 6 Sep 02 1L 38.00 28.30 8: 26 Sep 02 1L *32.00 26.39 9: 30 Sep 02 1L 32.00 24.65 10: 20 Nov 02 *1M *30.00 24.80 11: 5 Jun 03 1M *35.00 29.78 - ----------------------------------------------- *Indicates change. Chart current as of 14 June 2003 See "Important Disclosures" at the end of this report for a description of the firm's current and former rating systems A seat on the advisory board of General Electric is held by one or more directors or employees of Citigroup Global Markets Inc. or its affiliates. - -------------------------------------------------------------------------------- Citigroup Global Markets Inc. or its affiliates beneficially owns 1% or more of any class of common equity securities of General Electric. - -------------------------------------------------------------------------------- Within the past 12 months, Citigroup Global Markets Inc. or its affiliates has acted as manager or co-manager of a public offering of securities of General Electric. - -------------------------------------------------------------------------------- Citigroup Global Markets Inc. or its affiliates has received compensation for investment banking services provided within the past 12 months from General Electric. - -------------------------------------------------------------------------------- Citigroup Global Markets Inc. or its affiliates expects to receive or intends to seek, within the next three months, compensation for investment banking services from General Electric. - -------------------------------------------------------------------------------- Analysts' compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc. and its affiliates ("the Firm"). 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An Underperform (3) rating indicates that we expect the stock to underperform the analyst's coverage universe. In emerging markets, the same ratings classifications are used, but the stocks are rated based upon expected performance relative to the primary market index in the region or country. Our complementary Risk rating system takes into account predictability of financial results and stock price volatility. L (Low Risk): high predictability of financial results and low volatility; M (Medium Risk): moderate predictability of financial results and moderate volatility; H (High Risk): low predictability of financial results and high volatility; S (Speculative): exceptionally low predictability of financial results and highest risk and volatility. Risk ratings for Asia Pacific are determined by a quantitative screen which classifies stocks into four risk categories: Low Risk, Medium Risk, High Risk, and 6 [CITIGROUP SMITH BARNEY LOGO] Speculative Risk. 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The industry ratings are Overweight: we expect this industry to perform better than the primary index for the region in the next 12-18 months; Marketweight: we expect the industry to perform approximately in line with the primary index for the region in the next 12-18 months; and Underweight: we expect the industry to perform worse than the primary market index for the region in the next 12-18 months. - -------------------------------------------------------------------------------- General Electric is rated relative to a universe of Multi-industry (North America) stocks that comprises the following companies: American Standard, Cooper Industries, Crane Co., Danaher Corp., Emerson, General Electric, Honeywell International, Hubbell Incorporated, ITT Industries, Maytag Corporation, Rockwell Automation, Roper Industries, SPX Corporation, Textron, The 3M Company, Tyco International Ltd. and Whirlpool Corporation. - -------------------------------------------------------------------------------- Prior to September 9, 2002, the Firm's stock rating system was based upon the expected total return over the next 12 to 18 months. 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Any unauthorized use, duplication, redistribution or disclosure is prohibited by law and will result in prosecution. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST - -------------------------------------------------------------------------------- EX-99.N 16 c28573_ex-n.txt Exhibit N LEHMAN BROTHERS =================================================================EQUITY RESEARCH June 23, 2003 United States Industrial Electrical Equipment Robert T. Cornell 1.212.526.2498 rcornell@lehman.com GENERAL ELECTRIC (GE - $30.01) 2-EQUAL WEIGHT Company Update What We Learned At GE`s Analyst Meeting - -------------------------------------------------------------------------------- INVESTMENT CONCLUSION * Look For Modest EPS Growth in 2004 SUMMARY * GE reiterated $1.55-$1.70 EPS guidance for 2003, but indicated it will narrow the range at the 2Q earnings call on July 11. When they do, we look for the top end of the range to come down to $1.65, with the low end maintained at $1.55. We`re sticking to our $1.55 estimate. * At the meeting, GE highlighted three of its new growth platforms: Water Technology, Security & Sensors, and Healthcare IT. GE estimates these new markets are growing at 3x GDP. We calculate a business development program in 2004 could dilute EPS by approximately $0.03+. * We were impressed with the potential of these new growth platforms, and think investors might well continue to appreciate GE`s efforts to evolve towards a premium growth technology and services company. * We maintain our 2-Equal weight rating and $35 price target. - -------------------------------------------------------------------------------- EPS (FY Dec) - ----------------------------------------------------------------------------- 2002 2003 2004 % Change Actual Old New St. Est Old New St. Est 2003 2004 1Q 0.35 0.32A 0.32A 0.32A NA NA 0.38E (9) NA 2Q 0.44 0.38E 0.38E 0.38E NA NA 0.44E (14) NA 3Q 0.41 0.39E 0.39E 0.43E NA NA 0.45E (5) NA 4Q 0.31 0.46E 0.46E 0.49E NA NA 0.53E 48 NA - ----------------------------------------------------------------------------- Year 1.51 1.55E 1.55E 1.61E 1.70E 1.70E 1.76E 3 10 - ----------------------------------------------------------------------------- P/E 19.4 17.7 MARKET DATA FINANCIAL SUMMARY - -------------------------------------- ------------------------------------- Market Cap 298029.3M Revenue FY03 134B Shares Outstanding (Mil) 9931.0 Five-Year EPS CAGR 14.00 Float 9890 Return on Equity 20% Dividend Yield 2.53% Current BVPS 6.38 Convertible No Debt To Capital 81% 52 wk Range 32.98 - 21.30 - -------------------------------------- ------------------------------------- Stock Rating: Target: - ---------------------------------------- New: 2-Equal weight New: 35.00 Old: 2-Equal weight Old: 35.00 Sector View:1-Positive - -------------------------------------------------------------------------------- STOCK OVERVIEW [Graphic omitted showing volume and stock price from June 2002 to June 2003] - -------------------------------------------------------------------------------- INVESTMENT COMMENT: GE`s stock has had a nice run this year. Our question is: where do we go from here? GE historically outperforms the market in anticipation of a recovery. That has been true so far this year and may well prove true for a while further. Characteristically, though, once the recovery actually gets going, investors search for companies with better than market growth and the potential for upside surprises. Our current FY04 EPS growth estimate for GE of around 10% is in fact the lowest in the group. Moreover, right now GE is in a period of transition evolving towards a technology and services company. That could very well result in a company capable of sustained double-digit growth through an economic cycle ... as management has noted ... and such prospects could attract a premium P/E. However, GE`s strategic moves in this transition could result in diminished EPS growth as the company exits legacy businesses and builds new technology and services growth platforms. At a meeting Friday (6/20/03) GE gave an update and some insight into how some of its newest business platforms are doing. So far the market has given GE`s plan a vote of confidence. We maintain our 2-Equal weight rating and $35 price target which represents a 20 P/E on our FY04 estimate of $1.70. SOME OF OUR THOUGHTS ON THE MEETING - ----------------------------------- GUIDANCE STAYS AT $1.55-1.70 ... FOR NOW: Going into the meeting Friday, we think there was a feeling that GE might alter the EPS guidance ... maybe take the high end $1.70 in EPS off the $1.55-$1.70 range. Such thinking was prompted by weak May short-cycle orders. Actually, the company didn`t officially change guidance, but management did anoint the new `consensus` that popped up over the last couple of days in the $1.58-$1.59 ballpark. Friday`s implicit message we think, was that when GE reports earnings on July 11th, the $1.70 goes. We would make a couple of observations in that regard. We think GE`s EPS forecast for 2003 has been too back-end loaded ================================================================================ PLEASE SEE ANALYST(S) CERTIFICATION(S) ON PAGE 3 AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 5 ================================================================================ 1 LEHMAN BROTHERS =================================================================EQUITY RESEARCH to begin with. We said before that GE`s first-half EPS run rate on a historical pattern basis points to a full year `03 EPS of something like $1.52 rather than $1.70. We suspect that at the end of the day GE may not have been conservative enough on the economy and the short cycle performance in this year`s 2H. Now the bad actor is Plastics, but the whole short-cycle expectation, we think, may have been too aggressive from the start. STRATEGIC REPOSITIONING COULD RESULT IN ONE-TIME GAINS, DILUTION OF NEAR-TERM OPERATING EARNINGS: Then there is the issue of the strategic changes that are under way at GE. Management targeted $1-5 billion of industrial divestitures and $5-10 billion of dispositions out of GE Capital. Not much has happened so far this year, but GE said at the meeting the plans for the year were unchanged. The divestitures are likely to be slow-growth industrial units and low-return financial businesses (mostly insurance, GE said). If that`s the case, the impact on operating results could very well be dilutive. How much? Well if GE were to sell $1.0 billion of earnings for ten times and use the proceeds to buy earnings at fifteen times, that would dilute EPS by about $0.035 cents per share. Would investors applaud such a move? Probably so, if the businesses acquired were higher growth and higher return than those that were divested. Then there is the question of gains on these actions. The divestitures are all businesses GE has had for a while, so it`s reasonable to assume that GE could get significant EPS gains on the industrial businesses but possibly some losses on some of the financial services units. The net result of the industrial and financial dispositions is probably a meaningful gain. In the "old days," GE would use any meaningful one-time gains to book restructuring provisions. Now the rules under FASB 146 make such restructuring offsets much narrower in scope. So the point is that GE`s guidance for 2003 probably has remained wider than you would think because it might include the potential strategic moves and the associated one-time gains in the year`s 2H. WHAT ABOUT 2004?: We estimate that in 2004 GE might have operating EPS growth in the 5-10% range, excluding the impact of the strategic changes. To begin with, GE Capital could be about half of earnings and grow at 15%...even if interest rates are tracking up. Non-Power industrial segments might grow by $0.05-$0.08, and business development could contribute $0.05. GE has indicated that pension and Power Systems might each add about $0.05 of headwind ... a total of $0.10. With regard to the new labor contract, all in it is a wash, according to management. That foots to about $0.12-$0.15 of EPS growth in 2004 off the operating base for this year. We are at $1.70 for 2004 before the impact of strategic changes. Remember, a reasonable crack at the impact to recurring earnings of the plans GE has announced is potential dilution of $0.03-$0.04 at least when we run the math. And that would be a first year phenomenon. GE would likely be able to drive margins higher in acquired businesses over time as discussed below. BUSINESS DEVELOPMENT IS A CORE COMPETENCY: What did GE say on the business development front? Actually, little new in the big picture context. Management emphasized that the platforms GE is building out are part of a careful process of defining growth opportunities that would be attractive businesses both near term and 5, 10 or more years down the road. Management noted again that it had identified some $175 billion of new markets, in which GE currently has $7 billion in sales. We believe that GE`s new platforms are at double-digit margins already. GE sees these businesses growing to $12 billion in 2006, with 20% margins and 15%+ROTC ... nice if they can do it. And GE will probably be adding more platforms in 2004 and 2005 as it completes the strategic divestitures. Can GE be so successful in its business development effort? Here is where we came away incrementally impressed on the positive side. GE has the capability to throw powerful resources at these businesses, including all of GE`s best practices and the global footprint, too. We also noted that GE can take these new platforms and get them in front of existing customers, for example, power plants for the Water business and hospitals for the Security business. IMPLICATIONS FOR THE STOCK PRICE: All in, though, the Street is going to have to buy into the reality that GE probably will be diluting near-term EPS growth to some degree with this effort and taking down ROTC to somewhat, as well. The trade-off is a more attractive longer-term growth rate. Is there a precedent for the Street`s reaction to a company doing this? Actually, we think there is. Emerson has been going through this evolution for a while, and the Street has been very forgiving. Bottom line though is that we don`t think GE`s P/E would rise in the midst of this transition. Yes the organic growth rate could be seen as improving but we don`t think GE would change its fundamental long term guidance. That is, a company that can grow 10%+ through the cycle. So for a while earnings growth might define stock price upside. DISCUSSION OF WATER, SECURITY AND HEALTHCARE IT PLATFORMS - ---------------------------------------------------------
PLATFORM SUMMARY - ------------------------------------------------------------------------------------------------- PLATFORM 2003E GROWTH PATH TO 2006 2006E OP MARKET GE ACQUI- OP REVENUE MARGIN GROWTH CAPABILITY SITIONS REVENUE MARGIN Water Technologies $1.4 ~15% $0.4 $0.4 $0.8 ~$3.0 20%+ Security $1.0 16% $0.5 $0.5 $1.0-2.0 $3.0-4.0+ 20%+ Healthcare IT $1.7 18% $1.0 $0.5 $1.0 $4.0 25%+ - ------------------------------------------------------------------------------------------------- SOURCE: GE
2 LEHMAN BROTHERS =================================================================EQUITY RESEARCH GE WATER TECHNOLOGIES TO BE A KEY PLATFORM IN SPECIALTY MATERIALS SEGMENT: GE defined the on-going evolution of its Specialty Materials business from four businesses (Silicones, Quartz, Super-abrasives, Specialty Chemicals) to two multi-billion dollar platforms (Water Technologies, Advanced Materials). On the Advanced Materials side, GE is limiting investment in Super-Abrasives and Specialty Chemicals (looking to monetize Specialty Chemicals) and focusing on Silicones and Quartz as the growth areas. GE expects the acquisition of OSi Specialties (supplier of specialty silicones) to close in 3Q03 ($450 million+ in annual sales) complementing the existing Silcones business. For 2004, GE is targeting revenue from Silicones & OSi combined of $2 billion with operating profit of $300 million based on operating margin expansion from 10% for Silicones in 2003 to 15% for the combined businesses in 2004. The main focus though was on the Water Technologies platform. Let`s take a look. GE`s Water Technologies platform currently generates $1.4 billion in revenue. The platform was launched via the 2Q02 acquisition of Betz Dearborn`s industrial water treatment services business which is now GE Betz and has $1.1 billion in revenue. The next major building block was the 1Q03 acquisition of Osmonics which currently has $300 million in revenue. Osmonics manufactures equipment and components for water purification and fluid filtration, separation, and handling. GE highlighted that water is integral to virtually every industrial process with industrial sites often requiring higher water quality than drinking water. Specifically GE has identified a $40 billion subsegment of the $360 billion Water & Process market as a target area with potential for 2-3X GDP organic growth, 15% ROTC, and free cash flow conversion of 150%. Our view is that this is an attractive market in general but particularly for GE because of its ability to sell to its large installed base of customers across industries and apply the GE services model to what is still a more transactions-based business. GE is targeting revenues for the Water Technologies platform to increase from $1.4 billion in 2003 to $3.0 billion in 2006 ($400 million from GE "capability", $400 million from market growth, and $800 million from acquisitions); operating margin is targeted to go from 15% in 2003 to 20% in 2006. SECURITY PLATFORM: FROM $0 IN 2001 TO $1 BILLION IN 2003 TO $3-4+ BILLION IN 2006: GE sizes the global security industry at $127 billion, of which GE targets the $29 billion electronics products segment. This particular segment grows at 10%+ and allows to have margins of 15%+. GE has no intention at this point to be a security services company (monitoring/guard/protection) choosing to focus on the product side. GE established its presence in the security market in 1Q02 with the acquisition of Interlogix, which we believe had annual sales of about $700 million at the time. The platform, named GE Interlogix, was augmented in 4Q02 with the acquisition of a smaller company Ion Track. In 2003, management expects the security platform to reach $1 billion sales run rate. In addition to Ion Track, GE made four other smallish acquisitions in the security space with combined sales of $100 million. Management is also counting on $160 million of organic growth in 2003. It appears that within the array of the security products, GE is especially well positioned in digital video and trace detection, which are arguably the sweetest spots of the security market right now. GE has ambitious plans to grow its security business from $1 billion in 2003 to $3-4+ billion in 2006 through a combination of overall market growth, GE`s incremental organic growth on top of the market, and acquisitions. GE noted it has about 20 potential acquisition deals in the pipeline. Longer- term operating margins could top 20%, management believes. Similar to other newly acquired businesses, GE Interlogix is benefiting from the ability to leverage GE`s huge customer base. Interlogix has also adopted GE`s voice of the customer philosophy. Management pointed to a stronger product innovation culture post-acquisition: 52 scheduled new product launches in 2003 versus 38 in 2002. HEALTHCARE IT: GREAT CONCEPT, BUT CAN HOSPITALS AFFORD IT? Building off the already strong Medical Systems business, GE has added acquisitions within the healthcare IT sector and forged into a $25B industry segment that is expected to grow at 10-15%. GE plans to integrate its eleven acquisitions in this sector into a holistic solution that enables data to move with the patient instead of the other way around. GE estimates that revenues from Healthcare IT will be $1.7 billion in 2003, growing to $4 billion by 2006. Management also aims to increase operating margins from around 18% to 25% over the same time period. GE has shown already that it can effectively increase margins: in its first year under GE ownership Loral revenues grew 30% and profitability doubled. GE aims to own the entire information collection, transmittal and storage process with a paperless, film-less, and wireless digital solution. We believe GE has a strong customer base in the medical services market and a reputation for solid technology, but it could still be a tough sell to hospital CEO`s in the near term. Fiscal pressures from shrinking reimbursements, new patient safety requirements and overcrowded facilities have pushed a third of US hospitals into the red. Health systems are looking for ways to increase productivity and increase clinical efficacy through more accurate data, but piecemeal investments seem to be the norm. While the solutions sell makes sense from a technology standpoint, the sales force will need to create a rock-solid case for hospitals to ante up for an IT overhaul. - -------------------------------------------------------------------------------- Analyst Certification: I, Robert Cornell, hereby certify (1) that the views expressed in this research note accurately reflect my personal views about any or all of the subject securities or issuers referred to in this note and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this note. 3 LEHMAN BROTHERS =================================================================EQUITY RESEARCH COMPANY DESCRIPTION: GE is a diversified technology, services and manufacturing company. COMPANY NAME: DISCLOSURES TICKER PRICE (6/20) RATING General Electric A,D,E GE 30.01 2-Equal weight RELATED TICKERS: DISCLOSURES TICKER PRICE (06/19) RATING Emerson EMR 53.35 1-Overweight OTHER TEAM MEMBERS: Yuri Krapivin, CFA 1.212.526.5218 ykrapivi@lehman.com Shannon O`Callaghan 1.212.526.3204 socallag@lehman.com 4 LEHMAN BROTHERS =================================================================EQUITY RESEARCH IMPORTANT DISCLOSURES - --------------------- Rating and Price Target Chart: GE [Graphic omitted reflecting target stock price from June 2000 to June 2003 as well as closing price and changes based on analyst ratings and changes in coverage.] Date Closing Price Rating Price Target - ----------------------------------------------------------------------------- 14-Oct-02 $24.35 $30.00 - ----------------------------------------------------------------------------- 27-Sep-02 $24.47 $35.00 - ----------------------------------------------------------------------------- 27-Sep-02 $24.47 2-Equal weight - ----------------------------------------------------------------------------- 29-Aug-02 $30.35 $45.00 - ----------------------------------------------------------------------------- Date Closing Price Rating Price Target - ----------------------------------------------------------------------------- 05-Aug-02 $28.30 1-Overweight - ----------------------------------------------------------------------------- 12-Oct-01 $39.00 $50.00 - ----------------------------------------------------------------------------- 14-Jul-00 $52.19 $67.00 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- FOR EXPLANATION OF RATINGS PLEASE REFER TO THE STOCK RATING KEYS LOCATED AT THE END OF THIS DOCUMENT 5 LEHMAN BROTHERS =================================================================EQUITY RESEARCH IMPORTANT DISCLOSURES: The analysts responsible for preparing this report have received compensation based upon various factors including the Firm`s total revenues, a portion of which is generated by investment banking activities. A - Lehman Brothers Inc. and/or an affiliate managed or co-managed within the past 12 months a public offering of securities for this company. D - Lehman Brothers Inc. and/or an affiliate has received compensation for investment banking services from the subject company within the past 12 months. E - Lehman Brothers Inc. and/or an affiliate expects to receive or intends to seek compensation for investment banking services from the subject company within the next 3 months. RISKS WHICH MAY IMPEDE THE ACHIEVEMENT OF THE PRICE TARGET: GE: GE has noted that it needs short cycle businesses to grow in 2H02 and in 2003 to meet the double digit earnings growth target. If the economy weakens, the prospects of such earnings performance might diminish as well. KEY TO INVESTMENT OPINIONS: STOCK RATING - ------------ 1-OVERWEIGHT - The stock is expected to outperform the unweighted expected total return of the industry sector over a 12-month investment horizon. 2-EQUAL WEIGHT - The stock is expected to perform in line with the unweighted expected total return of the industry sector over a 12-month investment horizon. 3-UNDERWEIGHT - The stock is expected to underperform the unweighted expected total return of the industry sector over a 12-month investment horizon. RS-RATING SUSPENDED - The rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Lehman Brothers is acting in an advisory capacity on a merger or strategic transaction involving the company. SECTOR VIEW - ----------- 1-POSITIVE - sector fundamentals/valuations are improving. 2-NEUTRAL - sector fundamentals/valuations are steady, neither improving nor deteriorating. 3-NEGATIVE - sector fundamentals/valuations are deteriorating. STOCK RATINGS FROM FEBRUARY 2001 TO AUGUST 5, 2002 (SECTOR VIEW DID NOT EXIST): This is a guide to expected total return (price performance plus dividend) relative to the total return of the stock`s local market over the next 12 months. 1-STRONG BUY - expected to outperform the market by 15 or more percentage points. 2-BUY - expected to outperform the market by 5-15 percentage points. 3-MARKET PERFORM - expected to perform in line with the market, plus or minus 5 percentage points. 4-MARKET UNDERPERFORM - expected to underperform the market by 5-15 percentage points. 5-SELL - expected to underperform the market by 15 or more percentage points. STOCK RATINGS PRIOR TO FEBRUARY 2001 (SECTOR VIEW DID NOT EXIST): 1-BUY - expected to outperform the market by 15 or more percentage points. 2-OUTPERFORM - expected to outperform the market by 5-15 percentage points. 3-NEUTRAL - expected to perform in line with the market, plus or minus 5 percentage points. 4-UNDERPERFORM - expected to underperform the market by 5-15 percentage points. 5-SELL - expected to underperform the market by 15 or more percentage points. V-VENTURE - return over multiyear timeframe consistent with venture capital; should only be held in a well diversified portfolio. DISTRIBUTION OF RATINGS: Lehman Brothers Equity Research has 1526 companies under coverage. 34% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating, 14% of companies with this rating are investment banking clients of the Firm. 43% have been assigned a 2-Equal weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating, 5% of companies with this rating are investment banking clients of the Firm. 23% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating, 25% of companies with this rating are investment banking clients of the Firm. 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