1
Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): October 15, 1998
Hercules Incorporated
(Exact name of registrant as specified in its charter)
Delaware 001-00496 51-0023450
(State of other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
Hercules Plaza
1313 North Market Street
Wilmington, Delaware 19894-0001
(Address of principal executive offices) (Zip Code)
(302) 594-5000
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
2
Item 2. Acquisition or Disposition of Assets.
On October 15, 1998, Hercules Incorporated, a Delaware
corporation ("Hercules"), consummated the transactions contemplated by the
Agreement and Plan of Merger (the "Merger Agreement"), dated as of July 30,
1998, among Hercules, Water Acquisition Co., a Pennsylvania corporation and a
wholly owned subsidiary of Hercules ("Merger Sub"), and BetzDearborn Inc., a
Pennsylvania corporation ("BetzDearborn"), pursuant to which, among other
things, Merger Sub was merged with and into BetzDearborn, with BetzDearborn
continuing as the surviving corporation and a wholly owned subsidiary of
Hercules (the "Merger").
Upon the consummation of the Merger, each outstanding Common
Share, par value $.10 per share, of BetzDearborn ("Common Shares") was converted
into the right to receive $72 in cash, without interest thereon (the "Merger
Consideration"). Under BetzDearborn's Articles of Incorporation, shares of
Series A ESOP Convertible Preferred Shares, par value $.10 per share, of
BetzDearborn were automatically converted into Common Shares prior to the
Merger, with each such Common Share converted into the right to receive the
Merger Consideration. As a result of the Merger, the former shareholders of
BetzDearborn are entitled to receive from Hercules cash payments totaling an
aggregate of approximately $2.4 billion. Additionally, Hercules assumed or
refinanced approximately $700 million in BetzDearborn debt. The Merger
Consideration is to be paid with borrowings under a $3.65 billion credit
facility which was syndicated by NationsBank, N.A., and which was consummated on
October 15, 1998. Under such credit facility, Hercules, and certain of its
subsidiaries designated as borrowers, can borrow up to $900 million under
revolving credit loans and up to $2.75 billion as term loans, due at various
times ending December 31, 2003. Hercules has the option to prepay the revolving
credit loans or term loans in whole or in part pursuant to the provisions of
the credit facility and is obligated to make mandatory prepayments (i) if the
revolving credit loan obligations exceed the maximum aggregate principal amount,
(ii) upon certain asset dispositions, (iii) upon the receipt of proceeds from
any permitted receivables financings, and (iv) upon certain equity issuances as
long as any term loan is outstanding. For more information with respect to the
credit facility, reference is made to the provisions of the Credit Agreement
dated October 15, 1998, among Hercules, NationsBank, N.A., as Administrative
Agent and the lenders party thereto attached hereto as an exhibit to this
Current Report on Form 8-K and incorporated by reference herein.
In connection with the Merger, Hercules increased the size of
its Board of Directors (the "Board of Directors") to fourteen members and
elected four current directors of BetzDearborn, including William R. Cook, John
G. Drosdick, Alan R. Hirsig and John A. H. Shober, to fill the vacancies
created. Additionally, Hercules created an "Office of the Chairman" with R.
Keith Elliott serving as Chairman and Co-Chief Executive Officer, William R.
Cook serving as Vice Chairman and Co-Chief Executive Officer and Vincent J.
Corbo serving as President and Chief Operating Officer, of Hercules. Moreover,
George MacKenzie will continue to serve as Senior Vice President and Chief
Financial Officer of Hercules, Larry V. Rankin was appointed Senior Vice
President (Company Non-Paper Operations) and Dominick Di Donna was appointed
Senior Vice President (Paper Operations).
BetzDearborn is a leading global manufacturer and supplier of
specialty chemicals used in industrial, commercial, and institutional accounts
for the treatment of water, wastewater and process systems.
Copies of the following press releases issued by Hercules are
attached hereto as exhibits to this Current Report on Form 8-K and are
incorporated herein by reference: (i) a press release dated October 15, 1998
announcing the consummation of the Merger and (ii) a press release, dated
October 19, 1998 announcing the appointment of certain BetzDearborn directors to
the Board of Directors.
Item 5. Other Events.
In 1980, Hercules, along with UniRoyal Standard Chlorine, the
Department of Defense (the "DoD") and others, was identified as a potentially
responsible party by the United States Environmental Protection Agency for
environmental cleanup at a site in Jacksonville, Arkansas. Litigation over
liability at this site has been pending since that time on the District Court
for the Eastern District of Arkansas (the "Court").
As a result of a pretrial court ruling in October 1993,
Hercules was held jointly and severally liable for costs incurred, and for
future remediation costs, at the Jacksonville site. Hercules has reported on
the status of this litigation in certain of its prior Annual Reports on Form
10-K and Quarterly Reports on Form 10-Q, with the most recent update being in
its Quarterly Report on Form 10-Q for the period ended June 30, 1998. Other
defendants in this litigation have either settled with the government or, in
the case of the DoD, have not been held liable. Hercules appealed the Court's
order finding the DoD not liable. On January 31, 1995, the Eighth Circuit Court
of Appeals upheld the Court's order. Hercules filed a petition to the U.S.
Supreme Court requesting review and reversal of the Eighth Circuit's ruling.
The petition was denied on June 26, 1995, and the case was remanded to the
Court for further proceedings.
On May 21, 1997, the Court issued a ruling that Uniroyal was
liable to Hercules for contribution and that Standard Chlorine was not liable to
Hercules for contribution. A trial on allocation and damages among Hercules,
Uniroyal and the United States was scheduled to begin in October 1998. Through
the filing of separate summary judgment motions, Hercules and Uniroyal raised a
number of defenses to the United States' costs.
On October 23, 1998, the Court denied the above-referenced
motions and granted the United States' summary judgment motion, ordering
Hercules and Uniroyal to pay the United States $102,878,641.35 plus any
additional response costs incurred or to be incurred after July 31, 1997.
Hercules expects that this amount will be reduced by approximately $7 million,
the amounts received by the United States in previous settlements with other
parties. The trial on allocation of damages between Hercules and Uniroyal is
scheduled to begin on November 2, 1998. After a final judgment has been entered
in such trial, Hercules expects to appeal, among other things, the Court's
determination with respect to Hercules' liability, the order granting the
United States' costs, the issues related to the divisibility of harm and the
ruling with respect to Standard Chlorine's liability.
Hercules does not anticipate that its financial condition
will be materially affected by the outcome of this litigation.
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Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
(a) Financial Statements
INDEX TO FINANCIAL STATEMENTS
OF
BETZDEARBORN INC.
Page
----
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996. . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Common Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . F-9
Consolidated Statements of Operations for the six months ended June 30, 1998
and 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-32
Consolidated Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997. . . . .F-33
Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-35
Notes to Consolidated Financial Statements (unaudited). . . . . . . . . . . . . . . . . . F-36
F-1
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REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
BetzDearborn Inc.
We have audited the accompanying consolidated balance sheets of BetzDearborn
Inc. as of December 31, 1997 and 1996, and the related consolidated statements
of operations, common shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BetzDearborn Inc.
at December 31, 1997 and 1996, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, at October 1,
1997, the Company changed its method of accounting for certain business process
reengineering costs.
/S/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
February 2, 1998
F-2
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CONSOLIDATED STATEMENTS OF OPERATIONS
BetzDearborn Inc.
- --------------------------------------------------------------------------------------------------------
Year Ended December 31
---------------------------------------
(in millions, except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
NET SALES $1,294.8 $1,037.0 $ 752.5
Operating Costs and Expenses:
Cost of products sold 518.7 409.3 273.7
Selling, research and administration 570.6 472.0 353.2
Integration/restructuring 15.6 30.0 15.6
-------- -------- -------
1,104.9 911.3 642.5
-------- -------- -------
OPERATING EARNINGS 189.9 125.7 110.0
Other Income (Expense):
Interest (45.5) (25.7) (1.1)
Investment and other income, net (1.5) (0.3) 2.7
-------- -------- -------
(47.0) (26.0) 1.6
-------- -------- -------
EARNINGS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 142.9 99.7 111.6
Income Taxes 50.7 35.4 43.3
-------- -------- -------
EARNINGS BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 92.2 64.3 68.3
Cumulative effect of change in accounting for
business process reengineering, net of
$3.3 income taxes (6.0) -- --
-------- -------- -------
NET EARNINGS $ 86.2 $ 64.3 $ 68.3
======== ======== =======
Basic Earnings per Common Share:
Before cumulative effect of accounting change $ 3.02 $ 2.13 $ 2.30
Accounting change (.21) -- --
-------- -------- -------
Basic earnings per Common Share $ 2.81 $ 2.13 $ 2.30
======== ======== =======
Diluted Earnings per Common Share:
Before cumulative effect of accounting change $ 2.80 $ 2.01 $ 2.16
Accounting change (.19) -- --
-------- -------- -------
Diluted earnings per Common Share $ 2.61 $ 2.01 $ 2.16
======== ======== =======
Average Number of Common Shares:
(in thousands)
Basic 28,734 27,651 27,574
======== ======== =======
Diluted 31,992 30,736 30,592
======== ======== =======
1996 and 1995 earnings per share and average number of common shares have been
restated to comply with Statement of Financial Accounting Standards No. 128,
"Earnings per Share."
See notes to consolidated financial statements.
F-3
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CONSOLIDATED BALANCE SHEETS
BetzDearborn Inc.
- ------------------------------------------------------------------------------------------------------
December 31
------------------------
(in millions, except share amounts) 1997 1996
- ------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 36.9 $ 38.2
Trade accounts receivable, less allowances:
1997 - $7.2; 1996 - $7.6 293.0 243.2
Inventories:
Finished products and goods purchased for resale 49.2 54.5
Raw materials 45.1 42.2
-------- --------
94.3 96.7
Income taxes 19.6 31.1
Prepaid expenses and other 36.2 29.5
-------- --------
TOTAL CURRENT ASSETS 480.0 438.7
PROPERTY, PLANT AND EQUIPMENT --- at cost
Land 33.6 38.9
Buildings 214.3 221.9
Machinery and equipment 562.4 531.0
Construction in progress
(estimated cost to complete - $48.4) 15.8 11.9
-------- --------
826.1 803.7
Less allowance for depreciation (424.3) (374.7)
-------- --------
401.8 429.0
OTHER ASSETS
Investments and other 22.8 16.6
Goodwill - net of accumulated amortization:
1997 - $17.8; 1996 - $7.1 447.7 449.9
Other intangibles - net of accumulated amortization:
1997 - $8.8; 1996 - $4.3 81.3 84.1
-------- --------
551.8 550.6
-------- --------
$1,433.6 $1,418.3
======== ========
F-4
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- - ------------------------------------------------------------------------------------------------------------
December 31
----------------------------
1997 1996
- - ------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 77.7 $ 68.9
Payroll and related taxes 47.7 47.8
Notes payable 26.6 0.8
Accrued restructuring costs 15.9 30.9
Other accrued liabilities 43.7 67.5
Income taxes 7.4 -
Dividends payable 11.2 10.6
Current portion of long-term debt 1.3 1.0
--------- --------
TOTAL CURRENT LIABILITIES 231.5 227.5
LONG-TERM DEBT - less portion classified as current 678.2 744.5
OTHER LONG-TERM LIABILITIES
Income taxes 14.3 12.4
Employee benefit plans 54.5 44.3
Other 2.7 4.1
--------- --------
71.5 60.8
SHAREHOLDERS' EQUITY
Preferred shares, $.10 par value: authorized 1,000,000 shares;
issued 1997 - 475,371 shares; 1996 - 481,780 shares 95.0 96.4
Guarantee of related ESOP debt (88.6) (90.0)
Common shares, $.10 par value: authorized - 90,000,000 shares;
issued 1997 - 33,631,330 shares; 1996 - 33,637,359 shares 3.4 3.4
Capital in excess of par value of shares 131.6 93.8
Retained earnings 501.1 463.9
Cost of common shares in treasury: 1997 - 4,181,807 shares;
1996 - 5,509,124 shares (155.0) (188.0)
Unearned compensation (3.9) (4.2)
Foreign currency translation adjustments (31.2) 10.2
--------- --------
TOTAL SHAREHOLDERS' EQUITY 452.4 385.5
--------- --------
$ 1,433.6 $1,418.3
========= ========
See notes to consolidated financial statements.
F-5
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CONSOLIDATED STATEMENTS OF CASH FLOWS
BetzDearborn Inc.
- ------------------------------------------------------------------------------------------------------------------
Year Ended December 31
-------------------------------
(in millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 86.2 $ 64.3 $ 68.3
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 67.8 61.0 48.5
Amortization 15.7 7.8 0.7
Compensation and employee benefit plans 10.6 12.6 10.5
Income taxes 6.4 7.4 (0.2)
Provision for restructuring -- 9.6 15.6
Changes in operating assets and liabilities, net of business
acquisitions:
Accounts receivable (59.8) (24.2) (13.0)
Inventories (2.2) (2.7) (8.0)
Prepaid expenses and other (7.1) (1.0) (10.0)
Accounts payable and accrued expenses (4.1) 7.5 (2.7)
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 113.5 142.3 109.7
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (78.0) (64.9) (64.1)
Proceeds from sales of long-term assets 9.6 3.5 2.0
Purchases of businesses and long-term investments -- (6.6) (34.6)
Purchase of Dearborn, net of cash equivalents acquired -- (549.4) --
Other, net (0.5) 1.0 (0.6)
------ ------ ------
NET CASH USED IN INVESTING ACTIVITIES (68.9) (616.4) (97.3)
FINANCING ACTIVITIES
Repayments of long-term debt (462.5) (17.0) (1.0)
Borrowings classified as long-term debt 401.1 566.0 --
Net short-term borrowings (repayments) 24.0 (17.7) 17.4
Dividends paid (50.9) (48.9) (48.4)
Proceeds from issuance of common shares, including treasury shares 42.3 14.8 1.0
Purchase of treasury shares -- -- (12.6)
------ ------ ------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (46.0) 497.2 (43.6)
Effect of exchange rate changes on cash 0.1 1.2 1.2
------ ------ ------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1.3) 24.3 (30.0)
Cash and Cash Equivalents at Beginning of Year 38.2 13.9 43.9
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 36.9 $ 38.2 $ 13.9
====== ====== ======
See notes to consolidated financial statements.
F-6
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CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
BetzDearborn Inc.
- ----------------------------------------------------------------------------------------------------------------------------
Capital in
Number of Shares Excess of
-------------------------- Common Par Value Retained
(dollars in millions, except per share amounts) Common Treasury Stock of Stock Earnings
- ----------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1995 33,649,527 5,784,899 $ 3.4 $ 81.8 $ 423.5
Net earnings 68.3
Dividends on preferred shares ($16.00 per share) (7.8)
Tax benefit on preferred shares dividend 2.9
Dividends on common shares ($1.47 per share) (40.7)
Reacquired common shares 300,000
Impact of shares issued under employee stock plans,
net of tax of $.3 million (5,546) (94,074) 0.8
Currency translation adjustments (0.1)
---------- --------- ----- ------- -------
Balance at December 31, 1995 33,643,981 5,990,825 3.4 82.6 446.1
Net earnings 64.3
Dividends on preferred shares ($16.00 per share) (7.7)
Tax benefit on preferred shares dividend 2.7
Dividends on common shares ($1.49 per share) (41.5)
Impact of shares issued under employee stock plans,
net of tax of $2.1 million (6,622) (481,701) 11.2
Currency translation adjustments
---------- --------- ----- ------- -------
Balance at December 31, 1996 33,637,359 5,509,124 3.4 93.8 463.9
Net earnings 86.2
Dividends on preferred shares ($16.00 per share) (7.7)
Tax benefit on preferred shares dividend 2.6
Dividends on common shares ($1.51 per share) (43.9)
Impact of shares issued under employee stock plans,
net of tax of $6.6 million (6,029) (1,074,717) 28.9
Stock issued for acquisition (252,600) 8.9
Currency translation adjustments
---------- --------- ----- ------- -------
Balance at December 31, 1997 33,631,330 4,181,807 $ 3.4 $ 131.6 $ 501.1
========== ========== ===== ======= =======
See notes to consolidated financial statements.
F-7
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CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
BetzDearborn Inc.
- ------------------------------------------------------------------------------------------------------------------------------
Foreign
Unearned Currency
Treasury Compen- Translation
(dollars in millions, except per share amounts) Stock sation Adjustments
- - ----------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1995 $(187.5) $ (5.5) $ 2.7
Net earnings
Dividends on preferred shares ($16.00 per share)
Tax benefit on preferred shares dividend
Dividends on common shares ($1.47 per share)
Reacquired common shares (12.6)
Impact of shares issued under employee stock plans,
net of tax of $.3 million 1.9 2.2
Currency translation adjustments 3.5
------- ------ -------
Balance at December 31, 1995 (198.2) (3.3) 6.2
Net earnings
Dividends on preferred shares ($16.00 per share)
Tax benefit on preferred shares dividend
Dividends on common shares ($1.49 per share)
Impact of shares issued under employee stock plans,
net of tax of $2.1 million 10.2 (0.9)
Currency translation adjustments 4.0
------- ------ -------
Balance at December 31, 1996 (188.0) (4.2) 10.2
Net earnings
Dividends on preferred shares ($16.00 per share)
Tax benefit on preferred shares dividend
Dividends on common shares ($1.51 per share)
Impact of shares issued under employee stock plans,
net of tax of $6.6 million 25.9 0.3
Stock issued for acquisition 7.1
Currency translation adjustments (41.4)
------- ------ -------
Balance at December 31, 1997 $(155.0) $ (3.9) $ (31.2)
======= ====== =======
See notes to consolidated financial statements.
F-8
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BetzDearborn Inc.
- --------------------------------------------------------------------------------
1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - The Company is engaged in the engineered specialty chemical
treatment of water and industrial process systems operating in a wide variety of
industrial and commercial applications with particular emphasis on the chemical,
petroleum refining, paper, food processing, automotive, steel and power
industries. The Company develops, produces and markets a wide range of specialty
chemical products for use in boilers, cooling systems, heat exchangers, paper
and petroleum process streams and both influent and effluent systems. The
Company monitors changing water, process and plant operating conditions so as to
prescribe the appropriate treatment programs to solve problems such as
corrosion, scale, deposit formation and a variety of process problems.
Operations are conducted primarily in the United States, Canada and Europe, and
also in Asia-Pacific and Latin America.
Concentration of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
accounts receivable and interest rate swap agreements. Concentrations of credit
risk with respect to accounts receivable are limited because of the large number
of customers comprising the Company's customer base and their dispersion across
many different industries and geographies. The Company generally does not
require collateral or other security to support customer receivables. The
counterparties to the interest rate swaps are major international financial
institutions. The Company continually monitors the credit ratings of its
counterparties, has established policies for counterparty credit rating
requirements and has limited the amount of agreements with any one party. The
Company believes these procedures minimize the risk of credit losses in the
event of nonperformance by these counterparties.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and all subsidiaries. All significant intercompany
items and transactions are eliminated from the consolidated statements. The
Company follows the practice of using a November 30 fiscal year for all non-U.S.
subsidiaries, excluding Canada, in order to expedite the year-end closing.
Revenue Recognition - Primarily, the Company recognizes revenue upon
shipment and passage of title without right of return. For consignment sales,
revenue is recognized when material is used.
F-9
12
Cash Equivalents - The Company considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents. The
carrying value of these investments approximates their fair value at December
31, 1997.
Inventories - Inventories are stated at the lower of cost or market. Cost
of approximately 41 percent of the inventory is determined by the last-in,
first-out (LIFO) method, the balance by the first-in, first-out (FIFO) method.
If the FIFO method of inventory accounting had been used for all inventory,
amounts would have been approximately $10.6 million and $10.9 million higher
than reported at December 31, 1997 and December 31, 1996, respectively.
Property, Plant and Equipment - Property, plant and equipment is recorded
at cost. Depreciation is computed principally by the straight-line method over
the estimated useful lives of the related assets. The estimated useful lives of
depreciable assets are as follows: buildings - 20 to 40 years; computer
equipment and software - 3 to 8 years; other machinery and equipment - 5 to 15
years.
Accounting Change - On November 20, 1997, the FASB Emerging Issues Task
Force ("EITF") announced a consensus on Issue No. 97-13, "Accounting for Costs
Incurred in Connection with a Consulting Contract or an Internal Project That
Combines Business Process Reengineering and Information Technology
Transformation." This issue addressed how an entity should account for
third-party or internally generated costs associated with projects that combine
business process reengineering activities and information technology
transformation and how the total costs of a business process reengineering
consulting contract performed by a third party should be allocated to the
project's various individual activities. The EITF reached a consensus that the
cost of business process reengineering activities, whether done internally or by
third parties, is to be expensed as incurred. Also, the EITF reached a consensus
that any unamortized portion of those identifiable costs should be written off
as a cumulative effect type adjustment in the quarter that contains November 20,
1997.
The Company is engaged in a major project that combines business process
reengineering activities and information technology transformation. The business
process reengineering activities are being performed by both internal staff and
by third parties. The amount of business process reengineering activities
capitalized as of September 30, 1997 was $9.3 million, of which approximately
$4.1 million was capitalized prior to 1997. Consequently, the Company recorded a
write-off in the fourth quarter of 1997 for the cumulative effect of this change
in accounting and will prospectively include the continuing costs of business
process reengineering activities as operating expenses.
Investments - Marketable equity securities are recorded at fair value. All
other investments are generally carried at cost, which does not exceed estimated
fair value.
Goodwill and Other Intangible Assets - Goodwill amortization is computed by
the straight-line method mainly over 40 years. Other intangible assets are
F-10
13
amortized on a straight-line basis ranging between 3 and 40 years in accordance
with the nature of the asset. Goodwill and other intangible assets relate
primarily to the Dearborn acquisition (see Note 2). For all such assets, the
Company evaluates carrying values for impairment by considering the operating
performance and expected future undiscounted cash flows of the underlying
businesses.
Foreign Currency - The Company is exposed to the effect of foreign exchange
rate fluctuations on the U.S. dollar value of the income of its non-U.S.
subsidiaries (see Note 4). Occasionally, the Company enters into foreign
currency forward contracts to minimize the effect of fluctuating foreign
currencies on its cash flow and current unremitted income from certain non-U.S.
subsidiaries. The forward contracts generally are marked to market and resulting
adjustments are recorded directly in income. These adjustments had no material
impact on the results of operations for 1997, 1996 and 1995. There were no open
contracts at the end of 1997. Assets and liabilities of non-U.S. operations
where the functional currency is the local currency are translated into U.S.
dollars at the fiscal year-end exchange rates. The related translation
adjustments are recorded as cumulative translation adjustments, a separate
component of shareholders' equity. Revenues and expenses are translated using
average exchange rates prevailing during the year. Foreign currency transaction
gains and losses, as well as translation adjustments for assets and liabilities
of non-U.S. operations where the functional currency is the U.S. dollar, are
included in the results of operations. A foreign currency transaction loss of
$5.6 million was incurred in 1997 and is included in other income, net in the
Consolidated Statements of Operations; such adjustments were not material in
1996 and 1995.
Research and Development - Research and development costs ($38.8 million in
1997, $35.7 million in 1996 and $32.2 million in 1995) are charged to expense as
incurred.
Earnings Per Share - In 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings Per Share." Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic earnings per Common Share is computed by
dividing net income available to common shareholders by the weighted average
number of shares outstanding. In computing basic earnings per Common Share,
preferred stock dividends, net of related income tax benefits, reduce income
available to common shareholders. In computing diluted earnings per Common
Share, conversion of the Series A ESOP Convertible Preferred Shares is assumed
and the dilutive effect of stock options during the periods presented as well as
the effect of contingently issuable shares also increase the weighted average
number of shares (see Note 5). All earnings per share amounts for all periods
have been presented and, where appropriate, restated to conform to the Statement
128 requirement.
Stock-Based Compensation - The Company follows Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock-based compensation (see
Note 9).
14
Impact of Pending Accounting Pronouncements - In June 1997, the
Financial Accounting Standards Board issued Statement No. 130, "Reporting
Comprehensive Income," and Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information," both of which are required to be adopted
for fiscal years beginning after December 15, 1997. Statement 130 will require
the Company to report in its financial statements all non-owner related changes
in equity for the periods being reported. Statement 131 will require the Company
to disclose revenues, earnings, and other financial information pertaining to
the business segments by which the Company is managed, as well as what factors
management used to determine these segments. The Company is currently evaluating
the requirements of Statements 130 and 131 to determine how to present the
required information in its financial statements and related disclosures.
F-11
15
2: ACQUISITIONS
Dearborn - On June 28, 1996, pursuant to the Grace Dearborn Worldwide
Purchase and Sale Agreement (the "Agreement"), the Company acquired the Dearborn
business unit ("Dearborn") of W.R. Grace & Co. - Conn. ("Grace") for $632
million, subject to certain adjustments. Dearborn was a global supplier of
industrial water and process treatment chemicals with 1995 annual net revenues
of $399.1 million. This acquisition was financed by a $750 million Credit
Agreement among the Company and a syndicate of banks (see Note 6).
The Dearborn acquisition is accounted for using the purchase method of
accounting and is included in the Consolidated Statements of Operations since
the date of acquisition. The Company adopted a November 30 fiscal year-end for
non-U.S. Dearborn units except Canada to align the fiscal year-end with the
remainder of the Company's operations. Consequently, Dearborn units except
Canada and the U.S. reported five months of results of operations in 1996. The
Company subsequently integrated Betz and Dearborn, which makes it impractical to
report the results of Dearborn separately from the remainder of the Company's
results of operations.
The Company finalized its Dearborn purchase price allocation during 1997
and increased goodwill by $20.4 million to $440.7 million. Goodwill is
determined as follows (in millions):
Cash paid to Grace $ 640.9
Adjustments:
Restructuring provision (see Note 12) 38.8
Transition services cancellation fees 10.0
Professional fees and transaction costs 13.4
Tax effects, net (23.7)
----------
679.4
Less: Fair value of net tangible assets acquired 156.1
Fair value of identifiable intangible assets acquired 82.6
----------
Dearborn goodwill as of the acquisition date $ 440.7
==========
The $38.8 million restructuring provision (see Note 12) is primarily for
closure of Dearborn facilities and severance costs for Dearborn employees.
During the second quarter of 1997, the Company announced the planned closure of
the Lake Zurich, Illinois plant. The increase in restructuring liabilities and
fixed asset writedowns, as a result of this announcement, are the principal
reasons for the 1997 increase in goodwill. The Company incurred costs of
approximately $10.0 million in accordance with the Agreement relating to the
cancellation of transition services previously provided to the Company,
principally in its Latin American and European regions. Professional fees and
transaction costs amounting to $13.4 million are primarily for acquisition
F-12
16
consulting, legal and accounting fees. The tax effects, which reduce the
adjusted purchase price, are comprised of the estimated tax effects resulting
from the purchase price adjustments and for the net deferred tax effects of
differences in the allocation of purchase price for financial reporting and tax
purposes.
In accordance with the purchase method of accounting, the adjusted purchase
price was allocated to the estimated fair value of net assets acquired, with the
excess recorded as goodwill, which is amortized on a straight-line basis over 40
years. The $82.6 million allocated to identifiable intangibles is the
independently appraised value of the trademarks, trade names and patents of
Dearborn. Patents are amortized on a straight-line basis over 13 to 15 years and
unlimited-life trademarks and trade names are amortized over 40 years. Total
Dearborn intangible amortization expense of $14.6 million and $6.7 million is
included in the 1997 and 1996 results of operations, respectively.
Had the Acquisition occurred as of January 1, 1995, unaudited pro forma
results would have been (in millions, except per share amounts):
Year Ended December 31,
-------------------------
1996 1995
-------- --------
Net Sales $1,261.6 $1,151.6
Net Earnings 50.0 25.5
Net Earnings per Common Share:
Basic 1.61 .75
Diluted 1.54 --
The pro forma results reflect adjustments primarily for the increased
amortization and interest expense attributable to the Dearborn acquisition and
the related tax effects. Potential cost savings, however, from combining
Dearborn with the Company's operations are not reflected. Therefore, the pro
forma results are not indicative of the results that would have occurred had the
acquisition actually been consummated on January 1, 1995, and are not intended
to be a projection of future results or trends. The historical financial results
of operations of Dearborn reflect the "carve out" of Dearborn from Grace.
Certain selling, research and administrative expenses of Grace have been
allocated to Dearborn on various bases which, in the opinion of Grace's
management, are reasonable. However, such expenses are not necessarily
indicative of, and it is not practicable for management to estimate, the nature
and level of expenses which might have been incurred if Dearborn had been
operating as a separate independent company.
Argo Scientific - In November 1997, the Company acquired all the
outstanding common stock of D.W. Walker & Associates, Inc., d.b.a. Argo
Scientific, in exchange for 252,600 of the Company's Common Shares. Argo
Scientific is a leading supplier of highly specialized chemical treatments,
services and technology for membrane separation systems, which are used in the
production of "pure" water from fresh water and sea water.
F-13
17
The Argo Scientific acquisition is accounted for using the purchase method
of accounting. The goodwill recorded as a result of this acquisition amounted to
$15.7 million, which is amortized on a straight-line basis over 40 years. The
Argo Scientific results of operations are included with the Company's effective
November 1997. This acquisition did not have a material impact on the Company's
1997 results of operations nor its capital resources and liquidity. The pro
forma consolidated results of operations, as if the acquisition had taken place
at the beginning of fiscal 1996, would not have been materially different from
the reported amounts for fiscal 1996 and 1997.
Misan Group and Taiwan Peitz - On May 1, 1995, the Company acquired Taiwan
Peitz Company, Ltd., a water, paper process and refinery process treatment
business, which had been a licensee of the Company's products since 1974. On
November 7, 1995, the Company acquired the Misan Group, an industrial water,
paper process and fuel oil treatment company with headquarters in Naples, Italy
and subsidiaries in Spain and Portugal.
The Taiwan Peitz and Misan acquisitions have also been accounted for using
the purchase method of accounting. The combined purchase price for these
acquisitions was $43.4 million consisting of $32.5 million in cash paid in 1995,
$7.3 million paid in 1996 and $3.6 million paid in 1997. The goodwill resulting
from both acquisitions totaled approximately $25 million, which is amortized on
a straight-line basis over 40 years.
The operating results of these acquired businesses have been included in
the Consolidated Statements of Operations since the dates of acquisition. The
pro forma consolidated results of operations, as if the acquisitions had taken
place at the beginning of fiscal 1995, would not have been materially different
from the reported amounts.
F-14
18
3: INCOME TAXES
The components of earnings before income taxes and cumulative effect of
accounting change are (in millions):
1997 1996 1995
---- ---- ----
U.S. $106.2 $85.1 $ 75.6
Non-U.S 36.7 14.6 36.0
------ ---- ------
$142.9 $99.7 $111.6
====== ===== ======
The provision for income taxes consists of the following (in millions):
1997 1996 1995
---- ---- ----
Current:
Federal $34.6 $22.4 $31.8
State 2.9 4.3 4.4
Foreign 14.5 5.1 10.4
----- ----- -----
Total Current 52.0 31.8 46.6
Deferred:
Federal 0.5 2.9 (4.7)
State 0.1 0.5 (1.0)
Foreign (1.9) 0.2 2.4
----- ----- -----
Total Deferred (1.3) 3.6 (3.3)
----- ----- -----
Total Taxes $50.7 $35.4 $43.3
===== ===== =====
A reconciliation of the effective income tax rate with the statutory
federal income tax rate is as follows:
1997 1996 1995
---- ---- ----
Federal tax rate 35.0% 35.0% 35.0%
State and local taxes, net of
federal income taxes 1.4 3.1 2.0
Foreign tax credits (4.0) (4.8) --
Other items 3.1 2.2 1.8
---- ---- ----
Effective income tax rate 35.5% 35.5% 38.8%
==== ==== ====
F-15
19
Deferred income taxes reflect the estimated future tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities as of December
31 are as follows (in millions):
1997 1996
---- ----
Deferred Tax Assets:
Stock and benefit plans $ 20.0 $ 15.3
Operating loss carryforwards 9.1 4.2
Accrued liabilities not deducted until paid 17.1 19.3
------ ------
Total Deferred Tax Assets 46.2 38.8
Deferred Tax Liabilities:
Tax over book depreciation, net (24.7) (21.7)
Other (11.6) (6.8)
------ ------
Total Deferred Tax Liabilities (36.3) (28.5)
------ ------
Net Deferred Tax Assets $ 9.9 $ 10.3
====== ======
In 1997, income taxes classified as current and non-current liabilities
include deferred tax liabilities of $0.6 million and $14.3 million,
respectively. In addition, income taxes classified as current assets include
deferred tax assets of $19.6 million and income taxes classified as non-current
assets, which are included within investments and other on the Consolidated
Balance Sheets, include deferred tax assets of $5.1 million. In 1996, income
taxes classified as current assets include deferred tax assets of $22.7 million,
with the remaining deferred tax balance of $12.4 million classified as
non-current liabilities. Included in deferred tax assets are foreign operating
loss carryforwards, which mainly have an unlimited life.
The Company made income tax payments of $36.2 million, $45.8 million and
$46.0 million during the years 1997, 1996 and 1995, respectively.
The Company has not provided United States income taxes on $52.7 million of
unremitted earnings of foreign subsidiaries because management views such
earnings as being indefinitely invested.
F-16
20
4: GEOGRAPHIC INFORMATION
The Company operates principally in one industry segment which includes the
development, manufacture and sale of specialty chemical products.
The Company's areas of operation outside of the United States and Europe
principally include Canada, Latin America and Asia-Pacific. No single non-U.S.
country in which the Company produces or markets its products comprises more
than 10 percent of the Company's net sales, operating earnings or identifiable
assets. No single customer accounts for more than 10 percent of the Company's
revenues.
Information about the Company's operations in different geographic
locations is (in millions):
United Other
1997 States Europe Foreign Consolidated
- - ------------------------------------------------------------------------------
Net sales $ 711.2 $ 319.6 $ 264.0 $ 1,294.8
Operating earnings 120.3 39.4 30.2 189.9
Identifiable assets 706.9 417.9 308.8 1,433.6
- - ------------------------------------------------------------------------------
1996
- - ------------------------------------------------------------------------------
Net sales $ 641.1 $ 218.9 $ 177.0 $ 1,037.0
Operating earnings 90.4 12.2 23.1 125.7
Identifiable assets 702.0 412.8 303.5 1,418.3
- - ------------------------------------------------------------------------------
1995
- - ------------------------------------------------------------------------------
Net sales $ 555.9 $ 111.6 $ 85.0 $ 752.5
Operating earnings 78.6 15.2 16.2 110.0
Identifiable assets 395.7 142.7 92.1 630.5
- - ------------------------------------------------------------------------------
At December 31, 1997, the local currency is the functional currency of
non-U.S. operations representing 45% of consolidated identifiable assets. For
operations in highly inflationary economies, the U.S. dollar is the functional
currency. Identifiable assets of such operations were 6% of consolidated
identifiable assets at December 31, 1997.
United States identifiable assets include $0.3 million, $2.6 million and
$0.8 million of cash and cash equivalents and other investments at December 31,
1997, 1996 and 1995, respectively, that are available for general corporate
purposes.
Direct export sales of $14.2 million, $11.2 million and $10.8 million for
the years 1997, 1996 and 1995, respectively, are included in United States net
sales.
F-17
21
5: EARNINGS PER SHARE
In compliance with Financial Accounting Standards Board Statement No. 128,
"Earnings per Share," issued in February 1997, the Company has changed its
method of computing earnings per share effective with the fourth quarter 1997.
All prior periods presented have been restated to conform to the new
requirements which exclude contingently issuable shares and the dilutive effect
of stock options from the number of weighted average shares used in the
computation of basic earnings per share. The effect of Statement 128 on diluted
earnings per share is immaterial compared to previously disclosed fully diluted
earnings per share. Basic and diluted earnings per share are calculated as
follows (in millions, except per share amounts):
1997 1996 1995
-------- -------- --------
Basic Earnings per Share:
Net earnings before cumulative effect
of accounting change $ 92.2 $ 64.3 $ 68.3
Effect of preferred stock dividends, net of taxes (5.6) (5.3) (4.9)
-------- -------- --------
86.6 59.0 63.4
Cumulative effect of accounting change, net of taxes (6.0) -- --
-------- -------- --------
Net earnings available to common shareholders $ 80.6 $ 59.0 $ 63.4
======== ======== ========
Average Common Shares outstanding - basic 28.7 27.7 27.6
======== ======== ========
Basic Earnings per Common Share:
Before cumulative effect of accounting change $ 3.02 $ 2.13 $ 2.30
Cumulative effect of accounting change (0.21) -- --
-------- -------- --------
Basic earnings per Common Share $ 2.81 $ 2.13 $ 2.30
======== ======== ========
Diluted Earnings per Share:
Net earnings before cumulative effect
of accounting change $ 92.2 $ 64.3 $ 68.3
Effect of ESOP charge to operations assuming
conversion of Series A ESOP Convertible
Preferred Shares, net of taxes (2.7) (2.6) (2.1)
-------- -------- --------
89.5 61.7 66.2
Cumulative effect of accounting change, net of taxes (6.0) -- --
-------- -------- --------
Net earnings available to common shareholders $ 83.5 $ 61.7 $ 66.2
======== ======== ========
22
Average Common Shares outstanding - basic 28.7 27.7 27.6
Effect of dilutive securities:
Contingently issuable shares 0.2 0.1 0.1
Employee stock options 0.4 0.2 0.1
Assumed conversion of Series A ESOP
Convertible Preferred Shares 2.7 2.7 2.8
-------- -------- --------
Average Common Shares outstanding - diluted 32.0 30.7 30.6
======== ======== ========
Diluted Earnings per Common Share:
Before cumulative effect of accounting change $ 2.80 $ 2.01 $ 2.16
Cumulative effect of accounting change (0.19) -- --
-------- -------- --------
Diluted earnings per Common Share $ 2.61 $ 2.01 $ 2.16
======== ======== ========
Note 9 contains further disclosures regarding the Company's outstanding
stock options and contingently issuable shares (Incentive Plan). Note 8
describes the conversion provision of the Company's preferred stock in the ESOP.
F-18
23
6: LONG-TERM DEBT
Long-term debt at December 31 consisted of (in millions):
1997 1996
--------------------- ---------------------
Rate(1) Amount Rate(1) Amount
------ ------ ------ ------
Revolving credit agreement 5.83% $ 581.9 5.98% $ 548.0
Promissory note to Grace -- -- 5.87 100.0
ESOP debt 8.56 94.5 8.56 95.5
Other indebtedness 6.30 3.1 6.36 2.0
-------- --------
Total debt 679.5 745.5
Less current maturities 1.3 1.0
-------- --------
Long-term debt $ 678.2 $ 744.5
======== ========
(1) Weighted average interest rate for the year ended December 31.
On October 20, 1997, the Company entered into a Credit Agreement with a
syndicate of banks which provides for a five-year unsecured revolving credit
agreement in an amount of $750 million. The commitments made under the Credit
Agreement expire in October 2002. The Credit Agreement requires the Company,
among other things, to meet certain net worth and indebtedness tests.
Approximately $168.1 million of the Credit Agreement was unused at December 31,
1997.
Borrowings under the Credit Agreement bear interest at various rates based
on the types of borrowings used by the Company. Each type of borrowing bears
interest at a variable rate based on an index plus a margin. The borrowings
outstanding at year end for U.S. dollar loans bear interest at LIBOR plus a
margin and for Canadian dollar loans at market rates for Canadian bankers'
acceptances plus a margin. Margin pricing is dependent on the Company's selected
pricing option of either a specific financial ratio test or the Company's public
debt rating. The Company pays a facility fee based upon the selected pricing
option. At December 31, 1997, the Company is paying a facility fee of .08% of
the total commitment of funds provided by the banks. Commitment fees to maintain
the Credit Agreement totaled $1.3 million and $0.7 million during fiscal years
1997 and 1996, respectively, and are included in interest expense.
In 1989, the Company guaranteed a loan of $100 million to the ESOP Trust,
the proceeds of which were used by the trust for the purchase of the Company's
preferred stock (see Note 8). The loan and guarantee, which mature on June 19,
2009, are recorded in the Company's Consolidated Balance Sheets as long-term
debt and a reduction of shareholders' equity. With respect to the ESOP loan, the
Company is obligated, among other things, to maintain certain financial ratios
and meet certain net worth and indebtedness tests.
F-19
24
Scheduled maturities of long-term debt are as follows (in millions): 1998
- - $1.3; 1999 - $3.2; 2000 - $1.7; 2001 - $2.8; 2002 - $586.0; and 2003 through
2009 - $84.5.
Interest Rate Swaps - During the second quarter of 1996, the Company
entered into interest rate swap agreements, with maturities ranging from 1.5 to
5.5 years, to effectively convert $400 million of the Company's variable-rate
long-term debt to fixed interest rate obligations, thereby reducing the
Company's exposure to rising interest rates. Over the term of each swap
agreement, the Company exchanges interest payments with the swap counterparty
without exchanging the notional amount upon which the payments are based. The
differential to be paid or received is accrued and recognized as an adjustment
to interest expense. The related amount payable to such counterparties is
included in accrued liabilities.
The Company has designated the series of swaps as hedges against future
interest rate exposure on its variable-rate debt outstanding. The series of
swaps will hedge no more than the aggregate amount of variable-rate debt
outstanding. The Company may also designate individual swaps included in this
series as both a hedge against interest rate exposure and a hedge of the fair
value of future fixed-rate term debt replacing outstanding variable-rate debt.
In the event future fixed-rate term debt is issued, the Company intends to
terminate the designated swaps and amortize the gain or loss on such termination
over the remainder of the hedged period. In the event fixed-rate debt is not
issued for the entire remaining hedged period, a portion of the termination gain
or loss will be included in net earnings.
Fair Value of Debt and Interest Rate Swaps - The fair value of the
Company's short-term notes payable, long-term debt and interest rate swaps, all
of which are held for purposes other than trading, at December 31 is summarized
below (in millions):
1997 1996
-------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
Notes payable $ 26.6 $ 26.6 $ 0.8 $ 0.8
Long-term debt 679.5 692.7 745.5 753.3
Interest rate swap payable 0.5 7.2 0.7 5.6
The estimated fair values of these financial instruments are generally
based on quoted market prices or on current rates available to the Company for
financial instruments of similar remaining maturities and do not include
potential tax effects or possible expenses incurred in settling the transactions
to terminate the related agreements.
Notes payable are borrowings under uncommitted lines of credit with an
average interest rate of 5.76% at December 31, 1997.
25
Interest Expense - Net ESOP expense (see Note 8) is characterized as
interest expense in the accompanying financial statements. The effect of the
interest rate swap agreements referred to above was to increase interest expense
by $3.3 million and $2.0 million in 1997 and 1996, respectively. Cash payments
for interest amounted to $50.4 million, $17.8 million and $1.6 million for the
years 1997, 1996 and 1995, respectively. Interest expense is capitalized on
major construction projects. Interest expense components for the years ending
December 31 are as follows (in millions):
1997 1996 1995
---- ---- ----
Gross interest expense $45.9 $26.1 $ 1.6
Capitalized interest (0.4) (0.4) (0.5)
----- ----- -----
Interest expense $45.5 $25.7 $ 1.1
===== ===== =====
F-20
26
7: LONG-TERM LEASES
Total rental expense for all leases amounted to $23.2 million, $18.8
million and $14.9 million in 1997, 1996 and 1995, respectively. The future
rental commitments, primarily for automobiles, as of December 31, 1997 for all
noncancelable long-term leases are (in millions): 1998 - $12.1; 1999 - $7.0;
2000 - $3.7; 2001 - $1.4; 2002 - $1.1; and $0.2 thereafter.
8: EMPLOYEE STOCK OWNERSHIP (ESOP) AND 401(k) PLAN
In 1989, the Company established an ESOP and a related trust as a
long-term benefit for substantially all of its U.S. employees. This plan
supplements the Company's employee retirement plan. Under this plan, the Company
sold 500,000 shares of a new Series A ESOP Convertible Preferred Stock to the
trust for $100 million. This series of preferred stock has one vote per share
with cumulative dividends at a rate of 8% and is stated at the aggregate
liquidation preference on the Consolidated Balance Sheets. The Company arranged
for and guaranteed a loan of $100 million (see Note 6) to the trust for the
purchase of the preferred stock. Proceeds of the loan were primarily used for
the purchase of common treasury stock to be used for future conversion and
redemption of the preferred stock, which is presently convertible into 2,648,671
shares of common stock. The loan and guarantee are recorded in the Company's
Consolidated Balance Sheets as long-term debt and a reduction in shareholders'
equity.
Effective January 1, 1990, the Company's 401(k) program was integrated
into the Employee Stock Ownership Plan. Employees may invest 2 to 15 percent of
eligible compensation. Company matches, equal to 25 percent of the first 4
percent of employees' investments, fully vest to employees upon the completion
of 5 years of service. The Company's matching contributions, which are included
in ESOP expense, are made in the form of the ESOP Convertible Preferred Stock.
The value of such matching contributions amounted to $1.7 million in 1997, $1.5
million in 1996 and $1.4 million in 1995.
After satisfying the 401(k) matching contributions, the remaining shares
of ESOP stock are allocated to each participant based on the ratio of the
participant's compensation to total compensation of all participants. During
1997, 6,409 shares of the Preferred Stock were converted to Common Shares by
plan participants and permanently retired. The number of shares allocated and
unallocated at December 31 are as follows:
1997 1996
------- -------
Allocated 134,355 121,911
Unallocated 341,016 359,869
------- -------
Total shares held by ESOP 475,371 481,780
======= =======
The Company is required to make quarterly contributions to the Plan which
enable the trust to service its indebtedness. Net ESOP cost for the Company is
comprised of the following elements (in millions):
F-21
27
1997 1996 1995
---- ---- ----
ESOP expense $ 9.5 $ 9.3 $ 9.2
Preferred dividends
(charged to retained earnings) (7.7) (7.7) (7.8)
----- ----- -----
ESOP expense charged to earnings $ 1.8 $ 1.6 $ 1.4
===== ===== =====
ESOP contributions $ 9.1 $ 9.0 $ 8.8
===== ===== =====
The ESOP expense is calculated using the 80-percent-of-shares-allocated
method. To the extent that this expense exceeds the ESOP's annual debt service
requirements, an adjustment is made to the shareholders' equity reduction to
reflect the cumulative effect of the excess charges.
F-22
28
9: STOCK-BASED COMPENSATION AND SHAREHOLDER RIGHTS PLANS
The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," which results in no compensation expense being recognized
for its stock option plans or its stock purchase plan.
As required by Statement 123, pro forma information regarding net income
and earnings per share has been determined as if the Company had accounted for
its stock options under the fair value method. A weighted average fair value of
$16.96 for options granted in 1997, $9.63 for those granted in 1996 and $9.78
for those granted in 1995 was estimated as of the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for option grants in 1997, 1996 and 1995, respectively:
1997 1996 1995
---- ---- ----
Dividend yield 2.36% 3.4% 3.4%
Volatility .226 .203 .203
Risk-free interest rate 5.77% 6.22% 6.22%
Weighted average expected life, in years 6.65 6.75 6.75
Option valuation models use highly subjective assumptions to determine the
fair value of traded options with no vesting or trading restrictions. Because
options granted under the Company's Stock Option Plans have vesting requirements
and cannot be traded, and because changes in the assumptions can materially
affect the fair value estimate, in management's opinion, the existing valuation
models do not necessarily provide a reliable measure of the fair value of its
employee stock options.
For purposes of the pro forma disclosures required by Statement 123, the
estimated fair value of the options is amortized to expense over the options'
vesting period. Statement 123 requires only that the income effects of options
granted subsequent to December 31, 1994 be included in the pro forma
disclosures. Since a portion of the Company's stock options vest over one- and
two-year periods, and additional options are granted each year, the pro forma
effect on 1995 and 1996 net income reported below is not representative of the
effect of fair value stock option expense on future years' pro forma net income.
For purposes of the pro forma disclosures, compensation expense is recognized
under the stock purchase plan for the difference in price paid by employees and
the fair value of the Company's stock at the date of purchase. The Company's pro
forma information follows (in millions, except for per share information):
F-23
29
Year Ended December 31,
--------------------------------
1997 1996 1995
----- ----- -----
Pro forma net income $78.9 $60.5 $64.2
Pro forma earnings per share:
Basic
Before cumulative effect of accounting change 2.76 2.00 2.15
Net earnings 2.55 2.00 2.15
Diluted
Before cumulative effect of accounting change 2.59 1.89 2.03
Net earnings 2.40 1.89 2.03
Option Plans - Options granted under the Company's Stock Option Plans are
at the fair value at the date of grant. The period during which these options
become exercisable ranges from date of grant to two years after date of grant.
Unexercised options expire ten years after date of grant. No individual may
receive an option if that individual owns (or would own if options were
exercised) stock possessing five percent of the voting power or value of all
classes of stock of the Company.
Option activity is summarized as follows:
Number of Weighted Average
Shares Price per Share
---------- ----------------
Outstanding at January 1, 1995 2,564,269 $48.126
Granted 967,688 43.749
Canceled (40,998) 52.916
Forfeited (5,006) 44.875
Exercised (47,730) 21.606
--------- ---------
Outstanding at December 31, 1995 3,438,223 47.210
Granted 493,841 43.493
Canceled (44,715) 51.838
Forfeited (12,727) 44.450
Exercised (378,120) 39.501
--------- ---------
Outstanding at December 31, 1996 3,496,502 47.470
Granted 687,425 62.676
Canceled (8,191) 57.238
Forfeited (15,773) 50.083
Exercised (965,542) 44.404
--------- ---------
Outstanding at December 31, 1997 3,194,421 51.631
========= =========
Exercisable at December 31, 1997 2,659,399 50.442
========= =========
F-24
30
The exercise prices for options outstanding as of December 31, 1997 ranged
from $23.375 to $62.75. The options outstanding and exercisable at December 31,
1997 are segregated into groups based on ranges of exercise price below:
Wtd. Avg. Wtd. Avg.
Exercise Remaining
Shares Outstanding at 12/31/97: Range of Prices Price Life
------------------- -------- ---------
31,214 $23.375 - $29.125 $23.688 .47 yrs
134,494 33.500 - 39.250 38.517 6.94 yrs
1,467,208 40.500 - 49.625 45.065 6.90 yrs
789,042 50.250 - 59.813 56.668 4.62 yrs
772,463 60.000 - 62.750 62.363 6.56 yrs
---------
3,194,421 $23.375 - $62.750 $51.631 6.68 yrs
=========
Wtd. Avg.
Exercise
Shares Exercisable at 12/31/97: Range of Prices Price
------------------ ---------
31,214 $23.375 - $29.125 $23.688
134,494 33.500 - 39.250 38.517
1,325,518 40.500 - 49.625 45.255
781,506 50.250 - 59.813 56.638
386,667 60.000 - 62.750 62.007
---------
2,659,399 $23.375 - $62.750 $50.442
=========
At December 31, 1997, the Company had remaining an aggregate of 5,067,205
Common Shares reserved for issuance under its Stock Option Plans.
Employee Stock Purchase Plan - Effective July 1, 1997, the Company
established an Employee Stock Purchase Plan for all employees meeting certain
eligibility criteria. Under the Plan, eligible employees may purchase through a
series of semiannual offerings, each July and January, shares of the Company's
Common Stock, subject to certain limitations. The purchase price of each share
is 85 percent of the lesser of its fair market value on the grant date or on the
exercise date. The aggregate number of whole shares of Common Stock purchasable
under the option shall not exceed 10 percent of the employee's base
compensation. At December 31, 1997, 400,000 shares were available for purchase
under the plan. Based on the market price of common stock on the exercise date,
the Company issued approximately 47,215 shares in January 1998.
F-25
31
Incentive Plan - The Employee Stock Incentive Plan provides that up to
2,500,000 shares of common stock may be granted through April 13, 2005, at the
discretion of the Board of Directors, to key employees and non-employee
Directors at no cost to the employees or Directors. The Company granted 81,326
shares and 72,407 shares during 1997 and 1996, respectively, at a weighted
average value of $62.64 in 1997 and $43.58 in 1996. Key employees receiving
grants are entitled to receive dividends, but assumption of full beneficial
ownership is contingent at the time of grant. In the event the employee does not
remain in continuous employment for the periods stipulated, the shares are
canceled and revert to the Company for reissuance under the Plan.
The aggregate fair market value of the shares granted under this Plan is
considered unearned compensation at the time of grant and compensation is earned
ratably over the stipulated period. Compensation cost included in net income is
$1.8 million in 1997, $1.9 million in 1996, and $2.5 million in 1995.
At December 31, 1997, the Company had remaining an aggregate of 488,070
Common Shares available for issuance under its Employee Stock Incentive Plan.
Common Stock Shareholder Rights Plan - On September 8, 1988, the Board of
Directors declared a distribution of one Stock Purchase Right for each Common
Share outstanding. Each right will entitle the holder to buy from the Company a
unit consisting of one Common Share at an exercise price of $75 per unit. The
rights become exercisable ten days after a public announcement that a person or
group has acquired 20 percent or more of the Company's Common Shares or has
commenced a tender offer for 20 percent or more of the Common Shares. The rights
may be redeemed prior to becoming exercisable by action of the Board of
Directors at a redemption price of $.01 per right. If more than 20 percent of
the Company's Common Shares become held by a beneficial owner, other than
pursuant to an offer deemed in the best interests of the shareholders by the
Company's independent directors, each right may be exercised for Common Shares,
or other property, of the Company having a value of twice the exercise price of
each right. If the Company is acquired by any person after the rights become
exercisable, each right will entitle its holder to receive common shares of the
acquiring company having a market value of twice the exercise price of each
right. The rights expire on September 19, 1998.
In February 1998, the Board of Directors approved a new Shareholder Rights
Plan having a 10-year term which expires on September 19, 2008 which provides
for the declaration of a distribution of one Share Purchase Right for each
Common Share outstanding effective September 19, 1998. The exercise price of
each new right will be $250.00. This new plan is substantially the same as the
1988 plan.
F-26
32
10: EMPLOYEE RETIREMENT PLANS
The Company has defined benefit plans to provide pension benefits to
substantially all of its U.S. employees and for employees of several non-U.S.
operations. The benefits are primarily based on years of service and the
employee's final average compensation. The Company's funding policy is to
contribute an amount annually based upon actuarial and economic assumptions
designed to achieve adequate funding of projected benefit obligations. Plan
assets are principally invested in listed common stocks, bonds and common trust
funds.
U.S. Plans
The salary scale assumption is graded by age with an underlying inflation
assumption of 4% for U.S. plans. Other primary assumptions used to develop the
Company's U.S. net periodic pension expense and the actuarial present value of
the benefit obligations are as follows:
1997 1996 1995
---- ---- ----
Discount rate 7.25% 7.5% 7.0%
Long-term rate of return on plan assets 9.5% 9.25% 9.25%
Net periodic pension expense for the Company's U.S. defined benefit plans
consists of the following (in millions):
1997 1996 1995
--------- --------- -------
Service cost $ 7.3 $ 7.6 $ 5.5
Interest cost 14.0 12.8 11.4
Return on plan assets (37.0) (27.1) (31.2)
Net amortization and deferral 22.8 14.8 20.1
--------- --------- -------
Net periodic pension expense $ 7.1 $ 8.1 $ 5.8
========= ========= =======
F-27
33
The following table sets forth the actuarial present value of benefit
obligations and funded status at December 31 for the Company's U.S. plans (in
millions):
1997 1996
------- --------
Actuarial present value of benefit obligations:
Vested benefits $(168.6) $(148.4)
Nonvested benefits (9.0) (8.5)
------- --------
Accumulated benefit obligation (177.6) (156.9)
Effect of projected future salary increases (27.9) (25.1)
------- --------
Projected benefit obligation (205.5) (182.0)
Plan assets at fair value 205.3 176.4
------- --------
Projected benefit obligation in excess of plan assets (0.2) (5.6)
Unrecognized net gain (36.7) (25.6)
Unrecognized prior service cost 5.2 6.0
Other (2.8) (2.3)
------- --------
Net pension liability included in the Consolidated Balance Sheets $ (34.5) $ (27.5)
======== ========
Non-U.S. Plans
Primary assumptions used to develop the Company's non-U.S. net periodic
pension expense and the actuarial present value of the benefit obligations are
as follows:
1997 1996 1995
---- ---- ----
Salary increase 3.0-6.5% 3.0-7.0% 4.0-6.5%
Discount rate 6.0-8.5% 6.0-9.0% 6.5-8.5%
Long-term rate of return on plan assets 6.0-9.0% 6.0-9.0% 7.0-9.0%
Net periodic pension expense for the Company's non-U.S. defined benefit
plans consists of the following (in millions):
1997 1996 1995
------- ------- -------
Service cost $ 3.2 $ 2.2 $ 1.3
Interest cost 4.5 2.8 1.6
Return on plan assets (4.6) (2.8) (2.1)
Net amortization and deferral -- -- 0.5
------- ------- -------
Net periodic pension expense $ 3.1 $ 2.2 $ 1.3
======= ======= =======
34
The following table sets forth the actuarial present value of benefit
obligations and funded status at December 31 for the Company's non-U.S. plans
(in millions):
Assets Exceed Accumulated
Accumulated Benefits Ex-
Benefits ceed Assets
--------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- ---------
Actuarial present value of benefit obligations:
Vested benefits $ (40.7) $ (32.4) $ (4.5) $ (8.3)
Nonvested benefits (4.5) (3.6) (3.3) --
-------- -------- -------- ---------
Accumulated benefit obligation (45.2) (36.0) (7.8) (8.3)
Effect of projected future salary increases (13.8) (14.7) (4.2) (2.6)
-------- -------- -------- ---------
Projected benefit obligation (59.0) (50.7) (12.0) (10.9)
Plan assets at fair value 62.6 55.9 1.7 1.7
-------- -------- -------- ---------
Projected benefit obligation in excess of plan assets 3.6 5.2 (10.3) (9.2)
Unrecognized net gain (1.3) (2.6) 0.8 (0.1)
Unrecognized prior service cost -- -- 0.3 0.4
Other 1.3 1.5 -- 0.1
-------- -------- -------- ---------
Net pension asset (liability) included in the
Consolidated Balance Sheets $ 3.6 $ 4.1 $ (9.2) $ (8.8)
======== ======== ======== =========
F-28
35
11: POSTRETIREMENT BENEFITS
The Company pays limited medical and dental insurance premiums on behalf
of certain early retirees as well as providing a small life insurance benefit
for certain retirees.
Employee benefit plans at December 31, 1997 and 1996 include $8.5 million
and $7.8 million, respectively, representing the actuarially determined
liability for these benefits. The actuarially determined expense was $1.7
million, $1.5 million and $1.1 million in 1997, 1996 and 1995, respectively.
12: INTEGRATION/RESTRUCTURING
To achieve reductions in operating costs and to integrate the operations
of the former Betz Laboratories, Inc. (Betz) and the former Dearborn business
(Dearborn), the Company has incurred incremental and non-recurring expenses that
are reported as Integration/Restructuring operating expenses.
Integration expenses are incremental and non-recurring costs necessary to
integrate Dearborn and Betz. Integration expenses amounted to $16.6 million and
$20.4 million for 1997 and 1996, respectively. These expenses are associated
with the activities of integration teams responsible for merging the two
companies for the benefit of future operations and include items such as
consulting and legal fees, integration bonuses, training, travel and Betz
employee relocation expenses. These costs are expensed as incurred. Such
integration activities were completed in 1997.
The provision for restructuring is for estimated exit costs associated
with the decisions to close Betz facilities and severance costs for Betz
employees. These costs are accrued when the decisions are made and announced and
exit costs can be reasonably estimated. A $9.6 million provision for
restructuring, net of the 1995 provision reversal noted below, was recorded in
1996 for the closure of Betz facilities and the severance of Betz employees
located throughout the world. Additionally, $26.0 million and $12.8 million
restructuring provisions for the closure of Dearborn facilities and severance
and relocation costs for worldwide Dearborn employees were also recorded in 1996
and 1997, respectively, which are part of the overall purchase price allocation.
These combined actions include employee termination benefits for approximately
550 technical, production, administrative and support employees, as well as
office consolidations and asset dispositions. All restructuring plans were
completed in 1997.
In connection with the Dearborn acquisition and restructuring decisions,
at December 31, 1997, approximately $11.9 million of assets are held for sale.
These assets, included in property, plant and equipment, are primarily
production facilities of Dearborn. The Company estimates it will complete the
sale of such facilities by 1999.
The $15.6 million provision for restructuring recorded in 1995 was for a
series of actions to reduce operating costs. The provision included the
writedown associated with the closure of two blending plants and other asset
dispositions, and employee termination benefits covering approximately 150
technical, production, administrative and support employees located primarily in
the United States. As a result of the completion of these restructuring actions,
$3.5 million of the 1995 restructuring provision was reversed in 1996. The lower
than anticipated cost resulted from fewer than planned terminations and higher
than planned attrition, along with lower than estimated losses on the closure of
a blending plant.
F-29
36
A reconciliation of activity with respect to the restructuring accruals is
as follows (in millions):
1997 1996
------ ------
Balance at beginning of year $ 30.9 $ 7.5
Provision:
Included in Goodwill (see Note 2) 12.8 26.0
Charged to Consolidated Statements of
Operations - net (1.0) 9.6
Cash Payments (23.5) (11.4)
Noncash - Fixed asset writedowns and
foreign exchange translation (3.3) (0.8)
------ ------
Balance at end of year $ 15.9 $ 30.9
====== ======
The remaining reserve at December 31, 1997 is expected to be sufficient to
complete these actions. Cash flows from operations and available financing
sources are expected to be sufficient to meet restructuring liabilities.
F-30
37
13: QUARTERLY FINANCIAL INFORMATION (unaudited)
The following is a summary of quarterly financial information for the
years ended December 31, 1997 and 1996 (in millions, except for per share data):
1997 Quarter Ended
-----------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Net Sales $ 306.4 $ 322.4 $ 331.8 $ 334.2
Gross Profit 184.2 193.5 199.0 199.4
Earnings Before Income Taxes
and Cumulative Effect of
Accounting Change (Note 1) 28.8 32.8 41.4 39.9
Earnings Before
Cumulative Effect of
Accounting Change 18.6 21.1 26.7 25.8
Net Earnings 18.6 21.1 26.7 19.8
Net Earnings Per Common Share:
Basic
Before Cumulative Effect
of Accounting Change .61 .69 .88 .84
Net Earnings .61 .69 .88 .63
Diluted
Before Cumulative Effect
of Accounting Change .57 .64 .81 .78
Net Earnings .57 .64 .81 .59
Cash Dividends Declared
Per Common Share .375 .375 .38 .38
Common Share Market
Prices:
High Price 67-1/4 67-3/8 71 70-1/8
Low Price 55-1/4 61-1/4 59-11/16 57-11/16
1996 Quarter Ended
-------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Net Sales $ 199.5 $ 210.1 $ 304.2 $ 323.2
Gross Profit 122.6 129.3 183.8 192.0
Earnings Before Income Taxes
and Cumulative Effect of
Accounting Change (Note 1) 31.5 34.9 16.3 17.0
Earnings Before
Cumulative Effect of
Accounting Change 19.7 22.3 10.9 11.4
Net Earnings 19.7 22.3 10.9 11.4
Net Earnings Per Common Share:
Basic
Before Cumulative Effect
of Accounting Change .67 .76 .34 .36
Net Earnings .67 .76 .34 .36
Diluted
Before Cumulative Effect
of Accounting Change .62 .71 .34 .34
Net Earnings .62 .71 .34 .34
Cash Dividends Declared
Per Common Share .37 .37 .375 .375
Common Share Market
Prices:
High Price 47-1/4 48 53-1/2 60-1/8
Low Price 40-1/8 41-3/4 43-1/8 50
The 1996 and first three quarters of 1997 earnings per share amounts have
been restated to comply with Statement of Financial Accounting Standards No.
128, "Earnings per Share." The common stock of the Company is traded on the New
York Stock Exchange under the symbol BTL. The approximate number of record
holders of Common Shares as of January 30, 1998, was 3,466.
F-31
38
BETZDEARBORN INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In millions, except per share amounts)
Six Months Ended
June 30,
------------------------
1998 1997
--------- ---------
Net Sales $ 619.3 $ 628.8
Operating Costs and Expenses:
Cost of products sold 254.3 251.1
Selling, research and administrative 292.6 277.7
Integration/restructuring - 15.3
--------- ---------
546.9 544.1
OPERATING EARNINGS 72.4 84.7
Other Income (Expense):
Interest (19.7) (23.0)
Investment and other (0.2) (0.2)
--------- ---------
(19.9) (23.2)
--------- ---------
EARNINGS BEFORE INCOME TAXES 52.5 61.5
Income Taxes 18.6 21.8
--------- ---------
NET EARNINGS $ 33.9 $ 39.7
========= =========
Net earnings per Common Share:
Basic $ 1.06 $ 1.30
========= =========
Diluted $ 1.01 $ 1.21
========= =========
Cash dividends declared per Common Share $ .76 $ .75
========= =========
Average number of Common Shares:
Basic 29.4 28.5
========= =========
Diluted 32.4 31.8
========= =========
See notes to consolidated financial statements.
F-32
39
BETZDEARBORN INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
June 30, December 31,
1998 1997
---------- ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 22.7 $ 36.9
Trade accounts receivable, less allowances:
1998 -- $7.0; 1997 -- $7.2 272.9 293.0
Inventories:
Finished products and goods purchased for resale 48.1 49.2
Raw materials 47.6 45.1
---------- ----------
95.7 94.3
Income taxes 20.5 19.6
Prepaid expenses and other 29.6 36.2
---------- ----------
TOTAL CURRENT ASSETS 441.4 480.0
PROPERTY, PLANT AND EQUIPMENT -- at cost
Land 50.3 48.9
Buildings 194.6 199.0
Machinery and equipment 578.6 562.4
Construction in progress 38.6 15.8
---------- ----------
862.1 826.1
Less allowance for depreciation (453.5) (424.3)
---------- ----------
408.6 401.8
OTHER ASSETS
Investments and other 20.9 22.8
Goodwill -- net of accumulated amortization:
1998 -- $23.7; 1997 -- $17.8 441.8 447.7
Other intangibles -- net of accumulated amortization:
1998 -- $10.2; 1997 -- $8.8 80.4 81.3
---------- ----------
543.1 551.8
---------- ----------
TOTAL ASSETS $ 1,393.1 $ 1,433.6
========== ==========
F-33
40
BETZDEARBORN INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(In millions, except share amounts)
June 30, December 31,
1998 1997
---------- ------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 64.6 $ 77.7
Payroll and related taxes 34.9 47.7
Notes payable 4.7 26.6
Accrued restructuring costs 12.0 15.9
Other accrued liabilities 38.7 43.7
Income taxes 6.8 7.4
Dividends payable 11.3 11.2
Current portion of long-term debt 1.3 1.3
---------- ----------
TOTAL CURRENT LIABILITIES 174.3 231.5
LONG-TERM DEBT -- less portion classified as current 680.1 678.2
OTHER LONG-TERM LIABILITIES
Income taxes 16.4 14.3
Employee benefit plans 57.4 54.5
Other 4.1 2.7
---------- ----------
77.9 71.5
SHAREHOLDERS' EQUITY
Preferred shares, $.10 par value: authorized 1,000,000 shares;
issued 1998 -- 471,751 shares; 1997 -- 475,371 shares 94.4 95.0
Guarantee of related ESOP debt (88.0) (88.6)
Common shares, $.10 par value: authorized -- 250,000,000 shares;
issued 1998 -- 33,630,831 shares; 1997 -- 33,631,330 shares 3.4 3.4
Capital in excess of par value of shares 135.8 131.6
Retained earnings 508.7 501.1
Cost of common shares in treasury: 1998 -- 3,976,208 shares;
1997 -- 4,181,807 shares (149.2) (155.0)
Unearned compensation (4.6) (3.9)
Foreign currency translation adjustments (39.7) (31.2)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 460.8 452.4
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,393.1 $ 1,433.6
========== ==========
See notes to consolidated financial statements.
F-34
41
BETZDEARBORN INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In millions)
Six Months Ended
June 30,
--------------------
1998 1997
------- -------
OPERATING ACTIVITIES
Net earnings $ 33.9 $ 39.7
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 33.2 32.8
Amortization 7.9 7.5
Compensation and employee benefit plans 4.6 5.4
Changes in operating assets and liabilities, net of business
acquisitions:
Accounts receivable 17.6 (41.9)
Inventories (2.8) (9.0)
Prepaid expenses and other 5.1 (6.2)
Accounts payable and accrued expenses (28.7) (16.2)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 70.8 12.1
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (46.0) (30.8)
Proceeds from sales of long-term assets 3.2 6.0
Purchases of businesses and long-term investments (3.5) 0.2
Other, net - (1.0)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (46.3) (25.6)
FINANCING ACTIVITIES
Borrowings under credit facilities 5.8 9.8
Net short-term repayments (21.8) -
Dividends paid (26.3) (25.2)
Proceeds from issuance of common shares,
including treasury shares 5.4 29.5
------- -------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES (36.9) 14.1
Effect of exchange rate changes on cash (1.8) (1.6)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (14.2) (1.0)
Cash and Cash Equivalents at Beginning of Year 36.9 38.2
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22.7 $ 37.2
======= =======
See notes to consolidated financial statements.
F-35
42
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
JUNE 30, 1998 AND 1997
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of
BetzDearborn Inc. (the "Company") for the six-month periods ended June 30, 1998
and 1997 have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Certain amounts in the financial statements for
the year ended December 31, 1997 have been reclassified to conform with 1998
classifications. Operating results for the six-month period ended June 30, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the audited
consolidated financial statements and footnotes thereto of the Company included
elsewhere in this Registration Statement and Prospectus of Hercules Incorporated
and Hercules Trust I, Hercules Trust II, Hercules Trust III, and Hercules Trust
IV.
The Company is required starting in 1998 to report information about
comprehensive income in its annual and interim financial statements. Financial
Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income,"
requires companies to disclose in their annual reports the total, as well as the
components, of comprehensive income and in their interim reports the total
amount. The Company's components of comprehensive income are net income and
foreign currency translation adjustments which totaled to a gain of $25.4
million and $10.5 million for the first six months of 1998 and 1997,
respectively.
In the fourth quarter of 1997, the Company changed its method of
accounting for business process reengineering costs incurred in connection with
its ongoing major project that combines business process reengineering and
information technology transformation. This accounting change was mandated by
the consensus position of the Financial Accounting Standards Board's Emerging
Issues Task Force (Issue No. 97-13). Effective October 1, 1997, the Company's
policy is that all such costs are expensed as incurred, whereas previously such
costs were capitalized and amortized subsequently. In the fourth quarter of
1997, business process reengineering costs capitalized through September 30,
1997 were written off as a cumulative-effect-type adjustment.
Note 2 - Common Shares Reserved for Stock Plans
At June 30, 1998, 4,986,186 and 425,599 Common Shares were reserved for
possible issuance pursuant to the exercise of stock options and grants under
the Company's Stock Option and Incentive Plans, respectively. An additional
352,785 Common Shares were reserved for purchase through payroll deductions
under the terms of the Employee Stock Purchase Plan. Further, 2,639,000 Common
Shares were reserved for possible conversion of the Series A ESOP Convertible
preferred stock.
Note 3 - Earnings per Share
In compliance with Financial Accounting Standards Board Statement No. 128,
"Earnings per Share," the Company has changed its method of computing earnings
per share and has restated the prior year to conform to the new requirements.
Basic and diluted earnings per share as calculated under Statement 128 are as
follows (in millions, except per share amounts):
F-36
43
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998 AND 1997
Six months ended
June 30, June 30,
-------- --------
1998 1997
-------- --------
Basic Earnings per Share:
Net earnings $ 33.9 $ 39.7
Effect of preferred stock dividends, net of taxes (2.8) (2.8)
-------- --------
Net earnings available to common shareholders $ 31.1 $ 36.9
======== ========
Average Common Shares outstanding - basic 29.4 28.5
======== ========
Basic Earnings per Common Share $ 1.06 $ 1.30
======== ========
Diluted Earnings per Share:
Net earnings $ 33.9 $ 39.7
Effect of ESOP charge to operations assuming
conversion of Series A ESOP Convertible
Preferred Shares, net of taxes (1.4) (1.3)
-------- --------
Net earnings available to common shareholders $ 32.5 $ 38.4
======== ========
Average Common Shares outstanding - basic 29.4 28.5
Effect of dilutive securities:
Contingently issuable shares 0.2 0.1
Employee stock options 0.2 0.5
Assumed conversion of Series A ESOP Convertible
Preferred Shares 2.6 2.7
-------- --------
Average Common Shares outstanding - diluted 32.4 31.8
======== ========
Diluted Earnings per Common Share $ 1.01 $ 1.21
======== ========
Note 4 - Pending Accounting Changes
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which is required to be adopted for fiscal years beginning after December 15,
1997. Statement 131 will require the Company to disclose revenues and other
financial information pertaining to the business segments by which the Company
is managed, as well as the factors management used to determine these segments.
The Company is currently evaluating the requirements of Statement 131 to
determine how to present the required information in its financial statements
and expects to implement this statement in the fourth quarter of 1998.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," was issued by the Financial Accounting
Standards Board in June 1998. The Standard will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
the derivatives will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings, or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The change in a derivative's fair value related to the ineffective portion of a
hedge, if any, will be immediately recognized in earnings. The Company expects
to adopt this Standard on or before the beginning of its fiscal year 2000. The
effect of adopting the Standard is currently being evaluated, but is not
expected to have a material effect on the Company's financial position or
results of operations.
Note 5 - Subsequent Event - Hercules Merger Agreement
On July 30, 1998, the Company and Hercules Incorporated ("Hercules")
announced that they had entered into an Agreement and Plan of Merger, dated as
of July 30, 1998 (the "Merger Agreement"), pursuant to which a wholly owned
subsidiary of Hercules would be merged with and into the Company (the
"Merger"), with the Company surviving the Merger as a wholly owned subsidiary
of Hercules. In the Merger, all of the Company's Common Shares (including
Company Common Shares received upon conversion of the Company's Series A
ESOP Convertible Preferred Shares) would be converted into the right to receive
$72 per share in cash. In addition, outstanding employee stock options would be
cashed out in the Merger. As a result of the Merger, Hercules will assume all of
the Company's outstanding debt, which is estimated to be approximately $700
million. The Merger is subject to certain conditions, including
F-37
44
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998 AND 1997
approval of the Merger Agreement and the Merger by the Company's shareholders,
and receipt of regulatory approvals. The Merger is currently expected to be
consummated on or about October 15, 1998.
F-38
45
(b) Pro Forma Financial Information
Hercules Incorporated
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Financial Statements
reflect the acquisition by merger of all of the outstanding equity securities of
BetzDearborn Inc. ("BetzDearborn") by Hercules Incorporated ("Hercules").
The following Unaudited Pro Forma Financial Statements are attached to this
report:
Unaudited Pro Forma Condensed Combined Balance Sheet
at June 30, 1998........................................................ PF-2
Unaudited Pro Forma Condensed Combined Statement of
Income for the year ended December 31, 1997............................. PF-3
Unaudited Pro Forma Condensed Combined Statement of
Income for the six months ended June 30, 1998........................... PF-4
Notes to Unaudited Pro Forma Condensed Combined
Financial Statements.................................................... PF-5
The Unaudited Pro Forma Condensed Combined Balance Sheet reflects the
acquisition as if it had occurred on June 30, 1998. The Unaudited Pro Forma
Condensed Combined Statements of Income for the year ended December 31, 1997 and
for the six months ended June 30, 1998 reflect the acquisition as if it had
occurred at the beginning of the year ended December 31, 1997. The pro forma
information is based on the historical financial statements of Hercules and
BetzDearborn after giving effect to the acquisition using the purchase method of
accounting. Under this method of accounting, the aggregate purchase price is
allocated to assets acquired and liabilities assumed based on their estimated
fair values. For purposes of the Unaudited Pro Forma Condensed Combined
Financial Statements, the excess of the purchase price over the book value of
the net assets of BetzDearborn has been recorded as goodwill. The actual
allocation of the purchase price will be determined within a reasonable time
after consummation of such transaction and will be based on a complete
evaluation of the assets acquired and liabilities assumed. Accordingly, the
information presented herein may differ from the final purchase price
allocation. The Unaudited Pro Forma Condensed Combined Financial Statements also
reflect assumptions and adjustments deemed appropriate by Hercules, which are
described in the accompanying notes to the Unaudited Pro Forma Condensed
Combined Financial Statements. Cost savings benefits from synergies to be
derived from the acquisition, which may be significant, are not reflected in the
Unaudited Pro Forma Condensed Combined Financial Statements.
The Unaudited Pro Forma Condensed Combined Financial Statements do not purport
to be indicative of Hercules' financial position or results of operations had
the acquisition actually occurred on the dates presented nor is it necessarily
indicative of Hercules' future financial position or future operating results.
The Unaudited Pro Forma Condensed Combined Financial Statements should be read
in conjunction with the separate audited historical consolidated financial
statements of Hercules and the notes thereto set forth in Hercules' 1997 Annual
Report on Form 10-K and the unaudited financial statements of Hercules for the
periods ended March 31, 1998 and June 30, 1998, as set forth in its Quarterly
Reports on Form 10-Q for these periods, and the historical consolidated
financial statements of BetzDearborn and the notes thereto which are included in
this Current Report on Form 8-K.
In the opinion of Hercules' management, subject to finalization of the purchase
price allocation, all adjustments have been made that are necessary to present
fairly the pro forma data.
PF-1
46
HERCULES INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1998
(IN MILLIONS)
PRO FORMA PRO FORMA
HERCULES BETZDEARBORN ADJUSTMENTS COMBINED
ASSETS
Current Assets:
Cash and Cash Equivalents $ 32 $ 23 $ 55
Accounts and notes receivable, net 420 273 693
Inventories 267 96 363
Income Taxes 49 20 69
Other Current Assets/Prepaid Expenses 0 29 29
---------------------------------------------------------
Total Current Assets 768 441 1,209
Property, Plant, and Equipment, net 725 409 1,134
Investments and other 602 21 623
Other Assets 555 522 $ 1,826 (A) 2,963
60 (B)
---------------------------------------------------------
Total Assets $ 2,650 $ 1,393 $ 1,886 $ 5,929
===== ===== ===== =====
LIABILITIES
Current Liabilities:
Short-term Debt $ 474 $ 6 $ (480)(C) $ 0
Accounts Payable 128 65 193
Accrued expenses 352 96 25 (A) 473
Income taxes payable 80 7 87
---------------------------------------------------------
Total Current Liabilities 1,034 174 (455) 753
Long-Term Debt 461 680 2,269 (D) 3,890
480 (C)
Accrued Postretirement Benefits 338 57 395
Deferred Income Taxes 169 17 186
Other Liabilities/ Deferred Credits 0 4 4
SHAREHOLDERS' EQUITY 648 461 (461)(A) 701
53 (E)
---------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,650 $ 1,393 $ 1,886 $ 5,929
===== ===== ===== =====
The accompanying notes are an integral part of the Unaudited Pro Forma Condensed
Combined Financial Statements.
PF-2
47
HERCULES INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA
HERCULES BETZDEARBORN ADJUSTMENTS COMBINED
Net sales $ 1,866 $ 1,295 $ 3,161
Cost of sales 1,169 519 1,688
Selling, general and administrative expenses 251 531 $ 57 (F) 828
(11)(G)
Research and development 53 39 92
Other operating expenses (income), net 165 16 181
-------- -------- ------- --------
Profit from operations 228 190 (46) 372
Equity in income of affiliated companies 30 - 30
Interest and debt expense 39 46 187 (H) 272
Other income (expense), net 374 (1) 373
-------- -------- ------- --------
Income before income taxes and effect of
change in accounting principle 593 143 (233) 503
Income tax expense (benefit) 269 51 (66)(I) 254
-------- -------- ------- --------
Income before effect of change in accounting
principle $ 324 $ 92 $ (167) $ 249
======== ======== ======= ========
Basic earnings per common share before effect
of change in accounting principle $ 3.27 $ 2.34
Diluted earnings per common share before effect
of change in accounting principle $ 3.18 $ 2.30
Average common shares outstanding - basic 99.2 106.2
Average common shares outstanding - diluted 102.4 109.4
The accompanying notes are an integral part of the Unaudited Pro Forma Condensed
Combined Financial Statements.
PF-3
48
HERCULES INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN MILLIONS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA
HERCULES BETZDEARBORN ADJUSTMENTS COMBINED
Net sales $ 875 $ 619 $ 1,494
Cost of sales 529 254 783
Selling, general and administrative expenses 129 271 $ 28 (F) 422
(6)(G)
Research and development 25 21 46
Other operating expenses (income), net (3) 0 (3)
-------- -------- -------- --------
Profit from operations 195 73 (28) 240
Equity in income of affiliated companies 10 0 10
Interest and debt expense 24 20 92 (H) 136
Other income (expense), net (28) 0 (28)
-------- -------- -------- --------
Income before income taxes 153 53 (120) 86
Income tax expense (benefit) 51 19 (32)(I) 38
-------- -------- -------- --------
Net Income $ 102 $ 34 $ (88) $ 48
======== ======== ======== ========
Basic earnings per common share $ 1.07 $ 0.47
Diluted earnings per common share $ 1.06 $ 0.46
Average common shares outstanding - basic 95.3 102.3
Average common shares outstanding - diluted 96.7 103.7
The accompanying notes are an integral part of the Unaudited Pro Forma Condensed
Combined Financial Statements.
PF-4
49
HERCULES INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
A) The aggregate purchase price as determined by the offer price of $72 per
share is approximately $2,400, plus estimated direct acquisition costs of $25
and assumed debt of $680. The excess of the purchase price over the book value
of the BetzDearborn net assets of $461, plus the fair value of the unearned ESOP
compensation of $138 (see footnote J) is $1,826. This amount has been allocated
to goodwill ($2,400 + $25 - ($461 + $138)).
B) To record estimated debt issuance costs of $60 which will be capitalized.
C) To record refinancing of short term debt of $480 as long term debt.
D) To record debt to finance the purchase price of $2,400, plus estimated debt
issuance costs of $60, less estimated proceeds from the ESOP purchase of
Hercules common stock of $191 (see footnote J).
E) To record additional equity resulting from the purchase of Hercules common
stock by the ESOP. This amount is equal to the total estimated proceeds of $191
from the sale of Hercules shares to the ESOP less unearned compensation of $138,
representing unallocated shares (see footnote J).
F) To record amortization of goodwill of $2,268 ($1,826 of incremental
goodwill, plus $442 of pre-existing goodwill) over its estimated useful life of
40 years.
G) To eliminate historical goodwill amortization of BetzDearborn.
H) To record interest expense on incremental debt of $3,445 (including
refinanced debt of $1,176) at an assumed interest rate of 7.00%, the
approximate borrowing rate for Hercules, plus amortization of debt issuance
costs of $3 and $1.5 for the periods ended December 31, 1997 and June 30, 1998,
respectively.
I) To record the tax effect of the pro forma adjustments at the statutory rate
of 35% for the periods presented. The amortization of goodwill is substantially
non-deductible and accordingly has not been tax affected.
J) Under the terms of the merger between Hercules and BetzDearborn, the shares
in the BetzDearborn ESOP were automatically converted into common shares of
BetzDearborn immediately prior to the merger. Upon consummation of the merger,
the ESOP utilized the cash proceeds from the sale of BetzDearborn stock at $72
per share to purchase Hercules common shares. This treatment was applied to
allocated and unallocated shares. The value of the allocated shares was
approximately $53 and the value of the unallocated shares was approximately
$138. For the EPS calculations, the total approximate amount of 7 million ESOP
shares (allocated and unallocated) are considered outstanding.
PF-5
50
(c) Exhibits
2.1 Agreement and Plan of Merger, dated as of
July 30, 1998, among Hercules Incorporated,
Water Acquisition Co. and BetzDearborn Inc.
(previously filed with the Commission on
July 30, 1998 as Exhibit 2.1 to the Current
Report on Form 8-K of BetzDearborn,
Commission File No. 001-11558, and
incorporated by reference
herein).
10.1 Credit Agreement, dated October 15, 1998, by
and among Hercules Incorporated,
NationsBank, N.A., as Administrative Agent
and the lenders party thereto.
99.1 Press Release, dated October 15, 1998, of
Hercules Incorporated.
99.2 Press Release, dated October 19, 1998, of
Hercules Incorporated.
99.3 Item 1. Description of Business included on
pages 2 through 8 and Pending Legal
Proceedings included on pages 12 through 13
in the Annual Report on Form 10-K of
BetzDearborn for the fiscal year ended
December 31, 1997 (previously filed with the
Commission on March 9, 1998, as amended on
March 30, 1998, Commission File No.
000-2085, and incorporated by reference
herein) and Part II, Item 1, Legal
Proceedings included on Form 10-Q of
BetzDearborn, for the quarter ended March
31, 1998 (previously filed with the
Commission on May 15, 1998, Commission File
No. 000-2085, and incorporated herein by
reference).
3
51
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
HERCULES INCORPORATED
By: /s/ Israel J. Floyd
____________________
October 29, 1998 Israel J. Floyd
Corporate Secretary
4
52
EXHIBIT INDEX
Number Exhibit
- ------ -------
2.1 Agreement and Plan of Merger, dated as of July 30,
1998, among Hercules Incorporated, Water Acquisition
Co. and BetzDearborn Inc. (previously filed with the
Commission on July 30, 1998 as Exhibit 2.1 to the
Current Report on Form 8-K of BetzDearborn,
Commission File No. 001-11558, and incorporated by
reference herein).
10.1 Credit Agreement, dated October 15, 1998, by and
among Hercules Incorporated, NationsBank, N.A., as
Administrative Agent and the lenders party thereto.
99.1 Press Release, dated October 15, 1998, of Hercules
Incorporated.
99.2 Press Release, dated October 19, 1998, of Hercules
Incorporated.
99.3 Item 1. Description of Business included on pages 2
through 8 and Pending Legal Proceedings included on
pages 12 through 13 in the Annual Report on Form 10-K
of BetzDearborn for the fiscal year ended December
31, 1997 (previously filed with the Commission on
March 9, 1998, as amended on March 30, 1998,
Commission File No. 000-2085, and incorporated by
reference herein) and Part II, Item 1, Legal
Proceedings included on Form 10-Q of BetzDearborn,
for the quarter ended March 31, 1998 (previously
filed with the Commission on May 15, 1998, Commission
File No. 000-2085, and incorporated herein by
reference).
5