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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
Commission file number 1-496
HERCULES INCORPORATED
A Delaware Corporation
I.R.S. Employer Identification No. 51-0023450
Hercules Plaza
1313 North Market Street
Wilmington, Delaware 19894-0001
Telephone: 302-594-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO __
As of October 29, 1999, 106,321,162 shares of registrant's common stock
were outstanding.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -------------------
1999 1998 1999 1998
----- ----- ------ ------
(UNAUDITED)
Net sales............................................. $ 813 $ 510 $2,421 $1,385
Cost of sales......................................... 445 323 1,308 852
Selling, general, and administrative expenses......... 188 68 578 195
Research and development.............................. 21 17 62 42
Goodwill and intangible asset amortization............ 20 3 60 5
Other operating expenses (income), net................ 1 (2) 14 (5)
----- ----- ------ ------
Profit from operations................................ 138 101 399 296
Equity in income of affiliated companies.............. -- -- 1 10
Interest and debt expense............................. 38 18 145 42
Preferred security distributions of subsidiary
trusts.............................................. 16 -- 33 --
Other income (expense), net........................... (2) 18 5 (10)
----- ----- ------ ------
Income before income taxes............................ 82 101 227 254
Provision for income taxes............................ 25 30 76 81
----- ----- ------ ------
Net income............................................ $ 57 $ 71 $ 151 $ 173
===== ===== ====== ======
Earnings per share:
Basic............................................ $0.54 $0.75 $ 1.48 $ 1.82
===== ===== ====== ======
Diluted.......................................... $0.54 $0.74 $ 1.47 $ 1.80
===== ===== ====== ======
Dividends per share................................... $0.27 $0.27 $ 0.81 $ 0.81
===== ===== ====== ======
See accompanying notes to financial statements.
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HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents.............................. $ 88 $ 68
Accounts and notes receivable, net..................... 614 601
Other current assets................................... 103 62
Inventories
Finished products................................. 209 218
Materials, supplies, and work in process.......... 189 198
Deferred income taxes.................................. 125 93
------ ------
Total current assets................................... 1,328 1,240
Property, plant, and equipment.............................. 2,939 3,037
Accumulated depreciation and amortization................... 1,628 1,599
------ ------
Net property, plant, and equipment.......................... 1,311 1,438
Goodwill and other intangible assets (net of accumulated
amortization--1999, $110; 1998, $50)...................... 2,592 2,548
Other assets................................................ 677 607
------ ------
Total assets........................................... $5,908 $5,833
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable....................................... $ 263 $ 270
Accrued expenses....................................... 472 466
Short-term debt........................................ 334 566
Income taxes payable................................... 49 15
------ ------
Total current liabilities.............................. 1,118 1,317
Long-term debt.............................................. 2,405 3,096
Deferred income taxes....................................... 278 225
Postretirement benefits and other liabilities............... 428 436
Guaranteed preferred beneficial interests in Company's
subordinated debentures................................... 822 200
Stockholders' equity
Common stock (shares issued:1999 - 159,973,510;
1998 - 154,823,496).................................. 83 81
Additional paid-in capital............................. 759 504
Unearned compensation.................................. (126) (130)
Foreign currency translation adjustment................ (54) (13)
Retained earnings...................................... 2,136 2,068
------ ------
2,798 2,510
Reacquired stock, at cost (shares: 1999 - 53,766,435;
1998 - 53,995,692)................................... 1,941 1,951
------ ------
Total stockholders' equity............................. 857 559
------ ------
Total liabilities and stockholders' equity............. $5,908 $5,833
====== ======
See accompanying notes to financial statements.
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HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW
(DOLLARS IN MILLIONS)
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------
1999 1998
------- -----
(UNAUDITED)
Net cash provided by operations............................. $ 158 $ 74
------- -----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (120) (84)
Proceeds of investment and fixed asset disposals............ 22 71
Acquisitions, net of cash acquired.......................... (10) (317)
Other, net.................................................. (25) (17)
------- -----
Net cash used in investing activities.................. (133) (347)
------- -----
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds..................................... 239 74
Long-term debt repayments................................... (1,076) (79)
Change in short-term debt................................... 39 490
Payment of underwriting fees................................ (20) --
Proceeds from issuance of subsidiary trust preferred
securities................................................ 622 --
Proceeds from issuance of warrants.......................... 90 --
Common stock issued......................................... 180 9
Common stock reacquired..................................... (4) (112)
Proceeds from issuance of subsidiary preferred stock........ 12 --
Dividends paid.............................................. (83) (77)
------- -----
Net cash (used in) provided by financing activities.... (1) 305
------- -----
Effect of exchange rate changes on cash..................... (4) (2)
------- -----
Net increase in cash and cash equivalents................... 20 30
Cash and cash equivalents--beginning of period.............. 68 17
------- -----
Cash and cash equivalents--end of period.................... $ 88 $ 47
======= =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized)................... $ 141 $ 45
Distributions on trust preferred securities............ 20 --
Income taxes paid, net................................. 48 81
Noncash investing and financing activities:
Incentive plan stock issuances......................... 8 5
Conversion of notes and debentures..................... 1 7
Assumed debt of acquired businesses.................... -- 190
See accompanying notes to financial statements.
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HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(DOLLARS IN MILLIONS)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
(UNAUDITED)
Net income................................................. $57 $71 $151 $173
Foreign currency translation, net of tax................... (44) -- (41) (8)
--- --- ---- ----
Comprehensive income....................................... $13 $71 $110 $165
=== === ==== ====
See accompanying notes to financial statements.
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HERCULES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. These condensed financial statements are unaudited, but in the opinion
of management include all adjustments necessary to present fairly Hercules
financial position and results of operations for interim periods. These
condensed financial statements should be read in conjunction with the accounting
policies, financial statements, and notes included in our annual report for
1998. Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. Revenue Recognition -- Revenue is recognized generally upon shipment of
goods and passage of title. Service revenue is recognized as services are
performed.
3. The following table shows the amounts used in computing earnings per
share (EPS) and the effect on income and the weighted-average number of shares
of dilutive potential common stock:
(Amounts are in millions, except per share data):
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 1999 1998
------ ----- ------ -----
Basic
Net income.......................... $ 57 $ 71 $ 151 $ 173
Weighted-average shares
outstanding...................... 104.7 94.6 102.2 95.1
------ ----- ------ -----
EPS................................. $ 0.54 $0.75 $ 1.48 $1.82
====== ===== ====== =====
Diluted
Net income.......................... $ 57 $ 71 $ 151 $ 173
Interest on convertible
debentures....................... -- -- -- --
------ ----- ------ -----
Net income for EPS calculation...... $ 57 $ 71 $ 151 $ 173
====== ===== ====== =====
Weighted-average shares
outstanding...................... 104.7 94.6 102.2 95.1
Options............................. .5 .5 .4 .6
Debentures.......................... .2 .4 .2 .6
------ ----- ------ -----
Adjusted weighted-average shares.... 105.4 95.5 102.8 96.3
------ ----- ------ -----
EPS................................. $ 0.54 $0.74 $ 1.47 $1.80
====== ===== ====== =====
4. Cost and expenses include depreciation as follows:
SEPTEMBER 30,
(DOLLARS IN MILLIONS) -------------------
1999 1998
---- ----
Three months ended........................................ $ 36 $21
Nine months ended......................................... 104 53
5. Other operating expenses (income), net for the quarter and nine months
ended September 30, 1999 include integration charges of $4 million and $14
million, respectively, primarily for employee retention, consulting, legal, and
other costs associated with the BetzDearborn acquisition. Additionally, the
quarter and nine months ended September 30, 1999 include environmental charges
of $1 million and $5 million, respectively, partly offset by a $4 million
reversal of restructuring charges (see Note 9). The nine-month period for 1998
primarily reflects a favorable settlement of an environmental insurance claim.
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6. Interest and debt costs are summarized as follows:
SEPTEMBER 30,
(DOLLARS IN MILLIONS) -------------------
1999 1998
---- ----
Three months ended:
Costs incurred.......................................... $ 41 $20
Amount capitalized...................................... 3 2
---- ---
Interest expense........................................ $ 38 $18
==== ===
Nine months ended:
Costs incurred.......................................... $154 $49
Amount capitalized...................................... 9 7
---- ---
Interest expense........................................ $145 $42
==== ===
7. Other income (expense), net for the quarter and nine months ended
September 30, 1999 includes legal accruals of $1 million and $3 million,
respectively. Additionally, the nine months includes $9 million in gains on
sales of investments. Other income (expense), net for the nine months ended
September 30, 1998 includes legal settlements and accruals, primarily related to
the settlement of Qui Tam (Whistle Blower) lawsuit (see Note 15) of $64 million,
and a $2 million write-off of a claim related to a divested business.
Additionally, the quarter and nine months include interest income of $13 million
and $32 million, respectively, primarily related to the $500 million note
obtained upon completion of transactions that monetized the Tastemaker
investment (sold during the fourth quarter of 1998) and gains on sales of
investments of $2 million and $19 million, respectively.
8. During the period ended September 30, 1999, we substantially completed
the BetzDearborn purchase price allocation and increased goodwill from the
amount reported December 31, 1998 by $96 million, to $2,170 million. The
increase to goodwill results primarily from adjustments to the fair value of net
tangible assets acquired, completion of evaluation of pre-acquisition
contingencies related to litigation and claims, finalization of plans to exit
BetzDearborn activities and foreign currency translation adjustments, net of
related tax effects. The foreign currency translation adjustment resulting from
the purchase price allocation is reflected in comprehensive income for the
quarter and nine-month periods ended September 30, 1999.
9. Pursuant to the plans in place to merge the operations of BetzDearborn
with Hercules and to rationalize the support infrastructure and other existing
operations, approximately 590 employees were terminated and several facilities
were closed during the nine months ended September 30, 1999. Cash payments
during 1999 include $27 million for severance benefits and $6 million for other
exit costs. As a result of the completion of the plans to exit former
BetzDearborn activities, additional exit costs related to facility closures of
$8 million and a $4 million reduction in employee severance benefits were
reflected in the finalization of the purchase price allocation (see Note 8).
Additionally, we lowered the estimate of severance benefits related to the
termination of Hercules employees by $4 million. The lower than planned
severance benefits are the result of higher than anticipated attrition, with
such voluntary resignations not requiring the payment of termination benefits.
We estimate that approximately 1,250 employees will be terminated of which
approximately 970 employee terminations have occurred since the inception of the
plans. A reconciliation of activity with respect to the liabilities established
for these plans is as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
(DOLLARS IN MILLIONS) ---- ----
Balance at beginning of year.............................. $130 $15
Cash payments........................................... (33) (4)
Additional exit costs................................... 8 --
Reversals............................................... (8) --
---- ---
Balance at end of period.................................. $ 97 $11
==== ===
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Severance benefit payments are based on years of service and generally
continue for 3 months to 24 months subsequent to termination. We expect to
substantially complete remaining actions under the plans by 2001.
10. A summary of short-term and long-term debt follows:
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(DOLLARS IN MILLIONS)
SHORT-TERM:
Banks............................................ $ 44 $ 80
Current maturities............................... 290 486
---- ----
$334 $566
==== ====
At September 30, 1999, we had $221 million of unused lines of credit that
may be drawn as needed. Lines of credit in use at September 30, 1999 were $34
million.
(DOLLARS IN MILLIONS) SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
LONG-TERM:
6.15% notes due 2000............................. $ 100 $ 100
6.60% notes due 2027............................. 100 100
7.85% notes due 2000............................. 25 25
6.625% notes due 2003............................ 125 125
8% convertible subordinated debentures due
2010........................................... 3 3
Term loan tranche A due in varying amounts
through 2003................................... 1,217 1,250
Term loan tranche B due 1999..................... -- 470
Term loan tranche C due 2000..................... 488 1,000
Revolving credit agreement due 2003.............. 436 288
ESOP debt due in varying amounts through 2009.... 106 110
Term notes at various rates from 3.46% to 9.60%
due in varying amounts through 2006............ 85 102
Other............................................ 10 9
------ ------
2,695 3,582
Current maturities of long-term debt............. (290) (486)
------ ------
Net long-term debt............................... $2,405 $3,096
====== ======
Our credit agreement for the $3,650 million credit facility with a
syndicate of banks was amended in April 1999 to allow borrowings in euros, as
well as U.S. dollars. Approximately U.S. $950 million of term loan tranche A
domestic borrowings were converted into indebtedness denominated in euros during
the second quarter 1999. In addition, a Canadian subsidiary of ours can borrow
up to U.S. $100 million from select lenders in Canada in Canadian dollars.
11. Guaranteed Preferred Beneficial Interests in Company's Subordinated
Debentures consists of:
(DOLLARS IN MILLIONS) SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
9.42% Trust Originated Preferred Securities...... $362 $ --
Redeemable Hybrid INcome Overnight Shares........ 200 200
6 1/2% CRESTS Units.............................. 260 --
---- ----
$822 $200
==== ====
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TRUST ORIGINATED PREFERRED SECURITIES
In March 1999, Hercules Trust I, our wholly owned subsidiary trust ("Trust
I"), completed a $362 million underwritten public offering of 14,500,000 shares
of 9.42% Trust Originated Preferred Securities. Trust I invested the proceeds
from the sale of the Preferred Securities in an equal principal amount of 9.42%
Junior Subordinated Deferrable Interest Debentures of Hercules due March 2029.
We used these proceeds for the partial repayment of a term loan under our
existing credit facility.
Trust I will distribute quarterly cash payments it receives from Hercules
on the debentures to Preferred Security holders at an annual rate of 9.42% on
the liquidation amount of $25 per Preferred Security. We may defer interest
payments on the Debentures at any time, for up to 20 consecutive quarters. If
this occurs, Trust I will also defer distribution payments on the Preferred
Securities. The deferred distributions, however, will accumulate distributions
at a rate of 9.42% per annum.
Trust I will redeem the Preferred Securities when the Debentures are repaid
at maturity on March 31, 2029. Hercules may redeem the Debentures, in whole or,
on or after March 17, 2004, in part, before their maturity at a price equal to
100% of the principal amount of the Debentures redeemed, plus accrued interest.
When Hercules redeems any Debentures before their maturity, Trust I will use the
cash it receives to redeem Preferred Securities and common securities as
provided in the trust agreement. Hercules guarantees the obligations of Trust I
on the Preferred Securities.
REDEEMABLE HYBRID INCOME OVERNIGHT SHARES
In November 1998, Hercules Trust V, our wholly owned subsidiary ("Trust
V"), completed a private placement of $200 million Redeemable Hybrid INcome
Overnight Shares (RHINOS). At the same time as the private placement of the
RHINOS, we entered into a forward underwriting agreement to issue $200 million
of our common stock upon remarketing of the RHINOS. RHINOS are short-term
auction-rate reset Preferred Securities of Trust V, which used the proceeds from
the RHINOS sale to purchase junior subordinated notes of Hercules. We used these
proceeds to partially repay loans under our credit facility. Hercules pays
interest on the junior subordinated notes, and Trust V pays distributions on the
RHINOS at a floating rate equal to LIBOR plus 175 basis points, which is reset
on a quarterly basis. The RHINOS are guaranteed by Hercules.
We expected to remarket the RHINOS within twelve months of their issuance;
however, we amended the RHINOS agreements in July 1999 to eliminate this
requirement. Additionally in July 1999, we issued $175 million of our common
stock in an underwritten public offering (see Note 12). In October 1999, the
RHINOS agreements were amended to extend the redemption date to January 2000.
CRESTS UNITS
In July 1999, we completed a public offering of 350,000 CRESTS Units with
Hercules Trust II, a wholly owned subsidiary trust ("Trust II"). This
transaction provided net proceeds to Hercules and Trust II of $340.4 million.
The preferred security component of the CRESTS Units was initially valued at
$741.46 per unit and the warrant component of the CRESTS Units was initially
valued at $258.54 per warrant. Each CRESTS Unit consists of one preferred
security of Trust II and one warrant to purchase 23.4192 shares of Hercules
common stock at an initial exercise price of $1,000 (equivalent to $42.70 per
share). The preferred security and warrant components of each CRESTS Unit may be
separated and transferred independently. The warrants may be exercised, subject
to certain conditions, at any time before March 31, 2029, unless there is a
reset and remarketing event. No reset and remarketing event will occur before
July 27, 2004 unless all of our common stock is acquired in a transaction that
includes cash for a price above a predetermined level. Trust II used the
proceeds from the sale of its preferred securities to purchase junior
subordinated deferrable interest debentures of Hercules ("debentures"). As of
September 30, 1999, no warrants had been exercised.
We pay interest on the debentures, and Trust II pays distributions on its
preferred securities. Both are paid quarterly at an annual rate of 6 1/2% of the
scheduled liquidation amount of $1,000 per debenture and/or preferred security
until the scheduled maturity date and redemption date of June 30, 2029, unless
there is a
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reset and remarketing event. We guarantee payments by Trust II on its preferred
securities. Trust II must redeem the preferred securities when the debentures
are redeemed or repaid at maturity.
We used the proceeds from the CRESTS Units offering for the partial
repayment of a term loan under our credit facility. Issuance costs related to
the preferred security component of the CRESTS Units are being amortized over
the life of the security and costs related to the warrants were charged to
additional paid-in capital.
12. Common Stock Offering -- In July 1999, we completed a public offering
of 5,000,000 shares of our common stock, which provided us with proceeds of
$171.5 million, net of underwriting fees of $3.5 million. We used the proceeds
from the common stock offering for the partial repayment of a term loan under
our credit facility. Issuance costs associated with the stock offering were
charged to additional paid-in capital.
13. The Board of Directors has authorized the repurchase of up to
74,650,000 shares of our common stock. Of this amount, 6,150,000 shares are
intended for various employee benefit programs. Through September 30, 1999, a
total of 66,614,242 shares (including 6,150,000 shares for employee benefit
programs) had been purchased in the open market at an average price of $37.31
per share.
14. In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
This statement, as amended by Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133," is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company has not yet determined the impact
that the adoption of SFAS 133 will have on its earnings or statement of
financial position.
Also effective January 1, 1999, we adopted the American Institute of
Certified Public Accountants Statement of Position 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
The effect of this adoption was not material to our results of operations or
financial condition for the quarter and is not expected to be material for the
year ending December 31, 1999.
15. Commitments And Contingencies
ENVIRONMENTAL:
Hercules has been identified as a potentially responsible party (PRP) by
U.S. federal and state authorities, or has been sued for contribution by private
parties (or asked to participate), for the cost of environmental investigation
and/or cleanup at numerous sites. The estimated range of the reasonably possible
share of costs for investigation and cleanup is between $59 million and $226
million. The actual costs will depend upon numerous factors, including:
- the number of parties found responsible at each environmental site and
their ability to pay,
- the actual methods of remediation,
- outcomes of negotiations with regulatory authorities,
- outcomes of litigation,
- changes in environmental laws and regulations,
- technological developments, and
- the number of years of remedial activity required, which could range from
0 to 30 years.
We become aware of sites in which we may be named a PRP in investigatory
and/or remedial activities through correspondence from the U.S. Environmental
Protection Agency, or other government agencies, or through correspondence from
previously named PRPs, who either request information or notify us of our
potential liability. We have established procedures for identifying
environmental issues at our plant sites. In
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addition to environmental audit programs, we have environmental coordinators who
are familiar with environmental laws and regulations and act as resources for
identifying environmental issues.
At September 30, 1999, the consolidated balance sheet reflects a liability
of $59 million for environmental investigation and clean up costs. This amount
represents management's best estimate of the probable and reasonably estimable
costs related to environmental remediation and does not include any insurance
recovery in the estimate above. The extent of liability is evaluated quarterly.
The measurement of the liability is evaluated based on currently available
information, including the factors identified above. We do not anticipate that
our financial condition will be materially affected by environmental remediation
costs in excess of amounts accrued, although quarterly or annual operating
results could be materially affected.
United States v. Vertac Chemical Corporation, USDA No. LR-C-92-137 (E.D. Ark.)
We refer you to our Quarterly Report on Form 10-Q for the period ended June
30, 1999, for a discussion of the ongoing litigation over liability at the
Jacksonville, Arkansas site.
We previously disclosed in our June 30, 1999 filing that depending upon the
Court's judgment, we might choose to appeal to the Eighth Circuit on any of
the previous rulings on liability, allocation or damages. We posted the
bond required by the procedural rules and subsequently filed a Notice of
Appeal on September 27, 1999. We anticipate filing appeal briefs during the
fourth quarter 1999.
LITIGATION:
We are a defendant in numerous lawsuits resulting from the conduct of our
business. In these legal proceedings, no director, officer, or affiliate is a
party or a named defendant. These lawsuits concern issues such as product
liability, contract disputes, labor-related matters, patent infringement,
environmental proceedings, property damage, and personal injury matters. Listed
below are specific information updates related to ongoing litigation.
United States of America ex. rel. P. Robert Pratt v. Alliant Techsystems, Inc.
and Hercules Incorporated, Civil No. 95-4812 SVW(JGx).
As previously reported in our Form 10-Q for the period ended June 30, 1999,
the Court entered a judgment approving the settlement and dismissing this
Qui Tam lawsuit on February 17, 1999. On March 23, 1999, the U. S.
Department of Justice (DOJ) filed a Notice of Appeal. In subsequent
discussions with DOJ's counsel, Hercules and Alliant agreed to amend the
settlement agreement to include provisions that prevent Alliant from
recovering under its government contracts the costs that had been the
subject of prior discussions with the DOJ. Following such agreement, the
DOJ withdrew its appeal. At this point, the dismissal of the lawsuit became
final. The amendment to the settlement agreement was submitted to the Court
for its approval on August 2, 1999. The Court subsequently approved the
amendment to the settlement agreement.
Acosta, et al. v. Betz Laboratories, et al., No. BC 161 669 (1996); Adams, et
al. v. Betz Laboratories, et al., No BC 113 000 (1994); Aguilar et al. v. Betz
Laboratories, et al., No. BC 158 588 (1996); and Aguayo et al. v. Betz
Laboratories, et al., No. BC 123 749 (1995).
BetzDearborn, along with Pacific Gas and Electric (PG&E), is a defendant in
four lawsuits involving (in the aggregate) approximately 2,350 plaintiffs
pending in the Superior Court of Los Angeles County, California. Plaintiffs
are comprised primarily of present and former PG&E employees, their
families, and residents living in the vicinity of the three PG&E facilities
that are the subject of the lawsuits. Plaintiffs seek unspecified monetary
damages (including punitive damages) for personal injuries arising from
alleged exposures to chromate-based products sold or allegedly sold by Betz
Laboratories, Inc. (predecessor to BetzDearborn) to PG&E for use in the
cooling towers located at these facilities. The sales in question occurred
or allegedly occurred at various times between 1952 and the mid-1980s,
depending upon the facility. In three of the cases, the parties selected 20
plaintiffs and two alternates, whose claims will be tried together, before
the claims for the remaining plaintiffs in the lawsuits. BetzDearborn
denies any legal liability to plaintiffs, believes it has substantial
defenses, and intends to
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contest the claims vigorously. BetzDearborn further believes that any claim
for punitive damages is without any legitimate basis in fact or law.
Although both BetzDearborn and PG&E are named as defendants in each of the
lawsuits, not all plaintiffs seek damages from both defendants. PG&E
previously settled a lawsuit brought by many of the same individuals who
are plaintiffs in one of the lawsuits; as a result, PG&E will have no
additional liability to those plaintiffs.
BetzDearborn maintained insurance coverage for the purpose of securing
protection against alleged product and other liabilities, and certain of
the insurance carriers have undertaken to pay the cost of the defense of
the lawsuits, subject to various reservations of rights. BetzDearborn will
pursue all available insurance coverage to fund any damages payable to
plaintiffs in connection with the lawsuits (excluding any punitive damages
to the extent not recoverable under BetzDearborn's insurance policies).
The parties have engaged in a mediation and subsequent discussions, which
we believe will lead to a definitive settlement of the claims of plaintiffs
against BetzDearborn and the potential claims of BetzDearborn against its
insurers. Any definitive settlement agreement will likely contain
confidentiality and non-disclosure provisions.
Jeffrey Shelton Jr., et al. v. Hercules Incorporated, Civil No. LR-C-97-131
(E.D. Ark. 1997).
This lawsuit involves two individuals seeking medical monitoring and
damages for loss of recreational opportunities. They have brought a
Resource Conservation and Recovery Act (RCRA) citizens suit against us
seeking an injunction which would require us to fund or perform various
environmental and health studies and pay for any required remediation to
the Bayou Meto. Plaintiffs and Hercules have filed motions for summary
judgment. Recently, the Court granted Hercules' motion for summary
judgment.
At September 30, 1999, the consolidated balance sheet reflects a current
liability of approximately $90 million for litigation and claims. Estimated
insurance recoveries of approximately $46 million have been reflected in current
assets. These amounts represent management's best estimate of the probable and
reasonably estimable losses and recoveries related to litigation or claims. The
extent of the liability and recovery is evaluated quarterly. While it is not
feasible to predict the outcome of all pending lawsuits and claims, the ultimate
resolution of these matters could have a material effect upon our financial
position. Any resolution during a specific period could have a material effect
on our quarterly or annual operating results for that period.
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16. Segment Information
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
(DOLLARS IN MILLIONS) --------------- -------------------
1999 1998 1999 1998
---- ---- ------ ------
Net Sales:
Process Chemicals and Services....... $430 $117 $1,269 $ 334
Functional Products.................. 217 223 646 657
Chemical Specialties................. 167 170 507 394
Reconciling Items.................... (1) -- (1) --
---- ---- ------ ------
Consolidated...................... $813 $510 $2,421 $1,385
==== ==== ====== ======
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- -------------------
1999 1998 1999 1998
---- ---- ------ ------
Profit (Loss) from Operations:
Process Chemicals and Services....... $ 91 $ 25 $ 258 $ 72
Functional Products.................. 53 56 164 170
Chemical Specialties................. 19 22 68 55
Reconciling Items.................... (25)(a) (2) (91)(a) (1)
---- ---- ------ ------
Consolidated...................... $138 $101 $ 399 $ 296
==== ==== ====== ======
(a) Reconciling items for the quarter and nine months ended September 30, 1999
include goodwill and intangible asset amortization of $20 million and $60
million, respectively, integration costs of $4 million and $14 million,
respectively, and corporate research and development and other corporate
items not specifically allocated to business segments. In addition, the
three- and nine-month periods reflect a $4 million reversal of restructuring
charges.
13
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS
Within the following discussion, unless otherwise stated, "quarter" and
"nine-month period" refer to the third quarter of 1999 and the nine months ended
September 30, 1999. All comparisons are with the corresponding periods in the
previous year, unless otherwise stated.
Profit from operations for the quarter and nine months ended September 30,
1999 excludes integration costs, impacts from a production facility fire, the
impacts of Hurricane Floyd, and reversal of restructuring charges. For the
quarter and nine-month period, integration charges were $5 million and $17
million, respectively, and are reported primarily in other operating expenses
(see Note 5). Integration costs for travel, consulting, employee incentives and
other related items are expected to continue through the remainder of 1999 and
into early 2000. In addition, a production facility fire and Hurricane Floyd
added approximately $5 million to cost of sales (Functional Products $3 million
and Chemical Specialties $2 million) for the quarter and nine-month period.
These charges were partially offset by a $4 million restructuring charge
reversal reported in other operating expenses for both 1999 periods in
Reconciling items (see Note 5).
Acquisitions during 1998, which were accounted for using the purchase
method, significantly impact the comparability of results for the quarter and
nine-month period. Accordingly, sales and profit from operations for the quarter
and nine months ended September 30, 1998 are provided on a pro forma basis to
facilitate comparisons. The pro forma results include BetzDearborn and
FiberVisions as if the acquisitions had occurred on January 1, 1998. Pro forma
adjustments have been made primarily to reflect increased goodwill and
intangible amortization in Reconciling items. Cost savings from combining
operations with Hercules have not been reflected. Consequently, the pro forma
results do not reflect the actual results of operations had the acquisitions
occurred on the dates indicated, and are not intended to be a projection of
future results or trends.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
(DOLLARS IN MILLIONS) --------------- -------------------
1999 1998 1999 1998
---- ---- ------ ------
Net Sales by Industry Segment:
Process Chemicals and Services....... $430 $446 $1,269 $1,282
Functional Products.................. 217 223 646 657
Chemical Specialties................. 167 170 507 526
Reconciling Items.................... (1) -- (1) --
---- ---- ------ ------
Total............................. $813 $839 $2,421 $2,465
==== ==== ====== ======
Profit (Loss) from Operations:
Process Chemicals and Services....... $ 91 $ 77 $ 260 $ 212
Functional Products.................. 57 56 168 170
Chemical Specialties................. 21 22 70 76
Reconciling Items.................... (25)(a) (18)(b) (81)(a) (52)(b)
---- ---- ------ ------
Total............................. $144 $137 $ 417 $ 406
==== ==== ====== ======
(a) Reconciling items include the following for the quarter and nine-month
period ended September 30, 1999, respectively: goodwill and intangible asset
amortization of $20 million and $60 million, corporate research and
development costs of $3 million and $7 million and corporate environmental
accruals of $1 million and $5 million.
(b) Reconciling items include the following for the quarter and nine-month
period ended September 30, 1998, respectively: goodwill and intangible asset
amortization of $19 million and $57 million, and corporate research and
development costs of $2 million and $7 million. Additionally, the nine
months ended September 30, 1998 includes $4 million from sale of technology
and $2 million from a favorable environmental insurance claim settlement.
14
15
The discussion that follows speaks to comparisons in the table through
profit from operations.
Consolidated net sales decreased $26 million, or 3%, for the quarter, and
$44 million, or 2%, for the nine-month period. Weaker foreign currencies
relative to the dollar had a negative impact on sales of $6 million and $8
million for the quarter and nine-month period, respectively. During the quarter,
lower selling prices in all three segments, as well as lower volumes in the
Process Chemicals and Services and Functional Products segments also negatively
impacted sales. Volumes in Chemical Specialties had improved
quarter-over-quarter. For the nine-month period, the decline reflects lower
pricing in all three segments and lower sales volumes in Functional Products,
partly offset by volume improvements in Process Chemicals and Services and
Chemical Specialties.
Consolidated profit from operations was up $7 million, or 5%, for the
quarter and $11 million, or 3%, for the nine-month period. The improvement in
the quarter reflects the cost improvements and reductions in selling, general
and administrative expenses in the Process Chemicals and Services segment from
the integration of the BetzDearborn businesses. This improvement, along with
lower manufacturing costs in Functional Products and lower raw material costs in
Chemical Specialties, offset the negative impact of lower revenues discussed
above. For the nine-month period, the revenue declines were offset by the
continued cost improvements and expense reductions in Process Chemicals and
Services and lower raw material costs in Chemical Specialties.
Process Chemicals and Services sales were down $16 million, or 4%, for the
quarter primarily from the Brazilian currency devaluations and the competitive
pricing environment in the chemical, hydrocarbon and paper processing markets in
North America and Europe, along with lower volumes in these markets. For the
nine-month period, sales were down $13 million, or 1%, as year-to-date volume
improvements were offset by weaker pricing and currency devaluations. During the
quarter and nine months, operating profit increased $14 million and $48 million,
respectively. The improvement in operating profit is primarily the result of
cost improvements, including lower selling, general and administrative expenses
resulting from the integration of BetzDearborn, which more than offset revenue
declines.
Functional Product sales were down $6 million and $11 million, or 3% and
2%, for the quarter and nine-month period, respectively, as improved pectin
pricing and favorable impact of a stronger Japanese yen was offset by lower
volumes, primarily in oilfield markets and pricing pressures due to
over-capacity in various markets. For the quarter and nine-month period,
operating profit was relatively flat as lower volumes (oilfield), poor
performance in certain specialty products, and the pressure on pricing noted
above was offset by the improved performance of the food gums, principally
pectin pricing coupled with a stronger yen.
Chemical Specialties sales were down $3 million, or 2%, during the quarter
and $19 million, or 4%, for the nine-month period. For the three- and nine-month
periods, revenue declined primarily from the pass-through effects of lower
polypropylene raw material prices, continued competitive pricing for resin
products, and an unfavorable sales mix, particularly in Europe, for rosin
resins. Operating profit declined $1 million, or 5%, during the quarter, and $6
million, or 8% for the nine months. These declines are primarily the result of
the unfavorable pricing and product mix in resins products noted above, higher
resins manufacturing costs and poor performance in certain specialty products
partly offset by lower polypropylene raw material costs.
We are currently in the process of evaluating corrective actions related to
certain specialty product lines in the Functional Products and Chemical
Specialties segments. The completion of these studies may result in asset
write-downs, restructuring charges and other exit costs.
Equity in income of affiliated companies decreased $9 million for the
nine-month period because FiberVision's results are consolidated in our
financial statements in 1999. Prior to our purchasing the remaining 49% share of
FiberVisions in July 1998, results were accounted for on the equity method.
Interest and debt expense increased $20 million for the quarter and $103
million for the nine-month period as a result of the additional financial
leverage resulting from the 1998 acquisitions.
Preferred security distributions of subsidiary trusts are the quarterly
distributions to the holders of the trust preferred securities issued by wholly
owned subsidiary trusts of Hercules (see Note 11).
15
16
Other income, net decreased $20 million for the quarter and increased $15
million for the nine-month period. The decrease during the quarter is primarily
from lower interest income. The increase for the nine months is primarily due to
a 1998 charge of $64 million for legal settlements and accruals, offset by lower
interest income and lower gains on sales of investments (see Note 7).
The effective tax rate for the first nine months of 1999 was 33.5%,
compared to 88% for the full year 1998. The third quarter and nine-month 1999
tax provisions reflect the benefit of utilizing a capital loss carryback. Tax
rates in both years reflect the effect of nondeductible goodwill and intangible
amortization. Additionally, the 1998 tax rate reflects the effect of the
non-deductible charge for purchased in-process research and development. The
effective tax rate for 1999 is estimated at approximately 33.5%.
FINANCIAL CONDITION
Cash provided by operations was $158 million compared to $74 million in
1998. The increase reflects higher profit from operations, primarily from
businesses acquired in 1998, and lower tax payments, offset by higher interest
payments, cash outlays for termination benefits, other exit costs and
integration expenses, and higher working capital requirements.
Short term liquidity has improved since year-end 1998, primarily from
refinancing $470 million of current maturity debt existing under our $3,650
million credit facility with long-term Trust Originated Preferred Securities
issued during the first quarter of 1999 (see Note 11). As a result, we were able
to reduce our interest rate by 1.25% on the $2.64 billion balance remaining
under the credit facility. Current and quick ratios have improved to 1.2 and .8,
respectively, at September 30, 1999, compared with .9 and .6, respectively, at
December 31, 1998. As of September 30, 1999, we had $464 million available under
the revolving credit agreement and $221 million of short-term lines of credit
(see Note 10).
In July 1999, we completed a public offering of 5,000,000 shares of our
common stock, which provided us with net proceeds of $171.5 million (see Note
12). On the same date, we also completed a public offering of 350,000 CRESTS
Units with Hercules Trust II, a wholly owned subsidiary trust (see Note 11).
This transaction provided net proceeds to Hercules and Trust II of $340.4
million. We used the proceeds from both offerings for the partial repayment of a
term loan under our credit facility.
Each CRESTS Unit consists of one preferred security of Trust II and one
warrant to purchase 23.4192 shares of Hercules common stock at an initial
exercise price of $1,000 (equivalent to $42.70 per share). The warrants may be
exercised, subject to certain conditions, at any time before March 31, 2029,
unless there is a reset and remarketing event. Trust II used the proceeds from
the sale of its preferred securities to purchase junior subordinated deferrable
interest debentures of Hercules. Hercules will pay interest on the debentures
while Trust II will pay distribution on its preferred securities. Both are paid
quarterly at an annual rate of 6 1/2% of the scheduled liquidation amount of
$1,000 per debenture and/or preferred security.
In the fourth quarter 1998, Hercules Trust V, a wholly owned subsidiary,
completed a private placement of $200 million Redeemable Hybrid INcome Overnight
Shares (RHINOS). The RHINOS are guaranteed by Hercules. We expected to remarket
the RHINOS within twelve months of their issuance; however, in July 1999 we
amended the RHINOS agreements to eliminate this requirement, and in October 1999
we amended the agreements to extend the redemption date to January 2000 (see
Note 11).
During the second quarter of 1999, we amended our credit agreement to allow
for borrowing in euros, as well as in U.S. dollars. Approximately $950 million
of U.S. dollar denominated debt was converted to euro indebtedness. Also during
the nine-month period, we entered into a financing agreement with a bank, which
provides for the sale of promissory notes in the principal amount of up to $20
million at any one time. The agreement, which expires in December 1999, provides
for commitments by the bank and Hercules under which the bank purchases
promissory notes denominated in a number of foreign currencies in exchange for
U.S. dollars. The notes are repayable only to the extent of future revenue of
certain foreign subsidiaries. Neither Hercules nor the bank can cancel their
obligations under the agreement. Transaction gains and losses related to the
notes are deferred and recognized as an adjustment to the revenue supporting the
note repayment.
16
17
The ratio of debt-to-total capitalization (stockholders' equity, guaranteed
preferred beneficial interests in Company's subordinated debentures and debt)
decreased to 62% at September 30, 1999 from 83% at year-end 1998 as a result of
the CRESTS Units and common stock offerings during this quarter and the Trust
Originated Preferred Securities offering during the first quarter. The amount
accessible under our shelf registration is $1,763 million.
MARKET RISK
Our derivative and other financial instruments subject to interest rate
risk consist of debt instruments, equity-like securities, and interest rate
swaps. At September 30, 1999, net market value of these combined instruments was
a liability of $3.3 billion. The following sensitivity analysis assumes an
instantaneous 100-basis point move in interest rates from their levels at
September 30, 1999, with all other variables held constant. A 100-basis point
increase in interest rates would result in an $91 million decrease in the net
market value of the liability, while a 100-basis point decrease would result in
a $89 million increase. The change in the sensitivity level from year-end 1998
is primarily from the fixed distribution rate associated with the Trust
Originated Preferred Securities issued during 1999 (see Note 11).
Our financial instruments subject to foreign currency exchange risk consist
of foreign currency forwards, options, and foreign currency debt and represent a
net liability position of $912 million at September 30, 1999. The following
sensitivity analysis assumes an instantaneous 10% change in foreign currency
exchange rates from the September 30, 1999 levels, with all other variables held
constant. A 10% strengthening of the U.S. dollar versus other currencies would
result in a $93 million decrease in the net liability position, while a 10%
weakening of the dollar versus all the currencies would result in a $95 million
increase. The change in the sensitivity level from year-end 1998 is primarily
from replacing cross currency swaps with foreign currency debt to hedge exposure
to increased investments in foreign subsidiaries, primarily as a result of the
BetzDearborn acquisition.
Our financial instruments, subject to changes in equity price risk,
including the warrants component of the CRESTS Units issued in the third quarter
(see Note 11), represent a net obligation of $35 million at September 30, 1999.
The following sensitivity analysis assumes an instantaneous 10% change in
valuation with all other variables held constant. A 10% increase in market
values would increase the net obligation approximately $16 million, while a 10%
decrease would lower the net obligation $13 million. The change in equity price
risk from year-end 1998 is primarily from the warrants component of the CRESTS
Units issued in the third quarter 1999.
YEAR 2000 READINESS DISCLOSURE
READINESS
We have recognized the need to ensure that our operations and relationships
with our business partners will not be adversely affected by the Year 2000
("Y2K") problem, and have developed and implemented a comprehensive project that
addresses those areas of vulnerability. We have created a cross-functional Y2K
Program Office at the corporate level to coordinate and provide policies,
guidance and support for our Y2K initiatives. Site compliance teams have been
formed at all major sites worldwide.
The areas addressed by the Y2K Program Office include:
- corporate and plant computer systems;
- desktop and telecommunications systems;
- safety, environmental and quality systems;
- process control systems and plant floor equipment and devices with
embedded chips;
- equipment manufactured by or for BetzDearborn and sold to customers; and
- business partner and supply chain risk management.
17
18
We have developed a risk management plan for our business partners,
including suppliers, shippers, financial institutions and service providers,
involving direct communications with them and feedback analysis to assess their
Y2K readiness as it relates to their potential impact on our business. In these
cases, we are relying on our business partner's certifications and survey
results in determining our contingency response. We have not, in all instances,
independently verified the accuracy of the readiness certifications and survey
results received from third parties. Contingency plans are being developed in
those cases where we appear to be at risk.
We are engaged in a major project to implement SAP R/3((TM)) software. All
vendor supplied SAP code is Y2K compliant. The resulting systems comprise our
core business systems, including sales and distribution, inventory and
purchasing, finance and control, product costing, human resources and payroll
and fixed assets. Other internally developed programs are still in the process
of being tested for Y2K compliance. The systems are in the process of being
rolled out in North America and Europe. The most critical applications are
already operational. Overall, the project is on schedule to be completed in
1999.
In other regions of the world, only minor changes are required to make our
core business systems Y2K ready. BetzDearborn is also in the process of
implementing SAP R/3((TM)) software and has completed its program in North
America.
For all plants and departments, inventories have been taken of equipment
that may have embedded chips. Assessments of the compliance status and potential
impact on our operations and remediation plans are being completed.
Additionally, suppliers of raw materials and other critical services have been
identified. Questionnaires requesting Y2K status have been sent to all
identified major suppliers. Identification of the most critical suppliers is in
progress and, where necessary, additional research is being conducted.
Contingency plans are being developed or alternate suppliers identified in those
cases where we appear to be at risk.
BetzDearborn sells chemical feed equipment which is installed at customer
sites. Earlier versions of this equipment were not Y2K compliant. A kit, which
makes this equipment Y2K compliant, has been designed and tested. Affected
equipment is being updated through both regular and Y2K specific service visits
by our field technicians.
During the third quarter of 1999, our Y2K activities included:
- refinement of methodology and documentation for Y2K efforts, including
inventory, assessment, remediation, testing and contingencies;
- continuation of development of contingency plans and schedules;
- continuation of comprehensive risk assessment of crucial business
functions, including intensive site reviews and evaluation of
manufacturing and other facilities;
- presentation to customers and business partners of information about our
Y2K efforts;
- continuation of assessment of remediation of embedded devices and systems
in our manufacturing operations; and
- commencement of an active testing program to test Y2K affected systems
and the contingency plans for such systems.
COSTS
The primary strategy for achieving Y2K compliance is the replacement of our
core business systems through the installation of SAP R/3((TM)) software. For
non-IT systems, operational staff conducted departmental inventories under the
direction of an outside consulting firm. We are in the process of identifying
the costs associated with any necessary process control equipment upgrades or
replacements. We have also engaged outside consultants specializing in Y2K
readiness programs to provide support to our Y2K Program Office in the final
stages of Y2K readiness and compliance.
18
19
The total cost of the Y2K project is currently estimated to be
approximately $14 million and we have spent approximately $10 million as of
September 30, 1999. These costs are expensed as incurred and are being funded
through operating cash flow. The cost estimate does not include the cost to
upgrade or replace process control equipment and desktop computers. The cost of
implementing the SAP R/3((TM)) replacement system also is not included in the
Y2K project cost estimate.
RISKS AND CONTINGENCY PLANS
Failure to complete implementation of the SAP R/3((TM)) system by the end
of 1999 would represent the worst case Y2K scenario for us. At the present time,
we believe that our Y2K readiness implementation efforts will be completed as
scheduled so that the risks of material adverse consequences to our business,
results of operations, liquidity or financial condition should be reduced. Some
of our production facilities are similar in nature and products could be
manufactured and shipped from alternate locations. At these locations, there are
feasible manual procedures that can be implemented in the case of a Y2K related
failure. For cases where products cannot be made in multiple locations or where
manual procedures are not available, appropriate contingency plans are being
developed. Some have been completed and others will continue to be finished and
tested through November 1999.
We believe that we are unlikely to experience a material adverse effect on
our business, results of operations, liquidity or financial condition as a
result of Y2K-related failures.
FORWARD-LOOKING STATEMENT
This Y2K discussion includes forward-looking statements of Hercules'
efforts and management's expectations relating to Y2K readiness. Our ability to
achieve Y2K readiness and the level of incremental associated costs could be
adversely affected by the availability and cost of remediation and testing
resources, vendors' and customers' abilities to install or modify IT and non-IT
systems, and unanticipated problems identified in the ongoing Y2K readiness
review.
The costs of the Y2K project and the dates that we plan to complete the Y2K
modifications are based on management's best estimates. We used numerous
assumptions of future events including the continued availability of certain
resources, third parties' remediation plans and other factors. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially. Specific factors that might cause material differences
include the availability and cost of personnel trained to perform Y2K
modifications; our ability to locate and correct all non-compliant computer
codes and embedded controls; the ability of material customers, suppliers, and
business partners to successfully complete their own Y2K remediation projects;
the accuracy of information received from third parties concerning their Y2K
compliance and business risk assessments; and similar uncertainties.
FORWARD-LOOKING STATEMENT
This quarterly report includes forward-looking statements, as defined in
the Private Securities Litigation Reform Act of 1995, reflecting management's
current analysis and expectations, based on reasonable assumptions. Results
could differ materially depending on such factors as business climate, economic
and competitive uncertainties, higher manufacturing costs, reduced level of
customer orders, ability to integrate BetzDearborn, changes in strategies, risks
in developing new products and technologies, the ability of Hercules' customers
and suppliers to achieve Year 2000 readiness, environmental and safety
regulations and clean-up costs, foreign exchange rates, adverse legal and
regulatory developments, and adverse changes in economic and political climates
around the world. Accordingly, there can be no assurance that the Company will
meet analysts' earnings estimates. As appropriate, additional factors are
contained in reports filed with the Securities and Exchange Commission. This
paragraph is included to provide safe harbor for forward-looking statements,
which are not required to be publicly revised as circumstances change.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For discussion of quantitative and qualitative disclosure about market
risk, see the caption "Market Risk" under Item 2, Management's Discussion and
Analysis of Results of Operations and Financial Condition.
19
20
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information related to Legal Proceedings, see notes to financial
statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3-A.1 Restated Certificate of Incorporation of Hercules Incorporated
as revised and amended July 6, 1988. (Incorporated by reference
to Exhibit 3-A to Hercules' Annual Report on Form 10-K for the
year ended December 31, 1992.)
3-A.2 Certificate of Amendment dated October 24, 1995 to the Restated
Certificate of Incorporation of Hercules Incorporated as revised
and amended July 6, 1988. (Incorporated by reference to Exhibit
4.1a to Hercules' Registration Statement on Form S-3, filed
September 15, 1998 (File No. 333-63423).)
3-B By-Laws of Hercules Incorporated as revised and amended October
30, 1991. (Incorporated by reference to Exhibit 3-B to Hercules'
Annual Report on Form 10-K for the year ended December 31,
1992.)
4-A Amendment No. 2, dated as of October 25, 1999, to the Amended
and Restated Trust Agreement of Hercules Trust V, as amended,
dated as of November 12, 1998.
4-B Third Supplemental Indenture, dated as of October 25, 1999, to
the Junior Subordinated Debentures Indenture, as supplemented,
between Hercules Incorporated, as Issuer and The Chase Manhattan
Bank, as Trustee dated as of November 12, 1998.
4-C Officers' Certificate, dated as of July 27, 1999, pursuant to
the Junior Subordinated Debentures Indenture between Hercules
Incorporated, as Issuer and The Chase Manhattan Bank, as
Trustee. (Incorporated by reference to Exhibit 4.1 to Hercules'
Current Report on Form 8-K dated July 27, 1999.)
4-D Amended and Restated Trust Agreement of Hercules Trust II, dated
as of July 27, 1999, together with Annex I thereto.
(Incorporated by reference to Exhibit 4.2 to Hercules' Current
Report on Form 8-K dated July 27, 1999.)
4-E Unit Agreement, dated July 27, 1999, among Hercules
Incorporated, Hercules Trust II and The Chase Manhattan Bank, as
unit agent. (Incorporated by reference to Exhibit 4.3 to
Hercules' Current Report on Form 8-K dated July 27, 1999.)
4-F Warrant Agreement, dated July 27, 1999, among Hercules
Incorporated and The Chase Manhattan Bank, as warrant agent.
(Incorporated by reference to Exhibit 4.4 to Hercules' Current
Report on Form 8-K dated July 27, 1999.)
4-G Form of Series A Junior Subordinated Deferrable Interest
Debentures. (Incorporated by reference to Exhibit 4.5 to
Hercules' Current Report on Form 8-K dated July 27, 1999.)
4-H Form of Trust II Preferred Securities. (Incorporated by
reference to Exhibit 4.6 to Hercules' Current Report on Form 8-K
dated July 27, 1999.)
4-I Form of CRESTS Unit. (Incorporated by reference to Exhibit 4.7
to Hercules' Current Report on Form 8-K dated July 27, 1999.)
4-J Form of Warrant. (Incorporated by reference to Exhibit 4.8 to
Hercules' Current Report on Form 8-K dated July 27, 1999.)
27 Financial Data Schedule.
20
21
(b) Reports on Form 8-K
FINANCIAL
STATEMENTS
REPORT DATE OF REPORT ITEM NOS. INCLUDED
------ -------------- --------- ----------
8-K July 27, 1999 5 No
21
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERCULES INCORPORATED
By: /s/ GEORGE MACKENZIE
------------------------------------
George MacKenzie
Executive Vice President
President, Chemical Specialties
Segment
and Chief Financial Officer
(Principal Financial Officer
and duly authorized signatory)
November 15, 1999
By: /s/ MICHAEL J. SCOTT
------------------------------------
Michael J. Scott
Vice President and Controller
(Principal Accounting Officer)
November 15, 1999
22
23
EXHIBIT INDEX
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO
- ------ ----------- ----------------------------
3-A.1 Restated Certificate of Incorporation of Hercules Exhibit 3-A to Hercules' An-
Incorporated as revised and amended July 6, 1988. nual Report on Form 10-K for
the year ended December 31,
1992.
3-A.2 Certificate of Amendment dated October 24, 1995 to the Exhibit 4.1a to Hercules'
Restated Certificate of Incorporation of Hercules Registration Statement on
Incorporated as revised and amended July 6, 1988. Form S-3, filed September
15, 1998 (File No.
333-63423).
3-B By-Laws of Hercules Incorporated as revised and amended Exhibit 3-B to Hercules' An-
October 30, 1991. nual Report on Form 10-K for
the year ended December 31,
1992.
4-A Amendment No. 2, dated as of October 25, 1999, to the
Amended and Restated Trust Agreement of Hercules Trust
V, as amended, dated as of November 12, 1998.
4-B Third Supplemental Indenture, dated as of October 25,
1999, to the Junior Subordinated Debentures Indenture,
as supplemented, between Hercules Incorporated, as
Issuer and The Chase Manhattan Bank, as Trustee dated
as of November 12, 1998.
4-C Officers' Certificate, dated as of July 27, 1999, Exhibit 4.1 to Hercules'
pursuant to the Junior Subordinated Debentures Current Report on Form 8-K
Indenture between Hercules Incorporated, as Issuer and dated July 27, 1999.
The Chase Manhattan Bank, as Trustee.
4-D Amended and Restated Trust Agreement of Hercules Trust Exhibit 4.2 to Hercules'
II, dated as of July 27, 1999, together with Annex I Current Report on Form 8-K
thereto. dated July 27, 1999.
4-E Unit Agreement, dated July 27, 1999, among Hercules Exhibit 4.3 to Hercules'
Incorporated, Hercules Trust II and The Chase Manhattan Current Report on Form 8-K
Bank, as unit agent. dated July 27, 1999.
4-F Warrant Agreement, dated July 27, 1999, among Hercules Exhibit 4.4 to Hercules'
Incorporated and The Chase Manhattan Bank, as warrant Current Report on Form 8-K
agent. dated July 27, 1999.
4-G Form of Series A Junior Subordinated Deferrable Exhibit 4.5 to Hercules'
Interest Debentures. Current Report on Form 8-K
dated July 27, 1999.
4-H Form of Trust II Preferred Securities. Exhibit 4.6 to Hercules'
Current Report on Form 8-K
dated July 27, 1999.
4-I Form of CRESTS Unit. Exhibit 4.7 to Hercules'
Current Report on Form 8-K
dated July 27, 1999.
4-J Form of Warrant. Exhibit 4.8 to Hercules'
Current Report on Form 8-K
dated July 27, 1999.
27 Financial Data Schedule.
23