Edgar Filing: HERCULES INC

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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 March 31, 2001
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 April 30, 2001, 108,006,908 shares of registrant's common
stock were outstanding.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF INCOME
(Dollars in millions, except per share)

(Unaudited)
Three Months Ended March 31,
2001 2000
----- -----

Net sales .............................................. $ 702 $ 798
Cost of sales .......................................... 409 450
Selling, general, and administrative expenses .......... 190 197
Research and development ............................... 19 21
Goodwill and intangible asset amortization ............. 19 20
Other operating expenses, net .......................... 3 4
------ -----

Profit from operations ................................. 62 106

Equity in loss of affiliated companies, net of tax ..... (3) --
Interest and debt expense .............................. 55 32
Preferred security distributions of subsidiary trusts... 15 23
Other income (expense), net ............................ (3) 5
------ -----

Income (loss) before income taxes ...................... (14) 56
Provision for income taxes ............................. (4) 20
------ -----

Net income (loss) ...................................... $ (10) $ 36
====== =====
Earnings per share:
Basic ........................................... $(0.09) $0.34
====== =====
Diluted ......................................... $(0.09) $0.34
====== =====

Dividends per share .................................... $ -- $0.27
====== =====

See accompanying notes to financial statements.

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HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET
(Dollars in millions)

(Unaudited)
March 31, 2001 December 31, 2000
-------------- -----------------

ASSETS
Current assets
Cash and cash equivalents ................................ $ 161 $ 54
Accounts and notes receivable, net ....................... 519 535
Other current assets ..................................... 81 91
Inventories
Finished products ................................. 169 171
Materials, supplies and work in process ........... 135 134
Deferred income taxes .................................... 42 37
------- -------

Total current assets ..................................... 1,107 1,022

Property, plant and equipment ................................... 2,543 2,564
Accumulated depreciation and amortization ....................... (1,463) (1,460)
------- -------
Net property, plant, and equipment .............................. 1,080 1,104

Goodwill and other intangible assets, net ....................... 2,345 2,391
Other assets .................................................... 791 792
------- -------
Total assets ............................................. $ 5,323 $ 5,309
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ......................................... $ 255 $ 259
Accrued expenses ......................................... 355 385
Short-term debt .......................................... 299 261
Income taxes payable ..................................... 10 17
------- -------
Total current liabilities ................................ 919 922

Long-term debt .................................................. 2,412 2,342
Deferred income taxes ........................................... 186 187
Postretirement benefits and other liabilities ................... 409 420
Commitments and contingencies (Note 12)
Company-obligated preferred securities of
subsidiary trusts .......................................... 622 622
Stockholders' equity
Common stock (shares issued: 2001 - 159,984,444;
2000 - 159,984,444) ................................... 83 83
Additional paid-in capital ............................... 718 726
Unearned compensation .................................... (113) (115)
Other comprehensive losses ............................... (188) (143)
Retained earnings ........................................ 2,147 2,157
------- -------
2,647 2,708
Reacquired stock, at cost (shares: 2001 - 52,002,252;
2000 - 52,442,393) .................................... (1,872) (1,892)
------- -------
Total stockholders' equity ............................... 775 816
------- -------
Total liabilities and stockholders' equity ............... $ 5,323 $ 5,309
======= =======

See accompanying notes to financial statements

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HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW
(Dollars in millions)

(Unaudited)
Three Months Ended March 31,
2001 2000
---- ----

Net cash provided by (used in) operations ...................... $ 9 $(12)
---- ----

CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures ........................................... (23) (52)
Proceeds of investment and fixed asset disposals ............... -- 6
Other, net ..................................................... (2) (20)
---- ----
Net cash used in investing activities ................... (25) (66)
---- ----

CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds ........................................ 147 200
Long-term debt repayments ...................................... (3) (72)
Change in short-term debt ...................................... (28) (2)
Common stock issued ............................................ 8 3
Common stock reacquired ........................................ -- (1)
Dividends paid ................................................. -- (28)
---- ----
Net cash provided by financing activities ............... 124 100
---- ----

Effect of exchange rate changes on cash ........................ (1) --
---- ----

Net increase in cash and cash equivalents ...................... 107 22
Cash and cash equivalents - beginning of period ................ 54 63
---- ----
Cash and cash equivalents - end of period ...................... $161 $ 85
==== ====

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) .................... $ 38 $ 33
Preferred security distributions of subsidiary trusts.... 18 18
Income taxes ............................................ 5 11
Non-cash investing and financing activities:
Incentive plan stock issuances .......................... 5 6

See accompanying notes to financial statements.

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HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)

(Unaudited)
Three Months Ended March 31,
----------------------------
2001 2000
---- ----

Net income (loss) .......................... $(10) $ 36

Foreign currency translation, net of tax.... (45) (4)
---- ----

Comprehensive income (loss) ................ $(55) $ 32
==== ====

See accompanying notes to financial statements.

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HERCULES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

1. These condensed consolidated financial statements are unaudited, but in the
opinion of management include all adjustments necessary to present fairly
Hercules' financial position and results of operations for interim periods.
These condensed consolidated financial statements should be read in conjunction
with the accounting policies, financial statements and notes included in our
annual report on Form 10-K for the year ended December 31, 2000. Certain prior
period amounts have been reclassified to conform to the current period
presentation.

Pursuant to Securities and Exchange Commission ("SEC") Regulation S-X,
Rule 3-10, the Company is required to provide condensed consolidating financial
information on the Company and its subsidiaries in a prescribed format in all
periodic reports filed with the SEC. The information necessary to present all
of the required disclosure was not available in time to be included in this
Form 10-Q filing. The Company is in the process of preparing the required
condensed consolidating financial information and intends to file a Form 10-Q/A,
which will include this information as soon as it is available.

2. Revenue Recognition - The Company recognizes revenue when the earnings
process is complete. This generally occurs when products are shipped to the
customer or services are performed in accordance with terms of the agreement,
title and risk of loss have been transferred, collectibility is probable, and
pricing is fixed and determinable. Accruals are made for sales returns and other
allowances based on the Company's experience. The corresponding shipping and
handling costs are included in cost of sales.

3. Derivative Instruments and Hedging - On January 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended ("SFAS 133"). The new standard
requires that all derivative instruments be reported on the balance sheet at
their fair values. The Company has not designated any derivative as a hedge
instrument and accordingly, changes in fair value of derivatives are recorded
each period in earnings. The adoption of SFAS 133 did not result in a pre or
post tax cumulative-effect-type adjustment to income and did not result in a
change to accumulated other comprehensive loss.

Under procedures and controls established by the Company's risk
management policies, the Company strategically enters into contractual
arrangements (derivatives) in the ordinary course of business to reduce the
exposure to foreign currency and interest rates.

The policies have established a variety of approved derivative
instruments to be utilized in each risk management program and the level of
exposure coverage based on an assessment of risk factors. Derivative
instruments utilized during the period include forwards, swaps and options. The
Company has not designated any non-derivatives as hedging instruments.

The Company uses forward exchange contracts, generally no greater than
three months in term, to reduce its net exposure, by currency, related to
foreign currency denominated intercompany receivables. The objective of this
program is to maintain an overall balanced position in foreign currencies so
that exchange gains and losses resulting from exchange rate changes, net of
related tax effect, are minimized.

The Company has used interest rate swap agreements to manage interest
costs and risks associated with changing rates. Counterparties to the forward
exchange, currency swap and interest swap contracts are major financial
institutions. Credit loss from counterparty nonperformance is not anticipated.
During 2000, the interest rate swap portfolio was substantially terminated.

4. 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:

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(Amounts in millions, except per share data):
Three Months Ended March 31,
----------------------------
2001 2000
------ ------

Basic
Net income (loss) ...................... $ (10) $ 36
Weighted-average shares outstanding..... 107.9 106.7
------ ------
EPS .................................... $(0.09) $ 0.34
====== ======

Diluted
Net income (loss) ...................... (10) $ 36
Interest on convertible debentures ..... -- --
------ ------
Net income for EPS calculation ......... $ (10) $ 36
====== ======

Weighted-average shares outstanding .... 107.9 106.7
Options ................................ -- --
Debentures ............................. -- .2
------ ------
Adjusted weighted-average shares ....... 107.9 106.9
------ ------
EPS .................................... $(0.09) $ 0.34
====== ======

5. Cost and expenses include depreciation of $27 million and $33 million for the
three months ended March 31, 2001 and 2000, respectively.

6. Other operating expenses for the three months ended March 31, 2001 and 2000
include environmental charges of approximately $3 million and $2 million,
respectively. The first quarter 2000 also includes integration charges of $2
million, primarily for employee retention, consulting, legal and other costs
associated with the BetzDearborn acquisition.

7. Interest and debt costs are summarized as follows:

(Dollars in millions)
Three Months Ended March 31,
----------------------------
2001 2000
---- ----

Costs incurred....................... $57 $34
Amount capitalized................... (2) (2)
--- ---
Interest expense..................... $55 $32
=== ===

8. Other income (expense) for the three months ended March 31, 2001, includes
foreign currency losses of approximately $1 million as compared to foreign
currency gains of approximately $3 million in the first quarter 2000, combined
with non-operating related legal costs of $2 million and $1 million in the
quarters ended March 31, 2001 and 2000, respectively.

9. The consolidated balance sheet reflects liabilities for employee severance
benefits and other exit costs, primarily related to the 1998 plans initiated
upon the acquisition of BetzDearborn. During 2000, we committed to additional
plans relating to the restructuring of our Process Chemicals & Services segment
and corporate realignment due to the divestiture of our non-core businesses. As
a result of all these plans, we estimate approximately 1,705 employees will be
terminated, of which approximately 1,370 employee terminations have occurred
since the inception of the plans.

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Pursuant to the plans in place, approximately 10 employees were
terminated during the three months ended March 31, 2001. Cash payments during
the first quarter included $5 million for severance benefits. A reconciliation
of activity with respect to the liabilities established for these plans is as
follows:

(Dollars in millions)
Three Months Ended March 31,
----------------------------
2001 2000
---- ----

Balance at beginning of year............ $34 $77
Cash payments........................... (5) (9)
--- ---
Balance at end of period................ $29 $68
=== ===

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 the end of 2001.

10. A summary of short-term and long-term debt follows:

(Dollars in millions)
March 31, December 31,
2001 2000
---- ----

SHORT-TERM:
Banks ....................................... $ 86 $118
Current maturities of long-term debt......... 213 143
---- ----
$299 $261
==== ====

At March 31, 2001, we had $125 million of unused lines of credit that
may be drawn as needed. Lines of credit in use at March 31, 2001 were $86
million.

(Dollars in millions)
March 31, December 31,
2001 2000
--------- ------------

LONG-TERM:
6.60% notes due 2027 ...................................... $ 100 $ 100
6.625% notes due 2003 ..................................... 125 125
11.125% senior notes due 2007 ............................. 400 400
8% convertible subordinated debentures due 2010 ........... 3 3
Term loan tranche A due in varying amounts through 2003.... 874 875
Term loan tranche D due 2005 .............................. 375 375
Revolving credit agreement due 2003 ....................... 581 437
ESOP debt ................................................. 101 101
Term notes at various rates from 5.23% to 9.60% due
in varying amounts through 2006 ......................... 60 65
Other ..................................................... 6 4
------ ------
$2,625 $2,485
Current maturities of long-term debt ...................... (213) (143)
------ ------
Net long-term debt ........................................ $2,412 $2,342
====== ======

In 1998, we entered into a $3,650 million credit facility with a
syndicate of banks which includes varying maturity term loans totaling $2,750
million, of which $874 million was still outstanding at March 31, 2001. In
addition, the facility includes a $900 million revolving credit agreement, of
which $581 million

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was outstanding at March 31, 2001. Through this revolving credit facility, a
Canadian subsidiary of ours can borrow up to U.S. $100 million from select
lenders in Canada in Canadian dollars. As of March 31, 2001, $319 million of the
multi-currency revolver is available for use. However, actual availability under
the revolving credit agreement is constrained by our ability to meet covenants
in our senior credit facility (see Note 15).

On January 23, 2001, our corporate credit rating was downgraded by
Standard & Poor's Rating Services to BB which resulted in an increase to the
interest rate on the term loan tranche A to LIBOR + 2.75%, on the term loan
tranche D to LIBOR + 3.25% and on the ESOP loan and guarantee to 12.95%.

11. Guaranteed Preferred Beneficial Interests in Company's Subordinated
Debentures consists of:

(Dollars in millions)
March 31, December 31,
2001 2000
--------- ------------

9.42% Trust Originated Preferred Securities............................ $362 $362
6 1/2% CRESTS Units ................................................... 260 260
---- ----
$622 $622
==== ====

TRUST ORIGINATED PREFERRED SECURITIES

In March 1999, Hercules Trust I ("Trust I"), our wholly owned
subsidiary trust, completed a $362 million underwritten public offering of
14,500,000 shares of 9.42% Trust Originated Preferred Securities. Trust I
invested the proceeds from the sale of the Preferred Securities in an equal
principal amount of 9.42% Junior Subordinated Deferrable Interest Debentures of
Hercules due March 2029. We used these proceeds to repay long-term debt.

Trust I distributes quarterly cash payments it receives from Hercules
on the debentures to its 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 its preferred
securities. The deferred distributions, however, will accumulate distributions
at a rate of 9.42% per annum.

Trust I will redeem the preferred securities when the debentures are
repaid at maturity on March 31, 2029. Hercules may redeem the debentures, in
whole or, on or after March 17, 2004, in part, before their maturity at a price
equal to 100% of the principal amount of the debentures redeemed, plus accrued
interest. When Hercules redeems any debentures before their maturity, Trust I
will use the cash it receives to redeem preferred securities and common
securities as provided in the trust agreement. Hercules guarantees the
obligations of Trust I on the preferred securities.

CRESTS UNITS

In July 1999, we completed a $350 million public offering of 350,000
CRESTS Units with Hercules Trust II, a wholly owned subsidiary trust ("Trust
II"). Trust II used the proceeds from the sale of its preferred securities to
purchase Series A Junior Subordinated Deferrable Interest Debentures of
Hercules. 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 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. 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

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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. As of March 31, 2001, 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 6.5% of
the scheduled liquidation amount of $1,000 per debenture and/or preferred
security until the scheduled maturity date and redemption date of June 30, 2029,
unless there is a reset and remarketing event. We may defer interest payments on
the debentures at any time, for up to 20 consecutive quarters. If this occurs,
Trust II will also defer distribution payments on its preferred securities. The
deferred distributions will accumulate distributions at a rate of 6.5% per
annum. We guarantee payments by Trust II on its preferred securities. Trust II
must redeem the preferred securities when the debentures are redeemed or repaid
at maturity.

We used the proceeds from the CRESTS Units offering to repay long-term
debt. Issuance costs related to the preferred security component of the CRESTS
Units are being amortized over the life of the security and costs related to the
warrants were charged to additional paid-in capital.

12. Commitments and Contingencies

ENVIRONMENTAL

Hercules has been identified as a potentially responsible party (PRP)
by U.S. federal and state authorities, or by private parties seeking
contribution, for the cost of environmental investigation and/or cleanup at
numerous sites. The estimated range of the reasonably possible share of costs
for the investigation and cleanup is between $65 million and $239 million. The
actual costs will depend upon numerous factors, including the number of parties
found responsible at each environmental site and their ability to pay; the
actual methods of remediation required or agreed to; outcomes of negotiations
with regulatory authorities; outcomes of litigation; changes in environmental
laws and regulations; technological developments; and the years of remedial
activity required, which could range from 0 to 30 years.

Hercules becomes aware of sites in which it may be named a PRP in
investigatory and/or remedial activities through correspondence from the U.S.
Environmental Protection Agency, or other government agencies, or through
correspondence from previously named PRPs, who either request information or
notify us of our potential liability. We have established procedures for
identifying environmental issues at our plant sites. In addition to
environmental audit programs, we have environmental coordinators who are
familiar with environmental laws and regulations and act as a resource for
identifying environmental issues.

At March 31, 2001, the accrued liability of $65 million for
environmental remediation represents management's best estimate of the probable
and reasonably estimable costs related to environmental remediation. The extent
of liability is evaluated quarterly. The measurement of the liability is
evaluated based on currently available information, including the process of
remedial investigations at each site and the current status of negotiations with
regulatory authorities regarding the method and extent of apportionment of costs
among other PRPs. While it is not feasible to predict the outcome of all pending
suits and claims, the ultimate resolution of these environmental matters could
have a material effect upon the results of operations and the financial position
of Hercules.

On April 10, 2001, the United States Court of Appeals for the Eighth
Circuit issued an opinion in the United States, et al. v. Vertac Corporation, et
al. In that opinion, the Appeals Court reversed the Court's October 12, 1993
grant of partial summary judgment, which had held Hercules jointly and severally
liable for costs incurred and to be incurred at the Jacksonville site, and
remanded the case back to the U.S. District Court for the Eastern District of
Arkansas for a determination of whether the harms at the site giving rise to the
government's claims are divisible. The Appeals Court also vacated the Court's
October 23, 1998 order granting the United States' summary judgment motion and
the February 8, 2000 judgment finding Hercules liable for 97.4% of the costs at
issue, ordering that these issues be revisited following further proceedings
with respect to divisibility. Finally, the Appeals Court affirmed the judgment
of liability against Uniroyal.

As a result of the Appellate rulings described above, Hercules will be
allowed to present both facts and law to the Court in support of Hercules'
belief that it should not be liable under CERCLA for some or all of the costs
incurred by the government in connection with the site because those harms are

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divisible. Should Hercules prevail on remand, any liability to the government
will be either eliminated or reduced.

In 1992, Hercules brought suit against its insurance carriers for past
and future costs for cleanup of certain environmental sites (Hercules
Incorporated v. Aetna Casualty & Surety Company, et al., Del. Super, C.A. No.
92C-10-105 and 90C-FE-195-CV (consolidated). In April 1998, the trial regarding
insurance recovery for the Jacksonville, Arkansas site (see discussion above)
was completed. The jury returned a "Special Verdict Form" with findings that, in
conjunction with the Court's other opinions, were used by the Court to enter a
judgment in August 1999. The judgment determined the amount of Hercules'
recovery for past cleanup expenditures and stated that Hercules is entitled to
similar coverage for costs incurred since September 30, 1997 and in the future.
Hercules has not included any insurance recovery in the estimated range of costs
above. Since entry of the Court's August 1999 order, Hercules has entered into
settlement agreements with several of its insurance carriers and has recovered
certain settlement monies. The terms of those settlements and amounts recovered
are confidential. Hercules has appealed certain of the trial court's rulings to
the Delaware Supreme Court. Oral argument was held on February 13, 2001 before
the Delaware Supreme Court, but no ruling has been issued.

LITIGATION

Hercules is a defendant in numerous lawsuits that arise out of, and are
incidental to, the conduct of its business. In these legal proceedings, no
specifically identified director, officer or affiliate is a party or a named
defendant. These suits concern issues such as product liability, contract
disputes, labor-related matters, patent infringement, environmental proceedings,
property damage and personal injury matters.

Hercules is a defendant in numerous asbestos-related personal injury
lawsuits and claims which typically arise from alleged exposure to asbestos
fibers from resin-encapsulated pipe and tank products which were sold by a
former subsidiary of Hercules to a limited industrial market, or from alleged
exposure to asbestos contained in facilities owned or operated by Hercules.
Lawsuits are received and matters settled on a regular basis. In December 1999,
Hercules entered into a Settlement Agreement to resolve the majority of these
matters then pending. In connection with that settlement, Hercules entered into
an agreement with several of its insurance carriers pursuant to which a majority
of the amounts paid will be insured. The terms of both agreements are
confidential. During 2000 and 2001, Hercules entered into additional settlement
agreements. The terms of these settlements are also confidential. In accordance
with the terms of the previously mentioned agreement with several of Hercules'
insurance carriers, the majority of the amounts paid and to be paid pursuant to
these various settlement agreements will be insured. Further, Hercules continues
to pursue additional insurance coverage from carriers who were not part of the
previously mentioned agreement.

At March 31, 2001, the consolidated balance sheet reflects a current
liability of approximately $29 million for litigation and claims. These amounts
represent management's best estimate of the probable and reasonably estimable
losses and recoveries related to litigation or claims. The extent of the
liability and recovery is evaluated quarterly. While it is not feasible to
predict the outcome of all pending

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suits and claims, the ultimate resolution of these matters could have a material
effect upon the financial position of Hercules, and the resolution of any of the
matters during a specific period could have a material effect on the quarterly
or annual operating results for that period.

13. Segment Information

(Dollars in millions)
Three Months Ended March 31,
----------------------------
2001 2000
---- ----

Net Sales:
Process Chemicals and Services.... $407 $416
Functional Products (a) .......... 131 206
Chemical Specialties ............. 164 177
Reconciling Items ................ -- (1)
---- ----
Consolidated .............. $702 $798
==== ====

Profit from Operations:
Process Chemicals and Services ... $ 63 $ 77
Functional Products (a) .......... 24 52
Chemical Specialties ............. 17 16
Reconciling Items ................ (42)(b) (39)(c)
---- ----
Consolidated .............. $ 62 $106
==== ====

(a) Net sales and Profit from operations in 2001 reflect the divestitures
of the food gums and nitrocellulose businesses in 2000.

(b) Includes $21 million of goodwill and intangible asset amortization and
other asset amortization, approximately $3 million of environmental
charges and $18 million of other corporate charges.

(c) Includes $25 million of goodwill and intangible asset amortization and
other asset amortization, approximately $9 million of environmental
and other corporate charges, approximately $2 million in integration
costs and approximately $3 million of corporate research and
development costs.

14. Pending Transactions

In March 2001, we entered into an agreement to sell the Peroxides
portion of our Resins division (the "Peroxide transaction"). We anticipate
closing the Peroxide transaction on or before May 31, 2001.

In November 2000, the Company announced it was exploring strategic
alternatives for all or parts of the Company. The Company has retained Goldman
Sachs & Co. and Credit Suisse First Boston to assist in this process. This
process continues. A future decision to sell certain of our business could
result in a material impairment change in the period such decision is made.
There can be no assurance that a transaction will occur.

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be sold during 2001. The Resins division, including those portions associated
with the Eastman and Peroxides transactions, had approximately $450 million in
net sales in 2000.

15. Subsequent Events

Both our senior credit facility and our ESOP Trust loan (Note 10)
require quarterly compliance with certain financial covenants, including a
debt/EBITDA ratio ("leverage ratio"), an interest coverage ratio and minimum net
worth. In addition, we are required to deliver our annual audited consolidated
financial statements to the lenders within 90 days of the Company's fiscal year
end.

Due to a delay in closing the Eastman transaction, which in turn
delayed the pay down of debt, our debt as of March 31, 2001 was significantly
higher than planned. As a result, the Company would have been out of compliance
with the debt/EBITDA ratio covenant of its senior credit facility as of March
31, 2001. In addition, due to the fact that the Company extended the filing date
for the December 31, 2000 Form 10-K, the Company's annual audited financial
statements were not provided to the lenders by March 31, 2001.

On April 5, 2001, in consideration for the payment of a fee, our senior
credit facility bank syndicate and ESOP lender granted waivers with respect to:
(1) compliance with the debt/EBITDA ratio as of March 31, 2001, and (2) an
extension of time to deliver the December 31, 2000 audited financial statements
to April 17, 2001. These statements were completed and delivered on time.

With respect to the covenant regarding the debt/EBITDA ratio, the
waiver required that the Eastman transaction be consummated on or before May
31, 2001. On May 1, 2001, we completed the Eastman transaction, receiving gross
proceeds of approximately $244 million. In addition, the Company must
demonstrate, as of the last day of the month in which the Eastman transaction
closes, that the leverage ratio does not exceed 4.75 to 1.00 after giving affect
to the application of the net cash proceeds from the Eastman transaction to
prepay the Tranche A term loan and the ESOP Trust loan. The Company expects to
achieve this leverage ratio, although it will be necessary to close the Peroxide
transaction on or before May 31, 2001. Although no assurances can be given in
this regard, we anticipate closing the Peroxides transaction on or before May
31, 2001. Using the net proceeds for repayment of debt, we expect that we will
be in compliance with all debt covenants during the second quarter 2001 as well
as through March 31, 2002.

A breach of any of the terms and conditions of the waivers would give
the lenders the right to accelerate repayment of substantially all of our
indebtedness if they choose to do so. Upon any such acceleration, the debt would
become immediately due and payable and any loan commitments terminated.

While, as indicated above, we expect to satisfy all conditions of the
waivers and remain in compliance with our debt covenants, current and future
compliance is dependent upon generating sufficient EBITDA and cash flow which
are, in turn, impacted by business performance, economic climate, competitive
uncertainties and possibly the resolution of contingencies, including those set
forth in Note 13 to the consolidated financial statements.

In the event the Company is not in compliance with the debt covenants
at May 31, 2001 or thereafter, we would pursue various alternatives, which may
include, among other things, refinancing of debt, debt covenant amendments or
debt covenant waivers. While we believe we would be successful in pursuing these
alternatives, there can be no assurance that we would be successful.

On March 23, 2001, ISP filed with the SEC its definitive proxy
statement for soliciting proxies from the Company's shareholders to vote for
ISP's own slate of director nominees in opposition of management. In response
to ISP's filings, the Company filed its definitive proxy statement on April 12,
2001. ISP's proxy contest has resulted in the incurrence of substantial fees
and expenses and the diversion of management's time and efforts from the
Company's ongoing strategy to reduce debt, decrease spending and generate cash.
In addition, the proxy contest could negatively impact the Company's current
process aimed at a sale or merger of the Company and/or its business.

13
14

Court's October 12, 1993 grant of partial summary judgment, which had held
Hercules jointly and severally liable for costs incurred and to be incurred at
the Jacksonville site, and remanded the case back to the U.S. District Court for
the Eastern District of Arkansas for a determination of whether the harms at the
site giving rise to the government's claims are divisible. The Appeals Court
also vacated the Court's October 23, 1998 order granting the United States'
summary judgment motion and the February 8, 2000 judgment finding Hercules
liable for 97.4% of the costs at issue, ordering that these issues be revisited
following further proceedings with respect to divisibility. Finally, the Appeals
Court affirmed the judgment of liability against Uniroyal.

In 1999, Hercules was sued by Hexcel Corporation (Hexcel) in a case
captioned Hexcel Corporation v. Hercules Incorporated , Index No. 602293/99,
Supreme Court of New York, County of New York. In this case, Hexcel sought
recovery of a total of approximately $8,422,000 (plus interest) in
"post-closing" adjustments to the purchase price paid by Hexcel for Hercules'
former Composite Products Division. The basis for these alleged "adjustments"
derive from the Sale and Purchase Agreement between Hercules and Hexcel dated as
of April 15, 1996. In June 2000, the Court granted Hexcel's motion for summary
judgment as to liability, finding Hercules liable to Hexcel on technical
grounds, but reserved ruling on the amount of damages. The Court then referred
the damages determination to a Special Referee. In January 2001, the Special
Referee issued a Report, recommending that Hercules be found liable to Hexcel
for a total of approximately $7,300,000 plus interest. In February 2001, Hexcel
moved to confirm the Special Referee's Report and Hercules cross-moved to
confirm in part and reject in part the Special Referee's Report. We have
specifically challenged the majority of the Special Referee's findings, and we
have argued that a $2,000,000 indemnity "basket" established by the terms of the
April 1996 Sale and Purchase Agreement should apply, reducing any award to
Hexcel by $2,000,000. In May 2001, the Court accepted the Special Referee's
Report and rejected our position. We believe the Court's decision is incorrect,
at least in part, as a matter of law and we will appeal the Court's decision. In
addition to the foregoing, in October 2000, Hexcel brought an action against
Hercules to compel arbitration to determine the proper "Working Capital
Adjustment" under the terms of the April 1996 Sale and Purchase Agreement.
Hexcel claims it is owed approximately $1,500,000, while we believes Hercules is
owed approximately $129,000. The parties have agreed to arbitrate the matter.
We believe Hexcel's claims in this latter matter are without merit.

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15

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
"three-month period" refer to the first quarter of 2001 and the three months
ended March 31, 2001. All comparisons are with the corresponding periods in the
previous year, unless otherwise stated.

(Dollars in millions)
Three Months Ended March 31,
----------------------------
2001 2000
---- ----

Net Sales by Industry Segment:
Process Chemicals and Services.... $407 $416
Functional Products (a) .......... 131 206
Chemical Specialties ............. 164 177
Reconciling Items ................ -- (1)
---- ----
Total ..................... $702 $798
==== ====

(a) Net sales and Profit from operations in 2001 reflect the divestitures
of the food gums and nitrocellulose businesses in 2000.

(b) Includes $21 million of goodwill and intangible asset amortization and
other asset amortization, approximately $3 million of environmental
charges and $18 million of other corporate charges.

The discussion that follows speaks to comparisons in the table through
Profit from operations.

Consolidated Net sales decreased $96 million, or 12%, and volumes
declined 8%, principally reflecting the effects of the divested food gums and
nitrocellulose businesses. In addition, Net sales and volumes were down as a
result of the economic slowdown in the U.S. and foreign economies. On a
comparable basis (excluding the divested food gums and nitrocellulose
businesses), Net sales for the quarter were down $26 million, or 4%. The
strength of the U.S. dollar versus other currencies continued to negatively
impact results. Excluding the effects of the divested businesses and foreign
currency translation, Net sales were down $6 million, or 1%, for the quarter.
Consolidated Profit from operations declined $44 million, or 42%, on an absolute
basis and $33 million, or 35%, on a comparable basis. Higher freight, raw
material and energy costs coupled with soft demand and competitive pricing
pressure in key markets contributed to the lower Profit from operations. The
slowing worldwide economy particularly impacted the Pulp and Paper and Aqualon
Divisions.

Process Chemicals and Services segment, Net sales were down 2% and
Profit from operations declined 18%. The Pulp and Paper Division was impacted by
weak demand and competitive pressure in

15
16

the North American and European markets. Volume for the Pulp and Paper Division
declined 4%. BetzDearborn Net sales and Profit from operations were essentially
flat. Higher costs for freight, utility and selling, general and administrative
expenses were offset by price increases instituted in 2000, a 4% increase in
volumes and favorable changes in product mix.

Functional Products segment Net sales declined $75 million, or 36%, on
an absolute basis and $5 million, or 4% on a comparable basis. The decline in
segment Net sales primarily reflects the effects of the divested food gums and
nitrocellulose businesses. Slower sales in emerging international regions and to
the U.S. paint market were only partially offset by strong sales to the oilfield
sector and to a rebounding construction market in Europe. Profit from operations
declined 54% on an absolute basis and 38% on a comparable basis. Higher raw
material and energy costs unfavorably impacted results. In addition, segment
results reflect additional costs during the quarter relating to the
commissioning of the new methylcellulose facility. On a comparable business
basis, Aqualon Division volume rose 1% in the quarter versus the first quarter
2000.

Chemical Specialties segment net sales declined $13 million, or 7%,
although Profit from operations increased $1 million, or 6%. Higher pricing and
lower selling, general and administrative costs in both the Resins and
FiberVisions Divisions led to this improvement and more than offset higher raw
material and energy costs and unfavorable product mix variables. Segment volumes
were 9% lower in the quarter, principally relating to the FiberVisions
Division's exit of a number of lower margin textiles sectors in 2000. Within
this segment, the Company closed, at a gain, the sale of its hydrocarbon resins
and portions of its rosin resins business to Eastman Chemical Company on May 1,
2001, realizing gross proceeds of approximately $244 million, which were used to
partially prepay the tranche A term loan and the ESOP Trust loan.

Equity in loss of affiliated companies represents the Company's equity
interest in C.P. Kelco, net of the associated income tax benefit.

Interest and debt expense and preferred security distributions of
subsidiary trusts increased $15 million as a result of higher borrowing costs.

Other income (expense), net decreased $8 million primarily due to
current year unfavorable foreign currency losses of approximately $1 million as
compared to foreign currency gains of $3 million in 2000 combined with
non-operating related legal costs of $2 million and $1 million, respectively.

The effective tax rate for the quarter was 40% before the inclusion of
the equity loss. The anticipated rate for 2001 is 85% and reflects the effect of
non-deductible goodwill amortization against an anticipated lower pre-tax income
base. The effective tax rate of 35.7% for the first quarter 2000, reflects the
effect of non-deductible goodwill amortization offset by favorable audit
settlements and the utilization of research and development credits and a
capital loss.

FINANCIAL CONDITION

Liquidity and financial resources: Net cash provided by operations was
$9 million for the quarter compared to cash used in operations of $12 million in
the first quarter 2000. The increase primarily reflects lower working capital
requirements and non-cash charges offset by lower net income and less
depreciation and amortization. Current and quick ratios have increased to 1.2
and .87, respectively, at March 31, 2001, compared with 1.1 and .78,
respectively, at December 31, 2000. As of March 31, 2001, we have $319 million
available under our revolving credit agreement and $125 million of short-term
lines of credit. The Company expects to meet short-term cash requirements from
operating cash flow and availability under lines of credit. However, actual
availability is constrained by our ability to meet covenants in our senior
credit facility.

Capital Structure and Commitments: Total capitalization (stockholders'
equity, Company obligated preferred securities of subsidiary trusts and debt)
increased to $4.1 billion at March 31, 2001,

16
17

from $4.0 billion at year-end 2000. The ratio of debt-to-total capitalization
increased to 66% at March 31, 2001 from 64% at December 31, 2000.

RECENT EVENTS

In January 2001, we ended negotiations regarding the sale of our
FiberVisions business.

On January 23, 2001, Standard & Poor's downgraded our corporate credit
and secured bank loan rating to BB and our senior unsecured notes rating to BB-.

On March 5, 2001, International Specialty Products Inc. ("ISP") filed a
proxy statement to elect its nominees to Hercules' Board of Directors. On March
23, 2001, ISP filed with the SEC its definitive proxy statement for soliciting
proxies from the Company's shareholders to vote for ISP's own slate of director
nominees in opposition to management. In response to ISP's filings, the Company
filed its definitive proxy statement on April 12, 2001. ISP's proxy contest has
resulted in the incurrence of substantial fees and expenses and the diversion of
management's time and efforts from the Company's ongoing strategy to reduce
debt, decrease spending and generate cash. In addition, the proxy contest could
negatively impact the Company's current process aimed at a sale or merger of the
Company and/or its business.

During March 2001, definitive purchase and sale agreements were signed
for the sale of our hydrocarbon resins division and select portions of our rosin
resins divisions (the "Eastman transaction") to Eastman Chemical Resins, Inc., a
subsidiary of Eastman Chemical Company ("Eastman"). On May 1, 2001, we completed
the Eastman transaction, receiving gross proceeds of approximately $244 million.
Also in March 2001, we entered into an agreement to sell the Peroxides portion
of our Resins division (the "Peroxide transaction"). We anticipate closing the
Peroxide transaction on or before May 31, 2001.

The majority of the remaining portions of the Resins division,
including the ink toner portion that one of our joint venture partners exercised
a right of first refusal to purchase in June 2000, are expected to be sold
during 2001. The Resins division, including those portions associated with the
Eastman and Peroxides transactions, had approximately $450 million in net sales
in 2000.

Due to a delay in closing the Eastman transaction, which in turn
delayed the pay down of debt, our debt as of March 31, 2001 was significantly
higher than planned. As a result, the Company would have been out of compliance
with the debt/EBITDA ratio covenant of its senior credit facility as of March
31, 2001. In addition, due to the fact that the Company has extended the filing
date for December 31, 2000 Form 10-K, the Company's annual audited financial
statements were not provided to the lenders by March 31, 2001.

With respect to the covenant regarding the debt/EBITDA ratio, the
waivers required that the Eastman transaction be consummated on or before May
31, 2001. On May 1, 2001, we completed the Eastman transaction, receiving gross
proceeds of approximately $244 million. In addition, the Company must
demonstrate, as of the last day of the month in which the Eastman transaction
closes, that the leverage ratio does not exceed 4.75 to 1.00 after giving affect
to the application of the net cash proceeds from the Eastman transaction to
prepay the tranche A term loan and the ESOP Trust loan. The Company expects to
achieve this leverage ratio, although it will be necessary to close the Peroxide
transaction on or before May 31, 2001. Although no assurances can be given in
this regard, we anticipate closing the Peroxide transaction on or before May
31, 2001. Using the net proceeds for repayment of debt, we expect that we will
be in compliance with all debt covenants during the second quarter 2001 as well
as the remainder of the year through March 31, 2002.

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18
In the event the Company is not in compliance with the debt covenants
at May 31, 2001 or thereafter, we would pursue various alternatives, which may
include, among other things, refinancing of debt, debt covenant amendments, or
debt covenant waivers. While we believe we would be successful in pursuing these
alternatives, there can be no assurance that we would be successful.

On April 10, 2001, the United States Court of Appeals for the Eighth
Circuit issued an opinion in the United States, et al. v. Vertac Corporation, et
al., as described in Item 3. In that opinion, the Appeals Court reversed the
Court's October 12, 1993 grant of partial summary judgment, which had held
Hercules jointly and severally liable for costs incurred and to be incurred at
the Jacksonville site, and remanded the case back to the U.S. District Court for
the Eastern District of Arkansas for a determination of whether the harms at the
site giving rise to the government's claims are divisible. The Appeals Court
also vacated the Court's October 23, 1998 order granting the United States'
summary judgment motion and the February 8, 2000 judgment finding Hercules
liable for 97.4% of the costs at issue, ordering that these issues be revisited
following further proceedings with respect to divisibility. Finally, the Appeals
Court affirmed the judgment of liability against Uniroyal.

In 1999, Hercules was sued by Hexcel Corporation (Hexcel) in a case
captioned Hexcel Corporation v. Hercules Incorporated , Index No. 602293/99,
Supreme Court of New York, County of New York. In this case, Hexcel sought
recovery of a total of approximately $8,422,000 (plus interest) in
"post-closing" adjustments to the purchase price paid by Hexcel for Hercules'
former Composite Products Division. The basis for these alleged "adjustments"
derive from the Sale and Purchase Agreement between Hercules and Hexcel dated as
of April 15, 1996. In June 2000, the Court granted Hexcel's motion for summary
judgment as to liability, finding Hercules liable to Hexcel on technical
grounds, but reserved ruling on the amount of damages. The Court then referred
the damages determination to a Special Referee. In January 2001, the Special
Referee issued a Report, recommending that Hercules be found liable to Hexcel
for a total of approximately $7,300,000 plus interest. In February 2001, Hexcel
moved to confirm the Special Referee's Report and Hercules cross-moved to
confirm in part and reject in part the Special Referee's Report. We have
specifically challenged the majority of the Special Referee's findings, and we
have argued that a $2,000,000 indemnity "basket" established by the terms of the
April 1996 Sale and Purchase Agreement should apply, reducing any award to
Hexcel by $2,000,000. In May 2001, the Court accepted the Special Referee's
Report and rejected our position. We believe the Court's decision was incorrect,
at lease in part, as a matter of law and we will appeal the Court's decision.
In addition to the foregoing, in October 2000, Hexcel brought an action against
Hercules to compel arbitration to determine the proper "Working Capital
Adjustment" under the terms of the April 1996 Sale and Purchase Agreement.
Hexcel claims it is owed approximately $1,500,000, while we believes Hercules is
owed approximately $129,000. The parties have agreed to arbitrate the matter. We
believe Hexcel's claims in this latter matter are without merit.

RISK FACTORS

Market Risk - Fluctuations in interest and foreign currency exchange
rates affect our financial position and results of operations. We use several
strategies from time to time to actively hedge interest rate and foreign
currency exposure and minimize the effect of such fluctuations on reported
earnings and cash flow. Sensitivity of our financial instruments to selected
changes in market rates and prices, which are reasonably possible over a
one-year period, are described below. Market values are the present value of
projected future cash flows based on the market rates and prices chosen. The
market values for interest rate risk are calculated by utilizing a third-party
software model that utilizes standard pricing models to determine the present
value of the instruments based on the market conditions as of the valuation
date.

Our derivative and other financial instruments subject to interest rate
risk consist of debt instruments, interest rate swaps and currency swaps. At
March 31, 2001, net market value of these combined instruments was a liability
of $3.17 billion. The sensitivity analysis assumes an instantaneous 100-basis
point move in interest rates from their levels, with all other variables held
constant. A 100-basis point increase in interest rates at March 31, 2001 would
result in a $58 million decrease in the net market value of the liability. A
100-basis point decrease in interest rates at March 31, 2001 would result in an
$81 million increase in the net market value of the liability. During 2000, the
interest rate swap portfolio was substantially terminated.

19
Our financial instruments subject to changes in equity price risk,
including the warrant components of the CRESTS Units issued in 1999 (see Note
11), represent a net obligation of $41 million. The sensitivity analysis assumes
an instantaneous 10% change in valuation with all other variables held constant.
A 10% increase in market values at March 31, 2001 would increase the net
obligation by $4 million, while a 10% decrease would reduce the net obligation
by $4 million. The change in equity price risk from year-end 2000 is primarily
from the impact of the reduction in our stock price on the warrants component of
the CRESTS units.

Our financial instruments subject to foreign currency exchange risk
consist of foreign currency forwards, options and foreign currency debt and
represent a net asset position of $1 million at March 31, 2001. The following
sensitivity analysis assumes an instantaneous 10% change in foreign currency
exchange rates from year-end levels, with all other variables held constant. A
10% strengthening of the U.S. dollar versus other currencies at March 31, 2001
would result in a $3 million increase in the net asset position. A 10% weakening
of the dollar versus all currencies would result in a $3 million decrease in the
net asset position to a net liability position of $2 million. The change in the
sensitivity level from year-end 2000 is primarily due to the strengthening of
the U.S. dollar in the first quarter.

Foreign exchange forward and option contracts have been used to hedge
the Company's firm and anticipated foreign currency cash flows. Thus, there is
either an asset or cash flow exposure related to all the financial instruments
in the above sensitivity analysis for which the impact of a movement in exchange
rates would be in the opposite direction and substantially equal to the impact
on the instruments in the analysis. There are presently no significant
restrictions on the remittance of funds generated by the Company's operations
outside the United States.

The Company has not designated any derivative as a hedge instrument
under SFAS 133 and, accordingly, changes in the fair value of derivatives are
recorded each period in earnings (see Note 3).

Environmental - Hercules has been identified by U.S. federal and state
authorities as a "potentially responsible party" for environmental cleanup at
numerous sites. The estimated range of reasonably possible costs for remediation
is between $65 million and $239 million. While it is not

19
20

feasible to predict the outcome of all pending suits and claims, the ultimate
resolution of these environmental matters could have a material effect upon the
results of operations and financial position of Hercules (see Note 12).

Environmental remediation expenses are funded from internal sources of
cash. Such expenses are not expected to have a significant effect on the
Company's ongoing liquidity. Environmental cleanup costs, including capital
expenditures for ongoing operations, are a normal, recurring part of operations
and are not significant in relation to total operating costs or cash flows.

Litigation - Hercules is a defendant in numerous lawsuits that arise
out of, and are incidental to, the conduct of its business. These suits concern
issues such as product liability, contract disputes, labor-related matters,
patent infringement, environmental proceedings, property damage and personal
injury matters. While it is not feasible to predict the outcome of all pending
suits and claims, the ultimate resolution of these matters could have a material
effect upon the financial position of Hercules, and the resolution of any of the
matters during a specific period could have a material effect on the quarterly
or annual operating results for that period (see Note 12).

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21

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q 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.
Forward-looking statements may involve known and unknown risks, uncertainties
and other factors, which may cause the actual results to differ materially from
those projected, stated, or implied depending on such factors as: Hercules'
inability to generate cash and reduce debt, the result of Hercules' pursuit of
strategic alternatives, the outcome of the proxy contest, business performance,
economic and competitive uncertainties, Hercules' inability to monetize certain
of its identified businesses, higher manufacturing costs, reduced level of
customer orders, changes in strategies, risks in developing new products and
technologies, environmental and safety regulations and clean-up costs, foreign
exchange rates, failure to complete transactions, 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 future
results, performance or achievements expressed or implied by such
forward-looking statements. 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
generally required to be publicly revised as circumstances change.

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22

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

For discussion of quantitative and qualitative disclosure about market risk, see
the caption "Risk Factors" under Item 2, Management's Discussion and Analysis of
Results of Operations and Financial Condition.

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23

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

For information related to Legal Proceedings, see notes to financial
statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders during the first
quarter 2001, through the solicitation of proxies or otherwise.

ITEM 5. OTHER INFORMATION

Sale of Businesses:

On May 1, 2001, Hercules sold the assets comprising its hydrocarbon
resins business and the assets comprising select portions of its rosins resins
business to an affiliate of Eastman Chemical Company ("Eastman"). Part of the
assets sold included Hercules' manufacturing facilities located in Jefferson,
Pennsylvania; Middelburg, The Netherlands; Stonehouse, England; and Uruapan,
Mexico. Additionally, unit operations were acquired by Eastman, and will be
operated under contract by Hercules, at shared manufacturing facilities in
Savannah, Georgia and Franklin, Virginia. Hercules will also continue to
manufacture resins products for Eastman at four manufacturing facilities located
in Hattiesburg, Mississippi; Brunswick, Georgia; Tampere, Finland; and
Sobernheim, Germany. As consideration for the sale, Hercules received
approximately $244 million in cash. Hercules used the proceeds from the
divestiture to reduce debt. In addition, Hercules retained approximately $22
million of working capital.

Appointment of New Chief Executive Officer:

On May 8, 2001, the Board of Directors named William H. Joyce as Chief
Executive Officer and a member of the Board of Directors, effective immediately.
On July 1, 2001, Dr. Joyce will also become Chairman of the Board. He succeeds
Thomas L. Gossage, who has been serving as Chairman and CEO on an interim basis.
Prior to joining Hercules, Dr. Joyce was Chairman, President, and Chief
Executive Officer of Union Carbide Corporation, which merged with The Dow
Chemical Company ("Dow") in February 2001. At the time of that merger, Dr. Joyce
became Vice Chairman of the Board of Directors of Dow.

Mr. Gossage will continue to focus his efforts on the announced
strategic process to merge or sell the Company and its businesses. Mr. Gossage
will serve as Chairman of the Board in a non-employee capacity until July 1,
2001, and is currently expected to remain a member of the Board of Directors for
as long thereafter as he is needed in the strategic process.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

Please see the exhibits listed on the Exhibit Index.

(b) Reports on Form 8-K.

Financial Statements
Report Date of Report Item Nos. Included
------ -------------- --------- --------------------
Form 8-K February 23, 2001 2,4 No

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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
Vice Chairman and Chief Financial Officer
(Principal Financial Officer and
duly authorized signatory)
May 15, 2001

By: /s/ Robert C. Flexon
--------------------------------------------------
Robert C. Flexon
Vice President, Business Analysis and Controller
(Principal Accounting Officer)
May 15, 2001

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EXHIBIT INDEX

NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO
------ ----------- ----------------------------

3-A.1 Restated Certificate of Incorporation of Hercules Incorporated Exhibit 3-A to Hercules' Annual
as revised and amended July 6, 1988 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 4.1 a to Hercules'
Restated Certificate of Incorporation of Hercules Incorporated Registration Statement on Form S-3,
as revised and amended July 5, 1998 filed September 15, 1998
(File No. 333-63423).

3-B By-Laws of Hercules Incorporated as revised and amended Exhibit 3-B to Hercules' Annual Report
October 30, 1991 on Form 10-K for the year ended
December 31, 1992.

10-A Employment Contract between Hercules and William H. Joyce

10-B Letter Agreement between Hercules and Thomas L. Gossage