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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 June 30, 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 July 31, 2001, 108,364,379 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 data) (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net sales ............................................. $ 670 $ 822 $ 1,372 $ 1,620
Cost of sales ......................................... 375 462 784 912
Selling, general, and administrative expenses ......... 195 206 385 403
Research and development .............................. 17 20 36 41
Goodwill and intangible asset amortization ............ 19 20 38 40
Other operating (income) expenses, net ................ (65) 18 (62) 22
--------- --------- --------- ---------
Profit from operations ................................ 129 96 191 202
Equity in loss of affiliated companies ................ (1) -- (4) --
Interest and debt expense ............................. 53 42 108 74
Preferred security distributions of subsidiary trusts . 14 23 29 46
Other income (expense), net ........................... 4 (6) 1 (1)
--------- --------- --------- ---------
Income before income taxes ............................ 65 25 51 81
Provision for income taxes ............................ 42 9 38 29
--------- --------- --------- ---------
Net income ............................................ $ 23 $ 16 $ 13 $ 52
========= ========= ========= =========
Earnings per share:
Basic ......................................... $ 0.21 $ 0.15 $ 0.12 $ 0.49
========= ========= ========= =========
Diluted ....................................... $ 0.21 $ 0.15 $ 0.12 $ 0.49
========= ========= ========= =========
Dividends per share ................................... $ -- $ 0.27 $ -- $ 0.54
========= ========= ========= =========
See accompanying notes to financial statements.
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HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET
(Dollars in millions) (Unaudited)
June 30, 2001 December 31, 2000
------------- -----------------
ASSETS
Current assets
Cash and cash equivalents ...................... $ 41 $ 54
Accounts and notes receivable, net ............. 450 550
Other current assets ........................... 91 76
Inventories
Finished products ....................... 133 171
Materials, supplies, and work in process 110 134
Deferred income taxes .......................... 41 37
--------- ---------
Total current assets ........................... 866 1,022
Property, plant, and equipment ........................ 2,225 2,564
Accumulated depreciation and amortization ............. (1,292) (1,460)
--------- ---------
Net property, plant, and equipment .................... 933 1,104
Goodwill and other intangible assets, net ............. 2,303 2,391
Other assets .......................................... 760 792
--------- ---------
Total assets ................................... $ 4,862 $ 5,309
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ............................... $ 218 $ 259
Accrued expenses ............................... 401 385
Short-term debt ................................ 302 261
Income taxes payable ........................... 43 17
--------- ---------
Total current liabilities ...................... 964 922
Long-term debt ........................................ 1,915 2,342
Deferred income taxes ................................. 187 187
Postretirement benefits and other liabilities ......... 390 420
Commitments and contingencies ......................... -- --
Company-obligated preferred securities of
subsidiary trusts ................................ 622 622
Stockholders' equity
Common stock (shares issued: 2001 -- 159,984,444;
2000 - 159,984,444) ........................ 83 83
Additional paid-in capital ..................... 709 726
Unearned compensation .......................... (110) (115)
Other comprehensive losses ..................... (209) (143)
Retained earnings .............................. 2,169 2,157
--------- ---------
2,642 2,708
Reacquired stock, at cost (shares: 2001 --
51,639,880; 2000 - 52,442,393) ............. (1,858) (1,892)
--------- ---------
Total stockholders' equity ..................... 784 816
--------- ---------
Total liabilities and stockholders' equity ..... $ 4,862 $ 5,309
========= =========
See accompanying notes to financial statements.
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HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW
(Dollars in millions) (Unaudited)
Six Months Ended June 30,
2001 2000
----------- -----------
Net cash provided by operations ................................. $ 54 $ 23
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures ............................................ (43) (109)
Proceeds of investment and fixed asset disposals ................ 346 12
Acquisitions, net of cash acquired .............................. -- (5)
Other, net ...................................................... (1) (21)
----------- -----------
Net cash provided by (used in) investing activities ...... 302 (123)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds ......................................... 147 384
Long-term debt repayments ....................................... (434) (253)
Change in short-term debt ....................................... (92) 23
Common stock issued ............................................. 12 6
Common stock reacquired ......................................... -- (1)
Dividends paid .................................................. -- (57)
----------- -----------
Net cash (used in) provided by financing activities ...... (367) 102
----------- -----------
Effect of exchange rate changes on cash ......................... (2) --
----------- -----------
Net (decrease) increase in cash and cash equivalents ............ (13) 2
Cash and cash equivalents - beginning of period ................. 54 63
----------- -----------
Cash and cash equivalents - end of period ....................... $ 41 $ 65
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) ..................... $ 64 $ 75
Preferred security distributions of subsidiary trusts .... 32 40
Income taxes ............................................. 10 33
Noncash investing and financing activities:
Incentive and other employee benefit plan stock issuances 7 10
Acquisition of minority interest ......................... -- (11)
See accompanying notes to financial statements.
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HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Dollars in millions) (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income ................................ $ 23 $ 16 $ 13 $ 52
Foreign currency translation, net of tax .. (21) (61) (66) (65)
----------- ----------- ----------- -----------
Comprehensive income (loss) ............... $ 2 ($ 45) ($ 53) ($ 13)
=========== =========== =========== ===========
See accompanying notes to financial statements.
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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. The
condensed consolidated financial statements should be read in conjunction with
the accounting policies, financial statements and notes included in our annual
report on Form 10-K for the year ended December 31, 2000. Certain prior period
amounts have been reclassified to conform to the current period presentation.
Pursuant to Securities and Exchange Commission ("SEC") Regulation S-X,
Rule 3-10, the Company is required to provide condensed consolidating financial
information on the Company and its subsidiaries in a prescribed format in all
periodic reports filed with the SEC. The information necessary to present all of
the required disclosures 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. Derivatives Instruments and Hedging - On January 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended ("SFAS 133"). The new standard
requires that all derivative instruments be reported on the balance sheet at
their fair values. The Company has not designated any derivative as a hedge
instrument and accordingly, changes in fair value of derivatives are recorded
each period in earnings. The adoption of SFAS 133 did not result in a pre or
post tax cumulative-effect-type adjustment to income, and did not result in a
change to other comprehensive losses.
Under procedures and controls established by the Company's risk
management policies, the Company strategically enters into contractual
arrangements (derivatives) in the ordinary course of business to reduce the
exposure to foreign currency and interest rates.
The policies have established a variety of approved derivative
instruments to be utilized in each risk management program and the level of
exposure coverage based on the assessment of risk factors. Derivative
instruments utilized during the period include forwards, swaps, and options. The
Company has not designated any non-derivatives as hedging instruments.
The Company uses forward exchange contracts and options, generally no
greater than three months in term, to reduce its net currency exposure. The
objective of this program is to maintain an overall balanced position in foreign
currencies so that exchange gains and losses resulting from exchange rate
changes, net of related tax effect, are minimized.
The Company has used interest rate swap agreements to manage interest
costs and risks associated with changing rates. Counterparties to the forward
exchange, currency swap and interest swap contracts are major financial
institutions. Credit loss from counterparty nonperformance is not anticipated.
During 2000, the interest rate swap portfolio was substantially terminated.
4. Business Combinations and Intangible Assets - In June 2001, the Financial
Accounting Standards Board approved the issuance of Statement of Financial
Accounting Standards No. 141 ("SFAS 141"),
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"Business Combinations" and Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets." For Hercules, these
statements will generally become effective January 1, 2002, although business
combinations initiated after July 1, 2001 are subject to the non-amortization
and purchase accounting provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. Hercules is currently in
the process of conducting an assessment of the actual impact of the
non-amortization provision of SFAS 142 on its diluted earnings per share. The
assessment of goodwill for impairment is a complex issue in which the Company
must determine, among other things, the fair value of each defined component of
its operating segments. It is, therefore, not possible at this time to predict
the impact, if any, that the impairment assessment provisions of SFAS 142 will
have on Hercules' financial statements.
5. The following table shows the amounts used in computing earnings per share
(EPS) and the effect on income and the weighted-average number of shares of
dilutive potential common stock:
(Amounts in millions, except
per share data): Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Basic
Net income ........................... $ 23 $ 16 $ 13 $ 52
Weighted-average shares outstanding .. 108.1 107.1 108.0 106.9
----------- ----------- ----------- -----------
EPS .................................. $ 0.21 $ 0.15 $ 0.12 $ 0.49
=========== =========== =========== ===========
Diluted
Net income ........................... $ 23 $ 16 $ 13 $ 52
Interest on convertible debentures ... -- -- -- --
----------- ----------- ----------- -----------
Net income for EPS calculation ....... $ 23 $ 16 $ 13 $ 52
=========== =========== =========== ===========
Weighted-average shares outstanding .. 108.1 107.1 108.0 106.9
Options .............................. -- -- -- --
Debentures ........................... .2 .2 .2 .2
----------- ----------- ----------- -----------
Adjusted weighted-average shares ..... 108.3 107.3 108.2 107.1
----------- ----------- ----------- -----------
EPS .................................. $ 0.21 $ 0.15 $ 0.12 $ 0.49
=========== =========== =========== ===========
6. Cost and expenses include depreciation of $26 million and $34 million for the
three months ended June 30, 2001 and 2000, respectively, and $53 million and $67
million for the six months ended June 30, 2001 and 2000, respectively.
7. Other operating (income) expenses for the three and six months ended June 30,
2001 includes $74 million of net gains relating to the sale of the hydrocarbon
resins and select portions of the rosin resins business, the peroxy chemicals
business and the 50% interest in Hercules - Sanyo, Inc. These gains are
partially offset by $5 million of executive severance charges for the three and
six months ended June 30, 2001. The three and six months ended June 30, 2001
also include environmental charges of $1 million and $4 million, respectively,
and non-recurring fees associated with the proxy contest and other matters of $2
million and $3 million, respectively. In addition, the three and six months
ended June 30, 2001 include $1 million of costs relating to the abandonment of a
capital project.
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Other operating expenses for the three and six months ended June 30,
2000 includes $24 million of charges for both periods associated with the sale
of the nitrocellulose business, of which $3 million is for severance benefits
for approximately 100 employees. This is partially offset by $11 million of
recoveries of insurance and environmental claims for both periods. The three and
six months ended June 30, 2000 also include integration costs of $1 million and
$3 million, respectively, primarily for employee retention, consulting, legal
and other costs associated with the BetzDearborn acquisition. Additionally,
environmental charges of $4 million and $6 million, respectively, were also
incurred during the corresponding periods.
8. Interest and debt costs are summarized as follows:
(Dollars in millions) Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Costs incurred ...... $ 55 $ 45 $ 112 $ 79
Amount capitalized .. 2 3 4 5
----------- ----------- ----------- -----------
Interest expense .... $ 53 $ 42 $ 108 $ 74
=========== =========== =========== ===========
9. Other income (expense), net, for the three and six months ended June 30, 2001
includes approximately $1 million and $3 million, respectively, for litigation
costs. Foreign currency gains of approximately $6 million and $5 million,
respectively, are also included in the three and six month periods. Interest
income of $1 million and $3 million, respectively, are included for the three
and six months ended June 30, 2001, partially offset by rental expense of $1
million for both periods and miscellaneous discounts of $1 million and $3
million, respectively, for the same periods. Other income (expense), net, for
the three and six months ended June 30, 2000 includes $2 million in charges for
litigation. Additionally, the three months ended June 30, 2000 includes foreign
currency losses of $2 million, while the six months ended June 30, 2000 includes
net foreign currency gains of $1 million. The three and six months ended June
30, 2000 include rental expense of $2 million and gains from the sale of assets
of $2 million for both periods. These gains were partially offset by interest
income of $2 million and $4 million, respectively, for the three and six months
ended June 30, 2000.
10. The consolidated balance sheet reflects liabilities for employee severance
benefits and other exit costs. Primarily, these are related to the 1998 plans
initiated upon the acquisition of BetzDearborn and additional plans that we
committed to in 2000 relating to the restructuring of our Process Chemicals &
Services segment and corporate realignment due to the divestiture of our
non-core businesses. As a result of these plans, we now estimate that a total of
approximately 1,570 employees will be terminated. Approximately 1,392 employee
terminations have occurred since the inception of the plans.
Pursuant to the plans in place, approximately 31 employees were
terminated during the six months ended June 30, 2001. Cash payments during this
period included $7 million for severance benefits and $1 million for other exit
costs. Severance benefits paid during the year represent the continuing benefit
streams of previously terminated employees as well as those terminated in the
current year. During the second quarter 2001, we completed an assessment of the
remaining expenditures for the 1998 BetzDearborn plan and other plans. As a
result of this assessment, the estimates for severance benefits and other exit
costs were lowered by $12 million, with corresponding reductions to goodwill and
earnings of $10 million and $2 million, respectively. The lower than planned
severance benefits are the result of higher than anticipated attrition, with
voluntary resignations not requiring the payment of termination benefits. A
reconciliation of activity with respect to the liabilities established for these
plans is as follows:
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(Dollars in millions) Six Months Ended June 30,
-------------------------
2001 2000
----------- -----------
Balance at beginning of year ............ $ 34 $ 77
Additional termination benefits .. -- 4
Cash payments .................... (8) (30)
Reversals ........................ (12) --
----------- -----------
Balance at end of period ................ $ 14 $ 51
=========== ===========
The reserve balance at the end of the quarter represents severance
benefits and other exit costs of which $5 million pertains to the 1998
BetzDearborn plan and $9 million relates to other restructuring plans initiated
in 2000.
11. A summary of short-term and long-term debt follows:
(Dollars in millions) June 30, December 31,
2001 2000
--------- ---------
SHORT-TERM:
Banks ................................. $ 24 $ 118
Current maturities of long-term debt .. 278 143
--------- ---------
...................................... $ 302 $ 261
========= =========
At June 30, 2001, we had $124 million of unused lines of credit that
may be drawn as needed. Lines of credit in use at June 30, 2001 were $23
million.
(Dollars in millions) June 30, 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 .. 633 875
Term loan tranche D due 2005 ............................. 374 375
Revolving credit agreement due 2003 ...................... 410 437
ESOP debt ................................................ 85 101
Term notes at various rates from 5.23% to 9.60% due
in varying amounts through 2006 ...................... 58 65
Other .................................................... 5 4
--------- ---------
......................................................... $ 2,193 $ 2,485
Current maturities of long-term debt ..................... (278) (143)
--------- ---------
Net long-term debt ....................................... $ 1,915 $ 2,342
========= =========
In 1998, we entered into a $3,650 million credit facility with a
syndicate of banks which includes varying maturity term loans totaling $2,750
million, of which $633 million is still outstanding at June 30, 2001. In
addition, the facility includes a $900 million revolving credit agreement, of
which $410 million is outstanding at June 30, 2001. Through this revolving
credit facility, a Canadian subsidiary of ours can borrow up to U.S. $100
million from select lenders in Canada in Canadian dollars. As of June 30, 2001,
$69 million was outstanding under this facility. As of June 30, 2001, $416
million of the multi-currency revolver is available for use. However, actual
availability under the revolving credit agreement is constrained by our ability
to meet covenants in our senior credit facility.
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On January 23, 2001, our corporate credit rating was downgraded by
Standard & Poor's Rating Services to BB which resulted in an increase to the
interest rates on the term loan tranche A to LIBOR + 2.75%, on term loan tranche
D to LIBOR + 3.25% and on the ESOP loan and guarantee to 12.95%.
Both our senior credit facility and our ESOP Trust loan require quarterly
compliance with certain financial covenants, including a debt/EBITDA ratio
("leverage ratio"), an interest coverage ratio and minimum net worth. Due to a
delay in closing the Eastman Transaction, which in turn delayed the pay down of
debt, our debt as of March 31, 2001, was significantly higher than planned. As a
result, we would have been out of compliance with the leverage ratio covenant of
our senior credit facility and ESOP credit facility as of that date. On April 5,
2001, our senior credit facility bank syndicate and ESOP lender granted waivers
with respect to compliance with the leverage ratio as of March 31, 2001, and one
other covenant. In July 2001, our senior credit facility was amended to modify
certain covenants.
While we expect to remain in compliance with our debt covenants, future
compliance is dependent upon generating sufficient EBITDA and cash flow which
are, in turn, impacted by business performance, economic climate, competitive
uncertainties and possibly the resolution of contingencies, including those set
forth in Note 13.
In the event the Company is not in compliance with the debt covenants
in the future, we would pursue various alternatives, which may include, among
other things, refinancing of debt, debt covenant amendments or debt covenant
waivers. While we believe we would be successful in pursuing these alternatives,
there can be no assurance that we would be successful.
12. Guaranteed Preferred Beneficial Interests in Company's Subordinated
Debentures consists of:
(Dollars in millions) June 30, December 31,
2001 2000
----------- -----------
9.42% Trust Originated Preferred Securities .. $ 362 $ 362
6-1/2% CRESTS Units .......................... 260 260
----------- -----------
$ 622 $ 622
=========== ===========
13. Commitments and Contingencies
ENVIRONMENTAL
Hercules has been identified as a potentially responsible party
("PRP") by U.S. federal and state authorities, or by private parties seeking
contribution, for the cost of environmental investigation and/or cleanup at
numerous sites. The estimated range of the reasonably possible share of costs
for the investigation and cleanup is between $85 million and $274 million. The
actual costs will depend upon numerous factors, including the number of parties
found responsible at each environmental site and their ability to pay; the
actual methods of remediation required or agreed to; outcomes of negotiations
with regulatory authorities; outcomes of litigation; changes in environmental
laws and regulations; technological developments; and the years of remedial
activity required, which could range from 0 to 30.
Hercules becomes aware of sites in which it may be named a PRP in
investigatory and/or remedial activities through correspondence from the U.S.
Environmental Protection Agency, or other government agencies, or through
correspondence from previously named PRPs, who either request information or
notify us of our potential liability. We have established procedures for
identifying environmental issues at our plant sites. In addition to
environmental audit programs, we have environmental coordinators who are
familiar with environmental laws and regulations and act as a resource for
identifying environmental issues.
On April 10, 2001, the United States Court of Appeals for the Eighth
Circuit issued an opinion in the United States, et al., v. Vertac Corporation,
et al. In that opinion, the Appeals Court reversed the Court's October 12, 1993
grant of partial summary judgment, which had held Hercules jointly and severally
liable
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for costs incurred and to be incurred at the Jacksonville site, and remanded the
case back to the U.S. District Court for the Eastern District of Arkansas for a
determination of whether the harms at the site giving rise to the government's
claims are divisible. The Appeals Court also vacated the District Court's
October 23, 1998 order granting the United States' summary judgment motion and
the February 8, 2000 judgment finding Hercules liable for 97.4% of the costs at
issue, ordering that these issues be revisited following further proceedings
with respect to divisibility. Finally, the Appeals Court affirmed the judgment
of liability against Uniroyal.
As a result of the Appeals Court's rulings described above, Hercules
will be allowed to present both facts and law to the District Court in support
of Hercules' belief that it should not be liable under CERCLA for some or all of
the costs incurred by the government in connection with the site because those
harms are divisible. Should Hercules prevail on remand, any liability to the
government will be either eliminated or reduced.
In 1992, Hercules brought suit against its insurance carriers for past
and future costs for cleanup of certain environmental sites (Hercules
Incorporated v. Aetna Casualty & Surety Company, et al., Del. Super, C.A. No.
92C-10-105 and 90C-FE-195-CV (consolidated). In April 1998, the trial regarding
insurance recovery for the Jacksonville, Arkansas, site (see discussion above)
was completed. The jury returned a "Special Verdict Form" with findings that, in
conjunction with the trial court's findings, were used by the trial court to
enter a judgment in August 1999. The judgment determined the amount of Hercules'
recovery for past cleanup expenditures and stated that Hercules is entitled to
similar coverage for costs incurred since September 30, 1997 and in the future.
Hercules has not included any insurance recovery in the estimated range of costs
above. Since entry of the trial court's August 1999 order, Hercules has entered
into settlement agreements with several of its insurance carriers and has
recovered certain settlement monies. The terms of those settlements and amounts
recovered are confidential. Hercules has appealed certain of the trial court's
rulings to the Delaware Supreme Court. Oral argument was held on February 13,
2001 before the Delaware Supreme Court, but no ruling has been issued.
In connection with the sales of the Resins businesses, the Company
retained certain responsibilities for potential future remediation activities
relating to the divested businesses. Concurrent with the recognition of the sale
of the respective businesses, the Company recorded an accrual for its estimated
future remediation liability.
At June 30, 2001, the accrued liability of $85 million for
environmental remediation represents management's best estimate of the probable
and reasonably estimable costs related to environmental remediation. The extent
of liability is evaluated quarterly. The measurement of the liability is
evaluated based on currently available information, including the process of
remedial investigations at each site and the current status of negotiations with
regulatory authorities regarding the method and extent of apportionment of costs
among other PRPs. While it is not feasible to predict the outcome of all pending
suits and claims, the ultimate resolution of these environmental matters could
have a material effect upon the results of operations and the financial position
of Hercules.
LITIGATION
Hercules is a defendant in numerous lawsuits that arise out of, and are
incidental to, the conduct of its business. In these legal proceedings, no
specifically identified director, officer or affiliate is a party or a named
defendant. These suits concern issues such as product liability, contract
disputes, labor-related matters, patent infringement, environmental proceedings,
property damage and personal injury matters.
Hercules is a defendant in numerous asbestos-related personal injury
lawsuits and claims which typically arise from alleged exposure to asbestos
fibers from resin-encapsulated pipe and tank products which were sold by a
former subsidiary of Hercules to a limited industrial market, or from alleged
exposure to asbestos contained in facilities owned or operated by Hercules.
Lawsuits are received and matters settled on a regular basis. In December 1999,
Hercules entered into a Settlement Agreement to resolve the
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majority of these matters then pending. In connection with that settlement,
Hercules entered into an agreement with several of its insurance carriers
pursuant to which a majority of the amounts paid will be insured. The terms of
both agreements are confidential. During 2000 and 2001, Hercules entered into
additional settlement agreements. The terms of these settlements are also
confidential. In accordance with the terms of the previously mentioned agreement
with several of Hercules' insurance carriers, the majority of the amounts paid
and to be paid pursuant to these various settlement agreements will be insured.
Further, Hercules continues to pursue additional insurance coverage from
carriers who were not part of the previously mentioned agreement.
In May 2001, the Supreme Court of New York accepted a Special Referee's
Report and rejected our position in a case captioned Hexcel Corporation v.
Hercules Incorporated. In February 2001, Hexcel moved to confirm the Special
Referee's Report and Hercules crossmoved to confirm in part and reject in part
the Special Referee's Report. The Special Referee's Report, issued in January
2001, recommended that Hercules be found liable to Hexcel for a total of
approximately $7.3 million plus interest. As a result, a judgment was entered
against us in the amount of approximately $10 million. We believe the court's
decision is incorrect, at least in part, as a matter of law and we will appeal
the court's decision.
At June 30, 2001, the consolidated balance sheet reflects a current
liability of approximately $29 million for litigation and claims. These amounts
represent management's best estimate of the probable and reasonably estimable
losses and recoveries related to litigation or claims. The extent of the
liability and recovery is evaluated quarterly. While it is not feasible to
predict the outcome of all pending suits and claims, the ultimate resolution of
these matters could have a material effect upon the financial position of
Hercules, and the resolution of any of the matters during a specific period
could have a material effect on the quarterly or annual operating results for
that period.
14. Segment Information
(Dollars in millions) Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net Sales:
Process Chemicals and Services .. $ 414 $ 433 $ 821 $ 849
Functional Products (a) ......... 146 209 277 415
Chemical Specialties (b) ........ 110 180 274 357
Reconciling Items ............... -- -- -- (1)
--------- --------- --------- ---------
Consolidated ............. $ 670 $ 822 $ 1,372 $ 1,620
========= ========= ========= =========
Profit from Operations:
Process Chemicals and Services .. $ 66 $ 81 $ 129 $ 158
Functional Products (a) ......... 37 53 61 105
Chemical Specialties (b) ........ 9 17 26 33
Reconciling Items ............... 17(c) (55)(d) (25)(c) (94)(d)
--------- --------- --------- ---------
Consolidated ............. $ 129 $ 96 $ 191 $ 202
========= ========= ========= =========
(a) Net sales and Profit from operations in 2001 reflect the
divestitures of the food gums and nitrocellulose businesses in
2000.
(b) Net sales and Profit from operations in 2001 reflect the
divestiture of the hydrocarbon resins, select rosins resins and
the peroxy chemicals businesses.
(c) Includes the following for the quarter and six-month period ended
June 30, 2001, respectively: goodwill and intangible asset
amortization of $19 million and $38 million, environmental charges
of $1 million and $4 million, $2 million and $3 million of
non-recurring fees associated with the proxy and other matters, $1
million and $3 million of capitalized interest, and $28 million
and $46 million of other corporate items not specifically
allocated to the business segments. In addition, $74 million in
net gains
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relating to the sale of the hydrocarbon resins, select rosins
resins and peroxy chemicals businesses, partially offset by $5
million in executive severance charges and $1 million in project
abandonment costs are included for both periods.
(d) Includes the following for the quarter and six-month period ended
June 30, 2000, respectively: goodwill and intangible asset
amortization of $20 million and $40 million, integration costs of
$1 million and $3 million, environmental charges of $4 million and
$6 million, corporate research and development costs of $3 million
and $6 million, and $14 million and $26 million of other corporate
items not specifically allocated to the business segments.
Additionally, $24 million of charges associated with the sale of
the nitrocellulose business, partially offset by $11 million of
recoveries of insurance and environmental claims are included for
both periods.
15. Dispositions
On May 1, 2001, we completed the sale of our hydrocarbon resins
business and select portions of our rosin resins business to a subsidiary of
Eastman Chemical Company, receiving proceeds of approximately $244 million. On
May 31, 2001, we completed the sale of our peroxy chemicals business to GEO
Specialty Chemicals, Inc., receiving proceeds of approximately $92 million.
Additionally, on May 25, 2001, we completed the sale of our interest in Hercules
- Sanyo, Inc., a toner resin joint venture, to Sanam Corporation, a wholly owned
subsidiary of Sanyo Chemicals Industries, Ltd., our joint venture partner. The
Resins division, including those businesses sold in the Eastman and Peroxides
transactions, had approximately $450 million in net sales in 2000. We are
actively pursuing the sale of the remaining portion of the Resins division.
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
"six-month period" refer to the second quarter of 2001 and the six months ended
June 30, 2001. All comparisons are with the corresponding periods in the
previous year, unless otherwise stated.
The table below reflects Net sales and Profit from operations for the
quarters and six months ended June 30, 2001 and June 30, 2000.
(Dollars in millions) Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net Sales:
Process Chemicals and Services $ 414 $ 433 $ 821 $ 849
Functional Products (a) 146 209 277 415
Chemical Specialties (b) 110 180 274 357
Reconciling Items -- -- -- (1)
--------- --------- --------- ---------
Consolidated $ 670 $ 822 $ 1,372 $ 1,620
========= ========= ========= =========
Profit from Operations:
Process Chemicals and Services $ 66 $ 81 $ 129 $ 158
Functional Products (a) 37 53 61 105
Chemical Specialties (b) 9 17 26 33
Reconciling Items 17(c) (55)(d) (25)(c) (94)(d)
--------- --------- --------- ---------
Consolidated $ 129 $ 96 $ 191 $ 202
========= ========= ========= =========
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(a) Net sales and Profit from operations in 2001 reflect the divestitures
of the food gums and nitrocellulose businesses in 2000.
(b) Net sales and Profit from operations in 2001 reflect the divestiture of
the hydrocarbon resins, select rosins resins, and the peroxy chemicals
business.
(c) Includes the following for the quarter and six-month period ended June
30, 2001, respectively: goodwill and intangible asset amortization of
$19 million and $38 million, environmental charges of $1 million and $4
million, $2 million and $3 million of non-recurring fees associated
with the proxy and other matters, $1 million and $3 million of
capitalized interest, and $28 million and $46 million of other
corporate items not specifically allocated to the business segments. In
addition, $74 million in net gains relating to the sale of the
hydrocarbon resins, select rosins resins and peroxy chemicals
businesses, partially offset by $5 million in executive severance
charges and $1 million in project abandonment costs are included for
both periods.
(d) Includes the following for the quarter and six-month period ended June
30, 2000 respectively: goodwill and intangible asset amortization of
$20 million and $40 million, environmental charges of $4 million and $6
million, corporate research and development costs of $3 million and $6
million, and $14 million and $26 million of other corporate items not
specifically allocated to the business segments.
The discussion that follows speaks to comparisons in the table through Net sales
and Profit from operations.
Consolidated net sales were $670 million for the second quarter and
$1,372 million for the six-month period. This compares with $822 million and
$1,620 million for the corresponding periods in 2000. Total volumes decreased
20% and 13%, respectively, for the quarter and six-month period versus the
comparable periods in 2000, reflecting the effects of businesses divested in
June and September 2000 and May 2001, coupled with economic slowdown in the Pulp
and Paper sector. Excluding divested businesses, consolidated Net sales were
$639 million for the quarter and $1,259 million for the six-month period, a
decrease of 6% and 5%, respectively, from the same periods last year,
principally reflecting volume declines in Pulp & Paper and FiberVisions. The
stronger U.S. dollar, relative to foreign currencies, continues to negatively
impact sales and profits. Consolidated Profit from operations was $129 million
for the quarter, an increase of 34% over 2000, and $191 million for the
six-month period, a decrease of 5% from 2000. Profit from operations in 2001
includes $66 million, pre-tax, of non-recurring gains. The gains result from the
sales of the hydrocarbon resins, select portions of the rosin resins business
and the peroxy chemicals business. Profit from operations in 2000 was
unfavorably impacted by non-recurring losses associated with the divestiture of
the nitrocellulose business. Excluding divested businesses and non-recurring
items, Profit from operations was $60 million and $91 million, respectively, for
the quarters, and $117 million and $178 million, respectively, for the six-month
periods ended June 30, 2001 and 2000. Higher costs for raw materials, freight,
and energy, coupled with lower volumes, significantly impacted margins in the
quarter and for the six-month period. Additionally, the stronger dollar
negatively affected Profit from operations for the quarter and six-month periods
by approximately 6% and 4%, respectively, in 2001.
In the Process Chemicals and Services segment, Net sales were down 4%
and Profit from operations declined 19% versus the same quarter in 2000. The
Pulp and Paper Division continues to be impacted by weak demand in the European,
Asian and North American markets. Volumes for the Pulp and Paper Division were
off 3% from last year's second quarter and six-month periods. Additionally,
Profit from operations was negatively impacted by an approximately $4 million
charge in the second quarter 2001 to increase Pulp and Paper business bad debt
reserves. In the BetzDearborn Division, Net sales were flat for the quarter and
up slightly for the six month period, while Profit from operations improved 5%
for the quarter and was flat for the six-month period. Second quarter and
year-to-date 2001 Net sales improved in all regions of the world, except Europe,
compared to the same periods in 2000.
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Functional Products segment Net sales declined $63 million, or 30%, for
the quarter and $138 million, or 33% for the six-month period versus the
corresponding periods in 2000. Profit from operations for the quarter and
six-month period decreased $16 million, or 30%, and $44 million, or 42%,
respectively, compared to the same periods in 2000. Declines in both Net sales
and Profit from operations reflect the effects of the divestitures of the Food
Gums and nitrocellulose businesses in 2000. On a comparable basis, Net sales
were down 3% for the quarter and six-month period, and Profit from operations
declined 14% for the quarter and 27% for the six-month period. Higher raw
material and energy costs coupled with higher costs associated with the new
methylcellulose facility negatively impacted Profit from operations in 2001. Net
sales increased 11% and profit from operations increased 54% compared to the
first quarter 2001. The improvement in second quarter 2001 performance versus
the first quarter 2001 was driven by strong oilfield and construction sales and
improved sales in the paint segment. Excluding divested businesses, volumes
decreased less than 1% in the quarter versus the same period last year and
increased nearly 11% versus the first quarter 2001.
Chemical Specialties segment Net sales declined $70 million, or 39%,
for the quarter and $83 million, or 23%, for the six-month period, and Profit
from operations decreased $8 million, or 47%, and $7 million, or 21%, versus the
corresponding periods in 2000. In May 2001, the Company sold its hydrocarbon
resins, select portions of its rosin resins business, its peroxy chemicals
business and its 50% interest in the ink toner joint venture. Excluding divested
businesses, Net sales were down 16% for the quarter and 14% for the six-month
period, while Profit from operations was off $1 million for the quarter and
improved by $3 million for the six-month period. FiberVisions Profit from
operations improved significantly in the quarter and year-to-date from the same
periods in 2000. The improved performance was driven by lower polymer cost and
cost containment initiatives. Volumes for FiberVisions declined 13% and 14%,
respectively, from the second quarter and six-month period 2000 and were up 3%
versus the first quarter 2001.
Equity in income (loss) of affiliated companies represents
the Company's equity in C.P. Kelco which was no longer a wholly owned subsidiary
beginning September 28, 2000.
Interest and debt expense increased $11 million for the quarter and $34
million for the six-month period reflecting higher borrowing costs, offset
partially by lower debt as a result of the application of proceeds from the sale
of businesses. Preferred security distribution of subsidiary trusts decreased $9
million for the quarter and $17 million for the six-month period reflecting the
repayment of $370 million of these securities in 2000.
Other income (expense), net, decreased $10 million and $2 million for
the quarter and six months ended June 30, 2001, respectively. The decline is
primarily attributable to increased charges for litigation and lower gains on
the disposition of non-operating properties and investments during the
respective periods. In addition, the quarter reflects foreign currency losses as
compared to foreign currency gains in the prior year quarter.
The effective tax rate for the quarter was 65%. The anticipated
effective tax rate for 2001 is approximately 140% and reflects the effect of
non-deductible goodwill and intangible asset amortization on a lower pre-tax
earnings base. The effective tax rate of 36% for the second quarter of 2000
included the utilization of research and development credits.
FINANCIAL CONDITION
Liquidity and financial resources: Net cash provided by operations was
$54 million for the six-month period ended June 30, 2001, as compared to $23
million for the same period in 2000. The increase primarily reflects lower
working capital requirements. Current and quick ratios have decreased to .9 and
.65, respectively, at June 30, 2001, compared with 1.1 and .78, respectively,
at December 31, 2000. As of June 30, 2001, we have $ 416 million available
under our revolving credit agreement and $124 million available in short-term
lines of credit. 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
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covenants in our senior credit facility. While we expect to remain in compliance
with our debt covenants, future compliance is dependent upon generating
sufficient EBITDA and cash flow which are, in turn, impacted by business
performance, economic climate, competitive uncertainties and possibly the
resolution of contingencies.
Capital Structure and Commitments: Total capitalization (stockholders'
equity, company obligated preferred securities of subsidiary trusts and debt)
decreased to $3.6 billion at June 30, 2001, from $4.0 billion at year-end 2000.
The ratio of debt-to-total capitalization decreased to 61% at June 30, 2001 from
64% at December 31, 2000.
On May 1, 2001 we completed the sale of our hydrocarbon resins business
and select portions of our rosin resins business to a subsidiary of Eastman
Chemical Company, receiving gross proceeds of approximately $244 million. On May
31, 2001, we completed the sale of our peroxy chemicals business to GEO
Specialty Chemicals, Inc., receiving gross proceeds of approximately $92
million. We used the proceeds from these divestitures to permanently reduce
long-term debt.
The payment of the quarterly dividend was suspended in the fourth
quarter of 2000, subject to reconsideration of the policy by the Board, in its
discretion, when warranted under appropriate circumstances. In addition, payment
of future dividends is significantly restricted by the indenture governing the
senior notes. Quarterly dividends of $0.27 per share were declared and paid
for the first two quarters of 2000.
RECENT EVENTS
In the fourth quarter of 2000, we announced our intention to pursue a
merger or sale of the Company or one or more of its businesses in the belief
that, over the long term, becoming part of a larger enterprise is the best
strategic path for the company. To that end, we retained Goldman, Sachs & Co.
and Credit Suisse First Boston to assist the Board of Directors in its
identification and evaluation of various alternatives. If a sale of the Company
occurs, it would most likely be in a two-step-process, with the sale of our
BetzDearborn division constituting the first step. We are continuing to talk
with potential buyers of our BetzDearborn division, as well as potential buyers
of the Company or our other businesses. There can be no assurance that any of
these parties will be prepared to pay a price that is acceptable to us or that
any transaction will occur.
In January 2001, we terminated exclusive 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 B+.
In April 2001, the United States Court of Appeals for the Eighth
Circuit reversed an earlier judgement of the United States District Court for
the Eastern District of Arkansas in United States v. Vertac Corporation, et al.,
which had held Hercules liable for remediation costs at a site in Jacksonville,
Arkansas, and remanded the case to the District Court to determine the extent of
Hercules' responsibility, if any.
In May 2001, the Supreme Court of New York accepted a Special Referee's
Report and rejected our position in a case captioned Hexcel Corporation v.
Hercules Incorporated. In February 2001, Hexcel moved to confirm the Special
Referee's Report and Hercules cross-moved to confirm in part and reject in part
the Special Referee's Report. The Special Referee's Report, issued in January
2001, recommended that Hercules be found liable to Hexcel for a total of
approximately $7.3 million plus interest. As a result, judgment was entered
against us in the amount of approximately $10 million. We believe the trial
court's decision is incorrect, at least in part, as a matter of law and we will
appeal.
On May 1, 2001, we completed the sale of our hydrocarbon resins
business and select portions of our rosin resins business to a subsidiary of
Eastman Chemical Company, receiving proceeds of approximately $244 million. On
May 31, 2001, we completed the sale of our peroxides business to GEO Specialty
Chemicals, Inc., receiving proceeds of approximately $92 million. Additionally,
on May
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25, 2001, we completed the sale of our interest in Hercules-Sanyo, Inc., a toner
resin joint venture, to a wholly owned subsidiary of Sanyo Chemical Industries,
Ltd., our joint venture partner. The Resins division, including those businesses
sold in the Eastman and Peroxides transactions, had approximately $450 million
in net sales in 2000. We are actively pursuing the sale of the remaining portion
of the Resins division.
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 expected. As a result, we would have been out of compliance with the
debt/EBITDA ratio covenant in our senior credit facility and ESOP credit
facility as of that date. On April 5, 2001, our lenders granted waivers with
respect to this and one other covenant. In June 2001, our senior credit facility
was amended to modify certain covenants.
On May 8, 2001, the Board of Directors named Dr. William H. Joyce as
Chief Executive Officer and a member of the Board of Directors. On June 28,
2001, Dr. Joyce was elected to the additional position of Chairman of the Board.
On June 21, 2001, we announced that Samuel J. Heyman, Sunil Kumar and
Raymond Troubh had been elected members of our Board of Directors by the
stockholders at the annual meeting.
On June 28, 2001, we announced the election of Gloria Schaffer and the
re-election of Paula A. Sneed to the Board of Directors. We also announced a
new senior management team, including the appointment of Fred G. Aanonsen, Vice
President and Controller.
In June 2001, we announced a comprehensive cost reduction program to
improve our return on capital. This cost reduction program is being implemented
while we continue to explore strategic alternatives, including the merger or
sale of the company or one or more of our businesses. Our annualized and
recurring cost savings target is $100 million. Approximately one-half of the
cost reductions are targeted for our corporate functions and the other half for
our businesses. We are committed to achieving this target by the end of the
second quarter 2002. The expected cost to implement the cost savings program is
approximately $50 million. Actual cash outflows related to this program will be
paid over future quarters and should be more than offset by cash inflows from
the savings.
On July 1, 2001, George MacKenzie, Vice Chairman and Chief Financial
Officer, retired and resigned from the Board of Directors.
RISK FACTORS
Market Risk - Fluctuations in interest and foreign currency exchange
rates affect our financial position and results of operations. We use several
strategies 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 to the valuation date.
Our derivative and other financial instruments subject to interest rate
risk consist of debt instruments, interest rate swaps and currency swaps. At
June 30, 2001, net market value of these combined instruments was a liability of
$2.7 billion. The sensitivity analysis assumes an instantaneous 100-basis point
move in interest rates from their levels, with all other variables held
constant. A 100-basis point increase in interest rates at June 30, 2001 would
result in a $60 million decrease in the net market value of the liability. A
100-basis point decrease in interest rates at June 30, 2001 would result in a
$66 million increase in the net market value of the liability. The change in the
sensitivity level from year-end 2000 is primarily due to the partial repayment
of both syndicated and revolving debt as well as the current interest rate
environment.
Our financial instruments subject to changes in equity price risk,
including the warrants component of the CRESTS Units issued in 1999, represent a
net obligation of $61 million. The
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sensitivity analysis assumes an instantaneous 10% change in valuation with all
other variables held constant. A 10% increase in market values at June 30, 2001
would increase the net obligation by $7 million, while a 10% decrease would
reduce the net obligation by $7 million. The change in equity price risk from
year-end 2000 is primarily from the impact of the reduction in our stock price
on the warrants component of the CRESTS units.
Our financial instruments subject to foreign currency exchange risk
consist of foreign currency forwards and options and represent a net liability
position of $1 million at June 30, 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 June 30, 2001 would result in a $5
million decrease in the net liability position, while a 10% weakening of the
dollar versus all currencies would result in a $5 million increase in the net
liability position. The change in the sensitivity level from year-end 2000 is
primarily due to the strengthening of the U.S. dollar in the first half of the
year.
Foreign exchange forward and option contracts are generally used to
hedge firm and anticipated foreign currency cash flows. Thus, there is either an
asset or cash flow exposure related to all the financial instruments in the
above sensitivity analysis for which the impact of a movement in exchange rates
would be in the opposite direction and substantially equal to the impact on the
instruments in the analysis. There are presently no significant restrictions on
the remittance of funds generated by our operations outside the United States.
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 $85 million and $274 million. 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 (See Note 13).
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 13).
FORWARD-LOOKING STATEMENT
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, 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
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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 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.
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information related to Legal Proceedings, see notes to financial
statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On August 9, 2001, Hercules filed a Registration Statement on Form S-4
with the Securities and Exchange Commission, pursuant to which the Company will
offer to exchange all of its $400 million aggregate principal amount of 11 1/8%
Senior Notes due 2007 ("old notes") for $400 million aggregate principal amount
of 11 1/8% Senior Notes due 2007 ("new notes"). The form and terms of the new
notes are the same as the form and terms of the old notes except that, because
the issuance of the new notes is registered under the Securities Act, the new
notes will not bear legends restricting their transfer and, upon the
effectiveness of the registration statement of which the prospectus is a part,
will not be entitled to certain registration rights under the registration
rights agreement. The new notes will evidence the same debt as the old notes and
the old notes and the new notes will be governed by the same indenture.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Below is a summary of the final voting results from our Annual Meeting
of Stockholders that was held on May 24, 2001. A quorum of 91,753,836, or
84.65%, of the outstanding voting shares as of the record date was present in
person or by proxy at the annual meeting.
1. Election of Directors
Four of our 13 directors had terms that expired during 2001 and stood
for reelection this year. In addition, on March 23, 2001, International
Specialty Products, Inc. ("ISP") filed its definitive proxy statement
with the SEC soliciting proxies from the Company's shareholders to
vote for ISP's own slate of director nominees.
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Directors were elected to serve for three-year terms, expiring at the
2004 Annual Meeting of Shareholders, or until their successors are
elected and qualified. Samuel J. Heyman, Sunil Kumar and Raymond Troubh
were elected to the Board of Directors on June 21, 2001 after
certification of the following results by IVS Associates, Inc, an
independent inspector of election.
Name For Withheld Authority
Thomas L. Gossage 41,548,075 1,641,608
Ralph L. MacDonald, Jr. 35,337,194 1,671,585
John A. H. Shober 35,486,713 1,522,066
Paula A. Sneed 35,406,874 1,601,905
Samuel J. Heyman 54,433,527 311,530
Sunil Kumar 54,442,704 302,353
Gloria Schaffer 47,468,919 7,276,138
Raymond Troubh 54,457,127 287,930
Directors continuing in office after the meeting were: William H. Joyce
(Chairman of the Board effective June 28, 2001), John G. Drosdick,
Richard Fairbanks, Alan R. Hirsig, Edith E. Holiday, Gaynor N. Kelley,
H. Gene McBrayer, and Peter McCausland. On June 28, 2000, Ms. Gloria
Schaffer was elected and Ms. Paula A. Sneed was re-elected to the
board. Robert G. Jahn retired from the board effective May 24, 2001.
2. Ratification of PricewaterhouseCoopers LLP as Independent Accountants, which
proposal received more than a majority of the votes necessary for ratification.
FOR AGAINST ABSTAIN
74,395,693 1,696,987 14,031,370
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.
Hercules did not file any Current Reports on Form 8-K, during
the quarter ended June 30, 2001.
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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/Stuart C. Shears
-----------------------------------
Stuart C. Shears
Vice President and Treasurer
(Principal Financial Officer and
duly authorized signatory)
August 14, 2001
By: /s/ Fred G. Aanonsen
-----------------------------------
Fred G. Aanonsen
Vice President and Controller
(Principal Accounting Officer and
duly authorized signatory)
August 14, 2001
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EXHIBIT INDEX
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO
------ ----------- ----------------------------
3-A.1 Restated Certificate of Incorporation of Exhibit 3-A to Hercules' Annual
Hercules Incorporated as revised and amended Report on Form 10-K for the
July 6, 1988. year ended December 31, 1992.
3-A.2 Certificate of Amendment dated October 24, Exhibit 4.1 a to Hercules'
1995 to the Restated Certificate of Registration Statement on Form
Incorporation of Hercules Incorporated S-3, filed September 15, 1998
as revised and amended July 5, 1998 (File No. 333-63423).
3-B By-Laws of Hercules Incorporated as revised Exhibit 3-B to Hercules' Annual
and amended October 30, 1991 Report on Form 10-K for the
year ended December 31, 1992.
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