<PAGE> 1
Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 5, 1999
Hercules Incorporated
(Exact name of registrant as specified in its charter)
Delaware 001-00496 51-0023450
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
Hercules Plaza
1313 North Market Street
Wilmington, Delaware 19894-0001
(Address of principal executive offices) (Zip Code)
(302) 594-5000
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
<PAGE> 2
Item 5. Other Events.
The Registrant is hereby filing with the Securities and Exchange
Commission its consolidated financial statements as of December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998.
Item 7. Financial Statements and Exhibits.
(c) Exhibits
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 The Registrant's consolidated financial statements
as of December 31, 1998 and 1997, and for each of the
three years in the period ended December 31, 1998.
2
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
HERCULES INCORPORATED
By: /s/ Israel J. Floyd
--------------------------------
March 5, 1999 Israel J. Floyd
Corporate Secretary
3
<PAGE> 4
EXHIBIT INDEX
Number Exhibit
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 The Registrant's consolidated financial statements as of December 31,
1998 and 1997, and for each of the three years in the period ended
December 31, 1998.
4
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Hercules Incorporated on Form S-8 [Registration No. 33-37279 (which includes
Registration No. 33-21668), No. 33-14912, No. 33-15052, No. 33-21667, No.
33-47664, No. 33-51178, No. 33-52621, No. 33-66136, No. 33-62314, No. 33-65352,
No. 333-38795, and No. 333-38797] and on Form S-3 (Registration No. 333-63423)
of our report, which includes an explanatory paragraph regarding a change, in
1997, in the company's method of accounting for costs incurred in connection
with an enterprise software installation, dated February 19, 1999, on our audits
of the consolidated financial statements of Hercules Incorporated and subsidiary
companies as of December 31, 1998 and 1997 and for each of the three years in
the period ended December 31, 1998, which report is included in this Current
Report on Form 8-K.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 5, 1999
<PAGE> 1
Hercules Incorporated
Consolidated Statement of Income (Dollars in millions, except per share)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $2,145 $1,866 $ 2,060
Cost of sales 1,287 1,169 1,320
Selling, general, and administrative expenses 399 251 262
Research and development 61 53 56
Purchased in-process research and development (Note 14) 130 -- --
Other operating expenses (income), net (Note 15) 76 165 (19)
------ ------ -------
Profit from operations 192 228 441
Equity in income of affiliated companies 10 30 53
Interest and debt expense (Note 16) 103 39 35
Other income (expense), net (Note 17) (22) 374 26
------ ------ -------
Income before income taxes and effect of change in accounting principle 77 593 485
Provision for income taxes (Note 18) 68 269 160
------ ------ -------
Income before effect of change in accounting principle 9 324 325
Effect of change in accounting principle (Note 23) -- (5) --
------ ------ -------
Net income $ 9 $ 319 $ 325
====== ====== =======
Earnings per share (Note 19)
Basic:
Earnings before effect of change in accounting principle $ .10 $ 3.27 $ 3.10
Effect of change in accounting principle -- (.05) --
------ ------ -------
Earnings per share $ .10 $ 3.22 $ 3.10
====== ====== =======
Diluted:
Earnings before effect of change in accounting principle $ .10 $ 3.18 $ 2.98
Effect of change in accounting principle -- (.05) --
------ ------ -------
Earnings per share $ .10 $ 3.13 $ 2.98
====== ====== =======
</TABLE>
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
- 1 -
<PAGE> 2
Hercules Incorporated
Consolidated Balance Sheet (Dollars in millions)
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 68 $ 17
Accounts receivable, net (Note 2) 663 389
Inventories (Note 3) 416 234
Deferred income taxes (Note 18) 93 49
------ ------
Total current assets 1,240 689
Property, plant, and equipment, net (Note 12) 1,438 687
Investments (Note 4) 51 615
Goodwill (net of accumulated amortization - 1998, $28; 1997, $12) 2,356 41
Other intangible assets (net of accumulated amortization - 1998, $22; 1997, $15) 192 3
Prepaid pension (Note 13) 218 216
Deferred charges and other assets 338 160
------ ------
Total assets $5,833 $2,411
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 270 $ 116
Short-term debt (Note 5) 566 275
Accrued expenses (Note 12) 481 408
------ ------
Total current liabilities 1,317 799
Long-term debt (Note 6) 3,096 419
Deferred income taxes (Note 18) 225 160
Other postretirement benefits (Note 13) 136 139
Deferred credits and other liabilities 300 204
------ ------
Total liabilities 5,074 1,721
Company-obligated preferred securities of subsidiary trust (Note 7) 200 --
Stockholders' equity
Series preferred stock (Note 8) -- --
Common stock, $25/48 par value (Note 9)
(shares issued: 1998 - 154,823,496; 1997 - 154,357,015) 81 80
Additional paid-in capital 504 504
Unearned compensation (Note 10) (130) --
Foreign currency translation adjustment (13) (2)
Retained earnings 2,068 2,163
------ ------
2,510 2,745
Reacquired stock, at cost (shares: 1998 - 53,995,692; 1997 - 58,289,376) 1,951 2,055
------ ------
Total stockholders' equity 559 690
------ ------
Total liabilities and stockholders' equity $5,833 $2,411
====== ======
</TABLE>
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
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<PAGE> 3
Hercules Incorporated
Consolidated Statement of Cash Flow (Dollars in millions)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
NET INCOME $ 9 $ 319 $ 325
Adjustments to reconcile net income to net cash provided from operations:
Depreciation 86 73 106
Amortization 22 3 2
Write-off in-process research and development 130 -- --
Nonoperating gain on disposals (23) (398) (22)
Noncash charges (credits) 38 92 (26)
Other (6) 15 5
Accruals and deferrals of cash receipts and payments:
Affiliates' earnings in excess of dividends received (6) (25) (25)
Accounts receivable 26 (41) 6
Inventories (14) (6) (17)
Accounts payable and accrued expenses (72) 137 (83)
Noncurrent assets and liabilities (9) 18 (46)
------- ----- -----
Net cash provided by operations 181 187 225
------- ----- -----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (157) (119) (120)
Proceeds of investment and fixed asset disposals 600 295 196
Acquisitions, net of cash acquired (3,109) -- --
Other (25) (34) (6)
------- ----- -----
Net cash (used in) provided by investing activities (2,691) 142 70
------- ----- -----
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds 3,111 343 75
Long-term debt repayments (247) (130) (27)
Change in short-term debt (228) (35) 112
Payment of debt issuance costs and underwriting fees (66) -- --
Proceeds from trust preferred securities 200 -- --
Common stock issued 10 38 15
Common stock reacquired (114) (458) (417)
Dividends paid (104) (98) (95)
------- ----- -----
Net cash provided by (used in) financing activities 2,562 (340) (337)
Effect of exchange rate changes on cash ( 1) (2) (1)
------- ----- -----
Net increase (decrease) in cash and cash equivalents 51 (13) (43)
Cash and cash equivalents at beginning of year 17 30 73
------- ----- -----
Cash and cash equivalents at end of year $ 68 $ 17 $ 30
======= ===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $100 $ 37 $ 30
Income taxes paid, net 117 152 190
Noncash investing and financing activities:
Conversion of notes and debentures 8 31 1
ESOP and incentive plan stock issuances 196 15 14
Accounts payable for common stock acquisitions -- 5 8
Investment in unconsolidated affiliates -- -- 1
Investment in long-term notes -- 504 --
Accounts receivable from sale of investment/asset disposals -- 8 9
Assumed debt of acquired businesses 307 -- --
</TABLE>
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
- 3 -
<PAGE> 4
Hercules Incorporated
Consolidated Statement of Stockholders' Equity (Dollars in millions)
<TABLE>
<CAPTION>
Unearned
Common Paid-In Compen- Translation Retained Reacquired
Stock Capital sation Adjustment Earnings Stock
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996 $79 $472 -- $75 $1,712 $1,256
(Common shares: issued 151,663,465; reacquired, 43,176,841)
Net income -- -- -- -- 325 --
Cash dividends, $.92 per common share -- -- -- -- (95) --
Foreign currency translation adjustment -- -- -- (30) -- --
Purchase of common stock, 7,970,784 shares -- -- -- -- -- 425
Issuance of common stock:
Incentive plans, net, 844,751 shares
including 281,063 from reacquired stock -- 20 -- -- -- (9)
Conversion of notes and debentures,
41,923 shares -- 1 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 $79 $493 -- $45 $1,942 $1,672
(Common shares: issued 152,269,076; reacquired, 50,866,562)
Net income -- -- -- -- 319 --
Cash dividends, $1.00 per common share -- -- -- -- (98) --
Foreign currency translation adjustment -- -- -- (47) -- --
Purchase of common stock, 9,536,619 shares -- -- -- -- -- 455
Issuance of common stock:
Incentive plans, net, 2,113,805 shares
from reacquired stock -- (19) -- -- -- (72)
Conversion of notes and debentures,
2,087,939 shares 1 30 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 $80 $504 -- $(2) $2,163 $2,055
(Common shares: issued 154,357,015; reacquired, 58,289,376)
Net income -- -- -- -- 9 --
Cash dividends, $1.08 per common share -- -- -- -- (104) --
Foreign currency translation adjustment -- -- -- (11) -- --
Purchase of common stock, 2,361,390 shares -- -- -- -- -- 109
Issuance of common stock:
Incentive plans, net, 764,201 shares
from reacquired stock -- (7) -- -- -- (27)
ESOP, 5,890,873 shares from reacquired
stock -- -- (130) -- -- (186)
Conversion of notes and debentures,
466,481 shares 1 7 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 $81 $504 $(130) $(13) $2,068 $1,951
(Common shares: issued 154,823,496; reacquired, 53,995,692)
</TABLE>
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
- 4 -
<PAGE> 5
Hercules Incorporated
Consolidated Statement of Comprehensive Income (Dollars in millions)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Income $ 9 $319 $325
Foreign currency translation, net of tax (11) (47) (30)
---- ---- ----
Comprehensive income (loss) $ (2) $272 $295
==== ==== ====
</TABLE>
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
- 5 -
<PAGE> 6
Hercules Incorporated
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Hercules
Incorporated and all majority-owned subsidiaries. Following the acquisition of
BetzDearborn, the company continued BetzDearborn's practice of using a November
30 fiscal year-end for all former BetzDearborn non-U.S. subsidiaries, excluding
Canada, to expedite the year-end closing process. Investments in affiliated
companies with a 20% or greater ownership interest are accounted for on an
equity basis and, accordingly, consolidated income includes Hercules' share of
their income.
USE OF ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that pertain to current operations or future revenues
are expensed or capitalized according to the company's capitalization policy.
Expenditures for remediation of an existing condition caused by past operations
that do not contribute to current or future revenues are expensed. Liabilities
are recognized for remedial activities when the cleanup is probable and the cost
can be reasonably estimated.
CASH AND CASH EQUIVALENTS
Cash in excess of operating requirements is invested in short-term,
income-producing instruments. Cash equivalents include commercial paper and
other securities with original maturities of 90 days or less. Book value
approximates fair value because of the short maturity of those instruments.
INVENTORIES
Inventories are stated at the lower of cost or market. Domestic inventories are
valued predominantly on the last-in, first-out (LIFO) method. Foreign and
certain domestic inventories, which in the aggregate represent 67% of total
inventories at December 31, 1998, are valued principally on the average-cost
method.
PROPERTY AND DEPRECIATION
Property, plant, and equipment are stated at cost. The company changed to the
straight-line method of depreciation, effective January 1, 1991, for newly
acquired processing facilities and equipment. Assets acquired before then
continue to be depreciated by accelerated methods. The company believes
straight-line depreciation provides a better matching of costs and revenues over
the lives of the assets. The estimated useful lives of depreciable assets are as
follows: buildings - 30 years; plant, machinery and equipment - 15 years; other
machinery and equipment - 3 to 15 years.
Maintenance, repairs, and minor renewals are charged to income; major renewals
and betterments are capitalized. Upon normal retirement or replacement, the cost
of property (less proceeds of sale or salvage) is charged to income.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and Other intangible assets are amortized on a straight-line basis over
the estimated future periods to be benefited, generally 40 years for goodwill
and 5 to 15 years for other intangible assets.
LONG-LIVED ASSETS
The company reviews its long-lived assets, including goodwill and other
intangibles, for impairment on an exception basis whenever events or changes in
circumstances indicate carrying amounts of the assets may not be recoverable
through future cash flows. If an impairment loss has occurred based on expected
future cash flows (undiscounted), the loss is recognized in the income
statement. The amount of the impairment loss is the excess of the carrying
amount of the impaired asset over the fair value of the asset. The fair value
represents expected future cash flows from the use of the assets, discounted at
the rate used to evaluate potential investments.
FOREIGN CURRENCY TRANSLATION
With the exception of operations in countries with highly inflationary
economies, the financial statements of Hercules' non-U.S. entities are
translated into U.S. dollars using current rates of exchange, with gains or
losses included in the foreign currency translation adjustment account in the
stockholders' equity section of the balance sheet. The related allocation for
income taxes is not significant. For operations in countries with highly
inflationary economies, financial statements are translated at either current or
historical exchange rates, as appropriate. These adjustments, along with gains
and losses on currency transactions (denominated in currencies other than local
currency), are reflected in net income.
- 6 -
<PAGE> 7
FINANCIAL INSTRUMENTS AND HEDGING
Derivative financial instruments are used to hedge risk caused by fluctuating
currency and interest rates. The company enters into forward-exchange contracts
and currency swaps to hedge foreign currency exposure. Decisions regarding
hedging are made on a case-by-case basis, taking into consideration the amount
and duration of the exposure, market volatility, and economic trends. The
company uses the fair-value method of accounting, recording realized and
unrealized gains and losses on these contracts quarterly. They are included in
other income (expense), net, except for gains and losses on contracts to hedge
specific foreign currency commitments, which are deferred and accounted for as
part of the transaction. Gains or losses on contracts used to hedge the value of
investments in certain non-U.S. subsidiaries are accounted for under the
deferral method and are included in the foreign currency translation adjustment
account. It is the company's policy to match the term of financial instruments
with the term of the underlying designated item. If the designated item is an
anticipated transaction no longer likely to occur, gains or losses from the
instrument designated as a hedge are recognized in current period earnings. The
company does not hold or issue financial instruments for trading purposes. In
the Consolidated Statement of Cash Flow, the company reports the cash flows
resulting from its hedging activities in the same category as the related item
that is being hedged. Net investment hedges, requiring cash receipts or payments
from borrowed foreign currencies not identified with any specific cash flows,
are classified as financing activities.
The company uses interest rate swap agreements to manage interest costs and
risks associated with changing rates. The differential to be paid or received is
accrued as interest rates change and is recognized in interest expense over the
life of the agreements. Counterparties to the forward exchange, currency swap,
and interest rate swap contracts are major financial institutions. Credit loss
from counterparty nonperformance is not anticipated.
STOCK-BASED COMPENSATION
Compensation costs attributable to stock option and similar plans are recognized
based on any difference between the quoted market price of the stock on the date
of grant over the amount the employee is required to pay to acquire the stock
(the intrinsic-value method under Accounting Principles Board [APB] Opinion 25).
Such amount, if any, is accrued over the related vesting period, as appropriate.
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation," requires companies electing to continue to use the
intrinsic-value method to make pro forma disclosures of net income and earnings
per share as if the fair-value-based method of accounting had been applied.
NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS 130 establishes standards for reporting and display
of comprehensive income and its components in financial statements. This
statement requires all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in the financial
statements and displayed with the same prominence as other financial statements.
In 1998, the company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." (See Note 24).
PENDING ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is
effective for fiscal years beginning after June 15, 1999. SFAS 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction. For fair-value hedge transactions in
which the company is hedging changes in the fair value of an asset, liability,
or firm commitment, changes in the fair value of the derivative instrument will
generally be offset in the income statement by changes in the hedged item's fair
value. For cash-flow hedge transactions, in which the company is hedging the
variability of cash flows related to a variable-rate asset, liability, or a
forecasted transaction, changes in the fair value of the derivative instrument
will be reported in other comprehensive income. Gains and losses on the
derivative instrument that are reported in other comprehensive income will be
reclassified as earnings in periods in which earnings are impacted by the
variability of the cash flows of the hedged item. The ineffective portion of all
hedges will be recognized in current-period earnings.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides guidance
on the capitalization and amortization of costs of computer software developed
or obtained for internal use, and is effective for fiscal years beginning after
December 15, 1998. The company is currently capitalizing the design and
implementation costs of its ongoing enterprise-wide software installation
program.
- 7 -
<PAGE> 8
The company is currently evaluating the impact that these statements will have
on its results of operations or financial position.
RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 consolidated financial statements and notes
have been reclassified to conform to the 1998 presentation.
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<PAGE> 9
Hercules Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACQUISITIONS
All acquisitions have been accounted for under the purchase method. The results
of operations of the acquired businesses are included in the consolidated
financial statements from the dates of acquisition.
BetzDearborn - On October 15, 1998, the company acquired all of the outstanding
shares of BetzDearborn Inc., a global specialty chemical company engaged in the
treatment of water and industrial process systems, for $2,235 million in cash
and $186 million in common stock exchanged for the shares held by the
BetzDearborn ESOP Trust. In addition, the company assumed debt with a fair value
of $117 million and repaid $557 million of other long-term debt held by
BetzDearborn. This acquisition was financed with borrowings under a $3,650
million credit facility with a syndicate of banks. (See Note 6.)
The purchase price was allocated to the estimated fair value of net assets
acquired, with the excess of $2,074 million recorded as goodwill, which is being
amortized over its estimated useful life of 40 years. Additionally, based on an
independent appraisal, approximately $130 million of the purchase price was
allocated to purchased in-process research and development and was charged to
expense at the date of acquisition. (See Note 14.)
As of the acquisition date, the company began to formulate plans to combine the
operations of BetzDearborn and Hercules. It formed a program office, engaged
outside consultants and established several functional integration teams to
formulate and implement the plan and capture anticipated synergies. At December
31, 1998, the company had identified and approved various actions such as
personnel reductions, consolidation of operations and support functions, closure
of redundant or inefficient offices and facilities, and relocation of former
BetzDearborn employees. Accordingly, the company has included a $94 million
liability as part of the purchase price allocation. The liability includes
approximately $78 million related to employee termination benefits for
approximately 850 BetzDearborn manufacturing, technical, sales and marketing,
administrative and support personnel worldwide. Also included is $16 million for
office and facility closures, relocation of BetzDearborn employees and other
related exit costs. Through December 31, 1998, the company paid $5 million of
termination benefits for approximately 130 redundancies, and the remaining
liability is $89 million.
The purchase price allocation for BetzDearborn is a preliminary allocation and
the goodwill recorded is subject to further adjustment resulting primarily from
the completion of the integration and exit plans, which could result in
additional liabilities; adjustments to the fair value of the net assets
acquired; and, the resolution of pre-acquisition contingencies, primarily legal
matters and product liabilities, net of any related tax effects. The allocation
of the purchase price is expected to be completed in 1999.
FiberVisions L.L.C. - In July 1998, the company completed the acquisition of the
49% share of FiberVisions L.L.C. owned by its joint venture partner Jacob Holm &
Sons A/S for approximately $230 million in cash, plus assumed debt of $188
million. The allocation of the purchase price resulted in $188 million of
goodwill, which is being amortized over its estimated useful life of 40 years.
The following unaudited pro forma information presents a summary of consolidated
results of operations of the company as if the BetzDearborn and FiberVisions
acquisitions had occurred at the beginning of each of the periods presented
below:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
---- ----
<S> <C> <C>
Net Sales $3,276 $3,366
Income (loss) before effect of change in accounting
principle (70) 237
Net income (loss) (70) 226
Net Earnings per share:
Basic
Earnings before effect of change in accounting
principle $(.69) $2.25
Earnings per share (.69) 2.15
Diluted
Earnings before effect of change in accounting
principle $(.69) $2.21
Earnings per share (.69) 2.11
</TABLE>
- 9 -
<PAGE> 10
The pro forma results of operations are for comparative purposes only and
reflect increased amortization and interest expense resulting from the
acquisitions described above, but do not include any potential cost savings from
combining the acquired businesses with the company's operations. Consequently,
the pro forma results do not reflect the actual results of operations had the
acquisitions occurred on the dates indicated, and are not intended to be a
projection of future results or trends.
Other - The company also made three other acquisitions in 1998 for an aggregate
purchase price of approximately $105 million in cash. These acquisitions
included the worldwide paper chemicals group of Houghton International, Inc. and
Citrus Colloids Ltd., a pectin manufacturer, in April 1998, and Alliance
Technical Products, Ltd., a rosin dispersions company, in September 1998.
Allocations of the purchase prices for these acquisitions resulted in
approximately $67 million of goodwill, which is being amortized over estimated
useful lives ranging from 30 to 40 years.
2. ACCOUNTS RECEIVABLE, NET
<TABLE>
<CAPTION>
Accounts receivable, net, consists of: (Dollars in millions)
1998 1997
---- ----
<S> <C> <C>
Trade $598 $285
Other 78 107
---- ----
Total 676 392
Less allowance for doubtful accounts 13 3
---- ----
$663 $389
==== ====
</TABLE>
At December 31, 1998, net trade accounts receivable from customers located in
the United States, Europe, the Americas, and Asia were $404 million, $150
million, $24 million, and $7 million, respectively.
3. INVENTORIES
<TABLE>
<CAPTION>
The components of inventories are: (Dollars in millions)
1998 1997
---- ----
<S> <C> <C>
Finished products $218 $121
Materials, supplies, and work in process 198 113
---- ----
$416 $234
==== ====
</TABLE>
Inventories valued on the LIFO method were lower than if valued under the
average-cost method, which approximates current cost, by $33 million and $37
million at December 31, 1998 and 1997, respectively.
4. INVESTMENTS
Total equity investments in affiliated companies were $9 million at December 31,
1998, and $21 million at December 31, 1997. Dividends received from affiliated
companies were $0 in 1998 and 1997, and $11 million in 1996.
Other investments, at cost or less, were $42 million and $594 million at
December 31, 1998 and 1997, respectively. Included in these amounts are
non-current marketable securities aggregating $31 million and $81 million for
the corresponding years, classified as "available for sale." The value of these
investments, based on market quotes, approximates book values. At December 31,
1997, investments also included a $500 million 6.2% interest-bearing five-year
note (the Tastemaker note), which was sold in October 1998 for a $3 million net
loss as part of financing the BetzDearborn acquisition.
5. SHORT-TERM DEBT
<TABLE>
<CAPTION>
A summary of short-term debt follows: (Dollars in millions)
1998 1997
---- ----
<S> <C> <C>
Commercial paper $ 0 $195
Banks 80 80
Current maturities of long-term debt 486 --
---- ----
$566 $275
==== ====
</TABLE>
- 10 -
<PAGE> 11
The commercial paper program was replaced by the debt syndication utilized for
the acquisition of BetzDearborn. Previously, commercial paper was issued or
renewed for varying periods, with interest at prevailing market rates. Bank
borrowings represent primarily foreign overdraft facilities and short-term lines
of credit, which are generally payable on demand with interest at various rates.
Book values of commercial paper and bank borrowings approximate market value
because of their short maturity period.
At December 31, 1998, Hercules had $219 million of unused lines of credit that
may be drawn as needed, with interest at a negotiated spread over lenders' cost
of funds. Lines of credit in use at December 31, 1998, were $80 million.
Weighted-average interest rates on short-term borrowings at December 31, 1998
and 1997, were 5.10% and 5.40%, respectively.
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
A summary of long-term debt follows: (Dollars in millions)
1998 1997
---- ----
<S> <C> <C>
6.15% notes due 2000 $ 100 $100
6.60% notes due 2027 (a) 100 100
7.85% notes due 2000 25 25
6.625% notes due 2003 (b) 125 125
8% convertible subordinated debentures due 2010 (c) 3 10
Term loan tranche A due in varying amounts through 2003 (d) 1,250 --
Term loan tranche B due 1999 (d) 470 --
Term loan tranche C due 2000 (d) 1,000 --
Revolving credit agreement due 2003 (d) 288 --
ESOP debt (e) 110 --
Term notes at various rates from 5.11% to 9.60% due in varying
amounts through 2006 (f) 102 --
Commercial paper -- 50
Variable rate loans -- 2
Other 9 7
------ ----
3,582 419
Current maturities of long-term debt (486) --
------ ----
Net long-term debt $3,096 $419
====== ====
</TABLE>
(a) 30-year debentures with a 10-year put option, exercisable by
bondholder at a redemption price equal to principal amount.
(b) Par value of $125 million issued June 1993.
(c) Subordinated debentures are convertible into common stock at $14.90
per share and are redeemable at the option of the company at varying rates. The
annual sinking fund requirement of $5 million, beginning in 1996, has been
satisfied through conversions of debentures.
(d) The BetzDearborn acquisition was financed with borrowings under a
$3,650 million credit facility with a syndicate of banks, and was consummated on
October 15, 1998. The syndication included three tranches of varying maturity
term loans totaling $2,750 million and a $900 million revolving credit
agreement. The facility bears interest at London Interbank Offered Rate (LIBOR)
plus 2% and may decrease to LIBOR plus .75% after six months and after certain
conditions are met, including repayments of term-loan tranche B. Interest rates
are reset for one, three or six-month periods at the company's option. The
company's debt agreement contains various restrictive covenants that, among
other things, require maintenance of certain financial covenants: leverage, net
worth and interest coverage, and provides that the entry of a judgment or
judgments involving aggregate liabilities of $50 million or more be vacated,
discharged, stayed or bonded pending appeal within 60 days of entry. Issuance
costs of $59 million related to the financing are included in Deferred charges
and other assets and are being amortized over the term of the loans, using the
effective interest method. As of December 31, 1998, $612 million of the $900
million revolver is available for use.
(e) The company assumed a loan with a fair market value of $110 million
related to the BetzDearborn ESOP Trust. The proceeds of the loan were used by
the ESOP Trust for the purchase of BetzDearborn preferred shares which, upon
acquisition by Hercules, were converted into equivalent shares of Hercules
common stock. The loan was recorded at fair market value at the date of
acquisition, and the $16 million fair value step-up is being amortized over the
term of the debt. The loan and guarantee mature in June 2009.
(f) Debt assumed in conjunction with the acquisition of FiberVisions
L.L.C. (see Note 1), less repayments through December 31, 1998.
- 11 -
<PAGE> 12
Long-term debt maturities during the next five years are $486 million in 1999,
$1,342 million in 2000, $318 million in 2001, $366 million in 2002, and $831
million in 2003.
7. COMPANY-OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST
In the fourth quarter of 1998, Hercules Trust V (the Trust), the company's
wholly owned consolidated subsidiary trust created under the laws of the State
of Delaware, completed a private placement of units, consisting of Trust
Preferred Securities (the Securities) in the amount of $200 million and a
forward underwriting contract to purchase Hercules common stock. The proceeds of
the Securities were invested by the Trust in the company's newly issued Junior
Subordinated Debenture Notes (the Notes). Each Security will accrue and pay
distributions equal to LIBOR plus 175 basis points, compounded quarterly. The
obligations of the Trust are fully and unconditionally guaranteed by the
company.
The Securities are expected to be remarketed pursuant to their terms within 12
months from their issuance. The distribution rates will be reset to a fixed rate
in the remarketing based on bids received in a private auction to qualified
institutional buyers, and the maturity date will be reset to the one-year
anniversary of the successful remarketing. Hercules will be required to redeem
the Securities if remarketing does not occur within the established period. The
remarketing of the Securities may be accelerated under certain circumstances,
including the price of the company's common stock closing at or below $22.6875
(twenty-two and eleven-sixteenths). In addition, Hercules has agreed to offer
and sell, and a third party has agreed to underwrite $200 million of Hercules
common stock following the successful remarketing or redemption of the
Securities.
8. SERIES PREFERRED STOCK
The series preferred stock is without par value and is issuable in series. There
are 2,000,000 shares authorized for issuance, none of which have been issued.
9. COMMON STOCK
Hercules common stock has a stated value of $25/48, and 300,000,000 shares are
authorized for issuance. At December 31, 1998, a total of 16,023,661 shares were
reserved for issuance for the following purposes: 879,999 shares for sales to
the Savings Plan Trustee; 11,382,530 shares for the exercise of awards under the
Stock Option Plan; 2,197,137 shares for awards under incentive compensation
plans; 337,440 shares for conversion of debentures and notes; and 1,226,555
shares for employee stock purchases.
For the company's stock repurchase program, from its start in 1991 through
year-end 1998, the Board authorized the repurchase of up to 74,650,000 shares of
company common stock. Of that total, 6,150,000 shares were intended to satisfy
requirements of various employee benefit programs. During this period, a total
of 66,490,592 shares of common stock were purchased in the open market at an
average price of $37.33 per share.
10. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
In connection with the acquisition of BetzDearborn, the company acquired its
ESOP and related trust as a long-term benefit for substantially all of
BetzDearborn's U.S. employees. The plan is a supplement to the company's
retirement plan. The ESOP trust has existing long-term debt of $94 million (fair
value of $110 million - see Note 6) which is guaranteed by the company. The
proceeds of the original loan were used to purchase BetzDearborn convertible
preferred stock, which, at the date of the BetzDearborn acquisition, was
converted into Hercules common stock.
The BetzDearborn 401(k) program was previously integrated with the ESOP.
Eligible employees may invest 2% to 15% of eligible compensation. The company's
matching contributions equal to 50% of the first 6% of employees' investments,
fully vest to employees upon the completion of 5 years of service. The company's
matching contributions, which are made in the form of Hercules common stock, are
included in ESOP expense. After satisfying the 401(k) matching contributions and
the dividends on allocated shares, the remaining shares of ESOP stock are
allocated to each participant based on the ratio of participants' compensation
to total compensation of all participants.
The company contribution and dividends on the shares held by the ESOP trust are
used to repay the loan, and stock is allocated as the principal and interest are
paid. Long-term debt is reduced as payments are made on the third-party
financing. The loan and unearned compensation are recorded in the company's
Consolidated Balance Sheet as long-term debt and a reduction in shareholder's
equity, respectively.
The number of shares allocated and unallocated at December 31 are as follows:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Allocated 1,776,338
Unallocated 4,052,556
---------
Total shares held by ESOP 5,828,894
=========
</TABLE>
- 12 -
<PAGE> 13
The company is required to make cash contributions to the Plan which enable the
trust to service its indebtedness. ESOP expense was $1 million for 1998 which
was net of $2 million of dividends paid and charged to retained earnings.
11. LONG-TERM INCENTIVE COMPENSATION PLANS
The company's long-term incentive compensation plans provide for the grant of
stock options and the award of common stock and other market-based units to
certain key employees and nonemployee directors. Through 1994, shares of common
stock awarded under these plans normally were either restricted stock or
performance shares. During the restriction period, award holders have the rights
of stockholders, including the right to vote and receive cash dividends, but
they cannot transfer ownership.
In 1995, Hercules changed the structure of the long-term incentive compensation
plans to place a greater emphasis on shareholder value creation through grants
of regular stock options, performance-accelerated stock options, and Cash Value
Awards (performance-based awards denominated in cash and payable in shares of
common or restricted stock, subject to the same restrictions as restricted
stock). Restricted stock and other market-based units are awarded with respect
to certain programs. The number of awarded shares outstanding was 1,083,613;
873,627; and 1,881,946 at December 31, 1998, 1997, and 1996, respectively.
Under the company's incentive compensation plans, 2,197,137 shares of common
stock were available for grant as stock awards or stock option awards. Stock
awards are limited to approximately 15% of the total authorizations. Regular
stock options are granted at the market price on the date of grant and are
exercisable at various periods from one to five years after date of grant.
Performance-accelerated stock options are also granted at the market price on
the date of grant and are normally exercisable at nine and one-half years.
Exercisability may be accelerated based upon the achievement of predetermined
performance goals. Both regular and performance-accelerated stock options expire
10 years after the date of grant.
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to the company in the event of employment termination,
except in the case of death, disability, retirement, or other specified events.
The company applies APB Opinion 25 in accounting for its plans. Accordingly, no
compensation cost has been recognized for the stock option plans. The cost of
stock awards and other market-based units, which are charged to income over the
restriction or performance period, amounted to $5 million for 1998; $4 million
for 1997, and $9 million for 1996.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 1996, 1997, and 1998:
<TABLE>
<CAPTION>
Regular Performance-Accelerated
Weighted- Weighted-
Number of Shares Average Price Number of Shares Average Price
---------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
January 1, 1996 3,883,184 $26.24 786,375 $48.54
Granted 673,450 $55.40 2,303,750 $49.66
Exercised (646,247) $21.29 -- --
Forfeited (800) $47.25 (14,319) $48.29
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1996 3,909,587 $32.49 3,075,806 $49.38
Granted 1,708,100 $40.14 810,125 $41.07
Exercised (1,611,449) $20.97 -- --
Forfeited (4,950) $56.26 (10,534) $53.07
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1997 4,001,288 $40.41 3,875,397 $47.63
Granted 2,696,215 $32.75 1,170,890 $41.09
Exercised (279,795) $24.93 -- --
Forfeited (66,430) $41.58 (15,035) $46.09
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1998 6,351,278 $37.83 5,031,252 $46.12
</TABLE>
- 13 -
<PAGE> 14
The weighted-average fair value of regular stock options granted during 1996,
1997, and 1998 was $14.36, $10.13, and $8.53 respectively. The weighted-average
fair value of performance-accelerated stock options granted during 1996, 1997,
and 1998 was $10.20, $9.39, and $9.24 respectively.
Following is a summary of regular stock options exercisable at December 31,
1996, 1997, and 1998, and their respective weighted-average share prices:
<TABLE>
<CAPTION>
Weighted-Average
Number of Shares Exercise Price
---------------- --------------
<S> <C> <C>
Options exercisable
December 31, 1996 2,636,457 $25.08
Options exercisable
December 31, 1997 2,013,148 $38.54
Options exercisable
December 31, 1998 3,300,628 $41.57
</TABLE>
There were no performance-accelerated stock options exercisable at December 31,
1996, 1997 and 1998 .
Following is a summary of stock options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
Weighted-
Number Average Weighted- Number Weighted-
Exercise Price Outstanding Remaining Average Exercisable at Average
Range at 12/31/98 Contractual Life Exercise Price 12/31/98 Exercise Price
----- ----------- ---------------- -------------- -------- --------------
Regular Stock Options
- ---------------------
<S> <C> <C> <C> <C> <C>
$11 - $20 257,263 2.58 $15.62 257,263 $15.62
$21 - $30 1,915,600 9.31 $25.53 129,400 $25.00
$31 - $40 1,912,695 7.82 $38.75 1,491,140 $38.68
$41 - $60 2,265,720 7.79 $49.97 1,422,825 $50.79
--------- ---------
6,351,278 3,300,628
========= =========
<CAPTION>
Performance-Accelerated Stock Options
- -------------------------------------
<S> <C> <C> <C> <C> <C>
$25 - $40 1,094,733 9.01 $36.18 -- --
$41 - $50 3,114,778 7.83 $47.10 -- --
$51 - $61 821,741 7.08 $55.62 -- --
---------
5,031,252
=========
</TABLE>
The company estimates at December 31, 1998, 100% of performance-
accelerated stock options will eventually vest.
The company's Employee Stock Purchase Plan is a qualified noncompensatory plan,
which allows eligible employees to acquire shares of common stock through
systematic payroll deductions. The plan consists of three-month subscription
periods, beginning July 1 of each year. The purchase price is 85% of the fair
market value of the common stock on either the first or last day of that
subscription period, whichever is lower. Purchases may range from 2% to 15% of
an employee's base salary each pay period, subject to certain limitations.
Currently, 1,226,555 shares of Hercules common stock are registered for offer
and sale under the plan. Shares issued at December 31, 1998 and 1997, were
573,445 and 468,706, respectively. The company applies APB Opinion 25 and
related interpretations in accounting for its Employee Stock Purchase Plan.
Accordingly, no compensation cost has been recognized for the Employee Stock
Purchase Plan.
Had compensation cost for the company's Stock-Based Incentive Plans and Employee
Stock Purchase Plan been determined on the basis of fair value according to SFAS
No. 123, the fair value of each option granted or share purchased would be
estimated on the grant date using the Black-Scholes option pricing model.
The following assumptions would be used in estimating fair value for 1998, 1997,
and 1996:
- 14 -
<PAGE> 15
<TABLE>
<CAPTION>
Performance Accelerated Employee Stock
Assumption Regular Plan Plan Purchase Plan
---------- ------------ ---- -------------
<S> <C> <C> <C>
Dividend yield 3.0% 3.0% 3.0%
Risk-free interest rate 5.84% 5.77% 5.32%
Expected life 7.4 yrs. 5 yrs. 3 mos.
Expected volatility 23.1% 21.9% 27.0%
</TABLE>
The company's net income and earnings per share for 1998, 1997, and 1996
would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
(Dollars in millions, except per share)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income
As reported $9 $319 $325
Pro forma ($5) $308 $317
Basic earnings per share
As reported $.10 $3.22 $3.10
Pro forma ($.06) $3.10 $3.02
Diluted earnings per share
As reported $.10 $3.13 $2.98
Pro forma ($.06) $3.04 $2.92
</TABLE>
SFAS No. 123 does not apply to awards prior to 1995, and additional awards in
future years are anticipated.
12. ADDITIONAL BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
(Dollars in millions)
1998 1997
---- ----
<S> <C> <C>
Property, plant, and equipment
Land $ 74 $ 18
Buildings and equipment 2,837 1,957
Construction in progress 126 113
------ -------
Total 3,037 2,088
Accumulated depreciation and amortization 1,599 1,401
------ -------
Net property, plant, and equipment $1,438 $ 687
====== =======
Accrued expenses
Payroll and employee benefits $ 63 $ 37
Income taxes payable 15 91
Accrued pension benefits 29 --
Other 374 280
------ -------
$ 481 $ 408
====== =======
</TABLE>
13. PENSION AND OTHER POSTRETIREMENT BENEFITS
The company provides defined benefit pension and postretirement benefit plans to
employees. The pension and postretirement benefit plans for BetzDearborn
employees are included in the 1998 valuation. The following provides a
reconciliation of benefit obligations, plan assets, and funded status of the
plans.
<TABLE>
<CAPTION>
(Dollars in millions)
Other Postretirement
Pension Benefits Benefits
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1 $1,114 $1,046 $141 $141
Service cost 20 17 1 1
Interest cost 83 78 10 10
Amendments -- 6 -- --
</TABLE>
- 15 -
<PAGE> 16
<TABLE>
<S> <C> <C> <C> <C>
Assumption change 52 77 3 10
Divestiture -- (4) -- --
Acquisition 284 -- 9 --
Translation difference 7 (13) -- --
Actuarial loss 28 12 10 --
Benefits paid from plan assets (89) (105) (2) (2)
Benefits paid by Company -- -- (18) (19)
------ ------ ------ ------
Benefit obligation at December 31 $1,499 $1,114 $ 154 $ 141
====== ====== ====== ======
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 $1,237 $1,168 $ 9 $ 9
Actual return on plan assets 182 187 1 2
Divestiture -- (2) 0 --
Acquisition 256 -- -- --
Company contributions (refund) (2) 4 -- --
Translation difference 6 (15) -- --
Benefits paid from plan assets (90) (105) (2) (2)
------ ------ ------ ------
Fair value of plan assets at December 31 $1,589 $1,237 $ 8 $ 9
====== ====== ====== ======
Funded status of the plans $ 90 $ 124 $(146) $(132)
Unrecognized actuarial loss 89 93 34 22
Unrecognized prior service cost (benefit) 35 39 (44) (50)
Unrecognized net transition obligation (25) (40) -- --
Amount included in accrued expenses- other -- -- 20 21
------ ------ ------ ------
Prepaid (accrued) benefit cost $ 189 $ 216 $(136) $(139)
====== ====== ====== ======
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL
POSITION CONSIST OF:
Prepaid benefit cost 218 216 -- --
Accrued benefit liability (29) -- (136) (139)
------ ------ ------ ------
$ 189 $ 216 $(136) $(139)
====== ====== ====== ======
ASSUMPTIONS AS OF DECEMBER 31
Weighted average discount rate 7.00% 7.25% 7.00% 7.25%
Expected return on plan assets 9.25% 9.25% 9.25% 9.25%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
<CAPTION>
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
---------------- -----------------------------
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 20 $ 17 $ 19 $ 1 $ 1 $ 1
Interest cost 83 78 77 10 10 11
Return on plan assets (expected) (114) (103) (99) (1) (1) (1)
Amortization and deferrals 12 5 6 (4) (5) (5)
Amortization of transition asset (14) (14) (14) -- -- --
----- ----- ----- ---- ---- ----
Benefit cost (credit) $ (13) $ (17) $ (11) $ 6 $ 5 $ 6
===== ===== ===== ==== ==== ====
</TABLE>
Pension
During 1997, the company recognized a charge of approximately $8 million for
special termination benefits.
Other Postretirement Benefits
The nonpension postretirement benefit plans are contributory health care and
life insurance plans. In August 1993, a Voluntary Employees' Beneficiary
Association (VEBA) Trust was established and funded with $10 million of company
funds. The company periodically obtains reimbursement for union retiree claims,
while other claims are paid from company assets. The participant contributions
are immediately used to cover claim payments, and for this reason do not appear
as contributions to plan assets.
The assumed health care cost trend rate at December 31, 1998 and 1997, was 5%
for those under age 65 and 4.75% for those over age 65, decreasing to 4.5% in
subsequent years.
- 16 -
<PAGE> 17
A one-percentage point increase or decrease in the assumed health care cost
trend rate would increase or decrease the postretirement benefit obligation by
$6 million or $7 million, respectively, and would not have a material effect on
aggregate service and interest cost components.
14. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
Purchased in-process research and development (IPR&D) represents the value
assigned in a purchase business combination to research and development projects
of the acquired business that were commenced but not yet completed at the date
of the acquisition, and which, if unsuccessful, have no alternative future use
in research and development activities or otherwise. Amounts assigned to
purchased IPR&D must be charged to expense at the date of consummation of the
purchase business combination. Accordingly, the company has charged
approximately $130 million to expense at the acquisition date for IPR&D related
to the BetzDearborn acquisition. (See Note 1.)
The IPR&D projects were principally included in the water treatment and paper
process divisions of the acquired business. The former Water Treatment Group
(WTG) provided specialty water and process treatment programs for boiler,
cooling, influent, and effluent applications to markets such as refining,
chemical, paper, electric utility, food, industrial, commercial and
institutional establishments. Overall, the products are used to control
corrosion, scale, deposit formation, and microbiological growth, conserve energy
and improve efficiency. Additionally, the former Paper Process Group (PPG)
brought to market custom-engineered programs for the process-related problems
associated with paper production. These problems include deposition, corrosion,
microbiological fouling, foam control, deinking and felt conditioning.
The following is a summary of the significant projects and the values assigned:
(dollars in millions)
<TABLE>
<CAPTION>
Estimated
Percent Cost to Estimated Projected
Project Group Complete Complete Total Cost Launch Date IPR&D Value
------- ----- -------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
New Blend of
Actives (1) PPG 73% $ .3 $ 1.0 1999 $ 38
New Corrosion
Inhibitor (2) WTG 31% 1.5 2.1 2002 26
Alkaline
Drainage Aid (3) PPG 39% 1.6 2.7 2000 6
Other major
projects WTG 54% Avg. 3.5 7.6 1999-2001 27
Other
major projects PPG 80% Avg. .7 3.7 1999-2001 15
All other projects Various 29% Avg. 4.3 6.1 Various 18
-------- ----- ----- ----
Total IPR&D 49% $11.9 $23.2 $130
=== ===== ===== ====
</TABLE>
1) This project will continuously screen new microbiocidal actives in order
to identify promising compounds that may improve current product mix of
offerings.
2) This project involves the development of new corrosion control chemistry
for application in a range of water treatment systems.
3) This project involves the development of advanced retention, drainage,
and formation systems for printing and writing paper.
Due to the uniqueness of each of the projects, the costs and effort required are
estimated based on the latest available information. Additionally, the launch
date reflects management's best estimate of the time that the company will begin
to benefit from cash inflow of the projects. However, there is a risk that
certain projects may not be completed successfully for a variety of reasons
including: change in strategies, inability to develop a cost efficient
treatment, and changes in market demand or customer requirements.
- 17 -
<PAGE> 18
The IPR&D valuation charge was measured by the stage of completion method,
primarily calculated by dividing the costs incurred to date by the total
estimated costs. These percentages were applied to the results of
project-by-project discounted cash flow models that estimated the present value
of residual cash flows deemed attributable solely to the underlying IPR&D.
The projected revenues, costs, and margins in the cash flow forecasts are
consistent with projections by management based on available historical data.
The revenue projections are based on an opportunity analysis for each project,
which takes into account market and competitive conditions, potential customers,
and strategic goals. The weighted average cost of capital for the overall
business was estimated at 11% and the risk-adjusted discount rate used in the
IPR&D project valuation model was 13%.
15. OTHER OPERATING EXPENSES (INCOME), NET
As a result of the BetzDearborn acquisition in the fourth quarter of 1998,
Hercules began to formulate and implement a plan to merge the operations of
BetzDearborn with Hercules (see Note 1). Additionally, the company reviewed its
existing operations and support infrastructure and approved a plan to terminate
Hercules employees and exit activities to eliminate redundancies and
inefficiencies. As a result, the company incurred charges of approximately $76
million. These charges include employee termination benefits of $31 million;
exit costs related to facility closures of $10 million; write-downs of property,
plant and equipment of $24 million; and integration expenses of $11 million.
Employee termination benefits are for approximately 350 Hercules manufacturing,
sales and marketing, administration, technology and support personnel. Facility
closures and exit costs relate primarily to Process Chemicals and Services in
connection with the acquisition. Write-downs of property, plant and equipment
relate to asset impairments in Chemical Specialties and Functional Products
resulting from adverse business negotiations, the effects of the BetzDearborn
acquisition, and the loss of a customer. Integration expenses include consulting
and legal fees, integration bonuses, travel and training, and are expensed as
incurred.
Other operating expenses in 1997 included charges of $146 million, primarily
associated with reorganization of management and the adoption of new competitive
strategies (announced in early 1997). The charges included $122 million related
to asset rationalizations and impairment and $24 million related to severance
benefits. Included in the $122 million is an impairment loss of $95 million.
Additionally, the company recognized approximately $27 million of
rationalization charges primarily associated with certain assets, which were no
longer being utilized, and lease abandonment costs. Concurrently, management
authorized and committed the company to a plan to reduce its work force by
approximately 270 employees and accrued $24 million of severance-related
benefits. The plan included reorganization of management, reductions in
operating personnel at certain domestic and foreign facilities, and the
consolidation of certain support functions. Other operating expenses in 1997
also include $13 million of net environmental cleanup costs, principally for
nonoperating sites and $8 million of executive retirement benefits.
In 1996, other operating expenses (income), net, included probable recoveries
related to environmental remediation of $13 million and reduction in the
estimated loss on the divestiture of the Composite Products Division of $5
million.
During 1998, the company paid $10 million of these liabilities. As of December
31, 1998, the remaining liability for these charges is $36 million for
termination benefits representing approximately 370 employees and $10 million
for other exit costs. Reorganization in the foreign facilities has proceeded
slower than anticipated due to changes in the information system implementation
schedule, acquisition activity and other corporate initiatives. Management
expects to complete remaining actions under this plan during 2000.
16. INTEREST AND DEBT EXPENSE
<TABLE>
<CAPTION>
Interest and debt costs are summarized as follows:
(Dollars in millions)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Costs incurred $114 $ 47 $ 40
Amount capitalized 11 8 5
---- ---- ----
Amount expensed $103 $ 39 $ 35
==== ==== ====
</TABLE>
- 18 -
<PAGE> 19
17. OTHER INCOME (EXPENSE), NET
<TABLE>
<CAPTION>
Other income (expense), net, consists of the following:
(Dollars in millions)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income $ 36 $ 29 $ 5
Net gains on dispositions 23 398 22
Acquisition costs -- (20) --
Legal settlements and accruals (66) (41) --
Interest rate swap termination (13) -- --
Miscellaneous income (expense), net (2) 8 (1)
----- ---- ---
$(22) $374 $26
===== ==== ===
</TABLE>
Interest income in 1998 and 1997 relates primarily to the $500 million note
received upon completion of the Tastemaker monetization. The note was sold
during the fourth quarter of 1998 with a net loss of $3 million reported in net
gains on dispositions. Also, gains of $12 million and $19 million in 1998 and
1997, respectively, were recorded from the sale of Alliant Techsystems common
stock held by Hercules. (See Note 21.) Additionally, 1997 includes a gain of
$368 million on the completion of transactions that monetized the company's
investment in Tastemaker, a 50%-owned flavors joint venture. Net gains on
dispositions in 1996 reflect the sale of real estate and the sale of a product
line. Acquisition costs in 1997 represent a charge primarily related to the
company's unsuccessful bid for Allied Colloids. The 1998 legal settlements and
accruals relate primarily to settlements of Qui Tam ("Whistle Blower") lawsuits.
(See Note 22.) The 1998 loss from terminated interest rate swaps is related to
the company's financing effort upon the acquisition of BetzDearborn.
Miscellaneous income (expense), net, includes net foreign currency gains of $5
million, $19 million, and $11 million in 1998, 1997, and 1996, respectively.
18. INCOME TAXES
The domestic and foreign components of income before taxes and effect of change
in accounting principle are presented below:
<TABLE>
<CAPTION>
(Dollars in millions)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Domestic $(147) $396 $250
Foreign 224 197 235
----- ---- ----
$77 $593 $485
===== ==== ====
</TABLE>
A summary of the components of the tax provision follows:
<TABLE>
<CAPTION>
(Dollars in millions)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Currently payable
U.S. federal $(26) $169 $33
Foreign 74 63 60
State (4) 2 9
Deferred
Domestic 17 30 41
Foreign 7 5 17
----- ---- ----
Provision for income taxes $ 68 $269 $160
===== ==== ====
</TABLE>
Deferred tax liabilities (assets) at December 31 consist of:
- 19 -
<PAGE> 20
<TABLE>
<CAPTION>
(Dollars in millions)
1998 1997
---- ----
<S> <C> <C>
Depreciation $ 153 $ 119
Prepaid pension 93 82
Inventory 6 15
Investments 84 84
Other 46 22
----- -----
Gross deferred tax liabilities 382 322
----- -----
Postretirement benefits other than pensions (81) (66)
Accrued expenses (126) (110)
Loss carryforwards (24) (15)
Other (31) (32)
----- -----
Gross deferred tax assets (262) (223)
----- -----
Valuation allowance 12 12
----- -----
$ 132 $ 111
===== =====
</TABLE>
A reconciliation of the U.S. statutory income tax rate to the effective rate
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. statutory income tax rate 35% 35% 35%
Purchased in-process research and development (Note 14) 59 -- --
Goodwill amortization 7 -- --
Foreign dividends net of credits -- 2 --
State taxes 2 -- 1
Utilization of operating losses -- -- (2)
Reserves (17) 7 --
Other 2 1 (1)
--- --- ---
Effective tax rate 88% 45% 33%
=== === ===
</TABLE>
The company provides taxes on undistributed earnings of subsidiaries and
affiliates included in consolidated retained earnings to the extent such
earnings are planned to be remitted and not reinvested permanently.
The undistributed earnings of subsidiaries and affiliates on which no provision
for foreign withholding or U.S. income taxes has been made amounted to
approximately $400 million at December 31, 1998. U.S. and foreign income taxes
that would be payable if such earnings were distributed may be lower than the
amount computed at the U.S. statutory rate because of the availability of tax
credits.
19. EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share and
the effect on income and the weighted-average number of shares of dilutive
potential common stock:
- 20 -
<PAGE> 21
<TABLE>
<CAPTION>
(Dollars and shares in millions, except per
share)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Basic EPS computation:
Income before effect of change in accounting principle $ 9 $ 324 $ 325
Effect of change in accounting principle -- (5) --
----- ----- -----
Net income $9 $ 319 $ 325
===== ===== =====
Weighted-average shares outstanding 96.3 99.2 104.9
Earnings per share before effect of change in
accounting principle $ .10 $3.27 $3.10
Effect of change in accounting principle -- (.05) --
----- ----- -----
Earnings per share $ .10 $3.22 $3.10
===== ===== =====
Diluted EPS computation:
Income before effect of change in accounting principle $ 9 $ 324 $ 325
Interest on convertible debentures -- 2 2
Effect of change in accounting principle -- (5) --
----- ----- -----
Net Income $ 9 $ 321 $ 327
===== ===== =====
Weighted-average shares outstanding 96.3 99.2 104.9
Options .6 1.1 1.9
Convertible debentures .5 2.1 2.9
----- ----- -----
Adjusted weighted-average shares 97.4 102.4 109.7
===== ===== =====
Earnings per share before effect of change in
accounting principle $ .10 $3.18 $2.98
Effect of change in accounting principle -- (.05) --
----- ----- -----
Earnings per share $ .10 $3.13 $2.98
===== ===== =====
</TABLE>
20. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Notional Amounts and Credit Exposure of Derivatives
The notional amounts of derivatives summarized below do not represent amounts
exchanged by the parties and, thus, are not a measure of the exposure of the
company through its use of derivatives. The amounts exchanged are calculated on
the basis of the notional amounts and the other terms of the derivatives, which
relate to interest rates or exchange rates.
Interest Rate Risk Management
During 1998, interest rate swaps which converted 6.02% average fixed-rate debt
to floating-rate debt expired. During the fourth quarter, a series of interest
rate swap agreements converting floating rate debt into fixed rate debt ranging
from 6.05% to 7.08% per year were terminated primarily in conjunction with the
sale of the Tastemaker note (see Note 4) and the BetzDearborn acquisition. New
interest rate swaps totaling $1.0 billion were added in the fourth quarter 1998.
This series of interest rate swap agreements, maturing from 1999 through
December 2002, effectively converts floating-rate debt into debt with a fixed
rate ranging from 4.91% to 5.21% per year as a hedge against the company's
interest rate exposure on its variable rate debt outstanding. For the years
1998, 1997, and 1996, these contracts resulted in a less than 1% change in the
effective interest rate on the weighted-average notional principal amounts
outstanding. The aggregate notional principal amounts at the end of 1998 and
1997 were $1.0 billion and $650 million, respectively.
The following table indicates the types of swaps used and their
weighted-average interest rates:
<TABLE>
<CAPTION>
(Dollars in millions)
1998 1997
---- ----
<S> <C> <C>
Pay fixed on swaps notional amount (at year-end) $1,000 $650
Average pay rate 6.4% 6.4%
Average receive rate 5.5% 5.7%
</TABLE>
- 21 -
<PAGE> 22
Foreign Exchange Risk Management
The company selectively uses foreign currency forward contracts and currency
swaps to offset the effects of exchange rate changes on reported earnings, cash
flow, and net asset positions. The primary exposures are denominated in Danish
kroner, Dutch guilder, Belgian franc, British pound sterling, and the German
mark. Some of the contracts involve the exchange of two foreign currencies,
according to local needs in foreign subsidiaries. The term of the currency
derivatives is rarely more than one year. At December 31, 1998 and 1997, the
company had outstanding forward-exchange contracts to purchase foreign
currencies aggregating $117 million and $29 million and to sell foreign
currencies aggregating $320 million and $171 million, respectively. Non-U.S.
dollar cross-currency trades aggregated $380 million and $630 million at
December 31, 1998 and 1997, respectively. Currency swap agreements, used to
hedge net investment positions, totaled $512 million at December 31, 1998. The
forward-exchange contracts and currency swap agreements outstanding at December
31, 1998 will mature during 1999.
Fair Values
The following table presents the carrying amounts and fair values of the
company's financial instruments at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(Dollars in millions)
1998 1997
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Investment securities (available for sale) $ 31 $ 31 $ 81 $ 81
Investment securities (held to maturity) -- -- 500 500
Long-term debt (3,096) (3,101) (419) (452)
Company-obligated preferred securities of subsidiary trust (200) (200) -- --
Foreign exchange contracts 6* 6 2* 2
Currency swaps 8* 8 -- --
Interest rate swap contracts 0* 1 (1)* (12)
</TABLE>
*The carrying amount represents the net unrealized gain or net interest payable
associated with the contracts at the end of the period.
Fair values of derivative contracts are indicative of cash that would have been
required had settlement been December 31, 1998.
Basis of Valuation
Investment securities: Quoted market prices.
Long-term debt: Present value of expected cash flows related to existing
borrowings discounted at rates currently available to the company for long-term
borrowings with similar terms and remaining maturities.
Company obligated preferred securities of subsidiary trust: Year-end interest
rates and company common stock price.
Foreign exchange contracts: Year-end exchange rates.
Currency swaps: Year-end interest and exchange rates.
Interest rate swap contracts: Bank or market quotes or discounted cash flows
using year-end interest rates.
21. DIVESTITURES
In March 1997, the company completed transactions to monetize its investment in
Tastemaker for approximately $608 million, including $108 million in cash and a
$500 million, 6.2%, interest-bearing five-year note. Equity in income of
affiliated companies included Tastemaker earnings of $11 million in 1997 and $32
million in 1996.
In June 1997, the company completed a joint venture of its polypropylene fiber
business with Jacob Holm & Sons A/S (Denmark) in which Hercules owned 51% of the
joint venture, which was accounted for on the equity method at that time. In
July 1998, Hercules purchased its partner's 49% share of the joint venture, with
the operating results of FiberVisions being included in Hercules' consolidated
financial statements since the date of acquisition. (See Note 1.)
Pursuant to a 1997 agreement, Hercules sold its remaining shares of Alliant
Techsystems, Inc. for $12 million in 1998.
In June 1996, the company sold its Composite Products Division for $141 million
in cash. Net sales and operating profit of this business were $49 million and $8
million, respectively in 1996.
- 22 -
<PAGE> 23
22. COMMITMENTS AND CONTINGENCIES
Leases:
Hercules has operating leases (including office space, transportation, and data
processing equipment) expiring at various dates. Rental expense was $35 million
in 1998, and $31 million in both 1997 and 1996.
At December 31, 1998, minimum rental payments under noncancelable leases
aggregated $317 million with subleases of $30 million. A significant portion of
these payments relates to a long-term operating lease for corporate office
facilities. The net minimum payments over the next five years are $39 million in
1999, $32 million in 2000, $24 million in 2001, $20 million in 2002, and $18
million in 2003.
Environmental:
Hercules has been identified as a potentially responsible party (PRP) by U.S.
federal and state authorities, or has been sued for contribution by private
parties, for the cost of environmental investigation and/or cleanup at numerous
sites. The estimated range of the reasonably possible share of costs for
investigation and cleanup is between $63 million and $199 million. The actual
costs will depend upon numerous factors, including the number of parties found
responsible at each environmental site and their ability to pay, the actual
methods of remediation, outcomes of negotiations with regulatory authorities,
outcomes of litigation, changes in environmental laws and regulations,
technological developments, and the years of remedial activity required, which
could range up to 30 years.
In 1992, Hercules brought suit against its insurance carriers for past and
future costs for cleanup of certain environmental sites. In April 1998, the
trial regarding insurance recovery for the Jacksonville, Arkansas site (see
discussion below) was completed. The jury returned a "Special Verdict Form" with
findings that will, in conjunction with the court's other opinions, be used by
the Court to enter a judgment. The judgment will determine the amount of
Hercules recovery for past cleanup expenditures and will state 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 estimates
above.
Hercules becomes aware of sites in which it may be, but has not yet been named a
PRP, principally through its knowledge of investigation of sites by the U.S.
Environmental Protection Agency (EPA) or other government agencies or through
correspondence with previously named PRPs requesting information on Hercules'
activities at sites under investigation. In addition, Hercules has established
procedures for identifying environmental issues at its respective plant sites.
Environmental coordinators, familiar with environmental laws and regulations,
are resources for identification of environmental issues. Further, Hercules has
environmental audit programs, which are designed to identify environmental
issues at operating plant sites. Through these programs and information-
gathering activities, Hercules identifies potential environmental, regulatory,
and remedial issues.
Litigation over liability at Jacksonville, Arkansas, the most significant site,
has been pending since 1980. As a result of a pretrial court ruling in October
1993, Hercules has been held jointly and severally liable for costs incurred,
and for future remediation costs, at the Jacksonville site by the District
Court, Eastern District of Arkansas (the Court).
Other defendants in this litigation have either settled with the government or,
in the case of the Department of Defense (DoD), have not been held liable.
Hercules appealed the Court's order finding the DoD not liable. On January 31,
1995, the 8th Circuit Court of Appeals upheld the Court's order. Hercules filed
a petition to the U.S. Supreme Court requesting review and reversal of the 8th
Circuit Court ruling. This petition was denied on June 26, 1995, and the case
was remanded to the District Court for further proceedings.
On May 21, 1997, the Court issued a ruling that Uniroyal is liable and that
Standard Chlorine is not liable to Hercules for contribution. A trial on
allocation and damages among Hercules, Uniroyal, and the United States was
scheduled to begin October 1998. Through the filing of separate summary judgment
motions, Hercules and Uniroyal raised a number of defenses to the United States'
ability to recover its costs. On October 23, 1998, the Court denied those
motions and granted the United States' summary judgment motion, ordering
Hercules and Uniroyal to pay the United States approximately $103 million plus
any additional response costs incurred or to be incurred after July 31, 1997.
Hercules expects that this amount will be reduced by approximately $7 million,
the amount received by the United States in previous settlements with other
parties. Trial testimony on the issue of allocation between Hercules and
Uniroyal was completed on November 6, 1998. Once a final judgment has been
entered, Hercules expects to appeal the Court's determination with respect to
its liability, the United States' costs, the divisibility of harm issue, and
Standard Chlorine's liability.
At December 31, 1998, the accrued liability 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.
- 23 -
<PAGE> 24
Hercules does not anticipate that its 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.
Litigation:
The company 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 was a defendant in three Qui Tam (Whistle Blower) lawsuits brought by
former employees of the Aerospace business sold to Alliant Techsystems, Inc. in
March 1995. Among the allegations made in the three lawsuits were allegations
relating to submission of false claims and records under various government
contracts, delivery of defective products, a deficient quality control program,
mischarging of work performed under government contracts, misuse of government
equipment, other acts of financial mismanagement, and wrongful termination
claims. The government, after investigation of the allegations, declined to
intervene in two of these lawsuits and partially intervened in the third. In May
1998, Hercules announced that it had agreed to settle the first lawsuit. The
settlement was approved by the court and the case was dismissed in July 1998.
In August 1998, the parties to the second lawsuit reached a tentative
settlement, subject to approval of the court. Although it did not intervene in
the case, the U.S. Department of Justice (DOJ) objected to approval of the
tentative settlement, arguing that Hercules should only be released from claims
that the government contended were actually investigated, and that the proposed
allocation of settlement proceeds between False Claims Act claims and wrongful
Termination Claims should be revised to attribute a higher percentage of
recovery to claims arising under the False Claims Act. On February 9, 1999, the
court entered a judgment approving the settlement and dismissing the lawsuit.
The DOJ has 60 days from that date in which to file a Notice of Appeal, if it
chooses to do so.
In February 1998, the parties to the third lawsuit reached a tentative
settlement, which has since been finalized, under which all claims alleging
mischarging to the Intermediate Nuclear Forces Contract were settled. Other
portions of the complaint were not resolved by the settlement. In August
1998, the parties reached a tentative settlement of the remaining portions of
the complaint, subject to approval of the Court. The DOJ objected to approval of
the tentative settlement, arguing that Hercules should only be released from
claims that the government contended were actually investigated, and that the
settlement agreement should have contained certain provisions preventing Alliant
Techsystems, Inc., which was also a defendant in the lawsuit, from recovering
certain costs under its government contracts. On February 17, 1999, the Court
entered a judgment approving the settlement and dismissing the lawsuit. The DOJ
has 60 days from that date in which to file a Notice of Appeal, if it chooses to
do so.
As a result of these settlements, the company recognized charges of $4 million
and $62 million in 1997 and 1998, respectively.
In addition to the Jacksonville, Arkansas, site litigation described above, two
individuals have sued Hercules in a lawsuit captioned Jeffrey Shelton, Jr., et
al. v. Hercules Incorporated, Civil No. LR-C-97-131 (E.D. Ark. 1997). These
individuals seek medical monitoring and damages for loss of recreational
opportunities. They have brought a Resource Conservation and Recovery Act (RCRA)
citizens suit against Hercules seeking an injunction which would require
Hercules to fund or perform various environmental and health studies and pay for
any required remediation to the Bayou Meto. Trial is presently scheduled for
August 1999. Further, 19 individuals have sued Hercules in a matter entitled
Gary Graham, et al. v. Vertac Chemical Corporation and Hercules Incorporated,
No. LR-C-98-678 (E.D. Ark. 1998). These individuals seek damages for personal
injuries and diminution of property value as a result of alleged dioxin
contamination from the Jacksonville site. Trial is presently scheduled for
August 1999. Hercules denies liability in both actions, and Hercules intends to
vigorously defend itself.
BetzDearborn, along with Pacific Gas and Electric (PG&E), is a defendant in four
lawsuits involving in the aggregate approximately 2,350 plaintiffs pending in
the Superior Court of Los Angeles County, California (the Lawsuits). Plaintiffs
are comprised primarily of present and former PG&E employees, their families,
and residents living in the vicinity of the three PG&E facilities that are the
subject of the Lawsuits. Plaintiffs seek unspecified monetary damages (including
punitive damages) for personal injuries arising from alleged exposures to
chromate-based products sold or allegedly sold by Betz Laboratories, Inc.
(predecessor to BetzDearborn) to PG&E for use in the cooling towers located at
these facilities. The sales in question occurred or allegedly occurred at
various times between 1952 and the mid-1980s, depending upon the facility.
- 24 -
<PAGE> 25
In the Acosta, Aguilar and Aguayo cases, the parties have selected 20
plaintiffs and 2 alternatives whose claims will be tried together, and prior to
the claims for the remaining plaintiffs in the Lawsuits. It is anticipated that
the 20 plaintiffs' claims will be tried in late 1999. BetzDearborn denies any
legal liability to plaintiffs, believes it has substantial defenses, and intends
to contest the claims vigorously. BetzDearborn further believes that any claim
for punitive damages is without any legitimate basis in fact or law. The
Lawsuits are captioned as follows: Acosta, et al. v. Betz Laboratories, et al.,
No. BC 161 669 (1996); Adams, et al. v. Betz Laboratories, et al., No. BC 113
000 (1994); Aguilar, et al. v. Betz Laboratories, et al., No. BC 158 588 (1996);
and Aguayo et al. v. Betz Laboratories, et al.,No. BC 123 749 (1995).
Although both BetzDearborn and PG&E are named as defendants in each of the
Lawsuits, not all plaintiffs seek damages from both defendants. PG&E previously
settled a lawsuit brought by many of the same individuals who are plaintiffs in
the Adams lawsuit; as a result, PG&E will have no additional liability to those
plaintiffs.
In October 1998, BetzDearborn and PG&E settled a fifth lawsuit relating to
alleged exposure to chromate-based products sold or allegedly sold by Betz
Laboratories, Inc. to PG&E for use in cooling towers at one or more of the PG&E
facilities. That lawsuit was captioned Riep, et al. v. Betz Laboratories, et
al., No. 984695 (San Francisco County, 1997). The amount of the settlement was
not material.
BetzDearborn maintained insurance coverage for the purpose of securing
protection against alleged product and other liabilities, and certain of the
insurance carriers have undertaken to pay the cost of the defense of the
Lawsuits subject to various reservations of rights. BetzDearborn will pursue all
available insurance coverage to fund any damages payable to plaintiffs in
connection with the Lawsuits (excluding any punitive damages to the extent not
recoverable under BetzDearborn's insurance policies).
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.
23. CHANGE IN ACCOUNTING PRINCIPLE
In November 1997, FASB's Emerging Issues Task Force (EITF) reached a final
consensus on Issue 97-13, "Accounting for Costs Incurred in Connection With a
Consulting Contract That Combines Business Process Reengineering and Information
Technology Transformation." Activities deemed to be business process
reengineering include the following: current state assessments, configuring and
prototyping, process reengineering, and work force restructuring. The consensus
requires that the unamortized amounts of such costs previously capitalized as of
the beginning of the quarter, which includes November 20, 1997, be charged
during that quarter as the cumulative effect of a change in accounting
principle. The company adopted the consensus during the fourth quarter of 1997
and recorded a cumulative-effect adjustment of $5 million.
24. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
In 1998, Hercules adopted Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related Information." The
statement establishes new standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports. It also establishes standards
for related disclosure about products and services, geographic area, and major
customers. In compliance with SFAS 131 and with the acquisition of BetzDearborn,
the company has identified three reportable segments and has restated prior
years to conform with the 1998 presentation.
PROCESS CHEMICALS AND SERVICES: (Pulp and Paper and BetzDearborn.) Products and
services in this segment are designed to enhance customers' processes and
improve their manufacturing costs or environmental impact. Principal products
and markets include performance additives and water and process treatment
chemicals and related on-site services for a wide variety of industrial and
commercial applications including pulp and paper mills, refineries, chemical
plants, metals manufacturers, automobile assembly plants and makers of food and
beverages.
FUNCTIONAL PRODUCTS: (Aqualon and Food Gums.) Products from this segment are
principally derived from natural resources and are sold as key raw materials to
other manufacturers. Principal products and markets include water-soluble
polymers and natural gums, used as thickeners, emulsifiers and stabilizers for
water-based paints, oil and gas exploration, building materials, dairy and
bakery products and other processed food products such as jams, jellies and
meats.
CHEMICAL SPECIALTIES: (Resins and FiberVisions.) Products in this segment
provide low-cost, technology driven solutions to meet customer needs and market
demands. Principal products and markets include rosin and hydrocarbon resins for
- 25 -
<PAGE> 26
adhesives used in nonwoven fabrics, textile fibers, and adhesive tapes;
thermal-bond polypropylene staple fiber for disposable diapers and other
hygienic products; and automotive textiles.
The company evaluates performance and makes decisions based primarily on "Profit
from Operations" and "Capital Employed." Consolidated capital employed
represents the total resources employed in the company and is the sum of total
debt, trust preferred securities and stockholders' equity. Capital employed in
each reportable segment represents the net operating assets employed to conduct
business in that segment and generally includes working capital (excluding cash)
and property, plant and equipment. Other assets and liabilities, primarily
goodwill and other intangibles, not specifically allocated to business segments,
are reflected in "Reconciling Items" in the table below.
Hercules has no single customer representing greater than 10% of its revenues.
GEOGRAPHIC REPORTING
For geographic reporting, no single country, outside the United States, is
material for separate disclosure. However, because the company has significant
foreign operations, revenues and long-lived assets are disclosed by geographic
region.
Revenues are reported on a "customer basis," meaning that net sales are included
in the geographic area where the customer is located. Long-lived assets are
included in the geographic areas in which the producing entities are located.
Intersegment sales are eliminated in consolidation.
<TABLE>
<CAPTION>
(Dollars in millions)
PROCESS
CHEMICALS AND FUNCTIONAL CHEMICAL RECONCILING
INDUSTRY SEGMENTS SERVICES PRODUCTS SPECIALTIES ITEMS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Net sales $717 $863 $566 $ (1) $2,145
Profit (loss) from operations 131 215 75 (229)(a) 192
Equity in income of affiliated companies 10
Interest and debt expense 103
Other income (expense), net (22)
------
Income before income taxes 77
Capital employed 756 392 388 2,885 (d) 4,421
Capital expenditures 44 53 36 24 157
Depreciation and amortization 22 32 19 35 108
- -----------------------------------------------------------------------------------------------------------------------------------
1997
Net sales $443 $898 $526 $ (1) $1,866
Profit (loss) from operations 100 224 67 (163)(b) 228
Equity in income of affiliated companies 30
Interest and debt expense 39
Other income, net 374
------
Income before income taxes 593
Capital employed 138 355 168 723 (d) 1,384
Capital expenditures 22 47 30 20 119
Depreciation and amortization 11 34 13 18 76
- -----------------------------------------------------------------------------------------------------------------------------------
1996
Net sales $452 $924 $633 $ 51 (c) $2,060
Profit (loss) from operations 108 220 95 18 (c) 441
Equity in income of affiliated companies 21 32 53
Interest and debt expense 35
Other income, net 26
------
Income before income taxes 485
</TABLE>
- 26 -
<PAGE> 27
<TABLE>
<S> <C> <C> <C> <C> <C>
Capital employed 137 398 268 762 (d) 1,545
Capital expenditures 14 48 31 27 120
Depreciation and amortization 13 49 20 26 108
<CAPTION>
UNITED
GEOGRAPHIC AREAS STATES EUROPE AMERICAS ASIA PACIFIC TOTAL
(e)
- -----------------------------------------------------------------------------------------------------------------------------------
1998
<S> <C> <C> <C> <C> <C>
Net sales $ 944 $785 $258 $158 $2,145
Long-lived assets (f) 3,083 681 125 97 3,986
1997
Net sales 826 655 212 173 1,866
Long-lived assets (f) 387 309 19 16 731
1996
Net sales 929 726 223 182 2,060
Long-lived assets (f) 529 339 39 9 916
</TABLE>
(a) Includes costs for purchased in-process research and development,
facility closure and contract termination, employee termination benefits,
write-downs of property, plant and equipment, other integration expenses,
and amortization of goodwill and intangibles. (See Notes 14 and 15.)
(b) Primarily includes asset rationalizations, impairments and severance
costs. (See Note 15.)
(c) Includes revenues and profits pertaining to the Composite Products
business sold in June 1996.
(d) Assets and liabilities not specifically allocated to business segments,
primarily goodwill, intangibles and other long-term assets net of
liabilities.
(e) Ex-U.S.A.
(f) Long-lived assets include Property, plant and equipment, Goodwill and
Other intangible assets. In 1998, the goodwill and other intangible
assets related to the BetzDearborn acquisition are reflected in the
United States region. Once the purchase price allocation is completed,
these assets will be reported in the appropriate regions.
- 27 -
<PAGE> 28
REPORT OF INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows present fairly, in all material respects, the financial position
of Hercules Incorporated and subsidiary companies at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards that require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 23 to the financial statements, in 1997, the company
changed its method of accounting for costs incurred in connection with its
enterprise software installation.
Philadelphia, Pennsylvania
February 19, 1999
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