HERCULES INC, 10-Q, 2000-11-14

HERCULES INC
10-Q, 2000-11-14
MISCELLANEOUS CHEMICAL PRODUCTS

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<PAGE> 1

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2000
Commission file number 1-496

HERCULES INCORPORATED

A Delaware corporation
I.R.S. Employer Identification No. 51-0023450
Hercules Plaza
1313 North Market Street
Wilmington, Delaware 19894-0001
Telephone: 302-594-5000

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

Yes X No ___
----

As of November 9, 2000, 107,434,824 shares of registrant's common stock
were outstanding.

<PAGE> 2

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

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

<TABLE>
<CAPTION>
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----

<S> <C> <C> <C> <C>
Net sales .................................................... $815 $828 $2,435 $2,467
Cost of sales................................................. 463 460 1,375 1,354
Selling, general, and administrative expenses................. 210 188 613 578
Research and development...................................... 20 21 61 62
Goodwill and intangible asset amortization.................... 20 20 60 60
Other operating (income) expenses............................. (105) 1 (83) 14
---- ---- ---- ----

Profit from operations........................................ 207 138 409 399

Equity in income of affiliated companies...................... - - - 1
Interest and debt expense..................................... 42 38 116 145
Preferred security distributions of subsidiary trusts......... 23 16 69 33
Other income (expense), net................................... (13) (2) (14) 5
---- ---- ---- ----

Income before income taxes.................................... 129 82 210 227
Provision for income taxes.................................... 54 25 83 76
---- ---- ---- ----

Net income.................................................... $75 $57 $127 $151
=== === ==== ====

Earnings per share:
Basic................................................. $0.70 $0.54 $1.19 $1.48
===== ===== ===== =====
Diluted $0.70 $0.54 $1.18 $1.47
===== ===== ===== =====

Dividends per share........................................... $0.08 $0.27 $0.62 $0.81
===== ===== ===== =====
</TABLE>

See accompanying notes to financial statements.

<PAGE> 3

HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
(Dollars in millions) (Unaudited)
September 30, December 31,
2000 1999
---- ----
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents.............................. $ 48 $ 63
Accounts and notes receivable, net..................... 584 635
Other current assets................................... 90 131
Inventories
Finished products............................... 171 187
Materials, supplies, and work in process........ 138 193
Deferred income taxes.................................. 146 129
------ ------
Total current assets................................... 1,177 1,338
----- -----

Property, plant, and equipment................................ 2,541 2,978
Accumulated depreciation and amortization..................... (1,424) (1,657)
------- -------
Net property, plant, and equipment............................ 1,117 1,321
Goodwill and other intangible assets (net of
accumulated amortization - 2000, $190; 1999, $130) ......... 2,415 2,570
Other assets ................................................ 721 667
-------- -------
Total assets........................................... $5,430 $5,896
====== ======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable....................................... $221 $ 320
Accrued expenses....................................... 478 526
Short-term debt........................................ 685 678
Income taxes payable................................... 78 35
----- --------
Total current liabilities.............................. 1,462 1,559

Long-term debt................................................ 1,470 1,777
Deferred income taxes......................................... 263 287
Postretirement benefits and other liabilities................. 380 418

Company-obligated preferred securities of
subsidiary trusts........................................ 992 992
Stockholders' equity
Common stock (shares issued: 2000 -
159,984,444; 1999 - 159,976,730).................... 83 83
Additional paid-in capital............................. 731 757
Unearned compensation.................................. (117) (123)
Other comprehensive losses............................. (127) (44)
Retained earnings...................................... 2,187 2,125
----- -----
2,757 2,798
Reacquired stock, at cost (shares: 2000 -
52,514,906; 1999 - 53,587,365)..................... (1,894) (1,935)
------- -------
Total stockholders' equity............................. 863 863
------ ------
Total liabilities and stockholders' equity............. $5,430 $5,896
====== ======
</TABLE>

See accompanying notes to financial statements.

<PAGE> 4

HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW

<TABLE>
<CAPTION>
(Dollars in millions) (Unaudited)
Nine Months
Ended
September 30,

2000 1999
---- ----

<S> <C> <C>
Net cash provided by operations................................................ $ 86 $ 158
------- -------

CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................................... (155) (120)
Proceeds of investment and fixed asset disposals............................... 416 22
Acquisitions, net of cash acquired ............................................ (6) (10)
Other, net..................................................................... (22) (25)
------- --------
Net cash provided by (used in) investing activities..................... 233 (133)
------- --------

CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds........................................................ 527 239
Long-term debt repayments...................................................... (838) (1,076)
Change in short-term debt...................................................... 54 39
Payment of underwriting fees................................................... -- (20)
Proceeds from issuance of subsidiary trust preferred securities................ -- 622
Proceeds from issuance of warrants -- 90
Common stock issued............................................................ 10 180
Common stock reacquired........................................................ (1) (4)
Proceeds from issuance of subsidiary preferred stock........................... -- 12
Dividends paid................................................................. (86) (83)
-------- ---------
Net cash used in financing activities................................... (334) (1)
-------- ---------

Effect of exchange rate changes on cash........................................ -- (4)
--------- ---------

Net increase (decrease) in cash and cash equivalents........................... (15) 20
Cash and cash equivalents - beginning of period................................ 63 68
--------- ---------
Cash and cash equivalents - end of period...................................... $ 48 $ 88
========= =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized).................................... $ 107 $ 141
Preferred security distributions of subsidiary trusts................... 62 20
Income taxes............................................................ 13 48
Noncash investing and financing activities:
Incentive and other employee benefit plan stock issuances............... 12 8
Conversions of debentures............................................... -- 1
Acquisition of minority interest........................................ (11) --
</TABLE>

See accompanying notes to financial statements.

<PAGE> 5

HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
(Dollars in millions)

(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----

<S> <C> <C> <C> <C>
Net income ................................................... $75 $ 57 $127 $151

Foreign currency translation, net of tax...................... (18) (44) (83) (41)
---- ---- ---- ----

Comprehensive income (loss)................................... $ 57 $ 13 $ 44 $110
==== ==== ==== ====
</TABLE>

See accompanying notes to financial statements.

<PAGE> 6

HERCULES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

1. These condensed consolidated financial statements are unaudited, but in the
opinion of management include all adjustments necessary to present fairly
Hercules' financial position and results of operations for interim periods.
These condensed financial statements should be read in conjunction with the
accounting policies, financial statements, and notes included in our annual
report on Form 10-K for the year ended December 31, 1999. Certain prior period
amounts have been reclassified to conform to the current period presentation.

Effective with the second quarter 2000, we changed our policy regarding the
classification of shipping and handling. Costs for shipping and handling that
were previously reported as a direct reduction of sales revenues are now being
reported as a component of cost of sales. Accordingly, net sales and cost of
sales for prior periods have been restated to reflect this change for purposes
of comparability. Net sales and cost of sales for the three and nine months
ended September 30, 1999 were increased by $15 million and $46 million,
respectively. There is no impact on operating profits as a result of this
change.

2. Revenue Recognition - Revenue is recognized generally upon shipment of
goods and passage of title. Service revenue is recognized as services are
performed.

3. The following table shows the amounts used in computing earnings per share
(EPS) and the effect on income and the weighted-average number of shares of
dilutive potential common stock:

(Amounts are in millions, except per share data): Three Months Nine Months
Ended Ended
September 30, September 30,
----------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----

Basic
<S> <C> <C> <C> <C>
Net income...................................... $ 75 $ 57 $127 $ 151
Weighted-average shares outstanding............. 107.4 104.7 107.1 102.2
----- ----- ----- -----
EPS............................................. $ 0.70 $ 0.54 $ 1.19 $1.48
====== ====== ====== =====
Diluted
Net income...................................... $ 75 $ 57 $127 $151
Interest on convertible debentures.............. -- -- -- --
----- ----- ------ ------
Net income for EPS calculation.................. $ 75 $ 57 $127 $151
==== ==== ===== ====

Weighted-average shares outstanding............. 107.4 104.7 107.1 102.2
Options......................................... -- .5 -- .4
Debentures...................................... .2 .2 .2 .2
----- ----- ------ ------
Adjusted weighted-average shares................ 107.6 105.4 107.3 102.8
----- ----- ----- -----
EPS............................................. $0.70 $0.54 $ 1.18 $ 1.47
===== ===== ====== ======
</TABLE>

<PAGE> 7

4. Cost and expenses include depreciation as follows:

<TABLE>
<CAPTION>
(Dollars in millions) September 30,
------------
2000 1999
---- ----
<S> <C> <C>
Three months ended $ 32 $ 36
Nine months ended ............................................... 99 104
</TABLE>

5. Other operating (income) expenses for both the quarter and nine months
ended September 30, 2000 includes a gain of $168 million from the sale of the
Food Gums Business. On September 28, 2000, we sold our Food Gums division to CP
Kelco, a joint venture with Lehman Brothers Merchant Banking Partners II, L.P.,
which contributed approximately $300 million in equity. We received
approximately $395 million in cash proceeds, recorded certain selling and tax
expenses of approximately $77 million and retained a 28.6% equity position in CP
Kelco. CP Kelco simultaneously acquired the Kelco biogums business of Pharmacia
Corporation (formerly Monsanto Corporation).

Partially offsetting the gain from the sale of the Food Gums Business is
$51 million of charges for asset impairments, primarily in the FiberVisions
business and $9 million, net, for restructuring plans for both the quarter and
nine months ended September 30, 2000. Environmental charges of $1 million and $7
million, respectively, were incurred during the corresponding periods, offset by
$11 million in recoveries of insurance and environmental claims for the nine
months ended September 30, 2000. Additionally, the quarter and nine months ended
September 30, 2000 include charges of $1 million and $25 million, respectively,
associated with the sale of the nitrocellulose business, and $1 million and $4
million, respectively, associated with the integration of the BetzDearborn
acquisition.

The quarter and nine months ended September 30, 1999 include integration
charges of $4 million and $14 million, respectively, primarily for employee
retention, consulting, legal, and other costs associated with the BetzDearborn
acquisition and environmental charges of $1 million and $5 million,
respectively, partially offset by a $4 million reversal of restructuring
charges.

6. Interest and debt costs are summarized as follows:

<TABLE>
<CAPTION>
(Dollars in millions)
Three Months Nine Months
Ended Ended
September 30, September 30,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----

<S> <C> <C> <C> <C>
Costs incurred................................................ $ 45 $ 41 $124 $154
Amount capitalized............................................ 3 3 8 9
---- ---- ---- ----
Interest expense.............................................. $ 42 $ 38 $116 $145
==== ==== ==== ====
</TABLE>

7. Other income (expense), net, for the quarter and nine months ended
September 30, 2000 includes losses of $4 million and $2 million, respectively,
associated with the sale of properties of the BetzDearborn division.
Additionally, both periods include charges of $4 million and $6 million,
respectively, for litigation and asbestos claims settlements. Offsetting these
expenses is interest income of $2 million and $6 million, for the quarter and
nine months ended September 30, 2000.

Other income (expense), net for the quarter and nine months ended September
30, 1999 includes legal accruals of $1 million and $3 million, respectively.
Additionally, the nine months includes $9 million in gains on sales of
investments.

8. The consolidated balance sheet reflects liabilities for employee severance
benefits and other exit costs, primarily related to the 1998 plans initiated
upon the acquisition of BetzDearborn. In addition, we

<PAGE> 8

terminated approximately 100 employees in connection with the sale of our
nitrocellulose business (see Note 5). This resulted in the addition of
approximately $4 million in severance benefits to the accrued liability. In the
third quarter of 2000, we committed to plans relating to the restructuring of
our Process Chemicals & Services segment and corporate realignment due to the
divestiture of our non-core businesses. This resulted in the addition of
approximately $13 million in severance benefits to the accrued liability. As a
result of these plans, we estimate approximately 1,665 employees will be
terminated, of which approximately 1,230 employee terminations have occurred
since inception of the aforementioned plans.

Pursuant to the plans in place, approximately 245 employees were terminated
during the nine months ended September 30, 2000. Cash payments during 2000
included $43 million for severance benefits and other exit costs. A
reconciliation of activity with respect to the liabilities established for these
plans is as follows:

<TABLE>
<CAPTION>
(Dollars in millions) Nine Months
Ended
September 30,
-------------
2000 1999
---- ----

<S> <C> <C>
Balance at beginning of year..................................... $77 $130
Additional termination benefits........................... 17 8
Reversals................................................ (4) (8)
Cash payments............................................. (43) (33)
--- ----

Balance at end of period......................................... $47 $ 97
=== ====
</TABLE>

Severance benefit payments are based on years of service and generally
continue for three months to 24 months subsequent to termination. We expect to
substantially complete remaining actions under the plans by the end of 2001.

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

<TABLE>
<CAPTION>
(Dollars in millions) September 30, December 31,
2000 1999
---- ----
SHORT-TERM:
<S> <C> <C>
Banks............................................................ $ 79 $ 26
Current maturities............................................... 606 652
--- ---
$685 $678
==== ====
</TABLE>

At September 30, 2000, we had $252 million of unused lines of credit that
may be drawn as needed. Lines of credit in use at September 30, 2000 were $64
million.

<PAGE> 9

<TABLE>
<CAPTION>
(Dollars in millions) September 30, December 31,
2000 1999
---- ----
LONG-TERM:
<S> <C> <C>
6.15% notes due 2000............................................................ $ -- $ 100
6.60% notes due 2027 ........................................................... 100 100
7.85% notes due 2000............................................................ -- 25
6.625% notes due 2003 .......................................................... 125 125
8% convertible subordinated debentures due 2010 ................................ 3 3
Term loan tranche A due in varying amounts through 2003......................... 1,001 1,187
Term loan tranche C due 2000.................................................... 318 318
Revolving credit agreement due 2003............................................. 334 336
ESOP debt due in varying amounts through 2009 .................................. 102 106
Term notes at various rates from 5.23% to 9.60% due in varying amounts
through 2006 ........................................... 66 80
Variable rate loans............................................................. 23 41
Other........................................................................... 4 8
------ ------
2,076 2,429
Current maturities of long-term debt............................................ (606) (652)
------ ------
Net long-term debt.............................................................. $1,470 $1,777
====== ======
</TABLE>

In 1998, we entered into a $3,650 million credit facility with a syndicate
of banks which includes varying maturity term loans totaling $2,750 million, of
which $1,319 million is still outstanding at September 30, 2000. In addition,
the senior credit facility includes a $900 million revolving credit agreement,
of which $334 million is outstanding at September 30, 2000. Within this
revolving senior credit facility, a Canadian subsidiary of ours can borrow up to
U.S. $100 million from select lenders in Canada in Canadian dollars. As of
September 30, 2000, $84 million was outstanding under this facility. As of
September 30, 2000, $566 million of the multi-currency revolver is available for
use.

At September 30, 2000, proceeds from the sale of our Food Gums division
were applied against the revolving credit agreement. These proceeds will
ultimately be used to repay the term loan tranche C.

In July 2000, we secured an amendment to one of the financial covenants
included in our senior credit facility. The maximum leverage ratio, defined as
debt/EBITDA, was amended for the period April 1, 2000 through June 30, 2000.
During the third quarter of 2000, we did not meet the interest coverage ratio.
In September 2000, we were granted waivers of some of the financial covenants in
our senior credit facility and our ESOP credit facility through November 15,
2000. Effective November 14, 2000 our senior credit facility was permanently
amended (the "third amendment") to (i) modify certain financial covenants; (ii)
change the mandatory prepayment provisions; and (iii) provide for security,
among other things. The senior credit facility amendments were conditioned upon,
among other things, the issuance by us of the 11 1/8% senior notes and the term
loan tranche D (described below). The amendment to the senior credit facility
increased the interest rate on amounts outstanding under the revolving credit
agreement, term loan tranche A and term loan tranche C to LIBOR + 2.25%. The
senior credit facility and ESOP credit facility, as amended, will be secured by
liens on our property and assets (and those of our Canadian subsidiaries), a
pledge of the stock of substantially all of our domestic subsidiaries and 65% of
the stock of foreign subsidiaries directly owned by us and a pledge of domestic
intercompany indebtedness. In connection with the amendments to the senior
credit facility and the ESOP credit facility, our 6.60% notes due 2027 and our
6.625% notes due 2003 will be secured as required by the indenture under which
such notes were issued. As a result of the amendments, the company was in
compliance with all of the covenants.

On November 14, 2000, in conjunction with and conditioned upon the
effectiveness of the third amendment, we borrowed $375 million under the senior
credit facility (term loan tranche D) and we issued $400 million of senior notes
due November 15, 2007.

<PAGE> 10

2001. The senior notes will be guaranteed by each of Hercules' current and
future wholly-owned domestic restricted subsidiaries. At any time prior to
November 15, 2003, Hercules may, on any one or more occasions, redeem up to 35%
of the aggregate principal amount of the senior notes issued at a redemption
price of 111.125% of the principal amount, plus accrued and unpaid interest and
liquidated damages, if any, to the redemption date, with the net cash proceeds
of one or more Public Equity Offerings; provided that (i) at least 65% of the
aggregate principal amount of the senior notes issued under the indenture
remains outstanding immediately after the occurrence of such redemption
(excluding notes held by Hercules and its Subsidiaries); and (ii) the redemption
occurs within 45 days of the date of the closing of such Public Equity Offering.
At any time prior to November 15, 2001, Hercules may also redeem all or a part
of the senior notes upon the occurrence of a Change of Control at a redemption
price equal to 111.125% of the principal amount of senior notes redeemed, plus
accrued and unpaid interest and liquidated damages, if any, to the date of
redemption. Except as described above, the senior notes will not be redeemable
at Hercules' option prior to maturity. Hercules is not required to make
mandatory redemption or sinking fund payments with respect to the senior notes.

The proceeds of the term loan tranche D and the senior notes will be used
to reduce borrowings under our revolving credit agreement, repay the Redeemable
Hybrid INcome Overnight Securities, the Floating Rate Preferred Securities,
reduce the current portion of term loan tranche A, and pay fees and expenses
relating to the 11 1/8% senior notes offering.

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

<TABLE>
<CAPTION>
(Dollars in millions) September 30, December 31,
2000 1999
---- ----

<S> <C> <C>
Redeemable Hybrid INcome Overnight Shares.................................. $200 $200
9.42% Trust Originated Preferred Securities................................ 362 362
6 1/2% CRESTS Units 260 260
Floating Rate Preferred Securities......................................... 170 170
---- ----
$992 $992
==== ====
</TABLE>

REDEEMABLE HYBRID INCOME OVERNIGHT SHARES

In November 1998, Hercules Trust V, our wholly owned subsidiary ("Trust
V"), completed a private placement of $200 million Redeemable Hybrid INcome
Overnight Shares (RHINOS). RHINOS are short-term auction-rate reset preferred
securities of Trust V, which used the proceeds from the RHINOS sale to purchase
junior subordinated notes of Hercules. Hercules pays interest on the junior
subordinated notes, and Trust V pays distributions on the RHINOS at a floating
rate initially equal to LIBOR plus 1.75%, which is reset on a quarterly basis.
The RHINOS are guaranteed by Hercules.

Pursuant to amendments to the RHINOS agreements executed on February 9,
2000: (1) the interest rate on the RHINOS was reduced to LIBOR plus 1.5%, and
(2) the RHINOS may be remarketed at any time at the option of the holder. If the
holder elects to initiate a remarketing, Hercules and Trust V have the right to
redeem the RHINOS at a price equal to the aggregate liquidation amount of the
RHINOS, plus accumulated and unpaid distributions. Upon a successful
remarketing, the redemption date of the RHINOS will be extended for an
additional year. If the RHINOS are not remarketed, they will be redeemed by
Hercules and Trust V on February 9, 2002. On November 7, 2000, the terms of the
RHINOS were amended to provide that the holder of the RHINOS could require us to
repurchase them at any time after 11:59 p.m. on November 15, 2000 for $200
million, the aggregate liquidation amount of the RHINOS, plus any accrued but
unpaid distributions. We will repay the RHINOS with a portion of the
proceeds of the 11 1/8% senior notes offering.

<PAGE> 11

Trust Originated Preferred Securities

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

Trust I distributes quarterly cash payments it receives from Hercules on
the debentures to its preferred security holders at an annual rate of 9.42% on
the liquidation amount of $25 per preferred security. We may defer interest
payments on the debentures at any time, for up to 20 consecutive quarters. If
this occurs, Trust I will also defer distribution payments on its preferred
securities. The deferred distributions, however, will accumulate distributions
at a rate of 9.42% per annum.

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

CRESTS UNITS

In July 1999, we completed a $350 million public offering of 350,000 CRESTS
Units with Hercules Trust II, a wholly owned subsidiary trust ("Trust II").
Trust II used the proceeds from the sale of its preferred securities to purchase
junior subordinated deferrable interest debentures of Hercules. Each CRESTS Unit
consists of one preferred security of Trust II and one warrant to purchase
23.4192 shares of Hercules common stock at an initial exercise price of $1,000
(equivalent to $42.70 per share). The preferred security component of the CRESTS
Units was initially valued at $741.46 per unit and the warrant component of the
CRESTS Units was initially valued at $258.54 per warrant. The preferred security
and warrant components of each CRESTS Unit may be separated and transferred
independently. The warrants may be exercised, subject to certain conditions, at
any time before March 31, 2029, unless there is a reset and remarketing event.
No reset and remarketing event will occur before July 27, 2004, unless all of
our common stock is acquired in a transaction that includes cash for a price
above a predetermined level. As of September 30, 2000, no warrants had been
exercised.

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

Issuance costs related to the preferred security component of the CRESTS
Units are being amortized over the life of the security and costs related to the
warrants were charged to additional paid-in capital.

FLOATING RATE PREFERRED SECURITIES

In December 1999, Hercules Trust VI, our wholly owned subsidiary trust
("Trust VI"), completed a $170 million private offering of 170,000 shares of
Floating Rate Preferred Securities. Trust VI invested the proceeds from the sale
of its preferred securities in an equal principal amount of Floating Junior
Subordinated Deferrable Interest Debentures due 2000 of Hercules.

<PAGE> 12

Trust VI distributes quarterly cash payments it receives from Hercules on
the debentures to its preferred security holders at an annual rate of LIBOR plus
2.45%, which is reset on a quarterly basis, on the liquidation amount of $1,000
per preferred securities. We may defer interest payments on the debentures at
any time during the term of the preferred securities. If this occurs, Trust VI
will also defer distribution payments on the preferred securities. The deferred
distributions, however, will accumulate distributions at a rate of LIBOR plus
2.45%.

Trust VI will redeem the preferred securities when the debentures are
repaid at maturity on December 29, 2000. Hercules guarantees the obligations of
Trust VI on the preferred securities. Hercules will use a portion of the
proceeds of the 11 1/8% senior notes offering to repay the debentures.

11. The Board of Directors has authorized the repurchase of up to 74,650,000
shares of our common stock. Of this amount, 6,150,000 shares are intended for
various employee benefit programs. Through September 30, 2000, a total of
66,695,094 shares (including 6,150,000 shares for employee benefit programs) had
been purchased in the open market at an average price of $37.29 per share. The
indenture governing the senior notes will significantly restrict future
repurchases.

12. PENDING ACCOUNTING PRONOUNCEMENTS

In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, is to be effective by
the fourth quarter of 2000. While this SAB could impact the recognition of
revenue with respect to certain contractual arrangements, as well as sales in
certain foreign jurisdictions, we expect the impact on our profit from
operations to be immaterial.

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FASB 133). FASB 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
This statement, as amended by Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," and Statement No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. We have not yet
determined the impact that the adoption of FASB 133 will have on our financial
statements.

13. COMMITMENTS AND CONTINGENCIES

ENVIRONMENTAL

Hercules has been identified as a potentially responsible party (PRP) by U.S.
federal and state authorities, or by private parties seeking contribution, for
the cost of environmental investigation and/or cleanup at numerous sites. As of
September 30, 2000, the estimated range of the reasonably possible share of
costs for the investigation and remediation is between $72 million and $234
million. These cost estimates are based upon the facts and circumstances as they
are presently known. 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 from 0 to 30 years.

Hercules becomes aware of sites in which it may be named a PRP in
investigatory and/or remedial activities through correspondence from the U.S.
Environmental Protection Agency, or other government agencies, or through
correspondence from previously named PRPs, who either request

<PAGE> 13

information or notify us of our potential liability. We have established
procedures for identifying environmental issues at our plant sites. In addition
to environmental audit programs, we have environmental coordinators who are
familiar with environmental laws and regulations and act as a resource for
identifying environmental issues.

United States v. Vertac Chemical Corporation, USDA No. LR-C-92-137 (E.D. Ark.)

We refer you to our Annual Report on Form 10-K for the period ended
December 31, 1999 for a discussion of the ongoing litigation over liability at
the Jacksonville, Arkansas site. As previously disclosed in our Form 10-K, we
appealed a final judgment on the liability and allocation of response costs
between Uniroyal and Hercules. Oral argument before the United States Court of
Appeals for the Eighth Circuit took place on June 12, 2000. We await a decision
on such appeal.

Hercules Incorporated v. The Aetna Casualty & Surety Company, et al., Del.
Super., C.A. No. 92C-10-105 and 90C-FE-195-CV (consolidated)

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 above) was completed. The jury returned a "Special Verdict Form" with
findings that, in conjunction with the Court's other opinions, were used by the
Court to enter a judgment in August 1999. The judgment determined the amount of
Hercules' recovery for past cleanup expenditures and stated that Hercules is
entitled to similar coverage for costs incurred since September 30, 1997, and in
the future. Since entry of the Court's August 1999 order, Hercules has entered
into settlement agreements with several of its insurance carriers and has
recovered certain settlement monies. The terms of those settlements and amounts
recovered are confidential. Hercules has appealed certain of the trial court's
rulings to the Delaware Supreme Court. Oral argument is anticipated in early
2001.

Brunswick, Georgia Consent Order and Related Matters

We refer you to our Annual Report on Form 10-K for the period ended
December 31, 1999, for a discussion on the Brunswick, Georgia, consent order and
related matters. As noted therein, in February 1999, the Brunswick, Georgia
plant was subject to a multi-media inspection conducted jointly by the U.S.
Environmental Protection Agency (EPA) and the Georgia Environmental Protection
Department (EPD). In March 2000, the EPD sent a proposed Consent Order to
Hercules to resolve the potential areas of non-compliance identified in the
February 1999 multi-media inspection; that proposed Consent Order included a
penalty of $330,000. In August 2000, Hercules entered into a Consent Order with
EPD to resolve these potential areas of non-compliance and to pay a penalty of
$160,000.

As also noted in our Annual Report on Form 10-K, our Hattiesburg,
Mississippi plant was also subject to a multi-media inspection. In March 2000,
the Mississippi Department of Environmental Quality (DEQ) sent a proposed
Consent Order to Hercules which included a penalty of $232,500. The proposed
penalty was subsequently reduced to $26,800, plus $57,200 in Supplemental
Environmental Projects to be negotiated with DEQ. This matter is in the process
of being finalized.

At September 30, 2000, the accrued liability of $72 million for
environmental remediation represents management's best estimate of the probable
and reasonably estimable costs related to environmental remediation. The extent
of liability is evaluated quarterly. The measurement of the liability is
evaluated based on currently available information, including the process of
remedial investigations at each site and the current status of negotiations with
regulatory authorities regarding the method and extent of apportionment of costs
among other PRPs. 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.

<PAGE> 14

LITIGATION

We refer you to our Annual Report on Form 10-K for the period ended
December 31, 1999 for a discussion of the following cases: Coley, et al. v.
Hercules Incorporated, et al., No. 98 VSO 140933B (Fulton County, Georgia);
Thomas & Thomas Rodmakers v. Newport Adhesives and Composites, Case No.
CV-99-07796-GHK (U.S. District Court, Central District of California); and Chang
Ok-Lee, Individually and as Representative of a Class and Thomas Wolfe,
Individually and as Representative of a Class v. Dow Chemical Co., et al., Civil
Action No. 99-6127 (U.S. District Court, Eastern District of Pennsylvania).
Except as noted below, there have been no material developments in the ongoing
litigation referred to above.

Since the filing of our Form 10-K, the court in the Coley case dismissed
the other co-defendants, Georgia-Pacific and Allied Signal, without prejudice.
In September 2000, David T. Smith, a former Hercules employee and former plant
manager of the Brunswick plant, was dismissed by the Court with prejudice. On
July 18, 2000, we were served with a complaint in a case captioned Erica Nicole
Sullivan, et al. v. Hercules Incorporated and David T. Smith, Jr., Civil Action
File No. 00-1-05463-99 (Cobb County, Georgia). Based on the allegations
contained in the complaint, this matter is very similar to the Coley litigation,
and is brought on behalf of approximately 700 plaintiffs for alleged personal
injury and property damage arising from the discharge of hazardous waste from
Hercules' plant. We deny any liability to plaintiffs, and we will vigorously
defend this case.

At September 30, 2000, the consolidated balance sheet reflects a current
liability of approximately $22 million for litigation (including claims but
excluding matters covered in the Environmental section of this Report). This
amount represents management's best estimate of the probable and reasonably
estimable losses related to litigation. The extent of the liability is evaluated
quarterly. While it is not feasible to predict the outcome of pending
litigation, Hercules does not anticipate that its financial condition will be
materially affected by the ultimate resolution of pending litigation in excess
of amounts accrued, although quarterly or annual operating results could be
materially affected.

OTHER MATTERS

In January 2000, Hercules was served with a Grand Jury Subpoena by the
United States Department of Justice seeking the production of documents in
connection with the sale and pricing of carbon fiber and carbon prepreg by
Hercules' former Composite Products Division. Hercules sold its Composite
Products Division to Hexcel Corporation in April 1996. Hercules is cooperating
with the Department of Justice in responding to that subpoena. This
investigation concerns the same subject matter as the Thomas & Thomas Rodmakers
v. Newport Adhesives and Composites litigation referred to above and described
in our Form 10-K.

<PAGE> 15

14. SEGMENT INFORMATION

<TABLE>
<CAPTION>
(Dollars in millions) Three Months Nine Months
Ended Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
Net Sales:
<S> <C> <C> <C> <C>
Process Chemicals and Services................ $443 $436 $1,292 $1,285
Functional Products........................... 199 220 614 656
Chemical Specialties.......................... 173 173 530 527
Reconciling Items............................. - (1) (1) (1)
----- ------ -------- ------
Consolidated........................... $815 $828 $2,435 $2,467
==== ==== ======= ======

Profit (Loss) from Operations:
Process Chemicals and Services................ $ 74 $ 91 $ 232 $ 258
Functional Products........................... 45 53 150 164
Chemical Specialties.......................... 13 19 46 68
Reconciling Items............................. 75 (a) (25)(b) (19) (a) (91) (b)
----- ----- ------ ------
Consolidated........................... $207 $138 $ 409 $ 399
==== ==== ====== =====
</TABLE>

(a) Includes the following for the quarter and nine-month period ended
September 30, 2000, respectively: goodwill and intangible and other asset
amortization of $22 million and $65 million, integration costs of $1
million and $4 million, environmental charges of $1 million and $7 million,
net restructuring charges of $9 million for both periods, a gain on the
sale of the Food Gums business of $168 million for both periods, asset
impairment charges of $51 million for both periods, and $9 million and $37
million of other corporate charges not specifically allocated to business
segments. Additionally, $1 million and $25 million of charges for the
quarter and nine-month period ended September 30, 2000, respectively,
associated with the sale of the nitrocellulose business, and $11 million of
recoveries of insurance and environmental claims for the nine-month period
ended September 30, 2000 are included.

(b) Includes the following for the quarter and nine-month period ended
September 30, 1999, respectively: goodwill and intangible and other asset
amortization of $21 million and $62 million, integration charges of $4
million and $14 million, environmental charges of $1 million and $5
million, net restructuring reversals of $4 million for both periods, and $3
million and $14 million of other corporate items not specifically allocated
to business segments.

15. PENDING TRANSACTIONS

In September 2000, we announced that Eastman Chemical Company had signed a
letter of intent to purchase our hydrocarbon resins division and select portions
of our rosin resins division. In June 2000, one of our joint venture partners
exercised a right of first refusal to purchase the ink toner portion of our
Resins division. We plan to have fully divested our entire Resins division by
the end of the first quarter of 2001.

In addition, we are continuing to explore alternatives regarding our
FiberVisions business and are in discussions with respect to the divestiture of
this business.

On October 27, 2000, we announced that we had determined to consider the
full range of strategic alternatives available to us, including the possible
sale of the company. We also announced that, to that end, we had retained
Goldman, Sachs & Co. to assist the board of directors in its identification and
evaluation of various alternatives.

<PAGE> 16

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.

DIVESTITURES

On September 28, 2000, we sold our Food Gums division to CP Kelco, a joint
venture with Lehman Brothers Merchant Banking Partners II, L.P., which
contributed approximately $300 million in equity. We received approximately $395
million in cash proceeds, recorded certain selling and tax expenses of
approximately $77 million and retained a 28.6% equity position in CP Kelco. CP
Kelco simultaneously acquired the Kelco biogums business of Pharmacia
Corporation (formerly Monsanto Corporation).

Notwithstanding the foregoing, the following discussion describes the
results of operations and financial condition of the three segments and five
divisions that comprised Hercules' business at September 30, 2000.

RESULTS OF OPERATIONS

Within the following discussion, unless otherwise stated, "quarter" and
"nine-month period" refer to the third quarter of 2000 and the nine months ended
September 30, 2000. All comparisons are with the corresponding periods in the
previous year, unless otherwise stated.

The table below reflects Net sales and Profit from operations for the
quarters and nine months ended September 30, 2000 and September 30, 1999,
respectively. For these periods, Net sales and Profits from operations for the
Functional Products segment have been adjusted to eliminate the results of the
Food Gums business, which was sold in September 2000, and the Nitrocellulose
business, which was sold in June 2000. The above adjustments are provided to
facilitate comparisons.

<TABLE>
<CAPTION>
(Dollars in millions) Three Months Nine Months
Ended Ended
September 30, September 30,
--------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----

Net Sales by Industry Segment:
<S> <C> <C> <C> <C>
Process Chemicals and Services................ $443 $436 $1,292 $1,285
Functional Products........................... 145 147 431 436
Chemical Specialties.......................... 173 173 530 527
Reconciling Items............................. - (1) (1) (1)
---- ---- ------ ------
Total.................................. $761 $755 $2,252 $2,247
==== ==== ====== ======

Profit (Loss) from Operations:
Process Chemicals and Services................ 74 $ 91 $232 $ 260
Functional Products........................... 37 43 120 134
Chemical Specialties.......................... 13 21 46 70
Reconciling Items............................. (31)(a) (25)(b) (109)(a) (81)(b)
---- ---- ---- -------
Total.................................. $ 93 $130 $289 $ 383
==== ==== ==== =======
</TABLE>

(a) Reconciling items include the following for the quarter and nine-month
period ended September 30, 2000 respectively: $22 million and $65 million
of goodwill and intangible and other asset amortization, approximately $6
million and $35 million of environmental and other corporate charges, and
approximately $3 million and $9 million of corporate research and
development costs.

(b) Reconciling items include the following for the quarter and nine-month
period ended September 30, 1999 respectively: $21 million and $62 million
of goodwill and intangible and other asset amortization, approximately $1
million and $12 million of environmental and other corporate charges and
approximately $3 million and $7 million of corporate research and
development costs.

<PAGE> 17

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

Consolidated Net sales increased nominally for the quarter and nine months.
Volume increases in all three segments were offset by lower prices in the
Functional Products segment and the significant negative impact of the stronger
dollar, relative to foreign currencies. For the quarter, price increases in
Process Chemicals and Services and Chemical Specialties segments exceeded
decreases in the Functional Products segment. For the nine months, price
decreases in Process Chemicals and Services and Functional Products segments
overshadowed increases in the Chemical Specialties segment. Excluding the impact
of the stronger dollar, revenues increase by $37 million or 5% during the
quarter and $94 million or 4% for the nine-month period.

Consolidated Profit from operations declined $37 million or 28% for the
quarter and $94 million or 25% for the nine-month period. Profit from operations
for both the quarter and nine-month period was unfavorably impacted by a $12
million accounts receivable provision. Volume improvements were more than offset
by higher raw material costs, primarily higher polypropylene costs in the
Chemical Specialties segment, the negative impact of the stronger dollar, higher
energy costs, and higher corporate charges in Reconciling Items. Profit from
operations for the quarter was favorably impacted by higher overall pricing,
whereas for the nine-month period Profit from operations was negatively impacted
by lower overall prices. Excluding the impact of the stronger dollar,
consolidated Profit from operations was down $28 million or 22% for the quarter
and $69 million or 18% for the nine-month period.

Process Chemicals and Services segment Net sales increased $7 million for
the quarter and nine-month period, or 2% and 1%, respectively. Profit from
operations for both the quarter and nine-month period was negatively impacted by
the $12 million accounts receivable provision of which approximately $10 million
is reserved for BetzDearborn and $2 million is reserved for Pulp and Paper.
Volume improvement in the segment and higher prices in the BetzDearborn division
were offset by the effect of the stronger dollar and price erosion in the pulp
and paper markets. Profit from operations declined $17 million or 19% for the
quarter and $28 million or 11% for the nine-month period. Volume increases for
the quarter and nine-month period, and price improvement for the quarter, were
more than offset by higher operating costs, the impact of the stronger dollar
and, for the nine-month period, price declines. Excluding the effects of rates
of exchange, revenues were up $21 million and $44 million or 5% and 3%, for the
quarter and nine-month period, respectively, while Profit from operations
declined $14 million or 15% and $18 million or 7% for the respective quarter and
nine-month periods.

In an effort to improve near- and long-term performance in the Process
Chemicals and Services segment, we have undertaken an aggressive plan to address
the servicing of select markets and customer segments. This effort includes
reallocation, and where appropriate, the reduction of resources. It is
anticipated that we will reduce selling, general and administrative expenses in
this segment by approximately $20 million on an annual basis.

Functional Products segment Net sales were down $2 million and $5 million,
or 1%, for the quarter and nine-month period. For the quarter and nine-month
period, volume improvements were offset by lower prices and the impact of the
stronger dollar. Profit from operations declined $6 million or 14% for the
quarter and $14 million or 10% for the nine-month period. Lower prices and the
impact of the stronger dollar offset volume improvements in both periods.
Excluding the effects of rates of exchange, revenues were up $7 million and $21
million, or 5%, for the quarter and nine-month period while Profit from
operations was down $2 million, or 4% and 1% for the quarter and nine-month
period.

Chemical Specialties segment Net sales were essentially flat for the
quarter and increased $3 million or 1% for the nine-month period. Volume
improvements for the quarter and nine-month periods offset the effects of the
stronger dollar and lower prices. Volumes increased approximately 2% compared to
the third quarter 1999. Excluding currency effects, revenues increased $8
million and $28 million, or 5%, for the quarter and nine-month periods. Profit
from operations was down $8 million or 38% for the

<PAGE> 18

quarter and $24 million or 34% for the nine-month period. The bulk of the
decline in operating profit is due to margin contraction from significantly
higher polypropylene resin costs, and contractual lags enabling us to pass these
higher costs along to our customers. Improved volumes and prices in the
Hygienics markets, for the nine-month period, were fully offset by higher costs
and the effects of the stronger dollar. Excluding currency effects, Profit from
operations was down $7 million or 33% for the quarter and $21 million or 30 %
for the nine-month period.

Reconciling Items increased $6 million for the quarter and $28 million for
the nine-month period primarily as a result of higher software amortization and
other information technology costs as well as higher environmental charges and
higher research and development costs. The prior periods do not include
significant amounts for software amortization as our principal enterprise-wide
software project was brought online late in the fourth quarter of 1999.

As a result of our intention to monetize our non-core businesses (see Note
15), we are also proceeding with efforts to reallocate and reduce our corporate
infrastructure to properly support the remaining core business under a new
operating model. The restructuring efforts, which will materialize as
transactions come to closure, will likely result in exit costs, including
severance benefits, and other charges for those portions of the corporate
infrastructure not identified to transfer with non-core businesses. We are also
taking actions to reduce corporate costs, where possible, prior to transaction
closings.

Interest and debt expense, combined with preferred security distributions,
increased $11 million for the quarter, primarily as a result of higher interest
rates, compared to last year. For the nine-month period, interest and debt
expense, combined with the preferred security distributions, increased $7
million primarily as a result of lower overall financial leverage. Total debt
and preferred securities have been reduced by $414 million since September 30,
1999. Our efforts to monetize non-core businesses yielded net proceeds of
approximately $318 million from the sale of our Food Gums business in September
2000. These proceeds were used to pay-down our debt.

Other income (expense), net, decreased $11 million and $19 million for the
quarter and nine-months ended September 30, 2000, respectively. These decreases
are primarily attributable to losses from the sale of properties, legal costs,
and asbestos claims settlements.

The effective tax rate for the quarter was 42%. The effective tax rate for
2000 is anticipated to be in the low to mid-forty percent range. The primary
cause of the anticipated increase of the effective tax rate for the calendar
year 2000 is the effect of non-deductible goodwill amortization offset by the
benefit of the utilization of research and development credits from a favorable
court decision. The anticipated effective tax rate does not reflect any
additional tax planning initiatives. The effective tax rates of 30% and 33% for
the third quarter and the nine-month period 1999, respectively, reflect the
benefit of adjustments related to prior years' assessments, and the utilization
of a capital loss.

FINANCIAL CONDITION

Liquidity and financial resources: Net cash provided by operations was $86
million for the nine-month period ended September 30, 2000, as compared to $158
million for the same period in 1999. The decrease primarily reflects lower net
income and the payment of legal settlements, net of insurance recoveries. The
current ratio decreased to .80 at September 30, 2000, compared to .86 at
December 31, 1999. The quick ratio decreased to .59 at September 30, 2000,
compared to .61 at December 31, 1999. As of September 30, 2000, we have $566
million available under our revolving credit agreement and $252 million of
short-term lines of credit. Additionally, we may issue $1,763 million of
securities under our shelf registration, which allows us to issue equity,
equity-like and debt securities.

The increase in capital expenditures over the prior year primarily reflects
expenditures related to pectin capacity increases in Germany and Brazil and a
methylcellulose capacity increase in Belgium in

<PAGE> 19

the Functional Products segment. The higher other investing activities is
primarily the result of capitalization of cost related to internally developed
software.

In late September 2000, we sold our Food Gums Division for which we
received approximately $395 million in cash proceeds. After recording certain
selling and tax expenses of approximately $77 million, the net proceeds of
approximately $318 million will be applied to repay term loan tranche C.

During the third quarter of 2000, we were granted a waiver of some of the
financial covenants in our senior credit facility and our ESOP credit facility
through November 15, 2000. Concurrently with, and as a condition to the 11 1/8%
of senior notes offering and the term loan tranche D, our senior credit facility
and ESOP credit facility were permanently amended to: (i) modify our financial
covenants; (ii) change the mandatory prepayment provisions; and (iii) provide
for security, among other things.

On November 7, 2000, the terms of the Redeemable Hybrid INcome Overnight
Securities ("RHINOS") were amended to provide that the holder of the RHINOS
could require us to repurchase them at any time after 11:59 p.m. on November 15,
2000 for $200 million, the aggregate liquidation amount of the RHINOS, plus any
accrued but unpaid distributions. We expect to repay the RHINOS with a portion
of the proceeds of the 11 1/8% senior notes offering.

Capital Structure and Commitments: Total capitalization (stockholders'
equity, company obligated preferred securities of subsidiary trusts, and debt)
decreased to $4.0 billion at September 30, 2000, from $4.3 billion at year-end
1999. The ratio of debt-to-total capitalization decreased to 54% at September
30, 2000 from 57% at December 31, 1999.

On November 14, 2000, we completed a refinancing and modification of our
existing debt as part of an overall program to obtain a financial structure that
will appropriately support the streamlined organization that includes the Pulp
and Paper, BetzDearborn and Aqualon divisions. In conjunction with and
conditioned upon the effectiveness of the third amendment, the company borrowed
$375 million under the senior credit facility (term loan tranche D) and also
issued $400 million of senior notes due November 15, 2007.

Term loan tranche D will bear interest at LIBOR + 2.75%, mature on November
15, 2005 and will require only nominal principal payments prior to maturity. The
senior notes will accrue interest at 11 1/8% per annum, payable semi-annually
commencing May 15, 2001. The senior notes will be guaranteed by each of
Hercules' current and future wholly-owned domestic restricted subsidiaries. At
any time prior to November 15, 2003, Hercules may, on any one or more occasions,
redeem up to 35% of the aggregate principal amount of the senior notes issued at
a redemption price of 111.125% of the principal amount, plus accrued and unpaid
interest and liquidated damages, if any, to the redemption date, with the net
cash proceeds of one or more Public Equity Offerings; provided that (i) at least
65% of the aggregate principal amount of the senior notes issued under the
indenture remains outstanding, immediately after the occurrence of such
redemption (excluding notes held by Hercules and its Subsidiaries); and (ii) the
redemption occurs within 45 days of the date of the closing of such Public
Equity Offering. At any time prior to November 15, 2001, Hercules may also
redeem all or a part of the senior notes upon the occurrence of a Change of
Control at a redemption price equal to 111.125% of the principal amount of the
senior notes redeemed, plus accrued and unpaid interest and liquidated damages,
if any, to the date of redemption. Except as described above, the senior notes
will not be redeemable at Hercules' option prior to maturity. Hercules is not
required to make mandatory redemption or sinking fund payments with respect to
the senior notes.

On October 4, 2000, Moody's Investors Service, Inc., downgraded our senior
unsecured credit rating to Ba1 with a stable outlook. On October 19, 2000,
Standard & Poor's Ratings Services downgraded our corporate credit rating to BB+
and placed us on CreditWatch with "developing" implications. On November 9,
2000, Moody's Investors Service, Inc., assigned a Ba1 rating to the term loan
tranche D and a Ba2 rating to the 11 1/8% senior notes. Also on November 9,
2000, Standard & Poor's Ratings Services assigned a BB+ rating to the term loan
tranche D and a BB- rating to the 11 1/8% senior notes. Both ratings were placed
on CreditWatch with "developing" implications. These actions and future adverse
actions, if any, by the rating agencies are likely to result in us incurring
higher interest costs in future periods.

<PAGE> 20
The proceeds of the term loan tranche D and the senior notes will be used
to reduce borrowings under our revolving credit agreement, repay the Redeemable
Hybrid INcome Overnight Securities, the Floating Rate Preferred Securities, and
reduce the current portion of term loan tranche A.

Quarterly dividends of $0.27 per share have been declared and paid through
the first half of 2000. In late August 2000, the Board of Directors reduced our
quarterly dividend payment to $.08 per share, which was paid in September 2000.
On November 13, 2000, the Board of Directors determined to suspend the payment
of the quarterly dividend beginning with the fourth quarter of this year,
subject to reconsideration of the policy by the Board, in its discretion, when
warranted under appropriate circumstances. In addition, payment of future
dividends is significantly restricted by the indenture governing the senior
notes.

RISK FACTORS

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

Our derivative and other financial instruments subject to interest rate risk
consist of debt instruments, interest rate swaps, and currency swaps. At
September 30, 2000, net market value of these combined instruments was a
liability of $3 billion. The sensitivity analysis assumes an instantaneous
100-basis point move in interest rates from their levels, with all other
variables held constant. A 100-basis point increase in interest rates at
September 30, 2000 would result in a $60 million decrease in the net market
value of the liability. A 100-basis point decrease in interest rates at
September 30, 2000 would result in a $68 million increase in the net market
value of the liability. The change in the sensitivity level from year-end 1999
is primarily due to the fixed distribution rates associated with the Trust
Originated Preferred Securities and the preferred security component of the
CRESTS units (see Note 10), as well as the elimination of the notional amount of
the interest rate swaps related to our euro-denominated debt obligations which
were refinanced with U.S. dollar-denominated debt obligations during the second
quarter of 2000.

Our financial instruments subject to changes in equity price risk,
including the warrants component of the CRESTS Units issued in 1999 (see Note
10), represent a net obligation of $9 million. The sensitivity analysis assumes
an instantaneous 10% change in valuation with all other variables held constant.
A 10% increase in market values at September 30, 2000 would increase the net
obligation by $7 million, while a 10% decrease would reduce the net obligation
by $6 million. The change in equity price risk from year-end 1999 is primarily
from the impact of the reduction in our stock price on the warrants component of
the CRESTS units.

Our financial instruments subject to foreign currency exchange risk consist
of foreign currency forwards and options and represent a net liability position
of $2 million at September 30, 2000. The following sensitivity analysis assumes
an instantaneous 10% change in foreign currency exchange rates from year-end
levels, with all other variables held constant. A 10% strengthening of the U.S.
dollar versus other currencies at September 30, 2000 would result in a $5
million decrease in the net liability position, while a 10% weakening of the
dollar versus all currencies would result in a $5 million increase

<PAGE> 21

in the net liability position. The change in the sensitivity level from year-end
1999 is primarily due to the refinancing of our euro-denominated debt
obligations with U.S. dollar-denominated debt obligations during the second
quarter of 2000.

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

Environmental - Hercules has been identified by U.S. federal and state
authorities as a "potentially responsible party" for environmental cleanup at
numerous sites. The estimated range of reasonably possible costs for remediation
is between $72 million and $234 million. We do not anticipate that our financial
condition will be materially affected by environmental remediation costs in
excess of amounts accrued, although quarterly or annual operating results could
be materially affected (see Note 13).

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

Litigation - Hercules is a defendant in numerous lawsuits that arise out
of, and are incidental to, the conduct of its business. These suits concern
issues such as product liability, contract disputes, labor-related matters,
patent infringement, environmental proceedings, property damage, and personal
injury matters. While it is not feasible to predict the outcome of all pending
suits and claims, the ultimate resolution of these matters could have a material
effect upon the financial position of Hercules, and the resolution of any of the
matters during a specific period could have a material effect on the quarterly
or annual operating results for that period (see Note 13).

PENDING TRANSACTIONS

In September 2000, we announced that Eastman Chemical Company had signed a
letter of intent to purchase our hydrocarbon resins division and select portions
of our rosin resins business. In June 2000, one of our joint venture partners
exercised a right of first refusal to purchase the ink toner portion of our
Resins division. We plan to have fully divested our entire Resins division by
the end of the first quarter of 2001.

In addition, we are continuing to explore alternatives regarding our
FiberVisions business and are in discussions with respect to the divestiture of
this business.

FORWARD-LOOKING STATEMENT

This quarterly report on Form 10-Q includes forward-looking statements, as
defined in the Private Securities Litigation Reform Act of 1995, reflecting
management's current analysis and expectations, based on reasonable assumptions.
Results could differ materially depending on such factors as Hercules' inability
to generate cash and reduce debt, the result of Hercules' pursuit of strategic
alternatives, business

<PAGE> 22

climate, economic and competitive uncertainties, Hercules' inability to monetize
certain of its identified businesses, higher manufacturing costs, reduced level
of customer orders, ability to integrate BetzDearborn, changes in strategies,
risks in developing new products and technologies, environmental and safety
regulations and clean-up costs, foreign exchange rates, adverse legal and
regulatory developments, and adverse changes in economic and political climates
around the world. Accordingly, there can be no assurance that Hercules will meet
analysts' earnings estimates. As appropriate, additional factors are contained
in other reports filed with the Securities and Exchange Commission. This
paragraph is included to provide safe harbor for forward-looking statements,
which are not required to be publicly revised as circumstances change.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

<PAGE> 23

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

For information related to Legal Proceedings, see Note 13 of the notes to
the financial statements.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

On November 14, 2000, we issued $400 million of senior notes due November
15, 2007. The net proceeds to us from the senior notes offering and the
borrowing of $375 million under the new term loan tranche D under the senior
credit facility are expected to be $752 million after deducting commissions and
estimated offering expenses. We will use the net proceeds of the senior notes
offering to repay the Floating Rate Preferred Securities and the RHINOS and to
reduce the current portion of term loan tranche A, and we will use the proceeds
from the borrowings under term loan tranche D to reduce borrowings under our
revolving credit agreement (without a reduction in commitment) and the current
portion of term loan tranche A.

ITEM 5. OTHER INFORMATION

On October 11, 2000, our board of directors received a letter from Samuel
Heyman of International Specialty Products ("ISP"), which as of that date owned
9.99% of our common stock. The letter, and simultaneous filings with the SEC,
included a proposal for a partial tender offer by ISP for 25 million shares of
our common stock, subject to approval of our board of directors. The letter also
included a request that we abandon our strategic plan and any planned
refinancing.

On October 17, 2000, we announced that Thomas L. Gossage, who retired in
1996 as chairman and chief executive officer, had been named chairman and chief
executive officer and that Vincent J. Corbo, chairman, president and chief
executive officer, had resigned from the company and the board of directors to
pursue personal interests.

On October 31, 2000, we announced the formation of an Office of the
Chairman, a four member team including the current chief financial officer and
three former executives, who will work together to help us develop and implement
our strategic objectives.

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

(a) Exhibits.

Please see the exhibits listed on the Exhibit Index.

(b) Reports on Form 8-K.

Hercules did not file any Current Reports on Form 8-K during
the quarter ended September 30, 2000.

<PAGE> 24

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

HERCULES INCORPORATED

By: /s/ George MacKenzie
________________________________________
George MacKenzie
Executive Vice President
and Chief Financial Officer
November 14, 2000

By: /s/ Robert C. Flexon
________________________________________
Robert C. Flexon
Vice President, Business Analysis
and Controller
November 14, 2000

<PAGE> 25

EXHIBIT INDEX

<TABLE>
<CAPTION>
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO

<S> <C> <C>
3-A.1 Restated Certificate of Incorporation of Hercules Incorporated Exhibit 3-A to Hercules' Annual
as revised and amended July 6, 1988 Report on Form 10-K for the
year ended December 31, 1992.

3-A.2 Certificate of Amendment dated October 24, 1995 to the Restated Exhibit 4.1 a to Hercules'
Certificate of Incorporation of Hercules Incorporated as revised Registration Statement on Form
and amended July 5, 1998 S-3, filed September 15, 1998
(File No. 333-63423).

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

4-A Indenture, dated November 14, 2000, between Hercules Incorporated,
as issuer and Well Fargo Bank Minnesota, N.A., as trustee
(including the form of 11 1/8% senior notes due 2007 included as
Exhibit A thereto)

4-B Registration Rights Agreement, dated November 14, 2000, among
Hercules Incorporated and all of its domestic subsidiaries and
Donaldson, Lufkin & Jenrette Securities Corporation and Credit
Suisse First Boston Corporation, as the initial purchasers

10-A Share Purchase Agreement, dated as of August 10, 2000 Exhibit 2.1 to Hercules' Current
among CP Kelco ApS (formerly known as Hercules Report on Form 8-K filed
Copenhagen ApS), Hercules Investment ApS, Hercules October 13, 2000.
Incorporated, Lehman FG Newco, Inc., WSP, Inc. and
Hercules Holding BV/BVBA

10-B Amendment No. 1 to Remarketing and Contingent Purchase Exhibit 10.1 to Hercules' Current
Agreement, dated as of November 7, 2000, among Report on Form 8-K filed
Hercules Incorporated, Hercules Trust V and November 13, 2000.
Banc of America Securities LLC

10-C Third Amendment to Amended and Restated Credit Agreement dated
November 14, 2000, among Hercules Incorporated, BetzDearborn Canada,
certain subsidiaries of Hercules, the several banks and other
financial institutions identified in the agreement, and Bank of
America, N.A., as administrative agent, and Bank of America Canada, as
Canadian administrative agent

27 Financial Data Schedule
</TABLE>