<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 June 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 July 31, 2000, 107,430,659 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 Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ........................................... $ 822 $ 833 $ 1,620 $ 1,639
Cost of sales ....................................... 462 456 912 894
Selling, general, and administrative expenses ....... 206 193 403 390
Research and development ............................ 20 20 41 41
Goodwill and intangible asset amortization .......... 20 20 40 40
Other operating expenses ............................ 18 6 22 13
------- ------- ------- -------
Profit from operations .............................. 96 138 202 261
Equity in income of affiliated companies ............ -- -- -- 1
Interest and debt expense ........................... 42 47 74 107
Preferred security distributions of subsidiary trusts 23 12 46 17
Other income (expense), net ......................... (6) 4 (1) 7
------- ------- ------- -------
Income before income taxes .......................... 25 83 81 145
Provision for income taxes .......................... 9 27 29 51
------- ------- ------- -------
Net income .......................................... $ 16 $ 56 $ 52 $ 94
======= ======= ======= =======
Earnings per share:
Basic ....................................... $ 0.15 $ 0.56 $ 0.49 $ 0.93
======= ======= ======= =======
Diluted ..................................... $ 0.15 $ 0.56 $ 0.49 $ 0.93
======= ======= ======= =======
Dividends per share ................................. $ 0.27 $ 0.27 $ 0.54 $ 0.54
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 3
HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in millions) (Unaudited)
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ......................... $ 65 $ 63
Accounts and notes receivable, net ................ 630 635
Other current assets .............................. 90 131
Inventories
Finished products .......................... 191 187
Materials, supplies, and work in process ... 181 193
Deferred income taxes ............................. 144 129
------- -------
Total current assets .............................. 1,301 1,338
Property, plant, and equipment ........................... 2,970 2,978
Accumulated depreciation and amortization ................ 1,667 1,657
------- -------
Net property, plant, and equipment ....................... 1,303 1,321
Goodwill and other intangible assets (net of
accumulated amortization - 2000,
$170; 1999, $130)................................. 2,484 2,570
Other assets ............................................. 685 667
------- -------
Total assets ...................................... $ 5,773 $ 5,896
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable .................................. $ 240 $ 320
Accrued expenses .................................. 467 526
Short-term debt ................................... 686 678
Income taxes payable .............................. 23 35
------- -------
Total current liabilities ......................... 1,416 1,559
Long-term debt ........................................... 1,882 1,777
Deferred income taxes .................................... 284 287
Postretirement benefits and other liabilities ............ 390 418
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 ........................ 739 757
Unearned compensation ............................. (119) (123)
Other comprehensive losses ........................ (109) (44)
Retained earnings ................................. 2,120 2,125
------- -------
2,714 2,798
Reacquired stock, at cost (shares: 2000-
52,811,411; 1999 - 53,587,365) ................ 1,905 1,935
------- -------
Total stockholders' equity ........................ 809 863
------- -------
Total liabilities and stockholders' equity ........ $ 5,773 $ 5,896
======= =======
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
(Dollars in millions) (Unaudited)
Six Months Ended June 30,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Net cash provided by operations ................................. $ 23 $ 61
----- -----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures ............................................ (109) (79)
Proceeds of investment and fixed asset disposals ................ 12 8
Acquisitions, net of cash acquired .............................. (5) --
Other, net ...................................................... (21) (6)
----- -----
Net cash used in investing activities .................... (123) (77)
----- -----
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds ......................................... 384 218
Long-term debt repayments ....................................... (253) (560)
Change in short-term debt ....................................... 23 61
Payment of underwriting fees .................................... -- (11)
Proceeds from issuance of subsidiary trust's preferred securities -- 362
Common stock issued ............................................. 6 4
Common stock reacquired ......................................... (1) (3)
Proceeds from issuance of subsidiary preferred stock ............ -- 12
Dividends paid .................................................. (57) (54)
----- -----
Net cash provided by financing activities ................ 102 29
----- -----
Effect of exchange rate changes on cash ......................... -- (3)
----- -----
Net increase in cash and cash equivalents ....................... 2 10
Cash and cash equivalents - beginning of period ................. 63 68
----- -----
Cash and cash equivalents - end of period ....................... $ 65 $ 78
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) ..................... $ 75 $ 102
Preferred security distributions of subsidiary trusts .... 40 7
Income taxes ............................................. 33 29
Noncash investing and financing activities:
Incentive and other employee benefit
plan stock issuances ..................................... 10 8
Conversions of debentures ................................ -- 1
Acquisition of minority interest ......................... (11) --
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income ............................. $ 16 $ 56 $ 52 $ 94
Foreign currency translation,
net of tax ......................... (61) 13 (65) 3
---- ---- ---- ----
Comprehensive income (loss) ............ ($45) $ 69 ($13) $ 97
==== ==== ==== ====
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
HERCULES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. These condensed financial statements are unaudited, but in the opinion of
management include all adjustments necessary to present fairly Hercules'
financial position and results of operations for interim periods. These
condensed financial statements should be read in conjunction with the accounting
policies, financial statements, and notes included in our annual report 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 six
months ended June 30, 1999 were increased by $16 million and $31 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:
<TABLE>
<CAPTION>
(Amounts are in millions, Three Months Ended June 30, Six Months Ended June 30,
except per share data): --------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic
Net income ........................ $ 16 $ 56 $ 52 $ 94
Weighted-average shares
outstanding ..................... 107.1 100.9 106.9 100.9
-------- -------- -------- --------
EPS ............................... $ 0.15 $ 0.56 $ 0.49 $ 0.93
======== ======== ======== ========
Diluted
Net income ........................ $ 16 $ 56 $ 52 $ 94
Interest on convertible
debentures ...................... -- -- -- --
-------- -------- -------- --------
Net income for EPS calculation .... $ 16 $ 56 $ 52 $ 94
======== ======== ======== ========
Weighted-average shares
outstanding...................... 107.1 100.9 106.9 100.9
Options ........................... -- .3 -- .3
Debentures ........................ .2 .3 .2 .3
-------- -------- -------- --------
Adjusted weighted-average shares .. 107.3 101.5 107.1 101.5
-------- -------- -------- --------
EPS ............................... $ 0.15 $ 0.56 $ 0.49 $ 0.93
======== ======== ======== ========
</TABLE>
4. Cost and expenses include depreciation as follows:
<TABLE>
<CAPTION>
(Dollars in millions) June 30,
----------------
2000 1999
---- ----
<S> <C> <C>
Three months ended ....... $34 $34
Six months ended ......... 67 68
</TABLE>
6
<PAGE> 7
5. Other operating expenses for the three and six months ended June 30, 2000
include $24 million of charges for both periods associated with the sale of the
nitrocellulose business, of which $3 million is for severance benefits for
approximately 100 employees. This is partially offset by $11 million of
recoveries of insurance and environmental claims for both periods. The three and
six months ended June 30, 2000 include integration costs of $1 million and $3
million, respectively, primarily for employee retention, consulting, legal and
other costs associated with the BetzDearborn acquisition. Additionally,
environmental charges of $4 million and $6 million, respectively, were also
incurred during the corresponding periods.
Other operating expenses for the three and six months ended June 30,
1999 include integration costs of $3 million and $10 million and environmental
charges of $3 million and $4 million, respectively.
6. Interest and debt costs are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in millions)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Costs incurred ... $ 45 $ 50 $ 79 $113
Amount capitalized ... 3 3 5 6
---- ---- ---- ----
Interest expense ..... $ 42 $ 47 $ 74 $107
==== ==== ==== ====
</TABLE>
7. Other income (expense), net, for the three and six months ended June 30, 2000
includes $2 million in charges for litigation. Additionally, the three months
ended June 30, 2000 includes foreign currency losses of $2 million while the six
months ended June 30, 2000 includes net foreign currency gains of $1 million.
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 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. As a result of these plans, we estimate
approximately 1,400 employees will be terminated, of which approximately 1,175
employee terminations have occurred since inception of the aforementioned plans.
Pursuant to the plans in place, approximately 185 employees were
terminated during the six months ended June 30, 2000. Cash payments during 2000
included $23 million for severance benefits and $7 million for other exit costs.
A reconciliation of activity with respect to the liabilities established for
these plans is as follows:
<TABLE>
<CAPTION>
(Dollars in millions) Six Months Ended June 30,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Balance at beginning of year ......... $ 77 $ 130
Additional termination
benefits ................... 4 --
Cash payments ................. (30) (19)
----- -----
Balance at end of period ............. $ 51 $ 111
===== =====
</TABLE>
Severance benefit payments are based on years of service and generally
continue for 3 months to 24 months subsequent to termination. We expect to
substantially complete remaining actions under the plans by the end of 2000.
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<PAGE> 8
9. A summary of short-term and long-term debt follows:
<TABLE>
<CAPTION>
(Dollars in millions) June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
SHORT-TERM:
Banks .................. $ 49 $ 26
Current maturities ..... 637 652
---- ----
$686 $678
==== ====
</TABLE>
At June 30, 2000, we had $323 million of unused lines of credit that
may be drawn as needed. Lines of credit in use at June 30, 2000 were $32
million.
<TABLE>
<CAPTION>
(Dollars in millions) June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
LONG-TERM:
6.15% notes due 2000 .................................. $ 100 $ 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 1,092 1,187
Term loan tranche C due 2000 .......................... 318 318
Revolving credit agreement due 2003 ................... 595 336
ESOP debt due in varying amounts through 2009 ......... 103 106
Term notes at various rates from 5.23% to 9.60% due
in varying amounts through 2006 .................. 72 80
Variable rate loans ................................... 6 41
Other ................................................. 5 8
------- -------
2,519 2,429
Current maturities of long-term debt .................. (637) (652)
------- -------
Net long-term debt .................................... $ 1,882 $ 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 $1,410 million is still outstanding at June 30, 2000. In
addition, the facility includes a $900 million revolving credit agreement, of
which $595 million is outstanding at June 30, 2000. Through this revolving
credit facility, a Canadian subsidiary of ours can borrow up to U.S. $100
million from select lenders in Canada in Canadian dollars. As of June 30, 2000,
$85 million was outstanding under this facility. As of June 30, 2000, $305
million of the multi-currency revolver is available for use.
In July 2000, we secured an amendment to one of the financial covenants
included in our credit facility. The maximum leverage ratio, defined as
debt/EBITDA, was amended to 3.75 to 1 from 3.5 to 1 for the period April 1,
2000 through June 30, 2000. As a result, we were in compliance with all of our
covenants as of June 30, 2000. Based on current projections, there is a
possibility that we will not fulfill certain covenants, as defined in the
existing credit facility, within the second half of 2000. However, it is our
intention to amend or refinance the credit facility and modify our debt
structure to more appropriately support our core business model within the
second half of 2000. We are confident that we will be successful in these
efforts. The amendment discussed above will provide flexibility in the interim.
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<PAGE> 9
10. Guaranteed Preferred Beneficial Interests in Company's Subordinated
Debentures consists of:
<TABLE>
<CAPTION>
(Dollars in millions) June 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, unless, in the event of a failed
remarketing, the holder of the RHINOS exercises its right to require Hercules to
purchase the RHINOS within 15 days of a failed remarketing. Hercules paid an
affiliate of the holder an extension fee of 2.25% of the aggregate liquidation
amount of the RHINOS at the time of the February 2000 amendment.
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.
9
<PAGE> 10
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 June 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.
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.
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 June 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.
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<PAGE> 11
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. The estimated range of the reasonably possible share of costs
for the investigation and cleanup is between $72 million and $241 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 from 0 to 30 years.
Hercules becomes aware of sites in which it may be named a PRP in
investigatory and/or remedial activities through correspondence from the U.S.
Environmental Protection Agency, or other government agencies, or through
correspondence from previously named PRPs, who either request information or
notify us of our potential liability. We have established procedures for
identifying environmental issues at our plant sites. In addition to
environmental audit programs, we have environmental coordinators who are
familiar with environmental laws and regulations and act as a resource for
identifying environmental issues.
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.
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
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<PAGE> 12
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. Negotiations
with the DEQ are continuing with respect to that Consent Order.
At June 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.
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. 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 June 30, 2000, the consolidated balance sheet reflects a current
liability of approximately $26 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.
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<PAGE> 13
14. SEGMENT INFORMATION
<TABLE>
<CAPTION>
(Dollars in millions) Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales:
Process Chemicals and
Services .................. $ 433 $ 433 $ 849 $ 849
Functional Products .......... 209 224 415 436
Chemical Specialties ......... 180 176 357 354
Reconciling Items ............ -- -- (1) --
------- ------- ------- -------
Consolidated .......... $ 822 $ 833 $ 1,620 $ 1,639
======= ======= ======= =======
Profit (Loss) from Operations:
Process Chemicals and
Services .................. $ 81 $ 89 $ 158 $ 167
Functional Products .......... 53 57 105 111
Chemical Specialties ......... 17 23 33 49
Reconciling Items ............ (55)(a) (31)(b) (94)(a) (66)(b)
------- ------- ------- -------
Consolidated .......... $ 96 $ 138 $ 202 $ 261
======= ======= ======= =======
</TABLE>
(a) Includes the following for the quarter and six-month period ended June 30,
2000, respectively: goodwill and intangible asset amortization of $20
million and $40 million, integration costs of $1 million and $3 million,
environmental charges of $4 million and $6 million, corporate research and
development costs of $3 million and $6 million, and $14 million and $26
million of other corporate items not specifically allocated to the business
segments. Additionally, $24 million of charges associated with the sale of
the nitrocellulose business, partially offset by $11 million of recoveries
of insurance and environmental claims are included for both periods.
(b) Includes the following for the quarter and six-month period ended June 30,
1999, respectively: goodwill and intangible asset amortization of $20
million and $40 million, integration costs of $3 million and $10 million,
environmental charges of $3 million and $4 million, corporate research and
development costs of $2 million and $4 million, and $3 million and $8
million of other corporate items not specifically allocated to the business
segments.
15. PENDING TRANSACTIONS
In February 2000, we announced plans to form a new business venture
with Lehman Brothers Merchant Banking Partners II L.P. The new business will
include our food gums business, along with the Kelco biogums unit, which will be
purchased from Monsanto by the new venture. The Lehman Brothers partnership will
own 72% of the new entity, and we will own the remaining 28%. We expect that the
new venture will have annual revenues of approximately $450 million. We
anticipate this transaction will close in the second half of the year. Further,
we are pursuing the sale of our resins business.
In addition, we are continuing to explore alternatives regarding our
FiberVisions business including the possibility of a divestiture. While we are
aggressively pursuing all alternatives, any definitive actions could conceivably
continue into 2001.
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<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS
Within the following discussion, unless otherwise stated, "quarter" and
"six-month period" refer to the second quarter of 2000 and the six months ended
June 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 six months ended June 30, 2000 and June 30, 1999. For these
periods, Net sales and Profit from operations for the Functional Products
segment have been adjusted to eliminate the results of this segment's Agar
business, which was sold in December 1999 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 Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales by Industry Segment:
Process Chemicals
and Services .............. $ 433 $ 433 $ 849 $ 849
Functional Products .......... 201 204 392 396
Chemical Specialties ......... 180 176 357 354
Reconciling Items ............ -- -- (1) --
------- ------- ------- -------
Total ................. $ 814 $ 813 $ 1,597 $ 1,599
======= ======= ======= =======
Profit (Loss) from Operations:
Process Chemicals
and Services .............. $ 81 $ 89 $ 158 $ 169
Functional Products .......... 53 58 104 113
Chemical Specialties ......... 17 23 33 49
Reconciling Items ............ (41)(a) (28)(b) (78)(a) (56)(b)
------- ------- ------- -------
Total ................. $ 110 $ 142 $ 217 $ 275
======= ======= ======= =======
</TABLE>
(a) Includes the following for the quarter and six-month period ended June 30,
2000 respectively: goodwill and intangible asset amortization of $20
million and $40 million, environmental charges of $4 million and $6
million, corporate research and development costs of $3 million and $6
million, and $14 million and $26 million of other corporate items not
specifically allocated to the business segments.
(b) Includes the following for the quarter and six-month period ended June 30,
1999 respectively: goodwill and intangible asset amortization of
$20 million and $40 million, environmental charges of $3 million and $4
million, corporate research and development costs of $2 million and $4
million, and $3 million and $8 million of other corporate items not
specifically allocated to the business segments.
The discussion that follows speaks to comparisons in the table through
Profit from operations.
Consolidated Net sales were essentially flat for the quarter and six
months. Volume improvements across all three segments were offset by the
negative impact of the stronger dollar, relative to foreign currencies, and
slightly lower pricing in the Process Chemicals and Services and Functional
Products segments. Excluding the impact of the stronger dollar, revenues
increased $32 million or 4% during the quarter and $63 million or 4% for the
six-month period. Consolidated Profit from operations declined $32 million or
23% during the quarter and $58 million or 21% for the six-month period. Volume
improvements were more than offset by higher costs, primarily higher
polypropylene raw material costs in the Chemical Specialties segment, the impact
of the stronger dollar, lower pricing in the Process Chemicals and Services and
Functional Products segments, and higher corporate charges in
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<PAGE> 15
Reconciling Items. Excluding the impact of the stronger dollar, consolidated
Profit from operations declined $25 million or 17% during the quarter and $44
million or 16% for the six-month period.
Process Chemicals and Services segment Net sales were essentially flat
for the quarter and six-month period. Higher volumes were offset by the effect
of a stronger dollar and price erosion in the pulp and paper markets. Excluding
the effects of rates of exchange, revenues were up $11 million or 2% during the
quarter and $24 million or 3% for the six-month period. Profit from operations
declined $8 million or 9% during the quarter and $11 million or 7% for the
six-month period. Volume improvements were more than offset by price declines,
higher operating costs and the impact of the stronger dollar. Excluding currency
effects, Profit from operations was down $5 million or 6% during the quarter and
$5 million or 3% for the six-month period.
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 the
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 $3 million or 2% during
the quarter and $4 million or 1% for the six-month period. Volume improvements
in the domestic and European paint and construction markets, as well as pectin
volume improvements in these two regions, were offset by the effects of a
stronger U.S. dollar and lower pricing due to competitive pricing pressure.
Excluding currency effects, revenues rose $9 million or 4% during the quarter
and $20 million or 5% for the six-month period. Profit from operations was down
$5 million or 9% during the quarter and $9 million or 8% for the six-month
period. Volume improvements were offset by pricing declines and the relative
strength of the dollar versus foreign currencies. Excluding the impact of the
stronger dollar, Profit from operations decreased $1 million or 2% during the
quarter and $3 million or 2% for the six-month period.
Chemical Specialties segment Net sales were up $4 million or 2% during
the quarter and $3 million or 1% for the six-month period. Volume improvement in
the resins and fibers markets, particularly in North America, were offset by the
stronger dollar, particularly in Europe. Excluding currency effects, revenues
were up $12 million or 7% during the quarter and $21 million or 6% for the
six-month period. Profit from operations was down $6 million or 26% during the
quarter and $16 million or 33% for the six-month period. This was a result of
significantly higher polypropylene resin costs and the relatively higher costs
associated with meeting European demand in the hygenics market with domestically
sourced production. While the contractual lag associated with polypropylene
resins is expected to continue into the third quarter of 2000, we anticipate the
beginning of a recovery during the fourth quarter as these costs are forecasted
to stabilize. These factors were partly offset by volume improvements and
overall improved plant operability in the resins business. We anticipate passing
along to our customers a portion of the raw material price increase over the
remainder of the year and will be bringing additional capacity on line in Europe
during the fourth quarter to meet the demands of the hygenics market there.
Excluding currency effects, Profit from operations declined $5 million or 22%
during the quarter and $14 million or 29% for the six-month period.
Reconciling Items increased $13 million for the quarter and $22 million
for the six-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 the
corporate infrastructure to properly support the remaining core businesses under
a new operating model. The restructuring effort, which will materialize
15
<PAGE> 16
as the 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 the
transaction closings.
Interest and debt expense, combined with preferred security
distributions, increased $6 million for the quarter, primarily as a result of
higher interest rates compared to the prior year quarter. For the six-month
period, interest and debt expense, combined with preferred security
distributions, decreased $4 million primarily as a result of lower overall
financial leverage.
Other income (expense), net, decreased $10 million and $8 million for
the quarter and six months ended June 30, 2000, respectively. The decline is
primarily attributable to increased charges for litigation and lower gains on
the disposition of non-operating properties and investments during the
respective periods. In addition, the quarter reflects foreign currency losses as
compared to foreign currency gains in the prior year quarter.
The effective tax rate of 36% for the quarter reflects the benefit of a
favorable court decision relating to the utilization of research and development
credits. The effective tax rate for 2000 is anticipated to range in the
mid-forties. The primary cause for the anticipated increase of the effective tax
rate for calendar year 2000 is the effect of non-deductible goodwill and
intangible asset amortization on a lower pre-tax earnings base. The revision in
the effective tax rate for calendar year 2000 does not anticipate any additional
tax planning initiatives. The effective tax rate of 33% for the second quarter
of 1999 and six-month period, respectively, also reflects the benefit of
adjustments related to prior years' assessments, as well as utilization of
capital losses.
FINANCIAL CONDITION
Liquidity and financial resources: Net cash provided by operations was
$23 million for the six-month period ended June 30, 2000, as compared to $61
million for the same period in 1999. The decrease primarily reflects the payment
of legal settlements, net of insurance recoveries, higher cash outlays for
termination benefits and other exit costs (see Note 8), higher cash tax payments
and a larger payment of preferred security distributions, partly offset by lower
interest payments. The current ratio of .9 remained flat at June 30, 2000,
compared with December 31, 1999. The quick ratio has increased to .7 at June 30,
2000, compared with .6 at December 31, 1999. As of June 30, 2000, we have $305
million available under our revolving credit agreement and $323 million of
short-term lines of credit. Additionally, we have $1,763 million available 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 the Functional Products
segment. The higher Other investing activities is primarily the result of
capitalization of cost related to internally developed software.
Capital Structure and Commitments: Total capitalization (stockholders'
equity, company obligated preferred securities of subsidiary trusts, and debt)
increased to $4.4 billion at June 30, 2000, from $4.3 billion at year-end 1999.
The ratio of debt-to-total capitalization increased to 59% at June 30, 2000 from
57% at December 31, 1999.
As discussed in Note 9, we are pursuing a refinancing or 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 Agualon division, the BetzDearborn Division and the Pulp and Paper
Division. It is possible that our credit rating may be impacted such that we
will incur higher interest costs in future periods.
16
<PAGE> 17
Quarterly dividends of $0.27 per share have been declared and paid
through the first half of 2000. Dividend policy is reviewed by our Board of
Directors on a regular basis and the third quarter dividend will be addressed at
the next meeting.
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
June 30, 2000, net market value of these combined instruments was a liability of
$3.4 billion. The sensitivity analysis assumes an instantaneous 100-basis point
move in interest rates from their levels, with all other variables held
constant. A 100-basis point increase in interest rates at June 30, 2000 would
result in a $59 million decrease in the net market value of the liability. A
100-basis point decrease in interest rates at June 30, 2000 would result in a
$67 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 $17 million. The sensitivity analysis assumes
an instantaneous 10% change in valuation with all other variables held constant.
A 10% increase in market values at June 30, 2000 would increase the net
obligation by $7 million, while a 10% decrease would reduce the net obligation
by $7 million. The change in equity price risk from year-end 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 $3 million at June 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 June 30, 2000 would result in a $4
million decrease in the net liability position, while a 10% weakening of the
dollar versus all currencies would result in a $4 million
17
<PAGE> 18
increase 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.
As discussed in Note 9, in the unlikely event that our program is not
successful and in the absence of a refinancing or modification of our existing
debt, the debt under the existing credit facility, if not refinanced or
modified, could possibly be classified as current, and subject to call.
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 $241 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
On February 22, 2000, we announced a new corporate strategy focused on
cash generation, debt reduction and growth of the core businesses: Pulp and
Paper, BetzDearborn, and Aqualon. As part of this strategy, we will monetize our
investment in our food gums business through the formation of a joint venture
with Lehman Brothers Merchant Banking Partners II L.P. This new venture will
subsequently acquire the Kelco biogums business from Monsanto. The Lehman
Brothers partnership will own approximately 72% of the new entity and we will
own approximately 28%. We expect that the new entity will have annual revenues
of approximately $450 million. We anticipate this transaction will close in the
second half of the year (see Note 15). Further, we are pursuing the sale of our
resins business.
In addition, we are continuing to explore alternatives regarding our
FiberVisions business including the possibility of a divestiture. While we are
aggressively pursing all alternatives, any definitive action could conceivably
continue into 2001.
YEAR 2000 COMPLIANCE
We did not experience any difficulties related to the advent of the
Year 2000 on December 31, 1999 and have not experienced any such difficulties of
which we are aware since that date. Our operations have not, to date, been
adversely affected by any difficulties experienced by any of our
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<PAGE> 19
suppliers or customers in connection with the advent of the Year 2000. We will
continue to monitor our systems for potential difficulties through the remainder
of calendar year 2000.
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, business 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 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.
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<PAGE> 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information related to Legal Proceedings, see notes to financial
statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On August 4, 2000, the Board of Directors of Hercules adopted a Rights
Agreement between Hercules and ChaseMellon Shareholder Services, L.L.C. as the
Rights Agent. In connection with such Rights Agreement, the Board of Directors
declared a dividend of one preferred share purchase right for each outstanding
share of common stock. The dividend is payable on August 14, 2000, to the
stockholders of record at the close of business on August 14, 2000, and the
rights being issued are subject to the terms of the Rights Agreement.
The Hercules Board of Directors adopted the Rights Agreement to protect
stockholders from coercive or otherwise unfair takeover tactics. In general
terms, it works by imposing a significant penalty upon any person or group which
acquires 10% or more of Hercules' outstanding common stock without the approval
of Hercules' Board of Directors.
A summary of the specific terms of the Rights Agreement is contained
in our Registration Statement on Form 8-A filed on August 10, 2000. The summary
is not complete, and should be read together with, the entire Rights Agreement,
which is filed as an exhibit to the Registration Statement on Form 8-A, and
incorporated by reference in this Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on April 27, 2000. Voting
results were disclosed on our Form 10-Q for the period ended March 31, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Please see the exhibits listed on the Exhibit Index.
(b) Reports on Form 8-K.
Hercules did not file any Current Reports on Form 8-K during
the quarter ended June 30, 2000.
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<PAGE> 21
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
(Principal Financial Officer and
duly authorized signatory)
August 14, 2000
By: /s/ Michael J. Scott
-------------------------------------
Michael J. Scott
Vice President and Controller
(Principal Accounting Officer)
August 14, 2000
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<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO
------ ----------- ----------------------------
<S> <C> <C>
3-A.1 Restated Certificate of Incorporation of Hercules Exhibit 3-A to Hercules' Annual
Incorporated as revised and amended July 6, 1988 Report on Form 10-K for the
year ended December 31, 1992.
3-A.2 Certificate of Amendment dated October 24, 1995 to the Exhibit 4.1 a to Hercules'
Restated Certificate of Incorporation of Hercules Registration Statement on Form
Incorporated as revised 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 Exhibit 3-B to Hercules' Annual
amended October 30, 1991 Report on Form 10-K for the
year ended December 31, 1992.
4-A Rights Agreement between Hercules Incorporated Exhibit 4.1 to Hercules'
and ChaseMellon Shareholder Services, L.L.C., Registration of Certain Classes
dated August 4, 2000 of Securities on Form 8-A, filed
August 10, 2000.
10-A First Amendment to Amended and Restated Credit
Agreement dated March 31, 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.
10-B Second Amendment to Amended and Restated
Credit Agreement dated July 26, 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>
22
