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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 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
Securities registered pursuant to Section 12(b) of the Act
(Each class is registered on the New York Stock Exchange, Inc.)
Title of each class
Common Stock ($25/48 Stated Value)
8% Convertible Subordinated Debentures due August 15, 2010
9.42% Trust Originated Preferred Securities ($25
liquidation amount), issued by Hercules Trust I
and guaranteed by Hercules Incorporated
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
___ ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
As of March 15, 2000, registrant had outstanding 106,951,188 shares of
common stock, $25/48 stated value ("Common Stock"), which is registrant's only
class of common stock.
The aggregate market value of registrant's Common Stock held by
non-affiliates based on the closing price on March 15, 2000 was approximately
$1.5 billion.
DOCUMENTS INCORPORATED BY REFERENCE
(SPECIFIC PAGES INCORPORATED ARE IDENTIFIED UNDER THE
APPLICABLE ITEM HEREIN.)
Portions of the registrant's definitive Proxy Statement dated March 24,
2000 (the "Proxy Statement") are incorporated by reference in Part III of this
Report. Other documents incorporated by reference in this report are listed in
the Exhibit Index (see page 62).
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PART I
ITEM 1. BUSINESS:
Hercules Incorporated manufactures chemical specialties used in a variety
of home, office and industrial products. We are focused on sustaining long-term
growth in shareholder value, driven by new product development, continuous
improvement in manufacturing costs and responsive customer service. Our
principal products are performance (also referred to as functional) and process
paper chemicals, water treatment chemicals, water-soluble polymers, food
ingredients, resins and polypropylene and polyethylene fibers. The primary
markets we serve include pulp and paper, petroleum refineries, food processors
and manufacturers, paint manufacturers, construction materials, adhesives,
pharmaceutical companies and personal care product manufacturers.
Our products have a low cost impact on the end-users but frequently possess
characteristics important to the functionality of the finished product or the
efficient operation of the manufacturing process. Examples of our products in
consumer end uses include the paper coating and strengthener in writing paper,
the tackifier (which provides stickiness) in adhesive for labels and tapes, the
fibers in inner and outer linings of disposable diapers and the thickeners in
products such as jams, jellies, toothpaste, shampoos and water-based paints.
Examples of our products in industrial end uses include chemicals that improve
manufacturing processes, chemicals that improve the water quality in
manufacturing processes, tile cements used in building materials and resins used
in industrial adhesives. Industrial and commercial uses for our fibers include
decorative fabrics and automotive trim.
In the early 1990s, we were focused primarily on increasing our return on
equity and reducing our costs of operations. Although these objectives are still
important, growth has become our primary deliverable. Accordingly, since 1995,
we have implemented internal and external initiatives to achieve growth and have
disposed of a number of businesses that did not fit our portfolio and acquired
other businesses that better fit our strategy and our current businesses.
Internally, we have committed substantial resources to our research and
development efforts. Through these efforts, since 1995, we have increased sales
of products which are less than five years old. Externally, we consummated five
acquisitions in 1998, the largest of which was the acquisition of BetzDearborn
Inc. These businesses added approximately $1.5 billion of revenue in 1999.
Additionally, the integration of these acquisitions resulted in significant
synergies for us in 1999.
RECENT EVENTS
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 has
entered into an agreement to 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.
Further, we have expressed our intention to monetize our Resins business
and we are beginning to explore alternatives regarding our FiberVisions
business. There can be no assurance that we will successfully consummate the
monetization of Food Gums, Resins or FiberVisions.
The Food Gums, Resins and FiberVisions businesses account for approximately
$900 million of our 1999 revenues.
In addition to monetizing assets, we will be concentrating on improving our
asset utilization, working capital management and reducing debt and corporate
overhead costs. These actions may result in restructuring charges in 2000 as
exit plans are finalized.
We are also investigating the possibility of joining a consortium of
chemical and energy companies in a new online network, to be called Envera
Corp., that would provide its members access to business-to-business Internet
commerce. Our possible participation could range from an equity investment to
trading member status.
REPORTABLE SEGMENTS
Our reportable segments are: Process Chemicals and Services (comprised of
Pulp and Paper and BetzDearborn); Functional Products (comprised of Aqualon and
Food Gums); and Chemical Specialties (comprised of Resins and FiberVisions).
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The financial information regarding our segments, which includes net sales and
profit from operations for each of the three years ended December 31, 1999 and
capital employed as of December 31, 1999, 1998 and 1997, is provided in Note 26
to the Consolidated Financial Statements. See Part II, Item 8.
PROCESS CHEMICALS AND SERVICES (PULP AND PAPER AND BETZDEARBORN)
Products and services in this segment are designed to enhance the
manufacturing processes, reduce the operating costs or improve the quality of
the end products of our customers. At the same time, we help our customers meet
their environmental objectives and regulatory requirements. Pulp and Paper and
BetzDearborn sell each other's products to their customers and Pulp and Paper
also sells Aqualon's products to its customers.
In August 1999, we completed the acquisition of the Scriptset water soluble
polymer resin business from Solutia Inc. Since 1991, Hercules had an exclusive
license to sell Solutia's products in North America to the paper industry.
In January 2000, this segment and United States Filter Corporation, a
Vivendi Water Company, a global provider of commercial, industrial, municipal
and residential water and wastewater systems, entered into an alliance to sell
jointly USFilter's capital and chemical feed equipment and Hercules' water and
process treatment chemicals.
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS
- -------- ------------------ ---------------
PULP AND PAPER Performance chemicals: Makers of tissues,
Wet strength, dry strength and sizing paper towels,
packaging, beverage
Process treatment chemicals: containers, newsprint,
Deposit control, biofouling control, papers for magazines and
foam control, clarification, retention/drainage, books, printing and
felt conditioning, deinking, fiber recovery, water writing paper and
closure and crepe and release aids other stationery items
such as labels and
Water treatment chemicals: envelopes
Influent water, effluent water, cooling towers
and boiler systems
BETZDEARBORN Water treatment: Industrial, commercial
Influent water, boilers, cooling towers and and institutional
wastewater establishments;
petroleum refineries,
Process treatment: chemical plants,
Petroleum refining, chemical processing, metals manufacturers of metals,
processing and finishing, automotive assembly, automobile assembly
sugar and alcohol production and mineral plants and makers of food
processing and beverages
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FUNCTIONAL PRODUCTS (AQUALON AND FOOD GUMS)
Products in this segment modify the physical properties of aqueous
(water-based) and non-aqueous systems, are principally derived from natural
resources and are sold as key ingredients to other manufacturers. A broad range
of industries use our products for a variety of applications, including the
world's processed food industry (to stabilize and gel foods), construction
materials manufacturers (for tile cement) and paint manufacturers (to thicken
paints). Aqualon sells products produced by Food Gums to Aqualon's personal care
product customers, while Pulp and Paper and Food Gums sell Aqualon products to
their customer bases.
On December 10, 1999, we announced our intention to close our
nitrocellulose operations due to economic conditions brought on by a persistent
worldwide over-supply. Since that time, we have entered into a non-binding
letter of intent to sell this product line to an undisclosed buyer. We cannot
assure you that the sale of this product line will be consummated.
In December 1999, we sold our 70% interest in Algas Marinas, our Chilean
agar business.
On February 22, 2000, we announced our intention to contribute our Food
Gums division to a newly organized business venture with Lehman Brothers
Merchant Banking Partners II L.P. See "Recent Events" on page 1.
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS
- -------- ------------------ ---------------
AQUALON Water-soluble polymers: Manufacturers of interior and
Hydroxyethylcellulose (HEC), exterior water-based paints,
Carboxymethylcellulose (CMC), oilfield service companies for
Methylcellulose (MC) and derivatives oil and gas exploration, paper
and Hydroxypropylcellulose (HPC) mills, construction material
manufacturers and makers of
oral hygiene products, cosmetics
and dairy and bakery products
Solvent-soluble polymers: Producers of furniture lacquer,
Pentaerythritol (PE) and printing inks and aviation
Ethylcellulose (EC) and fluids
Nitrocellulose (NC)
FOOD GUMS Pectin: ingredient for jams and jellies, Multi-national and regional
yogurt fruit preparations, confectionery, manufacturers and processors
dairy applications, bakery products and of food products
low-fat and no-fat foods
Carrageenan: ingredient for dairy, meat,
poultry and fish products, bakery glazings
and toothpaste
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CHEMICAL SPECIALTIES (RESINS AND FIBERVISIONS)
In this segment, we manufacture hydrocarbon and rosin-based resins. We are
the only global manufacturer to make both of these resins. We are also the
largest manufacturer of thermal bond polypropylene staple fibers used in
products like disposable diapers.
In August 1999, Hercules acquired the water soluble polymer resin business
of Solutia Inc. In addition, to its use in the paper industry, these products
are sold in the adhesive and other industrial specialty markets.
In September 1999, FiberVisions and Chisso Corporation announced their
plans to establish a joint venture to develop and market bicomponent fibers for
use in hygienic and other applications.
In the fourth quarter of 1999, Hercules announced its intention to
discontinue manufacture of pure dicumyl peroxide at the Beringen, Belgium
facility.
DIVISION PRINCIPAL PRODUCTS PRIMARY MARKETS
- -------- ------------------ ---------------
RESINS Hydrocarbon resins: for adhesives and Makers of consumer
graphic arts and industrial products
such as masking,
Rosin resins: for adhesives, food, packaging, arts and duct
rubber and plastics tape, construction
materials, beverages,
Terpene resins: for chewing gum chewing gum, wire and
and adhesives cables, plastics,
fragrances and flavors,
Peroxides: for wire and cable insulation, printing inks and copier
plastics and rubber toner
Terpene specialties: for flavor and fragrance
in household and industrial products
FIBER VISIONS Polypropylene and polyethylene Makers of disposable
Monocomponent fibers and bicomponent products, feminine care
(PE/PP) fibers: for disposable hygiene products products, upholstered
fabrics, automotive
Textile fibers: for automotive, decorative textiles and
and industrial applications agricultural fabrics
RAW MATERIALS AND ENERGY SUPPLY
Raw materials and supplies are purchased from a variety of industry
sources, including agricultural, forestry, mining, petroleum, and chemical
industries.
Important raw materials for the Process Chemicals and Services segment
are cationic and anionic polyacrylarnides and emulsions, biocides, amines,
surfactants, rosin, adipic acid, epichlorohydrin, fumaric acid, stearic acid,
diethylenetriamine, phosphorus trichloride, wax and starch.
Raw materials important to the Functional Products segment are
acetaldehyde, fatty acids, chemical cotton, woodpulp, ethyl chloride, alcohols,
chlorine, ethylene oxide, propylene oxide, monochloroacetic acid, methyl
chloride, caustic, inorganic acids, guar splits, seaweed, terpenes and citrus
peel.
The important raw materials for the Chemical Specialties segment are
ketones, alcohols, phenol, adipic acid, epichlorohydrin, fumaric acid, stearic
acid, diethylenetriamine, phosphorus trichloride, wax, casein, starch, pigments,
antioxidants, d-limonene, turpentine, crude tall oil, rosin, pine wood stumps,
aromatic and aliphatic resin fonners, cumene, catalysts, pure monomers, toluene,
clay, process oils, polyethylene resin and polypropylene resin.
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Major requirements for key raw materials and fuels are typically
purchased pursuant to multi-year contracts. Hercules is not dependent on any one
supplier for a material amount of its raw material or fuel requirements, but
certain important raw materials are obtained from sole-source or a few major
suppliers.
While temporary shortages of raw materials and fuels may occur
occasionally, these items are currently readily available. However, their
continuing availability and price are subject to domestic and world market and
political conditions as well as to the direct or indirect effect of governmental
action or regulations. The impact of any future raw material and energy
shortages on our business as a whole or in specific world areas cannot be
accurately predicted. Operations and products may, at times, be adversely
affected by governmental action, shortages or international or domestic events.
COMPETITION
The specialty chemicals industry is highly fragmented and its
participants offer a broad array of product lines and categories, representing
many different products designed to meet specific customer requirements.
Individual product or service offerings compete on a global, regional and local
level due to the nature of the businesses and products, as well as the
end-markets and customers served. The industry has become increasingly global as
participants focus on establishing and maintaining leadership positions in
relatively narrow market niches. Many of our businesses face the competitive
pressures discussed above, including industry consolidation, pricing pressures
and competing technologies. In Pulp and Paper, for example, our end-markets are
consolidating and many of our competitors are attempting to enhance their
product offerings on a worldwide basis through alliances and distributor
arrangements. In addition, certain of our businesses are subject to intense
pricing pressures in various product lines, such as fibers in our hygiene
products line and carrageenan in our food ingredients line. FiberVisions, as a
fibers manufacturer for carded applications, faces competition from spunbond
(SB) and spunbond/melt blown/spunbond (SMS) technologies. SB/SMS products may
offer cost savings compared to the products of FiberVisions; however,
FiberVisions believes that its carded products provide improved softness and
acquisition and distribution properties preferred by certain segments of the
disposable diaper and other hygiene products markets.
PATENTS AND TRADEMARKS
Patents covering a variety of products and processes have been issued
to us and our assignees. We are licensed under certain other patents held by
other parties covering our products and processes. Our rights under these
patents and licenses constitute a valuable asset.
We or our wholly owned subsidiaries also have many global trademarks
covering our products. Some of the more significant trademarks include:
Aquapel(R) sizing agent, Hercon(R) sizing emulsions, Aqualon(R) water-soluble
polymers, Natrosol(R) hydroxyethylcellulose, Culminal(R) methylcellulose,
Klucel(R) hydroxypropylcellulose, Natrosol FPS(R) water-soluble polymer
suspension, Precis(R) sizing agent, Novus(R) polymer, Dianodic(R) cooling water
products, Continuum(R) cooling water products, Kymene(R) resin, Regalrez(R)
resin, Slendid(R) fat replacer and Herculon(R) fiber.
We do not consider any individual patent, license or trademark to be of
material importance to Hercules taken as a whole.
RESEARCH AND DEVELOPMENT
Research and development efforts are directed toward the discovery and
development of new products and processes, the improvement and refinement of
existing products and processes, the development of new applications for
existing products and cost improvement initiatives. For example, in 1999 we
entered into an agreement with a biotechnology research and development company
to develop new proprietary industrial enzymes for use in new product and process
development. We spent $85 million on research activities during 1999, as
compared to $61 million in 1998 and $53 million in 1997.
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Process Chemicals and Services currently focuses its research and
development efforts on growth (innovative new product development), technical
sales and services (incremental improvements to existing products and services)
and cost reduction programs to meet diverse customer needs worldwide. Our
state-of-the-art facilities located in Europe and the U.S. are large and
sophisticated research and development laboratories with pilot plant
capabilities that simulate actual operating conditions in our customer
facilities. This allows an accurate assessment of the potential impact of new
products on plant performance.
New product development for performance chemicals is focused on
improving end-use properties. Understanding the product end uses is a critical
step in the development of strength additives and internal and surface sizes, as
well as in the design of products for tissue creping, release and softeners.
In four regional operations centers located in Europe, Asia Pacific,
South America and the U.S., our scientists conduct research and customer
optimization studies focused on solving water and process treatment challenges
by using sophisticated techniques and equipment to provide high level analytical
testing and advanced technical support to customers worldwide.
Aqualon focuses its research and development efforts on targeted,
market-oriented technology programs, process technology and responsive technical
service to customers.
Food Gums focuses its advanced process technology programs on pectin
and carrageenan extraction yield improvement, cheaper peel sources for pectin,
lower cost processes for carrageenan and faster quality control methods.
We have a number of Applications and Development Laboratories
positioned in Europe, Asia and the Americas that provide technical support to
our major customers. At these laboratories, teams work as a network to develop
products, identify new product applications and solve customer problems.
Resins focuses a significant portion of its research and development
efforts primarily on cost improvement techniques in production processes and the
procurement of raw materials. It also engages in new product development (such
as resins for new adhesive systems) and modifying existing products for new
applications.
FiberVisions' major focus in its hygiene product unit is to improve
fiber strength while enhancing product properties for loft, softness and
stretch, thereby creating a competitive platform that is equal to or better than
spunbond. Other research is directed toward the binding, dusting and bonding
functions of bicomponent fibers. The textile product unit is investigating the
use of specific fibers for new applications in the upholstery, automotive,
industrial and decorative fabric industries. The research and development effort
is primarily geared toward the development of new fibers and new applications
for existing markets.
FiberVisions has research and development facilities in the U.S. and
Europe designed to serve the business needs of its customers. Pilot spinning and
processing lines are used to examine new polymers and processing concepts
such as monocomponent or bicomponent fibers from single filament spinning to
full-scale production facilities.
ENVIRONMENTAL MATTERS
We believe that we are in compliance in all material respects with
applicable federal, state, and local environmental laws and regulations.
Expenditures relating to environmental cleanup costs have not materially
affected, and are not expected to materially affect, capital expenditures or
competitive position. Additional information regarding environmental matters is
provided in Item 3.
EMPLOYEES
As of December 31, 1999, we had 11,347 employees worldwide.
Approximately 6,600 were located in the United States, and, of these employees,
about 14% were represented by various local or national unions.
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INTERNATIONAL OPERATIONS
Information on net sales and long-lived assets by geographic areas, for
each of the three years ended December 31, 1999, appears in Note 26 to the
Consolidated Financial Statements. See Part II, Item 8. Direct export sales from
the United States to unaffiliated customers were $342 million, $319 million, and
$309 million for 1999, 1998, and 1997, respectively. Our operations outside the
United States are subject to the usual risks and limitations related to
investments in foreign countries, such as fluctuations in currency values,
exchange control regulations, wage and price controls, employment regulations,
effects of foreign investment laws, governmental instability (including
expropriation or confiscation of assets) and other potentially detrimental
domestic and foreign governmental policies affecting United States companies
doing business abroad.
ITEM 2. PROPERTIES:
Our corporate headquarters and major research center are located in
Wilmington, Delaware, while the administrative headquarters of BetzDearborn is
located in Trevose, Pennsylvania. We also own a number of plants and facilities
worldwide, in locations strategic to the source of raw materials or to our
customers.
All of our principal properties are owned by us, except for our
corporate headquarters, which is leased.
The following are our major worldwide plants:
Process Chemicals and Services - BETZDEARBORN - Addison, Illinois;
Bakersfield, California; Beaumont, Texas; Buenos Aires, Argentina;
Chalon, France; Crissey, France; Edmonton, Alberta, Canada;
Ferentino, Italy; Garland, Texas; Helsingborg, Sweden; Herentals,
Belgium; Houston, Texas; Hsin Chu Hsien, Taiwan; Iksan City, Korea;
Ingelburn, Australia; Jurong Town, Singapore; Kilafors, Sweden;
Langhorne, Pennsylvania; Macon, Georgia; Mississauga, Ontario,
Canada; New Philadelphia, Ohio; Orange, Texas; Point-Claire, Quebec,
Canada; Pudahuel, Santiago, Chile; Qualiano, Italy; Reserve,
Louisiana; Santafe de Bogota, Colombia; Santiago, Chile; Sara,
Mexico; Sorocaba, Brazil; Stonehouse, Gloucester, United Kingdom;
Surabaya, Indonesia; Valencia, Venezuela; Washougal, Washington;
Widnes, Cheshire, United Kingdom; and PULP AND PAPER - Aberdeen,
Scotland; Beringen, Belgium; Burlington, Ontario, Canada; Busnago,
Italy; Chicopee, Massachusetts; Franklin, Virginia; Hattiesburg,
Mississippi; Kalamazoo, Michigan; Kim Cheon, Korea; Lilla Edet,
Sweden; Mexico City, Mexico; Milwaukee, Wisconsin; Nantou, Taiwan;
Pandaan, Indonesia; Paulinia, Brazil; Pendlebury, England; Portland,
Oregon; St. Jean, Quebec, Canada; Sandarne, Sweden; Savannah,
Georgia; Shanghai, China; Sobernheim, Germany; Tampere, Finland;
Tarragona, Spain; Traun, Austria; Voreppe, France; and Zwijndrecht,
The Netherlands.
Functional Products - AQUALON - Alizay, France; Doel, Belgium;
Hopewell, Virginia; Kenedy, Texas; Louisiana, Missouri; Parlin, New
Jersey; Zwijndrecht, The Netherlands; and FOOD GUMS - Cebu, The
Philippines; Grossenbrode, Germany; Lille Skensved, Denmark; and
Limeira, Brazil.
Chemical Specialties - FIBERVISIONS L.L.C. - Athens, Georgia;
Covington, Georgia; Suzhou, China; and Varde, Denmark; and RESINS -
Beringen, Belgium; Brunswick, Georgia; Burlington, Ontario, Canada;
Franklin, Virginia; Gibbstown, New Jersey; Hattiesburg, Mississippi;
Jefferson, Pennsylvania; Middelburg, The Netherlands; Portland,
Oregon; San Juan del Rio, Mexico; Savannah, Georgia; Tokushima,
Japan; and Uruapan, Mexico.
Our plants and facilities, which are continually added to and
modernized, are generally considered to be in good condition and adequate for
business operations. From time to time we discontinue operations at, or dispose
of, facilities that have for one reason or another become unsuitable. For
example, we have decided to close our nitrocellulose operations due to economic
conditions brought on by a persistent worldwide over-supply.
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We have initiated the following major expansion projects designed to
strengthen our market position in key growth areas, while continuing to improve
our manufacturing efficiencies:
- a 15,000 metric ton capacity expansion of long spin staple
fiber in China;
- a 7,000 metric ton methylcellulose capacity increase in
Belgium;
- a 2,200 metric ton pectin capacity increase in Germany;
- a 400 metric ton hydroxypropylcellulose capacity increase in
Virginia; and
- a 700 metric ton capacity plant for the manufacture of
high-performance paper chemicals in China.
ITEM 3. LEGAL PROCEEDINGS:
ENVIRONMENTAL
General
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 $60 million and $230 million. The actual
costs will depend upon numerous factors, including the number of parties found
responsible at each environmental site and their ability to pay; the actual
methods of remediation required or agreed to; outcomes of negotiations with
regulatory authorities; outcomes of litigation; changes in environmental laws
and regulations; technological developments; and the amount of time 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 Corporation, USDA No. LR-C-92-137 (E.D. Ark.)
Litigation over liability at Jacksonville, Arkansas, the most significant
site, has been pending since 1980. As a result of a pretrial Court ruling in
October 1993, Hercules has been held jointly and severally liable for costs
incurred, and for future remediation costs, at the Jacksonville site by the
District Court, Eastern District of Arkansas (the Court).
Other defendants in this litigation have either settled with the government
or, in the case of the Department of Defense (DOD), have not been held liable.
We appealed the Court's order finding the DOD not liable. On January 1, 1995,
the Eighth Circuit Court of Appeals upheld the Court's order. We filed a
petition to the U.S. Supreme Court requesting review and reversal of the Eighth
Circuit Court ruling. This petition was denied on June 26, 1995, and the case
was remanded to the District Court for further proceedings.
On May 21, 1997, the Court issued a ruling that Uniroyal is liable and that
Standard Chlorine is not liable to Hercules for contribution. Through the filing
of separate summary judgment motions, Hercules and Uniroyal raised a number of
defenses to the United States' ability to recover its costs. On October 23,
1998, the Court denied those motions and granted the United States' summary
judgment motion, ordering Hercules and Uniroyal to pay the United States
approximately $103 million plus any additional response costs incurred or to be
incurred after July 31,
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1997. Trial testimony on the issue of allocation between Hercules and Uniroyal
was completed on November 6, 1998.
On August 6, 1999, the Court issued a final judgment in which it reduced
the $103 million from the previous ruling on summary judgment by approximately
$7 million (the amount received by the United States in previous settlements
with other parties) and added applicable interest to reach a final total
adjudged liability of approximately $100.5 million. This final judgment was
based on the Court's findings that (a) Hercules and Uniroyal were jointly and
severally liable for approximately $89 million plus any additional response
costs incurred or to be incurred after May 31, 1998, and (b) Hercules was solely
liable for an additional amount of approximately $11 million. This judgment
finalizes the Court's 1993 and 1997 non-final orders in which Hercules and
Uniroyal were held jointly and severally liable for past and future remediation
costs at the site. Hercules appealed these rulings to the United States Court of
Appeals for the Eighth Circuit on December 16, 1999.
On February 8, 2000, the Court issued a final judgment on the allocation
between Uniroyal and Hercules, finding Uniroyal liable for 2.6 percent and
Hercules liable for 97.4 percent of the costs at issue. Hercules appealed that
judgment on February 10, 2000. That appeal has been docketed and consolidated
with the earlier mentioned appeal. Oral argument before the United States Court
of Appeals for the Eighth Circuit is presently scheduled for mid-2000. Neither
of the Court's final judgments has changed our outlook on the potential outcome
of this matter.
Hercules Incorporated v. Aetna Casualty & Surety Company, et al.,
Del. Super., C.A. No. 92C-10-105 and 90C-FE-195-1-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. Hercules has not included any insurance recovery in the estimated
range of costs above. Since entry of the Court's August 1999 order, Hercules has
entered into settlement agreements with several of its insurance carriers and
has recovered certain settlement monies. Pursuant to the settlement agreements,
the terms of those settlements and amounts recovered are confidential.
Brunswick, Georgia Consent Order and Related Matters
In December 1997, Hercules received notice of an enforcement action by the
State of Georgia, Environmental Protection Department (EPD). In the notice, EPD
requested that Hercules enter into a proposed Consent Order, alleged violations
of the Resource Conservation and Recovery Act (RCRA) and sought a civil penalty
of $250,000. Hercules, without admitting liability, entered into a Consent Order
with the State of Georgia settling those claims. The Consent Order was finalized
and became effective in January 1999. The Consent Order requires Hercules to pay
a fine of $80,000, install 3 aquaria in the Brunswick, Georgia community,
maintain the aquaria for 10 years and remediate certain soils that are located
at Hercules Brunswick, Georgia plant. That penalty was timely paid, and Hercules
is currently in compliance with that Consent Order. 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 EPD. As a result
of that inspection, several potential areas of non-compliance with applicable
environmental laws were identified. We have already addressed many of these
potential areas of non-compliance, and are working with both EPA and EPD to
address the others. In March 2000, EPD sent a proposed Consent Order to Hercules
which included a proposed penalty of $330,000. We are presently in negotiations
with EPD regarding the terms of the proposed Consent Order and the amount of the
proposed penalty.
In addition to the multi-media inspection at the Brunswick, Georgia plant
referred to above, the Hattiesburg, Mississippi plant was also subject to a
multi-media inspection. As a result of that inspection several potential areas
of non-compliance with applicable environmental laws were identified. We have
already addressed many of these potential areas of non-compliance, and are
working with both EPA and the Mississippi Department of Environmental Quality
(DEQ) to address others. In March 2000, DEQ sent a proposed Consent Order to
Hercules which included a proposed penalty of $232,500. We are presently in
negotiations with DEQ regarding the terms of the proposed Consent Order and the
amount of the proposed penalty.
******
At December 31, 1999, the accrued liability of $60 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
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remediation costs in excess of amounts accrued, although quarterly or annual
operating results could be materially affected.
Litigation
Current Litigation
Hercules is a defendant in numerous lawsuits that arise out of, and are
incidental to, the conduct of its business. In these legal proceedings, no
specifically identified director, officer, or affiliate is a party or a named
defendant. These suits concern issues such as product liability, contract
disputes, labor-related matters, patent infringement, environmental proceedings
(discussed above), property damage, and personal injury matters.
Hercules is a defendant in numerous asbestos-related personal injury
lawsuits and claims which typically arise from alleged exposure to products
which were sold by a former subsidiary of Hercules, or from alleged exposure to
asbestos contained in facilities owned or operated by Hercules. In December
1999, Hercules entered into a settlement agreement to resolve the majority of
these matters. In connection with that settlement, Hercules entered into an
agreement with several of its insurance carriers pursuant to which a majority of
the amounts paid will be insured. The terms of both agreements are confidential.
In June 1998, Hercules, along with Georgia-Pacific and AlliedSignal, were
sued in Georgia State Court by 423 plaintiffs for alleged personal injuries and
property damage. This litigation is captioned Coley, et al. v. Hercules
Incorporated, et al., No. 98 VSO 140933 B (Fulton County, Georgia). Plaintiffs
allege they were damaged by the discharge of hazardous waste from the companies'
plants. This case is in the early stages of motion practice and discovery. We
have denied liability and intend to vigorously defend.
In August 1999, Hercules was sued in an action styled as Cape Composites,
Inc. v. Mitsubishi Rayon Co., Ltd., Case No. 99-08260 (U.S. District Court,
Central District of California), one of a series of similar class action
lawsuits brought on behalf of purchasers of carbon fiber and carbon prepreg in
the United States (excluding the government) from the named defendants from
January 1, 1993 through January 31, 1999. In these lawsuits, plaintiffs allege
violations of Section 1 of the Sherman Antitrust Act for alleged price fixing.
In September 1999, these lawsuits were consolidated by the Court into a case
captioned Thomas & Thomas Rodmakers v. Newport Adhesives and Composites, Case
No. CV-99-07796-GHK (U.S. District Court, Central District of California), with
all related cases ordered dismissed. This lawsuit is in the early stages of
motion practice and discovery. Hercules, which is named in connection with its
former Composites Products Division, which division was sold to Hexcel
Corporation in 1996, has denied the material allegations set forth in the
consolidated complaint. Hercules intends to vigorously defend this action.
In December 1999, an action was filed in the U.S. District Court for the
Eastern District of Pennsylvania on behalf of two classes of individuals: (1)
veterans of the South Korean military who claim they were exposed to Agent
Orange and other chemical defoliants used in the demilitarized zone between
North and South Korea between 1967 and 1970 and (2) veterans of the United
States military who also claim to have been similarly exposed. This case is
captioned Chank 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). The case is in the earliest stages of motion practice, including
a motion to transfer venue to the Eastern District of New York, where Agent
Orange related lawsuits have previously been consolidated.
Litigation Resolved in 1999
Hercules was a defendant in three Qui Tam (Whistle Blower) lawsuits in the
U.S. District Court for the Central District of Utah, brought by former
employees of the Aerospace business sold to Alliant Techsystems Inc. in March
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1995. The first suit (United States of America ex. rel. Katherine A. Colunga v.
Hercules Incorporated, et al., Civil No. 89-C-954B(U.S. District Court, Central
District of Utah) was dismissed in July 1998.
United States of America ex. rel. Benny D. Hullinger, et al., Civil No.
92-CV-085 (U.S. District Court, Central District Utah)
The parties to this second lawsuit reached a tentative settlement, subject
to approval of the Court, in August 1998. Although it did not intervene in the
case, the U.S. Department of Justice ("DOJ") objected to approval of the
tentative settlement, arguing that we should only be released from claims that
the government contended were actually investigated. The DOJ further argued that
the proposed allocation of settlement proceeds between False Claims Act claims
and wrongful termination claims should be revised to attribute a higher
percentage of recovery to claims arising under the False Claims Act. On February
9, 1999, the Court entered a judgment to approve the settlement and dismiss the
lawsuit. On April 12, 1999 the DOJ's 60-day period to appeal the judgment
expired without the DOJ having filed a Notice of Appeal. Eight days later, on
April 20, 1999, the DOJ filed a Motion to Extend Time for Filing Notice of
Appeal. We and the plaintiffs opposed the motion, arguing that the DOJ had not
made the showing of excusable neglect required by the rules for such an
extension. On May 4, 1999, the Court denied the DOJ's motion. On May 21, 1999,
the DOJ determined that they would not appeal further. The Court's judgment
dismissing the lawsuit became final on May 28, 1999.
United States of America ex. rel. P. Robert Pratt v. Alliant Techsystems,
Inc. and Hercules Incorporated, Civil No. 95-4812 SVW (U.S. District Court,
Central District of California)
In March 1995, we sold our Aerospace business to Alliant Techsystems, Inc.
As part of the sale, we received an ownership interest in Alliant. In March
1997, Alliant and Hercules received a partially unsealed complaint that named
both as defendants, initiated on an unknown date, and filed in an undisclosed
federal court, in a Qui Tam action by a former employee alleging violations of
the False Claims Act. The action was subsequently identified as United States of
America ex. rel. P. Robert Pratt v. Alliant Techsystems, Inc and Hercules
Incorporated. The action alleged labor mischarging at Alliant's Bacchus Works
facility in Magna, Utah, and contained a claim for wrongful termination. Damages
were not specified, and Alliant and Hercules agreed to share equally the cost of
defense until such time as a determination was made as to the applicability of
the indemnification provisions of the Purchase and Sale Agreement between
Alliant and Hercules. In February 1998, the parties reached a tentative
settlement, which has since been finalized, under which all claims alleging
mischarging to the Intermediate Nuclear Forces Contract were settled. The
settlement was recognized in the fourth quarter 1997. Other portions of the
complaint, which included allegations of mischarging to other government
contracts and claims for wrongful termination of employment were not resolved by
the settlement. The government did not intervene in these other matters. In
August 1998, the parties reached a tentative settlement of the remaining
portions of the complaint, subject to approval of the Court. The DOJ objected to
approval of the tentative settlement, arguing that we should only be released
from claims that the government contended were actually investigated, and that
the settlement agreement should have contained certain provisions preventing
Alliant from recovering certain costs under its government contracts. On
February 17, 1999, the Court entered a judgment approving the settlement and
dismissing the lawsuit. On March 23, 1999, the DOJ filed a Notice of Appeal. In
subsequent discussions with DOJ's counsel, Hercules and Alliant agreed to amend
the settlement agreement to include provisions that prevent Alliant from
recovering under its government contracts the costs that had been the subject of
prior discussions with the DOJ. Following such agreement, the DOJ withdrew its
appeal. At this point, the dismissal of the lawsuit became final. The amendment
to the settlement agreement was submitted to the Court for its approval on
August 2, 1999. The Court subsequently approved the amendment to the settlement
agreement.
Jeffrey Shelton Jr., et al. v. Hercules Incorporated, Civil No. LR-C-97-131
(E.D. Ark. 1997)
This lawsuit involved two individuals seeking medical monitoring and
damages for loss of recreational opportunities. They brought a Resource
Conservation and Recovery Act (RCRA) citizens suit against us seeking an
injunction which would require us to fund or perform various environmental and
health studies and pay for any required remediation to the Bayou Meto.
Plaintiffs and Hercules filed motions for summary judgment. In October 1999, the
Court granted Hercules' motion for summary judgment and the time for any appeal
by the plaintiffs has expired.
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Gary Graham, et al. v. Vertac Chemical Corporation and Hercules
Incorporated, Civil No. LR-C-98-678 (U.S. District Court, Eastern District
of Arkansas).
In addition to the Vertac litigation described above in this Item 3 under
"Environmental," this lawsuit was filed by a group of 19 individuals seeking
damages for personal injuries and diminution of property value as a result of
alleged dioxin contamination from the Jacksonville, Arkansas site. This case was
dismissed without prejudice on technical grounds on August 2, 1999. The time to
appeal has run.
Acosta, et al. v. Betz Laboratories, et al., No. BC 161 669 (1996); Adams,
et al. v. Betz Laboratories, et al., No. BC 113 000 (1994); Aguilar, et al.
v. Betz Laboratories, et al., No. BC 158 588 (1996); and Aguayo et al. v.
Betz Laboratories, et al., No. BC 123 749 (1995).
BetzDearborn, along with Pacific Gas and Electric (PG&E), is a defendant in
these four lawsuits involving in the aggregate approximately 2,350 plaintiffs
pending in the Superior Court of Los Angeles County, California (the lawsuits).
BetzDearborn maintained insurance coverage for the purpose of securing
protection against alleged product and other liabilities, and certain of the
insurance carriers have undertaken to pay the cost of the defense of the
lawsuits subject to various reservations of rights.
In October 1999, BetzDearborn, several of its insurance carriers, and
plaintiffs engaged in a mediation, which led to a settlement of plaintiffs'
claims against BetzDearborn, which settlement was approved by the court in
February 2000. BetzDearborn also reached a settlement with many of its insurance
carriers with respect to these cases. All of these settlement agreements are
confidential.
******
At December 31, 1999, the consolidated balance sheet reflects a current
liability of approximately $101 million for litigation and claims. Estimated
insurance recoveries of approximately $46 million have been reflected in current
assets. These amounts represent management's best estimate of the probable and
reasonably estimable losses and recoveries related to litigation or claims. The
extent of the liability and recovery is evaluated quarterly. While it is not
feasible to predict the outcome of all pending suits and claims, the ultimate
resolution of these matters could have a material effect upon the financial
position of Hercules, and the resolution of any of the matters during a specific
period could have a material effect on the quarterly or annual operating results
for that period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matter was submitted to a vote of security holders during the fourth
quarter of 1999, through the solicitations of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR HERCULES' COMMON STOCK AND RELATED STOCKHOLDER MATTERS:
Our common stock is listed on the New York Stock Exchange (ticker symbol
HPC), The Stock Exchange, London, and the Swiss Stock Exchange. It is also
traded on the Philadelphia, Midwest, and Pacific Exchanges.
The approximate number of holders of record of common stock ($25/48 stated
value) as of March 15, 2000, was 19,434.
Period High Low
------ ---- ---
1998
First Quarter............................................... 51 3/8 45 3/16
Second Quarter.............................................. 50 1/2 40 1/2
Third Quarter............................................... 41 1/4 24 5/8
Fourth Quarter.............................................. 35 1/2 24 15/16
1999
First Quarter............................................... 29 3/8 25 1/4
Second Quarter.............................................. 40 11/16 24
Third Quarter............................................... 40 3/8 27 1/16
Fourth Quarter.............................................. 29 1/16 22 3/8
On December 31, 1999, the closing price of the common stock was $27 7/8.
Hercules has declared quarterly dividends as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
1998 ................................. $0.27 $0.27 $0.27 $0.27
1999 ................................. $0.27 $0.27 $0.27 $0.27
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ITEM 6. SELECTED FINANCIAL DATA:
A summary of selected financial data for Hercules for the years and year
ends specified is set forth in the table below.
(Dollars and shares in millions, except per share)
- --------------------------------------------------------------------------------------------------------------------
FOR THE YEAR 1999 1998* 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Net sales $3,248 $2,145 $1,866 $2,060 $2,427
Profit from operations 480 192 228 441 363
Income before effect of change in
accounting principle 168 9 324 325 333
Net income 168 9 319 325 333
Dividends 111 104 98 95 95
Per share of common stock
Basic:
Earnings before effect of change in
accounting principle 1.63 .10 3.27 3.10 2.98
Earnings 1.63 .10 3.22 3.10 2.98
Diluted:
Earnings before effect of change in
accounting principle 1.62 .10 3.18 2.98 2.87
Earnings 1.62 .10 3.13 2.98 2.87
Dividends 1.08 1.08 1.00 .92 .84
Total assets 5,896 5,833 2,411 2,386 2,493
Long-term debt 1,777 3,096 419 345 298
Company-obligated preferred securities of
subsidiary trust 992 200 -- -- --
* 1998 includes significant acquisitions (see Note 1.)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
This discussion should be read in connection with the information
contained in the Consolidated Financial Statements and Notes thereto. All
references to individual Notes refer to Notes to the Consolidated Financial
Statements.
ACQUISITIONS, DIVESTITURES, AND UNUSUAL ITEMS
In 1999, we incurred $39 million of integration charges ($3 million
reflected in cost of sales), primarily for employee incentive and retention,
consulting, legal and other costs associated with the BetzDearborn Inc.
acquisition, partly offset by a $4 million restructuring charge reversal (see
Note 13). Integration charges are not anticipated to be significant in 2000.
During the fourth quarter of 1999, we decided to exit the nitrocellulose
business, part of the Functional Products segment, and to take steps to address
the performance of some of our specialty product lines in the Chemical
Specialties segment. As a result of these decisions, we incurred $28 million of
pre-tax costs, consisting of $25 million of asset write-downs and disposal costs
($9 million related to the Functional Products segment and $16 million related
to the Chemical Specialties segment), and $3 million of severance benefits for
approximately 20 manufacturing employees at a Chemical Specialties segment plant
(see
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Notes 13 and 16). The 1999 Profit from operations also includes a net $5 million
charge related to legal and environmental matters (see Notes 16 and 24).
Additionally, a production facility fire, a works accident, and the impact of
Hurricane Floyd added approximately $8 million to cost of sales, and an
executive transition agreement increased selling, general and administrative
expense by $8 million. In 1999, we sold our Chilean Agar business, part of the
Functional Products segment, for a pre-tax gain of $16 million (see Notes 16 and
23).
In 1998, Hercules made five major acquisitions for an aggregate purchase
price of approximately $3,620 million, primarily in cash and assumed debt. These
acquisitions were accounted for using the purchase method of accounting, and
were financed with borrowed funds (see Note 1).
The largest of these acquisitions was the purchase of BetzDearborn, a
global specialty chemical company providing water and process treatment to a
variety of commercial and industrial processes. Additionally, the company
acquired Houghton International's paper chemicals group; Citrus Colloids, a
pectin manufacturer; Alliance Technical Products, a manufacturer of resins
serving the water-based adhesives industry; and the 49% share of FiberVisions
owned by Hercules' joint venture partner, making it a wholly owned subsidiary of
Hercules. This business is the world's largest producer of thermal-bond fiber
for disposable diapers and other hygienic products.
The results of operations of the acquired businesses are included in the
Consolidated Financial Statements from the dates of acquisition. In 1999 and
1998, these businesses added approximately $1,537 million and $363 million of
revenue, respectively. Selling, general and administrative expenses increased in
1999 and 1998 as a result of the amortization of goodwill and intangible assets
acquired, while interest and debt expense increased in both years as a result of
increased debt required to fund the acquisitions.
As a result of the 1998 acquisitions, Hercules incurred charges of $232
million before taxes ($197 million net of income taxes) in the fourth quarter of
1998; $215 million is reflected in Profit from operations and $17 million,
primarily related to termination costs of interest rate swaps on extinguished
debt, is reflected in Other income (expense) (see Note 18). The largest portion
of the charges reflected in Profit from operations was $130 million for
purchased in-process research and development related to the acquisition of
BetzDearborn (see Note 15). The remainder of the charges are primarily related
to the company's plans and actions to integrate the operations of BetzDearborn
and improve the efficiencies of its existing operations and support activities.
The charges include $31 million of employee termination benefits ($12 million
related to the Process Chemicals and Services segment, $7 million related to the
Functional Products segment, $5 million related to the Chemical Specialties
segment and $7 million related to corporate infrastructure), $5 million of exit
costs primarily related to facility closures in the Process Chemicals and
Services segment and $29 million of asset write-downs ($15 million related to
the Functional Products segment, $8 million related to the Chemical Specialties
segment and $6 million related to the Process Chemicals and Services segment)
resulting from adverse business negotiations, the BetzDearborn acquisition, and
the loss of a customer (see Notes 13 and 16). Additionally, we incurred
approximately $11 million of integration expenses related to the acquisition and
other expenses of $9 million. These actions are anticipated to yield cost
savings and productivity improvements of approximately $165 million before taxes
on an annual basis. Other income (expense) in 1998 also included a $62 million
charge from the settlements of long-standing "whistle-blower" lawsuits related
to the divested Aerospace business (see Notes 18 and 24).
The acquisition of BetzDearborn also resulted in the inclusion of a $94
million liability, subsequently adjusted to $98 million, as part of the purchase
price allocation. The adjustment reflects $8 million in additional exit costs,
net of a $4 million reduction in employee severance benefits. This liability
included approximately $74 million related to employee termination benefits and
$24 million for office and facility closures, relocation of BetzDearborn
employees and other related exit costs, all of which relate to the Process
Chemicals and Services segment (see Notes 1 and 13).
With respect to the termination benefits and exit costs incurred in 1998
($31 million in termination benefits and $5 million in exit costs charged to
other operating expenses and $98 million in termination benefits and exit costs
charged to goodwill), cumulative cash payments totaled $59 million through 1999
(see Notes 13 and 16).
Other operating expenses in 1997 reflected charges of $167 million
primarily associated with reorganization of management and the adoption of new
competitive strategies, and other costs (see Note 16). Included in these charges
were $24 million of termination benefits ($3 million in the Chemical Specialties
segment, $7 million in the
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Functional Products segment and $14 million for corporate infrastructure), asset
write-offs and other charges of $27 million ($3 million in Process Chemicals and
Services, $4 million in Functional Products, $13 million in Chemical Specialties
and $7 million related to corporate items), and asset impairments of $95 million
($66 million in the Chemicals Specialties segment, $24 million in the Functional
Products segment and $5 million in the Process Chemicals and Services segment).
The remaining $21 million is related to environmental expenses and executive
retirement benefits. Cash payments for termination benefits totaling $21 million
have been made through 1999 and the remaining $3 million is expected to be paid
in 2000 (see Notes 13 and 16). The asset impairments were the result of changes
in the marketplace and the implementation of alternative strategies which
culminated in the realignment of assets in order to reduce costs. Additionally,
Other income (expense) in 1997 reflects the following items: a $20 million
charge related to acquisition activity; a $32 million charge for legal
settlements; and a $368 million gain from the monetization of Hercules'
investment in Tastemaker (see Notes 18 and 23).
The impairment losses recognized in all three years are calculated
pursuant to our policy for accounting for long-lived assets (see Summary of
Significant Accounting Policies).
The above mentioned unusual items, excluding the $98 million
BetzDearborn purchase price allocation, are primarily included in Reconciling
items in each of the respective years in the segment footnote disclosure (see
Note 26).
In June 1997, we completed a joint venture of our polypropylene fibers
business (see Note 23).
SUBSEQUENT EVENTS
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 (see Note 22).
Further, we have entered into discussions with a third party to monetize
our Resins business and we are beginning to explore alternatives regarding our
FiberVisions business (see Note 22).
These three businesses account for approximately $900 million of our 1999
revenues.
In addition to monetizing assets, we will be concentrating on improving our
asset utilization, working capital management and reducing corporate overhead
costs. The above actions may result in restructuring charges in 2000 as exit
plans are finalized.
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RESULTS OF OPERATIONS
(All comparisons are with the previous year, unless otherwise stated.)
1999 VS. 1998:
Consolidated revenues increased $1,103 million or 51% primarily from the
full year revenue impact of the 1998 acquisition of BetzDearborn and
FiberVisions, as well as year-over-year volume improvements in all three
segments. These improvements were partially offset by pricing declines in all
segments due to competitive pressure and the negative effects of a stronger
dollar relative to foreign currencies. Consolidated profit from operations
increased $288 million or 150%. However, after adjusting for the unusual items
described in the previous section, consolidated profit from operations increased
$136 million or 34%. This increase is due to the full year operating profit
impact of the acquired businesses along with synergies realized, manufacturing
cost improvements and volume gains. Offsetting these increases were the negative
impact of pricing declines and the full year impact of goodwill and intangible
amortization expense.
Process Chemicals and Services segment revenues increased $988 million
or 138% primarily due to the full year impact of the acquired BetzDearborn
revenues and higher volumes, partly offset by lower pricing due to competitive
pressure and consolidation within the paper industry. A relatively stronger
dollar, particularly versus the Brazilian real, also negatively impacted the
revenue comparison. Profit from operations increased $207 million or 158%
reflecting a full year of BetzDearborn results in 1999, synergies realized and
manufacturing cost improvements. These improvements were offset by lower pricing
and higher supply chain costs.
Functional Products segment revenues were flat compared to 1998 as food
gums volume and pectin pricing improvements were offset by lower pricing due to
competitive pressure and over-capacity in various other markets and also by weak
demand in the oilfield markets. Profit from operations increased $3 million or
1%. However, excluding the costs primarily associated with a production facility
fire at the Parlin, New Jersey plant, operating profit increased $10 million or
5% primarily due to the recovery of the Asian currencies, particularly the
Japanese yen, relative to the dollar and manufacturing cost improvements.
Chemical Specialties segment revenues increased $119 million or 21%
primarily due to the full year effect of the FiberVisions acquisition and resins
volume improvements, partly offset by lower pricing due to competitive pricing
pressure and lower polymer costs, along with a stronger dollar relative to
foreign currencies. Profit from operations rose $14 million or 19%. Excluding
the third quarter 1999 impact of Hurricane Floyd on our resins production
facilities, operating profit increased $16 million or 21%. The increase in
operating profit is primarily due to the inclusion of FiberVisions results for
the full year 1999 and lower polymer cost offset by lower pricing.
1998 VS. 1997:
Consolidated revenues increased $279 million or 15% as the increase in
revenues from acquisitions was partially offset by the effects of the economic
crisis in Southeast Asia, the strength of the U.S. dollar, and competitive
pricing pressures. Consolidated profit from operations declined $36 million or
16%. However, after adjusting for the impact of the unusual items described in
the previous section, profit from operations increased $12 million or 3%, while
operating margins decreased from 21% in 1997 to 19% in 1998. These results are
due to the operating profit impact of the revenue variance noted above, coupled
with manufacturing cost improvement initiatives, partly offset by higher
selling, general, and administrative expenses.
Process Chemicals and Services segment revenues increased 62%, resulting
from acquisitions. Excluding acquisitions, revenues in this segment were
negatively impacted by competitive pricing pressures, the impact of the economic
crisis in Southeast Asia, and the weakness of foreign currencies relative to the
dollar. Profit from operations increased 31% as the favorable impact of
acquisitions was partly offset by the adverse revenue impacts described above,
higher raw material costs used in the production of wet strength products in
Europe, and higher selling, general, and administrative expenses.
Functional Products segment revenues declined 4% on lower volumes,
particularly in Asia and Eastern Europe, and also the U.S. oilfield markets,
along with the negative impact of weaker foreign currencies relative to
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the dollar, partly offset by acquired revenues and improved pectin pricing.
Profit from operations declined 4%. This was the result of volume declines and
the negative impact of the weaker foreign currencies offset by improved
manufacturing costs and pectin pricing.
Chemical Specialties segment revenues increased 8% as the additional
revenues from acquisitions were partly offset by lower pricing across the major
Resins product lines both in the U.S. and in Europe. Profit from operations rose
12% as the profit from acquisitions was partly offset by the pricing declines in
Resins.
Interest and debt expense and preferred security distributions of
subsidiary trusts increased as a result of the increased debt used to fund the
1998 acquisitions, amortization of debt issue costs and the subsequent
refinancing of this debt with equity-like securities (see Notes 6 and 7).
Equity in income of affiliated companies declined over the three year
period as a result of the monetization of Hercules' investment in Alliant
Techsystems in 1997 and 1998 and Hercules' investment in Tastemaker in 1997 (see
Note 23).
The provision for income taxes reflects effective tax rates of 31% in
1999, 88% in 1998, and 45% in 1997 (see Note 19). The 1999 rate was favorably
impacted by the utilization of a capital loss and other adjustments related to
prior years' assessments. Both the 1998 and 1997 rates are significantly higher
than the federal statutory income tax rate of 35%. The 1998 rate is high because
the charges for purchased in-process research and development and goodwill
amortization are not deductible for income tax purposes. The impact of these
nondeductible items was reduced by favorable state tax settlements relating to a
prior year's sale of an investment and favorable federal tax adjustments related
to prior years' assessments. The 1997 rate reflects the relatively higher tax
rate on the monetization of the Tastemaker and Alliant Techsystems investments,
along with required increases to tax reserves related to anticipated assessments
from federal, state, and foreign authorities. The 2000 tax rate is anticipated
to be approximately 36%.
FINANCIAL CONDITION
Liquidity and financial resources: Net cash flow from operations was
$280 million in 1999, $181 million in 1998, and $187 million in 1997. The 1999
increase reflects higher profit from operations, primarily from businesses
acquired and lower tax payments offset by higher interest payments, cash
expenditures for integration, termination benefits and other exit costs, along
with higher working capital requirements. 1998 included higher interest payments
related to increased debt and higher payments of legal settlements, offset by
lower income tax payments and cash flow from acquired businesses.
As noted above, during 1998, the company completed five acquisitions for
approximately $3,620 million, primarily in cash and assumed debt (see Notes 1
and 6). The company financed the acquisitions and refinanced existing debt with
borrowings under a $3,650 million credit facility with a syndicate of banks. The
company's debt agreement contains restrictive covenants that require maintenance
of certain financial covenants, including leverage, net worth, and interest
coverage, and provides that the entry of a judgment or judgments involving
aggregate liabilities of $50 million or more be vacated, discharged, stayed, or
bonded within 60 days of entry of such judgment or judgments.
During the second quarter of 1999, we amended our credit agreement to
allow for borrowing in euros, as well as in U.S. dollars. Approximately $950
million of U.S. dollar denominated debt was converted to euro indebtedness.
In September 1998, we filed a shelf registration to increase accessible
securities from $300 million to $3,000 million. The registration allowed for
issuance of equity, equity-like, and debt securities.
In November 1998, Hercules Trust V, a wholly owned subsidiary trust of
Hercules, completed a private placement of $200 million Redeemable Hybrid INcome
Overnight Shares (RHINOS). The RHINOS are guaranteed by Hercules (see Note 7).
Pursuant to amendments to the RHINOS agreements executed on February 9, 2000:
(I) the interest rate on the RHINOS was reduced to London Interbank Offered Rate
(LIBOR) plus 1.5%, and (2) the RHINOS can be remarketed at any time at the
option of the holder. If the holder elects to initiate a remarketing,
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Hercules has the right to redeem the RHINOS. 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 on February 9, 2002
(see Note 7).
In March 1999, another wholly owned subsidiary trust commenced a public
offering, under the registration statement noted above, and sold $362 million of
Trust Originated Preferred Securities (TOPrS) (see Note 7). Proceeds of the
offering were used to repay long-term debt. The Trust's obligations are
guaranteed by Hercules.
In July 1999, we completed a public offering of 5,000,000 shares of our
common stock, which provided us with net proceeds of $171.5 million (see Note
9). On the same date, we also completed a public offering of 350,000 CRESTS
Units with Hercules Trust II, a wholly owned subsidiary trust (see Note 7). This
transaction provided net proceeds to Hercules and Trust II of $340.4 million. We
used the proceeds from both offerings to repay long-term debt.
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 warrants may be
exercised, subject to certain conditions, at any time before March 31, 2029,
unless there is a reset and remarketing event. Trust II used the proceeds from
the sale of its preferred securities to purchase junior subordinated deferrable
interest debentures of Hercules. Hercules will pay interest on the debentures
while Trust II will pay distributions on its preferred securities. Both are paid
quarterly at an annual rate of 6 1/2% of the scheduled liquidation amount of
$1,000 per debenture and/or preferred security.
On December 23, 1999, we completed a private placement of 170,000
Floating Rate Preferred Securities (Floating Rate Preferred) with Hercules Trust
VI, a wholly owned subsidiary trust (see Note 7). The Floating Rate Preferred
are guaranteed by Hercules. This transaction provided net proceeds to Hercules
and Trust VI of approximately $170 million. We used the proceeds to repay
long-term debt.
During the second quarter of 1999, we entered into a financing
agreement with a bank, which provided for the sale of promissory notes in the
principal amount of up to $20 million at any one time. The agreement, which
expired in December 1999, provided for commitments by the bank and Hercules
under which the bank purchased promissory notes denominated in a number of
foreign currencies in exchange for U.S. dollars. The notes were repayable only
to the extent that Hercules had sufficient foreign currency revenue. Neither
Hercules nor the bank could cancel their obligations under the agreement.
Transaction gains and losses related to the notes were deferred and recognized
as an adjustment to the revenue supporting the note repayment.
As of December 31, 1999, the company has $564 million available under
the revolving credit agreement and $254 million of short-term lines of credit.
Capital Structure and Commitments: Total capitalization (stockholders'
equity, company obligated preferred securities of subsidiary trusts, and debt)
decreased to $4.3 billion at December 31, 1999, from $4.4 billion in the prior
year. The ratio of debt-to-total capitalization decreased to 57% at December 31,
1999 from 83% at December 31, 1998 as a result of the Floating Rate Preferred
offering in December 1999, the CRESTS Units and common stock offerings during
the third quarter and the TOPrS offering during the first quarter. The amount
accessible under our shelf registration is $1,763 million.
As noted earlier, in February 2000 we announced a new strategy that will
be focused on cash generation and debt reduction primarily through monetization
of assets and better asset utilization. We expect to generate in excess of $1
billion of cash through these actions. The cash will be used to pay down debt,
reduce interest expense by approximately $75 million annually and reduce the
ratio of debt to total capitalization to approximately 40%.
A quarterly dividend has been paid without interruption since 1913, the
company's first year of operation. The annual dividend was $1.08 per share
during 1999 and 1998.
Capital expenditures during 1999 were $196 million, with 28% of the
expenditures related to increased production capacity, compared with 27% in 1998
and 38% in 1997. The remainder mostly relates to cost-savings projects, capacity
maintenance, and regulatory requirements. The increase in capital expenditures
of $39 million in
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1999 over 1998 is primarily due to higher spending in the Functional Products
segment due to the methylcellulose expansion in Doel, Belgium and the pectin
expansion in Grossenbrode, Germany. The increase in 1998 capital expenditures of
approximately $38 million over 1997 is primarily from companies acquired in 1998
and higher spending in the Functional Products segment. Capital expenditures are
expected to approximate $185 million during 2000. This includes funds for
continuing or completing existing projects, including the methylcellulose
expansion in Doel, Belgium mentioned earlier and to fund new projects.
YEAR 2000
The company recognized the need to ensure that its operations and
relationships with its business partners would not be adversely affected by the
Year 2000 problem, and thus developed and implemented a comprehensive project
that addressed those areas of vulnerability. A cross-functional Year 2000
Program Office was created by the company at the corporate level to coordinate
and provide policies, guidance, and support for its Year 2000 initiatives. Site
compliance teams were formed at all major sites worldwide.
In addition to its other Year 2000 activities, the company is engaged in
a major project to implement SAP R/3(TM) software. All vendor-supplied SAP code
is Year 2000 compliant. The resulting systems comprise the company's core
business systems, including sales and distribution, inventory and purchasing,
finance and control, product costing, human resources and payroll, and fixed
assets.
The company believes that the Year 2000 problem has been successfully
addressed through its Year 2000 initiatives.
The company did not experience any difficulties related to the Year
2000 problem on December 31, 1999 and has not experienced any such difficulties
that the company is aware of since that date. The company's operations have not,
to date, been adversely affected by any difficulties experienced by any of our
suppliers or customers in connection with the Year 2000 problem, and the company
will continue to monitor its systems for potential difficulties through the
remainder of calendar year 2000.
The total cost of the company's Year 2000 project was approximately $12
million. These costs do not include the cost to upgrade or replace process
control equipment. These costs were expensed as incurred and were funded through
operating cash flow.
RISK FACTORS
Market Risk - Fluctuations in interest and foreign currency exchange
rates affect the company's financial position and results of operations. The
company uses several strategies to actively hedge interest rate and foreign
currency exposure and minimize the effect of such fluctuations on reported
earnings and cash flow. (See "Foreign Currency Translation" and "Financial
Instruments and Hedging" in the Summary of Significant Accounting Policies and
Notes 18 and 21.) Sensitivity of the company's 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 the company 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.
The company's derivative and other financial instruments subject to
interest rate risk consist of debt instruments, interest rate swaps, and
currency swaps. At December 31, 1999 and 1998, net market value of these
combined instruments was a liability of $3.32 billion and $3.66 billion,
respectively. 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 December 31, 1999 and
1998 would result in an $80 million and $36 million decrease in the net market
value of the liability, respectively. A 100-basis point decrease in interest
rates at December 31, 1999 and 1998 would result in a $92 million and $45
million increase in the net market value of the liability, respectively. The
change in the sensitivity level from year-end 1998 is primarily from the fixed
distribution rate associated with the Trust Originated Preferred Securities
issued in 1999 (see Note 7).
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22
Our financial instruments, subject to changes in equity price risk
including the warrants component of the CRESTS Units issued in 1999 (see Note
7), represent a net obligation of $29 million, and an asset of $22 million at
December 31, 1999 and 1998, respectively. The sensitivity analysis assumes an
instantaneous 10% change in valuation with all other variables held constant. A
10% increase in market values at December 31, 1999 and 1998 would increase the
net obligation by $15 million, and the asset portion by $2 million, while a 10%
decrease would reduce the net obligation by $12 million and the asset portion by
$2 million, respectively. The change in equity price risk from year-end 1998 is
primarily from the warrants component of the CRESTS unit issued in 1999.
Our financial instruments, subject to foreign currency exchange risk,
consist of foreign currency forwards, options, and foreign currency debt and
represent a net liability position of $885 million, and a net asset position of
$6 million at December 31, 1999 and 1998, respectively. 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 December 31,
1999 and 1998 would result in an $89 million decrease in the net liability
position, and a $63 million increase in the net asset position, while a 10%
weakening of the dollar versus all currencies would result in an $88 million
increase in the net liability and a $78 million decrease in the net asset
position, respectively. The change in the sensitivity level from year-end 1998
is primarily from replacing cross currency swaps with foreign currency debt to
hedge exposure to increased investments in foreign subsidiaries, primarily as a
result of the BetzDearborn acquisition.
Foreign exchange forward and option contracts are used to hedge the
company's firm and anticipated foreign currency cash flows. Thus, there is
either an asset or cash flow exposure related to all the financial instruments
in the above sensitivity analysis for which the impact of a movement in exchange
rates would be in the opposite direction and substantially equal to the impact
on the instruments in the analysis. There are presently no significant
restrictions on the remittance of funds generated by the company's operations
outside the United States.
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 $60 million and $230 million. The company 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 (see Note 24).
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 24).
FORWARD-LOOKING STATEMENT
This Annual Report on Form 10-K 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 the company 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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
For discussion of quantitative and qualitative disclosures about
market risk, see the caption "Risk Factors" under Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
REQUIRED SUPPLEMENTARY DATA
HERCULES INCORPORATED
CONSOLIDATED FINANCIAL STATEMENTS Page
----
Report of Independent Accountants................................................................ 23
Consolidated Statement of Income for the Years Ended December 31, 1999, 1998, and
1997.......................................................................................... 24
Consolidated Balance Sheet as of December 31, 1999 and 1998...................................... 25
Consolidated Statement of Cash Flow for the Years Ended December 31, 1999, 1998, and
1997.......................................................................................... 26
Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 1999,
1998, and 1997................................................................................ 27
Consolidated Statement of Comprehensive Income (Loss) for the Years Ended December 31,
1999, 1998, and 1997.......................................................................... 28
Accounting Policies and Notes to Consolidated Financial Statements............................... 29
SUPPLEMENTARY DATA
Summary of Quarterly Results (Unaudited)......................................................... 55
Subsidiaries of Registrant....................................................................... 56
22
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the consolidated financial statements listed in the foregoing
index present fairly, in all material respects, the financial position of
Hercules Incorporated and subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14(a)(2)
on page 60 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 25 to the financial statements, in 1997, the Company
changed its method of accounting for costs incurred in connection with its
enterprise software installation.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 24, 2000
23
25
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF INCOME (Dollar in millions, except per share)
1999 1998 1997
---- ---- ----
Net sales ............................................................. $ 3,248 $ 2,145 $ 1,866
------- ------- -------
Cost of sales ......................................................... 1,770 1,287 1,169
Selling, general, and administrative expenses ......................... 787 377 248
Research and development .............................................. 85 61 53
Goodwill and intangible asset amortization ............................ 79 22 3
Purchased in-process research and development (Note 15) ............... -- 130 --
Other operating expenses, net (Note 16) ............................... 47 76 165
------- ------- -------
Profit from operations ................................................ 480 192 228
Equity in income of affiliated companies .............................. 1 10 30
Interest and debt expense (Note 17) ................................... 185 101 39
Preferred security distributions of subsidiary trusts ................. 51 2 --
Other income (expense), net (Note 18) ................................. (2) (22) 374
------- ------- -------
Income before income taxes and effect of change in accounting principle 243 77 593
Provision for income taxes (Note 19) .................................. 75 68 269
------- ------- -------
Income before effect of change in accounting principle ................ 168 9 324
Effect of change in accounting principle (Note 25) .................... -- -- (5)
------- ------- -------
Net income ............................................................ $ 168 $ 9 $ 319
======= ======= =======
Earnings per share (Note 20)
Basic:
Earnings before effect of change in accounting principle ........ $ 1.63 $ .10 $ 3.27
Effect of change in accounting principle ........................ -- -- (.05)
------- ------- -------
Earnings per share .............................................. $ 1.63 $ .10 $ 3.22
======= ======= =======
Diluted:
Earnings before effect of change in accounting principle ........ $ 1.62 $ .10 $ 3.18
Effect of change in accounting principle ........................ -- -- (.05)
------- ------- -------
Earnings per share .............................................. $ 1.62 $ .10 $ 3.13
======= ======= =======
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
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26
HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET (Dollars in millions)
December 31,
1999 1998
---- ----
ASSETS
Current assets
Cash and cash equivalents ................................................. $ 63 $ 68
Accounts receivable, net (Note 2) ......................................... 766 663
Inventories (Note 3) ...................................................... 380 416
Deferred income taxes (Note 19) ........................................... 129 93
------- -------
Total current assets ...................................................... 1,338 1,240
Property, plant, and equipment, net (Note 12) ................................... 1,321 1,438
Investments (Note 4) ............................................................ 47 51
Goodwill (net of accumulated amortization - 1999, $91; 1998, $28) ............... 2,390 2,356
Other intangible assets (net of accumulated amortization - 1999, $39;
1998, $22) ................................................................... 180 192
Prepaid pension (Note 14) ....................................................... 217 218
Deferred charges and other assets ............................................... 403 338
------- -------
Total assets .............................................................. $ 5,896 $ 5,833
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable .......................................................... $ 320 $ 270
Short-term debt (Note 5) .................................................. 678 566
Accrued expenses (Note 12) ................................................ 561 481
------- -------
Total current liabilities ................................................. 1,559 1,317
Long-term debt (Note 6) ......................................................... 1,777 3,096
Deferred income taxes (Note 19) ................................................. 287 225
Other postretirement benefits (Note 14) ......................................... 129 136
Deferred credits and other liabilities .......................................... 289 300
------- -------
Total liabilities ......................................................... 4,041 5,074
Company-obligated preferred securities of subsidiary trusts (Note 7) ............ 992 200
Stockholders' equity
Series preferred stock (Note 8) ........................................... -- --
Common stock, $25/48 par value (Note 9) ................................... 83 81
(shares issued: 1999 - 159,976,730; 1998 - 154,823,496)
Additional paid-in capital ................................................ 757 504
Unearned compensation (Note 10) ........................................... (123) (130)
Other comprehensive losses ................................................ (44) (13)
Retained earnings ......................................................... 2,125 2,068
------- -------
2,798 2,510
Reacquired stock, at cost (shares: 1999 - 53,587,365; 1998 - 53,995,692) ........ 1,935 1,951
------- -------
Total stockholders' equity ................................................ 863 559
------- -------
Total liabilities and stockholders' equity ................................ $ 5,896 $ 5,833
======= =======
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
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27
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW (Dollars in millions)
1999 1998 1997
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
NET INCOME .............................................................................. $ 168 $ 9 $ 319
Adjustments to reconcile net income to net cash provided from
operations:
Depreciation ..................................................................... 144 86 73
Amortization ..................................................................... 106 22 3
Write-off in-process research and development .................................... -- 130 --
Nonoperating gain on disposals ................................................... (23) (23) (398)
Noncash charges (credits) ........................................................ (13) 38 92
Other ............................................................................ -- (6) 15
Accruals and deferrals of cash receipts and payments:
Affiliates' earnings in excess of dividends received ...................... (1) (6) (25)
Accounts receivable ....................................................... (69) 26 (41)
Inventories ............................................................... (7) (14) (6)
Accounts payable and accrued expenses ..................................... (27) (72) 137
Noncurrent assets and liabilities ......................................... 2 (9) 18
------- ------- -----
Net cash provided by operations ....................................... 280 181 187
------- ------- -----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures .................................................................... (196) (157) (119)
Proceeds of investment and fixed asset disposals ........................................ 50 600 295
Acquisitions, net of cash acquired ...................................................... (10) (3,109) --
Other, net .............................................................................. (37) (25) (34)
------- ------- -----
Net cash (used in) provided by investing activities ................... (193) (2,691) 142
------- ------- -----
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds ................................................................. 279 3,111 343
Long-term debt repayments ............................................................... (1,360) (247) (130)
Change in short-term debt ............................................................... 22 (228) (35)
Payment of debt issuance costs and underwriting fees .................................... (19) (66) --
Proceeds from issuance of subsidiary trusts' preferred securities ....................... 792 200 --
Proceeds from issuance of warrants ...................................................... 90 -- --
Common stock issued ..................................................................... 182 10 38
Common stock reacquired ................................................................. (3) (114) (458)
Proceeds from issuance of subsidiary preferred stock .................................... 12 -- --
Dividends paid .......................................................................... (83) (104) (98)
------- ------- -----
Net cash (used in) provided by financing activities ................... (88) 2,562 (340)
Effect of exchange rate changes on cash ................................................. (4) (1) (2)
------- ------- -----
Net increase (decrease) in cash and cash equivalents .................................... (5) 51 (13)
Cash and cash equivalents at beginning of year .......................................... 68 17 30
------- ------- -----
Cash and cash equivalents at end of year ................................................ $ 63 $ 68 $ 17
======= ======= =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) ............................................. $ 184 $ 100 $ 37
Distributions on trust preferred securities ...................................... 36 -- --
Income taxes paid, net ........................................................... 79 117 152
Noncash investing and financing activities:
Conversion of notes and debentures ............................................... 2 8 31
ESOP and incentive plan stock issuances .......................................... 8 196 15
Accounts payable for common stock acquisitions ................................... -- -- 5
Investment in long-term notes .................................................... -- -- 504
Accounts receivable from sale of investment/asset disposals ...................... -- -- 8
Assumed debt of acquired businesses .............................................. -- 307 --
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
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28
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Dollars in millions)
Other
Compre-
Unearned hensive
Common Paid-in Compen- Income Retained Reacquired
Stock Capital sation (Loss) Earnings Stock
- --------------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 1997 $79 $493 $ -- $45 $1,942 $1,672
(Common shares: issued 152,269,076;
reacquired, 50,866,562)
Net income -- -- -- -- 319 --
Common dividends, $1.00 per common share -- -- -- -- (98) --
Foreign currency translation adjustment -- -- -- (47) -- --
Purchase of common stock, 9,536,619 shares -- -- -- -- -- 455
Issuance of common stock:
Incentive plans, net, 2,113,805 shares
From reacquired stock -- (19) -- -- -- (72)
Conversion of notes and debentures,
2,087,939 shares 1 30 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 $80 $504 $ -- $(2) $2,163 $2,055
(Common shares: issued 154,357,015;
reacquired, 58,289,376)
Net income -- -- -- -- 9 --
Common dividends, $1.08 per common share -- -- -- -- (104) --
Foreign currency translation adjustment -- -- -- (11) -- --
Purchase of common stock, 2,361,390 shares -- -- -- -- -- 109
Issuance of common stock:
Incentive plans, net, 764,201 shares
From reacquired stock -- (7) -- -- -- (27)
ESOP, 5,890,873 shares from reacquired
Stock -- -- (130) -- -- (186)
Conversion of notes and debentures,
466,481 shares 1 7 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 $81 $504 $(130) $(13) $2,068 $1,951
(Common shares: issued 154,823,496;
reacquired, 53,995,692)
Net income -- -- -- -- 168 --
Common dividends, $1.08 per common share -- -- -- -- (111) --
Foreign currency translation adjustment -- -- -- (31) -- --
Impact of allocation of shares held by ESOP -- -- 7 -- -- --
Purchase of common stock, 126,893 shares -- -- -- -- -- 3
Warrants issued in connection with CRESTS
Units offering (Note 7) -- 88 -- -- -- --
Issuance of common stock:
Incentive plans, net, 535,220 shares
From reacquired stock -- -- -- -- -- (19)
Conversion of notes and debentures,
153,234 shares -- 2 -- -- -- --
Public offering, 5,000,000 shares 2 163 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 $83 $757 $(123) $(44) $2,125 $1,935
(Common shares: issued 159,976,730
reacquired, 53,587,365)
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
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29
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Dollars in millions)
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----