SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000 Commission file number 1-496
--------------------
HERCULES INCORPORATED
A DELAWARE CORPORATION
I.R.S. EMPLOYER IDENTIFICATION NO. 51-0023450
HERCULES PLAZA
1313 NORTH MARKET STREET
WILMINGTON, DELAWARE 19894-0001
TELEPHONE: 302-594-5000
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
Preferred Share Purchase Rights
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. X
As of March 6, 2001, registrant had 108,115,824 shares of common stock,
$25/48 stated value ("Common Stock") outstanding, 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 6, 2001 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 April 12,
2001 (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 357).
EXPLANATORY NOTE
This Amendment No. 1 to Hercules Incorporated's Annual Report on Form 10-K
for the year ended December 31, 2000 filed with the Securities and Exchange
Commission on April 17, 2001 is being filed to amend Part II, Item 8, Financial
Statements and Supplementary Data, to add the recently completed audited
financial statements of certain subsidiaries and to add Exhibit 23, Consent of
PricewaterhouseCoopers LLP.
1
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...................................................................................... 3
Consolidated Statement of Income for the Years Ended December 31, 2000, 1999 and 1998.................................. 4
Consolidated Balance Sheet as of December 31, 2000 and 1999............................................................ 5
Consolidated Statement of Cash Flow for the Years Ended December 31, 2000, 1999 and 1998............................... 6
Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998.................... 7
Consolidated Statement of Comprehensive Income (Loss) for the Years Ended December 31, 2000, 1999 and 1998............. 8
Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements.............................. 9
SUPPLEMENTARY DATA
Summary of Quarterly Results (Unaudited)............................................................................... 44
Subsidiaries of Registrant............................................................................................. 45
SUBSIDIARY FINANCIAL STATEMENTS Page
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Aqualon Company........................................................................................................ 46
BetzDearborn Canada, Inc. ............................................................................................. 61
BetzDearborn Europe, Inc. ............................................................................................. 77
BetzDearborn Inc. ..................................................................................................... 97
BetzDearborn International, Inc. ...................................................................................... 119
BL Technologies, Inc. ................................................................................................. 138
FiberVisions A/S....................................................................................................... 148
FiberVisions Incorporated.............................................................................................. 166
FiberVisions, L.L.C. .................................................................................................. 181
FiberVisions L.P. ..................................................................................................... 198
FiberVisions Products, Inc. ........................................................................................... 206
Hercules Canada, Inc. ................................................................................................. 219
Hercules Chemicals (Taiwan) Co., Limited .............................................................................. 228
Hercules Credit, Inc. ................................................................................................. 244
Hercules GB Holdings Limited .......................................................................................... 260
Hercules International Limited......................................................................................... 278
Hercules International Limited, LLC.................................................................................... 300
Hercules International Trade Corporation Limited....................................................................... 316
Hercules Investments Sarl.............................................................................................. 324
WSP, Inc. ............................................................................................................. 347
2
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
accompanying index present fairly, in all material respects, the financial
position of Hercules Incorporated and subsidiaries at December 31, 2000
and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a)(2) on page 69
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 of America, 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 our opinion.
As discussed in Note 23, on April 5, 2001 the Company received
waivers from certain of its lenders of debt covenant violations at March
31, 2001. The debt covenant violations, conditions of the waivers,
management's outlook as to future debt covenant compliance and plans
should they not be in compliance in the future are discussed in Note 23.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
April 10, 2001
3
HERCULES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share)
2000 1999 1998
---- ---- ----
Net sales $ 3,152 $ 3,309 $ 2,145
------- ------- -------
Cost of sales 1,784 1,831 1,287
Selling, general and administrative expenses 810 787 377
Research and development 80 85 61
Goodwill and intangible asset amortization 80 79 22
Purchased in-process research and development (Note 16) -- -- 130
Other operating (income) expenses, net (Note 17) (46) 47 76
------- ------- -------
Profit from operations 444 480 192
Equity in income (loss) of affiliated companies (2) 1 10
Interest and debt expense (Note 18) 164 185 101
Preferred security distributions of subsidiary trusts 96 51 2
Other income (expense), net (Note 19) (18) (2) (22)
------- ------- -------
Income before income taxes 164 243 77
Provision for income taxes (Note 20) 66 75 68
------- ------- -------
Net income $ 98 $ 168 $ 9
======= ======= =======
Earnings per share (Note 21)
Basic: $ 0.91 $ 1.63 $ 0.10
Diluted: $ 0.91 $ 1.62 $ 0.10
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
4
HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET
(Dollars in
millions)
December 31,
2000 1999
------- -------
ASSETS
Current assets
Cash and cash equivalents $ 54 $ 63
Accounts receivable, net (Note 2) 626 766
Inventories (Note 3) 305 380
Deferred income taxes (Note 20) 37 129
------- -------
Total current assets 1,022 1,338
Property, plant, and equipment, net (Note 12) 1,104 1,321
Investments (Note 4) 53 47
Goodwill and other intangible assets, net (Note 13) 2,391 2,570
Prepaid pension (Note 15) 246 217
Deferred charges and other assets 493 403
------- -------
Total assets $ 5,309 $ 5,896
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 259 $ 320
Short-term debt (Note 5) 261 678
Accrued expenses (Note 12) 402 561
------- -------
Total current liabilities 922 1,559
Long-term debt (Note 6) 2,342 1,777
Deferred income taxes (Note 20) 187 287
Other postretirement benefits (Note 15) 122 129
Deferred credits and other liabilities 298 289
------- -------
Total liabilities 3,871 4,041
Commitments and contingencies (Note 25) -- --
Company-obligated preferred securities of subsidiary trusts (Note 7) 622 992
Stockholders' equity
Series preferred stock (Note 8) -- --
Common stock, $25/48 par value (Note 9) 83 83
(shares issued: 2000 - 159,984,444; 1999 - 159,976,730)
Additional paid-in capital 726 757
Unearned compensation (Note 10) (115) (123)
Other comprehensive losses (143) (44)
Retained earnings 2,157 2,125
------- -------
2,708 2,798
Reacquired stock, at cost (shares: 2000 - 52,442,393; 1999 - 53,587,365) 1,892 1,935
------- -------
Total stockholders' equity 816 863
------- -------
Total liabilities and stockholders' equity $ 5,309 $ 5,896
======= =======
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
5
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW
(Dollars in millions)
2000 1999 1998
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 98 $ 168 $ 9
Adjustments to reconcile net income to net cash provided from
operations:
Depreciation 132 144 86
Amortization 114 106 22
Write-off of in-process research and development -- -- 130
Gain on disposals (142) (23) (23)
Noncash charges (credits) 105 (13) 38
Other -- -- (6)
Accruals and deferrals of cash receipts and payments:
Affiliates' earnings in excess of dividends received 2 (1) (6)
Accounts receivable 48 (69) 26
Inventories (3) (7) (14)
Accounts payable and accrued expenses (190) (27) (72)
Noncurrent assets and liabilities (94) 2 (9)
------- ------- -------
Net cash provided by operations 70 280 181
------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (187) (196) (157)
Proceeds of investment and fixed asset disposals 418 50 600
Acquisitions, net of cash acquired (6) (10) (3,109)
Other, net (12) (37) (25)
------- ------- -------
Net cash (used in) provided by investing activities 213 (193) (2,691)
------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds 1,889 279 3,111
Long-term debt repayments (1,790) (1,360) (247)
Change in short-term debt 92 22 (228)
Payment of debt issuance costs and underwriting fees (28) (19) (66)
Proceeds from issuance of subsidiary trusts preferred securities -- 792 200
Repayment of subsidiary trust preferred securities (370) -- --
Proceeds from issuance of warrants -- 90 --
Common stock issued 13 182 10
Common stock reacquired (2) (3) (114)
Proceeds from issuance of subsidiary preferred stock -- 12 --
Dividends paid (94) (83) (104)
------- ------- -------
Net cash (used in) provided by financing activities (290) (88) 2,562
------- ------- -------
Effect of exchange rate changes on cash (2) (4) (1)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (9) (5) 51
Cash and cash equivalents at beginning of year 63 68 17
------- ------- -------
Cash and cash equivalents at end of year $ 54 $ 63 $ 68
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $ 164 $ 184 $ 100
Distributions on trust preferred securities 85 36 --
Income taxes paid, net 29 79 117
Noncash investing and financing activities:
Conversion of notes and debentures -- 2 8
ESOP and incentive plan stock issuances 8 8 196
Assumed debt of acquired businesses -- -- 307
Acquisition of minority interest (11) -- --
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
6
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in millions)
Other
Comprehen-
Unearned sive
Common Paid-in Compen- Income Retained Reacquired
Stock Capital sation (Loss) Earnings Stock
Balances at January 1, 1998 $ 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)
Net income -- -- -- -- 98 --
Common dividends, $0.62 per common share -- -- -- -- (66) --
Foreign currency translation adjustment -- -- -- (99) -- --
Impact of allocation of shares held by ESOP -- -- 8 -- -- --
Purchase of common stock, 174,547 shares -- -- -- -- -- 5
Issuance of common stock:
Incentive plans, net, 1,319,519 shares, from reacquired stock -- (31) -- -- -- (48)
Conversion of notes and debentures, 7,714 shares -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000 $ 83 $ 726 $ (115) $ (143) $ 2,157 $ 1,892
(Common shares: issued,159,984,444; reacquired, 52,442,393)
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
7
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
Year Ended December 31,
2000 1999 1998
---- ---- ----
Net income $ 98 $ 168 $ 9
Foreign currency translation, net of tax (99) (31) (11)
----- ----- -----
Comprehensive income (loss) $ (1) $ 137 $ (2)
===== ===== =====
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
8
HERCULES INCORPORATED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of Hercules
Incorporated and all majority-owned subsidiaries where control exists. Following
the acquisition of BetzDearborn, the company continued BetzDearborn's practice
of using a November 30 fiscal year-end for certain former BetzDearborn non-U.S.
subsidiaries to expedite the year-end closing process. Investments in affiliated
companies with a 20% or greater ownership interest are accounted for using the
equity method of accounting and, accordingly, consolidated income includes
Hercules' share of their income.
USE OF ESTIMATES
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
REVENUE RECOGNITION
The company recognizes revenue when the earnings process is complete.
This generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the company's experience. The corresponding shipping and handling costs are
included in cost of sales.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that pertain to current operations or future
revenues are expensed or capitalized according to the company's capitalization
policy. Expenditures for remediation of an existing condition caused by past
operations that do not contribute to current or future revenues are expensed.
Liabilities are recognized for remedial activities when the cleanup is probable
and the cost can be reasonably estimated.
CASH AND CASH EQUIVALENTS
Cash in excess of operating requirements is invested in short-term,
income-producing instruments. Cash equivalents include commercial paper and
other securities with original maturities of 90 days or less. Book value
approximates fair value because of the short maturity of those instruments.
INVENTORIES
Inventories are stated at the lower of cost or market. Domestic
inventories are valued predominantly on the last-in, first-out (LIFO) method.
Foreign and certain domestic inventories, which in the aggregate represented 62%
of total inventories at December 31, 2000, are valued principally on the
average-cost method.
PROPERTY AND DEPRECIATION
Property, plant and equipment are stated at cost. The company changed to
the straight-line method of depreciation, effective January 1, 1991, for newly
acquired processing facilities and equipment. Assets acquired before then
continue to be depreciated by accelerated methods. The company believes
straight-line depreciation provides a better matching of costs and revenues over
the lives of the assets. The estimated useful lives of depreciable assets are as
follows: buildings - 30 years; plant machinery and equipment - 15 years; other
machinery and equipment - 3 to 15 years.
Maintenance, repairs and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is charged to income.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are amortized on a straight-line
basis over the estimated future periods to be benefited, generally 40 years for
goodwill, customer relationships and trademarks and tradenames and 5 to 15 years
for other intangible assets.
LONG-LIVED ASSETS
The company reviews its long-lived assets, including goodwill and other
intangibles, for impairment on an exception basis whenever events or changes in
circumstances indicate carrying amounts of the assets may not be recoverable
through undiscounted future cash flows. If an impairment loss has occurred based
on expected future cash flows (undiscounted), the loss is recognized in the
income statement. The amount of the impairment loss is the excess of the
carrying amount of the impaired asset over the fair value of the asset. The fair
value represents expected future cash flows from the use of the assets,
discounted at the rate used to evaluate potential investments.
FOREIGN CURRENCY TRANSLATION
The financial statements of Hercules' non-U.S. entities are translated
into U.S. dollars using current rates of exchange, with gains or losses included
in the other comprehensive income (loss). The related allocation for income
taxes is not significant.
9
HERCULES INCORPORATED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DERIVATIVE INSTRUMENTS AND HEDGING
Derivative financial instruments have been used to hedge risk caused by
fluctuating currency and interest rates. The company enters into
forward-exchange contracts and currency swaps to hedge foreign currency
exposure. Decisions regarding hedging are made on a case-by-case basis, taking
into consideration the amount and duration of the exposure, market volatility,
and economic trends. The company uses the fair-value method of accounting,
recording realized and unrealized gains and losses on these contracts monthly.
They are included in other income (expense), net, except for gains and losses on
contracts to hedge specific foreign currency commitments, which are deferred and
accounted for as part of the transaction. Gains or losses on instruments which
have been used to hedge the value of investments in certain non-U.S.
subsidiaries are included in the foreign currency translation adjustment. It is
the company's policy to match the term of financial instruments with the term of
the underlying designated item. If the designated item is an anticipated
transaction no longer likely to occur, gains or losses from the instrument
designated as a hedge are recognized in current period earnings. The company
does not hold or issue financial instruments for trading purposes. In the
Consolidated Statement of Cash Flow, the company reports the cash flows
resulting from its hedging activities in the same category as the related item
that is being hedged.
The company used interest rate swap agreements to manage interest costs
and risks associated with changing rates. The differential to be paid or
received is accrued as interest rates change and is recognized in interest
expense over the life of the agreements. Counter parties to the forward
exchange, currency swap, and interest rate swap contracts are major financial
institutions. Credit loss from counter party nonperformance is not anticipated.
During 2000 the interest rate swap portfolio was terminated due to the
conversion of foreign denominated debt to U.S. dollar denominated debt in the
first half of 2000; and the debt restructing in November 2000 that replaced
variable rate debt with fixed rate debt.
STOCK-BASED COMPENSATION
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation," requires companies electing to continue to use the
intrinsic-value method to make pro forma disclosures of net income and earnings
per share as if the fair-value-based method of accounting had been applied.
COMPUTER SOFTWARE COSTS
Effective January 1, 1999, we adopted the American Institute of
Certified Public Accountants Statement of Position 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
Our prior accounting was generally consistent with the requirements of SOP
98-1 and, accordingly, adoption of SOP 98-1 had no material effect. Computer
software costs are being amortized over a period of 5 to 10 years.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133," and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. SFAS 133, as amended, is effective for all
fiscal quarters of fiscal years beginning after December 31, 2000. The Company
adopted SFAS 133 effective January 1, 2001. As discussed in Notes 6 and 22,
during 2000, the Company converted substantially all of its foreign currency
denominated borrowings to fixed rate U.S. dollar denominated borrowings and
closed most of its outstanding interest rate swaps. Based on these actions and a
review of our contracts and agreements, the Company believes that the adoption
of SFAS No. 133 will not have a material effect on its earnings or statement of
financial position. However, due to certain provisions of our debt agreements,
the results of operations could be materially affected in 2001 if it becomes
more likely that a change of control will occur before November 15, 2001.
In December 1999, the U.S. Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the
staff's views in applying generally accepted accounting principles to selected
revenue recognition issues. Accordingly, guidance is provided with respect to
the recognition, presentation and disclosure of revenue in the financial
statements. Adoption of SAB 101, as amended by Staff Accounting Bulletin Nos.
101A and 101B, was effective October 1, 2000. Adoption of SAB 101 did not have a
material effect.
RECLASSIFICATIONS
Certain amounts in the 1999 and 1998 consolidated financial statements
and notes have been reclassified to conform to the 2000 presentation.
10
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACQUISITIONS
All acquisitions have been accounted for under the purchase method. The
results of operations of the acquired businesses are included in the
consolidated financial statements from the dates of acquisition.
BetzDearborn - On October 15, 1998, the company acquired all of the
outstanding shares of BetzDearborn Inc., a global specialty chemical company
engaged in the treatment of water and industrial process systems, for $2,235
million in cash and $186 million in common stock exchanged for the shares held
by the BetzDearborn ESOP Trust. The shares were valued using the quoted market
price of the stock at the time of exchange. In addition, the company assumed
debt with a fair value of $117 million and repaid $557 million of other
long-term debt held by BetzDearborn. This acquisition was financed with
borrowings under a $3,650 million credit facility with a syndicate of banks (see
Note 6).
During 1999, we completed the BetzDearborn purchase price allocation and
increased goodwill by $96 million, to $2,170 million. The increase to goodwill
results from adjustments to the fair value of net tangible assets acquired,
completion of the evaluation of pre-acquisition contingencies related to
litigation and claims, finalization of plans to exit BetzDearborn activities and
foreign currency translation adjustments, net of related tax effects. Goodwill
is determined as follows:
(Dollars in
millions)
---------
Cash paid, including transaction costs $2,235
Common stock exchanged for ESOP trust shares 186
Fair value of debt assumed 117
Payment of BetzDearborn long-term debt 557
-------
$3,095
Less: Fair value of net tangible assets acquired 650
Fair value of identifiable intangible assets acquired 725
Purchased in-process research and development 130
-------
BetzDearborn goodwill as of the date of acquisition $1,590
=======
In accordance with the purchase method of accounting, the adjusted
purchase price was allocated to the estimated fair value of net assets acquired,
with the excess recorded as goodwill. Goodwill is amortized over 40 years on a
straight-line basis. Identified intangibles are amortized over 10 to 40 years,
on a straight-line basis. Additionally, approximately $130 million of the
purchase price was allocated to purchased in-process research and development
and was charged to expense at the date of acquisition (see Note 16).
As of the acquisition date, the company began to formulate plans to
combine the operations of BetzDearborn and Hercules. We formed a program office,
engaged outside consultants and established several functional integration teams
to formulate and implement the plan and capture anticipated synergies. At
December 31, 1998, the company had identified and approved various actions such
as personnel reductions, consolidation of operations and support functions,
closure of redundant or inefficient offices and facilities and relocation of
former BetzDearborn employees. Accordingly, the company included a $98 million
liability as part of the purchase price allocation. The 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 (see Note 14).
FiberVisions L.L.C. - In July 1998, the company completed the
acquisition of the 49% share of FiberVisions L.L.C. owned by its joint venture
partner, Jacob Holm & Sons A/S, for approximately $230 million in cash, plus
assumed debt of $188 million. The allocation of the purchase price resulted in
$188 million of goodwill, which is being amortized over its estimated useful
life of 40 years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the company as if the BetzDearborn and
FiberVisions acquisitions had occurred at the beginning of the year ended
December 31, 1998:
11
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
1998
----
Net sales 3,276
Income (loss) before effect of change in accounting principle (70)
Net income (loss) (70)
Net earnings per share:
Basic
Earnings before effect of change in accounting principle (0.69)
Earnings per share (0.69)
Diluted
Earnings before effect of change in accounting principle (0.69)
Earnings per share (0.69)
The pro forma results of operations are for comparative purposes only
and reflect increased amortization and interest expense resulting from the
acquisitions described above, but do not include any potential cost savings from
combining the acquired businesses with the company's operations. Consequently,
the pro forma results do not reflect the actual results of operations had the
acquisitions occurred on the dates indicated, and are not intended to be a
projection of future results or trends.
Other - The company also made five other acquisitions; three in 1998,
one in 1999 and one in 2000, for an aggregate purchase price of approximately
$121 million in cash. These acquisitions included the worldwide paper chemicals
group of Houghton International, Inc. and Citrus Colloids Ltd., a pectin
manufacturer, in April 1998; Alliance Technical Products, Ltd., a rosin
dispersions company, in September 1998; the Scripset(R) water-soluble polymer
resin business of Solutia Inc. in July 1999; and Quaker Chemical Corporation's
paper chemicals business in May 2000. Allocations of the purchase prices for
these acquisitions resulted in approximately $75 million of goodwill, which is
being amortized over estimated useful lives ranging from 30 to 40 years. Citrus
Colloids Ltd. was subsequently divested in September 2000 as part of the Food
Gums transaction.
2. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
(Dollars in millions)
2000 1999
---- ----
Trade $562 $639
Other 91 143
---- ----
Total 653 782
Less allowance for doubtful accounts 27 16
---- ----
$626 $766
==== ====
At December 31, 2000, net trade accounts receivable from customers
located in the United States, Europe, the Americas and Asia were $284 million,
$170 million, $51 million and $30 million, respectively. At December 31, 1999,
net trade accounts receivable from customers located in the United States,
Europe, the Americas and Asia were $426 million, $151 million, $35 million and
$11 million, respectively.
3. INVENTORIES
The components of inventories are:
(Dollars in millions)
2000 1999
---- ----
Finished products $171 $187
Materials, supplies and work in process 134 193
---- ----
$305 $380
==== ====
Inventories valued on the LIFO method were lower than if valued under
the average-cost method, which approximates current cost, by $31 million at both
December 31, 2000 and 1999.
12
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENTS
Total equity investments in affiliated companies were $40 million at
December 31, 2000, and $10 million at December 31, 1999.
On September 29, 2000, we sold our Food Gums Division to CP Kelco, a
joint venture with Lehman Brothers Merchant Banking Partners II, L.P. We
retained a 28.6% equity position with a historical cost basis of $30 million in
CP Kelco. During the fourth quarter of 2000, Lehman Brothers made an additional
capital contribution to CP Kelco thereby reducing our equity position to
approximately 23%.
Other investments, at cost or less, were $13 million and $37 million at
December 31, 2000 and 1999, respectively. Included in these amounts are
non-current marketable securities aggregating $12 million and $32 million for
the corresponding years, classified as "available for sale." The value of these
investments, based on market quotes, approximates book values.
5. SHORT-TERM DEBT
A summary of short-term debt follows:
(Dollars in millions)
2000 1999
---- ----
Banks $118 $26
Current maturities of long-term debt 143 652
---- ----
$261 $678
==== ====
Bank borrowings represent primarily foreign overdraft facilities and
short-term lines of credit, which are generally payable on demand with interest
at various rates. Book values of bank borrowings approximate market value
because of their short maturity period.
At December 31, 2000, Hercules had $182 million of unused short-term
lines of credit that may be drawn as needed, with interest at a negotiated
spread over lenders' cost of funds. Lines of credit in use at December 31, 2000,
were $118 million. Weighted-average interest rates on short-term borrowings at
December 31, 2000 and 1999 were 5.88% and 6.04%, respectively.
6. LONG-TERM DEBT
A summary of long-term debt follows:
(Dollars in millions)
2000 1999
---- ----
6.15% notes due 2000 $ -- $ 100
6.60% notes due 2027 (a) 100 100
7.85% notes due 2000 -- 25
6.625% notes due 2003 (b) 125 125
11.125% senior notes due 2007 (c) 400 --
8% convertible subordinated debentures due 2010 (d) 3 3
Term loan tranche A due in varying amounts through 2003 (e) 875 1,187
Term loan tranche C due 2000 (e) -- 318
Term loan tranche D due 2005 (e) 375 --
Revolving credit agreement due 2003 (e) 437 336
ESOP debt (f) 101 106
Term notes at various rates from 5.23% to 9.72% due in varying
amounts through 2006 (g) 65 80
Variable rate loans -- 41
Other 4 8
------- -------
$ 2,485 $ 2,429
Current maturities of long-term debt (143) (652)
------- -------
Net long-term debt $ 2,342 $ 1,777
======= =======
13
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) 30-year debentures with a 10-year put option, exercisable by
bondholder at a redemption price equal to principal amount.
(b) Par value of $125 million issued June 1993.
(c) The senior notes accrue interest at 11 1/8% per annum, payable
semi-annually commencing May 15, 2001. The senior notes are
guaranteed by each of Hercules' current and future wholly owned
domestic restricted subsidiaries. At any time prior to November 15,
2003, Hercules may on any one or more occasions, redeem up to 35% of
the aggregate principal amount of the senior notes issued at a
redemption price of 111.125% of the principal amount, plus accrued
and unpaid interest and liquidated damages, if any, to the
redemption date, with the net cash proceeds of one or more public
equity offerings; provided that (i) at least 65% of the aggregate
principal amount of the senior notes issued under the indenture
remains outstanding immediately after the occurrence of such
redemption (excluding notes held by Hercules and its Subsidiaries);
and (ii) the redemption occurs within 45 days of the date of the
closing of such public equity offering. At any time prior to
November 15, 2001, Hercules may also redeem all or part of the
senior notes upon the occurrence of a change of control at a
redemption price equal to 111.125% of the principal amount of the
senior notes redeemed, plus accrued and unpaid interest and
liquidated damages, if any, to the date of redemption. Except as
described above, the senior notes will not be redeemable at
Hercules' option prior to maturity. Hercules is not required to make
mandatory redemption or sinking fund payments with respect to senior
notes. If a change of control occurs, each holder of the notes will
have the right to require Hercules to repurchase all or any part of
that Holder's notes pursuant to a change of control offer on the
terms set forth in the indenture. In the change of control offer,
Hercules will offer a change of control payment in cash equal to (i)
if such change of control is prior to November 15, 2001, 111.125% of
the aggregate principal amount of notes repurchased and (ii) if such
change of control is after November 15, 2001, 101% of the aggregate
principal amount of the notes repurchased plus, in each case,
accrued and unpaid interest and Liquidated Damages, if any, on the
notes repurchased, to the date of purchase. The 11 1/8% senior notes
are subject to a registration rights agreement that requires
Hercules to file an Exchange Offer registration statement with the
Securities and Exchange Commission within 270 days (August 11, 2001)
and to use its best efforts to have the registration statement
declared effective within 330 days (see Note 23).
(d) Subordinated debentures are convertible into common stock at $14.90
per share and are redeemable at the option of the company at varying
rates. The annual sinking fund requirement of $5 million, beginning
in 1996, has been satisfied through conversions of debentures.
(e) The BetzDearborn acquisition was financed with borrowings under a
$3,650 million credit facility with a syndicate of banks, and was
consummated on October 15, 1998. The syndication included three
tranches of varying maturity term loans totaling $2,750 million, of
which $875 million was outstanding at year end 2000, and a $900
million revolving credit agreement of which $437 million was
outstanding at year end 2000. On April 19, 1999, the credit
agreement was amended to allow borrowings in euros, as well as U.S.
dollars. Approximately U.S. $950 million of term loan tranche A
domestic borrowings were converted into indebtedness denominated in
euros during the second quarter 1999. In addition, a Canadian
subsidiary of ours can borrow up to U.S. $100 million from select
lenders in Canada in Canadian dollars that bears interest at
Bankers' Acceptances Rate plus 2.25% at December 31, 2000. Interest
rates are reset for one, three, or six month periods at the
company's option. The company's credit agreement contains various
restrictive covenants that, among other things, require maintenance
of certain financial covenants: leverage, net worth and interest
coverage, and provides that the entry of judgment or judgments
involving aggregate liabilities of $50 million or more be vacated,
discharged, stayed or bonded pending appeal within 60 days of entry.
Issuance costs related to the financing are included in deferred
charges and other assets and are being amortized over the term of
the loans, using the effective interest method. As of December 31,
2000, $459 million of the $900 million multi-currency revolver is
available for use. However, the actual availability under the
revolving credit agreement is constrained by our ability to meet
covenants in our senior credit facility. In July 2000, the credit
agreement was amended to modify the maximum leverage ratio, defined
as debt/EBITDA, for the period April 1, 2000 through June 30, 2000.
During the third quarter of 2000, we were granted waivers of some of
the financial covenants in our senior credit facility and our ESOP
credit facility through November 15, 2000. Effective November 14,
2000, our senior credit facility and our ESOP credit facility were
amended to (i) modify certain financial covenants; (ii) change the
mandatory prepayment provisions; and (iii) provide for security,
among other things. The senior credit facility amendments were
conditioned upon, among other things, the issuance by us of the
11-1/8% senior notes and term loan tranche D (described below). The
amendment to the senior credit facility increased the interest rate
on amounts outstanding under the revolving credit agreement, term
loan tranche A and term loan tranche C to LIBOR + 2.25% (8.90% at
December 31, 2000). The senior credit facility and ESOP credit
14
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
facility, as amended, are secured by liens on our property and
assets (and those of our Canadian Subsidiaries), a pledge of the
stock of substantially all of our domestic subsidiaries and 65% of
the stock of foreign subsidiaries directly owned by us and a pledge
of domestic intercompany indebtedness. In connection with the
amendments to the senior credit facility and the ESOP credit
facility, our 6.60% notes due 2027 and our 6.625% notes due 2003
were also secured as required by the indenture under which such
notes were issued. As a result of the amendments, the company was in
compliance with all of the covenants. On November 14, 2000, in
conjunction with and conditioned upon the effectiveness of the third
amendment, we borrowed $375 million under the senior credit facility
(term loan tranche D) and we issued $400 million of 11-1/8% senior
notes due 2007. Term loan tranche D initially bore interest at LIBOR
+ 2.75% (9.47% at December 31, 2000), matures on November 15, 2005,
and will require only nominal principal payments prior to maturity.
On January 23, 2001, our corporate credit rating was downgraded by
Standard & Poor's Rating Services to BB which resulted in an
increase to the interest rates on the term loan tranche A and term
loan tranche D to LIBOR +2.75% and LIBOR + 3.25%, respectively (see
Note 23).
(f) The company assumed a $94 million loan related to the BetzDearborn
ESOP Trust. The proceeds of the loan were originally used by the
ESOP Trust for the purchase of BetzDearborn preferred shares that,
upon acquisition by Hercules, were converted into equivalent shares
of Hercules common stock (see Note 10). The loan was recorded at a
fair market value of $110 million at the date of acquisition, and
the $16 million fair value step-up is being amortized over the term
of the debt. The loan and guarantee mature in June 2009. During the
third quarter of 2000, we were granted waivers of some of the
financial covenants in our senior credit facility and our ESOP
credit facility through November 15, 2000. Effective November 14,
2000, our senior credit facility was permanently amended. The senior
credit facility and ESOP credit facility, as amended, are secured by
liens on our property and assets (and those of our Canadian
Subsidiaries), a pledge of the stock of substantially all of our
domestic subsidiaries and 65% of the stock of foreign subsidiaries
directly owned by us and a pledge of domestic intercompany
indebtedness. Effective with the November 14, 2000 amendment, the
rate was increased to 11.95%. Effective January 23, 2001, as a
result of the lowered credit rating, the interest rate on the loan
and guarantee increased to 12.95% (see Note 23).
(g) Debt assumed in conjunction with the acquisition of FiberVisions
L.L.C. (see Note 1), net of repayments through December 31, 2000.
Long-term debt maturities during the next five years are $143 million in
2001, $328 million in 2002, $859 million in 2003, $25 million in 2004 and $385
million in 2005.
7. COMPANY-OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST
Redeemable Hybrid Income Overnight Shares
In November 1998, Hercules Trust V, our wholly owned subsidiary,
completed a private placement of $200 million Redeemable Hybrid INcome Overnight
Shares (RHINOS). We repaid the RHINOS with a portion of the proceeds from the
offering of 11-1/8% senior notes on November 14, 2000.
Trust Originated Preferred Securities
In March 1999, Hercules Trust I ("Trust I"), our wholly owned subsidiary
trust, completed a $362 million underwritten public offering of 14,500,000
shares of 9.42% Trust Originated Preferred Securities. Trust I invested the
proceeds from the sale of the Preferred Securities in an equal principal amount
of 9.42% Junior Subordinated Deferrable Interest Debentures of Hercules due
March 2029. We used these proceeds to repay long-term debt.
Trust I distributes quarterly cash payments it receives from Hercules on
the Debentures to Preferred Security holders at an annual rate of 9.42% on the
liquidation amount of $25 per Preferred Security. We may defer interest payments
on the Debentures at any time, for up to 20 consecutive quarters. If this
occurs, Trust I will also defer distribution payments on the Preferred
Securities. The deferred distributions, however, will accumulate distributions
at a rate of 9.42% per annum.
Trust I will redeem the Preferred Securities when the Debentures are
repaid at maturity on March 31, 2029. Hercules may redeem the Debentures, in
whole or, on or after March 17, 2004, in part, before their maturity at a price
equal to 100% of the principal amount of the Debentures redeemed, plus accrued
interest. When Hercules redeems any Debentures before their maturity, Trust I
will use the cash it receives to redeem Preferred Securities and common
securities as provided in the trust agreement. Hercules guarantees the
obligations of Trust I on the Preferred Securities.
15
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CRESTS Units
In July 1999, we completed a public offering of 350,000 CRESTS Units
with Hercules Trust II, a wholly owned subsidiary trust ("Trust II"). This
transaction provided net proceeds to Hercules and Trust II of $340.4 million.
The preferred security component of the CRESTS Units was initially valued at
$741.46 per unit and the warrant component of the CRESTS Units was initially
valued at $258.54 per warrant. Each CRESTS Unit consists of one preferred
security of Trust II and one warrant to purchase 23.4192 shares of Hercules
common stock at an initial exercise price of $1,000 (equivalent to $42.70 per
share). The preferred security and warrant components of each CRESTS Unit may be
separated and transferred independently. The warrants may be exercised, subject
to certain conditions, at any time before March 31, 2029, unless there is a
reset and remarketing event. No reset and remarketing event will occur before
July 27, 2004, unless all of our common stock is acquired in a transaction that
includes cash for a price above a predetermined level. Trust II used the
proceeds from the sale of its preferred securities to purchase junior
subordinated deferrable interest debentures of Hercules ("debentures"). As of
December 31, 2000, no warrants had been exercised.
We pay interest on the debentures, and Trust II pays distributions on
its preferred securities. Both are paid quarterly at an annual rate of 6 1/2% of
the scheduled liquidation amount of $1,000 per debenture and/or preferred
security until the scheduled maturity date and redemption date of June 30, 2029,
unless there is a reset and remarketing event. We guarantee payments by Trust II
on its preferred securities. Trust II must redeem the preferred securities when
the debentures are redeemed or repaid at maturity.
We used the proceeds from the CRESTS Units offering to repay long-term
debt. Issuance costs related to the preferred security component of the CRESTS
Units are being amortized over the life of the security and costs related to the
warrants were charged to additional paid-in capital.
Floating Rate Preferred Securities
In December 1999, Hercules Trust VI, our wholly owned subsidiary trust
("Trust VI"), completed a $170 million private offering of 170,000 shares of
Floating Rate Preferred Securities. We repaid the debentures with a portion of
the proceeds from the offering of 11 1/8% senior notes on December 29, 2000.
8. SERIES PREFERRED STOCK
There are 2,000,000 shares of series preferred stock without par value
authorized for issuance, none of which have been issued.
9. COMMON STOCK
Hercules common stock has a stated value of $25/48, and 300,000,000
shares are authorized for issuance. At December 31, 2000, a total of 27,960,812
shares were reserved for issuance for the following purposes: 402,253 shares for
sales to the Savings Plan Trustee; 17,135,353 shares for the exercise of awards
under the Stock Option Plan; 1,847,855 shares for awards under incentive
compensation plans; 176,492 shares for conversion of debentures and notes;
202,139 shares for employee stock purchases; and 8,196,720 shares for exercise
of the warrant component of the CRESTS Units.
For the company's stock repurchase program, from its start in 1991
through year-end 2000, the Board authorized the repurchase of up to 74,650,000
shares of company common stock. Of that total, 6,150,000 shares were intended to
satisfy requirements of various employee benefit programs. During this period, a
total of 66,792,032 shares of common stock were purchased in the open market at
an average price of $37.29 per share.
In July 1999, we completed a public offering of 5,000,000 shares of our
common stock, which provided us with proceeds of $171.5 million, net of
underwriting fees of $3.5 million. We used the proceeds from the common stock
offering for the partial repayment of a term loan under our credit facility.
Issuance costs associated with the stock offering were charged to additional
paid-in capital.
10. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
In connection with the acquisition of BetzDearborn in 1998, the company
acquired its ESOP and related trust as a long-term benefit for substantially all
of BetzDearborn's U.S. employees. The plan is a supplement to BetzDearborn's
401(k) plan. The ESOP trust had long-term debt of $91 million and $93 million at
December 31, 2000 and 1999, respectively, which is guaranteed by Hercules. Upon
acquisition, the debt had a fair value in excess of its recorded amount for
which a step-up was recorded to be amortized over the remaining term of the
debt. The fair value, included in long-term debt, was $101 million and $106
million at December 31, 2000 and 1999, respectively. The proceeds of the
original loan were used to purchase BetzDearborn convertible preferred stock,
which, at the date of acquisition, was converted into Hercules common stock.
16
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the provisions of the BetzDearborn 401(k) program, employees may
invest 2% to 15% of eligible compensation. The company's matching contributions,
made in the form of Hercules common stock, are equal to 50% of the first 6% of
employee contributions, and fully vest to employees upon the completion of 5
years of service. The company's matching contributions are included in ESOP
expense. After satisfying the 401(k) matching contributions and the dividends on
allocated shares, all remaining shares of ESOP stock are allocated to each
eligible participant's account based on the ratio of each eligible participant's
compensation to total compensation of all participants.
The company's contributions and dividends on the shares held by the
trust are used to repay the loan, and the shares are allocated to participants
as the principal and interest are paid. The company's common stock dividends
were suspended during the fourth quarter of 2000. Long-term debt is reduced as
payments are made on the third party financing. In addition, unearned
compensation is also reduced as the shares are allocated to employees. The
unallocated shares held by the trust are reflected in unearned compensation as a
reduction in stockholders' equity on the balance sheet for $115 million and $123
million at December 31, 2000 and 1999, respectively.
2000 1999
---- ----
Allocated 1,858,459 1,807,976
Unallocated 3,582,334 3,814,749
--------- ---------
Total shares held by ESOP 5,440,793 5,622,725
========= =========
The ESOP expense is calculated using the shares-allocated method and
includes net interest incurred on the debt of $6 million and $5 million for 2000
and 1999, respectively. The company is required to make quarterly contributions
to the plan, which enable the trust to service its indebtedness. Net ESOP
expense is comprised of the following elements:
(Dollars in millions)
2000 1999
---- ----
ESOP expense $ 13 $ 13
Common stock dividends (charged to retained earnings) (3) (6)
---- ----
Net ESOP expense $ 10 $ 7
---- ----
ESOP Contributions $ 10 $ 9
==== ====
11. LONG-TERM INCENTIVE COMPENSATION PLANS
The company's long-term incentive compensation plans provide for the
grant of stock options and the award of common stock and other market-based
units to certain key employees and non-employee directors. Through 1994, shares
of common stock awarded under these plans normally were either restricted stock
or performance shares. During the restriction period, award holders have the
rights of stockholders, including the right to vote and receive cash dividends,
but they cannot transfer ownership.
In 1995, Hercules changed the structure of the long-term incentive
compensation plans to place a greater emphasis on shareholder value creation
through grants of regular stock options, performance-accelerated stock options,
and Cash Value Awards (performance-based awards denominated in cash and payable
in shares of common or restricted stock, subject to the same restrictions as
restricted stock). Restricted stock and other market-based units are awarded
with respect to certain programs. The number of awarded shares outstanding was
491,488 at December 31, 2000, and 926,689 and 1,083,613 at December 31, 1999 and
1998, respectively.
At December 31, 2000, under the company's incentive compensation plans,
1,847,855 shares of common stock were available for grant as stock awards or
stock option awards. Stock awards are limited to approximately 15% of the total
authorizations. Regular stock options are granted at the market price on the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock options are also granted at
the market price on the date of grant and are normally exercisable at nine and
one-half years. Exercisability may be accelerated based upon the achievement of
predetermined performance goals. Both regular and performance-accelerated stock
options expire 10 years after the date of grant.
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to the company in the event of employment termination,
except in the case of death, disability, retirement, or other specified events.
The company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. The cost of stock awards and other market-based units, which are charged
to income over the restriction or performance period, amounted to $1 million for
2000, $3 million for 1999 and $5 million for 1998.
17
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Below is a summary of outstanding stock option grants under the
incentive compensation plans during 1998, 1999 and 2000:
Regular Performance-Accelerated
Number of Weighted-average Number of Weighted-average
Shares Price Shares Price
------ ----- ------ -----
January 1, 1998 4,001,288 $40.41 3,875,397 $47.63
Granted 2,696,215 $32.75 1,170,890 $41.09
Exercised (279,795) $24.93 - -
Forfeited (66,430) $41.58 (15,035) $46.09
-------------------------------------------------------------------------------------------------------------------
December 31, 1998 6,351,278 $37.83 5,031,252 $46.12
Granted 1,705,335 $37.49 1,079,455 $36.52
Exercised (94,275) $22.07 - -
Forfeited (158,780) $37.80 (99,866) $44.41
-------------------------------------------------------------------------------------------------------------------
December 31, 1999 7,803,558 $37.94 6,010,841 $44.42
Granted 3,418,275 $16.75 187,500 $14.06
Exercised (28,500) $11.83 - -
Forfeited (217,405) $34.30 (38,916) $42.31
-------------------------------------------------------------------------------------------------------------------
December 31, 2000 10,975,928 $31.49 6,159,425 $43.51
The weighted-average fair value of regular stock options granted during
1998, 1999 and 2000 was $8.53, $8.18 and $7.19 respectively. The
weighted-average fair value of performance-accelerated stock options granted
during 1998, 1999 and 2000 was $9.24, $7.82 and $5.86 respectively.
Following is a summary of regular stock options exercisable at December
31, 1998, 1999, and 2000, and their respective weighted-average share prices:
Options Number of Weighted-average
Exercisable Shares Exercise Price
----------- ------ --------------
December 31, 1998 3,300,628 $41.57
December 31, 1999 4,651,273 $39.95
December 31, 2000 6,237,147 $38.43
At December 31, 2000, there were 50,000 performance-accelerated stock
options exercisable at a weighted average exercise price of $47.00 per share.
There were no performance-accelerated stock options exercisable at December 31,
1998 and 1999.
Following is a summary of stock options outstanding at December 31,
2000:
Outstanding Options Exercisable Options
Number Weighted-average Weighted- Number
Outstanding at Remaining average Exercisable at Weighted average
Exercise Price Range 12/31/00 Contractual Life Exercise Price 12/31/00 Exercise Price
-------------------- -------- ---------------- -------------- -------- ----------------
Regular Stock Options
$12 - $20 3,565,188 8.91 $16.72 301,363 $16.56
$20 - $30 1,778,275 7.31 $25.52 1,326,820 $25.51
$30 - $40 3,475,865 7.09 $38.20 2,573,914 $38.41
$40 - $50 1,436,400 6.07 $47.43 1,332,350 $47.41
$50 - $60 720,200 5.18 $55.09 702,700 $55.22
---------- ---------
10,975,928 6,237,147
========== =========
Performance-Accelerated Stock Options
$14 - $40 2,289,405 7.84 $34.47 - -
$40 - $50 3,068,770 5.83 $47.09 50,000 $47.00
$50 - $61 801,250 5.08 $55.63 - -
---------- ---------
6,159,425 50,000
========== =========
The company currently expects that 100% of performance-accelerated stock options
will eventually vest.
18
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The company's Employee Stock Purchase Plan is a qualified
non-compensatory plan, which allows eligible employees to acquire shares of
common stock through systematic payroll deductions. The plan consists of
three-month subscription periods, beginning July 1 of each year. The purchase
price is 85% of the fair market value of the common stock on either the first or
last day of that subscription period, whichever is lower. Purchases may range
from 2% to 15% of an employee's base salary each pay period, subject to certain
limitations. Currently, 202,139 shares of Hercules common stock are registered
for offer and sale under the plan. Shares issued at December 31, 2000 and 1999,
were 1,597,861 and 949,464, respectively. The company applies APB Opinion 25 and
related interpretations in accounting for its Employee Stock Purchase Plan.
Accordingly, no compensation cost has been recognized for the Employee Stock
Purchase Plan.
Had compensation cost for the company's Stock-Based Incentive Plans and
Employee Stock Purchase Plan been determined on the basis of fair value
according to SFAS No. 123, the fair value of each option granted or share
purchased would be estimated on the grant date using the Black-Scholes option
pricing model.
The following weighted-average assumptions would be used in estimating
fair value for 2000, 1999 and 1998:
Regular Performance Employee Stock
Assumption Plan Accelerated Plan Purchase Plan
---------- ---- ---------------- -------------
Dividend yield 2% 3.4% 0.0%
Risk-free interest rate 5.88% 5.38% 5.41%
Expected life 7.1 yrs. 5 yrs. 3 mos.
Expected volatility 29.20% 27.31% 44.86%
The company's net income and earnings per share for 2000, 1999 and 1998
would approximate the pro forma amounts below:
(Dollars in millions, except per share)
2000 1999 1998
---- ---- ----
Net income
As reported $98 $168 $9
Pro forma $74 $149 $(5)
Basic earnings per share
As reported $0.91 $1.63 $0.10
Pro forma $0.69 $1.45 $(0.06)
Diluted earnings per share
As reported $0.91 $1.62 $0.10
Pro forma $0.69 $1.44 $(0.06)
12. ADDITIONAL BALANCE SHEET DETAIL
(Dollars in millions)
2000 1999
---- ----
Property, plant, and equipment
Land $ 44 $ 58
Buildings and equipment 2,394 2,785
Construction in progress 126 135
------- -------
Total 2,564 2,978
Accumulated depreciation and amortization (1,460) (1,657)
------- -------
Net property, plant, and equipment $ 1,104 $ 1,321
======= =======
19
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
2000 1999
---- ----
Accrued expenses
Payroll and employee benefits $78 $63
Income taxes payable 17 35
Current portion of restructuring liability 34 66
Current portion of postretirement benefits 20 20
Accrued interest payable 30 44
Legal accrual 25 101
Environmental accrual 24 29
Dividends payable - 28
Other 174 175
---- ----
$402 $561
==== ====
13. GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2000 and 1999, the goodwill and other intangible assets
were:
(Dollars in millions)
2000 1999
---- ----
Goodwill $1,856 $1,915
Customer relationships 314 322
Trademarks and tradenames 238 244
Other intangibles 193 219
------ ------
Total 2,601 2,700
Less accumulated amortization (210) (130)
------ ------
Net goodwill and other intangible assets $2,391 $2,570
====== ======
14. RESTRUCTURING
The consolidated balance sheet reflects liabilities for employee
severance benefits and other exit costs, primarily related to the plans
initiated upon the acquisition of BetzDearborn in 1998. In addition, we
terminated approximately 100 employees in connection with the sale of our
nitrocellulose business (see Note 17). This resulted in the addition of
approximately $4 million in severance benefits to the accrued liability. In the
third quarter of 2000, we committed to plans relating to the restructuring of
our Process Chemicals & Services segment and corporate realignment due to the
divestiture of our non-core businesses. This resulted in the addition of
approximately $13 million in severance benefits to the accrued liability (see
Note 17). In the fourth quarter of 2000, we committed to a plan relating to the
restructuring of several foreign entities in our Process Chemicals & Services
segments. This resulted in the addition of approximately $1 million in severance
benefits to the accrued liability. We estimate approximately 310 employees will
be terminated in connection with the third and fourth quarter 2000 plans. As a
result of these plans, we estimate approximately 1,705 employees will be
terminated, of which approximately 1,360 employee terminations have occurred
since inception of the aforementioned plans.
Approximately 375 employees were terminated during the year ended
December 31, 2000. Cash payments during 2000 included $36 million for severance
benefits and $9 million for other exit costs. We lowered the estimate for
severance benefits and other exit costs related to the termination of both
legacy Hercules and BetzDearborn employees by $4 million and $12 million,
respectively.
Pursuant to the plans in place to merge the operations of BetzDearborn
with Hercules and to rationalize the support infrastructure and other existing
operations, approximately 600 employees were terminated and several facilities
were closed during 1999. Cash payments during 1999 included $42 million for
severance benefits and $14 million for other exit costs. As a result of the
completion of plans to exit former BetzDearborn activities, an $8 million
increase in exit costs related to facility closures and a $4 million reduction
in employee severance benefits were reflected in the finalization of the
purchase price allocation (see Note 1). We lowered the estimate of severance
benefits related to the termination of Hercules employees by $4 million. The
lower than planned severance benefits are the result of higher than anticipated
attrition, with voluntary resignations not requiring the payment of termination
benefits. Additionally in 1999, we incurred
20
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
$3 million in severance charges related to a reduction in work force of
approximately 20 manufacturing employees within the Chemical Specialties segment
(see Note 17).
In 1998, Hercules incurred restructuring liabilities of $130 million in
connection with the acquisition of BetzDearborn (see Notes 1 and 17). These
liabilities included charges of $31 million for employee termination benefits
and $5 million for exit costs related to facility closures. In addition, a $94
million liability was charged to goodwill as part of the purchase price
allocation related to the acquisition of BetzDearborn, including $78 million for
employee termination benefits and $16 million for office and facility closures,
relocation of BetzDearborn employees and other related exit costs. Cash payments
during 1998 included $15 million of severance benefits.
Cash payments of $1 million and $2 million for the 1997 Restructuring
Plan are reflected in the table below in 2000 and 1999, respectively. Remaining
amounts to be paid, with respect to this plan are $2 million at the end of 2001.
A reconciliation of activity with respect to the liabilities established
for these plans is as follows:
(Dollars in millions)
2000 1999
---- ----
Balance at beginning of year $77 $130
Cash payments (45) (56)
Additional termination benefits and exit costs 18 11
Reversals against goodwill (12) (4)
Reversals against earnings (4) (4)
--- ---
Balance at end of year $34 $77
=== ===
Severance benefits payments are based on years of service and generally
continue for 3 to 24 months subsequent to termination. Actions under the 1998
restructuring plans are substantially complete as of December 31, 2000. We
anticipate that actions under the 1999 and 2000 restructuring plans will be
substantially completed by the end of 2001.
21
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
15. PENSION AND OTHER POSTRETIREMENT BENEFITS
The company provides a defined benefit pension and postretirement benefit plans
to employees. The following chart lists benefit obligations, plan assets and
funded status of the plans.
(Dollars in millions)
-------------------------------------------
Other Postretirement
Pension Benefits Benefits
----------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1 $1,343 $1,499 $ 181 $ 154
Service cost 26 30 1 2
Interest cost 101 97 14 13
Amendments -- 6 (7) 20
Assumption change 71 (147) 8 (9)
Settlements (6) -- -- --
Translation difference (16) (19) -- --
Actuarial loss (gain) 11 (8) 15 22
Benefits paid from plan assets (103) (115) (4) (2)
Benefits paid by company -- -- (20) (19)
------ ------ ----- -----
Benefit obligation at December 31 $1,427 $1,343 $ 188 $ 181
====== ====== ===== =====
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 $1,732 $1,589 $ 7 $ 8
Actual return on plan assets (44) 275 -- 1
Asset transfers and receivables 4 -- -- --
Settlements (4) -- -- --
Company contributions (refund) 2 2 -- --
Translation difference (19) (19) -- --
Benefits paid from plan assets (103) (115) (4) (2)
------ ------ ----- -----
Fair value of plan assets at December 31 $1,568 $1,732 $ 3 $ 7
====== ====== ===== =====
Funded status of the plans $ 142 $ 389 $(186) $(174)
Unrecognized actuarial loss (gain) 71 (197) 66 44
Unrecognized prior service cost (benefit) 32 36 (22) (19)
Unrecognized net transition obligation 1 (11) -- --
Amount included in accrued expenses--other -- -- 20 20
------ ------ ----- -----
Prepaid (accrued) benefit cost $ 246 $ 217 $(122) $(129)
====== ====== ===== =====
AMOUNTS RECOGNIZED IN THE STATEMENT OF
FINANCIAL POSITION CONSIST OF:
Prepaid benefit cost $ 246 $ 217 $ -- $ --
Accrued benefit liability -- -- (122) (129)
------ ------ ----- -----
$ 246 $ 217 $(122) $(129)
====== ====== ===== =====
ASSUMPTIONS AS OF DECEMBER 31
Weighted-average discount rate 7.50% 8.00% 7.50% 8.00%
Expected return on plan assets 9.25% 9.25% 9.25% 9.25%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
22
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Other Postretirement
Pension Benefits Benefits
-------------------------- ----------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Service cost $ 26 $ 30 $ 20 $ 1 $ 2 $ 1
Interest cost 101 97 83 14 13 10
Return on plan assets (expected) (142) (134) (114) (1) (1) (1)
Amortization and deferrals 3 3 12 (2) (2) (4)
Amortization of transition asset (11) (14) (14) -- -- --
----- ----- ----- --- --- ---
Benefit cost (credit) $ (23) $ (18) $ (13) $12 $12 $ 6
===== ===== ===== === === ===
Other Postretirement Benefits
The non-pension postretirement benefit plans are contributory health
care and life insurance plans. The assumed participation rate in these plans for
future eligible retirees was 60% for health care and 100% for life insurance. In
August 1993, a Voluntary Employees' Beneficiary Association Trust was
established and funded with $10 million of company funds. The company
periodically obtains reimbursement for union retiree claims, while other claims
are paid from company assets. The participant contributions are immediately used
to cover claim payments, and for this reason do not appear as contributions to
plan assets.
The assumed health care cost trend rate was 8.0% for the year ended
December 31, 2000. The assumed health care cost trend rate was 4.5% for the year
ended December 31, 1999, and was 5% for those under age 65 and 4.75% for those
over age 65 for the year ended December 31, 1998. The assumed health care cost
trend rate will be 7% in 2001, decreasing to 4.5% by 2004 and for all subsequent
years.
A one-percentage point increase or decrease in the assumed health care
cost trend rate would increase or decrease the postretirement benefit obligation
by $6 million or $4 million, respectively, and would not have a material effect
on aggregate service and interest cost components.
16. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
Purchased in-process research and development (IPR&D) represents the
value assigned in a purchase business combination to research and development
projects of the acquired business that were commenced but not yet completed at
the date of the acquisition, and which, if unsuccessful, have no alternative
future use in research and development activities or otherwise. Amounts assigned
to purchased IPR&D must be charged to expense at the date of consummation of the
purchase business combination. Accordingly, the company charged approximately
$130 million to expense during 1998 for IPR&D related to the BetzDearborn
acquisition (see Note 1).
The IPR&D projects were principally included in the water treatment and
paper process divisions of the acquired business. The former Water Management
Group provided specialty water and process treatment programs for boiler,
cooling, influent and effluent applications to markets such as refining,
chemical, paper, electric utility, food, industrial, commercial and
institutional establishments. Overall, the products are used to control
corrosion, scale, deposit formation and microbiological growth, conserve energy
and improve efficiency. Additionally, the former Paper Process Group (PPG)
brought to market custom-engineered programs for the process-related problems
associated with paper production. These problems include deposition, corrosion,
microbiological and foam control, fouling, deinking and felt conditioning.
Due to the uniqueness of each of the projects, the costs and effort
required were estimated based on the information available at the date of
acquisition. However, there is a risk that certain projects may not be completed
successfully for a variety of reasons, including change in strategies, inability
to develop cost-efficient treatment and changes in market demand or customer
requirements.
The IPR&D valuation charge was measured by the stage of completion
method, primarily calculated by dividing the costs incurred to the date of
acquisition by the total estimated costs. These percentages were applied to the
results of project-by-project discounted cash flow models that estimated the
present value of residual cash flows deemed attributable solely to the
underlying IPR&D.
The projected revenues, costs and margins in the cash flow forecasts
were consistent with projections by management based on available historical
data. The revenue projections were based on an opportunity analysis for each
project, which took into account market and competitive conditions, potential
customers and strategic goals. The weighted-average cost of capital for the
overall business was estimated at 11%, and the risk-adjusted discount rate used
in the IPR&D project valuation model was 13%.
23
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
17. OTHER OPERATING EXPENSES (INCOME), NET
Other operating expenses (income), net, in 2000 include a gain of $168
million from the sale of the Food Gums division. On September 28, 2000, we sold
our Food Gums division to CP Kelco, a joint venture with Lehman Brothers
Merchant Banking Partners II, L.P., which contributed approximately $300 million
in equity. We received approximately $395 million in cash proceeds, recorded
certain selling and tax expenses of approximately $77 million initially
retaining a 28.6% equity position in CP Kelco. CP Kelco simultaneously acquired
Kelco biogums business of Pharmacia Corporation (formerly Monsanto Corporation).
Partially offsetting the gain from the sale of the Food Gums Division
is $66 million of charges for asset impairments and write-offs, primarily in the
FiberVisions business. Restructuring charges of $18 million, including $4
million (below) related to the nitrocellulose divestiture, were incurred for
2000 plans, primarily relating to severance and termination benefits for
approximately 410 employee terminations in our Process Chemicals & Services
segment and corporate realignment due to the divestitures of our non-core
businesses (Food Gums, Resins, nitrocellulose). Offsetting these restructuring
charges was $4 million of reversals relating to prior year plans. Environmental
charges of $8 million were incurred, offset by $11 million in recoveries of
insurance for environmental claims. Additionally, we incurred a loss of $25
million, including $4 million for severance and termination benefits (Note 14),
associated with the sale of the nitrocellulose business, and $5 million
associated with the integration of the BetzDearborn acquisition were incurred.
Also reflected in 2000 are $16 million severance benefits and compensation
expense not associated with restructuring plans and $1 million for other items.
The asset impairments were triggered by significantly higher raw material costs
and the loss of a facility's major customer.
Other operating expenses (income), net, in 1999 include integration
charges of $36 million, primarily for employee incentive and retention,
consulting, legal and other costs associated with the BetzDearborn acquisition.
During 1999, the company recognized charges of approximately $36 million related
to a legal settlement and asset write-downs and disposal costs including
impairment losses of approximately $10 million in the Chemical Specialties
segment. Additionally, we recognized an additional $3 million of severance
benefits under a plan to terminate approximately 20 employees, primarily
manufacturing personnel (see Note 14). The asset write-down and severance
charges were incurred primarily as a result of our decisions to exit the
nitrocellulose business and rationalize assets in our resins business, which
will no longer be utilized. Also during 1999, we realized a $16 million gain on
the sale of our Agar business, a $6 million net environmental insurance recovery
and a $4 million reversal of restructuring charges (see Note 14).
Other operating expenses in 1998 included $65 million in restructuring
charges and $11 million in integration charges associated with the acquisition
of BetzDearborn (see Note 1). The restructuring charges include employee
termination benefits of $31 million for approximately 350 employees, facility
closure costs of $5 million (see Note 14) and asset write-downs of $29 million
including impairment losses of $15 million in the Functional Products segment
and $6 million in the Chemical Specialties segment. The termination benefits,
exit costs and facility closure costs relate primarily to the acquisition of
BetzDearborn during 1998 (see Note 1). Asset impairments in the Chemical
Specialties and Functional Products segments resulted from adverse business
negotiations, the BetzDearborn acquisition, and the loss of a customer.
18. INTEREST AND DEBT EXPENSE
Interest and debt costs are summarized as follows:
(Dollars in millions)
2000 1999 1998
---- ---- ----
Costs incurred $175 $197 $112
Amount capitalized 11 12 11
---- ---- ----
Amount expensed $164 $185 $101
==== ==== =====
24
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
19. OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following:
(Dollars in millions)
2000 1999 1998
---- ---- ----
Net gains (losses) on dispositions $ (1) $10 $ 23
Interest income, net 5 7 36
Legal settlements and accruals, net (10) (7) (66)
Bank charges (3) (2) (1)
Minority interests - (2) -
Interest rate swap termination - - (13)
Miscellaneous expense, net (9) (8) (1)
---- --- ----
$(18) $(2) $(22)
==== === ====
Net gains (losses) on dispositions include a loss of $1 million from
the sale of non-operating real estate and other investments in 2000, and gains
of $10 million in 1999 and $11 million in 1998. Also, a gain of $12 million in
1998 was recorded from the sale of Alliant Techsystems common stock held by
Hercules (see Note 24). Interest income in 1998 relates primarily to the $500
million note received upon completion of the Tastemaker monetization. The 1998
legal settlements and accruals relate primarily to settlements of Qui Tam
("Whistle Blower") lawsuits. Legal settlements and accruals in 2000 and 1999
primarily represent certain other legal expenses and settlements associated with
former operations of the company. The 1998 loss from terminated interest rate
swaps is related to the company's financing effort upon the acquisition of
BetzDearborn.
20. INCOME TAXES
The domestic and foreign components of income before taxes and effect
of change in accounting principle are presented below:
(Dollars in millions)
2000 1999 1998
---- ---- ----
Domestic $ (17) $ 4 $(147)
Foreign 181 239 224
----- ----- -----
$ 164 $ 243 $ 77
===== ===== =====
A summary of the components of the tax provision follows:
(Dollars in millions)
2000 1999 1998
---- ---- ----
Currently payable
U.S. federal $ 14 $(25) $(26)
Foreign 70 82 74
State 4 (4) (4)
Deferred
Domestic (21) 15 17
Foreign (1) 7 7
---- ---- ----
Provision for income taxes $ 66 $ 75 $ 68
==== ==== ====
25
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Deferred tax liabilities (assets) at December 31 consisted of:
(Dollars in millions)
2000 1999
---- ----
Depreciation $ 232 $ 235
Prepaid pension 68 84
Inventory 11 8
Investments 88 83
Other 79 51
----- -----
Gross deferred tax liabilities $ 478 $ 461
----- -----
Postretirement benefits other than pensions $ (70) $ (59)
Accrued expenses (172) (165)
Loss carryforwards (10) (24)
Other (104) (71)
----- -----
Gross deferred tax assets (356) (319)
----- -----
Valuation allowance 28 16
----- -----
$ 150 $ 158
===== =====
A reconciliation of the U.S. statutory income tax rate to the effective
rate follows:
2000 1999 1998
---- ---- ----
U.S. statutory income tax rate 35% 35% 35%
Purchased in-process research and development (Note 16) - - 59
Goodwill amortization 14 9 7
Valuation allowances 8 - -
Research and development credits (6) - -
Tax rate differences on subsidiary earnings (5) - -
Incremental tax on cash repatriations from non-US subsidiaries 2 3 -
State taxes 2 (2) 2
Utilization of capital losses (5) (7) -
Reserves (6) (6) (17)
Other 1 (1) 2
------------------------
Effective tax rate 40% 31% 88%
========================
The net operating losses have indefinite carryforward periods, but may
be limited in their use in any given year.
The company provides taxes on undistributed earnings of subsidiaries
and affiliates included in consolidated retained earnings to the extent such
earnings are planned to be remitted and not reinvested permanently. The
undistributed earnings of subsidiaries and affiliates on which no provision for
foreign withholding or U.S. income taxes has been made amounted to approximately
$246 million and $505 million at December 31, 2000 and 1999, respectively. U.S.
and foreign income taxes that would be payable if such earnings were distributed
may be lower than the amount computed at the U.S. statutory rate because of the
availability of tax credits.
26
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
21. EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share and
the effect on income and the weighted-average number of shares of dilutive
potential common stock:
(Dollars and shares in millions,
except per share)
2000 1999 1998
---- ---- ----
Basic EPS computation:
Net income $ 98 $ 168 $ 9
====== ====== ======
Weighted-average shares outstanding 107.2 103.2 96.3
------ ------ ------
Earnings per share $ 0.91 $ 1.63 $ 0.10
====== ====== ======
DILUTED EPS COMPUTATION:
Net income $ 98 $ 168 $ 9
====== ====== ======
Weighted-average shares outstanding 107.2 103.2 96.3
Options 0.0 0.4 0.6
Convertible debentures 0.2 0.3 0.5
------ ------ ------
Adjusted weighted-average shares 107.4 103.9 97.4
====== ====== ======
Earnings per share $ 0.91 $ 1.62 $ 0.10
===============================
22. DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The company enters into forward-exchange contracts and currency swaps
to hedge currency exposure. The company used interest rate swap agreements to
manage interest costs and risks associated with changing rates.
Notional Amounts and Credit Exposure of Derivatives
The notional amounts of derivatives summarized below do not represent
amounts exchanged by the parties and, thus, are not a measure of the exposure of
the company through its use of derivatives. The amounts exchanged are calculated
on the basis of the notional amounts and the other terms of the derivatives,
which relate to interest rates or exchange rates.
Interest Rate Risk Management
During 2000, the interest rate swap portfolio, which replaced variable
rate debt with fixed rate debt, was substantially terminated due to the
conversion of foreign denominated debt to U.S. dollar denominated debt in the
first half of 2000 and the November 2000 debt restructuring.
During 1999, the interest rate swap portfolio went through a series of
adjustments to reflect the replacement of U.S. dollar debt with a variable euro
debt. The series of outstanding interest rate swap agreements at December 31,
1999, with maturities from 2001 through September 2003, effectively converted
floating-rate debt into debt with a fixed rate ranging from 5.36% to 6.23% per
year for U.S. dollar debt and 2.76% to 3.18% per year for euro debt. These swaps
acted as a hedge against the company's interest rate exposure on its outstanding
variable rate debt. For the years 2000 and 1999, these contracts resulted in a
less than 1% change in the effective interest rate on the weighted-average
notional principal amounts outstanding. The aggregate notional principal amounts
at the end of 2000 and 1999 were $20 million and $1.2 billion, respectively.
27
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following table indicates the types of swaps used and their weighted-average
interest rates:
(Dollars in millions) 2000 1999
------------------------------------------------ ---- ----
Pay fixed on swaps notional amount (at year-end) $ 20 $1,160
Average pay rate 3.8% 4.0%
Average receive rate 4.3% 3.9%
Foreign Exchange Risk Management
The company has selectively used foreign currency forward contracts and
currency swaps to offset the effects of exchange rate changes on reported
earnings, cash flow, and net asset positions. The primary exposures are
denominated in the euro, Danish kroner and British pound sterling. Some of the
contracts involve the exchange of two foreign currencies, according to local
needs in foreign subsidiaries. The term of the currency derivatives is rarely
more than three months. At December 31, 2000 and 1999, the company had
outstanding forward-exchange contracts to purchase foreign currencies
aggregating $19 million and $59 million and to sell foreign currencies
aggregating $39 million and $72 million, respectively. Non-U.S. dollar
cross-currency trades aggregated $188 million and $410 million at December 31,
2000 and 1999, respectively. The foreign exchange contracts outstanding at
December 31, 2000 will mature during 2001.
Fair Values
The following table presents the carrying amounts and fair values of
the company's financial instruments at December 31, 2000 and 1999:
(Dollars in millions)
------------------------------------------------------
2000 1999
------------------------- -----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Investment securities (available for sale) $ 11 $ 11 $ 32 $ 32
Long-term debt (2,342) (2,325) (1,777) (1,759)
Company-obligated preferred securities of subsidiary trusts (622) (492) (992) (908)
Foreign exchange contracts (1) (1) 2 2
Interest rate swap contracts --- --- --- 28
Fair values of derivative contracts are indicative of cash that would have
been required had settlement been made at December 31, 2000 and 1999.
Basis of Valuation
- Investment securities: Quoted market prices.
- Long-term debt: Present value of expected cash flows related to
existing borrowings discounted at rates currently available to the
company for long-term borrowings with similar terms and remaining
maturities.
- Company obligated preferred securities of subsidiary trusts:
Year-end interest rates and company common stock price.
- Foreign exchange contracts: Year-end exchange rates.
- Currency swaps: Year-end interest and exchange rates.
- Interest rate swap contracts: Bank or market quotes or discounted
cash flows using year-end interest rates.
23. SUBSEQUENT EVENTS
During March 2001, definitive purchase and sale agreements were signed
for the sale of our hydrocarbon resins division and select portions of our rosin
resins divisions (the "Eastman transaction") to Eastman Chemical Resins, Inc., a
subsidiary of Eastman Chemical Company ("Eastman"). Also in March 2001, we
entered into an agreement to sell the Peroxides portion of our Resins division
(the "Peroxide transaction"). We anticipate closing both transactions prior to
May 31, 2001.
28
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Both our senior credit facility and our ESOP Trust loan (Note 6) require
quarterly compliance with certain financial covenants, including leverage ratio
("debt/EBITDA ratio"), an interest coverage ratio and minimum net worth. In
addition, we are required to deliver our annual audited consolidated financial
statements to the lenders within 90 days of the Company's fiscal year end.
Due to the delay in closing the Eastman transaction, which in turn
delayed the pay down of the debt, our debt as of March 31, 2001 was
significantly higher than planned. As a result, the Company would have been out
of compliance with the debt/EBITDA ratio covenant of its senior credit facility
as of March 31, 2001. In addition, due to the fact that the Company has extended
the filing date for this 10-K, the Company's annual audited financial statements
were not provided to the lenders by March 31, 2001.
On April 5, 2001, in consideration for the payment of a fee, our senior
credit facility bank syndicate and ESOP lender granted waivers with respect to:
(1) compliance with the debt/EBITDA ratio as of March 31, 2001, and (2) an
extension of time to deliver the December 31, 2000 audited financial statements
to April 17, 2001. These statements have now been completed.
With respect to the covenant regarding the debt/EBITDA ratio, the
waiver requires that the Eastman transaction be consummated on or before May 31,
2001. In addition, the Company must demonstrate, as of the last day of the month
in which the Eastman transaction closes, that the leverage ratio does not exceed
4.75 to 1.00 after giving affect to the application of the net cash proceeds
from the Eastman transaction to prepay the Tranche A Term loan and the ESOP
Trust loan. The Company expects to achieve this leverage ratio, although it may
be necessary to close the Peroxide transaction prior to or in the same month as
the Eastman transaction.
A breach of any of the terms and conditions of the waiver would give
the lenders the right to accelerate repayment of substantially all of our
indebtedness if they choose to do so. Upon any such acceleration, the debt would
become immediately due and payable and any loan commitments terminated. Although
no assurances can be given in this regard, we anticipate closing the Eastman and
Peroxides transactions prior to May 31, 2001. Using the net proceeds for
repayment of debt, we expect that we will be in compliance with all debt
covenants during the second quarter 2001 as well as the remainder of the year.
While, as indicated above, we expect to satisfy all conditions of the
waiver and remain in compliance with our debt covenants, current and future
compliance is dependent upon generating sufficient EBITDA and cash flow which
are, in turn, impacted by business performance, economic climate, competitive
uncertainties and possibly the resolution of contingencies, including those set
forth in Note 25 to the consolidated financial statements.
In the event the Company is not in compliance with the debt covenants
at the conditional date or thereafter, we would pursue various alternatives,
which may include, among other things, refinancing of debt, debt covenant
amendments, or debt covenant waivers. While we believe we would be successful in
pursuing these alternatives, there can be no assurance that we would be
successful.
On April 10, 2001, the United States Court of Appeals for the Eighth
Circuit issued an opinion in the United States, et al. v. Vertac Corporation, et
al., as described in Item 3. In that opinion, the Appeals Court reversed the
Court's October 12, 1993 grant of partial summary judgment, which had held
Hercules jointly and severally liable for costs incurred and to be incurred at
the Jacksonville site, and remanded the case back to the U.S. District Court for
the Eastern District of Arkansas for a determination of whether the harms at the
site giving rise to the government's claims are divisible. The Appeals Court
also vacated the Court's October 23, 1998 order granting the United States'
summary judgment motion and the February 8, 2000 judgment finding Hercules
liable for 97.4% of the costs at issue, ordering that these issues be revisited
following further proceedings with respect to divisibility. Finally, the Appeals
Court affirmed the judgment of liability against Uniroyal.
As a result of the Appellate rulings described above, Hercules will be
allowed to present both facts and law to the Court in support of Hercules'
belief that it should not be liable under CERCLA for some or all of the costs
incurred by the government in connection with the site because those harms are
divisible. Should Hercules prevail on remand, any liability to the government
will be either eliminated or reduced (see Note 25).
24. DIVESTITURES
In December 1999, we sold our 70% interest in Algas Marinas, our
Chilean Agar business, for approximately $27 million. The transaction resulted
in a pre-tax gain of approximately $16 million. This unit was included in the
Functional Products segment and contributed approximately $24 million of revenue
to this segment in 1999.
On September 28, 2000, we sold our Food Gums division to CP Kelco, a
joint venture we entered into with Lehman Brothers Merchant Banking Partners II,
L.P., which contributed approximately $300 million in equity. We received
approximately $395 million in cash proceeds, recorded certain selling and tax
expenses of approximately $77 million and retained a 28.6% equity position in CP
Kelco. CP Kelco simultaneously acquired Pharmacia's Kelco biogums business. The
net proceeds from the sale of the Food Gums division have been used to
permanently reduce borrowings under our senior credit facility. Food Gums had
net sales of approximately $208 million in 1999.
29
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In November 2000, the company announced it was exploring strategic
alternatives for all or parts of the Company with the assistance of Goldman
Sachs & Co. and Credit Suisse First Boston. Since this process is ongoing, any
potential sale of all or part of the business may have a material impact on the
estimates and assumptions used to prepare the amounts reported in the
consolidated financial statements and accompanying notes. There can be no
assurance that a transaction will occur.
The majority of the remaining portions of the Resins division,
including the ink toner portion that one of our joint venture partners exercised
a right of first refusal to purchase in June 2000, are expected to be sold
during 2001. The Resins division, including those portions associated with the
Eastman and Peroxides transactions, had approximately $450 million in net sales
in 2000.
25. COMMITMENTS AND CONTINGENCIES
Leases
Hercules has operating leases (including office space, transportation
and data processing equipment) expiring at various dates. Rental expense was $57
million in 2000, $55 million in 1999 and $35 million in 1998.
At December 31, 2000, minimum rental payments under noncancelable
leases aggregated $289 million with subleases of $20 million. A significant
portion of these payments relates to a long-term operating lease for corporate
office facilities. The net minimum payments over the next five years are $43
million in 2001, $36 million in 2002, $29 million in 2003, $23 million in 2004
and $19 million in 2005.
Environmental
Hercules has been identified as a potentially responsible party (PRP)
by U.S. federal and state authorities, or by private parties seeking
contribution, for the cost of environmental investigation and/or cleanup at
numerous sites. The estimated range of the reasonably possible share of costs
for the investigation and cleanup is between $64 million and $240 million. The
actual costs will depend upon numerous factors, including the number of parties
found responsible at each environmental site and their ability to pay; the
actual methods of remediation required or agreed to; outcomes of negotiations
with regulatory authorities; outcomes of litigation; changes in environmental
laws and regulations; technological developments; and the years of remedial
activity required, which could range from 0 to 30 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.
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). The case is
captioned United States, et al, v. Vertac Corporation, et al, USDC No.
LR-C-80-109 and LR-C-80-110 (E.D. Ark.)
Other defendants in this litigation have either settled with the
government or, in the case of the Department of Defense (DOD), have been held
not liable. We appealed the Court's order finding the DOD not liable. On January
31, 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 Court for further proceedings.
On May 21, 1997, the Court issued a ruling that Uniroyal was liable and
that Standard Chlorine was 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, 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
30
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 was held on June 12, 2000.
On April 10, 2001, the United States Court of Appeals for the Eighth
Circuit issued an opinion in the consolidated appeals described above. In that
opinion, the Appeals Court reversed the Court's October 12, 1993 grant of
partial summary judgment, which had held Hercules jointly and severally liable
for costs incurred and to be incurred at the Jacksonville site, and remanded the
case back to the U.S. District Court for the Eastern District of Arkansas for a
determination of whether the harms at the site giving rise to the government's
claims are divisible. The Appeals Court also vacated the Court's October 23,
1998 order granting the United States' summary judgment motion and the February
8, 2000 judgment finding Hercules liable for 97.4% of the costs at issue,
ordering that these issues be revisited following further proceedings with
respect to divisibility. Finally, the Appeals Court affirmed the judgment of
liability against Uniroyal.
As a result of the Appellate rulings described above, Hercules will be
allowed to present both facts and law to the Court in support of Hercules'
belief that it should not be liable under CERCLA for some or all of the costs
incurred by the government in connection with the site because those harms are
divisible. Should Hercules prevail on remand, any liability to the government
will be either eliminated or reduced.
In 1992, Hercules brought suit against its insurance carriers for past
and future costs for cleanup of certain environmental sites (Hercules
Incorporated v. Aetna Casualty & Surety Company, et al., Del. Super., C.A. No.
92C-10-105 and 90C-FE-195-CV (consolidated)). In April 1998, the trial regarding
insurance recovery for the Jacksonville, Arkansas site (see discussion above)
was completed. The jury returned a "Special Verdict Form" with findings that, in
conjunction with the 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. The terms of those settlements and amounts recovered
are confidential. Hercules has appealed certain of the trial court's rulings to
the Delaware Supreme Court. Oral argument was held on February 13, 2001 before
the Delaware Supreme Court, but no ruling has been issued.
At December 31, 2000, the accrued liability of $64 million for
environmental remediation represents management's best estimate of the probable
and reasonably estimable costs related to environmental remediation. The extent
of liability is evaluated quarterly. The measurement of the liability is
evaluated based on currently available information, including the process of
remedial investigations at each site and the current status of negotiations with
regulatory authorities regarding the method and extent of apportionment of costs
among other PRPs. While it is not feasible to predict the outcome of all pending
suits and claims, the ultimate resolution of these environmental matters could
have a material effect upon the results of operations and the financial position
of Hercules.
Litigation
Hercules is a defendant in numerous lawsuits that arise out of, and are
incidental to, the conduct of its business. In these legal proceedings, no
specifically identified director, officer or affiliate is a party or a named
defendant. These suits concern issues such as product liability, contract
disputes, labor-related matters, patent infringement, environmental proceedings,
property damage and personal injury matters.
Hercules is a defendant in numerous asbestos-related personal injury
lawsuits and claims which typically arise from alleged exposure to asbestos
fibers from resin-encapsulated pipe and tank products which were sold by a
former subsidiary of Hercules to a limited industrial market, or from alleged
exposure to asbestos contained in facilities owned or operated by Hercules.
Lawsuits are received and matters settled on a regular basis. In December 1999,
Hercules entered into a Settlement Agreement to resolve the majority of these
matters then pending. In connection with that settlement, Hercules entered into
an agreement with several of its insurance carriers pursuant to which a majority
of the amounts paid will be insured. The terms of both agreements are
confidential. During 2000 and 2001, Hercules entered into additional settlement
agreements. The terms of these settlements are also confidential. In accordance
with the terms of the previously mentioned agreement with several of Hercules'
insurance carriers, the majority of the amounts paid and to be paid pursuant to
these various settlement agreements will be insured. Further, Hercules continues
to pursue additional insurance coverage from carriers who were not part of the
previously mentioned agreement.
31
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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
1995. All of these actions were settled in 1999. We recognized a $62 million
charge in 1998 related to these settlements. There will be no future impacts to
our results of operations or financial condition as a result of these
settlements.
At December 31, 2000, the consolidated balance sheet reflects a current
liability of approximately $25 million for litigation and claims. These amounts
represent management's best estimate of the probable and reasonably estimable
losses and recoveries related to litigation or claims. The extent of the
liability and recovery is evaluated quarterly. While it is not feasible to
predict the outcome of all pending suits and claims, the ultimate resolution of
these matters could have a material effect upon the financial position of
Hercules, and the resolution of any of the matters during a specific period
could have a material effect on the quarterly or annual operating results for
that period.
Other
At December 31, 2000, Hercules had $21 million in letters of credit
outstanding with lenders, $4 million of which were issued under the senior
credit facility (Note 6).
26. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
In 1998, Hercules adopted Statement of Financial Accounting Standards
No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information." The statement established new standards for reporting
information about operating segments in annual financial statements and
required selected information about operating segments in interim financial
reports. It also established standards for related disclosure about products
and services, geographic area, and major customers. In compliance with SFAS
131, the company has identified three reportable segments.
Process Chemicals and Services: (Pulp and Paper and BetzDearborn.)
Products and services in this segment are designed to enhance customers'
processes and products, improve their manufacturing costs or environmental
impact. Principal products and markets include performance additives and
water and process treatment chemicals and related on-site services for a
wide variety of industrial and commercial applications including pulp and
paper mills, refineries, chemical plants, metals manufacturers, automobile
assembly plants and makers of food and beverages.
Functional Products: (Aqualon.) Products from this segment are
principally derived from natural resources and are sold as key raw materials
to other manufacturers. Principal products and markets include water-soluble
polymers and solvent-soluble polymers, used as thickeners, emulsifiers and
stabilizers for water-based paints, oil and gas exploration, building
materials, dairy and bakery products, cosmetic and oral hygiene products and
producers of lacquers, inks and aviation fluids. Prior to September 28,
2000, this segment also included our Food Gums Division, which was sold to
CP Kelco, a joint venture we entered with Lehman Brothers Merchant Banking
Partners II, L.P.
Chemical Specialties: (Resins and FiberVisions.) Products in this
segment provide low-cost, technology driven solutions to meet customer needs
and market demands. Principal products and markets include rosin and
hydrocarbon resins for adhesives used in nonwoven fabrics, textile fibers
and adhesive tapes; thermal-bond polypropylene staple fiber for disposable
diapers and other hygienic products; and yarns for decorative fabrics.
The company evaluates performance and makes decisions based primarily
on "Profit from Operations" and "Capital Employed." Consolidated capital
employed represents the total resources employed in the company and is the
sum of total debt, company-obligated preferred securities of subsidiary
trusts and stockholders' equity. Capital employed in each reportable segment
represents the net operating assets employed to conduct business in that
segment and generally includes working capital (excluding cash) and
property, plant and equipment. Other assets and liabilities, primarily
goodwill and other intangibles, not specifically allocated to business
segments, are reflected in "Reconciling Items" in the table below.
Hercules has no single customer representing greater than 10% of its
revenues.
32
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
GEOGRAPHIC REPORTING
For geographic reporting, no single country, outside the United States,
is material for separate disclosure. However, because the company has
significant foreign operations, revenues and long-lived assets are disclosed by
geographic region.
Revenues are reported on a "customer basis," meaning that net sales are
included in the geographic area where the customer is located. Long-lived assets
are included in the geographic areas in which the producing entities are
located.
Intersegment sales are eliminated in consolidation.
----------------------------------------------------------------------------------------------------------------------------
PROCESS
CHEMICALS FUNCTIONAL CHEMICAL RECONCILING
INDUSTRY SEGMENT AND SERVICES PRODUCTS SPECIALTIES ITEMS CONSOLIDATED
----------------------------------------------------------------------------------------------------------------------------
2000
Net sales $ 1,717 $ 742 $ 695 $ (2) $ 3,152
Profit (loss) from operations 297 176 59 (88) 444
Equity in income of affiliated companies (2)
Interest and debt expense 164
Preferred security distributions of subsidiary trusts 96
Other expense, net (18)
-------
Income before income taxes 164
-------
Capital employed(a) 632 219 308 2,882(b) 4,041
Capital expenditures 39 76 36 28 179
Depreciation and amortization 51 26 25 144 246
----------------------------------------------------------------------------------------------------------------------------
1999
Net sales $ 1,725 $ 875 $ 711 $ (2) $ 3,309
Profit (loss) from operations 338 218 89 (165)(c) 480
Equity in income of affiliated companies 1
Interest and debt expense 185
Preferred security distributions of subsidiary trusts 51
Other expense, net (2)
-------
Income before income taxes 243
-------
Capital employed(a) 735 372 379 2,824(b) 4,310
Capital expenditures 51 74 39 38 202
Depreciation and amortization 66 33 30 121 250
----------------------------------------------------------------------------------------------------------------------------
1998
Net sales $ 717 $ 863 $ 566 $ (1) $ 2,145
Profit (loss) from operations 131 215 75 (229)(d) 192
Equity in income of affiliated companies 10
Interest and debt expense 101
Preferred security distributions of subsidiary trusts 2
Other expense, net (22)
-------
Income before income taxes 77
-------
Capital employed(a) 756 392 388 2,885(b) 4,421
Capital expenditures 44 53 36 24 157
Depreciation and amortization 22 32 19 35 108
----------------------------------------------------------------------------------------------------------------------------
33
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Dollars in millions)
------------------------------------------------------------------------------
UNITED ASIA
GEOGRAPHIC AREAS STATES EUROPE AMERICAS(e) PACIFIC TOTAL
------------------------------------------------------------------------------
2000
Net sales $1,702 $ 964 $ 215 $ 271 $3,152
Long-lived assets (f) 2,267 748 382 98 3,495
1999
Net sales $1,742 $1,074 $ 220 $ 273 $3,309
Long-lived assets (f) 2,264 948 529 150 3,891
1998
Net sales $ 944 $ 785 $ 258 $ 158 $2,145
Long-lived assets (f) 3,083 681 125 97 3,986
(a) Represents total segment assets net of operating liabilities
(b) Assets and liabilities not specifically allocated to business
segments, primarily goodwill, intangibles, and other long-term
assets net of liabilities.
(c) Includes integration expenses, severance costs, asset
write-downs, and other charges net of litigation and insurance
settlements, partially offset by a gain on the sale of a
subsidiary and the reversal of restructuring charges (see Notes
14 and 17). Also included are amortization of goodwill and
intangibles, corporate research and development and other
corporate items not specifically allocated to business segments.
(d) Includes costs for purchased in-process research and
development, facility closures and contract terminations,
employee termination benefits, write-downs of property, plant
and equipment, and other integration expenses (see Notes 16 and
17). Also included are amortization of goodwill and intangibles,
corporate research and development and other corporate items not
specifically allocated to business segments.
(e) Ex-U.S.A.
(f) Long-lived assets include property, plant and equipment,
goodwill and other intangible assets. In 1998, the goodwill and
other intangible assets related to the BetzDearborn acquisition
are reflected in the United States region.
27. CONSOLIDATING CONDENSED FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES
One of the amendments to our senior credit facility effective November
14, 2000 (see Note 6) included a guarantee by each of our current and future
wholly owned domestic restricted subsidiaries (each, a "Guarantor Subsidiary").
The guarantee of each Guarantor Subsidiary is full and unconditional and joint
and several. The indenture under which our registered 6.6% notes due 2027 and
6.625% notes due 2003 were issued requires the holders of such notes to be on
the same basis as the holders of any other subsequently issued debt that
provides either guarantees or pledges of collateral. As a result, the following
wholly-owned domestic restricted subsidiaries jointly and severally, and full
and unconditionally guarantee the senior credit facility, our registered 6.6%
notes dues 2027, 6.625% notes due 2003 and our 11.125% notes due 2007.
Aqualon Company
Athens Holding Inc.
BetzDearborn China, Inc.
BetzDearborn Europe, Inc
BetzDearborn International, Inc
BetzDearborn Inc.
BL Chemicals Inc.
BL Technologies, Inc
BLI Holdings, Inc
Chemical Technologies India, Ltd.
Covington Holdings, Inc.
DRC, Ltd
East Bay Realty Services, Inc.
FiberVisions Incorporated
FiberVisions Products, Inc
FiberVisions, L.L.C
FiberVisions L.P.
Hercules Chemical Corporation
Hercules Country Club, Inc.
Hercules Credit, Inc
Hercules Euro Holdings, Inc.
Hercules Finance Company
Hercules Flavor, Inc.
Hercules International Limited
Hercules International Limited, L.L.C.
Hercules Investments L.L.C.
Hercules Shared Services Corp
HISPAN Corporation
WSP, Inc
34
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The non-guarantor subsidiaries (the "Non-Guarantor Subsidiaries")
include all of the Company's foreign subsidiaries and certain domestic
subsidiaries. The Company conducts much of its business through and derives much
of its income from its subsidiaries. Therefore the Company's ability to make
required payments with respect to its indebtedness and other obligations depends
on the financial results and condition of its subsidiaries and its ability to
receive funds from its subsidiaries. There are no restrictions on the ability of
any of the Guarantor Subsidiaries to transfer funds to the Company, however
there may be restrictions for certain foreign Non-Guarantor Subsidiaries.
The following condensed consolidating financial information for the
Company presents the financial information of Hercules, the Guarantor
Subsidiaries and the Non-Guarantor Subsidiaries based on the Company's
understanding of Securities and Exchange Commission's interpretation and
application of Rule 3-10 under the Securities and Exchange Commission's
Regulation S-X. The financial information may not necessarily be indicative of
results of operations or financial position had the Guarantor Subsidiaries or
Non-Guarantor Subsidiaries operated as independent entities.
In this presentation, Hercules consists of parent company operations.
Guarantor Subsidiaries and Non-Guarantor Subsidiaries of Hercules are reported
on an equity basis. For companies acquired during 1998, the goodwill and fair
values of the assets and liabilities acquired have been presented on a
"push-down" accounting basis.
35
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Consolidating Condensed Statement of Operations
December 31, 2000
(Millions of Dollars)
-------------------------------------------------------------------------
Unconsolidated
------------------------------------------
Guarantor Non-Guarantor Eliminations &
Parent Subsidiaries Subsidiaries Adjustments Consolidated
------ ------------ ------------ ----------- ------------
Net sales $ 606 $ 1,532 $ 1,701 $ (687) $ 3,152
Cost of sales 432 995 1,050 (693) 1,784
Selling, general, and administrative expenses 84 338 388 810
Research and development 33 35 12 80
Goodwill and intangible asset amortization 7 48 25 80
Other operating expenses (income), net 38 92 (176) (46)
------- ------- ------- ------- -------
Profit from operations 12 24 402 6 444
Equity in income (loss) from affiliated companies,
net of tax -- -- (2) (2)
Equity in income from consolidated subsidiaries,
net of tax 350 48 4 (402) --
Interest and debt expense 283 (129) 10 164
Preferred security distributions of subsidiary trusts -- -- 96 96
Other income (expense), net (17) (9) 8 (18)
------- ------- ------- ------- -------
Income (loss) before income taxes 62 192 306 (396) 164
Provision for income taxes (58) 68 54 2 66
------- ------- ------- ------- -------
Net income (loss) $ 120 $ 124 $ 252 $ (398) $ 98
======= ======= ======= ======= =======
36
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Consolidating Condensed Statement of Operations
December 31, 1999
(Millions of Dollars)
-------------------------------------------------------------------------
Unconsolidated
------------------------------------------
Guarantor Non-Guarantor Eliminations &
Parent Subsidiaries Subsidiaries Adjustments Consolidated
------ ------------ ------------ ----------- ------------
Net sales $ 584 $ 1,570 $ 1,827 $ (672) $ 3,309
Cost of sales 424 974 1,100 (667) 1,831
Selling, general, and administrative expenses 118 365 304 787
Research and development 28 13 44 85
Goodwill and intangible asset amortization 9 53 17 79
Other operating expenses, net 23 23 1 47
------- ------- ------- ------- -------
Profit (loss) from operations (18) 142 361 (5) 480
Equity in income (loss) from affiliated companies,
net of tax 2 -- (1) 1
Equity in income from consolidated subsidiaries,
net of tax 331 143 6 (480) --
Interest and debt expense 261 (51) (25) 185
Preferred security distributions of subsidiary trusts -- -- 51 51
Other income (expense), net (3) (1) 4 (2) (2)
------- ------- ------- ------- -------
Income (loss) before income taxes 51 335 344 (487) 243
Provision for income taxes (121) 89 110 (3) 75
------- ------- ------- ------- -------
Net income (loss) $ 172 $ 246 $ 234 $ (484) $ 168
======= ======= ======= ======= =======
37
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Consolidating Condensed Statement of Operations
December 31, 1998
(Millions of Dollars)
-------------------------------------------------------------------------
Unconsolidated
------------------------------------------
Guarantor Non-Guarantor Eliminations &
Parent Subsidiaries Subsidiaries Adjustments Consolidated
------ ------------ ------------ ----------- ------------
Net sales $ 558 $ 963 $ 1,309 $ (685) $ 2,145
Cost of sales 400 707 859 (679) 1,287
Selling, general, and administrative expenses 80 119 178 377
Research and development 27 24 10 61
Purchased in-process research and development -- 130 -- 130
Goodwill and intangible asset amortization 14 5 3 22
Other operating expenses, net 40 24 12 76
------- ------- ------- ------- -------
Profit (loss) from operations (3) (46) 247 (6) 192
Equity in income of affiliated companies, net of tax 10 -- 10
Equity in income from consolidated subsidiaries,
net of tax 119 67 6 (192) --
Interest and debt expense (income) 121 (32) 12 101
Preferred security distributions of subsidiary trusts -- -- 2 2
Other income (expense), net (70) 36 10 2 (22)
------- ------- ------- ------- -------
Income (loss) before income taxes (65) 89 249 (196) 77
Provision for income taxes (75) 59 85 (1) 68
------- ------- ------- ------- -------
Net income (loss) $ 10 $ 30 $ 164 $ (195) $ 9
======= ======= ======= ======= =======
38
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Consolidating Condensed Balance Sheet
December 31, 2000
(Millions of Dollars)
-------------------------------------------------------------------------
Unconsolidated
------------------------------------------
Guarantor Non-Guarantor Eliminations &
Parent Subsidiaries Subsidiaries Adjustments Consolidated
------ ------------ ------------ ----------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 1 $ 7 $ 46 $ -- $ 54
Accounts receivable, net 110 183 333 626
Intercompany receivables 37 81 79 (197) --
Inventories 63 124 128 (10) 305
Deferred income taxes 28 2 7 37
------- ------- ------- ------- -------
Total current assets 239 397 593 (207) 1,022
Property, plant, and equipment, net 264 359 481 1,104
Investments in subsidiaries 4,357 1,578 69 (6,004) --
Goodwill and other intangible assets, net 35 1,471 885 2,391
Deferred charges and other assets 648 36 108 792
------- ------- ------- ------- -------
Total assets $ 5,543 $ 3,841 $ 2,136 $(6,211) $ 5,309
======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable 121 14 122 2 259
Accrued expenses 132 130 140 402
Intercompany payables 45 68 84 (197) --
Short-term debt 127 5 129 261
------- ------- ------- ------- -------
Total current liabilities 425 217 475 (195) 922
Long-term debt 2,063 97 182 2,342
Deferred income taxes 82 48 57 187
Other postretirement benefits and other liabilities 210 169 41 420
Company-obligated preferred securities of
subsidiary trusts -- -- 622 622
Intercompany notes payable/(receivable) 1,947 (2,656) 719 (10) --
Stockholders' equity 816 5,966 40 (6,006) 816
------- ------- ------- ------- -------
Total liabilities and stockholders' equity $ 5,543 $ 3,841 $ 2,136 $(6,211) $ 5,309
======= ======= ======= ======= =======
39
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Consolidating Condensed Balance Sheet
December 31, 1999
(Millions of Dollars)
-------------------------------------------------------------------------
Unconsolidated
------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 2 $ 23 $ 38 $ -- $ 63
Accounts receivable, net 99 278 389 766
Intercompany receivable 22 24 78 (124) --
Inventories 63 147 184 (14) 380
Deferred income taxes 119 10 129
------- ------- ------- ------- -------
Total current assets 305 472 699 (138) 1,338
Property, plant, and equipment, net 251 436 634 1,321
Investments in subsidiaries 4,190 1,776 68 (6,034) --
Goodwill and other intangible assets, net 45 1,536 989 2,570
Deferred charges and other assets 517 44 106 667
------- ------- ------- ------- -------
Total assets $ 5,308 $ 4,264 $ 2,496 $(6,172) $ 5,896
======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable 48 125 147 320
Accrued expenses 148 250 163 561
Intercompany payable 31 57 36 (124) --
Short-term debt 641 2 35 678
------- ------- ------- ------- -------
Total current liabilities 868 434 381 (124) 1,559
Long-term debt 1,611 107 59 1,777
Deferred income taxes 77 119 91 287
Other postretirement benefits and other liabilities 159 203 56 418
Company-obligated preferred securities of
subsidiary trusts -- -- 992 992
Intercompany notes payable (receivable) 1,730 (1,189) (541) -- --
Stockholders' equity 863 4,590 1,458 (6,048) 863
------- ------- ------- ------- -------
Total liabilities and stockholders' equity $ 5,308 $ 4,264 $ 2,496 $(6,172) $ 5,896
======= ======= ======= ======= =======
40
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Consolidating Condensed Statement of Cash Flows
December 31, 2000
(Millions of Dollars)
-------------------------------------------------------------------------
Unconsolidated
------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATIONS $ (91) $ (24) $ 234 $ (49) $ 70
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (37) (38) (112) -- (187)
Proceeds of investment and fixed asset disposals -- 14 404 -- 418
Acquisitions, net of cash acquired (6) -- -- -- (6)
Other, net (19) (1) 8 -- (12)
------- ------- ------- ------- -------
Net cash (used in) provided by investing activities (62) (25) 300 -- 213
------- ------- ------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds 1,858 27 4 -- 1,889
Long-term debt repayments (1,756) (27) (7) -- (1,790)
Change in short-term debt -- -- 92 -- 92
Payment of debt issuance costs and underwriting fees (28) -- -- -- (28)
Repayment of subsidiary trust preferred securities -- -- (370) -- (370)
Change in intercompany, noncurrent 161 33 (194) -- --
Common stock issued 13 -- -- -- 13
Common stock reacquired (2) -- -- -- (2)
Dividends paid (94) -- (49) 49 (94)
------- ------- ------- ------- -------
Net cash (used in) provided by financing activities 152 33 (524) 49 (290)
------- ------- ------- ------- -------
Effect of exchange rate changes on cash -- -- (2) -- (2)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents (1) (16) 8 -- (9)
Cash and cash equivalents at beginning of year 2 23 38 -- 63
------- ------- ------- ------- -------
Cash and cash equivalents at end of year $ 1 $ 7 $ 46 $ -- $ 54
======= ======= ======= ======= =======
41
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Consolidating Condensed Statement of Cash Flows
December 31, 1999
(Millions of Dollars)
-------------------------------------------------------------------------
Unconsolidated
------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATIONS $(59) $ 198 $ 243 $ (102) $ 280
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (42) (66) (88) -- (196)
Proceeds of investment and fixed asset disposals 2 28 20 -- 50
Acquisitions, net of cash acquired (10) -- -- -- (10)
Other, net (24) (15) 2 -- (37)
------- ------- ----- ------- -------
Net cash (used in) provided by investing activities (74) (53) (66) -- (193)
------- ------- ----- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds 274 5 -- -- 279
Long-term debt repayments (1,344) (16) -- -- (1,360)
Change in short-term debt 99 (17) (60) -- 22
Payment of debt issuance costs and underwriting fees -- -- (19) -- (19)
Proceeds from issuance of subsidiary trusts'
preferred securities -- -- 792 -- 792
Change in intercompany, noncurrent 915 (112) (804) 1 --
Proceeds from issuance of warrants 90 -- -- -- 90
Common stock issued 182 -- -- -- 182
Common stock reacquired (3) -- -- -- (3)
Proceeds from issuance of subsidiary preferred stock -- 12 -- -- 12
Dividends paid (83) -- (101) 101 (83)
------- ------- ----- ------- -------
Net cash (used in) provided by financing activities 130 (128) (192) 102 (88)
------- ------- ----- ------- -------
Effect of exchange rate changes on cash -- -- (4) -- (4)
------- ------- ----- ------- -------
Net increase (decrease) in cash and cash equivalents (3) 17 (19) -- (5)
Cash and cash equivalents at beginning of year 5 6 57 -- 68
------- ------- ----- ------- -------
Cash and cash equivalents at end of year $ 2 $ 23 $ 38 $ -- $ 63
======= ======= ===== ======= =======
42
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Consolidating Condensed Statement of Cash Flows
December 31, 1998
(Millions of Dollars)
-------------------------------------------------------------------------
Unconsolidated
------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATIONS $ 119 $ 32 $ 119 $ (89) $ 181
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (39) (52) (66) -- (157)
Proceeds of investment and fixed asset disposals 77 522 1 -- 600
Acquisitions, net of cash acquired (3,109) -- -- -- (3,109)
Other, net (14) (11) -- -- (25)
------- ----- ----- ------- -------
Net cash (used in) provided by investing activities (3,085) 459 (65) -- (2,691)
------- ----- ----- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds 2,960 151 -- -- 3,111
Long-term debt repayments (175) (72) -- -- (247)
Change in short-term debt (212) 7 (23) -- (228)
Payment of debt issuance costs and underwriting fees (59) -- (7) -- (66)
Change in intercompany, noncurrent 665 (573) (92) -- --
Proceeds from trust preferred securities -- -- 200 -- 200
Common stock issued 10 -- -- -- 10
Common stock reacquired (114) -- -- -- (114)
Dividends paid (104) -- (89) 89 (104)
------- ----- ----- ------- -------
Net cash (used in) provided by financing activities 2,971 (487) (11) 89 2,562
------- ----- ----- ------- -------
Effect of exchange rate changes on cash -- -- (1) -- (1)
------- ----- ----- ------- -------
Net increase (decrease) in cash and cash equivalents 5 4 42 -- 51
Cash and cash equivalents at beginning of year -- 2 15 -- 17
------- ----- ----- ------- -------
Cash and cash equivalents at end of year $ 5 $ 6 $ 57 $ -- $ 68
======= ===== ===== ======= =======
43
HERCULES INCORPORATED
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ----- ---- ----- ----- ----- -----
Operating Results
Net sales $798 $806 $ 822 $833 $ 815 $ 828 $ 717 $ 842
Cost of sales 450 438 462 456 463 460 409 477
Selling, general, and administrative expenses 197 197 206 193 210 188 197 209
Research and development 21 21 20 20 20 21 19 23
Goodwill and intangible asset amortization 20 20 20 20 20 20 20 19
Other operating expenses (income), net 4 7 18 6 (105) 1 37 33
--------------------------------------------------------------
Profit (loss) from operations $106 $123 $ 96 $138 $ 207 $ 138 $ 35 $ 81
Equity income -- 1 -- -- -- -- (2) --
Interest and debt expense 32 60 42 47 42 38 48 40
Preferred security distributions of subsidiary trusts 23 5 23 12 23 16 27 18
Other income (expense), net 5 3 (6) 4 (13) (2) (4) (7)
--------------------------------------------------------------
Income (loss) before income taxes $ 56 $ 62 $ 25 $ 83 $ 129 $ 82 $ (46) $ 16
Income taxes 20 24 9 27 54 25 (17) (1)
--------------------------------------------------------------
Net income (loss) $ 36 $ 38 $ 16 $ 56 $ 75 $ 57 $ (29) $ 17
==============================================================
Earnings per share**
Basic
Earnings (loss) per share $0.34 $0.37 $0.15 $0.56 $0.70 $0.54 ($0.28) $0.17
Diluted:
Earnings (loss) per share $0.34 $0.37 $0.15 $0.56 $0.70 $0.54 $(0.28) $0.16
Year
2000 1999
------- -------
Operating Results
Net sales $3,152 $3,309
Cost of sales 1,784 1,831
Selling, general, and administrative expenses 810 787
Research and development 80 85
Goodwill and intangible asset amortization 80 79
Other operating expenses (income), net (46) 47
------------------
Profit (loss) from operations $ 444 $ 480 *
Equity income (2) 1
Interest and debt expense 164 185
Preferred security distributions of subsidiary trusts 96 51
Other income (expense), net (18) (2)
------------------
Income (loss) before income taxes $ 164 $ 243
Income taxes 66 75
------------------
Net income (loss) $ 98 $ 168
==================
Earnings per share**
Basic
Earnings (loss) per share $ 0.91 $ 1.63
Diluted:
Earnings (loss) per share $ 0.91 $ 1.62
* Includes net unusual credits of $56 million in 2000 and unusual
charges of $62 million in 1999 (see Note 17).
** Earnings per share calculations for each of the quarters are based
on the weighted-average number of shares outstanding for each period. The sum of
the quarters may not necessarily be equal to the full year's earnings per share
amounts.
44
HERCULES INCORPORATED
PRINCIPAL CONSOLIDATED SUBSIDIARIES
ARGENTINA
Hercules Argentina S.A.
AUSTRALIA
BetzDearborn Australia Pty, Ltd.
Little H Pty Ltd.
AUSTRIA
Hercules Austria GmbH.
BAHAMAS
Hercules International Trade Corporation Limited
BELGIUM
BetzDearborn N.V.
Hercules Beringen B.V.B.A.
Hercules Doel B.V.B.A.
Hercules Europe B.V.B.A.
Hercules Holding B.V./B.V.B.A.
BERMUDA
Curtis Bay Insurance Co. Ltd.
BRAZIL
Hercules BetzDearborn Brasil Ltda.
Hercules do Brasil Produtos Quimicos Ltda.
CANADA
BetzDearborn Canada, Inc.
Hercules Canada Inc.
Hercules Canada (partnership)
CHILE
Hercules Quimica Chile Ltda
CHINA
Beijing Hercules Chemical Co. Ltd.*
BetzDearborn China, Ltd.
FiberVisions (Suzhou) Nonwovens Products Co. Ltd.
FiberVisions (China) Textile Products Ltd.
Shanghai Hercules Chemical Co., Ltd.*
COLOMBIA
Hercules de Colombia S.A.
CROATIA
BetzDearborn d.o.o.
CURACAO
BetzDearborn Caribbean N.V.
CZECH (REPUBLIC)
Hercules CZ s.r.o.
DENMARK
Hercules Denmark A/S
FiberVisions, A/S
Hercules Investment ApS
ECUADOR
BetzDearborn de Ecuador S.A.
FINLAND
Hercules Finland OY
FRANCE
Aqualon France B.V.
BetzDearborn SA
Hercules SA
GERMANY
Abieta Chemie, GmbH*
BetzDearborn Gmbh
Hercules Deutschland GmbH
Hercules GmbH
HONG KONG
Hercules China Limited
HUNGARY
BetzDearborn Hungary Kft
INDIA
Hercules Specialty Chemicals (India) Private Limited
INDONESIA
P.T. BetzDearborn Persada
P.T. Hercules Mas Indonesia
IRELAND
BetzDearborn Ireland Limited
ITALY
Hercules Italia SpA
JAPAN
Hercules Japan Ltd.
Nippon BetzDearborn K.K.*
KOREA
BetzDearborn Korea, Ltd.
Hercules Korea Chemical Co. Ltd.
LIECHTENSTEIN
Organa Trust
LUXEMBOURG
Hercules Investments S.a.r.l.
Hercules Luxembourg S.a.r.l.
Hercules European Participations S.a.r.l.
MALAYSIA
Hercules Chemicals (Malaysia) Sdn. BHD
MEXICO
BetzDearborn de Mexico S.A. de C.V.
Hercules Inc. Mexico, S.A. de C.V.
Hercules Mexico, S.A. de C.V.
Taloquimia S.A. de C.V.*
NETHERLANDS
Aqualon France B.V.
Betz Chemical Technologies B.V.
BetzDearborn B.V.
Hechem B.V.
Hercules B.V.
NORWAY
Hercules Norway A/S
PAKISTAN
Pakistan Gum Industries PVT Ltd.*
PERU
Hercules del Peru S.A.
POLAND
Hercules Polska Sp. zo.o
PORTUGAL
Misan Portuguesa, Ltda.
SINGAPORE
Hercules Chemicals Singapore Pte Ltd.
SOUTH AFRICA
Hercules Chemicals South Africa (Pty) Ltd.
SPAIN
Hercules Quimica, S.A.
SWEDEN
Betz KEMI AB
BetzDearborn AB
Hercules AB
SWITZERLAND
Fibervisions A.G./Fibervisions Ltd.
TAIWAN
Hercules Chemicals (Taiwan) Co., Ltd.
THAILAND
Hercules Chemicals (Thailand) Co., Ltd.
UNITED KINGDOM
BetzDearborn Limited
Hercules Investments Global Ltd.
Hercules Limited
Hercules GB Holdings Limited
URUGUAY
BetzDearborn de Uruguay S.A.
UNITED STATES
Aqualon Company, Delaware
Athens Holding Inc., Delaware
BetzDearborn China, Ltd., Delaware
BetzDearborn Europe, Inc., Delaware
BetzDearborn Inc., Pennsylvania
BetzDearborn International, Inc., Pennsylvania
BL Chemicals Inc., Delaware
BL Technologies, Inc., Delaware
BLI Holdings, Inc., Delaware
Chemical Technologies India, Ltd., Delaware
Covington Holdings Inc., Delaware
DRC., Ltd. Delaware
East Bay Realty Services, Inc., Delaware
FiberVisions Incorporated, Delaware
FiberVisions, L.L.C., Delaware
FiberVisions L.P., Delaware
FiberVisions Products, Inc., Georgia
Hercules Chemical Corporation, Delaware
Hercules Country Club, Inc., Delaware
Hercules Credit Inc., Delaware
Hercules Euro Holdings, L.L.C., Delaware
Hercules Finance Company, Delaware
Hercules Flavor, Inc., Delaware
Hercules International Limited, Delaware
Hercules International Limited, L.L.C., Delaware
Hercules Investments L.L.C., Delaware
HISPAN Corporation, Delaware
Hercules Shared Services Corporation, Delaware*
WSP, Inc., Delaware
VENEZUELA
Hercules BetzDearborn C.A.
VIRGIN ISLANDS
Hercules Islands Corporation *
Hercules Overseas Corp.
*This entity is owned in part by Hercules with the remaining interest
held by a third party.
45
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and of cash flows present fairly, in
all material respects, the financial position of Aqualon Company, a subsidiary
of Hercules Incorporated, and its subsidiaries at December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 10, 2001
46
AQUALON COMPANY
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Sales to third parties..................................... $274,775 $295,473 $349,179
Sales to Hercules Group.................................... 63,033 62,657 57,528
-------- -------- --------
337,808 358,130 406,707
Cost of sales.............................................. 227,272 250,066 278,091
Selling, general, and administrative expenses.............. 48,069 53,775 47,606
Research and development................................... 11,780 12,078 11,588
Goodwill and intangible asset amortization................. 1,014 1,014 1,014
Other operating expenses, net (Note 12).................... 22,259 3,554 10,245
-------- -------- --------
Profit from operations..................................... 27,414 37,643 58,163
Interest and debt expense.................................. 415 545 438
Other (income) expense, net................................ (1,199) 127 24
-------- -------- --------
Net income................................................. $ 28,198 $ 36,971 $ 57,701
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
47
AQUALON COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 2,494 $ 1,313
Accounts receivable, net (Note 3)......................... 35,743 46,045
Notes receivable (Note 4)................................. 3,600 --
Inventories (Note 5)...................................... 45,409 52,493
Other current assets...................................... 4,691 4,492
-------- --------
Total current assets.............................. 91,937 104,343
-------- --------
Property, plant, and equipment, net (Note 8)................ 91,742 92,062
Notes receivable (Note 4)................................... 3,000 --
Goodwill, net (Note 9)...................................... 28,550 29,564
Deferred charges and other assets........................... 5,256 5,548
-------- --------
Total assets...................................... $220,485 $231,517
======== ========
LIABILITIES AND NET PARTNERS' (HERCULES GROUP) INVESTMENT
Current liabilities
Accounts payable.......................................... $ 17,724 $ 24,323
Short-term debt (Note 6).................................. -- 1,650
Accrued expenses (Note 8)................................. 24,172 25,277
-------- --------
Total current liabilities......................... 41,896 51,250
-------- --------
Pension and other postretirement benefits (Note 11)......... 110 (17)
Environmental and other liabilities......................... 22,526 9,825
-------- --------
Total liabilities......................................... 64,532 61,058
-------- --------
Commitments and contingencies (Note 16)..................... -- --
Net partners' (Hercules Group) investment (Note 14)....... 155,953 170,459
-------- --------
Total liabilities and net partners' (Hercules
Group) investment................................ $220,485 $231,517
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
48
AQUALON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income.................................................. $ 28,198 $ 36,971 $ 57,701
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation.............................................. 9,757 11,009 11,896
Amortization.............................................. 1,014 1,014 1,014
Loss on disposal (Note 15)................................ 6,854 6,500 --
Loss on impairment of fixed assets (Note 12).............. -- 2,000 15,300
Corporate and other cost allocations...................... 15,313 21,444 16,424
Accruals and deferrals of cash receipts and payments:
Accounts receivable and other assets................... 10,103 4,531 5,982
Inventories............................................ 7,084 5,112 (7,483)
Accounts payable and accrued expenses.................. (8,659) (3,389) (5,662)
Environmental and other assets and liabilities......... 800 3,743 3,719
-------- -------- --------
Net cash provided by operations...................... 70,464 88,935 98,891
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (9,437) (12,133) (20,856)
Investment in affiliate..................................... (179) 254 (63)
-------- -------- --------
Net cash used in investing activities................ (9,616) (11,879) (20,919)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of debt........................................... (1,650) -- (13)
Transfers to partners' (Hercules Group)..................... (58,017) (79,877) (74,040)
-------- -------- --------
Net cash used in financing activities................ (59,667) (79,877) (74,053)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 1,181 (2,821) 3,919
Cash and cash equivalents at beginning of year.............. 1,313 4,134 215
-------- -------- --------
Cash and cash equivalents at end of year............. $ 2,494 $ 1,313 $ 4,134
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ 415 $ 545 $ 438
Noncash financing activities
Issuance of note receivable............................... 6,600 -- --
Corporate and other cost allocations...................... 15,313 21,444 16,424
The accompanying notes are an integral part of
the consolidated financial statements.
49
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Aqualon Company (Aqualon) is a U.S. partnership which is owned 99.4182% by
Hercules Credit, Inc., a U.S. holding company and 0.5818% by WSP, Inc., a U.S.
holding company. Hercules Credit, Inc. and WSP, Inc. are wholly owned
subsidiaries of Hercules Incorporated (Hercules). Aqualon is engaged in
providing products and services to manage the properties of aqueous
(water-based) and non-aqueous systems. These products are principally derived
from renewable natural raw materials and are sold as thickeners, emulsifiers,
and stabilizers to other manufacturers, including makers of oral hygiene and
personal care products, construction materials and latex paints, and are used in
the oil and gas industry for drilling and recovery.
In June 2000, Aqualon sold its nitrocellulose operation in Parlin, NJ to
Greentree Chemical Technologies, Inc.
Historically, separate company stand-alone financial statements were not
prepared for Aqualon. In November 2000, Hercules amended its senior credit
facility and ESOP credit facility (the "Facilities"). The Facilities, as
amended, are secured by liens on Hercules' property and assets (and those of
Hercules' Canadian Subsidiaries), a pledge of the stock and partnership
interests of substantially all of Hercules' domestic subsidiaries (including
Aqualon) and 65% of the stock of foreign subsidiaries directly owned by
Hercules, and a pledge of Hercules' domestic intercompany indebtedness. These
financial statements present the financial information on Aqualon, a collateral
party to the Hercules debt, based on Hercules' understanding of Securities and
Exchange Commission's interpretation and application of Rule 3-16 under the
Securities and Exchange Commission's Regulation S-X. These statements were
derived from historical accounting records.
Aqualon participates in Hercules' centralized cash management system.
Accordingly, cash received from Aqualon operations is transferred to Hercules on
a periodic basis, and Hercules funds all operational and capital requirements.
The financial statements of Aqualon reflect certain allocated support costs
incurred by other entities in the Hercules group. These costs include executive,
legal, accounting, tax, auditing, cash management, purchasing, human resources,
safety, health and environmental, information management, investor relations and
other corporate services. Allocations and charges included in Aqualon's
financial statements were based on either a direct cost pass-through for items
directly identified as related to Aqualon's activities; a percentage allocation
for such services provided based on factors such as sales, net assets, or cost
of sales; or a relative weighting of geographic activity. Management believes
that the allocation methods are reasonable.
During 1989, Hercules acquired the 50% shareholding held by Henkel [its
joint venture partner] to make Aqualon a wholly owned subsidiary. These
financial statements include the push-down of fair value adjustments to assets
and liabilities, including goodwill, other intangible assets and property,
plant, and equipment and their related amortization and depreciation
adjustments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Aqualon and
its wholly-owned subsidiary, Organa Trust. All intercompany transactions and
profits have been eliminated.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
50
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Aqualon recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
Aqualon's experience. The corresponding shipping and handling costs are included
in cost of sales.
Environmental Expenditures
Environmental expenditures that pertain to current operations or future
revenues are expensed or capitalized according to Aqualon's capitalization
policy. Expenditures for remediation of an existing condition caused by past
operations that do not contribute to current or future revenues are expensed.
Liabilities are recognized for remedial activities when the cleanup is probable
and can be reasonably estimated.
Cash and Cash Equivalents
Cash equivalents include commercial paper and other securities with
original maturities of 90 days or less. Book value approximates fair value
because of the short maturity of those instruments.
Inventories
Inventories are stated at the lower of cost or market. Inventories are
valued at standard cost which approximates the average cost method.
Property and Depreciation
Property, plant, and equipment are stated at cost and depreciated using the
straight-line method. The estimated useful lives of depreciable assets are as
follows: buildings -- 30 years; plant, machinery and equipment -- 15 years;
other machinery and equipment -- 3 to 15 years.
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is charged to income.
Goodwill
Goodwill and other intangible assets are amortized on a straight-line basis
over the estimated future periods to be benefited, generally 40 years for
goodwill, customer relationships, and trademarks and tradenames and 5 to 15
years for other intangible assets.
Long-lived Assets
Aqualon reviews its long-lived assets, including goodwill and other
intangibles, for impairment on an exception basis whenever events or changes in
circumstances indicate carrying amounts of the assets may not be recoverable
through undiscounted future cash flows. If an impairment loss has occurred based
on expected future cash flows (undiscounted), the loss is recognized in the
income statement. The amount of the impairment loss is the excess of the
carrying amount of the impaired asset over the fair value of the asset. The fair
value represents expected future cash flows from the use of the assets,
discounted at the rate used to evaluate potential investments.
51
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentrations of Credit Risk
Financial instruments that potentially subject Aqualon to concentrations of
credit risk consist principally of trade receivables. Concentrations of credit
risk with respect to trade receivables are limited due to the Company's large
number of customers and their dispersion across many different industries and
locations.
Financial Instruments
Aqualon uses various non-derivative financial instruments, including
letters of credit, and generally does not require collateral to support its
financial instruments.
Stock-based Compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25)). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-based Compensation," requires companies electing to continue to use the
intrinsic-value method to make pro forma disclosures of net income as if the
fair-value-based method of accounting had been applied.
Computer Software Costs
Effective January 1, 1999, Aqualon adopted the American Institute of
Certified Public Accountants Statement of Position 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
Our prior accounting was generally consistent with the requirements of SOP
98-1 and, accordingly, adoption of SOP 98-1 had no material effect. Computer
software costs are being amortized over a period of 5 to 10 years.
Research and Development
Research and development expenditures are expensed as incurred.
Income Taxes
Income taxes have not been provided in the accompanying financial
statements, as the tax effects of the operating partnership's operations accrue
directly to the partners.
Net Partners' (Hercules Group) Investment
The net partners' (Hercules Group) investment account reflects the balance
of Aqualon's historical earnings, intercompany amounts, post-employment
liabilities and other transactions between Aqualon and the partners/Hercules
Group.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. This statement, as amended, is effective for
all
52
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
fiscal quarters of fiscal years beginning after December 31, 2000. Aqualon
adopted SFAS 133 effective January 1, 2001. The adoption of SFAS No. 133 did not
have a material effect on its earnings or statement of financial position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was to be effective
October 1, 2000. Adoption of SAB 101 did not have a material effect on the
Company's profit from operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). For Aqualon, these statements will generally become
effective January 1, 2002, although business combinations initiated after June
30, 2001 are subject to the non-amortization and purchase accounting provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. Aqualon is currently in
the process of conducting an assessment of the actual impact of the
non-amortization provision of SFAS 142. The assessment of goodwill for
impairment is a complex issue in which the Company must determine, among other
things, the fair value of each defined reporting unit. It is, therefore, not
possible at this time to predict the impact, if any, that the impairment
assessment provisions of SFAS 142 will have on Aqualon's financial statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assets. SFAS 143 will become effective for Aqualon in
January 1, 2003 and requires recognition of a liability for an asset retirement
obligation in the period in which it is incurred. Management is in the process
of evaluating the impact this standard will have on the Company's financial
statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Trade.................................................... $36,413 $46,865
Less allowance for doubtful accounts..................... (670) (820)
------- -------
Total.......................................... $35,743 $46,045
======= =======
4. NOTE RECEIVABLE
Notes receivable as of December 31, 2000, consist of a $6,600 thousand
30-day demand note from Greentree Chemical Technologies, Inc. (Greentree),
related to the divestiture of the Nitrocellulose business in June 2000. On
January 8, 2001, Aqualon received $3,600 thousand in cash from Greentree and
issued a new
53
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
unsecured demand note to Greentree for $3,000 thousand, due June 30, 2005. The
new note carries an interest rate of 13.5% until May 1, 2001; thereafter, the
interest rate is equal to Prime +7.5% for the remaining duration of the note.
5. INVENTORIES
The components of inventories are:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Finished products........................................ $27,754 $34,330
Raw material and supplies................................ 15,613 14,594
Work in process.......................................... 2,042 3,569
------- -------
Total.......................................... $45,409 $52,493
======= =======
6. SHORT-TERM DEBT
Short-term debt of $1,650 thousand at December 31, 1999 consists of an
Industrial Revenue Bond from the Industrial Development Authority of the city of
Hopewell, Virginia. This debt carried an interest rate of 8%. The principal and
interest was paid in June 2000.
7. LONG-TERM INCENTIVE COMPENSATION PLANS
Aqualon participates in long-term incentive compensation plans sponsored by
Hercules. These plans provide for the grant of stock options and the award of
common stock and other market-based units to certain key employees and
non-employee directors.
In 1995, Hercules changed the structure of the long-term incentive
compensation plans to place a greater emphasis on shareholder value creation
through grants of regular stock options, performance-accelerated stock options,
and cash value awards (performance-based awards denominated in cash and payable
in shares of common or restricted stock, subject to the same restrictions as
restricted stock). Restricted stock and other market-based units are awarded
with respect to certain programs. The number of awarded shares outstanding was
491,488 at December 31, 2000, and 926,689 and 1,083,613 at December 31, 1999 and
1998, respectively.
At December 31, 2000, under the Company's incentive compensation plans,
1,847,855 shares of common stock were available for grant as stock awards or
stock option awards. Stock awards are limited to approximately 15% of the total
authorizations. Regular stock options are granted at the market price on the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock options are also granted at
the market price on the date of grant and are normally exercisable at nine and
one-half years. Exercisability may be accelerated based upon the achievement of
predetermined performance goals. Both regular and performance-accelerated stock
options expire 10 years after the date of grant.
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to the Company in the event of employment termination,
except in the case of death, disability, retirement, or other specified events.
The Company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. There were no charges to income for the cost of stock awards over the
restriction or performance period for 2000, 1999 and 1998, respectively.
54
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 2000, 1999 and 1998:
REGULAR PERFORMANCE-ACCELERATED
----------------------------- -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES PRICE SHARES PRICE
--------- ---------------- --------- ----------------
January 1, 1998........................ 195,870 $42.18 72,000 $45.91
Granted................................ 145,225 $35.84 64,645 $47.29
Exercised.............................. -- -- -- --
Forfeited.............................. (3,690) $39.50 -- --
------- ------ ------- ------
December 31, 1998...................... 337,405 $39.48 136,645 $46.56
Granted................................ 71,875 $37.73 69,980 $37.58
Exercised.............................. (1,050) $16.21 -- --
Forfeited.............................. (3,910) $39.50 -- --
------- ------ ------- ------
December 31, 1999...................... 404,320 $39.23 206,625 $43.52
Granted................................ 129,800 $17.20 -- --
Exercised.............................. -- -- -- --
Forfeited.............................. (39,250) $39.50 -- --
------- ------ ------- ------
December 31, 2000...................... 494,870 $33.43 206,625 $43.52
The weighted-average fair value of regular stock options granted during
2000, 1999 and 1998 was $8.85, $8.26 and $9.20 respectively. The
weighted-average fair value of performance-accelerated stock options granted
during 1999 and 1998 was $8.01 and $11.01, respectively. There were no
performance-accelerated stock options granted during 2000.
Following is a summary of regular stock options exercisable at December 31,
2000, 1999, and 1998, and their respective weighted-average share prices:
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISABLE SHARES EXERCISE PRICE
------------------- --------- ----------------
December 31, 1998................................. 95,194 $43.18
December 31, 1999................................. 224,230 $40.49
December 31, 2000................................. 293,370 $39.20
There were no performance-accelerated stock options exercisable at December
31, 2000, 1999 and 1998.
55
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
EXERCISE OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
PRICE RANGE AT 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/00 EXERCISE PRICE
----------------------------- ----------- ---------------- ---------------- ----------- ----------------
Regular Stock Options
$12 - $20 129,800 9.14 $17.20 2,950 $17.25
$20 - $30 76,475 7.67 $25.56 63,700 $25.56
$30 - $40 174,025 7.23 $38.77 130,900 $39.11
$40 - $50 85,970 6.73 $47.27 74,720 $47.29
$50 - $60 28,600 5.56 $54.03 21,100 $55.39
------- -------
494,870 293,370
======= =======
Performance-Accelerated Stock
Options
$14 - $40 104,655 7.69 $38.16 -- --
$40 - $50 81,270 6.70 $47.40 -- --
$50 - $61 20,700 5.18 $55.40 -- --
------- -------
206,625 --
======= =======
The Company currently expects that 100% of performance-accelerated stock
options will eventually vest.
Aqualon employees may also participate in the Hercules Employee Stock
Purchase Plan ("ESPP"). The ESPP is a qualified non-compensatory plan, which
allows eligible employees to acquire shares of common stock through systematic
payroll deductions. The plan consists of three-month subscription periods,
beginning July 1 of each year. The purchase price is 85% of the fair market
value of the common stock on either the first or last day of that subscription
period, whichever is lower. Purchases may range from 2% to 15% of an employee's
base salary each pay period, subject to certain limitations. Currently, 202,139
shares of Hercules common stock are registered for offer and sale under the
plan. Shares issued at December 31, 2000 and 1999, were 1,597,861 and 949,464,
respectively. The Company applies APB Opinion 25 and related interpretations in
accounting for its Employee Stock Purchase Plan. Accordingly, no compensation
cost has been recognized for the Employee Stock Purchase Plan.
Had compensation cost for the Hercules' Stock-Based Incentive Plans and
Employee Stock Purchase Plan been determined on the basis of fair value
according to SFAS No. 123, the fair value of each option granted or share
purchased would be estimated on the grant date using the Black-Scholes option
pricing model.
The following weighted-average assumptions would be used in estimating fair
value for 2000, 1999 and 1998:
REGULAR PERFORMANCE EMPLOYEE STOCK
ASSUMPTION PLAN ACCELERATED PLAN PURCHASE PLAN
---------- -------- ---------------- --------------
Dividend yield............................... 2% 3.4% 0.0%
Risk-free interest rate...................... 5.88% 5.38% 5.41%
Expected life................................ 7.1 yrs. 5 yrs. 3 mos.
Expected volatility.......................... 29.20% 27.31% 44.86%
56
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's net income for 2000, 1999 and 1998 would approximate the pro
forma amounts below:
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Net income
As reported......................................... $28,198 $36,971 $57,701
Pro forma........................................... $26,573 $35,422 $56,386
8. ADDITIONAL BALANCE SHEET DETAIL
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Property, plant, and equipment
Land...................................................... $ 527 $ 527
Buildings and equipment................................... 363,737 516,440
Construction in progress.................................. 11,909 5,503
-------- --------
Total..................................................... 376,173 522,470
Accumulated depreciation and amortization................. 284,431 430,408
-------- --------
Net property, plant, and equipment........................ $ 91,742 $ 92,062
======== ========
Accrued expenses
Payroll and employee benefits............................. $ 4,685 $ 4,298
Nitrocellulose inventory disposal cost reserve............ 6,478 6,500
Current environmental reserve............................. 4,686 4,670
Other..................................................... 8,323 9,809
-------- --------
Total..................................................... $ 24,172 $ 25,277
======== ========
9. GOODWILL
Goodwill relates to Hercules' 1989 purchase of Henkel's 50% ownership
interest in Aqualon. At December 31, 2000 and December 31, 1999, goodwill was
$28,550 thousand and $29,564 thousand, respectively, (net of accumulated
amortization of $11,994 thousand and $10,980 thousand respectively). The
amortization period for goodwill is 40 years.
10. RESTRUCTURING
In 2000 and 1999, Aqualon incurred $1,662 thousand and $1,912 thousand,
respectively, related to employee reductions at Parlin, NJ, Louisiana, MO, and
Hopewell, VA, manufacturing sites. There are no remaining amounts to be paid.
Severance benefits payments are based on years of service. A reconciliation
of activity with respect to the liabilities established for these plans is as
follows:
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of year................................ $ -- $1,466
Additional termination benefits and other exit costs........ 1,662 446
Cash payments............................................... (1,662) (1,912)
------- ------
Balance at end of year...................................... $ -- $ --
======= ======
57
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. PENSION AND OTHER POSTRETIREMENT BENEFITS
Aqualon participates in a defined benefit pension plan sponsored by
Hercules, which covers substantially all employees of Hercules in the U.S.
Benefits under this plan are based on the average final pay and years of
service. Hercules also provides post-retirement health care and life insurance
benefits to eligible retired employees and their dependents.
Information on the actuarial present value of the benefit obligation and
fair value of the plan assets is not presented as Hercules manages its U.S.
employee benefit plans on a consolidated basis and such information is not
maintained separately for the U.S. employees of the Company. The Company's
statement of operations includes an allocation of the costs of the U.S. benefits
plans. The pension costs were allocated based on percentage of pensionable
wages, for each of the years presented, post-retirement benefit costs were
allocated using factors derived from the relative net assets and revenues. Net
pension income of Hercules allocated to the Company was $3,367 thousand, $3,810
thousand, and $4,069 thousand for the years ended December 31, 2000, 1999 and
1998, respectively, and post-retirement benefit expense was $2,462 thousand,
$1,774 thousand, and $1,813 thousand for the years ended December 31, 2000, 1999
and 1998, respectively.
12. OTHER OPERATING EXPENSES, NET
Other operating expenses, net, consists of the following:
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Loss on disposal of Nitrocellulose.................... $25,241 $ 6,500 $ --
Asset impairments..................................... -- 2,000 15,300
Environmental charges................................. 2,617 3,020 2,151
Restructuring charges................................. 1,662 446 1,466
Royalties............................................. (7,613) (8,474) (8,734)
Other................................................. 352 62 62
------- ------- -------
Total....................................... $22,259 $ 3,554 $10,245
======= ======= =======
In 1998, the Nitrocellulose fixed assets at Parlin, NJ were deemed to be
impaired; Nitrocellulose capital expenditures in 1999 were also impaired.
13. OTHER FINANCING ARRANGEMENTS
Hercules manages Aqualon's cash and indebtedness. The majority of the cash
provided by or used by Aqualon is provided through this consolidated cash and
debt management system. As a result, the amount of domestic cash or debt
historically related to Aqualon is not determinable. For purposes of Aqualon's
historical financial statements all of Aqualon's positive or negative cash flows
have been treated as cash transferred to or from its partners (Hercules Group).
58
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. NET PARTNERS' (HERCULES GROUP) INVESTMENT
Changes in net partners' (Hercules Group) investment were as follows:
(DOLLARS IN
THOUSANDS)
Balance, January 1, 1998.................................... $191,836
Net income................................................ 57,701
Intercompany transactions, net............................ (57,615)
--------
Balance, December 31, 1998.................................. 191,922
Net income................................................ 36,971
Intercompany transactions, net............................ (58,434)
--------
Balance, December 31, 1999.................................. 170,459
Net income................................................ 28,198
Intercompany transactions, net............................ (42,704)
--------
Balance, December 31, 2000.................................. $155,953
========
15. DIVESTITURES
In June 2000, Aqualon divested its Nitrocellulose operation at Parlin, NJ
to Greentree Chemical Technologies, Inc. As a result of the transaction, Aqualon
received a $6,600 thousand note (see note 4) and recorded a one-time pre-tax
loss of $25,241 thousand, primarily for employee termination benefits, inventory
transfer and disposal, environmental liabilities, and other miscellaneous
expenses, of which $18,387 thousand has been expended. Aqualon terminated
approximately 100 employees associated with the Nitrocellulose operation at
Parlin, NJ, which resulted in severance payments of $4 million. Nitrocellulose
revenues were $23,503 thousand, $58,526 thousand, and $59,944 thousand in 2000,
1999, and 1998, respectively.
16. COMMITMENTS AND CONTINGENCIES
Leases
Aqualon has operating leases (including office space, transportation, and
data processing equipment) expiring at various dates. Rental expense was $528
thousand in 2000, $661 thousand in 1999, and $629 thousand in 1998.
At December 31, 2000, minimum rental payments under noncancelable leases
aggregated $771 thousand. The net minimum payments over the next five years are
$306 thousand in 2001, $250 thousand in 2002, $158 thousand in 2003, $36
thousand in 2004, and $20 thousand in 2005.
Litigation
Aqualon currently and from time to time is involved in litigation
incidental to the conduct of its business. In the opinion of Aqualon's
management, none of such litigation as of December 31, 2000 is likely to have a
material adverse effect on the financial position and results of operations of
Aqualon.
Environmental
Aqualon has established accruals for the estimated cost of environmental
remediation and/or cleanup at various sites. The estimated range of the
reasonable possible share of costs for investigation and cleanup is between $25
million and $46 million. The actual costs will depend upon numerous factors,
including the number of parties found to be responsible at each environmental
site and their ability to pay; the actual methods of remediation required or
agreed to; the outcomes of negotiations with regulatory authorities;
59
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
outcomes of litigation; changes in environmental laws and regulations;
technological developments; and the number of years of remedial activity
required, which could range from 0 to 30 years. As of December 31, 2000, the
accrued liability of $25 million for environmental remediation represents
management's best estimate of the probable and reasonably estimable costs
related to environmental remediation. Aqualon estimates that these liabilities
will be paid over the next five years. 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
potentially responsible parties. Aqualon is unaware of any unasserted claims and
has not reflected them in the reserve. While it is not feasible to predict the
outcome of all pending suits and claims, the ultimate resolution of these
environmental matters could have a material effect upon the results of
operations and the financial position of Aqualon.
Other
As of December 31, 2000, Aqualon had $4.3 million in letters of credit
outstanding with lenders.
17. RELATED PARTY TRANSACTIONS
Aqualon has entered into certain agreements with affiliated entities. These
agreements were developed in the context of parent/subsidiary relationship and
therefore may not necessarily reflect the result of arms-length negotiations
between independent parties. Aqualon records sales with affiliates based on a
cost-plus formula developed and agreed-upon by both parties.
Corporate and other cost allocations: As discussed in Note 1, the financial
statements of Aqualon reflect certain allocated support costs incurred by other
entities in Hercules group. These costs include executive, legal, accounting,
tax, auditing, cash management, purchasing, human resources, safety, health and
environmental, information management, research & development overhead, investor
relations and other corporate services. Allocations and charges included in
Aqualon's financial statements were based on either a direct cost pass-through
for items directly identified as related to Aqualon's activities; a percentage
allocation for such services provided based on factors such as revenues, net
assets, costs of sales or a relative weighting of geographic activity. These
allocations are reflected in the selling, general and administrative line item
in our statement of operations. Such allocations and corporate charges totaled
$15,313 thousand, $21,444 thousand, and $16,424 thousand in 2000, 1999 and 1998,
respectively.
Royalties: Aqualon entered into a license agreement in respect of the use
of manufacturing formulations and specifications by affiliated companies which
are developed and owned by Aqualon. Aqualon received royalties in respect of
this agreement of $7,613 thousand, $8,474 thousand, and $8,734 thousand in 2000,
1999 and 1998, respectively. The royalties are included as reductions to other
operating expenses in the financial statements.
Purchases from affiliates: Aqualon purchases a broad range of products in
the normal course of business from affiliated companies. Aqualon's purchases
from affiliated companies were $23,457 thousand, $23,598 thousand, and $50,022
thousand in 2000, 1999 and 1998, respectively.
60
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income (loss)
and of cash flows present fairly, in all material respects, the financial
position of BetzDearborn Canada, Inc., a subsidiary of Hercules Incorporated,
and its subsidiary at December 31, 2000 and 1999 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Mississauga, Ontario
June 15, 2001, except for note 2, New accounting pronouncements, which is as of
October 19, 2001
61
BETZDEARBORN CANADA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(THOUSANDS OF
U.S. DOLLARS)
Sales to third parties...................................... $167,668 $158,833
Sales to Hercules Group..................................... 10,844 7,033
-------- --------
Net sales................................................. 178,512 165,866
Cost of sales............................................... 107,811 94,629
Selling, general and administrative expenses................ 40,979 48,114
Goodwill and intangible asset amortization.................. 8,137 8,056
Other operating expense..................................... 6,487 5,203
-------- --------
Profit from operations.................................... 15,098 9,864
Interest and debt expense................................... 5,075 7,717
Interest income............................................. (1,090) (529)
Other expense (income) (note 12)............................ 540 (1,266)
-------- --------
Income before income taxes................................ 10,573 3,942
Provision for income tax (note 13).......................... 5,362 2,685
-------- --------
Income before minority interest........................... 5,211 1,257
Minority interest -- held by affiliate...................... 4,003 3,221
-------- --------
Net income (loss)......................................... 1,208 (1,964)
Translation adjustments..................................... (8,897) 16,261
-------- --------
Comprehensive (loss) income............................... $ (7,689) $ 14,297
======== ========
The accompanying accounting policies and notes are an integral part of
the consolidated financial statements.
62
BETZDEARBORN CANADA, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------
2000 1999
-------- --------
(THOUSANDS OF
U.S. DOLLARS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 4 $ 2,113
Accounts receivable -- net (note 3)....................... 28,896 25,647
Inventories (note 4)...................................... 13,465 14,585
Income taxes receivable................................... -- 1,100
-------- --------
Total current assets................................... 42,365 43,445
Property, plant and equipment -- net (note 8)............... 21,595 22,380
Goodwill and other intangible assets -- net (note 9)........ 288,307 305,748
Pension and other post-retirement benefits (note 11)........ 5,095 4,851
Deferred charges and other assets........................... 773 215
-------- --------
Total assets........................................... $358,135 $376,639
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Bank overdraft (note 5)................................... $ 1,351 $ 2,321
Accounts payable.......................................... 10,272 4,175
Accrued expenses (note 8)................................. 4,415 5,993
-------- --------
Total current liabilities.............................. 16,038 12,489
Long-term debt (note 6)..................................... 83,434 86,174
Deferred income taxes (note 13)............................. 2,449 1,729
-------- --------
Total liabilities...................................... 101,921 100,392
-------- --------
Commitments and contingencies (note 16)..................... -- --
-------- --------
Minority interest -- held by affiliate...................... 11,874 14,713
-------- --------
Net Hercules Group investment (note 15)
Accumulated other comprehensive income.................... 4,842 13,739
Intercompany transactions (note 14)....................... 239,498 247,795
-------- --------
Net Hercules Group investment.......................... 244,340 261,534
-------- --------
Total liabilities and net Hercules Group investment.... $358,135 $376,639
======== ========
The accompanying accounting policies and notes are an integral part of
the consolidated financial statements.
63
BETZDEARBORN CANADA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(THOUSANDS OF
U.S. DOLLARS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 1,208 $ (1,964)
Adjustments to reconcile net income (loss) to net cash
provided from operations:
Minority interest -- held by affiliate.................... 4,003 3,221
Depreciation.............................................. 2,492 2,175
Amortization.............................................. 8,137 8,056
Loss on disposals of property, plant and equipment........ -- 9
Write-off of property, plant and equipment................ 21 --
Deferred tax expense...................................... 776 1,902
Pension and other post-retirement benefits expense........ 496 895
Corporate and other cost allocations...................... 3,067 5,738
Accruals and deferrals of cash receipts and payments
Accounts receivables...................................... (3,445) (2,261)
Income taxes receivable/payable........................... 2,888 (2,510)
Inventories............................................... 973 (1,797)
Prepaid expenses.......................................... -- 320
Pension and other post-retirement benefit contributions... (902) (785)
Accounts payable and accrued expenses..................... 1,312 (1,453)
Non-current assets and liabilities........................ (558) (11)
Transfers to/from Hercules Group.......................... 2,793 (3,517)
-------- --------
Net cash provided by operations........................ 23,261 8,018
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (2,424) (3,493)
Software expenditures....................................... (114) --
Proceeds of disposals of property, plant and equipment...... -- 295
-------- --------
Net cash used in investing activities.................. (2,538) (3,198)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Transfers to/from Hercules Group............................ (13,566) 80,796
Long-term debt repayments................................... (54) (87,510)
Payments to minority interest -- affiliated company......... (7,904) --
Increase (decrease) in bank overdraft....................... (970) 1,677
-------- --------
Net cash used in financing activities.................. (22,494) (5,037)
-------- --------
Effect of exchange rate changes on cash..................... (338) 138
-------- --------
Net decrease in cash and cash equivalents................... (2,109) (79)
Cash and cash equivalents -- Beginning of year.............. 2,113 2,192
-------- --------
Cash and cash equivalents -- End of year............... $ 4 $ 2,113
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ 5,256 $ 7,698
Income taxes.............................................. 1,747 3,051
Non-cash financing activities:
Corporate and other cost allocations...................... $ 3,067 $ 5,738
The accompanying accounting policies and notes are an integral part of
the consolidated financial statements.
64
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
BetzDearborn Canada, Inc. (BDCI or the Company) is 100% owned by
BetzDearborn Inc., which in turn is 100% owned by Hercules Incorporated
(Hercules). BDCI is engaged in providing products and services in the areas of
process chemicals and services, functional products, and chemical specialties to
the Canadian marketplace.
Historically, separate company stand-alone financial statements were not
prepared for BDCI. In November 2000, Hercules amended its senior credit facility
and ESOP credit facility (the Facilities). The Facilities, as amended, are
secured by liens on Hercules' property and assets (and those of Hercules'
Canadian subsidiaries, including BDCI), a pledge of the stock and partnership
and member interests of substantially all of Hercules' U.S.A. subsidiaries and
65% of the stock of non-U.S.A. subsidiaries directly owned by Hercules,
including BDCI, and a pledge of Hercules' U.S. intercompany indebtedness. These
financial statements present the financial information on BDCI, a collateral
party to the Hercules debt, based on Hercules' understanding of Securities and
Exchange Commission's interpretation and application of Rule 3-16 under the
Securities and Exchange Commission's Regulation S-X. These statements were
derived from historical accounting records.
When Hercules acquired all of the outstanding shares of BetzDearborn Inc.
on October 15, 1998, it paid $2,235 million in cash and $186 million in common
stock exchanged for the shares held by the BetzDearborn ESOP Trust. As a result
of this acquisition, Hercules initiated a global process of internal
reorganization, in which the Company entered into an agreement with Hercules
Canada, Inc. to transfer its business to a newly created partnership, Hercules
Canada Partnership (HCP or the partnership). The Company has a 71.92% share of
future profits from the partnership. Since this reorganization is under the
common control of Hercules, the transactions have been accounted for in a manner
similar to pooling of interest. The purchase price allocated to the Company and
its subsidiary was approximately $295 million. During 1999, Hercules completed
the purchase price allocation and the final determination of goodwill was $1,822
million of which the amount attributable to the Company was approximately $300
million. These financial statements include the push down of fair value
adjustments to assets and liabilities, including goodwill, other intangible
assets and property, plant and equipment and their related amortization and
depreciation adjustments.
The financial statements of BDCI reflect certain allocated support costs
incurred by other entities in the Hercules group. These costs include executive,
legal, accounting, tax, auditing, cash management, purchasing, human resources,
safety, health and environmental, information management, investor relations and
other corporate services. Allocations and charges included in BDCI's financial
statements were based on either a direct cost pass-through for items directly
identified as related to BDCI's activities; a percentage allocation for such
services provided based on factors such as sales, net assets, or cost of sales;
or a relative weighting of geographic activity. Management believes that the
allocation methods are reasonable.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of BetzDearborn
Canada, Inc. and its majority controlled partnership, Hercules Canada
Partnership. This partnership is located in Mississauga, Ontario, Canada. All
material intercompany transactions and profits have been eliminated.
Use of estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
65
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue recognition
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Company's experience. The corresponding shipping and handling costs are
included in cost of sales.
Cash and cash equivalents
Cash equivalents include commercial paper and other securities with
original maturities of 90 days or less. Book value approximates fair value
because of the short maturity of those instruments.
Inventories
Inventories are stated at the lower of cost or market. Cost includes the
cost of raw materials, direct labor and an allocation of overhead. Inventories
are valued on the standard cost method, which approximates average cost.
Property and depreciation
Property, plant and equipment are stated at cost and depreciated using the
straight-line method. The estimated useful lives of depreciable assets are as
follows: buildings -- 30 years; plant, machinery and equipment -- 15 years;
other machinery and equipment -- 3 to 15 years.
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is charged to income.
Goodwill and other intangible assets
Goodwill and other intangible assets are amortized on a straight-line basis
over the estimated future periods to be benefited, generally 40 years for
goodwill and 5 to 15 years for other intangible assets.
Long-lived assets
The Company reviews its long-lived assets, including goodwill and other
intangibles, for impairment whenever events or changes in circumstances indicate
carrying amounts of the assets may not be recoverable through undiscounted
future cash flows. If an impairment loss has occurred based on expected future
cash flows (undiscounted), the loss is recognized in the statement of income.
The amount of the impairment loss is the excess of the carrying amount of the
impaired asset over the fair value of the asset. The fair value represents
expected future cash flows from the use of the assets, discounted at the rate
used to evaluate potential investments.
Income taxes
The provisions for income taxes have been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
income taxes represent the future tax consequences expected to occur when the
reported amounts of assets and liabilities are recovered or paid. The provision
for income taxes represents income taxes paid or payable for the current year
plus the change in deferred taxes during the year. Deferred income taxes result
from differences between the financial and tax basis of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when
66
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
changes are enacted. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit will not be realized.
Foreign currency translation and transactions
The accompanying consolidated financial statements are reported in U.S.
dollars. The Canadian dollar is the functional currency for the Company and the
partnership. The translation of the functional currency into U.S. dollars
(reporting currency) is performed for assets and liabilities using the current
exchange rates in effect at the balance sheets dates, and for revenues, costs
and expenses using average exchange rates prevailing during the reporting
periods. Adjustments resulting from the translation of functional currency
financial statements to reporting currency are accumulated and reported as other
comprehensive income, a component of net Hercules Group investment.
Transactions in foreign currency are recorded at the exchange rate
prevailing on the date of transaction. Monetary assets and liabilities
denominated in foreign currencies are expressed in the functional currency at
the exchange rates in effect at the balance sheets dates. Revenues, costs and
expenses are recorded using average exchange rates prevailing during the
reporting periods. Gains or losses resulting from foreign currency transactions
are included in the statements of operations.
Concentration of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the Company's large number of customers and their dispersion across many
different industries and locations.
Financial instruments
The Company uses various non-derivative financial instruments, including
letters of credit, and generally does not require collateral to support its
financial instruments.
Stock-based compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25)). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard No. 123, Accounting for
Stock-based Compensation, requires companies electing to continue to use the
intrinsic-value method to make pro forma disclosures of net income as if the
fair value based method of accounting had been applied.
Net Hercules Group investment
The net Hercules Group investment account reflects the balance of BDCI's
historical earnings, intercompany amounts, foreign currency translation and
other transactions between BDCI and the Hercules Group.
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138,
67
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
requires that all derivative instruments be recorded on the balance sheets at
their fair value. SFAS 133, as amended, is effective for all fiscal quarters of
fiscal years beginning after December 31, 2000. The Company adopted SFAS 133
effective January 1, 2001. The adoption of SFAS No. 133 did not have a material
effect on the Company's earnings or financial position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was effective October
1, 2000. Adoption of SAB 101 did not have a material effect on the Company's
profit from operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" (SFAS 141) and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). For BDCI, these statements will generally become effective
January 1, 2002, although business combinations initiated after June 30, 2001
are subject to the non-amortization and purchase accounting provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. BDCI is currently in the
process of conducting an assessment of the actual impact of the non-amortization
provision of SFAS 142. The assessment of goodwill for impairment is a complex
issue in which the Company must determine, among other things, the fair value of
each defined reporting unit. It is, therefore, not possible at this time to
predict the impact, if any, that the impairment assessment provisions of SFAS
142 will have on BDCI's financial statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assets. SFAS 143 will become effective for BDCI from
January 1, 2003 and requires recognition of a liability for an asset retirement
obligation in the period in which it is incurred. Management is in the process
of evaluating the impact this standard will have on the Company's financial
statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.
3 ACCOUNTS RECEIVABLE -- NET
Accounts receivable -- net consists of:
2000 1999
------- -------
(THOUSANDS OF
U.S. DOLLARS)
Trade....................................................... $27,225 $24,503
Other....................................................... 2,672 2,085
------- -------
Gross accounts receivable................................. 29,897 26,588
Less: Allowance for doubtful accounts....................... 1,001 941
------- -------
Total..................................................... $28,896 $25,647
======= =======
68
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4 INVENTORIES
The components of inventories are:
2000 1999
------- -------
(THOUSANDS OF
U.S. DOLLARS)
Finished products........................................... $ 7,224 $ 8,286
Materials, supplies and work-in-process..................... 6,241 6,299
------- -------
Total.................................................. $13,465 $14,585
======= =======
5 BANK OVERDRAFT
Bank borrowings represent primarily overdraft facilities and short-term
lines of credit, which are payable on demand with interest at various rates.
Book values of bank borrowings approximate market value because of their short
maturity period.
At December 31, 2000, the Company had $5 million of unused lines of credit
that may be drawn as needed, with interest at a negotiated spread over lenders'
cost of funds. Lines of credit unused at December 31, 1999 totalled $6.8
million. Weighted average interest rates on short-term borrowings at December
31, 2000 and 1999 were 7.5% and 6.5%, respectively. Lines of credit are
repayable in Canadian funds.
6 LONG-TERM DEBT
The Company's bank loan facility of up to the equivalent of US$100 million
from select lenders in Canada is a component of the Hercules' $3,650 million
credit facility with a syndicate of banks, which is due in 2003. The bank loan
facility is drawn in the form of bankers' acceptances, is repayable in Canadian
funds and bears interest at bankers' acceptance rates plus 2.25%. The interest
prepaid on the bankers' acceptances is included in the net payable amount. The
Company's assets and 65% of its common shares are pledged as collateral on the
Hercules' credit facility.
The Company believes that the carrying value of other borrowings
approximates fair market value, based on discounting future cash flows using
rates currently available for debt of similar terms and remaining maturities.
Interest expense for the year on long-term debt was $5,256 thousand
(1999 -- $7,698 thousand).
7 LONG-TERM INCENTIVE COMPENSATION PLANS
BDCI participates in long-term incentive compensation plans sponsored by
Hercules. These plans provide for the grant of stock options and the award of
common stock and other market-based units to certain key employees and
non-employee directors.
In 1995, Hercules changed the structure of the long-term incentive
compensation plans to place a greater emphasis on shareholder value creation
through grants of regular stock options, performance-accelerated stock options,
and Cash Value Awards (performance-based awards denominated in cash and payable
in shares of common or restricted stock, subject to the same restrictions as
restricted stock). Restricted stock and other market-based units are awarded
with respect to certain programs. The number of awarded shares outstanding was
491,488 at December 31, 2000 and 926,689 at December 31, 1999.
At December 31, 2000, under Hercules' incentive compensation plans,
1,847,855 shares of common stock were available for grant as stock awards or
stock option awards. Stock awards are limited to approximately 15% of the total
authorizations. Regular stock options are granted at the market price on the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock
69
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options are also granted at the market price on the date of grant and are
normally exercisable at nine and one-half years. Exercisability may be
accelerated based upon the achievement of predetermined performance goals. Both
regular and performance-accelerated stock options expire 10 years after the date
of grant.
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to Hercules in the event of employment termination, except
in the case of death, disability, retirement, or other specified events.
The Company applies APB Opinion 25 in accounting for plans participated in
by BDCI employees. Accordingly, no compensation cost has been recognized for the
stock option plans. There were no charges to income for the cost of stock awards
over the restriction or performance period for 2000 or 1999.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 2000 and 1999, which relate to stock options held by
BDCI employees:
REGULAR
----------------------------
NUMBER WEIGHTED-AVERAGE
OF SHARES PRICE
--------- ----------------
January 1, 1999............................................. 20,100 $39.71
Granted................................................... 33,850 37.75
Exercised................................................. -- --
Forfeited................................................. -- --
December 31, 1999........................................... 53,950 38.48
Granted................................................... -- --
Exercised................................................. -- --
Forfeited................................................. -- --
December 31, 2000........................................... 53,950 $38.48
There were no performance-accelerated stock options granted or outstanding
during 2000 and 1999.
The weighted-average fair value of regular stock options granted to BDCI
employees during 2000 and 1999 was $nil and $8.26, respectively.
Following is a summary of regular stock options exercisable at December 31,
2000 and 1999 and their respective weighted-average share prices:
NUMBER WEIGHTED-AVERAGE
OPTIONS EXERCISABLE OF SHARES EXERCISE PRICE
------------------- --------- ----------------
December 31, 1999........................................... 15,880 $39.60
December 31, 2000........................................... 33,540 38.89
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------------------------- ---------------------------------
NUMBER NUMBER
OUTSTANDING AT WEIGHTED-AVERAGE EXERCISABLE AT
DECEMBER 31, REMAINING WEIGHTED-AVERAGE DECEMBER 31, WEIGHTED-AVERAGE
EXERCISE PRICE RANGE 2000 CONTRACTUAL LIFE EXERCISE PRICE 2000 EXERCISE PRICE
-------------------- -------------- ---------------- ---------------- -------------- ----------------
REGULAR STOCK OPTIONS
$30 - $40............. 53,450 7.74 $38.39 33,140 $38.78
$40 - $50............. 500 7.35 47.81 400 47.81
------ ------
53,950 33,540
====== ======
70
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BDCI employees may also participate in the Hercules Employee Stock Purchase
Plan (ESPP). The ESPP is a qualified non-compensatory plan, which allows
eligible employees to acquire shares of common stock through systematic payroll
deductions. The plan consists of three-month subscription periods, beginning
July 1 of each year. The purchase price is 85% of the fair market value of the
common stock on either the first or last day of that subscription period,
whichever is lower. Purchases may range from 2% to 15% of an employee's base
salary each pay period, subject to certain limitations. Currently, 202,139
shares of Hercules common stock are registered for offer and sale under the
plan. Shares issued at December 31, 2000 and 1999 were 1,597,861 and 949,464,
respectively. BDCI applies APB Opinion 25 and related interpretations in
accounting for the ESPP of Hercules. Accordingly, no compensation cost has been
recognized for the ESPP.
Had compensation cost for Hercules' Stock-Based Incentive Plans and ESPP
been determined on the basis of fair value according to SFAS No. 123, the fair
value of each option granted or share purchased would be estimated on the grant
date using the Black-Scholes option pricing model.
The following weighted-average assumptions would be used in estimating fair
value for 2000 and 1999:
PERFORMANCE- EMPLOYEE
ACCELERATED STOCK PURCHASE
ASSUMPTION REGULAR PLAN PLAN PLAN
---------- ------------ ------------ --------------
Dividend yield................................. 2.00% 3.40% --
Risk-free interest rate........................ 5.88% 5.38% 5.41%
Expected life.................................. 7.1 years 5 years 3 months
Expected volatility............................ 29.20% 27.31% 44.86%
The Company's net income for 2000 and 1999 would approximate the pro forma
amounts below:
2000 1999
------ -------
(THOUSANDS OF
U.S. DOLLARS)
Net income
As reported............................................... $1,208 $(1,964)
Pro forma................................................. 1,130 (2,028)
8 ADDITIONAL BALANCE SHEET DETAIL
2000 1999
------- -------
(THOUSANDS OF
U.S. DOLLARS)
Property, plant and equipment
Land...................................................... $ 1,632 $ 1,685
Buildings and equipment................................... 32,134 31,302
Construction-in-progress.................................. 1,838 1,172
------- -------
Total.................................................. 35,604 34,159
Less: Accumulated depreciation and amortization............. 14,009 11,779
------- -------
Net property, plant and equipment...................... $21,595 $22,380
======= =======
Accrued expenses
Payroll and employees benefits............................ $ 934 $ 686
Income taxes payable...................................... 3,104 --
Restructuring liability (note 10)......................... 212 2,562
Other..................................................... 165 2,745
------- -------
Total.................................................. $ 4,415 $ 5,993
======= =======
71
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9 GOODWILL AND OTHER INTANGIBLE ASSETS -- NET
At December 31, 2000 and 1999, the goodwill and other intangible assets
were:
2000 1999
-------- --------
(THOUSANDS OF
U.S. DOLLARS)
Goodwill.................................................... $298,734 $308,346
Other intangibles........................................... 6,672 6,821
-------- --------
Total....................................................... 305,406 315,167
Less: Accumulated amortization.............................. 17,099 9,419
-------- --------
Net goodwill and other intangible assets.................... $288,307 $305,748
======== ========
10 RESTRUCTURING
The consolidated balance sheets reflect liabilities for employee severance
benefits and other exit costs, primarily related to the plans initiated upon the
acquisition of BetzDearborn in 1998. In 1998 and 1999, BDCI incurred
restructuring liabilities of $3.8 million in connection with the acquisition of
BetzDearborn. These liabilities included $3.3 million for employee termination
benefits and $0.5 million for exit costs related to facility closures. Thirty
employees were terminated during the year ended December 31, 2000. Cash payments
during 2000 included $2.3 million for severance benefits. Pursuant to the plans
in place to merge the operations of BetzDearborn with Hercules and to
rationalize the support infrastructure and other existing operations, nineteen
employees were terminated during 1999. Cash payments during 1999 included $1.3
million for severance benefits.
A reconciliation of activity with respect to the liabilities established
for these plans is as follows:
2000 1999
------- -------
(THOUSANDS OF
U.S. DOLLARS)
Balance -- Beginning of year................................ $ 2,562 $ 883
Cash payments............................................... (2,317) (1,322)
Additional termination benefits and exit costs.............. -- 2,915
Translation adjustment...................................... (33) 86
------- -------
Balance -- End of year...................................... $ 212 $ 2,562
======= =======
Severance benefit payments are based on years of service and generally
continue for 3 to 24 months subsequent to termination. Actions under the 1998
restructuring plans are substantially complete as of December 31, 2000. The
Company anticipates that actions under the 1999 restructuring plan will be
substantially completed by the end of 2001.
72
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11 PENSION AND OTHER POST-RETIREMENT BENEFITS
The Company provides defined benefit pension and post-retirement benefit
plans to employees. The following chart lists benefit obligations, plan assets,
and funded status of the plans:
OTHER POST-RETIREMENT
PENSION BENEFITS BENEFITS
------------------ ----------------------
2000 1999 2000 1999
------- ------- --------- ---------
(THOUSANDS OF U.S. DOLLARS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1................... $25,426 $24,858 $ 1,652 $ 1,634
Service cost...................................... 1,086 1,027 42 45
Interest cost..................................... 1,994 1,800 115 112
Assumption change................................. 1,371 1,493 -- --
Translation difference............................ (876) (2,731) (52) 102
Actuarial gain.................................... (20) -- (61) (183)
Benefits paid from plan assets.................... (889) (1,021) (61) (58)
------- ------- ------- -------
Benefit obligation at December 31................... $28,092 $25,426 $ 1,635 $ 1,652
======= ======= ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1............ $34,825 $27,959 $ -- $ --
Actual return on plan assets...................... 1,856 5,605 -- --
Company contributions............................. 841 727 61 58
Translation difference............................ (1,128) 1,555 -- --
Benefits paid from plan assets.................... (889) (1,021) (61) (58)
------- ------- ------- -------
Fair value of plan assets at December 31............ $35,505 $34,825 $ -- $ --
======= ======= ======= =======
Funded status of the plans.......................... $ 7,413 $ 9,399 $(1,635) $(1,652)
Unrecognized actuarial gain......................... (1,922) (4,107) (292) (240)
Unrecognized prior service cost..................... 269 -- -- --
Unrecognized net transition obligation.............. (26) -- 1,288 1,451
------- ------- ------- -------
Prepaid (accrued) benefit cost...................... $ 5,734 $ 5,292 $ (639) $ (441)
======= ======= ======= =======
Assumptions as of December 31
Weighted-average discount rate.................... 7% 7% 7% 6.5%
Expected return on plan assets.................... 7% 7.5% N/A N/A
Rate of compensation increase..................... 4% 4% 4% 4%
Health-care trend rate............................ N/A N/A 4% 4%
Funded status of plans in deficit position.......... (855) (544) (1,635) (1,652)
OTHER POST-RETIREMENT
PENSION BENEFITS BENEFITS
------------------ ----------------------
2000 1999 2000 1999
------- ------- --------- ---------
(THOUSANDS OF U.S. DOLLARS)
Service cost........................................ $ 1,086 $ 1,027 $ 42 $ 45
Interest cost....................................... 1,994 1,800 115 112
Return on plan assets (expected).................... (2,688) (2,132) -- --
Amortization and deferrals.......................... 16 112 -- --
Amortization of transition asset.................... (189) (187) 120 118
------- ------- ------- -------
Benefit cost........................................ $ 219 $ 620 $ 277 $ 275
======= ======= ======= =======
73
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other post-retirement benefits
The nonpension post-retirement benefit plans are contributory health-care
and life insurance plans. The assumed participation rate in these plans for
future eligible retirees was 95% for health care and 95% for life insurance. A
one-percentage point increase or decrease in the assumed health-care cost trend
rate would increase or decrease the post-retirement benefit obligation by $172
thousand or $152 thousand, respectively, and would not have a material effect on
aggregate service and interest cost components.
12 OTHER EXPENSE (INCOME)
Other expense (income) consists of the following:
2000 1999
---- -------
(THOUSANDS OF
U.S. DOLLARS)
Foreign exchange loss (gain)................................ $226 $ (927)
Miscellaneous expense (income).............................. 314 (339)
---- -------
$540 $(1,266)
==== =======
13 INCOME TAXES
A summary of the components of the tax provision follows:
2000 1999
------ ------
(THOUSANDS OF
U.S. DOLLARS)
Current..................................................... $4,586 $ 783
Deferred.................................................... 776 1,902
------ ------
Provision for income taxes.................................. $5,362 $2,685
====== ======
The deferred income tax liability at December 31 is comprised of:
2000 1999
------ ------
(THOUSANDS OF
U.S. DOLLARS)
Accrued expenses............................................ $ 90 $ 741
------ ------
Gross deferred tax assets................................. 90 741
------ ------
Depreciation................................................ 906 990
Prepaid pension and post-retirement benefits................ 1,599 1,402
Other....................................................... 34 78
------ ------
Gross deferred tax liabilities............................ 2,539 2,470
------ ------
Total deferred income tax liability....................... $2,449 $1,729
====== ======
A reconciliation of the Canadian statutory income tax rate to the effective
rate is as follows:
2000 1999
------ ------
Statutory income tax rate................................... 40.14% 40.54%
Minority interest in income................................. (15.20) (33.12)
Goodwill amortization....................................... 22.36 53.73
Non-deductible expenses..................................... 1.76 5.07
Large corporations tax...................................... 1.64 3.43
Other....................................................... 0.01 (1.54)
------ ------
Effective tax rate.......................................... 50.71% 68.11%
====== ======
74
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14 INTERCOMPANY NOTES RECEIVABLE
In addition to current receivables and payables with the Hercules Group,
BDCI has intercompany notes receivable from the Hercules Group in the amount of
$23.088 million (1999 -- $12.614 million), which is included in the net Hercules
Group investment balance as of December 31, 2000 and 1999. The weighted average
rate on the intercompany notes receivable was 10% in 2000 and 1999. The notes
receivable are due on demand. Interest income earned on intercompany notes
receivable for the year was $1,090 thousand (1999 -- $529 thousand).
15 NET HERCULES GROUP INVESTMENT
Changes in net Hercules Group investment were as follows:
(THOUSANDS OF
U.S. DOLLARS)
Balance -- January 1, 1999.................................. $170,317
Net loss.................................................. (1,964)
Other comprehensive income................................ 16,261
Intercompany transactions -- net.......................... 76,920
--------
Balance -- December 31, 1999................................ 261,534
Net income................................................ 1,208
Other comprehensive loss.................................. (8,897)
Intercompany transactions -- net.......................... (9,505)
--------
Balance -- December 31, 2000................................ $244,340
========
The Company includes accumulated other comprehensive income (loss) in net
Hercules Group investment. At December 31, 2000 and 1999, accumulated other
comprehensive income included $4,842 thousand and $13,739 thousand,
respectively, of foreign currency translation adjustments.
16 COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases (including facilities, transportation, and
data processing equipment) expiring at various dates. Rental expense was $2,474
thousand in 2000 and $2,379 thousand in 1999.
At December 31, 2000, minimum rental payments under noncancelable leases
aggregated $4,938, less subleases of $335. A significant portion of these
payments relates to facilities and vehicles. The net minimum payments over the
next five years are $2,188 thousand in 2001, $1,328 thousand in 2002, $798
thousand in 2003, $289 thousand in 2004 and $nil in 2005.
Litigation
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business. In the opinion of the Company's
management, none of such litigation as of December 31, 2000 is likely to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
17 RELATED PARTY TRANSACTIONS
BDCI has entered into certain agreements with affiliated entities. These
agreements were developed in the context of parent/subsidiary relationship and,
therefore, may not necessarily reflect the result of arm's
75
BETZDEARBORN CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
length negotiations between independent parties. BDCI records sales with
affiliates based on a cost-plus formula developed and agreed upon by both
parties.
Corporate and other cost allocations
As discussed in note 1, the financial statements of BDCI reflect certain
allocated support costs incurred by other entities in Hercules Group. These
costs include executive, legal, accounting, tax, auditing, cash management,
purchasing, human resources, safety, health and environmental, information
management, research and development overhead, investor relations and other
corporate services. Allocations and charges included in BDCI's financial
statements were based on either a direct cost pass-through for items directly
identified as related to BDCI's activities, a percentage allocation for such
services provided based on factors such as revenues, net assets, cost of sales
or a relative weighting of geographic activity. These allocations are reflected
in the selling, general and administrative line item in the statements of
operations. Such allocations and corporate charges totalled $3,067 thousand and
$5,738 thousand in 2000 and 1999, respectively.
Royalties
BDCI entered into a licence agreement in respect of the use of
manufacturing formulations and specifications, which are developed and owned by
affiliated companies. BDCI paid royalties in respect of this agreement of $5,998
thousand and $4,937 thousand in 2000 and 1999, respectively. The royalties are
reflected in the other operating expense line item in the consolidated
statements of operations.
Purchases
BDCI purchases products for resale in the normal course of business from
affiliated companies. BDCI's purchases from affiliated companies were $7,056
thousand and $12,502 thousand in 2000 and 1999, respectively.
Other
BDCI reimburses affiliated companies for charges incurred on its behalf.
These costs are reflected in the selling, general and administrative line item
in the consolidated statements of income. The amount paid was $874 thousand and
$58 thousand in 2000 and 1999, respectively. BDCI receives commissions for sales
made on behalf of affiliated companies, which are reflected as a decrease to
selling, general and administrative costs in the consolidated statements of
operations. Total commissions earned from affiliates amounted to $422 thousand
and $291 thousand in 2000 and 1999, respectively.
18 SUBSEQUENT EVENTS
On May 1, 2001, Hercules completed the sale of the hydrocarbon resins
business and select portions of the rosin resins business to a subsidiary of
Eastman Chemical Company for which Hercules received proceeds of approximately
$244 million. On May 31, 2001, Hercules completed the sale of the peroxides
business to GEO Specialty Chemicals, Inc. for which Hercules received proceeds
of approximately $92 million. BDCI had third party sales of $12.3 million in the
resins businesses and $265 thousand in the peroxide business during the year
ended December 31, 2000.
76
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND THE BOARD OF DIRECTORS OF
HERCULES INCORPORATED
WILMINGTON, DELAWARE
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive loss and of cash
flows present fairly, in all material respects, the financial position of
BetzDearborn Europe, Inc., a subsidiary of Hercules Incorporated, and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 22, 2001
77
BETZDEARBORN EUROPE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED DECEMBER 31,
------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Sales to third parties...................................... $160,386 $176,145
Sales to Hercules Group..................................... 60,782 64,952
-------- --------
221,168 241,097
Cost of sales............................................... 134,438 142,608
Selling, general, and administrative expenses............... 55,405 63,242
Research and development.................................... 2,782 3,931
Goodwill and intangible asset amortization.................. 6,126 6,696
Other operating expenses, net (Note 13)..................... 12,432 13,814
-------- --------
Profit from operations...................................... 9,985 10,806
Equity in income of affiliated companies.................... 3,716 3,104
Interest and debt expense (Note 14)......................... 9,438 9,277
Other income (expense), net (Note 15)....................... 998 1,666
-------- --------
Income before income taxes.................................. 5,261 6,299
Provision for income taxes (Note 16)........................ 2,300 6,609
-------- --------
Net income.................................................. 2,961 (310)
Translation adjustments..................................... (28,564) (11,658)
-------- --------
Comprehensive loss.......................................... $(25,603) $(11,968)
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
78
BETZDEARBORN EUROPE INC
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 2,406 $ 3,113
Accounts receivable, net (Note 3)......................... 44,476 47,247
Inventories (Note 4)...................................... 16,224 22,765
Deferred income taxes (Note 16)........................... 1,716 5,481
-------- --------
Total current assets................................... 64,822 78,606
-------- --------
Property, plant, and equipment, net (Note 9).............. 53,382 62,749
Investments in affiliates (Note 5)........................ 152,468 145,921
Goodwill and other intangible assets, net (Note 10)....... 182,927 214,671
Prepaid pension (Note 12)................................. 7,785 6,011
Deferred charges and other assets......................... 1,289 700
-------- --------
Total assets...................................... $462,673 $508,658
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable.......................................... $ 17,511 $ 18,487
Short-term debt (Note 6).................................. 5,730 10,382
Accrued expenses (Note 9)................................. 21,477 23,599
-------- --------
Total current liabilities.............................. 44,718 52,468
Deferred income taxes (Note 16)............................. 5,411 11,197
Deferred credits and other liabilities...................... 30 48
-------- --------
Total liabilities................................. 50,159 63,713
Commitments and Contingencies (Note 17)
Net Hercules Group investment (Note 19)
Accumulated other comprehensive losses.................... (54,068) (25,504)
Intercompany transactions................................. 466,582 470,449
-------- --------
Net Hercules Group investment..................... 412,514 444,945
-------- --------
Total liabilities and net Hercules Group
investment...................................... $462,673 $508,658
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
79
BETZDEARBORN EUROPE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss)........................................... $ 2,961 $ (310)
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Depreciation and amortization of property, plant and
equipment.............................................. 7,037 6,538
Amortization of goodwill and other intangible assets...... 6,126 6,696
Deferred Income Tax....................................... (372) 1,869
Loss on disposals......................................... 84 --
Equity in income of affiliates............................ (3,716) (3,104)
Dividends from equity method investments.................. -- 1,666
Corporate and other cost allocations...................... 3,940 7,530
Accruals and deferrals of cash receipts and payments:
Accounts receivable.................................... (1,215) 2,332
Inventories............................................ 4,638 1,912
Accounts payable and accrued expenses.................. 584 (7,881)
Noncurrent assets and liabilities...................... (2,850) 3,199
Net transfers from (to) Hercules Group................. 38,809 (13,632)
-------- --------
Net cash provided by operations........................ 56,026 6,815
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures, net of proceeds from sale............. (3,123) 2,590
-------- --------
Net cash (used in) provided by investing activities.... (3,123) 2,590
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Change in short-term debt................................... (4,341) 9,843
Net transfers to Hercules Group............................. (49,096) (27,957)
-------- --------
Net cash used in financing activities.................. (53,437) (18,114)
-------- --------
Effect of exchange rate changes on cash..................... (173) (747)
-------- --------
Net decrease in cash and cash equivalents................... (707) (9,456)
Cash and cash equivalents at beginning of year.............. 3,113 12,569
-------- --------
Cash and cash equivalents at end of year.................... $ 2,406 $ 3,113
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized)...................... $ 9,439 $ 9,215
Income taxes, net......................................... 4,622 6,948
Noncash investing and financing activities:
Corporate and other cost allocations...................... 3,940 7,530
Corporate and other asset allocations..................... 4,609 3,551
The accompanying notes are an integral part of the consolidated financial
statements.
80
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
BetzDearborn Europe Inc. (the "Company") is a wholly owned subsidiary of
BetzDearborn Inc. (immediate parent) ("BetzDearborn") and Hercules Incorporated
(ultimate parent) ("Hercules"). Hercules and its wholly owned subsidiaries
comprise the Hercules Group. The Company supplies engineered chemical treatment
programs for water and process systems in industrial, commercial and
institutional establishments, offering a range of products and services for
preserving or enhancing productivity, reliability and efficiency in plant
operations and in complying with environmental regulations.
When Hercules acquired all of the outstanding shares of BetzDearborn Inc.
on October 15, 1998 it paid $2,235 million in cash and $186 million in common
stock exchanged for the shares held by the BetzDearborn ESOP Trust. The purchase
price allocated to the Company and its subsidiaries was approximately $810
million. During 1999, Hercules completed the purchase price allocation and the
final determination of goodwill was $1,822 million of which the amount
attributable to the Company was approximately $204 million. These financial
statements include the push down of fair value adjustments to assets and
liabilities, including goodwill, other intangible assets and property, plant and
equipment and their related amortization and depreciation adjustments.
As a result of this acquisition, the Company, as a part of an effort by
Hercules, entered into several internal reorganization transactions during 2000
and 1999. The transactions included the Company selling several of its
investments in subsidiaries to Hercules affiliates, purchasing several
investments in subsidiaries from Hercules affiliates, merging companies, and
acquiring certain investments in Hercules group companies that are valued at
cost. As all investments in this reorganization are under the common control of
Hercules, these transactions have been accounted for in a manner similar to
pooling of interests.
Historically, separate company stand-alone financial statements were not
prepared for the Company. In November 2000, Hercules amended its senior credit
facility and ESOP credit facility (the "Facilities"). The Facilities, as
amended, are secured by liens on Hercules' property and assets (and those of
Hercules' Canadian Subsidiaries), a pledge of the stock of substantially all of
Hercules' domestic subsidiaries (including the Company) and 65% of the stock of
foreign subsidiaries directly owned by Hercules, and a pledge of Hercules'
domestic intercompany indebtedness. These consolidated financial statements
present the financial information of the Company, a collateral party to the
Hercules debt, based on the Hercules' understanding of the Securities and
Exchange Commission's interpretation and application of Rule 3-16 under the
Securities and Exchange Commission's Regulation S-X. These statements were
derived from historical accounting records.
The consolidated financial statements of the Company reflect certain
allocated support costs incurred by the Hercules Group. These costs include
executive, legal, accounting, tax, auditing, cash management, purchasing, human
resources, safety, health and environmental, information management, investor
relations and other corporate services. Allocations and charges included in the
Company's consolidated financial statements were based on either a direct cost
pass-through for items directly identified as related to the Company's
activities; a percentage allocation for such services provided based on factors
such as sales, net assets, or cost of sales; or a relative weighting of
geographic activity. Management believes that the allocation method is
reasonable. (See Note 18)
A number of the Company's operating companies participate in Hercules
Holding BV/BVBA's (a Hercules Group affiliate) centralized cash management
system. Accordingly, cash received from operations may be transferred to
Hercules on a periodic basis, and Hercules funds operational and capital
requirements upon request.
81
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries where control exists. Following the
acquisition of BetzDearborn by Hercules in 1998, the Company continued
BetzDearborn's practice of using a November 30 fiscal year end for certain
former BetzDearborn non-U.S. subsidiaries to expedite the year end closing
process. All intercompany transactions and profits have been eliminated.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Company's experience. The corresponding shipping and handling costs are
included in cost of sales.
Research and Development Expenditures
Research and development expenditures are expensed as incurred.
Environmental Expenditures
Environmental expenditures that pertain to current operations or future
revenues are expensed or capitalized according to the Company's capitalization
policy. Expenditures for remediation of an existing condition caused by past
operations that do not contribute to current or future revenues are expensed.
Liabilities are recognized for remedial activities when the cleanup is probable
and can be reasonably estimated.
Cash and Cash Equivalents
Cash in excess of operating requirements is invested in short-term, income
producing instruments. Cash equivalents include commercial paper and other
securities with original maturities of 90 days or less. Book value approximates
fair value because of the short-term maturity of those instruments.
Inventories
Inventories are stated at the lower of cost or market. Inventories are
valued on the average cost method.
Property and Depreciation
Property, plant, and equipment are stated at cost. The Company changed to
the straight-line method of depreciation, effective January 1, 1991, for newly
acquired processing facilities and equipment. Assets acquired before then
continue to be depreciated by accelerated methods. The Company believes
straight-line depreciation provides a better matching of costs and revenues over
the lives of the assets. The estimated useful lives of depreciable assets are as
follows: buildings -- 30 years; plant, machinery and equipment -- 15 years;
other machinery and equipment -- 3 to 15 years.
82
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is charged to income.
Investments
Investments in affiliated companies with a 20% or greater ownership
interest in which the Company has significant influence are accounted for using
the equity method of accounting. Accordingly, these investments are included in
investments in affiliates on the Company's balance sheet and the income or loss
from these investments is included in equity in (loss) income of affiliated
companies in the Company's statement of income.
Investments in affiliated companies in which the Company does not have a
controlling interest, or an ownership and voting interest so large as to exert
significant influence, are accounted for using the cost method of accounting.
Accordingly, these investments are included in investments in affiliates on the
Company's balance sheet.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are amortized on a straight-line basis
over the estimated future periods to be benefited, generally 40 years for
goodwill and 5 to 15 years for other intangible assets.
Long-lived Assets
The Company reviews its long-lived assets, including goodwill and other
intangibles, for impairment on an exception basis whenever events or changes in
circumstances indicate carrying amounts of the assets may not be recoverable
through undiscounted future cash flows. If an impairment loss has occurred based
on expected future cash flows (undiscounted), the loss is recognized in the
income statement. The amount of the impairment loss is the excess of the
carrying amount of the impaired asset over the fair value of the asset. The fair
value represents expected future cash flows from the use of the assets,
discounted at the rate used to evaluate potential investments.
Income Taxes
Income tax expense in the accompanying consolidated financial statements
has been computed assuming the Company filed separate income tax returns.
The provisions for income taxes have been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax basis of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
The company provides taxes on undistributed earnings of subsidiaries and
affiliates included in consolidated retained earnings to the extent such
earnings are planned to be remitted and not re-invested permanently. The
undistributed earnings of subsidiaries and affiliates on which no provision for
foreign withholding or US income taxes has been made amounted to approximately
$5,290 thousand and $1,853 thousand at December 31, 2000 and 1999, respectively.
US and foreign income taxes that would be payable if such
83
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
earnings were distributed may be lower than the amount computed at the US
statutory rate because of the availability of tax credits.
Foreign Currency Translation and Transactions
The accompanying consolidated financial statements are reported in U.S.
dollars. The U.S. dollar is the functional currency for the Company. The
translation of the functional currencies of the Company's subsidiaries into U.S.
dollars (reporting currency) is performed for assets and liabilities using the
current exchange rates in effect at the balance sheet date, and for revenues,
costs and expenses using average exchange rates prevailing during the reporting
periods. Adjustments resulting from the translation of functional currency
financial statements to reporting currency are accumulated and reported as other
comprehensive income, a separate component of net Hercules Group investment.
Transactions in foreign currency are recorded at the exchange rate
prevailing on the date of transaction. Monetary assets and liabilities
denominated in foreign currencies are expressed in the functional currency at
the exchange rates in effect at the balance sheet date. Revenues, costs and
expenses are recorded using average exchange rates prevailing during the
reporting periods. Gains or losses resulting from foreign currency transactions
are included in the statement of income.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables and
receivables from affiliated companies, which are included in the net Hercules
Group investment in the consolidated balance sheet. Concentrations of credit
risk with respect to trade receivables are limited due to the Company's large
number of customers and their dispersion across many different industries and
locations.
Stock-based Compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25)). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," requires companies electing to continue to use
the intrinsic-value method to make pro forma disclosures of net income as if the
fair-value-based method of accounting had been applied.
Net Hercules Group Investment
The Net Hercules Group Investment account reflects the balance of the
Company's historical earnings, intercompany amounts, foreign currency
translation and other transactions between the Company and the Hercules Group.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. SFAS 133, as amended, is effective for all
fiscal quarters of fiscal years beginning after December 31, 2000. The Company
adopted SFAS 133 effective
84
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
January 1, 2001. The Company believes that the adoption of SFAS No. 133, as
amended by SFAS 137 and 138, did not have a material effect on its earnings or
statement of financial position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was effective October
1, 2000. Adoption of SAB 101 did not have a material effect on profit from
operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" (SFAS 141) and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). For the Company, these statements will generally become
effective January 1, 2002, although business combinations initiated after June
30, 2001 are subject to the non-amortization and purchase accounting provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. The assessment of
goodwill for impairment is a complex issue in which the Company must determine,
among other things, the fair value of each defined reporting unit. It is,
therefore, not possible at this time to predict the impact, if any, that the
impairment assessment provisions of SFAS 142 will have on the Company's
financial statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assts. SFAS 143 will become effective for the Company on
January 1, 2003 and requires recognition of a liability for an asset retirement
obligation in the period in which it is incurred. Management is currently in the
process of evaluating the impact this standard will have on the Company's
financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Trade....................................................... $39,830 $44,933
Other....................................................... 7,413 4,157
------- -------
47,243 49,090
Less allowance for doubtful accounts........................ (2,767) (1,843)
------- -------
Total............................................. $44,476 $47,247
======= =======
Other accounts receivable mainly comprise VAT receivable.
85
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES
The components of inventories are:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Finished products........................................... $ 9,876 $14,422
Materials, supplies, and work in process.................... 6,348 8,343
------- -------
Total............................................. $16,224 $22,765
======= =======
5. INVESTMENTS
The Company has various equity investments in companies, as described
below. Summarized financial information for these equity affiliates at December
31, and for the years then ended is as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Current assets.............................................. $ 26,497 $ 32,009
Non-current assets.......................................... 210,711 214,308
Current liabilities......................................... $ 23,481 $ 35,630
Non-current liabilities..................................... 25,113 31,622
Net sales................................................... $ 62,348 $ 62,860
Gross profit................................................ 18,142 17,930
Net earnings................................................ 8,393 6,699
At December 31, 2000, the Company's equity investments consist of a 38.97%
ownership of Hercules Quimica S.A., a Hercules affiliate, a 50% ownership of BL
Technologies, a Hercules affiliate and a 19.75% ownership of Hercules de
Colombia S.A., a Hercules affiliate. The Company's carrying value for these
investments at December 31, 2000 and 1999 equals its share of the underlying
equity in net assets of the respective affiliates. Dividends paid to the Company
from its equity investees were $1,666 thousand during 1999. No dividends were
received by the Company from equity investees in 2000. Each of these entities
operates in lines of business similar to the Company, supplying engineered
chemical treatment programs for water and process systems in industrial,
commercial and institutional establishments. The Company's cost investment
consists of a 7.5% ownership of Hercules International Limited, a Hercules
affiliate.
6. SHORT-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Short-term debt of $5,730 thousand and $10,382 thousand at December 31,
2000 and 1999, respectively, consists of bank borrowings primarily representing
foreign overdraft facilities and short-term lines of credit, which are generally
payable on demand with interest at various rates. Book values of bank borrowings
approximate market value because of their short maturity period.
Short-term debt with affiliates of $26,856 thousand and $31,668 thousand at
December 31, 2000 and 1999, respectively, is recorded in Net Hercules Group
Investment in the consolidated balance sheet and is generally payable on demand
with interest at various rates.
At December 31, 2000 and 1999, the Company had $28,300 thousand and $7,500
thousand, respectively, of unused lines of credit that may be drawn as needed,
with interest at a negotiated spread over lenders' cost of funds.
86
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Weighted-average interest rates on all third party and affiliate short-term
borrowings at December 31, 2000 and 1999 were 6.3% and 6.8%, respectively.
7. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt with affiliates at December 31, 2000 and 1999, which is
recorded in Net Hercules Group Investment in the consolidated balance sheet, is
summarized as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSAND)
7.11% variable rate affiliate note.......................... $ 45,195 $ 51,558
4.81% variable rate affiliate note.......................... 27,063 30,724
6.00% variable rate affiliate note.......................... 26,278 31,220
7.56% variable rate affiliate note.......................... 5,022 5,729
7.99% variable rate affiliate note.......................... 2,196 2,442
4.81% variable rate affiliate note.......................... 1,766 1,947
8.47% variable rate affiliate note.......................... -- 1,131
3.70% variable rate affiliate note.......................... -- 804
10.00% variable rate affiliate note......................... -- 77
-------- --------
Less current maturities..................................... -- --
-------- --------
Total.................................................. $107,520 $125,632
======== ========
All of the long-term debt with the Hercules Group has maturity dates after
2005. The fair values of the Company's long-term debt was $107,520 at December
31, 2000, and $125,632 and at December 31, 1999. The Company believes that the
carrying value of long-term debt borrowings approximates fair value, based on
discounting future cash flows using rates currently available for debt of
similar terms and remaining maturities.
8. LONG-TERM INCENTIVE COMPENSATION PLANS
The Company participates in long-term incentive compensation plans
sponsored by Hercules. These plans provide for the grant of stock options and
the award of common stock and other market-based units to certain key employees
and non-employee directors.
The Hercules long-term incentive compensation plans place a great emphasis
on shareholder value creation through grants of regular stock options,
performance-accelerated stock options, and Cash Value Awards (performance-based
awards denominated in cash and payable in shares of common or restricted stock,
subject to the same restrictions as restricted stock). Restricted stock and
other market-based units are awarded with respect to certain programs. The
number of awarded shares outstanding was 491,488 and 926,689 at December 31,
2000 and 1999, respectively.
At December 31, 2000, under Hercules' incentive compensation plans,
1,847,855 shares of common stock were available for grant as stock awards or
stock option awards. Stock awards are limited to approximately 15% of the total
authorizations. Regular stock options are granted at the market price on the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock options are also granted at
the market price on the date of grant and are normally exercisable at nine and
one-half years. Exercisability may be accelerated based upon the achievement of
predetermined performance goals. Both regular and performance-accelerated stock
options expire 10 years after the date of grant.
87
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to Hercules in the event of employment termination, except
in the case of death, disability, retirement, or other specified events.
The Company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. There were no charges to income for the cost of stock awards over the
restriction or performance period for 2000 and 1999.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 2000 and 1999:
REGULAR PERFORMANCE-ACCELERATED
----------------------------- -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES PRICE SHARES PRICE
--------- ---------------- --------- ----------------
January 1, 1999................ 17,750 $40.27 -- --
Granted...................... 25,250 $37.73 1,350 $37.56
Exercised.................... -- -- -- --
Forfeited.................... -- -- -- --
------ ------ ----- ------
December 31, 1999.............. 43,000 $38.78 1,350 $37.56
Granted...................... 3,850 $17.25 -- --
Exercised.................... -- -- -- --
Forfeited.................... -- -- -- --
------ ------ ----- ------
December 31, 2000.............. 46,850 $37.01 1,350 $37.56
The weighted-average fair value of regular stock options granted during
2000 and 1999 was $8.85 and $8.26, respectively. The weighted-average fair value
of performance-accelerated stock options granted during 1999 was $8.01.
Following is a summary of regular stock options exercisable at December 31,
2000 and 1999, and their respective weighted-average share prices:
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISABLE SHARES EXERCISE PRICE
------------------- --------- ----------------
December 31, 1999......................................... 13,540 $39.91
December 31, 2000......................................... 27,520 $39.25
There were no performance-accelerated stock options exercisable at December
31, 2000 and 1999.
88
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS
---------------------------------------------------- EXERCISABLE OPTIONS
WEIGHTED- --------------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE RANGE 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/00 EXERCISE PRICE
-------------------- -------------- ---------------- -------------- -------------- --------------
REGULAR STOCK OPTIONS
$12 - $20.............. 3,850 9.13 $17.25 -- --
$30 - $40.............. 41,350 7.67 $38.42 26,200 $38.82
$40 - $50.............. 1,650 7.35 $47.81 1,320 $47.81
------ ------
46,850 27,520
====== ======
PERFORMANCE-ACCELERATED
STOCK OPTIONS
$14 - $40.............. 1,350 8.34 $37.56 -- --
====== ======
The Company currently expects that 100% of performance-accelerated stock
options will eventually vest.
The Company's employees may also participate in the Hercules Employee Stock
Purchase Plan ("ESPP"). The ESPP is a qualified non-compensatory plan, which
allows eligible employees to acquire shares of common stock through systematic
payroll deductions. The plan consists of three-month subscription periods,
beginning July 1 of each year. The purchase price is 85% of the fair market
value of the common stock on either the first or last day of that subscription
period, whichever is lower. Purchases may range from 2% to 15% of an employee's
base salary each pay period, subject to certain limitations. Currently, 202,139
shares of Hercules common stock are registered for offer and sale under the
plan. Shares issued at December 31, 2000 and 1999, were 1,597,861 and 949,464,
respectively. The Company applies APB Opinion 25 and related interpretations in
accounting for its Employee Stock Purchase Plan. Accordingly, no compensation
cost has been recognized for the Employee Stock Purchase Plan.
Had compensation cost for Hercules' Stock-Based Incentive Plans and
Employee Stock Purchase Plan been determined on the basis of fair value
according to SFAS No. 123, the fair value of each option granted or share
purchased would be estimated on the grant date using the Black-Scholes option
pricing model.
The following weighted-average assumptions would be used in estimating fair
value for 2000 and 1999:
PERFORMANCE EMPLOYEE STOCK
ASSUMPTION REGULAR PLAN ACCELERATED PLAN PURCHASE PLAN
---------- ------------ ---------------- --------------
Dividend yield............................ 2% 3.4% 0.0%
Risk-free interest rate................... 5.88% 5.38% 5.41%
Expected life............................. 7.1 yrs... 5 yrs. 3 mos.
Expected volatility....................... 29.20% 27.31% 44.86%
The Company's net income for 2000 and 1999 would approximate the pro forma
amounts below:
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Net income
As reported............................................... $2,961 $ (310)
Pro forma................................................. $2,885 $ (370)
89
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ADDITIONAL BALANCE SHEET DETAIL
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Property, plant, and equipment
Land...................................................... $ 5,221 $ 6,037
Buildings and equipment................................... 77,036 79,905
Construction in progress.................................. -- 1,717
-------- --------
Total............................................. 82,257 87,659
Accumulated depreciation and amortization................... (28,875) (24,910)
-------- --------
Net property, plant, and equipment........................ $ 53,382 $ 62,749
======== ========
Accrued expenses
Payroll and employee benefits............................. $ 1,432 $ 6,256
Income taxes payable...................................... 6,386 1,372
Restructuring............................................. 2,989 4,353
Other..................................................... 10,670 11,618
-------- --------
$ 21,477 $ 23,599
======== ========
10. GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2000 and 1999, the goodwill and other intangible assets
were:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Goodwill.................................................... $191,224 $217,419
Other intangibles........................................... 6,882 7,532
-------- --------
Total....................................................... 198,106 224,951
Less accumulated amortization............................... (15,179) (10,280)
-------- --------
Net goodwill and other intangible assets............... $182,927 $214,671
======== ========
Goodwill and other intangible assets primarily represent amounts
capitalized from the Hercules acquisition of BetzDearborn (Note 1).
11. RESTRUCTURING
The consolidated balance sheet reflects liabilities for employee severance
benefits and other exit costs, primarily related to the plans initiated upon the
creation of the European Shared Service Center in 1997 and the acquisition of
BetzDearborn in 1998. In the fourth quarter of 2000, we committed to a plan
relating to the restructuring of several entities. This resulted in the addition
in severance benefits to the accrued liability. As a result of these plans, we
estimate approximately 113 employees will be terminated, of which approximately
96 employee terminations have occurred since inception of the aforementioned
plans. These employees come from various parts of the business, including but
not limited to manufacturing, support functions and research.
Pursuant to the plans in place to merge the operations of BetzDearborn with
Hercules and to rationalize the support infrastructure and other existing
operations, facilities were closed and approximately 82 employees were
terminated during 1999. Cash payments for the year included $9.0 million for
severance benefits and other exit costs. At the same time, we lowered the
estimates of severance benefits related to the implementation of the shared
service center by $304 thousand due to a suspension of implementations.
90
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 2000, 14 employees were terminated and $2.5 million of cash was paid in
severance benefits and other exit costs. The estimate for the remaining plans
was decreased by $444 thousand against goodwill due to lower than planned
severance benefits as the result of higher than anticipated attrition, with
voluntary resignations not requiring the payment of termination benefits. The
estimate for the plans related to the shared services center were decreased by
$626 thousand against operating expense.
Severance benefits payments are based on years of service and generally
continue for 3 months to 24 months subsequent to termination. We expect to
substantially complete remaining actions under the plans in 2001. A
reconciliation of activity with respect to the liabilities established for these
plans, which is included in accrued expenses in the consolidated balance sheet,
is as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of year................................ $ 4,353 $11,721
Cash payments............................................... (2,459) (9,028)
Additional termination benefits and exit costs.............. 2,165 1,964
Reversals against goodwill.................................. (444) --
Reversals against earnings.................................. (626) (304)
------- -------
Balance at end of year...................................... $ 2,989 $ 4,353
======= =======
12. PENSIONS
The Company has a number of defined benefit pension plans in Europe,
covering substantially all employees. The following chart lists benefit
obligations, plan assets, and funded status of the plans.
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1........................... $75,968 $78,457
Service cost.............................................. 2,092 2,313
Interest cost............................................. 4,189 4,326
Amendments................................................ 12 --
Employee contributions.................................... 760 624
Translation difference.................................... (6,872) (2,855)
Actuarial loss (gain)..................................... 3,154 (4,532)
Benefits paid from plan assets............................ (1,992) (2,365)
------- -------
Benefit obligation at December 31........................... $77,311 $75,968
======= =======
91
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1.................... 89,389 80,011
Actual return on plan assets.............................. 5,143 13,622
Employee contributions.................................... 760 624
Company contributions (refund)............................ 1,789 446
Actuarial loss (gain)..................................... (1,748) --
Translation difference.................................... (6,112) (2,949)
Benefits paid from plan assets............................ (1,992) (2,365)
------- -------
Fair value of plan assets at December 31.................. $87,229 $89,389
======= =======
Funded status of the plans.................................. 9,918 13,421
Unrecognized actuarial gain................................. (2,176) (7,316)
Unrecognized prior service cost............................. 217 76
Unrecognized net transition obligation...................... -- (170)
Plan amendments............................................. (174) --
------- -------
Prepaid benefit cost........................................ $ 7,785 $ 6,011
======= =======
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
------- -------
Prepaid benefit cost...................................... $ 7,785 $ 6,011
======= =======
ASSUMPTIONS AS OF DECEMBER 31
Weighted-average discount rate............................ 6.50% 6.00%
Expected return on plan assets............................ 7.00% 7.00%
COMPONENTS OF NET PERIOD PENSION COST
PENSION BENEFITS
------------------
2000 1999
------- -------
Service cost................................................ $ 2,092 $ 2,313
Interest cost............................................... 4,189 4,326
Return on plan assets (expected)............................ (6,291) (5,912)
Amortization and deferrals.................................. (384) 269
Amortization of transition asset............................ (160) (185)
------- -------
Benefit (credit) cost....................................... $ (554) $ 811
======= =======
During 1999 and up to March 1, 2000, the Company's Belgian employees
participated in a multi-employer pension fund, which was administered by an
affiliated company. Contribution amounts for this fund were $63 thousand and
$427 thousand in 2000 and 1999, respectively and were allocated to the Company
by the Plan administrator.
On March 1, 2000, the Company terminated its participation in the
multi-employer pension fund and primarily all Belgian employees were transferred
into a Company sponsored defined contribution plan on that date. The Company's
cost of the defined contribution plan for the period March 1, 2000 through
December 31, 2000 was $248 thousand.
92
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. OTHER OPERATING EXPENSES, NET
Other operating expenses, net, in 2000 include Hercules Group affiliate
royalty costs totaling $10,993 thousand, restructuring costs totaling $1,539
thousand, and foreign currency gains totaling $100 thousand.
Other operating expenses, net, in 1999 include Hercules Group affiliate
royalty costs totaling $11,764 thousand, restructuring costs totaling $1,660
thousand and foreign currency losses totaling $390 thousand.
14. INTEREST AND DEBT EXPENSE
No interest and debt costs were capitalized during 1999 and 2000. The costs
incurred are presented separately in the consolidated statement of income.
15. OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following:
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Interest income, net........................................ $ 359 $1,629
Miscellaneous income, net................................... 639 37
------ ------
$ 998 $1,666
====== ======
16. INCOME TAXES
The domestic and foreign components of income before taxes are presented
below:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Domestic.................................................... $(3,779) $(1,816)
Foreign..................................................... 9,040 8,115
------- -------
$ 5,261 $ 6,299
======= =======
A summary of the components of the tax provision follows:
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Current
Domestic.................................................. $ -- $1,478
Foreign................................................... 2,672 3,262
Deferred
Domestic.................................................. (1,357) --
Foreign................................................... 985 1,869
------- ------
Provision for income taxes.................................. $ 2,300 $6,609
======= ======
93
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax (liabilities) assets at December 31 consist of:
2000 1999
--------- ----------
(DOLLARS IN THOUSANDS)
Depreciation................................................ $(4,678) $ (5,029)
Intangible asset revaluation................................ (1,357) (1,548)
Fixed asset revaluation..................................... (1,181) (1,442)
Pension..................................................... (2,061) (1,708)
Other....................................................... -- (707)
------- --------
Gross deferred tax liabilities.............................. (9,277) (10,434)
------- --------
Loss carryforwards.......................................... $ 2,057 $ 1,140
Business transfer revenue................................... -- 1,542
Restructuring expenses...................................... 1,580 2,050
Intangible asset............................................ 1,385 --
Other....................................................... 737 349
------- --------
Gross deferred tax assets................................... 5,759 5,081
------- --------
Valuation allowance......................................... (177) (363)
------- --------
$(3,695) $ (5,716)
======= ========
A reconciliation of the statutory income tax rate to the effective rate
follows:
2000 1999
----- -----
Statutory income tax rate................................... 35.0% 35.0%
Goodwill amortization....................................... 39.7% 47.2%
Nondeductible expenses...................................... 7.2% 7.4%
Tax rate differences on subsidiary earnings................. (5.5)% (9.1)%
Income from equity investments in affiliates................ (24.7)% (17.3)%
Cash dividends received from equity investments in
affiliates................................................ -- 9.3%
Change in tax contingency accrual........................... (8.9)% (2.5)%
Foreign dividends, net of credits........................... 0.0% 33.5%
Other....................................................... 0.9% 1.4%
----- -----
Effective tax rate.......................................... 43.7% 104.9%
===== =====
The net operating losses have carryforward periods ranging from 10 years to
indefinite, but may be limited in their use in any given year.
17. COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases (including office space, transportation,
and data processing equipment) expiring at various dates. Rental expense was
$4,267 thousand in 2000 and $6,043 thousand in 1999.
At December 31, 2000, minimum rental payments under noncancelable leases
aggregated $5,588 thousand. The net minimum payments over the next five years
are $2,396 thousand in 2001, $1,931 thousand in 2002, $906 thousand in 2003,
$354 thousand in 2004, and $1 thousand in 2005.
94
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Litigation
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business. In the opinion of the Company's
management, none of such litigation as of December 31, 2000 is likely to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
Environmental
The Company has potential liability in connection with obligations to
authorities of various EU countries in which it has manufacturing facilities,
and to private parties pursuant to contract, for the cost of environmental
investigation and/or cleanup at several sites. Potential costs will depend upon
numerous factors, including the actual methods of remediation required or agreed
to; outcomes of negotiations with regulatory authorities and private parties;
changes in environmental laws and regulations; technological developments; and
the years of remedial activity required, which could range from 0 to 30 years.
The Company becomes aware of its obligations relating to sites in which it
may have liability for the costs of environmental investigations and/or remedial
activities through correspondence from government authorities, or through
correspondence from companies with which the Company has contractual
obligations, 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.
Testing performed at the Herentals plant in Belgium in December 2000 for
soil pollution, indicated that the soil is polluted. The Company will
potentially be responsible for remediation activities. Testing is currently
being performed to determine the extent of remediation activities required, if
any.
At this moment no accrual is included in the balance sheet as of December
31, 2000, as a reliable estimate of the remediation costs cannot be made.
18. RELATED PARTY TRANSACTIONS
The Company has entered into certain agreements with affiliated entities.
These agreements were developed in the context of a Hercules Group/subsidiary
relationship and therefore may not necessarily reflect the result of
arm's-length negotiations between independent parties. All transactions
described below are eliminated on consolidation of Hercules.
Intercompany borrowing and interest: The Company has intercompany loans
with Hercules affiliated entities. The loans with affiliates are presented in
Net Hercules Group Investment in the consolidated balance sheet. Interest paid
to affiliated entities was $8,490 thousand and $8,924 thousand in 2000 and 1999,
respectively.
Corporate, regional and other allocations: As discussed in Note 1, the
consolidated financial statements of the Company reflect certain allocated
support costs incurred by other entities in the Hercules group. These costs
include executive, legal, accounting, tax, auditing, cash management,
purchasing, human resources, safety, health and environmental, information
management, investor relations and other corporate services. Allocations and
charges included in the Company's consolidated financial statements were based
either on a direct cost pass-through for items directly identified as related to
the Company's activities; a percentage allocation for such services provided
based on factors such as sales, net assets, cost of sales; or a relative
weighting of geographic activity. These allocations are reflected in the
selling, general and administrative line item in the consolidated statement of
income. Such allocations and corporate charges totaled approximately $9,494
thousand and $12,295 thousand in 2000 and 1999, respectively.
95
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Sales to affiliates: The Company sells raw material and finished goods
inventory in the normal course of business to affiliated companies. The
Company's revenues from sales to affiliated companies are presented separately
in the consolidated statement of income.
Purchases from affiliates: The Company purchases in the normal course of
business raw material and finished goods inventory from affiliated companies.
The Company's purchases of inventory from affiliated companies is reflected in
costs of sales in the consolidated statement of income and totaled $34,688
thousand and $40,153 thousand in 2000 and 1999, respectively.
Royalties: The Company entered into a license agreement in respect of the
use of manufacturing formulations and specifications developed and owned by an
affiliated entity. Total royalties accrued in respect of this agreement are
included in the other operating expense line item in the consolidated statement
of income and totaled $10,993 thousand and $11,764 thousand in 2000 and 1999,
respectively.
19. NET HERCULES GROUP INVESTMENT
Changes in Net Hercules Group Investment were as follows:
(DOLLARS IN THOUSANDS)
Balance, December 31, 1998.................................. $483,857
Net loss.................................................. (310)
Other comprehensive loss.................................. (11,658)
Intercompany transactions, net............................ (26,944)
--------
Balance, December 31, 1999.................................. 444,945
Net income................................................ 2,961
Other comprehensive loss.................................. (28,564)
Intercompany transactions, net............................ (6,828)
--------
Balance, December 31, 2000.................................. 412,514
The Company includes accumulated other comprehensive income in Net Hercules
Group Investment. At December 31, 2000 and 1999, accumulated other comprehensive
income consisted only of foreign currency translation adjustments.
20. SUBSEQUENT EVENTS
On May 1, 2001, Hercules completed the sale of its hydrocarbon resins
divisions and select portions of its rosin resins divisions to Eastman Chemical
Company. In addition, on May 31, 2001, Hercules completed the sale of its peroxy
chemicals business to GEO Specialty Chemicals, Inc.
96
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and comprehensive loss and of cash
flows present fairly, in all material respects, the financial position of
BetzDearborn Inc., a subsidiary of Hercules Incorporated, and its subsidiaries
at December 31, 2000 and 1999, and the results of their operations and their
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 24, 2001
97
BETZDEARBORN INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE LOSS
YEAR ENDED
DECEMBER 31,
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
Sales to third parties...................................... $1,170 $1,203
Sales to Hercules Group..................................... 108 69
------ ------
1,278 1,272
Cost of sales............................................... 632 588
Selling, general, and administrative expenses............... 404 423
Corporate and other cost allocations........................ 27 19
Research and development.................................... 20 36
Goodwill and intangible asset amortization.................. 71 70
Other operating expenses, net (Note 14)..................... 22 11
------ ------
Profit from operations...................................... 102 125
Equity income (loss) of affiliated companies................ -- --
Interest expense, net....................................... 30 37
Other expense, net (Note 16)................................ 2 --
------ ------
Income before income taxes and minority interest............ 70 88
Provision for income taxes (Note 19)........................ 40 51
------ ------
Income before minority interest............................. 30 37
Minority interest........................................... 5 4
------ ------
Net income.................................................. 25 33
Translation adjustments..................................... (46) (47)
------ ------
Comprehensive loss.......................................... $ (21) $ (14)
====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
98
BETZDEARBORN INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 21 $ 32
Accounts receivable, net (Note 3)......................... 215 259
Miscellaneous receivable.................................. 15 70
Inventories (Note 4)...................................... 91 121
Deferred income taxes (Note 19)........................... 20 53
------ ------
Total current assets................................... 362 535
------ ------
Property, plant, and equipment, net (Note 9)................ 304 370
Investments in affiliates (Note 5).......................... 156 156
Goodwill and other intangible assets, net (Note 10)......... 2,102 2,238
Prepaid pension (Note 13)................................... 13 11
Deferred charges and other assets........................... 57 28
------ ------
Total assets........................................... $2,994 $3,338
====== ======
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Current income tax liability.............................. $ 62 $ 73
Accounts payable.......................................... 69 71
Short-term debt (Note 6).................................. 26 27
Accrued expenses (Note 9)................................. 93 195
------ ------
Total current liabilities.............................. 250 366
Long term debt (Note 7)..................................... 181 188
Deferred income taxes (Note 19)............................. 262 277
Pension and other postretirement benefits (Note 13)......... 34 31
Deferred credits and other liabilities...................... 8 17
------ ------
Total liabilities...................................... 735 879
Commitments and contingencies (Note 17)..................... -- --
Minority Interest........................................... 23 26
Net Hercules Group Investment (Note 15)
Accumulated other comprehensive loss...................... (77) (31)
Intercompany transactions, net............................ 2,313 2,464
------ ------
Total Net Hercules Group Investment.................... 2,236 2,433
------ ------
Total liabilities and Net Hercules Group Investment.... $2,994 $3,338
====== ======
The accompanying notes are an integral part of
the consolidated financial statements
99
BETZDEARBORN INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED
DECEMBER 31,
----------------------
2000 1999
-------- --------
(DOLLARS IN MILLIONS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income.................................................. $ 25 $ 33
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation.............................................. 48 45
Amortization.............................................. 71 70
Loss on disposal.......................................... 3 --
Deferred income taxes..................................... 19 9
Minority Interest......................................... 5 4
Corporate and other cost allocations...................... 27 19
Other noncash charges (income)............................ 5 (2)
Accruals and deferrals of cash receipts and payments:
Accounts and miscellaneous receivables.................. 91 (65)
Inventories............................................. 30 8
Accounts payable and accrued expenses................... (66) 12
Noncurrent assets and liabilities....................... (67) (6)
Transfers to/from Hercules Group from operations........ (97) 12
----- -----
Net cash provided by operations...................... 94 139
----- -----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (27) (28)
Proceeds from fixed asset disposals......................... 13 9
Other, net.................................................. (13) (10)
----- -----
Net cash used in investing activities................ (27) (29)
----- -----
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds..................................... 6 --
Long-term debt repayments................................... (9) (82)
Changes in short-term debt.................................. (2) 16
Transfers to/from Hercules Group............................ (75) (33)
----- -----
Net cash used in financing activities................ (80) (99)
----- -----
Effect of exchange rate changes on cash..................... 2 (4)
----- -----
Net (decrease) increase in cash and cash equivalents........ (11) 7
Cash and cash equivalents at beginning of year.............. 32 25
----- -----
Cash and cash equivalents at end of year.................... $ 21 $ 32
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ 29 $ 37
Income taxes, net......................................... 34 14
Non-cash financing activities:
Corporate and other lost allocations...................... 27 19
The accompanying notes are an integral part of the consolidated financial
statements.
100
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
BetzDearborn Inc. ("BetzDearborn" or the "Company") is a wholly owned
subsidiary of Hercules Incorporated ("Hercules"). The Company is a global
engineered specialty chemical company engaged in the treatment of water and
industrial process systems operating in a wide variety of industrial and
commercial applications with particular emphasis on the chemical, petroleum
refining, paper, food processing, automotive, steel and power industries.
On October 15, 1998, Hercules acquired all of the outstanding shares of the
Company for $2,235 million in cash and $186 million in common stock exchanged
for the shares held by the BetzDearborn ESOP Trust. The shares were valued using
the quoted market price of the stock at the time of exchange. In addition,
Hercules assumed debt with a fair value of $117 million and repaid $557 million
of other long-term debt held by the Company.
During 1999, Hercules completed the purchase price allocation and the final
determination of goodwill was $1,822 million. Goodwill is determined as follows:
(DOLLARS IN
MILLIONS)
-----------
Cash paid, including transaction costs...................... $2,235
Common stock exchanged for ESOP trust shares................ 186
Fair value of debt assumed.................................. 117
Payment of BetzDearborn long-term debt...................... 557
------
$3,095
Less: Fair value of identifiable net assets acquired........ 1,143
Purchased in-process research and development......... 130
------
BetzDearborn goodwill as of the date of acquisition... $1,822
======
In accordance with the purchase method of accounting, the adjusted purchase
price was allocated to the estimated fair value of net assets acquired, with the
excess recorded as goodwill. Goodwill is amortized over 40 years on a
straight-line basis. Identified intangibles are amortized over 10 to 40 years,
on a straight-line basis. Additionally, approximately $130 million of the
purchase price was allocated to purchased in-process research and development
and was charged to expense at the date of acquisition.
As of the acquisition date, Hercules began to formulate plans to combine
the operations of the Company and Hercules. Hercules formed a program office,
engaged outside consultants and established several functional integration teams
to formulate and implement the plan and capture anticipated synergies. At
December 31, 1998, Hercules had identified and approved various actions such as
personnel reductions, consolidation of operations and support functions, closure
of redundant facilities and relocation of former BetzDearborn employees.
Accordingly, the Company included a $98 million liability as part of the
purchase price allocation. The liability included approximately $74 million
related to employee termination benefits and $24 million for office and facility
closures, relocation of former BetzDearborn employees and other related exit
costs (see Note 11).
As a result of this acquisition the Company, as a part of a effort by
Hercules, entered into several internal reorganization transactions during 1999
and 2000. The transactions included the Company selling several of its
investments in subsidiaries to Hercules affiliates, purchasing several
investments in subsidiaries from Hercules affiliates, merging companies, and
acquiring certain investments in Hercules group companies that are valued at
cost. As all investments in this reorganization are under the common control of
Hercules, these transactions have been accounted for in a manner similar to
pooling of interests.
101
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Separate company stand-alone financial statements were not prepared for the
Company since its acquisition and subsequent reorganization within Hercules. In
November 2000, Hercules amended its senior credit facility and ESOP credit
facility (the "Facilities"). The Facilities, as amended, are secured by liens on
Hercules' property and assets (and those of Hercules' Canadian Subsidiaries), a
pledge of the stock and partnership and member interests of substantially all of
Hercules' domestic subsidiaries (including the Company) and 65% of the stock of
foreign subsidiaries directly owned by Hercules, and a pledge of Hercules'
domestic intercompany indebtedness. These financial statements present the
financial information on the Company, a collateral party to the Hercules debt,
based on Hercules' understanding of Securities and Exchange Commission's
interpretation and application of Rule 3-16 under the Securities and Exchange
Commission's Regulation S-X. These statements were derived from historical
accounting records.
The Company participates in Hercules' centralized cash management system.
Accordingly, cash received from Company operations is transferred to Hercules on
a periodic basis, and Hercules funds all operational and capital requirements.
The consolidated financial statements of the Company reflect certain
allocated support costs incurred by other entities in the Hercules group. These
costs include executive, legal, accounting, tax, auditing, cash management,
purchasing, human resources, safety, health and environmental, information
management, investor relations and other corporate services. Allocations and
charges included in the Company's financial statements were based on either a
direct cost pass-through for items directly identified as related to the
Company's activities; a percentage allocation for such services provided based
on factors such as sales, net assets, or cost of sales; or a relative weighting
of geographic activity. Management believes that the allocation methods are
reasonable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries where control exists. Following the
acquisition of the Company by Hercules, the Company continued its practice of
using a November 30 fiscal year-end for certain non-U.S. subsidiaries to
expedite the year-end closing process. All intercompany transactions and profits
have been eliminated.
USE OF ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
REVENUE RECOGNITION
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Company's experience. The corresponding shipping and handling costs are
included in cost of sales.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that pertain to current operations or future
revenues are expensed or capitalized according to the Company's capitalization
policy. Expenditures for remediation of an existing condition caused by past
operations that do not contribute to current or future revenues are expensed.
Liabilities are recognized for remedial activities when the cleanup is probable
and can be reasonably estimated.
102
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash equivalents include commercial paper and other securities with
original maturities of 90 days or less. Book value approximates fair value
because of the short maturity of those instruments.
INVENTORIES
Inventories are stated at the lower of cost or market. Domestic inventories
are valued predominantly on the last-in, first-out (LIFO) method. Foreign and
certain domestic inventories, which in the aggregate represent 45% of total
inventories at December 31, 2000, are valued principally at standard cost, which
approximates the average cost method.
PROPERTY AND DEPRECIATION
Property, plant, and equipment are stated at cost and depreciated using the
straight-line method. The estimated useful lives of depreciable assets are as
follows: buildings -- 30 years; plant, machinery and equipment -- 15 years;
other machinery and equipment -- 3 to 15 years.
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is charged to income.
INVESTMENTS
Investments in affiliated companies with a greater than 20% or 50% or less
ownership interest are accounted for using the equity method of accounting.
Accordingly, these investments are included in investments in affiliates on the
Company's balance sheet and the income or loss from these investments is
included in equity income (loss) of affiliated companies in the Company's
statement of income.
Investments in affiliated companies in which the Company does not have a
controlling interest, or an ownership and voting interest so large as to exert
significant influence, are accounted for using the cost method of accounting.
Accordingly, these investments are included in investments in affiliates on the
Company's balance sheet.
GOODWILL
Goodwill and other intangible assets are amortized on a straight-line basis
over the estimated future periods to be benefited, generally 40 years for
goodwill, customer relationships, and trademarks and tradenames and 5 to 15
years for other intangible assets.
LONG-LIVED ASSETS
The Company reviews its long-lived assets, including goodwill and other
intangibles, for impairment on an exception basis whenever events or changes in
circumstances indicate carrying amounts of the assets may not be recoverable
through undiscounted future cash flows. If an impairment loss has occurred based
on expected future cash flows (undiscounted), the loss is recognized in the
income statement. The amount of the impairment loss is the excess of the
carrying amount of the impaired asset over the fair value of the asset. The fair
value represents expected future cash flows from the use of the assets,
discounted at the rate used to evaluate potential investments.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
103
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to the Company's large number of customers and their dispersion across many
different industries and locations.
DERIVATIVE INSTRUMENTS AND HEDGING
Derivative financial instruments have been used to hedge risk caused by
fluctuating currency and interest rates. The Company enters into
forward-exchange contracts and currency swaps to hedge foreign currency
exposure. Decisions regarding hedging are made on a case-by-case basis, taking
into consideration the amount and duration of the exposure, market volatility,
and economic trends. The Company uses the fair-value method of accounting,
recording realized and unrealized gains and losses on these contracts monthly.
They are included in other income (expense), net, except for gains and losses on
contracts to hedge specific foreign currency commitments, which are deferred and
accounted for as part of the transaction. Gains or losses on instruments which
have been used to hedge the value of investments in certain non-U.S.
subsidiaries are included in the foreign currency translation adjustment. It is
the Company's policy to match the term of financial instruments with the term of
the underlying designated item. If the designated item is an anticipated
transaction no longer likely to occur, gains or losses from the instrument
designated as a hedge are recognized in current period earnings. The Company
does not hold or issue financial instruments for trading purposes. In the
Consolidated Statement of Cash Flow, the Company reports the cash flows
resulting from its hedging activities in the same category as the related item
that is being hedged.
The Company used interest rate swap agreements to manage interest costs and
risks associated with changing rates. The differential to be paid or received is
accrued as interest rates change and is recognized in interest expense over the
life of the agreements. Counter parties to the forward exchange, currency swap,
and interest rate swap contracts are major financial institutions. Credit loss
from counter party nonperformance is not anticipated. During 2000 the interest
rate swap portfolio was terminated due to the conversion of foreign denominated
debt to U.S. dollar denominated debt and a debt restructing that replaced
variable rate debt with fixed rate debt.
STOCK-BASED COMPENSATION
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25)). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-based Compensation," requires companies electing to continue to use the
intrinsic-value method to make pro forma disclosures of net income as if the
fair-value-based method of accounting had been applied.
COMPUTER SOFTWARE COSTS
Effective January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants Statement of Position 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
The Company's prior accounting was generally consistent with the requirements of
SOP 98-1 and, accordingly, adoption of SOP 98-1 had no material effect. Computer
software costs are being amortized over a period of 5 to 10 years.
INCOME TAXES
The Company's operations have since acquisition been included in the
consolidated income tax returns filed by its parent. Income tax expense in the
accompanying financial statements has been computed assuming the Company filed
separate income tax returns. Differences between this calculation of income
taxes currently payable and consolidated amounts reported in the consolidated
financial statements of the parent have been reflected as net Hercules Group
investment.
104
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed as incurred.
NET HERCULES GROUP INVESTMENT
The net Hercules Group investment account reflects the balance of the
Company's historical earnings, intercompany amounts, income taxes, taxes accrued
and deferred, post-employment liabilities, foreign currency translation and
other transactions between the Company and the Hercules Group.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. This statement, as amended, is effective for
all fiscal quarters of fiscal years beginning after December 31, 2000. The
Company adopted SFAS 133 effective January 1, 2001. The adoption of SFAS No. 133
did not have a material effect on its earnings or statement of financial
position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was to be effective
October 1, 2000. Adoption of SAB 101 did not have a material effect on our
profit from operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). For The Company, these statements will generally become
effective January 1, 2002, although business combinations initiated after June
30, 2001 are subject to the non-amortization and purchase accounting provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. The Company is currently
in the process of conducting an assessment of the actual impact of the
non-amortization provision of SFAS 142. The assessment of goodwill for
impairment is a complex issue in which the Company must determine, among other
things, the fair value of each defined component of its reporting units. It is,
therefore, not possible at this time to predict the impact, if any, that the
impairment assessment provisions of SFAS 142 will have on the Company's
financial statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assts. SFAS 143 will become effective for the Company in
January 1, 2003 and requires recognition of a liability for an asset retirement
obligation in the period in which it is incurred. Management is in the process
of evaluating the impact this standard will have on the Company's financial
statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement
105
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are effective for financial statements issued for fiscal years beginning after
December 15, 2001. Management is in the process of evaluating the impact this
standard will have on the Company's financial statements.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
Trade....................................................... $233 $269
Less allowance for doubtful accounts........................ (18) (10)
---- ----
Total....................................................... $215 $259
==== ====
4. INVENTORIES
The components of inventories are:
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
Finished products........................................... $54 $ 74
Materials, supplies and work in process..................... 37 47
--- ----
Total....................................................... $91 $121
=== ====
Inventories valued on the LIFO method were the same as if valued under the
average-cost method, which approximates current cost, at December 31, 2000, and
were lower than if valued under the average cost method at December 31, 1999 by
$1 million.
5. INVESTMENTS
Total investments in affiliated companies were as follows:
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
Investment in Hercules International Limited................ $137 $137
Investment in Hercules Quimica SA........................... 19 19
---- ----
Total....................................................... $156 $156
==== ====
At December 31, 2000 the Company's equity investment consist of a 38.97%
ownership of Hercules Quimica S.A., a Hercules affiliate, and a 16% ownership
of Hercules International Limited, a Hercules affiliate. The Company's
carrying value for these investments at December 31, 2000 and 1999 equals its
share of the underlying equity in net assets of the affiliates. Each of these
entities operates in lines of business similar to the Company, supplying
engineered chemical treatment programs for water and process systems in
industrial, commercial and institutional establishments.
106
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SHORT-TERM DEBT
A summary of short-term debt follows:
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
Banks....................................................... $21 $23
Current maturities of long-term debt........................ 5 4
--- ---
$26 $27
Bank borrowings represent primarily foreign overdraft facilities and
short-term lines of credit, which are generally payable on demand with interest
at various rates. These borrowings approximate market value because of their
short maturity period.
At December 31, 2000, the Company had $54 million of unused short-term
lines of credit that may be drawn as needed, with interest at a negotiated
spread over lenders' cost of funds. Lines of credit in use at December 31, 2000,
were $16 million. Weighted-average interest rates on short-term borrowings at
December 31, 2000 and 1999 were 5.66% and 5.85%, respectively.
7. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt with third parties at December 31, 2000 and 1999 is
summarized below:
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
Canadian revolving loan facility(a)......................... $ 83 $ 86
ESOP debt(b)................................................ 101 106
Other....................................................... 2 --
---- ----
$186 $192
Less current maturities of long-term debt................... 5 4
---- ----
$181 $188
==== ====
(a) The Company's Canadian subsidiary has a bank loan facility of up to the
equivalent of US $100 million from select lenders in Canada, which is part
of the Hercules $3,650 million credit facility with a syndicate of banks.
The bank loan facility is repayable in Canadian funds and bears interest at
bankers' acceptance rates plus 2.25%. The interest prepaid on the bankers'
acceptances is included in the net payable amount. The Company's Canadian
subsidiary's assets and 100% of its common shares are pledged as collateral
to the Hercules credit facility.
(b) The proceeds of this loan were originally used by the BetzDearborn ESOP
Trust for the purchase of BetzDearborn preferred shares that, upon
acquisition by Hercules, were converted into equivalent shares of Hercules
common stock. At the date of acquisition by Hercules, the loan was recorded
at a fair market value of $110 million which included a $16 million fair
value step-up that is being amortized over the life of the debt. The loan
matures in June 2009. As of December 31, 2000, the interest rate was 11.95%.
Effective January 23, 2001, the interest rate increased to 12.95%.
Both the senior credit facility and the ESOP Trust loan require compliance
with certain financial covenants, including a debt/EBITDA ratio, an interest
coverage ratio and minimum net worth.
Long-term debt maturities during the next five years are $5.3 million in
2001, $6 million in 2002, $90.2 million in 2003, $8.5 million in 2004 and $10.4
million in 2005 and $65.6 million thereafter.
107
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the year ended 2000, the Company has $289 million of long term debt
payable to affiliates that is primarily held by Hercules, Hercules Shared
Services Center, Inc., and SA Hercules Europe NV. For the year ended 1999, the
Company had $367 million in long-term debt payable to affiliates with the same
parties. The long-term debt payable to affiliates primarily has no set payment
schedule and carry interest rates ranging from 4.60% to 12.42%. The long term
debt payable to affiliates is recorded in the Net Hercules Group Investment
account in the financial statements.
Net interest expense in 2000 was $30 million of which $19 million was
related party net interest expense. In 1999, the net interest expense was $37
million, which includes $25 million of related party net interest expense.
8. LONG-TERM INCENTIVE COMPENSATION PLANS
The Company participates in long-term incentive compensation plans
sponsored by Hercules. These plans provide for the grant of stock options and
the award of common stock and other market-based units to certain key employees
and non-employee directors.
In 1995, Hercules changed the structure of the long-term incentive
compensation plans to place a greater emphasis on shareholder value creation
through grants of regular stock options, performance-accelerated stock options,
and Cash Value Awards (performance-based awards denominated in cash and payable
in shares of common or restricted stock, subject to the same restrictions as
restricted stock). Restricted stock and other market-based units are awarded
with respect to certain programs. The number of awarded shares outstanding was
491,488 at December 31, 2000, and 926,689 at December 31, 1999.
At December 31, 2000, under Hercules' incentive compensation plans,
1,847,855 shares of common stock were available for grant as stock awards or
stock option awards. Stock awards are limited to approximately 15% of the total
authorizations. Regular stock options are granted at the market price on the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock options are also granted at
the market price on the date of grant and are normally exercisable at nine and
one-half years. Exercisability may be accelerated based upon the achievement of
predetermined performance goals. Both regular and performance-accelerated stock
options expire 10 years after the date of grant.
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to Hercules in the event of employment termination, except
in the case of death, disability, retirement, or other specified events.
The Company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. There were no charges to income for the cost of stock awards over the
restriction or performance period for 2000 and 1999, respectively.
108
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 2000 and 1999:
REGULAR PERFORMANCE-ACCELERATED
----------------------------- -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES PRICE SHARES PRICE
--------- ---------------- --------- ----------------
January 1, 1999........ 48,625 $37.59 -- --
Granted................ 219,750 $37.47 120,625 $37.29
Exercised.............. -- -- -- --
Forfeited.............. (28,000) $35.02 (14,042) $37.56
------- ------ ------- ------
December 31, 1999...... 240,375 $37.78 106,583 $37.26
Granted................ 240,300 $17.13 -- --
Exercised.............. -- -- -- --
Forfeited.............. (9,100) $37.56 (1,400) $37.56
------- ------ ------- ------
December 31, 2000...... 471,575 $27.26 105,183 $37.26
The weighted-average fair value of regular stock options granted during
2000 and 1999 was $8.84 and $8.25, respectively. The weighted-average fair value
of performance-accelerated stock options granted during 1999 was $7.99. There
were no performance-accelerated stock options granted during 2000.
Following is a summary of regular stock options exercisable at December 31,
2000 and 1999, and their respective weighted-average share prices:
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISABLE SHARES EXERCISE PRICE
------------------- --------- ----------------
December 31, 1999................................. 32,490 $39.04
December 31, 2000................................. 143,115 $36.62
There were no performance-accelerated stock options exercisable at December
31, 2000 and 1999.
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
-------------------------------------------------- ---------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICE RANGE 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE 12/31/00 EXERCISE PRICE
-------------------- -------------- ---------------- -------------- -------------- ----------------
Regular Stock Options
$12 - $20............... 240,300 9.15 $17.13 9,575 $17.25
$30 - $40............... 228,325 8.18 $37.66 131,180 $37.83
$40 - $50............... 2,950 7.35 $47.81 2,360 $47.81
------- -------
471,575 143,115
======= =======
Performance-Accelerated
Stock Options
$14 - $40............... 105,183 8.37 $37.26 -- --
------- -------
105,183 --
======= =======
The Company currently expects that 100% of performance-accelerated stock
options will eventually vest.
BetzDearborn employees may also participate in the Hercules Employee Stock
Purchase Plan ("ESPP"). The ESPP is a qualified non-compensatory plan, which
allows eligible employees to acquire shares of common stock through systematic
payroll deductions. The plan consists of three-month subscription
109
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
periods, beginning July 1 of each year. The purchase price is 85% of the fair
market value of the common stock on either the first or last day of that
subscription period, whichever is lower. Purchases may range from 2% to 15% of
an employee's base salary each pay period, subject to certain limitations.
Currently, 202,139 shares of Hercules common stock are registered for offer and
sale under the plan. Shares issued at December 31, 2000 and 1999 were 1,597,861
and 949,464, respectively. The Company applies APB Opinion 25 and related
interpretations in accounting for its Employee Stock Purchase Plan. Accordingly,
no compensation cost has been recognized for the Employee Stock Purchase Plan.
Had compensation cost for Hercules' Stock-Based Incentive Plans and
Employee Stock Purchase Plan been determined on the basis of fair value
according to SFAS No. 123, the fair value of each option granted or share
purchased would be estimated on the grant date using the Black-Scholes option
pricing model.
The following weighted-average assumptions would be used in estimating fair
value for 2000 and 1999:
PERFORMANCE EMPLOYEE STOCK
ASSUMPTION REGULAR PLAN ACCELERATED PLAN PURCHASE PLAN
---------- ------------ ---------------- --------------
Dividend yield............ 2% 3.4% 0.0%
Risk-free interest rate... 5.88% 5.38% 5.41%
Expected life............. 7.1 yrs. 5 yrs. 3 mos.
Expected volatility....... 29.20% 27.31% 44.86%
The Company's net income for 2000 and 1999 would approximate the pro forma
amounts below:
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
Net income
As reported............................................... $25 $33
Pro forma................................................. $24 $33
9. ADDITIONAL BALANCE SHEET DETAIL
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
Property, plant, and equipment
Land...................................................... $ 22 $ 28
Buildings and equipment................................... 399 432
Construction in progress.................................. 16 23
---- ----
Total.................................................. 437 483
Accumulated depreciation and amortization................. 133 113
---- ----
Net property, plant, and equipment........................ $304 $370
==== ====
Accrued expenses
Payroll and employee benefits............................. $ 29 $ 25
Claims and litigation..................................... 8 78
Restructuring reserves.................................... 18 45
Other..................................................... 38 47
---- ----
Total.................................................. $ 93 $195
==== ====
110
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
At December 31, 2000 and 1999, the goodwill and identified intangible
assets, net were:
2000 1999
------ ------
(DOLLARS IN
MILLIONS)
Goodwill.................................................... $1,558 $1,609
Customer relationships...................................... 318 324
Trademarks and tradenames................................... 242 246
Other intangibles........................................... 137 141
------ ------
Total....................................................... 2,255 2,320
Less accumulated amortization............................... (153) (82)
------ ------
Net goodwill and other intangible assets.................. $2,102 $2,238
====== ======
11. RESTRUCTURING
The consolidated balance sheet reflects liabilities for employee severance
benefits and other exit costs related to the plans initiated upon the
acquisition of BetzDearborn in 1998 to rationalize the support infrastructure
and other existing operations. Accordingly, the Company included a $98 million
liability as part of the purchase price allocation. The liability included
approximately $74 million related to employee termination benefits and $24
million for office and facility closures, relocation of former BetzDearborn
employees and other related exit costs (see Note 1). As a result of this
acquisition the Company, as a part of an effort by Hercules, entered into
several internal reorganization transactions during 1999 and 2000. As a result
of these plans, we estimate approximately 1,370 employees will be terminated, of
which approximately 1,180 employee terminations have occurred since the
inception of the aforementioned plans.
Approximately 190 employees were terminated during the year ended December
31, 2000. Cash payments during 2000 included $16 million for severance benefits
and $7 million for other exit costs. We lowered the estimate for severance
benefits and other exit costs related to the termination of employees by $10
million and $2 million, respectively.
Pursuant to these plans, approximately 990 employees were terminated and
several facilities were closed during 1999. Cash payments during 1999 included
$29 million for severance benefits and $13 million for other exit costs. As a
result of the completion of plans to exit former BetzDearborn activities, an $8
million increase in exit costs related to facility closures and a $4 million
reduction in employee severance benefits were reflected in the finalization of
the purchase price allocation (see Note 1). The lower than planned severance
benefits are the result of higher than anticipated attrition, with voluntary
resignations not requiring the payment of termination benefits.
A reconciliation of activity with respect to the liabilities established
for these plans is as follows:
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
Balance at beginning of year................................ $56 $94
Cash payments............................................... (23) (42)
Additional termination benefits and exit costs.............. 3 4
Reversals against goodwill.................................. (12) --
--- ---
Balance at end of year...................................... $24 $56
=== ===
111
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Severance benefits payments are based on years of service and generally
continue for 3 to 24 months subsequent to termination. We anticipate the actions
under these restructuring plans will be substantially complete by the end of
2001.
12. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
In connection with the acquisition of BetzDearborn in 1998, Hercules
acquired its ESOP and related trust as a long-term benefit for substantially all
of BetzDearborn's U.S. employees. The plan is a supplement to BetzDearborn's
401(k) plan. The ESOP trust had long-term debt of $91 million and $93 million at
December 31, 2000 and 1999, respectively, which is guaranteed by Hercules. Upon
acquisition, the debt had a fair value in excess of its recorded amount for
which a step-up was recorded to be amortized over the remaining term of the
debt. The fair value, included in long-term debt, was $101 million and $106
million at December 31, 2000 and 1999, respectively. The proceeds of the
original loan were used to purchase BetzDearborn convertible preferred stock,
which, at the date of acquisition, was converted into Hercules common stock.
Under the provisions of the BetzDearborn 401(k) program, employees may
invest 2% to 15% of eligible compensation. The Company's matching contributions,
made in the form of Hercules common stock, are equal to 50% of the first 6% of
employee contributions, and fully vest to employees upon the completion of 5
years of service. The Company's matching contributions are included in ESOP
expense. After satisfying the 401(k) matching contributions and the dividends on
allocated shares, all remaining shares of ESOP stock are allocated to each
eligible participant's account based on the ratio of each eligible participant's
compensation to total compensation of all participants.
The Company's contributions and dividends on the shares held by the trust
are used to repay the loan, and the shares are allocated to participants as the
principal and interest is paid. The Company's common stock dividends were
suspended during the fourth quarter of 2000. Long-term debt is reduced as
payments are made on the third party financing. In addition, unearned
compensation is also reduced as the shares are allocated to employees. The
unallocated shares held by the trust are reflected as a reduction in Net
Hercules Group Investment of $115 million and $123 million at December 31, 2000
and 1999, respectively.
2000 1999
--------- ---------
Allocated............................................. 1,858,459 1,807,976
Unallocated........................................... 3,582,334 3,814,749
--------- ---------
Total shares held by ESOP............................. 5,440,793 5,622,725
========= =========
The ESOP expense is calculated using the shares-allocated method and
includes net interest incurred on the debt of $6 million and $5 million for 2000
and 1999, respectively. The Company is required to make quarterly contributions
to the plan, which enable the trust to service its indebtedness. Net ESOP
expense is comprised of the following elements:
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
ESOP expense................................................ $13 $13
Common stock dividends (charged to retained earnings)....... (3) (6)
--- ---
Net ESOP expense............................................ $10 $ 7
--- ---
ESOP Contributions.......................................... $10 $ 9
=== ===
112
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company participates in a defined benefit pension plan sponsored by
Hercules, which covers substantially all employees of Hercules in the U.S.
Benefits under this plan are based on the average final pay and years of
service. Hercules also provides post-retirement health care and life insurance
benefits to eligible retired employees and their dependents.
Information on the actuarial present value of the benefit obligation and
fair value of the plan assets is not presented as Hercules manages its U.S.
employee benefit plans on a consolidated basis and such information is not
maintained separately for the U.S. employees of the Company. The Company's
statement of operations includes an allocation of the costs of the U.S. benefits
plans. The pension costs were allocated based on percentage of pensionable
wages, for each of the years presented; post-retirement benefit costs were
allocated using factors derived from the relative net assets and revenues. Net
pension income (costs) of Hercules allocated to the Company were $8 million, $7
million, and ($1 million) for the years ended December 31, 2000, 1999 and 1998,
respectively, and post-retirement benefit expense was $1 million, $.6 million,
and $.2 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
The Company also has a number of defined pension plans which it provides to
employees in locations other than the U.S. The following table lists benefit
obligations, plan assets, and the funded status of these plans.
113
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION BENEFITS
----------------
2000 1999
------ ------
(DOLLARS IN
MILLIONS)
CHANGE IN BENEFIT OBLIGATION
Benefit Obligation at January 1........................... $104 $106
Service cost.............................................. 4 4
Interest cost............................................. 6 6
Assumption change......................................... 1 1
Employee contributions.................................... 1 1
Translation adjustment.................................... (8) (6)
Actuarial loss (gain)..................................... 3 (5)
Benefits paid from plan assets............................ (3) (3)
---- ----
Benefit Obligation at December 31........................... $108 $104
---- ----
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1.................... $127 $110
Actual return plan assets................................. 7 19
Employee contributions.................................... 1 1
Company contributions..................................... 3 1
Actuarial loss (gain)..................................... (2) --
Translation adjustment.................................... (8) (2)
Benefits paid from plan assets............................ (3) (3)
---- ----
Fair value of plan assets at December 31.................... $125 $126
---- ----
Funded status of the plans.................................. $ 17 $ 22
Unrecognized acturial (gain)/loss........................... (4) (11)
Unrecognized net transition obligation...................... -- --
---- ----
Prepaid ( accrued) benefit cost............................. $ 13 $ 11
---- ----
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
Prepaid benefit cost...................................... $ 13 $ 11
---- ----
ASSUMPTIONS AS OF DECEMBER 31
Weighted average discount rate............................ 6.5% 6.3%
Expected return on plan assets............................ 6.7% 6.8%
Rate of compensation increase............................. 4.5% 4.5%
Health care term rate..................................... N/A N/A
Funded status of plans in deficit position.................. $ (1) $ (1)
COMPONENTS OF NET PERIODIC PENSION COST:
Service cost................................................ $ 4 $ 4
Interest cost............................................... 6 6
Return on plan assets expected.............................. (9) (8)
---- ----
Benefit cost................................................ $ 1 $ 2
---- ----
114
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. OTHER OPERATING EXPENSES, NET
Other operating expenses, net, consists of the following:
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
Loss on asset dispositions.................................. $ 3 $--
Integration expenses........................................ 2 9
Royalties expense, net...................................... 16 (1)
Restructuring charges....................................... 1 2
Other....................................................... -- 1
--- ---
$22 $11
=== ===
15. NET HERCULES GROUP INVESTMENT
Changes in net parent investment were as follows:
(DOLLARS IN
MILLIONS)
Balance, January 1, 1999.................................... $2,541
Net income................................................ 33
Other comprehensive income................................ (47)
Impact of shares held by ESOP............................. 8
Intercompany transactions, net............................ (102)
------
Balance, December 31, 1999.................................. 2,433
Net income................................................ 25
Other comprehensive income................................ (46)
Impact of shares held by ESOP............................. 7
Intercompany transactions, net............................ (183)
------
Balance, December 31, 2000.................................. $2,236
======
The Company includes accumulated other comprehensive loss in net parent
investment. At December 31, 2000 and 1999, accumulated other comprehensive loss
included $77 million and $31 million of foreign currency translation
adjustments, respectively.
16. OTHER EXPENSE, NET
Other expense, net, consists of foreign currency transaction losses of $5
million in both 2000 and 1999 and interest and miscellaneous income of $3
million and $5 million in 2000 and 1999, respectively.
17. COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases (including office space, transportation,
and data processing equipment) expiring at various dates. Rental expense was $22
million in 2000, $18 million in 1999, and $28 million in 1998.
At December 31, 2000, minimum rental payments under noncancelable leases
aggregated $35 million. The net minimum payments over the next five years are
$11 million in 2001, $9 million in 2002, $7 million in 2003, $6 million in 2004,
and $1 million in 2005.
115
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Litigation
The Company is a defendant in numerous lawsuits that arise out of, and are
incidental to the conduct of its business. In these legal proceedings, no
specifically identified officer or affiliate is a party or a named defendant.
These suits concern issues such as product liability, labor-related matters,
property damage and personal injury matters.
At December 31, 2000 and 1999, the consolidated balance sheet reflects a
current liability of approximately $8 million and $78 million, respectively, 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 the Company, 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.
Environmental
The Company 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.
The Company has established accruals for the estimated cost of
environmental remediation and/or cleanup at various sites. The estimated range
of the reasonable possible share of costs for investigation and cleanup is
between $1 million and $3 million at December 31, 2000. The actual costs will
depend upon numerous factors, including the number of parties found to be
responsible at each environmental site and their ability to pay; the actual
methods of remediation required or agreed to; the outcomes of negotiations with
regulatory authorities; outcomes of litigation; changes in environmental laws
and regulations; technological developments; and the number of years of remedial
activity required, which could range from 0 to 30 years. As of December 31,
2000, the accrued liability of $1 million for environmental remediation
represents management's best estimate of the probable and reasonably estimable
costs related to environmental remediation. The Company estimates that these
liabilities will be paid over the next five years. 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 potentially responsible parties. The Company is unaware of any
unasserted claims and has not reflected them in the reserve. While it is not
feasible to predict the outcome of all pending suits and claims, the ultimate
resolution of these environmental matters could have a material effect upon the
results of operations and the financial position of the Company.
Other
As of December 31, 2000, the Company had $5.9 million in letters of credit
outstanding with lenders.
18. RELATED PARTY TRANSACTIONS
The Company has entered into certain agreements with affiliated entities.
These agreements were developed in the context of parent/subsidiary relationship
and therefore may not necessarily reflect the result
116
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of arms-length negotiations between independent parties. The Company records
sales with affiliates based on a cost-plus formula developed and agreed-upon by
both parties.
Corporate and other allocations: As discussed in Note 1, the financial
statements of the Company reflect certain allocated support costs incurred by
other entities in Hercules group. These costs include executive, legal,
accounting, tax, auditing, cash management, purchasing, human resources, safety,
health and environmental, information management, research & development
overhead, investor relations and other corporate services. Allocations and
charges included in the Company's financial statements were based on either a
direct cost pass-through for items directly identified as related to the
Company's activities; a percentage allocation for such services provided based
on factors such as revenues, net assets, costs of sales or a relative weighting
of geographic activity. These allocations are presented separately in the
consolidated statement of income.
Royalty expense: The Company entered into license agreements with
affiliated companies, which pertain to licensing rights for certain patents,
trademarks and know-how (technology) related to manufacturing formulations and
specifications of specialty chemical products. Fees are both earned by and paid
outside of this consolidated group. Beginning in the year 2000 and for seven
years thereafter certain fees are to be split between BL Technologies, Inc. (a
member of this consolidated group) and Hercules on a declining rights basis
favoring Hercules in the later years. The net royalty expense is included as
part of other operating expenses in the financial statements.
Sales to affiliates: The Company sells raw material and finished goods
inventory in the normal course of business to affiliated companies. The
Company's revenues from sales to affiliated companies are presented separately
in the consolidated statement of income.
Purchases from affiliates: The Company purchases certain raw material and
finished goods inventory from affiliated companies in the normal course of
business. These purchases of inventory from affiliated companies are reflected
in cost of sales in the consolidated statement of income and totaled $62 million
and $56 million for the years ended 2000 and 1999, respectively.
Intercompany borrowing and interest: The Company has $289 million and $367
million of intercompany loans with affiliated entities in 2000 and 1999,
respectively. These intercompany loans are primarily with Hercules, the Hercules
Shared Services Center, Inc., and SA Hercules Europe NV. The long-term debt
payable to affiliates primarily has no set payment schedule and carry interest
rates ranging from 4.60% to 12.42%. The loans with affiliates are recorded in
the Net Hercules Group Investment in the consolidated balance sheet. Net
interest paid to affiliated entities was $19 and $25 million in 2000 and 1999,
respectively.
19. INCOME TAXES
The components of income before taxes are presented below:
2000 1999
------- -------
(DOLLARS IN MILLIONS)
Domestic.................................................... $46 $78
Foreign..................................................... 24 10
--- ---
$70 $88
=== ===
117
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the components of the tax provision follows:
2000 1999
------- -------
(DOLLARS IN MILLIONS)
Currently payable
Domestic.................................................. $11 $37
Foreign................................................... 10 5
Deferred
Domestic.................................................. 17 5
Foreign................................................... 2 4
--- ---
Provision for income taxes.................................. $40 $51
=== ===
Deferred tax liabilities (assets) at December 31, consist of the following:
2000 1999
------- -------
(DOLLARS IN MILLIONS)
Depreciation................................................ $ 36 $ 40
Amortization of intangible asset............................ 249 257
Prepaid pension and post-retirement benefits................ 4 3
Other....................................................... 2 3
---- ----
Gross deferred tax liabilities............................ 291 303
Pension and other postretirement benefits................... (26) (29)
Accrued expenses............................................ (17) (50)
Loss carryforwards.......................................... (15) (12)
Other....................................................... (6) (5)
---- ----
Gross deferred tax assets................................. (64) (96)
---- ----
Valuation allowance....................................... 15 17
---- ----
$242 $224
==== ====
A reconciliation of the statutory income tax rate to the effective rate
follows:
2000 1999
------ ------
Statutory income tax rate................................... 35.00% 35.00%
Goodwill amortization....................................... 20.73 17.76
Non-deductible expenses..................................... 2.88 2.97
Valuation allowance......................................... 2.87 4.82
Other....................................................... (4.35) (2.60)
------ ------
Effective tax rate.......................................... 57.13% 57.95%
====== ======
Unremitted foreign earnings were approximately $12 million and $3 million
at December 31, 2000 and 1999, respectively.
20. SUBSEQUENT EVENT
On May 1, 2001, Hercules Incorporated completed the sale of its hydrocarbon
resins divisions and select portions of its rosin resins divisions to Eastman
Chemical Company. In addition, on May 31, 2001, Hercules completed the sale of
its peroxy chemical business to GEO Specialty Chemicals, Inc.
118
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive loss and of cash
flows present fairly, in all material respects, the financial position of
BetzDearborn International Inc., a subsidiary of Hercules Incorporated, and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
August 31, 2001
119
BETZDEARBORN INTERNATIONAL INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Sales to third parties...................................... $183,628 $174,691
Sales to Hercules Group..................................... 3,097 1,902
-------- --------
186,725 176,593
Cost of sales............................................... 85,489 75,354
Selling, general, and administrative expenses............... 79,316 75,731
Research and development.................................... 251 451
Goodwill amortization....................................... 5,527 5,864
Other operating expenses, net (Note 12)..................... 5,952 7,098
-------- --------
176,535 164,498
Profit from operations...................................... 10,190 12,095
Equity in (income) loss of affiliated companies............. (245) 94
Interest expense (Note 6)................................... 6,252 6,146
Other expense, net (Note 13)................................ 5,596 6,932
-------- --------
Loss before income taxes and minority interest.............. (1,413) (1,077)
Provision for income taxes (Note 15)........................ (1,611) (3,020)
-------- --------
Net loss before minority interest........................... (3,024) (4,097)
Minority interest........................................... 984 149
-------- --------
Net loss.................................................... (4,008) (4,246)
Translation adjustments..................................... (2,061) (989)
-------- --------
Comprehensive loss.......................................... $ (6,069) $ (5,235)
======== ========
The accompanying notes are an integral part of
the consolidated financial statements.
120
BETZDEARBORN INTERNATIONAL INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 13,622 $ 6,231
Accounts receivable, net (Note 3)......................... 34,755 43,022
Inventories (Note 4)...................................... 19,261 21,731
Prepaid and other current assets.......................... 9,858 6,766
Deferred income taxes (Note 15)........................... 1,260 296
-------- --------
Total current assets.............................. 78,756 78,046
-------- --------
Property, plant, and equipment, net (Note 8)................ 41,191 44,798
Goodwill, net (Note 9)...................................... 197,496 209,489
Investment in affiliates.................................... 1,691 1,739
Deferred charges and other assets........................... 5,783 2,376
-------- --------
Total assets...................................... $324,917 $336,448
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable.......................................... $ 11,692 $ 11,978
Short-term debt (Note 5).................................. 14,262 10,787
Accrued expenses (Note 8)................................. 17,264 14,582
Current tax liability (Note 15)........................... 2,575 2,907
-------- --------
Total current liabilities......................... 45,793 40,254
Long-term debt (Note 6)..................................... 956 --
Deferred credits and other liabilities...................... 4,278 5,967
-------- --------
Total liabilities................................. 51,027 46,221
Commitments and contingencies (Note 16)..................... -- --
Minority Interest........................................... 11,489 10,831
Net Hercules Group Investment (Note 14)
Accumulated other comprehensive income.................... (22,969) (20,908)
Intercompany transactions, net............................ $285,370 300,304
-------- --------
Net Hercules Group Investment..................... $262,401 279,396
-------- --------
Total liabilities and Net Hercules Group
Investment....................................... $324,917 $336,448
======== ========
The accompanying notes are an integral part of
the consolidated financial statements.
121
BETZDEARBORN INTERNATIONAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (4,008) $ (4,246)
Adjustments to reconcile net loss to net cash provided by
operations:
Minority interest......................................... 984 149
Depreciation.............................................. 8,387 8,538
Amortization.............................................. 5,527 5,864
Provision for bad debts................................... (188) 394
Equity in affiliated companies (income) loss.............. (245) 94
Deferred income taxes..................................... (964) 114
Corporate and other cost allocations...................... 6,055 6,262
Loss on the disposal of assets............................ 1,484 1,016
Accruals and deferrals of cash receipts and payments:
Accounts receivable.................................... 8,455 (8,315)
Inventories............................................ 2,470 (1,732)
Prepaid and other current assets....................... (3,092) (219)
Accounts payable and accrued expenses.................. 2,064 (1,490)
Noncurrent assets and liabilities...................... (5,096) 2,137
Transfers to/from Hercules Group....................... (4,674) 4,388
-------- --------
Net cash provided by operations...................... 17,159 12,954
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (10,760) (10,452)
Proceeds from the disposal of property, plant and
equipment................................................. 4,497 2,954
-------- --------
Net cash used in investing activities................ (6,263) (7,498)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds..................................... 956 --
Long term repayments........................................ -- (130)
Change in short-term debt................................... 3,475 4,090
Transfers to/from Hercules Group............................ (8,175) (12,795)
-------- --------
Net cash used in financing activities................ (3,744) (8,835)
-------- --------
Effect of exchange rate changes on cash..................... 239 (287)
-------- --------
Net increase (decrease) in cash and cash equivalents........ 7,391 (3,666)
Cash and cash equivalents at beginning of year.............. 6,231 9,897
-------- --------
Cash and cash equivalents at end of year.................... $ 13,622 $ 6,231
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ 685 $ 1,543
Income taxes, net......................................... (1,776) (54)
Noncash financing activities
Corporate and other cost allocations...................... 6,055 6,262
The accompanying notes are an integral part of
the consolidated financial statements.
122
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
BetzDearborn International Inc. (the "Company"), a subsidiary of Hercules
Inc. (Hercules), is engaged in the engineered specialty chemical treatment of
water and industrial process systems operating in a wide variety of industrial
and commercial applications. The Company develops, produces and markets a broad
range of specialty chemical products. The Company also monitors changing water,
process and plant operating conditions so as to prescribe the appropriate
treatment programs. Operations are conducted primarily in Asia-Pacific, South
America and Mexico.
Historically, separate company stand-alone financial statements were not
prepared for the Company. In November 2000, Hercules amended its senior credit
facility and ESOP credit facility (the "Facilities"). The Facilities, as
amended, are secured by liens on Hercules' property and assets (and those of
Hercules' Canadian Subsidiaries), a pledge of the stock of substantially all of
Hercules' domestic subsidiaries (including the Company) and 65% of the stock of
foreign subsidiaries directly owned by Hercules, and a pledge of Hercules'
domestic intercompany indebtedness. These financial statements present the
financial information on the Company, a collateral party to the Hercules debt,
based on Hercules' understanding of Securities and Exchange Commission's
interpretation and application of Rule 3-16 under the Securities and Exchange
Commission's Regulation S-X. These statements were derived from historical
accounting records.
As an operating division of Hercules, the Company participates in Hercules'
centralized cash management system. Accordingly, cash received from the
Company's operations is transferred to Hercules on a periodic basis, and
Hercules funds all operational and capital requirements.
The financial statements of the Company reflect certain allocated support
costs incurred by other entities in the Hercules group. These costs include
executive, legal, accounting, tax, auditing, cash management, purchasing, human
resources, safety, health and environmental, information management, investor
relations and other corporate services. Allocations and charges included in the
Company's financial statements were based on either a direct cost pass-through
for items directly identified as related to the Company's activities; a
percentage allocation for such services provided based on factors such as sales,
net assets, or cost of sales; or a relative weighting of geographic activity.
Management believes that the allocation methods are reasonable.
When Hercules acquired all of the outstanding shares of BetzDearborn Inc.
on October 15, 1998 it paid $2,235 million in cash and $186 million in common
stock exchanged for the shares held by the BetzDearborn ESOP Trust. The purchase
price allocated to the Company and its subsidiaries was approximately $232
million. During 1999, Hercules completed the purchase price allocation and the
final determination of goodwill was $1,822 million of which the amount
attributable to the Company was approximately $216 million. These financial
statements include the push down of fair value adjustments to assets and
liabilities, including goodwill, property, plant and equipment and their related
amortization and depreciation adjustments.
As a result of this acquisition the Company, as a part of an effort by
Hercules, entered into several internal reorganization transactions during 1999
and 2000. The transactions included the Company selling several of its
investments in subsidiaries to Hercules affiliates, purchasing several
investments in subsidiaries from Hercules affiliates, merging companies, and
acquiring certain investments in Hercules group companies that are valued at
cost. As all investments in this reorganization are under the common control of
Hercules, these transactions have been accounted for in a manner similar to
pooling of interest.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries where control exits; following the
acquisition of BetzDearborn; the Company continued BetzDearborn's practice of
using a November 30 fiscal year-end for certain former BetzDearborn non-U.S.
subsidiaries to expedite the year-end closing process. Investments in affiliated
companies with a 20% to 50% ownership interest are accounted for using the
equity method of accounting and, accordingly, consolidated
123
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income includes the Company's share of their net income. All intercompany
transactions and profits have been eliminated. The following tables represent
the Company's principal consolidated subsidiaries.
SUBSIDIARY DOMICILE FUNCTIONAL CURRENCY
---------- --------- -------------------
Hercules Argentina S.A...................................... Argentina Dollar U.S.
BetzDearborn Australia Pty, Ltd............................. Australia Dollar Australian
Hercules BetzDearborn Brazil Ltda........................... Brazil Real
Hercules Quimica Chile Ltda................................. Chile Peso
BetzDearborn Caribbean N.V. ................................ Aruba Dollar U.S.
BetzDearborn de Ecuador S.A................................. Ecuador Dollar U.S.
Hercules Specialty Chemicals (India) Private Limited........ India Rupee
P.T. BetzDearborn Persada................................... Indonesia Rupiah
BetzDearborn Korea Ltd...................................... Korea Won
Hercules Chemicals (Malaysia) Sdn. BHD...................... Malaysia Rinnggit
BetzDearborn de Mexico S.A. de C.V.......................... Mexico Peso
Hercules del Peru S.A....................................... Peru Newsol
Hercules Chemicals Singapore Pte. Ltd....................... Singapore Dollar Singapore
Hercules Chemicals (Taiwan) Co. Ltd......................... Taiwan Dollar Taiwan
Hercules Chemicals (Thailand) Co. Ltd....................... Thailand Baht
BetzDearborn de Uruguay S.A................................. Uruguay Peso
Hercules BetzDearborn C.A. ................................. Venezuela Dollar U.S.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Company's experience. The corresponding shipping and handling costs are
included in cost of sales.
Environmental Expenditures
Environmental expenditures that pertain to current operations or future
revenues are expensed or capitalized according to the Company's capitalization
policy. Expenditures for remediation of an existing condition caused by past
operations that do not contribute to current or future revenues are expensed.
Liabilities are recognized for remedial activities when the cleanup is probable
and can be reasonably estimated.
Cash and Cash Equivalents
Cash in excess of operating requirements is invested in short-term,
income-producing instruments. Cash equivalents include time deposits and other
securities with original maturities of 90 days or less. Book value approximates
fair value because of the short maturity of those instruments.
124
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market. Inventories are
valued on the average cost method.
Property and Depreciation
Property, plant and equipment is recorded at cost. Depreciation is computed
principally by the straight-line method over the estimated useful lives of the
related assets. The estimated useful lives of depreciable assets are as follows:
buildings -- 30 years; plant machinery and equipment -- 15 years; other
machinery and equipment -- 3 to 15 years.
The Company is engaged in several projects related to process or plant
improvements. Costs are capitalized until the project is ready for intended use.
The cost of business process reengineering, whether done internally or by a
third party is expensed as incurred.
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is expensed.
Goodwill
Goodwill is amortized on a straight-line basis over 40 years, which is the
estimated future period to be benefited.
Long-lived Assets
The Company reviews its long-lived assets, including goodwill for
impairment on an exception basis whenever events or changes in circumstances
indicate carrying amounts of the assets may not be recoverable through
undiscounted future cash flows. If an impairment loss has occurred based on
expected future cash flows (undiscounted), the loss is recognized in the income
statement. The amount of the impairment loss is the excess of the carrying
amount of the impaired asset over the fair value of the asset. The fair value
represents expected future cash flows from the use of the assets, discounted at
the rate used to evaluate potential investments.
Foreign Currency Translation and Transactions
The accompanying consolidated financial statements are reported in U.S.
dollars. The U. S. dollar is the functional currency for the Company and its
domestic subsidiaries and associated companies. However, the currencies listed
previously are the functional currencies for its foreign subsidiaries located in
the indicated countries. The translation of the functional currencies into U.S.
dollars (reporting currency) is performed for assets and liabilities using the
current exchange rates in effect at the balance sheet date, and for revenues,
costs and expenses using average exchange rates prevailing during the reporting
periods. Adjustments resulting from the translation of functional currency
financial statements to reporting currency are accumulated and reported as other
comprehensive income.
Transactions in foreign currency are recorded at the exchange rate
prevailing on the date of transaction. Monetary assets and liabilities
denominated in foreign currencies are expressed in the functional currency at
the exchange rates in effect at the balance sheet date. Revenues, costs and
expenses are recorded using average exchange rates prevailing during the
reporting periods. Gains or losses resulting from foreign currency transactions
are included in the statements of operations.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of short-term cash investments
and trade receivables. The Company places its short-term cash investments of
$7,029 thousand at December 31, 2000 and $2,696 thousand at December 31, 1999 in
securities with maturities of 90 days or less. These securities were
concentrated in Brazil and Chile, which
125
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
together held $6,945 thousand and $2,591 thousand for 2000 and 1999,
respectively. These securities are primarily denominated in the respective local
currencies. Cost approximates market for these securities. Concentrations of
credit risk with respect to trade receivables are limited due to the Company's
large number of customers and their dispersion across many different industries
and locations.
Stock-based Compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25)). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-based Compensation," requires companies electing to continue to use the
intrinsic-value method to make pro forma disclosures of net income as if the
fair-value-based method of accounting had been applied.
Computer Software Costs
Effective January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants Statement of Position 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
The Company's prior accounting was generally consistent with the requirements of
SOP 98-1 and, accordingly adoption of SOP 98-1 had no material effect. Computer
software costs are being amortized over a period of 5 to 10 years.
Research and Development
Research and development expenditures are expensed as incurred.
Income Taxes
The Company's operations have historically been included in the
consolidated income tax returns filed by its parent. Income tax expense in the
accompanying financial statements has been computed assuming the Company filed
separate income tax returns. Differences between this calculation of income
taxes currently payable and consolidated amounts reported in the consolidated
financial statements of the parent have been reflected as Net Hercules Group
Investment.
Net Hercules Group Investment
The Net Hercules Group Investment account reflects the balance of the
Company's historical earnings, intercompany amounts, income taxes, taxes accrued
and deferred, post-employment liabilities, foreign currency translation and
other transactions between the Company and the Hercules Group.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. This statement, as amended, is effective for
all fiscal quarters of fiscal years beginning after December 31, 2000. The
Company adopted SFAS 133 effective January 1, 2001. The adoption of SFAS No. 133
did not have a material effect on our earnings or statement of financial
position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
126
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was to be effective
October 1, 2000. Adoption of SAB 101 did not have a material effect on the
Company's profit from operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). For the Company, these statements will generally become
effective January 1, 2002, although business combinations initiated after June
30, 2001 are subject to the non-amortization and purchase accounting provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. The Company is currently
in the process of conducting an assessment of the actual impact of the
non-amortization provision of SFAS 142. The assessment of goodwill for
impairment is a complex issue in which the Company must determine, among other
things, the fair value of each defined reporting unit. It is, therefore, not
possible at this time to predict the impact, if any, that the impairment
assessment provisions of SFAS 142 will have on the Company's financial
statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assts. SFAS 143 will become effective for the Company
from January 1, 2003 and requires recognition of a liability for an asset
retirement obligation in the period in which it is incurred. Management is in
the process of evaluating the impact this standard will have on the Company's
financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Trade....................................................... $38,575 $47,030
Less allowance for doubtful accounts........................ (3,820) (4,008)
------- -------
Total............................................. $34,755 $43,022
======= =======
4. INVENTORIES
The components of inventories are:
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Finished products........................................... $ 9,502 $ 9,324
Materials, supplies, and work in process.................... 9,759 12,407
------- -------
Total............................................. $19,261 $21,731
======= =======
127
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SHORT-TERM DEBT
A summary of short-term debt follows:
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Lines of credit............................................. $13,776 $10,787
Current maturities of long-term debt........................ 486 --
------- -------
Total............................................. $14,262 $10,787
======= =======
Lines of credit primarily represent foreign overdraft facilities and
short-term lines of credit, which are generally payable on demand with interest
at various rates. Book values of bank borrowings approximate market value
because of their short maturity period.
At December 31, 2000 and 1999 the Company had $23,467 thousand and $10,580
thousand, respectively, of unused lines of credit that may be drawn as needed,
with interest at a negotiated spread over the lenders' cost of funds.
Weighted-average interest rates on short-term borrowings at December 31, 2000
and 1999 were 5.66% and 5.84%, respectively.
6. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt with third parties at December 31, 2000 is summarized below.
There was no long-term debt with third parties at December 31, 1999.
2000
----------------------
(DOLLARS IN THOUSANDS)
Construction loan -- Bank of Hong Kong at 13.5%............. $1,442
Less current maturities..................................... (486)
------
Total....................................................... $ 956
======
The construction loan with Hong Kong bank has an additional availability of
$1,122 thousand and payments are due through 2007. The loan features a clause,
which allows for no payments to be made for the years 2002 and 2003.
Scheduled annual maturities of long-term debt outstanding in the successive
five-year period are summarized as follows:
2000
----------------------
(DOLLARS IN THOUSANDS)
2001........................................................ $ 486
2002........................................................ --
2003........................................................ --
2004........................................................ 120
2005........................................................ 239
Thereafter.................................................. 597
------
Total....................................................... $1,442
------
Less current maturities..................................... (486)
------
Total....................................................... $ 956
======
The Company believes that the carrying value of borrowings approximates
fair market value, based on discounting future cash flows using rates currently
available for debt of similar terms and remaining maturities.
128
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 2000, the Company had $58,259 thousand of long term debt
payable to affiliates that was primarily held by Hercules Shared Services
Corporation, BetzDearborn Inc. and by Hercules Europe B.V.B.A., all wholly owned
subsidiaries of Hercules. As of December 31, 1999, the Company had $64,066
thousand in long-term debt payable to affiliates, of which $14,000 thousand was
payable to Hercules Shared Services Corporation and BetzDearborn Inc. The
remaining debt was primarily held by BetzDearborn N.V. a wholly subsidiary of
Hercules and transferred to Hercules Europe B.V.B.A. during the year. The
long-term debt payable to affiliates primarily has no set payment schedule and
carry interest rates ranging from 4.5% to 10.5%. The long term debt payable to
affiliates is recorded in the Net Hercules Group Investment account in the
financial statements.
Interest expense in 2000 was $6,252 thousand, of which $4,391 thousand was
related party interest. There was no capitalized interest during the period.
Interest expense in 1999 was $6,146 thousand, of which $4,639 thousand was
related party interest. There was no capitalized interest during the period.
7. LONG-TERM INCENTIVE COMPENSATION PLANS
The Company participates in long-term incentive compensation plans
sponsored by Hercules. These plans provide for the grant of stock options and
the award of common stock and other market-based units to certain key employees
and non-employee directors.
In 1995, Hercules changed the structure of the long-term incentive
compensation plans to place a greater emphasis on shareholder value creation
through grants of regular stock options, performance-accelerated stock options,
and Cash Value Awards (performance-based awards denominated in cash and payable
in shares of common or restricted stock, subject to the same restrictions as
restricted stock). Restricted stock and other market-based units are awarded
with respect to certain programs. The number of awarded shares outstanding was
491,488 at December 31, 2000 and 926,689 at December 31, 1999.
At December 31, 2000, under Hercules' incentive compensation plans,
1,847,855 shares of common stock were available for grant as stock awards or
stock option awards. Stock awards are limited to approximately 15% of the total
authorizations. Regular stock options are granted at the market price on the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock options are also granted at
the market price on the date of grant and are normally exercisable at nine and
one-half years. Exercisability may be accelerated based upon the achievement of
predetermined performance goals. Both regular and performance-accelerated stock
options expire 10 years after the date of grant.
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to Hercules in the event of employment termination, except
in the case of death, disability, retirement, or other specified events.
The Company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. There were no charges to income for the cost of stock awards over the
restriction or performance period for 2000 and 1999.
129
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 2000 and 1999:
REGULAR PERFORMANCE-ACCELERATED
---------------------------- ----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES PRICE SHARES PRICE
--------- ---------------- --------- ----------------
January 1, 1999........................... 9,800 $40.60 -- --
Granted................................... 48,200 $37.72 13,150 $37.70
Exercised................................. -- -- -- --
Forfeited................................. -- -- -- --
-------------------------------------------------------------------------------------------------------
December 31, 1999......................... 58,000 $38.21 13,150 $37.70
Granted................................... 37,675 $17.25 -- --
Exercised................................. -- -- -- --
Forfeited................................. -- -- -- --
-------------------------------------------------------------------------------------------------------
December 31, 2000......................... 95,675 $29.95 13,150 $37.70
The weighted-average fair value of regular stock options granted during
2000 and 1999 was $8.85 and $8.26, respectively. The weighted-average fair value
of performance-accelerated stock options granted during 1999 was $8.01 There
were no performance-accelerated stock options granted in 2000.
Following is a summary of regular stock options exercisable at December 31,
2000, and 1999, and their respective weighted-average share prices:
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISABLE SHARES EXERCISE PRICE
------------------- --------- ----------------
December 31, 1999.......................................... 7,320 $40.09
December 31, 2000.......................................... 28,820 $38.61
There were no performance-accelerated stock options exercisable at December
31, 2000 and 1999.
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
EXERCISE OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
PRICE RANGE AT 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/00 EXERCISE PRICE
----------------------------- ----------- ---------------- ---------------- ----------- ----------------
Regular Stock Options
$12 - $20 37,675 9.13 $17.25 -- --
$30 - $40 56,700 8.13 $37.99 27,780 $38.26
$40 - $50 1,300 7.35 $47.81 1,040 $47.81
------- -------
95,675 28,820
======= =======
Performance-Accelerated Stock
Options
$14 - $40 13,150 8.36 $37.70 -- --
======= =======
The Company currently expects that 100% of performance-accelerated stock
options will eventually vest.
The Company's employees may also participate in the Hercules Employee Stock
Purchase Plan ("ESPP"). The ESPP is a qualified non-compensatory plan, which
allows eligible employees to acquire shares of common stock through systematic
payroll deductions. The plan consists of three-month subscription periods,
beginning July 1 of each year. The purchase price is 85% of the fair market
value of the common stock on either the first or last day of that subscription
period, whichever is lower. Purchases may range from 2% to 15% of an employee's
base salary each pay period, subject to certain limitations. Currently, 202,139
shares of Hercules common stock are registered for offer and sale under the
plan. Shares issued at
130
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2000 and 1999, were 1,597,861 and 949,464, respectively. The
Company applies APB Opinion 25 and related interpretations in accounting for its
Employee Stock Purchase Plan. Accordingly, no compensation cost has been
recognized for the Employee Stock Purchase Plan.
Had compensation cost for Hercules' Stock-Based Incentive Plans and
Employee Stock Purchase Plan been determined on the basis of fair value
according to SFAS No. 123, the fair value of each option granted or share
purchased would be estimated on the grant date using the Black-Scholes option
pricing model.
The following weighted-average assumptions would be used in estimating fair
value for 2000 and 1999.
REGULAR PERFORMANCE EMPLOYEE STOCK
ASSUMPTION PLAN ACCELERATED PLAN PURCHASE PLAN
---------- ------- ---------------- --------------
Dividend yield................................. 2% 3.4% 0.0%
Risk-free interest rate........................ 5.88% 5.38% 5.41%
Expected life.................................. 7.1 yrs 5 yrs. 3 mos.
Expected volatility............................ 29.20% 27.31% 44.86%
The Company's net loss for 2000 and 1999 would approximate the pro forma
amounts below:
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Net loss
As reported............................................... $(4,008) $(4,246)
Pro forma................................................. $(4,213) $(4,335)
8. ADDITIONAL BALANCE SHEET DETAIL
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Property, plant, and equipment
Land...................................................... $ 7,085 $ 7,241
Buildings and equipment................................... 48,455 48,848
Construction in progress.................................. 4,123 826
-------- --------
Total............................................. 59,663 56,915
Accumulated depreciation and amortization................. (18,472) (12,117)
-------- --------
Net property, plant, and equipment........................ $ 41,191 $ 44,798
======== ========
Accrued expenses
Payroll and related taxes.............................. $ 3,623 $ 3,184
Incentives/bonus....................................... 2,222 1,174
Current portion of restructuring liability............. 3,861 1,646
Pension................................................ 682 355
Other.................................................. 6,876 8,223
-------- --------
$ 17,264 $ 14,582
======== ========
131
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. GOODWILL
Goodwill at December 31, 2000 and 1999, was:
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Goodwill.................................................... $209,973 $216,439
Less accumulated amortization............................... (12,477) (6,950)
-------- --------
Total............................................. $197,496 $209,489
======== ========
10. RESTRUCTURING
The consolidated balance sheet reflects liabilities for employee severance
benefits and other exit costs, primarily related to plans initiated upon the
acquisition of BetzDearborn by Hercules in 1998.
Pursuant to the plans in place to merge the operations of BetzDearborn with
Hercules and to rationalize the support infrastructure and other existing
operations, a $1,328 thousand reserve was established by the Company in 1998 and
further increased by $4,499 thousand in 1999. 35 people were terminated in 1999
and 17 in 2000. The majority of the terminations were administrative, sales and
marketing personnel. Cash payments made during 2000 and 1999 include $665
thousand and $1,528 thousand, respectively, for severance benefits and $125
thousand and $118 thousand, respectively, for other exit costs.
Severance benefit payments are based on years of service and generally
continue for 3 months to 24 months subsequent to termination. We expect to
substantially complete remaining actions under the plans in 2001. A
reconciliation of activity with respect to the liabilities established for these
plans is as follows:
2000 1999
--------- ----------
(DOLLARS IN THOUSANDS)
Balance at beginning of year................................ $4,554 $ 1,328
Acquisition-related accrual................................. -- 4,499
Additional termination benefits and exit costs.............. 124 531
Cash payments............................................... (790) (1,646)
Currency effects............................................ (27) (158)
------ -------
Balance at end of year...................................... $3,861 $ 4,554
====== =======
132
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. PENSION BENEFITS
The Company provides defined benefit plans for approximately 370 employees.
The Company funds the plans primarily through trust arrangements where the
assets of the fund are held separately from the employer. The following table
lists benefit obligations, plan assets, and funded status of the plans.
PENSION BENEFITS
-----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1........................... $2,854 $2,388
Service cost.............................................. 289 245
Interest cost............................................. 157 143
Benefits paid from plan assets............................ (489) --
Translation adjustments................................... (146) 78
------ ------
Benefit obligation at December 31........................... $2,665 $2,854
====== ======
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1.................... 2,381 2,107
Actual return on plan assets.............................. 144 109
Company contributions..................................... 122 101
Benefits paid from plan assets............................ (463) --
Translation adjustments................................... (114) 64
------ ------
Fair value of plan assets at December 31.................. $2,070 $2,381
====== ======
Funded status of the plans.................................. (595) (473)
Unrecognized net loss....................................... 540 --
Unrecognized net transition obligation...................... -- 603
------ ------
(Accrued) prepaid benefit cost.............................. $ (55) $ 130
====== ======
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
Prepaid benefit cost...................................... $ -- $ 336
Accrued benefit liability................................. (55) (206)
------ ------
$ (55) $ 130
====== ======
ASSUMPTIONS AS OF DECEMBER 31
Weighted-average discount rate............................ 6.00% 6.00%
Expected return on plan assets............................ 6.00% 6.00%
Rate of compensation increase............................. 6.00% 6.00%
133
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION BENEFITS
-----------------
2000 1999
------ ------
(DOLLARS IN
THOUSANDS)
Components of net periodic benefit cost:
Service cost.............................................. $ 289 $ 245
Interest cost............................................. 157 143
Return on plan assets (expected).......................... (144) (109)
Amortization of net (gain) loss........................... -- 22
Amortization of transition asset.......................... 34 (16)
----- -----
Benefit cost................................................ $ 336 $ 285
===== =====
The Company also participates in defined contribution plans, which
supplements the local government pension plans. The Company's employees may
contribute from 5% to 12% of their annual compensation to the plan each calendar
year. The Company's matching contribution was approximately $520 thousand for
2000 and $460 thousand for 1999.
12. OTHER OPERATING EXPENSES, NET,
Other operating expenses, net in 2000 primarily includes $5,599 thousand in
royalty expense, $68 thousand for integration costs and $124 thousand additional
charges to the restructuring accrual.
Other operating expenses, net in 1999 primarily includes $4,901 thousand in
royalty expense, $1,118 thousand for integration costs and $531 thousand
additional charges to the restructuring accrual.
13. OTHER EXPENSE, NET
Other Expense, net, consists primarily of exchange and transaction losses
for 2000 and 1999.
14. NET HERCULES GROUP INVESTMENT
Changes in Net Hercules Group Investment were as follows:
(DOLLARS IN THOUSANDS)
Balance, December 31, 1998.................................. $286,177
Net loss.................................................. (4,246)
Other comprehensive income................................ (989)
Intercompany transactions, net............................ (1,546)
--------
Balance, December 31, 1999.................................. 279,396
Net loss.................................................. (4,008)
Other comprehensive income................................ (2,061)
Intercompany transactions, net............................ (10,926)
--------
Balance, December 31, 2000.................................. $262,401
========
The Company includes accumulated other comprehensive income in Net Hercules
Group Investment. At December 31, 2000 and 1999, accumulated other comprehensive
income included ($22,969) thousand and ($20,908) thousand, of foreign currency
translation adjustments.
134
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. INCOME TAXES
The components of income before taxes are presented below.
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Domestic.................................................... $(4,904) $ 1,042
Foreign..................................................... 3,491 (2,119)
------- -------
$(1,413) $(1,077)
======= =======
A summary of the components of the tax provision follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Currently payable
Domestic.................................................. $ -- $1,890
Foreign................................................... 2,575 1,017
Deferred
Domestic.................................................. (698) 133
Foreign................................................... (266) (20)
------ ------
Provision for income taxes.................................. $1,611 $3,020
====== ======
Deferred tax assets (liabilities) at December 31 consisted of:
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Depreciation................................................ $ (977) $ (575)
Investments................................................. (57) --
Other....................................................... 540 (412)
-------- --------
Gross deferred tax liabilities.............................. $ (494) $ (987)
-------- --------
Postretirement benefits other than pensions................. $ 1,047 $ 827
Inventory................................................... 316 582
Accrued expenses............................................ 5,591 5,427
Loss carryforwards.......................................... 9,175 7,352
-------- --------
Gross deferred tax assets................................... 16,129 14,188
-------- --------
Valuation allowance......................................... (14,375) (12,905)
-------- --------
$ 1,260 $ 296
======== ========
135
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory income tax rate to the effective rate
follows:
2000 1999
---- ----
Statutory income tax rate................................... (35)% (35)%
Goodwill amortization....................................... 121 168
Meals and entertainment..................................... 11 17
Foreign dividends net of credits............................ -- 9
Valuation allowance......................................... 80 146
Cash repatriations from non-US subsidiaries................. (84) (41)
Travel expense.............................................. 5 8
Other....................................................... 16 8
--- ---
Effective tax rate.......................................... 114% 280%
=== ===
The net operating losses have indefinite carryforward periods, but may be
limited in their use in any given year.
The Company provides taxes on undistributed earnings of subsidiaries and
affiliates included in Net Hercules Group Investment to the extent such earnings
are planned to be remitted and not reinvested permanently. The undistributed
earnings of subsidiaries and affiliates on which no provision for foreign
withholding or domestic income taxes has been made was $0 for 2000 and 1999,
respectively. U.S. and foreign income taxes that would be payable if such
earnings were distributed may be lower than the amount computed at the domestic
statutory rate because of the availability of tax credits.
16. COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases (including office space, transportation,
and data processing equipment) expiring at various dates. Rental expense was
$3,065 thousand in 2000 and $2,726 thousand in 1999.
Future minimum lease payments under noncancellable operating leases are as
follows:
2000
-----------
(DOLLARS IN
THOUSANDS)
2001........................................................ $2,575
2002........................................................ 1,618
2003........................................................ 679
2004........................................................ 249
2005........................................................ 268
Thereafter.................................................. 241
------
$5,630
======
Litigation
The Company currently and from time to time is involved in litigation to
the conduct of its business. In the opinion of the Company's management none of
such litigation as of December 31, 2000 is likely to have a material adverse
effect on the financial position and results of operations of the Company.
17. RELATED PARTY TRANSACTIONS
The Company has entered into certain agreements with affiliated entities.
These agreements were developed in the context of parent/subsidiary relationship
and therefore may not necessarily reflect the result
136
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of arms-length negotiations between independent parties. The Company records
sales with affiliates generally based on a cost-plus formula developed and
agreed-upon by both parties.
Corporate and other allocations: As discussed in Note 1, the financial
statements of the Company reflect certain allocated support costs incurred by
other entities in Hercules group. These costs include executive, legal,
accounting, tax, auditing, cash management, purchasing, human resources, safety,
health and environmental, information management, research & development
overhead, investor relations and other corporate services. Allocations and
charges included in the Company's financial statements were based on either a
direct cost pass-through for items directly identified as related to the
Company's activities; a percentage allocation for such services provided based
on factors such as revenues, net assets, costs of sales or a relative weighting
of geographic activity. These allocations are reflected in the selling, general
and administrative line item in our statement of operations. Such allocations
and corporate charges totaled $6,055 thousand and $6,262 thousand in 2000 and
1999, respectively.
The Company has net advances to affiliates at December 31, 2000 of $16,210
thousand. These advances are to BetzDearborn Inc. and BetzDearborn Europe Inc.
There were no advances to affiliates outstanding in 1999. The advances are also
recorded as part of the Net Hercules Group Investment account.
Royalty expense: The Company entered into a license agreement, which
pertains to foreign licensing rights for certain patents, trademarks, and
know-how (technology) related to the manufacture of specialty chemical products.
The royalties are payable to BL Technologies, Inc., a related party 50% owned by
BetzDearborn Inc. and 50% owned by BetzDearborn Europe, Inc. Royalty expense for
2000 was $5,599 thousand and $4,901 thousand in 1999. Beginning in the year 2000
and for seven years thereafter, the fees are to be split between BL Technologies
and Hercules on a declining rights basis favoring Hercules in the "out years".
The royalty expense is included as part of other operating expenses in the
financial statements.
The Company from time to time will purchase finished or semi finished
product from affiliated companies. For the years ended December 31, 2000 and
1999, these purchases totaled $7,171 thousand and $605 thousand, respectively.
18. SUBSEQUENT EVENT:
On May 1, 2001, Hercules completed the sale of its hydrocarbon resins
divisions and select portions of its rosin resins divisions to Eastman Chemical
Company. In addition, on May 31, 2001, Hercules completed the sale of its peroxy
chemicals business to GEO Specialty Chemicals, Inc. Results of operations for
the Company include net sales of approximately $2,122 thousand and $2,841
thousand, respectively, in 2000 and 1999 relating to these divested businesses.
137
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
BL Technologies, Inc.
In our opinion, the accompanying balance sheets and the related statements
of income and of cash flows present fairly, in all material respects, the
financial position of BL Technologies, Inc., a subsidiary of Hercules
Incorporated, at December 31, 2000 and 1999, and the results of its operations
and of its cash flows for each of the two years in the period ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 16, 2001
138
BL TECHNOLOGIES, INC.
STATEMENT OF INCOME
YEAR ENDED
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Royalty income.............................................. $ 172 $ 139
Royalty income -- affiliates................................ 20,972 22,785
------- -------
21,144 22,924
Selling, general, and administrative expenses............... 13 15
Corporate and other cost allocations........................ 2,188 2,941
Amortization of licensing rights............................ 11,358 13,250
------- -------
Profit from operations...................................... 7,585 6,718
Other income, net (Note 4).................................. 211 36
------- -------
Income before income taxes.................................. 7,796 6,754
Provision for income taxes (Note 5)......................... 2,729 2,363
------- -------
Net income.................................................. $ 5,067 $ 4,391
======= =======
The accompanying notes are an integral part of the financial statements.
139
BL TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 19 $ 26
Foreign currency contract receivable (Note 6)............. -- 113
-------- --------
Total current assets...................................... 19 139
-------- --------
Investment in Hercules International Limited................ 72,962 72,962
Licensing rights, net (Note 3).............................. 28,392 39,750
-------- --------
Total assets.............................................. $101,373 $112,851
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Liabilities
Income taxes payable...................................... $ 6,704 $ 7,001
Deferred income taxes (Note 5)............................ 9,937 13,913
-------- --------
Total liabilities 16,641 20,914
Commitments and contingencies (Note 7)...................... -- --
Net Hercules Group Investment (Note 9)
Intercompany transactions, net............................ 84,732 91,937
-------- --------
Net Hercules Group Investment............................. 84,732 91,937
-------- --------
Total liabilities and net Hercules Group investment....... $101,373 $112,851
======== ========
The accompanying notes are an integral part of the financial statements.
140
BL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income.................................................. $ 5,067 $ 4,391
Adjustments to reconcile net income to net cash provided by
operations:
Amortization of licensing rights.......................... 11,358 13,250
Deferred income taxes..................................... (3,975) (4,638)
Corporate and other allocations........................... 2,188 2,941
Accruals and deferrals of cash receipts and payments:
Foreign currency contract receivable................... 113 (113)
Income taxes payable................................... (297) 2,830
Transfers to/from Hercules Group....................... -- 4,171
-------- --------
Net cash provided by operations...................... 14,454 22,832
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Transfers to/from Hercules Group............................ (14,461) (24,020)
-------- --------
Net cash used in financing activities................ (14,461) (24,020)
-------- --------
Net decrease in cash and cash equivalents................... (7) (1,188)
Cash and cash equivalents at beginning of year.............. 26 1,214
-------- --------
Cash and cash equivalents at end of year.................... $ 19 $ 26
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ -- $ --
Income taxes.............................................. -- --
Noncash financing activities:
Corporate and other cost allocations...................... 2,188 2,941
The accompanying notes are an integral part of the financial statements.
141
BL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
BL Technologies, Inc. ("BL Tech" or the "Company") was incorporated in 1994
in the state of Delaware as an Investment Holding Company for the purpose of
providing certain financial services to its majority shareholder and former
parent company, BetzDearborn Inc. (BetzDearborn). BL Tech and BetzDearborn are
wholly owned subsidiaries of Hercules Incorporated ("Hercules"). The Company's
primary business activity is the licensing of technologies (e.g., patents,
trademarks, and formulations) and the collection of royalties therefrom to
foreign based affiliates of the Hercules Group.
When Hercules acquired all of the outstanding shares of BetzDearborn Inc.
on October 15, 1998, it paid $2,235 million in cash and $186 million in common
stock in exchange for the shares held by the BetzDearborn ESOP Trust. The
purchase price allocated to the Company was approximately $53 million. During
1999, Hercules completed the purchase price allocation and the final
determination of goodwill was $1,822. These financial statements include the
pushdown of fair value adjustments to assets and liabilities including other
intangible assets and the related amortization adjustment.
Effective January 1, 2000, Hercules began funding all research and
development costs and became the owner of all future technologies. The Company
continues to have economic rights to license the technologies in existence prior
to January 1, 2000 and receive annual royalties related to such rights from
Hercules and its affiliates. Accordingly, as part of recording the acquisition
under the purchase accounting method, the Company remeasured the value of its
licensing rights giving consideration to the future cash flows thereby
reflecting the licensing rights at fair value.
As a result of the acquisition, during 1999, the Company was a party to one
of several reorganization transactions initiated by Hercules. The transaction
included the Company exchanging an investment in a BetzDearborn subsidiary for
an 8.5% investment in Hercules International Limited. As this investment is
under the common control of Hercules, it has been accounted for at book value
and consolidated on an "as if" pooling basis for all periods presented.
The Company also has a .001% investment in the stock of Hercules de
Colombia S.A., an affiliate.
Historically, separate company stand-alone financial statements were not
prepared for the Company. In November 2000, Hercules amended its senior credit
facility and ESOP credit facility (the "Facilities"). The Facilities, as
amended, are secured by liens on Hercules' property and assets (and those of
Hercules' Canadian Subsidiaries), a pledge of the stock of substantially all of
Hercules' domestic subsidiaries (including the Company) and 65% of the stock of
foreign subsidiaries directly owned by Hercules, and a pledge of Hercules'
domestic intercompany indebtedness. These financial statements present the
financial information of the Company, a collateral party to the Hercules debt,
based on the Hercules' understanding of the Securities and Exchange Commission's
interpretation and application of Rule 3-16 under the Securities and Exchange
Commission's Regulation S-X. These statements were derived from historical
accounting records.
The financial statements of the Company reflect certain allocated support
costs incurred by other entities in the Hercules group. These costs include
executive, legal, accounting, tax, auditing, cash management, purchasing, human
resources, safety, health and environmental, information management, investor
relations and other corporate services. Allocations and charges included in the
Company's financial statements were based on either a direct cost pass-through
for items directly identified as related to the Company's activities; a
percentage allocation for such services provided based on net assets; or a
relative weighting of geographic activity. Management believes that the
allocation methods are reasonable.
BL Tech participates in Hercules' centralized cash management system.
Accordingly, cash received from BL Tech operations is transferred to Hercules on
a periodic basis, and Hercules funds all operational requirements.
142
BL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
Royalty income is based on a fixed percentage of the licensee's sales. The
Company recognizes royalty revenue when the earnings process is complete. This
generally occurs when the licensee has shipped product to the customer. Accruals
are made for royalty refunds and other allowances based on the Company's
experience.
Cash and Cash Equivalents
Cash in excess of operating requirements is invested in short-term,
income-producing instruments. Cash equivalents include securities with original
maturities of 90 days or less. Book value approximates fair value because of the
short maturity of those instruments.
Licensing Rights
Licensing rights are amortized on a sum-of-years digits basis during the
economic life of such rights, which is seven years.
Foreign Currency Transactions
Transactions in foreign currency, primarily royalty payments, are recorded
at the exchange rate prevailing on the date of transaction. Monetary assets and
liabilities denominated in foreign currencies are expressed in the functional
currency at the exchange rates in effect at the balance sheet date. Revenues,
costs and expenses are recorded using average exchange rates prevailing during
the reporting periods. Gains or losses resulting from foreign currency
transactions are included in the statement of operations.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of short-term cash investments
and receivables from affiliated companies. The Company places its short-term
cash investments in a highly-liquid money market account at a large financial
institution.
Derivative Instruments and Hedging
The Company has entered into forward-exchange contracts to hedge foreign
currency exposure. Decisions regarding hedging have been made on a case-by-case
basis, taking into consideration the amount and duration of the exposure, market
volatility, and economic trends. The Company uses the fair-value method of
accounting, recording realized and unrealized gains and losses on these
contracts monthly. They are included in other income (expense), net. It is the
Company's policy to match the term of financial instruments with the term of the
underlying designated item. The Company does not hold or issue financial
instruments for trading purposes. In the Statement of Cash Flows, the Company
reports the cash flows resulting from its hedging activities in the same
category as the related item that is being hedged.
143
BL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company's operations have historically been included in the
consolidated income tax returns filed by its parent. Income tax expense in the
accompanying financial statements has been computed assuming the Company filed
separate income tax returns. Differences between this calculation of income
taxes currently payable and consolidated amounts reported in the consolidated
financial statements of the parent have been reflected as net Hercules Group
investment.
Net Hercules Group Investment
The net Hercules Group investment account reflects the balance of BL Tech's
historical earnings, intercompany amounts, income taxes, taxes accrued and
deferred, foreign currency translation and other transactions between the
Company and the Hercules Group.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. This statement, as amended, is effective for
all fiscal quarters of fiscal years beginning after December 31, 2000. The
Company adopted SFAS 133 effective January 1, 2001. The adoption of SFAS No. 133
did not have a material effect on its earnings or statement of financial
position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was to be effective
October 1, 2000. Adoption of SAB 101 did not have a material effect on our
profit from operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). For BL Tech, these statements will generally become
effective January 1, 2002, although business combinations initiated after June
30, 2001 are subject to the non-amortization and purchase accounting provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. The impairment assessment
provisions of SFAS 142 will not have an impact on the Company's financial
statements.
144
BL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. LICENSING RIGHTS
The Company has a exclusive right to license Hercules technologies for a
seven year period from its date of acquisition on October 15, 1998. At December
31, 2000 and 1999, licensing rights were:
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Licensing rights............................................ $ 53,000 $53,000
Less accumulated amortization............................... (24,608) (13,250)
-------- -------
Licensing rights, net $ 28,392 $39,750
======== =======
4. OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following:
2000 1999
---- ----
(DOLLARS IN
THOUSANDS)
Interest income, net........................................ $ 1 $11
Foreign exchanges gains..................................... 210 25
---- ---
$211 $36
==== ===
5. INCOME TAXES
A summary of the components of the tax provision follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Currently payable........................................... $ 6,704 $ 7,001
Deferred.................................................... (3,975) (4,638)
------- -------
Provision for income taxes.................................. $ 2,729 $ 2,363
======= =======
Deferred tax liabilities at December 31 consist of:
2000 1999
--------- ----------
(DOLLARS IN THOUSANDS)
Intangible assets........................................... $9,937 $13,913
------ -------
Gross deferred tax liabilities.............................. 9,937 13,913
------ -------
Valuation allowance......................................... -- --
------ -------
$9,937 $13,913
====== =======
A reconciliation of the statutory income tax rate to the effective rate
follows:
2000 1999
---- ----
Statutory income tax rate................................... 35% 35%
-- --
Effective tax rate.......................................... 35% 35%
== ==
145
BL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
The Company has selectively used foreign currency forward contracts to
offset the effects of exchange rate changes cash flow. The primary exposures
have been denominated in the euro, Canadian dollar and the British pound
sterling. The term of the currency derivatives is rarely more than three months.
At December 31, 1999, the Company had outstanding forward-exchange contracts to
purchase foreign currencies aggregating $9.5 million and to sell foreign
currencies aggregating $13.3 million. These notional amount do not represent
amounts exchanged by the parties and, thus, are not a measure of the exposure of
the Company through its use of derivatives. The amounts exchanged are calculated
on the basis of the notional amounts and the other terms of the derivatives,
which relate to exchange rates.
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1999:
1999
-----------------
CARRYING *FAIR
AMOUNT* VALUE
-------- -----
Foreign exchange contracts.................................. $113 $113
---------------
*The carrying amount represents the net unrealized gain associated with the
contracts at the end of the period.
Fair values of derivative contracts are indicative of cash that would have
been received had settlement occurred on December 31, 1999, using quoted
exchange rates.
7. COMMITMENTS AND CONTINGENCIES
The Company has an operating lease for office space which expires September
30, 2001. Rental expense was $2 thousand in 2000 and $1 thousand in 1999. The
net minimum payments required to be paid during 2001 is approximately $2
thousand.
8. RELATED PARTY TRANSACTIONS
BL Tech has entered into certain agreements with affiliated entities. These
agreements were developed in the context of parent/subsidiary relationship and
therefore may not necessarily reflect the result of arms-length negotiations
between independent parties.
Corporate and other allocations: As discussed in Note 1, the financial
statements of BL Tech reflect certain allocated support costs incurred by other
entities in Hercules group. These costs include executive, legal, accounting,
tax, auditing, cash management, purchasing, human resources, safety, health and
environmental, information management, research & development overhead, investor
relations and other corporate services. Allocations and charges included in BL
Tech's financial statements were based on either a direct cost pass-through for
items directly identified as related to BL Tech's activities; a percentage
allocation for such services provided based on factors such as revenues, net
assets, or a relative weighting of geographic activity. These allocations are
reflected in the corporate and other cost allocations line in our statement of
income. Such allocations and corporate charges totaled $2,188 thousand and
$2,941 thousand in 2000 and 1999, respectively.
Royalties: BL Tech has an exclusive right to license Hercules technologies
to foreign based affiliates of the Hercules Group and enters into a licensing
agreements in respect of the use of manufacturing formulations and
specifications with affiliated companies which are developed and owned by
Hercules. BL Tech received
146
BL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
royalties in respect of this agreement of $20,972 thousand and $22,785 thousand
in 2000 and 1999, respectively.
9. NET HERCULES GROUP INVESTMENT
Changes in net parent investment were as follows:
(DOLLARS IN THOUSANDS)
Balance, January 1, 1999.................................... $104,454
Net income................................................ 4,391
Intercompany transactions, net............................ (16,908)
--------
Balance, December 31, 1999.................................. 91,937
Net income................................................ 5,067
Intercompany transactions, net............................ (12,272)
--------
Balance, December 31, 2000.................................. $ 84,732
========
147
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive (loss) income
and of cash flows present fairly, in all material respects, the financial
position of FiberVisions A/S, a subsidiary of Hercules Incorporated, and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the two years ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America that require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers
Skive, Denmark
October 22, 2001
148
FIBERVISIONS A/S
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
YEAR ENDED DECEMBER 31,
------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Sales to third parties...................................... $ 94,405 $112,804
Sales to affiliates......................................... 13,414 --
Sales to Hercules Group..................................... 36,471 30,919
-------- --------
144,290 143,723
Cost of sales............................................... 128,103 120,999
Selling, general, and administrative expenses............... 4,586 6,321
Research and development.................................... 1,017 1,004
Impairment of long lived assets (Note 13)................... 28,169 --
Other operating expenses, net (Note 14)..................... 2,745 2,350
-------- --------
(Loss) profit from operations............................... (20,330) 13,049
Equity in income of affiliated companies.................... 2,617 12,716
Interest expense, net (Note 12)............................. 2,234 4,755
-------- --------
(Loss) income before income taxes........................... (19,947) 21,010
Provision for income taxes (Note 15)........................ 3,430 8,055
-------- --------
Net (loss) income........................................... (23,377) 12,955
Translation adjustments, net of tax of $557 and $384........ 1,299 897
-------- --------
Comprehensive (loss) income................................. $(22,078) $ 13,852
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
149
FIBERVISIONS A/S
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 3,629 $ 5,129
Accounts receivable, net.................................. 18,939 17,538
Receivables from affiliates (Note 5)...................... 2,815 --
Inventories (Note 4)...................................... 6,143 7,952
-------- --------
Total current assets...................................... 31,526 30,619
Property, plant, and equipment, net (Notes 9 and 13)........ 95,030 123,030
Investments (Note 6)........................................ 18,140 15,677
Goodwill and other intangible assets, net (Note 10)......... 98,058 103,467
Deferred charges and other assets........................... 198 268
-------- --------
Total assets.............................................. $242,952 $273,061
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable.......................................... $ 12,927 $ 13,484
Current maturities of long-term debt (Note 7)............. 11,588 10,288
Accrued expenses (Note 9)................................. 6,585 8,438
-------- --------
Total current liabilities................................. 31,100 32,210
Long-term debt -- third parties (Note 7).................... 53,919 70,141
Deferred income taxes (Note 15)............................. 18,737 17,493
-------- --------
Total liabilities......................................... 103,756 119,844
Commitments and contingencies (Note 17)..................... -- --
Net Hercules Group investment (Note 16).....................
Accumulated other comprehensive income.................... 2,351 1,052
Intercompany transactions................................. 136,845 152,165
-------- --------
Net Hercules Group Investment............................. 139,196 153,217
-------- --------
Total liabilities and net Hercules Group Investment....... $242,952 $273,061
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
150
FIBERVISIONS A/S
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $(23,377) $ 12,955
Adjustments to reconcile net (loss) income to net cash
provided from operations:
Depreciation.............................................. 10,054 11,863
Provision for impairment of long-lived assets............. 28,169 --
Amortization of goodwill.................................. 2,696 2,790
Bad debt expense.......................................... 216 --
Nonoperating loss on disposals............................ -- 74
Affiliates' earnings in excess of dividends received...... 94 (12,716)
Corporate and other cost allocations...................... 426 1,747
Deferred income taxes..................................... 1,642 5,182
Accruals and deferrals of cash receipts and payments:
Accounts receivable.................................... (1,611) (1,604)
Receivable from affiliates, net........................ (5,030) --
Transfers from/(to) Hercules Group, net................ 1,481 7,556
Inventories............................................ 1,416 (1,046)
Accounts payable and accrued expenses.................. (2,263) 421
Noncurrent assets and liabilities...................... 294 11
-------- --------
Net cash provided by operating activities............ 14,207 27,233
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (11,350) (9,970)
Acquisition of subsidiaries, net of cash acquired........... (355) --
Other, net.................................................. 47 (171)
-------- --------
Net cash used in investing activities................ (11,658) (10,141)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt repayments, third parties.................... (9,726) (11,092)
Transfers from/(to) Hercules Group, net..................... 6,150 (6,134)
Change in short-term debt................................... (9) --
-------- --------
Net cash used in financing activities................ (3,585) (17,226)
-------- --------
Effect of exchange rate changes on cash..................... (464) (140)
-------- --------
Net decrease in cash and cash equivalents................... (1,500) (274)
Cash and cash equivalents at beginning of year.............. 5,129 5,403
-------- --------
Cash and cash equivalents at end of year.................... $ 3,629 $ 5,129
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized)...................... $ 4,727 $ 5,662
Income taxes, net......................................... 1,424 380
Noncash financing activities
Corporate and other cost allocations...................... 426 1,747
The accompanying notes are an integral part of the consolidated financial
statements.
151
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
FiberVisions A/S, based in Varde, Denmark, ("FiberVisions A/S" or the
"Company") serves worldwide markets for polypropylene fiber used to make
disposable hygiene products. The Company is a wholly owned subsidiary of
FiberVisions, L.L.C. ("FiberVisions"). Hercules Inc. acquired the 49% share of
FiberVisions from their joint venture partner in July 1998, making FiberVisions
a wholly owned subsidiary of Hercules, Inc.
Historically, separate company stand-alone financial statements were not
prepared for the Company. In November 2000, Hercules amended its senior credit
facility and ESOP credit facility (the "Facilities"). The Facilities, as
amended, are secured by liens on Hercules' property and assets (and those of
Hercules' Canadian Subsidiaries), a pledge of the stock of substantially all of
Hercules' domestic subsidiaries (including FiberVisions A/S) and 65% of the
stock of foreign subsidiaries directly owned by Hercules, and a pledge of
Hercules' domestic intercompany indebtedness. These financial statements present
the financial information on the Company, a collateral party to the Hercules
debt, based on the Hercules' understanding of Securities and Exchange
Commission's interpretation and application of Rule 3-16 under the Securities
and Exchange Commission's Regulation S-X. These statements were derived from
historical accounting records.
The financial statements of the Company reflect certain allocated support
costs incurred by other entities in the Hercules group. These costs include
executive, legal, accounting, tax, auditing, cash management, purchasing, human
resources, safety, health and environmental, information management, investor
relations and other corporate services. Allocations and charges included in the
Company's financial statements were based on either a direct cost pass-through
for items directly identified as related to the Company's activities; a
percentage allocation for such services provided based on factors such as sales,
net assets, or cost of sales; or a relative weighting of geographic activity.
Management believes that the allocation methods are reasonable.
During 1998, Hercules acquired the Company to make this a wholly owned
subsidiary. These financial statements include the push-down of fair value
adjustments to assets and liabilities, including goodwill, other intangible
assets and property, plant, and equipment and their related amortization and
depreciation adjustments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries where control exits (see below). Investments
in affiliated companies with a greater than 20% and 50% or less ownership
interest are accounted for using the equity method of accounting and,
accordingly, consolidated income includes the Company share of their income. All
intercompany transactions and profits have been eliminated.
SUBSIDIARY DOMICILE FUNCTIONAL CURRENCY
---------- -------- -------------------
FiberVisions Products, Inc..................... United States US Dollar
FiberVisions GmBH.............................. Germany German Mark
FiberVisions (China) A/S....................... Denmark Danish Kroner
FiberVisions A.G. ............................. Switzerland Swiss Franc
FiberVisions (China) Textiles Products Ltd. ... China Chinese Renmimbi
FiberVisions (Suzhou) Nonwovens Products China
Ltd. ........................................ Chinese Renmimbi
FiberVisions, LP............................... United States US Dollar
Athens Holding, Inc. .......................... United States US Dollar
FV Holdings, Inc. ............................. United States US Dollar
ES FiberVisions Holdings ApS................... Denmark Danish Kroner
ES FiberVisions, Inc. ......................... United States US Dollar
152
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUBSIDIARY DOMICILE FUNCTIONAL CURRENCY
---------- -------- -------------------
ES FiberVisions LP............................. United States US Dollar
ES FiberVisions ApS............................ Denmark Danish Kroner
ES FiberVisions Hong Kong Ltd. ................ Hong Kong Hong Kong Dollar
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with the terms of the agreement, title and risk of loss
have been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Company's experience. The corresponding shipping and handling costs are
included in cost of sales.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less. Cash in excess of operating requirements is
transferred to Hercules or invested in interest bearing bank accounts.
Inventories
Inventories are stated at the lower of cost or market using the average
cost method.
Property and Depreciation
Property, plant, and equipment are stated at cost. The company uses the
straight-line method of depreciation. The company believes straight-line
depreciation provides a better matching of costs and revenues over the lives of
the assets. The estimated useful lives of depreciable assets are as follows:
buildings -- 30 years; plant, machinery and equipment -- 15 years; other
machinery and equipment -- 3 to 15 years.
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is charged to income.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are amortized on a straight-line basis
over the estimated future periods to be benefited, generally 40 years for
goodwill and 10 years for other intangible assets. Goodwill arises in connection
with acquisitions. The purchase price is allocated to the fair value of the
assets acquired and liabilities assumed with the excess recorded as goodwill.
Impairment of Long Lived Assets
The company reviews its long-lived assets, including goodwill and other
intangibles, for impairment on an exception basis whenever events or changes in
circumstances indicate carrying amounts of the assets may not be recoverable
through undiscounted future cash flows. If an impairment loss has occurred based
on expected future cash flows (undiscounted), the loss is recognized in the
income statement. The amount of the
153
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
impairment loss is the excess of the carrying amount of the impaired asset over
the fair value of the asset. The fair value represents expected future cash
flows from the use of the assets, discounted at the rate used to evaluate
potential investments. During 2000 the company had long-lived asset impairments
of $28,169 thousand (see note 13).
Foreign Currency Translation and Transactions
The accompanying consolidated financial statements are reported in U.S.
dollars. The Danish kroner is the functional currency for the Company and its
domestic subsidiaries and associated companies. However, the U.S. dollar,
Chinese renmimbi, German mark and the Swiss franc are the functional currencies
for its foreign subsidiaries located in the United States, China, Germany and
Switzerland, respectively. The translation of the functional currencies into
U.S. dollars (reporting currency) is performed for assets and liabilities using
the current exchange rates in effect at the balance sheet date, and for
revenues, costs and expenses using average exchange rates prevailing during the
reporting periods.
Adjustments resulting from the translation of functional currency financial
statements to reporting currency are accumulated and reported as other
comprehensive income.
Transactions in foreign currency are recorded at the exchange rate
prevailing on the date of transaction. Monetary assets and liabilities
denominated in foreign currencies are expressed in the functional currency at
the exchange rates in effect at the balance sheet date. Revenues, costs and
expenses are recorded using average exchange rates prevailing during the
reporting periods. Gains or losses resulting from foreign currency transactions
are included in the statements of income.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to insurance coverage for customers of the Company. As of December 31, 2000 and
1999, the Company's accounts include cash, bank borrowings, trade receivables
and accounts payable which are denominated in currencies other than the U.S.
Dollar. Wherever possible the Group attempts to limit the exchange rate exposure
by matching the receivables, borrowings and payables in the same currency.
Operating results, however, are affected by significant fluctuations in exchange
rates. Financial instruments, which potentially subject the group to a
concentration of credit risk principally, consist of trade receivables.
Approximately 87% and 70% of trade receivables were concentrated with 10
customers as of December 31, 2000 and 1999, respectively. There was one customer
that accounted for 21% and 10% of total trade receivables as of December 31,
2000 and 1999.
The Company has deposited its cash and cash equivalents with reputable
financial institutions and believes the risk of loss due to non-performance by
the counter party to be remote.
Stock-based Compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25)). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-based Compensation," requires companies electing to continue to use the
intrinsic-value method to make pro forma disclosures of net income as if the
fair-value-based method of accounting had been applied.
154
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Hercules Group Investment
The net Hercules Group investment account reflects the balance of the
Company's historical earnings, foreign currency translation, intercompany
amounts, income tax, and other transactions between the Company and the Hercules
Group.
Research and Development
Research and development expenditures are expensed as incurred.
Income Taxes
The provisions for income taxes has been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax basis of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
The company provides taxes on undistributed earnings of subsidiaries and
affiliates included in consolidated retained earnings to the extent such
earnings are planned to be remitted and not re-invested permanently. The
undistributed earnings of subsidiaries and affiliates on which no provision for
foreign withholding or US income taxes has been made amounted to approximately
$62,410 thousand and $61,343 thousand at December 31 2000 and 1999,
respectively. US and foreign income taxes that would be payable if such earnings
were distributed may be lower than the amount computed at the US statutory rate
because of the availability of tax credits.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. This statement, as amended, is effective for
all fiscal quarters of fiscal years beginning after December 31, 2000. The
Company adopted SFAS 133 effective January 1, 2001. The adoption of SFAS No. 133
did not have a material effect on its earnings or statement of financial
position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, is to be effective
October 1, 2000. Adoption of SAB 101 did not have a material effect on our
profit from operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). For the Company, these statements will generally become
effective January 1, 2002, although business combinations initiated after June
30, 2001 are subject to the non-amortization and purchase accounting provisions.
155
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. The assessment of
goodwill for impairment is a complex issue in which the Company must determine,
among other things, the fair value of each defined reporting unit. It is,
therefore, not possible at this time to predict the impact, if any, that the
impairment assessment provisions of SFAS 142 will have on the Company's
financial statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assts. SFAS 143 will become effective for the Company
from January 1, 2003 and requires recognition of a liability for an asset
retirement obligation in the period in which it is incurred. Management is in
the process of evaluating the impact this standard will have on the Company's
financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Trade....................................................... $15,220 $14,574
Rebates from suppliers...................................... 2,820 2,626
Other....................................................... 1,260 483
------- -------
19,300 17,683
Less allowance for doubtful accounts........................ (361) (145)
------- -------
Total............................................. $18,939 $17,538
======= =======
4. INVENTORIES
The components of inventories are:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Finished products........................................... $2,647 $4,065
Materials, supplies, and work in process.................... 3,496 3,887
------ ------
Total............................................. $6,143 $7,952
====== ======
5. RECEIVABLES FROM AFFILIATES
Trade receivables from affiliates, consists of $5,030 thousands due from ES
FiberVisons, net of $2,215 thousand of accumulated losses of unconsolidated
companies in excess of investments (see Note 6).
156
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS IN AFFILIATED COMPANIES
The equity investments in affiliated companies consist of:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Investment in FiberVisions, LP.............................. $18,140 $15,677
======= =======
On January 1, 2000 the Company and Chisso Polypro Fiber Co., Ltd formed a
50/50 joint venture, ES FiberVisions, combining their bicomponent fibers
businesses outside of Japan. While the Company has a 50% equity interest, it's
share of joint venture operations is 67%. The venture extends the Company's
strategy to continue globalization of bicomponent fiber by establishing sales
support facilities in key regions. Both parent companies supply fiber to the
joint venture under manufacturing agreements. The Company manufactures
bicomponent fibers for the joint venture at the Varde, Denmark and Athens,
Georgia locations. The annual sales of the venture were approximately $48
million in fiscal 2000,and the Company's share of net income for 2000 was $153
thousand.
In 1998, the Company's majority owned subsidary FiberVisions Products, Inc.
entered into a 50% joint venture with FiberVisions Inc., a wholly owned
subsidary of FiberVisions. FiberVisions Products Inc. and FiberVisions Inc.
manufacture products for the joint venture, FiberVisions LP, under a
manufacturing agreement. FiberVisions Products' share of the net income was
$2,464 thousand and $12,716 thousand in 2000 and 1999, respectively.
Summarized financial information for the equity affiliates at December 31,
and the years then ended is as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Current assets.............................................. $ 38,614 $ 27,878
Non Current assets.......................................... 9,925 3,475
Current liabilities......................................... 10,803 --
Net sales................................................... $197,417 $150,450
Gross profit................................................ 13,418 27,730
Net earnings................................................ 5,150 25,432
The majority of the investments are partnerships which require the
associated tax benefit or expense to be recorded by the parent.
157
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
Long-term at December 31, 2000 and 1999 is summarized as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSAND)
Unibank A/S term note due in varying amounts through 2005
with an average interest rate of 5.82%.................... $ 19,428 $ 21,221
Finansierings Instituttet for Industri og Handvoerk A/S
(FIH) term notes at various rates from 7.90% to 9.60% and
due in varying amounts through 2006....................... 15,447 22,043
Danmark Finansiering Institut A/S (DFI) term notes at
various rates from 6.48% to 9.72% and due in varying
amounts through 2006...................................... 23,482 28,943
Mortgage at a fixed rate of 7.16% and due in varying amounts
through 2014.............................................. 4,490 5,121
Industrialization Fund for Developing Countries (IFU) at a
fixed rate of 5.23% and due in 2001....................... 2,410 2,851
Lease purchase obligation................................... 250 250
-------- --------
65,507 80,429
Less current maturities..................................... (11,588) (10,288)
-------- --------
Total............................................. $ 53,919 $ 70,141
======== ========
FIH term notes are collateralized by land, buildings, and plant and
machinery of approximately $28,932 thousand. The DFI loan is collateralized by a
letter of indemnification regarding land, buildings and plant and machinery of
approximately $18,706 thousand. The mortgage is collateralized by land and
buildings of approximately $4,490 thousand.
In December 1996 the Company entered into a long-term lease purchase
obligation with The Athens-Clark County Industrial Development Authority to
purchase land. The interest rate is fixed at 1% per annum and the due date of
the obligation is December 2020. The balance of the obligation was $250 thousand
at December 31, 2000 and 1999.
Scheduled annual maturities of long-term debt outstanding at December 31,
2000 in the successive five-year period are summarized as follows:
(DOLLARS IN
THOUSAND)
2001........................................................ $11,588
2002........................................................ 7,773
2003........................................................ 12,737
2004........................................................ 12,705
2005........................................................ 13,169
Thereafter.................................................. 7,535
-------
Total............................................. $65,507
=======
158
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. ADDITIONAL BALANCE SHEET DETAIL
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Property, plant, and equipment
Land...................................................... $ 628 $ 646
Buildings and equipment................................... 191,940 188,046
Construction in progress.................................. 4,979 6,447
--------- --------
Total............................................. 197,547 195,139
Accumulated depreciation and amortization................. (102,517) (72,109)
--------- --------
Net property, plant, and equipment........................ $ 95,030 $123,030
========= ========
Accrued expenses
Payroll and employee benefits............................. $ 2,168 $ 1,957
Accrued interest payable.................................. 365 312
Miscellaneous............................................. 4,052 6,169
--------- --------
$ 6,585 $ 8,438
========= ========
10. GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2000 and 1999, the goodwill and other intangible assets
were:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Goodwill from Hercules acquisition.......................... $104,411 $104,411
Other Goodwill.............................................. -- 2,849
Other intangibles........................................... 1,598 1,658
-------- --------
Total....................................................... 106,009 108,918
Less accumulated amortization............................... (7,951) (5,451)
-------- --------
Net goodwill and other intangible assets.................. $ 98,058 $103,467
======== ========
In July 1998, Hercules completed the acquisition of 49% share of
FiberVisions L.L.C. owned by its joint venture partner, Jacob Holm & Son A/S,
for approximately $230 million in cash, plus assumed debt of $188 million. The
allocation of the purchase price resulted in $188,051 thousand of goodwill for
the FiberVisions group, which is being amortized over its estimated useful life
of 40 years. Goodwill of $43,290 thousand and $61,121 thousand was assigned to
FiberVisions Products, Inc. and FiberVisions A/S, respectively.
As described in note 13, the other Goodwill of $2,849 thousand was included
in the impairment of the Suzhou, China facility.
11. OTHER FINANCING ARRANGEMENTS
Hercules manages the Company's cash and indebtedness. The majority of the
cash provided by or used by the Company is provided through this consolidated
cash and debt management system. As a result, the amount of domestic cash or
debt historically related to the Company is not determinable. For the purposes
of the Company's historical financial statements all of its positive or negative
cash flows have been treated as cash transferred to or from its parent.
The Company has an intercompany receivable with the Hercules Group in the
amount of $16,258 thousand and $17,378 thousand which is included in the net
Hercules Group investment balance at
159
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2000 and 1999, respectively. During 2000 and 1999 the weighted
average interest rate on the intercompany borrowings was 7.4% and 6.4%,
respectively.
12. INTEREST EXPENSE, NET
Interest and debt costs are summarized as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Interest expense............................................ $2,383 $5,667
Amount capitalized.......................................... (132) (11)
------ ------
Amount expensed............................................. 2,251 5,656
Interest income............................................. (17) (901)
------ ------
Interest expense, net....................................... $2,234 $4,755
====== ======
13. IMPAIRMENT OF LONG LIVED ASSETS
In the third quarter of 2000, the Company recorded assets impairments of
$28,169 thousand. Management determined that revised growth projections for the
China hygiene non-woven market would indefinitely delay the feasibility of
expanding the production capability of the facility. Estimated future cash flows
related to this facility without the planned expansion indicated that an
impairment had occurred. The impairment charge was required to write off
approximately 90% of the net book value of the existing Suzhou, China facility
as well as the investment in the new fiber line.
14. OTHER OPERATING EXPENSES, NET
Other operating expenses, net, consists of the following:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Amortization of goodwill.................................... $2,644 $2,660
Foreign currency transactions expense (income).............. 106 (327)
Miscellaneous (income) expense, net......................... (5) 17
------ ------
$2,745 $2,350
====== ======
15. INCOME TAXES
The domestic and foreign components of income before taxes and effect of
change in accounting principle are presented below:
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Domestic.................................................... $ 98 $ 9,845
Foreign..................................................... (20,045) 11,165
-------- -------
$(19,947) $21,010
======== =======
160
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the components of the tax provision follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Currently payable
Domestic.................................................. $ (438) $ (169)
Foreign................................................... 2,225 3,042
Deferred
Domestic.................................................. 1,009 4,218
Foreign................................................... 634 964
------ ------
Provision for income taxes.................................. $3,430 $8,055
====== ======
Deferred tax liabilities (assets) at December 31 consist of:
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Depreciation................................................ $ 20,091 $19,372
Accrued expenses............................................ 1,093 1,370
-------- -------
Gross deferred tax liabilities.............................. 21,184 20,742
-------- -------
Amortization................................................ $ (1,345) $ (451)
Inventory................................................... (108) (67)
Impairment of assets........................................ (3,704) --
Loss carryforwards.......................................... (5,273) (3,179)
Other comprehensive income.................................. 1,005 448
Other....................................................... (691) --
-------- -------
Gross deferred tax assets................................... (10,116) (3,249)
-------- -------
Valuation allowance......................................... 7,669 --
-------- -------
Total deferred income tax................................... $ 18,737 $17,493
======== =======
A reconciliation of the statutory income tax rate to the effective rate
follows:
2000 1999
------ -----
Statutory income tax rate................................... 35.00% 35.00%
Foreign Rate Differential................................... (24.87) 1.80
Valuation Allowance......................................... (28.78) --
Reserves.................................................... (1.91) (1.45)
Goodwill.................................................... (3.15) 2.59
Other....................................................... 6.52 0.40
------ -----
Effective tax rate.......................................... (17.19)% 38.34%
====== =====
161
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. NET HERCULES GROUP INVESTMENT
Changes in net Hercules Group Investment were as follows:
(DOLLARS IN
THOUSANDS)
Balance at January 1, 1999.................................. $136,196
Comprehensive income for the year ended December 31, 1999... 13,852
Intercompany transactions, net.............................. 3,169
--------
Balance at December 31, 1999................................ 153,217
Comprehensive income for the year ended December 31, 2000... (22,078)
Intercompany transactions, net.............................. 8,057
--------
Balance at December 31, 2000................................ $139,196
========
The Company includes accumulated other comprehensive income in net parent
investment. At December 31, 2000 and 1999 accumulated other comprehensive income
included $2,351 thousand and $1,052 thousand, respectively, of foreign currency
translation adjustments.
17. COMMITMENTS AND CONTINGENCIES
Leases
FiberVisions A/S has operating leases (including office space,
transportation, and data processing equipment) expiring at various dates. Rental
expense was $34 thousand in 2000 and $50 thousand in 1999.
The net minimum future payments at December 31, 2000 are as follows:
(DOLLARS IN
THOUSANDS)
2001........................................................ $34
2002........................................................ 29
2003........................................................ 15
2004........................................................ 6
2005........................................................ 3
---
Total....................................................... $87
===
In the spring of 2001 the Danish tax authorities indicated that they intend
to increase FiberVisions A/S' taxable income for the tax year 1997. The tax
value of the declared increase amounts to approximately $1,400 thousand.
Management does not agree with the assessment of the tax authorities, and the
case will be appealed. Consequently, the final outcome of the case uncertain.
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business. In the opinion of the Company's
management, none of such litigation as of December 31, 2000 is likely to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
18. PENSION AND POSTRETIREMENT BENEFITS
FiberVisions Products, Inc. participates in a defined benefit pension plan
sponsored by Hercules, which covers substantially all employees of Hercules in
the U.S. Benefits under this plan are based on the average final pay and years
of service. Hercules also provides postretirement health care and life insurance
benefits to eligible retired employees and their dependents.
162
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information on the actuarial present value of the benefit obligation and
fair value of the plan assets is not presented as Hercules manages its U.S.
employee benefit plans on a consolidated basis and such information is not
maintained separately for the U.S. employees of the Company. The Company's
statement of operation includes an allocation of the costs of the U.S. benefits
plans. The pension costs were allocated based on percentage of pensionable
wages, for each of the years presented, postretirement benefit costs were
allocated using factors derived from the relative net assets and revenues. Net
pension expense (income) of Hercules allocated to FiberVisions Products, Inc was
($129) thousand for the year ended December 31, 2000. There was no allocation in
1999.
FiberVisions A/S maintains a contributory pension plan. The Company's
matching contribution was $964 thousand and $977 thousand for 2000 and 1999,
respectively. FiberVisions Products, Inc. maintains a 401(k) savings plan for
its full-time employees in North America. Each participant in the plan may elect
to contribute 1 % to 15 % of his or her annual salary to the plan subject to
statutory limitations. The company matches employee contributions to the plan at
the rate of 50% of the first 6% of salary contributed. The Company's matching
contribution was $69 thousand and $79 thousand for 2000 and 1999, respectively.
FiberVisions (China) Textiles Products, Ltd. provides a housing allowance for
their employees. The Company's contribution was $160 thousand and $137 thousand
in 2000 and 1999, respectively.
19. LONG TERM INCENTIVE COMPENSATION PLAN
FiberVisions A/S Denmark participates in long-term incentive compensation
plans sponsored by Hercules. These plans provide for the grant of stock options
and the award of common stock and other market-based units to certain key
employees and non-employee directors.
In 1995, Hercules changed the structure of the long-term incentive
compensation plans to place a greater emphasis on shareholder value creation
through grants of regular stock options, performance-accelerated stock options,
and Cash Value Awards (performance-based awards denominated in cash and payable
in shares of common or restricted stock, subject to the same restrictions as
restricted stock). Restricted stock and other market-based units are awarded
with respect to certain programs. The number of awarded shares outstanding was
491,488 at December 31, 2000, and 926,689 at December 31, 1999.
At December 31, 2000, under Hercules' incentive compensation plans,
1,847,855 shares of common stock were available for grant as stock awards or
stock option awards. Stock awards are limited to approximately 15% of the total
authorizations. Regular stock options are granted at the market price on the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock options are also granted at
the market price on the date of grant and are normally exercisable at nine and
one-half years. Exercisability may be accelerated based upon the achievement of
predetermined performance goals. Both regular and performance-accelerated stock
options expire 10 years after the date of grant.
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to Hercules in the event of employment termination, except
in the case of death, disability, retirement, or other specified events.
The Company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. There were no charges to income for the cost of stock awards over the
restriction or performance period for 2000 and 1999, respectively.
163
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 2000 and 1999:
REGULAR
-----------------------------
NUMBER OF WEIGHTED-AVERAGE
SHARES PRICE
--------- ----------------
December 31, 1999................................. -- --
Granted........................................... 6,875 $17.25
Exercised......................................... -- --
Forfeited......................................... -- --
----- ------
December 31, 2000................................. 6,875 $17.25
There were no performance-accelerated stock options granted or outstanding
during 2000 and 1999. There were no regular stock options granted or outstanding
during 1999. The weighted-average fair value of regular stock options granted
during 2000 was $8.85.
There were no regular stock options exercisable at December 31, 2000 and
1999.
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
EXERCISE OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
PRICE RANGE AT 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/00 EXERCISE PRICE
----------------------------- ----------- ---------------- ---------------- ----------- ----------------
Regular Stock Options
$12 - $20 6,875 9.13 $17.25 -- --
----- ------ -------
6,875 --
===== ====== =======
FiberVisions A/S Denmark employees may also participate in the Hercules
Employee Stock Purchase Plan ("ESPP"). The ESPP is a qualified non-compensatory
plan, which allows eligible employees to acquire shares of common stock through
systematic payroll deductions. The plan consists of three-month subscription
periods, beginning July 1 of each year. The purchase price is 85% of the fair
market value of the common stock on either the first or last day of that
subscription period, whichever is lower. Purchases may range from 2% to 15% of
an employee's base salary each pay period, subject to certain limitations.
Currently, 202,139 shares of Hercules common stock are registered for offer and
sale under the plan. Shares issued at December 31, 2000 and 1999, were 1,597,861
and 949,464, respectively. Hercules applies APB Opinion 25 and related
interpretations in accounting for its Employee Stock Purchase Plan. Accordingly,
no compensation cost has been recognized for the Employee Stock Purchase Plan.
Had compensation cost for Hercules' Stock-Based Incentive Plans and ESPP
been determined on the basis of fair value according to SFAS No. 123, the fair
value of each option granted or share purchased would be estimated on the grant
date using the Black-Scholes option pricing model.
The following weighted-average assumptions would be used in estimating fair
value for 2000 and 1999:
REGULAR PERFORMANCE EMPLOYEE STOCK
ASSUMPTION PLAN ACCELERATED PLAN PURCHASE PLAN
---------- -------- ---------------- --------------
Dividend yield............................... 2% 3.4% 0.0%
Risk-free interest rate...................... 5.88% 5.38% 5.41%
Expected life................................ 7.1 yrs 5 yrs. 3 mos.
Expected volatility.......................... 29.20% 27.31% 44.86%
164
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's net (loss) income for 2000 and 1999 would approximate the pro
forma amounts below:
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Net income
As reported............................................... $(23,377) $12,955
Pro forma................................................. $(23,402) $12,955
20. RELATED PARTY TRANSACTIONS
The Company has entered into certain agreements with affiliated entities.
These agreements were developed in the context of parent/subsidiary relationship
and therefore may not necessarily reflect the result of arm-length negotiations
between independent parties. The terms of the agreements provide for the sale of
product to the affiliated entities based on a cost-plus formula.
Corporate and other allocations
As discussed in Note 1, the financial statements of the Company reflect
certain allocated support costs incurred by other entities in Hercules group.
These costs include executive, legal, accounting, tax, auditing, cash
management, purchasing, safety, information management, health and
environmental, investor relations and other corporate services. Allocations and
charges included in the Company's financial statements were based on either a
direct cost pass-through for items directly identified as related to the
Company's activities, or a percentage allocation for such services provided
based on factors such as revenues, net assets, cost of sales and relative
weighting of geographic activity. These allocations are reflected in the
selling, general and administrative line item in our statements of income. In
addition, the Company allocates certain of its own costs to other companies in
the FiberVision group of companies. Such allocations and corporate charges
totaled $426 thousand and $1,747 thousand in 2000 and 1999, respectively.
Sales to affiliates
The Company sells fiber in the normal course of business to affiliated
companies. The Company's revenues from sales to affiliated companies were
$49,885 thousand and $30,919 thousand in 2000 and 1999, respectively.
Purchases from Hercules Group
The Company also purchases finished product for resale in the normal course
of business from the Hercules Group. The Company's purchases from the Hercules
Group were $3,874 thousand and $9,994 thousand in 2000 and 1999, respectively.
In addition, supplies are purchased in the normal course of business from the
Hercules Group. The Company's purchases from Hercules Group were $7 thousand and
$8 thousand in 2000 and 1999, respectively.
165
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and of cash flows present fairly,
in all material respects, the financial position of FiberVisions, Inc., a
subsidiary of Hercules Incorporated, and its subsidiaries at December 31, 2000
and 1999, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America that require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
August 31, 2001
166
FIBERVISIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Sales to Hercules Group..................................... $105,724 $92,352
Cost of sales............................................... 99,026 82,854
Selling, general, and administrative expenses............... 3,570 4,643
Research and development.................................... 3,458 3,396
Impairment of long lived assets (Note 9).................... 25,372 --
Other operating expenses, net (Note 10)..................... 4,451 4,739
-------- -------
Loss from operations........................................ (30,153) (3,280)
Equity in income of affiliated companies (Note 4)........... 2,463 12,716
Interest expense, net (Note 8).............................. 5,209 3,796
-------- -------
(Loss) income before income taxes........................... (32,899) 5,640
(Benefit) provision for income taxes (Note 11).............. (9,808) 2,740
-------- -------
Net (loss) income........................................... $(23,091) $ 2,900
======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
167
FIBERVISIONS INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 1,148 $ 26
Miscellaneous receivables................................. 174 1,579
Inventories (Note 3)...................................... 11,850 14,466
-------- --------
Total current assets...................................... 13,172 16,071
-------- --------
Property, plant, and equipment, net (Notes 5 and 9)......... 26,936 56,133
Investment in affiliates (Note 4)........................... 18,140 15,677
Goodwill and other intangible assets, net (Note 6).......... 101,638 106,336
Deferred charges and other assets........................... 224 1,079
-------- --------
Total assets.............................................. $160,110 $195,296
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable.......................................... $ 8,478 $ 10,415
Payables to affiliates (Note 7)........................... 104 --
Accrued expenses (Note 5)................................. 6,202 5,086
-------- --------
Total current liabilities................................. 14,784 15,501
Deferred income taxes (Note 11)............................. 1,368 12,549
-------- --------
Total liabilities......................................... 16,152 28,050
Commitments and contingencies (Note 13)..................... -- --
Net Hercules Group investment (Note 17)..................... 143,958 167,246
-------- --------
Total liabilities and net Hercules Group investment......... $160,110 $195,296
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
168
FIBERVISIONS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED
DECEMBER 31
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $(23,091) $ 2,900
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation.............................................. 5,604 5,543
Impairment of long lived assets........................... 25,372
Amortization of goodwill.................................. 4,698 4,742
Loss on disposal of fixed assets.......................... -- 15
Affiliates' earning in excess of dividends received....... (2,463) (12,716)
Corporate and other cost allocations...................... (1,444) (2,865)
Deferred income taxes..................................... (11,181) (1,333)
Goodwill adjustment....................................... -- (131)
Accruals and deferrals of cash receipts and payments:
Miscellaneous receivable............................... 1,405 (2,658)
Inventories............................................ 2,616 (2,413)
Transfers to/from Hercules Group....................... 2,096 17,116
Accounts payable and accrued expenses.................. (821) (2,325)
Payables to affiliates................................. 104 --
Noncurrent assets and liabilities...................... 855 (574)
-------- --------
Net cash provided by operations...................... 3,750 5,301
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (1,779) (5,398)
-------- --------
Net cash used in investing activities................ (1,779) (5,398)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Transfers to/from Hercules Group............................ (849) (1,043)
-------- --------
Net cash used in financing activities................ (849) (1,043)
-------- --------
Net increase (decrease) in cash and cash equivalents........ 1,122 (1,140)
Cash and cash equivalents at beginning of year.............. 26 1,166
-------- --------
Cash and cash equivalents at end of year.................... $ 1,148 $ 26
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes, net......................................... $ 300 $ 4,836
Interest.................................................. 2,253 2,825
Noncash financing activities
Corporate and other cost allocations...................... (1,444) (2,865)
The accompanying notes are an integral part of the consolidated financial
statements.
169
FIBERVISIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
FiberVisions Inc. ("FiberVisions" or the "Company") serves worldwide
markets for polypropylene nonwoven fiber used to make disposable hygiene
products. FiberVisions also produces olefin fiber and yarn for domestic textile
and industrial markets for use in fabrics, residential upholstery, geotextiles,
carpets and asphalt. The company was formed on May 30, 1997 and is a wholly
owned subsidiary of FiberVisions, L.L.C. ("FiberVisions"); itself a wholly owned
subsidiary of Hercules Incorporated ("Hercules").
Historically, separate company stand-alone financial statements were not
prepared for the Company. In November 2000, Hercules amended its senior credit
facility and ESOP credit facility (the "Facilities"). The Facilities, as
amended, are secured by liens on Hercules' property and assets (and those of
Hercules' Canadian Subsidiaries), a pledge of the stock of substantially all of
Hercules' domestic subsidiaries (including FiberVisions Inc.) and 65% of the
stock of foreign subsidiaries directly owned by Hercules, and a pledge of
Hercules' domestic intercompany indebtedness. These financial statements present
the financial information on the Company, a collateral party to the Hercules
debt, based on the Hercules' understanding of Securities and Exchange
Commission's interpretation and application of Rule 3-16 under the Securities
and Exchange Commission's Regulation S-X. These statements were derived from
historical accounting records.
The Company participates in Hercules' centralized cash management system.
Accordingly, cash received from the Company's operations is transferred to
Hercules on a periodic basis, and Hercules funds all operational and capital
requirements.
The financial statements of the Company reflect certain allocated support
costs incurred by other entities in the Hercules group. These costs include
executive, legal, accounting, tax, auditing, cash management, purchasing, human
resources, safety, health and environmental, information management, investor
relations and other corporate services. Allocations and charges included in the
Company's financial statements were based on either a direct cost pass-through
for items directly identified as related to the Company's activities; a
percentage allocation for such services provided based on factors such as sales,
net assets, or cost of sales; or a relative weighting of geographic activity.
Management believes that the allocation methods are reasonable.
During 1998, Hercules acquired FiberVisions, making the Company a wholly
owned subsidiary. These financial statements include the push-down of fair value
adjustments to assets and liabilities, including goodwill, other intangible
assets and property, plant, and equipment and their related amortization and
depreciation adjustments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
FiberVisions and its majority-owned subsidiaries where control exits (see chart
below). Investments in affiliated companies with a greater than 20% and less
than 50% ownership interest are accounted for using the equity method of
accounting and, accordingly, consolidated income includes FiberVisons share of
their income. All intercompany transactions and profits have been eliminated.
SUBSIDIARY DOMICILE PERCENTAGE OWNERSHIP FUNCTIONAL CURRENCY
------------------------ ------------- -------------------- -------------------
FiberVisions, LP United States 50% US Dollar
Covington Holdings, Inc. United States 100% US Dollar
170
FIBERVISIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with the terms of the agreement, title and risk of loss
have been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Company's experience. The corresponding shipping and handling costs are
included in cost of sales.
Cash and Cash Equivalents
Cash equivalents include commercial paper and other securities with
original maturities of 90 days or less. Book value approximates fair value
because of the short maturity of those instruments.
Inventories
Inventories are stated at the lower of cost or market using the average
cost method.
Property and Depreciation
Property, plant, and equipment are stated at cost. The company uses the
straight-line method of depreciation to depreciate assets over their useful
lives. The estimated useful lives of depreciable assets are as follows:
buildings -- 30 years; plant, machinery and equipment -- 15 years; other
machinery and equipment -- 3 to 15 years.
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is charged to income.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are amortized on a straight-line basis
over the estimated future periods to be benefited, generally 40 years for
goodwill and 10 years for other intangible assets.
Long-lived Assets
The company reviews its long-lived assets, including goodwill and other
intangibles, for impairment on an exception basis whenever events or changes in
circumstances indicate carrying amounts of the assets may not be recoverable
through undiscounted future cash flows. If an impairment loss has occurred based
on expected future cash flows (undiscounted), the loss is recognized in the
income statement. The amount of the impairment loss is the excess of the
carrying amount of the impaired asset over the fair value of the asset. The fair
value represents expected future cash flows from the use of the assets,
discounted at the rate used to evaluate potential investments. During 2000 the
company had long-lived asset impairments of $25,372 thousand (see note 10).
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of trade receivables with FiberVisions LP.
171
FIBERVISIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-based Compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25)). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-based Compensation," requires companies electing to continue to use the
intrinsic-value method to make pro forma disclosures of net income as if the
fair-value-based method of accounting had been applied.
Net Hercules Group Investment
The net Hercules Group investment account reflects the balance of the
Company's historical earnings, intercompany amounts, post employment
liabilities, and other transactions between the Company and the Hercules Group.
Income Taxes
The provisions for income taxes has been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax basis of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
Research and Development
Research and development costs are expensed as incurred.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. This statement, as amended, is effective for
all fiscal quarters of fiscal years beginning after December 31, 2000. The
Company adopted SFAS 133 effective January 1, 2001. The adoption of SFAS No. 133
will not have a material effect on its earnings or statement of financial
position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, is to be effective
October 1, 2000. Adoption of SAB 101 did not have a material effect on our
profit from operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). For the Company, these statements will generally
172
FIBERVISIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
become effective January 1, 2002, although business combinations initiated after
June 30, 2001 are subject to the non-amortization and purchase accounting
provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. The assessment of
goodwill for impairment is a complex issue in which the Company must determine,
among other things, the fair value of each defined reporting units. It is,
therefore, not possible at this time to predict the impact, if any, that the
impairment assessment provisions of SFAS 142 will have on the Company's
financial statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assts. SFAS 143 will become effective for the Company
from January 1, 2003 and requires recognition of a liability for an asset
retirement obligation in the period in which it is incurred. Management is in
the process of evaluating the impact this standard will have on the Company's
financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.
3. INVENTORIES
The components of inventories are:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
----------------------
Finished products........................................... $ 4,813 $ 6,649
Raw materials and work-in-process........................... 7,037 7,817
------- -------
Total............................................. $11,850 $14,466
======= =======
4. INVESTMENT
In 1998, the Company entered into a 50% joint venture with FiberVisions
Products, Inc. Both parties manufacture products for the joint venture,
FiberVisions LP, under a manufacturing agreement. FiberVisions Inc.'s share of
the net income was $2,463 thousand and $12,716 thousand in 2000 and 1999,
respectively.
Summarized financial information for the equity affiliate at December 31,
and the years then ended is as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Current assets.............................................. $ 27,805 $ 27,878
Non Current assets.......................................... 8,475 3,475
Net sales................................................... $149,007 $150,450
Gross profit................................................ 5,898 27,730
Net earnings................................................ 4,927 25,432
The investment is a partnership which requires the associated tax benefit
or expense to be recorded by the parent.
173
FIBERVISIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ADDITIONAL BALANCE SHEET DETAIL
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Property, plant, and equipment
Land...................................................... $ 654 $ 684
Buildings and equipment................................... 173,599 173,446
Construction in progress.................................. 11,075 9,421
--------- ---------
Total............................................. 185,328 183,551
Accumulated depreciation and amortization................... (158,392) (127,418)
--------- ---------
Net property, plant, and equipment........................ $ 26,936 $ 56,133
========= =========
Accrued expenses
Income taxes payable...................................... $ 245 $ --
Miscellaneous............................................. 5,957 5,086
--------- ---------
$ 6,202 $ 5,086
========= =========
6. GOODWILL AND OTHER INTANGIBLES ASSETS
At December 31, 2000 and 1999, the goodwill and other intangible assets
were:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Goodwill.................................................... $ 83,640 $ 83,640
Other intangible assets..................................... 29,752 29,752
Less accumulated amortization............................... (11,754) (7,056)
-------- --------
Net goodwill and other intangible assets............... $101,638 $106,336
======== ========
In July 1998, Hercules Inc. completed the acquisition of 49% share of
FiberVisions L.L.C. owned by its joint venture partner, Jacob Holm & Son A/S,
for approximately $230 million in cash, plus assumed debt of $188 million. The
allocation of the purchase price resulted in $188,051 thousand of goodwill for
the FiberVisons group, which is being amortized over its estimated useful life
of 40 years. $83,640 thousand of the goodwill was assigned to FiberVisions Inc.
Other intangibles assets, related to the acquisition, amounted to $29,752
thousand.
7. PAYABLES TO AFFILIATES
Trade payables to affiliates, consists of $104 thousand due to ES
FiberVisions.
8. INTEREST EXPENSE, NET
Interest costs were $5,209 thousand and $3,796 thousand, respectively, in
2000 and 1999.
9. IMPAIRMENT OF LONG LIVED ASSETS
In 2000, $25,372 was recorded to write-off the remaining net book value of
the textiles plant in Covington, GA. The textiles business fundamentals have
been deteriorating for the past few years. In 2000, the cost for the major raw
material, polypropylene, had risen above historical price levels. The
combination of the above factors has resulted in an irreversible loss of
profitability for the textiles business. Estimated future cash flows related to
this facility indicated full impairment had occurred.
174
FIBERVISIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. OTHER OPERATING EXPENSES, NET
Other operating expenses, net, consists of the following:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Goodwill and intangible amortization........................ $4,698 $4,742
Miscellaneous (income) expense, net......................... (247) (3)
------ ------
$4,451 $4,739
====== ======
11. INCOME TAXES
The domestic and foreign components of income before (benefit) taxes and
effect of change in accounting principle are presented below:
2000 1999
---------- --------
(DOLLARS IN THOUSANDS)
Domestic.................................................... $(32,901) $5,650
Foreign..................................................... 2 (10)
-------- ------
$(32,899) $5,640
======== ======
A summary of the components of the tax (benefit) provision follows:
2000 1999
---------- --------
(DOLLARS IN THOUSANDS)
Current
Domestic.................................................. $ 1,373 $3,545
Foreign................................................... 1 --
Deferred
Domestic.................................................. (11,182) (805)
-------- ------
(Benefit) provision for income taxes........................ $ (9,808) $2,740
======== ======
Deferred tax liabilities (assets) at December 31 consist of:
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Depreciation................................................ $ 14,105 $15,482
-------- -------
Gross deferred tax liabilities.............................. 14,105 15,482
-------- -------
Amortization................................................ (413) (328)
Inventory................................................... (2,595) (2,269)
Impairment of Assets........................................ (8,938) 0
Bad Debts/Other Accrueds.................................... (791) (336)
-------- -------
Gross deferred tax assets................................... (12,737) (2,933)
-------- -------
Valuation allowance......................................... 0 0
-------- -------
$ 1,368 $12,549
======== =======
175
FIBERVISIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory income tax rate to the effective rate
follows:
2000 1999
----- ------
Statutory income tax rate................................... 35.00% 35.00%
State taxes................................................. 0.85 (12.77)
Provision to return true-up................................. 2.32 8.60
Goodwill.................................................... (5.00) 12.85
Reserves.................................................... (3.31) 4.20
Other....................................................... (0.04) 0.64
----- ------
29.81% 48.53%
===== ======
12. LONG TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Hercules manages the Company's cash and indebtedness. The majority of the
cash provided by or used by the Company is provided through this consolidated
cash and debt management system. As a result, the amount of domestic cash or
debt historically related to the Company is not determinable. For the purposes
of the Company's historical financial statements all of its positive or negative
cash flows have been treated as cash transferred to or from its parent.
The Company has intercompany loans with Hercules Group in the amount of
$61,532 thousand and $60,399 thousand which is included in the net Hercules
Group investment balance at December 31, 2000 and 1999, respectively. The
weighted average rate on long term intercompany borrowing was 7.4% and 6.4% in
2000 and 1999, respectively. Interest expense was $5,209 thousand and $3,606
thousand in 2000 and 1999, respectively. Repayment terms of the loan are
included as part of the Hercules cash management system as described in the
previous paragraph.
13. COMMITMENTS AND CONTINGENCIES
The Company has operating leases (including office space, storage space,
and data processing equipment) expiring at various dates. Rental expense was
$540 thousand in 2000 and $434 thousand in 1999.
The net minimum future payments at December 31, 2000 are as follows:
(DOLLARS IN
THOUSANDS)
2001........................................................ $370
2002........................................................ 255
2003........................................................ 189
----
Total.................................................. $814
====
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business. In the opinion of the Company's
management, none of such litigation as of December 31, 2000 is likely to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
14. PENSION, OTHER POSTRETIREMENT BENEFITS AND OTHER BENEFITS
The Company participates in a defined benefit pension plan sponsored by
Hercules, which covers substantially all employees of Hercules in the U.S.
Benefits under this plan are based on the average final pay and years of
service. Hercules also provides postretirement health care and life insurance
benefits to eligible retired employees and their dependents.
176
FIBERVISIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information on the actuarial present value of the benefit obligation and
fair value of the plan assets is not presented as Hercules manages its U.S.
employee benefit plans on a consolidated basis and such information is not
maintained separately for the U.S. employees of the Company. The Company's
statement of operations includes an allocation of the costs of the U.S. benefits
plans. The pension costs were allocated based on percentage of pensionable
wages, for each of the years presented, postretirement benefit costs were
allocated using factors derived from the relative net assets and revenues. Net
pension expense (income) of Hercules allocated to the Company was ($670) for the
year ended December 31, 2000 and there was no allocation for 1999 as the Company
did not participate in the plan.
The Company maintains a 401(k) savings plan for its full-time U.S.
employees. Each participant in the plan may elect to contribute 1% to 15% of his
or her annual salary to the plan subject to statutory limitations. The company
matches employee contributions to the plan at the rate of 50% of the first 6% of
salary contributed. The Company's matching contribution was $313 thousand and
$334 thousand for 2000 and 1999, respectively.
15. LONG TERM INCENTIVE COMPENSATION PLAN
FiberVisions participates in long-term incentive compensation plans
sponsored by Hercules. These plans provide for the grant of stock options and
the award of common stock and other market-based units to certain key employees
and non-employee directors.
In 1995, Hercules changed the structure of the long-term incentive
compensation plans to place a greater emphasis on shareholder value creation
through grants of regular stock options, performance-accelerated stock options,
and cash value awards (performance-based awards denominated in cash and payable
in shares of common or restricted stock, subject to the same restrictions as
restricted stock). Restricted stock and other market-based units are awarded
with respect to certain programs. The number of awarded shares outstanding was
491,488 at December 31, 2000, and 926,689 at December 31, 1999.
At December 31, 2000, under Hercules' incentive compensation plans,
1,847,855 shares of common stock were available for grant as stock awards or
stock option awards. Stock awards are limited to approximately 15% of the total
authorizations. Regular stock options are granted at the market price on the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock options are also granted at
the market price on the date of grant and are normally exercisable at nine and
one-half years. Exercisability may be accelerated based upon the achievement of
predetermined performance goals. Both regular and performance-accelerated stock
options expire 10 years after the date of grant.
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to Hercules in the event of employment termination, except
in the case of death, disability, retirement, or other specified events.
The Company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. There were no charges to income for the cost of stock awards over the
restriction or performance period for 2000 and 1999, respectively.
177
FIBERVISIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 2000 and 1999:
REGULAR PERFORMANCE-ACCELERATED
----------------------------- -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES PRICE SHARES PRICE
--------- ---------------- --------- ----------------
January 1, 1999................ -- -- -- --
Granted........................ 69,000 $37.56 55,700 $37.56
Exercised...................... -- -- -- --
Forfeited...................... -- -- -- --
------- ------ ------ ------
December 31, 1999.............. 69,000 $37.56 55,700 $37.56
Granted........................ 97,800 $17.25 -- --
Exercised...................... -- -- -- --
Forfeited...................... -- -- -- --
------- ------ ------ ------
December 31, 2000.............. 166,800 $25.65 55,700 $37.56
The weighted-average fair value of regular stock options granted during
2000 and 1999 was $8.85 and $8.08, respectively. The weighted-average fair value
of performance-accelerated stock options granted during 1999 was $8.01.
Following is a summary of regular stock options exercisable at December 31,
2000 and 1999, and their respective weighted-average share prices:
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISABLE SHARES EXERCISE PRICE
------------------- --------- ----------------
December 31, 1999......................................... -- --
December 31, 2000......................................... 37,850 $31.53
There were no performance-accelerated stock options exercisable at December
31, 2000 and 1999.
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS
---------------------------------------------------- EXERCISABLE OPTIONS
WEIGHTED- --------------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICE RANGE 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE 12/31/00 EXERCISE PRICE
-------------------- -------------- ---------------- -------------- -------------- --------------
REGULAR STOCK OPTIONS
$12 - $20.............. 97,800 9.13 $17.25 11,250 $17.25
$30 - $40.............. 69,000 8.34 $37.56 26,600 $37.56
------- ------
166,800 37,850
======= ======
PERFORMANCE-ACCELERATED
STOCK OPTIONS
$14 - $40.............. 55,700 8.34 $37.56 -- --
------- ------
55,700 --
======= ======
The Company currently expects that 100% of performance-accelerated stock
options will eventually vest.
The company's employees may also participate in the Hercules Employee Stock
Purchase Plan ("ESPP"). The ESPP is a qualified non-compensatory plan, which
allows eligible employees to acquire shares of common stock through systematic
payroll deductions. The plan consists of three-month subscription periods,
beginning July 1 of each year. The purchase price is 85% of the fair market
value of the common
178
FIBERVISIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock on either the first or last day of that subscription period, whichever is
lower. Purchases may range from 2% to 15% of an employee's base salary each pay
period, subject to certain limitations. Currently, 202,139 shares of Hercules
common stock are registered for offer and sale under the plan. Shares issued at
December 31, 2000 and 1999, were 1,597,861 and 949,464, respectively. The
Company applies APB Opinion 25 and related interpretations in accounting for its
Employee Stock Purchase Plan. Accordingly, no compensation cost has been
recognized for the Employee Stock Purchase Plan.
Had compensation cost for Hercules' Stock-Based Incentive Plans and
Employee Stock Purchase Plan been determined on the basis of fair value
according to SFAS No. 123, the fair value of each option granted or share
purchased would be estimated on the grant date using the Black-Scholes option
pricing model.
The following weighted-average assumptions would be used in estimating fair
value for 2000 and 1999:
PERFORMANCE EMPLOYEE STOCK
ASSUMPTION REGULAR PLAN ACCELERATED PLAN PURCHASE PLAN
---------- ------------ ---------------- --------------
Dividend yield............................ 2% 3.4% 0.0%
Risk-free interest rate................... 5.88% 5.38% 5.41%
Expected life............................. 7.1 yrs 5 yrs. 3 mos.
Expected volatility....................... 29.20% 27.31% 44.86%
The Company's net (loss) income for 2000 and 1999 would approximate the pro
forma amounts below:
2000 1999
--------- -------
(DOLLARS IN THOUSANDS)
Net income
As reported............................................... $(23,091) $2,900
Pro forma................................................. $(23,521) $2,745
16. RELATED PARTY TRANSACTIONS
The Company has entered into certain agreements with affiliated entities.
These agreements were developed in the context of parent/subsidiary relationship
and therefore may not necessarily reflect the result of arm-length negotiations
between independent parties. The terms of the agreements provide for the sale of
product to the affiliated entities based on a cost-plus formula.
Corporate and other allocations
As discussed in Note 1, the financial statements of the Company reflect
certain allocated support costs incurred by other entities in Hercules group.
These costs include executive, legal, accounting, tax, auditing, cash
management, purchasing, safety, information management, health and
environmental, investor relations and other corporate services. Allocations and
charges included in the Company's financial statements were based on either a
direct cost pass-through for items directly identified as related to the
Company's activities; or a percentage allocation for such services provided
based on factors such as revenues, net assets, cost of sales and relative
weighting of geographic activity. In addition, the Company allocates certain of
its own costs to other companies in the FiberVision group of companies. These
allocations are reflected in the selling, general and administrative line item
in our statement of operations. Such allocations and corporate charges totaled
($1,444) thousand and ($2,865) thousand in 2000 and 1999, respectively.
Sales to Hercules Group
The Company sells fiber in the normal course of business to affiliated
companies. Company's revenues from sales to affiliated companies were $105,724
thousand and $92,352 thousand in 2000 and 1999, respectively.
179
FIBERVISIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Purchases from Hercules Group
The Company purchases supplies in the normal course of business from the
Hercules Group. The Company's purchases from Hercules Group were $69 thousand
and $80 thousand in 2000 and 1999, respectively.
17. NET HERCULES GROUP INVESTMENT
Changes in net Hercules Group investment were as follows:
(DOLLARS IN
THOUSANDS)
Balance at January 1, 1999.................................. $151,138
Net income.................................................. 2,900
Intercompany transactions, net.............................. 13,208
--------
Balance at December 31, 1999................................ 167,246
Net (loss).................................................. (23,091)
Intercompany transactions, net.............................. (197)
--------
Balance at December 31, 2000................................ $143,958
========
180
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive (loss) income
and of cash flows present fairly, in all material respects, the financial
position of FiberVisions L.L.C., a subsidiary of Hercules Incorporated, and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America that
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
August 31, 2001
181
FIBERVISIONS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
YEAR ENDED DECEMBER 31,
------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Sales to third parties...................................... $236,856 $253,648
Sales to affiliates......................................... 15,003 $ --
-------- --------
251,859 253,648
Cost of sales............................................... 223,133 193,696
Selling, general, and administrative expenses............... 9,573 13,262
Research and development.................................... 4,475 4,400
Impairment of long lived assets (Note 11)................... 53,541 --
Other operating expenses, net (Note 12)..................... 7,196 7,089
-------- --------
(Loss) profit from operations............................... (46,059) 35,201
Equity in income of affiliated companies (Note 6)........... 153 --
Interest expense, net (Note 10)............................. 6,940 8,551
-------- --------
Net (loss) income........................................... (52,846) 26,650
Translation adjustments..................................... 1,856 1,281
-------- --------
Comprehensive (loss) income................................. $(50,990) $ 27,931
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
182
FIBERVISIONS, L.L.C.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 4,777 $ 5,155
Accounts receivable, net.................................. 42,809 43,103
Affiliate receivables, net (Note 5)....................... 2,711 --
Inventories (Note 4)...................................... 17,993 22,418
-------- --------
Total current assets...................................... 68,290 70,676
-------- --------
Property, plant, and equipment, net (Note 8)................ 121,966 179,163
Goodwill and other intangible assets, net (Note 9).......... 199,696 209,803
Deferred charges and other assets........................... 423 1,347
-------- --------
Total assets.............................................. $390,375 $460,989
======== ========
LIABILITIES AND NET MEMBERS' (HERCULES GROUP) INVESTMENT
Current liabilities
Accounts payable.......................................... $ 21,405 $ 23,899
Short-term debt (Note 7).................................. 11,588 10,288
Accrued expenses (Note 8)................................. 12,542 13,524
-------- --------
Total current liabilities................................. 45,535 47,711
Long-term debt -- third parties (Note 7).................... 53,919 70,141
-------- --------
Total liabilities......................................... 99,454 117,852
Commitments and contingencies (Note 14)..................... -- --
Net members' (Hercules Group) investment (Note 18)
Accumulated other comprehensive income.................... 3,356 1,500
Intercompany transactions................................. 287,565 341,637
-------- --------
Net members' (Hercules Group) investment.................. 290,921 343,137
-------- --------
Total liabilities and net members' (Hercules Group)
investment............................................. $390,375 $460,989
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
183
FIBERVISIONS, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $(52,846) $ 26,650
Adjustments to reconcile net (loss) income to net cash
provided by operations:
Depreciation.............................................. 15,658 17,406
Provision for impairment of long-lived assets............. 53,541 --
Amortization of goodwill.................................. 7,394 7,532
Bad debt expense.......................................... 216 --
Loss on disposal of fixed assets.......................... -- 89
Affiliates' earnings in excess of dividends received...... (303) --
Corporate and other cost allocations...................... 457 1,180
Noncash (credits)......................................... (142) (131)
Accruals and deferrals of cash receipts and payments:
Accounts receivable.................................... (498) (1,486)
Affiliate receivables (payables)....................... (4,926) --
Transfers to/from Hercules Group....................... (932) 3,294
Inventories............................................ 4,031 (3,459)
Accounts payable and accrued expenses.................. (1,792) 4,216
Noncurrent assets and liabilities...................... 1,148 (565)
-------- --------
Net cash provided by operations...................... 21,006 54,726
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (13,129) (15,368)
Acquisitions, net of cash acquired.......................... (355) --
Other, net.................................................. 2,908 (171)
-------- --------
Net cash used in investing activities................ (10,576) (15,539)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt repayments, third parties.................... (9,726) (11,092)
Transfers to/from Hercules Group............................ (751) (29,370)
Change in short-term debt................................... (9) --
-------- --------
Net cash used in financing activities................ (10,486) (40,462)
-------- --------
Effect of exchange rate changes on cash..................... (322) (140)
-------- --------
Net decrease in cash and cash equivalents................... (378) (1,415)
Cash and cash equivalents at beginning of year.............. 5,155 6,570
-------- --------
Cash and cash equivalents at end of year.................... $ 4,777 $ 5,155
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized)...................... $ 6,980 $ 8,487
Income taxes, net......................................... 1,724 5,216
Noncash financing activities:
Corporate and other cost allocations...................... 457 1,180
The accompanying notes are an integral part of the consolidated financial
statements.
184
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
FiberVisions LLC. ("FiberVisions" or the "Company") serves worldwide
markets for polypropylene nonwoven fiber used to make disposable hygiene
products. The Company also produces olefin fiber and yarn for domestic textile
and industrial markets for use in fabrics, residential upholstery, geotextiles,
carpets and asphalt. The company is a wholly owned subsidiary of Hercules
Incorporated ("Hercules").
Historically, separate company stand-alone financial statements were not
prepared for the Company. In November 2000, Hercules amended its senior credit
facility and ESOP credit facility (the "Facilities"). The Facilities, as
amended, are secured by liens on Hercules' property and assets (and those of
Hercules' Canadian Subsidiaries), a pledge of the stock of substantially all of
Hercules' domestic subsidiaries (including FiberVisions LLC) and 65% of the
stock of foreign subsidiaries directly owned by Hercules, and a pledge of
Hercules' domestic intercompany indebtedness. These financial statements present
the financial information on the Company, a collateral party to the Hercules
debt, based on the Hercules' understanding of Securities and Exchange
Commission's interpretation and application of Rule 3-16 under the Securities
and Exchange Commission's Regulation S-X. These statements were derived from
historical accounting records.
The Company participates in Hercules' centralized cash management system.
Accordingly, cash received from the Company's operations is transferred to
Hercules on a periodic basis, and Hercules funds all operational and capital
requirements.
The financial statements of the Company reflect certain allocated support
costs incurred by other entities in the Hercules group. These costs include
executive, legal, accounting, tax, auditing, cash management, purchasing, human
resources, safety, health and environmental, information management, investor
relations and other corporate services. Allocations and charges included in the
Company's financial statements were based on either a direct cost pass-through
for items directly identified as related to the Company's activities; a
percentage allocation for such services provided based on factors such as sales,
net assets, or cost of sales; or a relative weighting of geographic activity.
Management believes that the allocation methods are reasonable.
During 1998, Hercules acquired the remaining 49% of the Company to make it
a wholly owned subsidiary. These financial statements include the push-down of
fair value adjustments to assets and liabilities, including goodwill, other
intangible assets and property, plant, and equipment and their related
amortization and depreciation adjustments.
185
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
FiberVisions, L.L.C. and its majority-owned subsidiaries where control exits
(see below). Investments in affiliated companies with a greater than 20% and
less than 50% ownership interest are accounted for using the equity method of
accounting and, accordingly, consolidated income includes FiberVisons L.L.C.'s
share of their income. All intercompany transactions and profits have been
eliminated.
SUBSIDIARY DOMICILE FUNCTIONAL CURRENCY
---------- -------- -------------------
FiberVisions Products, Inc......................... United States US Dollar
FiberVisions GmBH.................................. Germany German Mark
FiberVisions (China) A/S........................... Denmark Danish Kroner
FiberVisions A.G................................... Switzerland Swiss Franc
FiberVisions (China) Textiles
Products Ltd..................................... China Chinese Renmimbi
FiberVisions (Suzhou) Nonwovens Products Ltd....... China Chinese Renmimbi
FiberVisions, LP................................... United States US Dollar
Athens Holding, Inc................................ United States US Dollar
FV Holdings, Inc................................... United States US Dollar
ES FiberVisions Holdings ApS....................... Denmark Danish Kroner
ES FiberVisions, Inc............................... United States US Dollar
ES FiberVisions LP................................. United States US Dollar
ES FiberVisions ApS................................ Denmark Danish Kroner
ES FiberVisions Hong Kong Ltd...................... Hong Kong Hong Kong Dollar
Covington Holdings, Inc............................ United States US Dollar
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
The company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with the terms of the agreement, title and risk of loss
have been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Company's experience. The corresponding shipping and handling costs are
included in cost of sales.
Cash and Cash Equivalents
Cash equivalents include commercial paper and other securities with
original maturities of 90 days or less. Book value approximates fair value
because of the short maturity of those instruments.
Inventories
Inventories are stated at the lower of cost or market using the average
cost method.
186
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Depreciation
Property, plant, and equipment are stated at cost. The company uses the
straight-line method of depreciation. The company believes straight-line
depreciation provides a better matching of costs and revenues over the lives of
the assets. The estimated useful lives of depreciable assets are as follows:
buildings -- 30 years; plant, machinery and equipment -- 15 years; other
machinery and equipment -- 3 to 15 years.
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is expensed.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are amortized on a straight-line basis
over the estimated future periods to be benefited, generally 40 years for
goodwill and 10 years for other intangible assets. Goodwill arises in connection
with acquisitions. The purchase price is allocated to the fair value of the
assets acquired and liabilities assumed with the excess recorded as goodwill.
Income Taxes
The Company is a multi-member Limited Liability Company (LLC). Under U.S.
tax regulations, LLC's are treated as a partnership for tax purposes.
Accordingly, income taxes have not been provided in the accompanying financial
statements, as the tax effects of the operating LLC's operations accrue directly
to the members.
Impairment of Long-lived Assets
The company reviews its long-lived assets, including goodwill and other
intangibles, for impairment on an exception basis whenever events or changes in
circumstances indicate carrying amounts of the assets may not be recoverable
through undiscounted future cash flows. If an impairment loss has occurred based
on expected future cash flows (undiscounted), the loss is recognized in the
income statement. The amount of the impairment loss is the excess of the
carrying amount of the impaired asset over the fair value of the asset. The fair
value represents expected future cash flows from the use of the assets,
discounted at the rate used to evaluate potential investments. During 2000 the
company recorded long-lived asset impairments of $53,541 thousand (see note 11).
Foreign Currency Translation and Transactions
The accompanying consolidated financial statements are reported in U.S.
dollars. The US Dollar is the functional currency for FiberVisions L.L.C. and
its domestic subsidiaries and associated companies. However, the Danish kroner,
Chinese renmimbi, German mark, and the Swiss franc are the functional currencies
for its foreign subsidiaries located in the Denmark, China, Germany, and
Switzerland respectively. The translation of the functional currencies into U.S.
dollars (reporting currency) is performed for assets and liabilities using the
current exchange rates in effect at the balance sheet date, and for revenues,
costs and expenses using average exchange rates prevailing during the reporting
periods. Adjustments resulting from the translation of functional currency
financial statements to reporting currency are accumulated and reported as other
comprehensive income, a separate component of shareholders' equity.
Transactions in foreign currency are recorded at the exchange rate
prevailing on the date of transaction. Monetary assets and liabilities
denominated in foreign currencies are expressed in the functional currency at
the exchange rates in effect at the balance sheet date. Revenues, costs and
expenses are recorded using average exchange rates prevailing during the
reporting periods. Gains or losses resulting from foreign currency transactions
are included in the statement of operations.
187
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
Cash equivalents include commercial paper and other securities with
original maturities of 90 days or less. Book value approximates fair value
because of the short maturity of those instruments.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. However,
the overall risk is limited to the large number of customers in different
geographic areas and industries.
Stock-based Compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25)). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-based Compensation," requires companies electing to continue to use the
intrinsic-value method to make pro forma disclosures of net income as if the
fair-value-based method of accounting had been applied.
Net Members' (Hercules Group) Investment
The net Members' (Hercules Group) investment account reflects the balance
of FiberVisions historical earnings, foreign currency translation, intercompany
amounts, income tax, taxes accrued and deferred, post employment liabilities,
and other transactions between the Company and the Members/Hercules Group.
Research and Development
Research and development costs are expensed as incurred.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. This statement, as amended, is effective for
all fiscal quarters of fiscal years beginning after December 31, 2000. The
Company adopted SFAS 133 effective January 1, 2001. The adoption of SFAS No. 133
will not have a material effect on its earnings or statement of financial
position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, is to be effective
October 1, 2000. Adoption of SAB 101 did not have a material effect on our
profit from operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). For the Company's, these statements will generally
188
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
become effective January 1, 2002, although business combinations initiated after
June 30, 2001 are subject to the non-amortization and purchase accounting
provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. The assessment of
goodwill for impairment is a complex issue in which the Company must determine,
among other things, the fair value of each defined reporting units. It is,
therefore, not possible at this time to predict the impact, if any, that the
impairment assessment provisions of SFAS 142 will have on the Company's
financial statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assts. SFAS 143 will become effective for the Company
from January 1, 2003 and requires recognition of a liability for an asset
retirement obligation in the period in which it is incurred. Management is in
the process of evaluating the impact this standard will have on the Company's
financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Trade.................................................... $39,834 $40,836
Rebates from suppliers................................... 2,857 2,626
Other.................................................... 748 459
------- -------
43,439 43,921
Less allowance for doubtful accounts..................... (630) (818)
------- -------
Total.......................................... $42,809 $43,103
======= =======
4. INVENTORIES
The components of inventories are:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Finished products........................................ $ 7,461 $10,713
Materials, supplies, and work in process................. 10,532 11,705
------- -------
Total.......................................... $17,993 $22,418
======= =======
5. AFFILIATE RECEIVABLES, NET
Trade receivables from affiliates, consists of $4,926 thousand due from ES
FiberVisions, net of $2,215 thousand of accumulated losses of unconsolidated
companies in excess of investments (see Note 6).
189
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS
On January 1, 2000 FiberVisions and Chisso Polypro Fiber Co., Ltd formed a
50/50 joint venture, ES FiberVisions, combining their bicomponent fibers
businesses outside of Japan. While FiberVisions has a 50% equity interest, it's
share of joint venture operations is 67%. The venture extends the Company's
strategy to continue globalization of bicomponent fiber by establishing sales
support facilities in key regions. Both parent companies supply fiber to the
joint venture under manufacturing agreements. FiberVisions manufactures
bicomponent fibers for the joint venture at the Varde, Denmark and Athens,
Georgia locations. The annual sales of the venture were approximately $48
million in fiscal 2000. FiberVisions share of ES FiberVisions net income was
$153 thousand.
Summarized financial information for the equity affiliate at December 31,
2000 and the year then ended is as follows:
2000
------------
(DOLLARS IN
THOUSANDS)
Current assets.............................................. $10,809
Non Current assets.......................................... 1,450
Current liabilities......................................... 10,803
Net sales................................................... $48,410
Gross profit................................................ 7,520
Net earnings................................................ 228
7. LONG-TERM DEBT
Long-term debt at December 31, 2000 and 1999 is summarized as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSAND)
Unibank A/S Term Loan due in varying amounts through 2005
with an average interest rate of 5.82%.................... $ 19,428 $ 21,221
Finansierings Instituttet for Industri og Handvoerk A/S
(FIH) term notes at various rates from 7.90% to 9.60% and
due in varying amounts through 2006....................... 15,447 22,043
Danmark Finansiering Institut A/S (DFI) term notes at
various rates from 6.48% to 9.72% and due in varying
amounts through 2006...................................... 23,482 28,943
Mortgage at a fixed rate of 7.16% and due in varying amounts
through 2014.............................................. 4,490 5,121
Industrialization Fund for Developing Countries (IFU) at a
fixed rate of 5.23% and due in 2001....................... 2,410 2,851
Lease purchase obligation................................... 250 250
-------- --------
65,507 80,429
Less current maturities..................................... (11,588) (10,288)
-------- --------
Total....................................................... $ 53,919 $ 70,141
======== ========
FIH term notes are collateralized by land, buildings, and plant and
machinery of approximately $28,932 thousand. The DFI loan is collateralized by a
letter of indemnification regarding land, buildings and plant and machinery of
approximately $18,706 thousand. The mortgage is collateralized by land and
buildings of approximately $4,490 thousand.
In December 1996 the Company entered into a long-term lease purchase
obligation with The Athens-Clark County Industrial Development Authority to
purchase land. The interest rate is fixed at 1% per annum and the due date of
the obligation is December 2020. The balance of the obligation was $250 thousand
at December 31, 2000 and 1999.
190
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled annual maturities of long-term debt outstanding at December 31,
2000 in the successive five-year period are summarized as follows:
(DOLLARS IN
THOUSANDS)
2001 $11,588
2002........................................................ 7,773
2003........................................................ 12,737
2004........................................................ 12,705
2005........................................................ 13,169
Thereafter.................................................. 7,535
-------
Total....................................................... $65,507
=======
8. ADDITIONAL BALANCE SHEET DETAIL
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Property, plant, and equipment
Land...................................................... $ 1,282 $ 1,330
Buildings and equipment................................... 365,539 361,492
Construction in progress.................................. 16,054 15,868
--------- ---------
Total.................................................. 382,875 378,690
Accumulated depreciation and amortization................. (260,909) (199,527)
--------- ---------
Net property, plant, and equipment........................ $ 121,966 $ 179,163
========= =========
Accrued expenses
Payroll and employee benefits............................. $ 2,168 $ 1,957
Accrued interest payable.................................. 365 312
Miscellaneous............................................. 10,009 11,255
--------- ---------
$ 12,542 $ 13,524
========= =========
9. GOODWILL AND OTHER INTANGIBLES ASSETS
At December 31, 2000 and 1999, the goodwill and other intangible assets
were:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Goodwill from Hercules acquisition.......................... $188,051 $188,051
Other goodwill.............................................. -- 2,849
Other intangibles........................................... 31,350 31,410
-------- --------
Total....................................................... 219,401 222,310
Less accumulated amortization............................... (19,705) (12,507)
-------- --------
Net goodwill and other intangible assets.................. $199,696 $209,803
======== ========
In July 1998, Hercules Inc. completed the acquisition of 49% share of
FiberVisions L.L.C. owned by its joint venture partner, Jacob Holm & Son A/S,
for approximately $230 million in cash, plus assumed debt of $188 million. The
allocation of the purchase price resulted in $188,051 thousand of goodwill for
the FiberVisons group, which is being amortized over its estimated useful life
of 40 years. Other intangibles assets,
191
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related to the acquisition, amounted to $29,752 thousand, the remaining other
intangible assets relate to capitalization of certain patent costs.
10. INTEREST EXPENSE, NET
Interest costs are summarized as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Interest expense............................................ $7,459 $8,738
Interest income............................................. (519) (187)
------ ------
Interest expense, net....................................... $6,940 $8,551
====== ======
11. IMPAIRMENT OF LONG LIVED ASSETS
In the third quarter of 2000, FiberVisions recorded assets impairments of
the China facility of $28,169 thousand. Management determined that revised
growth projections for the China hygiene non-woven market would indefinitely
delay the feasibility of expanding the production capability of the facility.
Estimated future cash flows related to this facility without the planned
expansion indicated that an impairment had occurred. The impairment charge was
required to write off approximately 90% of the net book value of the existing
Suzhou, China facility as well as the investment in the new fiber line.
In addition, impairment of $25,372 thousand was required to write off the
remaining net book value of the textiles plant in Covington, GA. The textiles
business fundamentals have been deteriorating for the past few years. In 2000,
the cost for the major raw material, polypropylene, has risen above historical
price levels. The combination of the above factors has resulted in an
irreversible loss of profitability for the textiles business. Estimated future
cash flows related to this facility indicated full impairment had occurred.
12. OTHER OPERATING EXPENSES, NET
Other operating expenses, net, consists of the following:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Goodwill and intangible amortization........................ $7,342 $7,402
Loss (gain) on foreign currency translation................. 106 (327)
Miscellaneous expense (income), net......................... (252) 14
------ ------
$7,196 $7,089
====== ======
13. OTHER FINANCING ARRANGEMENTS
Hercules manages the Company's cash and indebtedness. The majority of the
cash provided by or used by the Company is provided through this consolidated
cash and debt management system. As a result, the amount of domestic cash or
debt historically related to the Company is not determinable. For the purposes
of the Company's historical financial statements all of its positive or negative
cash flows have been treated as cash transferred to or from its parent.
The Company has an intercompany loan with the Hercules Group in the amount
of $36,799 thousand and $39,546 thousand which is included in the net members'
(Hercules Group) investment balance at December 31, 2000 and 1999, respectively.
During 2000 and 1999 the weighted average interest rate on the intercompany
borrowings was 7.4% and 6.4%, respectively. Interest expense was $2,865 thousand
and
192
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$2,721 thousand in 2000 and 1999, respectively. Repayment terms of the loan are
included as part of the Hercules cash management system as described in the
previous paragraph.
14. COMMITMENTS AND CONTINGENCIES
The Company has operating leases (including office space, storage space,
and data processing equipment) expiring at various dates. Rental expense was
$574 thousand in 2000 and $484 thousand in 1999.
The net minimum future payments at December 31, 2000 are as follows:
(DOLLARS IN
THOUSANDS)
2001........................................................ $404
2002........................................................ 284
2003........................................................ 204
2004........................................................ 6
2005........................................................ 3
----
Total............................................. $901
====
In the spring of 2001 the Danish tax authorities indicated that they intend
to increase FiberVisions A/S' taxable income for the tax year 1997. The tax
value of the declared increase amounts to approximately $1,400 thousand.
Management does not agree with the assessment of the tax authorities, and the
case will be appealed. Consequently, the final outcome of the case is uncertain.
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business. In the opinion of the Company's
management, none of such litigation as of December 31, 2000 is likely to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
15. PENSION, OTHER POSTIRETIREMENT BENEFITS AND OTHER BENEFITS
The Company participates in a defined benefit pension plan sponsored by
Hercules, which covers substantially all employees of Hercules in the U.S.
Benefits under this plan are based on the average final pay and years of
service. Hercules also provides postretirement health care and life insurance
benefits to eligible retired employees and their dependents.
Information on the actuarial present value of the benefit obligation and
fair value of the plan assets is not presented as Hercules manages its U.S.
employee benefit plans on a consolidated basis and such information is not
maintained separately for the U.S. employees of the Company. The Company's
statement of operation includes an allocation of the costs of the U.S. benefits
plans. The pension costs were allocated based on percentage of pensionable
wages, for each of the years presented, postretirement benefit costs were
allocated using factors derived from the relative net assets and revenues. Net
pension expense (income) of Hercules allocated to the Company was ($799) for the
year ended December 31, 2000 and $0 for the year ended December 31, 1999.
The Company maintains a 401(k) savings plan for its US full-time employees.
Each participant in the plan may elect to contribute 1% to 15% of his or her
annual salary to the plan subject to statutory limitations. The company matches
employee contributions to the plan at the rate of 50% of the first 6% of salary
contributed. The Company's matching contribution was $382 thousand and $413
thousand for 2000 and 1999, respectively.
FiberVisions A/S maintains a contributory pension plan. FiberVisions A/S
matching contribution was $964 thousand and $977 thousand for 2000 and 1999,
respectively. FiberVisions (China) Textiles Products,
193
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Ltd. provides a housing allowance for their employees. FiberVisions (China)
Textiles Products, Ltd. contribution was $160 thousand and $137 thousand in 2000
and 1999, respectively.
16. LONG TERM INCENTIVE COMPENSATION PLAN
The company participates in long-term incentive compensation plans
sponsored by Hercules. These plans provide for the grant of stock options and
the award of common stock and other market-based units to certain key employees
and non-employee directors.
In 1995, Hercules changed the structure of the long-term incentive
compensation plans to place a greater emphasis on shareholder value creation
through grants of regular stock options, performance-accelerated stock options,
and Cash Value Awards (performance-based awards denominated in cash and payable
in shares of common or restricted stock, subject to the same restrictions as
restricted stock). Restricted stock and other market-based units are awarded
with respect to certain programs. The number of awarded shares outstanding was
491,488 at December 31, 2000, and 926,689 at December 31, 1999.
At December 31, 2000, under Hercules' incentive compensation plans,
1,847,855 shares of common stock were available for grant as stock awards or
stock option awards. Stock awards are limited to approximately 15% of the total
authorizations. Regular stock options are granted at the market price on the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock options are also granted at
the market price on the date of grant and are normally exercisable at nine and
one-half years. Exercisability may be accelerated based upon the achievement of
predetermined performance goals. Both regular and performance-accelerated stock
options expire 10 years after the date of grant.
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to Hercules in the event of employment termination, except
in the case of death, disability, retirement, or other specified events.
The Company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. There were no charges to income for the cost of stock awards over the
restriction or performance period for 2000 and 1999, respectively.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 2000 and 1999:
REGULAR PERFORMANCE-ACCELERATED
----------------------------- -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES PRICE SHARES PRICE
--------- ---------------- --------- ----------------
January 1, 1999........................ -- -- -- --
Granted................................ 69,000 $37.56 55,700 $37.56
Exercised.............................. -- -- -- --
Forfeited.............................. -- -- -- --
------- ------ ------ ------
December 31, 1999...................... 69,000 $37.56 55,700 $37.56
Granted................................ 104,675 $17.25 -- --
Exercised.............................. -- -- -- --
Forfeited.............................. -- -- -- --
------- ------ ------ ------
December 31, 2000...................... 173,675 $25.32 55,700 $37.56
The weighted-average fair value of regular stock options granted during
2000 and 1999 was $8.85 and $8.08, respectively. The weighted-average fair value
of performance-accelerated stock options granted during 1999 was $8.01.
194
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of regular stock options exercisable at December 31,
1999 and 2000, and their respective weighted-average share prices:
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISABLE SHARES EXERCISE PRICE
------------------- --------- ----------------
December 31, 1999................................. -- --
December 31, 2000................................. 37,850 $31.53
There were no performance-accelerated stock options exercisable at December
31, 2000 and 1999.
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------- -------------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
EXERCISE OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
PRICE RANGE AT 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/00 EXERCISE PRICE
----------------------- ----------- ---------------- ---------------- ------------------ ----------------
Regular Stock Options
$12 - $20 104,675 9.13 $17.25 11,250 $17.25
$30 - $40 69,000 8.34 $37.56 26,600 $37.56
------- ------
173,675 37,850
======= ======
Performance-Accelerated
Stock Options
$14 - $40 55,700 8.34 $37.56 -- --
------- ------
55,700 --
======= ======
The Company currently expects that 100% of performance-accelerated stock
options will eventually vest.
The company employees may also participate in the Hercules Employee Stock
Purchase Plan ("ESPP"). The ESPP is a qualified non-compensatory plan, which
allows eligible employees to acquire shares of common stock through systematic
payroll deductions. The plan consists of three-month subscription periods,
beginning July 1 of each year. The purchase price is 85% of the fair market
value of the common stock on either the first or last day of that subscription
period, whichever is lower. Purchases may range from 2% to 15% of an employee's
base salary each pay period, subject to certain limitations. Currently, 202,139
shares of Hercules common stock are registered for offer and sale under the
plan. Shares issued at December 31, 2000 and 1999, were 1,597,861 and 949,464,
respectively. The Company applies APB Opinion 25 and related interpretations in
accounting for its Employee Stock Purchase Plan. Accordingly, no compensation
cost has been recognized for the Employee Stock Purchase Plan.
Had compensation cost for Hercules' Stock-Based Incentive Plans and
Employee Stock Purchase Plan been determined on the basis of fair value
according to SFAS No. 123, the fair value of each option granted or share
purchased would be estimated on the grant date using the Black-Scholes option
pricing model.
The following weighted-average assumptions would be used in estimating fair
value for 2000 and 1999:
REGULAR PERFORMANCE EMPLOYEE STOCK
ASSUMPTION PLAN ACCELERATED PLAN PURCHASE PLAN
---------- -------- ---------------- --------------
Dividend yield............................... 2% 3.4% 0.0%
Risk-free interest rate...................... 5.88% 5.38% 5.41%
Expected life................................ 7.1 yrs. 5 yrs. 3 mos.
Expected volatility.......................... 29.20% 27.31% 44.86%
195
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's net (loss) income for 1999 and 2000 would approximate the pro
forma amounts below:
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Net income
As reported............................................... $(52,846) $26,650
Pro forma................................................. $(53,290) $26,495
17. RELATED PARTY TRANSACTIONS
The Company has entered into certain agreements with affiliated entities.
These agreements were developed in the context of parent/subsidiary relationship
and therefore may not necessarily reflect the result of arm-length negotiations
between independent parties. The terms of the agreements provide for the sale of
product to the affiliated entities based on a cost-plus formula.
Corporate and other allocations
As discussed in Note 1, the financial statements of the Company reflect
certain allocated support costs incurred by other entities in Hercules group.
These costs include executive, legal, accounting, tax, auditing, cash
management, purchasing, safety, information management, health and
environmental, investor relations and other corporate services. Allocations and
charges included in the Company's financial statements were based on either a
direct cost pass-through for items directly identified as related to the
Company's activities; or a percentage allocation for such services provided
based on factors such as revenues, net assets, cost of sales and relative
weighting of geographic activity. These allocations are reflected in the
selling, general and administrative line item in our statement of operations.
Such allocations and corporate charges totaled $457 thousand and $1,180 thousand
in 2000 and 1999, respectively.
Sales to affiliates
The Company sells fiber in the normal course of business to affiliated
companies. Company's revenues from sales to affiliated companies were $15,003
thousand in 2000. Total amounts due from affiliated companies related to those
sales were $4,926 thousand as of December 31, 2000.
Purchases from Hercules Group
The Company purchases supplies in the normal course of business from the
Hercules Group. The Company's purchases from Hercules Group were $76 thousand
and $88 thousand in 2000 and 1999, respectively.
196
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. NET MEMBERS' (HERCULES GROUP) INVESTMENT
Changes in net Members' (Hercules Group) investment were as follows:
(DOLLARS IN THOUSANDS)
----------------------
Balance at January 1, 1999.................................. $340,102
Comprehensive income for the year ended December 31, 1999... 27,931
Intercompany transactions, net.............................. (24,896)
--------
Balance at December 31, 1999................................ 343,137
Comprehensive income for the year ended December 31, 2000... (50,990)
Intercompany transactions, net.............................. (1,226)
--------
Balance at December 31, 2000................................ $290,921
========
The Company includes accumulated other comprehensive income in net Members'
Hercules Group investment. At December 31, 2000 and 1999 accumulated other
comprehensive income included $3,356 thousand and $1,500 thousand, respectively,
of foreign currency translation adjustments.
197
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying balance sheets and the related statements
of income and of cash flows present fairly, in all material respects, the
financial position of FiberVisions L.P., a subsidiary of Hercules Incorporated,
at December 31, 2000 and 1999, and the results of their operations and their
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America that require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
August 31, 2001
198
FIBERVISIONS L.P.
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Sales to third parties...................................... $143,507 $139,403
Sales to Hercules Group..................................... 3,911 11,047
Sales to affiliates......................................... 1,589 --
-------- --------
149,007 150,450
Cost of sales............................................... 143,108 122,720
-------- --------
Gross profit................................................ 5,899 27,730
Selling, general, and administrative expenses............... 1,475 2,298
-------- --------
Profit from operations...................................... 4,424 25,432
Interest income............................................. 503 --
-------- --------
Net income.................................................. $ 4,927 $ 25,432
======== ========
The accompanying notes are an integral part of the financial statements.
199
FIBERVISIONS L.P.
BALANCE SHEETS
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Trade receivable, net of $269 and $673 allowance for
doubtful accounts at December 31, 2000 and 1999,
respectively........................................... $24,346 $25,589
------- -------
Total assets.............................................. $24,346 $25,589
======= =======
LIABILITIES AND NET PARTNERS' (HERCULES GROUP) INVESTMENT
Commitments and contingencies (Note 3)...................... -- --
Net partners' (Hercules Group) investment (Note 4).......... 24,346 25,589
------- -------
Total liabilities and net partners' (Hercules Group)
investment............................................. $24,346 $25,589
======= =======
The accompanying notes are an integral part of the financial statements.
200
FIBERVISIONS L.P.
STATEMENTS OF CASH FLOWS
YEAR ENDED
DECEMBER 31,
2000 1999
--------- ----------
(DOLLARS IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income.................................................. $ 4,927 $ 25,432
Adjustments to reconcile net income to net cash provided by
operations
Corporate and other cost allocations...................... 1,475 2,298
Accruals and deferrals of cash receipts and payments:
Accounts receivable, net............................... 1,243 2,776
Transfers to/from Hercules Group....................... (1,170) (21,377)
------- --------
Net cash provided by operations...................... 6,475 9,129
------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Transfers to/from Hercules Group....................... (6,475) (9,129)
------- --------
Net cash used in financing activities................ (6,475) (9,129)
------- --------
Net increase (decrease) in cash and cash equivalents........ -- --
Cash and cash equivalents at beginning of year.............. -- --
------- --------
Cash and cash equivalents at end of year.................... $ -- $ --
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Noncash financing activities
Corporate and other cost allocations................... $ 1,475 $ 2,298
The accompanying notes are an integral part of the financial statements.
201
FIBERVISIONS L.P.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
FiberVisions L.P. ("FiberVisions LP" or the "Partnership") was formed in
1998 as a 50% joint venture between FiberVisions, Inc. and FiberVisions
Products, Inc. FiberVisions Inc. and FiberVisions Products, Inc. manufacture
products for the Partnership under a manufacturing agreement. FiberVisions LP,
FiberVisions Inc. and FiberVisions Products, Inc. are wholly owned subsidiaries
of FiberVisions, L.L.C.; itself a wholly owned subsidiary of Hercules
Incorporated ("Hercules").
The Partnership serves worldwide markets for polypropylene nonwoven fiber
used to make disposable hygiene products. FiberVisions LP also sells olefin
fiber and yarn to domestic textile and industrial markets for use in fabrics,
residential upholstery, geotextiles, carpets and asphalt.
Historically, separate Partnership stand-alone financial statements were
not prepared for the Partnership. In November 2000, Hercules amended its senior
credit facility and ESOP credit facility (the "Facilities"). The Facilities, as
amended, are secured by liens on Hercules' property and assets (and those of
Hercules' Canadian Subsidiaries), a pledge of the stock of substantially all of
Hercules' domestic subsidiaries and partnership interests (including
FiberVisions LP) and 65% of the stock of foreign subsidiaries directly owned by
Hercules, and a pledge of Hercules' domestic intercompany indebtedness. These
financial statements present the financial information on the Partnership, a
collateral party to the Hercules debt, based on Hercules' understanding of
Securities and Exchange Commission's interpretation and application of Rule 3-16
under the Securities and Exchange Commission's Regulation S-X. These statements
were derived from historical accounting records.
The Partnership participates in Hercules' centralized cash management
system. Accordingly, cash received from the Partnership's operations is
transferred to Hercules on a periodic basis, and Hercules funds all operational
and capital requirements.
The financial statements of the Partnership reflect certain allocated
support costs incurred by other entities in the Hercules group. These costs
include executive, legal, accounting, tax, auditing, cash management,
purchasing, human resources, safety, health and environmental, information
management, investor relations and other corporate services. Allocations and
charges included in the Partnership's financial statements were based on either
a direct cost pass-through for items directly identified as related to the
Partnership's activities; a percentage allocation for such services provided
based on factors such as sales, net assets, or cost of sales; or a relative
weighting of geographic activity. Management believes that the allocation method
is reasonable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
The Partnership recognizes revenue when the earnings process is complete.
This generally occurs when products are shipped to the customer or services are
performed in accordance with the terms of the agreement, title and risk of loss
have been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Partnership's experience. The corresponding shipping and handling costs are
included in cost of sales.
202
FIBERVISIONS L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Partnership to
concentrations of credit risk consist principally of trade receivables.
The Partnership's two largest customers constitute approximately 33% and
30% of total sales dollars for the years ended December 31, 2000 and 1999. The
Partnership anticipates that this significant customer concentration will
continue for the foreseeable future.
Income Taxes
Income taxes have not been provided in the accompanying financial
statements, as the tax effects of the operating partnership's operations accrue
directly to the partners.
Net Partners' (Hercules Group) Investment
The net partners' (Hercules Group) investment account reflects the balance
of the Partnership's historical retained earnings, intercompany amounts and
other transactions between the Company and the partners/Hercules Group.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. This statement, as amended, is effective for
all fiscal quarters of fiscal years beginning after December 31, 2000.
FiberVisions LP adopted SFAS 133 effective January 1, 2001. The adoption of SFAS
No. 133 did not have an effect on its earnings or statement of financial
position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was to be effective
October 1, 2000. The Partnership adopted SAB 101 effective as of January 1,
2000. Adoption of SAB 101 did not have a material effect on our profit from
operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). For the Partnership, these statements will generally
become effective January 1, 2002, although business combinations initiated after
June 30, 2001 are subject to the non-amortization and purchase accounting
provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. The provisions of SFAS
142 will have no impact on the Partnership's financial statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assts. SFAS 143 will become effective for the Partnership
in January 1, 2003 and
203
FIBERVISIONS L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
requires recognition of a liability for an asset retirement obligation in the
period in which it is incurred. This standard will have no impact on the
Partnership's financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.
3. COMMITMENTS AND CONTINGENCES
The Partnership currently and from time to time is involved in litigation
incidental to the conduct of its business. In the opinion of the Partnership's
management, none of such litigation as of December 31, 2000 is likely to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Partnership.
4. NET PARTNERS' (HERCULES GROUP) INVESTMENT
Changes in net partners' (Hercules Group) investment were as follows:
(DOLLARS IN THOUSANDS)
----------------------
Balance at January 1, 1999.................................. $28,365
Net income for the year ended December 31, 1999............. 25,432
Intercompany transactions, net.............................. (28,208)
-------
Balance at December 31, 1999................................ 25,589
Net income for the year ended December 31, 2000............. 4,927
Intercompany transactions, net.............................. (6,170)
-------
Balance at December 31, 2000................................ $24,346
=======
5. LONG TERM DEBT AND OTHER FINANCING ARRANGEMENTS
The Partnership has long term intercompany receivables with affiliated
entities in the amount of $8,475 thousand and $3,475 thousand which are included
in the net partners' (Hercules Group) investment balance at December 31, 2000
and 1999, respectively. The weighted average rate on intercompany borrowings was
7.4% and 6.4% in 2000 and 1999, respectively. Interest income was $503 thousand
and $0 in 2000 and 1999, respectively. The receivable is included as part of the
Hercules cash management system as discussed in Note 1.
6. RELATED PARTY TRANSACTIONS
The Partnership has entered into certain agreements with affiliated
entities. These agreements were developed in the context of parent/subsidiary
relationship and therefore may not necessarily reflect the result of arm-length
negotiations between independent parties. The terms of the agreements provide
for the sale of product to the affiliated entities based on a cost-plus formula.
Corporate and other allocations
The financial statements of the Partnership reflect certain allocated
support costs incurred by other entities in Hercules group. These costs include
executive, legal, accounting, tax, auditing, cash management, purchasing,
safety, information management, health and environmental, investor relations and
other corporate services. Allocations and charges included in the Partnership's
financial statements were based on either a
204
FIBERVISIONS L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
direct cost pass-through for items directly identified as related to the
Partnership's activities; or a percentage allocation for such services provided
based on factors such as revenues, net assets, cost of sales and relative
weighting of geographic activity. These allocations are reflected in the
selling, general and administrative line item in our statement of operations.
Such allocations and corporate charges totalled $1,475 thousand and $2,298
thousand in 2000 and 1999, respectively.
Sales to Hercules Group
The Partnership sells fiber in the normal course of business to the
Hercules Group. Partnership's revenues from sales to affiliated companies were
$1,589 thousand in 2000.
Purchases from Hercules Group
The Partnership purchases finished product for resale in the normal course
of business from the Hercules Group. The Partnership's purchases from Hercules
Group were $143,109 thousand and $122,720 thousand in 2000 and 1999,
respectively.
205
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and of cash flows present fairly, in
all material respects, the financial position of FiberVisions Products, Inc., a
subsidiary of Hercules Incorporated, and its subsidiaries at December 31, 2000
and 1999, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America that require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
August 31, 2001
206
FIBERVISIONS PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Sales to Hercules Group..................................... $33,695 $31,013
Cost of sales............................................... 32,108 28,856
------- -------
Gross Profit................................................ 1,587 2,157
Selling, general, and administrative expenses............... 1,037 922
Other operating expenses (income), net (Note 11)............ 1,112 1,125
------- -------
Profit from operations...................................... (562) 110
Equity income of affiliated companies....................... 2,057 12,716
Interest (income) expense, net (Note 10).................... (143) 1,426
------- -------
Income before income taxes.................................. 1,638 11,400
Provision for income taxes (Note 13)........................ 571 4,049
------- -------
Net income.................................................. $ 1,067 $ 7,351
======= =======
The accompanying notes are an integral part of
the consolidated financial statements.
207
FIBERVISIONS PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
-----------------------
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 13 $ 6
Miscellaneous accounts receivable......................... 1,703 1,187
Receivables from affiliates (Note 3)...................... 476 --
Inventories (Note 4)...................................... 2,053 1,624
-------- -------
Total current assets...................................... 4,245 2,817
-------- -------
Property, plant, and equipment, net (Note 8)................ 37,640 38,635
Investments (Note 5)........................................ 18,140 15,677
Goodwill (Note 9)........................................... 40,534 41,638
Deferred charges and other assets........................... 6 --
-------- -------
Total assets.............................................. $100,565 $98,767
======== =======
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable.......................................... $ 3,278 $ 4,115
Accrued expenses.......................................... 54 --
-------- -------
Total current liabilities................................. 3,332 4,115
Long-term debt -- third parties (Note 6).................... 250 250
Deferred income taxes (Note 13)............................. 6,920 5,911
-------- -------
Total liabilities......................................... 10,502 10,276
Commitments and contingencies (Note 15)..................... -- --
Net Hercules Group investment (Note 14)..................... 90,063 88,491
-------- -------
Total liabilities and net Hercules Group investment....... $100,565 $98,767
======== =======
The accompanying notes are an integral part of
the consolidated financial statements.
208
FIBERVISIONS PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
--------- ----------
(DOLLARS IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income.................................................. $ 1,067 $ 7,351
Adjustments to reconcile net income to net cash provided
from operations:
Depreciation................................................ 3,128 2,949
Amortization of goodwill.................................... 1,104 1,104
Nonoperating gain on disposals.............................. -- 53
Affiliates' earnings in excess of dividends received........ (1,006) (12,716)
Corporate and other cost allocations........................ (346) 129
Deferred income taxes....................................... 1,009 4,218
Accruals and deferrals of cash receipts and payments:
Accounts receivable....................................... (516) 702
Receivables from affiliates............................... (1,933) --
Transfers to/from Hercules Group.......................... (243) 3,504
Inventories............................................... (429) (145)
Accounts payable and accrued expenses..................... (783) 2,568
Noncurrent assets and liabilities......................... (6) 312
------- --------
Net cash provided by operations...................... 1,046 10,029
------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (2,133) (1,934)
------- --------
Net cash used in investing activities................ (2,133) (1,934)
------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Transfers to/from Hercules Group............................ 1,094 (8,095)
------- --------
Net cash provided by (used in) financing
activities.......................................... 1,094 (8,095)
------- --------
Net increase in cash and cash equivalents................... 7 --
Cash and cash equivalents at beginning of year.............. 6 6
------- --------
Cash and cash equivalents at end of year.................... 13 6
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes, net......................................... $ -- $ 353
Noncash financing activities
Corporate and other cost allocations...................... (346) 129
The accompanying notes are an integral part of
the consolidated financial statements.
209
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
FiberVisions Products, Inc. ("Products" or the "Company"), a wholly owned
subsidiary of Hercules Incorporated ("Hercules"), serves worldwide markets for
polypropylene nonwoven fiber used to make disposable hygiene products. The
company was formed on September 26, 1994.
Historically, separate company stand-alone financial statements were not
prepared for the Company. In November 2000, Hercules amended its senior credit
facility and ESOP credit facility (the "Facilities"). The Facilities, as
amended, are secured by liens on Hercules' property and assets (and those of
Hercules' Canadian Subsidiaries), a pledge of the stock of substantially all of
Hercules' domestic subsidiaries (including FiberVisions Products) and 65% of the
stock of foreign subsidiaries directly owned by Hercules, and a pledge of
Hercules' domestic intercompany indebtedness. These financial statements present
the financial information on the Company, a collateral party to the Hercules
debt, based on the Hercules' understanding of Securities and Exchange
Commission's interpretation and application of Rule 3-16 under the Securities
and Exchange Commission's Regulation S-X. These statements were derived from
historical accounting records.
The Company participates in Hercules' centralized cash management system.
Accordingly, cash received from the Company's operations is transferred to
Hercules on a periodic basis, and Hercules funds all operational and capital
requirements.
The financial statements of the Company reflect certain allocated support
costs incurred by other entities in the Hercules group. These costs include
executive, legal, accounting, tax, auditing, cash management, purchasing, human
resources, safety, health and environmental, information management, investor
relations and other corporate services. Allocations and charges included in the
Company's financial statements were based on either a direct cost pass-through
for items directly identified as related to the Company's activities; a
percentage allocation for such services provided based on factors such as sales,
net assets, or cost of sales; or a relative weighting of geographic activity.
Management believes that the allocation methods are reasonable.
During 1998, Hercules acquired the Company to make it a wholly owned
subsidiary. These financial statements include the push-down of fair value
adjustments to assets and liabilities, including goodwill, other intangible
assets and property, plant, and equipment and their related amortization and
depreciation adjustments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries where control exists (see chart below).
Investments in affiliated companies with a greater than 20% and 50% or less
ownership interest are accounted for using the equity method of accounting and,
accordingly, consolidated income includes the Company's share of their income.
All intercompany transactions and profits have been eliminated.
PERCENTAGE
SUBSIDIARY DOMICILE OWNERSHIP FUNCTIONAL CURRENCY
---------- ------------- ---------- -------------------
FiberVisions, LP......................... United States 50% US Dollar
Athens Holding, Inc...................... United States 100% US Dollar
FV Holdings, Inc. ....................... United States 100% US Dollar
ES FiberVisions, Inc. ................... United States 50% US Dollar
ES FiberVisions LP....................... United States 50% US Dollar
210
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
The company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with the terms of the agreement, title and risk of loss
have been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Company's experience. The corresponding shipping and handling costs are
included in cost of sales.
Cash and Cash Equivalents
Cash equivalents include commercial paper and other securities with
original maturities of 90 days or less. Book value approximates fair value
because of the short maturity of those instruments.
Inventories
Inventories are stated at the lower of cost or market using the average
cost method.
Property and Depreciation
Property, plant, and equipment are stated at cost. The company uses the
straight-line method of depreciation to depreciate assets over their useful
lives. The estimated useful lives of depreciable assets are as follows:
buildings -- 30 years; plant, machinery and equipment -- 15 years; other
machinery and equipment -- 3 to 15 years.
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is charged to income.
Goodwill
Goodwill is amortized on a straight-line basis over the estimated future
periods to be benefited, generally 40 years.
Impairment of Long Lived Assets
The company reviews its long-lived assets, including goodwill and other
intangibles, for impairment on an exception basis whenever events or changes in
circumstances indicate carrying amounts of the assets may not be recoverable
through undiscounted future cash flows. If an impairment loss has occurred based
on expected future cash flows (undiscounted), the loss is recognized in the
income statement. The amount of the impairment loss is the excess of the
carrying amount of the impaired asset over the fair value of the asset. The fair
value represents expected future cash flows from the use of the assets,
discounted at the rate used to evaluate potential investments.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of trade receivables from FiberVisions LP.
211
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial Instruments
The Company uses various non-derivative financial instruments, including
letters of credit, and generally does not require collateral to support its
financial instruments.
Net Hercules Group Investment
The net Hercules Group investment account reflects the balance of
FiberVisions historical earnings, intercompany amounts, income tax, and other
transactions between FiberVisions Products, Inc. and the Hercules Group.
Income Taxes
The provisions for income taxes has been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax basis of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. This statement, as amended, is effective for
all fiscal quarters of fiscal years beginning after December 31, 2000. The
Company adopted SFAS 133 effective January 1, 2001. The adoption of SFAS No. 133
will not have a material effect on its earnings or statement of financial
position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, is to be effective
October 1, 2000. Adoption of SAB 101 did not have a material effect on our
profit from operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). For FiberVisions Products, these statements will generally
become effective January 1, 2002, although business combinations initiated after
June 30, 2001 are subject to the non-amortization and purchase accounting
provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. The assessment of
goodwill for impairment is a complex issue in which the Company must determine,
among other things, the fair value of each defined reporting unit. It is,
therefore, not possible at this time to predict the impact, if any, that the
impairment assessment provisions of SFAS 142 will have on FiberVisions Products'
financial statements.
212
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assets. SFAS 143 will become effective for FiberVisions
Products, Inc. in January 1, 2003 and requires recognition of a liability for an
asset retirement obligation in the period in which it is incurred. Management is
in the process of evaluating the impact this standard will have on the Company's
financial statements.
3. RECEIVABLES FROM AFFILIATES
Trade receivables from affiliates, consists of $1,933 thousand due from ES
FiberVisions, net of $1,647 thousand of accumulated losses of unconsolidated
companies in excess of investment (see Note 5).
4. INVENTORIES
The components of inventories are:
2000 1999
------ ------
Finished products.......................................... $ 766 $ 467
Raw materials.............................................. 1,254 1,116
Work in process............................................ 33 41
------ ------
Total...................................................... $2,053 $1,624
====== ======
5. INVESTMENTS
The equity investments in affiliated companies consist of:
2000 1999
------- -------
(DOLLARS IN
THOUSANDS)
Investment in FiberVisions, LP........................... $18,140 $15,677
In 1998, Products entered into a 50% joint venture with Fibervisions Inc.
Products and FiberVisions Inc. manufacture products for the joint venture,
FiberVisions LP, under a manufacturing agreement. Products share of the net
income was $2,463 thousand and $12,716 thousand in 2000 and 1999 respectively.
On January 1, 2000 Products and Chisso Polypro Fiber Co., Ltd formed a
50/50 joint venture, ES FiberVisions, combining their bicomponent fibers
businesses outside of Japan. While Products has a 50% equity interest, it's
share of joint venture income is 67%. The venture extends the Company's strategy
to continue globalization of bicomponent fiber by establishing sales support
facilities in key regions. Both parent companies supply fiber to the joint
venture under manufacturing agreements. Products manufactures bicomponent fibers
for the joint venture at the Varde, Denmark and Athens, Georgia locations. The
annual sales of the venture were approximately $48 million in fiscal 2000.
Products share of net loss for 2000 was $406.
213
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information for the equity affiliates at December 31,
and the years then ended is as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Current assets.............................................. $ 33,023 $ 27,878
Non Current assets.......................................... 9,335 3,475
Current liabilities......................................... 6,476 --
Net sales................................................... $164,714 $150,450
Gross profit................................................ 8,397 27,730
Net earnings................................................ 4,305 25,432
The investments are partnerships which require the associated tax benefit
or expense to be recorded by the parent.
6. LONG TERM DEBT -- THIRD PARTY
In December 1996 the Company entered into a long-term lease purchase
obligation with The Athens-Clark County Industrial Development Authority to
purchase land. The interest rate is fixed at 1% per annum and the due date of
the obligation is December 2020. The balance of the obligation was $250 at
December 31, 2000 and 1999.
7. ADDITIONAL BALANCE SHEET DETAIL
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Property, plant, and equipment
Land...................................................... $ 430 $ 430
Buildings and equipment................................... 45,703 45,659
Construction in progress.................................. 4,682 2,593
-------- --------
Total....................................................... 50,815 48,682
Accumulated depreciation and amortization................. (13,175) (10,047)
-------- --------
Net property, plant, and equipment........................ $ 37,640 $ 38,635
======== ========
9. GOODWILL
At December 31, 2000 and 1999, the goodwill was:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Goodwill.................................................... $43,290 $43,290
Less accumulated amortization............................... (2,756) (1,652)
------- -------
Net goodwill and other intangible assets.................. $40,534 $41,638
======= =======
In July 1998, Hercules Inc. completed the acquisition of 49% share of
FiberVisions L.L.C. owned by its joint venture partner, Jacob Holm & Son A/S,
for approximately $230 million in cash, plus assumed debt of $188 million. The
allocation of the purchase price resulted in $188,051 of goodwill for the
FiberVisons group, which is being amortized over its estimated useful life of 40
years. $43,290 of the goodwill was assigned to Products.
214
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INTEREST (INCOME) EXPENSE
Interest costs are summarized as follows:
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Interest Expense............................................ $ 2,201 $2,311
Interest Income............................................. (2,344) (885)
------- ------
Interest (income) expense, net.............................. $ (143) $1,426
======= ======
11. OTHER OPERATING EXPENSES (INCOME), NET
Other operating expenses (income), net, consists of the following:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Goodwill and intangible amortization........................ $1,104 $1,104
Miscellaneous expense, net.................................. 8 21
------ ------
$1,112 $1,125
====== ======
12. LONG TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Hercules manages the Company's cash and indebtedness. The majority of the
cash provided by or used by the Company is provided through this consolidated
cash and debt management system. As a result, the amount of domestic cash or
debt historically related to the Company is not determinable. For the purposes
of the Company's historical financial statements all of its positive or negative
cash flows have been treated as cash transferred to or from its parent.
The Company has an intercompany loan with the Hercules Group in the amount
of $34,280 and $36,251 which is included in the net Hercules Group investment
balance at December 31, 2000 and 1999, respectively. In 2000 and 1999 interest
was charged on the intercompany loans based on the stated rate of 6.5%. The loan
is payable upon demand.
The Company also has an intercompany receivable with the Hercules Group in
the amount of $16,258 and $17,378 which is included in the net Hercules Group
investment balance at December 31, 2000 and 1999, respectively. During 2000 and
1999 the weighted average interest rate on the intercompany borrowings was 7.4%
and 6.4%, respectively.
13. INCOME TAXES
A summary of the components of the tax provision follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Currently payable
Domestic.................................................. $ (438) $ (169)
Deferred
Domestic.................................................. 1,009 4,218
------ ------
Provision for income taxes.................................. $ 571 $4,049
====== ======
215
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax liabilities (assets) at December 31 consist of:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Depreciation................................................ $ 9,369 $ 8,683
------- -------
Gross deferred tax liabilities.............................. 9,369 8,683
------- -------
Inventory................................................... $ (154) $ (116)
Accrued expenses............................................ (152) 20
Loss carryforwards.......................................... (1,309) (2,223)
Amortization................................................ (412) (453)
Other....................................................... (422) --
------- -------
Gross deferred tax assets................................... (2,449) (2,772)
------- -------
Total deferred income taxes................................. $ 6,920 $ 5,911
======= =======
A reconciliation of the statutory income tax rate to the effective rate
follows:
2000 1999
----- -----
Statutory income tax rate................................... 35.00% 35.00%
Rate differential adjustment................................ -- 2.46
State taxes................................................. 2.31 0.69
Reserves.................................................... (0.74) 5.83
Other....................................................... (1.72) (8.47)
----- -----
Effective tax rate.......................................... 34.85% 35.51%
===== =====
14. NET HERCULES GROUP INVESTMENT
Changes in net Hercules Group investment were as follows:
(DOLLARS IN
THOUSANDS)
Balance at January 1, 1999.................................. $85,603
Net income for the year ended December 31, 1999............. 7,351
Intercompany transactions, net.............................. (4,463)
-------
Balance at December 31, 1999................................ 88,491
Net income for the year ended December 31, 2000............. 1,067
Intercompany transactions, net.............................. 505
-------
Balance at December 31, 2000................................ $90,063
=======
15. COMMITMENTS AND CONTINGENCIES
The Company has operating leases (storage space and data processing
equipment) expiring at various dates. Rental expense was $14 thousand in 2000
and $10 thousand in 1999.
216
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net minimum future payments at December 31, 2000 are as follows:
(DOLLARS IN
THOUSANDS)
2001........................................................ $14
2002........................................................ 9
2003........................................................ 8
2004........................................................ 6
2005........................................................ 3
---
Total............................................. $40
===
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business. In the opinion of the Company's
management, none of such litigation as of December 31, 2000 is likely to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
16. PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company participates in a defined benefit pension plan sponsored by
Hercules which covers substantially all employees of Hercules in the U.S.
Benefits under this plan are based on the average final pay and years of
service. Hercules also provides postretirement health care and life insurance
benefits to eligible retired employees and their dependents.
Information on the actuarial present value of the benefit obligation and
fair value of the plan assets is not presented as Hercules manages its U.S.
employee benefit plans on a consolidated basis and such information is not
maintained separately for the U.S. employees of the Company. The Company's
statement of operation includes an allocation of the costs of the U.S. benefits
plans. The pension costs were allocated based on percentage of pensionable
wages, for each of the years presented, postretirement benefit costs were
allocated using factors derived from the relative net assets and revenues. Net
pension expense (income) of Hercules allocated to the Company was ($129) for the
year ended December 31, 2000.
Products maintains a 401(k) savings plan for its full-time employees in
North America. Each participant in the plan may elect to contribute 1 % to 15 %
of his or her annual salary to the plan subject to statutory limitations. The
company matches employee contributions to the plan at the rate of 50% of the
first 6% of salary contributed. The Company's matching contribution was $69
thousand and $79 thousand for 2000 and 1999, respectively.
17. RELATED PARTY TRANSACTIONS
The Company has entered into certain agreements with affiliated entities.
These agreements were developed in the context of parent/subsidiary relationship
and therefore may not necessarily reflect the result of arm-length negotiations
between independent parties. The terms of the agreements provide for the sale of
product to the affiliated entities based on a cost-plus formula.
Corporate and other allocations
As discussed in Note 1, the financial statements of the Company reflect
certain allocated support costs incurred by other entities in Hercules group.
These costs include executive, legal, accounting, human resources, tax,
auditing, cash management, purchasing, safety, information management, health
and environmental, investor relations and other corporate services. Allocations
and charges included in the Company's financial statements were based on either
a direct cost pass-through for items directly identified as related to the
Company's activities; or a percentage allocation for such services provided
based on factors such as
217
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revenues, net assets, cost of sales and relative weighting of geographic
activity. These allocations are reflected in the selling, general and
administrative line item in our statement of operations. Such allocations and
corporate charges totaled ($346) thousand and $129 thousand in 2000 and 1999,
respectively.
Sales to Hercules Group
The Company sells fiber in the normal course of business to the Hercules
Group. Company's revenues from sales to the Hercules Group were $33,695 thousand
and $31,013 thousand in 2000 and 1999, respectively.
Purchases from Hercules Group
The Company purchases supplies in the normal course of business from the
Hercules Group. The Company's purchases from Hercules Group were $7 thousand and
$8 thousand in 2000 and 1999, respectively.
218
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying balance sheets and the related statements
of income and comprehensive income and of cash flows present fairly, in all
material respects, the financial position of Hercules Canada, Inc., a subsidiary
of Hercules Incorporated, at December 31, 2000 and 1999 and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Mississauga, Ontario
June 15, 2001
219
HERCULES CANADA, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEAR ENDED
DECEMBER 31,
---------------
2000 1999
------ ------
(THOUSANDS OF
U.S. DOLLARS)
Equity in income of affiliated company (note 3)............. $4,003 $3,221
Interest and debt expense (note 9).......................... 1,021 311
Interest income (note 9).................................... (136) --
Other expense -- net........................................ 67 17
------ ------
Income before income taxes................................ 3,051 2,893
Provision for income taxes (note 7)......................... 2,281 1,977
------ ------
Net income................................................ 770 916
Translation adjustments..................................... (105) 676
------ ------
Comprehensive income...................................... $ 665 $1,592
====== ======
The accompanying notes are an integral part of the financial statements.
220
HERCULES CANADA, INC.
BALANCE SHEETS
DECEMBER 31,
--------------------
2000 1999
-------- --------
(THOUSANDS OF
U.S. DOLLARS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 33 $ --
Income taxes receivable................................... 1,186 1,099
-------- --------
Total current assets...................................... 1,219 1,099
Investment (note 3)......................................... 12,010 15,359
-------- --------
Total assets.............................................. $ 13,229 $ 16,458
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Bank overdraft (note 4)................................... $ -- $ 1,249
Accrued expenses.......................................... 341 48
-------- --------
Total current liabilities................................. 341 1,297
Deferred income taxes (note 7).............................. 1,174 1,041
-------- --------
Total liabilities......................................... 1,515 2,338
-------- --------
Contingencies (note 8)...................................... -- --
Net Hercules Group investment (note 6)
Accumulated other comprehensive loss...................... (10,160) (10,055)
Intercompany transactions (note 5)........................ 21,874 24,175
-------- --------
Total net Hercules Group investment....................... 11,714 14,120
-------- --------
Total liabilities and net Hercules Group investment....... $ 13,229 $ 16,458
======== ========
The accompanying notes are an integral part of the financial statements.
221
HERCULES CANADA, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED
DECEMBER 31,
------------------
2000 1999
------- -------
(THOUSANDS OF
U.S. DOLLARS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income.................................................. $ 770 $ 916
Adjustments to reconcile net income to net cash provided by
operations
Equity in income of affiliated company -- net of
withdrawals from partnership equity.................... 3,877 (3,221)
Deferred income taxes..................................... 166 365
Accruals and deferrals of cash receipts and payments
Income taxes receivable................................... (632) (2,828)
Accrued expenses.......................................... 293 48
Transfer to Hercules Group................................ (1,632) (22)
------- -------
Net cash provided by (used in) operations................. 2,842 (4,742)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Transfers (to) from Hercules Group.......................... (1,594) 3,497
(Decrease) increase in bank overdraft....................... (1,237) 1,245
------- -------
Net cash (used in) provided by financing activities....... (2,831) 4,742
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Withdrawals from equity in partnership in excess of
earnings.................................................. 24 --
------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................... (2) --
------- -------
Net increase in cash and cash equivalents................... 33 --
Cash and cash equivalents -- Beginning of year.............. -- --
------- -------
Cash and cash equivalents -- End of year.................. $ 33 $ --
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ 428 $ 70
Income taxes.............................................. 436 (790)
The accompanying notes are an integral part of the financial statements.
222
HERCULES CANADA, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Hercules Canada, Inc. (HCI or the Company) is a holding company, which is a
partner in Hercules Canada Partnership (HCP). The majority partner in HCP is
BetzDearborn Canada, Inc. (BDCI), which is an affiliate company under common
control of Hercules Incorporated (Hercules). HCI is owned 100% by Hercules.
Historically, separate company stand-alone financial statements were not
prepared for HCI. In November 2000, Hercules amended its senior credit facility
and ESOP credit facility (the Facilities). The Facilities, as amended, are
secured by liens on Hercules' property and assets (and those of Hercules'
Canadian subsidiaries, including HCI), a pledge of the stock and partnership and
member interests of substantially all of Hercules' U.S. subsidiaries and 65% of
the stock of non-U.S.A. subsidiaries directly owned by Hercules, including HCI,
and a pledge of Hercules' U.S.A. intercompany indebtedness. These financial
statements present the financial information on HCI, a collateral party to the
Hercules debt, based on Hercules' understanding of Securities and Exchange
Commission's interpretation and application of Rule 3-16 under the Securities
and Exchange Commission's Regulation S-X. These statements were derived from
historical accounting records.
As a result of the Hercules acquisition of BetzDearborn Inc. on October 15,
1998, Hercules initiated a global process of internal reorganization, for which
the Company entered into an agreement with BDCI to transfer its business to a
newly created partnership, Hercules Canada Partnership. The Company has a 28.09%
share of future profits from the partnership. Since this reorganization is under
the common control of Hercules, the transactions have been accounted for in a
manner similar to pooling of interest.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments
Investments in affiliated companies with a 20% or greater ownership
interest are accounted for using the equity method of accounting and,
accordingly, net income includes HCI's share of the income of HCP.
Use of estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue recognition
Income earned by HCI is limited to its share of income of HCP. This is
recognized on the same basis as net income is generated in HCP. Interest income
is recognized on the note receivable from the Hercules Group on a daily basis.
Cash and cash equivalents
Cash equivalents include commercial paper and other securities with
original maturities of 90 days or less. Book value approximates fair value
because of the short maturity of those instruments.
Foreign currency translation and transactions
The accompanying financial statements are reported in U.S. dollars. The
Canadian dollar is the functional currency for HCI. The translation of the
functional currency into U.S. dollars (reporting currency) is performed for
assets and liabilities using the current exchange rates in effect at the balance
sheets dates, and for revenues, costs and expenses using average exchange rates
prevailing during the reporting periods.
223
HERCULES CANADA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Adjustments resulting from the translation of functional currency financial
statements to reporting currency are accumulated and reported as other
comprehensive income, a component of net Hercules Group investment.
Transactions in foreign currency are recorded at the exchange rate
prevailing on the date of transaction. Monetary assets and liabilities
denominated in foreign currencies are expressed in the functional currency at
the exchange rates in effect at the balance sheets dates. Revenues, costs and
expenses are recorded using average exchange rates prevailing during the
reporting periods. Gains or losses resulting from foreign currency transactions
are included in the statements of income.
Net Hercules Group investment
The net Hercules Group investment account reflects the balance of HCI's
historical earnings, intercompany amounts, foreign currency translation and
other transactions between HCI and the Hercules Group.
Income taxes
The provisions for income taxes have been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year, plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax basis of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities", requires that all derivative instruments be recorded on the
balance sheets at their fair value. This statement, as amended, is effective for
all fiscal quarters of fiscal years beginning after December 31, 2000. The
adoption of SFAS No. 133 did not have a material effect on the Company's
earnings or financial position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, is to be effective
October 1, 2000. Adoption of SAB 101 did not have a material effect on earnings.
3. INVESTMENT
The investment in HCP is accounted for on the equity basis. As this
investment is a partnership, the associated tax benefit or expense is recorded
by its parent companies. The amount of retained earnings in the Company that
represents undistributed earnings of HCP is $nil (1999 -- $3,877 thousand).
During 2000, the Company received a distribution of $7,904 thousand
(1999 -- $nil).
224
HERCULES CANADA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information for this equity affiliate at December 31
and for the years then ended is as follows:
2000 1999
-------- --------
(THOUSANDS OF
U.S. DOLLARS)
Current assets.............................................. $ 42,361 $ 42,345
Non-current assets.......................................... 315,770 333,194
-------- --------
Total assets................................................ $358,131 $375,539
======== ========
Current liabilities......................................... $ 34,418 $ 31,010
======== ========
Net sales................................................... $178,512 $165,866
Gross profit................................................ 70,700 71,238
Net earnings................................................ 14,251 11,467
4. BANK OVERDRAFT
Bank borrowings represent primarily overdraft facilities and short-term
lines of credit, which are generally payable on demand with interest at various
rates. Book values of bank borrowings approximate market value because of their
short maturity period.
At December 31, 2000, HCI had $331 thousand of unused lines of credit that
may be drawn as needed, with interest at a negotiated spread over lenders' cost
of funds. Lines of credit in use at December 31, 1999 totalled $664 thousand.
Weighted average interest rates on short-term borrowings at December 31, 2000
and 1999 were nil and 6.5%, respectively. All lines of credit are payable in
Canadian funds.
5. INTERCOMPANY NOTE RECEIVABLE, LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
HCI has an intercompany loan with the Hercules Group in the amount of
$15,882 thousand and $12,295 thousand, which is included in the net Hercules
Group investment balance as of December 31, 2000 and 1999, respectively. The
loan is denominated in Canadian dollars, is due on demand and bears interest at
10%.
Also included in the net Hercules Group investment balance as of December
31, 2000 is a note receivable that HCI has with the Hercules Group in the amount
of $2,978 thousand. It is denominated in Canadian dollars, is due on demand and
bears interest at 10%.
225
HERCULES CANADA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. NET HERCULES GROUP INVESTMENT
Changes in net parent investment were as follows:
(THOUSANDS OF
U.S. DOLLARS)
Balance -- January 1, 1999.................................. $10,774
Net income................................................ 916
Other comprehensive income................................ 676
Intercompany transactions -- net.......................... 1,754
-------
Balance -- December 31, 1999................................ 14,120
Net income................................................ 770
Other comprehensive loss.................................. (105)
Intercompany transactions -- net.......................... (3,071)
-------
Balance -- December 31, 2000................................ $11,714
=======
The Company includes accumulated comprehensive income or loss in net
Hercules Group investment. At December 31, 2000 and 1999, accumulated
comprehensive loss included a cumulative loss of $10,160 thousand and $10,055
thousand, respectively, of foreign currency translation adjustments.
7. INCOME TAXES
A summary of the components of the tax provision follows:
2000 1999
------ ------
(THOUSANDS OF
U.S. DOLLARS)
Current..................................................... $2,115 $1,612
Deferred.................................................... 166 365
------ ------
Provision for income taxes.................................. $2,281 $1,977
====== ======
The deferred tax liability at December 31 is comprised of:
2000 1999
------ ------
(THOUSANDS OF
U.S. DOLLARS)
Accrued expenses of HCP..................................... 35 288
------ ------
Gross deferred tax assets................................... 35 288
------ ------
Depreciation of HCP......................................... 574 754
Prepaid pension and post-retirement benefits of HCP......... 622 545
Other....................................................... 13 30
------ ------
Gross deferred tax liabilities.............................. 1,209 1,329
------ ------
Total deferred income tax liability......................... $1,174 $1,041
====== ======
226
HERCULES CANADA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory income tax rate to the effective rate is
as follows:
2000 1999
----- -----
Statutory income tax rate................................... 40.14% 40.54%
Goodwill amortization of HCP................................ 30.12 28.47
Non-deductible expenses..................................... 2.37 2.69
Other....................................................... 2.13 (3.36)
----- -----
Effective tax rate.......................................... 74.76% 68.34%
===== =====
8. CONTINGENCIES
The Company, currently and from time to time, is involved in litigation
incidental to the conduct of its business. In the opinion of the Company's
management, none of such litigation as of December 31, 2000 is likely to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
9. RELATED PARTY TRANSACTIONS
In the year 2000, HCI incurred interest expense of $1,021 thousand
(1999 -- $311 thousand) on its intercompany loan with the Hercules Group. In
2000, HCI also earned interest income of $136 thousand (1999 -- $nil) on its
note receivable with the Hercules Group.
227
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying balance sheets and the related statements
of income and comprehensive income (loss) and cash flows present fairly, in all
material respects, the financial position of Hercules Chemicals (Taiwan) Co.,
Limited, a subsidiary of Hercules Incorporated, at November 30, 2000 and 1999,
and the results of its operations and its cash flows for each of the three years
in the period ended November 30, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers
Taipei, Taiwan, Republic of China
October 19, 2001
228
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
2000 1999 1998
-------- -------- -------
(DOLLARS IN THOUSANDS)
Sales to third parties...................................... $ 27,467 $ 22,605 $12,489
Sales to Hercules group..................................... 2,373 1,199 1,050
-------- -------- -------
29,840 23,804 13,539
Cost of sales............................................... (15,801) (13,565) (8,808)
Selling, general, and administrative expenses............... (8,235) (7,734) (3,506)
Goodwill amortization....................................... (419) (405) (98)
Royalty expense............................................. (1,852) (1,286) (606)
-------- -------- -------
Profit from operations...................................... 3,533 814 521
Other expense, net (Note 9)................................. (286) (184) (240)
-------- -------- -------
Income before income taxes.................................. 3,247 630 281
Provision for income taxes (Note 11)........................ (949) (215) (72)
-------- -------- -------
Net Income.................................................. 2,298 415 209
Translation adjustments, net of tax......................... (1,051) 565 (263)
-------- -------- -------
Comprehensive income (loss)................................. $ 1,247 $ 980 $ (54)
======== ======== =======
The accompanying notes are an integral part of the financial statements.
229
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
BALANCE SHEET
NOVEMBER 30,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Current Assets
Cash and cash equivalents................................. $ 466 $ 296
Notes receivable.......................................... 1,038 1,103
Accounts receivable, net (Note 3)......................... 5,400 5,934
Inventories (Note 4)...................................... 3,600 2,823
Deferred income taxes (Note 10)........................... 448 199
Other current assets...................................... 451 692
------- -------
Total current assets................................... 11,403 11,047
Property, plant and equipment, net (Note 5)................. 5,660 6,215
Goodwill, net (Note 12)..................................... 14,926 16,167
Deferred income taxes (Note 10)............................. 425 514
Deferred charges............................................ 2,863 444
Other assets................................................ 107 141
------- -------
TOTAL ASSETS................................................ $35,384 $34,528
======= =======
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current Liabilities
Short term debt and borrowings (Note 6)................... $ 2,923 $ 5,151
Accounts payable.......................................... 1,099 1,161
Accrued expenses (Note 7)................................. 3,252 2,763
Other current liabilities................................. 784 187
------- -------
Total current liabilities.............................. 8,058 9,262
------- -------
Total liabilities........................................... $ 8,058 $ 9,262
Commitment and contingencies (Note 13)...................... -- --
Net Hercules Group Investment (Note 16)
Accumulated other comprehensive income.................... (814) 188
Intercompany transactions, net............................ 28,140 25,078
------- -------
Net Hercules Group Investment.......................... 27,326 25,266
------- -------
TOTAL LIABILITIES AND NET HERCULES GROUP INVESTMENT......... $35,384 $34,528
======= =======
The accompanying notes are an integral part of the financial statements.
230
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 30,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 2,298 $ 415 $ 209
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Depreciation............................................ 536 440 322
Amortization............................................ 447 433 124
Provision for bad debts................................. 118 14 42
(Gain) Loss on disposal of fixed assets................. (47) 31 (8)
Corporate and other cost allocations.................... 941 1,241 396
Accruals and deferrals of cash receipts and payments:
Notes receivable........................................ 7 (137) (127)
Accounts receivable..................................... 112 (1,430) (1,224)
Inventories............................................. (925) (354) (124)
Prepaid pension expense................................. 124 160 (282)
Other current assets.................................... 82 (19) (27)
Deferred tax assets..................................... (200) 392 (92)
Accounts payable........................................ -- 223 (964)
Accrued expense......................................... 578 (103) 561
Other current liabilities............................... 662 35 75
Other liabilities....................................... -- (482) --
Transfers to/from Hercules Group........................ (177) (76) 925
------- ------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......... 4,556 783 (194)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditure....................................... (397) (589) (390)
Proceeds from disposal of fixed assets.................... 165 186 8
Deposit................................................... (6) 52 (19)
Deferred charges.......................................... (2,436) (43) 135
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES....................... (2,674) (394) (266)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of short-term notes................ 704 3,931 263
Repayment of short-term notes loan........................ (4,060) (273) (918)
Increase in commercial paper payable...................... 1,280 (753) 1,763
Transfers to/from Hercules Group.......................... -- (3,888) --
------- ------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES......... (2,076) (983) 1,108
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 364 (61) 191
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 170 (655) 839
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 296 951 112
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 466 $ 296 $ 951
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interests................................................. $ 238 $ 203 $ 172
Income tax, net........................................... 266 173 516
NON CASH INVESTING AND FINANCING ACTIVITIES
Corporate and other cost allocations...................... $ 941 $ 1,241 $ 396
Pushdow adjustment on the acquisition of BetzDearborn..... -- -- 21,279
The accompanying notes are an integral part of the financial statements.
231
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The Company
Hercules Chemicals (Taiwan) Co., Limited (the "Company"), a wholly-owned
subsidiary of Hercules Incorporated ("Hercules"), was incorporated in the
Republic of China (ROC) on March 16, 1984. The Company is primarily engaged in
the manufacturing and distribution of chemicals, including specialty chemicals
and equipment for industrial and waste water treatments, and the provision of
related engineering services in ROC.
Historically, separate company stand-alone financial statements were not
prepared for the Company. In November 2000, Hercules amended its senior credit
facility and ESOP credit facility (the "Facilities"). The Facilities, as
amended, are secured by liens on Hercules' property and assets (and those of
Hercules' Canadian Subsidiaries), a pledge of the stock and partnership and
member interests of substantially all of Hercules' domestic subsidiaries and 65%
of the stock of foreign subsidiaries including the companies directly owned by
Hercules, and a pledge of Hercules' domestic intercompany indebtedness. These
financial statements present the financial information on the Company, a
collateral party to the Hercules' debt, based on the Hercules's understanding of
Securities and Exchange Commission's interpretation and application of Rule 3-16
under the Securities and Exchange Commission's Regulation S-X. These statements
were derived from historical accounting records.
When Hercules acquired all of the outstanding shares of BetzDearborn Inc on
October 15, 1998, it paid $2,235 million in cash and $186 million in common
stock in exchanged for the shares held by the BetzDearborn ESOP Trust. As a
result of this acquisition, the Company, as a part of an effort by Hercules,
entered into an internal reorganization transaction during 1999 and 2000. The
transaction included merging BetzDearborn Taiwan Ltd. into the Company. As this
reorganization is under the common control of Hercules, this transaction has
been accounted for in a manner similar to pooling of interest.
The purchase price allocated to the Company was approximately $20 million.
During 1999, Hercules completed the purchase price allocation and the final
determination of goodwill was $2,170 million of which the amount attributable to
the Company was approximately $16 million. These financial statements include
the push down of fair value adjustments to assets and liabilities, including
goodwill, other intangible assets and property, plant and equipment and their
related amortization and depreciation adjustments. The Company participates in
Hercules' centralized cash management system. Accordingly, cash received from
the Company operations is transferred to Hercules on a periodic basis, and
Hercules funds all operational and capital requirements.
The financial statements of the Company reflect certain allocated support
costs incurred by other entities in the Hercules Group. These costs include
executive, legal, accounting, tax, auditing, cash management, purchasing, human
resources, safety, health and environmental, information management, investor
relations and other corporate services. Allocations and charges included in the
Company's financial statements were based on either a direct cost pass-through
for items directly identified as related to the Company's activities; a
percentage allocation for such services provided based on factors such as sales,
net assets, or cost of sales; or a relative weighting of geographic activity.
Management believes that the allocation methods are reasonable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that effect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
232
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
Cash equivalents include cash in banks and certificates of deposit with
original maturities of 90 days or less. Book value approximates fair value
because of the short maturity of those instruments.
Foreign currency translation and transactions
The accompanying financial statements are reported in U.S. dollars. The New
Taiwan dollar is the functional currency for the Company. The translation of the
functional currencies into U.S. dollars (reporting currency) is performed for
assets and liabilities using the current exchange rates in effect at the balance
sheet date, and for revenues, costs and expenses using average exchange rates
prevailing during the reporting periods. Adjustments resulting from the
translation of functional currency financial statements to reporting currency
are accumulated and reported as other comprehensive income, a separate component
of Net Hercules Group Investment.
Transactions in foreign currency are recorded at the exchange rate
prevailing on the date of transaction. Monetary assets and liabilities
denominated in foreign currencies are expressed in the functional currency at
the exchange rates in effect at the balance sheet date. Revenues, costs and
expenses are recorded using average exchange rates prevailing during the
reporting periods. Gains or losses resulting from foreign currency transactions
are included in the statement of income.
Financial instruments
The Company uses various non-derivative financial instruments, including
letters of credit, and generally does not require collateral to support its
financial instruments.
Inventories
Inventories are stated at the lower of cost or market value. Inventories
are valued at standard cost which approximates the average cost.
Property and depreciation
Property, plant and equipment are stated at cost and depreciated using
straight-line method. The estimated useful lives of depreciable assets are
estimated based on the economic useful lives of assets.
Maintenance, repairs and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is expensed.
Goodwill
Goodwill is amortized on a straight-line basis over 40 years, the estimated
future period to be benefited.
Long-Lived assets
The company reviews its long-lived assets, including goodwill for
impairment on an exception basis whenever events or changes in circumstances
indicate the carrying amounts of the assets may not be recoverable through
undiscounted future cash flows. If an impairment loss has occurred based on
expected future cash flows (undiscounted), the loss is recognized in the income
statement. The amount of the impairment loss is the excess of the carrying
amount of the impaired asset over the fair value of the asset. The fair value
represents expected future cash flows from the use of the assets, discounted at
the rate used to evaluate potential investments.
233
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Charges
Deferred charges include construction-in-progress costs primarily
consisting of fixed assets not yet placed in use. Once the projects are
completed and approved, the assets are reclassified to property, plant and
equipment and are depreciated there in accordance with the Company's policy.
Generally, these assets are held in deferred charges for no longer than one
year.
Revenue recognition
The Company recognizes revenue when the earning process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with the terms of the agreement, title and risk of loss
have been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Company's experience. The corresponding shipping and handling costs are
included in cost of sales.
Environmental expenditures
Environmental expenditures that pertain to current operations or future
revenues are expensed or capitalized according to the Company's capitalization
policy. Expenditures for remediation of an existing condition caused by past
operations that do not contribute to current or future revenues are expensed.
Liabilities are recognized for remedial activities when the cleanup is probable
and the cost can be reasonably estimated.
Income Taxes
Income tax expense in the accompanying financial statements has been
computed assuming the Company filed separate income tax returns.
The provisions for income taxes have been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax basis of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
Stock-based Compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25)). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-based Compensation," requires companies electing to continue to use the
intrinsic-value method to make pro forma disclosures of net income as if the
fair-value-based method of accounting had been applied.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the Company's large number of customers and their dispersion across many
different industries and locations.
234
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net Hercules Group Investment
The Net Hercules Group Investment account reflects the balance of the
Company's historical earnings, intercompany amounts, foreign currency
translation and other transactions between the Company and the Hercules Group.
New accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities", as amended by Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FAS Statement No. 133", and Statement No. 138, "Accounting for
Derivative Instruments and Certain Hedging Activities", requires that all
derivative instruments be recorded on the balance sheet at their fair value.
This statement, as amended, is effective for all fiscal quarters of fiscal years
after December 31, 2000. As the Company does not have any derivative instruments
of hedging activities, the adoption of SFAS 133 on January 1, 2001 did not have
a material impact on its financial position or earnings.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was to be effective
October 1, 2000. Adoption of SAB 101 did not have a material effect on our
profit from operations.
In July 2001, the Financial Accounting Standards Board (FASB) approved the
issuance of the Statement of Financial Accounting Standard No. 141 (SFAS 141),
Business Combination and, Statement of Financial Accounting Standard No. 142
(SFAS 142), Goodwill and Other Intangible Assets. For the Company, these
statements will generally become effective December 1, 2002, although business
combinations initiated after June 30, 2001 are subject to the non-amortization
and purchase accounting.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. The Company is currently
in the process of conducting an assessment of the actual impact of the
non-amortization provision of SFAS 142. The assessment of goodwill for
impairment is a complex issue in which the Company must determine, among other
things, the fair value of each defined reporting unit. It is, therefore, not
possible at this time to predict the impact, if any, that the impairment
assessment provisions of SFAS 142 will have on the Company's financial
statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assts. SFAS 143 will become effective for the Company
from December 1, 2003 and requires recognition of a liability for an asset
retirement obligation in the period in which it is incurred. Management is in
the process of evaluating the impact this standard will have on the Company's
financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.
235
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE, NET
The accounts receivable, net, consists of:
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Trade....................................................... $5,567 $6,034
Less Allowance for doubtful accounts........................ (167) (100)
------ ------
Total............................................. $5,400 $5,934
====== ======
4. INVENTORIES
The components of inventories are:
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Finished goods.............................................. $1,396 $ 673
Raw materials and supplies.................................. 1,564 1,468
Goods in transit............................................ 640 682
------ ------
Total............................................. $3,600 $2,823
====== ======
5. PROPERTY, PLANT, AND EQUIPMENT
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Buildings and improvements.................................. $ 3,752 $ 4,082
Machinery and equipment..................................... 5,248 5,226
Other equipment............................................. 965 895
9,964 10,202
------- -------
Less: Accumulated depreciation.............................. (4,304) (3,987)
------- -------
Total............................................. $ 5,660 $ 6,215
======= =======
Depreciation expense for the years ended November 30, 2000, 1999 and 1998
amounted to $536 thousands, $440 thousands and $322 thousands, respectively.
6. SHORT TERM DEBT
At November 30, 2000 and 1999, the Company has an outstanding balance of
$665 thousands and $4 million, respectively, on advances on the Company's $6.5
million revolving bank facility. The facility, guaranteed by Hercules, bears
floating interest rates ranging from 6.61% to 12% and 4.75% to 7.6%, during 2000
and 1999, respectively.
Commercial papers-short term, which are guaranteed by CitiBank and Hong
Kong Shanghai Bank bearing an interest rate of 5% at November 30, 2000 and 1999,
are as follows:
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Commercial papers payable................................... $2,267 $1,116
Less: unamortized discount.................................. (9) (9)
------ ------
Total............................................. $2,258 $1,107
====== ======
236
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. ACCRUED EXPENSES
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Other accrued expenses...................................... $1,010 $ 673
Payroll and employee benefits............................... 450 540
Restructuring reserves...................................... 1,199 512
Accrued royalty expenses.................................... 593 1,038
------ ------
Total............................................. $3,252 $2,763
====== ======
8. OTHER EXPENSES, NET
Other income (expenses), net consist of the following:
2000 1999 1998
----- ----- -----
(DOLLARS IN THOUSANDS)
Interest expense........................................... $(256) $(202) $(164)
Foreign exchange (loss) gain............................... 11 2 (57)
Interest income............................................ 9 10 3
Other (expenses) income.................................... (50) 6 (22)
----- ----- -----
Total............................................ $ 286 $(184) $(240)
===== ===== =====
9. RETIREMENT BENEFITS
The Company has a non-contributory defined benefit plan covering all its of
employees in ROC. The Company funds the plan through trust arrangements where
the assets of the fund are held separately from the employer. The level of
funding is in line with local practice and in accordance with the local tax and
supervisory requirements. The following table lists benefit obligations, plan
assets, and funded status of the plans:
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at December 1............................ $2,854 $2,388
Service cost................................................ 289 245
Interest cost............................................... 157 143
Benefits paid............................................... (489) --
Translation adjustments..................................... (146) 78
------ ------
Benefit obligation at November 30........................... $2,665 $2,854
====== ======
CHANGE IN PLAN ASSETS
Fair value of plan assets at December 1..................... $2,381 $2,107
Actual return on plan assets................................ 144 109
Company contributions....................................... 122 101
Benefits paid............................................... (464) --
Translation adjustments..................................... (114) 64
------ ------
Fair value of plan assets at November 30.................... $2,069 $2,381
====== ======
237
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Funded status of the plan................................... $ (596) $ (473)
Unrecognized net (gain) loss................................ 540 --
Unrecognized net transition obligation...................... -- 603
------ ------
Prepaid (accrued) benefit cost.............................. $ (55) $ 130
====== ======
AMOUNTS RECOGNIZED IN THE BALANCE SHEET CONSIST OF:......... $ -- $ 336
Prepaid benefit cost........................................ (55) (206)
------ ------
Accrued benefit liability................................... $ 55 $ 130
====== ======
ASSUMPTIONS AS OF NOVEMBER 30
Weighted-average discount rate.............................. 6% 6%
Expected return on plan assets.............................. 6% 6%
Rate of compensation increase............................... 6% 6%
2000 1999 1998
----- ----- ----
(DOLLARS IN THOUSANDS)
COMPONENTS OF NET PERIOD PENSION COST
Service cost................................................ $ 289 $ 245 $133
Interest cost............................................... 157 143 95
Return on plan assets (expected)............................ (144) (109) (81)
Amortization of net (gain) loss............................. -- 22 --
Amortization of transition asset............................ 34 (16) 27
----- ----- ----
Benefit cost................................................ $ 336 $ 285 $174
===== ===== ====
10. INCOME TAXES
A summary of the components of the tax provision is as follows:
2000 1999 1998
----- ----- -----
(DOLLARS IN THOUSANDS)
Current..................................................... $807 $ 11 $57
Deferred.................................................... 142 205 15
---- ---- ---
Provision for income taxes.................................. $949 $216 $72
==== ==== ===
238
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets consist of the following:
2000 1999
------- -------
(DOLLARS IN THOUSANDS)
Current items:
Unrealized expenses....................................... $151 $263
Unrealized foreign exchange loss (gain)................... 269 (72)
Allowance for doubtful accounts........................... 28 8
---- ----
$448 $199
==== ====
Non-current items:
Depreciation.............................................. $333 $463
Deferred pension cost..................................... 92 50
---- ----
$425 $513
==== ====
A reconciliation of the ROC statutory income tax rate to the effective rate
as follows:
2000 1999 1998
---- ---- ----
Statutory income tax rate................................... 25% 25% 25%
Additional 10% tax imposed on the undistributed earnings.... 2% -- --
Non-deductible amortization of goodwill..................... 1% 5% 3%
Non-deductible meals, entertainment and others.............. 1% 8% 8%
Investment tax credit....................................... -- (5)% (10)%
Other....................................................... -- 1% --
-- -- ---
Effective tax rate.......................................... 29% 34% 26%
== == ===
11. RELATED PARTY TRANSACTIONS
The Company has entered into certain agreements with affiliated entities.
These agreements were developed in the context of parent/subsidiary relationship
and therefore may not necessarily reflect the result of arms-length negotiations
between independent parties. The Company records sales with affiliates based on
a cost-plus formula developed and agreed-upon by both parties.
Corporate and other allocations
As discussed in Note 1, the financial statements of the Company reflect
certain allocated support costs incurred by other entities in Hercules Group.
These costs include executive, legal, accounting, tax, auditing, cash
management, purchasing, human resources, safety, health and environmental,
information management, research and development overhead, investor relations
and other corporate services. Allocations and charges included in the Company's
financial statements were based on either a direct cost pass-through for items
directly identified as related to the Company's activities; a percentage
allocation for such services provided based on factors such as revenues, net
assets, costs of sales or a relative weighting of geographic activity. These
allocations are reflected in the selling, general and administrative line item
in our statement of operations. Such allocations and corporate charges totaled
$427 thousand, $343 thousand, and $235 thousand in 2000, 1999, and 1998,
respectively.
Royalty expenses
The Company has an intellectual property license agreement with Hercules
under which the Company agreed to pay royalties on a basis rested on certain
percentages of the net sales of licensed products. The
239
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
agreement expires in December 2004. Royalty expenses were $1,252 thousands
$1,286 thousands and $606 thousands for the years ended November 30, 2000, 1999
and 1998, respectively.
Sales to affiliates
The Company sells paper and water treatment chemicals in the normal course
of business to affiliated companies. Company's revenues from sales to affiliated
companies were $2,372 thousand, $1,199 thousand and $1,050 thousand in 2000,
1999 and 1998, respectively.
Purchases from affiliates
The Company purchases raw materials and resale products for paper and water
treatment chemicals in the normal course of business to affiliated companies.
Company's expenses from purchases from affiliated companies were $8,338
thousand, $5,557 thousand and $5,264 thousand in 2000, 1999 and 1998,
respectively.
12. GOODWILL
Goodwill relates to the Hercules' 1998 purchase of BDTL. At November 30,
2000 and, 1999, goodwill was $14,926 thousand and $16,167 thousand,
respectively, (net of accumulated amortization of $890 thousand and $529
thousand respectively). The amortization period for goodwill is 40 years.
13. COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases (including office space, transportation,
and data processing equipment) expiring at various dates. Rental expense was
$307 thousand in 2000, $230 thousand in 1999, and $157 thousand in 1998. At
November 30, 2000, minimum rental payments under noncancelable leases aggregated
$469 thousand. The net minimum payments over the next four years are $241
thousand in 2001, $95 thousand in 2002, $81 thousand in 2003 and $52 thousand in
2004. There are no payments due in 2005 and thereafter.
Other
At November 30, 2000 the Company has an unused letter of credit amounting
to $124 thousands.
14. RESTRUCTURING
Pursuant to the plans in place to merge the operations of BDTL with the
Company and to rationalize the support infrastructure and other existing
operations, 22 employees (21 related to the 1998 BDTL acquisition) were
terminated and one facility was closed during 2000. Cash payments during 2000
amounted to $375 thousands for severance benefits and $15 thousands for other
exit costs. Cash payments during 1999 included $348 thousands for severance
benefits. In 1998, the Company incurred restructuring liabilities of $1,347
thousands in connection with the acquisition of BDTL (see Notes 1). These
liabilities included charges of $723 thousands for employee termination benefits
and $624 thousands for exit costs related to facility closures. The
restructuring liability was charged to goodwill as part of the purchase price
allocation related to the acquisition of BDTL.
240
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Severance benefits payments are based on years of service and generally
continue for 3 months to 24 months subsequent to termination. We expect to
substantially complete remaining actions under the plans in 2001. A
reconciliation of activity with respect to the liabilities established for these
plans is as follows:
2000 1999
-------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of year................................ $ 983 $1,386
Cash payments............................................... (390) (348)
----- ------
Balance at end of year...................................... $ 593 $1,038
===== ======
15. STOCK COMPENSATION
The Company participates in long-term incentive compensation plans
sponsored by Hercules. These plans provide for the grant of stock options and
the award of common stock and other market-based units to certain key employees
and non-employee directors.
In 1995, Hercules changed the structure of the long-term incentive
compensation plans to place a greater emphasis on shareholder value creation
through grants of regular stock options, performance-accelerated stock options,
and cash value awards (performance-based awards denominated in cash and payable
in shares of common or restricted stock, subject to the same restrictions as
restricted stock). Restricted stock and other market-based units are awarded
with respect to certain programs. The number of awarded shares outstanding was
491,488 at November 30, 2000, and 926,689 and 1,083,613 at November 30, 1999 and
1998, respectively.
At November 30, 2000, under Hercules' incentive compensation plans,
1,847,855 shares of common stock were available for grant as stock awards or
stock option awards. Stock awards are limited to approximately 15% of the total
authorizations. Regular stock options are granted at the market price on the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock options are also granted at
the market price on the date of grant and are normally exercisable at nine and
one-half years. Exercisability may be accelerated based upon the achievement of
predetermined performance goals. Both regular and performance-accelerated stock
options expire 10 years after the date of grant.
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to Hercules in the event of employment termination, except
in the case of death, disability, retirement, or other specified events.
The Company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. There were no charges to income for the cost of stock awards over the
restriction or performance period for 2000, 1999 and 1998, respectively.
241
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 2000, 1999 and 1998:
REGULAR
-----------------------------
NUMBER OF WEIGHTED-AVERAGE
SHARES PRICE
--------- ----------------
December 1, 1998.......................................... 5,900 $39.50
Granted................................................... 700 $47.81
Exercised................................................. -- --
Forfeited................................................. -- --
------ ------
November 30, 1998......................................... 6,600 $40.38
Granted................................................... 7,650 $37.74
Exercised................................................. -- --
Forfeited................................................. -- --
------ ------
November 30, 1999......................................... 14,250 $38.96
Granted................................................... -- --
Exercised................................................. -- --
Forfeited................................................. -- --
------ ------
November 30, 2000......................................... 14,250 $38.96
There were no performance-accelerated stock options granted or outstanding
during 2000, 1999 and 1998.
The weighted-average fair value of regular stock options granted during
1999 and 1998 was $8.26 and $12.88, respectively.
Following is a summary of regular stock options exercisable at November 31,
2000, 1999, and 1998, and their respective weighted-average share prices:
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISABLE SHARES PRICE
------------------- --------- ----------------
November 30, 1998.......................................... 2,360 $39.50
November 30, 1999.......................................... 5,000 $39.97
November 30, 2000.......................................... 9,520 $39.42
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICE RANGE AT 11/30/00 CONTRACTUAL LIFE EXERCISE PRICE AT 11/30/00 EXERCISE PRICE
----------------------------- ----------- ---------------- ---------------- ----------- ----------------
Regular Stock Options
$30 - $40 13,550 7.58 $38.50 8,960 $38.90
$40 - $50 700 7.35 $47.81 560 $47.81
------ -----
14,250 9,520
====== =====
The company's employees may also participate in the Hercules Employee Stock
Purchase Plan ("ESPP"). The ESPP is a qualified non-compensatory plan, which
allows eligible employees to acquire shares of common stock through systematic
payroll deductions. The plan consists of three-month subscription periods,
beginning July 1 of each year. The purchase price is 85% of the fair market
value of the common stock on either the first or last day of that subscription
period, whichever is lower. Purchases may range from 2% to 15% of an employee's
base salary each pay period, subject to certain limitations. Currently, 202,139
242
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
shares of Hercules Group common stock are registered for offer and sale under
the plan. Shares issued at November 30, 2000 and 1999, were 1,597,861 and
949,464, respectively. The Company applies APB Opinion 25 and related
interpretations in accounting for its Employee Stock Purchase Plan. Accordingly,
no compensation cost has been recognized for the Employee Stock Purchase Plan.
Had compensation cost for Hercules' Stock-Based Incentive Plans and
Employee Stock Purchase Plan been determined on the basis of fair value
according to SFAS No. 123, the fair value of each option granted or share
purchased would be estimated on the grant date using the Black-Scholes option
pricing model.
The following weighted-average assumptions would be used in estimating fair
value for 2000, 1999 and 1998:
REGULAR PERFORMANCE EMPLOYEE STOCK
ASSUMPTION PLAN ACCELERATED PLAN PURCHASE PLAN
---------- -------- ---------------- --------------
Dividend yield................................. 2% 3.4% 0.0%
Risk-free interest rate........................ 5.88% 5.38% 5.41%
Expected life.................................. 7.1 yrs. 5 yrs. 3 mos.
Expected volatility............................ 29.20% 27.31% 44.86%
The Company's net income for 2000, 1999 and 1998 would approximate the pro
forma amounts below:
2000 1999 1998
------- ----- -----
(DOLLARS IN THOUSANDS)
Net income
As reported............................................... $2,298 $415 $209
Pro forma................................................. $2,277 $395 $193
16. NET HERCULES GROUP INVESTMENT
Changes in Net Hercules Group Investment were as follows:
(DOLLARS IN
THOUSANDS)
Balance, December 1, 1997................................... $ 4,577
Net income................................................ 209
Other comprehensive income, (net of tax of $120).......... (359)
Intercompany transaction, net............................. 22,600
-------
Balance, November 30, 1998.................................. 27,027
Net income................................................ 415
Other comprehensive income, (net of tax of $182).......... 547
Intercompany transaction, net............................. (2,723)
-------
Balance, November 30, 1999.................................. 25,266
Net income................................................ 2,298
Other comprehensive income, (net of tax of $334).......... (1,002)
Intercompany transaction, net............................. 764
-------
Balance, November 30, 2000.................................. $27,326
=======
The Company includes accumulated other comprehensive income in net parent
investment. At November 30, 2000 and 1999, accumulated other comprehensive
income foreign currency translation adjustments only.
243
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and of cash flows present fairly, in
all material respects, the financial position of Hercules Credit, Inc., a
subsidiary of Hercules Incorporated, and its subsidiaries at December 31, 2000
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 10, 2001
244
HERCULES CREDIT, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Sales to third parties..................................... $274,775 $295,473 $349,179
Sales to Hercules Group.................................... 63,033 62,657 57,528
-------- -------- --------
337,808 358,130 406,707
Cost of sales.............................................. 227,272 250,066 278,091
Selling, general, and administrative expenses.............. 50,599 57,745 50,458
Research and development................................... 11,780 12,078 11,588
Goodwill and intangible asset amortization................. 1,014 1,014 1,014
Other operating expenses, net (Note 12).................... 22,259 3,554 10,245
-------- -------- --------
Profit from operations..................................... 24,884 33,673 55,311
Equity Income in affiliated companies...................... 9,423 7,358 6,028
Interest and debt expense.................................. 417 547 440
Other (income) expense, net................................ (1,468) 903 (469)
-------- -------- --------
Income before income taxes and minority interest........... 35,358 39,581 61,368
Provision for income taxes (Note 14)....................... 14,241 15,707 24,644
-------- -------- --------
Income before minority interest............................ 21,117 23,874 36,724
Minority interest.......................................... (164) (215) (336)
-------- -------- --------
Net income................................................. $ 20,953 $ 23,659 $ 36,388
======== ======== ========
The accompanying notes are an integral part of
the consolidated financial statements.
245
HERCULES CREDIT, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 2,592 $ 1,933
Accounts receivable, net (Note 3)......................... 35,743 46,045
Notes receivable (Note 4)................................. 3,600 --
Inventories (Note 5)...................................... 45,409 52,493
Other current assets...................................... 4,691 4,491
-------- --------
Total current assets.............................. 92,035 104,962
-------- --------
Property, plant, and equipment, net (Note 8)................ 92,229 92,652
Notes receivable (Note 4)................................... 3,000 --
Investments (Note 9)........................................ 93,046 87,070
Goodwill and other intangible assets, net (Note 10)......... 28,550 29,564
Deferred charges and other assets........................... 5,382 5,676
-------- --------
Total assets...................................... $314,242 $319,924
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 17,724 $ 24,323
Short-term debt (Note 6).................................. -- 1,650
Current tax liability..................................... 33,600 44,690
Accrued expenses (Note 8)................................. 25,590 26,750
-------- --------
Total current liabilities......................... 76,974 97,413
Deferred income taxes (Note 14)............................. 7,720 6,061
Pension and other postretirement benefits (Note 11)......... 110 (17)
Environmental and other liabilities......................... 32,863 21,816
-------- --------
Total liabilities................................. 117,667 125,273
Commitments and contingencies (Note 17)..................... -- --
Minority interest........................................... 3,800 3,636
Net Hercules Group Investment............................... 192,775 191,015
-------- --------
Total liabilities and Net Hercules Group
Investment....................................... $314,242 $319,924
======== ========
The accompanying notes are an integral part of
the consolidated financial statements.
246
HERCULES CREDIT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income.................................................. $ 20,953 $ 23,659 $ 36,388
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation.............................................. 9,861 11,131 12,019
Amortization.............................................. 1,014 1,014 1,014
Loss on disposal (Note 14)................................ 6,854 6,500 --
Loss on impairment of fixed assets (Note 12).............. -- 2,000 15,300
Affiliates' earnings in excess of dividends received...... (9,423) (7,358) (6,028)
Minority Loss............................................. 164 215 336
Corporate and other cost allocations...................... 17,569 25,148 19,105
Accruals and deferrals of cash receipts and payments:
Accounts receivable and other assets................... 10,103 4,523 5,930
Inventories............................................ 7,084 5,112 (7,483)
Accounts payable and accrued expenses.................. (16,324) 258 9,364
Environmental and other assets and liabilities......... 832 (5,496) 3,932
-------- -------- --------
Net cash provided by operations................... 48,687 66,706 89,877
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (9,437) (12,133) (20,856)
Investment in affiliate..................................... (179) 254 (63)
-------- -------- --------
Net cash used in investing activities............. (9,616) (11,879) (20,919)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of debt........................................... (1,650) -- (13)
Transfers to/from Hercules Group............................ (36,762) (57,115) (64,878)
-------- -------- --------
Net cash used in financing activities............. (38,412) (57,115) (64,891)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 659 (2,288) 4,067
Cash and cash equivalents at beginning of year.............. 1,933 4,221 154
-------- -------- --------
Cash and cash equivalents at end of year.......... $ 2,592 $ 1,933 $ 4,221
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ 417 $ 547 $ 440
Income taxes.............................................. $ 23,614 $ 22,697 $ 10,022
Noncash financing activities
Issuance of note receivable............................... 6,600 -- --
Corporate and other cost allocations...................... 17,569 25,148 19,105
The accompanying notes are an integral part of
the consolidated financial statements.
247
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Hercules Credit, Inc., ("Credit" or the "Company") is a U.S. holding
company which owns 99.4182% of Aqualon Company ("Aqualon") and 20% of Hercules
Finance. Credit, Aqualon and Hercules Finance are wholly owned subsidiaries of
Hercules Incorporated (Hercules).
Historically, separate company stand-alone financial statements were not
prepared for Credit. In November 2000, Hercules amended its senior credit
facility and ESOP credit facility (the "facilities"). The facilities, as
amended, are secured by liens on Hercules' property and assets (and those of
Hercules' Canadian Subsidiaries), a pledge of the stock of substantially all of
Hercules' domestic subsidiaries (including Hercules Credit) and 65% of the stock
of foreign subsidiaries directly owned by Hercules, and a pledge of Hercules'
domestic intercompany indebtedness. These financial statements present the
financial information on Credit, a collateral party to the Hercules debt, based
on Hercules' understanding of Securities and Exchange Commission's
interpretation and application of Rule 3-16 under the Securities and Exchange
Commission's Regulation S-X. These statements were derived from historical
accounting records.
As an operating division of Hercules, Credit participates in Hercules'
centralized cash management system. Accordingly, cash received from Credit's
operations is transferred to Hercules on a periodic basis, and Hercules funds
all operational and capital requirements.
The financial statements of Credit reflect certain allocated support costs
incurred by other entities in the Hercules group. These costs include executive,
legal, accounting, tax, auditing, cash management, purchasing, human resources,
safety, health and environmental, information management, investor relations and
other corporate services. Allocations and charges included in Credit's financial
statements were based on either a direct cost pass-through for items directly
identified as related to Credit's activities; a percentage allocation for such
services provided based on factors such as sales, net assets, or cost of sales;
or a relative weighting of geographic activity. Management believes that the
allocation methods are reasonable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Credit and
its' subsidiary, Aqualon. All intercompany transactions and profits have been
eliminated.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
Credit's experience. The corresponding shipping and handling costs are included
in cost of sales.
Environmental Expenditures
Environmental expenditures that pertain to current operations or future
revenues are expensed or capitalized according to Credit's capitalization
policy. Expenditures for remediation of an existing condition
248
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
caused by past operations that do not contribute to current or future revenues
are expensed. Liabilities are recognized for remedial activities when the
cleanup is probable and can be reasonably estimated.
Cash and Cash Equivalents
Cash equivalents include commercial paper and other securities with
original maturities of 90 days or less. Book value approximates fair value
because of the short maturity of those instruments.
Inventories
Inventories are stated at the lower of cost or market. Inventories are
valued at standard cost which approximates the average cost method.
Property and Depreciation
Property, plant, and equipment are stated at cost and depreciated using the
straight-line method. The estimated useful lives of depreciable assets are as
follows: buildings -- 30 years; plant, machinery and equipment -- 15 years;
other machinery and equipment -- 3 to 15 years.
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is charged to income.
Goodwill
Goodwill and other intangible assets are amortized on a straight-line basis
over the estimated future periods to be benefited, generally 40 years for
goodwill, customer relationships, and trademarks and tradenames and 5 to 15
years for other intangible assets.
Long-lived Assets
Credit reviews its long-lived assets, including goodwill and other
intangibles, for impairment on an exception basis whenever events or changes in
circumstances indicate carrying amounts of the assets may not be recoverable
through undiscounted future cash flows. If an impairment loss has occurred based
on expected future cash flows (undiscounted), the loss is recognized in the
income statement. The amount of the impairment loss is the excess of the
carrying amount of the impaired asset over the fair value of the asset. The fair
value represents expected future cash flows from the use of the assets,
discounted at the rate used to evaluate potential investments.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the Company's large number of customers and their dispersion across many
different industries and locations.
Financial Instruments
The Company uses various non-derivative financial instruments, including
letters of credit, and generally does not require collateral to support its
financial instruments.
249
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-based Compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25)). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-based Compensation," requires companies electing to continue to use the
intrinsic-value method to make pro forma disclosures of net income as if the
fair-value-based method of accounting had been applied.
Computer Software Costs
Effective January 1, 1999, Credit adopted the American Institute of
Certified Public Accountants Statement of Position 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
Our prior accounting was generally consistent with the requirements of SOP 98-1
and, accordingly, adoption of SOP 98-1 had no material effect. Computer software
costs are being amortized over a period of 5 to 10 years.
Income Taxes
The Company's operations have historically been included in the
consolidated tax returns filed by its parent. Income tax expense in the
accompanying financial statements have been computed assuming the Company filed
separate income tax returns. Differences between this calculation of income
taxes currently payable and consolidated amounts reported in the consolidated
financial statements of the parent have been reflected as net Hercules Group
investment.
Research and Development
Research and development expenditures are expensed as incurred.
Net Hercules Group Investment
The net Hercules Group investment account reflects the balance of Credit's
historical earnings, intercompany amounts, income taxes, taxes accrued and
deferred, post-employment liabilities and other transactions between Credit and
the Hercules Group.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. This statement, as amended, is effective for
all fiscal quarters of fiscal years beginning after December 31, 2000. The
adoption of SFAS No. 133 did not have a material effect on its earnings or
statement of financial position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was to be effective
October 1, 2000. Hercules Credit adopted SAB
250
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
101 effective as of December 31, 2000. Adoption of SAB 101 did not have a
material effect on our profit from operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). For Credit, these statements will generally become
effective January 1, 2002, although business combinations initiated after June
30, 2001 are subject to the non-amortization and purchase accounting provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. Hercules Credit is
currently in the process of conducting an assessment of the actual impact of the
non-amortization provision of SFAS 142. The assessment of goodwill for
impairment is a complex issue in which the Company must determine, among other
things, the fair value of each defined reporting unit. It is, therefore, not
possible at this time to predict the impact, if any, that the impairment
assessment provisions of SFAS 142 will have on Credit's financial statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assts. SFAS 143 will become effective for the Company
from January 1, 2003 and requires recognition of a liability for an asset
retirement obligation in the period in which it is incurred. Management is in
the process of evaluating the impact this standard will have on the Company's
financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Trade.................................................... $36,413 $46,865
Less allowance for doubtful accounts..................... (670) (820)
------- -------
Total.......................................... $35,743 $46,045
======= =======
4. NOTE RECEIVABLE
Notes receivable as of December 31, 2000, consist of a $6,600 thousand
30-day demand note from Greentree Chemical Technologies, Inc. (Greentree),
related to the divestiture of the Nitrocellulose business in June 2000. On
January 8, 2001, the Company received $3,600 thousand in cash from Greentree and
issued a new unsecured demand note to Greentree for $3,000 thousand, due June
30, 2005. The new note carries an interest rate of 13.5% until May 1, 2001;
thereafter, the interest rate is equal to Prime +7.5% for the remaining duration
of the note.
251
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORIES
The components of inventories are:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Finished products........................................ $27,754 $34,330
Raw material and supplies................................ 15,613 14,594
Work in process.......................................... 2,042 3,569
------- -------
Total.......................................... $45,409 $52,493
======= =======
6. SHORT-TERM DEBT
Short-term debt of $1,650 thousand at December 31, 1999 consists of an
Industrial Revenue Bond from the Industrial Development Authority of the city of
Hopewell, Virginia. This debt carried an interest rate of 8%. The principal and
interest was paid in June 2000.
7. LONG-TERM INCENTIVE COMPENSATION PLANS
The Company participates in long-term incentive compensation plans
sponsored by Hercules. These plans provide for the grant of stock options and
the award of common stock and other market-based units to certain key employees
and non-employee directors.
In 1995, Hercules changed the structure of the long-term incentive
compensation plans to place a greater emphasis on shareholder value creation
through grants of regular stock options, performance-accelerated stock options,
and Cash Value Awards (performance-based awards denominated in cash and payable
in shares of common or restricted stock, subject to the same restrictions as
restricted stock). Restricted stock and other market-based units are awarded
with respect to certain programs. The number of awarded shares outstanding was
491,488 at December 31, 2000, and 926,689 and 1,083,613 at December 31, 1999 and
1998, respectively.
At December 31, 2000, under Hercules' incentive compensation plans,
1,847,855 shares of common stock were available for grant as stock awards or
stock option awards. Stock awards are limited to approximately 15% of the total
authorizations. Regular stock options are granted at the market price on the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock options are also granted at
the market price on the date of grant and are normally exercisable at nine and
one-half years. Exercisability may be accelerated based upon the achievement of
predetermined performance goals. Both regular and performance-accelerated stock
options expire 10 years after the date of grant.
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to Hercules in the event of employment termination, except
in the case of death, disability, retirement, or other specified events.
The Company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. There were no charges to income for the cost of stock awards over the
restriction or performance period for 2000, 1999 and 1998, respectively.
252
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 2000, 1999 and 1998:
REGULAR PERFORMANCE-ACCELERATED
----------------------------- -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES PRICE SHARES PRICE
--------- ---------------- --------- ----------------
January 1, 1998........................ 195,870 $42.18 72,000 $45.91
Granted................................ 145,225 $35.84 64,645 $47.29
Exercised.............................. -- -- -- --
Forfeited.............................. (3,690) $39.50 -- --
------- ------ ------- ------
December 31, 1998...................... 337,405 $39.48 136,645 $46.56
Granted................................ 71,875 $37.73 69,980 $37.58
Exercised.............................. (1,050) $16.21 -- --
Forfeited.............................. (3,910) $39.50 -- --
------- ------ ------- ------
December 31, 1999...................... 404,320 $39.23 206,625 $43.52
Granted................................ 129,800 $17.20 -- --
Exercised.............................. -- -- -- --
Forfeited.............................. (39,250) $39.50 -- --
------- ------ ------- ------
December 31, 2000...................... 494,870 $33.43 206,625 $43.52
The weighted-average fair value of regular stock options granted during
2000, 1999 and 1998 was $8.85, $8.26 and $9.20, respectively. The
weighted-average fair value of performance-accelerated stock options granted
during 1999 and 1998 was $8.01 and $11.01, respectively.
Following is a summary of regular stock options exercisable at December 31,
2000, 1999, and 1998, and their respective weighted-average share prices:
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISABLE SHARES EXERCISE PRICE
------------------- --------- ----------------
December 31, 1998................................. 95,194 $43.18
December 31, 1999................................. 224,230 $40.49
December 31, 2000................................. 293,370 $39.20
There were no performance-accelerated stock options exercisable at December
31, 2000, 1999 and 1998.
253
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
EXERCISE OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
PRICE RANGE AT 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/00 EXERCISE PRICE
----------------------------- ----------- ---------------- ---------------- ----------- ----------------
Regular Stock Options
$12 - $20 129,800 9.14 $17.20 2,950 $17.25
$20 - $30 76,475 7.67 $25.56 63,700 $25.56
$30 - $40 174,025 7.23 $38.77 130,900 $39.11
$40 - $50 85,970 6.73 $47.27 74,720 $47.29
$50 - $60 28,600 5.56 $54.03 21,100 $55.39
------- -------
494,870 293,370
======= =======
Performance-Accelerated Stock
Options
$14 - $40 104,655 7.69 $38.16 -- --
$40 - $50 81,270 6.70 $47.40 -- --
$50 - $61 20,700 5.18 $55.40 -- --
------- -------
206,625 --
======= =======
Hercules currently expects that 100% of performance-accelerated stock
options will eventually vest.
Credit employees may also participate in the Hercules Employee Stock
Purchase Plan. The ESSP is a qualified non-compensatory plan, which allows
eligible employees to acquire shares of common stock through systematic payroll
deductions. The plan consists of three-month subscription periods, beginning
July 1 of each year. The purchase price is 85% of the fair market value of the
common stock on either the first or last day of that subscription period,
whichever is lower. Purchases may range from 2% to 15% of an employee's base
salary each pay period, subject to certain limitations. Currently, 202,139
shares of Hercules common stock are registered for offer and sale under the
plan. Shares issued at December 31, 2000 and 1999, were 1,597,861 and 949,464,
respectively. Hercules applies APB Opinion 25 and related interpretations in
accounting for its Employee Stock Purchase Plan. Accordingly, no compensation
cost has been recognized for the Employee Stock Purchase Plan.
Had compensation cost for Hercules' Stock-Based Incentive Plans and
Employee Stock Purchase Plan been determined on the basis of fair value
according to SFAS No. 123, the fair value of each option granted or share
purchased would be estimated on the grant date using the Black-Scholes option
pricing model.
The following weighted-average assumptions would be used in estimating fair
value for 2000, 1999 and 1998:
REGULAR PERFORMANCE EMPLOYEE STOCK
ASSUMPTION PLAN ACCELERATED PLAN PURCHASE PLAN
---------- -------- ---------------- --------------
Dividend yield............................... 2% 3.4% 0.0%
Risk-free interest rate 5.88% 5.38% 5.41%
Expected life................................ 7.1 yrs. 5 yrs. 3 mos.
Expected volatility.......................... 29.20% 27.31% 44.86%
254
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's net income for 2000, 1999 and 1998 would approximate the pro
forma amounts below:
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Net income
As reported............................................. $20,953 $23,659 $36,388
Pro forma............................................... $19,328 $22,110 $35,073
8. ADDITIONAL BALANCE SHEET DETAIL
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Property, plant, and equipment
Land...................................................... $ 527 $ 527
Buildings and equipment................................... 365,202 517,905
Construction in progress.................................. 11,909 5,503
-------- --------
Total..................................................... 377,638 523,935
Accumulated depreciation and amortization................. 285,409 431,283
-------- --------
Net property, plant, and equipment........................ $ 92,229 $ 92,652
======== ========
Accrued expenses
Payroll and employee benefits............................. $ 4,685 $ 4,298
Nitrocellulose inventory disposal cost reserve............ 6,478 6,500
Current environmental reserve............................. 4,686 4,670
Other..................................................... 9,741 11,282
-------- --------
Total..................................................... $ 25,590 $ 26,750
======== ========
9. INVESTMENTS
Summarized financial information for Hercules Finance Company at December
31, 2000 and 1999, and the three years then ended is as follows:
2000 1999
------- -------
Assets.................................................... $ 55 $ 225
Net Hercules Group Investment............................. 55 225
2000 1999 1998
------- ------- -------
Interest income........................................... $ 1,235 $ 1,274 $27,811
Interest income from Hercules Group....................... 48,011 38,582 8,128
Corporate and other cost allocations...................... (2,132) (3,067) (2,283)
Other expense............................................. -- -- (3,518)
Net income................................................ 47,114 36,789 30,138
10. GOODWILL
Goodwill relates to the Company's 1989 purchase of Henkel's 50% ownership
interest in Aqualon. At December 31, 2000 and December 31, 1999, goodwill was
$28,550 thousand and $29,564 thousand, respectively, (net of accumulated
amortization of $11,994 thousand and $10,980 thousand respectively). The
amortization period for goodwill is 40 years.
255
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. RESTRUCTURING
In 2000 and 1999, Credit incurred $1,662 thousand and $1,912 thousand,
respectively, related to employee reductions at Parlin, NJ, Louisiana, MO, and
Hopewell, VA, manufacturing sites. There are no remaining amounts to be paid.
Severance benefits payments are based on years of service. A reconciliation
of activity with respect to the liabilities established for these plans is as
follows:
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of year................................ $ -- $1,466
Additional termination benefits and other exit costs........ 1,662 446
Cash payments............................................... (1,662) (1,912)
------- ------
Balance at end of year...................................... $ -- $ --
======= ======
12. PENSION AND OTHER POSTRETIREMENT BENEFITS
Credit participates in a defined benefit pension plan sponsored by
Hercules, which covers substantially all employees of Hercules in the U.S.
Benefits under this plan are based on the average final pay and years of
service. Hercules also provides post-retirement health care and life insurance
benefits to eligible retired employees and their dependents.
Information on the actuarial present value of the benefit obligation and
fair value of the plan assets is not presented as Hercules manages its U.S.
employee benefit plans on a consolidated basis and such information is not
maintained separately for the U.S. employees of the Company. The Company's
statement of operations includes an allocation of the costs of the U.S. benefits
plans. The pension costs were allocated based on percentage of pensionable
wages, for each of the years presented, post-retirement benefit costs were
allocated using factors derived from the relative net assets and revenues. Net
pension income of Hercules allocated to the Company was $3,367 thousand, $3,810
thousand, and $4,069 thousand for the years ended December 31, 2000, 1999 and
1998, respectively, and post-retirement benefit expense was $2,462 thousand,
$1,774 thousand, and $1,813 thousand for the years ended December 31, 2000, 1999
and 1998, respectively.
13. OTHER OPERATING EXPENSES, NET
Other operating expenses, net, consists of the following:
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Loss on disposal of Nitrocellulose.................... $25,241 $ 6,500 $ --
Asset impairments..................................... -- 2,000 15,300
Environmental charges................................. 2,617 3,020 2,151
Restructuring charges................................. 1,662 446 1,466
Royalties received.................................... (7,613) (8,474) (8,734)
Other................................................. 352 62 62
------- ------- -------
Total....................................... $22,259 $ 3,554 $10,245
======= ======= =======
In 1998, the Nitrocellulose fixed assets at Parlin, NJ were deemed to be
impaired; Nitrocellulose capital expenditures in 1999 were also impaired.
256
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. INCOME TAXES
The domestic components of income before taxes are presented below:
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Domestic.............................................. $35,358 $39,581 $61,368
------- ------- -------
$35,358 $39,581 $61,368
======= ======= =======
A summary of the components of the tax provision follows:
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Currently payable
Domestic............................................ $12,583 $23,612 $22,697
Deferred
Domestic............................................ 1,658 (7,905) 1,947
------- ------- -------
Provision for income taxes............................ $14,241 $15,707 $24,644
======= ======= =======
Deferred tax liabilities (assets) at December 31 consists of:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Amortization................................................ 7 7
Partnership interest........................................ 12,151 11,116
Other....................................................... 704 704
------- -------
Gross deferred tax liabilities.............................. $12,862 $11,827
------- -------
Depreciation................................................ $ (217) $ (196)
Deemed rent................................................. (425) (425)
Lease liability............................................. (4,500) (5,145)
------- -------
Gross deferred tax assets................................... (5,142) (5,766)
Valuation allowance......................................... -- --
------- -------
$ 7,720 $ 6,061
======= =======
A reconciliation of the statutory income tax rate to the effective rate
follows:
2000 1999 1998
---- ---- ----
Statutory income tax rate................................... 35% 35% 35%
State Taxes................................................. 5 5 5
-- -- --
40% 40% 40%
== == ==
257
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. NET HERCULES GROUP INVESTMENT
Changes in net Hercules Group investment were as follows:
(DOLLARS IN
THOUSANDS)
Balance, January 1, 1998.................................... $208,708
Net income................................................ 36,388
Intercompany transactions, net............................ (45,773)
--------
Balance, December 31, 1998.................................. 199,323
Net income................................................ 23,659
Intercompany transactions, net............................ (31,967)
--------
Balance, December 31, 1999.................................. 191,015
Net income................................................ 20,953
Intercompany transactions, net............................ (19,193)
--------
Balance, December 31, 2000.................................. $192,775
========
16. DIVESTITURES
In June 2000, the Company divested its Nitrocellulose operation at Parlin,
NJ to Greentree Chemical Technologies, Inc. As a result of the transaction, the
Company received a $6,600 thousand note (see note 4) and recorded a one-time
pre-tax loss of $25,241 thousand, primarily for employee termination benefits,
inventory transfer and disposal, environmental liabilities, and other
miscellaneous expenses, of which $18,387 thousand has been expended. The Company
terminated approximately 100 employees associated with the Nitrocellulose
operation at Parlin, NJ, which resulted in severance payments of $4 million.
Nitrocellulose revenues were $23,503 thousand, $58,526 thousand, and $59,944
thousand in 2000, 1999, and 1998, respectively.
17. COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases (including office space, transportation,
and data processing equipment) expiring at various dates. Rental expense was
$3,215 thousand in 2000, $3,446 thousand in 1999, and $2,903 thousand in 1998.
At December 31, 2000, minimum rental payments under noncancelable leases
aggregated $771 thousand. The net minimum payments over the next five years are
$2,351 thousand in 2001, $2,295 thousand in 2002, $2,203 thousand in 2003,
$2,081 thousand in 2004, and $2,065 thousand in 2005.
Litigation
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business. In the opinion of Credit's
management, none of such litigation as of December 31, 2000 is likely to have a
material adverse effect on the financial position and results of operations of
Credit.
Environmental
The Company has established accruals for the estimated cost of
environmental remediation and/or cleanup at various sites. The estimated range
of the reasonable possible share of costs for investigation and cleanup is
between $25 million and $46 million. The actual costs will depend upon numerous
factors, including
258
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the number of parties found to be responsible at each environmental site and
their ability to pay; the actual methods of remediation required or agreed to;
the outcomes of negotiations with regulatory authorities; outcomes of
litigation; changes in environmental laws and regulations; technological
developments; and the number of years of remedial activity required, which could
range from 0 to 30 years. As of December 31, 2000, the accrued liability of $25
million for environmental remediation represents management's best estimate of
the probable and reasonably estimable costs related to environmental
remediation. Credit estimates that these liabilities will be paid over the next
five years. 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 potentially responsible parties. The Company
is unaware of any unasserted claims and has not reflected them in the reserve.
While it is not feasible to predict the outcome of all pending suits and claims,
the ultimate resolution of these environmental matters could have a material
effect upon the results of operations and the financial position of The Company.
Other
As of December 31, 2000, The Company had $4.3 million in letters of credit
outstanding with lenders.
18. RELATED PARTY TRANSACTIONS
The Company has entered into certain agreements with affiliated entities.
These agreements were developed in the context of parent/subsidiary relationship
and therefore may not necessarily reflect the result of arms-length negotiations
between independent parties. The Company records sales with affiliates based on
a cost-plus formula developed and agreed-upon by both parties.
Corporate and other cost allocations: As discussed in Note 1, the financial
statements of The Company reflect certain allocated support costs incurred by
other entities in Hercules group. These costs include executive, legal,
accounting, tax, auditing, cash management, purchasing, human resources, safety,
health and environmental, information management, research and development
overhead, investor relations and other corporate services. Allocations and
charges included in Credit's financial statements were based on either a direct
cost pass-through for items directly identified as related to Credit's
activities; a percentage allocation for such services provided based on factors
such as revenues, net assets, costs of sales or a relative weighting of
geographic activity. These allocations are reflected in the selling, general and
administrative line item in our statement of operations. Such allocations and
corporate charges totaled $17,569 thousand, $25,148 thousand, and $19,105
thousand in 2000, 1999 and 1998, respectively.
Royalties: Credit entered into a license agreement in respect of the use of
manufacturing formulations and specifications by affiliated companies which are
developed and owned by The Company. The Company received royalties in respect of
this agreement of $7,613 thousand, $8,474 thousand, and $8,734 thousand in 2000,
1999 and 1998, respectively. The royalties are included as reductions to other
operating expenses in the financial statements.
Purchases from affiliates: The Company purchases a broad range of products
in the normal course of business from affiliated companies. Credit's purchases
from affiliated companies were $23,457 thousand, $23,598 thousand, and $50,022
thousand in 2000, 1999 and 1998, respectively.
259
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive loss and of cash
flows present fairly, in all material respects, the financial position of
Hercules GB Holdings Limited, a subsidiary of Hercules Incorporated, and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, 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 our opinion.
PricewaterhouseCoopers
Liverpool, United Kingdom
22 October 2001
260
HERCULES GB HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
DECEMBER 31
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Sales to third parties...................................... $123,301 $136,056
Sales to Hercules Group..................................... 23,072 22,334
-------- --------
146,373 158,390
Cost of sales............................................... 85,980 92,200
Selling, general, and administrative expenses............... 36,198 39,887
Goodwill and intangible asset amortization.................. 4,608 4,875
Other operating expenses, net (Note 12)..................... 6,373 5,618
-------- --------
Profit from operations...................................... 13,214 15,810
Interest and debt expense (Note 13)......................... (11,678) (4,827)
Other (expense) income, net (Note 14)....................... 85 (111)
-------- --------
Income before income taxes.................................. 1,621 10,872
Provision for income taxes (Note 16)........................ (1,960) (4,817)
-------- --------
Net (loss) income........................................... $ (339) $ 6,055
Translation adjustments..................................... (2,534) (8,724)
-------- --------
Comprehensive Loss.......................................... $ (2,873) $ (2,669)
======== ========
The accompanying notes are an integral part
of the consolidated financial statements
261
HERCULES GB HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 1,057 $ 1,445
Accounts receivable, net (Note 3)......................... 34,146 35,772
Inventories (Note 4)...................................... 8,312 13,108
-------- --------
Total current assets................................... 43,515 50,325
Property, plant, and equipment, net (Note 8)................ 29,687 33,626
Goodwill and other intangible assets, net (Note 9).......... 139,157 155,762
Prepaid pension (Note 11)................................... 7,786 5,955
Deferred charges and other assets........................... 1,722 2,314
-------- --------
Total assets...................................... $221,867 $247,982
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable.......................................... $ 11,893 $ 13,923
Short-term debt (Note 5).................................. 4,469 251
Accrued expenses (Note 8)................................. 9,961 10,871
-------- --------
Total current liabilities.............................. 26,323 25,045
Deferred income taxes (Note 16)............................. 4,831 4,828
-------- --------
Total liabilities................................. 31,154 29,873
Commitments and contingencies (Note 17)..................... -- --
Net Hercules Group Investment (Note 15)
Accumulated other comprehensive income.................... (6,388) (3,854)
Intercompany transactions................................. 197,101 221,963
-------- --------
Net Hercules Group Investment..................... 190,713 218,109
-------- --------
Total liabilities and Net Hercules Group
Investment...................................... $221,867 $247,982
======== ========
The accompanying notes are an integral part
of the consolidated financial statements
262
HERCULES GB HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31
-----------------------
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income.................................................. $ (339) $ 6,055
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation of property, plant and equipment............. 3,431 2,921
Amortization of goodwill and other intangible assets...... 4,608 4,875
Nonoperating gain on disposals............................ 214 307
Movement on deferred tax provision........................ 410 1,615
Corporate cost allocations................................ 1,917 3,593
Prepaid pension expense and other deferred charges........ (1,753) (888)
Accruals and deferrals of cash receipts and payments:
Accounts receivable....................................... (1,194) 1,235
Transfers to Hercules Group............................... (11,064) (4,665)
Inventories............................................... 3,861 (403)
Accounts payable and accrued expenses..................... (1,124) (4,308)
-------- -------
Net cash (used in) provided by operations......... (1,033) 10,337
-------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (2,419) (5,587)
Proceeds of fixed asset disposals........................... 112 1,093
Acquisitions................................................ (255) (253)
-------- -------
Net cash used in investing activities............. (2,562) (4,747)
-------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Transfers to Hercules Group................................. (1,067) (8,855)
New loan proceeds........................................... 4,571 254
Loan repayments............................................. (190) --
-------- -------
Net cash provided by (used in) financing
activities....................................... 3,314 (8,601)
-------- -------
Effect of exchange rate changes on cash..................... (107) (159)
-------- -------
Net decrease in cash and cash equivalents................... (388) (3,170)
Cash and cash equivalents at beginning of year.............. 1,445 4,615
-------- -------
Cash and cash equivalents at end of year.................... $ 1,057 $ 1,445
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during year for:
Income taxes.............................................. $ 1,550 6,911
Interest.................................................. 4,982 7,830
NON CASH FINANCING ACTIVITIES
Corporate cost allocations.................................. $ 1,917 3,593
The accompanying notes are an integral part of the consolidated financial
statements.
263
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Hercules GB Holdings Limited (referred to singly or together with its
subsidiaries as "the Company") is the intermediate United Kingdom holding
company (directly or indirectly) of all entities in the United Kingdom in the
ultimate ownership of Hercules Incorporated (Wilmington, Delaware, USA)
("Hercules"), with the sole exception of Citrus Colloids Limited which is not
included in these consolidated statements. Hercules and its wholly owned
subsidiaries comprise the Hercules Group. The two principle operating
subsidiaries are Hercules Limited, engaged in the manufacture and merchanting of
functional chemicals and food ingredients and BetzDearborn Limited engaged in
the manufacture and marketing of water and process treatment chemicals and
ancilliary equipment.
BetzDearborn Limited became a subsidiary of the Company following the
acquisition by Hercules on 15th October, 1998, of all of the outstanding shares
of BetzDearborn Inc. (formerly the ultimate parent company of BetzDearborn
Limited). Hercules paid $2,235 million in cash and $186 million in common stock
exchanged for the shares held by the BetzDearborn ESOP Trust. The purchase price
allocated to the Company and its subsidiaries was approximately $123 million.
During 1999, Hercules completed the purchase price allocation and the final
determination of goodwill was $1,822 million of which the amount attributable to
the Company was approximately $146 million. These financial statements include
the push down of fair value adjustments to assets and liabilities, including
goodwill, other intangible assets and property, plant and equipment and their
related amortization and depreciation adjustments.
Hercules GB Holdings Limited was set up in June 1999 to be the principal
holding company for Hercules entities based in UK. This was a result of several
internal reorganization transactions during 1999 and 2000, that were initiated
after the acquisition of BetzDearborn Inc. The reorganization included the
Company acquiring nearly all of the existing UK based subsidiaries from other
Hercules group of companies. As these reorganization transactions were under the
common control of Hercules, they have been accounted for at book value and have
been consolidated in a manner similar to pooling of interest.
Historically, separate company stand alone financial statements were not
prepared for the Company. In November 2000, Hercules amended its senior credit
facility and ESOP credit facility (the "Facilities"). The Facilities, as
amended, are secured by liens on Hercules' property and assets (and those of
Hercules' Canadian Subsidiaries), a pledge of the stock and partnership and
member interests of substantially all of Hercules' domestic subsidiaries and 65%
of the stock of foreign subsidiaries directly owned by Hercules, including the
Company, and a pledge of Hercules' domestic intercompany indebtedness. These
financial statements present the financial information on the Company, a
collateral party to the Hercules debt, based on the Hercules' understanding of
Securities and Exchange Commission's interpretation and application of Rule 3-16
under the Securities and Exchange Commission's Regulation S-X. These statements
were derived from historical accounting records.
The Company participates in Hercules' centralized cash management system.
Accordingly, cash received from the Company's operations is transferred to
Hercules on a periodic basis, and Hercules funds all operational and capital
requirements.
The financial statements of the Company reflect certain allocated support
costs incurred by other entities in the Hercules group. These costs include
executive, legal, accounting, tax, auditing, cash management, purchasing, human
resources, safety, health and environmental, information management, investor
relations and other corporate services. Allocations and charges included in the
Company's financial statements were based on either a direct cost pass-through
for items directly identified as related to the Company's activities; a
percentage allocation for such services provided based on factors such as sales,
net assets, or cost of sales; or a relative weighting of geographic activity.
Management believes that the allocation methods are reasonable.
264
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Hercules GB
Holdings Limited and its subsidiaries, listed below, which are all directly or
indirectly wholly owned. Following the acquisition of BetzDearborn, the company
continued BetzDearborn's practice of using a November 30 fiscal year-end for
certain former BetzDearborn non-U.S. subsidiaries to expedite the year-end
closing process. All intercompany transactions and profits have been eliminated.
Hercules Investments Global (registered as unlimited February 26, 1999):
Hercules Limited
Praf Limited
Alliance Technical Products Limited
HUK Trustee Co. Ltd.
Hercules UK Investments
Hercules Investments Limited
Hercules (UK) Investments Finance Ltd.
BetzDearborn Limited
Argo Scientific Limited
All the above subsidiaries are registered in the United Kingdom.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Company's experience. The corresponding shipping and handling costs are
included in cost of sales.
Environmental Expenditures
Environmental expenditures that pertain to current operations or future
revenues are expensed or capitalized according to the Company's capitalization
policy. Expenditures for remediation of an existing condition caused by past
operations that do not contribute to current or future revenues are expensed.
Liabilities are recognized for remedial activities when the cleanup is probable
and can be reasonably estimated.
Cash and Cash Equivalents
Cash in excess of operating requirements is invested in short-term,
income-producing instruments and on interest bearing deposit with Hercules
Europe NV, the Treasury Co-ordination Center. Cash equivalents include
commercial paper and other securities with original maturities of 90 days or
less. Book value approximates fair value because of the short maturity of those
instruments.
265
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market value. Cost is
established on a moving average or standard cost basis both of which approximate
to actual historic cost.
Property and Depreciation
Property, plant, and equipment are stated at cost. Asset values are
depreciated over estimated useful lives on the straight-line method of
depreciation. The estimated useful lives of depreciable assets are as follows:
buildings -- 30 years; plant, machinery and equipment -- 15 years; other
machinery and equipment -- 3 to 15 years; computer software -- 10 years.
Maintenance, repairs, and minor renewals are charged to income; major
renewals and improvements are capitalized. Upon normal retirement or
replacement, the cost of property (less proceeds of sale or salvage) are
expensed.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are amortized on a straight-line basis
over the estimated future periods to be benefited, generally 40 years for
goodwill, and 3 to 15 years for other intangible assets.
Long-lived Assets
The company reviews its long-lived assets, including goodwill and other
intangibles, for impairment on an exception basis whenever events or changes in
circumstances indicate carrying amounts of the assets may not be recoverable
through undiscounted future cash flows. If an impairment loss has occurred based
on expected future cash flows (undiscounted), the loss is recognized in the
income statement. The amount of the impairment loss is the excess of the
carrying amount of the impaired asset over the fair value of the asset. The fair
value represents expected future cash flows from the use of the assets,
discounted at the rate used to evaluate potential investments.
Foreign Currency Translation and Transactions
The accompanying consolidated financial statements are reported in U.S.
dollars. The pound sterling is the functional currency for the Company and its
subsidiaries. The translation of the functional currencies into U.S. dollars
(reporting currency) is performed for assets and liabilities using the current
exchange rates in effect at the balance sheet date, and for revenues, costs and
expenses using average exchange rates prevailing during the reporting periods.
Adjustments resulting from the translation of functional currency financial
statements to reporting currency are accumulated and reported as other
comprehensive income, a separate component of Net Hercules Group Investment.
Transactions in foreign currency are recorded at the exchange rate
prevailing on the date of transaction. Monetary assets and liabilities
denominated in foreign currencies are expressed in the functional currency at
the exchange rates in effect at the balance sheet date. Revenues, costs and
expenses are recorded using average exchange rates prevailing during the
reporting periods. Gains or losses resulting from foreign currency transactions
are included in the statement of income.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of short-term cash investments
and trade receivables. The Company places its short-term cash investments on the
London money market via its commercial relationship banks. Concentrations of
credit risk
266
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with respect to trade receivables are limited due to the Company's large number
of customers and their dispersion across many different industries and
locations.
Stock based compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25)). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation," requires companies electing to continue to use the
intrinsic-value method to make pro forma disclosures of net income as if the
fair-value-based method of accounting had been applied.
Income taxes
Income tax expense in the accompanying financial statements has been
computed assuming the Company filed separate income tax returns.
The provisions for income taxes has been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax basis of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
Net Hercules Group Investment
The Net Hercules Group Investment reflects the balance of the Company's
historical earnings, inter-company amounts, foreign currency translation and
other transactions between the Company and the Hercules Group.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. SFAS 133, as amended, is effective for all
fiscal quarters of fiscal years beginning after December 31, 2000. The Company
adopted SFAS 133 effective January 1, 2001. The adoption of SFAS No. 133 did not
have a material effect on its earnings or statement of financial position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was effective October
1, 2000. Adoption of SAB 101 did not have a material effect on our profit from
operations.
267
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" (SFAS 141) and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). For the Company, these statements will generally become
effective January 1, 2002, although business combinations initiated after June
30, 2001 are subject to the non-amortization and purchase accounting provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. The assessment of
goodwill for impairment is a complex issue in which the Company must determine,
among other things, the fair value of each defined reporting unit. It is,
therefore, not possible at this time to predict the impact, if any, that the
impairment assessment provisions of SFAS 142 will have on the Company's
financial statements.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations"
(SFAS 143). SFAS 143 establishes accounting standards for the recognition and
measurement of legal obligations associated with the retirement of tangible
long-lived assts. SFAS 143 will become effective for the Company from January 1,
2003 and requires recognition of a liability for an asset retirement obligation
in the period in which it is incurred. Management is in the process of
evaluating the impact this standard will have on the Company's financial
statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statement.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Trade....................................................... $32,519 $34,461
Other....................................................... 3,863 3,000
------- -------
36,382 37,461
Less allowance for doubtful accounts........................ $(2,236) $(1,689)
------- -------
Total............................................. $34,146 $35,772
======= =======
There are no single receivables which constitute more than 10% of the
total.
4. INVENTORIES
The components of inventories are:
2000 1999
--------- ----------
(DOLLARS IN THOUSANDS)
Finished products........................................... $4,904 $ 9,026
Materials, supplies, and work in process.................... 3,408 4,082
------ -------
Total............................................. $8,312 $13,108
====== =======
268
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SHORT-TERM DEBT
Short-term debt consists of bank borrowings primarily representing
overdraft facilities and short-term lines of credit, in the United Kingdom,
which are generally payable on demand with interest at various rates. Book
values of bank borrowings approximate market value because of their short
maturity period.
At December 31, 2000, the Company and its subsidiaries had $1,489,550 of
unused lines of credit that may be drawn as needed, with interest at a
negotiated spread over lenders' cost of funds. Weighted-average interest rates
on short-term borrowings at December 31, 2000 and 1999, were 6.5% and 6.3%,
respectively.
6. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Hercules manages the Company's cash and indebtedness. The majority of the
cash provided by or used by the Company is provided through this consolidated
cash and debt management system. As a result, the amount of cash or debt
historically related to the Company is not determinable.
The Company has a number of intercompany loans with the Hercules Group in
the amounts of $145,393 thousand and $158,867 thousand, which are included in
the Net Hercules Group Investment balance as of December 31, 2000 and 1999,
respectively.
Interest rates on these loans are detailed below:
INTEREST RATE 2000 1999
------------- ------- -------
$'000 $'000
Variable LIBOR plus 0.55%................................... 92,519 100,373
Variable LIBOR plus 0.75%................................... 47,666 52,843
Variable LIBOR plus 1.00%................................... 5,138 5,575
Fixed 10%................................................... 70 76
------- -------
145,393 158,867
======= =======
LIBOR is the London Inter-Bank Offer Rate.
Interest paid on these loans was $3,951 thousand in 2000 and $5,275
thousand in 1999.
All the long-term debt with the Hercules Group has maturity dates after
2005.
The Company does not enter into forward-exchange contracts and currency
swaps to hedge currency exposure nor does it use interest rate swap agreements
to manage interest costs and risks associated with changing rates. The basis of
valuation of long-term debt is the present value of expected cash flows related
to existing borrowings discounted at rates currently available to the company
for long-term borrowings with similar terms and remaining maturities.
Fair Values
The following table presents the carrying amounts and fair values of the
company's financial instruments at December 31, 2000 and 1999:
2000 1999
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Long-term debt.......................... $145,393 $145,393 $158,867 $158,867
269
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM INCENTIVE COMPENSATION PLANS
The Company participates in long-term incentive compensation plans
sponsored by Hercules. These plans provide for the grant of stock options and
the award of common stock and other market-based units to certain key employees
and non-employee directors.
The Hercules long-term incentive compensation plans place an emphasis on
shareholder value creation through grants of regular stock options,
performance-accelerated stock options, and Cash Value Awards (performance-based
awards denominated in cash and payable in shares of common or restricted stock,
subject to the same restrictions as restricted stock). Restricted stock and
other market-based units are awarded with respect to certain programs. The
number of awarded shares outstanding was 491,488 at December 31, 2000, and
926,689 at December 31, 1999.
At December 31, 2000, under Hercules' incentive compensation plans,
1,847,855 shares of common stock were available for grant as stock awards or
stock option awards. Stock awards are limited to approximately 15% of the total
authorizations. Regular stock options are granted at the market price on the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock options are also granted at
the market price on the date of grant and are normally exercisable at nine and
one-half years. Exercisability may be accelerated based upon the achievement of
predetermined performance goals. Both regular and performance-accelerated stock
options expire 10 years after the date of grant.
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to Hercules in the event of employment termination, except
in the case of death, disability, retirement, or other specified events.
The Company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 2000 and 1999:
REGULAR
-----------------------------
NUMBER OF WEIGHTED-AVERAGE
SHARES PRICE
--------- ----------------
January 1, 1999........................................... 17,750 $40.27
Granted................................................. 22,550 $37.75
Exercised............................................... -- --
Forfeited............................................... -- --
------ ------
December 31, 1999......................................... 40,300 $38.86
Granted................................................. -- --
Exercised............................................... -- --
Forfeited............................................... -- --
------ ------
December 31, 2000......................................... 40,300 $38.86
There were no performance-accelerated stock options granted or outstanding
during 2000 and 1999.
The weighted-average fair value of regular stock options granted during
1999 was $8.26.
270
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of regular stock options exercisable at December 31,
2000, and 1999, and their respective weighted-average share prices:
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISABLE SHARES EXERCISE PRICE
------------------- --------- ----------------
December 31, 1999......................................... 13,540 $39.91
December 31, 2000......................................... 26,440 $39.32
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------------------------- ---------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
EXERCISE PRICE RANGE 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE 12/31/00 EXERCISE PRICE
-------------------- -------------- ---------------- ---------------- -------------- ----------------
REGULAR STOCK OPTIONS
$30 - $40................ 38,650 7.63 $38.48 25,120 $38.87
$40 - $50................ 1,650 7.35 $47.81 1,320 $47.81
------ ------
40,300 26,440
====== ======
The Company's employees may also participate in the Hercules Employee Stock
Purchase Plan ("ESPP"). The ESPP is a qualified non-compensatory plan, which
allows eligible employees to acquire shares of common stock through systematic
payroll deductions. The plan consists of three-month subscription periods,
beginning July 1 of each year. The purchase price is 85% of the fair market
value of the common stock on either the first or last day of that subscription
period, whichever is lower. Purchases may range from 2% to 15% of an employee's
base salary each pay period, subject to certain limitations. Currently, 202,139
shares of Hercules common stock are registered for offer and sale under the
plan. Shares issued at December 31, 2000 and 1999, were 1,597,861 and 949,464,
respectively. The Company applies APB Opinion 25 and related interpretations in
accounting for its Employee Stock Purchase Plan. Accordingly, no compensation
cost has been recognized for the Employee Stock Purchase Plan.
Had compensation cost for Hercules' Stock-Based Incentive Plans and
Employee Stock Purchase Plan been determined on the basis of fair value
according to SFAS No. 123, the fair value of each option granted or share
purchased would be estimated on the grant date using the Black-Scholes option
pricing model.
The following weighted-average assumptions would be used in estimating fair
value for 2000 and 1999:
PERFORMANCE EMPLOYEE STOCK
ASSUMPTION REGULAR PLAN ACCELERATED PLAN PURCHASE PLAN
---------- ------------ ---------------- --------------
Dividend yield............................. 2% 3.4% 0.0%
Risk-free interest rate.................... 5.88% 5.38% 5.41%
Expected life.............................. 7.1 yrs. 5 yrs. 3 mos.
Expected volatility........................ 29.20% 27.31% 44.86%
The Company's net (loss) income for 2000 and 1999 would approximate the pro
forma amounts below:
2000 1999
-------- ---------
(DOLLARS IN THOUSANDS)
Net income
As reported............................................... $(339) $6,055
Pro forma................................................. $(399) $6,000
271
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. ADDITIONAL BALANCE SHEET DETAIL
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
PROPERTY, PLANT, AND EQUIPMENT
Land...................................................... $ 1,864 $ 2,014
Buildings and equipment................................... 49,303 49,077
Construction in progress.................................. -- 1,526
-------- --------
Total............................................. 51,167 52,617
Accumulated depreciation and amortization................. (21,480) (18,991)
-------- --------
Net property, plant, and equipment........................ $ 29,687 $ 33,626
======== ========
2000 1999
--------- ----------
(DOLLARS IN THOUSANDS)
ACCRUED EXPENSES
Goods received not invoiced............................... $2,695 $ 3,028
Payroll and employee benefits............................. 1,453 1,812
Income taxes payable...................................... 1,973 1,355
Restructuring liability (Note 10)......................... 2,420 2,628
Other..................................................... 1,420 2,048
------ -------
$9,961 $10,871
====== =======
9. GOODWILL AND OTHER INTANGIBLES ASSETS
At December 31, 2000 and 1999, the goodwill and other intangible assets
were:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Goodwill.................................................... $146,363 $158,517
Customer relationships...................................... 44 48
Other intangibles........................................... 5,347 5,976
-------- --------
Total....................................................... 151,754 164,541
Less accumulated amortization............................... (12,597) (8,779)
-------- --------
Net goodwill and other intangible assets.......... $139,157 $155,762
======== ========
10. RESTRUCTURING
Coincident with the acquisition of BetzDearborn Inc. and its subsidiaries
worldwide by Hercules Incorporated in October 1998, plans were put in place to
merge certain BetzDearborn and Hercules operations and support infrastructure,
including facility closures and personnel reductions. The estimated costs of
these plans was established as a liability as part of the overall purchase price
allocation of the BetzDearborn acquisition, in accordance with purchase
accounting methods. The principle constituent part of the restructuring reserves
in the Company's accounts is the estimate for these exit and severance costs
attributable to the Hercules operations in the United Kingdom. The remaining
balance of restructuring reserves, as reassessed during the year, is considered
sufficient to meet the remaining outstanding costs associated with closure of
the
272
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Widnes European laboratory facility and severance cost principally associated
with the planned transfer of accounting activities to the Hercules European
Shared Service Centre in the Netherlands.
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of year................................ $2,628 $6,266
Additional accrual.......................................... 363 81
Severance and exit costs incurred........................... (375) (3,093)
Reversals................................................... (44) (438)
Translation difference...................................... (152) (188)
------ ------
Balance at end of year...................................... $2,420 $2,628
====== ======
For 2000, the severance and exit costs incurred include the costs for 9
employees, including 8 employees at the former Argo Scientific Limited office
and workshop in Edinburgh, Scotland. For 1999, severance and exit costs include
costs for 39 employees including 16 employees affected by the closure of the
laboratory facility at Widnes, Cheshire and 2 employees at the former sales
office in Glasgow, Scotland, together with costs and necessary write downs of
assets resulting from these closures and other specific asset write downs and
costs resulting from business restructuring decisions.
The additional accruals and the reversals were charged or released against
income.
11. PENSION BENEFITS
The Company provides defined benefit pension plans to all eligible
employees. The following chart lists benefit obligations, plan assets, and
funded status of the plans.
PENSION BENEFITS
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1........................... $75,968 $78,457
Service cost.............................................. 2,092 2,313
Interest cost............................................. 4,189 4,326
Amendments................................................ 12 --
Employee contributions.................................... 760 624
Translation difference.................................... (6,872) (2,855)
Actuarial loss (gain)..................................... 3,154 (4,532)
Benefits paid from plan assets............................ (1,992) (2,365)
Benefits paid by company.................................. -- --
------- -------
Benefit obligation at December 31........................... $77,311 $75,968
======= =======
273
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION BENEFITS
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1.................... 89,389 80,011
Expected return on plan assets............................ 6,304 5,865
Employee contributions.................................... 760 624
Company contributions (refund)............................ 1,789 446
Actuarial loss (gain)..................................... (1,915) 7,757
Translation difference.................................... (7,105) (2,949)
Benefits paid from plan assets............................ (1,992) (2,365)
------- -------
Fair value of plan assets at December 31.................. $87,230 $89,389
======= =======
Funded status of the plans.................................. 9,919 13,421
Unrecognized actuarial loss (gain).......................... (2,174) (7,372)
Unrecognized prior service cost (benefit)................... 217 76
Unrecognized net transition obligation...................... -- (170)
Amendments.................................................. (176) --
------- -------
Prepaid (accrued) benefit cost.............................. $ 7,786 $ 5,955
======= =======
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION CONSIST OF:
Prepaid benefit cost...................................... 7,786 5,955
------- -------
$ 7,786 $ 5,955
======= =======
ASSUMPTIONS AS OF DECEMBER 31
Weighted-average discount rate............................ 6.50% 5.88%
Expected average return on plan assets.................... 8.00% 7.50%
Average rate of compensation increase..................... 3.75% 3.88%
COMPONENTS OF NET PERIOD PENSION COST
Service cost.............................................. $ 2,092 $ 2,313
Interest cost............................................. 4,189 4,326
Return on plan assets (expected).......................... (6,304) (5,864)
Amortization and deferrals................................ (384) 269
Amortization of transition asset.......................... (160) (185)
------- -------
Benefit cost (credit)..................................... $ (567) $ 859
======= =======
12. OTHER OPERATING EXPENSE, NET
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Royalty..................................................... $5,675 $5,902
Other expense (income)...................................... 698 (284)
------ ------
$6,373 $5,618
====== ======
274
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INTEREST AND DEBT EXPENSE
Interest and debt costs incurred and expensed were as follows. No interest
or debt costs were capitalised.
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Intercompany net interest expense........................... $11,305 $4,887
Third party net interest expense (income)................... 373 (60)
------- ------
$11,678 $4,827
======= ======
14. OTHER (INCOME) EXPENSE, NET
Other (income) expense, net, consists of the following:
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Currency (gains) losses..................................... $(444) $ 100
Intercompany factoring expense.............................. 187 158
Miscellaneous expense (income).............................. 172 (147)
----- -----
$ (85) $ 111
===== =====
15. NET HERCULES GROUP INVESTMENT
Changes in net Hercules Group investment were as follows:
(DOLLARS IN THOUSANDS)
Balance December 31, 1998................................... $230,375
Net income................................................ 6,055
Other comprehensive losses................................ (8,724)
Inter-company transactions, net........................... (9,597)
--------
Balance, December 31, 1999.................................. 218,109
Net loss.................................................. (339)
Other comprehensive losses................................ (2,534)
Intercompany transactions, net............................ (24,523)
--------
Balance, December 31, 2000.................................. $190,713
========
The Company includes accumulated other comprehensive losses in Net Hercules
Group Investment. At December 31, 2000 and 1999, accumulated other comprehensive
losses consisted of foreign currency translation adjustments, net of tax, of
$6,388 thousand and $3,854 thousand, respectively.
16. TAXES
A summary of the components of the tax provision in respect of United
Kingdom Corporation Tax follows:
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Current..................................................... $1,550 $3,202
Deferred.................................................... 410 1,615
------ ------
Provision for income taxes.................................. $1,960 $4,817
====== ======
275
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax liabilities (assets) at December 31 consist of:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Components of timing differences
Depreciation.............................................. $ 7,369 $ 8,386
Prepaid pension........................................... 7,786 5,955
Employee Intangible Asset................................. 4,757 5,161
Restructuring Provisions.................................. (2,284) (3,101)
Disallowed doubtful debt provisions....................... (1,064) (116)
Other temporarily disallowed provisions................... (263) (192)
Other expenditure temporarily disallowed.................. (198) --
------- -------
Cumulative timing differences............................. 16,103 16,093
------- -------
Net deferred tax liabilities.............................. $ 4,831 $ 4,828
------- -------
A reconciliation of the statutory income tax rate to the effective rate
follows:
2000 1999
---- ----
Statutory income tax rate................................... 30% 31%
Goodwill amortization....................................... 85% 11%
Disallowable business expenses.............................. 6% 2%
--- --
Effective tax rate.......................................... 121% 44%
=== ==
17. COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases (including office space, transportation,
and data processing equipment) expiring at various dates. Rental expense was
$2,981 thousand in 2000 and $2,759 thousand in 1999.
At December 31, 2000, minimum rental payments under noncancelable leases
aggregated $3,679 thousand. The net minimum payments over the next five years
are $1,585 thousand in 2001, $1,341 thousand in 2002, $523 thousand in 2003,
$229 thousand in 2004, and $1 thousand in 2005.
Litigation
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business. In the opinion of the Company's
management, none of such litigation as of December 31, 2000 is likely to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
18. RELATED PARTY TRANSACTIONS
The Company has entered into certain agreements with affiliated entities.
These agreements were developed in the context of parent/subsidiary relationship
and therefore may not necessarily reflect the result of arms-length negotiations
between independent parties. The Company records sales with affiliates based on
a cost-plus formula developed and agreed-upon by both parties. All transactions
described below are eliminated on consolidation of Hercules Incorporated.
Corporate and other allocations: As discussed in Note 1, the financial
statements of the Company reflect certain allocated support costs incurred by
other entities in the Hercules group. These costs include executive,
276
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
legal, accounting, tax, auditing, cash management, purchasing, human resources,
safety, health and environmental, information management, investor relations and
other corporate services. Allocations and charges included in the Company's
financial statements were based on either a direct cost pass-through for items
directly identified as related to the Company's activities; a percentage
allocation for such services provided based on factors such as sales, net
assets, costs of sales or a relative weighting of geographic activity. These
allocations are reflected in the selling, general and administrative line item
in our statement of income. Such allocations and corporate charges totaled
$5,921 thousand, and $6,314 thousand in 2000 and 1999 respectively.
Royalties: The Company entered into license agreements in respect of the
use of manufacturing formulations and specifications which are developed and
owned by other Hercules Group companies. The Company paid royalties in respect
of these agreements of $5,675 thousand and $5,902 thousand in 2000 and 1999,
respectively. The royalties are included as other operating expenses in the
financial statements.
Sales to affiliates: The Company sells manufactured chemical products in
the normal course of business to affiliated companies. Company's revenues from
sales to affiliated companies were $23,072 thousand and $22,334 thousand in 2000
and 1999 respectively.
Purchases from affiliates: The Company has commercial relationships with
affiliated companies for the purchase of chemical products and raw materials.
The value of these purchases were $16,639 thousand and $16,408 thousand for 2000
and 1999 respectively.
19. SUBSEQUENT EVENT
On May 1, 2001, Hercules completed the sale of its hydrocarbon resins
divisions and select portions of its rosin resins divisions to Eastman Chemical
Company. In addition, on May 31, 2001, Hercules completed the sale of its peroxy
chemicals business to GEO Specialty Chemicals, Inc. Results of operations for
the Company include net sales of approximately $5,057 thousand and $8,161
thousand, respectively, in 2000 and 1999 relating to these divested businesses.
277
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and comprehensive income and of cash
flows present fairly, in all material respects, the financial position of
Hercules International Limited, a subsidiary of Hercules Incorporated, and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 22, 2001
278
HERCULES INTERNATIONAL LIMITED
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- -------- --------
(DOLLARS IN THOUSANDS)
Sales to third parties.................................... $ 791,771 $857,878 $681,418
Sales to Hercules Group................................... 93,717 120,167 144,337
--------- -------- --------
885,488 978,045 825,755
Cost of sales............................................. 530,321 562,701 502,891
Selling, general, and administrative expenses............. 153,928 144,696 92,293
Research and development.................................. 19,977 25,399 21,979
Goodwill and intangible asset amortization................ 8,292 11,271 4,128
Other operating (income) expenses, net (Note 13).......... (131,749) 27,700 37,890
--------- -------- --------
Profit from operations.................................... 340,719 206,278 166,574
Equity in (loss) income of affiliated companies........... (3,891) 2,938 (103)
Interest and debt expense (Note 14)....................... 8,028 4,381 6,252
Other income (expense), net (Note 15)..................... 12,714 650 (1,731)
--------- -------- --------
Income before income taxes and minority interest, net..... 305,514 205,485 158,488
Provision for income taxes (Note 16)...................... 119,794 63,421 62,129
--------- -------- --------
Income before minority interest, net...................... 185,720 142,064 96,359
Minority interest, net.................................... (1,107) (910) (889)
--------- -------- --------
Net income................................................ 184,613 141,154 95,470
Translation adjustments................................... (100,135) (51,868) 17,018
--------- -------- --------
Comprehensive income...................................... $ 84,478 $ 89,286 $112,488
========= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
279
HERCULES INTERNATIONAL LIMITED
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
-----------------------
2000 1999
--------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 14,340 $ 16,042
Accounts receivable, net (Note 3)......................... 149,346 205,279
Inventories (Note 4)...................................... 79,787 127,018
Deferred income taxes (Note 16)........................... 2,669 5,200
--------- ----------
Total current assets................................... 246,142 353,539
--------- ----------
Property, plant, and equipment, net (Note 9)................ 275,325 387,657
Investments in affiliates (Note 5).......................... 30,279 3,337
Goodwill and other intangible assets, net (Note 10)......... 224,443 300,739
Deferred charges and other assets........................... 12,696 9,642
--------- ----------
Total assets...................................... $ 788,885 $1,054,914
========= ==========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable.......................................... $ 94,908 $ 116,042
Short-term debt (Note 6).................................. 90,944 13,241
Accrued expenses (Note 9)................................. 118,162 97,164
--------- ----------
Total current liabilities.............................. 304,014 226,447
Long-term debt -- third parties (Note 7).................... 138 458
Deferred income taxes (Note 16)............................. 59,841 75,096
Pension liability (Note 12)................................. 20,066 25,021
Deferred credits and other liabilities...................... 2,031 1,537
--------- ----------
Total liabilities................................. 386,090 328,559
Commitments and contingencies (Note 17)
Minority Interest........................................... 18,599 20,299
Net Hercules Group Investment (Note 20)
Accumulated other comprehensive losses.................... (140,805) (40,670)
Intercompany transactions................................. 525,001 746,726
--------- ----------
Total Net Hercules Group Investment............... 384,196 706,056
--------- ----------
Total liabilities and Net Hercules Group
Investment...................................... $ 788,885 $1,054,914
========= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
280
HERCULES INTERNATIONAL LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
(DOLLARS IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income.............................................. $ 184,613 $ 141,154 $ 95,470
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization of property, plant and
equipment.......................................... 28,615 32,784 26,279
Amortization of goodwill and other intangible
assets............................................. 8,292 11,271 4,128
Deferred income tax................................... 13,396 11,789 (875)
(Gain) loss on disposals.............................. 1,617 184 (506)
Gain on sale of investments........................... (167,566) (13,302) --
Equity in (income) loss of affiliates................. 3,891 (2,938) 103
Dividends received.................................... 579 3,093 107
Minority interest, net................................ 1,107 910 889
Corporate and other cost allocations.................. 13,033 16,665 8,536
Accruals and deferrals of cash receipts and payments:
Accounts receivable................................ 3,420 (25,858) (5,686)
Inventories........................................ (11,618) (10,684) 684
Accounts payable and accrued expenses.............. 40,590 21,952 39,487
Noncurrent assets and liabilities.................. (1,484) 13,864 (3,486)
Net transfers to Hercules Group.................... 69,474 (129,329) 917
--------- --------- ---------
Net cash provided by operations.................... 187,959 71,555 166,047
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures, net of proceeds from sale......... (68,708) (72,437) (35,285)
Proceeds from sale of investment........................ -- 22,009 --
Purchase of equity method investments................... -- (25) --
--------- --------- ---------
Net cash used in investing activities.............. (68,708) (50,453) (35,285)
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Change in short-term debt............................... 78,435 (58,142) (6,149)
Long-term debt repayments............................... (306) (620) (5,498)
Proceeds from issuance of long-term debt................ 41,213 -- --
Net transfers (to) from Hercules Group.................. (239,146) 36,119 (103,011)
--------- --------- ---------
Net cash provided by (used in) financing
activities....................................... (119,804) (22,643) (114,658)
--------- --------- ---------
Effect of exchange rate changes on cash................. (1,149) (2,470) 1,165
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents.... (1,702) (4,011) 17,269
Cash and cash equivalents at beginning of year.......... 16,042 20,053 2,784
--------- --------- ---------
Cash and cash equivalents at end of year................ 14,340 16,042 20,053
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized).................. $ 7,081 $ 4,708 $ 6,267
Income taxes, net..................................... 65,008 60,680 60,597
Noncash investing and financing activities:
Sale of CPKelco (Note 14)............................. 119,261 -- --
Net asset (excluding cash) contribution from Hercules
Group of BetzDearborn entities (Note 1)............ -- -- 314,678
Corporate and other cost allocations.................. 13,033 16,665 8,536
Net asset (excluding cash) contribution from Hercules
Group of Citrus Colloid entities................... -- -- 73,690
Reversal of restructuring accruals to goodwill (Note
11)................................................ 3,320 -- --
The accompanying notes are an integral part of the consolidated financial
statements.
281
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Hercules International Limited (the "Company") is a subsidiary of Hercules
Incorporated (ultimate parent) ("Hercules"). Hercules and its wholly owned
subsidiaries comprise the Hercules Group. The Company supplies engineered
process and water treatment chemical programs, as well as products that manage
the properties of aqueous systems, for industrial, commercial and institutional
establishments. These products and services contribute to preserving or
enhancing productivity, reliability and efficiency in plant operations and in
complying with environmental regulations.
When Hercules acquired all of the outstanding shares of BetzDearborn Inc on
October 15, 1998 it paid $2,235 million in cash and $186 million in common stock
exchanged for the shares held by the BetzDearborn ESOP Trust. The purchase price
allocated to the Company and its subsidiaries was approximately $682 million.
During 1999, Hercules completed the purchase price allocation and the final
determination of goodwill was $1,822 million of which the amount attributable to
the Company was approximately $278 million. These financial statements include
the push down of fair value adjustments to assets and liabilities, including
goodwill, other intangible assets and property, plant and equipment and their
related amortization and depreciation adjustments.
As a result of the Hercules acquisition of BetzDearborn Inc., the Company
entered into several internal reorganization transactions during 1999 and 2000.
The transactions included the Company selling several of its investments in
subsidiaries to Hercules affiliates, purchasing several investments in
subsidiaries from Hercules affiliates, merging companies, and acquiring certain
investments in Hercules group companies that are valued at cost. As all
investments in this reorganization are under the common control of Hercules,
these transactions have been accounted for in a manner similar to pooling of
interests.
Historically, separate company stand-alone financial statements were not
prepared for the Company. In November 2000, Hercules amended its senior credit
facility and ESOP credit facility (the "Facilities"). The Facilities, as
amended, are secured by liens on Hercules' property and assets (and those of
Hercules' Canadian Subsidiaries), a pledge of the stock of substantially all of
Hercules' domestic subsidiaries (including the Company) and 65% of the stock of
foreign subsidiaries directly owned by Hercules, and a pledge of Hercules'
domestic intercompany indebtedness. These consolidated financial statements
present the financial information of the Company, a collateral party to the
Hercules debt, based on Hercules' understanding of the Securities and Exchange
Commission's interpretation and application of Rule 3-16 under the Securities
and Exchange Commission's Regulation S-X. These statements were derived from
historical accounting records.
The consolidated financial statements of the Company reflect certain
allocated support costs incurred by the Hercules Group. These costs include
executive, legal, accounting, tax, auditing, cash management, purchasing, human
resources, safety, health and environmental, information management, investor
relations and other corporate services. Allocations and charges included in the
Company's consolidated financial statements were based on either a direct cost
pass-through for items directly identified as related to the Company's
activities; a percentage allocation for such services provided based on factors
such as sales, net assets, or cost of sales; or a relative weighting of
geographic activity. Management believes that the allocation method is
reasonable. See Note 18 for more information.
A number of the operating companies participate in Hercules' centralized
cash management system. Accordingly, cash received from operations may be
transferred to Hercules on a periodic basis, and Hercules funds operational and
capital requirements upon request.
282
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries where control exists. Following the
acquisition of BetzDearborn by Hercules in 1998, the Company continued
BetzDearborn's practice of using a November 30 fiscal year end for certain
former BetzDearborn Inc. non-U.S. subsidiaries to expedite the year end closing
process. All intercompany transactions and profits have been eliminated.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Company's experience. The corresponding shipping and handling costs are
included in cost of sales.
Research and Development
Research and development expenditures are expensed as incurred.
Environmental Expenditures
Environmental expenditures that pertain to current operations or future
revenues are expensed or capitalized according to the Company's capitalization
policy. Expenditures for remediation of an existing condition caused by past
operations that do not contribute to current or future revenues are expensed.
Liabilities are recognized for remedial activities when the cleanup is probable
and can be reasonably estimated.
Cash and Cash Equivalents
Cash in excess of operating requirements is invested in short-term,
income-producing instruments. Cash equivalents include commercial paper and
other securities with original maturities of 90 days or less. Book value
approximates fair value because of the short maturity of those instruments.
Inventories
Inventories are stated at the lower of cost or market. Inventories are
valued on the average cost method.
Property and Depreciation
Property, plant, and equipment are stated at cost. The Company changed to
the straight-line method of depreciation, effective January 1, 1991, for newly
acquired processing facilities and equipment. Assets acquired before then
continue to be depreciated by accelerated methods. The Company believes
straight-line depreciation provides a better matching of costs and revenues over
the lives of the assets. The estimated useful lives of depreciable assets are as
follows: buildings -- 30 years; plant, machinery and equipment -- 15 years;
other machinery and equipment -- 3 to 15 years.
283
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is charged to income.
Investments
Investments in affiliated companies with a 20% or greater ownership
interest in which the Company has significant influence are accounted for using
the equity method of accounting. Accordingly, these investments are included in
investments in affiliates on the Company's balance sheet and the income or loss
from these investments is included in equity in (loss) income of affiliated
companies in the Company's statement of income.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are amortized on a straight-line basis
over the estimated future periods to be benefited, generally 40 years for
goodwill and 5 to 15 years for other intangible assets.
Long-lived Assets
The Company reviews its long-lived assets, including goodwill and other
intangibles, for impairment on an exception basis whenever events or changes in
circumstances indicate carrying amounts of the assets may not be recoverable
through undiscounted future cash flows. If an impairment loss has occurred based
on expected future cash flows (undiscounted), the loss is recognized in the
income statement. The amount of the impairment loss is the excess of the
carrying amount of the impaired asset over the fair value of the asset. The fair
value represents expected future cash flows from the use of the assets,
discounted at the rate used to evaluate potential investments.
Income Taxes
Income tax expense in the accompanying consolidated financial statements
has been computed assuming the Company filed separate income tax returns.
The provisions for income taxes has been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax basis of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
The company provides taxes on undistributed earnings of subsidiaries and
affiliates included in consolidated retained earnings to the extent such
earnings are planned to be remitted and not re-invested permanently. The
undistributed earnings/(losses) of subsidiaries and affiliates on which no
provision for foreign withholding or US income taxes has been made amounted to
approximately ($6,629) thousand and $10,468 thousand at December 31, 2000 and
1999, respectively. US and foreign income taxes that would be payable if such
earnings were distributed may be lower than the amount computed at the US
statutory rate because of the availability of tax credits.
Foreign Currency Translation and Transactions
The accompanying consolidated financial statements are reported in U.S.
dollars. The US dollar is the functional currency for the Company. The
translation of the functional currencies of the Company's
284
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subsidiaries into U.S. dollars (reporting currency) is performed for assets and
liabilities using the current exchange rates in effect at the balance sheet
date, and for revenues, costs and expenses using average exchange rates
prevailing during the reporting periods. Adjustments resulting from the
translation of functional currency financial statements to reporting currency
are accumulated and reported as other comprehensive income, a separate component
of Net Hercules Group Investment.
Transactions in foreign currency are recorded at the exchange rate
prevailing on the date of transaction. Monetary assets and liabilities
denominated in foreign currencies are expressed in the functional currency at
the exchange rates in effect at the balance sheet date. Revenues, costs and
expenses are recorded using average exchange rates prevailing during the
reporting periods. Gains or losses resulting from foreign currency transactions
are included in the statement of income.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables and
receivables from affiliated companies, which are included in the Net Hercules
Group Investment in the consolidated balance sheet. Concentrations of credit
risk with respect to trade receivables are limited due to the Company's large
number of customers and their dispersion across many different industries and
locations.
Derivative Instruments and Hedging
Derivative financial instruments have been used to hedge risk caused by
fluctuating currency. The Company enters into forward-exchange contracts to
hedge foreign currency exposure. Decisions regarding hedging are made on a
case-by-case basis, taking into consideration the amount and duration of the
exposure, market volatility, and economic trends. The Company uses the
fair-value method of accounting, recording to other income (expense), net
realized and unrealized gains and losses on these contracts monthly, except for
gains and losses on contracts to hedge specific foreign currency commitments,
which are deferred and accounted for as part of the transaction. Gains or losses
on instruments which have been used to hedge the value of investments in certain
non-U.S. subsidiaries have been accounted for under the deferral method and are
included in the foreign currency translation adjustment. It is the Company's
policy to match the term of financial instruments with the term of the
underlying designated item. If the designated item is an anticipated transaction
no longer likely to occur, gains or losses from the instrument designated as a
hedge are recognized in current period earnings. The Company does not hold or
issue financial instruments for trading purposes. In the consolidated statement
of cash flow, the Company reports the cash flows resulting from its hedging
activities in the same category as the related item that is being hedged.
Stock-based Compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25)). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," requires companies electing to continue to use
the intrinsic-value method to make pro forma disclosures of net income as if the
fair-value-based method of accounting had been applied.
Minority Interest
Minority interest at December 31, 2000 and 1999 represents a 38.97%
proportionate share of the equity of Hercules Quimica S.A., owned by a Hercules
Group affiliate.
285
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Computer Software Costs
Effective January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants Statement of Position 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
The prior accounting was generally consistent with the requirements of SOP 98-1
and, accordingly, adoption of SOP 98-1 had no material effect. Computer software
costs are being amortized over a period of 5 to 10 years.
Net Hercules Group Investment
The Net Hercules Group Investment account reflects the balance of the
Company's historical earnings, intercompany amounts, foreign currency
translation and other transactions between the Company and the Hercules Group.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. SFAS 133, as amended, is effective for all
fiscal quarters of fiscal years beginning after December 31, 2000. The Company
adopted SFAS 133 effective January 1, 2001. The adoption of SFAS No. 133, as
amended by SFAS 137 and 138, did not have a material effect on its earnings or
statement of financial position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was effective October
1, 2000. Adoption of SAB 101 did not have a material effect on our profit from
operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" (SFAS 141) and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). For the Company, these statements will generally become
effective January 1, 2002, although business combinations initiated after June
30, 2001 are subject to the non-amortization and purchase accounting provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. The assessment of
goodwill for impairment is a complex issue in which the Company must determine,
among other things, the fair value of each defined reporting unit. It is,
therefore, not possible at this time to predict the impact, if any, that the
impairment assessment provisions of SFAS 142 will have on the Company's
financial statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assets. SFAS 143 will become effective for the Company on
January 1, 2003 and requires recognition of a liability for an asset retirement
obligation in the period in which it is incurred. Management is currently in the
process of evaluating the impact this standard will have on the Company's
financial statements.
286
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Trade....................................................... $138,464 $188,335
Other....................................................... 13,634 20,188
-------- --------
152,098 208,523
Less allowance for doubtful accounts........................ (2,752) (3,244)
-------- --------
Total............................................. $149,346 $205,279
======== ========
Other accounts receivable mainly comprise VAT receivable.
4. INVENTORIES
The components of inventories are:
2000 1999
--------- ----------
(DOLLARS IN THOUSANDS)
Finished products........................................... $54,573 $ 58,813
Materials, supplies, and work in process.................... 25,214 68,205
------- --------
Total............................................. $79,787 $127,018
======= ========
5. INVESTMENTS
The Company has various equity investments in companies, as described
below. Summarized financial information for these equity affiliates at December
31, and for the years then ended is as follows:
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Current assets.............................................. $269,814 $17,470
Non-current assets.......................................... 942,946 3,923
Current liabilities......................................... $109,486 $13,275
Non-current liabilities..................................... 730,579 1,378
2000 1999 1998
-------- ------- -------
Net sales............................................ $143,245 $56,410 $43,712
Gross profit......................................... 17,290 14,489 11,414
Net earnings......................................... (15,864) 5,865 (273)
At December 31, 2000, the Company's equity investments, all affiliates of
Hercules consisted of a 50% ownership of Abieta Chemie GmbH and BetzDearborn
Nippon KK, a 49% ownership of Hercules Mas Indonesia, and a 28.57% ownership of
the consolidated group CP Kelco ApS. The Company's carrying value for these
investments at December 31, 2000 and 1999 equals its share of the underlying
equity in net assets of
287
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the respective affiliates. Dividends paid to the Company from its equity
investees were $579 thousand, $3,093 thousand and $107 thousand during 2000,
1999 and 1998, respectively. Except for CP Kelco ApS, each of these entities
operates in lines of business similar to the Company, supplying engineered
process and water treatment chemical programs, as well as products that manage
the properties of aqueous systems, for industrial, commercial and institutional
establishments. As discussed further in Note 13, CP Kelco ApS was the Company's
Food Gums business that was divested in 2000.
6. SHORT-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Short-term debt of $90,944 thousand and $13,241 thousand at December 31,
2000 and 1999, respectively, consists of bank borrowings primarily representing
foreign overdraft facilities and short-term lines of credit, which are generally
payable on demand with interest at various rates. Book values of bank borrowings
approximate market value because of their short maturity period.
Short-term debt with affiliates of $32,685 thousand and $27,998 thousand at
December 31, 2000 and 1999, respectively, is recorded in Net Hercules Group
Investment in the consolidated balance sheet.
At December 31, 2000 and 1999, the Company had $34,774 thousand and $23,607
thousand, respectively, of unused lines of credit that may be drawn as needed,
with interest at a negotiated spread over lenders' cost of funds. Lines of
credit in use at December 31, 2000 and 1999 were $90,944 thousand and $5,331
thousand, respectively.
Weighted-average interest rates on all short-term borrowings at December
31, 2000 and 1999 were 5.60% and 4.45%, respectively.
7. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt with third parties and affiliates at December 31, 2000 and
1999 is summarized as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
4.50% third party note...................................... $ 93 $ 102
11.00% third party note..................................... -- 280
Other....................................................... 45 76
------- -------
Less current maturities..................................... -- --
------- -------
Total long-term debt, third party........................... 138 458
------- -------
5.51% affiliate note........................................ 22,853 --
5.80% affiliate note........................................ 20,516 22,345
6.00% affiliate note........................................ -- 5,145
------- -------
Less current maturities..................................... -- --
------- -------
Total long-term debt, affiliates............................ 43,369 27,490
------- -------
Total long term debt, third party and affiliates............ $43,507 $27,948
======= =======
Long-term debt with affiliates, which is recorded in Net Hercules Group
Investment in the consolidated balance sheet, has no stated maturity. Third
party long-term debt matures after 2005. The fair value of the Company's
long-term debt was $43,507 at December 31, 2000 and $27,948 at December 31,
1999. The Company believes that the carrying value of long-term debt borrowings
approximates fair value, based on discounting future cash flows using rates
currently available for debt of similar terms and remaining maturities.
288
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM INCENTIVE COMPENSATION PLANS
The Company participates in long-term incentive compensation plans
sponsored by Hercules. These plans provide for the grant of stock options and
the award of common stock and other market-based units to certain key employees
and non-employee directors.
Hercules long-term incentive compensation plans place a great emphasis on
shareholder value creation through grants of regular stock options,
performance-accelerated stock options, and Cash Value Awards (performance-based
awards denominated in cash and payable in shares of common or restricted stock,
subject to the same restrictions as restricted stock). Restricted stock and
other market-based units are awarded with respect to certain programs. The
number of awarded shares outstanding for all of the Hercules Group was 491,488
at December 31, 2000, and 926,689 and 1,083,613 at December 31, 1999 and 1998,
respectively.
At December 31, 2000, under Hercules' incentive compensation plans,
1,847,855 shares of common stock were available for grant as stock awards or
stock option awards. Stock awards are limited to approximately 15% of the total
authorizations. Regular stock options are granted at the market price on the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock options are also granted at
the market price on the date of grant and are normally exercisable at nine and
one-half years. Exercisability may be accelerated based upon the achievement of
predetermined performance goals. Both regular and performance-accelerated stock
options expire 10 years after the date of grant.
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to Hercules in the event of employment termination, except
in the case of death, disability, retirement, or other specified events.
The Company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. There were no charges to income for the cost of stock awards over the
restriction or performance period for 2000, 1999 and 1998, respectively.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 2000, 1999, and 1998:
REGULAR PERFORMANCE-ACCELERATED
-------------------------- --------------------------
NUMBER OF WEIGHTED- NUMBER OF WEIGHTED-
SHARES AVERAGE PRICE SHARES AVERAGE PRICE
--------- ------------- --------- -------------
January 1, 1998.............................. 313,475 $40.36 55,075 $43.75
Granted.................................... 135,875 $37.70 46,025 $47.24
Exercised.................................. (960) $39.50 -- --
Forfeited.................................. -- -- -- --
------- ------ ------- ------
December 31, 1998............................ 448,390 $39.56 101,100 $45.34
Granted.................................... 219,175 $37.53 68,525 $37.35
Exercised.................................. -- -- -- --
Forfeited.................................. -- -- (900) $45.73
------- ------ ------- ------
December 31, 1999............................ 667,565 $38.89 168,725 $42.09
Granted.................................... 162,875 $17.25 -- --
Exercised.................................. -- -- -- --
Forfeited.................................. (19,650) $36.82 (1,350) $37.56
------- ------ ------- ------
December 31, 2000............................ 810,790 $34.59 167,375 $42.13
289
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted-average fair value of regular stock options granted during
2000, 1999 and 1998 was $8.85, $8.25 and $9.19, respectively. The
weighted-average fair value of performance-accelerated stock options granted
during 1999 and 1998 was $7.99 and $11.02.
Following is a summary of regular stock options exercisable at December 31,
2000, 1999 and 1998, and their respective weighted-average share prices:
NUMBER OF WEIGHTED-
OPTIONS EXERCISABLE SHARES AVERAGE
------------------- --------- ---------
December 31, 1998........................................... 129,175 $40.81
December 31, 1999........................................... 306,825 $39.84
December 31, 2000........................................... 561,295 $37.20
There were no performance-accelerated stock options exercisable at December
31, 2000.
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------------- ---------------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICE RANGE 12/31/00 REMAINING EXERCISE 12/31/00 EXERCISE
-------------------- -------------- --------- --------- -------------- ---------
REGULAR STOCK OPTIONS
$12 - $20....................... 159,025 9.13 $17.25 50,150 $17.25
$20 - $30....................... 59,025 7.67 $25.56 51,120 $25.56
$30 - $40....................... 516,290 7.21 $38.99 393,965 $39.45
$40 - $50....................... 75,450 7.27 $47.84 65,060 $47.82
$50 - $60....................... 1,000 5.11 $55.38 1,000 $55.38
------- -------
810,790 561,295
======= =======
PERFORMANCE-ACCELERATED STOCK OPTIONS
$14 - $40....................... 102,475 7.68 $37.93 -- --
$40 - $50....................... 56,800 6.86 $47.82 -- --
$50 - $61....................... 8,100 5.11 $55.38 -- --
------- -------
167,375 --
======= =======
The Company's employees may also participate in the Hercules Employee Stock
Purchase Plan ("ESPP"). The ESPP is a qualified non-compensatory plan, which
allows eligible employees to acquire shares of common stock through systematic
payroll deductions. The plan consists of three-month subscription periods,
beginning July 1 of each year. The purchase price is 85% of the fair market
value of the common stock on either the first or last day of that subscription
period, whichever is lower. Purchases may range from 2% to 15% of an employee's
base salary each pay period, subject to certain limitations. Currently, 202,139
shares of Hercules common stock are registered for offer and sale under the
plan. Shares issued at December 31, 2000 and 1999, were 1,597,861 and 949,464,
respectively. The Company applies APB Opinion 25 and related interpretations in
accounting for its Employee Stock Purchase Plan. Accordingly, no compensation
cost has been recognized for the Employee Stock Purchase Plan.
Had compensation cost for Hercules' Stock-Based Incentive Plans and
Employee Stock Purchase Plan been determined on the basis of fair value
according to SFAS No. 123, the fair value of each option granted or share
purchased would be estimated on the grant date using the Black-Scholes option
pricing model.
290
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following weighted-average assumptions would be used in estimating fair
value for 2000, 1999 and 1998:
PERFORMANCE EMPLOYEE STOCK
ASSUMPTION REGULAR PLAN ACCELERATED PLAN PURCHASE PLAN
---------- ------------ ---------------- --------------
Dividend yield............................ 2% 3.4% 0.0%
Risk-free interest rate................... 5.88% 5.38% 5.41%
Expected life............................. 7.1 yrs. 5 yrs. 3 mos.
Expected volatility....................... 29.20% 27.31% 44.86%
The Company's net income for 2000, 1999 and 1998 would approximate the pro
forma amounts below:
2000 1999 1998
-------- -------- -------
(DOLLARS IN THOUSANDS)
Net income
As reported....................................... $184,613 $141,154 $95,470
Pro forma......................................... $183,163 $139,801 $94,353
9. ADDITIONAL BALANCE SHEET DETAIL
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Property, plant, and equipment
Land...................................................... $ 7,240 $ 8,870
Buildings and equipment................................... 533,902 773,185
Construction in progress.................................. -- 682
--------- ---------
Total............................................. 541,142 782,737
Accumulated depreciation and amortization................. (265,817) (395,080)
--------- ---------
Net property, plant, and equipment........................ $ 275,325 $ 387,657
========= =========
Accrued expenses
Payroll and employee benefits............................. $ 14,834 $ 29,732
Income taxes payable...................................... 72,078 22,374
Restructuring............................................. 12,743 26,546
Environmental............................................. 9,300 800
Other..................................................... 9,207 17,712
--------- ---------
$ 118,162 $ 97,164
========= =========
291
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2000 and 1999, the goodwill and other intangible assets
were:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Goodwill.................................................... $241,425 $312,495
Other intangibles........................................... 7,829 9,564
-------- --------
Total....................................................... 249,254 322,059
Less accumulated amortization............................... (24,811) (21,320)
-------- --------
Net goodwill and other intangible assets............... $224,443 $300,739
======== ========
Goodwill and other intangible assets primarily represent amounts
capitalized from the Hercules acquisition of BetzDearborn (Note 1).
11. RESTRUCTURING
The consolidated balance sheet reflects liabilities for employee severance
benefits and other exit costs, primarily related to the plans initiated upon the
creation of the European Shared Service Center in 1997 and the acquisition of
BetzDearborn in 1998. In the fourth quarter of 2000, we committed to a plan
relating to the restructuring of several entities. As a result of these plans,
we estimate approximately 512 employees will be terminated, of which
approximately 461 employee terminations have occurred since inception of the
aforementioned plans. These employees come from various parts of the business,
including but not limited to manufacturing, support functions and research.
Pursuant to the plans in place to merge the operations of BetzDearborn with
Hercules and to rationalize the support infrastructure and other existing
operations, facilities were closed and in total approximately 393 employees were
terminated during 1999. Cash payments for the year included $13.2 million for
severance benefits and other exit costs. As a result of the completion of plans
to exit former BetzDearborn activities, a $9 million increase in employee
severance benefits was reflected in the finalization of the purchase price
allocation. We lowered the estimates of severance benefits related to the
implementation of the European Shared Service Center by $1.3 million due to a
suspension of implementations, while increasing the estimates of other plans by
$13.9 million due to the identification of additional facilities for closure.
These amounts were charged to operating expense.
In 2000, in total approximately 68 employees were terminated and $13.6
million cash was paid in severance benefits and other exit costs. The estimate
for the remaining plans was decreased by $3.3 million against goodwill due to
lower than planned severance benefits as the result of higher than anticipated
attrition, with voluntary resignations not requiring the payment of termination
benefits. The estimate for the plans related to the shared services center were
decreased by $1.7 million against operating expense.
292
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Severance benefits payments are based on years of service and generally
continue for 3 months to 24 months subsequent to termination. We expect to
substantially complete remaining actions under the plans in 2001. A
reconciliation of activity with respect to the liabilities established for these
plans is as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of year................................ $ 26,546 $ 27,190
Cash payments............................................... (13,556) (13,195)
Additional termination benefits and exit costs.............. 4,731 13,840
Reversals against goodwill.................................. (3,320) --
Reversals against earnings.................................. (1,658) (1,289)
-------- --------
Balance at end of year...................................... $ 12,743 $ 26,546
======== ========
12. PENSION
The Company has a number of pension plans in Europe, covering substantially
all employees. The following chart lists benefit obligations, plan assets, and
funded status of the plans.
2000 1999
-------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1........................... $149,158 $176,845
Service cost.............................................. 3,846 6,270
Interest cost............................................. 7,696 8,593
Reclassification of assets for plan settlement............ (416) --
Settlements and transfers................................. (10,612) --
Translation difference.................................... (12,350) (23,041)
Actuarial loss (gain)..................................... 598 (16,269)
Benefits paid from plan assets............................ (2,585) (2,445)
Benefits paid by company.................................. (523) (795)
-------- --------
Benefit obligation at December 31........................... $134,812 $149,158
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1.................... 135,204 132,972
Actual return on plan assets.............................. 6,200 22,801
Settlements and transfers................................. (1,109) --
Company contributions (refund)............................ (348) 607
Translation difference.................................... (11,185) (18,731)
Benefits paid from plan assets............................ (2,532) (2,445)
-------- --------
Fair value of plan assets at December 31.................. $126,230 $135,204
======== ========
Funded status of the plans.................................. (8,582) (13,954)
Unrecognized actuarial gain................................. (17,466) (22,299)
Unrecognized prior service cost............................. 4,640 5,483
Unrecognized net transition obligation...................... 1,342 5,749
-------- --------
Accrued benefit cost........................................ $(20,066) $(25,021)
======== ========
293
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000 1999
-------- --------
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
Accrued benefit liability................................. (20,066) (25,021)
-------- --------
$(20,066) $(25,021)
======== ========
ASSUMPTIONS AS OF DECEMBER 31
Weighted-average discount rate............................ 5.75% 6.00%
Expected return on plan assets............................ 6.50% 6.50%
Rate of compensation increase............................. 3.50% 3.75%
PENSION BENEFITS
-----------------------------
2000 1999 1998
------- ------- -------
COMPONENTS OF NET PERIOD PENSION COST
Service cost.......................................... $ 3,846 $ 6,270 $ 4,523
Interest cost......................................... 7,696 8,593 8,527
Return on plan assets (expected)...................... (7,793) (9,253) (9,075)
Amortization and deferrals............................ (238) 458 415
(Gain) loss on settlements............................ (8,675) -- --
Amortization of prior service cost.................... 10 12 12
Amortization of transition asset...................... 2,437 708 731
------- ------- -------
Benefit cost (credit)................................. $(2,717) $ 6,788 $ 5,133
======= ======= =======
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefits obligations
in excess of plan assets were $27,060 thousand, $22,753 thousand and $2,058
thousand, respectively, as of December 31, 2000 and $36,766 thousand, $28,900
thousand and $1,334 thousand, respectively, as of December 31, 1999.
13. OTHER OPERATING INCOME AND EXPENSES, NET
Other operating income and expenses, net, in 2000 include a gain of
$167,566 thousand from the sale of the Food Gums division. On September 28,
2000, the Company sold its Food Gums division to CP Kelco, a joint venture with
Lehman Brothers Merchant Banking Partners II, L.P., which contributed
approximately $300 million in equity. The Company received a note of
approximately $248 million from Hercules, which collected the original cash
proceeds, recorded tax expenses of approximately $61 million and retained a
28.57% equity position in CP Kelco. CP Kelco simultaneously acquired Kelco
biogums business of Pharmacia Corporation (formerly Monsanto Corporation). Other
operating expenses, net, also include Hercules Group affiliate royalty costs,
net restructuring costs, environmental costs, net losses on asset dispositions,
and foreign currency losses totaling $22,471 thousand, $3,073 thousand, $8,500
thousand, $1,617 thousand and $156 thousand, respectively.
Other operating expenses, net, in 1999 include Hercules Group affiliate
royalty costs of $27,318 thousand, a gain on sale of investments of $13,302
thousand, net restructuring costs of $12,551, environmental costs of $800
thousand, net losses on asset disposition of $184 thousand and foreign currency
losses amounting to $149 thousand.
Other operating expenses, net, in 1998 include Hercules Group affiliate
royalty costs of $21,029 thousand, net restructuring costs of $16,072, net gains
on asset dispositions of $506 thousand and foreign currency losses amounting to
$1,295 thousand.
294
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. INTEREST AND DEBT EXPENSE
No interest and debt costs were capitalized during 1998, 1999 and 2000. The
costs incurred are presented separately in the consolidated statement of income.
15. OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following:
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Interest income, net.................................. $12,380 $ 5,180 $ 1,876
Rent.................................................. 26 (6) 11
Miscellaneous income (expense), net................... 308 (4,524) (3,618)
------- ------- -------
$12,714 $ 650 $(1,731)
======= ======= =======
16. INCOME TAXES
A summary of the components of the tax provision follows:
2000 1999 1998
-------- ------- -------
(DOLLARS IN THOUSANDS)
Current.............................................. $106,398 $51,632 $63,004
Deferred............................................. 13,396 11,789 (875)
-------- ------- -------
Provision for income taxes........................... $119,794 $63,421 $62,129
======== ======= =======
Deferred tax liabilities (assets) at December 31 consist of:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Depreciation................................................ $(41,661) $(52,772)
Amortization................................................ (8,819) (10,823)
Stock valuation............................................. (2,207) (2,498)
Insurance provision (ppd)................................... (4,989) (6,037)
Replacement reserve......................................... (3,282) (3,776)
Intangible asset............................................ (1,385) --
Other....................................................... (2,314) (3,371)
-------- --------
Gross deferred tax liabilities.............................. (64,657) (79,277)
-------- --------
Loss carryforwards.......................................... 2,959 2,730
Inventory reserves.......................................... 2,551 4,124
Other....................................................... 2,677 3,356
-------- --------
Gross deferred tax assets................................... 8,187 10,210
-------- --------
Valuation allowance......................................... (702) (829)
-------- --------
Net deferred tax assets..................................... $(57,172) $(69,896)
======== ========
295
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory income tax rate to the effective rate
follows:
2000 1999 1998
----- ----- -----
Statutory income tax rate................................... 35.0% 35.0% 35.0%
Non-deductible expenses..................................... 0.5% 1.6% 1.3%
Non-taxable income.......................................... (3.9)% (1.4)% (3.2)%
Gain on sale of investment.................................. (19.3)% (2.9)% 0.0%
Tax rate differences on subsidiary earnings................. 0.4% 1.1% 3.6%
Foreign dividends, net of credits........................... 23.2% 0.3% 0.3%
Other....................................................... 3.5% (2.7)% 2.4%
----- ----- -----
Effective tax rate.......................................... 39.4% 31.0% 39.4%
===== ===== =====
The net operating losses have a carryforward period ranging from 5 years to
indefinite, but may be limited in their use in any given year.
17. COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases (including office space, transportation,
and data processing equipment) expiring at various dates. Rental expense was
$8,713 thousand, $9,075 thousand and $5,654 thousand in 2000, 1999 and 1998,
respectively.
At December 31, 2000, minimum rental payments under noncancelable leases
aggregated $24,236 thousand. The net minimum payments over the next five years
and thereafter are $7,694 thousand in 2001, $5,197 thousand in 2002, $3,024
thousand in 2003, $1,161 thousand in 2004, $1,630 thousand in 2005 and $5,530
thousand beyond 2005, respectively.
Litigation
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business. In the opinion of the Company's
management, none of such litigation as of December 31, 2000 is likely to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
Environmental
The Company has potential liability in connection with obligations to
authorities of various EU countries in which it has manufacturing facilities,
and to private parties pursuant to contract, for the cost of environmental
investigation and/or cleanup at several sites. The estimated range of the
reasonably possible share of costs for the investigation and cleanup is between
$5,000 thousand and $12,000 thousand. The actual costs will depend upon numerous
factors, including the actual methods of remediation required or agreed to;
outcomes of negotiations with regulatory authorities and private parties;
changes in environmental laws and regulations; technological developments; and
the years of remedial activity required, which could range to 30 years.
The Company becomes aware of its obligations relating to sites in which it
may have liability for the costs of environmental investigations and/or remedial
activities through correspondence from government authorities, or through
correspondence from companies with which the Company has contractual
obligations, 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
296
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
coordinators who are familiar with environmental laws and regulations and act as
a resource for identifying environmental issues.
In December 2000, PFW Aroma Chemicals B.V., a company that in 1996
purchased from the Company a Fragrances Plant in Barneveld, NL, submitted a
claim of 7,295 thousand EURO. The claim seeks payment of costs alleged to be
owed under the 1996 Agreement between the parties. The claim generally alleges
that the Company is obligated to pay for the costs of cleaning up contamination
at the Barneveld plant and to pay various costs relating to compliance with
permit obligations. The Company has questioned its obligation to pay the amounts
sought, and is currently in negotiations with PFW regarding this claim.
On May 1, 2001, the Company sold a hydrocarbon resins manufacturing
facility located in Middelburg, the Netherlands as part of the sale by Hercules
of its Resins Division to Eastman Chemical Resins, Inc. Under the Purchase and
Sale Agreement between the parties, Hercules retained certain specific
liabilities relating to environmental conditions at the Middelburg hydrocarbon
resins plant, including pre-existing contamination.
At December 31, 2000, the total accrued liability of $9,300 thousand 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 remediation that will
be required and the negotiations regarding apportionment of costs among other
private parties. While it is not feasible to predict the outcome of all pending
suits and claims, the ultimate resolution of these environmental matters could
have a material effect upon the results of operations and the financial position
of the Company.
18. RELATED PARTY TRANSACTIONS
The Company has entered into certain agreements with affiliated entities.
These agreements were developed in the context of a Hercules Group/subsidiary
relationship and therefore may not necessarily reflect the result of
arm's-length negotiations between independent parties. All transactions
described below are eliminated on consolidation of Hercules.
Intercompany borrowing and interest: The Company has intercompany loans
with Hercules affiliated entities. The loans with affiliates are presented in
net Hercules Group Investment in the consolidated balance sheet. Interest paid
to affiliated entities was $6,992 thousand, $1,968 thousand and $1,319 thousand
in 2000, 1999 and 1998, respectively.
Corporate, regional and other allocations: As discussed in Note 1, the
consolidated financial statements of the Company reflect certain allocated
support costs incurred by other entities in the Hercules group. These costs
include executive, legal, accounting, tax, auditing, cash management,
purchasing, human resources, safety, health and environmental, information
management, investor relations and other corporate services. Allocations and
charges included in the Company's consolidated financial statements were based
either on a direct cost pass-through for items directly identified as related to
the Company's activities; a percentage allocation for such services provided
based on factors such as sales, net assets, cost of sales; or a relative
weighting of geographic activity. These allocations are reflected in the
selling, general and administrative line item in the consolidated statement of
income. Such allocations and corporate charges totaled approximately $25,303
thousand, $33,712 thousand and $17,802 thousand in 2000, 1999 and 1998,
respectively.
Sales to affiliates: The Company sells raw material and finished goods
inventory in the normal course of business to affiliated companies. The
Company's revenues from sales to affiliated companies are presented separately
in the consolidated statement of income.
297
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Purchases from affiliates: The Company purchases in the normal course of
business raw material and finished goods inventory from affiliated companies.
The Company's purchases of inventory from affiliated companies is reflected in
costs of sales in the consolidated statement of income and totaled $107,593
thousand, $115,269 thousand and $113,938 thousand in 2000, 1999 and 1998,
respectively.
Royalties: The Company entered into a license agreement in respect of the
use of manufacturing formulations and specifications developed and owned by an
affiliated entity. Total royalties accrued in respect of this agreement are
included in the other operating (income) expenses line item in the consolidated
statement of income and totaled $22,471 thousand, $27,318 thousand and $21,029
thousand in 2000, 1999 and 1998, respectively.
19. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
The Company enters into forward-exchange contracts to hedge currency
exposure.
Notional Amounts and Credit Exposure of Derivatives
The notional amounts of derivatives summarized below do not represent
amounts exchanged by the parties and, thus, are not a measure of the exposure of
the Company through its use of derivatives. The amounts exchanged are calculated
on the basis of the notional amounts and the other terms of the derivatives,
which relate to interest rates or exchange rates.
Foreign Exchange Risk Management
The Company has selectively used foreign currency forward contracts to
offset the effects of exchange rate changes on reported earnings, cash flow, and
net asset positions. The primary exposures are denominated in the U.S. Dollar,
the Japanese Yen and the British Pound Sterling. Some of the contracts involve
the exchange of two foreign currencies, according to local needs in foreign
subsidiaries. The term of the currency derivatives is rarely more than three
months. At December 31, 2000 and 1999, the Company had outstanding
forward-exchange contracts to purchase foreign currencies aggregating $62,393
thousand and $165,299 thousand, respectively, and to sell foreign currencies
aggregating $62,833 thousand and $164,819 thousand, respectively. The foreign
exchange contracts outstanding at December 31, 2000 will mature during 2001.
Fair Values
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 2000 and 1999:
2000 1999
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Foreign exchange contracts........................ $205 $ 205 $480 $ 480
The carrying amount represents the net unrealized gain or net interest payable
associated with the contracts at the end of the period. Fair values of
derivative contracts are indicative of cash that would have been required had
settlement been December 31, 2000. Foreign exchange contracts are valued based
on year-end exchange rates.
298
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. NET HERCULES GROUP INVESTMENT
Changes in Net Hercules Group Investment were as follows:
Balance, January 1, 1998.................................... $ 283,509
Net income................................................ 95,470
Other comprehensive income................................ 17,018
Intercompany transactions, net............................ 317,977
---------
Balance, December 31, 1998.................................. 713,974
Net income................................................ 141,154
Other comprehensive loss.................................. (51,868)
Intercompany transactions, net............................ (97,204)
---------
Balance, December 31, 1999.................................. 706,056
Net income................................................ 184,613
Other comprehensive loss.................................. (100,135)
Intercompany transactions, net............................ (406,338)
---------
Balance, December 31, 2000.................................. $ 384,196
=========
The Company includes accumulated other comprehensive income (loss) in net
Hercules Group investment. At December 31, 2000 and 1999, accumulated other
comprehensive income (loss) consisted of foreign currency translation
adjustments.
21. SUBSEQUENT EVENT
On May 1, 2001, Hercules completed the sale of its hydrocarbon resins
divisions and select portions of its rosin resins divisions to Eastman Chemical
Company. In addition, on May 31, 2001, Hercules completed the sale of its peroxy
chemicals business to GEO Specialty Chemicals, Inc.
299
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and comprehensive income and of cash
flows present fairly, in all material respects, the financial position of the
Hercules International Limited, LLC, a subsidiary of Hercules International
Limited, and its subsidiaries at December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America that require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 18 to the financial statements, the Company has ceased
to act as a reseller of two of its three business lines and is reviewing the
current activities of the Company.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 22, 2001
300
HERCULES INTERNATIONAL LIMITED, LLC
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Sales to third parties..................................... $211,041 $210,697 $179,803
Sales to Hercules Group.................................... 150,914 163,277 187,281
-------- -------- --------
361,955 373,974 367,084
Cost of sales.............................................. 335,455 348,403 344,685
Selling, general, and administrative expenses.............. 17,626 18,157 17,659
Goodwill and intangible asset amortization................. 12 14 9
Other operating expenses (income), net (Note 11)........... 62 (207) 171
-------- -------- --------
Profit from operations................................... 8,800 7,607 4,560
Interest and debt expense (Note 12)........................ (1,735) (797) (517)
Other income, net (Note 13)................................ 798 495 2,147
-------- -------- --------
Income before income taxes................................. 7,863 7,305 6,190
Provision for income taxes (Note 15)....................... 2,778 2,725 2,168
-------- -------- --------
Net income............................................... 5,085 4,580 4,022
Translation adjustments.................................... (428) (1,651) 572
-------- -------- --------
Comprehensive income..................................... $ 4,657 $ 2,929 $ 4,594
======== ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
301
HERCULES INTERNATIONAL LIMITED, LLC
BALANCE SHEETS
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Accounts receivable, net (Note 3)......................... $31,058 $40,514
Inventories (Note 4)...................................... 23,679 23,901
Deferred income taxes (Note 15)........................... 437 384
------- -------
Total current assets................................... 55,174 64,799
------- -------
Deferred charges and other assets........................... 269 796
Goodwill and other intangible assets, net (Note 8).......... 293 333
------- -------
Total assets...................................... $55,736 $65,928
======= =======
LIABILITIES AND NET MEMBER'S/HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable.......................................... $ 7,355 $ 5,630
Accrued expenses (Note 7)................................. 5,202 8,095
------- -------
Total current liabilities.............................. 12,557 13,725
Commitments and contingencies (Note 17)..................... -- --
Net Member's/Hercules Group Investment (Note 10)
Accumulated other comprehensive losses.................... (3,580) (3,152)
Intercompany transactions................................. 46,759 55,355
------- -------
Net Member's/Hercules Group Investment............ 43,179 52,203
------- -------
Total liabilities and Net Member's/Hercules Group
Investment....................................... $55,736 $65,928
======= =======
The accompanying notes are an integral part
of the consolidated financial statements.
302
HERCULES INTERNATIONAL LIMITED, LLC
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- ------- --------
(DOLLARS IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income.................................................. $ 5,085 $ 4,580 $ 4,022
Adjustments to reconcile net income to net cash provided by
(used in) operations:
Amortization of goodwill and other intangible assets...... 12 14 9
Deferred income taxes..................................... (53) (64) 227
Corporate and other cost allocations from Hercules
Group.................................................. 1,859 2,730 1,809
Corporate and other cost allocations to Hercules Group.... (3,282) (3,664) --
Accruals and deferrals of cash receipts and payments:
Accounts receivable.................................... 6,613 2,384 (49,919)
Inventories............................................ (1,869) (4,750) (6,740)
Deferred charges and other assets...................... 498 (304) 322
Net transfers from (to) Hercules Group................. 6,558 (6,717) 48,715
Accounts payable and accrued expenses.................. (48) 6,365 2,872
-------- ------- --------
Net cash (used in) provided by operations.............. 15,373 574 1,317
-------- ------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired................. -- -- (407)
-------- ------- --------
Net cash used in investing activities.................. -- -- (407)
-------- ------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Net transfers from (to) Hercules Group...................... (15,373) (573) (908)
-------- ------- --------
Net cash provided by (used in) financing activities.... (15,373) (573) (908)
-------- ------- --------
Effect of exchange rate changes on cash..................... -- (1) (2)
-------- ------- --------
Net increase (decrease) in cash and cash equivalents........ -- -- --
Cash and cash equivalents at beginning of year.............. -- -- --
-------- ------- --------
Cash and cash equivalents at end of year.................... $ -- $ -- $ --
======== ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ 667 $ -- $ --
Income taxes.............................................. 6,036 1,035 1,035
Non cash financing activities:
Corporate and other cost allocations from Hercules
Group.................................................. $ 1,859 $ 2,730 $ 1,809
Corporate and other cost allocations to Hercules Group.... (3,282) (3,664) --
Operating payable to Hercules Group settled with issuance
of short-term debt to Hercules Group................... 24,334 -- --
The accompanying notes are an integral part
of the consolidated financial statements.
303
HERCULES INTERNATIONAL LIMITED, LLC
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Hercules International Limited, LLC (the "Company") is a single member
limited liability corporation wholly owned by Hercules International Limited.
The Company's ultimate parent is Hercules Incorporated ("Hercules"). Hercules
and its wholly owned subsidiaries comprise the "Hercules Group". The Company is
engaged in selling process and water treatment chemical programs for the pulp
and paper industry, products that manage the properties of aqueous systems, and
resins and has a branch in the Netherlands. These programs and products are
produced by entities located in the Netherlands and Belgium that are affiliated
by way of common ownership. As from the year 1999, the Company also provides
financial and IT-related services to other affiliated European entities.
Historically, separate company financial statements were not prepared for
the Company. In November 2000, Hercules amended its senior credit facility and
ESOP credit facility (the "Facilities"). The Facilities, as amended, are secured
by liens on Hercules' property and assets (and those of Hercules' Canadian
Subsidiaries), a pledge of the stock of substantially all of Hercules' domestic
subsidiaries and 65% of the stock of foreign subsidiaries directly owned by
Hercules, and a pledge of Hercules' domestic intercompany indebtedness. These
financial statements present the financial information of the Company, a
collateral party to the Hercules debt, based on the Hercules' understanding of
the Securities and Exchange Commission's interpretation and application of Rule
3-16 under the Securities and Exchange Commission's Regulation S-X. These
financial statements were derived from historical accounting records.
The Company participates in Hercules' centralized cash management system.
Accordingly, cash received from Company operations may be transferred to
Hercules on a periodic basis, and Hercules funds all operational and capital
requirements upon request.
The financial statements of the Company reflect certain allocated support
costs incurred by other entities within the Hercules Group. Certain costs
incurred by the Company are allocated to other entities in the Hercules group.
Costs include executive, legal, accounting, tax, auditing, cash management,
purchasing, human resources, safety, health and environmental, information
management, investor relations, property, plant and equipment facilities and
other corporate services. Allocations and charges included in the Company's
financial statements were based on either a direct cost pass-through for items
directly identified as related to the Company's activities; a percentage
allocation for such services provided based on factors such as sales, net
assets, or cost of sales; or a relative weighting of geographic activity.
Management believes that the allocation method is reasonable. (See Note 16)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Company's experience. The corresponding shipping and handling costs are
included in cost of sales.
304
HERCULES INTERNATIONAL LIMITED, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
The Company has an agreement with Hercules Europe NV, an entity affiliated
by way of common ownership, which acts as the Treasury Coordination Center (TCC)
for the Hercules entities, whereby the TCC provides immediate cash availability
to the Company relating to all third party receivables. In exchange, the Company
pays to the TCC a finance charge and receives or pays interest payments for net
balances held by the TCC. As a consequence the Company does not have a bank
account and does not reflect cash or cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Inventories are
valued at standard cost which approximates the average cost method.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are amortized on a straight-line basis
over the estimated future periods to be benefited, 30 years for goodwill and 5
years for other intangible assets.
Long-lived Assets
The Company reviews its long-lived assets, including goodwill and other
intangibles, for impairment on an exception basis whenever events or changes in
circumstances indicate carrying amounts of the assets may not be recoverable
through undiscounted future cash flows. If an impairment loss has occurred based
on expected future cash flows (undiscounted), the loss is recognized in the
income statement. The amount of the impairment loss is the excess of the
carrying amount of the impaired asset over the fair value of the asset. The fair
value represents expected future cash flows from the use of the assets,
discounted at the rate used to evaluate potential investments.
Income Taxes
U.S. Federal income taxes on earnings of the Company are payable directly
by Hercules. Where a foreign corporate branch exists, the Company provides for
income taxes currently payable as well as for those deferred because of
temporary differences between the financial and tax basis of assets and
liabilities.
Income tax expense in the accompanying financial statements has been
computed assuming the Company filed separate income tax returns. The provisions
for income taxes has been determined using the asset and liability approach of
accounting for income taxes. Under this approach, deferred taxes represent the
future tax consequences expected to occur when the reported amounts of assets
and liabilities are recovered or paid. The provision for income taxes represents
income taxes paid or payable for the current year plus the change in deferred
taxes during the year. Deferred taxes result from differences between the
financial and tax basis of the Company's assets and liabilities and are adjusted
for changes in tax rates and tax laws when changes are enacted. Valuation
allowances are recorded to reduce deferred tax assets when it is more likely
than not that a tax benefit will not be realized.
Foreign Currency Translation and Transactions
The accompanying financial statements are reported in U.S. dollars. The
Dutch Guilder is the functional currency for Hercules International Limited,
LLC. The translation of the functional currency into U.S. dollars (reporting
currency) is performed for assets and liabilities using the current exchange
rates in effect at the balance sheet date, and for revenues, costs and expenses
using average exchange rates prevailing during the reporting periods.
Adjustments resulting from the translation of functional currency financial
statements to
305
HERCULES INTERNATIONAL LIMITED, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
reporting currency are accumulated and reported as other comprehensive income, a
separate component of the Net Member's/Hercules Group Investment.
Transactions in foreign currency are recorded at the exchange rate
prevailing on the date of transaction. Monetary assets and liabilities
denominated in foreign currencies are expressed in the functional currency at
the exchange rates in effect at the balance sheet date. Revenues, costs and
expenses are recorded using average exchange rates prevailing during the
reporting periods. Gains or losses resulting from foreign currency transactions
are included in the statement of income.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables and
receivables from affiliated companies, which are included in the Net
Member's/Hercules Group Investment balance. Concentrations of credit risk with
respect to trade receivables are limited due to the Company's large number of
customers and their dispersion across many different industries and locations.
Derivative Instruments and Hedging
Derivative financial instruments have been used to hedge risk caused by
fluctuating exchange rates. The Company enters into forward-exchange contracts
and currency swaps to hedge foreign currency exposure. Decisions regarding
hedging are made on a case-by-case basis, taking into consideration the amount
and duration of the exposure, market volatility, and economic trends. The
Company uses the fair-value method of accounting, recording to other income
(expense) net any realized and unrealized gains and losses on these contracts
monthly.
Gains and losses on contracts to hedge specific foreign currency
commitments are deferred and accounted for as part of the transaction. It is the
Company's policy to match the term of financial instruments with the term of the
underlying designated item. If the designated item is an anticipated transaction
no longer likely to occur, gains or losses from the instrument designated as a
hedge are recognized in current period earnings. The Company does not hold or
issue financial instruments for trading purposes. In the statement of cash flow,
the Company reports the cash flows resulting from its hedging activities in the
same category as the related item that is being hedged.
Stock-based Compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25)). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation," requires companies electing to continue to use the
intrinsic-value method to make pro forma disclosures of net income as if the
fair-value-based method of accounting had been applied.
Net Member's/Hercules Group Investment
The Net Member's/Hercules Group Investment account reflects the balance of
the Company's historical earnings, intercompany amounts, foreign currency
translation and other transactions between the Company and the Member/Hercules
Group.
306
HERCULES INTERNATIONAL LIMITED, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. This statement, as amended, is effective for
all fiscal quarters of fiscal years beginning after December 31, 2000. The
Company adopted SFAS 133 effective January 1, 2001. The adoption of SFAS No.
133, as amended by SFAS 137 and 138, did not have a material effect on its
earnings or statement of financial position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was effective October
1, 2000. Adoption of SAB 101 did not have a material effect on profit from
operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" (SFAS 141) and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). For the Company, these statements will generally become
effective January 1, 2002, although business combinations initiated after June
30, 2001 are subject to the provisions of these statements as of the date of
acquisition.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. The assessment of
goodwill for impairment is a complex issue in which the Company must determine,
among other things, the fair value of each defined reporting unit. It is,
therefore, not possible at this time to predict the impact, if any, that the
impairment assessment provisions of SFAS 142 will have on the Company's
financial statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assets. SFAS 143 will become effective for the Company
from January 1, 2003 and requires recognition of a liability for an asset
retirement obligation in the period in which it is incurred. Management is in
the process of evaluating the impact this standard will have on the Company's
financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.
307
HERCULES INTERNATIONAL LIMITED, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of the following accounts receivable
from third parties:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Trade....................................................... $30,120 $39,318
Other..................................................... 1,414 1,657
------- -------
31,534 40,975
Less allowance for doubtful accounts........................ (476) (461)
------- -------
Total............................................. $31,058 $40,514
======= =======
4. INVENTORIES
The components of inventories are:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Finished products........................................... $23,679 $23,713
Materials, supplies, and work in process.................... -- 188
------- -------
Total............................................. $23,679 $23,901
======= =======
5. SHORT-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
The Company has a revolving credit agreement with Hercules Europe NV, an
entity affiliated by way of common ownership, which acts as the Treasury
Coordination Center for Hercules entities. The amount outstanding at December
31, 2000 totaled $22,587 thousand, bearing an interest rate of 5.13 percent,
which is included in the Net Member's/Hercules Group Investment balance. At
December 31, 1999, there was no outstanding balance. These approximate market
value because of their short maturity period.
6. LONG-TERM INCENTIVE COMPENSATION PLANS
The Company participates in long-term incentive compensation plans
sponsored by Hercules. These plans provide for the grant of stock options and
the award of common stock and other market-based units to certain key employees
and non-employee directors.
The Hercules long-term incentive compensation plans place a great emphasis
on shareholder value creation through grants of regular stock options,
performance-accelerated stock options, and Cash Value Awards (performance-based
awards denominated in cash and payable in shares of common or restricted stock,
subject to the same restrictions as restricted stock). Restricted stock and
other market-based units are awarded with respect to certain programs. The
number of awarded shares outstanding was 491,488 at December 31, 2000, and
926,689 and 1,083,613 at December 31, 1999 and 1998, respectively.
At December 31, 2000, under Hercules' incentive compensation plans,
1,847,855 shares of common stock were available for grant as stock awards or
stock option awards. Stock awards are limited to approximately 15% of the total
authorizations. Regular stock options are granted at the market price on the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock options are also granted at
the market price on the date of grant and are normally exercisable at nine and
one-half years. Exercisability may be accelerated based upon the achievement of
predetermined performance goals. Both regular and performance-accelerated stock
options expire 10 years after the date of grant.
308
HERCULES INTERNATIONAL LIMITED, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to Hercules in the event of employment termination, except
in the case of death, disability, retirement, or other specified events.
The Company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. There were no charges to income for the cost of stock awards over the
restriction or performance period for 2000, 1999 and 1998, respectively.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 2000, 1999 and 1998:
REGULAR PERFORMANCE-ACCELERATED
----------------------------- -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES PRICE SHARES PRICE
--------- ---------------- --------- ----------------
January 1, 1998................ 11,000 $41.65 6,500 $42.54
Granted...................... 20,100 $36.69 5,550 $47.81
Exercised.................... (960) $39.50 -- --
Forfeited.................... -- -- -- --
December 31, 1998.............. 30,140 $38.41 12,050 $44.97
Granted...................... 3,375 $32.75 7,750 $36.26
Exercised.................... -- -- -- --
Forfeited.................... -- -- -- --
December 31, 1999.............. 33,515 $37.84 19,800 $41.56
Granted...................... 21,875 $17.25 -- --
Exercised.................... -- -- -- --
Forfeited.................... -- -- -- --
December 31, 2000.............. 55,390 $29.71 19,800 $41.56
The weighted-average fair value of regular stock options granted during
2000, 1999 and 1998 was $8.85, $7.50 and $9.19, respectively. The
weighted-average fair value of performance-accelerated stock options granted
during 1999 and 1998 was $7.99 and $11.08, respectively.
Following is a summary of regular stock options exercisable at December 31,
2000, 1999 and 1998, and their respective weighted-average share prices:
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISABLE SHARES EXERCISE PRICE
------------------- --------- ----------------
December 31, 1998......................................... 4,440 $44.11
December 31, 1999......................................... 16,280 $39.56
December 31, 2000......................................... 27,470 $38.38
There were no performance-accelerated stock options exercisable at December
31, 2000, 1999 and 1998.
309
HERCULES INTERNATIONAL LIMITED, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------------------------- ---------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
EXERCISE PRICE RANGE 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE 12/31/00 EXERCISE PRICE
-------------------- -------------- ---------------- ---------------- -------------- ----------------
REGULAR STOCK OPTIONS
$12 - $20................ 21,875 9.13 $17.25 -- --
$20 - $30................ 10,050 7.67 $25.56 8,040 $25.56
$30 - $40................ 11,415 7.03 $37.50 9,390 $38.53
$40 - $50................ 11,050 7.07 $47.76 9,040 $47.75
$50 - $60................ 1,000 5.11 $55.38 1,000 $55.38
------ ------
55,390 27,470
====== ======
PERFORMANCE-ACCELERATED STOCK OPTIONS
$14 - $40................ 12,750 7.61 $37.53 -- --
$40 - $50................ 6,050 7.09 $47.77 -- --
$50 - $61................ 1,000 5.11 $55.38 -- --
------ ------
19,800 --
====== ======
Hercules currently expects that 100% of performance-accelerated stock
options will eventually vest.
Employees of the Company may also participate in the Hercules Employee
Stock Purchase Plan ("ESPP"). The ESPP is a qualified non-compensatory plan,
which allows eligible employees to acquire shares of common stock through
systematic payroll deductions. The plan consists of three-month subscription
periods, beginning July 1 of each year. The purchase price is 85% of the fair
market value of the common stock on either the first or last day of that
subscription period, whichever is lower. Purchases may range from 2% to 15% of
an employee's base salary each pay period, subject to certain limitations.
Currently, 202,139 shares of Hercules common stock are registered for offer and
sale under the plan. Shares issued at December 31, 2000 and 1999, were 1,597,861
and 949,464, respectively. The Company applies APB Opinion 25 and related
interpretations in accounting for its Employee Stock Purchase Plan. Accordingly,
no compensation cost has been recognized for the Employee Stock Purchase Plan.
Had compensation cost for Hercules' Stock-Based Incentive Plans and
Employee Stock Purchase Plan been determined on the basis of fair value
according to SFAS No. 123, the fair value of each option granted or share
purchased would be estimated on the grant date using the Black-Scholes option
pricing model.
The following weighted-average assumptions would be used in estimating fair
value for 2000, 1999 and 1998:
PERFORMANCE EMPLOYEE STOCK
ASSUMPTION REGULAR PLAN ACCELERATED PLAN PURCHASE PLAN
---------- ------------ ---------------- --------------
Dividend yield............................ 2% 3.4% 0.0%
Risk-free interest rate................... 5.88% 5.38% 5.41%
Expected life............................. 7.1 yrs. 5 yrs. 3 mos.
Expected volatility....................... 29.20% 27.31% 44.86%
310
HERCULES INTERNATIONAL LIMITED, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's net income for 2000, 1999 and 1998 would approximate the pro
forma amounts below:
2000 1999 1998
------ ------ ------
(DOLLARS IN THOUSANDS)
Net income
As reported............................................ $5,085 $4,580 $4,022
Pro forma.............................................. $4,964 $4,485 $3,949
7. ACCRUED EXPENSES
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Income taxes payable........................................ $ 626 $3,894
Payroll and employee benefits............................... 650 371
Incentive and bonuses....................................... 167 283
Commissions to agents....................................... 2,982 1,682
Rebate settlement........................................... 592 1,608
Other....................................................... 185 257
------ ------
$5,202 $8,095
====== ======
8. GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2000 and 1999, the goodwill and other intangible assets
were:
2000 1999
------- -------
(DOLLARS IN THOUSANDS)
Goodwill.................................................... $316 $344
Other intangibles........................................... 9 9
---- ----
Total....................................................... 325 353
Less accumulated amortization............................... (32) (20)
---- ----
Net goodwill and other intangible assets.......... $293 $333
==== ====
Goodwill relates to the purchase of certain assets of Houghton. Houghton is
a paper chemical factory, which was purchased on June 1, 1998. The goodwill
represents the amount paid in excess of the fair value and is amortized over 30
years. Other intangibles relate to non-compete agreements.
9. PENSION BENEFITS
The Company participates in a multiemployer pension fund, which is
administered by an affiliated company. Contribution amounts are based upon costs
allocated to the Company by the Plan administrator. Pension costs relating to
the multiemployer plan were $325 thousand, $346 thousand and $131 thousand in
2000, 1999 and 1998, respectively.
311
HERCULES INTERNATIONAL LIMITED, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. NET MEMBER'S/HERCULES GROUP INVESTMENT
Changes in the Net Member's/Hercules Group Investment were as follows:
Balances at January 1, 1998................................. $ 10,258
Net income.................................................. 4,022
Other comprehensive income.................................. 572
Intercompany transactions, net.............................. 49,707
--------
Balances at December 31, 1998............................... 64,559
Net income.................................................. 4,580
Other comprehensive income.................................. (1,651)
Intercompany transactions, net.............................. (15,285)
--------
Balances at December 31, 1999............................... 52,203
Net income.................................................. 5,085
Other comprehensive income.................................. (428)
Intercompany transactions, net.............................. (13,681)
--------
Balances at December 31, 2000............................... $ 43,179
The Company includes accumulated other comprehensive income in Net
Member's/Hercules Group Investment. At December 31, 2000, 1999 and 1998,
accumulated other comprehensive income consisted of foreign currency translation
adjustments.
11. OTHER OPERATING EXPENSES, NET
Net other operating expenses (income) consists solely of foreign exchange
gains and losses.
12. INTEREST AND DEBT EXPENSE
Interest and debt costs are summarized as follows:
2000 1999 1998
------ ---- ----
(DOLLARS IN THOUSANDS)
Interest costs.............................................. $ 52 $ -- $ --
Related party financing costs............................... 1,683 797 517
------ ---- ----
$1,735 $797 $517
====== ==== ====
There are no capitalized costs included in the above interest and debt
costs.
13. OTHER INCOME, NET
Other income, net, consists of the following:
2000 1999 1998
---- ---- ------
(DOLLARS IN THOUSANDS)
Third party interest income, net............................ $ 7 $ -- $ 4
Related party interest income, net.......................... 792 487 2,159
Other....................................................... (1) 8 (16)
---- ---- ------
$798 $495 $2,147
==== ==== ======
312
HERCULES INTERNATIONAL LIMITED, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
The company enters into forward-exchange contracts and currency swaps to
hedge currency exposure.
Notional Amounts and Credit Exposure of Derivatives
The notional amounts of derivatives summarized below do not represent
amounts exchanged by the parties and, thus, are not a measure of the exposure of
the company through its use of derivatives. The amounts exchanged are calculated
on the basis of the notional amounts and the other terms of the derivatives,
which relate to interest rates or exchange rates.
Foreign Exchange Risk Management
The company has selectively used foreign currency forward contracts and
currency swaps to offset the effects of exchange rate changes on reported
earnings, cash flow, and net asset positions. The primary exposures are
denominated in the U.S. Dollar, the Japanese Yen and the British Pound Sterling.
Some of the contracts involve the exchange of two foreign currencies, according
to local needs in foreign subsidiaries. The term of the currency derivatives is
rarely more than three months. At December 31, 2000, 1999 and 1998, the company
had outstanding forward-exchange contracts to purchase foreign currencies
aggregating $15,879 thousand, $11,140 thousand and $24,595 thousand,
respectively, and to sell foreign currencies aggregating $15,889 thousand,
$10,990 thousand and $22,816 thousand, respectively. The foreign exchange
contracts outstanding at December 31, 2000 will mature during 2001.
Fair Values
The following table presents the carrying amounts and fair values of the
company's derivative financial instruments at December 31, 2000, 1999 and 1998:
2000 1999 1998
----------------- ----------------- -----------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Foreign exchange contracts.............. $635 $635 $(77) $(77) $45 $45
The carrying amount represents the net unrealized gain associated with the
contracts at the end of the year. Fair values of derivative contracts are
indicative of cash that would have been required had settlement been made at
December 31, 2000, 1999 and 1998. Foreign exchange contracts are valued based on
year-end exchange rates.
15. INCOME TAXES
The foreign components of income before taxes are presented below:
2000 1999 1998
------ ------ ------
(DOLLARS IN THOUSANDS)
Foreign.................................................. $7,863 $7,305 $6,190
------ ------ ------
$7,863 $7,305 $6,190
====== ====== ======
313
HERCULES INTERNATIONAL LIMITED, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the components of the tax provision follows:
2000 1999 1998
------ ------ ------
(DOLLARS IN THOUSANDS)
Current
Domestic............................................... $ -- $ 164 $ --
Foreign................................................ 2,831 2,625 1,941
Deferred
Foreign................................................ (53) (64) 227
------ ------ ------
Provision for income taxes............................... $2,778 $2,725 $2,168
====== ====== ======
Deferred tax assets at December 31 consist of:
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Allowance for doubtful accounts reserve..................... $437 $384
---- ----
Gross deferred tax assets................................... $437 $384
==== ====
A rate reconciliation of the statutory income tax rate to the effective tax
rate follows:
2000 1999 1998
---- ---- ----
Statutory tax rate.......................................... 35% 35% 35%
Foreign dividends, net of credits........................... -- 2% --
-- -- --
Effective tax rate.......................................... 35% 37% 35%
== == ==
16. RELATED PARTY TRANSACTIONS
The Company has entered into certain agreements with affiliated entities.
These agreements were developed in the context of a Hercules Group/subsidiary
relationship and therefore may not necessarily reflect the result of arm-length
negotiations between independent parties. The Company records sales with
affiliates based on a cost-plus formula developed and agreed-upon by both
parties.
Intercompany borrowing and interest: As discussed in Note 5, the Company
has a revolving credit agreement with Hercules Europe NV, which acts as the
Treasury Coordination Center for Hercules entities. The balance under this
agreement is $22,587 thousand and is included in the Net Member/Hercules Group
investment balance on the balance sheet. Interest paid to affiliate entities was
$615 thousand in 2000. No interest was paid to affiliates in 1999 or 1998.
Corporate, regional and other allocations: As discussed in Note 1, the
financial statements of the Company reflect certain allocated support costs
incurred by other entities in the Hercules group and incurred by the Company.
These costs include executive, legal, accounting, tax, auditing, cash
management, purchasing, human resources, safety, health and environmental,
information management, investor relations, property, plant and equipment
facilities and other corporate services. Allocations and charges included in the
Company's financial statements were based either on a direct cost pass-through
for items directly identified as related to the Company's activities; a
percentage allocation for such services provided based on factors such as sales,
net assets, cost of sales; or a relative weighting of geographic activity. These
allocations are reflected in the selling, general and administrative line item
in the statement of income. Such allocations and corporate charges billed to the
Company from affiliates totaled approximately $14,053 thousand, $11,367 thousand
and $1,809 thousand in 2000, 1999 and 1998, respectively. Such allocations and
corporate charges billed from the Company to affiliates totaled approximately
$29,397 thousand and $17,452 thousand in 2000 and 1999, respectively. As
discussed in Note 1, during 1998 the Company did not provide financial or
IT-related services
314
HERCULES INTERNATIONAL LIMITED, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
to other affiliated European entities, thus there were no such allocations and
corporate charges billed from the Company to affiliates in this year.
Sales to affiliates: The Company sells raw material and finished goods
inventory in the normal course of business to affiliated companies. The
Company's revenues from sales to affiliated companies are presented separately
in the statement of income.
Purchases from affiliates: The Company purchases in the normal course of
business raw material and finished goods inventory from affiliated companies.
The Company's purchases of inventory from affiliated companies is reflected in
costs of sales in the statement of income and totaled $47,554 thousand, $49,293
thousand and $33,034 thousand in 2000, 1999 and 1998, respectively.
Notes receivable: The Company had a notes receivable due from an affiliated
company of approximately $512 thousand at December 31, 1999, which is included
in the Net Member's/Hercules Group Investment balance. This receivable was paid
in full in 2000.
17. COMMITMENTS AND CONTINGENCIES
Leases
Total rental expense amounted to $637 thousand in 2000, $289 thousand in
1999, and $198 thousand in 1998. The Company has operating leases for
transportation and data processing equipment. The operating leases are
cancelable by the Company with six months rental indemnity. Future minimum
rental payments required under these operating leases are $357 thousand in 2001,
there are no lease obligations in excess of one year as of December 31, 2000.
18. SUBSEQUENT EVENTS
In February 2001, the Company ceased to act as a reseller of Aqualon
product for affiliated entities. This product contributed $208,661 thousand or
58% to sales during 2000;
On May 1, 2001, Hercules completed the sale of its hydrocarbon resins
divisions and select portions of its rosin resins divisions to Eastman Chemical
Company. In addition, on May 31, 2001, Hercules completed the sale of its peroxy
chemicals business to GEO Specialty Chemicals, Inc. These product lines
contributed $136,761 thousand or 38% to sales during 2000.
Hercules is in the process of reviewing current activities within the
Hercules Group in anticipation of reallocating the trading activities among the
Hercules Group.
The Company does not expect to incur a loss due to the potential
reorganization of its activities.
315
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying balance sheets and the related statements
of income and cashflows present fairly, in all material respects, the financial
position of Hercules International Trade Corporation Limited, a subsidiary of
Hercules Inc., at December 31, 2000 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Philadelphia, PA
October 11, 2001
316
HERCULES INTERNATIONAL TRADE CORPORATION LIMITED
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Sales to third parties..................................... $ 58,098 $ 50,126 $ 51,906
Sales to Hercules Group.................................... 70,298 73,305 82,395
-------- -------- --------
128,396 123,431 134,301
Cost of sales.............................................. 102,905 91,470 105,144
Selling, general, and administrative expenses.............. 2,246 2,550 2,172
Other operating (income) expenses, net (Note 4)............ (3,876) 692 (1,396)
-------- -------- --------
Profit from operations..................................... 27,121 28,719 28,381
Interest income............................................ 264 406 286
-------- -------- --------
Net income................................................. $ 27,385 $ 29,125 $ 28,667
======== ======== ========
The accompanying notes are an integral part of the financial statements.
317
HERCULES INTERNATIONAL TRADE CORPORATION LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 1,430 $ 525
Accounts receivable, net (Note 3)......................... 15,688 15,906
------- -------
Total current assets.............................. 17,118 16,431
------- -------
Deferred charges and other assets........................... 115 461
------- -------
Total assets...................................... $17,233 $16,892
======= =======
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable.......................................... $ 104 $ 718
Accrued expenses.......................................... 514 142
------- -------
Total current liabilities......................... 618 860
Net Hercules Group investment:
Accumulated other comprehensive income.................... 39 39
Intercompany transactions................................. 16,576 15,993
------- -------
Net Hercules Group investment........................ 16,615 16,032
------- -------
Total liabilities and net Hercules Group
investment....................................... $17,233 $16,892
======= =======
The accompanying notes are an integral part of the financial statements.
318
HERCULES INTERNATIONAL TRADE CORPORATION LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income................................................. $ 27,385 $ 29,125 $ 28,667
Adjustments to reconcile net income to net cash provided
from operations:
Corporate and other cost allocations..................... 307 473 (179)
Accruals and deferrals of cash receipts and payments:
Accounts receivable................................... 218 (1,372) 4,105
Inventories........................................... 11 (18)
Accounts payable and accrued expenses................. (242) 664 (2,069)
Transfer to/from Hercules Group....................... (540) (1,440) 4,601
Noncurrent assets and liabilities..................... 346 (33) (382)
-------- -------- --------
Net cash provided by (used in) operations........... 27,474 27,428 34,725
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Transfer to/from Hercules Group............................ (26,569) (27,900) (35,500)
-------- -------- --------
Net cash used in financing activities............... (26,569) (27,900) (35,500)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... 905 (472) (775)
Cash and cash equivalents at beginning of year............. 525 997 1,772
-------- -------- --------
Cash and cash equivalents at end of year................... $ 1,430 $ 525 $ 997
======== ======== ========
Noncash financing activities
Corporate and other cost allocations..................... $ 307 $ 473 $ (179)
The accompanying notes are an integral part of the financial statements.
319
HERCULES INTERNATIONAL TRADE CORPORATION LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Hercules International Trade Corporation Limited ("HINTCO") is incorporated
in the Bahamas and is wholly owned by Hercules Incorporated ("Hercules"). HINTCO
is engaged in acting as a chemical business in charge of selling products made
by Hercules, in Caribbean and Central American countries.
Historically, separate company stand-alone financial statements were not
prepared for HINTCO. In November 2000, Hercules amended its senior credit
facility and ESOP credit facility (the "facilities"). The facilities, as
amended, are secured by liens on Hercules' property and assets (and those of
Hercules' Canadian Subsidiaries), a pledge of the stock of substantially all of
Hercules' domestic subsidiaries and 65% of the stock of foreign subsidiaries
directly owned by Hercules (including HINTCO), and a pledge of Hercules'
domestic intercompany indebtedness. These financial statements present the
financial information on HINTCO, a collateral party to the Hercules debt, based
on Hercules' understanding of Securities and Exchange Commission's
interpretation and application of Rule 3-16 under the Securities and Exchange
Commission's Regulation S-X. These statements were derived from historical
accounting records.
As an operating division of Hercules, HINTCO participates in Hercules'
centralized cash management system. Accordingly, cash received from HINTCO
operations is transferred to Hercules on a periodic basis, and Hercules funds
all operational and capital requirements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Corporate Allocations
The financial statements of HINTCO reflect certain allocated support costs
incurred by other entities in the Hercules group. These costs include executive,
legal, accounting, tax, auditing, cash management, purchasing, human resources,
safety, health and environmental, information management, investor relations and
other corporate services. Allocations and charges included in HINTCO's financial
statements are based on either a direct cost pass-through for items directly
identified as related to HINTCO's activities; a percentage allocation for such
services provided based on factors such as revenue, net assets, or cost of
sales; or a relative weighting of geographic activity. Management believes that
the allocation method is reasonable.
Revenue Recognition
HINTCO recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer in accordance with
terms of the agreement, title and risk of loss have been transferred,
collectibility is probable, and pricing is fixed and determinable. Accruals are
made for sales returns and other allowances based on HINTCO's experience. The
corresponding shipping and handling costs are included in cost of sales.
320
HERCULES INTERNATIONAL TRADE CORPORATION LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes
No taxes have been provided for HINTCO because the company is located in a
non-tax jurisdiction.
Cash and Cash Equivalents
Cash in excess of operating requirements is invested in short-term,
income-producing instruments. Cash equivalents include commercial paper and
other securities with original maturities of 90 days or less. Book value
approximates fair value because of the short maturity of those instruments.
Foreign Currency Transactions
The Company's functional and reporting currency is the U.S. dollar.
Transactions in foreign currency are recorded at the exchange rate prevailing on
the date of transaction. Monetary assets and liabilities denominated in foreign
currencies are expressed in the functional currency at the exchange rates in
effect at the balance sheet date. Revenues, costs and expenses are recorded
using average exchange rates prevailing during the reporting periods. Gains or
losses resulting from foreign currency transactions are included in the
statement of operations.
Concentrations of Credit Risk
Financial instruments that potentially subject HINTCO to concentrations of
credit risk consist principally of short-term cash investments and trade
receivables. HINTCO places its short-term cash investments in a highly liquid
money market account a large financial institution. Concentrations of credit
risk with respect to trade receivables are limited due to the Company's large
number of customers and their dispersion across many different industries and
locations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. This statement, as amended, is effective for
all fiscal quarters of fiscal years beginning after December 31, 2000. HINTCO
adopted SFAS 133 effective January 1, 2001. During 2000, HINTCO converted
substantially all of its foreign currency denominated borrowings to fixed rate
U.S. dollar denominated borrowings and closed most of its outstanding interest
rate swaps. The adoption of SFAS No. 133 did not have a material effect on its
earnings or statement of financial position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was to be effective
October 1, 2000. Adoption of SAB 101 did not have a material effect on our
profit from operations.
321
HERCULES INTERNATIONAL TRADE CORPORATION LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Trade.................................................... $15,688 $15,906
Less allowance for doubtful accounts..................... -- --
------- -------
Total.......................................... $15,688 15,906
======= =======
4. OTHER OPERATING EXPENSES (INCOME), NET
Other operating income, net, in 2000 include a $2,791 thousand intercompany
management fee on sales made by BetzDearborn, Inc. in Caribbean and Central
American countries and a $484 thousand gain on foreign currency transaction.
Other operating expenses, net, in 1999 includes a $548 thousand expense
while 1998 includes a $1,162 thousand gain from foreign currency transactions.
5. NET PARENT INVESTMENT
Changes in net parent investment were as follows:
(DOLLARS IN
THOUSANDS)
Balance, January 1, 1998.................................... $ 18,185
Net income.................................................. 28,667
Intercompany, transactions, net............................. (31,078)
--------
Balance, December , 1998.................................. 15,774
Net income.................................................. 29,125
Intercompany, transactions, net............................. (28,867)
--------
Balance, December , 1999.................................. 16,032
Net income.................................................. 27,385
Intercompany, transactions, net............................. (26,802)
--------
Balance, December , 2000.................................. $ 16,615
========
The Company includes accumulated other comprehensive income in net Hercules
Group investment. At December 31, 2000, 1999 and 1998, accumulated other
comprehensive income consisted of foreign currency translation adjustments.
6. RELATED PARTY TRANSACTIONS
HINTCO has entered into certain agreements with affiliated entities. These
agreements were developed in the context of parent/subsidiary relationship and
therefore may not necessarily reflect the result of arms-length negotiations
between independent parties.
Corporate and other allocations: As discussed in Note 1, the financial
statements of HINTCO reflect certain allocated support costs incurred by other
entities in Hercules group. These costs include executive, legal, accounting,
tax, auditing, cash management, purchasing, human resources, safety, health and
environmental, information management, research & development overhead, investor
relations and other corporate services. Allocations and charges included in
HINTCO's financial statements were based on either a direct
322
HERCULES INTERNATIONAL TRADE CORPORATION LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cost pass-through for items directly identified as related to HINTCO's
activities; a percentage allocation for such services provided based on factors
such as revenues, net assets, costs of sales or a relative weighting of
geographic activity. These allocations are reflected in the selling, general and
administrative line item in our statement of operations. Such allocations and
corporate charges totaled $307 thousand, $496 thousand, and $133 thousand in
2000, 1999, and 1998, respectively.
Sales to affiliates: HINTCO sells the full range of Hercules and
BetzDearborn products in the normal course of business to affiliated companies.
HINTCO's revenues from sales to affiliated companies were $70,298 thousand,
$73,305 thousand, and $82,395 thousand in 2000, 1999, and 1998, respectively.
Purchases from affiliates: The Company purchases, in the normal course of
business, finished goods inventory from affiliated companies. The Company's
purchases of inventory from affiliated companies is reflected in cost of sales
in the statement of income and totaled $102,905 thousand, $91,470 thousand and
$100,027 thousand, in 2000, 1999 and 1998 respectively.
323
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and comprehensive income and of cash
flows present fairly, in all material respects, the financial position of
Hercules Investments Sarl, a subsidiary of Hercules Incorporated, and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, 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 our opinion.
PricewaterhouseCoopers N.V.
Amsterdam, The Netherlands
October 22, 2001
324
HERCULES INVESTMENTS SARL
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
--------- ---------- --------
(DOLLARS IN THOUSANDS)
Sales to third parties................................... $ 580,730 $ 647,182 $501,615
Sales to Hercules Group.................................. 328,822 382,530 389,581
--------- ---------- --------
909,552 1,029,712 891,196
Cost of sales............................................ 580,886 639,939 590,732
Selling, general, and administrative expenses............ 137,403 130,991 73,336
Research and development................................. 19,977 25,399 21,979
Goodwill and intangible asset amortization............... 8,279 11,257 4,119
Other operating (income) expense, net (Note 13).......... (131,862) 27,840 37,709
--------- ---------- --------
Profit from operations................................... 294,869 194,286 163,321
Equity in (loss) income of affiliated companies.......... (3,891) 2,938 (103)
Interest and debt expense (Note 14)...................... 38,990 646 4,670
Other income (expense), net (Note 15).................... 11,460 5,204 (1,668)
Income before income taxes and minority interest, net.... 263,448 201,782 156,880
Provision for income taxes (Note 16)..................... 46,244 61,019 60,735
--------- ---------- --------
Income before minority interest, net..................... 217,204 140,763 96,145
Minority interest, net................................... (1,441) (2,984) (1,158)
--------- ---------- --------
Net income............................................... 215,763 137,779 94,987
Translation adjustments.................................. (71,025) (49,869) 16,306
--------- ---------- --------
Comprehensive income..................................... $ 144,738 $ 87,910 $111,293
========= ========== ========
The accompanying notes are an integral part of the consolidated financial
statements.
325
HERCULES INVESTMENTS SARL
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
-----------------------
2000 1999
--------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents................................. $ 14,340 $ 16,042
Accounts receivable, net (Note 3)......................... 147,439 204,086
Inventories (Note 4)...................................... 56,109 103,118
Deferred income taxes (Note 16)........................... 2,231 4,816
--------- ----------
Total current assets................................... 220,119 328,062
--------- ----------
Property, plant, and equipment, net (Note 9)................ 275,325 387,657
Investments in affiliates (Note 5).......................... 30,279 3,332
Goodwill and other intangible assets, net (Note 10)......... 224,150 300,406
Deferred charges and other assets........................... 12,427 9,093
--------- ----------
Total assets...................................... $ 762,300 $1,028,550
========= ==========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable.......................................... $ 84,955 $ 108,953
Short-term debt (Note 6).................................. 90,944 13,230
Accrued expenses (Note 9)................................. 47,514 89,708
--------- ----------
Total current liabilities.............................. 223,413 211,891
Long-term debt -- third parties (Note 7).................... 138 458
Deferred income taxes (Note 16)............................. 59,679 74,082
Pension liability (Note 12)................................. 20,757 28,086
Deferred credits and other liabilities...................... 2,030 1,536
--------- ----------
Total liabilities................................. 306,017 316,053
Commitments and contingencies (Note 17)
Minority Interest........................................... 22,649 25,422
Net Hercules Group Investment (Note 20)
Accumulated other comprehensive losses.................... (108,259) (37,234)
Intercompany transactions................................. 541,893 724,309
--------- ----------
Total Net Hercules Group Investment............... 433,634 687,075
--------- ----------
Total liabilities and Net Hercules Group
Investment...................................... $ 762,300 $1,028,550
========= ==========
The accompanying notes are an integral part of the consolidated financial
statements
326
HERCULES INVESTMENTS SARL
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
--------- -------- ---------
(DOLLARS IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income.................................................. $ 215,763 $137,779 $ 94,987
Adjustments to reconcile net income to net cash provided by
(used in) operations:
Depreciation and amortization of property, plant and
equipment............................................... 28,615 32,784 26,279
Amortization of goodwill and other intangible assets...... 8,279 11,257 4,119
Deferred income tax....................................... 14,360 12,967 579
(Gain) loss on disposals.................................. 1,617 184 (506)
Gain on sale of investments............................... (167,566) (13,302) --
Equity in (income) loss of affiliates..................... 3,891 (2,938) 103
Dividends received........................................ 579 3,093 107
Minority interest, net.................................... 1,441 2,984 1,158
Corporate and other cost allocations...................... 11,369 14,317 7,077
Accruals and deferrals of cash receipts and payments:
Accounts receivable..................................... 4,239 (23,374) (6,188)
Inventories............................................. (9,883) (5,245) 7,099
Accounts payable and accrued expenses................... (26,616) 14,076 36,545
Noncurrent assets and liabilities....................... (4,091) 11,138 (7,769)
Net transfers (to) from Hercules Group.................. 74,314 (74,896) (70,708)
--------- -------- ---------
Net cash provided by (used in) operations............... 156,311 120,464 92,882
--------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures, net of proceeds from sale............. (68,708) (72,437) (35,285)
Proceeds from sale of investment............................ -- 22,009 --
Purchase of equity method investments....................... -- (25) --
--------- -------- ---------
Net cash used in investing activities................... (68,708) (50,453) (35,285)
--------- -------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Change in short-term debt................................... 78,445 (58,154) (6,149)
Long-term debt repayments................................... (306) (620) (5,498)
Proceeds from issuance of long-term debt.................... 41,213 -- --
Net transfers (to) from Hercules Group...................... (207,508) (12,805) (29,829)
--------- -------- ---------
Net cash (used in) provided by financing activities..... (88,156) (71,579) (41,476)
--------- -------- ---------
Effect of exchange rate changes on cash..................... (1,149) (2,443) 1,147
--------- -------- ---------
Net (decrease) increase in cash and cash equivalents........ (1,702) (4,011) 17,268
Cash and cash equivalents at beginning of year.............. 16,042 20,053 2,785
--------- -------- ---------
Cash and cash equivalents at end of year.................... $ 14,340 $ 16,042 $ 20,053
========= ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized)...................... $ 792 $ 955 $ 4,685
Income taxes, net......................................... 55,149 59,645 59,562
Noncash investing and financing activities:
Sale of CPKelco (Note 14)................................. 119,261 -- --
Net asset (excluding cash) contribution from Hercules
Group of BetzDearborn entities (Note 1)................. -- -- 314,678
Corporate and other cost allocations...................... 11,369 14,317 7,077
Net asset (excluding cash) contribution from Hercules
Group of Citrus Colloid entities........................ -- -- 73,690
Reversal of restructuring accruals to goodwill (Note
11)..................................................... 3,320 -- --
The accompanying notes are an integral part of the consolidated financial
statements
327
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Hercules Investments Sarl (the "Company") is a wholly owned subsidiary of
Hercules International Limited (immediate parent) and Hercules Incorporated
(ultimate parent) or ("Hercules"). Hercules and its wholly owned subsidiaries
comprise the Hercules Group. The Company supplies engineered process and water
treatment chemical programs, as well as products that manage the properties of
aqueous systems, for industrial, commercial and institutional establishments.
These products and services contribute to preserving or enhancing productivity,
reliability and efficiency in plant operations and in complying with
environmental regulations.
When Hercules acquired all of the outstanding shares of BetzDearborn Inc on
October 15, 1998 it paid $2,235 million in cash and $186 million in common stock
exchanged for the shares held by the BetzDearborn ESOP Trust. The purchase price
allocated to the Company and its subsidiaries was approximately $682 million.
During 1999, Hercules completed the purchase price allocation and the final
determination of goodwill was $1,822 million of which the amount attributable to
the Company was approximately $278 million. These financial statements include
the push down of fair value adjustments to assets and liabilities, including
goodwill, other intangible assets and property, plant and equipment and their
related amortization and depreciation adjustments.
As a result of the Hercules acquisition of BetzDearborn Inc., the Company
entered into several internal reorganization transactions during 1999 and 2000.
The transactions included the Company selling several of its investments in
subsidiaries to Hercules affiliates, purchasing several investments in
subsidiaries from Hercules affiliates, merging companies, and acquiring certain
investments in Hercules group companies that are valued at cost. As all
investments in this reorganization are under the common control of Hercules,
these transactions have been accounted for in a manner similar to pooling of
interests.
Historically, separate company stand-alone financial statements were not
prepared for the Company. In November 2000, Hercules amended its senior credit
facility and ESOP credit facility (the "Facilities"). The Facilities, as
amended, are secured by liens on Hercules' property and assets (and those of
Hercules' Canadian Subsidiaries), a pledge of the stock of substantially all of
Hercules' domestic subsidiaries (including the Company) and 65% of the stock of
foreign subsidiaries directly owned by Hercules, and a pledge of Hercules'
domestic intercompany indebtedness. These consolidated financial statements
present the financial information of the Company, a collateral party to the
Hercules debt, based on the Hercules' understanding of the Securities and
Exchange Commission's interpretation and application of Rule 3-16 under the
Securities and Exchange Commission's Regulation S-X. These statements were
derived from historical accounting records.
The consolidated financial statements of the Company reflect certain
allocated support costs incurred by the Hercules Group. These costs include
executive, legal, accounting, tax, auditing, cash management, purchasing, human
resources, safety, health and environmental, information management, investor
relations and other corporate services. Allocations and charges included in the
Company's consolidated financial statements were based on either a direct cost
pass-through for items directly identified as related to the Company's
activities; a percentage allocation for such services provided based on factors
such as sales, net assets, or cost of sales; or a relative weighting of
geographic activity. Management believes that the allocation method is
reasonable. See Note 18 for more information.
A number of the operating companies participate in Hercules' centralized
cash management system. Accordingly, cash received from operations may be
transferred to Hercules on a periodic basis, and Hercules funds operational and
capital requirements upon request.
328
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries where control exists. Following the
acquisition of BetzDearborn by Hercules in 1998, the Company continued
BetzDearborn's practice of using a November 30 fiscal year end for certain
former BetzDearborn Inc. non-U.S. subsidiaries to expedite the year end closing
process. All intercompany transactions and profits have been eliminated.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable, and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Company's experience. The corresponding shipping and handling costs are
included in cost of sales.
Research and Development Expenditures
Research and development expenditures are expensed as incurred.
Environmental Expenditures
Environmental expenditures that pertain to current operations or future
revenues are expensed or capitalized according to the Company's capitalization
policy. Expenditures for remediation of an existing condition caused by past
operations that do not contribute to current or future revenues are expensed.
Liabilities are recognized for remedial activities when the cleanup is probable
and can be reasonably estimated.
Cash and Cash Equivalents
Cash in excess of operating requirements is invested in short-term,
income-producing instruments. Cash equivalents include commercial paper and
other securities with original maturities of 90 days or less. Book value
approximates fair value because of the short maturity of those instruments.
Inventories
Inventories are stated at the lower of cost or market. Inventories are
valued on the average cost method.
Property and Depreciation
Property, plant, and equipment are stated at cost. The Company changed to
the straight-line method of depreciation, effective January 1, 1991, for newly
acquired processing facilities and equipment. Assets acquired before then
continue to be depreciated by accelerated methods. The Company believes
straight-line depreciation provides a better matching of costs and revenues over
the lives of the assets. The estimated useful lives of depreciable assets are as
follows: buildings -- 30 years; plant, machinery and equipment -- 15 years;
other machinery and equipment -- 3 to 15 years.
329
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is charged to income.
Investments
Investments in affiliated companies with a 20% or greater ownership
interest in which the Company has significant influence are accounted for using
the equity method of accounting. Accordingly, these investments are included in
investments in affiliates on the Company's balance sheet and the income or loss
from these investments is included in equity in (loss) income of affiliated
companies in the Company's statement of income.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are amortized on a straight-line basis
over the estimated future periods to be benefited, generally 40 years for
goodwill and 5 to 15 years for other intangible assets.
Long-lived Assets
The Company reviews its long-lived assets, including goodwill and other
intangibles, for impairment on an exception basis whenever events or changes in
circumstances indicate carrying amounts of the assets may not be recoverable
through undiscounted future cash flows. If an impairment loss has occurred based
on expected future cash flows (undiscounted), the loss is recognized in the
income statement. The amount of the impairment loss is the excess of the
carrying amount of the impaired asset over the fair value of the asset. The fair
value represents expected future cash flows from the use of the assets,
discounted at the rate used to evaluate potential investments.
Income Taxes
Income tax expense in the accompanying consolidated financial statements
has been computed assuming the Company filed separate income tax returns.
The provisions for income taxes has been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax basis of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
The company provides taxes on undistributed earnings of subsidiaries and
affiliates included in consolidated retained earnings to the extent such
earnings are planned to be remitted and not re-invested permanently. The
undistributed earnings/(loss) of subsidiaries and affiliates on which no
provision for foreign withholding or US income taxes has been made amounted to
approximately ($6,629) thousand and $10,468 thousand at December 31, 2000 and
1999, respectively. US and foreign income taxes that would be payable if such
earnings were distributed may be lower than the amount computed at the US
statutory rate because of the availability of tax credits.
Foreign Currency Translation and Transactions
The accompanying consolidated financial statements are reported in U.S.
dollars. The U.S. dollar is the functional currency for the Company. The
translation of the functional currencies of the Company's
330
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subsidiaries into U.S. dollars (reporting currency) is performed for assets and
liabilities using the current exchange rates in effect at the balance sheet
date, and for revenues, costs and expenses using average exchange rates
prevailing during the reporting periods. Adjustments resulting from the
translation of functional currency financial statements to reporting currency
are accumulated and reported as other comprehensive income, a separate component
of Net Hercules Group Investment.
Transactions in foreign currency are recorded at the exchange rate
prevailing on the date of transaction. Monetary assets and liabilities
denominated in foreign currencies are expressed in the functional currency at
the exchange rates in effect at the balance sheet date. Revenues, costs and
expenses are recorded using average exchange rates prevailing during the
reporting periods. Gains or losses resulting from foreign currency transactions
are included in the statement of income.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables and
receivables from affiliated companies, which are included in the Net Hercules
Group Investment in the consolidated balance sheet. Concentrations of credit
risk with respect to trade receivables are limited due to the Company's large
number of customers and their dispersion across many different industries and
locations.
Derivative Instruments and Hedging
Derivative financial instruments have been used to hedge risk caused by
fluctuating currency. The Company enters into forward-exchange contracts to
hedge foreign currency exposure. Decisions regarding hedging are made on a
case-by-case basis, taking into consideration the amount and duration of the
exposure, market volatility, and economic trends. The Company uses the
fair-value method of accounting, recording to other income (expense), net
realized and unrealized gains and losses on these contracts monthly, except for
gains and losses on contracts to hedge specific foreign currency commitments,
which are deferred and accounted for as part of the transaction. Gains or losses
on instruments which have been used to hedge the value of investments in certain
non-U.S. subsidiaries have been accounted for under the deferral method and are
included in the foreign currency translation adjustment. It is the Company's
policy to match the term of financial instruments with the term of the
underlying designated item. If the designated item is an anticipated transaction
no longer likely to occur, gains or losses from the instrument designated as a
hedge are recognized in current period earnings. The Company does not hold or
issue financial instruments for trading purposes. In the consolidated statement
of cash flow, the Company reports the cash flows resulting from its hedging
activities in the same category as the related item that is being hedged.
Stock-based Compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
(APB 25). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," requires companies electing to continue to use
the intrinsic-value method to make pro forma disclosures of net income as if the
fair-value-based method of accounting had been applied.
Minority Interest
Minority interest at December 31, 2000 and 1999 represents a 38.97%
proportionate share of the equity of Hercules Quimica S.A., owned by a Hercules
Group affiliate and a 0.4% proportionate share of the equity of Hercules Holding
BV/BVBA, owned by a Hercules Group affiliate.
331
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Computer Software Costs
Effective January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants Statement of Position 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
The prior accounting was generally consistent with the requirements of SOP 98-1
and, accordingly, adoption of SOP 98-1 had no material effect. Computer software
costs are being amortized over a period of 5 to 10 years.
Net Hercules Group Investment
The Net Hercules Group Investment account reflects the balance of the
Company's historical earnings, intercompany amounts, foreign currency
translation and other transactions between the Company and the Hercules Group.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. SFAS 133, as amended, is effective for all
fiscal quarters of fiscal years beginning after December 31, 2000. The Company
adopted SFAS 133 effective January 1, 2001. The adoption of SFAS No. 133, as
amended by SFAS 137 and 138, did not have a material effect on its earnings or
statement of financial position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was effective October
1, 2000. Adoption of SAB 101 did not have a material effect on profit from
operations.
In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 141, "Business Combinations" (SFAS 141) and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). For the Company, these statements will generally become
effective January 1, 2002, although business combinations initiated after June
30, 2001 are subject to the non-amortization and purchase accounting provisions.
SFAS 142 stipulates that goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but must be evaluated
periodically for impairment beginning January 1, 2002. The assessment of
goodwill for impairment is a complex issue in which the Company must determine,
among other things, the fair value of each defined reporting unit. It is,
therefore, not possible at this time to predict the impact, if any, that the
impairment assessment provisions of SFAS 142 will have on the Company's
financial statements.
In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assts. SFAS 143 will become effective for the Company on
January 1, 2003 and requires recognition of a liability for an asset retirement
obligation in the period in which it is incurred. Management is currently in the
process of evaluating the impact this standard will have on the Company's
financial statements.
332
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Trade....................................................... $139,568 $188,335
Other....................................................... 10,228 18,534
-------- --------
149,796 206,869
Less allowance for doubtful accounts........................ (2,357) (2,783)
-------- --------
Total............................................. $147,439 $204,086
======== ========
Other accounts receivable mainly comprise VAT receivable.
4. INVENTORIES
The components of inventories are:
2000 1999
--------- ----------
(DOLLARS IN THOUSANDS)
Finished products........................................... $30,895 $ 35,102
Materials, supplies, and work in process.................... 25,214 68,016
------- --------
Total............................................. $56,109 $103,118
======= ========
5. INVESTMENTS
The Company has various equity investments in companies, as described
below. Summarized financial information for these equity affiliates at December
31, and for the three years then ended is as follows:
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Current assets.............................................. $269,814 $17,470
Non-current assets.......................................... 942,946 3,923
Current liabilities......................................... $109,486 $13,275
Non-current liabilities..................................... 730,579 1,378
2000 1999 1998
-------- ------- -------
Net sales............................................ $143,245 $56,410 $43,712
Gross profit......................................... 17,290 14,488 11,414
Net earnings......................................... (15,864) 5,865 (273)
At December 31, 2000, the Company's equity investments, all affiliates of
the Hercules Group, consisted of a 50% ownership of Abieta Chemie GmbH and
BetzDearborn Nippon KK, a 49% ownership of Hercules Mas Indonesia, and a 28.57%
ownership of the consolidated group CP Kelco ApS. The Company's carrying
333
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value for these investments at December 31, 2000 and 1999 equals its share of
the underlying equity in net assets of the respective affiliates. Dividends paid
to the Company from its equity investees were $579 thousand, $3,093 thousand and
$107 thousand during 2000, 1999 and 1998, respectively. Except for CP Kelco ApS,
each of these entities operates in lines of business similar to the Company,
supplying engineered process and water treatment chemical programs, as well as
products that manage the properties of aqueous systems, for industrial,
commercial and institutional establishments. As discussed further in Note 13, CP
Kelco ApS was the Company's Food Gums business that was divested in 2000.
6. SHORT-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Short-term debt of $90,944 thousand and $13,230 thousand at December 31,
2000 and 1999, respectively, consists of bank borrowings primarily representing
foreign overdraft facilities and short-term lines of credit, which are generally
payable on demand with interest at various rates. Book values of bank borrowings
approximate market value because of their short maturity period.
Short-term debt with affiliates of $32,734 thousand and $29,740 thousand at
December 31, 2000 and 1999, respectively, is recorded in Net Hercules Group
Investment in the consolidated balance sheet and is generally payable on demand
with interest at various rates.
At December 31, 2000 and 1999, the Company had $34,774 thousand and $23,607
thousand, respectively, of unused lines of credit that may be drawn as needed,
with interest at a negotiated spread over lenders' cost of funds.
Weighted-average interest rates on all short-term borrowings at December
31, 2000 and 1999 were 5.60% and 4.61%, respectively.
7. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt with third parties and affiliates at December 31, 2000 and
1999 is summarized as follows:
2000 1999
---------- -------
(DOLLARS IN THOUSAND)
4.50% third party note...................................... $ 93 $ 102
11.00% third party note..................................... -- 280
Other....................................................... 45 76
---------- -------
Less current maturities..................................... -- --
---------- -------
Total long-term debt, third party........................... 138 458
---------- -------
5.10% affiliate note........................................ 1,698,968 --
5.51% affiliate note........................................ 22,853 --
5.80% affiliate note........................................ 20,516 22,345
6.00% affiliate note........................................ -- 5,145
---------- -------
Less current maturities..................................... -- --
---------- -------
Total long-term debt, affiliates............................ 1,742,337 27,490
---------- -------
Total long term debt, third party and affiliates............ $1,742,475 $27,948
========== =======
Long-term debt with affiliates, which is recorded in Net Hercules Group
Investment in the consolidated balance sheet, has no stated maturity. Third
party long-term debt matures after 2005. The fair values of the Company's
long-term debt were $1,742,475 at December 31, 2000 and $27,948 at December 31,
1999. The Company believes that the carrying value of long-term debt borrowings
approximates fair value, based on
334
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discounting future cash flows using rates currently available for debt of
similar terms and remaining maturities.
8. LONG-TERM INCENTIVE COMPENSATION PLANS
The Company participates in long-term incentive compensation plans
sponsored by Hercules. These plans provide for the grant of stock options and
the award of common stock and other market-based units to certain key employees
and non-employee directors.
The Hercules long-term incentive compensation plans place a great emphasis
on shareholder value creation through grants of regular stock options,
performance-accelerated stock options, and Cash Value Awards (performance-based
awards denominated in cash and payable in shares of common or restricted stock,
subject to the same restrictions as restricted stock). Restricted stock and
other market-based units are awarded with respect to certain programs. The
number of awarded shares outstanding for all of the Hercules Group was 491,488
at December 31, 2000, and 926,689 and 1,083,613 at December 31, 1999 and 1998,
respectively.
At December 31, 2000, under Hercules' incentive compensation plans,
1,847,855 shares of common stock were available for grant as stock awards or
stock option awards. Stock awards are limited to approximately 15% of the total
authorizations. Regular stock options are granted at the market price on the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock options are also granted at
the market price on the date of grant and are normally exercisable at nine and
one-half years. Exercisability may be accelerated based upon the achievement of
predetermined performance goals. Both regular and performance-accelerated stock
options expire 10 years after the date of grant.
Restricted shares, options and performance-accelerated stock options are
forfeited and revert to Hercules in the event of employment termination, except
in the case of death, disability, retirement, or other specified events.
The Company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. There were no charges to income for the cost of stock awards over the
restriction or performance period for 2000, 1999 and 1998, respectively.
335
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 2000, 1999 and 1998:
REGULAR PERFORMANCE-ACCELERATED
----------------------------- -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES PRICE SHARES PRICE
--------- ---------------- --------- ----------------
January 1, 1998................ 302,475 $40.31 48,575 $43.91
Granted...................... 115,775 $37.88 40,475 $47.17
Exercised.................... -- -- -- --
Forfeited.................... -- -- -- --
------- ------ ------- ------
December 31, 1998.............. 418,250 $39.64 89,050 $45.39
Granted...................... 215,500 $37.61 60,775 $37.49
Exercised.................... -- -- -- --
Forfeited.................... -- -- (900) $45.73
------- ------ ------- ------
December 31, 1999.............. 633,750 $38.95 148,925 $42.16
Granted...................... 141,000 $17.25 -- --
Exercised.................... -- -- -- --
Forfeited.................... (19,650) $36.82 (1,350) $37.56
------- ------ ------- ------
December 31, 2000.............. 755,100 $34.95 147,575 $42.21
The weighted-average fair value of regular stock options granted during
2000, 1999 and 1998 was $8.85, $8.25 and $9.19, respectively. The
weighted-average fair value of performance-accelerated stock options granted
during 1999 and 1998 was $7.99 and $11.02, respectively.
Following is a summary of regular stock options exercisable at December 31,
2000, 1999 and 1998 and their respective weighted-average share prices:
NUMBER OF WEIGHTED-
OPTIONS EXERCISABLE SHARES AVERAGE
------------------- --------- ---------
December 31, 1998........................................... 124,735 $40.69
December 31, 1999........................................... 290,545 $39.85
December 31, 2000........................................... 533,705 $37.14
There were no performance-accelerated stock options exercisable at December
31, 2000, 1999 and 1998.
336
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of stock options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------------------------- ---------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
EXERCISE PRICE RANGE 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE 12/31/00 EXERCISE PRICE
-------------------- -------------- ---------------- ---------------- -------------- ----------------
REGULAR STOCK OPTIONS
$12 - $20................ 137,150 9.13 $17.25 50,150 $17.25
$20 - $30................ 48,975 7.67 $25.56 43,080 $25.56
$30 - $40................ 504,575 7.21 $39.03 384,455 $39.47
$40 - $50................ 64,400 7.31 $47.86 56,020 $47.86
------- -------
755,100 533,705
======= =======
PERFORMANCE-ACCELERATED STOCK OPTIONS
$14 - $40................ 89,725 7.69 $37.98 -- --
$40 - $50................ 50,750 6.83 $47.83 -- --
$50 - $61................ 7,100 5.11 $55.38 -- --
------- -------
147,575 --
======= =======
The Company currently expects that 100% of performance-accelerated stock
options will eventually vest.
The Company's employees may also participate in the Hercules Employee Stock
Purchase Plan ("ESPP"). The ESPP is a qualified non-compensatory plan, which
allows eligible employees to acquire shares of common stock through systematic
payroll deductions. The plan consists of three-month subscription periods,
beginning July 1 of each year. The purchase price is 85% of the fair market
value of the common stock on either the first or last day of that subscription
period, whichever is lower. Purchases may range from 2% to 15% of an employee's
base salary each pay period, subject to certain limitations. Currently, 202,139
shares of Hercules common stock are registered for offer and sale under the
plan. Shares issued at December 31, 2000 and 1999, were 1,597,861 and 949,464,
respectively. The Company applies APB Opinion 25 and related interpretations in
accounting for its Employee Stock Purchase Plan. Accordingly, no compensation
cost has been recognized for the Employee Stock Purchase Plan.
Had compensation cost for Hercules' Stock-Based Incentive Plans and
Employee Stock Purchase Plan been determined on the basis of fair value
according to SFAS No. 123, the fair value of each option granted or share
purchased would be estimated on the grant date using the Black-Scholes option
pricing model.
The following weighted-average assumptions would be used in estimating fair
value for 2000, 1999 and 1998:
PERFORMANCE EMPLOYEE STOCK
ASSUMPTION REGULAR PLAN ACCELERATED PLAN PURCHASE PLAN
---------- ------------ ---------------- --------------
Dividend yield......................................... 2% 3.4% 0.0%
Risk-free interest rate................................ 5.88% 5.38% 5.41%
Expected life.......................................... 7.1 yrs. 5 yrs. 3 mos.
Expected volatility.................................... 29.20% 27.31% 44.86%
337
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's net income for 2000, 1999 and 1998 would approximate the pro
forma amounts below:
2000 1999 1998
-------- -------- -------
(DOLLARS IN THOUSANDS)
Net income
As reported....................................... $215,763 $137,779 $94,987
Pro forma......................................... $214,434 $136,521 $93,944
9. ADDITIONAL BALANCE SHEET DETAIL
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Property, plant, and equipment
Land................................................... $ 7,240 $ 8,870
Buildings and equipment................................ 533,902 773,185
Construction in progress............................... -- 682
--------- ---------
Total.......................................... 541,142 782,737
Accumulated depreciation and amortization................ (265,817) (395,080)
--------- ---------
Net property, plant, and equipment..................... $ 275,325 $ 387,657
========= =========
Accrued expenses
Payroll and employee benefits.......................... $ 14,395 $ 29,131
Income taxes payable................................... 4,966 17,671
Restructuring.......................................... 12,743 26,546
Environmental.......................................... 9,300 800
Other.................................................. 6,110 15,560
--------- ---------
$ 47,514 $ 89,708
========= =========
10. GOODWILL AND OTHER INTANGIBLES ASSETS
At December 31, 2000 and 1999, the goodwill and other intangible assets
were:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Goodwill.................................................... $241,109 $312,151
Other intangibles........................................... 7,820 9,554
-------- --------
Total....................................................... 248,929 321,705
Less accumulated amortization............................... (24,779) (21,299)
-------- --------
Net goodwill and other intangible assets............... $224,150 $300,406
======== ========
Goodwill and other intangible assets primarily represent amounts
capitalized from the Hercules acquisition of BetzDearborn (Note 1).
11. RESTRUCTURING
The consolidated balance sheet reflects liabilities for employee severance
benefits and other exit costs, primarily related to the plans initiated upon the
creation of the European Shared Service Center in 1997 and the acquisition of
BetzDearborn in 1998. In the fourth quarter of 2000, we committed to a plan
relating to the restructuring of several entities. As a result of these plans,
we estimate that in total approximately
338
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
512 employees will be terminated, of which approximately 461 employee
terminations have occurred since inception of the aforementioned plans. These
employees come from various parts of the business, including but not limited to
manufacturing, support functions and research.
Pursuant to the plans in place to merge the operations of BetzDearborn with
Hercules and to rationalize the support infrastructure and other existing
operations, facilities were closed and in total approximately 393 employees were
terminated during 1999. Cash payments for the year included $13.2 million for
severance benefits and other exit costs. As a result of the completion of plans
to exit former BetzDearborn activities, a $9 million increase in employee
severance benefits was reflected in the finalization of the purchase price
allocation. We lowered the estimates of severance benefits related to the
implementation of the European Shared Service Center by $1.3 million due to a
suspension of implementations, while increasing the estimates of other plans by
$13.9 million due to the identification of additional facilities for closure.
These amounts were charged to operating expense.
In 2000, in total approximately 68 employees were terminated and $13.6
million cash was paid in severance benefits and other exit costs. The estimate
for the remaining plans was decreased by $3.3 million against goodwill due to
lower than planned severance benefits as the result of higher than anticipated
attrition, with voluntary resignations not requiring the payment of termination
benefits. The estimate for the plans related to the shared services center were
decreased by $1.7 million against operating expense.
Severance benefits payments are based on years of service and generally
continue for 3 months to 24 months subsequent to termination. We expect to
substantially complete remaining actions under the plans in 2001. A
reconciliation of activity with respect to the liabilities established for these
plans is as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of year................................ $ 26,546 $ 27,190
Cash payments............................................... (13,556) (13,195)
Additional termination benefits and exit costs.............. 4,731 13,840
Reversals against goodwill.................................. (3,320) --
Reversals against earnings.................................. (1,658) (1,289)
-------- --------
Balance at end of year...................................... $ 12,743 $ 26,546
======== ========
339
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. PENSION
The Company has a number of pension plans in Europe, covering substantially
all employees. The following chart lists benefit obligations, plan assets, and
funded status of the plans.
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1........................... $ 37,408 $ 40,009
Service cost.............................................. 842 1,510
Interest cost............................................. 1,388 2,258
Reclassification of assets for plan settlement............ (416)
Settlements and transfers................................. (10,612) --
Translation difference.................................... (3,108) (5,395)
Actuarial loss (gain)..................................... 111 (171)
Benefits paid from plan assets............................ (10) (8)
Benefits paid by company.................................. (523) (795)
-------- --------
Benefit obligation at December 31........................... $ 25,080 $ 37,408
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1.................... 2,817 2,883
Actual return on plan assets.............................. 22 (60)
Settlements and transfers................................. (1,109) --
Company contributions (refund)............................ 122 398
Translation difference.................................... (233) (396)
Benefits paid from plan assets............................ (10) (8)
-------- --------
Fair value of plan assets at December 31.................. $ 1,609 $ 2,817
======== ========
Funded status of the plans.................................. (23,471) (34,591)
Unrecognized actuarial loss (gain).......................... 1,876 1,631
Unrecognized prior service cost (benefit)................... 119 141
Unrecognized net transition obligation...................... 719 4,733
-------- --------
Prepaid (accrued) benefit cost.............................. $(20,757) $(28,086)
======== ========
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
Accrued benefit liability................................. (20,757) (28,086)
-------- --------
$(20,757) $(28,086)
======== ========
ASSUMPTIONS AS OF DECEMBER 31
Weighted-average discount rate............................ 5.75% 6.00%
Expected return on plan assets............................ 6.50% 6.50%
Rate of compensation increase............................. 3.50% 3.75%
340
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION BENEFITS
---------------------------
2000 1999 1998
------- ------ ------
COMPONENTS OF NET PERIOD PENSION COST
Service cost............................................ $ 842 $1,510 $ 877
Interest cost........................................... 1,388 2,258 1,631
Return on plan assets (expected)........................ (36) (98) (64)
Amortization and deferrals.............................. (17) (14) (72)
Gain on settlements..................................... (8,675) -- --
Amortization of prior service cost...................... 10 12 12
Amortization of transition asset........................ 2,129 351 362
------- ------ ------
Benefit (credit) cost................................... $(4,359) $4,019 $2,746
======= ====== ======
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefits obligations
in excess of plan assets were $23,562 thousand, $19,780 thousand and $0,
respectively, as of December 31, 2000 and $36,766 thousand, $28,900 thousand and
$1,334 thousand, respectively, as of December 31, 1999.
The Company's employees in The Netherlands participate in a multi-employer
pension fund which is administered by an affiliated company. Contribution
amounts are based upon costs allocated to the Company by the Plan administrator.
Pension costs/(benefits) relating to the multi-employer plan were ($428)
thousand, $199 thousand and ($2,136) thousand in 2000, 1999 and 1998,
respectively.
13. OTHER OPERATING INCOME AND EXPENSES, NET
Other operating income and expenses, net, in 2000 include a gain of
$167,566 thousand from the sale of the Food Gums division. On September 28,
2000, the Company sold its Food Gums division to CP Kelco, a joint venture with
Lehman Brothers Merchant Banking Partners II, L.P., which contributed
approximately $300 million in equity. The Company received a note of
approximately $248 million from Hercules, which collected the original cash
proceeds, recorded tax expenses of approximately $61 million and retained a
28.57% equity position in CP Kelco. CP Kelco simultaneously acquired Kelco
biogums business of Pharmacia Corporation (formerly Monsanto Corporation). Other
operating expenses, net, also include Hercules Group affiliate royalty costs,
net restructuring costs, environmental costs, net losses on asset dispositions
and foreign currency losses totaling $22,471 thousand, $3,073 thousand, $8,500
thousand, $1,617 thousand and $43 thousand, respectively.
Other operating expenses, net, in 1999 include Hercules Group affiliate
royalty costs of $27,318 thousand, a gain on sale of investments of $13,302
thousand, net restructuring costs of $12,551, environmental costs of $800
thousand, net losses on asset dispositions of $184 thousand and foreign currency
losses amounting to $289 thousand.
Other operating expenses, net, in 1998 include Hercules Group affiliate
royalty costs of $21,029 thousand, net restructuring costs of $16,072, net gains
on asset dispositions of $506 thousand and foreign currency losses amounting to
$1,114 thousand.
14. INTEREST AND DEBT EXPENSE
No interest and debt costs were capitalized during 1998, 1999 and 2000. The
costs incurred are presented separately in the statement of income.
341
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following:
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Interest income, net.................................. $11,124 $ 9,742 $ 1,920
Rent.................................................. 27 (6) 12
Miscellaneous income (expense), net................... 309 (4,532) (3,600)
------- ------- -------
$11,460 $ 5,204 $(1,668)
======= ======= =======
16. INCOME TAXES
A summary of the components of the tax provision follows:
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Current............................................... $31,884 $48,052 $60,156
Deferred.............................................. 14,360 12,967 579
------- ------- -------
Provision for income taxes............................ $46,244 $61,019 $60,735
======= ======= =======
Deferred tax liabilities (assets) at December 31 consist of:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Depreciation................................................ $(41,661) $(52,772)
Goodwill amortization....................................... (8,819) (10,823)
Stock valuation............................................. (2,207) (2,498)
Intangible asset............................................ (1,385) --
Insurance provision......................................... (4,989) (6,037)
Replacement provision....................................... (3,282) (3,776)
Other....................................................... (2,151) (2,357)
-------- --------
Gross deferred tax liabilities.............................. (64,494) (78,263)
-------- --------
Loss carryforwards.......................................... 2,959 2,730
Inventory provision......................................... 2,551 4,124
Other....................................................... 2,239 2,972
-------- --------
Gross deferred tax assets................................... 7,749 9,826
-------- --------
Valuation allowance......................................... (703) (829)
-------- --------
$(57,448) $(69,266)
======== ========
342
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory income tax rate to the effective rate
follows:
2000 1999 1998
----- ---- ----
Statutory income tax rate................................... 37.5% 37.5% 37.5%
Non-deductible expenses..................................... 5.1% 1.8% 1.6%
Non-taxable income.......................................... (4.9)% (1.6)% (3.5)%
Tax rate differences on subsidiary earnings................. (1.4)% (1.2)% 0.7%
Income (loss) from equity investments in affiliates......... 0.7% 0.1% 0.2%
Gain on sale of investment.................................. (24.0)% (3.3)% 0.0%
Other....................................................... 4.7% 2.6% 2.5%
----- ---- ----
Effective tax rate.......................................... 17.7% 30.7% 39.0%
===== ==== ====
The net operating losses have a carryforward period ranging from 5 years to
indefinite, but may be limited in their use in any given year.
17. COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases (including office space, transportation,
and data processing equipment) expiring at various dates. Rental expense was
$8,076 thousand, $8,786 thousand and $5,457 thousand in 2000, 1999 and 1998,
respectively.
At December 31, 2000, minimum rental payments under noncancelable leases
aggregated $24,236 thousand. The net minimum payments over the next five years
and thereafter are $7,694 thousand in 2001, $5,197 thousand in 2002, $3,024
thousand in 2003, $1,161 thousand in 2004, $1,630 thousand in 2005 and $5,530
thousand beyond 2005.
Litigation
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business. In the opinion of the Company's
management, none of such litigation as of December 31, 2000 is likely to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
Environmental
The Company has potential liability in connection with obligations to
authorities of various EU countries in which it has manufacturing facilities,
and to private parties pursuant to contract, for the cost of environmental
investigation and/or cleanup at several sites. The estimated range of the
reasonably possible share of costs for the investigation and cleanup is between
$5,000 thousand and $12,000 thousand. The actual costs will depend upon numerous
factors, including the actual methods of remediation required or agreed to;
outcomes of negotiations with regulatory authorities and private parties;
changes in environmental laws and regulations; technological developments; and
the years of remedial activity required, which could range from 0 to 30 years.
The Company becomes aware of its obligations relating to sites in which it
may have liability for the costs of environmental investigations and/or remedial
activities through correspondence from government authorities, or through
correspondence from companies with which the Company has contractual
obligations, 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
343
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
coordinators who are familiar with environmental laws and regulations and act as
a resource for identifying environmental issues.
In December 2000, PFW Aroma Chemicals B.V., a company that in 1996
purchased from the Company a Fragrances Plant in Barneveld, NL, submitted a
claim of 7,295 thousand EURO. The claim seeks payment of costs alleged to be
owed under the 1996 Agreement between the parties. The claim generally alleges
that the Company is obligated to pay for the costs of cleaning up contamination
at the Barneveld plant and to pay various costs relating to compliance with
permit obligations. The Company has questioned its obligation to pay the amounts
sought, and is currently in negotiations with PFW regarding this claim.
On May 1, 2001, the Company sold a hydrocarbon resins manufacturing
facility located in Middelburg, the Netherlands as part of the sale by Hercules
of its Resins Division to Eastman Chemical Resins, Inc. Under the Purchase and
Sale Agreement between the parties, Hercules retained certain specific
liabilities relating to environmental conditions at the Middelburg hydrocarbon
resins plant, including pre-existing contamination
At December 31, 2000, the total accrued liability of $9,300 thousand 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 remediation that will
be required and the negotiations regarding apportionment of costs among other
private parties. While it is not feasible to predict the outcome of all pending
suits and claims, the ultimate resolution of these environmental matters could
have a material effect upon the results of operations and the financial position
of the Company.
18. RELATED PARTY TRANSACTIONS
The Company has entered into certain agreements with affiliated entities.
These agreements were developed in the context of a Hercules Group/subsidiary
relationship and therefore may not necessarily reflect the result of
arm's-length negotiations between independent parties. All transactions
described below are eliminated on consolidation of Hercules.
Intercompany borrowing and interest: The Company has intercompany loans
with Hercules affiliated entities. The loans with affiliates are included in net
Hercules Group investment in the consolidated balance sheet. Interest paid to
affiliated entities was $42,602 thousand, $2,581 thousand and $3,527 thousand in
2000, 1999 and 1998, respectively.
Corporate, regional and other allocations: As discussed in Note 1, the
consolidated financial statements of the Company reflect certain allocated
support costs incurred by other entities in the Hercules group and incurred by
the Company. These costs include executive, legal, accounting, tax, auditing,
cash management, purchasing, human resources, safety, health and environmental,
information management, investor relations and other corporate services.
Allocations and charges included in the Company's consolidated financial
statements were based either on a direct cost pass-through for items directly
identified as related to the Company's activities; a percentage allocation for
such services provided based on factors such as sales, net assets, cost of
sales; or a relative weighting of geographic activity. These allocations are
reflected in the selling, general and administrative line item in the
consolidated statement of income. Such allocations and corporate charges totaled
approximately $23,980 thousand, $31,596 thousand and $15,850 thousand in 2000,
1999 and 1998, respectively.
Sales to affiliates: The Company sells raw material and finished goods
inventory in the normal course of business to affiliated companies. The
Company's revenues from sales to affiliated companies are presented separately
in the consolidated statement of income.
344
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Purchases from affiliates: The Company purchases in the normal course of
business raw material and finished goods inventory from affiliated companies.
The Company's purchases of inventory from affiliated companies are reflected in
costs of sales in the consolidated statement of income and totaled $221,230
thousand, $241,737 thousand and $239,306 thousand in 2000, 1999 and 1998,
respectively.
Royalties: The Company entered into a license agreement in respect of the
use of manufacturing formulations and specifications developed and owned by an
affiliated entity. Total royalties accrued in respect of this agreement are
included in the other operating (income) expense line item in the consolidated
statement of income and totaled $22,471 thousand, $27,318 thousand and $21,029
thousand in 2000, 1999 and 1998, respectively.
19. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
The Company enters into forward-exchange contracts to hedge currency
exposure.
Notional Amounts and Credit Exposure of Derivatives
The notional amounts of derivatives summarized below do not represent
amounts exchanged by the parties and, thus, are not a measure of the exposure of
the Company through its use of derivatives. The amounts exchanged are calculated
on the basis of the notional amounts and the other terms of the derivatives,
which relate to interest rates or exchange rates.
Foreign Exchange Risk Management
The Company has selectively used foreign currency forward contracts to
offset the effects of exchange rate changes on reported earnings, cash flow, and
net asset positions. The primary exposures are denominated in the U.S. Dollar,
the Japanese Yen and the British Pound Sterling. Some of the contracts involve
the exchange of two foreign currencies, according to local needs in foreign
subsidiaries. The term of the currency derivatives is rarely more than three
months. At December 31, 2000 and 1999, the Company had outstanding
forward-exchange contracts to purchase foreign currencies aggregating $78,281
thousand and $176,516 thousand, respectively, and to sell foreign currencies
aggregating $78,712 thousand and $175,958 thousand, respectively. The foreign
exchange contracts outstanding at December 31, 2000 will mature during 2001.
Fair Values
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 2000 and 1999:
2000 1999
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Foreign exchange contracts................. $(430) $(430) $557 $557
The carrying amount represents the net unrealized gain or net interest payable
associated with the contracts at the end of the period. Fair values of
derivative contracts are indicative of cash that would have been required had
settlement been December 31, 2000. Foreign exchange contracts are valued based
on year-end exchange rates. Net Hercules Group Investment
345
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. NET HERCULES GROUP INVESTMENT
Changes in Net Hercules Group Investment were as follows:
Balance, January 1, 1998.................................... $ 265,716
Net income................................................ 94,987
Other comprehensive income................................ 16,306
Intercompany transactions, net............................ 317,580
---------
Balance, December 31, 1998.................................. 694,589
Net income................................................ 137,779
Other comprehensive income................................ (49,869)
Intercompany transactions, net............................ (95,424)
---------
Balance, December 31, 1999.................................. 687,075
Net income................................................ 215,763
Other comprehensive income................................ (71,025)
Intercompany transactions, net............................ (398,179)
---------
Balance, December 31, 2000.................................. $ 433,634
=========
The Company includes accumulated other comprehensive income in net Hercules
Group investment. At December 31, 2000, 1999 and 1998, accumulated other
comprehensive income consisted of foreign currency translation adjustments.
21. SUBSEQUENT EVENT
On May 1, 2001, Hercules completed the sale of its hydrocarbon resins
divisions and select portions of its rosin resins divisions to Eastman Chemical
Company. In addition, on May 31, 2001, Hercules completed the sale of its peroxy
chemicals business to GEO Specialty Chemicals, Inc.
346
WSP, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying balance sheets and the related statements
of operations and comprehensive (loss) income and of cash flows present fairly,
in all material respects, the financial position of WSP, Inc., a subsidiary of
Hercules Incorporated at December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America that require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 19, 2001
347
WSP, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
2000 1999 1998
-------- ------- ------
(DOLLARS IN THOUSANDS)
Interest income............................................. $ 2,452 $ -- $ --
Equity in (loss) income of affiliated company (Note 3)...... (25,895) 13,059 5,369
-------- ------- ------
(Loss) income before income taxes........................... (23,443) 13,059 5,369
(Benefit) provision for income taxes (Note 7)............... (8,205) 4,571 1,879
-------- ------- ------
Net (loss) income........................................... (15,238) 8,488 3,490
Translation adjustments..................................... 910 627 --
-------- ------- ------
Comprehensive (loss) income................................. $(14,328) $ 9,115 $3,490
======== ======= ======
The accompanying notes are an integral part
of the financial statements.
348
WSP, INC.
BALANCE SHEETS
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Investments (Note 3)........................................ $126,138 $151,123
Deferred income taxes (Note 7).............................. 4,143 --
-------- --------
Total assets...................................... $130,281 $151,123
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Current tax liability (Note 7)............................ $ 919 $ 99
-------- --------
Total current liabilities.............................. 919 99
Deferred income taxes (Note 7).............................. -- 4,981
-------- --------
Total liabilities................................. 919 5,080
Commitments and contingencies (Note 4)...................... -- --
Net Hercules Group Investment (Note 5)...................... 129,362 146,043
-------- --------
Total liabilities and Net Hercules Group
Investment...................................... $130,281 $151,123
======== ========
The accompanying notes are an integral part
of the financial statements.
349
WSP, INC.
STATEMENTS OF CASH FLOW
YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
-------- -------- ---------
(DOLLARS IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $(15,238) $ 8,488 $ 3,490
Adjustments to reconcile net (loss) income to net cash
provided by operations:
Accruals and deferrals of cash receipts and payments:
Affiliates' losses (earnings) in excess of dividend
received........................................... 25,895 (13,059) (5,369)
Accounts payable and accrued expenses................ 820 (17) 116
Deferred taxes....................................... (9,124) 4,472 509
-------- -------- ---------
Net cash (used in) provided by operations.......... 2,353 (116) (1,254)
-------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired........................ -- -- (130,253)
-------- -------- ---------
Net cash used in investing activities.............. -- -- (130,253)
-------- -------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Transfers (to) from Hercules group........................ (2,353) 116 131,507
-------- -------- ---------
Net cash (used in) provided by financing
activities...................................... (2,353) 116 131,507
-------- -------- ---------
Net (decrease) increase in cash and cash equivalents...... -- -- --
Cash and cash equivalents at beginning of year............ -- -- --
-------- -------- ---------
Cash and cash equivalents at end of year.................. -- -- --
======== ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes paid, net.................................. 99 116 1,254
The accompanying notes are an integral part
of the financial statements.
350
WSP, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
WSP, Inc. ("WSP"), a U.S. holding company, is owned 100% by Hercules
Incorporated ("Hercules"). WSP owns 0.5818% of Aqualon Company, a U.S.
partnership that is engaged in providing products and services to manage the
properties of aqueous (water-based) systems. WSP also owns 49% of FiberVisions
L.L.C., a limited liability corporation that serves worldwide polypropylene
non-woven fiber used to make disposable hygiene products.
Historically, separate company stand-alone financial statements were not
prepared for WSP. In November 2000, Hercules amended its senior credit facility
and ESOP credit facility (the "Facilities"). The Facilities, as amended, are
secured by liens on Hercules' property and assets (and those of Hercules'
Canadian Subsidiaries), a pledge of the stock and partnership interests of
substantially all of Hercules' domestic subsidiaries (including WSP) and 65% of
the stock of foreign subsidiaries directly owned by Hercules, and a pledge of
Hercules' domestic intercompany indebtedness. These financial statements present
the financial information on WSP, a collateral party to the Hercules debt, based
on Hercules' understanding of Securities and Exchange Commission's
interpretation and application of Rule 3-16 under the Securities and Exchange
Commission's Regulation S-X. These statements were derived from historical
accounting records.
WSP participates in Hercules' centralized cash management system.
Accordingly, cash received from WSP operations is transferred to Hercules on a
periodic basis, and Hercules funds all operational and capital requirements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
WSP recognizes revenue, including interest income, when the earnings
process is complete.
Cash and Cash Equivalents
Cash equivalents include commercial paper and other securities with
original maturities of 90 days or less. Book value approximates fair value
because of the short maturity of these instruments.
INVESTMENTS
Investments in affiliated companies with a 20% or greater ownership
interest in which the Company has significant influence are accounted for using
the equity method of accounting. Accordingly, these investments are included in
investments in affiliates on the Company's balance sheet and the income or loss
from these investments is included in equity in (loss) income of affiliated
companies in the Company's statement of income.
Investments in affiliated companies in which the Company does not have a
controlling interest, or an ownership and voting interest so large as to exert
significant influence, are accounted for using the cost method of accounting.
Accordingly, these investments are included in investments in affiliates on the
Company's balance sheet.
351
WSP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company's operations have historically been included in the
consolidated income tax returns filed by its parent. Income tax expense in the
accompanying financial statements has been computed assuming the Company filed
separate income tax returns. Differences between this calculation of income
taxes currently payable and consolidated amounts reported in the consolidated
financial statements of the parent have been reflected as Net Hercules Group
Investment.
Net Hercules Group Investment
The Net Hercules Group Investment account reflects the balance of WSP's
historical earnings, intercompany amounts, income taxes, taxes accrued and
deferred, foreign currency translation and other transactions between WSP and
the Hercules Group.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," requires that all derivative instruments be recorded on the
balance sheet at their fair value. This statement, as amended, is effective for
all fiscal quarters of fiscal years beginning after December 31, 2000. The
adoption of SFAS No. 133 did not have a material effect on its earnings or
statement of financial position.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was to be effective
October 1, 2000. Adoption of SAB 101 did not have a material effect on our
profit from operations.
3. INVESTMENTS
Total investments in affiliated companies were as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Investment in FiberVisions L.L.C. .......................... $124,323 $149,308
Investment in Aqualon Company............................... 1,815 1,815
-------- --------
Total Investments........................................... $126,138 $151,123
======== ========
Summarized financial information for FiberVisions, L.L.C. at December 31
2000 and 1999 and the years then ended is as follows:
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Current assets.............................................. $ 68,290 $ 70,676
Non-current assets.......................................... 322,085 390,313
Current liabilities......................................... 45,535 47,711
Other non-current liabilities............................... 53,919 70,141
352
WSP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Net sales................................................... $251,859 $253,648
Gross profit................................................ 28,726 59,952
Net earnings................................................ (52,846) 26,650
The summarized financial information above does not include certain
intercompany assets and liabilities recorded in FiberVisions, L.L.C. These
intercompany accounts have been reclassified to the Net Hercules Group
Investment in accordance with the Company's accounting policy (see Note 2).
4. COMMITMENTS AND CONTINGENCIES
WSP currently and from time to time is involved in litigation incidental to
the conduct of its business. In the opinion of WSP's management, none of such
litigation as of December 31, 2000 is likely to have a material adverse effect
on the financial position and results of operations of WSP.
5. NET HERCULES GROUP INVESTMENT
Changes in net Hercules Group Investment were as follows:
(DOLLARS IN
THOUSANDS)
Balance, January 1, 1998.................................... $ 1,815
Net income................................................ 3,490
Other comprehensive income................................ --
Intercompany transactions, net............................ 131,507
--------
Balance, December 31, 1998.................................. 136,812
Net income................................................ 8,488
Other comprehensive income................................ 627
Intercompany transactions, net............................ 116
--------
Balance, December 31, 1999.................................. 146,043
Net loss.................................................. (15,238)
Other comprehensive income................................ 910
Intercompany transactions, net............................ (2,353)
--------
Balance, December 31, 2000.................................. $129,362
========
6. ACQUISITIONS AND DIVESTITURES
In July 1998, WSP acquired 49% of the shares of FiberVisions, LLC. This
transaction was funded by Hercules and was recognized as an increase in equity
investment by WSP.
7. INCOME TAXES
The domestic components of income before taxes are presented below:
2000 1999 1998
-------- ------- ------
(DOLLARS IN THOUSANDS)
Domestic.............................................. $(23,443) $13,059 $5,369
-------- ------- ------
$(23,443) $13,059 $5,369
======== ======= ======
353
WSP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the components of the tax provision follows:
2000 1999 1998
------- ------ ------
(DOLLARS IN THOUSANDS)
Currently payable....................................... $ 919 $ 99 $ 116
Deferred................................................ (9,124) 4,472 1,763
------- ------ ------
Provision for income taxes.............................. $(8,205) $4,571 $1,879
======= ====== ======
Deferred tax (assets) liabilities at December 31, consist of the following:
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Partnership basis........................................... $(4,143) $4,981
------- ------
Gross deferred tax liabilities.............................. -- 4,981
Gross deferred tax assets................................... (4,143) --
------- ------
$(4,143) $4,981
======= ======
The effective tax rate for WSP was 35%.
354
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a) Documents filed as part of this Report:
1. Financial Statements
See Item 8 for an Index to the Consolidated Financial Statements
of Hercules Incorporated.
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts............ 355
All other schedules are omitted because they are not applicable, not
required, or the information required is either presented in the Notes to
Financial Statements or has not changed materially from that previously
reported.
3. Exhibits:
A complete listing of exhibits required is included in the
Exhibit Index that precedes the exhibits filed with this Report.
(b) Reports on Form 8-K.
Financial Statements
Report Date of Report Item Nos. Included
----------- ------------------ --------- --------------------
Form 8-K September 28, 2000 2,7 Yes
Form 8-K/A September 28, 2000 2,7 Yes
Form 8-K November 2, 2000 5,7 No
Form 8-K November 7, 2000 7,9 No
Form 8-K November 7, 2000 5,7 No
HERCULES INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (Dollars in millions)
-------------------------------------------------------------------------------------------------------
Col. A. Col. B Col. C Col. D Col. E
------------------------------- ------------ ---------------------------- ---------- -----------
Additions
----------------------------
Balance at Charged to Balance at
beginning of costs and Charged to end of
Description period expenses other accounts Deductions period
-------------------------------------------------------------------------------------------------------
YEAR 2000
Allowance for doubtful accounts $ 16 $21 (10) $ 27
Tax valuation allowance 16 12 28
YEAR 1999
Allowance for doubtful accounts $ 13 --- $ 3 (a) --- $ 16
Tax valuation allowance 12 --- 4 (a) --- 16
YEAR 1998
Allowance for doubtful accounts $ 3 --- $10 (a) --- $ 13
Tax valuation allowance 12 --- --- --- 12
-------------------------------------------------------------------------------------------------------
(a) Primarily a result of 1998 acquisitions, including subsequent purchase price
allocation adjustments.
355
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to be
signed on its behalf by the undersigned, thereunto duly authorized on October
31, 2001.
HERCULES INCORPORATED
/s/ WILLIAM H. JOYCE
By: ______________________________________
William H. Joyce
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 1 has been signed below by the following persons on behalf of the
registrant in the capacities indicated on October 31, 2001.
PRINCIPAL EXECUTIVE OFFICER:
/s/ WILLIAM H. JOYCE
Chairman and Chief Executive Officer ________________________________
William H. Joyce
PRINCIPAL FINANCIAL OFFICER:
/s/ STUART C. SHEARS
Vice President and Treasurer ________________________________
Stuart C. Shears
PRINCIPAL ACCOUNTING OFFICER:
/s/ FRED G. AANONSEN
Vice President and Controller ________________________________
Fred G. Aanonsen
DIRECTORS:
/s/ WILLIAM H. JOYCE /s/
________________________________ ________________________________
William H. Joyce Robert D. Kennedy
/s/ JOHN G. DROSDICK /s/ JEFFREY M. LIPTON
________________________________ ________________________________
John G. Drosdick Jeffrey M. Lipton
/s/ RICHARD M. FAIRBANKS, III /s/ PETER MCCAUSLAND
________________________________ ________________________________
Richard M. Fairbanks, III Peter McCausland
/s/ SAMUEL J. HEYMAN /s/ GLORIA SCHAFFER
________________________________ ________________________________
Samuel J. Heyman Gloria Schaffer
/s/ ALAN R. HIRSIG /s/ PAULA A. SNEED
________________________________ ________________________________
Alan R. Hirsig Paula A. Sneed
/s/ EDITH E. HOLIDAY /s/ RAYMOND TROUBH
________________________________ ________________________________
Edith E. Holiday Raymond Troubh
/s/ SUNIL KUMAR
________________________________ ________________________________
Sunil Kumar Joe B. Wyatt
356
HERCULES INCORPORATED
EXHIBIT INDEX
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO
2-A Agreement and Plan of Merger among Hercules, Water Exhibit 2.1, BetzDearborn Inc. Current Report
Acquisition Company and BetzDearborn Inc., dated July on Form 8-K, filed July 30, 1998
30, 1998
3-A.1 Restated Certificate of Incorporation of Hercules, as Exhibit 3-A, Annual Report on form 10-K filed
revised and amended July 6, 1988 March 26, 1993
3-A.2 Certificate of Amendment dated October 24, 1995, to Exhibit 4.1a, Registration Statement on Form
Hercules' Restated Certificate of Incorporation as S-3, filed September 15, 1998
revised and amended July 5, 1998
3-B By-Laws of Hercules, as revised and amended October 30, Exhibit 3-B, Annual Report on Form 10-K filed
1991 March 26, 1993
4-A Officers' Certificate, dated as of March 17, 1999, Exhibit 4.1, Current Report on Form 8-K dated
pursuant to the Junior Subordinated Debentures March 17, 1999
Indenture between Hercules and Chase
4-B Form of Preferred Securities Guarantee by Hercules and Exhibit 4.28, Amendment No. 1 to Registration
Chase, with respect to Hercules Trust I Statement on Form S-3, filed October 29, 1998
4-C Form of Amended and Restated Trust Agreement of Exhibit 4.13, Amendment No. 1 to Registration
Hercules Trust I Statement on Form S-3, filed October 29, 1998
4-D Form of 9.42% Trust Originated Preferred Securities of Exhibit 4.2, Current Report on Form 8-K, dated
Hercules Trust I March 17, 1999
4-E Form of 9.42% Junior Subordinated Deferrable Interest Exhibit 4.3, Current Report on Form 8-K, dated
Debentures due 2029 March 17, 1999
4-F Officer's Certificate, dated as of July 27, 1999, Exhibit 4.1, Current Report on Form 8-K, dated
pursuant to the Junior Subordinated Debentures July 27, 1999
Indenture between Hercules and Chase, dated as of
November 12, 1998
4-G Amended and Restated Trust Agreement of Hercules Trust Exhibit 4.2, Current Report on Form 8-K, dated
II, dated as of July 27, 1999, together with Annex I July 27, 1999
thereto
4-H Unit Agreement, dated July 27, 1999, among Hercules, Exhibit 4.3, Current Report on Form 8-K, dated
Hercules Trust II and The Chase Manhattan Bank, as unit July 27, 1999
agent
4-I Warrant Agreement, dated July 27, 1999, between Hercules Exhibit 4.4, Current Report on Form 8-K, dated
and The Chase Manhattan Bank, as warrant agent July 27, 1999
4-J Form of Series A Junior Subordinated Deferrable Exhibit 4.5, Current Report on Form 8-K, dated
Interest Debentures July 27, 1999
4-K Form of Trust II Preferred Securities Exhibit 4.6, Current Report on Form 8-K, dated
July 27, 1999
4-L Form of CRESTS Unit Exhibit 4.7, Current Report on Form 8-K, dated
July 27, 1999
4-M Form of Warrant Exhibit 4.8, Current Report on Form 8-K, dated
July 27, 1999
4-N Rights Agreement, dated as of August 24, 2000, between Exhibit 4.1 to Hercules Registration of
Hercules Incorporated and Chase Mellon Shareholder Certain Classes of Securities on Form 8-A
Services, L.L.C. filed August 10, 2000
357
HERCULES INCORPORATED
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO
4-O Indenture, dated as of November 14, 2000, between Exhibit 4-A, Quarterly Report on Form 10-Q,
Hercules Incorporated, as issuer and Wells Fargo Bank filed November 14, 2000
Minnesota, N.A., as trustee (including the form of
11-1/8% senior notes due 2007 included as Exhibit A
thereto).
4-P Registration Rights Agreement, dated as of November 14, Exhibit 4-B Quarterly Report on Form 10-Q,
2000, among Hercules Incorporated and all of its filed November 14, 2000
domestic subsidiaries and Donaldson, Lufkin & Jenrette
Securities Corporation and Credit Suisse First Boston
Corporation, as the initial purchasers.
Hercules is party to several long-term debt instruments under which in each case
the total amount of securities Authorized does not exceed 10% of the total
assets of Hercules. Hercules agrees to furnish a copy of such instruments to the
Securities and Exchange Commission upon request.
10-A Hercules Executive Survivor Benefit Plan Exhibit 10-D, Annual Report on Form 10-K,
filed March 27, 1981
10-B Hercules Phantom Stock Plan Exhibit E, Notice Annual Meeting and Proxy
Statement, dated February 14, 1986
10-C Hercules Deferred Compensation Plan Exhibit 10-I, Annual Report on Form 10-K,
filed March 29, 1988
10-D Hercules Annual Management Incentive Compensation Plan Exhibit 10-H, Annual Report on Form 10-K,
filed March 26, 1993
10-E Hercules 1993 Nonemployee Director Stock Accumulation Exhibit 4.1, Registration Statement on Form
Plan S-8, filed July 16, 1993
10-F Hercules Deferred Compensation Plan for Nonemployee Exhibit 10-J, Annual Report Form 10-K, filed
Directors March 26, 1993
10-G Hercules Employee Pension Restoration Plan Exhibit 10-L, Annual Report on Form 10-K,
filed March 26, 1993
10-H Form of Employment Contract between Hercules and Exhibit 10-J, Annual Report on Form 10-K,
certain of its officers filed March 29, 1988
10-I Form of Indemnification Agreement between Hercules and Annex II, Notice of Annual Meeting and Proxy
certain officers and directors of Hercules Statement, dated February 19, 1987*
10-J Employment Agreement effective August 1, 1998, between Exhibit 10-T, Annual Report on Form 10-K,
Hercules and Vincent J. Corbo filed March 30, 1999
10-K Hercules Amended and Restated Long Term Incentive Exhibit 10-K, Annual Report on Form 10-K,
Compensation Plan filed March 29, 2000
10-L BetzDearborn Inc. Employee Stock Ownership and 401(k) Exhibit 10-L, Annual Report on Form 10-K,
Plan filed March 29, 2000
10-M Amended and Restated Credit Agreement, dated April 19, 1999, Exhibit 10.2, Current Report on Form 8-K,
among Hercules, NationsBank, N.A., as Administrative Agent, dated April 19, 1999
and the lenders party thereto
10-N Underwriting Agreement, dated March 12, 1999, among Exhibit 1.1, Current Report on Form 8-K, dated
Hercules, Hercules Trust I and the Underwriters named March 17, 1999
therein
10-O CRESTS Units Underwriting Agreement, dated July 21, Exhibit 1.1, Current Report on Form 8-K, dated
1999, among Hercules, Hercules Trust II and the July 27, 1999
Underwriters named therein
10-P Common Stock Underwriting Agreement, dated July 21, Exhibit 1.2, Current Report on Form 8-K, dated
1999, among Hercules and the Underwriters named therein July 27, 1999
358
HERCULES INCORPORATED
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO
10-Q First Amendment to Amended and Restated Credit Exhibit 10-A, Quarterly Report on Form 10-Q,
Agreement, dated March 31, 2000, among Hercules filed August 15, 2000
Incorporated, Betz Dearborn Canada, certain
subsidiaries of Hercules, the several banks and other
financial institutions identified in the agreement and
Bank of America, N.A., as administrative agent, and
Bank of America Canada, as Canadian administrative
agent.
10-R Second Amendment to Amended and Restated Credit Exhibit 10-B, Quarterly Report on Form 10-Q,
Agreement, dated July 26, 2000, among Hercules filed August 15, 2000
Incorporated, BetzDearborn Canada, certain subsidiaries
of Hercules, the several banks and other financial
institutions identified in the agreement and Bank of
America, N.A., as administrative agent, and Bank of
America Canada, as Canadian administrative agent.
10-S Share Purchase Agreement, dated as of August 10, 2000, Exhibit 2-1, Current Report on Form 8-K, dated
among CP Kelco ApS (formerly known as Hercules September 28, 2000
Copenhagen ApS), Hercules Investment ApS, Hercules
Incorporated, Lehman FG Newco, Inc., WSP, Inc. and
Hercules Holding BV/BVBA.
10-T* Third Amendment to Amended and Restated Credit
Agreement, dated November 14, 2000, among Hercules
Incorporated, BetzDearborn Canada, certain subsidiaries
of Hercules, the several banks and other financial
institutions identified in the agreement, and Bank of
America, N.A., as administrative agent, and Bank of
America Canada, as Canadian administrative agent.
10-U First Amendment to Amended and Restated Credit Exhibit 10-A, Quarterly Report on Form 10-Q,
Agreement, dated March 31, 2000, among Hercules filed August 15, 2000
Incorporated, BetzDearborn Canada, certain subsidiaries
of Hercules, the several banks and other financial
institutions identified in the agreement and Bank of
America, N.A., as administrative agent, and Bank of
America Canada Canadian administrative agent.
21 Subsidiaries of Registrant See Part II, Item 8 on page 66 of this 2000
Form 10-K
23 Consent of PricewaterhouseCoopers LLP
*Previously filed.
359