SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001 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 in Part III of this Form 10-K/A or any amendment to this Form 10-K/A.
X
As of March 15, 2002, registrant had 109,157,515 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 15, 2002 was approximately
$1.3 billion.
DOCUMENTS INCORPORATED BY REFERENCE
(SPECIFIC PAGES INCORPORATED ARE IDENTIFIED UNDER THE APPLICABLE ITEM HEREIN.)
EXPLANATORY NOTE
This amendment to Hercules Incorporated's Annual Report on Form 10-K for
the year ended December 31, 2001 filed with the Securities and Exchange
Commission on March 29, 2002 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 Exhibits 23.1 to 23.18,
Consents of PricewaterhouseCoopers LLP.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
INDEX TO REQUIRED SUPPLEMENTARY DATA
HERCULES INCORPORATED
SUBSIDIARY FINANCIAL STATEMENTS
Aqualon Company............................................ 1
BetzDearborn Inc. ......................................... 15
BetzDearborn Canada, Inc. ................................. 35
BetzDearborn Europe, Inc. ................................. 56
BetzDearborn International, Inc. .......................... 76
BL Technologies, Inc. ..................................... 97
FiberVisions A/S........................................... 106
FiberVisions Incorporated.................................. 122
FiberVisions L.L.C. ....................................... 138
FiberVisions Products, Inc. ............................... 156
Hercules Canada, Inc. ..................................... 170
Hercules Chemicals (Taiwan) Co., Limited................... 180
Hercules Credit, Inc. ..................................... 205
Hercules GB Holdings Limited............................... 220
Hercules International Limited............................. 237
Hercules Investments Sarl.................................. 259
WSP, Inc................................................... 279
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, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001 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
November 4, 2002
1
AQUALON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Year Ended December 31,
2001 2000 1999
---- ---- ----
Sales to third parties $ 255,285 $ 274,775 $ 295,473
Sales to Hercules Group 49,359 63,033 62,657
--------- --------- ---------
304,644 337,808 358,130
Cost of sales third parties 204,127 227,272 250,066
Selling, general, and administrative expenses 48,119 48,069 53,775
Research and development 12,708 11,780 12,078
Goodwill and intangible asset amortization 1,014 1,014 1,014
Other operating (income) expense, net (Note 11) (2,129) 22,259 3,554
--------- --------- ---------
Profit from operations 40,805 27,414 37,643
Interest and debt expense 56 415 545
Other (income) expense, net (1,091) (1,199) 127
--------- --------- ---------
Net income $ 41,840 $ 28,198 $ 36,971
========= ========= =========
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
2
AQUALON COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
2001 2000
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 5,534 $ 2,494
Accounts receivable, net (Note 3) 30,924 35,743
Notes receivable (Note 4) -- 3,600
Inventories (Note 5) 39,340 45,409
Other current assets 4,205 4,691
-------- --------
Total current assets 80,003 91,937
-------- --------
Property, plant, and equipment, net (Note 7) 94,338 91,742
Notes receivable (Note 4) 3,000 3,000
Goodwill, net (Note 8) 27,536 28,550
Deferred charges and other assets 3,141 5,256
-------- --------
Total assets $208,018 $220,485
======== ========
LIABILITIES AND NET PARTNERS' (HERCULES GROUP) INVESTMENT
Current liabilities
Accounts payable $ 14,354 $ 17,724
Accrued expenses (Note 7) 25,224 24,172
-------- --------
Total current liabilities 39,578 41,896
-------- --------
Pension and other postretirement benefits (Note 10) -- 110
Environmental and other liabilities 19,663 22,526
-------- --------
Total liabilities 59,241 64,532
Commitments and contingencies (Note 15) -- --
Net partners' (Hercules Group) investment (Note 13) 148,777 155,953
-------- --------
Total liabilities and net partners' (Hercules Group)
investment $208,018 $220,485
======== ========
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
3
AQUALON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
2001 2000 1999
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 41,840 $ 28,198 $ 36,971
Adjustments to reconcile net income to net cash provided
from operations:
Depreciation 9,133 9,757 11,009
Amortization 1,014 1,014 1,014
Loss on disposal (Note 14) -- 6,854 6,500
Loss on impairment of fixed assets (Note 11) -- -- 2,000
Corporate and other cost allocations 16,433 15,313 21,444
Accruals and deferrals of cash receipts and payments:
Accounts receivable and other assets 8,905 10,103 4,531
Inventories 6,069 7,084 5,112
Accounts payable and accrued expenses (2,318) (8,659) (3,389)
Environmental and other assets and liabilities (896) 800 3,743
-------- -------- --------
Net cash provided by operations 80,180 70,464 88,935
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (11,729) (9,437) (12,133)
Investment in affiliate 38 (179) 254
-------- -------- --------
Net cash used in investing activities (11,691) (9,616) (11,879)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of debt -- (1,650) --
Transfers to partners' (Hercules Group) (65,449) (58,017) (79,877)
-------- -------- --------
Net cash used in financing activities (65,449) (59,667) (79,877)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 3,040 1,181 (2,821)
Cash and cash equivalents at beginning of year 2,494 1,313 4,134
-------- -------- --------
Cash and cash equivalents at end of year $ 5,534 $ 2,494 $ 1,313
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest Paid $ 56 $ 415 $ 545
Noncash financing activities
Issuance of note receivable 3,000 6,600 --
Corporate and other cost allocations 16,433 15,313 21,444
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
4
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.
On April 29, 2002, in connection with Hercules' sale of its Water
Treatment Business (see Note 17) and the repayment of the Facilities, the stock
pledges were released. As a result, based on Hercules' current debt structure,
these separate company stand-alone financial statements will not be required for
the fiscal year ending December 31, 2002.
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 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 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.
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. Shipping and handling costs that are billed to customers
are included in revenue; shipping and handling costs that are incurred by
Aqualon are included in cost of sales.
5
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that pertain to current operations or future
revenues are expensed or capitalized according to Aqualon's capitalization
policy, which is to charge repairs and maintenance to expense and capitalize
replacements or betterments. 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 net book value 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.
Pursuant to Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" (SFAS 142), beginning January 1, 2002, goodwill
will not be amortized but will be tested for impairment annually and any
necessary adjustment charged to expense. Intangible assets with finite lives
will be amortized over their useful lives.
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.
CONCENTRATIONS OF CREDIT
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.
6
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
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 2001, the FASB issued 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"). SFAS 141 supersedes Accounting Principles Board Opinion ("APB") No. 16,
Business Combinations. The provisions of SFAS 141 (1) require that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001, (2) provide specific criteria for the initial recognition and
measurement of intangible assets apart from goodwill and (3) require that
unamortized negative goodwill be written off immediately as extraordinary gain
instead of being deferred and amortized. SFAS 141 also requires that upon
adoption of SFAS 142 the Company reclassify the carrying amounts of certain
intangible assets into or out of goodwill, based on certain criteria. SFAS 142
supersedes APB No. 17, Intangible Assets, and is effective for fiscal years
beginning after December 15, 2001. SFAS 142 primarily addresses the accounting
for goodwill and intangible assets subsequent to their initial recognition. The
provisions of SFAS 142 (1) prohibit the amortization of goodwill and
indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), based on
fair value (as opposed to cost recovery using future undiscounted cash flows),
(3) require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill and (4) remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.
Effective January 1, 2002 Hercules adopted the provisions of SFAS 142.
Hercules identified the following reporting units: BetzDearborn, Pulp and Paper,
Aqualon, FiberVisions and Resins. In the first quarter 2002, Hercules completed
its transitional impairment, determined that reported goodwill was impaired in
the BetzDearborn and FiberVisions reporting units, and recognized an after-tax
impairment loss of $368 million as a cumulative effect of a change in
accounting principle. As a result of Hercules' adoption of SFAS 142, the Company
will no longer record $1.0 million of annual amortization relating to existing
goodwill and intangibles, as adjusted for the reclassifications just mentioned.
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. The Company does not believe this statement
will have a material effect on its financial statements.
On January 1, 2002, the Company adopted 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 Company does not believe
this statement will have a material effect on its financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." The Company has elected to early
adopt the provisions of SFAS 145 related to the rescission of SFAS 4, "Reporting
Gains and Losses for the Extinguishment of Debt" ("SFAS" 4"). Early adoption had
no effect on the Company's financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 addresses financial accounting and reporting for
7
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs in a Restructuring)". SFAS 146 defines the timing of the recognition of
costs associated with exit or disposal activities, the types of costs that may
be recognized and the methodology for calculating the fair value of such costs.
The provisions of SFAS 146 are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not believe this
statement will have a material effect on its financial statements.
RECLASSIFICATIONS
Certain amounts in the 2000 and 1999 consolidated financial statements and
notes have been reclassified to conform to the 2001 presentation.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
(Dollars in thousands)
2001 2000
---- ----
Trade $ 31,365 $ 36,413
Less allowance for doubtful accounts (441) (670)
-------- --------
Total $ 30,924 $ 35,743
======== ========
4. NOTE RECEIVABLE
Notes receivable as of December 31, 2001, consists of an unsecured demand
note to Greentree Chemical Technologies, Inc. (Greentree) for $3,000 thousand,
due June 30, 2005. The note carried 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. Notes receivable as of December 31, 2000, consist of a $6,600
thousand 30-day demand note from 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 the unsecured demand note to
Greentree for $3,000 thousand, due June 30, 2005.
5. INVENTORIES
The components of inventories are:
(Dollars in thousands)
2001 2000
---- ----
Finished products $22,480 $27,754
Raw material and supplies 14,280 15,613
Work in process 2,580 2,042
------- -------
Total $39,340 $45,409
======= =======
6. 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.
8
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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
189,704 at December 31, 2001, and 491,488 and 926,689 at December 31, 2000 and
1999, respectively.
At December 31, 2001, under Hercules' incentive compensation plans,
1,265,493 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 2001, 2000 and 1999, respectively.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 1999, 2000 and 2001:
Regular Performance-Accelerated
------- -----------------------
Number of Weighted-average Number of Weighted-average
Shares price Shares price
------ ----- ------ -----
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
Granted 131,925 $14.22 -- --
Exercised -- -- -- --
Forfeited (40,710) $39.56 -- --
-------- ------ ------- ------
December 31, 2001 586,085 $28.01 206,625 $43.52
The weighted-average fair value of regular stock options granted during
1999, 2000 and 2001 was $8.26, $8.85 and $5.69, respectively. The
weighted-average fair value of performance-accelerated stock options granted
during 1999, 2000 and 2001 was $8.01, $0 and $0, respectively.
Following is a summary of regular stock options exercisable at December
31, 1999, 2000, and 2001, and their respective weighted-average share prices:
Options Number of Weighted-average
Exercisable Shares exercise price
----------- ------ --------------
1999 224,230 $40.49
2000 293,370 $39.20
2001 368,975 $35.01
There were no performance-accelerated stock options exercisable at
December 31, 1999, 2000 and 2001.
9
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
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Following is a summary of stock options outstanding at December 31, 2001:
Outstanding Exercisable
Options Options
---------------------------------------------------- -------------------------------
Number Weighted-average Weighted- Number Weighted-
Outstanding at Remaining average Exercisable at average
Exercise Price Range 12/31/2001 Contractual Life exercise price 12/31/2001 exercise price
-------------------- ---------- ---------------- -------------- ---------- --------------
Regular Stock Options
$11 - $20 261,725 8.90 $ 14.22 64,690 $ 16.58
$20 - $30 76,475 6.67 $ 25.56 76,475 $ 25.56
$30 - $40 135,515 6.33 $ 38.68 122,940 $ 38.77
$40 - $50 84,120 5.73 $ 47.26 84,120 $ 47.26
$50 - $60 28,250 4.56 $ 54.01 20,750 $ 55.39
------- -------
586,085 368,975
------- -------
Performance-Accelerated Stock Options
$14 - $40 104,655 6.69 $ 38.16 -- --
$40 - $50 81,270 5.70 $ 47.40 -- --
$50 - $61 20,700 4.18 $ 55.40 -- --
------- -------
206,625 --
------- -------
Hercules 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, there
are no shares of Hercules common stock registered for offer and sale under the
plan. Shares issued at December 31, 2001 and 2000, were 1,758,081 and 1,597,861,
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 1999, 2000 and 2001:
Performance
Regular Accelerated Employee Stock
Assumption Plan Plan Purchase Plan
---------- ---- ---- -------------
Dividend yield 0.96% 3.83% 0.0%
Risk-free interest rate 5.80% 5.57% 4.86%
Expected life 7.1 yrs. 5 yrs. 3 mos.
Expected volatility 33.36% 29.78% 49.11%
The Company's net income and earnings per share for 2001, 2000 and 1999
would approximate the pro forma amounts below:
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Net income
As reported $41,840 $28,198 $36,971
Pro forma $41,070 $26,573 $35,422
10
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. ADDITIONAL BALANCE SHEET DETAIL
(Dollars in thousands)
2001 2000
---- ----
Property, plant, and equipment
Land $ 527 $ 527
Buildings and equipment 369,708 363,737
Construction in progress 16,185 11,909
-------- --------
Total 386,420 376,173
Accumulated depreciation and amortization 292,082 284,431
-------- --------
Net property, plant, and equipment $ 94,338 $ 91,742
======== ========
Accrued expenses
Payroll and employee benefits $ 5,416 $ 4,685
Nitrocellulose inventory disposal cost reserve 5,917 6,478
Current environmental reserve 5,222 4,686
Restructuring reserve 1,762 --
Other 6,907 8,323
-------- --------
Total $ 25,224 $ 24,172
======== ========
8. GOODWILL
Goodwill relates to Hercules' 1989 purchase of Henkel's portion of
ownership in Aqualon. At December 31, 2001 and December 31, 2000, goodwill was
$27,536 thousand and $28,550 thousand, respectively, (net of accumulated
amortization of $13,008 thousand and $11,994 thousand respectively). Through
December 31, 2001, the goodwill was being amortized over 40 years.
9. RESTRUCTURING
In 2001 and 2000, Aqualon incurred $6,000 thousand and $1,662 thousand,
respectively, in other operating expenses related to employee severance benefits
for workforce reductions at Parlin, NJ, Louisiana, MO, and Hopewell, VA,
manufacturing sites and Wilmington, DE headquarters in business support
functions.
During 2001, management authorized and committed to a plan to reduce the
workforce as part of the comprehensive cost reduction and work process redesign
program. Under this plan, 97 employees have left or will leave Aqualon, of which
74 employees were terminated pursuant to this plan through December 31, 2001.
The 2000 restructuring costs are related to workforce reductions in the
Aqualon manufacturing cost reduction plan. The total number of employee
terminations relating to the 2000 plan is 35, and the actions under the 2000
plan are complete.
Severance benefits were paid in accordance with Hercules' standard
severance pay plan. A reconciliation of activity with respect to the liabilities
established for these plans is as follows:
(Dollars in thousands)
2001 2000
---- ----
Balance at beginning of year $ -- $ --
Additional termination benefits and other exit costs 6,000 1,662
Cash payments (4,238) (1,662)
------- -------
Balance at end of year $ 1,762 $ --
======= =======
11
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. 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 $1,719 thousand, $3,367
thousand, and $3,810 thousand for the years ended December 31, 2001, 2000 and
1999, respectively, and post-retirement benefit expense was $2,125 thousand,
$2,462 thousand, and $1,774 thousand for the years ended December 31, 2001, 2000
and 1999, respectively.
11. OTHER OPERATING EXPENSES, NET
Other operating expenses, net, consists of the following:
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Loss on disposal of Nitrocellulose $ -- $ 25,241 $ 6,500
Asset impairments -- -- 2,000
Environmental charges 2,344 2,617 3,020
Restructuring charges 6,000 1,662 446
Royalties received (10,473) (7,613) (8,474)
Other -- 352 62
-------- -------- -------
Total $ (2,129) $ 22,259 $ 3,554
======== ======== =======
In 1999, the remaining Nitrocellulose fixed assets at Parlin, NJ were
deemed to be impaired.
12. 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 (parent).
13. NET PARTNERS' (HERCULES GROUP) INVESTMENT
Changes in net partners' (Hercules Group) investment were as follows:
(Dollars in thousands)
Balance, January 1, 1999 $ 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
Net income 41,840
Intercompany transactions, net (49,016)
---------
Balance, December 31, 2001 $ 148,777
=========
12
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
14. 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 $20,316 thousand has been expended as of December 31, 2001.
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 and $58,526 thousand
in 2000 and 1999, respectively.
15. COMMITMENTS AND CONTINGENCIES
Leases
Aqualon has operating leases (including office space, transportation, and
data processing equipment) expiring at various dates. Rental expense was $1,533
thousand in 2001, $553 thousand in 2000, and $661 thousand in 1999.
At December 31, 2001, minimum rental payments under noncancelable leases
aggregated $737 thousand. The net minimum payments over the next five years are
$403 thousand in 2002, $242 thousand in 2003, $61 thousand in 2004, $22 thousand
in 2005, and $9 thousand in 2006.
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, 2001 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 $42 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; 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, 2001, 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, 2001, Aqualon had $4.3 million in letters of credit
outstanding with lenders.
16. 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 allocations: As discussed in Note 1, 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, 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
13
AQUALON COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
selling, general and administrative line item in the statement of operations.
Such allocations and corporate charges totaled $16,433 thousand, $15,313
thousand, and $21,444 thousand in 2001, 2000 and 1999, 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 $10,473 thousand, $7,613 thousand, and $8,474 thousand in
2001, 2000 and 1999, 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 $21,391 thousand, $23,457 thousand, and $23,598
thousand in 2001, 2000 and 1999, respectively.
17. SUBSEQUENT EVENTS
On April 29, 2002, Hercules completed the sales of its Water Treatment
Business to GE Specialty Materials (GESM). Pursuant to the Stock and Asset
Purchase Agreement for the transaction, the sale included the stock of
BetzDearborn Inc. and certain specified assets and liabilities. Hercules used
the proceeds from the sale to prepay borrowings under its Facilities. Pursuant
to the prepayment, among other things, the Company's stock, which had been
pledged as collateral to the Facilities, was released.
14
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, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001 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
December 9, 2002
15
BETZDEARBORN INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE LOSS
(Dollars in millions)
Year Ended December 31,
2001 2000 1999
-------- -------- --------
Sales to third parties $ 1,105 $ 1,170 $ 1,203
Sales to Hercules Group 89 108 69
-------- -------- --------
1,194 1,278 1,272
Cost of sales 581 632 588
Selling, general, and administrative expenses 379 404 423
Corporate and other cost allocations 35 27 19
Research and development 16 20 36
Goodwill and intangible asset amortization 61 71 70
Other operating expenses, net (Note 14) 55 22 11
-------- -------- --------
Profit from operations 67 102 125
Interest expense, net 21 30 37
Other expense, net (Note 16) 7 2 --
-------- -------- --------
Income before income taxes and minority interest 39 70 88
Provision for income taxes (Note 19) 32 40 51
-------- -------- --------
Income before minority interest 7 30 37
Minority interest 3 5 4
-------- -------- --------
Net income 4 25 33
Additional minimum pension liability, net of tax (15) -- --
Translation adjustments (41) (46) (47)
-------- -------- --------
Comprehensive loss $ (52) $ (21) $ (14)
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
16
BETZDEARBORN INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
December 31,
2001 2000
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 25 $ 21
Accounts receivable, net (Note 3) 173 215
Miscellaneous receivable 15 15
Inventories (Note 4) 83 91
Deferred income taxes (Note 19) 18 20
-------- --------
Total current assets 314 362
-------- --------
Property, plant, and equipment, net (Note 9) 270 304
Investments in affiliates (Note 5) 150 150
Goodwill and other intangible assets, net (Note 10) 2,212 2,276
Prepaid pension (Note 13) 15 13
Deferred charges and other assets 57 57
-------- --------
Total assets $ 3,018 $ 3,162
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Current income tax liability $ 38 $ 62
Accounts payable 64 69
Short-term debt (Note 6) 8 26
Accrued expenses (Note 9) 74 93
-------- --------
Total current liabilities 184 250
Long term debt (Note 7) 148 181
Deferred income taxes (Note 19) 259 262
Pension and other postretirement benefits (Note 13) 45 34
Deferred credits and other liabilities 7 8
-------- --------
Total liabilities 643 735
Commitments and contingencies (Note 17) -- --
Minority Interest 22 23
Net Hercules Group Investment (Note 15)
Accumulated other comprehensive loss (133) (77)
Intercompany balances, net 2,486 2,481
-------- --------
Total Net Hercules Group Investment 2,353 2,404
-------- --------
Total liabilities and Net Hercules Group Investment $ 3,018 $ 3,162
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
17
BETZDEARBORN INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
Year Ended December 31,
2001 2000 1999
------ ------ ------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 4 $ 25 $ 33
Adjustments to reconcile net income to net cash provided by operations:
Depreciation 35 48 45
Amortization 61 71 70
Loss on disposal 15 3 --
Deferred income taxes (5) 19 9
Minority interest 3 5 4
Corporate and other cost allocations 35 27 19
Other noncash charges (income) -- 5 (2)
Accruals and deferrals of cash receipts and payments:
Accounts and miscellaneous receivables 42 91 (65)
Inventories 8 30 8
Accounts payable and accrued expenses (24) (66) 12
Noncurrent assets and liabilities 14 (67) (6)
Transfers (to) from Hercules Group from operations (223) (97) 12
------ ------ ------
Net cash (used in) provided by operations (35) 94 139
------ ------ ------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (15) (27) (28)
Proceeds from fixed asset disposals 2 13 9
Other, net (3) (13) (10)
------ ------ ------
Net cash used in investing activities (16) (27) (29)
------ ------ ------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds -- 6 --
Long-term debt repayments (33) (9) (82)
Changes in short-term debt (18) (2) 16
Transfers from (to) Hercules Group 108 (75) (33)
------ ------ ------
Net cash used in financing activities 57 (80) (99)
------ ------ ------
Effect of exchange rate changes on cash (2) 2 (4)
------ ------ ------
Net increase (decrease) in cash and cash equivalents 4 (11) 7
Cash and cash equivalents at beginning of year 21 32 25
------ ------ ------
Cash and cash equivalents at end of year $ 25 $ 21 $ 32
====== ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 22 $ 29 $ 37
Income taxes, net 61 34 14
Noncash financing activities:
Corporate and other cost allocations 35 27 19
The accompanying notes are an integral part of the
consolidated financial statements.
18
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.
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 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 interests.
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.
On April 29, 2002, in connection with Hercules' sale of its Water
Treatment Business (see Note 20) and the repayment of the Facilities, the stock
pledges were released. As a result, based on Hercules' current debt structure,
these separate company stand-alone financial statements will not be required for
the fiscal year ending December 31, 2002.
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.
19
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, which is to charge repairs and maintenance to expense and capitalize
replacements or betterments. 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. 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, 2001, 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 net book value 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.
Pursuant to Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" (SFAS 142), beginning January 1, 2002, goodwill
will not be amortized but will be tested for impairment annually and any
necessary adjustment charged to expense. Intangible assets with finite lives
will be amortized over their useful lives.
20
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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
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 since acquisition have 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.
21
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"), and SFAS No. 142. SFAS 141 supersedes Accounting Principles Board
Opinion ("APB") No. 16, Business Combinations. The provisions of SFAS 141 (1)
require that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, (2) provide specific criteria for
the initial recognition and measurement of intangible assets apart from goodwill
and (3) require that unamortized negative goodwill be written off immediately as
extraordinary gain instead of being deferred and amortized. SFAS 141 also
requires that upon adoption of SFAS 142 the Company reclassify the carrying
amounts of certain intangible assets into or out of goodwill, based on certain
criteria. SFAS 142 supersedes APB No. 17, Intangible Assets, and is effective
for fiscal years beginning after December 15, 2001. SFAS 142 primarily addresses
the accounting for goodwill and intangible assets subsequent to their initial
recognition. The provisions of SFAS 142 (1) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), based on
fair value (as opposed to cost recovery using future undiscounted cash flows),
(3) require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill and (4) remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.
Effective January 1, 2002 Hercules adopted the provisions of SFAS 142.
Hercules identified the following reporting units: BetzDearborn, Pulp and Paper,
Aqualon, FiberVisions and Resins. In connection with Hercules' transitional
review, recorded goodwill was determined to be impaired in the BetzDearborn and
FiberVisions reporting units. In the first quarter 2002, Hercules completed its
transitional impairment review of the identified reporting units and recognized
an after tax impairment loss of $368 million as a cumulative effect of a change
in accounting principle, of which $263 million related to the BetzDearborn
reporting unit. As a result of Hercules' adoption of SFAS 142, the Company will
no longer record $61 million of annual amortization relating to existing
goodwill and intangibles.
Goodwill related to the BetzDearborn business was evaluated for impairment
at December 31, 2001 under Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of". Such evaluation indicated that goodwill associated with the
business was recoverable from anticipated future undiscounted cash flows.
Accordingly, no impairment loss was recorded in the December 31, 2001 financial
statements.
In June 2001, the Financial Accounting Standards Board ("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. The Company does not believe this statement will have a material
effect on its financial statements.
On January 1, 2002, the Company adopted 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 Company does not believe
this statement will have a material effect on its financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment to FASB
Statement No. 13, and Technical Corrections." The Company has elected to early
adopt the provisions of SFAS 145 related to the rescission of SFAS 4, "Reporting
Gains and Losses from the Extinguishment of Debt" ("SFAS 4"). The early adoption
of SFAS 145 had no effect on the Company's financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 addresses financial accounting and reporting for
22
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs in a Restructuring)". SFAS 146 defines the timing of the recognition of
costs associated with exit or disposal activities, the types of costs that may
be recognized and the methodology for calculating the fair value of such costs.
The provisions of SFAS 146 are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not believe this
statement will have a material effect on its financial statements.
RECLASSIFICATIONS
Certain amounts in the 2000 and 1999 consolidated financial statements and
notes have been reclassified to conform to the 2001 presentation.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
(Dollars in millions)
2001 2000
------ ------
Trade $ 189 $ 233
Less allowance for doubtful accounts (16) (18)
------ ------
Total $ 173 $ 215
====== ======
4. INVENTORIES
The components of inventories are:
(Dollars in millions)
2001 2000
------ ------
Finished products $ 48 $ 54
Materials, supplies and work in process 35 37
------ ------
Total $ 83 $ 91
====== ======
Inventories valued on the LIFO method were lower than if valued under the
average-cost method, which approximates current cost, by $1 million and $0 at
December 31, 2001, and 2000 respectively.
5. INVESTMENTS
Total investments in affiliated companies were as follows:
(Dollars in millions)
2001 2000
------ ------
Investment in Hercules International Limited $ 137 $ 137
Investment in Hercules Quimica SA 13 13
------ ------
Total $ 150 $ 150
====== ======
At December 31, 2001 the Company's 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 of Hercules Quimica S.A. at December 31, 2001 and 2000 equals its share of
the underlying equity in net assets of the affiliate. The investment in Hercules
International Limited is recorded at cost at December 31, 2001 and 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.
23
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. SHORT-TERM DEBT
A summary of short-term debt follows:
(Dollars in millions)
2001 2000
------ ------
Banks $ 4 $ 21
Current maturities of long-term debt 4 5
------ ------
$ 8 $ 26
====== ======
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, 2001, the Company had $7 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, 2001,
were $4 million. Weighted-average interest rates on short-term borrowings at
December 31, 2001 and 2000 were 15% and 5.66%, respectively.
7. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt with third parties at December 31, 2001 and 2000 is
summarized below.
(Dollars in millions)
2001 2000
------ ------
Canadian revolving loan facility (a) $ 65 $ 83
ESOP debt (b) 84 101
Other 3 2
------ ------
152 186
Less current maturities of long-term debt 4 5
------ ------
$ 148 $ 181
====== ======
(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
65% of its common stock 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. Effective
November 14, 2000, the ESOP credit facility together with the
Hercules senior credit facility were amended. The senior credit
facility and ESOP credit facility, as amended are secured by liens
on the Hercules' property and assets, a pledge of the stock of the
Company and all its domestic subsidiaries and 65% of the stock of
first tier foreign subsidiaries and a pledge of domestic
intercompany indebtedness. Effective with the third amendment, the
interest rate was increased to 11.95%.
Effective January 23, 2001, as a result of the lowered credit rating
of Hercules, the interest rate on the loan and guarantee increased
to 12.95%. As a result of Hercules' divestiture in May 2001 of the
Eastman and Peroxide businesses, the Company was required to use a
portion of the proceeds to prepay the ESOP facility. Hercules paid
$13 million against the loan principal, resulting in the incurrence
of $5 million in pre-payment penalties which were expensed. Both
Hercules' senior credit facility and the ESOP credit facility
require quarterly compliance with certain financial covenants.
Effective March 6, 2002, the facilities were amended to (i) modify
certain financial covenants; (ii) change the mandatory prepayment
provisions; (iii) permit the reorganization of the Company in order
to effect the separation of the Water Treatment Business; and (iv)
permanently reduce the revolving committed amount
24
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
under the credit facility to $200 million. The amendment to the
credit facility also included provisions that are effective only
upon the consummation of the sale of the Water Treatment Business
and the prepayment of the credit facility, which occurred on April
29,2002. These additional provisions include the following: (i) the
release of the subsidiary stock pledge to the collateral agent; (ii)
the elimination of the requirement that stock of any additional
subsidiaries be pledged in the future; and (iii) the revision of the
permitted amount of asset purchases and dispositions.
Hercules used the net proceeds of approximately $1.7 billion from the sale
of the Water Treatment Business to pay in full the amounts outstanding under the
Facilities. Concurrently, the Canadian revolving credit facility was cancelled.
For the year ended 2001, the Company has $130 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 2000, the
Company had $289 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 2001, 2000 and 1999 was $21 million, $30 million,
and $37 million respectively, of which $16 million, $19 million and $25 million
respectively, was 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
189,704 at December 31, 2001, and 491,488 and 926,689 at December 31, 2000 and
1999, respectively.
At December 31, 2001, under Hercules' incentive compensation plans,
1,265,493 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 2001, 2000 and 1999, respectively.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 1999, 2000 and 2001:
25
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Regular Performance-Accelerated
Number of Weighted-average Number of Weighted-average
Shares Price Shares Price
--------------------------- ------------------------------
December 31, 1998 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
Granted 290,875 $11.28 - -
Exercised - - - -
Forfeited (39,800) $28.46 (1,500) $35.96
--------------------------------------------------------------------------------
December 31, 2001 722,650 $20.76 103,683 $37.27
The weighted-average fair value of regular stock options granted during
1999, 2000 and 2001 was $8.25, $8.84 and $5.69, respectively. The
weighted-average fair value of performance-accelerated stock options granted
during 1999, 2000 and 2001 was $7.99, $0 and $0, respectively.
Following is a summary of regular stock options exercisable at December
31, 1999, 2000 and 2001, 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
December 31, 2001 315,630 $29.09
There were no performance-accelerated stock options exercisable at
December 31, 1999, 2000 and 2001.
Following is a summary of stock options outstanding at December 31, 2001:
Outstanding Options Exercisable Options
Number Weighted-average Weighted- Number Weighted-
Outstanding at Remaining average Exercisable at average
Exercise Price Range 12/31/01 Contractual Life Exercise Price 12/31/01 Exercise Price
-------------------- -------------- ---------------- -------------- -------------- --------------
Regular Stock Options
$11 - $20 513,475 9.00 $13.81 131,325 $16.77
$30 - $40 206,225 7.15 $37.69 181,355 $37.70
$40 - $50 2,950 6.35 $47.81 2,950 $47.81
--------- ---------
722,650 315,630
========= =========
Performance-Accelerated Stock Options
$14 - $40 103,683 7.37 $37.27 - -
--------- ---------
103,683 -
========= =========
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
26
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, there
are no shares of Hercules common stock registered for offer and sale under the
plan. Shares issued at December 31, 2001 and 2000, were 1,758,081 and 1,597,861,
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 2001, 2000 and 1999:
Performance Employee Stock
Assumption Regular Plan Accelerated Plan Purchase Plan
---------- ------------ ---------------- --------------
Dividend yield 0.96% 3.83% 0.0%
Risk-free interest rate 5.80% 5.57% 4.86%
Expected life 7.1 5 yrs. 3 mos.
Expected volatility 33.36% 29.78% 49.11%
The Company's net income and earnings per share for 2001, 2000 and 1999
would approximate the pro forma amounts below:
(Dollars in millions)
2001 2000 1999
------ ------ ------
Net income
As reported $ 4 $ 25 $ 33
Pro forma $ 3 $ 24 $ 33
9. ADDITIONAL BALANCE SHEET DETAIL
(Dollars in millions)
2001 2000
------ ------
Property, plant, and equipment
Land $ 19 $ 22
Buildings and equipment 396 399
Construction in progress 6 16
------ ------
Total 421 437
Accumulated depreciation and amortization 151 133
------ ------
Net property, plant, and equipment $ 270 $ 304
====== ======
Accrued expenses
Payroll and employee benefits $ 19 $ 29
Claims and litigation 3 8
Restructuring reserves (Note 11) 17 24
Other 35 32
------ ------
Total $ 74 $ 93
====== ======
27
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
At December 31, 2001 and 2000, the goodwill and identified intangible
assets, net were:
(Dollars in millions)
2001 2000
-------- --------
Goodwill $ 1,692 $ 1,692
Customer relationships 330 330
Trademarks and tradenames 250 250
Other intangibles 145 145
-------- --------
Total 2,417 2,417
Less accumulated amortization (205) (141)
-------- --------
Net goodwill and other intangible assets $ 2,212 $ 2,276
======== ========
11. RESTRUCTURING
The consolidated balance sheet reflects liabilities for employee severance
benefits and other exit costs of $17 million and $24 million, respectively, at
December 31, 2001 and 2000. During the third quarter of 2001, management
authorized and committed to a plan to reduce the workforce as part of the
comprehensive cost reduction and work process redesign program. The Company
incurred restructuring charges of $16 million, for employee termination benefits
and exit costs related to facility closures. Under this plan, approximately 377
employees have left or will leave the Company. The plan includes reductions
throughout the Company with the majority of them from support functions as well
as the BetzDearborn and Pulp and Paper units.
The restructuring liabilities also include amounts relating to the 1998
plan initiated upon the acquisition of BetzDearborn and additional plans that
the Company committed to in 2000 relating to the restructuring of the
BetzDearborn and Pulp and Paper units. As a result of these plans, we estimate
approximately 1,554 employees will be terminated, most of which have occurred
since the inception of the aforementioned plans. Actions under the 1998 and 2000
plans were substantially complete as of December 31, 2000 and December 31, 2001,
respectively.
Pursuant to the above plans, approximately 374 employees were terminated
during the year ended December 31, 2001. Cash payments during 2001 and 2000
included $16 million and $23 million, respectively, for severance benefits and
other exit costs. Severance benefits paid during the current year represent the
continuing benefit streams of previously terminated employees as well as those
terminated in the current year. During the second and third quarters of 2001,
the Company completed assessments of the remaining expenditures for the 1998
BetzDearborn plan and the 2000 plans, respectively. As a result of these
assessments, the estimates for severance benefits and other exit costs were
lowered by $22 million, with corresponding reductions to goodwill of $10 million
and $12 million, respectively. 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:
(Dollars in millions)
2001 2000
------ ------
Balance at beginning of year $ 24 $ 56
Cash payments (16) (23)
Additional termination benefits and exit costs 22 3
Reversals against goodwill (10) (12)
Other (3) --
------ ------
Balance at end of year $ 17 $ 24
====== ======
12. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
In connection with the acquisition of BetzDearborn in 1998, the Company
acquired BetzDearborn's 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 $75 million and
$91 million at December 31, 2001
28
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
and 2000, respectively, which is guaranteed by Hercules. Upon acquisition, the
debt had a fair value in excess of its recorded amount for which a $16 million
step-up was recorded and is being amortized over the remaining term of the debt.
The fair value, included in long-term debt, was $84 million and $101 million at
December 31, 2001 and 2000, 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.
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 net Hercules Group Investment on the balance sheet for $104 million
and $115 million at December 31, 2001 and 2000, respectively.
2001 2000
--------- ---------
Allocated 2,075,687 1,858,459
Unallocated 3,228,690 3,582,334
--------- ---------
Total shares held by ESOP 5,304,377 5,440,793
========= =========
The ESOP expense is calculated using the shares-allocated method and
includes net interest incurred on the debt of $8 million, $6 million and $5
million for 2001, 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)
2001 2000 1999
------ ------ ------
ESOP expense $ 19 $ 13 $ 13
Common stock dividends (charged to net Hercules Group
Investment) -- (3) (6)
------ ------ ------
Net ESOP expense 19 10 7
------ ------ ------
ESOP Contributions $ 15 $ 10 $ 9
====== ====== ======
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 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 were $6 million, $8 million
and $7 million for the years ended December 31, 2001, 2000 and 1999,
respectively, and post-retirement benefit expense was $5.1 million, $1 million
and $.6 million for the years ended December 31, 2001, 2000 and 1999,
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.
29
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
Pension benefits
2001 2000
----- -----
CHANGE IN BENEFIT OBLIGATION
Benefit Obligation at January 1 $ 108 $ 104
Service cost 3 4
Interest cost 7 6
Assumption change 1 1
Employee contributions 1 1
Translation adjustment (4) (8)
Actuarial loss (gain) 11 3
Benefits paid from plan assets (3) (3)
----- -----
Benefit Obligation at December 31 $ 124 $ 108
----- -----
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 $ 125 $ 127
Actual return plan assets (12) 7
Employee contributions 1 1
Company contributions 2 3
Actuarial loss (gain) -- (2)
Translation adjustment (4) (8)
Benefits paid from plan assets (3) (3)
----- -----
Fair value of plan assets at December 31 $ 109 $ 125
----- -----
Funded status of the plans $ (15) $ 17
Unrecognized actuarial (gain)/loss 29 (4)
Unrecognized prior service cost 1 --
----- -----
Prepaid benefit cost $ 15 $ 13
----- -----
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL
POSITION CONSIST OF:
Additional minimum liability $(22) $ --
Intangible asset 1 --
Other comprehensive income 21 --
Prepaid benefit cost 15 13
----- -----
$ 15 $ 13
----- -----
ASSUMPTIONS AS OF DECEMBER 31
Weighted average discount rate 7.25% 6.5%
Expected return on plan assets 9.25% 6.7%
Rate of compensation increase 4.50% 4.5%
Health care term rate N/A N/A
2001 2000 1999
---- ---- ----
COMPONENTS OF NET PERIODIC PENSION COST:
Service cost $ 3 $ 4 $ 4
Interest cost 7 6 6
Return on plan assets expected (10) (9) (8)
---- ---- ----
Benefit cost $ -- $ 1 $ 2
---- ---- ----
30
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. OTHER OPERATING EXPENSES, NET
Other operating expenses, net, consist of the following:
(Dollars in millions)
2001 2000 1999
---- ---- ----
Loss on asset dispositions $ 8 $ 3 $ --
Integration expenses -- 2 9
Royalties expense, net 25 16 (1)
Restructuring charges 16 1 2
Other 6 -- 1
---- ---- ----
$ 55 $ 22 $ 11
==== ==== ====
15. NET HERCULES GROUP INVESTMENT
Changes in Net Hercules Group Investment were as follows:
(Dollars in millions)
Balance, January 1, 1999 $ 2,541
Net income 33
Other comprehensive loss (47)
Impact of shares held by ESOP 8
Intercompany balances, net (102)
-------
Balance, December 31, 1999 $ 2,433
Net income 25
Other comprehensive loss (46)
Impact of shares held by ESOP 7
Intercompany balances, net (15)
-------
Balance, December 31, 2000 $ 2,404
Net income 4
Other comprehensive loss (56)
Impact of shares held by ESOP 11
Intercompany balances, net (10)
-------
Balance, December 31, 2001 $ 2,353
=======
The Company includes accumulated other comprehensive loss in Net Hercules
Group Investment. At December 31, 2001 accumulated and other comprehensive
losses consisted of an additional minimum pension liability and foreign currency
translation adjustments of $15 million and $118 million respectively. At
December 31, 2000 and 1999, accumulated other comprehensive losses included $77
million and $31 million of foreign currency translation adjustments,
respectively.
16. OTHER EXPENSE, NET
(Dollars in millions)
2001 2000 1999
---- ---- ----
Foreign currency transaction losses $ 1 $ 5 $ 5
Miscellaneous (income) expense 8 (2) (4)
Equity in (income) of affiliated company (2) (1) (1)
--- --- ---
$ 7 $ 2 $--
=== === ===
31
BETZDEARBORN INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $27
million in 2001, $22 million in 2000 and $18 million in 1999.
At December 31, 2001, minimum rental payments under noncancelable leases
aggregated $30 million. The net minimum payments over the next five years are
$11 million in 2002, $9 million in 2003, $7 million in 2004, $2 million in 2005
and $1 million in 2006 and thereafter.
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, 2001 and 2000, the consolidated balance sheet reflects a
current liability of approximately $3 million and $8 million, respectively, 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 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, 2001. 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,
2001, 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, 2001, the Company had $1.8 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 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
32
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $45
million, $62 million and $56 million for the years ended 2001, 2000 and 1999
respectively.
Intercompany borrowing and interest: The Company has $130 and $289 million
of intercompany loans with affiliated entities in 2001 and 2000, 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 $16 million and $19 million in 2001 and 2000,
respectively.
19. INCOME TAXES
The components of domestic and foreign income before taxes and minority
interest are presented below:
(Dollars in millions)
2001 2000 1999
---- ---- ----
Domestic $ 35 $ 46 $ 78
Foreign 4 24 10
---- ---- ----
$ 39 $ 70 $ 88
==== ==== ====
A summary of the components of the tax provision follows:
(Dollars in millions)
2001 2000 1999
---- ---- ----
Currently payable
Domestic $ 26 $ 11 $ 37
Foreign 11 10 5
Deferred
Domestic (1) 17 5
Foreign (4) 2 4
---- ---- ----
Provision for income taxes $ 32 $ 40 $ 51
==== ==== ====
33
BETZDEARBORN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax liabilities (assets) at December 31, consist of the following:
(Dollars in millions)
2001 2000
---- ----
Depreciation $ 34 $ 36
Intangible asset revaluation $ 1 $ --
Amortization of intangible asset 241 249
Prepaid pension and post-retirement benefits 1 4
Other 2 2
----- -----
Gross deferred tax liabilities 279 291
Pension and other postretirement benefits (19) (26)
Accrued expenses (6) (17)
Loss carryforwards (18) (15)
Inventory (4)
Other (8) (6)
----- -----
Gross deferred tax assets (55) (64)
----- -----
Valuation allowance 17 15
----- -----
$ 241 $ 242
===== =====
A reconciliation of the statutory income tax rate to the effective rate follows:
2001 2000 1999
---- ---- ----
Statutory income tax rate 35.00% 35.00% 35.00%
Goodwill amortization 42.21 20.73 17.76
Non-deductible expenses 1.72 2.88 2.97
Valuation allowance 3.38 2.87 4.82
Other -- (4.35) (2.60)
----- ----- -----
Effective tax rate 82.31% 57.13% 57.95%
===== ===== =====
The Company provides taxes on undistributed earnings of foreign 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
foreign earnings of subsidiaries and affiliates on which no provision for
foreign withholding or U.S. income taxes has been made amounted to approximately
$41 million, $42 million and $27 million at December 31, 2001, 2000 and 1999,
respectively.
20. SUBSEQUENT EVENT
On April 29, 2002, Hercules completed the sale of its Water Treatment
Business to GE Specialty Materials (GESM). Pursuant to the Stock and Asset
Agreement for the transaction, the sale included all of the stock of
BetzDearborn and the Company. Hercules used the proceeds from the sale to prepay
borrowings under its Senior Credit Facility and ESOP Credit Facility. Pursuant
to the prepayment, among other things, the stock pledges were released.
34
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
BetzDearborn Canada, Inc., a subsidiary of Hercules Incorporated, and its
majority controlled partnership at December 31, 2001 and 2000 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001 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
January 25, 2002, except for note 2, New accounting pronouncements, and note 18,
Subsequent event, which are as of November 8, 2002
35
BETZDEARBORN CANADA, INC.
Consolidated Statements of Operations and Comprehensive (Loss) Income
------------------------------------------------------------------------------
(thousands of U.S. dollars)
Year ended December 31,
2001 2000 1999
--------- --------- ---------
Sales to third parties $ 136,404 $ 167,668 $ 158,833
Sales to Hercules Group 13,420 10,844 7,033
--------- --------- ---------
Net sales 149,824 178,512 165,866
Cost of sales 86,942 107,811 94,629
Selling, general and administrative expenses 35,827 40,979 48,114
Goodwill and intangible asset amortization 7,825 8,137 8,056
Other operating expense 11,367 6,487 5,203
--------- --------- ---------
Profit from operations 7,863 15,098 9,864
Interest and debt expense 4,996 5,075 7,717
Interest income (1,071) (1,090) (529)
Other expense (income) (note 12) 1,057 540 (1,266)
--------- --------- ---------
Income before income taxes 2,881 10,573 3,942
Provision for income taxes (note 13) 2,205 5,362 2,685
--------- --------- ---------
Income before minority interest 676 5,211 1,257
Minority interest - held by affiliate 1,726 4,003 3,221
--------- --------- ---------
Net (loss) income (1,050) 1,208 (1,964)
Translation adjustments (15,359) (8,897) 16,261
--------- --------- ---------
Comprehensive (loss) income $ (16,409) $ (7,689) $ 14,297
========= ========= =========
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
36
BETZDEARBORN CANADA, INC.
Consolidated Balance Sheets
-------------------------------------------------------------------------------
(thousands of U.S. dollars)
December 31,
2001 2000
--------- ---------
ASSETS
Current assets
Cash and cash equivalents $ -- $ 4
Accounts receivable - net (note 3) 21,619 28,896
Inventories (note 4) 10,886 13,465
Assets held for sale 3,419 --
--------- ---------
Total current assets 35,924 42,365
Property, plant and equipment - net (note 8) 15,155 21,595
Goodwill and other intangible assets - net (note 9) 265,197 288,307
Pension and other post-retirement benefits (note 11) 4,388 5,095
Deferred charges and other assets 736 773
--------- ---------
Total assets $ 321,400 $ 358,135
========= =========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Bank overdraft (note 5) $ 3,298 $ 1,351
Accounts payable 11,377 10,272
Accrued expenses (note 8) 11,035 4,415
--------- ---------
Total current liabilities 25,710 16,038
Long-term debt (note 6) 65,427 83,434
Deferred income taxes (note 13) -- 2,449
Deferred charges 235 --
--------- ---------
Total liabilities 91,372 101,921
--------- ---------
Commitments and contingencies (note 16) -- --
--------- ---------
Minority interest - held by affiliate 7,442 11,874
--------- ---------
Net Hercules Group investment (note 15)
Accumulated other comprehensive (loss) income (10,517) 4,842
Intercompany transactions (note 14) 233,103 239,498
--------- ---------
Net Hercules Group investment 222,586 244,340
--------- ---------
Total liabilities and net Hercules Group investment $ 321,400 $ 358,135
========= =========
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
37
BETZDEARBORN CANADA, INC.
Consolidated Statements of Cash Flows
-------------------------------------------------------------------------------
(thousands of U.S. dollars)
Year ended December 31,
2001 2000 1999
-------- -------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,050) $ 1,208 $ (1,964)
Adjustments to reconcile net income (loss) to net cash
provided from operations:
Minority interest - held by affiliate 1,726 4,003 3,221
Depreciation 2,634 2,492 2,175
Amortization 7,825 8,137 8,056
Loss on disposals of property, plant and equipment -- -- 9
Write-off of property, plant and equipment 906 21 --
Deferred tax (recovery) expense (2,296) 776 1,902
Pension and other post-retirement benefits expense 626 496 895
Corporate and other cost allocations 1,180 3,067 5,738
Accruals and deferrals of cash receipts and payments
Accounts receivable 8,047 (3,445) (2,261)
Income taxes receivable/payable (1,075) 2,888 (2,510)
Inventories 2,967 973 (1,797)
Prepaid expenses -- -- 320
Pension and other post-retirement benefit contributions (173) (902) (785)
Accounts payable and accrued expenses 8,064 1,312 (1,453)
Non-current assets and liabilities 322 (558) (11)
Transfers (to) from Hercules Group (14,518) 2,793 (3,517)
-------- -------- --------
Net cash provided by operations 15,185 23,261 8,018
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (1,552) (2,424) (3,493)
Software expenditures -- (114) --
Proceeds of disposal of property, plant and equipment -- -- 295
-------- -------- --------
Net cash used in investing activities (1,552) (2,538) (3,198)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Transfers from (to) Hercules Group 5,649 (13,566) 80,796
Long-term debt repayments (14,454) (54) (87,510)
Payments to minority interest - affiliated company (6,524) (7,904) --
Increase (decrease) in bank overdraft 1,947 (970) 1,677
-------- -------- --------
Net cash used in financing activities (13,382) (22,494) (5,037)
-------- -------- --------
Effect of exchange rate changes on cash (255) (338) 138
-------- -------- --------
Net decrease in cash and cash equivalents (4) (2,109) (79)
Cash and cash equivalents - Beginning of year 4 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 $ 5,032 $ 5,256 $ 7,698
Income taxes 5,573 1,747 3,051
Non-cash financing activities:
Corporate and other cost allocations $ 1,180 $ 3,067 $ 5,738
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
38
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, were 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 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.
On April 29, 2002, in connection with Hercules' sale of its Water
Treatment Business (Water Treatment Business) (notes 6 and 18) and the
repayment of the Facilities, the stock pledges were released. As a result,
based on Hercules' current debt structure, these separate company
stand-alone financial statements will not be required for the fiscal year
ending December 31, 2002.
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 a 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
$2,170 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.
39
BETZDEARBORN CANADA, INC.
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
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.
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. Gross shipping and handling
charges are included in revenue with the corresponding shipping and
handling costs 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 net book value of property (less proceeds of sale or
salvage) is charged to income.
40
BETZDEARBORN CANADA, INC.
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
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 consolidated statements of operations. 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 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 (loss) income, a component
of net Hercules Group investment.
Transactions in foreign currency are recorded at the exchange rate
prevailing on the date of the 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 consolidated statements of
operations.
41
BETZDEARBORN CANADA, INC.
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
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 2001, the Financial Accounting Standards Board (FASB) issued
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). SFAS 141
supersedes Accounting Principles Board Opinion (APB) No. 16, Business
Combinations. The provisions of SFAS 141 (1) require that the purchase
method of accounting be used for all business combinations initiated after
June 30, 2001, (2) provide specific criteria for the initial recognition
and measurement of intangible assets apart from goodwill and (3) require
that unamortized negative goodwill be written off immediately as
extraordinary gain instead of being deferred and amortized. SFAS 141 also
requires that upon adoption of SFAS 142, the Company reclassify the
carrying amounts of certain intangible assets into or out of goodwill,
based on certain criteria. SFAS 142 supersedes APB No. 17, Intangible
Assets, and is effective for fiscal years beginning after December 15,
2001. SFAS 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their initial recognition. The provisions
of SFAS 142 (1) prohibit the amortization of goodwill and indefinite-lived
intangible assets, (2) require that goodwill and indefinite-lived
intangible assets be tested annually for impairment (and in interim
periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), based
on fair value (as opposed to cost recovery using future undiscounted cash
flows), (3) require that reporting units be identified for the purpose of
assessing potential future impairments of goodwill and (4) remove the
forty-year limitation on the amortization period of intangible assets that
have finite lives.
42
BETZDEARBORN CANADA, INC.
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Effective January 1, 2002, Hercules adopted the provisions of SFAS 142.
Hercules identified the following reporting units: BetzDearborn and Pulp
and Paper, Aqualon and Fiber Visions. In connection with Hercules'
transitional review, recorded goodwill was determined to be impaired in
the BetzDearborn reporting unit. In the first quarter of 2002, Hercules
completed its transitional impairment review of the identified reporting
units and recognized an after tax impairment loss of $368 million as a
cumulative effect of a change in accounting principle. As a result of
Hercules' adoption of SFAS 142, the Company will no longer record $7,825
thousand of annual amortization relating to existing goodwill and
intangibles.
Goodwill related to the BetzDearborn business was evaluated for impairment
at December 31, 2001 under Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of". Such evaluation indicated that
goodwill associated with the business was recoverable from anticipated
future undiscounted cash flows. Accordingly, no impairment loss was
recorded in the December 31, 2001 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 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.
The Company does not believe it will have a material effect on its
financial statements.
On January 1, 2002, the Company adopted 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 Company
does not believe it will have a material effect on its financial
statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment to
FASB Statement No. 13, and Technical Corrections". The Company elected to
early adopt the provisions of SFAS 145 related to the rescission of SFAS
4, "Reporting Gains and Losses from the Extinguishment of Debt" (SFAS 4).
The early adoption had no effect on the Company's financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" (SFAS 146). SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs in a Restructuring)". SFAS 146
defines the timing of the recognition of costs associated with exit or
disposal activities, the types of costs that may be recognized and the
methodology for calculating the fair value of such costs. The provisions
of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company is in the process of
evaluating the impact of this standard but it does not believe this
statement will have a material effect on its financial statements.
43
BETZDEARBORN CANADA, INC.
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
3 ACCOUNTS RECEIVABLE - NET
Accounts receivable - net consist of:
(thousands of U.S. dollars)
2001 2000
------- -------
Trade $21,855 $27,225
Other 596 2,672
------- -------
Gross accounts receivable 22,451 29,897
Less: Allowance for doubtful accounts 832 1,001
------- -------
Total $21,619 $28,896
======= =======
4 INVENTORIES
The components of inventories are:
(thousands of U.S. dollars)
2001 2000
------- -------
Finished products $ 5,862 $ 7,224
Materials, supplies and work-in-process 5,024 6,241
------- -------
Total $10,886 $13,465
======= =======
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, 2001, the Company had $3,097 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 unused at December 31, 2000
totalled $3,309 thousand. Weighted average interest rates on short-term
borrowings at December 31, 2001 and 2000 were 6% and 7.5%, respectively.
Lines of credit are repayable in Canadian funds.
44
BETZDEARBORN CANADA, INC.
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
6 LONG-TERM DEBT
The Company's bank loan facility of up to the equivalent of US$100 million
from select lenders in Canada (the Canadian Revolver) 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.
Effective with the consummation of the sale of the Water Treatment
Business on April 29, 2002 (Note 18) and the application of the net
proceeds by Hercules to repay in full borrowings under the Facilities,
the Canadian revolving credit agreement was cancelled.
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 $4,996 thousand (2000
- $5,075 thousand; 1999 - $7,717 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 189,704 at December 31, 2001 and
491,488 and 926,689 at December 31, 2000 and 1999, respectively.
At December 31, 2001, under Hercules' incentive compensation plans,
1,265,493 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 ten 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.
45
BETZDEARBORN CANADA, INC.
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
The Company applies APB 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 2001, 2000 and 1999,
respectively.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 1999, 2000 and 2001:
Regular
Number of Weighted-
shares average price
---------- -------------
December 31, 1998 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
Granted -- --
Exercised -- --
Forfeited -- --
---------------------------------------------------------------------------
December 31, 2001 53,950 $38.48
There were no performance-accelerated stock options granted or outstanding
during 1999, 2000 and 2001.
The weighted-average fair value of regular stock options granted during
1999 was $8.26.
Following is a summary of regular stock options exercisable at December 31,
1999, 2000 and 2001 and their respective weighted-average share prices:
Weighted-
Number of average
Options exercisable shares exercise price
--------- --------------
December 31, 1999 15,880 $39.60
December 31, 2000 33,540 38.89
December 31, 2001 47,180 38.58
46
BETZDEARBORN CANADA, INC.
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Following is a summary of stock options outstanding at December 31, 2001:
Outstanding options Exercisable options
-------------------------------------------------- -------------------------------
Number Weighted-average Weighted- Number Weighted-
outstanding at remaining average exercisable at average
December 31, contractual exercise December 31, exercise
Exercise price range 2001 life price 2001 price
-------------------- -------------- ---------------- --------- -------------- -----------
Regular stock options
---------------------
$30 - $40 53,450 6.74 $ 38.39 46,680 $ 38.48
$40 - $50 500 6.35 47.81 500 47.81
------------- ---------
53,950 47,180
============= =========
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, there are no shares of Hercules common
stock registered for offer and sale under the plan. Shares issued at
December 31, 2001 and 2000 were 1,758,081 and 1,597,861, respectively. The
Company applies APB 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 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 2001, 2000 and 1999:
Performance-
accelerated Employee Stock
Assumption Regular plan plan Purchase Plan
---------- ------------ ------------ -------------
Dividend yield 0.96% 3.83% 0.0%
Risk-free interest rate 5.80% 5.57% 4.86%
Expected life 7.1 years 5 years 3 months
Expected volatility 33.36% 29.78% 49.11%
The Company's net income (loss) for 2001, 2000 and 1999 would approximate
the pro forma amounts below:
(thousands of U.S. dollars)
2001 2000 1999
------- ------- -------
Net income (loss)
As reported $(1,050) $ 1,208 $(1,964)
Pro forma (1,107) 1,130 (2,028)
47
BETZDEARBORN CANADA, INC.
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
8 ADDITIONAL BALANCE SHEET DETAIL
(thousands of U.S. dollars)
2001 2000
------- -------
Property, plant and equipment
Land $ 142 $ 1,632
Buildings and equipment 26,783 32,134
Construction-in-progress 1,387 1,838
------- -------
Total 28,312 35,604
Less: Accumulated depreciation and amortization 13,157 14,009
------- -------
Net property, plant and equipment $15,155 $21,595
======= =======
Accrued expenses
Payroll and employee benefits $ 1,818 $ 934
Income taxes payable 2,041 3,104
Restructuring liability (note 10) 4,301 212
Other 2,875 165
------- -------
Total $11,035 $ 4,415
======= =======
9 GOODWILL AND OTHER INTANGIBLE ASSETS - NET
At December 31, 2001 and 2000, the goodwill and other intangible assets
were:
(thousands of U.S. dollars)
2001 2000
-------- --------
Goodwill $298,734 $298,734
Other intangibles 6,672 6,672
-------- --------
Total 305,406 305,406
Less: Accumulated amortization 40,209 17,099
-------- --------
Net goodwill and other intangible assets $265,197 $288,307
======== ========
48
BETZDEARBORN CANADA, INC.
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
10 RESTRUCTURING
The consolidated balance sheets reflect liabilities for employee severance
benefits and other exit costs of $4.3 million and $0.2 million,
respectively, at December 31, 2001 and 2000. During the third quarter of
2001, management authorized and committed to a plan to reduce the
workforce as part of the comprehensive cost reduction and work process
redesign program. The Company incurred restructuring charges of $4.1
million, which includes charges of $1.8 million for employee termination
benefits and $2.3 million for exit costs related to facility closures.
Under this plan, approximately 48 employees have left or will leave the
Company. The plan includes reductions throughout the Company with the
majority of them from support functions as well as the Process Chemicals
and Services segment.
The restructuring liabilities also include amounts relating to the 1998
plan initiated upon the acquisition of BetzDearborn and additional plans
that the Company committed to in 2000 relating to the restructuring of the
Process Chemicals and Services segment and corporate realignment due to
the divestiture of non-core businesses.
A reconciliation of activity with respect to the liabilities established
for these plans is as follows:
(thousands of U.S. dollars)
2001 2000
------- -------
Balance - Beginning of year $ 212 $ 2,562
Cash payments -- (2,317)
Additional termination benefits and exit costs 4,101 --
Translation adjustment (12) (33)
------- -------
Balance - End of year $ 4,301 $ 212
======= =======
Severance benefit payments are based on years of service and generally
continue for 3 to 24 months subsequent to termination. Actions under the
1998 and 1999 restructuring plans are substantially complete as of
December 31, 2001.
49
BETZDEARBORN CANADA, INC.
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
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:
(thousands of U.S. dollars)
Pension benefits Other post-retirement benefits
-------------------------- ------------------------------
2001 2000 2001 2000
-------- -------- -------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1 $ 28,092 $ 25,426 $ 1,635 $ 1,652
Service cost 1,115 1,086 42 42
Interest cost 1,998 1,994 114 115
Assumption change -- 1,371 -- --
Translation difference (1,594) (876) (95) (52)
Actuarial (loss) gain (752) (20) 64 (61)
Benefits paid from plan assets (608) (889) (61) (61)
-------- -------- -------- --------
Benefit obligation at December 31 $ 28,251 $ 28,092 $ 1,699 $ 1,635
======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at
January 1 $ 35,505 $ 34,825 $ -- $ --
Actual return on plan assets (2,250) 1,856 -- --
Company contributions 112 841 61 61
Translation difference (1,789) (1,128) -- --
Benefits paid from plan assets (608) (889) (61) (61)
-------- -------- -------- --------
Fair value of plan assets at
December 31 $ 30,970 $ 35,505 $ -- $ --
======== ======== ======== ========
Funded status of the plans $ 2,719 $ 7,413 $ (1,699) $ (1,635)
Unrecognized actuarial gain (loss) 2,824 (1,922) (214) (292)
Unrecognized prior service cost 176 269 -- --
Unrecognized net transition
obligation (525) (26) 1,107 1,288
-------- -------- -------- --------
Prepaid (accrued) benefit cost $ 5,194 $ 5,734 $ (806) $ (639)
======== ======== ======== ========
Assumptions as of December 31
Weighted-average discount rate 7% 7% 6.75% 7%
Expected return on plan assets 7.5% 7% 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 (943) (855) (1,699) (1,635)
50
BETZDEARBORN CANADA, INC.
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
(thousands of U.S. dollars)
Pension benefits Other post-retirement benefits
-------------------------------------- -----------------------------------
2001 2000 1999 2001 2000 1999
------- ------- ------- ------- ------- -------
Service cost $ 1,115 $ 1,086 $ 1,027 $ 42 $ 42 $ 45
Interest cost 1,998 1,994 1,800 114 115 112
Expected return on
plan assets (2,620) (2,688) (2,132) -- -- --
Amortization and
deferrals 9 16 112 -- -- --
Amortization of
transition
asset (183) (189) (187) 116 120 118
Special termination
benefit 35 -- -- -- -- --
------- ------- ------- ------- ------- -------
Benefit cost $ 354 $ 219 $ 620 $ 272 $ 277 $ 275
======= ======= ======= ======= ======= =======
OTHER POST-RETIREMENT BENEFITS
The non-pension 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 $179 thousand or $157 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:
(thousands of U.S. dollars)
2001 2000 1999
------- ------- -------
Foreign exchange loss (gain) $ 714 $ 226 $ (927)
Miscellaneous expense (income) 343 314 (339)
------- ------- -------
$ 1,057 $ 540 $(1,266)
======= ======= =======
51
BETZDEARBORN CANADA, INC.
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
13 INCOME TAXES
A summary of the components of the tax provision follows:
(thousands of U.S. dollars)
Year ended December 31,
2001 2000 1999
------- ------- -------
Current $ 4,501 $ 4,586 $ 783
Deferred (2,296) 776 1,902
------- ------- -------
Provision for income taxes $ 2,205 $ 5,362 $ 2,685
======= ======= =======
The deferred income tax asset (liability) at December 31 is comprised of:
(thousands of U.S. dollars)
2001 2000
------- -------
Accrued expenses $ 1,267 $ 90
------- -------
Gross deferred tax assets 1,267 90
------- -------
Depreciation 127 906
Prepaid pension and post-retirement benefits 1,037 1,599
Other 70 34
------- -------
Gross deferred tax liabilities 1,234 2,539
------- -------
Total deferred income tax asset (liability) $ 33 $(2,449)
======= =======
A reconciliation of the Canadian statutory income tax rate to the
effective rate is as follows:
2001 2000 1999
----- ----- -----
Statutory income tax rate 40.62% 40.14% 40.54%
Minority interest in income (24.62) (15.20) (33.12)
Goodwill amortization 80.39 22.36 53.73
Non-deductible expenses 3.21 1.76 5.07
Large corporations tax -- 1.64 3.43
Change in enacted deferred tax rates 4.10 -- --
Prior year recovery (29.37) -- --
Other 2.21 0.01 (1.54)
----- ----- -----
Effective tax rate 76.54% 50.71% 68.11%
===== ===== =====
52
BETZDEARBORN CANADA, INC.
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
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 $27,340 thousand (2000 - $23,088 thousand), which is included in
the net Hercules Group investment balance as of December 31, 2001 and
2000. The weighted average rate on the intercompany notes receivable was
6% in 2001 and 10% in 2000. The notes receivable are due on demand.
Interest income earned on intercompany notes receivable for the year was
$1,071 thousand (2000 - $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
Net income (1,050)
Other comprehensive loss (15,359)
Intercompany transactions - net (5,345)
---------
Balance - December 31, 2001 $ 222,586
=========
The Company includes accumulated other comprehensive income (loss) in net
Hercules Group investment. At December 31, 2001 and 2000, accumulated
other comprehensive (loss) income included a cumulative loss of $10,517
thousand and a cumulative gain of $4,842 thousand, respectively, of
foreign currency translation adjustments.
53
BETZDEARBORN CANADA, INC.
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
16 COMMITMENTS AND CONTINGENCIES
LEASES
The Company has operating leases (including facilities, transportation,
and data processing equipment) expiring at various dates. Rental expense
was $2,457 thousand in 2001, $2,474 thousand in 2000 and $2,379 thousand
in 1999.
At December 31, 2001, minimum rental payments under noncancelable leases
aggregated $4,017 thousand. A significant portion of these payments
relates to facilities and vehicles. The net minimum payments over the next
three years are $2,170 thousand in 2002, $1,310 thousand in 2003, and $537
thousand in 2004.
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, 2001 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 companies under common
control (affiliated companies). These agreements were developed in the
context of parent/subsidiary relationship and, therefore, may not
necessarily reflect the result of arm's 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 the 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 consolidated
statements of operations. Such allocations and corporate charges totalled
$1,180 thousand in 2001, $3,067 thousand in 2000 and $5,738 thousand in
1999.
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 $5,396 thousand in 2001, $5,998 thousand in 2000 and $4,937
thousand in 1999. The royalties are reflected in the other operating
expense line item in the consolidated statements of operations.
54
BETZDEARBORN CANADA, INC.
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
PURCHASES
BDCI purchases products for resale in the normal course of business from
affiliated companies. BDCI's purchases from affiliated companies were
$34,936 thousand in 2001, $52,639 thousand in 2000 and $12,502 thousand in
1999.
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 operations. The amount paid was
$274 thousand in 2001, $874 thousand in 2000 and $58 thousand in 1999.
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 and
comprehensive (loss) income. Total commissions earned from affiliates
amounted to $12 thousand in 2001, $422 thousand in 2000 and $291 thousand
in 1999.
18 SUBSEQUENT EVENT
On April 29, 2002, Hercules completed the sale of its Water Treatment
Business to GE Specialty Materials. Pursuant to the Stock and Asset
Agreement for the transaction, the sale included all of the stock of
BetzDearborn and the Company. Hercules used the proceeds from the sale to
prepay borrowings under its Senior Credit Facility (including the $65,427
thousand outstanding under the US$100 million Canadian Revolver) and ESOP
Credit Facility. Pursuant to the prepayment, among other things, the stock
pledges were released and the Canadian Revolver was cancelled.
55
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, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 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
November 12, 2002
56
BETZDEARBORN EUROPE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Dollars in thousands)
Year Ended December 31,
2001 2000 1999
---- ---- ----
Sales to third parties $ 136,912 $ 160,386 $ 176,145
Sales to Hercules Group 53,634 60,782 64,952
--------- --------- ---------
190,546 221,168 241,097
Cost of sales 113,768 134,438 142,608
Selling, general, and administrative 50,590 55,405 63,242
expenses
Research and development 2,203 2,782 3,931
Goodwill and intangible asset amortization 5,466 6,126 6,696
Other operating expenses, net (Note 13) 23,163 12,432 13,814
--------- --------- ---------
(Loss) profit from operations (4,644) 9,985 10,806
Interest and debt expense (Note 14) 6,903 9,438 9,277
Other income (expense), net (Note 15) 1,779 998 1,666
--------- --------- ---------
(Loss) income before income taxes
and equity income (9,768) 1,545 3,195
Provision for income taxes (Note 16) 1,885 2,300 6,609
--------- --------- ---------
Loss before equity income (11,653) (755) (3,414)
Equity income of affiliated companies 3,245 3,716 3,104
--------- --------- ---------
Net (loss) income (8,408) 2,961 (310)
Additional minimum pension liability, net of
tax of $(6,327) (14,762) -- --
Foreign currency translation, net of tax
of $0 for each year (4,481) (28,564) (11,658)
--------- --------- ---------
Comprehensive loss $ (27,651) $ (25,603) $ (11,968)
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
57
BETZDEARBORN EUROPE INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
2001 2000
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 1,837 $ 2,406
Accounts receivable, net (Note 3) 36,213 44,476
Inventories (Note 4) 12,458 16,224
Deferred income taxes (Note 16) 1,085 1,716
--------- ---------
Total current assets 51,593 64,822
--------- ---------
Property, plant, and equipment, net (Note 9) 47,529 53,382
Investments in affiliates (Note 5) 135,139 152,468
Goodwill and other intangible assets, net (Note 10) 165,248 182,927
Deferred income taxes (Note 16) 2,950 --
Prepaid pension (Note 12) 9,935 7,785
Deferred charges and other assets 3,134 1,289
--------- ---------
Total assets $ 415,528 $ 462,673
========= =========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable $ 17,214 $ 17,511
Short-term debt (Note 6) -- 5,730
Accrued expenses (Note 9) 20,245 21,477
--------- ---------
Total current liabilities 37,459 44,718
Deferred income taxes (Note 16) -- 5,411
Pension liability (Note 12) 22,139 --
Deferred credits and other liabilities -- 30
--------- ---------
Total liabilities 59,598 50,159
Commitments and contingencies (Note 17)
Net Hercules Group investment (Note 20)
Accumulated other comprehensive losses (73,311) (54,068)
Intercompany transactions 429,241 466,582
--------- ---------
Net Hercules Group investment 355,930 412,514
--------- ---------
Total liabilities and net Hercules Group investment $ 415,528 $ 462,673
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
58
BETZDEARBORN EUROPE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
2001 2000 1999
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (8,408) $ 2,961 $ (310)
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Depreciation and amortization of property, plant and
equipment 5,825 7,037 6,538
Amortization of goodwill and other intangible assets 5,466 6,126 6,696
Restructuring plans 4,153 1,539 1,660
Deferred income tax (1,926) (372) 1,869
Loss on disposals of property, plant and equipment 996 84 --
Loss on sale of investment 7,194 -- --
Equity income of affiliates (3,245) (3,716) (3,104)
Dividends from equity method investments 19,932 -- 1,666
Corporate and other cost allocations 4,806 3,940 7,530
Accruals and deferrals of cash receipts and payments:
Accounts receivable 7,670 (1,215) 2,332
Inventories 2,977 4,638 1,912
Accounts payable and accrued expenses (3,251) (955) (9,541)
Noncurrent assets and liabilities (2,988) (2,850) 3,199
Net transfers (to) from Hercules Group (242) 38,809 (13,632)
-------- -------- --------
Net cash provided by operations 38,959 56,026 6,815
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures, net of proceeds from sale (2,541) (3,123) 2,590
-------- -------- --------
Net cash (used in) provided by investing activities (2,541) (3,123) 2,590
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Change in short-term debt (5,743) (4,341) 9,843
Net transfers (to) from Hercules Group (30,937) (49,096) (27,957)
-------- -------- --------
Net cash provided by (used in) financing activities (36,680) (53,437) (18,114)
-------- -------- --------
Effect of exchange rate changes on cash (307) (173) (747)
-------- -------- --------
Net decrease in cash and cash equivalents (569) (707) (9,456)
Cash and cash equivalents at beginning of year 2,406 3,113 12,569
-------- -------- --------
Cash and cash equivalents at end of year $ 1,837 $ 2,406 $ 3,113
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $ 6,242 $ 9,439 $ 9,215
Income taxes, net 4,733 4,622 6,948
Noncash investing and financing activities:
Corporate and other cost allocations 4,806 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.
59
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 $2,170 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
Prior to the fiscal 2000 year, 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.
On April 29, 2002, in connection with Hercules' sale of its Water Treatment
Business (see Note 21) and the repayment of the Facilities, the stock pledges
were released. As a result, based on Hercules' current debt structure, these
separate company stand-alone financial statements will not be required for the
fiscal year ending December 31, 2002.
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'
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.
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.
60
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the net book value 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. Pursuant to Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142), beginning January 1,
61
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2002, goodwill will not be amortized but will be tested for impairment annually
and any necessary adjustment charged to expense. Intangible assets with finite
lives will be amortized over their useful lives.
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.
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.
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 (losses)/earnings of subsidiaries and affiliates on which no
provision for foreign withholding or US income taxes has been made amounted to
approximately $(10,058 thousand), $5,380 thousand and $1,853 thousand at
December 31, 2001, 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 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 (loss), 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.
62
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
DERIVATIVE INSTRUMENTS AND HEDGING
On January 1, 2001, the Company adopted 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. The
Company has not designated any derivative as a hedge instrument and accordingly,
changes in fair value of derivatives are recorded each period in earnings. The
adoption of SFAS 133 did not result in a pre-tax or post-tax
cumulative-effect-type adjustment to income and did not result in a change to
other comprehensive income (loss).
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.
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 2001, the Financial Accounting Standards Board ("FASB") issued
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"). SFAS 141 supersedes Accounting
Principles Board Opinion ("APB") No. 16, Business Combinations. The provisions
of SFAS 141 (1) require that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) provide specific
criteria for the initial recognition and measurement of intangible assets apart
from goodwill and (3) require that unamortized negative goodwill be written off
immediately as extraordinary gain instead of being deferred and amortized. SFAS
141 also requires that upon adoption of SFAS 142 the Company reclassify the
carrying amounts of certain intangible assets into or out of goodwill, based on
certain criteria. SFAS 142 supersedes APB No. 17, Intangible Assets, and is
effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
initial recognition. The provisions of SFAS 142 (1) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), based on
fair value (as opposed to cost recovery using future undiscounted cash flows),
(3) require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill and (4) remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.
63
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Effective January 1, 2002 Hercules adopted the provisions of SFAS 142.
Hercules identified the following reporting units: BetzDearborn and Pulp and
Paper, Aqualon and FiberVisions. In connection with Hercules' transitional
review, recorded goodwill was determined to be impaired in the BetzDearborn
reporting unit. In the first quarter 2002, Hercules completed its transitional
impairment review of the identified reporting units and recognized an after tax
impairment loss of $368 million as a cumulative effect of a change in accounting
principle, of which $263 million related to the BetzDearborn Inc. water
business. As a result of Hercules' adoption of SFAS 142, the Company will no
longer record approximately $5.4 million of annual amortization relating to
existing goodwill and intangibles.
Goodwill related to the BetzDearborn business was evaluated for impairment
at December 31, 2001 under Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Fixed Assets and for Long-Lived Assets to
Be Disposed of". Such evaluation indicated that goodwill associated with the
business was recoverable from anticipated future undiscounted cash flows.
Accordingly, no impairment loss was recorded in the December 31, 2001 financial
statements.
In June 2001, the Financial Accounting Standards Board ("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. The Company does not believe it will have a material effect on its
financial statements.
On January 1, 2002, the Company adopted 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 Company does not believe it
will have a material effect on its financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment to FASB
Statement No. 13, and Technical Corrections." The Company elected to early adopt
the provisions of SFAS 145 related to the rescission of SFAS 4, "Reporting Gains
and Losses from the Extinguishment of Debt" ("SFAS 4"). The early adoption of
SFAS 145 had no effect on the Company's financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs in a
Restructuring)". SFAS 146 defines the timing of the recognition of costs
associated with exit or disposal activities, the types of costs that may be
recognized and the methodology for calculating the fair value of such costs. The
provisions of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe this statement
will have a material effect on its financial statements.
RECLASSIFICATIONS
Certain amounts in the 2000 and 1999 consolidated financial statements and
notes have been reclassified to conform to the 2001 presentation.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
(Dollars in thousands)
2001 2000
---- ----
Trade $ 35,925 $ 39,830
Other 3,059 7,413
-------- --------
38,984 47,243
Less allowance for doubtful accounts (2,771) (2,767)
-------- --------
Total $ 36,213 $ 44,476
-------- --------
Other accounts receivable mainly comprise VAT receivable.
64
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4. INVENTORIES
The components of inventories are:
(Dollars in thousands)
2001 2000
---- ----
Finished products $ 7,510 $ 9,876
Materials, supplies, and work in process 4,948 6,348
------- -------
Total $12,458 $16,224
------- -------
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:
(Dollars in thousands)
2001 2000
---- ----
Current assets $ 24,137 $ 26,497
Non-current assets 164,103 210,711
Current liabilities $ 36,895 $ 23,481
Non-current liabilities 864 25,113
2001 2000 1999
---- ---- ----
Net sales $ 65,250 $ 62,348 $62,860
Gross profit 18,829 18,142 17,930
Net earnings 7,447 8,393 6,699
At December 31, 2001, 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, 2001 and 2000 equals its share of the underlying
equity in net assets of the respective affiliates. Dividends paid to the Company
from its equity investees were $19,932 thousand during 2001 and $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 at December 31, 2000, 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. There was no short-term debt outstanding at December 31,
2001.
Short-term debt with affiliates of $55,784 thousand and $26,856 thousand
at December 31, 2001 and 2000, 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, 2001 and 2000, the Company had $1,413 thousand and $28,300
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 third party and affiliate
short-term borrowings at December 31, 2001 and 2000 were 5.3% and 6.3%,
respectively.
65
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt with affiliates at December 31, 2001 and 2000, which is
recorded in Net Hercules Group Investment in the consolidated balance sheet, is
summarized as follows:
(Dollars in thousand)
2001 2000
---- ----
7.11% variable rate affiliate note $ -- $ 45,195
4.42% variable rate affiliate note 24,162 27,063
LIBOR variable rate affiliate note 27,836 26,278
7.56% variable rate affiliate note -- 5,022
7.15% variable rate affiliate note 2,165 2,196
4.10% variable rate affiliate note 1,685 1,766
------- --------
Less current maturities -- --
------- --------
Total $55,848 $107,520
======= ========
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 $55,848 thousand at
December 31, 2001 and $107,520 thousand at December 31, 2000. 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.
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
189,704 at December 31, 2001, and 491,488 and 926,689 at December 31, 2000 and
1999, respectively.
At December 31, 2001, under Hercules' incentive compensation plans,
1,265,493 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 2001, 2000 and 1999, respectively.
66
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 1999, 2000 and 2001:
Regular Performance-Accelerated
------- -----------------------
Number of Weighted-average Number of Weighted-average
Shares price Shares price
------ ----- ------ -----
December 31, 1998 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
Granted 3,850 $ 11.28 -- --
Exercised -- -- -- --
Forfeited (3,800) $ 37.80 -- --
------ -------- ----- --------
December 31, 2001 46,900 $ 34.83 1,350 $ 37.56
The weighted-average fair value of regular stock options granted during
1999, 2000 and 2001 was $8.26, $8.85 and $5.69, respectively. The
weighted-average fair value of performance-accelerated stock options granted
during 1999, 2000 and 2001 was $8.01, $0 and $0, respectively.
Following is a summary of regular stock options exercisable at December
31, 1999, 2000 and 2001, 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
December 31, 2001 36,430 $38.10
There were no performance-accelerated stock options exercisable at
December 31, 1999, 2000 and 2001.
Following is a summary of stock options outstanding at December 31, 2001:
Outstanding Options Exercisable Options
------------------- -------------------
Weighted-
Number Weighted-average average Number Weighted-
Outstanding at Remaining exercise Exercisable at average
Exercise Price Range 12/31/2001 Contractual Life price 12/31/2001 exercise price
-------------------- ---------- ---------------- ----- ---------- --------------
Regular Stock Options
$11 - $20 7,700 8.89 $14.27 1,540 $17.25
$30 - $40 37,550 6.59 $38.48 33,240 $38.58
$40 - $50 1,650 6.35 $47.81 1,650 $47.81
------ ------
46,900 36,430
------ ------
Performance-Accelerated Stock Options
$14 - $40 1,350 7.34 $37.56 -- --
------ ------
1,350 --
------ ------
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 ("ESSP"). 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, there are no shares of Hercules common stock registered for offer and
sale under the plan. Shares issued at December 31, 2001 and 2000, were 1,758,081
and 1,597,861, 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.
67
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 2001, 2000 and 1999:
Performance Employee Stock
Assumption Regular Plan Accelerated Plan Purchase Plan
---------- ------------ ---------------- -------------
Dividend yield 0.96% 3.83% 0.0%
Risk-free interest rate 5.80% 5.57% 4.86%
Expected life 7.1 yrs. 5 yrs. 3 mos.
Expected volatility 33.36% 29.78% 49.11%
The Company's net income and earnings per share for 2001, 2000 and 1999
would approximate the pro forma amounts below:
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Net (loss) income
As reported $(8,408) $2,961 $(310)
Pro forma $(8,464) $2,885 $(370)
9. ADDITIONAL BALANCE SHEET DETAIL
(Dollars in thousands)
2001 2000
---- ----
Property, plant, and equipment
Land $ 4,295 $ 5,221
Buildings and equipment 74,756 77,036
-------- --------
Total 79,051 82,257
Accumulated depreciation and amortization (31,522) (28,875)
-------- --------
Net property, plant, and equipment $ 47,529 $ 53,382
======== ========
Accrued expenses
Payroll and employee benefits $ 2,249 $ 1,432
Income taxes payable 6,907 6,386
Restructuring (Note 11) 2,349 2,989
Other 8,740 10,670
-------- --------
$ 20,245 $ 21,477
======== ========
10. GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2001 and 2000, the goodwill and other intangible assets
were:
(Dollars in thousands)
2001 2000
---- ----
Goodwill $178,017 $191,224
Other intangibles 7,175 6,882
-------- --------
Total 185,192 198,106
Less accumulated amortization (19,944) (15,179)
-------- --------
Net goodwill and other intangible assets $165,248 $182,927
======== ========
Goodwill and other intangible assets primarily represent amounts
capitalized from the Hercules acquisition of BetzDearborn (Note 1).
68
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, the acquisition of
BetzDearborn in 1998 and the Work Process Redesign ("WPR") program in 2001.
During the third quarter of 2001, Hercules started a Work Process Redesign
program. The WPR program has been set up to analyze and change the way we work
to improve the mechanics of how we do business - to do it better, quicker and at
less costs. Teams were established to focus initially on seven work processes of
our business that needed major improvement: manufacturing, solicit order to
cash, finance and control fundamentals, logistics, information technology,
purchase to pay and discovery to commercialization.
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 14 employees were
terminated during the year 2000. Cash payments for the year included
approximately $2.5 million for 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.
As a result of the WPR program, we estimate approximately 64 employees to
leave and have charged $5.3 million to operating expense for these costs. These
employees come from various parts of the business, including but not limited to
all above-mentioned processes.
During the year 2001, approximately 79 employees were terminated and cash
worth approximately $3.4 million was paid for severance benefits and other exit
costs. The estimate for the remaining plans was decreased by approximately $1.4
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 service center was decreased by approximately $1.1 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 the remaining actions under the plans in 2002.
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:
(Dollars in thousands)
2001 2000
---- ----
Balance at beginning of year $ 2,989 $ 4,353
Cash payments (3,410) (2,459)
Additional termination benefits and exit costs 5,254 2,165
Reversals against goodwill (1,383) (444)
Reversals against earnings (1,101) (626)
------- -------
Balance at end of year $ 2,349 $ 2,989
======= =======
69
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
(Dollars in thousands)
2001 2000
---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1 $ 77,311 $ 75,968
Service cost 1,571 2,092
Interest cost 4,941 4,189
Amendments 711 12
Employee contributions 710 760
Translation difference (1,915) (6,872)
Actuarial loss 11,658 3,154
Benefits paid from plan assets (2,019) (1,992)
-------- --------
Benefit obligation at December 31 $ 92,968 $ 77,311
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 87,229 89,389
Actual return on plan assets (9,368) 5,143
Employee contributions 710 760
Company contributions 1,932 1,789
Actuarial loss -- (1,748)
Translation difference (2,370) (6,112)
Benefits paid from plan assets (2,019) (1,992)
-------- --------
Fair value of plan assets at December 31 $ 76,114 $ 87,229
======== ========
Funded status of the plans (16,854) 9,918
Unrecognized actuarial loss (gain) 25,880 (2,176)
Unrecognized prior service cost 909 217
Plan amendments -- (174)
-------- --------
Prepaid benefit cost $ 9,935 $ 7,785
======== ========
AMOUNTS RECOGNIZED IN THE STATEMENT OF
FINANCIAL POSITION CONSIST OF:
Additional minimum liability (22,139) --
Intangible asset 1,050 --
Other comprehensive income 21,089 --
Prepaid benefit cost 9,935 7,785
-------- --------
$ 9,935 $ 7,785
======== ========
ASSUMPTIONS AS OF DECEMBER 31
Weighted-average discount rate 6.50% 6.50%
Expected return on plan assets 7.00% 8.00%
Rate of compensation increase 3.50% 3.75%
70
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
COMPONENTS OF NET PERIOD PENSION COST (Dollars in thousands)
Pension Benefits
2001 2000 1999
---- ---- ----
Service cost $ 1,571 $ 2,092 $ 2,313
Interest cost 4,941 4,189 4,326
Expected return on plan assets (6,825) (6,291) (5,912)
Amortization and deferrals 19 (384) 269
Amortization of transition asset -- (160) (185)
------- ------- -------
Benefit (credit) cost $ (294) $ (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 year ended December 31, 2001 was
$193 thousand and for the period March 1, 2000 through December 31, 2000 was
$153 thousand.
13. OTHER OPERATING EXPENSES, NET
Other operating expense, net, in 2001 includes $7,194 thousand in net
losses from the sale of the Company's hydrocarbon resins business, select
portions of its rosin resins business, and its peroxy chemicals business.
Furthermore, other operating expense, net, includes Hercules Group affiliate
royalty costs totaling $10,776 thousand, net restructuring costs totaling $4,153
thousand, net losses on asset sales totaling $996 thousand and net foreign
currency losses totaling $44 thousand.
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 2001, 2000 or 1999. The
costs incurred are presented separately in the consolidated statement of income
and are primarily from debt with affiliates.
15. OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following:
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Interest income, net 1,741 $ 359 1,629
Miscellaneous income, net 38 639 37
------ ------ ------
$1,779 $ 998 $1,666
====== ====== ======
71
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
16. INCOME TAXES
The domestic and foreign components of (loss) income before taxes are
presented below:
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Domestic $ 6,892 $(3,779) $(1,816)
Foreign (16,660) 5,324 5,011
-------- ------- -------
$ (9,768) $ 1,545 $ 3,195
======== ======= =======
A summary of the components of the tax provision follows:
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Current
Domestic $ 2,683 $ -- $1,478
Foreign 1,063 2,672 3,262
Deferred
Domestic -- (1,357) --
Foreign (1,861) 985 1,869
------- ------- ------
Provision for income taxes $ 1,885 $ 2,300 $6,609
======= ======= ======
Deferred tax (liabilities) assets at December 31 consist of:
(Dollars in thousands)
2001 2000
---- ----
Depreciation $ (4,366) $(4,678)
Intangible asset revaluation (1,053) (1,357)
Fixed asset revaluation (884) (1,181)
Pension (2,981) (2,061)
-------- -------
Gross deferred tax liabilities (9,284) (9,277)
-------- -------
Loss carryforwards $ 5,339 $ 2,057
Restructuring expenses 211 1,580
Allowance for doubtful accounts 395 344
Pension 6,789 --
Intangible asset 1,385 1,385
Other 466 393
-------- -------
Gross deferred tax assets 14,585 5,759
-------- -------
Valuation allowance (1,266) (177)
-------- -------
$ 4,035 $(3,695)
======== =======
72
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
A reconciliation of the statutory income tax rate to the effective rate
follows:
2001 2000 1999
---- ---- ----
Statutory income tax rate 35.0 % 35.0 % 35.0 %
Goodwill amortization (46.5)% 135.2 % 93.1 %
Nondeductible expenses (4.2)% 24.5 % 14.6 %
Tax rate differences on (3.5)% (18.7)% (17.9)%
subsidiary earnings
Cash dividends received from
equity investments in affiliates -- -- 18.3 %
Change in tax contingency accrual -- (30.3)% (4.9)%
Foreign dividends, net of credits -- -- 66.0 %
Other (0.1)% 3.2 % 2.7 %
------ ------ ------
Effective tax rate (19.3)% 148.9 % 206.9 %
====== ====== ======
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
$3,579 thousand, $4,267 thousand and $6,043 thousand in 2001, 2000 and 1999,
respectively.
At December 31, 2001, minimum rental payments under noncancelable leases
aggregated $4,398 thousand. The net minimum payments over the next five years
are $1,739 thousand in 2002, $1,581 thousand in 2003, $844 thousand in 2004,
$234 thousand in 2005, and $0 thousand in 2006.
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, 2001 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, Belgium plan indicates that the soil
is contaminated around the area of an underground wastewater tank that was
removed in 1990. Studies have been performed to evaluate the extent of the
contamination and nature of the contaminants. This information is required for
the Company to develop a remediation plan satisfactory to governmental
authorities. On April 29, 2002, the Company was transferred to and the liability
for the environmental remediation was assumed by GE Betz (Note 21).
At this moment no accrual is included in the balance sheet as of December
31, 2001, as a reliable estimate of the remediation costs cannot be made.
73
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 $5,717 thousand, $8,490 thousand and $8,924 thousand
in 2001, 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 resourses, 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 $15,606
thousand, $9,494 thousand and $12,925 thousand in 2001, 2000 and 1999,
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.
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 $23,067
thousand, $34,688 thousand and $40,153 thousand in 2001, 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 $10,776 thousand, $10,993 thousand and $11,764 thousand in
2001, 2000 and 1999, 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
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, 2001, the Company had outstanding forward-exchange contracts to purchase
foreign currencies aggregating $9,150 thousand, and to sell foreign currencies
aggregating $9,160 thousand. The Company had no material outstanding
forward-exchange contracts at December 31, 2000. The foreign exchange contracts
outstanding at December 31, 2001 will mature during 2002.
74
BETZDEARBORN EUROPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FAIR VALUES
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 2001 and 2000:
(Dollars in thousands)
2001
----------------------
Carrying Fair
Amount Value
------ -----
Foreign exchange contracts $(9) $(9)
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, 2001. Foreign exchange contracts are valued based
on year-end exchange rates.
20. NET HERCULES GROUP INVESTMENT
Changes in Net Hercules Group Investment were as follows:
(Dollars in thousands)
Balance, January 1, 1999 $ 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
Net loss (8,408)
Other comprehensive loss (19,243)
Intercompany transactions, net (28,933)
---------
Balance, December 31, 2001 $ 355,930
=========
The Company includes accumulated other comprehensive losses in Net
Hercules Group Investment. At December 31, 2001, accumulated other comprehensive
losses consisted of an additional minimum pension liability and foreign currency
translation adjustments, net of tax, of $(14,762) thousand and $(58,549)
thousand, respectively. At December 31, 2000 and 1999, accumulated other
comprehensive losses consisted of foreign currency translation adjustments, net
of tax, of $(54,068) thousand and $(25,504) thousand, respectively.
21. SUBSEQUENT EVENTS
On April 29, 2002, Hercules completed the sale of its Water Treatment
Business to GE Specialty Materials (GESM). Pursuant to the Stock and Asset
Agreement for the transaction, the sale included all of the stock of
BetzDearborn and the Company. Hercules used the proceeds from the sale to prepay
borrowings under its Senior Credit Facility and ESOP Credit Facility. Pursuant
to the prepayment, among other things, the stock pledges were released.
75
BETZDEARBORN INTERNATIONAL INCORPORATED
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
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, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 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
November 21, 2002
76
BETZDEARBORN INTERNATIONAL INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Dollars in thousands)
Year Ended December 31,
2001 2000 1999
--------- --------- ---------
Sales to third parties $ 175,907 $ 183,628 $ 174,691
Sales to Hercules Group 2,323 3,097 1,902
--------- --------- ---------
178,230 186,725 176,593
Cost of sales 82,297 85,489 75,354
Selling, general, and administrative expenses 78,366 79,316 75,731
Research and development 136 251 451
Goodwill amortization 5,068 5,527 5,864
Other operating expenses, net (Note 12) 6,425 5,952 7,098
--------- --------- ---------
172,292 176,535 164,498
Profit from operations 5,938 10,190 12,095
Equity in (income) loss of affiliated companies (305) (245) 94
Interest expense (Note 6) 4,474 6,252 6,146
Other expense, net (Note 13) 26 5,596 6,932
--------- --------- ---------
Income (loss) before income taxes and minority interest 1,743 (1,413) (1,077)
Provision for income taxes (Note 15) (2,508) (1,611) (3,020)
--------- --------- ---------
Net loss before minority interest (765) (3,024) (4,097)
Minority interest 1,638 984 149
--------- --------- ---------
Net loss (2,403) (4,008) (4,246)
Translation adjustments (4,568) (2,061) (989)
--------- --------- ---------
Comprehensive loss $ (6,971) $ (6,069) $ (5,235)
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
77
BETZDEARBORN INTERNATIONAL INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
2001 2000
--------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 18,713 $ 13,622
Accounts receivable, net (Note 3) 37,910 34,755
Inventories (Note 4) 19,293 19,261
Prepaid and other current assets 7,484 9,858
Deferred income taxes (Note 15) 2,995 2,435
--------- ---------
Total current assets 86,395 79,931
--------- ---------
Property, plant, and equipment, net (Note 8) 37,003 41,191
Goodwill, net (Note 9) 187,124 197,496
Investment in affiliates 1,570 1,691
Deferred charges and other assets 5,458 5,783
--------- ---------
Total assets $ 317,550 $ 326,092
========= =========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable $ 11,390 $ 11,692
Short-term debt (Note 5) 1,015 14,262
Accrued expenses (Note 8) 11,471 17,264
Current tax liability (Note 15) 2,300 2,575
--------- ---------
Total current liabilities 26,176 45,793
Long-term debt (Note 6) 2,385 956
Deferred income taxes (Note 15) 1,902 1,175
Deferred credits and other liabilities 2,491 4,278
--------- ---------
Total liabilities 32,954 52,202
Commitments and contingencies (Note 16) -- --
Minority Interest 13,534 11,489
Net Hercules Group Investment (Note 14)
Accumulated other comprehensive income (27,537) (22,969)
Intercompany balances, net 298,599 285,370
--------- ---------
Net Hercules Group Investment 271,062 262,401
--------- ---------
Total liabilities and Net Hercules Group Investment $ 317,550 $ 326,092
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
78
BETZDEARBORN INTERNATIONAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
2001 2000 1999
-------- -------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (2,403) $ (4,008) $ (4,246)
Adjustments to reconcile net loss to net cash provided by operations:
Minority interest 1,638 984 149
Depreciation 7,346 8,387 8,538
Amortization 5,068 5,527 5,864
Provision for bad debts 1,971 (188) 394
Equity in affiliated companies (income) loss (305) (245) 94
Deferred income taxes 209 (964) 114
Corporate and other cost allocations 4,517 6,055 6,262
Loss on the disposal of assets 1,788 1,484 1,016
Accruals and deferrals of cash receipts and payments:
Accounts receivable (5,126) 8,455 (8,315)
Inventories (32) 2,470 (1,732)
Prepaid and other current assets 2,374 (3,092) (219)
Accounts payable and accrued expenses (6,095) 2,064 (1,490)
Noncurrent assets and liabilities (1,462) (5,096) 2,137
Transfers (to) from Hercules Group (10,501) (4,674) 4,388
-------- -------- --------
Net cash (used in) provided by operations (1,013) 17,159 12,954
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (6,872) (10,760) (10,452)
Proceeds from the disposal of property, plant and equipment 1,927 4,497 2,954
-------- -------- --------
Net cash used in investing activities (4,945) (6,263) (7,498)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds 1,429 956 --
Long term repayments -- -- (130)
Change in short-term debt (13,247) 3,475 4,090
Transfers from (to) Hercules Group 24,312 (8,175) (12,795)
-------- -------- --------
Net cash provided by (used in) financing activities 12,494 (3,744) (8,835)
-------- -------- --------
Effect of exchange rate changes on cash (1,445) 239 (287)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 5,091 7,391 (3,666)
Cash and cash equivalents at beginning of year 13,622 6,231 9,897
-------- -------- --------
Cash and cash equivalents at end of year $ 18,713 $ 13,622 $ 6,231
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 145 $ 685 $ 1,543
Income taxes, net (2,575) (1,776)
(54)
Noncash financing activities
Corporate and other cost allocations 4,517 6,055 6,262
The accompanying notes are an integral part of the consolidated financial
statements.
79
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 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.
On April 29, 2002, in connection with Hercules' sale of its Water
Treatment Business (see Note 18) and the repayment of the Facilities, the stock
pledges were released. As a result, based on Hercules' current debt structure,
these separate company stand-alone financial statements will not be required for
the fiscal year ending December 31, 2002.
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 $207 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 exists. Following the
acquisition of BetzDearborn, the Company continued BetzDearborn's practice of
80
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 income includes the
Company's share of their net income. 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, which is to charge repairs and maintenance to expense and capitalize
replacements or betterments. 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.
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 net book value 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.
Pursuant to Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" (SFAS 142), beginning January 1, 2002, goodwill
will not be amortized but will be tested for impairment annually and any
necessary adjustment charged to expense. Intangible assets with finite lives
will be amortized over their useful lives.
81
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The functional currencies of its
foreign subsidiaries are translated into U.S. dollars 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 (loss).
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
$8,189 thousand at December 31, 2001 and $7,029 thousand at December 31, 2000 in
securities with maturities of 90 days or less. These securities were
concentrated in Argentina, Brazil and Chile, in which together held $7,896
thousand in 2001, and by Brazil and Chile which held $6,945 thousand in 2000.
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 EXPENDITURES
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.
82
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141") and SFAS 142. SFAS 141 supersedes Accounting Principles Board
Opinion ("APB") No. 16, Business Combinations. The provisions of SFAS 141 (1)
require that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, (2) provide specific criteria for
the initial recognition and measurement of intangible assets apart from goodwill
and (3) require that unamortized negative goodwill be written off immediately as
extraordinary gain instead of being deferred and amortized. SFAS 141 also
requires that upon adoption of SFAS 142 the Company reclassify the carrying
amounts of certain intangible assets into or out of goodwill, based on certain
criteria. SFAS 142 supersedes APB No. 17, Intangible Assets, and is effective
for fiscal years beginning after December 15, 2001. SFAS 142 primarily addresses
the accounting for goodwill and intangible assets subsequent to their initial
recognition. The provisions of SFAS 142 (1) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), based on
fair value (as opposed to cost recovery using future undiscounted cash flows),
(3) require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill and (4) remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.
Effective January 1, 2002 Hercules adopted the provisions of SFAS 142.
Hercules identified the following reporting units: BetzDearborn, Pulp and Paper,
Aqualon, FiberVisions and Resins. In connection with Hercules' transitional
review, recorded goodwill was determined to be impaired in the BetzDearborn and
FiberVisions reporting units. In the first quarter 2002, Hercules completed its
transitional impairment review of the identified units and recognized an after
tax impairment loss of $368 million as a cumulative effect of a change of
accounting principle, of which $263 million related to the BetzDearborn
reporting unit. As a result of Hercules' adoption of SFAS 142, the Company will
no longer record $5.1 million of annual amortization relating to existing
goodwill and intangibles.
Goodwill related to the BetzDearborn business was evaluated for impairment
at December 31, 2001 under Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of." Such evaluation indicated that goodwill associated with the
business was recoverable from anticipated future undiscounted cash flows.
Accordingly, no impairment loss was recorded in the December 31, 2001 financial
statements.
83
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED 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 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. The Company does not believe
this statement will have a material effect on its financial statements.
On January 1, 2002, the Company adopted 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 Company does not believe
this statement will have a material effect on its financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment to FASB
Statement No. 13, and Technical Corrections." The Company has elected to early
adopt the provisions of SFAS 145 related to the rescission of SFAS 4, "Reporting
Gains and Losses from the Extinguishment of Debt" ("SFAS 4"). The early adoption
of SFAS 145 had no effect on the Company's financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs in a
Restructuring)." SFAS 146 defines the timing of the recognition of costs
associated with exit or disposal activities, the types of costs that may be
recognized and the methodology for calculating the fair value of such costs. The
provisions of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe this statement
will have a material effect on its financial statements.
RECLASSIFICATIONS
Certain amounts in the 2000 and 1999 consolidated financial statements and
notes have been reclassified to conform to the 2001 presentation.
84
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
(Dollars in thousands)
2001 2000
-------- --------
Trade $ 43,701 $ 38,575
Less allowance for doubtful accounts (5,791) (3,820)
-------- --------
Total $ 37,910 $ 34,755
======== ========
4. INVENTORIES
The components of inventories are:
(Dollars in thousands)
2001 2000
------- -------
Finished products $10,433 $ 9,502
Materials, supplies, and work in process 8,860 9,759
------- -------
Total $19,293 $19,261
======= =======
5. SHORT-TERM DEBT
A summary of short-term debt follows:
(Dollars in thousands)
2001 2000
------- -------
Lines of credit $ 852 $13,776
Current maturities of long-term debt 163 486
------- -------
Total $ 1,015 $14,262
======= =======
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, 2001 and 2000 the Company had $962 thousand and $23,467
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, 2001
and 2000 were 15.0% and 5.66%, respectively.
6. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt with third parties at December 31, 2001 and 2000 is
summarized below.
85
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
2001 2000
------- -------
Construction loan -Bank of Hong Kong at 13.5% $ 2,548 $ 1,442
Less current maturities (163) (486)
------- -------
Total $ 2,385 $ 956
======= =======
The construction loan with Hong Kong bank has an additional availability
of $117 thousand and payments are due through 2007. The loan features a
clause, which allows for no payments to be made for the years 2002 to
2004.
Scheduled annual maturities of long-term debt outstanding in the
successive five-year period are summarized as follows:
(Dollars in thousands)
2001
-------
2002 $ 163
2003 --
2004 --
2005 298
2006 596
Thereafter 1,491
-------
Total $ 2,548
-------
Less current maturities (163)
-------
Total $ 2,385
=======
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.
As of December 31, 2001 the Company had $68,159 thousand of long
term debt payable to affiliates that was primarily held by Hercules Shared
Services Corporation, Hercules Europe B.V.B.A., BetzDearborn Canada, Inc.,
and Hercules Canada Inc., all wholly owned subsidiaries of Hercules. 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. The long-term debt payable to affiliates
primarily has no set payment schedule and carry interest rates ranging
from 2.5% to 10.5%. The long term debt payable to affiliates is recorded
in the Net Hercules Group Investment account in the financial statements.
(Dollars in thousands)
Interest Expense
Components of interest expense: 2001 2000 1999
------- ------- -------
Third parties, net (income) expense $ (225) $ 1,861 $ 1,507
Related parties, net expense 4,699 4,391 4,639
------- ------- -------
Interest expense $ 4,474 $ 6,252 $ 6,146
======= ======= =======
There was no capitalized interest during 2001, 2000 or 1999.
86
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
189,704 at December 31, 2001, 491,488 at December 31, 2000 and 926,689 at
December 31, 1999.
At December 31, 2001, under Hercules' incentive compensation plans,
1,265,493 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 2001, 2000 and 1999.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 1999, 2000 and 2001:
Regular Performance-Accelerated
Number Weighted-average Number Weighted-average
of Shares Price of Shares Price
---------------------------- ---------------------------
December 31, 1998 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
Granted 37,675 $ 11.28 -- --
Exercised -- -- -- --
Forfeited (3,500) $ 37.85 -- --
--------------------------------------------------------------------------------
December 31, 2001 129,850 $ 24.32 13,150 $ 37.70
The weighted-average fair value of regular stock options granted during 1999,
2000 and 2001 was $8.26, $8.85 and $5.69, respectively. The weighted-average
87
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fair value of performance-accelerated stock options granted during 1999, 2000
and 2001 was $8.01, $0, and $0, respectively.
Following is a summary of regular stock options exercisable at December 31,
1999, 2000, and 2001 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
December 31, 2001 60,590 $33.09
There were no performance-accelerated stock options exercisable at December 31,
1999, 2000 and 2001.
Following is a summary of stock options outstanding at December 31, 2001:
Outstanding Options Exercisable Options
Number Weighted-average Number
Outstanding at Remaining Weighted-average Exercisable at Weighted-average
Exercise Price Range 12/31/2001 Contractual Life Exercise Price 12/31/2001 Exercise Price
-------------------- -------------- ---------------- ---------------- -------------- ----------------
Regular Stock Options
$11 - $20 75,350 8.89 $14.27 15,070 $17.25
$30 - $40 53,200 7.11 $37.99 44,220 $38.05
$40 - $50 1,300 6.35 $47.81 1,300 $47.81
-------------- --------------
129,850 60,590
============== ==============
Performance-Accelerated
Stock Options
$14 - $40 13,150 7.36 $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, there are no shares of Hercules common stock registered for offer and
sale under the plan. Shares issued at December 31, 2001 and 2000 were 1,758,081
and 1,597,861, 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.
88
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following weighted-average assumptions would be used in estimating
fair value for 2001, 2000 and 1999.
Regular Performance Employee Stock
Assumption Plan Accelerated Plan Purchase Plan
---------- -------- ---------------- --------------
Dividend yield 1% 3.83% 0.0%
Risk-free interest rate 5.80% 5.57% 4.86%
Expected life 7.1 yrs. 5 yrs. 3 mos.
Expected volatility 33.36% 29.78% 49.11%
The Company's net income and earnings for 2001, 2000 and 1999 would
approximate the pro forma amounts below:
(Dollars in thousands)
2001 2000 1999
------- ------- -------
Net loss
As reported $(2,403) $(4,008) $(4,246)
Pro forma $(2,611) $(4,213) $(4,335)
8. ADDITIONAL BALANCE SHEET DETAIL
(Dollars in thousands)
2001 2000
-------- --------
Property, plant, and equipment
Land $ 6,622 $ 7,085
Buildings and equipment 50,921 48,455
Construction in progress 1,462 4,123
-------- --------
Total 59,005 59,663
Accumulated depreciation and amortization (22,002) (18,472)
-------- --------
Net property, plant, and equipment $ 37,003 $ 41,191
======== ========
Accrued expenses
Payroll and related taxes $ 3,733 $ 3,623
Incentives / bonus 2,315 2,222
Restructuring liability (Note 10) 1,569 3,861
Pension 637 682
Other 3,217 6,876
-------- --------
$ 11,471 $ 17,264
======== ========
89
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. GOODWILL, NET
Goodwill at December 31, 2001 and 2000 was:
(Dollars in thousands)
2001 2000
--------- ---------
Goodwill $ 204,724 $ 209,973
Less accumulated amortization (17,600) (12,477)
--------- ---------
Total $ 187,124 $ 197,496
========= =========
10. RESTRUCTURING
The consolidated balance sheet reflects liabilities for employee severance
benefits and other exit costs of $1,569 thousand and $3,861 thousand,
respectively at December 31, 2001 and 2000. During 2001, management authorized
and committed to a plan to reduce the workforce as part of the comprehensive
cost reduction and work process redesign program. The Company incurred
restructuring charges of $2,430 thousand, for employee termination benefits and
exit costs related to facility closures. Under this plan, approximately 72
employees have left the Company. The plan includes reductions throughout the
Company with the majority of them from support functions as well as the
BetzDearborn and Pulp and Paper units.
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,
17 in 2000 and 72 in 2001. Cash payments made during 2001 and 2000 include
$1,535 thousand and $665 thousand, respectively, for severance benefits and $593
thousand and $125 thousand, respectively, for other exit costs.
During 2001, the Company completed assessments of the remaining
expenditures for the 1998 BetzDearborn plan and the 2000 plans, respectively. As
a result of these assessments, the estimates for severance benefits and other
exit costs were lowered by $2,487 thousand, with corresponding reductions to
goodwill. The lower than planned severance benefits are the result of higher
than anticipated attrition, with voluntary resignations not requiring the
payment of termination benefits.
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 2002. A
reconciliation of activity with respect to the liabilities established for these
plans is as follows:
(Dollars in thousands)
2001 2000
------- -------
Balance at beginning of year $ 3,861 $ 4,554
Additional termination benefits and exit costs 2,430 124
Cash payments (2,128) (790)
Reversals against goodwill (2,487) --
Currency effects (107) (27)
------- -------
Balance at end of year $ 1,569 $ 3,861
======= =======
11. PENSION BENEFITS
The Company has a non-contributory defined benefit plan covering all of
its employees in the Republic of China. The Company funds the plans 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.
90
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Pension Benefits
2001 2000
------- -------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1 $ 2,665 $ 2,854
Service cost 298 289
Interest cost 148 157
Benefits paid from plan assets (621) (489)
Actuarial loss 675 --
Translation adjustments (115) (146)
------- -------
Benefit obligation at December 31 $ 3,050 $ 2,665
======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 2,069 2,381
Actual return on plan assets 101 144
Company contributions 217 122
Benefits paid from plan assets (621) (464)
Translation adjustments (76) (114)
------- -------
Fair value of plan assets at December 31 $ 1,690 $ 2,069
======= =======
Funded status of the plans (1,360) (595)
Unrecognized net loss 667 540
Unrecognized net transition obligation 488 --
------- -------
Accrued prepaid benefit cost $ (205) $ (55)
======= =======
ASSUMPTIONS AS OF DECEMBER 31
Weighted-average discount rate 5.00% 6.00%
Expected return on plan assets 5.00% 6.00%
Rate of compensation increase 5.00% 6.00%
(Dollars in thousands)
Pension Benefits
Components of net periodic benefit cost: 2001 2000 1999
----- ----- -----
Service cost $ 298 $ 289 $ 245
Interest cost 148 157 143
Expected return on plan assets (105) (144) (109)
Amortization of net (gain) loss -- -- 22
Amortization of transition asset 31 34 (16)
----- ----- -----
Benefit cost $ 372 $ 336 $ 285
===== ===== =====
91
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $270 thousand for
2001, $520 thousand for 2000 and $460 thousand for 1999.
12. OTHER OPERATING EXPENSES, NET,
(Dollars in thousands)
Other Operating Expenses
Components of other operating expenses: 2001 2000 1999
------ ------ ------
Royalty expense $5,103 $5,599 $4,901
Integration -- 68 1,118
Restructuring 1,307 124 531
Miscellaneous other 15 161 548
------ ------ ------
Other operating expenses $6,425 $5,952 $7,098
====== ====== ======
13. OTHER EXPENSE, NET
Other Expense, net, consists primarily of exchange and transaction losses
for 2001, 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 balances, net (1,546)
---------
Balance, December 31, 1999 $ 279,396
Net loss (4,008)
Other comprehensive income (2,061)
Intercompany balances, net (10,926)
---------
Balance, December 31, 2000 $ 262,401
Net loss (2,403)
Other comprehensive income (4,568)
Intercompany balances, net 15,632
---------
Balance, December 31, 2001 $ 271,062
=========
92
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company includes accumulated other comprehensive income in Net
Hercules Group Investment. At December 31, 2001, 2000 and 1999, accumulated
other comprehensive income included ($27,537) thousand, ($22,969) thousand and
($20,908) thousand, respectively, of foreign currency translation adjustments.
15. INCOME TAXES
The domestic and foreign components of income (loss) before taxes and
minority interest are presented below:
(Dollars in thousands)
2001 2000 1999
------- ------- -------
Domestic $(4,930) $(4,904) $ 1,042
Foreign 6,673 3,491 (2,119)
------- ------- -------
$ 1,743 $(1,413) $(1,077)
======= ======= =======
A summary of the components of the tax provision follows:
(Dollars in thousands)
2001 2000 1999
------- ------- -------
Currently payable
Domestic $ (840) $ -- $ 1,890
Foreign 3,139 2,575 1,017
Deferred
Domestic (166) (698) 133
Foreign 375 (266) (20)
------- ------- -------
Provision for income taxes $ 2,508 $ 1,611 $ 3,020
======= ======= =======
Deferred tax assets (liabilities) at December 31 consisted of:
93
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
2001 2000
-------- --------
Depreciation $ -- $ (977)
Investments -- --
Other (1,902) (198)
-------- --------
Gross deferred tax liabilities $ (1,902) $ (1,175)
-------- --------
Postretirement benefits other than pensions $ 762 $ 1,047
Inventory 3 316
Accrued expenses 5,187 6,272
Loss carryforwards 10,598 9,175
-------- --------
Gross deferred tax assets 16,550 16,810
Valuation allowance (13,555) (14,375)
-------- --------
Deferred tax assets, net 2,995 2,435
-------- --------
$ 1,093 $ 1,260
======== ========
A reconciliation of the statutory income tax rate to the effective rate
follows:
2001 2000 1999
---- ---- ----
Statutory income tax rate 35% (35)% (35)%
Goodwill amortization 81 121 168
Meals and entertainment 6 11 17
Foreign dividends net of credits -- -- 9
Valuation allowance 72 80 146
Cash repatriations from non-US subsidiaries (44) (84) (41)
Travel expense 2 5 8
Other (8) 16 8
---- ---- ----
Effective tax rate 144% 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 foreign
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 U.S. income taxes has been made amounted to
approximately $19,228 thousand, $13,740 thousand and $6,559 thousand at December
31, 2001, 2000 and 1999, respectively.
94
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
$4,657 thousand in 2001, $3,065 thousand in 2000 and $2,726 thousand in 1999.
Future minimum lease payments under noncancellable operating leases are as
follows:
(Dollars in thousands)
2001
-------
2002 $ 2,642
2003 1,303
2004 859
2005 711
2006 707
Thereafter 273
-------
$ 6,495
=======
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, 2001 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 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 $4,517 thousand, $6,055 thousand and $6,262
thousand in 2001, 2000 and 1999, respectively.
The Company has net advances to affiliates at December 31, 2001 of $15,037
thousand and at December 31, 2000 of $16,210 thousand. These advances are to
BetzDearborn Inc. and BetzDearborn Europe Inc. 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 2001, 2000 and 1999 was $5,103 thousand, $5,599 thousand and $4,901
thousand, respectively. 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
95
BETZDEARBORN INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2001, 2000
and 1999, these purchases totaled $13,128 thousand, $7,171 thousand and $605
thousand, respectively.
18. SUBSEQUENT EVENT
On April 29, 2002, Hercules completed the sale of its Water Treatment
Business to GE Specialty Materials (GESM). Pursuant to the Stock and Asset
Agreement for the transaction, the sale included all of the stock of
BetzDearborn and the Company. Hercules used the proceeds from the sale to prepay
borrowings under its Senior Credit Facility and ESOP Credit Facility. Pursuant
to the prepayment, among other things, the stock pledges were released.
96
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 BL Technologies, Inc., a subsidiary of Hercules
Incorporated, at December 31, 2001 and 2000, and the results of its operations
and of its cash flows for each of the three years in the period ended December
31, 2001 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 25, 2002
97
BL TECHNOLOGIES, INC.
STATEMENT OF INCOME
(Dollars in thousands)
Year Ended December 31
2001 2000 1999
---- ---- ----
Royalty income $ 21 $ 172 $ 139
Royalty income - affiliates 17,485 20,972 22,785
------- ------- -------
17,506 21,144 22,924
Selling, general, and administrative expenses 13 13 15
Corporate and other cost allocations 2,346 2,188 2,941
Amortization of licensing rights 9,464 11,358 13,250
------- ------- -------
Profit from operations 5,683 7,585 6,718
Other income, net (Note 4) 7 211 36
------- ------- -------
Income before income taxes 5,690 7,796 6,754
Provision for income taxes (Note 5) 1,992 2,729 2,363
------- ------- -------
Net income $ 3,698 $ 5,067 $ 4,391
======= ======= =======
The accompanying notes are an
integral part of the financial statements.
98
BL TECHNOLOGIES, INC.
BALANCE SHEETS
(Dollars in thousands)
December 31
2001 2000
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 732 $ 19
-------- --------
Total current assets 732 19
Investment in Hercules International Limited 72,962 72,962
Licensing rights, net (Note 3) 18,928 28,392
-------- --------
Total assets $ 92,622 $101,373
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Liabilities
Income taxes payable $ 5,304 $ 6,704
Deferred income taxes (Note 5) 6,625 9,937
-------- --------
Total liabilities 11,929 16,641
Commitments and contingencies (Note 6) --
Net Hercules Group Investment (Note 9)
Intercompany transactions, net 80,693 84,732
-------- --------
Net Hercules Group Investment 80,693 84,732
-------- --------
Total liabilities and net Hercules Group investment $ 92,622 $101,373
======== ========
The accompanying notes are an
integral part of the financial statements.
99
BL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31
2001 2000 1999
-------- -------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 3,698 $ 5,067 $ 4,391
Adjustments to reconcile net income to net cash provided by operations:
Amortization of licensing rights 9,464 11,358 13,250
Deferred income taxes (3,312) (3,975) (4,638)
Corporate and other allocations 2,346 2,188 2,941
Accruals and deferrals of cash receipts and payments:
Foreign currency contract receivable -- 113 (113)
Income taxes payable (1,400) (297) 2,830
Transfers to/from Hercules Group -- -- 4,171
-------- -------- --------
Net cash provided by operations 10,796 14,454 22,832
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Transfers to/from Hercules Group (10,083) (14,461) (24,020)
-------- -------- --------
Net cash used in financing activities (10,083) (14,461) (24,020)
-------- -------- --------
Net decrease in cash and cash equivalents 713 (7) (1,188)
Cash and cash equivalents at beginning of year 19 26 1,214
-------- -------- --------
Cash and cash equivalents at end of year $ 732 $ 19 $ 26
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash financing activities:
Corporate and other cost allocations $ 2,346 $ 2,188 $ 2,941
The accompanying notes are an
integral part of the financial statements.
100
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 $2,170. 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 measured 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 Company's 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.
On April 29, 2002, in connection with Hercules' sale of its Water Treatment
Business (see Note 8) and the repayment of the Facilities, the stock pledges
were released. As a result, based on Hercules' current debt structure, these
separate company stand-alone financial statements will not be required for the
fiscal year ending December 31, 2002.
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.
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.
101
BL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
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 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.
102
BL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
In June 2001, the Financial Accounting Standards Board ("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. The Company does not believe this statement will have a material
effect on its financial statements.
On January 1, 2002, the Company adopted 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 Company does not believe
this statement will have a material effect on its financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment to FASB
Statement No. 13, and Technical Corrections." The Company has elected to early
adopt the provisions of SFAS 145 related to the rescission of SFAS 4, "Reporting
Gains and Losses from the Extinguishment of Debt" ("SFAS 4"). Accordingly, the
prepayment penalties and the write-off of debt issuance costs relating to the
April 2002 debt repayment (see Note 11) are reported in net (loss) income from
continuing operations. Under SFAS 4, the majority of these costs would have been
reported as an extraordinary loss in the Consolidated Statement of Operations.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs in a
Restructuring)". SFAS 146 defines the timing of the recognition of costs
associated with exit or disposal activities, the types of costs that may be
recognized and the methodology for calculating the fair value of such costs. The
provisions of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe this statement
will have a material effect on its financial statements.
3. LICENSING RIGHTS
The Company has an exclusive right to license Hercules technologies for a
seven year period from its date of acquisition on October 15, 1998. At December
31, 2001 and 2000, licensing rights were:
(Dollars in thousands)
2001 2000
-------- --------
Licensing rights $ 53,000 $ 53,000
Less accumulated amortization (34,072) (24,608)
-------- --------
Licensing rights, net $ 18,928 $ 28,392
======== ========
4. OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following:
(Dollars in thousands)
2001 2000 1999
----- ----- -----
Interest income, net $ 8 $ 1 $ 11
Foreign exchanges (loss) gains (1) 210 25
----- ----- -----
$ 7 $ 211 $ 36
===== ===== =====
103
BL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
5. INCOME TAXES
A summary of the components of the tax provision follows:
(Dollars in thousands)
2001 2000 1999
------- ------- -------
Currently payable $ 5,304 $ 6,704 $ 7,001
Deferred (3,312) (3,975) (4,638)
------- ------- -------
Provision for income taxes $ 1,992 $ 2,729 $ 2,363
======= ======= =======
Deferred tax liabilities at December 31 consist of:
(Dollars in thousands)
2001 2000
------ ------
Intangible assets $6,625 $9,937
------ ------
Gross deferred tax liabilities 6,625 9,937
------ ------
Valuation allowance -- --
------ ------
$6,625 $9,937
====== ======
6. COMMITMENTS AND CONTINGENCIES
The Company had an operating lease for office space which expired
September 30, 2001. Rental expense was $2 thousand in 2001 and 2000 and $1
thousand in 1999.
7. 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 $2,346 thousand, $2,188
thousand and $2,941 thousand in 2001, 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 royalties in respect of this agreement of $17,485
thousand, $20,972 thousand and $22,785 thousand in 2001, 2000 and 1999,
respectively.
8. SUBSEQUENT EVENTS
On April 29, 2002, Hercules completed the sale of its Water Treatment
Business to GE Specialty Materials (GESM). Pursuant to the Stock and Asset
Agreement for the transaction, the sale included all of the stock of
BetzDearborn and the Company. Hercules used the proceeds from the sale to
prepay borrowings under its Senior Credit Facility and ESOP Credit Facility.
Pursuant to the prepayment, among other things, the stock pledges were
released.
104
BL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
9. NET HERCULES GROUP INVESTMENT
Changes in net parent investment were as follows:
(Dollars in thousands)
Balance, December 31, 1999 $ 91,937
Net income 5,067
Intercompany transactions, net (12,272)
--------
Balance, December 31, 2000 84,732
Net income 3,698
Intercompany transactions, net (7,737)
--------
Balance, December 31, 2001 $ 80,693
========
105
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 FiberVisions A/S, a subsidiary of Hercules Incorporated, and its
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years ended December 31, 2001 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
November 19, 2002
106
FIBERVISIONS A/S
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Year ended December 31,
2001 2000 1999
--------- --------- ---------
Sales to third parties $ 87,863 $ 94,405 $ 112,804
Sales to affiliates 15,463 13,414 --
Sales to Hercules Group 27,780 36,471 30,919
--------- --------- ---------
131,106 144,290 143,723
Cost of sales 111,075 128,103 120,999
Selling, general, and administrative expenses 3,717 4,586 6,321
Research and development 910 1,017 1,004
Impairment of long lived assets (Note 12) -- 28,169 --
Other operating expenses, net (Note 13) 2,984 2,745 2,350
--------- --------- ---------
Profit (loss) from operations 12,420 (20,330) 13,049
Equity income of affiliated companies 4,409 2,617 12,716
Interest expense, net (Note 11) 2,697 2,234 4,755
--------- --------- ---------
Income (loss) before income taxes 14,132 (19,947) 21,010
Provision for income taxes (Note 14) 5,318 3,430 8,055
--------- --------- ---------
Net income (loss) 8,814 (23,377) 12,955
Translation adjustments, net of tax 1,274 1,299 897
--------- --------- ---------
Comprehensive income (loss) $ 10,088 $ (22,078) $ 13,852
========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
107
FIBERVISIONS A/S
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
2001 2000
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 5,500 $ 3,629
Accounts receivable, net (Note 3) 16,452 18,939
Receivables from affiliates (Note 5) 2,522 2,815
Inventories (Note 4) 5,829 6,143
-------- --------
Total current assets 30,303 31,526
Property, plant, and equipment, net (Notes 8 and 12) 84,482 95,030
Investments (Note 6) 21,215 18,140
Goodwill and other intangible assets, net (Note 9) 95,307 98,058
Deferred charges and other assets 176 198
-------- --------
Total assets $231,483 $242,952
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable $ 8,761 $ 12,927
Current maturities of long-term debt (Note 7) 7,532 11,588
Accrued expenses (Note 8) 11,051 6,585
-------- --------
Total current liabilities 27,344 31,100
Long-term debt - third parties (Note 7) 44,489 53,919
Deferred income taxes (Note 14) 22,631 18,737
-------- --------
Total liabilities 94,464 103,756
Commitments and contingencies (Note 16) -- --
Net Hercules Group investment (Note 15)
Accumulated other comprehensive income 3,625 2,351
Intercompany transactions 133,394 136,845
-------- --------
Net Hercules Group Investment 137,019 139,196
-------- --------
Total liabilities and net Hercules Group Investment $231,483 $242,952
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
108
FIBERVISIONS A/S
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
(Dollars in thousands)
Year ended December 31,
2001 2000 1999
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 8,814 $(23,377) $ 12,955
Adjustments to reconcile net income (loss) to net cash
provided from operations:
Depreciation 8,707 10,054 11,863
Provision for impairment of long-lived assets -- 28,169 --
Amortization of goodwill and other intangible assets 2,644 2,696 2,790
Bad debt expense -- 216 --
Nonoperating loss on disposals 18 -- 74
Corporate and other cost allocations 226 426 1,747
Deferred income taxes (1,032) 1,642 5,182
Affiliates' earnings in excess of dividends received (3,387) 94 (12,716)
Accruals and deferrals of cash receipts and payments:
Accounts receivable 1,180 (1,611) (1,604)
Receivable from affiliates, net 412 (5,030) --
Transfers from Hercules Group, net 270 1,481 7,556
Inventories 148 1,416 (1,046)
Accounts payable and accrued expenses 1,393 (2,263) 421
Noncurrent assets and liabilities 82 294 11
-------- -------- --------
Net cash provided by operating activities 19,475 14,207 27,233
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (356) (11,350) (9,970)
Acquisition of subsidiaries, net of cash acquired -- (355) --
Other, net 95 47 (171)
-------- -------- --------
Net cash used in investing activities (261) (11,658) (10,141)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt repayments, third parties (11,279) (9,726) (11,092)
Transfers (to)/from Hercules Group, net (5,953) 6,150 (6,134)
Change in short-term debt -- (9) --
-------- -------- --------
Net cash used in financing activities (17,232) (3,585) (17,226)
-------- -------- --------
Effect of exchange rate changes on cash (111) (464) (140)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,871 (1,500) (274)
Cash and cash equivalents at beginning of year 3,629 5,129 5,403
-------- -------- --------
Cash and cash equivalents at end of year $ 5,500 $ 3,629 $ 5,129
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $ 3,929 $ 4,727 $ 5,662
Income taxes, net 2,728 1,424 380
Noncash financing activities
Corporate and other cost allocations 226 426 1,747
The accompanying notes are an integral part of the
consolidated financial statements.
109
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.
On April 29, 2002, in connection with Hercules' sale of its Water
Treatment Business (see Note 20) and the repayment of the Facilities, the stock
pledges were released. As a result, based on Hercules' current debt structure,
these separate company stand-alone financial statements will not be required for
the fiscal year ending December 31, 2002.
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 exists. 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.
110
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 net book value 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.
Pursuant to Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142), beginning January 1, 2002,
goodwill will not be amortized but will be tested for impairment annually and
any necessary adjustment charged to expense. Intangible assets with finite
lives will be amortized over their useful lives.
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 had long-lived asset impairments of $28,169 thousand (see Note 12).
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, EURO 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.
111
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 statement of operations.
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, 2001 and
2000, 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 82% and 87% of trade receivables were concentrated with 10
customers as of December 31, 2001 and 2000, respectively. There was one customer
that accounted for 16% and 21% of total trade receivables as of December 31,
2001 and 2000.
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 options 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, foreign currency translation, intercompany
amounts, income tax, 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.
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
$63,270 thousand, $62,410 thousand, and $61,343 thousand at December 31 2001,
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 2001, the Financial Accounting Standards Board ("FASB") issued
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"). SFAS 141 supersedes Accounting
Principles Board Opinion ("APB") No. 16, Business Combinations. The provisions
of SFAS 141 (1) require that the purchase method of
112
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
accounting be used for all business combinations initiated after June 30, 2001,
(2) provide specific criteria for the initial recognition and measurement of
intangible assets apart from goodwill and (3) require that unamortized negative
goodwill be written off immediately as extraordinary gain instead of being
deferred and amortized. SFAS 141 also requires that upon adoption of SFAS 142
the Company reclassify the carrying amounts of certain intangible assets into or
out of goodwill, based on certain criteria. SFAS 142 supersedes APB No. 17,
Intangible Assets, and is effective for fiscal years beginning after December
15, 2001. SFAS 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their initial recognition. The provisions of
SFAS 142 (1) prohibit the amortization of goodwill and indefinite-lived
intangible assets, (2) require that goodwill and indefinite-lived intangible
assets be tested annually for impairment (and in interim periods if certain
events occur indicating that the carrying value of goodwill and/or
indefinite-lived intangible assets may be impaired), based on fair value (as
opposed to cost recovery using future undiscounted cash flows), (3) require that
reporting units be identified for the purpose of assessing potential future
impairments of goodwill and (4) remove the forty-year limitation on the
amortization period of intangible assets that have finite lives.
Effective January 1, 2002 Hercules adopted the provisions of SFAS 142 and
determined that FiberVisions consists of one reporting unit. In the first
quarter 2002, Hercules completed its transitional impairment review and
determined that FiberVisions' recorded goodwill was impaired. Accordingly, at
March 31, 2002 FiberVisions recognized an after tax impairment loss of $87
million as a cumulative effect of a change in accounting principle. As a result
of Hercules adoption of SFAS 142, the Company will no longer record $2.6 million
of annual amortization relating to existing goodwill and intangibles.
Goodwill was evaluated for impairment at December 31, 2001 under Statement
of Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-lived Assets and for Long-Lived Assets to Be Disposed of." Such
evaluations indicated that goodwill associated with the business was recoverable
from anticipated future undiscounted cash flows. Accordingly, no impairment loss
was recorded in the December 31, 2001 financial statements.
In June 2001, the Financial Accounting Standards Board ("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. The Company does not believe this statement will have a material
effect on its financial statements.
On January 1, 2002, the Company adopted 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 Company does not believe
this statement will have a material effect on its financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment to FASB
Statement No. 13, and Technical Corrections." The Company has elected to early
adopt the provisions of SFAS 145 related to the rescission of SFAS 4, "Reporting
Gains and Losses from the Extinguishment of Debt" ("SFAS 4"). The early adoption
had no effect on the Company's financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs in a
Restructuring)". SFAS 146 defines the timing of the recognition of costs
associated with exit or disposal activities, the types of costs that may be
recognized and the methodology for calculating the fair value of such costs. The
provisions of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe this statement
will have a material effect on its financial statements.
113
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
(Dollars in thousands)
2001 2000
-------- --------
Trade $ 12,940 $ 15,220
Rebates from suppliers 3,224 2,820
Other 551 1,260
-------- --------
16,715 19,300
Less allowance for doubtful accounts (263) (361)
-------- --------
Total $ 16,452 $ 18,939
======== ========
4. INVENTORIES
The components of inventories are:
(Dollars in thousands)
2001 2000
------ ------
Finished products $2,330 $2,647
Materials, supplies, and work in process 3,499 3,496
------ ------
Total $5,829 $6,143
====== ======
5. RECEIVABLES FROM AFFILIATES
Trade receivables from affiliates, consists of $4,462 thousand and $5,030
thousand due from ES FiberVisions for years then ended December 31, 2001 and
2000, respectively, and net of $1,940 and $2,215 of accumulated losses of
unconsolidated companies in excess of investment for years 2001 and 2000,
respectively (see Note 6).
6. INVESTMENTS IN AFFILIATED COMPANIES
The equity investments in affiliated companies consist of:
(Dollars in thousands)
2001 2000
-------- -------
Investment in FiberVisions, LP $ 21,215 $18,140
======== =======
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 $55 million and
$48 million in fiscal 2001 and 2000, respectively. The Company's share of net
income was $1,319 thousand and $153 thousand in 2001 and 2000, respectively.
In 1998, the Company's majority owned subsidiary FiberVisions Products,
Inc. entered into a 50% joint venture with FiberVisions Inc., a wholly owned
subsidiary 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
$3,090 thousand, $2,464 thousand and $12,716 thousand in 2001, 2000 and 1999,
respectively.
Summarized financial information for the equity affiliates at December 31,
and the years then ended is as follows:
114
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Dollars in thousands)
2001 2000
-------- --------
Current assets $ 32,002 $ 38,614
Non Current assets 22,706 9,925
Current liabilities 9,389 10,803
Non Current liabilities 94 --
2001 2000 1999
-------- -------- ---------
Net sales $169,478 $197,417 $150,450
Gross profit 15,414 13,418 27,730
Net earnings 8,149 5,150 25,432
The majority of the investments are partnerships which require the
associated tax benefit or tax expense to be recorded by the parent.
7. LONG-TERM DEBT
Long-term at December 31, 2001 and 2000 is summarized as follows:
(Dollars in thousands)
2001 2000
--------------------------- ---------------------------
Book Value Market Value Book Value Market Value
---------- ------------ ---------- ------------
Revolving credit facility due in varying amounts through $ 18,533 $ 18,533 $ 19,428 $ 19,428
2005 with an average interest rate of 4.15%
Finansierings Instituttet for Industri og Handvoerk A/S (FIH) 10,455 10,610 15,447 15,684
term notes at various rates from 6.94% to 9.60%
and due in varying amounts through 2006
Danmark Finansiering Institut A/S (DFI) 18,704 19,266 23,482 23,760
term notes at various rates from 6.48% to 8.56%
and due in varying amounts through 2006
Mortgage at a fixed rate of 7.16% and due in varying 4,079 4,304 4,490 4,683
amounts through 2014
Industrialization Fund for Developing Countries (IFU) -- -- 2,410 2,371
at a fixed rate of 5.23% and due in 2001
Lease purchase obligation 250 250 250 250
------------------------ ------------------------
52,021 52,963 65,507 66,176
Less current maturities (7,532) (7,765) (11,588) (11,723)
------------------------ ------------------------
Total $ 44,489 $ 45,198 $ 53,919 $ 54,453
======================== ========================
As of December 31, 2001 FIH term notes are collateralized by land,
buildings, and plant and machinery of approximately $27,598 thousand. The DFI
loan is collateralized by a letter of indemnification regarding land, buildings
and plant and machinery of approximately $17,843 thousand. The mortgage is
collateralized by land and buildings of approximately $4,079 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, 2001 and 2000.
115
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Scheduled annual maturities of long-term debt outstanding at December 31,
2001 in the successive five-year period are summarized as follows:
(Dollars in thousands)
2002 $ 7,532
2003 12,270
2004 12,243
2005 12,692
2006 4,222
Thereafter 3,062
-------
Total $52,021
=======
8. ADDITIONAL BALANCE SHEET DETAIL
(Dollars in thousands)
2001 2000
--------- ---------
Property, plant, and equipment
Land $ 619 $ 628
Buildings and equipment 187,338 191,940
Construction in progress 4,952 4,979
--------- ---------
Total 192,909 197,547
Accumulated depreciation and amortization (108,427) (102,517)
--------- ---------
Net property, plant, and equipment $ 84,482 $ 95,030
========= =========
Accrued expenses
Payroll and employee benefits $ 2,069 $ 2,168
Accrued interest payable 275 365
Current taxes payable 2,897 --
Miscellaneous 5,810 4,052
--------- ---------
$ 11,051 $ 6,585
========= =========
9. GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2001 and 2000, the goodwill and other intangible assets
were:
(Dollars in thousands)
2001 2000
--------- ---------
Goodwill from Hercules acquisition $ 104,411 $ 104,411
Other intangibles 1,467 1,598
--------- ---------
Total 105,878 106,009
Less accumulated amortization (10,571) (7,951)
--------- ---------
Net goodwill and other intangible assets $ 95,307 $ 98,058
========= =========
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 $104,411 thousand was assigned to the Company.
116
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. 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 $18,921 thousand and $16,258 thousand which is included in the net
Hercules Group investment balance at December 31, 2001 and 2000, respectively.
At December 31, 2001 and 2000 the weighted average interest rate on the
intercompany borrowings was 7.6% and 7.4%, respectively.
11. INTEREST EXPENSE, NET
Interest and debt costs are summarized as follows:
(Dollars in thousands)
2001 2000 1999
------- ------- -------
Interest expense $ 2,737 $ 2,383 $ 5,667
Amount capitalized (13) (132) (11)
------- ------- -------
Amount expensed 2,724 2,251 5,656
Interest income (27) (17) (901)
------- ------- -------
Interest expense, net $ 2,697 $ 2,234 $ 4,755
======= ======= =======
12. 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.
13. OTHER OPERATING EXPENSES, NET
Other operating expenses, net, consists of the following:
(Dollars in thousands)
2001 2000 1999
------- ------- -------
Goodwill amortization $ 2,644 $ 2,644 $ 2,660
Foreign currency transactions expense (income) 8 106 (327)
Miscellaneous (income) expense, net 332 (5) 17
------- ------- -------
$ 2,984 $ 2,745 $ 2,350
======= ======= =======
14. INCOME TAXES
The domestic and foreign components of income before taxes and effect of
change in accounting principle are presented below:
(Dollars in thousands)
2001 2000 1999
------- -------- -------
Domestic $ 1,515 $ 98 $ 9,845
Foreign 12,617 (20,045) 11,165
------- -------- -------
$14,132 $(19,947) $21,010
======= ======== =======
A summary of the components of the tax provision follows:
117
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Dollars in thousands)
2001 2000 1999
------- ------- -------
Currently payable
Domestic $ -- $ (438) $ (169)
Foreign 6,350 2,225 3,042
Deferred
Domestic 944 1,009 4,218
Foreign (1,976) 634 964
------- ------- -------
Provision for income taxes $ 5,318 $ 3,430 $ 8,055
======= ======= =======
Deferred tax liabilities (assets) at December 31 consist of:
(Dollars in thousands)
2001 2000
-------- --------
Depreciation $ 15,079 $ 20,091
Accrued expenses -- 1,093
Other 9,881 --
-------- --------
Gross deferred tax liabilities 24,960 21,184
-------- --------
Amortization $ -- $ (1,345)
Inventory -- (108)
Impairment of assets (3,704) (3,704)
Loss carryforwards (6,293) (5,273)
Other comprehensive income -- 1,005
Other -- (691)
-------- --------
Gross deferred tax assets (9,997) (10,116)
-------- --------
Valuation allowance 7,668 7,669
-------- --------
Total deferred income tax $ 22,631 $ 18,737
======== ========
A reconciliation of the statutory income tax rate to the effective rate
follows:
2001 2000 1999
------- ------- -------
Statutory income tax rate 35.00% 35.00% 35.00%
Foreign Rate Differential (4.00) (24.87) 1.80
Valuation Allowance 0.42 (28.78) --
Reserves -- (1.91) (1.45)
Goodwill 6.00 (3.15) 2.59
Other 0.01 6.52 0.40
State tax 0.19 -- --
----- ------- -----
Effective tax rate 37.62% (17.19)% 38.34%
===== ======= =====
118
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
15. 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 January 1, 2000 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
Comprehensive income for the year ended December 31, 2001 10,088
Intercompany transactions, net (12,265)
---------
Balance at December 31, 2001 $ 137,019
=========
The Company includes accumulated other comprehensive income in net parent
investment. At December 31, 2001, 2000, and 1999 accumulated other comprehensive
income included $3,625 thousand, $2,351 thousand, and $1,052 thousand,
respectively, of foreign currency translation adjustments.
16. 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 $78 thousand, $34 thousand, and $50 thousand in 2001, 2000, and
1999, respectively.
The net minimum future payments at December 31, 2001 are as follows:
(Dollars in thousands)
2002 $ 87
2003 69
2004 33
2005 8
2006 8
----
Total $205
====
The Danish tax authorities have increased 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 has been 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, 2001 is likely to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
17. 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.
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
119
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 ($112) thousand and ($129)
thousand for the year ended December 31, 2001 and 2000, respectively. There was
no allocation in 1999.
FiberVisions A/S maintains a contributory pension plan. The Company's
matching contribution was $940 thousand, $964 thousand and $977 thousand for
2001, 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 $59 thousand, $69 thousand
and $79 thousand for 2001, 2000 and 1999, respectively. FiberVisions (China)
Textiles Products, Ltd. provides a housing allowance for their employees. The
Company's contribution was $141 thousand, $160 thousand, and $137 thousand in
2001, 2000 and 1999, respectively.
18. 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 189,704 at
December 31, 2001, and 491,489 and 926,689 at December 31, 2000 and 1999,
respectively.
At December 31, 2001, under Hercules' incentive compensation plans, 1,265,493
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 2001, 2000 and 1999, respectively.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 1999, 2000 and 2001:
Regular
-------------------------------
Number of Weighted-average
Shares price
-------------------------------
December 31, 1999 -- --
Granted 6,875 $17.25
Exercised -- --
Forfeited -- --
------ ------
December 31, 2000 6,875 $17.25
Granted 6,875 $11.28
Exercised -- --
Forfeited -- --
------ ------
December 31, 2001 13,750 $14.27
There were no performance-accelerated stock options granted or outstanding
during 1999, 2000 and 2001, and no regular stock options granted or outstanding
during 1999. The weighted-average fair value of regular stock options granted
during 2000 and 2001 was $8.85 and $5.69.
120
FIBERVISIONS A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Following is a summary of regular stock options exercisable at December 31,
1999, 2000 and 2001, and their respective weighted-average exercise share price.
Number of Weighted-average
Options Exercisable Shares exercise price
-----------------------------------------------------------------
December 31, 2001 2,750 $11.28
Following is a summary of stock options outstanding at December 31, 2001:
Outstanding Options Exercisable Options
--------------------------------------------------------------- ---------------------------------------
Number Weighted-average Weighted- Number Weighted-
Outstanding at Remaining average Exercisable at average
Exercise Price Range 12/31/2001 Contractual Life exercise price 12/31/2001 exercise price
-------------------- --------------------------------------------------------------- ---------------------------------------
Regular Stock Options
$11 - $20 13,750 8.89 $14.27 2,750 $11.28
----------------- ---------------
13,750 2,750
----------------- ---------------
The Company's employees may also participate in the Hercules Employee Stock
Purchase Plan ("ESSP"). 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, there
are no shares of Hercules common stock registered for offer and sale under the
plan. Shares issued at December 31, 2001 and 2000, were 1,758,081 and 1,597,861,
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 2001, 2000 and 1999:
Performance Employee Stock
Assumption Regular Plan Accelerated Plan Purchase Plan
---------- ------------ ---------------- -------------
Dividend yield 0.96% 3.83% 0.0%
Risk-free interest rate 5.80% 5.57% 4.86%
Expected life 7.1 yrs. 5 yrs. 3 mos.
Expected volatility 33.36% 29.78% 49.11%
The Company's net income and earnings per share for 2001, 2000 and 1999 would
approximate the pro forma amounts below:
(Dollars in thousands)
2001 2000 1999
----- -------- -------
Net income (loss)
As reported $8,814 $(23,377) $12,955
Pro forma $8,849 $(23,402) $12,955
19. 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 operations.
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 $226 thousand, $426 thousand and $1,747 thousand in 2001, 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
$43,243 thousand, $49,885 thousand, and $30,919 thousand in 2001, 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 $30 thousand, $3,874 thousand, and $9,994 thousand in 2001,
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 $9 thousand, $7 thousand, and $8 thousand in 2001, 2000, and
1999, respectively.
20. SUBSEQUENT EVENTS
On April 29, 2002, Hercules completed the sale of its Water Treatment
Business to GE Specialty Materials (GESM). Pursuant to the Stock and Asset
Agreement for the transaction, the sale included all of the stock of
BetzDearborn Inc. Hercules used the proceeds from the sale to prepay borrowings
under its Senior Credit Facility and ESOP Credit Facility. Pursuant to the
prepayment, among other things, the stock pledges were released.
121
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, 2001
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001 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
November 7, 2002
122
FIBERVISIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
Year ended December 31,
2001 2000 1999
-------- --------- --------
Sales to Hercules Group $ 82,101 $ 105,724 $ 92,352
Cost of sales 71,285 99,026 82,854
Selling, general, and administrative expenses 3,717 3,570 4,643
Research and development 2,772 3,458 3,396
Impairment of long lived assets (Note 9) -- 25,372 --
Goodwill and intangible amortization $ 4,704 $ 4,698 $ 4,742
Miscellaneous (income) expense, net 1,023 (247) (3)
-------- --------- --------
Loss from operations (1,400) (30,153) (3,280)
Equity in income of affiliated companies (Note 4) 3,090 2,463 12,716
Interest expense, net (Note 8) 4,221 5,209 3,796
-------- --------- --------
(Loss) income before income taxes (2,531) (32,899) 5,640
(Benefit) provision for income taxes (Note 10) 792 (9,808) 2,740
-------- --------- --------
Net (loss) income $ (3,323) $ (23,091) $ 2,900
======== ========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
123
FIBERVISIONS INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
December 31,
2001 2000
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 4,803 $ 1,148
Miscellaneous receivables 234 174
Inventories (Note 3) 9,022 11,850
-------- --------
Total current assets 14,059 13,172
-------- --------
Property, plant, and equipment, net (Notes 5 and 9) 24,667 26,936
Investment in affiliates (Note 4) 21,215 18,140
Goodwill and other intangible assets, net (Note 6) 96,934 101,638
Deferred charges and other assets 126 224
-------- --------
Total assets $157,001 $160,110
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable $ 6,724 $ 8,478
Payables to affiliates (Note 7) 649 104
Accrued expenses (Note 5) 6,362 6,202
-------- --------
Total current liabilities 13,735 14,784
Deferred income taxes (Note 10) 1,685 1,368
-------- --------
Total liabilities 15,420 16,152
Commitments and contingencies (Note 12) -- --
Net Hercules Group investment (Note 16) 141,581 143,958
-------- --------
Total liabilities and net Hercules Group investment $157,001 $160,110
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
124
FIBERVISIONS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Year ended December 31,
2001 2000 1999
------- -------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income $(3,323) $(23,091) $ 2,900
Adjustments to reconcile net income to net
cash provided from operations:
Depreciation 2,522 5,604 5,543
Impairment of long lived assets -- 25,372
Amortization of goodwill and other intangible assets 4,704 4,698 4,742
Loss on disposal of fixed assets -- -- 15
Corporate and other cost allocations 650 (1,444) (2,865)
Deferred income taxes 318 (11,181) (1,333)
Goodwill adjustment -- -- (131)
Affiliates' earning in excess of dividends received (3,075) (2,463) (12,716)
Accruals and deferrals of cash receipts and payments:
Miscellaneous receivable (60) 1,405 (2,658)
Inventories 2,828 2,616 (2,413)
Transfers from Hercules Group 940 2,096 17,116
Accounts payable and accrued expenses (1,594) (821) (2,325)
Payables to affiliates 545 104 --
Noncurrent assets and liabilities 98 855 (574)
------- -------- --------
Net cash provided by operations 4,553 3,750 5,301
------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (253) (1,779) (5,398)
------- -------- --------
Net cash used in investing activities (253) (1,779) (5,398)
------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Transfers to Hercules Group (645) (849) (1,043)
------- -------- --------
Net cash used in financing activities (645) (849) (1,043)
------- -------- --------
Net increase (decrease) in cash and cash equivalents 3,655 1,122 (1,140)
Cash and cash equivalents at beginning of year 1,148 26 1,166
------- -------- --------
Cash and cash equivalents at end of year $ 4,803 $ 1,148 $ 26
======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes paid, net $ -- $ 300 $ 4,836
Interest paid 1,878 2,253 2,825
Noncash financing activities
Corporate and other cost allocations 650 (1,444) (2,865)
The accompanying notes are an integral part of the consolidated financial
statements.
125
FIBERVISIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
FiberVisions Inc. (the "Company") serves worldwide markets for
polypropylene nonwoven fiber used to make disposable hygiene products.
FiberVisions Inc. 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.
On April 29, 2002, in connection with Hercules' sale of its Water
Treatment Business (see Note 17) and the repayment of the Facilities, the stock
pledges were released. As a result, based on Hercules' current debt structure,
these separate company stand-alone financial statements will not be required for
the fiscal year ending December 31, 2002.
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 Inc. and its majority-owned subsidiaries where control exits.
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 Inc. share of their
income. 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 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.
126
FIBERVISIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 net book value 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.
Pursuant to Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142), beginning January 1, 2002,
goodwill will not be amortized but will be tested for impairment annually and
any necessary adjustment charged to expense. Intangible assets with finite lives
will be amortized over their useful lives.
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 9).
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of trade receivables with
FiberVisions LP.
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
127
FIBERVISIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2001, the Financial Accounting Standards Board ("FASB") issued
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"). SFAS 141 supersedes Accounting
Principles Board Opinion ("APB") No. 16, Business Combinations. The provisions
of SFAS 141 (1) require that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) provide specific
criteria for the initial recognition and measurement of intangible assets apart
from goodwill and (3) require that unamortized negative goodwill be written off
immediately as extraordinary gain instead of being deferred and amortized. SFAS
141 also requires that upon adoption of SFAS 142 the Company reclassify the
carrying amounts of certain intangible assets into or out of goodwill, based on
certain criteria. SFAS 142 supersedes APB No. 17, Intangible Assets, and is
effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
initial recognition. The provisions of SFAS 142 (1) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), based on
fair value (as opposed to cost recovery using future undiscounted cash flows),
(3) require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill and (4) remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.
Effective January 1, 2002 Hercules adopted the provisions of SFAS 142.
Hercules identified the following reporting units: BetzDearborn, Pulp and Paper,
Aqualon, FiberVisions and Resins. In connection with Hercules' transitional
review recorded goodwill was determined to be impaired in the BetzDearborn and
FiberVisions reporting units. In the first quarter 2002, Hercules completed its
transitional impairment review of the identified reporting units and recognized
an after-tax impairment loss of $368 million as a cumulative effect of a change
in accounting principle, of which $87 million related to the FiberVisions
reporting unit. As a result of Hercules' adoption of SFAS 142, the Company will
no longer record $4.7 million of annual amortization relating to existing
goodwill and intangibles, as adjusted for the reclassifications just mentioned.
Goodwill was evaluated for impairment at December 31, 2001 under
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Fixed Assets and for Long-Lived Assets to Be Disposed of".
Such evaluations indicated that goodwill associated with the business was
recoverable from anticipated future undiscounted cash flows. Accordingly, no
impairment loss was recorded in the December 31, 2001 financial statements.
In June 2001, the Financial Accounting Standards Board ("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. The Company does not believe it will have a material effect on its
financial statements.
On January 1, 2002, the Company adopted 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 Company does
not believe it will have a material effect on its financial statements.
128
FIBERVISIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
to FASB Statement No. 13, and Technical Corrections." The Company elected to
early adopt the provisions of SFAS 145 related to the rescission of SFAS 4,
"Reporting Gains and Losses from the Extinguishment of Debt" ("SFAS 4"). The
early adoption had no effect on the Company's financial statements.
In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"). SFAS 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs in a Restructuring)". SFAS 146 defines the timing of the recognition of
costs associated with exit or disposal activities, the types of costs that may
be recognized and the methodology for calculating the fair value of such costs.
The provisions of SFAS 146 are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not believe this
statement will have a material effect on its financial statements.
RECLASSIFICATIONS
Certain amounts in the 2000 and 1999 consolidated financial statements
and notes have been reclassified to conform to the 2001 presentation.
129
FIBERVISIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVENTORIES
The components of inventories are:
(Dollars in thousands)
2001 2000
------ -------
Finished products $2,897 $ 4,813
Raw materials 6,100 7,013
Work in process 25 24
------ -------
Total $9,022 $11,850
====== =======
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 $3,090 thousand, $2,463 thousand, and $12,716 thousand in
2001, 2000, and 1999, respectively.
Summarized financial information for the equity affiliate at December
31, and the years then ended is as follows:
(Dollars in thousands)
2001 2000
-------- --------
Current assets $21,589 $27,805
Non Current assets 20,841 8,475
1999
--------
Net sales $114,969 $149,007 $150,450
Gross profit 5,526 5,898 27,730
Net earnings 6,180 4,927 25,432
The investment is a partnership which require the associated tax
benefit or expense to be recorded by the partners.
130
FIBERVISIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. ADDITIONAL BALANCE SHEET DETAIL
(Dollars in thousands)
2001 2000
--------- ---------
Property, plant, and equipment
Land $ 654 $ 654
Buildings and equipment 172,977 173,599
Construction in progress 10,579 11,075
--------- ---------
Total 184,210 185,328
Accumulated depreciation and amortization (159,543) (158,392)
--------- ---------
Net property, plant, and equipment $ 24,667 $ 26,936
========= =========
Accrued expenses
Income taxes payable $ 719 $ 245
Miscellaneous 5,643 5,957
--------- ---------
$ 6,362 $ 6,202
========= =========
6. GOODWILL AND OTHER INTANGIBLES ASSETS
At December 31, 2001 and 2000, the goodwill and other intangible assets
were:
(Dollars in thousands)
2001 2000
-------- ---------
Goodwill $ 83,640 $ 83,640
Other intangible assets 29,752 29,752
Less accumulated amortization (16,458) (11,754)
-------- ---------
Net goodwill and other intangible assets $ 96,934 $ 101,638
======== =========
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 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 $649 thousand and $104
thousand due to ES FiberVisions in 2001 and 2000, respectively.
131
FIBERVISIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INTEREST EXPENSE, NET
Interest costs are summarized as follows:
(Dollars in thousands)
2001 2000 1999
------ ------ -------
Interest expense $4,221 $5,209 $ 3,915
Amount capitalized -- -- (119)
------ ------ -------
Interest expense, net 4,221 5,209 3,796
====== ====== =======
9. IMPAIRMENT OF LONG LIVED ASSETS
In 2000, an impairment of $25,372 was recorded to write off the
remaining net book value of the textiles plant in Covington, GA. The textiles
business fundamentals had been deteriorating during the previous 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.
10. INCOME TAXES
The domestic and foreign components of income before taxes and effect
of change in accounting principle are presented below:
(Dollars in thousands)
2001 2000 1999
-------- -------- -------
Domestic $ (2,532) $(32,901) $ 5,650
Foreign -- 2 (10)
-------- -------- -------
$ (2,532) $(32,899) $ 5,640
======== ======== =======
A summary of the components of the tax provision follows:
(Dollars in thousands)
2001 2000 1999
-------- -------- -------
Current
Domestic $474 $ 1,373 $ 3,545
Foreign -- 1 --
Deferred
Domestic 318 (11,182) (805)
-------- -------- -------
(Benefit) provision for income taxes $792 $ (9,808) $ 2,740
======== ======== =======
132
FIBERVISIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax liabilities (assets) at December 31 consist of:
(Dollars in thousands)
2001 2000
-------- --------
Depreciation $ 13,041 $ 14,105
-------- --------
Gross deferred tax liabilities 13,041 14,105
-------- --------
Amortization $ (531) $ (413)
Bad Debts/ Other Accrueds (1,069) (791)
Impairment of assets (8,938) (8,938)
Inventory (817) (2,595)
-------- --------
Gross deferred tax assets (11,355) (12,737)
-------- --------
Valuation allowance -- --
-------- --------
Total deferred income taxes $ 1,686 $ 1,368
======== ========
A reconciliation of the statutory income tax rate to the effective rate
follows:
2001 2000 1999
----- ----- -----
Statutory income tax rate 35.00% 35.00% 35.00%
State Taxes (0.87) 0.85 (12.77)
Provision to return true-up 2.32 8.60
Goodwill (65.02) (5.00) 12.85
Reserves -- (3.31) 4.20
Other (0.40) (0.04) 0.64
----- ----- -----
Effective tax rate (31.29) 29.81% 48.53%
===== ===== =====
11. 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
$61,467 thousand and $61,532 thousand which is included in the net Hercules
Group investment balance at December 31, 2001 and 2000, respectively. The
weighted average rate on long term intercompany borrowing was 7.6%, 7.4%, and
6.4% as of December 31, 2001, 2000, and 1999, respectively. Interest expense was
$4,221 thousand, $5,209 thousand, and $3,606 thousand in 2001, 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.
12. COMMITMENTS AND CONTINGENCIES
The Company has operating leases (including office space, storage
space, and data processing equipment) expiring at various dates. Rental expense
was $359 thousand, $540 thousand, and $434 thousand in 2001, 2000, and 1999,
respectively.
The net minimum future payments at December 31, 2001 are as follows:
133
FIBERVISIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
2002 $ 186
2003 81
2004 19
thereafter -
-----------
Total $ 286
===========
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, 2001 is likely to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
13. 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.
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 ($612)
thousand and ($670) thousand for the year ended December 31, 2001 and 2000
respectively, and there was no allocation for 1999.
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 $268
thousand, $313 thousand, and $334 thousand for 2001, 2000, and 1999,
respectively.
14. 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
189,704 at December 31, 2001, and 491,488 and 926,689 at December 31, 2000 and
1999, respectively.
At December 31, 2001, under Hercules' incentive compensation plans,
1,265,493 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 2001, 2000 and 1999, respectively.
134
FIBERVISIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 1999, 2000 and 2001:
Regular Performance-Accelerated
---------------------------------- ----------------------------------
Number of Weighted-average Number of Weighted-average
Shares price Shares price
-------- ------ -------- ------
December 31, 1998 -- $ -- -- --
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
Granted 86,550 $11.28 -- --
Exercised -- -- -- --
Forfeited -- -- -- --
------- ------ ------ ------
December 31, 2001 253,350 $20.74 55,700 $37.56
The weighted-average fair value of regular stock options granted during 1999,
2000 and 2001 was $8.08, $8.85 and $5.69, respectively. The weighted-average
fair value of performance-accelerated stock options granted during 1999, 2000
and 2001 was $8.01, $0 and $0, respectively.
Following is a summary of regular stock options exercisable at December
31, 1999, 2000, and 2001, and their respective weighted-average share prices:
Number of Weighted-average
Options Exercisable Shares exercise price
-----------------------------------------------------------------------------
December 31, 2000 37,850 $31.53
December 31, 2001 102,470 $28.47
There were no performance-accelerated stock options exercisable at
December 31, 1999, 2000 and 2001.
Following is a summary of stock options outstanding at December 31, 2001:
Outstanding Options Exercisable Options
------------------------------------------------------ -----------------------------------
Number Weighted-average Weighted- Number Weighted-
Outstanding at Remaining average Exercisable at average
Exercise Price Range 12/31/2001 Contractual Life exercise price 12/31/2001 exercise price
-------------------- -------------- ---------------- -------------- -------------- --------------
Regular Stock Options
$11 - $20 184,350 8.84 $14.45 45,870 $17.25
$30 - $40 69,000 7.34 $37.56 56,600 $37.56
-------- --------
253,350 102,470
-------- --------
Performance-Accelerated
Stock Options
$14 - $40 55,700 7.34 $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 ("ESSP"). 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, there are no shares of Hercules common stock registered for offer
and sale under the plan. Shares issued at December 31, 2001 and 2000, were
1,758,081 and 1,597,861, 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 2001, 2000 and 1999:
135
FIBERVISIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Regular Performance Employee Stock
Assumption Plan Accelerated Plan Purchase Plan
---------- -------- ---------------- -------------
Dividend yield 0.96% 3.83% 0.0%
Risk-free interest rate 5.80% 5.57% 4.86%
Expected life 7.1 yrs. 5 yrs. 3 mos.
Expected volatility 33.36% 29.78% 49.11%
The Company's net income and earnings per share for 2001, 2000 and 1999
would approximate the pro forma amounts below:
(Dollars in thousands)
2001 2000 1999
------ --------- ------
Net income
As reported $(3,323) $(23,091) $2,900
Pro forma $(3,793) $ (23,521) $2,745
15. 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 FiberVisions 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
$650 thousand, ($1,444) thousand and ($2,865) thousand in 2001, 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 $82,101
thousand, $105,724 thousand, and $92,352 thousand in 2001, 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 $35
thousand, $69 thousand, and $80 thousand in 2001, 2000, and 1999, respectively.
16. NET HERCULES GROUP INVESTMENT
Changes in net Hercules Group investment were as follows:
136
FIBERVISIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 income (23,091)
Intercompany transactions, net (197)
---------
Balance at December 31, 2000 143,958
Net (loss) (3,323)
Intercompany transactions, net 946
---------
Balance at December 31, 2001 $ 141,581
=========
17. SUBSEQUENT EVENTS
On April 29, 2002, Hercules completed the sale of its Water Treatment
Business to GE Specialty Materials (GESM). Pursuant to the Stock and Asset
Agreement for the transaction, the sale included all of the stock of
BetzDearborn Inc. Hercules used the proceeds from the sale to prepay borrowings
under its Senior Credit Facility and ESOP Credit Facility. Pursuant to the
prepayment, among other things, the stock pledges were released.
137
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 FiberVisions L.L.C., a subsidiary of Hercules Incorporated, and its
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years ended December 31, 2001 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 20, the Company has restated its December 31, 2000
and 1999 financial statements to reflect income tax provisions for its
subsidiaries whose income is subject to corporate income taxes at the
subsidiary level.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 21, 2002
138
FIBERVISIONS, L.L.C.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
YEAR ENDED DECEMBER 31,
--------------------------------------------
Restated Restated
2001 2000 1999
-------- -------- --------
Sales to third parties $201,780 $236,856 $253,648
Sales to affiliates 16,586 15,003 --
-------- -------- --------
218,366 251,859 253,648
Cost of sales 184,393 223,133 193,696
Selling, general, and administrative expenses 5,509 9,521 13,132
Research and development 3,681 4,475 4,400
Impairment of long lived assets (Note 11) -- 53,541 --
Goodwill and intangible amortization 7,348 7,394 7,532
Other operating expenses (income), net (Note 12) 1,363 (146) (313)
-------- -------- --------
Profit (loss) from operations 16,072 (46,059) 35,201
Equity in income of affiliated companies (Note 6) 1,319 153 --
Interest expense, net (Note 10) 5,790 6,940 8,551
-------- -------- --------
Income (loss) before income taxes 11,601 (52,846) 26,650
Provision (benefit) for income taxes (Note 19) 6,110 (6,378) 10,795
-------- -------- --------
Net income (loss) 5,491 (46,468) 15,855
Translation gain, net of tax 1,274 1,299 897
-------- -------- --------
Comprehensive income (loss) $ 6,765 $ (45,169) $ 16,752
======== ========= ========
The accompanying notes are an integral part of the consolidated
financial statements.
139
FIBERVISIONS, L.L.C.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
DECEMBER 31,
---------------------
Restated
2001 2000
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 10,303 $ 4,777
Accounts receivable, net (Note 3) 34,205 42,809
Affiliate receivables (Note 5) 1,873 2,711
Inventories (Note 4) 14,851 17,993
-------- --------
Total current assets 61,232 68,290
Property, plant, and equipment, net (Note 8) 109,149 121,966
Goodwill and other intangible assets, net (Note 9) 192,241 199,696
Deferred charges and other assets 502 423
-------- --------
Total assets $363,124 $390,375
======== ========
LIABILITIES AND NET MEMBERS' (HERCULES GROUP) INVESTMENT
Current liabilities
Accounts payable $ 15,485 $ 21,405
Short-term debt (Note 7) 7,532 11,588
Accrued expenses (Note 8) 17,413 12,787
-------- --------
Total current liabilities 40,430 45,780
Long-term debt - third parties (Note 7) 44,489 53,919
Deferred income taxes (Note 19) 24,316 20,105
-------- --------
Total liabilities 109,235 119,804
Commitments and contingencies (Note 14) -- --
Net members' (Hercules Group) investment (Note 18)
Accumulated other comprehensive income 3,625 2,351
Intercompany balances 250,264 268,220
-------- --------
Net members' (Hercules Group) investment 253,889 270,571
-------- --------
Total liabilities and net members' (Hercules Group) investment $363,124 $390,375
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
140
FIBERVISIONS, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
YEAR ENDED DECEMBER 31
--------------------------------
Restated Restated
2001 2000 1999
-------- -------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,491 $(46,468) $ 15,855
Adjustments to reconcile net income (loss) to net cash provided from operations:
Depreciation 11,229 15,658 17,406
Provision for impairment of long-lived assets -- 53,541 --
Amortization of goodwill and other intangible assets 7,348 7,394 7,532
Bad debt expense -- 216 --
Loss on disposal of fixed assets 18 -- 89
Corporate and other cost allocations 876 457 1,180
Deferred income taxes (714) (9,539) 4,377
Other items, net -- -- (131)
Affiliates earnings in excess of dividends received (282) (303) --
Accruals and deferrals of cash receipts and payments:
Accounts receivable 7,946 (498) (1,486)
Affiliate receivables (payables) 957 (4,926) --
Transfers from Hercules Group 1,210 3,577 2,766
Inventories 2,976 4,031 (3,459)
Accounts payable and accrued expenses (201) (3,084) (1,894)
Noncurrent assets and liabilities (20) 1,148 (565)
-------- -------- --------
Net cash provided by operations 36,834 21,204 41,670
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (609) (13,129) (15,368)
Acquisitions, net of cash aquired -- (355) --
Other, net 95 2,908 (171)
-------- -------- --------
Net cash used in investing activities (514) (10,576) (15,539)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt repayments, third parties (11,279) (9,726) (11,092)
Transfers to Hercules Group (19,404) (807) (16,314)
Change in short-term debt -- (9) --
-------- -------- --------
Net cash used in financing activities (30,683) (10,542) (27,406)
-------- -------- --------
Effect of exchange rate changes on cash (111) (464) (140)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 5,526 (378) (1,415)
Cash and cash equivalents at beginning of year 4,777 5,155 6,570
-------- -------- --------
Cash and cash equivalents at end of year $ 10,303 $ 4,777 $ 5,155
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 5,807 $ 6,980 $ 8,487
Income taxes, net 2,728 1,724 5,216
Noncash financing activities
Corporate and other cost allocations 876 457 1,180
The accompanying notes are an integral part of the consolidated
financial statements.
141
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.
On April 29, 2002, in connection with Hercules' sale of its Water Treatment
Business (see Note 21) and the repayment of the Facilities, the stock pledges
were released. As a result, based on Hercules' current debt structure, these
separate company stand-alone financial statements will not be required for the
fiscal year ending December 31, 2002.
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
legal, accounting, tax, purchasing, safety, information management 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
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
FiberVisions, L.L.C. and its majority-owned subsidiaries where control exits.
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 FiberVisions L.L.C.'s share of their
income. 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 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.
142
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 historical 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 net book value 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.
Pursuant to Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" (SFAS 142), beginning January 1, 2002, goodwill
will not be amortized but will be tested for impairment annually and any
necessary adjustment charged to expense. Intangible assets with finite lives
will be amortized over their useful lives.
INCOME TAXES
U.S. Federal income taxes on net earnings of the company are payable
directly by the members. In jurisdictions where partnership status is not
recognized or foreign corporate subsidiaries exist, 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. 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
$63,270 thousand, $62,410 thousand, and $61,343 thousand at December 31 2001,
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.
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.
143
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Adjustments resulting from the translation of functional currency financial
statements to reporting currency are accumulated and reported as other
comprehensive income (loss), 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.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
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"). SFAS 141 supersedes Accounting
Principles Board Opinion ("APB") No. 16, Business Combinations. The provisions
of SFAS 141 (1) require that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) provide specific
criteria for the initial recognition and measurement of intangible assets apart
from goodwill and (3) require that unamortized negative goodwill be written off
immediately as extraordinary gain instead of being deferred and amortized. SFAS
141 also requires that upon adoption of SFAS 142 the Company reclassify the
carrying amounts of certain intangible assets into or out of goodwill, based on
certain criteria. SFAS 142 supersedes APB No. 17, Intangible Assets, and is
effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
initial recognition. The provisions of SFAS 142 (1) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), based on
fair value (as opposed to cost recovery using future undiscounted cash flows),
(3) require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill and (4) remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.
Effective January 1, 2002, Hercules adopted the provisions of SFAS 142.
Hercules identified the following reporting units: Betz Dearborn, Pulp and
Paper, Aqualon, FiberVisions, and Resins. In connection with Hercules'
transitional review, recorded goodwill was determined to be impaired in the Betz
Dearborn and FiberVisions reporting units. In the first quarter 2002, Hercules
completed its transitional impairment review of the identified units and
recognized an after tax impairment loss of $368 million as a cumulative effect
of a change in accounting principle of which $87 million related to the
FiberVisions reporting unit. As a result of Hercules' adoption of SFAS 142, the
Company will no longer record $7.3 million of annual amortization relating to
existing goodwill and intangibles.
Goodwill was evaluated for impairment at December 31, 2001 under Statement
of Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Fixed Assets and for Long-Lived Assets to Be Disposed of". Such evaluations
indicated that goodwill associated with the business was recoverable from
anticipated future
144
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
undiscounted cash flows. Accordingly, no impairment loss was recorded in the
December 31, 2001 financial statements.
In June 2001, the Financial Accounting Standards Board ("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. The Company does not believe it will have a material effect on its
financial statements.
On January 1, 2002, the Company adopted 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 Company does not believe it
will have a material effect on its financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment to FASB
Statement No. 13, and Technical Corrections." The Company elected to early adopt
the provisions of SFAS 145 related to the rescission of SFAS 4, "Reporting Gains
and Losses from the Extinguishment of Debt" ("SFAS 4"). The early adoption had
no effect on the Company's financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs in a
Restructuring)". SFAS 146 defines the timing of the recognition of costs
associated with exit or disposal activities, the types of costs that may be
recognized and the methodology for calculating the fair value of such costs. The
provisions of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe this statement
will have a material effect on its financial statements.
RECLASSIFICATIONS
Certain amounts in the 2000 and 1999 consolidated financial statements and
notes have been reclassified to conform to the 2001 presentation.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
(Dollars in thousands)
2001 2000
-------- --------
Trade $ 30,609 $ 39,834
Rebates from suppliers 3,856 2,857
Other 154 748
-------- --------
34,619 43,439
Less allowance for doubtful accounts (414) (630)
-------- --------
Total $ 34,205 $ 42,809
======== ========
4. INVENTORIES
The components of inventories are:
145
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Dollars in thousands)
2001 2000
------- -------
Finished products $ 5,227 $ 7,461
Materials and work in process 3,643 4,596
Supplies 5,981 5,936
------- -------
Total $14,851 $17,993
======= =======
5. AFFILIATE RECEIVABLES (PAYABLES), NET
Trade receivables from affiliates, consists of $3,813 thousand and $4,926
thousand due from ES FiberVisions for years ended December 31, 2001 and 2000,
respectively, net of $1,940 and $2,215 of accumulated losses of unconsolidated
companies in excess of investment for years 2001 and 2000, respectively (see
Note 6). The company agrees to fund the accumulated losses of such
unconsolidated companies.
6. INVESTMENTS
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%. 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 $55
million and $48 million in fiscal 2001 and 2000, respectively. The Company's
share of net income was $1,319 thousand and $153 thousand in 2001 and 2000,
respectively.
Summarized financial information for the equity affiliates at December 31,
and the years then ended is as follows:
(Dollars in thousands)
2001 2000
------- -------
Current assets $10,413 $10,809
Noncurrent assets 1,865 1,450
Current liabilities 9,389 10,803
Noncurrent liabilities 94
Net sales $54,509 $48,410
Gross profit 9,888 7,520
Net earnings 1,969 228
7. LONG-TERM DEBT
Long-term debt at December 31, 2001 and 2000 is summarized as follows:
146
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Dollars in thousand)
2001 2000
--------------------------- ---------------------------
BOOK VALUE MARKET VALUE BOOK VALUE MARKET VALUE
---------- ------------ ---------- ------------
Revolving credit facility due in varying amounts through $ 18,533 $ 18,533 $ 19,428 $ 19,428
2005 with an average interest rate of 4.15%
Finansierings Instituttet for Industri og Handvoerk A/S 10,455 10,610 15,447 15,684
(FIH)
term notes at various rates from 6.94% to 9.60%
and due in varying amounts through 2006
Danmark Finansiering Institut A/S (DFI) 18,704 19,266 23,482 23,760
term notes at various rates from 6.48% to 8.56%
and due in varying amounts through 2006
Mortgage at a fixed rate of 7.16% and due in varying 4,079 4,304 4,490 4,683
amounts through 2014
Industrialization Fund for Developing Countries (IFU) -- -- 2,410 2,371
at a fixed rate of 5.23% and due in 2001
Lease purchase obligation 250 250 250 250
-------- -------- -------- --------
52,021 52,963 65,507 66,176
Less current maturities (7,532) (7,765) (11,588) (11,723)
-------- -------- -------- --------
Total $ 44,489 $ 45,198 $ 53,919 $ 54,453
======== ======== ======== ========
As of December 31, 2001 FIH term notes are collateralized by land,
buildings, and plant and machinery of approximately $27,598 thousand. The DFI
loan is collateralized by a letter of indemnification regarding land, buildings
and plant and machinery of approximately $17,843 thousand. The mortgage is
collateralized by land and buildings of approximately $4,079 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, 2001 and 2000.
Scheduled annual maturities of long-term debt outstanding at December 31,
2001 in the successive five-year period are summarized as follows:
(Dollars in thousands)
----------------------
2002 $ 7,532
2003 12,270
2004 12,243
2005 12,692
2006 4,222
Thereafter 3,062
-------
Total $52,021
=======
147
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
8. ADDITIONAL BALANCE SHEET DETAIL
(Dollars in thousands)
2001 2000
--------- ---------
Property, plant, and equipment
Land $ 1,273 $ 1,282
Buildings and equipment 360,315 365,539
Construction in progress 15,531 16,054
--------- ---------
Total 377,119 382,875
Accumulated depreciation and amortization (267,970) (260,909)
--------- ---------
Net property, plant, and equipment $ 109,149 $ 121,966
========= =========
Accrued expenses
Payroll and employee benefits $ 2,069 $ 2,168
Accrued interest payable 275 365
Current taxes payable 3,616 245
Accrued MICP 945 --
Miscellaneous 10,508 10,009
--------- ---------
$ 17,413 $ 12,787
========= =========
9. GOODWILL AND OTHER INTANGIBLES ASSETS
At December 31, 2001 and 2000, the goodwill and other intangible assets
were:
(Dollars in thousands)
2001 2000
--------- ---------
Goodwill from Hercules acquisition $ 188,051 $ 188,051
Other intangibles 31,219 31,350
--------- ---------
Total 219,270 219,401
Less accumulated amortization (27,029) (19,705)
--------- ---------
Net goodwill and other intangible assets $ 192,241 $ 199,696
========= =========
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, 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:
(Dollars in thousands)
2001 2000 1999
------- ------- -------
Interest expense $ 6,945 $ 7,459 $ 8,738
Interest income (1,155) (519) (187)
------- ------- -------
Interest expense, net $ 5,790 $ 6,940 $ 8,551
======= ======= =======
148
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 (INCOME), NET
Other operating expenses, net, consists of the following:
(Dollars in thousands)
2001 2000 1999
------- ------- -------
Miscellaneous expense (income), net $ 1,355 $ (252) $ 14
Loss (gain) on foreign currency transactions 8 106 (327)
------- ------- -------
$ 1,363 $ (146) $ (313)
======= ======= =======
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 $21,705 thousand and $36,799 thousand which is included in the net members'
investment balance at December 31, 2001 and 2000, respectively. At December 31,
2001 and 2000 the weighted average interest rate on the intercompany borrowings
was 7.6% and 7.4%, respectively. Interest expense was $3,009 thousand, $2,865
thousand and $2,721 thousand in 2001, 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
$437 thousand, $574 thousand, and $484 thousand in 2001, 2000, and 1999,
respectively.
The net minimum future payments at December 31, 2001 are as follows:
149
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Dollars in thousands)
2002 $273
2003 150
2004 52
2005 8
2006 8
----
Total $491
====
The Danish tax authorities have increased 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 has been 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, 2001 is likely to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
15. 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.
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 ($724)
thousand ($799) thousand for the year ended December 31, 2001 and 2000
respectively. There was no allocation in 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 $327
thousand, $382 thousand, and $413 thousand for 2001, 2000, and 1999,
respectively.
FiberVisions A/S maintains a contributory pension plan. FiberVisions A/S
matching contribution was $940 thousand, $964 thousand, and $977 thousand for
2001, 2000, and 1999, respectively. FiberVisions (China) Textiles Products, Ltd.
provides a housing allowance for their employees. FiberVisions (China) Textiles
Products, Ltd. contribution was $141 thousand, $160 thousand, and $137 thousand
in 2001, 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
189,704 at December 31, 2001, and 491,488 and 926,689 at December 31, 2000 and
1999, respectively.
150
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
At December 31, 2001, under Hercules' incentive compensation plans
1,265,493 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 2001, 2000 and 1999, respectively.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 1999, 2000 and 2001:
REGULAR PERFORMANCE-ACCELERATED
----------------------------- -----------------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES PRICE SHARES PRICE
--------- ---------------- --------- -----------------------
December 31, 1998 -- $ -- -- --
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
Granted 93,425 $ 11.28 -- --
Exercised -- -- -- --
Forfeited -- -- -- --
------- --------- ------ ---------
December 31, 2001 267,100 $ 20.41 55,700 $ 37.56
The weighted-average fair value of regular stock options granted during 1999,
2000 and 2001 was $8.08, $8.85 and $5.69, respectively. The weighted-average
fair value of performance-accelerated stock options granted during 1999, 2000
and 2001 was $8.01, $0 and $0, respectively.
Following is a summary of regular stock options exercisable at December
31, 2001, 2000, and 1999, and their respective weighted-average share prices:
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISABLE SHARES EXERCISE PRICE
------------------- --------- ----------------
December 31, 2000 37,850 $31.53
December 31, 2001 105,220 $28.18
There were no performance-accelerated stock options exercisable at
December 31, 2001, 2000 and 1999.
Following is a summary of stock options outstanding at December 31, 2001:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
--------------------------------------------------- --------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICE RANGE 12/31/2001 CONTRACTUAL LIFE EXERCISE PRICE 12/31/2001 EXERCISE PRICE
-------------------- -------------- ---------------- -------------- -------------- --------------
Regular Stock Options
$11 - $20 198,100 8.85 $14.43 48,620 $17.25
$30 - $40 69,000 7.34 $37.56 56,600 $37.56
------- -------
267,100 105,220
------- -------
Performance-Accelerated Stock Options
$14 - $40 55,700 7.34 $37.56 -- --
------- -------
55,700 --
------- -------
The Company currently expects that 100% of performance-accelerated stock
options will eventually vest.
151
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FiberVisions LLC employees may also participate in the Hercules Employee
Stock Purchase Plan ("ESSP"). 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, three are no shares of Hercules common stock are registered for offer
and sale under the plan. Shares issued at December 31, 2001 and 2000, were
1,758,081 and 1,597,861, 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 2001, 2000 and 1999:
PERFORMANCE EMPLOYEE STOCK
ASSUMPTION REGULAR PLAN ACCELERATED PLAN PURCHASE PLAN
---------- ------------ ---------------- --------------
Dividend yield 0.96% 3.83% 0.0%
Risk-free interest rate 5.80% 5.57% 4.86%
Expected life 7.1 yrs. 5 yrs. 3 mos.
Expected volatility 33.36% 29.78% 49.11%
The Company's net income and earnings per share for 2001, 2000 and 1999
would approximate the pro forma amounts below:
(Dollars in thousands)
2001 2000 1999
-------- --------- --------
Net income
As reported $5,491 $(46,468) $15,855
Pro forma $5,001 $(46,912) $15,700
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 legal, accounting, tax, purchasing, safety, information
management, 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 $876 thousand, $457 thousand and $1,180 thousand in
2001, 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 $16,586
thousand, $15,003 thousand in 2001 and 2000, respectively. Total amounts due
from affiliated companies related to those sales were $3,813 thousand and $4,926
thousand at December 31, 2001 and 2000, respectively.
152
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 $44 thousand,
$76 thousand and $88 thousand in 2001, 2000 and 1999, respectively.
18. NET MEMBERS' (HERCULES GROUP) INVESTMENT
Changes in net Members' (Hercules Group) investment were as follows:
(Dollars in thousands)
----------------------
Balance at January 1, 1999 $ 309,777
Comprehensive income for the year ended December 31, 1999 16,752
Intercompany transactions, net (11,831)
---------
Balance at December 31, 1999 314,698
Comprehensive income for the year ended December 31, 2000 (45,169)
Intercompany transactions, net 1,042
---------
Balance at December 31, 2000 270,571
Comprehensive income for the year ended December 31, 2001 6,765
Intercompany transactions, net (23,447)
---------
Balance at December 31, 2001 $ 253,889
=========
The Company includes accumulated other comprehensive income in net
Members' Hercules Group investment. At December 31, 2001 and 2000 accumulated
other comprehensive income included $3,625 thousand and $2,351 thousand,
respectively, of foreign currency translation adjustments.
19. INCOME TAXES
The domestic and foreign components of income before taxes and effect of
change in accounting principle are presented below:
(Dollars in thousands)
2001 2000 1999
-------- -------- --------
Domestic $ (1,016) $(32,803) $ 15,495
Foreign 12,617 (20,043) 11,155
-------- -------- --------
$ 11,601 $(52,846) $ 26,650
======== ======== ========
A summary of the components of the tax provision follows:
153
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Dollars in thousands)
2001 2000 1999
-------- -------- --------
Currently payable
Domestic $ 474 $ 935 $ 3,376
Foreign 6,350 2,226 3,042
Deferred
Domestic 1,262 (10,173) 3,413
Foreign (1,976) 634 964
-------- -------- --------
Provision (benefit) for
income taxes $ 6,110 $ (6,378) $ 10,795
======== ======== ========
Deferred tax liabilities (assets) at December 31 consist of:
2001 2000
-------- --------
Depreciation $ 28,120 $ 34,196
Accrued expenses -- 1,093
Other 9,881
-------- --------
Gross deferred tax liabilities 38,001 35,289
-------- --------
Amortization $ (531) $ (1,758)
Inventory (818) (2,703)
Bad debts/other accrueds (1,069) (791)
Impairment of assets (12,642) (12,642)
Loss carryforwards (6,293) (5,273)
Other comprehensive income -- 1,005
Other -- (691)
-------- --------
Gross deferred tax assets (21,353) (22,853)
-------- --------
Valuation allowance 7,668 7,669
-------- --------
Total deferred income tax $ 24,316 $ 20,105
======== ========
A reconciliation of the statutory income tax rate to the effective rate
follows:
Statutory income tax rate 35.00% 35.00% 35.00%
Foreign rate differential (4.87) (9.39) 1.42
Valuation allowance 0.51 (10.86) --
Reserves -- (2.78) (0.25)
Goodwill 21.49 (4.30) 4.76
Other 0.10 2.44 0.45
State taxes 0.42 0.53 (2.70)
Provision to return true-up 1.44 1.82
----- ----- -----
Effective tax rate 52.65% 12.08% 40.50%
===== ===== =====
20. RESTATEMENT
The Company has restated it's December 31, 2000 and 1999 financial
statements to reflect income tax provisions for both years. During 2002, the
Company discovered that it's prior financial statements did not include income
tax provisions for its subsidiaries whose income is subject to corporate income
taxes at the subsidiary level. Accordingly, the financial statements for
December 31, 2000 and 1999 have been restated. The effect of these adjustments
on the Company's December 31, 2000 and 1999 financial statements is as follows:
154
FIBERVISIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Dollars in thousands)
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------------------- ----------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
-------------- ----------- ------------- -----------
BALANCE SHEET
Accrued Expenses $ 12,542 $ 12,787 $ 13,524 $ 11,920
Deferred income taxes -- 20,105 -- 30,042
Net members' investment 290,921 253,889 343,137 314,698
Opening net members' investment 343,137 314,698 340,102 309,777
INCOME STATEMENT
Income before taxes (52,846) (52,846) 26,650 26,650
Income taxes -- (6,378) -- 10,795
Net income (52,846) (46,468) 26,650 15,855
CASHFLOW STATEMENT
Net income (52,846) (46,468) 26,650 15,855
Deferred income taxes -- (9,539) -- 4,377
Transfers to/from Hercules Group (1,683) 2,822 (26,076) (13,418)
Accounts payable and accrued expenses (1,792) (3,084) 4,216 (1,894)
21. SUBSEQUENT EVENTS
On April 29, 2002, Hercules completed the sale of its Water Treatment
Business to GE Specialty Materials (GESM). Pursuant to the Stock and Asset
Agreement for the transaction, the sale included all of the stock of
BetzDearborn Inc.. Hercules used the proceeds from the sale to prepay borrowings
under its Senior Credit Facility and ESOP Credit Facility. Pursuant to the
prepayment, among other things, the stock pledges were released.
155
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, 2001
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001 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
November 7, 2002
156
FIBERVISIONS PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Year ended December 31
------------------------------------
2001 2000 1999
-------- -------- --------
Sales to Hercules Group $ 25,426 $ 33,695 $ 31,013
Cost of sales 24,883 32,108 28,856
Selling, general, and administrative 434 1,037 922
expenses
Other operating expenses, net (Note 10) 1,124 1,112 1,125
-------- -------- --------
(Loss) income from operations (1,015) (562) 110
Equity income of affiliated companies 3,562 2,057 12,716
Interest expense (income), net (Note 9) 1,032 (143) 1,426
-------- -------- --------
Income before income taxes 1,515 1,638 11,400
Provision for income taxes (Note 12) 944 571 4,049
-------- -------- --------
Net income $ 571 $ 1,067 $ 7,351
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
157
FIBERVISIONS PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
December 31
2001 2000
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 17 $ 13
Miscellaneous accounts receivable 1,138 1,703
Receivables from affiliates (Note 3) 1,672 476
Inventories (Note 4) 1,640 2,053
-------- --------
Total current assets 4,467 4,245
Property, plant, and equipment, net (Note 7) 34,483 37,640
Investments (Note 5) 21,215 18,140
Goodwill (Note 8) 39,430 40,534
Deferred charges and other assets 11 6
-------- --------
Total assets $ 99,606 $100,565
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable $ 2,707 $ 3,278
Accrued expenses -- 54
-------- --------
Total current liabilities 2,707 3,332
Long-term debt - third parties (Note 6) 250 250
Deferred income taxes (Note 12) 6,160 6,920
-------- --------
Total liabilities 9,117 10,502
Commitments and contingencies (Note 14) -- --
Net Hercules Group investment (Note 13) 90,489 90,063
-------- --------
Total liabilities and net Hercules Group investment $ 99,606 $100,565
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
158
FIBERVISIONS PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year ended December 31
2001 2000 1999
-------- -------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 571 $ 1,067 $ 7,351
Adjustments to reconcile net income to net cash
provided from operations:
Depreciation 3,261 3,128 2,949
Amortization of goodwill 1,104 1,104 1,104
Nonoperating gain on disposals -- -- 53
Corporate and other cost allocations -- (346) 129
Deferred income taxes (760) 1,009 4,218
Affiliates' earnings in excess of dividends (2,849) (1,006) (12,716)
received
Accruals and deferrals of cash receipts and
payments:
Accounts receivable 565 (516) 702
Receivables from affiliates (1,422) (1,933) --
Transfers to/from Hercules Group -- (243) 3,504
Inventories 413 (429) (145)
Accounts payable and accrued expenses (625) (783) 2,568
Noncurrent assets and liabilities (5) (6) 312
-------- -------- --------
Net cash provided by operations 253 1,046 10,029
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (104) (2,133) (1,934)
-------- -------- --------
Net cash used in investing activities (104) (2,133) (1,934)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Transfers to/from Hercules Group (145) 1,094 (8,095)
-------- -------- --------
Net cash provided by (used in) financing
activities (145) 1,094 (8,095)
-------- -------- --------
Net increase in cash and cash equivalents 4 7 --
Cash and cash equivalents at beginning of year 13 6 6
-------- -------- --------
Cash and cash equivalents at end of year $ 17 $ 13 $ 6
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Income taxes, net $ 348 $ -- $ 353
Noncash financing activities
Corporate and other cost allocations -- (346) 129
The accompanying notes are an integral part of the consolidated financial
statements.
159
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.
On April 29, 2002, in connection with Hercules' sale of its Water Treatment
Business (see Note 17) and the repayment of the Facilities, the stock pledges
were released. As a result, based on Hercules' current debt structure, these
separate company stand-alone financial statements will not be required for the
fiscal year ending December 31, 2002.
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. 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 income. 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 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.
160
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 net book value 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.
Pursuant to Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" (SFAS 142), beginning January 1, 2002, goodwill
will not be amortized but will be tested for impairment annually and any
necessary adjustment charged to expense. Intangible assets with finite lives
will be amortized over their useful lives.
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.
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 the
Company's 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.
161
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
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"). SFAS 141 supersedes Accounting
Principles Board Opinion ("APB") No. 16, Business Combinations. The provisions
of SFAS 141 (1) require that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) provide specific
criteria for the initial recognition and measurement of intangible assets apart
from goodwill and (3) require that unamortized negative goodwill be written off
immediately as extraordinary gain instead of being deferred and amortized. SFAS
141 also requires that upon adoption of SFAS 142 the Company reclassify the
carrying amounts of certain intangible assets into or out of goodwill, based on
certain criteria. SFAS 142 supersedes APB No. 17, Intangible Assets, and is
effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
initial recognition. The provisions of SFAS 142 (1) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), based on
fair value (as opposed to cost recovery using future undiscounted cash flows),
(3) require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill and (4) remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.
Effective January 1, 2002, Hercules adopted the provisions of SFAS 142.
Hercules identified the following reporting units: BetzDearborn, Pulp and Paper,
Aqualon, FiberVisions and Resins. In connection with Hercules' transitional
review recorded goodwill was determined to be impaired in the BetzDearborn and
FiberVisions reporting units. In the first quarter 2002, Hercules completed its
transitional impairment review of the identified reporting units and recognized
an after-tax impairment loss of $368 million as a cumulative effect of a change
in accounting principle, of which $87 million related to the FiberVisions
reporting unit. As a result of Hercules' adoption of SFAS 142, the Company will
no longer record $1.1 of annual amortization relating to existing goodwill and
intangibles, as adjusted for the reclassifications just mentioned.
Goodwill was evaluated for impairment at December 31, 2001 under Statement
of Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Fixed Assets and for Long-Lived Assets to Be Disposed of". Such evaluations
indicated that goodwill associated with the business was recoverable from
anticipated future undiscounted cash flows. Accordingly, no impairment loss was
recorded in the December 31, 2001 financial statements.
In June 2001, the Financial Accounting Standards Board ("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. The Company does not believe it will have a material effect on its
financial statements.
On January 1, 2002, the Company adopted 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 Company does not believe it
will have a material effect on its financial statements.
162
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment to FASB
Statement No. 13, and Technical Corrections." The Company elected to early adopt
the provisions of SFAS 145 related to the rescission of SFAS 4, "Reporting Gains
and Losses from the Extinguishment of Debt" ("SFAS 4"). The early adoption had
no effect on the Company's financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs in a
Restructuring)". SFAS 146 defines the timing of the recognition of costs
associated with exit or disposal activities, the types of costs that may be
recognized and the methodology for calculating the fair value of such costs. The
provisions of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe this statement
will have a material effect on its financial statements.
RECLASSIFICATIONS
Certain amounts in the 2000 and 1999 consolidated financial statements and
notes have been reclassified to conform to the 2001 presentation.
163
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
3. RECEIVABLES FROM AFFILIATES
Trade receivables from affiliates, consists of $3,355 thousand and $1,933
thousand due from ES FiberVisions for years then ended December 31, 2001 and
2000, respectively, and net of $1,683 and $1,457 of accumulated losses of
unconsolidated companies in excess of investment for years 2001 and 2000,
respectively (see Note 5).
4. INVENTORIES
The components of inventories are:
(Dollars in thousands)
2001 2000
------ ------
Finished products $ 420 $ 766
Raw materials 1,220 1,254
Work in process -- 33
------ ------
Total $1,640 $2,053
====== ======
5. INVESTMENTS
The equity investments in affiliated companies consist of:
(Dollars in thousands)
2001 2000
------- -------
Investment in FiberVisions, LP $21,215 $18,140
======= =======
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 $3,090 thousand, $2,463 thousand and $12,716 thousand in 2001, 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 operations is 67%. Both parent companies supply fiber to the joint
venture under manufacturing agreements. Products manufactures bicomponent fibers
for the joint venture at its Varde, Denmark and Athens, Georgia locations. The
annual sales of the venture were approximately $55 million and $48 million in
fiscal 2001 and 2000, respectively. Products share of net income (loss) was $472
thousand and ($406) thousand in 2001 and 2000, respectively.
Summarized financial information for the equity affiliates at December 31,
and the years then ended is as follows:
164
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Dollars in thousands)
2001 2000
---- ----
Current assets $ 26,566 $ 33,023
Non Current assets 22,133 9,335
Current liabilities 6,206 6,476
1999
----
Net sales $136,703 $164,714 $150,450
Gross profit 9,309 8,397 27,730
Net earnings 6,885 4,305 25,432
The investments are partnerships which require the associated tax benefit or
expense to be recorded by the Company.
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 thousand
at December 31, 2001 and 2000.
7. ADDITIONAL BALANCE SHEET DETAIL
(Dollars in thousands)
2001 2000
-------- --------
Property, plant, and equipment
Land $ 430 $ 430
Buildings and equipment 45,704 45,703
Construction in progress 4,785 4,682
-------- --------
Total 50,919 50,815
Accumulated depreciation and amortization (16,436) (13,175)
-------- --------
Net property, plant, and equipment $ 34,483 $ 37,640
======== ========
8. GOODWILL
At December 31, 2001 and 2000, the goodwill was:
(Dollars in thousands)
2001 2000
-------- --------
Goodwill $ 43,290 $ 43,290
Less accumulated amortization (3,860) (2,756)
-------- --------
Net goodwill and other intangible assets $ 39,430 $ 40,534
======== ========
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 thousands of goodwill for
the FiberVisons group, which is being amortized over its estimated useful life
of 40 years. $43,290 thousands of the goodwill was assigned to FiberVisions
Products, Inc.
165
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
9. INTEREST (INCOME) EXPENSE
Interest costs are summarized as follows:
(Dollars in thousands)
2001 2000 1999
------- ------- -------
Interest expense $ 2,265 $ 2,201 $ 2,311
Interest income (1,233) (2,344) (885)
------- ------- -------
Interest (income) expense, net $ 1,032 $ (143) $ 1,426
======= ======= =======
10. OTHER OPERATING EXPENSES (INCOME), NET
Other operating expenses (income), net, consists of the following:
(Dollars in thousands)
2001 2000 1999
------ ------ ------
Goodwill and intangible amortization $1,104 $1,104 $1,104
Miscellaneous expense, net 20 8 21
------ ------ ------
$1,124 $1,112 $1,125
====== ====== ======
11. 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 $37,720 thousand and $34,280 thousand which is included in the net Hercules
Group investment balance at December 31, 2001 and 2000, respectively. In 2001
and 2000 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 $18,926 thousand and $16,258 thousand which is included in the net
Hercules Group investment balance at December 31, 2001 and 2000, respectively.
At December 31, 2001 and 2000 the weighted average interest rate on the
intercompany borrowings was 7.6% and 7.4%, respectively.
166
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
12. INCOME TAXES
A summary of the components of the tax provision follows:
(Dollars in thousands)
2001 2000 1999
------- ------- -------
Current (Domestic) $ -- $ (438) $ (169)
Deferred (Domestic) 944 1,009 4,218
------- ------- -------
Provision for income taxes $ 944 $ 571 $ 4,049
======= ======= =======
Deferred tax liabilities (assets) at December 31 consist of:
(Dollars in thousands)
2001 2000
------- -------
Depreciation $ 9,302 $ 9,369
------- -------
Gross deferred tax liabilities 9,302 9,369
------- -------
Inventory $ -- $ (154)
Accrued expenses (226) (152)
Loss carryforwards (2,329) (1,309)
Amortization (472) (412)
Other (115) (422)
------- -------
Gross deferred tax assets (3,142) (2,449)
------- -------
Total deferred income taxes $ 6,160 $ 6,920
======= =======
A reconciliation of the statutory income tax rate to the effective rate
follows:
2001 2000 1999
----- ----- -----
Statutory income tax rate 35.00% 35.00% 35.00%
Rate differential adjustment -- -- 2.46
Goodwill 25.50 30.00 3.39
State taxes 1.73 2.30 0.69
Reserves -- (30.71) --
Other 0.07 (1.72) (6.03)
----- ----- -----
Effective tax rate 62.30% 34.87% 35.51%
----- ----- -----
167
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
13. NET HERCULES GROUP INVESTMENT
Changes in net Hercules Group investment were as follows:
(Dollars in thousands)
----------------------
Balance at January 1, 1999 $ 85,603
Net loss for the year ended December 31, 1999 7,351
Intercompany transactions, net (4,463)
--------
Balance at January 1, 2000 $ 88,491
Net loss for the year ended December 31, 2000 1,067
Intercompany transactions, net 505
--------
Balance at December 31, 2000 90,063
Net loss for the year ended December 31, 2001 571
Intercompany transactions, net (145)
--------
Balance at December 31, 2001 $ 90,489
========
14. COMMITMENTS AND CONTINGENCIES
The Company has operating leases (storage space and data processing
equipment) expiring at various dates. Rental expense was $22 thousand, $14
thousand, and $10 thousand in 2001, 2000, and 1999, respectively.
The net minimum future payments at December 31, 2001 are as follows:
(Dollars in thousands)
----------------------
2002 $ 7
2003 2
------------
Total $ 9
============
2004 and thereafter the net minimum future payments are zero.
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, 2001 is likely to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
15. PENSION, OTHER POSTRETIREMENT BENEFITS AND OTHER BENEFITS
The Company participates in a defined benefit pension plan sponsored by
Hercules, Inc. ("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 ($112)
thousand, ($129) thousand, and $0 for the years ended December 31, 2001, 2000,
and 1999, respectively.
168
FIBERVISIONS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 $59 thousand, $69 thousand, and $79 thousand for 2001, 2000,
and 1999, respectively.
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, 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 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. In
addition, the company allocates certain of it's own costs to other companies in
the FiberVisions group of companies. 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 $25,426
thousand, $33,695 thousand, and $31,013 thousand in 2001, 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 $9 thousand, $7
thousand, and $8 thousand in 2001, 2000, and 1999, respectively.
17. SUBSEQUENT EVENTS
On April 29, 2002, Hercules completed the sale of its Water Treatment
Business to GE Specialty Materials (GESM). Pursuant to the Stock and Asset
Agreement for the transaction, the sale included all of the stock of
BetzDearborn Inc.. Hercules used the proceeds from the sale to prepay borrowings
under its Senior Credit Facility and ESOP Credit Facility. Pursuant to the
prepayment, among other things, the stock pledges were released.
169
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 Hercules Canada, Inc., a
subsidiary of Hercules Incorporated, at December 31, 2001 and 2000 and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001 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
January 25, 2002, except for note 2, New accounting pronouncements, and note 10,
Subsequent event, which are as of November 8, 2002
170
HERCULES CANADA, INC.
Statements of Operations and Comprehensive (Loss) Income
--------------------------------------------------------------------------------
(thousands of U.S. dollars)
Year ended December 31,
2001 2000 1999
---------------- ---------------- ----------------
Equity in income of affiliated company (note 3) $ 1,726 $ 4,003 $ 3,221
Interest and debt expense (note 9) (993) (1,021) (311)
Interest income (note 9) 34 136 -
Other income (expense) - net 82 (67) (17)
---------------- ---------------- ----------------
Income before income taxes 849 3,051 2,893
Provision for income taxes (note 7) 1,753 2,281 1,977
---------------- ---------------- ----------------
Net (loss) income (904) 770 916
Translation adjustments (408) (105) 676
---------------- ---------------- ----------------
Comprehensive (loss) income $ (1,312) $ 665 $ 1,592
================ ================ ================
The accompanying accounting policies and notes are an integral part of the financial statements.
171
HERCULES CANADA, INC.
Balance Sheets
--------------------------------------------------------------------------------
(thousands of U.S. dollars)
December 31,
2001 2000
----------------- -----------------
ASSETS
Current assets
Cash and cash equivalents $ 799 $ 33
Income taxes receivable 959 1,186
----------------- -----------------
Total current assets 1,758 1,219
Investment (note 3) 6,745 12,010
----------------- -----------------
Total assets $ 8,503 $ 13,229
================= =================
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accrued expenses $ 2 $ 341
----------------- -----------------
Total current liabilities 2 341
----------------- -----------------
Deferred income taxes (note 7) 167 1,174
----------------- -----------------
Total liabilities 169 1,515
----------------- -----------------
Contingencies (note 8) - -
Net Hercules Group investment (note 6)
Accumulated other comprehensive loss (10,568) (10,160)
Intercompany transactions (note 5) 18,902 21,874
----------------- -----------------
Total net Hercules Group investment 8,334 11,714
----------------- -----------------
Total liabilities and net Hercules Group investment $ 8,503 $ 13,229
================= =================
The accompanying accounting policies and notes are an integral part of
the financial statements.
172
HERCULES CANADA, INC.
Statements of Cash Flows
--------------------------------------------------------------------------------
(thousands of U.S. dollars)
Year ended December 31,
2001 2000 1999
---------------- --------------- ----------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income $ (904) $ 770 $ 916
Adjustments to reconcile net income to net cash provided from
operations
Equity in income (loss) of affiliated company - net
of withdrawals from partnership equity 4,798 3,877 (3,221)
Deferred income taxes (686) 166 365
Accruals and deferrals of cash receipts and payments
Income taxes receivable 438 (632) (2,828)
Accrued expenses (339) 293 48
Transfer to Hercules Group 83 (1,632) (22)
---------------- --------------- ----------------
Net cash provided by (used in) operations 3,390 2,842 (4,742)
---------------- --------------- ----------------
CASH FLOW FROM FINANCING ACTIVITIES:
Transfers (to) from Hercules Group (2,655) (1,594) 3,497
(Decrease) increase in bank overdraft - (1,237) 1,245
---------------- --------------- ----------------
Net cash (used in) provided by financing activities (2,655) (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 31 (2) -
---------------- --------------- ----------------
Net increase in cash and cash equivalents 766 33 -
Cash and cash equivalents - Beginning of year 33 - -
---------------- --------------- ----------------
Cash and cash equivalents - End of year $ 799 $ 33 $ -
================ =============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 2,396 $ 428 $ 70
Income taxes 3,296 436 (790)
The accompanying accounting policies and notes are an integral part of
the financial statements.
173
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 affiliated 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, were 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 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.
On April 29, 2002, in connection with Hercules' sale of its Water
Treatment Business (note 10) and the repayment of the Facilities, the
stock pledges were released. As a result, based on Hercules' current debt
structure, these separate company stand-alone financial statements will
not be required for the fiscal year ending December 31, 2002.
As a result of the global 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
a pooling of interest.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Investments in affiliated companies with a 20% to 50% ownership interest
are accounted for using the equity method of accounting and, accordingly,
net income includes HCI's share of the income of HCP. 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.
174
HERCULES CANADA, INC.
Notes to Financial Statements
--------------------------------------------------------------------------------
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.
Adjustments resulting from the translation of functional currency
financial statements to reporting currency are accumulated and reported as
other comprehensive (loss) income, a component of net Hercules Group
investment.
Transactions in foreign currency are recorded at the exchange rate
prevailing on the date of the 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.
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.
175
HERCULES CANADA, INC.
Notes to Financial Statements
--------------------------------------------------------------------------------
NEW ACCOUNTING PRONOUNCEMENTS
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.
The Company does not believe it will have a material effect on its
financial statements.
On January 1, 2002, the Company adopted 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 Company
does not believe it will have a material effect on its financial
statements.
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 (2000 -
$nil). During 2001, the Company received a distribution of $6,524 thousand
(2000 - $7,904 thousand).
Summarized financial information for this equity affiliate at December 31
and for the years then ended is as follows:
(thousands of U.S. dollars)
2001 2000 1999
Current assets $ 43,449 $ 42,361
Non-current assets 286,249 315,770
---------------- ----------------
Total assets $ 329,698 $ 358,131
================ ================
Current liabilities $ 38,286 $ 34,418
================ ================
Net sales $ 149,824 $ 178,512 $ 165,866
Gross profit 62,882 70,700 71,238
Net earnings 6,151 14,251 11,467
176
HERCULES CANADA, INC.
Notes to Financial Statements
--------------------------------------------------------------------------------
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, 2001, HCI had $3,131 thousand (2000 - $3,309 thousand) 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, 2001 and 2000 were nil%.
All lines of credit are payable in Canadian funds.
5 INTERCOMPANY NOTE PAYABLE AND OTHER FINANCING ARRANGEMENTS
HCI has an intercompany loan with the Hercules Group in the amount of
$12,522 thousand and $15,882 thousand, which is included in the net
Hercules Group investment balance as of December 31, 2001 and 2000,
respectively. The loan is denominated in Canadian dollars, is due on
demand and bears interest at 10%.
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 - January 1, 2000 14,120
Net income 770
Other comprehensive loss (105)
Intercompany transactions - net (3,071)
-----------------
Balance - December 31, 2000 11,714
Net loss (904)
Other comprehensive loss (408)
Intercompany transactions - net (2,068)
-----------------
Balance - December 31, 2001 $ 8,334
=================
The Company includes accumulated comprehensive income or loss in net
Hercules Group investment. At December 31, 2001 and 2000, accumulated
other comprehensive loss included a cumulative loss of $10,568 thousand
and a cumulative loss of $10,160 thousand, respectively, of foreign
currency translation adjustments.
177
HERCULES CANADA, INC.
Notes to Financial Statements
--------------------------------------------------------------------------------
7 INCOME TAXES
A summary of the components of the tax provision follows:
(thousands of U.S. dollars)
Year ended December 31,
2001 2000 1999
---------------- --------------- ----------------
Current $ 2,439 $ 2,115 $ 1,612
Deferred (686) 166 365
---------------- --------------- ----------------
Provision for income taxes $ 1,753 $ 2,281 $ 1,977
================ =============== ================
The deferred tax liability at December 31 is comprised of:
(thousands of U.S. dollars)
2001 2000
----------------- -----------------
Accrued expenses of HCP $ 502 $ 35
----------------- -----------------
Gross deferred tax assets 502 35
----------------- -----------------
Depreciation of HCP 279 574
Prepaid pension and post-retirement benefits of HCP 390 622
Other - 13
----------------- -----------------
Gross deferred tax liabilities 669 1,209
----------------- -----------------
Total deferred income tax liability $ 167 $ 1,174
================= =================
A reconciliation of the statutory income tax rate to the effective rate is
as follows:
2001 2000 1999
------ ----- -----
Statutory income tax rate 40.62% 40.14% 40.54%
Goodwill amortization of HCP 105.41 30.12 28.47
Non-deductible expenses 6.51 2.37 2.69
Other 53.93 2.13 (3.36)
------ ----- -----
Effective tax rate 206.47% 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, 2001 is likely to
have a material adverse effect on the financial position, results of
operations, or cash flows of the Company.
178
HERCULES CANADA, INC.
Notes to Financial Statements
--------------------------------------------------------------------------------
9 RELATED PARTY TRANSACTIONS
In the year 2001, HCI incurred interest expense of $993 thousand (2000 -
$1,021 thousand; 1999 - $311 thousand) on its intercompany loan with the
Hercules Group. In 2001, HCI also earned interest income of $34 thousand
(2000 - $136 thousand; 1999 - $nil) on its note receivable with the
Hercules Group.
10 SUBSEQUENT EVENT
On April 29, 2002, Hercules completed the sale of its Water Treatment
Business to GE Specialty Materials. Pursuant to the Stock and Asset
Agreement for the transaction, the sale included all of the stock of
BetzDearborn and the partnership interest of the Company. Hercules used
the proceeds from the sale to prepay borrowings under its Senior Credit
Facility and ESOP Credit Facility. Pursuant to the prepayment, among other
things, the stock pledges were released.
179
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 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, 2001 and 2000, and the
results of its operations and its cash flows for each of the three years in the
period ended November 30, 2001, 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
November 13, 2002
180
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
STATEMENTS OF INCOME and COMPREHENSIVE INCOME
(Dollars in thousands)
2001 2000 1999
-------- -------- --------
SALES TO THIRD PARTIES $ 27,727 $ 27,467 $ 22,605
SALES TO HERCULES GROUP 2,402 2,373 1,199
-------- -------- --------
30,129 29,840 23,804
COST OF SALES (15,822) (15,801) (13,565)
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (7,468) (8,235) (7,734)
GOODWILL AMORTIZATION (358) (419) (405)
ROYALTY EXPENSE (1,886) (1,852) (1,286)
-------- -------- --------
PROFIT FROM OPERATIONS 4,595 3,533 814
OTHER EXPENSE, NET (NOTE 8) (10) (286) (184)
-------- -------- --------
INCOME BEFORE INCOME TAXES 4,585 3,247 630
PROVISION FOR INCOME TAXES (NOTE 10) (913) (949) (215)
-------- -------- --------
NET INCOME 3,672 2,298 415
TRANSLATION ADJUSTMENTS, NET OF TAX (703) (1,051) 565
-------- -------- --------
COMPREHENSIVE INCOME $ 2,969 $ 1,247 $ 980
======== ======== ========
The accompanying notes are an integral part of the financial statements.
181
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
BALANCE SHEET
(Dollars in thousand)
November 30,
2001 2000
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 983 $ 466
Notes receivable 532 1,038
Accounts receivable, net (Note 3) 5,987 5,400
Inventories (Note 4) 2,747 3,600
Deferred income taxes (Note 10) 702 448
Other current assets 439 451
-------- --------
Total current assets 11,390 11,403
Property, plant and equipment, net (Note 5) 5,717 3,088
Goodwill, net (Note 12) 13,720 14,926
Deferred income taxes (Note 10) 453 425
Deferred charges 286 2,733
Other assets 2,832 2,809
-------- --------
TOTAL ASSETS $ 34,398 $ 35,384
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current Liabilities
Short term debt and borrowings (Note 6) $ -- $ 2,923
Accounts payable 1,358 1,099
Accrued expenses (Note 7) 1,395 3,252
Other current liabilities 986 784
-------- --------
Total current liabilities 3,739 8,058
-------- --------
Total liabilities 3,739 8,058
-------- --------
Commitment and contingencies (Note 13) -- --
Net Hercules Group Investment (Note 16)
Accumulated other comprehensive income (1,517) (814)
Intercompany transactions, net 32,176 28,140
-------- --------
Net Hercules Group Investment 30,659 27,326
-------- --------
TOTAL LIABILITIES AND NET HERCULES GROUP INVESTMENT $ 34,398 $ 35,384
======== ========
The accompanying notes are an integral part of the financial statements.
182
HERCULES CHEMICALS (TAIWAN) CO., LIMITED.
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended November 30,
2001 2000 1999
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,672 $ 2,298 $ 415
Adjustments to reconcile net income to
net cash provided from operations
Depreciation 624 536 440
Amortization 358 419 433
Provision for bad debts 53 118 14
(Gain)loss on disposal of fixed assets (25) (47) 31
Corporate and other cost allocations 1,303 941 1,241
Accruals and deferrals of cash receipts and payments:
Notes receivable 464 7 (137)
Accounts receivable (1,110) 112 (1,430)
Inventories 710 (925) (354)
Prepaid pension expense -- 124 160
Other current assets (6) 82 (19)
Deferred tax assets 21 (200) 392
Accounts payable (57) -- 223
Accrued expense (1,693) 578 (103)
Other current liabilities 232 662 35
Other liabilities -- -- (482)
Transfers to/from Hercules Group (236) (177) (76)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,310 4,528 783
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditure (976) (397) (589)
Proceeds from disposal of fixed assets 87 165 186
Deposit (273) (6) 52
Goodwill Adjustment 270 -- --
Deferred charges 26 (2,408) (43)
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (866) (2,646) (394)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of short-term notes -- 704 3,931
Repayment of short-term notes loan (638) (4,060) (273)
Increase in commercial paper payable (2,166) 1,280 (753)
Transfers to/from Hercules Group -- -- (3,888)
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (2,804) (2,076) (983)
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (123) 364 (61)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 517 170 (655)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 466 296 951
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 983 $ 466 $ 296
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interests $ 78 $ 238 $ 203
Income tax, net 1,272 266 173
NON CASH INVESTING AND FINANCING ACTIVITIES
Corporate and other cost allocations $ 1,303 $ 941 $ 1,241
Reversal of restructuring reserve, net of tax 270 -- --
The accompanying notes are an integral part of the financial statements.
183
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.
On April 29, 2002, in connection with Hercules' sale of its Water
Treatment Business (see Note 17) and the repayment of the Facilities, the
stock pledges were released. As a result, based on Hercules' current debt
structure, these separate company stand-alone financial statements will
not be required for the fiscal year ending November 30, 2002.
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. 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.
184
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
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.
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.
185
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
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. 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.
186
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
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
as follows: building and improvement - 5 to 30 years; machinery and
equipment - 5 to 15 years; other 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 net book value 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. Pursuant to Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible
Asset," ("SFAS 142"), beginning January 1, 2002, goodwill will not be
amortized but will be tested for impairment annually and any necessary
adjustment will be charged to expense. Intangible assets with finite lives
will be amortized over their useful lives.
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.
Deferred Charges
Deferred charges include construction-in-progress costs primarily
consisting of fixed assets not yet placed in use. Once the projects are
completed, 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
187
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
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.
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
188
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
principally of cash and cash equivalent, notes receivable and accounts
receivable. The cash and cash equivalents are deposited with various
well-known domestic and foreign financial institutions. Therefore, the
concentration risk is limited. Concentrations of credit risk with respect
to notes receivable and accounts receivable are limited due to the
Company's large number of customers and their dispersion across many
different industries and locations.
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 2001, the Financial Accounting Standards Board ("FASB") issued
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").
SFAS 141 supersedes Accounting Principles Board Opinion ("APB") No. 16,
Business Combinations. The provisions of SFAS 141 (1) require that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001, (2) provide specific criteria for the
initial recognition and measurement of intangible assets apart from
goodwill and (3) require that unamortized negative goodwill be written off
immediately as extraordinary gain instead of being deferred and amortized.
SFAS 141 also requires that upon adoption of SFAS 142 the Company
reclassify the carrying amounts of certain intangible assets into or out
of goodwill, based on certain criteria. SFAS 142 supersedes APB No. 17,
Intangible Assets, and is effective for fiscal years beginning after
December 15, 2001. SFAS 142 primarily addresses the accounting for
goodwill and intangible assets subsequent to their initial recognition.
The provisions of SFAS 142 (1) prohibit the amortization of goodwill and
indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and
in interim periods if certain events occur indicating that the carrying
value of goodwill and/or indefinite-lived intangible assets may be
impaired), based on fair value (as opposed to cost recovery using future
undiscounted cash flows), (3) require that reporting units be identified
for the purpose of assessing potential future impairments of goodwill and
(4) remove the forty-year limitation on the amortization period of
intangible assets that have finite lives.
189
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
Effective January 1, 2002 Hercules adopted the provisions of SFAS 142.
Hercules identified the following reporting units: BetzDearborn, Pulp and
Paper, Aqualon and FiberVisions. In connection with Hercules' transitional
review, recorded goodwill was determined to be impaired in the
BetzDearborn reporting unit. In the first quarter 2002, Hercules completed
its transitional impairment review of the identified reporting units and
recognized an after tax impairment loss of $368 million as a cumulative
effect of a change in accounting principle. As a result of Hercules'
adoption of SFAS 142, the Company will no longer record $358 thousand of
annual amortization relating to existing goodwill and intangibles.
Goodwill related to the BetzDearborn business was evaluated for impairment
at November 30, 2001 under Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of". Such evaluation indicated that goodwill
associated with the business was recoverable from anticipated future
undiscounted cash flows. Accordingly, no impairment loss was recorded in
the November 30, 2001 financial statements.
In June 2001, the Financial Accounting Standards Board ("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. The Company does not believe this
statement will have a material effect on its financial statements.
On January 1, 2002, the Company adopted 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
Company does not believe this statement will have a material effect on its
financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment to
FASB Statement No. 13, and Technical Corrections." The Company has elected
to early adopt the provisions of SFAS 145 related to the rescission of
SFAS 4, "Reporting Gains and Losses from the Extinguishment of Debt"
("SFAS 4"). The early adoption of SFAS 145 had no effect on the Company's
financial statements.
190
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"). SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs in a Restructuring)". SFAS 146
defines the timing of the recognition of costs associated with exit or
disposal activities, the types of costs that may be recognized and the
methodology for calculating the fair value of such costs. The provisions
of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe this
statement will have a material effect on its financial statements.
Reclassifications
Certain accounts presented in the year ended November 30, 2000 financial
statements have been reclassified to conform with presentation adopted for
the year ended November 30, 2001.
191
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
3. ACCOUNTS RECEIVABLE, NET
The accounts receivable, net, consists of:
(Dollars in thousands)
2001 2000
------- -------
Trade $ 6,192 $ 5,567
Less: Allowance for doubtful accounts (205) (167)
------- -------
Total $ 5,987 $ 5,400
======= =======
4. INVENTORIES
The components of inventories are:
(Dollars in thousands)
2001 2000
------ ------
Finished goods $ 884 $1,396
Raw materials and supplies 1,434 1,564
Goods in transit 429 640
------ ------
Total $2,747 $3,600
====== ======
5. PROPERTY, PLANT, AND EQUIPMENT
(Dollars in thousands)
2001 2000
-------- --------
Buildings and improvements $ 2,714 $ 1,271
Machinery and equipment 6,652 5,208
Other equipment 697 841
-------- --------
10,063 7,320
Less: Accumulated depreciation (4,346) (4,232)
-------- --------
Total $ 5,717 $ 3,088
======== ========
192
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
Depreciation expense for the years ended November 30, 2001, 2000 and 1999
amounted to $624 thousand, $536 thousand and $440 thousand,
respectively.
6. SHORT TERM DEBT
At November 30, 2000, the Company has an outstanding balance of $665
thousand 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% during 2000.
Commercial papers-short term, which are guaranteed by CitiBank and Hong
Kong Shanghai Bank bearing an interest rate of 5% at November 30, 2000,
are as follows:
(Dollars in thousands)
2001 2000
------ -------
Commercial papers payable $ -- $ 2,267
Less: unamortized discount -- (9)
------ -------
Total $ -- $ 2,258
====== =======
The Company paid off all of its short-term debt during 2001.
7. ACCRUED EXPENSES
(Dollars in thousands)
2001 2000
------ ------
Other accrued expenses $ 493 $1,010
Payroll and employee benefits 693 1,199
Restructuring reserves 195 593
Accrued royalty expenses 14 450
------ ------
Total $1,395 $3,252
====== ======
8. OTHER EXPENSES, NET
Other income (expenses), net consist of the following:
193
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
2001 2000 1999
----- ----- -----
Interest expense ($ 75) ($256) ($202)
Foreign exchange gain 66 11 2
Interest income 3 9 10
Other (expenses) income (4) (50) 6
----- ----- -----
Total ($ 10) ($286) ($184)
===== ===== =====
194
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
9. RETIREMENT BENEFITS
The Company has a non-contributory defined benefit plan covering all of
its 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:
(Dollars in thousands)
2001 2000
------- -------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at December 1 $ 2,665 $ 2,854
Service cost 298 289
Interest cost 148 157
Benefits paid (621) (489)
Actuarial loss 675 --
Translation adjustments (115) (146)
------- -------
Benefit obligation at November 30 $ 3,050 $ 2,665
======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at December 1 $ 2,069 $ 2,381
Actual return on plan assets 101 144
Company contributions 217 122
Benefits paid (621) (464)
Translation adjustments (76) (114)
------- -------
Fair value of plan assets at November 30 $ 1,690 $ 2,069
======= =======
195
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
Funded status of the plan ($1,360) ($ 596)
Unrecognized net loss 667 540
Unrecognized net transition obligation 488 --
------- -------
Accrued benefit cost ($ 205) ($ 55)
======= =======
ASSUMPTIONS AS OF NOVEMBER 30
Weighted-average discount rate 5% 6%
Expected return on plan assets 5% 6%
Rate of compensation increase 5% 6%
(Dollars in thousands)
COMPONENTS OF NET PERIOD PENSION COST 2001 2000 1999
----- ----- -----
Service cost $ 298 $ 289 $ 245
Interest cost 148 157 143
Expected return on plan assets (105) (144) (109)
Amortization of net loss -- -- 22
Amortization of transition obligation (asset) 31 34 (16)
----- ----- -----
Benefit cost $ 372 $ 336 $ 285
===== ===== =====
196
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
10. INCOME TAXES
A summary of the components of the tax provision is as follows:
(Dollars in thousands)
2001 2000 1999
----- ----- -----
Current $ 980 $ 807 $ 11
Deferred (67) 142 204
----- ----- -----
Provision for income taxes $ 913 $ 949 $ 215
===== ===== =====
Deferred tax assets consist of the following:
(Dollars in thousands)
2001 2000
---- ----
Current items:
Unrealized expenses $ 62 $151
Unrealized foreign exchange loss 598 269
Allowance for doubtful accounts 42 28
---- ----
$702 $448
==== ====
Non-current items:
Depreciation $388 $333
Deferred pension cost 65 92
---- ----
$453 $425
==== ====
A reconciliation of the ROC statutory income tax rate to the effective rate is
as follows:
2001 2000 1999
---- ---- ----
Statutory income tax rate 32% 32% 32%
Non-deductible amortization of goodwill 1% 1% 5%
Overaccrual for prior year's income tax (2%) -- --
Non-deductible meals and entertainment -- 1% 8%
Investment tax credit (13%) -- (5%)
Other 2% (5%) (6%)
--- --- ---
Effective tax rate 20% 29% 34%
=== === ===
197
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
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 the 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 $1,303 thousand,
$941 thousand, and $1,241 thousand in 2001, 2000, and 1999, 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 agreement expires in
December 2004. Royalty expenses were $1,886 thousand, $1,852 thousand and
$1,286 thousand for the years ended November 30, 2001, 2000 and 1999,
198
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
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 $2,402 thousand, $2,373 thousand and $1,199
thousand in 2001, 2000 and 1999, 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 $6,407 thousand, $8,338 thousand and $5,557 thousand in 2001, 2000
and 1999, respectively.
12. GOODWILL
Goodwill relates to the Hercules' 1998 purchase of BDTL. At November 30,
2001 and 2000, goodwill was $13,720 thousand and $14,926 thousand,
respectively, (net of accumulated amortization of $1,206 thousand and $890
thousand, respectively). The amortization period for goodwill is 40 years.
A reconciliation of activities with related to goodwill is as follows:
(Dollars in thousands)
2001 2000
-------- --------
Balance at beginning of year $ 14,926 $ 16,167
Amortization (358) (419)
Reversal of restructuring reserve,
net of tax (270) --
Translation adjustment (578) (822)
-------- --------
Balance at end of year $ 13,720 $ 14,926
======== ========
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 $486 thousand in 2001, $307 thousand in 2000, and $230 thousand in
1999.
199
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
At November 30, 2001, minimum rental payments under noncancelable leases
aggregated $146 thousand, which will be paid in 2002.
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. In
1998, the Company incurred restructuring liabilities of $1,347 thousands in
connection with the acquisition of BDTL (see Note 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. During the second and third quarter 2001,
Hercules completed a global assessment of remaining expenditures for the 1998
BetzDearborn plan. As a result, the estimate for severance was lowered by $344
thousand with an offsetting reduction to goodwill and deferred taxes assets of
$270 thousand and $74 thousand, respectively.
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:
(Dollars in thousands)
2001 2000
----- -----
Balance at beginning of year $ 569 $ 983
Cash payments (30) (390)
Reversal of restructuring reserve (344) --
----- -----
Balance at end of year $ 195 $ 593
===== =====
200
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
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 189,704 at
December 31, 2001, and 491,488 and 926,689 at December 31, 2000 and 1999,
respectively.
At December 31, 2001, under Hercules' incentive compensation plans, 1,265,493
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 2001, 2000 and 1999, respectively.
201
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 1999, 2000 and 2001:
Regular
------------------------------
Number of Weighted-average
Shares price
------------------------
December 31, 1998 6,600 $40.38
Granted 7,650 $37.74
Exercised -- --
Forfeited -- --
------------------------
December 31, 1999 14,250 $38.96
Granted -- --
Exercised -- --
Forfeited -- --
------------------------
December 31, 2000 14,250 $38.96
Granted -- --
Exercised -- --
Forfeited -- --
------------------------
December 31, 2001 14,250 $38.96
There were no performance-accelerated stock options granted or outstanding
during 1999, 2000 and 2001.
The weighted-average fair value of regular stock options granted during 1999,
2000 and 2001 was $8.26, $0 and $0, respectively.
Following is a summary of regular stock options exercisable at December 31,
1999, 2000, and 2001, and their respective weighted-average share prices:
Number of Weighted-average
Options Exercisable Shares exercise price
-----------------------------------------------------------------------
December 31, 1999 5,000 $39.97
December 31, 2000 9,520 $39.42
December 31, 2001 12,720 $39.11
Following is a summary of stock options outstanding at December 31, 2001:
Outstanding Options Exercisable Options
---------------------------------------------------------- ----------------------------------------
Number Weighted-average Weighted- Number Weighted-
Outstanding at Remaining average Exercisable at average
Exercise Price Range 12/31/2001 Contractual Life exercise price 12/31/2001 exercise price
-------------------- ---------------------------------------------------------- ----------------------------------------
Regular Stock Options
$30 - $40 13,550 6.58 $38.50 12,020 $38.60
$40 - $50 700 6.35 $47.81 700 $47.81
-------------- -------------
14,250 12,720
-------------- -------------
The Company employees may also participate in the Hercules Employee Stock
Purchase Plan ("ESSP"). 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
202
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
may range from 2% to 15% of an employee's base salary each pay period, subject
to certain limitations. Currently, there are no shares of Hercules common stock
registered for offer and sale under the plan. Shares issued at December 31,
2001 and 2000, were 1,758,081 and 1,597,861, 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 2001, 2000 and 1999:
Performance Employee Stock
Assumption Regular Plan Accelerated Plan Purchase Plan
---------- ------------ ---------------- -------------
Dividend yield 0.96% 3.83% 0.0%
Risk-free interest rate 5.80% 5.57% 4.86%
Expected life 7.1 yrs. 5 yrs. 3 mos.
Expected volatility 33.36% 29.78% 49.11%
The Company's net income and earnings per share for 2001, 2000 and 1999 would
approximate the pro forma amounts below:
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Net income
As reported $3,672 $2,298 $ 415
Pro forma $3,659 $2,277 $ 395
203
HERCULES CHEMICALS (TAIWAN) CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
16. NET HERCULES GROUP INVESTMENT
Changes in Net Hercules Group Investment were as follows:
(Dollars in thousands)
Balance, December 1, 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
Net income 2,969
Other comprehensive income, (net of tax of $326) (703)
Intercompany transaction, net 1,067
-------
Balance, November 30, 2001 $ 30,659
=======
The Company includes accumulated other comprehensive income in net parent
investment. At November 30, 2001 and 2000, accumulated other comprehensive
income consisted of foreign currency translation adjustments only.
17. SUBSEQUENT EVENTS NOTE
On April 29, 2002, Hercules completed the sale of its Water Treatment
Business to GE Specialty Materials (GESM). Pursuant to the Stock and Asset
Agreement ("SAPA") for the transaction, the sale was executed using the
stock of BetzDearborn, Inc and all of the assets, liabilities, and/or
equity interests relating to the Water Treatment Business. Pursuant to the
SAPA, the Company sold its Water Treatment Business assets to GESM.
Hercules used the proceeds from the sale to repay borrowings under its
Senior Credit Facility.
204
November 15, 2002
--------------------------------------------------------------------------------
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, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001 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
November 13, 2002
205
HERCULES CREDIT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Year Ended December 31,
2001 2000 1999
--------- --------- ---------
Sales to third parties $ 255,285 $ 274,775 $ 295,473
Sales to Hercules Group 49,359 63,033 62,657
--------- --------- ---------
304,644 337,808 358,130
Cost of sales third parties 204,127 227,272 250,066
Selling, general, and administrative expenses 51,529 50,599 57,745
Research and development 12,708 11,780 12,078
Goodwill and intangible asset amortization 1,014 1,014 1,014
Other operating (income) expenses, net (Note 12) (2,129) 22,259 3,554
--------- --------- ---------
Profit from operations 37,395 24,884 33,673
Equity Income in affiliated companies 9,088 9,423 7,358
Interest and debt expense (58) (417) (547)
Other income (expense), net 2,617 1,468 (903)
--------- --------- ---------
Income before income taxes and minority interest $ 49,042 $ 35,358 $ 39,581
Provision for income taxes (Note 13) 19,985 14,241 15,707
--------- --------- ---------
Income before minority interest $ 29,057 $ 21,117 $ 23,874
Minority interest (243) (164) (215)
--------- --------- ---------
Net income $ 28,814 $ 20,953 $ 23,659
========= ========= =========
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
206
HERCULES CREDIT, INC.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
(Dollars in thousands)
December 31,
2001 2000
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 5,683 $ 2,592
Accounts receivable, net (Note 3) 30,924 35,743
Notes receivable (Note 4) -- 3,600
Inventories (Note 5) 39,340 45,409
Other current assets 4,204 4,691
-------- --------
Total current assets 80,151 92,035
-------- --------
Property, plant, and equipment, net (Note 7) 94,722 92,229
Notes receivable (Note 4) 3,000 3,000
Investments (Note 8) 98,499 93,046
Goodwill and other intangible assets, net (Note 9) 27,536 28,550
Deferred charges and other assets 3,140 5,382
-------- --------
Total assets $307,048 $314,242
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable $ 14,354 $ 17,724
Taxes Payable 39,824 33,660
Accrued expenses (Note 7) 26,844 25,590
-------- --------
Total current liabilities 81,022 76,974
Deferred income taxes (Note 13) 8,957 7,720
Pension and other postretirement benefits (Note 11) -- 110
Environmental and other liabilities 26,661 32,863
-------- --------
Total liabilities 116,640 117,667
Commitments and contingencies (Note 16) -- --
Minority Interest 4,044 3,800
Net Hercules Group Investment (Note 14)
Net Hercules Group Investment 186,364 192,775
-------- --------
Total Net Hercules Group Investment 186,364 192,775
-------- --------
Total liabilities and Net Hercules Group Investment $307,048 $314,242
======== ========
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
207
HERCULES CREDIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
2001 2000 1999
-------- -------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 28,814 $ 20,953 $ 23,659
Adjustments to reconcile net income to net cash provided
from operations:
Depreciation 9,236 9,861 11,131
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
Deferred Income Taxes 1,237 1,659 (7,906)
Minority Loss 243 164 215
Corporate and other cost allocations 19,296 17,569 25,148
Affiliates' earnings in excess of dividends
received (9,088) (9,423) (7,358)
Accruals and deferrals of cash receipts and
payments:
Accounts receivable and other assets 8,905 10,103 4,523
Inventories 6,069 7,084 5,112
Accounts payable and accrued expenses 7,661 (16,324) 258
Environmental and other assets and liabilities (4,084) (827) 2,410
-------- -------- --------
Net cash provided by operations 69,303 48,687 66,706
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (11,729) (9,437) (12,133)
Investment in affiliate 38 (179) 254
-------- -------- --------
Net cash used in investing activities (11,691) (9,616) (11,879)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of debt (1,650) --
Transfers to Hercules Group (54,521) (36,762) (57,115)
-------- -------- --------
Net cash used in financing activities (54,521) (38,412) (57,115)
-------- -------- --------
Net increase (decrease) in cash and cash 3,091 659 (2,288)
equivalents
Cash and cash equivalents at beginning of year 2,592 1,933 4,221
-------- -------- --------
Cash and cash equivalents at end of year $ 5,683 $ 2,592 $ 1,933
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest paid 58 $ 417 $ 547
Income taxes paid $ 12,583 $ 23,614 $ 22,697
Noncash financing activities
Issuance of note receivable 3,000 6,600 --
Corporate and other cost allocations 19,296 17,569 25,148
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
208
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.
On April 29, 2002, in connection with Hercules' sale of its Water Treatment
Business (see Note 18) and the repayment of the Facilities, the stock pledges
were released. As a result, based on Hercules' current debt structure, these
separate company stand-alone financial statements will not be required for the
fiscal year ending December 31, 2002.
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. 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 Hercules Credit's
share of their income.
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, which is to charge repairs and maintenance to earnings and capitalize
replacements or betterments. 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.
209
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 net book value 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.
Pursuant to Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" (SFAS 142), beginning January 1, 2002, goodwill
will not be amortized but will be tested for impairment annually and any
necessary adjustment charged to expense. Intangible assets with finite lives
will be amortized over their useful lives.
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.
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
98-1and, accordingly, adoption of SOP 98-1 had no material effect. Computer
software costs are being amortized over a period of 5 to 10 years.
210
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
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 2001, the FASB issued 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"). SFAS 141 supersedes Accounting Principles Board Opinion ("SPB") No. 16,
Business Combinations. The provisions of SFAS 141 (1) require that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001, (2) provide specific criteria for the initial recognition and
measurement of intangible assets apart from goodwill and (3) require that
unamortized negative goodwill be written off immediately as extraordinary gain
instead of being deferred and amortized. SFAS 141 also requires that upon
adoption of SFAS 142 the Company reclassify the carrying amounts of certain
intangible assets into or out of goodwill, based on certain criteria. SFAS 142
supersedes APB No. 17, Intangible Assets, and is effective for fiscal years
beginning after December 15, 2001. SFAS 142 primarily addresses the accounting
for goodwill and intangible assets subsequent to their initial recognition. The
provisions of SFAS 142 (1) prohibit the amortization of goodwill and
indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), based on
fair value (as opposed to cost recovery using future undiscounted cash flows),
(3) require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill and (4) remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.
Effective January 1, 2002 Hercules adopted the provisions of SFAS 142.
Hercules identified the following reporting units: BetzDearborn, Pulp and Paper,
Aqualon, FiberVisions and Resins. In connection with Hercules' transitional
review recorded goodwill was determined to be impaired in the BetzDearborn and
FiberVisions reporting units. In the first quarter 2002, Hercules completed its
transitional impairment review of the identified reporting units and recognized
an after-tax impairment loss of $368 million as a cumulative effect of a change
in accounting principle. As a result of Hercules' adoption of SFAS 142, the
Company will no longer record $1.0 million of annual amortization relating to
existing goodwill and intangibles, as adjusted for the reclassifications just
mentioned.
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. The Company does not believe this statement
will have a material effect on its financial statements.
On January 1, 2002, the Company adopted 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 Company does not believe
this statement will have a material effect on its financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." The Company has elected to early
adopt the provisions of SFAS 145 related to the rescission of SFAS 4, "Reporting
Gains and Losses for the Extinguishment of Debt" ("SFAS" 4"). The early adoption
had no effect on the Company's financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs in a
Restructuring)". SFAS 146 defines the timing of the recognition of costs
associated with exit or disposal activities, the types of costs that may be
recognized and the methodology for calculating the fair value of such costs. The
provisions of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe this statement
will have a material effect on its financial statements.
211
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
(Dollars in thousands)
2001 2000
-------- --------
Trade $ 31,365 $ 36,413
Less allowance for doubtful accounts (441) (670)
-------- --------
Total $ 30,924 $ 35,743
======== ========
4. NOTE RECEIVABLE
Notes receivable as of December 31, 2001, consists of an unsecured demand
note to Greentree Chemical Technologies, Inc. (Greentree) for $3,000 thousand,
due June 30, 2005. The note carried 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. Notes receivable as of December 31, 2000, consist of a $6,600
thousand 30-day demand note from 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 the unsecured demand note to
Greentree for $3,000 thousand, due June 30, 2005.
5. INVENTORIES
The components of inventories are:
(Dollars in thousands)
2001 2000
------- -------
Finished products $22,480 $27,754
Raw material and supplies 14,280 15,613
Work in process 2,580 2,042
------- -------
Total $39,340 $45,409
======= =======
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.
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
189,704 at December 31, 2001, and 491,488 and 926,689 at December 31, 2000 and
1999, respectively.
At December 31, 2001, under Hercules' incentive compensation plans,
1,265,493 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.
212
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 2001, 2000 and 1999, respectively.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 1999, 2000 and 2001:
Regular Performance-Accelerated
---------------------------- ---------------------------
Number of Weighted-average Number of Weighted-average
Shares price Shares price
------- -------- ------- --------
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
Granted 131,925 $ 14.22 -- --
Exercised -- -- -- --
Forfeited (40,710) $ 39.56 -- --
------- -------- ------- --------
December 31, 2001 586,085 $ 28.01 206,625 $ 43.52
The weighted-average fair value of regular stock options granted during 1999,
2000 and 2001 was $8.26, $8.85 and $5.69, respectively. The weighted-average
fair value of performance-accelerated stock options granted during 1999, 2000
and 2001 was $8.01, $0 and $0, respectively.
Following is a summary of regular stock options exercisable at December 31,
1999, 2000, and 2001, and their respective weighted-average share prices:
Number of Weighted-average
Options Exercisable Shares exercise price
------------------- ------ --------------
1999 224,230 $40.49
2000 293,370 $39.20
2001 368,975 $35.01
There were no performance-accelerated stock options exercisable at December
31, 1999, 2000 and 2001.
Following is a summary of stock options outstanding at December 31, 2001:
Outstanding Options Exercisable Options
---------------------------------------------------- ---------------------------------
Number Weighted-average Weighted- Number Weighted-
Outstanding at Remaining average Exercisable at average
Exercise Price Range 12/31/2001 Contractual Life exercise price 12/31/2001 exercise price
------------------------------------------------------------------------------------------
Regular Stock Options
$11 - $20 261,725 8.90 $ 14.22 64,690 $ 16.58
$20-$30 76,475 6.67 $ 25.56 76,475 $ 25.56
$30-$40 135,515 6.33 $ 38.68 122,940 $ 38.77
$40-$50 84,120 5.73 $ 47.26 84,120 $ 47.26
$50-$60 28,250 4.56 $ 54.01 20,750 $ 55.39
------- -------
586,085 368,975
------- -------
Performance-Accelerated
Stock Options
$14-$40 104,655 6.69 $ 38.16 -- --
$40-$50 81,270 5.70 $ 47.40 -- --
$50-$61 20,700 4.18 $ 55.40 -- --
------- -------
206,625 --
------- -------
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 ("ESSP"). 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.
213
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, there are no shares of Hercules common stock
registered for offer and sale under the plan. Shares issued at December 31, 2001
and 2000, were 1,758,081 and 1,597,861, 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 1999, 2000 and 2001:
Performance Employee
Regular Accelerated Stock
Assumption Plan Plan Purchase Plan
---------- ---- ---- -------------
Dividend yield 0.96% 3.83% 0.0%
Risk-free interest rate 5.80% 5.57% 4.86%
Expected life 7.1 yrs. 5 yrs. 3 mos.
Expected volatility 33.36% 29.78% 49.11%
The Company's net income and earnings per share for 2001, 2000 and 1999
would approximate the pro forma amounts below:
(Dollars in thousands)
2001 2000 1999
------- ------- -------
Net income
As reported $28,814 $20,953 $23,659
Pro forma $28,043 $19,328 $22,110
7. ADDITIONAL BALANCE SHEET DETAIL
(Dollars in thousands)
2001 2000
-------- --------
Property, plant, and equipment
Land $ 527 $ 527
Buildings and equipment 371,173 365,202
Construction in progress 16,185 11,909
-------- --------
Total 387,885 377,638
Accumulated depreciation and amortization 293,163 285,409
-------- --------
Net property, plant, and equipment $ 94,722 $ 92,229
======== ========
Accrued expenses
Payroll and employee benefits $ 5,416 $ 4,685
Nitrocellulose inventory disposal cost 5,917 6,478
reserve
Current environmental reserve 5,222 4,686
Restructuring reserve (Note 10) 1,762
Other 8,527 9,741
-------- --------
Total $ 26,844 $ 25,590
======== ========
8. INVESTMENTS
Summarized financial information for Hercules Finance Company, at December
31, 2001 and 2000 and the three years then ended is as follows:
214
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2001 2000
-------- --------
Assets -- $ 55
Net Hercules Group Investment -- 55
2001 2000 1999
-------- -------- --------
Interest income $ 110 $ 1,235 $ 1,274
Interest income from Hercules Group 47,952 48,011 38,582
Corporate and other cost
allocations (2,621) (2,132) (3,067)
Other expense -- -- --
Net income 45,441 47,114 36,789
9. GOODWILL
Goodwill relates to Hercules' 1989 purchase of Henkel's portion of ownership
in Aqualon. At December 31, 2001 and December 31, 2000, goodwill was $27,536
thousand and $28,550 thousand, respectively, (net of accumulated amortization of
$13,008 thousand and $11,994 thousand respectively). Through December 31, 2001,
the goodwill was being amortized over 40 years.
10. RESTRUCTURING
In 2001 and 2000, Hercules Credit incurred $6,000 thousand and $1,662
thousand, respectively, in other operating expenses related to employee
severance benefits for workforce reductions at Parlin, NJ, Louisiana, MO, and
Hopewell, VA, manufacturing sites and Wilmington, DE headquarters in business
support functions.
During 2001, management authorized and committed to a plan to reduce the
workforce as part of the comprehensive cost reduction and work process redesign
program. Under this plan, 97 employees have left or will leave Hercules Credit,
of which 74 employees were terminated pursuant to this plan through December 31,
2001.
The 2000 restructuring costs are related to workforce reductions in the
Hercules Credit manufacturing cost reduction plan. The total number of employee
terminations relating to the 2000 plan is 35, and the actions under the 2000
plan are complete.
Severance benefits were paid in accordance with Hercules' standard severance
pay plan. A reconciliation of activity with respect to the liabilities
established for these plans is as follows:
(Dollars in thousands)
2001 2000
------- -------
Balance at beginning of year $ -- $ --
Additional termination benefits and other exit costs 6,000 1,662
Cash payments (4,238) (1,662)
------- -------
Balance at end of year $ 1,762 $ --
======= =======
11. 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
215
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 $1,719 thousand, $3,367 thousand, and
$3,810 thousand for the years ended December 31, 2001, 2000 and 1999,
respectively, and post-retirement benefit expense was $2,125 thousand, $2,462
thousand, and $1,774 thousand for the years ended December 31, 2001, 2000 and
1999, respectively.
12. OTHER OPERATING EXPENSES, NET
Other operating expenses, net, consists of the following:
(Dollars in thousands)
2001 2000 1999
-------- -------- --------
Loss on disposal of Nitrocellulose $ -- $ 25,241 $ 6,500
Asset impairments -- -- 2,000
Environmental charges 2,344 2,617 3,020
Restructuring charges 6,000 1,662 446
Royalties received (10,473) (7,613) (8,474)
Other -- 352 62
-------- -------- --------
Total $ (2,129) $ 22,259 $ 3,554
======== ======== ========
In 1999, the remaining Nitrocellulose fixed assets at Parlin, NJ were
deemed to be impaired.
216
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
13. INCOME TAXES
The domestic components of income before taxes are presented below:
(Dollars in thousands)
2001 2000 1999
------- ------- -------
Domestic $49,042 $35,358 $39,581
------- ------- -------
$49,042 $35,358 $39,581
======= ======= =======
A summary of the components of the tax provision follows:
(Dollars in thousands)
2001 2000 1999
-------- -------- --------
Currently
Payable
Domestic $ 18,747 $ 12,583 $ 23,612
Deferred
Domestic 1,238 1,658 (7,905)
-------- -------- --------
Provision for income taxes $ 19,985 $ 14,241 $ 15,707
======== ======== ========
Deferred tax liabilities (assets) at December 31 consists of:
(Dollars in thousands)
2001 2000
-------- --------
Amortization -- 7
Partnership Interest 11,040 12,151
Other -- 704
-------- --------
Gross deferred tax liabilities $ 11,040 $ 12,862
-------- --------
Depreciation $ (238) $ (217)
Deemed rent -- (425)
Lease liability (1,471) (4,500)
Other (374) --
-------- --------
Gross deferred tax assets (2,083) (5,142)
-------- --------
$ 8,957 $ 7,720
======== ========
A reconciliation of the statutory tax rate to the effective tax rate
follows:
2000 1999 1998
----- ----- -----
Statutory income tax rate 35.00% 35.00% 35.00%
State Taxes 5.00% 5.00% 5.00%
----- ----- -----
40% 40% 40%
===== ===== =====
217
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
14. NET HERCULES GROUP INVESTMENT
Changes in net Hercules Group investment were as follows:
(Dollars in thousands)
----------------------
Balance, January 1, 1999 $ 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
Net income 28,814
Intercompany transactions, net (35,224)
---------
Balance, December 31, 2001 $ 186,364
=========
15. 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 $20,316 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 and $58,526 thousand, in 2000 and
1999, respectively.
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
$3,993 thousand in 2001, $3,240 thousand in 2000, and $3,446 thousand in 1999.
At December 31, 2001, minimum rental payments under noncancelable leases
aggregated $10,962 thousand. The net minimum payments over the next five years
are $2,448 thousand in 2002, $2,287 thousand in 2003, $2,106 thousand in 2004,
$2,067 thousand in 2005, and $2,054 thousand in 2006.
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, 2001 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 $42 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; 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, 2001, 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
218
HERCULES CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
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 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 & 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 $19,296 thousand, $17,569 thousand, and $25,148
thousand in 2001, 2000 and 1999, 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 $10,473 thousand, $7,613 thousand, and $8,474 thousand in
2001, 2000 and 1999, 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 $21,391 thousand, $23,457 thousand, and $23,598
thousand in 2001, 2000 and 1999, respectively.
18. SUBSEQUENT EVENTS
On April 29, 2002, Hercules completed the sales of its Water Treatment
Business to GE Specialty Materials (GESM). Pursuant to the Stock and Asset
Purchase Agreement for the transaction, the sale included the stock of
BetzDearborn Inc. and certain specified assets and liabilities. Hercules used
the proceeds from the sale to prepay borrowings under its Facilities. Pursuant
to the prepayment, among other things, the Company's stock, which had been
pledged as collateral to the Facilities, was released.
219
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, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 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 Accountants N.V.
Amsterdam, The Netherlands
November 12, 2002
220
HERCULES GB HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Dollars in thousands)
Year Ended December 31,
2001 2000 1999
---------- ---------- ----------
Sales to third parties $ 101,514 $ 123,301 $ 136,056
Sales to Hercules Group 18,932 23,072 22,334
---------- ---------- ----------
120,446 146,373 158,390
Cost of sales 69,811 85,980 92,200
Selling, general, and administrative expenses 31,982 35,332 38,493
Research and development 43 574 1,778
Goodwill and intangible asset amortization 4,099 4,608 4,875
Other operating expenses, net (Note 12) 15,603 6,248 5,361
---------- ---------- ----------
(Loss) profit from operations (1,092) 13,631 15,683
Interest and debt expense (Note 13) (9,752) (12,107) (5,376)
Other income, net (Note 14) 560 97 565
---------- ---------- ----------
(Loss) income before income taxes (10,284) 1,621 10,872
Provision for income taxes (Note 16) (781) (1,960) (4,817)
---------- ---------- ----------
Net (loss) income $ (11,065) $ (339) $ 6,055
Additional minimum pension liability, net of
tax of $(6,327) (14,762) -- --
Foreign currency translation, net of tax of $0
for each year 1,196 (2,534) (8,724)
---------- ---------- ----------
Comprehensive loss $ (24,631) $ (2,873) $ (2,669)
========== ========== ==========
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
221
HERCULES GB HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
2001 2000
---------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 590 $ 1,057
Accounts receivable, net (Note 3) 28,603 34,146
Inventories (Note 4) 5,334 8,312
Deferred income taxes (Note 16) 644 --
---------- ----------
Total current assets 35,171 43,515
Property, plant, and equipment, net (Note 8) 24,512 29,687
Goodwill and other intangible assets, net (Note 9) 121,252 139,157
Deferred income taxes (Note 16) 3,217 --
Prepaid pension (Note 11) 9,935 7,785
Deferred charges and other assets 3,037 1,723
---------- ----------
Total assets $ 197,124 $ 221,867
========== ==========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable $ 12,595 $ 14,588
Short-term debt (Note 5) -- 4,469
Accrued expenses (Note 8) 9,323 7,266
---------- ----------
Total current liabilities 21,918 26,323
Deferred income taxes (Note 16) -- 4,831
Pension (Note 11) 22,139 --
---------- ----------
Total liabilities 44,057 31,154
---------- ----------
Commitments and contingencies (Note 17) -- --
Net Hercules Group Investment (Note 15)
Accumulated other comprehensive income (19,954) (6,388)
Intercompany transactions 173,021 197,101
---------- ----------
Net Hercules Group Investment 153,067 190,713
---------- ----------
Total liabilities and Net Hercules Group Investment $ 197,124 $ 221,867
========== ==========
The accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
222
HERCULES GB HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31
(Dollars in thousands)
2001 2000 1999
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net (Loss) Income $(11,065) $ (339) $ 6,055
Adjustments to reconcile net (loss) income to net cash
provided from operations:
Depreciation of property, plant and equipment 3,294 3,431 2,921
Amortization of goodwill and other intangible assets 4,099 4,608 4,875
Restructuring plans 1,919 319 (357)
Loss on disposals of property, plant
and equipment 981 214 307
Nonoperating loss on sale of investment 7,194 -- --
Movement on deferred tax provision (898) 410 1,615
Corporate cost allocations 1,802 1,917 3,593
Prepaid pension expense and other deferred charges (3,602) (1,753) (888)
Accruals and deferrals of cash receipts and payments:
Accounts receivable 5,182 (1,194) 1,235
Transfers from (to) Hercules Group 7,770 (11,064) (4,665)
Inventories 2,384 3,861 (403)
Accounts payable and accrued expenses 3,958 (1,443) (3,951)
-------- -------- --------
Net cash provided by (used in) operations 23,018 (1,033) 10,337
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures, net of proceeds from sale (219) (2,562) (4,747)
-------- -------- --------
Net cash used in investing activities (219) (2,562) (4,747)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Transfers to Hercules Group (18,795) (1,067) (8,855)
New loan proceeds -- 4,571 254
Loan repayments (4,468) (190) --
-------- -------- --------
Net cash (used in) provided by financing
activities (23,263) 3,314 (8,601)
-------- -------- --------
Effect of exchange rate changes on cash (3) (107) (159)
-------- -------- --------
Net decrease in cash and cash equivalents (467) (388) (3,170)
Cash and cash equivalents at beginning of year 1,057 1,445 4,615
-------- -------- --------
Cash and cash equivalents at end of year $ 590 $ 1,057 $ 1,445
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during year for:
Income Taxes $ 1,136 $ 1,550 $ 6,911
Interest $ 3,127 $ 4,982 $ 7,830
NON CASH FINANCING ACTIVITIES
Corporate cost allocations $ 1,802 $ 1,917 $ 3,593
223
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 $2,170 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 a pooling of interests.
Prior to the 2000 fiscal year, 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.
On April 29, 2002, in connection with Hercules' sale of its Water
Treatment Business (see Note 19) and the repayment of the Facilities, the stock
pledges were released. As a result, based on Hercules' current debt structure,
these separate company stand-alone financial statements will not be required for
the fiscal year ending December 31, 2002.
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Hercules GB
Holdings Limited and its wholly owned subsidiaries. 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.
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.
224
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 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.
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 net book value 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 3 to 15 years for other intangible assets. Pursuant to Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142), beginning January 1, 2002, goodwill will not be amortized
but will be tested for impairment annually and any necessary adjustment charged
to expense. Intangible assets with finite lives will be amortized over their
useful lives.
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.
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.
225
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 (loss), 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 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
On January 1, 2001, the Company adopted 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. The
Company has not designated any derivative as a hedge instrument and accordingly,
changes in fair value of derivatives are recorded each period in earnings. The
adoption of SFAS 133 did not result in a pre-tax or post-tax
cumulative-effect-type adjustment to income and did not result in a change to
other comprehensive income (loss).
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 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
226
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 2001, the Financial Accounting Standards Board ("FASB") issued
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"). SFAS 141 supersedes Accounting
Principles Board Opinion ("APB") No. 16, Business Combinations. The provisions
of SFAS 141 (1) require that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) provide specific
criteria for the initial recognition and measurement of intangible assets apart
from goodwill and (3) require that unamortized negative goodwill be written off
immediately as extraordinary gain instead of being deferred and amortized. SFAS
141 also requires that upon adoption of SFAS 142 the Company reclassify the
carrying amounts of certain intangible assets into or out of goodwill, based on
certain criteria. SFAS 142 supersedes APB No. 17, Intangible Assets, and is
effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
initial recognition. The provisions of SFAS 142 (1) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), based on
fair value (as opposed to cost recovery using future undiscounted cash flows),
(3) require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill and (4) remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.
Effective January 1, 2002 Hercules adopted the provisions of SFAS 142.
Hercules identified the following reporting units: BetzDearborn and Pulp and
Paper, Aqualon and FiberVisions. In connection with Hercules' transitional
review, recorded goodwill was determined to be impaired in the BetzDearborn
reporting unit. In the first quarter 2002, Hercules completed its transitional
impairment review of the identified reporting units and recognized an after tax
impairment loss of $368 million as a cumulative effect of a change in accounting
principle. As a result of Hercules' adoption of SFAS 142, the Company will no
longer record approximately $4 million of annual amortization relating to
existing goodwill and intangibles.
Goodwill related to the BetzDearborn business was evaluated for impairment
at December 31, 2001 under Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Fixed Assets and for Long-Lived Assets to
Be Disposed of". Such evaluation indicated that goodwill associated with the
business was recoverable from anticipated future undiscounted cash flows.
Accordingly, no impairment loss was recorded in the December 31, 2001 financial
statements.
In June 2001, the Financial Accounting Standards Board ("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. The Company does not believe it will have a material effect on its
financial statements.
On January 1, 2002, the Company adopted 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 Company does not believe it
will have a material effect on its financial statements.
227
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment to FASB
Statement No. 13, and Technical Corrections." The Company elected to early adopt
the provisions of SFAS 145 related to the rescission of SFAS 4, "Reporting Gains
and Losses from the Extinguishment of Debt" ("SFAS 4"). The early adoption of
SFAS 145 had no effect on the Company's financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs in a
Restructuring)". SFAS 146 defines the timing of the recognition of costs
associated with exit or disposal activities, the types of costs that may be
recognized and the methodology for calculating the fair value of such costs. The
provisions of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe this statement
will have a material effect on its financial statements.
RECLASSIFICATIONS
Certain amounts in the 2000 and 1999 consolidated financial statements and
notes have been reclassified to conform to the 2001 presentation.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
(Dollars in thousands)
2001 2000
---- ----
Trade $ 28,607 $ 32,519
Other 2,204 3,863
-------- --------
30,811 36,382
Less allowance for doubtful accounts $ (2,208) $ (2,236)
-------- --------
Total $ 28,603 $ 34,146
======== ========
There are no single receivables which constitute more than 10% of the
total.
4. INVENTORIES
The components of inventories are:
(Dollars in thousands)
2001 2000
---- ----
Finished products $ 3,027 $ 4,904
Materials, supplies, and work in process 2,307 3,408
-------- ---------
Total $ 5,334 $ 8,312
======== =========
5. SHORT-TERM DEBT
Short-term third party debt at December 31, 2000, 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. There was no third party debt
outstanding at December 31, 2001.
At December 31, 2001, the Company and its subsidiaries had $1,413 thousand
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, 2001 and 2000, were 7.5% and 6.5%,
respectively.
228
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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. For purposes of the
Company's historical financial statements all of the Company's positive or
negative cash flows have been treated as cash transferred to or from the
Hercules Group.
The Company has a number of intercompany loans with the Hercules Group in
the amounts of $126,330 thousand and $145,393 thousand, which are included in
the Net Hercules Group Investment balance as of December 31, 2001 and 2000,
respectively.
Interest rates on these loans are detailed below:
(Dollars in thousands)
Interest rate 2001 2000
------------- ---- ----
Variable LIBOR plus 0.55% $ 90,075 $ 92,519
Variable LIBOR plus 0.75% 36,255 47,666
Variable LIBOR plus 1.00% 5,138
Fixed 10% -- 70
-------- --------
$126,330 $145,393
======== ========
LIBOR is the London Inter-Bank Offer Rate.
All long-term debt with the Hercules Group has maturity dates after 2005.
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, 2001 and 2000:
(Dollars in thousands)
2001 2000
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Long-term debt $126,330 $126,330 $145,393 $145,393
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
189,704 at December 31, 2001, and 491,488 and 926,689 at December 31, 2000 and
1999, respectively.
At December 31, 2001, under Hercules' incentive compensation plans,
1,265,493 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
229
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 2001, 2000 and 1999, respectively.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 1999, 2000 and 2001:
Regular
---------------------------------
Number of Weighted-average
Shares price
---------------------------------
December 31, 1998 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
Granted -- --
Exercised -- --
Forfeited (3,800) $ 37.80
---------------------------------
December 31, 2001 36,500 $ 38.97
There were no performance-accelerated stock options granted or outstanding
during 1999, 2000 and 2001.
The weighted-average fair value of regular stock options granted during
1999, 2000 and 2001 was $8.26, $0 and $0, respectively.
Following is a summary of regular stock options exercisable at December
31, 1999, 2000 and 2001, and their respective weighted-average share prices:
Number of Weighted-average
Options Exercisable Shares price
--------------------------------------------------------------------------------
December 31, 1999 13,540 $ 39.91
December 31, 2000 26,440 $ 39.32
December 31, 2001 32,730 $ 39.11
Following is a summary of stock options outstanding at December 31, 2001:
Outstanding Options Exercisable Options
----------------------------------------------------- ---------------------------------
Number Weighted-average Weighted- Number Weighted-
Outstanding at Remaining average Exercisable at average
Exercise Price Range 12/31/2001 Contractual Life exercise price 12/31/2001 exercise price
----------------------------------------------------- ---------------------------------
Regular Stock Options
$30 - $40 34,850 6.53 $38.55 31,080 $38.65
$40 - $50 1,650 6.35 $47.81 1,650 $47.81
-------------- --------------
36,500 32,730
-------------- --------------
The Company's employees may also participate in the Hercules Employee
Stock Purchase Plan ("ESSP"). 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, there are no shares of Hercules common stock registered for offer and
sale under the plan. Shares issued at December 31, 2001 and 2000, were 1,758,081
and 1,597,861, 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.
230
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 2001, 2000 and 1999:
Performance Employee Stock
Assumption Regular Plan Accelerated Plan Purchase Plan
---------- ------------ ---------------- -------------
Dividend yield 0.96% 3.83% 0.0%
Risk-free interest rate 5.80% 5.57% 4.86%
Expected life 7.1 yrs. 5 yrs. 3 mos.
Expected volatility 33.36% 29.78% 49.11%
The Company's net income and earnings per share for 2001, 2000 and 1999
would approximate the pro forma amounts below:
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Net (loss) income
As reported $(11,065) $ (339) $ 6,055
Pro forma $(11,104) $ (399) $ 6,000
8. ADDITIONAL BALANCE SHEET DETAIL
(Dollars in thousands)
2001 2000
---- ----
PROPERTY, PLANT, AND EQUIPMENT
Land $ 1,395 $ 1,864
Buildings and equipment 45,121 49,303
-------- --------
Total 46,516 51,167
Accumulated depreciation and amortization (22,004) (21,480)
-------- --------
Net property, plant, and equipment $ 24,512 $ 29,687
======== ========
ACCRUED EXPENSES
(Dollars in thousands)
2001 2000
---- ----
Payroll and employee benefits $ 1,432 $ 1,453
Income taxes payable 4,551 1,973
Restructuring liability (Note 10) 1,425 2,420
Other 1,915 1,420
-------- --------
$ 9,323 $ 7,266
======== ========
9. GOODWILL AND OTHER INTANGIBLES ASSETS
At December 31, 2001 and 2000, the goodwill and other intangible assets
were:
(Dollars in thousands)
2001 2000
---- ----
Goodwill $ 130,878 $ 146,363
Other intangibles 5,813 5,391
---------- ----------
Total 136,691 151,754
Less accumulated amortization (15,439) (12,597)
---------- ----------
Net goodwill and other intangible assets $ 121,252 $ 139,157
========== ==========
Goodwill and other intangible assets primarily represent amounts
capitalized from the Hercules acquisition of BetzDearborn (Note 1).
231
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. RESTRUCTURING
Coincident with the acquisition of BetzDearborn Inc. and its subsidiaries
worldwide by Hercules in October 1998, plans were put in place to merge certain
BetzDearborn and Hercules operations and support infrastructure, including
facility closures and personnel reduction. 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 was the estimate for these exit and severance costs attributable to the
Hercules operations in the United Kingdom. The remaining balance of these
restructuring reserves, as reassessed during the year, was in excess of
requirements, principally due to the cancellation of plans to transfer
accounting activities to the Hercules European Shared Service Centre. This
excess was written back as a reduction of original purchase cost and consequent
goodwill on acquisition.
During the year, the company adopted Hercules plans to improve future
profitability using "Work Process Redesign" methods. An estimate of severance
costs to implement these plans was charged against income and established as
additionally accrued restructuring reserves. The balance of these reserves was
reassessed at the end of the year and the amount in excess of estimated
remaining costs was released back to income.
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 2001, the severance and exit costs
incurred include the costs for 25 employees associated with operations at
Widnes, Cheshire, 18 from Sales and Marketing departments and 7 from other
departments.
(Dollars in thousands)
2001 2000
---- ----
Balance at beginning of year $ 2,420 $ 2,628
Additional accrual 2,122 363
Severance and exit costs incurred (2,914) (527)
Reversals (203) (44)
-------- --------
Balance at end of year $ 1,425 $ 2,420
======== ========
232
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
(Dollars in thousands)
Pension Benefits
2001 2000
---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1 $ 77,311 $ 75,968
Service cost 1,571 2,092
Interest cost 4,941 4,189
Amendments 711 12
Employee contributions 710 760
Translation difference (1,915) (6,872)
Actuarial loss 11,658 3,154
Benefits paid from plan assets (2,019) (1,992)
-------- --------
Benefit obligation at December 31 $ 92,968 $ 77,311
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 87,229 89,389
Actual return on plan assets (9,368) 5,143
Employee contributions 710 760
Company contributions 1,932 1,789
Actuarial loss -- (1,748)
Translation difference (2,370) (6,112)
Benefits paid from plan assets (2,019) (1,992)
-------- --------
Fair value of plan assets at December 31 $ 76,114 $ 87,229
======== ========
Funded status of the plans (16,854) 9,918
Unrecognized actuarial loss (gain) 25,880 (2,176)
Unrecognized prior service cost 909 217
Amendments -- (174)
-------- --------
Prepaid benefit cost $ 9,935 $ 7,785
======== ========
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION CONSIST OF:
Additional minimum liability $(22,139) --
Intangible asset 1,050 --
Other comprehensive income 21,089 --
Prepaid benefit cost 9,935 7,785
-------- --------
$ 9,935 $ 7,785
======== ========
ASSUMPTIONS AS OF DECEMBER 31
Weighted-average discount rate 6.50% 6.50%
Expected average return on plan assets 7.00% 8.00%
Average rate of compensation increase 3.50% 3.75%
COMPONENTS OF NET PERIOD PENSION COST (Dollars in thousands)
Pension Benefits
---------------------------------
2001 2000 1999
---- ---- ----
Service cost $ 1,571 $ 2,092 $ 2,313
Interest cost 4,941 4,189 4,326
Expected return on plan assets (6,825) (6,304) (5,864)
Amortization and deferrals 19 (384) 269
Amortization of transition asset -- (160) (185)
-------- -------- --------
Benefit (credit) cost $ (294) $ (567) $ 859
======= ======== ========
12. OTHER OPERATING EXPENSE, NET
Other operating expense, net, in 2001 includes $7,194 thousand in net
losses from the sale of the Company's hydrocarbon resins business, select
portions of its rosin resins business, and its peroxy chemicals business.
Furthermore, other operating expense, net includes Hercules Group affiliate
royalty costs of $5,664 thousand, net losses on asset sales of $981 thousand,
net restructuring costs of $1,919 thousand, and foreign currency gains amounting
to $155 thousand.
233
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Other operating expenses, net, in 2000 include Hercules Group affiliate
royalty costs of $5,675 thousand, net restructuring costs of $319 thousand,
foreign currency gains amounting to $444 thousand and other net losses amounting
to $698 thousand.
Other operating expenses, net, in 1999 include Hercules Group affiliate
royalty costs of $5,902 thousand, net gains on restructuring reversals of $357
thousand, foreign currency losses amounting to $100 thousand and other net gains
amounting to $284 thousand.
13. INTEREST AND DEBT EXPENSE
Interest and debt costs incurred and expensed were as follows. No interest
or debt costs were capitalised.
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Intercompany interest expense $ 9,740 $ 11,641 $ 5,343
Third party interest expense 12 466 33
-------- -------- --------
$ 9,752 $ 12,107 $ 5,376
======== ======== ========
14. OTHER INCOME (EXPENSE), NET
Other (expense) income, net, consists of the following:
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Interest income $ 569 $ 242 $ 391
Miscellaneous (expense) income (9) (145) 174
-------- -------- --------
$ 560 $ 97 $ 565
======== ======== ========
15. NET HERCULES GROUP INVESTMENT
Changes in net Hercules Group investment were as follows:-
Balance, January 1, 1999 $ 230,375
Net income 6,055
Other comprehensive loss (8,724)
Intercompany transactions, net (9,597)
-----------
Balance, December 31, 1999 218,109
Net loss (339)
Other comprehensive loss (2,534)
Intercompany transactions, net (24,523)
-----------
Balance, December 31, 2000 190,713
Net loss (11,065)
Other comprehensive loss (13,566)
Intercompany transactions, net (13,015)
-----------
Balance, December 31, 2001 $ 153,067
===========
The Company includes accumulated other comprehensive losses in Net Hercules
Group Investment. At December 31, 2001, accumulated other comprehensive losses
consisted of an additional minimum pension liability and foreign currency
translation adjustments, net of tax, of $(14,762) thousand and $(5,192)
thousand, respectively. 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.
234
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
16. TAXES
A summary of the components of the tax provision in respect of United
Kingdom Corporation Tax follows:
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Current $ 1,679 $ 1,550 $ 3,202
Deferred (898) 410 1,615
-------- -------- --------
Provision for income taxes $ 781 $ 1,960 $ 4,817
======== ======== ========
Deferred tax (liabilities) assets at December 31 consist of:
(Dollars in thousands)
Components of temporary differences 2001 2000
----------------------------------- ---- ----
Depreciation $ (5,703) $ (7,369)
Accrued (Prepaid) pension 11,118 (7,786)
Employee Intangible Asset (4,943) (4,757)
Net Operating Losses 10,491 --
Restructuring Provisions 477 2,284
Allowance for doubtful accounts 1,223 1,064
Other temporary differences 207 461
-------- --------
Cumulative temporary differences 12,870 (16,103)
-------- --------
Net deferred tax assets (liabilities) $ 3,861 $ (4,831)
======== ========
A reconciliation of the statutory income tax rate to the effective rate
follows:
2001 2000 1999
---- ---- ----
Statutory income tax rate 30.0% 30.0% 31%
Goodwill amortization (32.1) 85.0% 11%
Other non-deductible expenses (5.5) 6.0% 2%
---------------------------
Effective tax rate (7.6)% 121.0% 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
$2,348 thousand, $2,981 thousand and $2,759 thousand in 2001, 2000 and 1999
respectively.
At December 31, 2001, minimum rental payments under non-cancelable leases
aggregated $2,893 thousand. The net minimum payments over the next five years
are $1,527 thousand in 2002, $915 thousand in 2003, $427 thousand in 2004, $24
thousand in 2005, and $0 thousand in 2006.
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, 2001 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.
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 $3,175 thousand, $11,641 thousand and $5,343 thousand
in 2001, 2000 and 1999, respectively.
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, 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
235
HERCULES GB HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 $8,745 thousand, $5,921 thousand
and $6,314 thousand in 2001, 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 $5,664 thousand, $5,675 thousand and $5,902 thousand in
2001, 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 $18,932 thousand, $23,072 and $22,334
thousand in 2001, 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 $23,403 thousand, $16,639 thousand and $16,408
for 2001, 2000 and 1999, 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
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, 2001, the Company had outstanding forward-exchange contracts to purchase
foreign currencies aggregating $6,418 thousand, and to sell foreign currencies
aggregating $6,414 thousand. The Company had no material outstanding
forward-exchange contracts at December 31, 2000. The foreign exchange contracts
outstanding at December 31, 2001 will mature during 2002.
FAIR VALUES
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 2001 and 2000:
(Dollars in thousands)
2001
------------------------
Carrying
Amount Fair Value
---------- ------------
Foreign exchange contracts $ (3) $ (3)
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, 2001. Foreign exchange contracts are valued based
on year-end exchange rates.
20. SUBSEQUENT EVENT
On April 29, 2002, Hercules completed the sale of its Water Treatment
Business to GE Specialty Materials (GESM). Pursuant to the Stock and Asset
Agreement for the transaction, the sale included all of the stock of
BetzDearborn and the Company. Hercules used the proceeds from the sale to prepay
borrowings under its Senior Credit Facility and ESOP Credit Facility. Pursuant
to the prepayment, among other things, the stock pledges were released.
236
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, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 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
November 12, 2002
237
HERCULES INTERNATIONAL LIMITED
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands)
Year Ended December 31,
2001 2000 1999
---- ---- ----
Sales to third parties $ 572,859 $ 791,771 $ 857,878
Sales to Hercules Group 49,459 93,717 120,167
--------- --------- ---------
622,318 885,488 978,045
Cost of sales 376,908 530,321 562,701
Selling, general, and administrative expenses 140,310 153,928 144,696
Research and development 14,057 19,977 25,399
Goodwill and intangible asset amortization 6,166 8,292 11,271
Other operating expenses (income), net (Note 13) 10,064 (131,749) 27,700
--------- --------- ---------
Profit from operations 74,813 304,719 206,278
Interest and debt expense (Note 14) 3,077 8,028 4,381
Other income, net (Note 15) 34,101 12,714 650
--------- --------- ---------
Income before income taxes, equity (loss) income
and minority interest, net 105,837 309,405 202,547
Provision for income taxes (Note 16) 45,906 119,794 63,421
--------- --------- ---------
Income before equity (loss) income and minority interest, net 59,931 189,611 139,126
Equity (loss) income of affiliated companies (10,026) (3,891) 2,938
Minority interest, net (1,328) (1,107) (910)
--------- --------- ---------
Net income 48,577 184,613 141,154
Additional minimum pension liability, net of tax of $(1,036) (1,646) -- --
Foreign currency translation, net of tax of $0 for each year (28,164) (100,135) (51,868)
--------- --------- ---------
Comprehensive (loss) income $ 18,767 $ 84,478 $ 89,286
========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements
238
HERCULES INTERNATIONAL LIMITED
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
2001 2000
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 17,585 $ 14,340
Accounts receivable, net (Note 3) 128,951 149,346
Inventories (Note 4) 49,526 79,787
Deferred income taxes (Note 16) 2,533 2,669
--------- ---------
Total current assets 198,595 246,142
--------- ---------
Property, plant, and equipment, net (Note 9) 216,488 275,325
Investments in affiliates (Note 5) 19,565 30,279
Goodwill and other intangible assets, net (Note 10) 207,689 224,443
Deferred charges and other assets 10,194 12,696
--------- ---------
Total assets $ 652,531 $ 788,885
========= =========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable $ 78,700 $ 94,908
Short-term debt (Note 6) 5,144 91,007
Accrued expenses (Note 9) 107,236 118,162
--------- ---------
Total current liabilities 191,080 304,014
Long-term debt - third parties (Note 7) 264 75
Deferred income taxes (Note 16) 65,009 59,841
Pension liability (Note 12) 25,850 20,066
Deferred credits and other liabilities 3,720 2,031
--------- ---------
Total liabilities 285,923 386,090
Commitments and contingencies (Note 17)
Minority Interest 18,555 18,599
Net Hercules Group Investment (Note 20)
Accumulated other comprehensive losses (170,615) (140,805)
Intercompany transactions, net 518,668 525,001
--------- ---------
Total Net Hercules Group Investment 348,053 384,196
--------- ---------
Total liabilities and Net Hercules Group Investment $ 652,531 $ 788,885
========= =========
The accompanying notes are an integral part of the consolidated
financial statements
239
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Dollars in thousands)
Year Ended December 31
2001 2000 1999
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 48,577 $ 184,613 $ 141,154
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization of property, plant and equipment 20,774 28,615 32,784
Amortization of goodwill and other intangible assets 6,166 8,292 11,271
Restructuring plans 3,876 3,073 12,551
Deferred income tax 10,470 13,396 11,789
Loss on disposals of property, plant and equipment 1,608 1,617 184
Gain on sale of investments (15,731) (167,566) (13,302)
Equity loss (income) of affiliates 10,026 3,891 (2,938)
Dividends received 593 579 3,093
Minority interest, net 1,328 1,107 910
Corporate and other cost allocations 19,053 13,033 16,665
Accruals and deferrals of cash receipts and payments:
Accounts receivable 12,269 3,420 (25,858)
Inventories 1,868 (11,618) (10,684)
Accounts payable and accrued expenses (23,858) 37,517 9,401
Noncurrent assets and liabilities 6,811 (1,484) 13,864
Net transfers from (to) Hercules Group 17,152 69,474 (129,329)
---------- ---------- ----------
Net cash provided by operations 120,982 187,959 71,555
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures, net of proceeds from sale (17,554) (68,708) (72,437)
Proceeds from sale of investment -- -- 22,009
Purchase of equity method investments -- -- (25)
---------- ---------- ----------
Net cash used in investing activities (17,554) (68,708) (50,453)
---------- ---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Change in short-term debt (84,302) 78,435 (58,142)
Long-term debt repayments -- (306) (620)
Proceeds from issuance of long-term debt 193 41,213 --
Net transfers (to) from Hercules Group (16,030) (239,146) 36,119
---------- ---------- ----------
Net cash used in financing activities (100,139) (119,804) (22,643)
---------- ---------- ----------
---------- ---------- ----------
Effect of exchange rate changes on cash (44) (1,149) (2,470)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 3,245 (1,702) (4,011)
Cash and cash equivalents at beginning of year 14,340 16,042 20,053
---------- ---------- ----------
Cash and cash equivalents at end of year 17,585 14,340 16,042
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $ 3,737 $ 7,081 $ 4,708
Income taxes, net 15,088 65,008 60,680
Noncash investing and financing activities:
Sale of investment in CP Kelco ApS (Note 13) -- 119,261 --
Corporate and other cost allocations 19,053 13,033 16,665
Reversal of restructuring accruals to goodwill (Note 11) 435 3,320 --
240
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 $2,170 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.
Prior to the 2000 fiscal year, 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.
On April 29, 2002, in connection with Hercules' sale of its Water
Treatment Business (see Note 21) and the repayment of the Facilities, the stock
pledges were released. As a result, based on Hercules' current debt structure,
these separate company stand-alone financial statements will not be required for
the fiscal year ending December 31, 2002.
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.
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.
241
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the net book value 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, customer relationships, and trademarks and tradenames and 5 to 15
years for other intangible assets. Pursuant to Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), beginning
January 1, 2002, goodwill will not be amortized but will be tested for
242
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
impairment annually and any necessary adjustment charged to expense. Intangible
assets with finite lives will be amortized over their useful lives.
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 $25,645 thousand, $(7,730) thousand and $9,273 thousand at
December 31, 2001, 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 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 (loss), 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
On January 1, 2001, the Company adopted 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.
243
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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. The Company has not
designated any derivative as a hedge instrument and accordingly, changes in fair
value of derivatives are recorded each period in earnings. The adoption of SFAS
133 did not result in a pre-tax or post-tax cumulative-effect-type adjustment to
income and did not result in a change to other comprehensive income (loss).
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, 2001 and 2000 represents a 38.97%
proportionate share of the equity of Hercules Quimica S.A., owned by a Hercules
Group affiliate.
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 2001, the Financial Accounting Standards Board ("FASB") issued
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"). SFAS 141 supersedes Accounting
Principles Board Opinion ("APB") No. 16, Business Combinations. The provisions
of SFAS 141 (1) require that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) provide specific
criteria for the initial recognition and measurement of intangible assets apart
from goodwill and (3) require that unamortized negative goodwill be written off
immediately as extraordinary gain instead of being deferred and amortized. SFAS
141 also requires that upon adoption of SFAS 142 the Company reclassify the
carrying amounts of certain intangible assets into or out of goodwill, based on
certain criteria. SFAS 142 supersedes APB No. 17, Intangible Assets, and is
effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily
addresses the accounting for goodwill and
244
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
intangible assets subsequent to their initial recognition. The provisions of
SFAS 142 (1) prohibit the amortization of goodwill and indefinite-lived
intangible assets, (2) require that goodwill and indefinite-lived intangible
assets be tested annually for impairment (and in interim periods if certain
events occur indicating that the carrying value of goodwill and/or
indefinite-lived intangible assets may be impaired), based on fair value (as
opposed to cost recovery using future undiscounted cash flows), (3) require that
reporting units be identified for the purpose of assessing potential future
impairments of goodwill and (4) remove the forty-year limitation on the
amortization period of intangible assets that have finite lives.
Effective January 1, 2002 Hercules adopted the provisions of SFAS 142.
Hercules identified the following reporting units: BetzDearborn and Pulp and
Paper, Aqualon and FiberVisions. In connection with Hercules' transitional
review, recorded goodwill was determined to be impaired in the BetzDearborn
reporting unit. In the first quarter 2002, Hercules completed its transitional
impairment review of the identified reporting units and recognized an after tax
impairment loss of $368 million as a cumulative effect of a change in accounting
principle. As a result of Hercules' adoption of SFAS 142, the Company will no
longer record approximately $6.2 million of annual amortization relating to
existing goodwill and intangibles.
Goodwill related to the BetzDearborn business was evaluated for impairment
at December 31, 2001 under Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Fixed Assets and for Long-Lived Assets to
Be Disposed of". Such evaluation indicated that goodwill associated with the
business was recoverable from anticipated future undiscounted cash flows.
Accordingly, no impairment loss was recorded in the December 31, 2001 financial
statements.
In June 2001, the Financial Accounting Standards Board ("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. The Company does not believe it will have a material effect on its
financial statements.
On January 1, 2002, the Company adopted 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 Company does not believe it
will have a material effect on its financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment to FASB
Statement No. 13, and Technical Corrections." The Company elected to early adopt
the provisions of SFAS 145 related to the rescission of SFAS 4, "Reporting Gains
and Losses from the Extinguishment of Debt" ("SFAS 4"). The early adoption of
SFAS 145 had no effect on the Company's financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs in a
Restructuring)". SFAS 146 defines the timing of the recognition of costs
associated with exit or disposal activities, the types of costs that may be
recognized and the methodology for calculating the fair value of such costs. The
provisions of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe this statement
will have a material effect on its financial statements.
RECLASSIFICATIONS
Certain amounts in the 2000 and 1999 consolidated financial statements and
notes have been reclassified to conform to the 2001 presentation.
245
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
(Dollars in thousands)
2001 2000
---- ----
Trade $ 123,410 $ 138,464
Other 8,610 13,634
--------- ---------
132,020 152,098
Less allowance for doubtful accounts (3,069) (2,752)
--------- ---------
Total $ 128,951 $ 149,346
========= =========
Other accounts receivable mainly comprise VAT receivable.
4. INVENTORIES
The components of inventories are:
(Dollars in thousands)
2001 2000
---- ----
Finished products $ 32,579 $ 54,573
Materials, supplies, and work in process 16,947 25,214
--------- ---------
Total $ 49,526 $ 79,787
========= =========
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:
(Dollars in thousands)
2001 2000
---- ----
Current assets $241,134 $269,814
Non-current assets 890,455 942,946
Current liabilities $ 81,123 $109,486
Non-current liabilities 725,523 730,579
2001 2000 1999
---- ---- ----
Net sales $ 471,411 $ 143,245 $ 56,410
Gross profit 148,987 17,290 14,489
Net (losses) earnings (50,021) (15,864) 5,865
At December 31, 2001, 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, 2001 and 2000 equals its share of the underlying
equity in net assets of the respective affiliates. Dividends paid to the Company
from its equity investees were $593 thousand, $579 thousand, $3,093 thousand
during 2001, 2000, 1999, 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.
246
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. SHORT-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Short-term debt of $5,144 thousand and $91,007 thousand at December 31,
2001 and 2000, 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 $3,539 thousand and $32,685 thousand at
December 31, 2001 and 2000, respectively, is recorded in Net Hercules Group
Investment in the consolidated balance sheet.
At December 31, 2001 and 2000, the Company had $7,155 thousand and $34,774
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, 2001 and 2000 were $3,860 thousand and $91,007
thousand, respectively.
Weighted-average interest rates on all short-term borrowings at December
31, 2001 and 2000 were 4.40% and 5.60%, respectively.
7. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt with third parties and affiliates at December 31, 2001 and
2000 is summarized as follows:
(Dollars in thousand)
2001 2000
---- ----
5.72% third party note $ 309 $ 93
Other 24 45
-------- --------
Less current maturities 69 63
-------- --------
Total long-term debt, third party 264 75
-------- --------
5.51% affiliate note 21,799 22,853
5.80% affiliate note 19,496 20,516
-------- --------
Less current maturities -- --
-------- --------
Total long-term debt, affiliates 41,295 43,369
-------- --------
Total long term debt, third party and affiliates $ 41,559 $ 43,444
======== ========
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 at December 31, 2001 matures as follows: $69 thousand, $48
thousand, $50 thousand, $53 thousand and $113 thousand in the years 2002, 2003,
2004, 2005 and 2006 and thereafter, respectively. The fair value of the
Company's long-term debt was $41,559 thousand at December 31, 2001 and $43,444
thousand at December 31, 2000. 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.
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
189,704 at December 31, 2001, and 491,488 and 929,689 at December 31, 2000 and
1999, respectively.
At December 31, 2001, under Hercules' incentive compensation plans,
1,265,493 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
247
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 2001, 2000 and 1999, respectively.
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 1999, 2000 and 2001:
Regular Performance-Accelerated
--------------------------------- ---------------------------------
Number of Weighted-average Number of Weighted-average
Shares price Shares price
--------------------------------- ---------------------------------
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
Granted 102,000 $ 11.28 -- $ --
Exercised -- -- -- --
Forfeited (60,460) $ 30.85 (900) $ 45.73
--------------------------------- ---------------------------------
December 31, 2001 852,330 $ 32.07 166,475 $ 42.11
The weighted-average fair value of regular stock options granted during 1999,
2000 and 2001 was $8.25, $8.85 and $5.69, respectively. The weighted-average
fair value of performance-accelerated stock options granted during 1999, 2000
and 2001 was $7.99, $0 and $0.
Following is a summary of regular stock options exercisable at December
31, 1999, 2000, and 2001, and their respective weighted-average share prices:
Number of Weighted-average
Options Exercisable Shares exercise price
--------------------------------------------------------------------------------
December 31, 1999 306,825 $39.84
December 31, 2000 561,295 $37.20
December 31, 2001 654,195 $36.38
There were no performance-accelerated stock options exercisable at
December 31, 2001.
248
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Following is a summary of stock options outstanding at December 31, 2001:
Outstanding Options Exercisable Options
------------------------------------------------------ ----------------------------------
Number Weighted-average Weighted- Number Weighted-
Outstanding at Remaining average Exercisable at average
Exercise Price Range 12/31/2001 Contractual Life exercise price 12/31/2001 exercise price
------------------------------------------------------ ----------------------------------
Regular Stock Options
$11 - $20 240,025 8.78 $14.71 77,595 $17.25
$20 - $30 54,525 6.67 $25.56 54,525 $25.56
$30 - $40 474,255 6.23 $38.68 438,550 $38.78
$40 - $50 74,125 6.11 $47.81 74,125 $47.81
$50 - $60 9,400 4.11 $55.38 9,400 $55.38
--------------- --------------
852,330 654,195
--------------- --------------
Performance-Accelerated Stock Options
$14 - $40 102,250 6.68 $37.92 -- --
$40 - $50 56,125 5.85 $47.82 -- --
$50 - $61 8,100 4.11 $55.38 -- --
--------------- --------------
166,475 --
--------------- --------------
The Company's employees may also participate in the Hercules Employee
Stock Purchase Plan ("ESSP"). 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, there are no shares of Hercules common stock are registered for offer
and sale under the plan. Shares issued at December 31, 2001 and 2000, were
1,758,081 and 1,597,861, 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 2001, 2000 and 1999:
Performance Employee Stock
Assumption Regular Plan Accelerated Plan Purchase Plan
---------- ------------ ---------------- -------------
Dividend yield 0.96% 3.83% 0.0%
Risk-free interest rate 5.80% 5.57% 4.86%
Expected life 7.1 yrs. 5 yrs. 3 mos.
Expected volatility 33.36% 29.78% 49.11%
The Company's net income and earnings per share for 2001, 2000 and 1999
would approximate the pro forma amounts below:
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Net income
As reported $ 48,577 $184,613 $141,154
Pro forma $ 47,531 $183,163 $139,801
249
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
9. ADDITIONAL BALANCE SHEET DETAIL
(Dollars in thousands)
2001 2000
---- ----
Property, plant, and equipment
Land $ 4,659 $ 7,240
Buildings and equipment 436,298 533,902
--------- ---------
Total 440,957 541,142
Accumulated depreciation and amortization (224,469) (265,817)
--------- ---------
Net property, plant, and equipment $ 216,488 $ 275,325
========= =========
Accrued expenses
Payroll and employee benefits $ 15,281 $ 14,834
Income taxes payable 59,654 72,078
Restructuring (Note 11) 10,656 12,743
Environmental 9,300 9,300
Other 12,345 9,207
--------- ---------
$ 107,236 $ 118,162
========= =========
10. GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2001 and 2000, the goodwill and other intangible assets
were:
(Dollars in thousands)
2001 2000
---- ----
Goodwill $ 225,727 $ 241,425
Other intangibles 5,035 7,829
--------- ---------
Total 230,762 249,254
Less accumulated amortization (23,073) (24,811)
--------- ---------
Net goodwill and other intangible assets $ 207,689 $ 224,443
========= =========
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, the acquisition of
BetzDearborn in 1998 and the Work Process Redesign ("WPR") program in 2001.
During the third quarter of 2001, Hercules started a Work Process Redesign
program. The WPR program has been set up to analyze and change the way we work
to improve the mechanics of how we do business - to do it better, quicker and at
less costs. Teams were established to focus initially on seven work processes of
our business that needed major improvement: manufacturing, solicit order to
cash, finance and control fundamentals, logistics, information technology,
purchase to pay and discovery to commercialization.
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 68 employees were
terminated and approximately $13.6 million cash was paid in severance benefits
and other exit costs. The estimate for the remaining plans was decreased by
approximately $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 service center were decreased by approximately
$1.7 million against operating expense.
250
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
As a result of the WPR program, we estimate approximately 74 employees to
leave and have charged $4.3 million to operating expense for these costs. These
employees come from various parts of the business, including but not limited to
all above-mentioned processes.
During the year 2001, approximately 209 employees were terminated and cash
worth approximately $5.5 million was paid in severance benefits and other exit
costs. The estimate for the remaining plans was decreased by $435 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 service center were decreased by $ 386 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 2002.
A reconciliation of activity with respect to the liabilities established
for these plans is as follows:
(Dollars in thousands)
2001 2000
---- ----
Balance at beginning of year $ 12,743 $ 26,546
Cash payments (5,528) (13,556)
Additional termination benefits and exit costs 4,262 4,731
Reversals against goodwill (435) (3,320)
Reversals against earnings (386) (1,658)
-------- --------
Balance at end of year $ 10,656 $ 12,743
======== ========
251
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
(Dollars in thousands)
2001 2000
---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1 $ 137,156 $ 150,833
Service cost 3,506 3,846
Interest cost 6,676 7,696
Employee contributions 576 669
Reclassification of assets for plan settlement -- (416)
Settlements and transfers (23,547) (10,612)
Translation difference (6,760) (12,350)
Actuarial loss 13,961 598
Benefits paid from plan assets (4,559) (2,585)
Benefits paid by company (674) (523)
--------- ---------
Benefit obligation at December 31 $ 126,335 $ 137,156
========= =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 128,577 136,882
Actual return on plan assets (8,317) 6,200
Employee contributions 576 669
Settlements and transfers (25,921) (1,109)
Company refund (4,859) (348)
Translation difference (5,802) (11,185)
Benefits paid from plan assets (4,559) (2,532)
--------- ---------
Fair value of plan assets at December 31 $ 79,695 $ 128,577
========= =========
Funded status of the plans (46,640) (8,579)
Unrecognized actuarial gain (loss) 20,315 (17,466)
Unrecognized prior service cost 3,138 4,640
Unrecognized net transition obligation 822 1,342
Amount included in other accrued expenses 353 --
--------- ---------
Accrued benefit cost $ (22,012) $ (20,066)
========= =========
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION CONSIST OF:
Intangible asset 1,156 --
Other comprehensive income 2,682 --
Additional minimum liability (3,838)
Accrued benefit liability (22,012) (20,066)
--------- ---------
$ (22,012) $ (20,066)
========= =========
ASSUMPTIONS AS OF DECEMBER 31
Weighted-average discount rate 5.00% 5.75%
Expected return on plan assets 6.00% 6.50%
Rate of compensation increase 3.00% 3.50%
252
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
COMPONENTS OF NET PERIOD PENSION COST (Dollars in Thousands)
2001 2000 1999
---- ---- ----
Service cost $ 3,506 $ 3,846 $ 6,270
Interest cost 6,676 7,696 8,593
Expected return on plan assets (6,623) (7,793) (9,253)
Amortization and deferrals (428) (238) 458
Gain on settlements -- (8,675) --
Amortization of prior service cost 396 10 12
Amortization of transition asset 303 2,437 708
------- ------- -------
Benefit cost (credit) $ 3,830 $(2,717) $ 6,788
======= ======= =======
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 $ 115,493 thousand, $ 95,943 thousand and $ 78,054
thousand, respectively, as of December 31, 2001 and $27,060 thousand, $22,753
thousand and $2,058 thousand, respectively, as of December 31, 2000.
During 1999 and up to March 1, 2000, the Company's Belgian employees
participated in a defined benefit pension plan. On March 1, 2000, the Company
terminated its participation in the defined benefit pension plan 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 year ended December 31, 2001 was $330 thousand and for the period
March 1, 2000 through December 31, 2000 was $222 thousand.
13. OTHER OPERATING (INCOME) EXPENSES, NET
Other operating expense, net, in 2001 includes $15,731 thousand in net
gains from the sale of the Company's hydrocarbon resins business, select
portions of its rosin resins business, and its peroxy chemicals business.
Furthermore, other operating expense, net, includes Hercules Group affiliate
royalty costs totaling $25,164 thousand, net restructuring costs totaling $3,876
thousand, net losses on asset sales totaling $1,608 thousand and foreign
currency gains totaling $4,853 thousand.
Other operating income, 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 dispositions of $184 thousand and foreign currency
losses amounting to $149 thousand.
14. INTEREST AND DEBT EXPENSE
No interest and debt costs were capitalized during 2001, 2000 and 1999.
The costs incurred are presented separately in the consolidated statement of
income and are primarily from debt with affiliates.
253
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
15. OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following:
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Interest income $32,488 $12,380 $ 5,180
Rent 28 26 (6)
Miscellaneous income (expense), net 1,585 308 (4,524)
------- ------- -------
$34,101 $12,714 $ 650
======= ======= =======
16. INCOME TAXES
A summary of the components of the tax provision follows:
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Current $ 35,436 $106,398 $ 51,632
Deferred 10,470 13,396 11,789
-------- -------- --------
Provision for income taxes $ 45,906 $119,794 $ 63,421
======== ======== ========
Deferred tax (liabilities) assets at December 31 consist of:
(Dollars in thousands)
2001 2000
---- ----
Depreciation $(38,028) $(41,661)
Amortization (9,498) (8,819)
Fixed asset valuation (101) (2,207)
Insurance provision (4,193) (4,989)
Replacement reserve (10,491) (3,282)
Intangible asset (613) (1,385)
Other (4,747) (2,314)
-------- --------
Gross deferred tax liabilities (67,671) (64,657)
-------- --------
Allowance for doubtful accounts 1,113 --
Loss carryforwards 950 2,959
Inventory valuation 1,416 2,551
Accrued pension 2,583 --
Other 602 2,677
-------- --------
Gross deferred tax assets 6,664 8,187
-------- --------
Valuation allowance (1,469) (702)
-------- --------
$(62,476) $(57,172)
======== ========
254
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
A reconciliation of the statutory income tax rate to the effective rate
follows:
2001 2000 1999
---- ---- ----
Statutory income tax rate 35.0% 35.0% 35.0%
Non-deductible expenses 8.1% 0.5% 1.6%
Non-taxable income (13.4)% (3.9)% (1.4)%
Gain on sale of investment (1.9)% (19.3)% (2.9)%
Tax rate differences on subsidiary earnings 1.3% 0.4% 1.1%
Foreign dividends, net of credits 13.6% 23.2% 0.3%
Other 0.7% 2.8% (2.4)%
------ ------ ------
Effective tax rate 43.4% 38.7% 31.3%
====== ====== ======
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
$9,445 thousand, $8,713 thousand and $9,075 thousand in 2001, 2000 and 1999,
respectively.
At December 31, 2001, minimum rental payments under noncancelable leases
aggregated $21,995 thousand. The net minimum payments over the next five years
and thereafter are $6,245 thousand in 2002, $4,527 thousand in 2003, $2,722
thousand in 2004, $1,595 thousand in 2005, $1,459 thousand in 2006 and $5,447
thousand beyond 2006, 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, 2001 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 coordinators who are familiar with environmental laws and
regulations and act as a resource for identifying environmental issues.
255
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, 2001, 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 $3,608 thousand, $6,992 thousand, and $1,968 thousand
in 2001, 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 $47,416
thousand, $25,303 thousand and $33,712 thousand in 2001, 2000 and 1999,
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.
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 $49,964
thousand, $107,593 thousand and $115,269 thousand in 2001, 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 (income) expenses line item in the consolidated
statement of income and totaled $25,164 thousand, $22,471 thousand and $27,318
thousand and thousand in 2001, 2000 and 1999, respectively.
19. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
The Company enters into forward-exchange contracts to hedge currency
exposure.
256
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, 2001 and 2000, the Company had outstanding
forward-exchange contracts to purchase foreign currencies aggregating $84,615
thousand and $62,393 thousand, respectively, and to sell foreign currencies
aggregating $84,667 thousand and $62,833 thousand, respectively. The foreign
exchange contracts outstanding at December 31, 2001 will mature during 2002.
FAIR VALUES
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 2001 and 2000:
(Dollars in thousands)
2001 2000
------------------------- ---------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------------------- ---------------------------
Foreign exchange contracts $ (52) $ (52) $ 205 $ 205
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, 2001. Foreign exchange contracts are valued based
on year-end exchange rates.
20. NET HERCULES GROUP INVESTMENT
Changes in Net Hercules Group Investment were as follows:
Balance, January 1, 1999 $ 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
Net income 48,577
Other comprehensive loss (29,810)
Intercompany transactions, net (54,910)
---------
Balance, December 31, 2001 $ 348,053
=========
The Company includes accumulated other comprehensive losses in Net
Hercules Group Investment. At December 31, 2001, accumulated other comprehensive
losses consisted of an additional minimum pension liability and foreign currency
translation adjustments, net of tax, of $(1,646) thousand and $(168,969)
thousand, respectively. At December
257
HERCULES INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
31, 2000 and 1999, accumulated other comprehensive losses consisted of foreign
currency translation adjustments, net of tax, of $(140,805) thousand and
$(40,670) thousand, respectively.
21. SUBSEQUENT EVENT
On April 29, 2002, Hercules completed the sale of its Water Treatment
Business to GE Specialty Materials (GESM). Pursuant to the Stock and Asset
Agreement for the transaction, the sale included all of the stock of
BetzDearborn and the Company. Hercules used the proceeds from the sale to prepay
borrowings under its Senior Credit Facility and ESOP Credit Facility. Pursuant
to the prepayment, among other things, the stock pledges were released.
258
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, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 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 Accountants N.V.
Amsterdam, The Netherlands
November 12, 2002
259
HERCULES INVESTMENTS SARL
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Year Ended December 31,
2001 2000 1999
----------- ----------- -----------
Sales to third parties $ 512,579 $ 580,730 $ 647,182
Sales to Hercules Group 80,579 328,822 382,530
----------- ----------- -----------
593,158 909,552 1,029,712
Cost of sales 354,441 580,886 639,939
Selling, general, and administrative expenses 130,016 137,403 130,991
Research and development 14,057 19,977 25,399
Goodwill and intangible asset amortization 6,114 8,279 11,257
Other operating expense (income), net (Note 13) 9,354 (131,862) 27,840
----------- ----------- -----------
Profit from operations 79,176 294,869 194,286
Interest and debt expense (Note 14) 90,005 38,990 646
Other income, net (Note 15) 20,441 11,460 5,204
----------- ----------- -----------
Income before income taxes, equity (loss) income
and minority interest, net 9,612 267,339 198,844
Provision for income taxes (Note 16) 28,176 46,244 61,019
----------- ----------- -----------
Income before equity (loss) income
and minority interest, net (18,564) 221,095 137,825
Equity (loss) income of affiliated companies (10,026) (3,891) 2,938
Minority interest, net (1,563) (1,441) (2,984)
----------- ----------- -----------
Net (loss) income (30,153) 215,763 137,779
Additional minimum pension liability, net of
tax of $(872) (1,340) -- --
Foreign Currency Translation, net of tax of $0 for
each year 59,040 (71,025) (49,869)
----------- ----------- -----------
Comprehensive income $ 27,547 $ 144,738 $ 87,910
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements
260
HERCULES INVESTMENTS SARL
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
2001 2000
ASSETS
Current assets
Cash and cash equivalents $ 17,585 $ 14,340
Accounts receivable, net (Note 3) 127,314 147,439
Inventories (Note 4) 49,333 56,109
Deferred income taxes (Note 16) 2,614 2,231
--------- ---------
Total current assets 196,846 220,119
--------- ---------
Property, plant, and equipment, net (Note 9) 216,488 275,325
Investments in affiliates (Note 5) 19,565 30,279
Goodwill and other intangible assets, net (Note 10) 206,902 224,150
Deferred charges and other assets 9,902 12,427
--------- ---------
Total assets $ 649,703 $ 762,300
========= =========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Accounts payable $ 73,888 $ 84,955
Short-term debt (Note 6) 5,144 91,007
Accrued expenses (Note 9) 53,864 47,514
--------- ---------
Total current liabilities 132,896 223,413
Long-term debt - third parties (Note 7) 264 75
Deferred income taxes (Note 16) 65,440 59,679
Pension liability (Note 12) 24,203 20,757
Deferred credits and other liabilities 3,720 2,030
--------- ---------
Total liabilities 226,523 306,017
Commitments and contingencies (Note 17)
Minority Interest 22,249 22,649
Net Hercules Group Investment (Note 20)
Accumulated other comprehensive losses (50,559) (108,259)
Intercompany transactions 451,490 541,893
--------- ---------
Total Net Hercules Group Investment 400,931 433,634
--------- ---------
Total liabilities and Net Hercules Group Investment $ 649,703 $ 762,300
========= =========
The accompanying notes are an integral part of the consolidated financial
statements
261
HERCULES INVESTMENTS SARL
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
2001 2000 1999
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income $ (30,153) $ 215,763 $ 137,779
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization of property, plant and equipment 20,774 28,615 32,784
Amortization of goodwill and other intangible assets 6,114 8,279 11,257
Restructuring plans 3,016 3,073 12,551
Deferred income tax 9,835 14,360 12,967
Loss on disposals of property, plant and equipment 1,608 1,617 184
Gain on sale of investments (15,219) (167,566) (13,302)
Equity loss (income) of affiliates 10,026 3,891 (2,938)
Dividends received 593 579 3,093
Minority interest, net 1,563 1,441 2,984
Corporate and other cost allocations 10,681 11,369 14,317
Accruals and deferrals of cash receipts and payments:
Accounts receivable 12,858 4,239 (23,734)
Inventories (20,978) (9,883) (5,245)
Accounts payable and accrued expenses (717) (29,689) 1,525
Noncurrent assets and liabilities 5,537 (4,091) 11,138
Net transfers from (to) Hercules Group 70,621 74,314 (74,896)
--------- --------- ---------
Net cash provided by operations 86,159 156,311 120,464
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures, net of proceeds from sale (17,554) (68,708) (72,437)
Proceeds from sale of investment -- -- 22,009
Purchase of equity method investments -- -- (25)
--------- --------- ---------
Net cash used in investing activities (17,554) (68,708) (50,453)
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Change in short-term debt (84,303) 78,445 (58,154)
Long-term debt repayments -- (306) (620)
Proceeds from issuance of long-term debt 193 41,213 --
Net transfers from (to) Hercules Group 18,798 (207,508) (12,805)
--------- --------- ---------
Net cash used in financing activities (65,312) (88,156) (71,579)
--------- --------- ---------
--------- --------- ---------
Effect of exchange rate changes on cash (48) (1,149) (2,443)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 3,245 (1,702) (4,011)
Cash and cash equivalents at beginning of year 14,340 16,042 20,053
--------- --------- ---------
Cash and cash equivalents at end of year $ 17,585 $ 14,340 $ 16,042
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $ 114,765 $ 792 $ 955
Income taxes, net 15,591 55,149 59,645
Noncash investing and financing activities:
Sale of investment in CP Kelco ApS (Note 13) -- 119,261 --
Corporate and other cost allocations 10,681 11,369 14,317
Reversal of restructuring accruals to goodwill (Note 11) 435 3,320 --
The accompanying notes are an integral part of the consolidated financial
statements
262
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 $2,170 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.
Prior to fiscal year 2000, 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.
On April 29, 2002, in connection with Hercules' sale of its Water
Treatment Business (see Note 21) and the repayment of the Facilities, the stock
pledges were released. As a result, based on Hercules' current debt structure,
these separate company stand-alone financial statements will not be required for
the fiscal year ending December 31, 2002.
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.
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.
263
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the net book value 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, customer relationships, and trademarks and tradenames and 5 to 15
years for other intangible assets. Pursuant to Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), beginning
January 1, 2002, goodwill will not be amortized but will be tested for
impairment annually and any necessary adjustment charged to expense. Intangible
assets with finite lives will be amortized over their useful lives.
264
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 $25,645 thousand, $(7,730) thousand and $9,273 thousand at
December 31, 2001, 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 Euro 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.
DERIVATIVE INSTRUMENTS AND HEDGING
On January 1, 2001, the Company adopted 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. The
Company has not designated any derivative as a hedge instrument and accordingly,
changes in fair value of derivatives are recorded each period in earnings. The
adoption of SFAS 133 did not result in a pre-tax or post-tax
cumulative-effect-type adjustment to income and did not result in a change to
other comprehensive income (loss).
265
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, 2001 and 2000 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.
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 2001, the Financial Accounting Standards Board ("FASB") issued
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"). SFAS 141 supersedes Accounting
Principles Board Opinion ("APB") No. 16, Business Combinations. The provisions
of SFAS 141 (1) require that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) provide specific
criteria for the initial recognition and measurement of intangible assets apart
from goodwill and (3) require that unamortized negative goodwill be written off
immediately as extraordinary gain instead of being deferred and amortized. SFAS
141 also requires that upon adoption of SFAS 142 the Company reclassify the
carrying amounts of certain intangible assets into or out of goodwill, based on
certain criteria. SFAS 142 supersedes APB No. 17, Intangible Assets, and is
effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
initial recognition. The provisions of SFAS 142 (1) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), based on
fair value (as opposed to cost recovery using future undiscounted cash flows),
(3) require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill and (4) remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.
266
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Effective January 1, 2002 Hercules adopted the provisions of SFAS 142.
Hercules identified the following reporting units: BetzDearborn and Pulp and
Paper, Aqualon and FiberVisions. In connection with Hercules' transitional
review, recorded goodwill was determined to be impaired in the BetzDearborn
reporting unit. In the first quarter 2002, Hercules completed its transitional
impairment review of the identified reporting units and recognized an after tax
impairment loss of $368 million as a cumulative effect of a change in accounting
principle. As a result of Hercules' adoption of SFAS 142, the Company will no
longer record approximately $6.1 million of annual amortization relating to
existing goodwill and intangibles.
Goodwill related to the BetzDearborn business was evaluated for impairment
at December 31, 2001 under Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Fixed Assets and for Long-Lived Assets to
Be Disposed of". Such evaluation indicated that goodwill associated with the
business was recoverable from anticipated future undiscounted cash flows.
Accordingly, no impairment loss was recorded in the December 31, 2001 financial
statements.
In June 2001, the Financial Accounting Standards Board ("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. The Company does not believe it will have a material effect on its
financial statements.
On January 1, 2002, the Company adopted 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 Company does not believe it
will have a material effect on its financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment to FASB
Statement No. 13, and Technical Corrections." The Company elected to early adopt
the provisions of SFAS 145 related to the rescission of SFAS 4, "Reporting Gains
and Losses from the Extinguishment of Debt" ("SFAS 4"). The early adoption of
SFAS 145 had no effect on the Company's financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs in a
Restructuring)". SFAS 146 defines the timing of the recognition of costs
associated with exit or disposal activities, the types of costs that may be
recognized and the methodology for calculating the fair value of such costs. The
provisions of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe this statement
will have a material effect on its financial statements.
RECLASSIFICATIONS
Certain amounts in the 2000 and 1999 consolidated financial statements and
notes have been reclassified to conform to the 2001 presentation.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of:
(Dollars in thousands)
2001 2000
--------- ---------
Trade $ 121,937 $ 139,568
Other 8,440 10,228
--------- ---------
130,377 149,796
Less allowance for doubtful accounts (3,063) (2,357)
--------- ---------
Total $ 127,314 $ 147,439
========= =========
267
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Other accounts receivable mainly comprise VAT receivable.
4. INVENTORIES
The components of inventories are:
(Dollars in thousands)
2001 2000
------- -------
Finished products $32,386 $30,895
Materials, supplies, and work in process 16,947 25,214
------- -------
Total $49,333 $56,109
======= =======
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:
(Dollars in thousands)
2001 2000
---- ----
Current assets $241,134 $269,814
Non-current assets 890,455 942,946
Current liabilities $ 81,123 $109,486
Non-current liabilities 725,523 730,579
2001 2000 1999
---- ---- ----
Net sales $471,411 $143,245 $56,410
Gross profit 148,987 17,290 14,488
Net (losses) earnings (50,021) (15,864) 5,865
At December 31, 2001, 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 value
for these investments at December 31, 2001 and 2000 equals its share of the
underlying equity in net assets of the respective affiliates. Dividends paid to
the Company from its equity investees were $593 thousand, $579 thousand and
$3,093 thousand during 2001, 2000 and 1999, 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 $5,144 thousand and $91,007 thousand at December 31,
2001 and 2000, 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 $3,539 thousand and $32,734 thousand at
December 31, 2001 and 2000, 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, 2001 and 2000, the Company had $7,155 thousand and $34,774
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, 2001 and 2000 were 4.40% and 5.60%, respectively.
268
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt with third parties and affiliates at December 31, 2001 and
2000 is summarized as follows:
(Dollars in thousand)
2001 2000
---- ----
5.72% third party note $ 309 $ 93
Other 24 45
---------- ----------
Less current maturities 69 63
---------- ----------
Total long-term debt, third party 264 75
---------- ----------
4.93% affiliate note 1,614,562 1,698,968
Cibor + 0.0075% affiliate note 21,799 22,853
Euribor + 0.5% affiliate note 19,496 20,516
---------- ----------
Less current maturities -- --
---------- ----------
Total long-term debt, affiliates 1,655,857 1,742,337
---------- ----------
Total long term debt, third party and affiliates $1,656,121 $1,742,412
========== ==========
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 at December 31, 2001 matures as follows: $69 thousand, $48
thousand, $50 thousand, $53 thousand and $113 thousand in the years 2002, 2003,
2004, 2005 and 2006 and thereafter, respectively. The fair values of the
Company's long-term debt were $1,656 thousand at December 31, 2001 and $1,742
thousand at December 31, 2000. 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.
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
189,704 at December 31, 2001, and 491,488 and 926,689 at December 31, 2000 and
1999, respectively.
At December 31, 2001, under Hercules' incentive compensation plans,
1,265,493 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 2001, 2000 and 1999, respectively.
269
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Below is a summary of outstanding stock option grants under the incentive
compensation plans during 1999, 2000 and 2001:
Regular Performance-Accelerated
----------------------------------- -----------------------------------
Number of Weighted-average Number of Weighted-average
Shares price Shares price
---------------------------------- -----------------------------------
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
Granted 80,125 $11.28 - -
Exercised - - - -
Forfeited (60,460) $30.85 (900) $45.73
-------------------------------- -----------------------------------
December 31, 2001 774,765 $32.82 146,675 $42.18
The weighted-average fair value of regular stock options granted during 1999,
2000 and 2001 was $8.25, $8.85 and $5.69, respectively. The weighted-average
fair value of performance-accelerated stock options granted during 1999, 2000
and 2001 was $7.99, $0 and $0, respectively.
Following is a summary of regular stock options exercisable at December
31, 1999, 2000, and 2001, and their respective weighted-average share prices:
Number of Weighted-average
Options Exercisable Shares exercise price
------------------- ------ --------------
December 31, 1999 290,545 $39.85
December 31, 2000 533,705 $37.14
December 31, 2001 612,365 $36.57
There were no performance-accelerated stock options exercisable at
December 31, 1999, 2000 and 2001.
Following is a summary of stock options outstanding at December 31, 2001:
Outstanding Options Exercisable Options
--------------------------------------------------------- ----------------------------------------
Number Weighted-average Weighted- Number Weighted-
Outstanding at Remaining average Exercisable at average
Exercise Price Range 12/31/2001 Contractual Life exercise price 12/31/2001 exercise price
--------------------------------------------------------- ----------------------------------------
Regular Stock Options
$11 - $20 196,275 8.75 $14.81 68,845 $17.25
$20 - $30 44,475 6.67 $25.56 44,475 $25.56
$30 - $40 462,540 6.23 $38.71 427,570 $38.80
$40 - $50 63,075 6.11 $47.82 63,075 $47.82
$50 - $60 8,400 4.11 $55.38 8,400 $55.38
----------- ---------
774,765 612,365
----------- ---------
Performance-Accelerated
Stock Options
$14 - $40 89,500 6.69 $37.98 -
$40 - $50 50,075 5.82 $47.83 -
$50 - $61 7,100 4.11 $55.38 -
----------- ---------
146,675 -
----------- ---------
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 ("ESSP"). 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, there are no shares of Hercules common stock registered for offer
and sale under the plan. Shares issued at December 31, 2001 and 2000, were
1,758,081 and 1,597,861, 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.
270
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 2001, 2000 and 1999:
Performance Employee Stock
Assumption Regular Plan Accelerated Plan Purchase Plan
---------- ------------ ---------------- -------------
Dividend yield 0.96% 3.83% 0.0%
Risk-free interest rate 5.80% 5.57% 4.86%
Expected life 7.1 yrs. 5 yrs. 3 mos.
Expected volatility 33.36% 29.78% 49.11%
The Company's net income and earnings per share for 2001, 2000 and 1999
would approximate the pro forma amounts below:
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Net (loss) income
As reported $(30,153) $215,763 $137,779
Pro forma $(31,100) $214,434 $136,521
9. ADDITIONAL BALANCE SHEET DETAIL
(Dollars in thousands)
2001 2000
---- ----
Property, plant, and equipment
Land $ 4,659 $ 7,240
Buildings and equipment 436,298 533,902
--------- ---------
Total 440,957 541,142
Accumulated depreciation and amortization (224,469) (265,817)
--------- ---------
Net property, plant, and equipment $ 216,488 $ 275,325
========= =========
Accrued expenses
Payroll and employee benefits $ 14,986 $ 14,395
Income taxes payable 9,315 4,966
Restructuring (Note 11) 10,002 12,743
Environmental 9,300 9,300
Other 10,261 6,110
--------- ---------
$ 53,864 $ 47,514
========= =========
10. GOODWILL AND OTHER INTANGIBLES ASSETS
At December 31, 2001 and 2000, the goodwill and other intangible assets
were:
(Dollars in thousands)
2001 2000
---- ----
Goodwill $ 225,472 $ 241,109
Other intangibles 4,467 7,820
--------- ---------
Total 229,939 248,929
Less accumulated amortization (23,037) (24,779)
--------- ---------
Net goodwill and other intangible assets $ 206,902 $ 224,150
========= =========
Goodwill and other intangible assets primarily represent amounts
capitalized from the Hercules acquisition of BetzDearborn (Note 1).
271
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, the acquisition of
BetzDearborn in 1998 and the Work Process Redesign ("WPR") program in 2001.
During the third quarter of 2001, Hercules started a Work Process Redesign
program. The WPR program has been set up to analyze and change the way we work
to improve the mechanics of how we do business - to do it better, quicker and at
less costs. Teams were established to focus initially on seven work processes of
our business that needed major improvement: manufacturing, solicit order to
cash, finance and control fundamentals, logistics, information technology,
purchase to pay and discovery to commercialization.
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 68 employees were
terminated in the year 2000 and cash worth approximately $13.6 million was paid
for severance benefits and other exit costs. The estimate for the remaining
plans was decreased by approximately $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 service center was
decreased by approximately $1.7 million against operating expense.
As a result of the WPR program, we estimate approximately 68 employees to
leave and have charged $3.4 million to operating expense for these costs. These
employees come from various parts of the business, including but not limited to
all above-mentioned processes.
During the year 2001, a total of approximately 183 employees were
terminated and cash worth approximately $5.3 million was paid for severance
benefits and other exit costs. The estimate for the remaining plans was
decreased by $435 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 service center was decreased by $386 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 2002.
A reconciliation of activity with respect to the liabilities established
for these plans is as follows:
(Dollars in thousands)
2001 2000
---- ----
Balance at beginning of year $ 12,743 $ 26,546
Cash payments (5,322) (13,556)
Additional termination benefits and exit costs 3,402 4,731
Reversals against goodwill (435) (3,320)
Reversals against earnings (386) (1,658)
-------- --------
Balance at end of year $ 10,002 $ 12,743
======== ========
272
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
(Dollars in thousands)
2001 2000
---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1 $ 25,087 $37,408
Service cost 909 842
Interest cost 1,454 1,388
Employee contributions - 7
Reclassification of assets for plan settlement - (416)
Settlements and transfers - (10,612)
Translation difference (1,307) (3,108)
Actuarial loss 2,794 111
Benefits paid from plan assets - (10)
Benefits paid by company (674) (523)
-------- -------
Benefit obligation at December 31 $ 28,263 $25,087
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 1,616 2,817
Actual return on plan assets 11 22
Employee contributions - 7
Settlements and transfers -- (1,109)
Company contributions 103 122
Translation difference (81) (233)
Benefits paid from plan assets -- (10)
-------- -------
Fair value of plan assets at December 31 $ 1,649 $ 1,616
======== ========
Funded status of the plans (26,614) (23,471)
Unrecognized actuarial loss 4,514 1,876
Unrecognized prior service cost 103 119
Unrecognized net transition obligation 602 719
-------- -------
Accrued benefit cost $(21,395) $(20,757)
======== ========
AMOUNTS RECOGNIZED IN THE STATEMENT OF
FINANCIAL POSITION CONSIST OF:
Intangible asset 596 -
Other comprehensive income 2,212 -
Additional minimum liability (2,808) -
Accrued benefit liability (21,395) (20,757)
-------- -------
$(21,395) $(20,757)
======== ========
ASSUMPTIONS AS OF DECEMBER 31
Weighted-average discount rate 5.00% 5.75%
Expected return on plan assets 6.00% 6.50%
Rate of compensation increase 3.00% 3.50%
273
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
COMPONENTS OF NET PERIOD PENSION COST
Pension Benefits
2001 2000 1999
---- ---- ----
Service cost $ 909 $ 842 $ 1,510
Interest cost 1,454 1,388 2,258
Expected return on plan assets (37) (36) (98)
Amortization and deferrals (8) (17) (14)
Gain on settlements - (8,675) -
Amortization of prior service cost 66 10 12
Amortization of transition asset 82 2,129 351
------- ------- -------
Benefit (credit) cost $ 2,466 $(4,359) $ 4,019
------- ------- -------
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 $17,410 thousand, $16,241 thousand and $0,
respectively, as of December 31, 2001 and $23,562 thousand, $19,780 thousand and
$ 0 thousand, respectively, as of December 31, 2000.
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 $1,265
thousand, $(428) thousand and $199 thousand in 2001, 2000 and 1999,
respectively.
During 1999 and up to March 1, 2000, the Company's Belgian employees
participated in a defined benefit pension plan. On March 1, 2000, the Company
terminated its participation in the defined benefit pension plan 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 year ended December 31, 2001 was $330 thousand and for the period
March 1, 2000 through December 31, 2000 was $222 thousand.
13. OTHER OPERATING (INCOME) EXPENSES, NET
Other operating expense, net, in 2001 includes $15,219 thousand in net
gains from the sale of the Company's hydrocarbon resins business, select
portions of its rosin resins business, and its peroxy chemicals business.
Furthermore, other operating expense, net, includes Hercules Group affiliate
royalty costs totaling $25,164 thousand, net restructuring costs totaling $3,016
thousand, net losses on assets sales totaling $1,608 thousand and foreign
currency gains totaling $5,215 thousand.
Other operating income, 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.
14. INTEREST AND DEBT EXPENSE
No interest and debt costs were capitalized during 2001, 2000 and 1999.
The costs incurred are presented separately in the consolidated statement
of income and are primarily from debt with affiliates.
274
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
15. OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following:
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Interest income, net $ 18,682 $ 11,124 $ 9,742
Rent 28 27 (6)
Miscellaneous income (expense), net 1,731 309 (4,532)
-------- -------- -------
$ 20,441 $ 11,460 $ 5,204
======== ======== =======
16. INCOME TAXES
A summary of the components of the tax provision follows:
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Current $ 18,341 $ 31,884 $ 48,052
Deferred 9,835 14,360 12,967
-------- -------- --------
Provision for income taxes $ 28,176 $ 46,244 $ 61,019
======== ======== ========
Deferred tax (liabilities) assets at December 31 consist of:
(Dollars in thousands)
2001 2000
---- ----
Depreciation $(37,991) $(41,661)
Goodwill amortization (9,497) (8,819)
Fixed asset valuation (101) (2,207)
Intangible asset (613) (1,385)
Insurance provision (4,193) (4,989)
Replacement provision (10,491) (3,282)
Other (4,817) (2,151)
-------- --------
Gross deferred tax liabilities (67,703) (64,494)
-------- --------
Loss carryforwards 950 2,959
Accrued pension 2,169 --
Allowance for doubtful accounts 1,119 58
Inventory valuation 1,506 2,551
Other 602 2,181
-------- --------
Gross deferred tax assets 6,346 7,749
-------- --------
Valuation allowance (1,469) (703)
-------- --------
$(62,826) $(57,448)
======== ========
275
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
A reconciliation of the statutory income tax rate to the effective rate
follows:
2001 2000 1999
---- ---- ----
Statutory income tax rate 37.5% 37.5% 37.5%
Goodwill amortization 18.1% 0.0% 0.0%
Non-deductible expenses 78.9% 5.0% 1.8%
Non-taxable income (157.9)% (4.8)% (1.6)%
Tax rate differences on subsidiary earnings 344.8% (1.4)% (1.2)%
Gain on sale of investment (22.5)% (23.5)% (3.3)%
Effects of rate changes (14.0)% 0.0% 0.0%
Other 8.2% 4.5% (2.5)%
------ ----- -----
Effective tax rate 293.1% 17.3% 30.7%
====== ====== =====
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
$8,822 thousand, $ 8,076 thousand and $ 8,786 thousand in 2001, 2000 and 1999,
respectively.
At December 31, 2001, minimum rental payments under non-cancelable leases
aggregated $18,823 thousand. The net minimum payments over the next five years
and thereafter are $5,697 thousand in 2002, $4,008 thousand in 2003, $2,201
thousand in 2004, $1,071 thousand in 2005, $931 thousand in 2006 and $4,915
thousand beyond 2006.
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, 2001 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 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.
276
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, 2001, 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 $115,325 thousand, $42,602 thousand and $2,581 thousand
in 2001, 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 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 $43,836 thousand, $23,980 thousand and $31,596 thousand in 2001,
2000 and 1999, 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.
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 $66,648
thousand, $221,230 thousand and $241,737 thousand in 2001, 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 (income) expense line item in the consolidated
statement of income and totaled $25,164 thousand, $22,471 thousand and $27,318
thousand in 2001, 2000 and 1999, 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
277
HERCULES INVESTMENTS SARL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, 2001 and 2000, the Company had outstanding
forward-exchange contracts to purchase foreign currencies aggregating $87,616
thousand and $78,281 thousand, respectively, and to sell foreign currencies
aggregating $87,676 thousand and $78,712 thousand, respectively. The foreign
exchange contracts outstanding at December 31, 2001 will mature during 2002.
FAIR VALUES
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 2001 and 2000:
(Dollars in thousands)
2001 2000
---- ----
Carrying Carrying
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Foreign exchange contracts $ (60) $ (60) $ (430) $ (430)
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, 2001. Foreign exchange contracts are valued based
on year-end exchange rates.
20. NET HERCULES GROUP INVESTMENT
Changes in Net Hercules Group Investment were as follows:
Balance, January 1, 1999 $ 694,589
Net income 137,779
Other comprehensive loss (49,869)
Intercompany transactions, net (95,424)
--------------
Balance, December 31, 1999 687,075
Net income 215,763
Other comprehensive loss (71,025)
Intercompany transactions, net (398,179)
--------------
Balance, December 31, 2000 433,634
Net loss (30,153)
Other comprehensive income 57,700
Intercompany transactions, net (60,250)
--------------
Balance, December 31, 2001 $ 400,931
==============
The Company includes accumulated other comprehensive losses in Net
Hercules Group Investment. At December 31, 2001, accumulated other comprehensive
income consisted of an additional minimum pension liability and foreign currency
translation adjustments, net of tax, of $1,340 thousand and $(51,899) thousand,
respectively. At December 31, 2000 and 1999, accumulated other comprehensive
losses consisted of foreign currency translation adjustments, net of tax, of
$(108,259) thousand and $(37,234) thousand, respectively.
21. SUBSEQUENT EVENT
On April 29, 2002, Hercules completed the sale of its Water Treatment
Business to GE Specialty Materials (GESM). Pursuant to the Stock and Asset
Agreement for the transaction, the sale included all of the stock of
BetzDearborn and the Company. Hercules used the proceeds from the sale to prepay
borrowings under its Senior Credit Facility and ESOP Credit Facility. Pursuant
to the prepayment, among other things, the stock pledges were released.
278
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 income (loss) and of cash flows present fairly,
in all material respects, the financial position of WSP, Inc., a subsidiary of
Hercules Incorporated, at December 31, 2001 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001 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 more fully discussed in Note 7, the Company has restated its December 31,
2000 and 1999 financial statements to correctly reflect equity income (loss)
from an equity investment.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 2, 2002
279
WSP, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Restated Restated
2001 2000 1999
-------- -------- --------
Interest income $ -- $ 2,452 $ --
-------- -------- --------
Income before income taxes and equity income (loss) -- 2,452 --
Provision for income taxes (Note 6) -- (3,523) 3,108
-------- -------- --------
Income before equity income (loss) -- 5,975 (3,108)
Equity income (loss) of affiliated company, net of tax (Note 3) 2,691 (22,770) 7,769
-------- -------- --------
Net income (loss) 2,691 (16,795) 4,661
Translation gain, net of tax 624 637 440
-------- -------- --------
Comprehensive income (loss) $ 3,315 $(16,158) $ 5,101
-------- -------- --------
The accompanying notes are an integral part of the financial statements.
280
WSP, INC.
BALANCE SHEETS
(Dollars in thousands)
Restated
December 31,
2001 2000
-------- --------
ASSETS
Investments (Note 3) $126,828 $123,513
-------- --------
Total assets $126,828 $123,513
======== ========
LIABILITIES AND NET HERCULES GROUP INVESTMENT
Current liabilities
Current tax liability (Note 6) $ -- $ 981
-------- --------
Total current liabilities -- 981
Deferred income taxes (Note 6) -- --
-------- --------
Total liabilities -- 981
Commitments and contingencies (Note 4) -- --
Net Hercules Group investment (Note 5)
Accumulated other comprehensive income 1,701 1,077
Intercompany balances, net 125,127 121,455
-------- --------
Net Hercules Group investment 126,828 122,532
-------- --------
Total liabilities and net Hercules
Group investment $126,828 $123,513
======== ========
The accompanying notes are an integral part of the financial statements.
281
WSP, INC.
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Restated Restated
Year Ended December 31,
2001 2000 1999
-------- -------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,691 $(16,795) $ (4,661)
Adjustments to reconcile net income (loss) to net cash provided from operations:
Affiliates' (earnings) losses in excess of dividends received (2,691) 22,770 (7,769)
Deferred income taxes -- (4,504) 3,108
Accruals and deferrals of cash receipts and payments:
Accounts payable and accrued expenses (981) 981 --
-------- -------- --------
Net cash (used in) provided by operations (981) 2,452 --
CASH FLOW FROM INVESTING ACTIVITIES:
-------- -------- --------
Net cash (used in) investing activities -- -- --
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Transfers from (to) Hercules Group 981 (2,452) --
-------- -------- --------
Net cash provided by (used in) financing activities 981 (2,452) --
-------- -------- --------
Net 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 $ 981 -- --
The accompanying notes are an integral part of the financial statements.
282
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 markets for
polypropylene nonwoven 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.
On April 29, 2002, in connection with Hercules' sale of its Water
Treatment Business (see Note 8) and the repayment of the Facilities, the stock
pledges were released. As a result, based on Hercules' current debt structure,
these separate company stand-alone financial statements will not be required for
the fiscal year ending December 31, 2002.
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.
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
On January 1, 2002, the Company adopted 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 Company does not believe
this statement will have a material effect on its financial statements.
283
WSP, INC.
NOTES TO FINANCIAL STATEMENTS
RECLASSIFICATIONS
Certain amounts in the 2000 and 1999 consolidated financial statements and
notes have been reclassified to conform to the 2001 presentation.
3. INVESTMENTS
Total investments in affiliated companies were as follows:
(Dollars in thousands)
2001 2000
-------- --------
Investment in FiberVisions, L.L.C $125,013 $121,698
Investment in Aqualon Company 1,815 1,815
-------- --------
Total Investments $126,828 $123,513
======== ========
Summarized financial information for FiberVisions, L.L.C. at December 31,
2001 and 2000 and the years then ended is as follows:
(Dollars in thousands)
2001 2000
-------- --------
Current assets $ 61,232 $ 68,290
Non-current assets 301,892 322,085
Current liabilities 40,430 45,780
Other non-current liabilities 68,805 74,024
(Dollars in thousands)
2001 2000 1999
--------- --------- ---------
Net sales $ 218,366 $ 251,859 $ 253,648
Gross profit 33,973 28,726 59,952
Net earnings 5,491 (46,468) 15,855
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, 2001 is likely to have a material adverse effect
on the financial position and results of operations of WSP.
284
WSP, INC.
NOTES TO FINANCIAL STATEMENTS
5. NET HERCULES GROUP INVESTMENT
Changes in net Hercules Group investment were as follows:
(Dollars in thousands)
Balance, January 1, 1999 $ 136,041
Net income 4,661
Other comprehensive income 440
Intercompany transactions, net --
---------
Balance, December 31, 1999 141,142
Net loss (16,795)
Other comprehensive income 637
Intercompany transactions, net (2,452)
---------
Balance, December 31, 2000 122,532
Net income 2,691
Other comprehensive income 624
Intercompany transactions, net 981
---------
Balance, December 31, 2001 $ 126,828
---------
6. INCOME TAXES
The domestic components of income before taxes are presented below:
(Dollars in thousands)
2001 2000 1999
----- ------- ----
Domestic $ -- $ 2,452 $ --
----- ------- ----
$ -- $ 2,452 $ --
===== ======= ====
A summary of the components of the tax provision follows:
(Dollars in thousands)
2001 2000 1999
----- ---- ----
Currently payable $ -- $ 981 $ --
Deferred -- (4,504) 3,108
----- ------- ------
Provision for income taxes $ -- $(3,523) $3,108
===== ======= ======
Deferred tax assets at December 31, consist of the following:
(Dollars in thousands)
2001 2000
---- ----
Partnership basis $ -- $ --
---- ----
Gross deferred tax assets -- --
Valuation allowance -- --
---- ----
$ -- $ --
==== ====
285
WSP, INC.
NOTES TO FINANCIAL STATEMENTS
7. RESTATEMENT
The Company has restated its December 31, 2000 and 1999 financial
statements to correctly reflect equity income (loss) from an equity investment.
During 2002, the Company discovered that the prior financial statements of its
49% investment in FiberVisions, L.L.C. did not include income tax provisions for
its subsidiaries whose income is subject to corporate income taxes at the
subsidiary level. Accordingly, the financial statements for December 31, 2000
and 1999 have been restated. The effect of these adjustments on the Company's
December 31, 2000 and 1999 financial statements is as follows:
(Dollars in thousands)
December 31, 2000 December 31, 1999
As Previously As Restated As Previously As Restated
Reported Reported
------------- ----------- ------------- -----------
BALANCE SHEET
Investments $ 126,138 $ 123,513 $ 151,123 $ 145,646
Current tax liability 919 981 99 -
Deferred income taxes (asset) liability (4,143) - 4,981 4,504
Net Hercules Group investment
January 1 146,043 141,142 136,812 136,041
December 31 129,362 122,532 146,043 141,142
INCOME STATEMENT
(Benefit)/Provision for income taxes $ (8,205) $ (3,523) $ 4,571 $ 3,108
Equity (loss) income of affiliated company (25,895) (22,770) 13,059 7,769
Net (loss) income (15,238) (16,795) 8,488 4,661
Translation gain 910 637 627 440
Comprehensive (loss) income (14,328) (16,158) 9,115 5,101
CASH FLOW STATEMENT
Net (loss) income $ (15,238) $ (16,795) $ 8,488 $ 4,661
Affiliates' losses (earnings) in excess of dividends
received 25,895 22,770 (13,059) (7,769)
Accounts payable and accrued expenses 820 981 (17) -
Noncurrent assets and liabilities (9,124) (4,504) 4,472 3,108
Transfers (to) from Hercules Group (2,353) (2,452) 116 -
Cash paid during the year for:
Income taxes paid, net $ 99 $ - $ 116 $ -
8. SUBSEQUENT EVENTS
On April 29, 2002, Hercules completed the sale of its Water Treatment
Business to GE Specialty Materials (GESM). Pursuant to the Stock and Asset
Agreement for the transaction, the sale was executed using the stock of
BetzDearborn,Inc. and all of the assets, liabilities, and/or equity interests
relating to the Water Treatment Business. Hercules used the proceeds from the
sale to prepay borrowings under its Senior Credit Facility and ESOP Credit
Facility. Pursuant to the prepayment, among other things, the stock pledges were
released.
Effective January 1, 2002, Hercules adopted the provisions of Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142") and determined it has the following reporting units:
BetzDearborn, Pulp and Paper, Aqualon, FiberVisions and Pinova (formerly Rosins
and Terpenes). In the first quarter, 2002 Hercules completed its transitional
impairment review and determined that FiberVisions' recorded goodwill was
impaired. Accordingly, at March 31, 2002 Hercules recognized an after-tax
impairment loss of $87 million as a cumulative effect of a change in accounting
principle relating to its FiberVisions reporting unit.
286
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:
None
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 8K:
None
HERCULES INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
in the capacity indicated on December 13, 2002.
HERCULES INCORPORATED
By: /S/ Fred G. Aanonsen
----------------------------------------
Fred G. Aanonsen
Vice President and Controller
(Principal Accounting Officer and duly
authorized signatory)
December 13, 2002
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William H. Joyce, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K/A of Hercules
Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report.
/s/ William H. Joyce
--------------------------------
William H. Joyce
Chairman & Chief Executive Officer
December 13, 2002
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Fred G. Aanonsen, Vice President and Controller, certify that:
1. I have reviewed this annual report on Form 10-K/A of Hercules
Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report.
/s/ Fred G. Aanonsen
--------------------------------
Fred G. Aanonsen
Vice President and Controller
December 13, 2002
EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
23.1 Consent of PricewaterhouseCoopers LLP with respect to Hercules
Incorporated
23.2 Consent of PricewaterhouseCoopers LLP with respect to Aqualon
Company
23.3 Consent of PricewaterhouseCoopers LLP with respect to BetzDearborn
Inc.
23.4 Consent of PricewaterhouseCoopers LLP with respect to BetzDearborn
Canada, Inc.
23.5 Consent of PricewaterhouseCoopers LLP with respect to BetzDearborn
Europe, Inc.
23.6 Consent of PricewaterhouseCoopers LLP with respect to BetzDearborn
International, Inc.
23.7 Consent of PricewaterhouseCoopers LLP with respect to BL
Technologies, Inc.
23.8 Consent of PricewaterhouseCoopers with respect to FiberVisions A/S
23.9 Consent of PricewaterhouseCoopers LLP with respect to FiberVisions
Incorporated
23.10 Consent of PricewaterhouseCoopers LLP with respect to FiberVisions
L.L.C.
23.11 Consent of PricewaterhouseCoopers LLP with respect to FiberVisions
Products, Inc.
23.12 Consent of PricewaterhouseCoopers LLP with respect to Hercules
Canada, Inc.
23.13 Consent of PricewaterhouseCoopers LLP with respect to Hercules
Chemicals (Taiwan) Co., Limited
23.14 Consent of PricewaterhouseCoopers LLP with respect to Hercules
Credit, Inc.
23.15 Consent of PricewaterhouseCoopers Accountants N.V. with respect to
Hercules GB Holdings Limited
23.16 Consent of PricewaterhouseCoopers LLP with respect to Hercules
International Limited
23.17 Consent of PricewaterhouseCoopers Accountants N.V. with respect to
Hercules Investments Sarl
23.18 Consent of PricewaterhouseCoopers LLP with respect to WSP, Inc.
99.1 Certification of Chairman and Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Vice President and Controller Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002