SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 11-K
ANNUAL REPORT
PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT 1934
FOR THE YEAR ENDED DECEMBER 31, 2001
001-496
(Commission File Number)
TITLE OF PLAN
BETZDEARBORN INC. EMPLOYEE STOCK OWNERSHIP AND 401(k) PLAN
ISSUER OF THE SECURITIES HELD PURSUANT TO THE PLAN
HERCULES INCORPORATED
Hercules Plaza
1313 North Market Street
Wilmington Delaware 19894
BETZDEARBORN INC. EMPLOYEE STOCK OWNERSHIP AND 401(k) PLAN
FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULE
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
at December 31, 2001 and 2000
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
for the year ended December 31, 2001
NOTES TO FINANCIAL STATEMENTS
SUPPLEMENTAL SCHEDULE:
Schedule H, Part IV, Item 4i - Assets (Held at End of Year)
REPORT OF INDEPENDENT ACCOUNTANTS
EXHIBIT INDEX
2
BETZDEARBORN INC. EMPLOYEE STOCK OWNERSHIP AND 401(k) PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
(Dollars in thousands)
December 31,
2001 2000
-------- --------
ASSETS
Investments $205,933 $299,133
Contribution receivable - Employer 244 295
Cash 1 47
-------- --------
Total Assets 206,178 299,475
LIABILITIES
Accrued interest payable 244 295
Loan payable 86,461 91,000
-------- --------
Net Assets Available for Benefits $119,473 $208,180
======== ========
The accompanying notes are an integral part of these financial statements.
3
BETZDEARBORN INC. EMPLOYEE STOCK OWNERSHIP AND 401(k) PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
(Dollars in thousands)
Year Ended
ADDITIONS: December 31, 2001
-----------------
(Decrease in) additions to net assets attributable to:
Investment (loss) income
Net depreciation in fair value of investments $ (95,531)
Interest 4,182
Contributions:
Participant 11,802
Employer 20,124
---------
Net Additions (59,423)
---------
DEDUCTIONS:
Deductions from net assets attributable to:
Benefits paid to participants 13,694
Interest expense 10,499
Loan payable prepayment penalty (Note 4) 5,086
Administrative expenses 5
---------
Total Deductions 29,284
---------
Net Decrease (88,707)
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 208,180
---------
End of year $ 119,473
=========
The accompanying notes are an integral part of these financial statements.
4
BETZDEARBORN INC. EMPLOYEE STOCK OWNERSHIP AND 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF PLAN AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following description of the BetzDearborn Inc. Employee Stock Ownership
and 401(k) Plan (the Plan) provides only general information. Participants
should refer to the Plan agreement for a more complete description of the Plan's
provisions.
The Plan is a defined contribution plan, which covers substantially all
domestic employees of the former BetzDearborn Inc. who have attained age 21. The
Plan is subject to the provisions of the Employee Retirement Income Security Act
of 1974 (ERISA).
The BetzDearborn 401(k) program was previously integrated with the Employee
Stock Ownership Plan (ESOP). Under the 401(k) provisions of the Plan, employees
can contribute on a pretax basis 2% to 15% of salary, the first 6% being matched
50% by Hercules Incorporated (the Company) in the form of Hercules Incorporated
common stock.
Participants are immediately vested in their contributions plus actual
earnings thereon. Vesting in the Company's matching contribution portion of
their accounts plus actual earnings thereon is based on years of continuous
service. A participant is 100% vested after 5 years of credited service. Each
participant's account is credited with the participant's contribution, the
Company's contribution and the Plan earnings, and charged with an allocation of
administrative expenses. Allocations are based on participant earnings or
account balances, as defined. The benefit to which a participant is entitled is
the benefit that can be provided from the participant's vested account.
After satisfying the 401(k) matching contributions, dividends and other
obligations stated in the Plan, the remaining allocable common shares are
allocated to individual participants' accounts as of December 31st of each plan
year based on the participants' eligible compensation as a percentage of total
eligible compensation. The number of shares released for allocation in a plan
year is equal to the number of previously unreleased shares multiplied by a
fraction. The numerator of the fraction is the amount of principal and interest
paid on the loan for the Plan year, and the denominator of the fraction is the
sum of the numerator plus the principal and interest to be paid on the loan for
all future plan years during the term of the loan. If this allocation is not
sufficient to satisfy the 401(k) contributions and dividends the Company is
required to fund the shortfall. For the year ended December 31, 2001 the Company
released a sufficient number of shares to meet matching requirements.
The Plan currently offers eleven mutual funds and the common stock of the
Company as investment options for participants. Investment securities are
exposed to various risks, such as interest rate, market, and credit. Due to the
level of risk associated with certain investment securities and the level of
uncertainty related to changes in the value of investment securities, it is at
least reasonably possible that changes in risks in the near term would
materially affect participants' account balances and the amounts reported in the
statement of net assets available for benefits and the statement of changes in
net assets available for benefits.
The assets of the Plan are held by Putnam Fiduciary Trust Company (the
Trustee). The Trustee also performs record keeping for the Plan.
The Plan includes an employee loan provision authorizing participants to
borrow up to 50% of withholdings and earnings, up to $50 thousand. The loans are
executed by promissory notes and have a minimum term of 12 months and a maximum
term of 60 months. The loans bear interest at a rate of 2% over prime, set on
the first day of each quarter. The loans are repaid over the term in monthly
installments of principal and interest by payroll deduction. A participant also
has the right to repay the loan in full at any time without penalty.
At December 31, 2001 forfeited nonvested accounts totaled $38 thousand.
These accounts will be used to reduce future employer contributions. Also, in
2001, employer contributions were reduced by $23 thousand from forfeited
nonvested accounts.
5
BETZDEARBORN INC. EMPLOYEE STOCK OWNERSHIP AND 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and changes
therein, and disclosures of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.
The financial statements of the Plan are prepared under the accrual method
of accounting. The Plan's investments are stated at fair value. Quoted market
prices are used to value investments. Shares of mutual funds are valued at the
net asset value of shares held by the Plan at year end. The fair value of the
common stock of Hercules Incorporated is based upon the price at which the stock
market closed on the New York Stock Exchange on the last business day of the
year.
Purchases and sales of securities are recorded on a trade-date basis.
Dividends are recorded on the ex-dividend date.
Withdrawals are recorded upon distribution.
The Plan presents in the statement of changes in net assets available for
benefits under the net appreciation (depreciation) in fair value of its
investments, which consists of the realized gains or losses and the unrealized
appreciation (depreciation) on those investments.
Although it has not expressed any intent to do so, the Company has the right
under the Plan to discontinue its contributions at any time and to terminate the
Plan subject to the provisions of ERISA. In the event of Plan termination,
participants will become 100% vested in their accounts.
2. INVESTMENTS
The fair value of the Plan's investments that represent five percent or
more of net assets available for benefits at December 31, 2001 or 2000 are as
follows:
(Dollars in thousands)
2001 2000
-------- --------
Hercules Incorporated Common Stock(1) $ 19,734 $ 39,326
Hercules Incorporated ESOP Stock(2) 54,992 105,406
Putnam International Growth Fund(3) 6,345 8,054
Putnam Fund for Growth & Income(4) 25,273 27,211
Putnam New Opportunities Fund(5) 14,762 20,583
Putnam Voyager Fund(6) 37,584 50,487
Putnam U.S. Government Fund(7) 7,273 5,858
Putnam S&P 500 Index Fund(8) 10,987 10,683
Putnam Money Market Fund(9) 18,132 17,854
(1) 1,973,423 and 2,062,747 shares, respectively.
(2) 5,499,153 and 5,529,486 shares, respectively.
(3) 318,094 and 324,750 shares, respectively.
(4) 1,423,006 and 1,391,136 shares, respectively.
(5) 351,812 and 343,853 shares, respectively.
(6) 2,115,021 and 2,111,525 shares, respectively.
(7) 564,256 and 458,357 shares, respectively.
(8) 394,517 and 337,217 shares, respectively.
(9) 18,131,584 and 17,853,920 shares, respectively.
6
BETZDEARBORN INC. EMPLOYEE STOCK OWNERSHIP AND 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
During 2001, the Plan's investments (including gains and losses on
investments bought and sold, as well as held during the year) depreciated in
value by $95,531 thousand as follows:
(Dollars in thousands)
Common Stock $ (67,368)
Mutual Funds (28,163)
---------
$ (95,531)
=========
3. NONPARTICIPANT-DIRECTED INVESTMENTS
Information about the net assets and the significant components of the
changes in net assets relating to the nonparticipant-directed investments is as
follows:
(Dollars in thousands)
December 31, 2001 December 31, 2000
Allocated Unallocated Allocated Unallocated
--------- ----------- --------- -----------
Net Assets:
Investments in Hercules Incorporated Common
Stock $ 21,508 $ 33,438 $ 37,118 $ 68,288
Contribution receivable -- 244 -- 295
Accrued interest payable -- (244) -- (295)
Loan payable -- (86,461) -- (91,000)
-------- -------- -------- --------
$ 21,508 $(53,023) $ 37,118 $(22,712)
======== ======== ======== ========
Changes in Net Assets: Year Ended
December 31, 2001
Allocated Unallocated
--------- -----------
Net depreciation in fair value of investments $(18,014) $(30,901)
Employer contributions -- 20,124
Benefits paid to participants (1,524) --
Interest expense -- (10,499)
Loan payable prepayment penalty -- (5,086)
Allocation of shares under ESOP provision 3,949 (3,949)
Transfer to other investment options (21) --
-------- --------
Net Decrease $(15,610) $(30,311)
======== ========
7
BETZDEARBORN INC. EMPLOYEE STOCK OWNERSHIP AND 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
4. ESOP LOAN, COMPANY LOAN GUARANTEE, AND EMPLOYER CONTRIBUTIONS
The ESOP loan is secured by the unallocated shares of Hercules
Incorporated Common Stock and is guaranteed by the Company. At December 31,
2001, the Plan held 3,228,690 unallocated shares of Common Stock with a fair
value of $32,287 thousand. The Company is required to make sufficient
contributions to the Plan to enable it to service its indebtedness. Interest was
incurred on the loan at 11.95% from November 14, 2000 to January 22, 2001 and
12.95% from January 23, 2001 to December 31, 2001. Debt service contributions
paid to the ESOP during 2001 and 2000 totaled approximately $20,124 thousand and
$10,136 thousand, respectively, including dividends of $3,450 thousand in 2000
and prepayment penalties of $5,086 thousand in 2001. An additional contribution
of $244 thousand has been accrued by the Plan and is included in the
contribution receivable recorded at December 31, 2001.
In May 2001 the Company completed the sales of its hydrocarbon resins
business and select portions of its rosin resins business to Eastman Chemical
Company (Eastman) and of its peroxy chemicals business to GEO Specialty
Chemicals Inc. (GEO). As part of the Company's existing bank agreement, a
portion of the proceeds from both sales were used to directly pay down the ESOP
debt. The prepayments made as a result of the Eastman and GEO sales were $9,845
thousand and $3,582 thousand, respectively. The prepayments were applied on a
pro-rata basis to reduce future principal payments on the ESOP loan.
8
BETZDEARBORN INC. EMPLOYEE STOCK OWNERSHIP AND 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
In December 2001, the Plan entered into a loan agreement with the
Company under which it was agreed that the Plan could borrow money from the
Company up to $86,461 thousand as evidenced by Promissory Notes. Concurrent with
and under the loan agreement, the Plan borrowed $11,000 thousand from the
Company, payable in annual installments of $200 thousand with the final payment
of $7,400 thousand due on December 31, 2019.
5. RELATED-PARTY TRANSACTIONS
Certain Plan investments are share of mutual funds managed by the
Trustee, therefore, these transactions qualify as party-in-interest
transactions. Fees paid by the Plan for the investment management services
amounted to $5 thousand for the year ended December 31, 2001.
In accordance with the Plan document, the Company will pay substantially
all administrative expenses reasonably incurred in connection with the Plan. It
is impractical to allocate common expenses of the Company and the Plan. However,
certain employees of the Company are involved in the operation of the Plan.
6. TAX STATUS
The United States Treasury Department advised on April 2, 1999, that the
Plan as amended through April 9, 1998 is a qualified plan under Section 401(a)
of the Internal Revenue Code and whose trust is therefore exempt from Federal
income taxes under provisions of Section 501(a) of the code. The Plan has been
amended since receiving the determination letter. However, the Plan
administrator believes that the Plan is designed and currently being operated in
compliance with the applicable provisions of the Internal Revenue Code.
7. SUBSEQUENT EVENTS
On April 28, 2002, pursuant to a Stock and Asset Purchase Agreement
executed February 12, 2002 (the Agreement), the Company sold its BetzDearborn
Water Treatment Business to GE Specialty Materials (GESM), a unit of General
Electric Company (the Water Treatment Business sale). As a result of this
transaction, the Company undertook certain actions to facilitate the Water
Treatment Business sale, as summarized below.
On April 24, 2002, the Board of Directors of Hercules approved the
merging of the BetzDearborn Inc. Employee Stock Ownership and 401(k) Plan (the
BetzDearborn Plan) into the Hercules Incorporated Savings and Investment Plan,
effective March 1, 2002. In addition, the BetzDearborn Plan Trust was
transferred from BetzDearborn Inc. to Hercules.
Also effective with the closing of the sale of the BetzDearborn Water
Treatment Business, the Board of Directors amended the BetzDearborn Plan to
facilitate BetzDearborn Plan participants who are Water Treatment Business
employees (the Inactive Participants) to make direct account rollovers to the GE
401(k) Plan, including: (i) full and immediate vesting of all account balances
coincident with the closing of the Water Treatment Business sale, (ii)
permitting transfers from Hercules stock accounts without restraint, (iii)
allowing retention of the right to have Hercules stock accounts distributed in
the form of stock certificates, and (iv) allowing the retention of the account
balances and loans under the Hercules Savings and Investment Plan.
In conjunction with the Water Treatment Business sale, the Company
prepaid the remaining $75,461 thousand of the ESOP loan. Concurrent with the
settlement of the debt obligation to Prudential, the Plan borrowed the
additional $75,461 thousand from the Company under the aforementioned loan
agreement. The promissory note requires quarterly payments of $250,000 with any
remaining principal balance payable on December 31, 2020.
9
BETZDEARBORN INC. EMPLOYEE STOCK OWNERSHIP AND 401(k) PLAN
SUPPLEMENTAL SCHEDULE H, ITEM 4I
ASSETS (HELD AT END OF YEAR)
DECEMBER 31, 2001
(Dollars in thousands)
Description of Investment
Including Maturity Date,
Rate of Interest, Par or
Maturity Value Current
Identity of Issue, Borrower, or Similar Party (shares) Cost Value
----------------------------------------------------------------------------------------------------------
Common Stock:
*Hercules Incorporated ESOP Stock 5,499,153 $ 158,709 $ 54,992
*Hercules Incorporated Common Stock 1,973,422 36,450 19,734
Mutual Funds:
*Putnam Asset Allocation - Growth Fund 1,677
*Putnam Asset Allocation - Balanced Fund 1,687
*Putnam Asset Allocation - Conservative Fund 841
*Putnam OTC Emerging Growth Fund 3,734
*Putnam International Growth Fund 6,345
*Putnam Fund for Growth & Income 25,273
*Putnam New Opportunities Fund 14,762
*Putnam Voyager Fund 37,584
*Putnam U.S. Government Fund 7,273
*Putnam S&P 500 Index Fund 10,987
*Putnam Money Market Fund 18,132
Loan Fund:
* Putnam Loan Fund (with maturity dates
between 12 and 60 months) 10.5% - 11.5% 2,912
----------------------------------------------------------------------------------------------------------
TOTAL $ 205,933
==========================================================================================================
* Indicates party-in-interest to the Plan.
10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors,
Hercules Incorporated,
Wilmington, Delaware
In our opinion, the accompanying statements of net assets available for benefits
and the related statement of changes in net assets available for benefits
present fairly, in all material respects, the net assets available for benefits
of the BetzDearborn Inc. Employee Stock Ownership and 401(k) Plan (the "Plan")
at December 31, 2001 and December 31, 2000, and the changes in net assets
available for benefits for the year 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 Plan's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audits of the 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 audit provides a reasonable basis
for our opinion.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule of Assets (Held
at End of Year) is presented for the purpose of additional analysis and is not a
required part of the basic financial statements but is supplementary information
required by the Department of Labor's Rules and Regulations for Reporting and
Disclosure under the Employee Retirement Income Security Act of 1974. The
supplemental schedule is the responsibility of the Plan's management. The
supplemental schedule has been subjected to the auditing procedures applied in
the audit of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania 19103
June 24, 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
trustees (or other persons who administer the Plan) have duly caused this annual
report to be signed by the undersigned hereunto duly authorized.
BETZDEARBORN INC. EMPLOYEE STOCK OWNERSHIP AND 401(k) PLAN
/s/ Edward V. Carrington
------------------------------------
Edward V. Carrington
Vice President
Human Resources and Corporate
Resources Group
Plan Administrator
June 28, 2002
EXHIBIT INDEX
NUMBER DESCRIPTION
23 Consent of Independent Accountants