SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 11-K
ANNUAL REPORT
Pursuant to Section 15(d) of the Securities Exchange Act of 1934
For the Year Ended December 31, 2002
001-496
------------------------------
(Commission File Number)
Title of the Plan
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HERCULES INCORPORATED SAVINGS AND INVESTMENT PLAN
Issuer of the securities held pursuant to the Plan
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HERCULES INCORPORATED
Hercules Plaza
1313 North Market Street
Wilmington, Delaware 19894
STATEMENT OF NET ASSETS AVAILABLE
FOR BENEFITS
at December 31, 2002 and 2001
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE
FOR BENEFITS
for the year ended December 31, 2002
NOTES TO FINANCIAL STATEMENTS
SUPPLEMENTAL SCHEDULES
Schedule H, Part IV, Item 4(i) - Assets Held for Investment Purposes
Schedule H, Part IV, Item 4(j) - Reportable Transactions
REPORTS OF INDEPENDENT ACCOUNTANTS
EXHIBIT INDEX
2
HERCULES INCORPORATED SAVINGS AND INVESTMENT PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
(Dollars in thousands)
December 31, 2002 December 31, 2001
----------------- -----------------
Assets
Participant's interest in Hercules Incorporated Master Savings Trust $ - $ 220,108
Investments 307,663 -
Contributions receivable 719 -
----------- ------------
Total assets 308,382 220,108
----------- ------------
Liabilities
Loan payable 76,449 -
----------- ------------
Total liabilities 76,449 -
----------- ------------
Net assets available for benefits $ 231,933 $ 220,108
=========== ============
The accompanying notes are an integral part of these financial statements.
3
HERCULES INCORPORATED SAVINGS AND INVESTMENT PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE
(Dollars in thousands)
Year Ended
December 31, 2002
---------------------
ADDITIONS:
Investment income (loss)
Increase (decrease) to net assets attributed to:
Net depreciation in fair value of investments (Note 3) $ (66,166)
Interest 4,394
Dividends 2,537
Contributions:
Participant 12,742
Employer 15,454
Transfers from other plans (Note 6) 131,829
-----------------
Net Additions 100,790
-----------------
DEDUCTIONS:
Deductions from net assets attributed to:
Benefits paid to participants 31,798
Administrative expenses 330
Interest Expense 4,431
Transfers to other plans 52,406
-----------------
Total Deductions 88,965
-----------------
Net Increase 11,825
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 220,108
-----------------
End of year $ 231,933
=================
The accompanying notes are an integral part of these financial statements.
4
HERCULES INCORPORATED SAVINGS AND INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF PLAN
The following description of the Hercules Incorporated Savings and
Investments Plan (the Plan) provides only general information. The Plan is a
defined contribution plan subject to the provisions of the Employee Retirement
Income Security Act of 1974 (ERISA). Participants should refer to the Plan
agreement for a more complete description of the Plan's provisions.
Upon hire, substantially all domestic Hercules Incorporated ("Hercules"
or the "Company") employees are immediately eligible to participate in the Plan
and obtain immediate, non-forfeitable (vested) rights to the full market value
of their account. At time of enrollment in the Plan, participants may elect to
contribute up to 15% of their annual wages on either a pre- or post-tax basis,
or a combination thereof. The Company contributes in the form of Hercules
Incorporated common stock, 50% of the first 6% of the annual wages that an
employee contributes to the Plan. Participants shall direct the investment of
their monthly savings in any of the Plan's investment options, or a combination
thereof.
The Plan provides for various investment options in any combination of
stocks, bonds, fixed income securities, mutual funds, and other investment
securities. 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 Plan includes an employee loan provision authorizing participants
to borrow a minimum of $1,000 up to a maximum, equal to the lesser of $50,000 or
50% of their vested balances in the Plan. The loans are executed by promissory
notes and have a minimum term of 12 months and a maximum term of 60 months,
except for qualified residential loans, which have a maximum term of 120 months.
The loans bear an interest rate equal to the average rate charged by selected
major banks to prime customers for secured loans. 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.
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 (See Note 6).
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. Investments in the Plan are carried at fair value. The
fair value of the common stock of Hercules Incorporated is based upon the price
at which the stock closed on the New York Stock Exchange on the last business
day of the year. The Hercules Blended Interest Fund is carried at cost plus
investment earnings less withdrawals, which is equivalent to contract value. The
market value for funds managed by The Vanguard Group are
5
valued at the net asset value of the shares held by the Plan at year end, which
is based on the fair value of the underlying securities held by the fund.
Purchases and sales of securities are recorded on a trade-date basis. Interest
income is recorded on the accrual basis and dividends are recorded on the
ex-dividend date.
Withdrawals are recorded upon distribution. The Plan provides that
participants who retire from the Company may elect, upon retirement, an Optional
Valuation Date ("OVD") for determining their final withdrawal. The OVD is the
last business day of any month following retirement, in which the distribution
is requested.
3. INVESTMENTS
At the beginning of 2002, the assets of the Plan were held in the
Hercules Incorporated Master Savings Trust. However, on April 29, 2002, the
Board of Directors of the Company approved the appointment of The Vanguard Group
(the "Trustee") as both the trustee and record keeper for the Plan, effective
July 1, 2002. At December 31, 2002, the assets of the Plan are held by the
Trustee.
The following table presents the fair values of investments at December
31:
(Dollars in thousands)
2002 2001
---------- ----------
* Vanguard 500 Index Fund $ 37,076 $ -
Vanguard Explorer Fund 4,799 -
Vanguard Extended Market Index Fund 1,852 -
* Vanguard Growth & Income Fund 19,146 -
Vanguard International Growth Fund 5,297 -
Vanguard LifeStrategy Conservative Growth Fund 2,397 -
Vanguard LifeStrategy Growth Fund 1,383 -
Vanguard LifeStrategy Income Fund 1,365 -
Vanguard LifeStrategy Moderate Growth Fund 3,955 -
* Vanguard PRIMECAP Fund 28,848 -
Vanguard Small-Cap Value Index Fund 643 -
Vanguard Total Bond Market Index Fund 15,310 -
* Vanguard Windsor II Fund 16,360 -
* Hercules Common Stock Fund 73,203 28,318
Loan Fund 4,852 4,241
* Hercules Blended Interest Fund 91,177 81,014
Other Mutual Funds - 106,535
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$ 307,663 $ 220,108
========== ==========
* Represents at least 5% interest at December 31, 2002.
6
Net depreciation in fair value of investments for the Plan for the year
ended December 31, 2002 is as follows:
(Dollars in thousands)
Hercules Common Stock $ (26,949)
Mutual Funds (39,217)
-----------
$ (66,166)
===========
4. NON-PARTICIPANT-DIRECTED INVESTMENTS
Information about the net assets and the significant components of the
changes in net assets relating to the non-participant-directed investments is as
follows:
(Dollars in thousands)
Investments Loan Net Assets
----------- ---------- ----------
December 31, 2001
Hercules Common Stock Fund
Participant-directed $ 19,348 $ - $ 19,348
Non-participant-directed 8,970 - 8,970
----------- ---------- ----------
$ 28,318 $ - $ 28,318
=========== ========== ==========
December 31, 2002
Hercules Common Stock Fund
Participant-directed $ 25,597 $ - $ 25,597
Non-participant-directed 7,908 - 7,908
----------- ---------- ----------
33,505 - 33,505
----------- ---------- ----------
Hercules ESOP Stock Fund
Allocated Non-participant-directed $ 14,198 $ - $ 14,198
Unallocated Non-participant-directed 25,500 (76,449) (50,949)
----------- ---------- ----------
39,698 (76,449) (36,751)
----------- ---------- ----------
$ 73,203 $ (76,449) $ (3,246)
=========== ========== ==========
7
Investment (loss) income for the year ended December 31, 2002 is as
follows:
(Dollars in thousands)
Hercules ESOP Stock Fund
----------------------------
Hercules Common
Stock Fund Allocated Unallocated
--------------- ------------- ------------
Net (depreciation) in
fair value of investments: $ (1,860) $ (6,909) $ (11,585)
Transfers in from ESOP Plan - 27,195 (46,102)
Employer contributions 1,020 - 14,444
Benefit paid to participants (233) (7,786) -
Interest expense - - (4,431)
Allocation of shares under
ESOP provision - 3,275 (3,275)
Net loan activity 50 - -
Transfer to other investments
options (4) (1,577) -
--------- ---------- -----------
Net (decrease) increase $ (1,027) $ 14,198 $ (50,949)
========= ========== ===========
5. TAX STATUS
On March 18, 2003, the United States Treasury Department advised the
Company that the Plan as amended through January 28, 2002, is a qualified trust
under Section 401(a) of the Internal Revenue Code and 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, to include, among
other things, the merger of the BetzDearborn Plan (see Note 6). However, the
Plan administrator and the Plan's tax counsel believe that the Plan is designed
and currently being operated in compliance with the applicable requirements of
the Internal Revenue Code.
6. MERGER OF BETZDEARBORN PLAN
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"). In accordance with the
terms of the Agreement, the Company was required to take 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 Plan into the Plan, effective March 1, 2002. In
addition, the BetzDearborn Plan Trust was transferred from BetzDearborn Inc. to
Hercules.
Approximately 2,475 participants with net assets having a fair market
value of $131,824 thousand at the time of the plan transfer, became part of the
Plan. The following schedule summarizes the March 1, 2002 assets and liabilities
of the BetzDearborn Plan which merged into the Plan:
8
(Dollars in thousands)
March 1, 2002
----------------------
Investments $ 177,926
Hercules stock ESOP - Unallocated 40,359
Interest receivable 1,931
------------
Total assets 220,216
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Loan payable - Prudential 75,461
Loan payable - Hercules 11,000
Interest payable 1,931
------------
Total liabilities 88,392
------------
Transfer from the BetzDearborn Plan 131,824
Transfers from other plans 5
------------
Total transfers from other plans $ 131,829
============
Effective with the closing of the Water Treatment Business sale, the
Board of Directors amended the BetzDearborn Plan to facilitate BetzDearborn Plan
participants who are Water Treatment Business employees 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 to and 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 Plan. Of the $52,406 thousand
transferred to other plans, $4,174 thousand was transferred to General Electric
Company benefit plans. The remaining transfers were to IRA's and other qualified
benefit plans.
At December 31, 2001, prior to its merger into the Plan, the
BetzDearborn Plan, had long-term debt with third parties of $75 million ("ESOP
credit facility"), which was guaranteed by the Company, as well as $11 million
of debt with the Company, pursuant to a loan agreement entered into with the
Company in December 2001. This loan agreement permitted the Plan to borrow up to
$86 million from the Company. On April 29, 2002, the Company used a portion of
the proceeds from the Water Treatment Business sale to fully prepay the existing
ESOP credit facility. Concurrent with this prepayment, the Plan borrowed the
additional $75 million from the Company, pursuant to the aforementioned loan
agreement. The $75 million promissory note requires quarterly payments of $250
thousand and the $11 million note requires annual payments of $200 thousand. Any
remaining principal balance on either note is payable December 31, 2020.
Outstanding borrowings under the promissory notes are $76 million at December
31, 2002.
7. RELATED PARTY TRANSACTIONS
Certain Plan investments are shares of mutual funds managed by the Trustee,
therefore, these transactions qualify as party-in-interest transactions.
9
HERCULES INCORPORATED SAVINGS AND INVESTMENT PLAN SCHEDULE I
SUPPLEMENTAL SCHEDULE H, PART IV, ITEM 4(i)
ASSETS HELD FOR INVESTMENT PURPOSES
DECEMBER 31, 2002
(Dollars in thousands)
Identity of Issue Investment Type Cost Current Value
-------------------------------------------------------------------------------------------------------------
* Vanguard 500 Index Fund Registered Investment Company $ 40,854 $ 37,076
* Vanguard Explorer Fund Registered Investment Company 5,451 4,799
* Vanguard Extended Market Index Fund Registered Investment Company 1,832 1,852
* Vanguard Growth & Income Fund Registered Investment Company 21,550 19,146
* Vanguard International Growth Fund Registered Investment Company 5,661 5,297
* Vanguard LifeStrategy Conservative Growth Fund Registered Investment Company 2,487 2,397
* Vanguard LifeStrategy Growth Fund Registered Investment Company 1,404 1,383
* Vanguard LifeStrategy Income Fund Registered Investment Company 1,357 1,365
* Vanguard LifeStrategy Moderate Growth Fund Registered Investment Company 4,102 3,955
* Vanguard PRIMECAP Fund Registered Investment Company 28,997 28,848
* Vanguard Small-Cap Value Index Fund Registered Investment Company 659 643
* Vanguard Total Bond Market Index Fund Registered Investment Company 15,040 15,310
* Vanguard Windsor II Fund Registered Investment Company 16,766 16,360
* Hercules Common Stock Fund Company Stock Fund 216,340 73,203
* Loan Fund 6.50%-11.50% 4,852 4,852
* Hercules Blended Interest Fund Unallocated Insurance Contract 91,177 91,177
------------------------
Total assets held for investment purposes $ 458,529 $ 307,663
========================
* Indicates party-in-interest to the Plan
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HERCULES INCORPORATED SAVINGS AND INVESTMENT PLAN SCHEDULE II
SUPPLEMENTAL SCHEDULE H, PART IV, ITEM 4(j)
REPORTABLE TRANSACTIONS
DECEMBER 31, 2002
(Dollars in thousands)
Current Value of
Identity of Party Historical Cost Asset on Historical Gain
Involved Description of Asset Purchase Price Selling Price of Asset Transaction Date (Loss)
----------------- ---------------------- -------------- ------------- --------------- ---------------- ---------------
The Vanguard Group Hercules Blended $ 100,041 $ 100,041
Interest Fund
The Vanguard Group Hercules Blended $ 8,864 $ 8,864 8,864 $ -
Interest Fund
The Vanguard Group Hercules Common 59,280 59,280
Stock Fund
The Vanguard Group Hercules Common 2,285 4,151 2,285 (1,866)
Stock Fund
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Hercules Incorporated
Wilmington, Delaware
We have audited the accompanying statement of net assets available for benefits
of Hercules Incorporated Savings and Investment Plan as of December 31, 2002,
and the related statement of changes in net assets available for benefits for
the year then ended. 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 audit in accordance with auditing standards generally accepted
in the United States. Those standards 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of Hercules
Incorporated Savings and Investment Plan as of December 31, 2002, and changes in
its net assets available for benefits for the year then ended, in conformity
with accounting principles generally accepted in the United States.
Our audit was performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of assets held
for investment purposes and reportable transactions are presented for the
purpose of additional analysis and are not a required part of the basic
financial statements but are 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. These supplemental
schedules are the responsibility of the Plan's management. The supplemental
schedules have been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, are fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ Cogen Sklar LLP
Bala Cynwyd, Pennsylvania
June 17, 2003
12
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Hercules Incorporated
Wilmington, Delaware
In our opinion, the accompanying statement of net assets available for benefits
presents fairly, in all material respects, the net assets available for benefits
of the Hercules Incorporated Savings and Investment Plan (the "Plan") at
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. This financial statement is the responsibility
of the Plan's management; our responsibility is to express an opinion on this
financial statement based on our audit. We conducted our audit of this statement
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.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
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.
HERCULES INCORPORATED SAVINGS AND INVESTMENT PLAN
/s/ Edward V. Carrington
---------------------------------
Edward V. Carrington
Vice President, Human Resources
Plan Administrator
June 30, 2003
13
EXHIBIT INDEX
Number Description
23.1 Consent of Independent Accountants
99.1 Certification of Vice President, Human Resources and Plan
Administrator 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 Treasurer, and Plan Sponsor
Pursuant to 18. U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
14