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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 2003
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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HERCULES INCORPORATED
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HERCULES SHAREHOLDERS' COMMITTEE FOR NEW MANAGEMENT
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THE HERCULES SHAREHOLDERS' COMMITTEE FOR NEW MANAGEMENT
17 STATE STREET, NEW YORK, NY 10004
June 2, 2003
Fellow Hercules Shareholders:
We have been major Hercules shareholders for almost three years. As a
result of our dissatisfaction with the Hercules Board and management,
International Specialty Products, an international specialty chemicals company,
waged a proxy contest at the Company's 2001 Annual Meeting, at which Hercules
shareholders elected our four nominees to seats on the Hercules Board. The
minority directors have endeavored to work with Hercules management and the
remaining incumbent directors. Our efforts, however, have been frustrated by
management and the Board's majority directors, who, voting in lockstep, have
rebuffed our almost every initiative.(1)
Although we continued to be sharply critical of the majority directors
and management for their conduct of the Company's affairs, which in our view has
contributed to the destruction of shareholder values at the Company, primarily
in order to provide the Company with one last opportunity to do the right thing
for shareholders, we decided not to wage a proxy contest for control of the
Board at the 2002 Annual Meeting. At the meeting last June, the minority
directors issued the following statement: "Hercules' majority directors and
management still have the opportunity to right themselves and maximize the
potential of the Company and its operating businesses, but they cannot do so
without promptly and fully addressing the issues [we have] outlined. We urge
them to accept that challenge."
Unfortunately, that challenge continues to go unheeded, and we have
decided to wage a proxy contest this year for the four seats up for election
because in our view there is no other way in which to help maximize shareholder
values for all Hercules shareholders. The Hercules Shareholders' Committee for
NEW Management includes our four current Hercules directors ("minority
directors") and four additional director nominees for this year's Annual
Meeting. Our directors and nominees represent the interests of all Hercules
shareholders, including those of the Company's second largest shareholder,
International Specialty Products Inc., which owns almost 10 million shares of
Hercules stock and has an investment in Hercules of more than $140 million.(2)
In contrast, the four Hercules incumbent directors running for
reelection this year own in the aggregate only slightly more than 50,000 shares.
You should know that Joyce owns 157,230 shares, 156,330 of which were GIVEN to
him in connection with the Company's bonus program and 900 of which were GIVEN
to him in the form of a matching grant in connection with the Company's 401k
program. To our knowledge, Joyce has not PURCHASED a single share of Hercules
stock since he came to the Company.
--------
(1) You should know that our experience prompted us prior to the 2002 Annual
Meeting to propose - a proposal which was rebuffed - that if Dr. Joyce,
Hercules' Chief Executive, and his majority directors agreed to elect a new
Chairman and CEO, acceptable to both majority and minority directors, we would
abandon consideration of a proxy contest to acquire control of the Hercules
Board at the 2002 Annual Meeting.
(2) ISP's investment is measured at cost.
As one of Hercules' major shareholders, our interests are clearly
aligned with yours, and we are committed to maximizing value for all Hercules
shareholders as we have invested our own money in Hercules as you have.
THE HERCULES SHAREHOLDERS' COMMITTEE FOR NEW MANAGEMENT
THE COMMITTEE'S FOUR CURRENT HERCULES DIRECTORS
The four minority directors who were elected at the 2001 Annual
Meeting are:
SAMUEL J. HEYMAN - Mr. Heyman began his career as a lawyer in the
United States Justice Department under Robert F. Kennedy and later served as
Chief Assistant United States Attorney (New Haven Division, District of
Connecticut). In 1968, Mr. Heyman left Government service to run Heyman
Properties, a small but growing family business, which he expanded into a
successful, national real estate development company.
In 1983, Mr. Heyman and a slate of nominees representing shareholder
interests waged a successful proxy contest for control of GAF, in what BARRON'S,
a leading financial publication, characterized as "one of the most striking
achievements in the annals of corporate finance." (Aug. 8, 1983) Mr. Heyman
served as GAF's Chairman and Chief Executive Officer (1983-2000) and is
currently ISP's Chairman and controlling shareholder.
Mr. Heyman has been involved as a shareholder activist or potential
acquirer with respect to five public companies, helping to create more than $7
billion of increased wealth for shareholders of those companies, as illustrated
below:(3)
Realized Value
Time per Share for
Period Initial all Subject Stockholder
(initial purchase - value Cost Company Percentage Value Created
Company realization) Per Share Shareholders(4) Increase (rounded)
----------------------- ------------------------------- --------------- ---------------- ------------- ---------------
GAF 1981-1989 $ 6.50 $53.00 715% $ 1.6 billion
Union Carbide 1984-1985 $43.63 $85.00 95% $ 2.9 billion
Borg-Warner 1986-1987 $29.15 $48.50 66% $ 1.7 billion
Dexter 1998-2000 $25.18 $62.50 148% $ .9 billion
Life Technologies 1998-2000 $35.80 $60.00 68% $ .2 billion
---------------
Total Shareholder Value Created: $ 7.3 billion
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(3) There is, of course, no assurance that either the efforts of the Committee
or Mr. Heyman will result in similar benefits for Hercules shareholders.
(4) GAF was acquired by Mr. Heyman and a management group in 1989 at $53 per
share. Union Carbide implemented a recapitalization of its own in response to
GAF's premium bid for the Company that resulted in a market value immediately
thereafter of $85 per share. Borg Warner, Dexter and Life Technologies were
acquired by third parties after GAF or ISP made premium offers for those
companies.
2
SUNIL KUMAR - Mr. Kumar was formerly Executive Vice President of
Bridgestone-Firestone, heading up that company's $3 billion national retail
store operations. Mr. Kumar served for three years as President and Chief
Operating Officer of Building Materials Corporation of America, the nation's
leading manufacturer of residential and commercial roofing. Mr. Kumar has been
Chief Executive of ISP since June 1999.
GLORIA SCHAFFER - Mrs. Schaffer has had a distinguished career in
Government service, having held major positions in Connecticut, including
Secretary of State, Commissioner of the Department of Consumer Protection, and
State Senator for six terms. Mrs. Schaffer was also a Member of the Federal
Civil Aeronautics Board and has served as a Board member of several public and
private companies.
RAYMOND S. TROUBH - Mr. Troubh has had broad financial experience,
including as a General Partner of Lazard Freres & Co. and Governor of the
American Stock Exchange. He is a Board member of a number of public companies
and currently serves as the non-executive Chairman of Enron Corp., having joined
that company's Board in the wake of its financial problems last year.
THE COMMITTEE'S FOUR DIRECTOR-NOMINEES
HARRY FIELDS - Mr. Fields served as an executive for more than forty
years at International Flavors and Fragrances Inc., where he was President of
the International Flavor Division and a member of its Board of Directors. He is
currently President of Fields Associates, Ltd. and has served as a director of
other companies.
ANTHONY T. KRONMAN - Mr. Kronman is currently Dean of Yale Law School.
Mr. Kronman is a director of Adelphia Communications Corporation, having been
elected to the Board after the Company's bankruptcy filing last year.
VINCENT TESE - Mr. Tese has had a distinguished career in Government
service, having held the positions of New York State Superintendent of Banks,
Director of Economic Development for the State of New York, and Chairman and
Chief Executive Officer of the Urban Development Corporation. He is currently
the Chairman of Wireless Cable International Inc. and is a Board member of a
number of public companies.
GERALD TSAI, JR. - Mr. Tsai was Chairman and Chief Executive Officer of
Primerica Corporation, a diversified financial services company, and served as
Chairman of the Board, President and Chief Executive Officer of Delta Life
Corporation, a life insurance and annuity company. Mr. Tsai is currently a Board
member of a number of public companies.
REASONS FOR OUR SOLICITATION
Under Joyce's management, the Company's financial and stock price
performance have in our opinion been disastrous. Moreover, we believe that
Hercules has been a case study in failed corporate governance. In addition,
Joyce and the Hercules Board were responsible for selling the Company's best
business in our opinion at the worst possible time, and management's poor
business judgment was in no small measure responsible for the Company's $570
million pension fiasco.
3
The Committee's four director-nominees, if elected, will, when combined
with our four minority directors, constitute a majority of the Board and will be
in a position to not only avoid the mistakes of the past but cause the Hercules
Board to take positive actions designed to increase shareholder value, such as:
o Focus on the "hands-on" management of Hercules' businesses and
successful, bottom-line operating and growth strategies, both short and
long term.
o Strengthen the Hercules management team. We intend to elect a new,
highly qualified, full-time, "roll up your sleeves" Chief Executive
committed to the turnaround of the Company's businesses, who will
reside in the Wilmington area and whose compensation will be designed
to closely align his or her interests with those of Hercules
shareholders. Moreover, we will rebuild the management ranks which in
our view have been allowed to atrophy under the current Chief
Executive.
o Devote high-level attention to not only the turnaround of Hercules'
operating businesses but also the management of the Company's critical,
non-operating issues, such as the minimization of its pension exposure.
o Redeem the Company's poison pill, which prevented Hercules
shareholders, in October 2000, from accepting ISP's $17.50 per share
offer for 25 million shares - thereby costing Hercules shareholders
more than $190 million.(5)
o Recommend that shareholders remove a Hercules election Bylaw, which the
Company claims requires the affirmative vote of the holders of a
majority of all outstanding shares for the election of directors.
THE COMPANY'S PERFORMANCE HAS GONE
FROM BAD TO WORSE UNDER JOYCE
NOTWITHSTANDING WHAT WE BELIEVE TO BE MANAGEMENT'S EFFORTS TO OBSCURE
HERCULES' ACTUAL FINANCIAL PERFORMANCE BY THE USE OF "PRO-FORMA" EARNINGS AND
THE MISCHARACTERIZATION OF CHARGES AS "NON-RECURRING" WHICH ARE IN FACT
RECURRING, WHEN MEASURED BY VIRTUALLY ANY FINANCIAL YARDSTICK, THE COMPANY'S
RECORD IN RECENT YEARS UNDER JOYCE AND HIS PREDECESSORS HAS IN OUR OPINION BEEN
DISASTROUS.
Consider the following:
o After reaching a high of $66.25 on March 19, 1996, Hercules' stock
price has fallen more than 85%, wiping out more than $6.1 billion in
shareholder value. Between the time Joyce became Chief Executive, on
May 8, 2001, and February 11, 2003, the day prior to ISP's filing of an
amendment to its Form 13D which indicated that it was considering
waging a proxy contest for control of the Hercules Board, the price of
Hercules stock (which has paid no dividends since that time) lost 32%
of its value, while the S&P MidCap Specialty Chemicals
---------
(5) Cost to Hercules shareholders calculated on the basis of $17.50 per share
less the Company's stock price of $9.81 per share, as of May 29, 2003.
4
Index increased by 3.2% (including dividends) -- an underperformance of
more than 35%.(6)
o Hercules' financial performance has in our opinion gone from bad to
worse under Joyce, prompting a financial columnist (Christopher Byron,
February 17, 2003, NEW YORK POST) to characterize Hercules as "spewing
red ink in all directions". Under Joyce, the Company has not been
profitable in 6 of the last 7 reported quarters, registering more than
$300 million in after-tax losses (even excluding an almost $400 million
"goodwill" and FAS 143 write-down). For the 7 full reported quarters
since Joyce became CEO, even adjusting for almost $385 million in net,
after-tax, "non-recurring" charges as well as the almost $400 million
of additional charge-offs, the Company has managed to register only $78
million in "pro forma" earnings -- or little more than an average of
$0.41 per share per annum.
o In BUSINESS WEEK'S recent performance ranking of companies in the S&P
500 index (BUSINESS WEEK, Report Card on 500 S&P Companies, Spring
Issue, 2003), Hercules' performance was ranked 482 out of 500 - down
from 466 in the previous year. In connection with its ranking, the
Company received the following grades:
PERFORMANCE RANKINGS
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Total Total Sales Profit
Return Return Sales Growth Profit Growth Return
Rank Rank (1 (3 Growth (3 Growth (3 Net on
2003 2002 Year) Years) (1 Year) Years) (1 Year) Years) Margin Equity
--------- ------ ---------- -------- ------- --------- -------- --------- -------- -------- --------
482 466 Hercules D D D F F F F F
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Similarly, in FORTUNE'S ranking of the Fortune 1000 Industrial
Companies (April 4, 2003) in terms of 2002 profitability vs. 2001 and
2002 profitability as a percentage of revenues, assets, and
shareholders equity, Hercules was ranked 35, 36, 36, and 32,
respectively, out of 36 chemicals companies.
o As detailed in the table below, Joyce, operating as his own Chief
Financial Officer, has become in our opinion the master of the
one-time, "non-recurring" charge, taking substantial "non-recurring"
charges in all 7 quarters since he came
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(6) On May 8, 2001, Hercules shares closed on the New York Stock Exchange at $12
per share, and, on February 11, 2003, Hercules shares closed at $8.12 per share.
It should be noted that Hercules shares have rallied since ISP's February 11th
13D filing, and the current price, as of the close on May 29, 2003, was $9.81
per share. Between May 8, 2001, and May 29, 2003, Hercules stock lost 18% of its
value, while the S&P MidCap Specialty Chemicals Index increased by 15%
(including dividends) -- an underperformance for Hercules of 33%.
We believe that the S&P MidCap Specialty Chemicals Index, which consists of 8
specialty chemicals companies with a mean market capitalization of $1.16
billion, is the most relevant index, although it should be noted that Hercules,
starting more than 20 years ago when it was a completely different and much
larger company, has been listed in the S&P 500 Chemicals Index. We do not
believe that that index, which is comprised of 14 companies including Dupont and
Dow and other companies with a mean market capitalization of $8.94 billion, with
Hercules being by far the smallest, is an appropriate reference point with
regard to Hercules' performance. Even so, Hercules' stock price has
substantially underperformed the S&P 500 Chemicals Index as well over the
relevant time frame.
5
to Hercules -- and doing so in a manner which misleadingly implies that
these charges or "adjustments" are one-time items(7).
2001 2002 2003
---- ---- ----
Q3 Q4 Q1 Q2 Q3 Q4 Q1 TOTAL
--------------------------------------------- ------ ------ ------ ------ ------ ------ ------ -----
Restructuring Charges 0.30 0.03 0.02 0.04 0.03 0.04 0.01 0.47
--------------------------------------------- ------ ------ ------ ------ ------ ------ ------ -----
Loss on Sale of Betz 2.11 2.11
--------------------------------------------- ------ ------ ------ ------ ------ ------ ------ -----
Asbestos Reserve 0.39 0.39
--------------------------------------------- ------ ------ ------ ------ ------ ------ ------ -----
Early Debt Retirement 0.25 0.01 0.26
--------------------------------------------- ------ ------ ------ ------ ------ ------ ------ -----
Tax Adjustments 0.03 0.02 0.08 0.01 0.14
--------------------------------------------- ------ ------ ------ ------ ------ ------ ------ -----
Asset Impairment 0.04 0.01 0.05
--------------------------------------------- ------ ------ ------ ------ ------ ------ ------ -----
Other 0.29 0.01 0.02 0.01 0.34
--------------------------------------------- ------ ------ ------ ------ ------ ------ ------ -----
Total "Non-Recurring" Charges and 0.59 0.03 2.17 0.37 0.52 0.07 0.01 3.76
"Adjustments"
--------------------------------------------- ------ ------ ------ ------ ------ ------ ------ -----
You should know that the SEC is seriously concerned about the misuse of
"pro forma" earnings by public companies and the practice of characterizing
charges which are in effect recurring as "non-recurring" because of their
tendency to mislead investors. Under GAAP, charges which are likely to recur
should not be characterized as "non-recurring." In accordance with new SEC
regulations, which seek to reflect long-standing policy, companies are
prohibited from characterizing as "non-recurring" items which are "likely to
recur within the next two years or if there was a similar charge [or gain]
within the prior two years." We estimate that Hercules' 2002 "pro forma"
earnings, had they excluded only those charges which were truly "non-recurring"
in accordance with GAAP, would have been little more than 50% of the $0.63 per
share in earnings the Company actually reported.
ASK YOURSELF:
DO YOU BELIEVE THAT HERCULES' "PRO FORMA" EARNINGS, WHICH EXCLUDE THE
ABOVE-MENTIONED "NON-RECURRING" CHARGES, CAN BE RELIED UPON AS AN ACCURATE
MEASURE OF THE COMPANY'S FINANCIAL PERFORMANCE?
AND
DON'T YOU BELIEVE THAT JOYCE'S PENCHANT FOR THE FINANCIAL REPORTING
PRACTICES JUST DESCRIBED IS RELATED TO HIS REFUSAL FOR ALMOST TWO YEARS NOW TO
BRING A CHIEF FINANCIAL OFFICER TO THE COMPANY?
o Even after adjusting for "one-time" charges and goodwill amortization,
Hercules' financial performance has been extremely disappointing, with
2002 earnings being little more than 50% of results for 2000 (the last
full year prior to Joyce's arrival at Hercules). "Pro forma" earnings
per share for 2000-2002 have been as follows:(8)
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(7) The table excludes non-recurring gains and pro-forma adjustments.
(8) 2000 "pro forma" earnings per share includes earnings and related interest
expenses for the BetzDearborn business and excludes goodwill amortization
consistent with the Company's "pro forma" earnings for 2001 and 2002. "Pro
forma" 2001 and 2002 earnings per share exclude the earnings and related
interest expenses for the BetzDearborn business which was sold.
6
2000 $ 1.12
2001 0.04
2002 0.63
o Moreover, Hercules' financial performance (again even after adjustment
for non-recurring charges and on a "pro forma" basis) continues to lag
the specialty chemicals industry (as measured by 8 companies in the S&P
MidCap Specialty Chemicals Index). In 2002, for example, Hercules
revenue growth was only 2.5% compared with 5.7% for the weighted
average of companies in the Index, while its return on assets and sales
(excluding goodwill writedowns) were only approximately 50% and 70%,
respectively, of the returns for the same 8 companies. By way of
update, Hercules' performance in the first quarter of 2003 continued to
lag the average performance of the 8 Index companies with respect to
all three metrics.
JOYCE'S RECORD AT UNION CARBIDE FORESHADOWS
HIS PERFORMANCE AT HERCULES - DISASTROUS
FINANCIAL PERFORMANCE, BROKEN PROMISES,
AND OUTRAGEOUS COMPENSATION
Joyce is in our view doing to Hercules what he did to Union Carbide.
Prior to coming to Hercules, Joyce spent his entire business career at
Union Carbide, and you should be aware of these FACTS concerning his record
as Union Carbide's Chief Executive (1995 - 2000):
o Under Joyce's leadership, Union Carbide's net income declined from
$925 million in 1995 to $162 million in 2000 - down an astounding
82% - making Union Carbide's performance the worst in the S&P 500
Chemicals Index (consisting of the 15 largest chemicals companies at
that time).
o Despite Joyce's cost cutting efforts at Union Carbide, the Company's
operating margins declined from 16.2% in 1995 to 2.7% in 2000,
regularly ranking the company in the bottom quartile of the S&P
Chemicals Index for return on assets, including last in Joyce's
final year.
o Joyce's efforts to grow Union Carbide were in our view nothing short
of disastrous, as he invested $5.2 billion in capital expansions and
acquisitions (70% of the Company's entire EBITDA for the period!),
with the following results: Asset growth of 7.7% per annum, sales
growth of 2.3% per annum, and operating return on assets of 2% in
2000 compared with 17% in 1995.
o Joyce's credibility with Union Carbide shareholders was undermined
by repeated broken promises.
(1) In 1997, Joyce advised analysts that Union Carbide planned to
meet or exceed a 15% return on capital over the course of the
chemical cycle, while earning an 8% return at the trough. IN
FACT, Union Carbide's returns on capital were actually 3% at
the trough of the chemical industry cycle in 2000.
7
(2) In early 1999, Joyce told Union Carbide shareholders that the
Company was "in good shape entering 1999". IN FACT, operating
income was down 30% in 1999 compared with the previous year.
(3) On July 26, 1999, little more than 60 days before the end of
the quarter, Joyce informed Union Carbide shareholders that
"prospects for improved third quarter earnings appear
encouraging based upon current conditions." IN FACT, operating
income was down in the third quarter compared to both the
previous quarter and the same quarter in 1998.
(4) One commitment that Joyce staked his reputation on was his
often-repeated promise that Union Carbide would earn a minimum
of $4 per share in 2000. In a grandstand move, characterized
in an October 13, 1997 BUSINESS WEEK article entitled, "Smoke,
Mirrors, and the Boss' Paycheck," as "clever public
relations...unlikely to dent Joyce's wallet or stoke up Union
Carbide's performance," Joyce committed to forfeit his salary
if Union Carbide did not earn $4 per share in 2000. As it
turned out, Union Carbide's earnings for 2000 were $1.18 per
share and, notwithstanding his public commitment, Joyce took
his full salary and bonus anyway!
o Notwithstanding Union Carbide's dismal performance during the five
years that he was Chief Executive, Joyce's total annual compensation
increased almost three fold--from $8.8 million per annum in 1995 to
$23.3 million per annum in 1999. (9)
o Finally, after five years of Joyce's leadership at Union Carbide,
the Company was acquired by Dow Chemical. Of Joyce's tenure at Union
Carbide, James Kelleher of Argus Research observed in a DELAWARE
NEWS JOURNAL article (May 17, 2001), entitled "Hercules Chief Knows
Trouble," "I think he had a better reputation as a scientist than an
administrator. He did virtually nothing with the Company."
Similarly, in the same article, Paul Leming, an ING Barings security
analyst, had this to say about the condition of Union Carbide at the
conclusion of Joyce's tenure - "The wheels were coming off."
Finally, in a BUSINESS WEEK article entitled, "Formula For A Perfect
Marriage" (Diane Brady, August 16, 1999), Joyce acknowledged that
Union Carbide's poor performance had led to the Dow takeover. The
BUSINESS WEEK article went on to observe, "For the team in Danbury,
the deal is bound to be bittersweet. Union Carbide has faced a
litany of woes in recent years, from troubled partnerships in places
like Kuwait to delayed plant openings. Joyce also spent heavily on
new facilities, but the payoff eluded his company."
---------
(9) 2000 numbers are not available because of the Dow merger. Total annual
compensation includes, as per Union Carbide's proxy statements, stock option
grants, assuming 10% per annum appreciation.
8
JOYCE'S COMPENSATION CONTINUES TO ESCALATE
WHILE THE FORTUNES OF THE COMPANY
AND ITS SHAREHOLDERS SUFFER
To add insult to injury in the face of Hercules' disappointing
financial performance, Joyce enjoys what we believe to be outrageously excessive
compensation - all at the expense of Hercules shareholders.
Consider these facts about Joyce's compensation package in light of his "track
record" and then ask yourself: - DID HE EARN IT?
o When Joyce came to Hercules in May 2001, he was given a golden
parachute agreement which would provide him today with a payment of
almost $10 million in the event of a "change in control," which was
defined to include a shift in the composition of a majority of
directors as a result of a proxy contest.
o For Joyce's seven months on the job in 2001 (he came to Hercules in May
of that year), a year in which the Company registered a $58 million
loss, in addition to stock options for 1,250,000 shares, Joyce was paid
a salary at the rate of $1 million per annum and was given a $1 million
bonus for his seven months on the job.
o For 2002, a year in which the Company posted a loss of $248 million
(excluding a $368 million write-down of goodwill), in addition to his
$1 million annual salary, Joyce was given a bonus of $1.9 million
($900,000 of which was given to him in the form of Hercules stock at a
15% discount) and additional stock options for 600,000 Hercules shares.
o On April 23, 2003, the Board's Compensation Committee proposed that the
Board give Joyce a GRANT of 211,000-500,000 restricted shares, to vest
upon a "change in control" defined to include, among other things, the
Committee's winning this very proxy contest, with the amount of
restricted shares depending upon the price of Hercules stock at the
time of the change in control. YOU SHOULD KNOW THAT, IN PRIOR
DISCUSSIONS WITH THE COMPENSATION COMMITTEE, JOYCE HAD INSISTED ON AN
EVEN LARGER GRANT THAN THE ONE THE COMMITTEE PROPOSED. ONLY AFTER THE
OBJECTION OF OUR MINORITY DIRECTORS AT THE APRIL 24TH BOARD MEETING AND
THE ACKNOWLEDGEMENT BY ONE OF THE MAJORITY DIRECTORS THAT THE PROPOSED
COURSE OF ACTION WOULD NOT "READ WELL ON THE FRONT PAGE OF THE WALL
STREET JOURNAL," DID THE BOARD DECIDE TO DEFER ACTION ON JOYCE'S GRANT
UNTIL A LATER TIME.
On May 20, 2003, the Compensation Committee again approved, over the
objection of the one minority director on the committee, a GRANT to
Joyce, subject to Board consent, of restricted shares valued at $3
million with the same above-mentioned vesting position. As of the date
of this letter, the Board has not yet taken action on this matter.
o For 2002, including the value of Joyce's long-term incentive
compensation, Joyce's total compensation of $6 million easily ranked
him higher than any CEO
9
of the eight companies in the S&P Mid-Cap Specialty Chemicals Index -
with his compensation being almost 2-1/2 times the average for the
eight companies.
You should know that, in the event that Joyce's management is repudiated
in this proxy contest, we estimate that he will have been paid more than
$29 million for his two years on the job.(10) ASK YOURSELF WHETHER
HERCULES IS BEING RUN MAINLY FOR YOUR BENEFIT OR FOR THE BENEFIT OF ITS
CHIEF EXECUTIVE.
THE BETZDEARBORN SALE - JOYCE AND THE HERCULES
BOARD, AFTER REFUSING TO SEEK SHAREHOLDER
APPROVAL, SELL WHAT WE SAW AS THE COMPANY'S
BEST BUSINESS AT THE WORST TIME
Last year's sale of the Company's BetzDearborn business to General
Electric was in our view a major strategic mistake and raises the most serious
question as to whether Hercules has been run in the interests of its bondholders
at the expense of the Company's shareholders. Moreover, this transaction has
unfortunately had the effect of significantly reducing the future value of the
Company and the upside with respect to all of our investments.
By way of background, Hercules' $3.1 billion acquisition of
BetzDearborn in 1998, which has been characterized by Paul Leming as "one of the
worst acquisitions in the history of the chemicals industry" (July 18, 2000), is
a dramatic example of the Company's "buy high-sell low" strategy. For the
subsequent sale last year consisted of most of the BetzDearborn businesses
originally acquired by Hercules, with the net sale price being the equivalent of
1.7 x sales compared to the 2.4 x sales paid by Hercules in 1998.
You should know that last year's decision to sell BetzDearborn was
taken by an 8-5 vote over the objection of the four minority directors and one
majority director (not one of Joyce's hand-picked directors, but rather a
director elected during the term of a previous management). The sale would have
only made sense in our opinion had the Company no other way to refinance its
debt. For private sale multiples in the chemicals industry in 2001 (when the
price was established) were, as illustrated in the table that follows, at their
lowest level in more than 10 years, with only the most desperate of sellers
selling major businesses in that inhospitable environment. In a Deutsche Bank
Securities report entitled, "Surviving a Harsh Climate" (September, 2002), David
Begleiter credited the BetzDearborn sale (along with three smaller transactions)
with having reset the valuation benchmarks for specialty chemicals transactions
from the 10-12x EBITDA range in the late 90's to 7-8x EBITDA in 2002. And if
there were any doubt as to the poor timing of the BetzDearborn sale, you should
know that multiples have rebounded to some extent after the BetzDearborn
transaction.
---------
(10) The $29 million estimate assumes final Board approval of the $3 million
restricted share grant recommended by the Compensation Committee.
10
SPECIALTY CHEMICALS PRIVATE SALE MULTIPLES (1992 - 2002)
[LINE CHART OMITTED]
BetzDearborn
Sale Price
Established
--------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
--------------------------------------------------------------------------------------------------------------------
Private Sale Transaction Multiples 8.3x 9.9x 10.7x 8.3x 9.6x 9.5x 10.0x 10.9x 8.1x 7.4x 8.3x
--------------------------------------------------------------------------------------------------------------------
WHAT HERCULES AT THE TIME OF THE SALE FAILED TO COMMUNICATE, TO BOTH
ITS SHAREHOLDERS AND WALL STREET ANALYSTS WHO FOLLOW THE COMPANY, IS THAT IT HAD
AVAILABLE WHAT WE BELIEVE TO HAVE BEEN A SUPERIOR ALTERNATIVE. PRIOR TO THE
COMPANY'S DECISION TO SELL BETZDEARBORN, MAJOR BANKS OFFERED THE COMPANY AN
ATTRACTIVE REFINANCING PACKAGE WHICH WOULD NOT HAVE REQUIRED THE COMPANY TO MAKE
ILL-TIMED ASSET SALES.
Sale proceeds, after taxes and transaction costs, amounted to
approximately 6 x estimated 2002 EBITDA, while the Company's already depressed
public stock price at the time was trading at a multiple of approximately 7 x
EBITDA -- a move hardly calculated to increase shareholder value! Moreover, the
sale was made at a time when forward operating profits for the business were
estimated by Hercules to increase substantially as a result of cost reductions
already implemented. Finally, the sale of the business has substantially diluted
the Company's earnings due in part to the fact that Hercules was required to
utilize the net sale proceeds to pay down debt carrying relatively low interest
rates (approximately 5% on average).
YOU SHOULD KNOW THAT THE HERCULES BOARD ACTION APPROVING THE SALE WAS
TAKEN NOTWITHSTANDING THE FACT THAT OTHER MAJOR, INSTITUTIONAL HERCULES
SHAREHOLDERS, TOGETHER WITH OURSELVES, HAD URGED JOYCE TO REJECT THE SALE AND
RETAIN THE BETZDEARBORN BUSINESS. MOREOVER, WHEN THE MINORITY DIRECTORS
REQUESTED THAT THE MOTION APPROVING THE TRANSACTION BE AMENDED TO REQUIRE THAT
THE SALE BE SUBMITTED TO A SHAREHOLDERS' VOTE, THEY WERE RULED "OUT OF ORDER"
AND THE ISSUE OF SHAREHOLDER APPROVAL WAS NEVER SUBMITTED TO A VOTE OF THE
BOARD.
DON'T YOU BELIEVE THAT, WHERE THERE IS SIGNIFICANT QUESTION CONCERNING
A COURSE OF ACTION INVOLVING A SUBSTANTIAL SALE OF ASSETS (AT A PRICE, FOR
EXAMPLE,
11
EQUIVALENT TO ALMOST TWICE THE COMPANY'S ENTIRE MARKET VALUE), JOYCE AND THE
BOARD, KNOWING OF SIGNIFICANT SHAREHOLDER OPPOSITION, SHOULD HAVE SUBMITTED THE
MATTER TO A VOTE OF HERCULES SHAREHOLDERS EVEN WHEN THEY MAY NOT HAVE BEEN
LEGALLY REQUIRED TO DO SO?
THE REVOLVING DOOR AT HERCULES - SIX CHIEF EXECUTIVES
IN SIX YEARS AND NO APPARENT BUSINESS STRATEGY
The primary responsibilities of a Company's Board of Directors are to
attract and manage by appropriate objectives capable chief executives as well as
establish policies and business strategies for the Company. By this standard of
measurement, the Hercules Board in recent years has been in our opinion an
extraordinary failure.
Between 1996-2001, Hercules had six different Chief Executives,
awarding one an estimated $14.25 million severance package for three years of
service and another a $6 million package after only 16 months on the job.(11)
Joyce came to Hercules in May, 2001, and his election was in our opinion a last
minute attempt by the Board to deflect criticism leveled against it in the proxy
contest that Hercules was being run on "autopilot." Joyce retired from Dow
Chemical after selling Union Carbide in February 2001, lives in Connecticut more
than 200 miles from the Hercules Wilmington headquarters and has been unwilling
to relocate to the Wilmington area.
It is a critical function of a Board to make sure that the Chief
Executive's compensation arrangement is designed to closely align his interests
with those of the Company's shareholders. Unfortunately, Joyce's compensation
arrangements at Hercules, which are outlined at pp. 9-10 of this letter, bear no
relationship in our view to overall corporate, individual, or stock performance.
Quite to the contrary, the worse Hercules has done for its shareholders, the
more lucrative Joyce's compensation appears to have become.
Finally, the Hercules Board's sorry record is most starkly illustrated
by its failure in our view to provide Joyce with sufficient guidance and
direction in terms of establishing the Chief Executive's objectives and then
holding him accountable for meeting them. In fact, the objectives set forth by
the Board's Compensation Committee were limited almost exclusively to cost
reduction and other measurements directly related thereto. By way of just one
example, management of the Company's two principal non-operating issues,
Hercules' pension and asbestos exposures, which resulted last year in pre-tax
charges to earnings of more than $600 million, were not even mentioned in
Joyce's 2002 management objectives.
As further evidence of the Board's failure, aside from reductions to an
obviously bloated cost structure, we have seen no evidence of any focus
whatsoever on a turnaround strategy, long-range or short-term growth strategies,
upgrading of the organization, attracting outstanding people to the Company, or
the hundreds of other matters so basic to the operation of a large corporation.
Even Joyce acknowledged in a quarterly earnings call last year that his
management focus has been almost entirely on cost reduction. This short-term
strategy presumably led Leslie Ravitz, a chemicals analyst at Morgan Stanley, to
question Hercules' long-term prospects (November 2,
---------
(11) The $14.25 million estimate is based on a 20 year life expectancy.
12
2001) and continues to be illustrated by Joyce's sharp cuts in both research and
development and capital expenditures.
With regard to the Company's capital programs, for example, under the
current Hercules Board and management, capital expenditures have been reduced
from $119 million in 2000 to $49 million in 2001 and $43 million in 2002.(12)
Hercules' capital spending last year approximated only 60% of the Company's
depreciation expense of $71 million. This prompted Andrew Cash, a security
analyst at UBS Warburg, to recently observe, after predicting that 2003 will be
the third consecutive year in which capital spending is below depreciation,
"Although we applaud management's frugality, investors need to be aware that
capital spending cannot remain this low into perpetuity, i.e., equipment ages,
new capital must be invested into the business to allow for growth, etc." (May
2, 2003).
To add insult to injury, in February of this year, after the Company
had posted a loss of $248 million (excluding a $368 million write-down of
goodwill) for the 2002 year, and Hercules shareholders lost approximately $400
million in the market value of their investments during the previous year, the
Hercules Board, over the objection of the minority directors, awarded bonuses to
135 senior executives in the amount of almost $10 million (representing 193% of
their targeted bonuses) - including a $1.9 million bonus for Joyce. This
followed action by the Hercules Board in the previous year, notwithstanding the
Company's $58 million loss in 2001, awarding, again over the objection of the
minority directors, bonuses to 214 senior executives of almost $9 million -
including a $1 million bonus to Joyce for his seven months on the job in 2001.
HERCULES' $570 MILLION PENSION FIASCO - WITH ALMOST NO
ADVANCE WARNING TO COMPANY SHAREHOLDERS
Over the last three years, including almost two full years under
Joyce's management, Hercules pension plans, in addition to their failure to earn
their minimum investment hurdle rate, have in fact lost more than $250 million
as a result of negative investment returns. This enormous loss required the
Company earlier this year to take a pre-tax charge to equity of almost $570
million, which has now resulted in a negative equity for the Company of $123
million. Compounding the problem is the fact that Hercules management failed in
our opinion to provide Company shareholders with full, informative, transparent,
and timely disclosure concerning the Company's pension losses and their serious
ramifications until late last year. You should know that Hercules management
failed to fully inform even the Company's Board of this situation and its
ramifications until after the fact.
Based upon what we believe to be the Company's unrealistic 8-3/4%
investment assumption, in order to maintain compliance with minimum ERISA
funding requirements, it is estimated that the loss will require the Company to
make cash contributions of almost $500 million (including payments of $97
million made last year) over the next 10 years. Pension expenses are now
projected to adversely impact earnings for the time period by an estimated
average annual, after-tax, amount of $0.46 per share as follows:
----------
(12) The above-mentioned expenditures are adjusted to exclude all divested
businesses.
13
PRETAX PENSION COST (INCLUDING HEALTH CARE EXPENSE)(13)
2003 $48 million
2004 69 million
2005 92 million
2006 94 million
2007 92 million
2008 89 million
2009 84 million
2010 82 million
2011 81 million
2012 82 million
Illustrative of how sensitive these estimates are to future investment
performance, if, for example, one were to assume a 6% average annual return on
pension assets, total cash contributions for the next 10 years are estimated to
be approximately $700 million (including the $97 million paid last year), and
pension expenses would be approximately $30 million per annum higher than the
schedule of pension costs referred to above - thereby adversely impacting annual
earnings on average by an estimated $0.63 per share, after tax.
While other Companies to be sure have been plagued in recent years by
investment underperformance in their pension plans, the seriousness of the
Hercules situation was underscored in a recent Credit Suisse First Boston report
(David Zion, April 14, 2003), which estimates that of 361 S&P 500 companies with
defined benefit pension plans, Hercules' underfunded status ranks it in the 16th
worst position when compared to its equity market capitalization. The report
concluded that Hercules' total pension obligations represent 159% of its market
capitalization, ranking it the 20th highest of the 361 companies in that
category. In addition, an earlier Credit Suisse First Boston report (September
27, 2002) predicted that Hercules may very well be required to incur the 5th
largest after tax charge as a percentage of equity in the fourth quarter of
2002.(14)
Hercules' pension performance has been in no small measure the result
of management's asset allocation decision to invest approximately 70% of its
pension assets in equities, including almost 30% of that amount in international
equities. Interestingly enough, Hercules' investment policy has allocated
nothing to alternative assets, hedge funds, or so-called "market neutral"
investments, which tend to focus on delivering consistent absolute returns with
low correlation to the U.S. stock market or other asset classes. WHEN ONE
CONSIDERS THE SIZE OF THE COMPANY'S PENSION ASSETS COMPARED WITH THE SIZE OF
HERCULES, THE FACT THAT THE COMPANY'S PENSION LIABILITIES ARE ESSENTIALLY FIXED
AND RELATIVELY MATURE INASMUCH AS RETIREES AND INACTIVES OUTNUMBER ACTIVES IN
THE PLAN BY A 10-TO-1 RATIO, HERCULES' ASSET ALLOCATION POLICY HAS BEEN IN OUR
OPINION WHOLLY INAPPROPRIATE AND UNDULY RISKY.
You should know the Hercules pension plan has been largely run on
autopilot for the last 10 years. Despite the importance of the pension plan's
performance to the overall
---------
(13) Hercules employs multi-year smoothing of asset returns, as do many other
companies, which operates to defer the full effect of the Company's pension
losses in the last several years to 2005 and beyond.
(14) The size of Hercules' fourth quarter charge has now materialized almost as
predicted, but whether this charge amounts to the fifth largest cannot be easily
ascertained.
14
financial performance of the Company as a result of the size of the plan, there
is in our view no one at Hercules that has demonstrated the slightest expertise
in this area. What is more, during Joyce's tenure, until this issue reached
crisis proportions, neither the Board nor its Finance Committee had ever
conducted a meaningful review of management's investment decisions. While
companies normally make pension asset allocation decisions on as often as a
quarterly or at least annual basis, Hercules, seemingly oblivious to the
vicissitudes of the investment climate over the last 10 years, had made no
significant change to its investment policy during this entire period of time,
including the last two years under Joyce. At the very least, this underscores
the Company's need for a CFO, which we urged upon Joyce and the Board almost two
years ago.
HERCULES HAS DISREGARDED IN OUR VIEW THE INTERESTS
OF ITS SHAREHOLDERS BY PACKING THE BOARD
WITH FIVE HANDPICKED DIRECTORS AND ERECTING
A FORTRESS OF ANTI-TAKEOVER DEFENSES
In addition to packing the Board with five handpicked directors,
Hercules has erected over time an arsenal of anti-takeover provisions, which
include a poison pill, staggered board, interpretation of a Company Bylaw to
require an affirmative vote of a majority of ALL OUTSTANDING SHARES for election
of directors, "blank check" preferred stock, an 80% super majority voting
requirement to amend certain Bylaws and charter provisions and approve certain
merger transactions, and the ability to add directors without shareholder
approval. Moreover, the Company has made flagrant use of these devices to
undermine the interests of Hercules shareholders - making Hercules in our view a
"walking corporate governance nightmare."
(1) JOYCE PACKS THE BOARD WITH FIVE HANDPICKED DIRECTORS, CONTINUING A
HERCULES "YOU SCRATCH MY BACK, I'LL SCRATCH YOURS" TRADITION
The record over the years at Hercules is replete with examples of
Boards who in our opinion do very little to safeguard the interests of the
Company's shareholders and are virtually always supportive of whatever the Chief
Executive wants, failed Chief Executives who receive what we view as exorbitant
parachute payments, and Board members who until well after our 2001 proxy
contest were permitted to fund with Company monies million dollar gifts to their
favorite charities.(15)
Taking advantage of a charter provision which permits the addition of
new directors without shareholder approval, no sooner had the votes been counted
in connection with the 2001 proxy contest, when Joyce, whose own "election" was
not originally submitted to shareholders either, together with the nominating
committee, thumbed their noses at Hercules shareholders by choosing Paula Sneed,
an incumbent director who had been defeated in that contest for reelection, to
fill an existing Board opening. Since that time, Joyce, acting in concert with
the Board's nominating committee, has handpicked Messrs. Wyatt, Kennedy, Lipton,
and Hunter (three of whom are former or current executives in the commodity
chemicals industry), to either replace departing directors or fill existing
openings. WE BELIEVE THAT THESE FOUR DIRECTORS HAVE
---------
(15) This last practice was stopped at the insistence of our minority directors
some months after we joined the Board in 2001.
15
ONE COMMON QUALIFICATION FOR THE JOB - A CLOSE RELATIONSHIP WITH JOYCE. IT
SHOULD NOT SURPRISE YOU THAT NONE OF THE FIVE HANDPICKED DIRECTORS (INCLUDING
PAULA SNEED WHO RESIGNED EARLIER THIS YEAR) HAVE VOTED AGAINST JOYCE'S POSITIONS
ON A SINGLE ISSUE.
As further evidence of Joyce's view of shareholder democracy, at the
minority directors' first Board meeting in June, 2001, the Nominating Committee
proposed that seven of the eight then majority incumbent directors each be given
one of two major committee assignments - Audit or Compensation. None of the four
minority directors were proposed for membership on either of these
committees.(16) When the minority members protested that they were the only
Hercules directors with a real mandate from the Company's shareholders, they
were told that this was the way committee assignments were made at Hercules and
that Board members had, in words to the effect, "to work their way up" to
qualify for major committee assignments. Parenthetically, Lipton and Kennedy,
who were elected to the Board after the four minority directors, were appointed
shortly thereafter to the Audit and Compensation Committees - so much for the
Hercules seniority system!
(2) JOYCE'S ATTEMPT TO USE HERCULES' POISON PILL AS A BARGAINING CHIP TO
BUY HIS OWN RE-ELECTION
In October 2000, in order to increase its investment in the Company,
ISP proposed a tender offer to all Hercules shareholders, to purchase 25 million
additional shares of Hercules stock for $17.50 per share in cash. However,
because of the Company's poison pill, its offer required Board consent. Despite
repeated requests that Hercules permit it to proceed, the Board refused to do so
- thereby costing Hercules shareholders more than $190 million.
You should know that the Hercules poison pill, with its unusually low
10% trigger point, was adopted in August, 2000, less than two weeks after ISP
publicly reported acquiring 9.9% of Hercules shares, notwithstanding the fact
that Hercules shareholders in the past had voiced strong opposition to the
poison pill.(17) In 1991, a non-binding proposal to redeem Hercules'
then-existing poison pill, or submit it to a shareholder vote, was approved by
shareholders. Despite this earlier shareholder vote, the Hercules Board refused
to seek shareholder approval for the current pill adopted in 2000.
In August 2001, after the election of the four minority directors to
the Hercules Board, we proposed that the Board amend the Company's poison pill
to revise its trigger point from 10% to 20% -- and then later offered to further
compromise at 15%. In addition, in response to Hercules' stated concern, ISP
offered a standstill agreement, which would prevent it from ever acquiring
control of Hercules. After Joyce indicated that he would only consider a change
in the threshold should ISP agree not to contest the reelection of himself and
his fellow majority directors at the 2002 Annual Meeting, which ISP was not
willing to do for obvious reasons, our proposal was defeated by a vote of 7-6.
YOU SHOULD KNOW THAT JOYCE CAST THE DECIDING VOTE AGAINST THE PROPOSAL AND
REPORTED TO THE BOARD HIS INTENTION AT THE SAME TIME TO SOLICIT OTHER HERCULES
SHAREHOLDERS WITH THE SAME PROPOSITION - NAMELY, THAT HE WOULD CONSIDER
---------
(16) At a later time, one of our minority directors received major committee
assignments, although the three other minority directors still have not.
(17) According to an Investor Responsibility Research Center study of more than
2,000 companies with poison pills, only 6% have trigger points as low as 10%.
16
SUPPORTING CHANGES TO THE POISON PILL ONLY IN RETURN FOR ASSURANCES OF SUPPORT
IN CONNECTION WITH HIS CANDIDACY FOR ELECTION AT THE 2002 ANNUAL MEETING!
WHAT DO YOU THINK OF A CHIEF EXECUTIVE WHO IS WILLING TO RESORT TO
BLATANTLY INAPPROPRIATE DEMANDS SO AS TO ENTRENCH HIMSELF AND HIS HANDPICKED
DIRECTORS IN OFFICE?
ASK YOURSELF WHETHER THE POISON PILL DEVICE IS IN YOUR BEST INTEREST
AND WHETHER YOU NEED TO BE "PROTECTED" FROM MAKING YOUR OWN DECISION TO SELL
YOUR SHARES. WE BELIEVE THAT IT IS PARAMOUNT THAT YOU HAVE THE RIGHT TO CONSIDER
FOR YOURSELF THE MERITS OF OFFERS FOR YOUR SHARES. OUR NOMINEES WILL ADVOCATE
THAT THE BOARD REMOVE, OR SUBSTANTIALLY REVISE, BARRIERS TO OFFERS FOR YOUR
SHARES SO THAT YOU CAN MAKE YOUR OWN DECISIONS.
(3) JOYCE AND THE HERCULES BOARD REFUSE TO NULLIFY A COMPANY BYLAW THAT
DISENFRANCHISES ITS SHAREHOLDERS
The disregard of Joyce and the Hercules Board for the interests of the
Company's shareholders is dramatically demonstrated by their refusal to rescind
a Hercules election Bylaw which the Board claims requires an affirmative vote of
the holders of a majority of ALL OUTSTANDING SHARES for the election of
directors, instead of the greatest number of votes actually cast at an Annual
Meeting (a plurality vote). This means, for example, that if each Committee
nominee receives 50 million votes and each incumbent director receives only 10
million votes, the incumbents would retain their seats on the Board because the
Committee nominees would not have received a majority vote of approximately 108
million outstanding shares of Hercules common stock.
This voting requirement disenfranchises shareholders, is highly unusual
if not unique, and is in our view inconsistent with good corporate governance.
In fact, we are unaware of a single other Delaware public company that has such
a provision with regard to election of directors. The Hercules Bylaw, as
interpreted by the Company, serves in our view as a mechanism to entrench the
current Board, because if no nominee receives a majority vote of the outstanding
shares, the incumbent directors would remain in place beyond their three-year
term, even if our nominees received a plurality vote.
As early as 2001, after calling to Hercules' attention this obvious
inequity and requesting that it take the necessary action to remedy this
situation in connection with the 2001 Annual Meeting, the Hercules Board refused
to do so. As it turned out, three of the four minority directors were elected at
the 2001 Annual Meeting by more than 50% of the outstanding shares, and Hercules
agreed to seat the fourth minority director, who had won by a plurality of those
voting, in order to avoid a court test. After joining the Board, the minority
directors again proposed that Joyce and the Hercules Board take action to
effectively nullify the Bylaw, but they have refused to do so.
You should know that in a DELAWARE NEWS JOURNAL article (March 14,
2001), entitled "Hercules' Election Method Is Fought", the Hercules voting
requirement prompted the following comments from a Wall Street analyst as well
as a corporate governance expert: Gary Hindes, Managing Director of New York's
Deltec Asset Management stated that, "These people [referring to the Hercules
directors] have managed to destroy what was a wonderful company," and is further
reported to have stated that Hercules should be asking for the resignation of
its directors, not supporting
17
them for re-election; and Charles Elson, Director of the Center for Corporate
Governance at the University of Delaware, characterized Hercules' voting
provision as "highly unusual" and further stated, "In all my years [of tracking
corporate policies], I have not seen that with the election of a board."
* * * * * * * * * *
THE COMMITTEE'S PROGRAM TO REALIZE HERCULES' UNDERLYING VALUES
The Committee believes that there is presently a substantial
discrepancy between the underlying value of Hercules shares and their current
market price. We are convinced that there are strong underlying values at
Hercules and that the Company's two remaining, primary businesses, the pulp and
paper and Aqualon businesses, have substantial potential for growth under the
right direction. As major shareholders, we are determined to maximize our
Company's underlying values for all Hercules shareholders.
To this end, we would pursue the following program:
(1) Conduct a thorough search for a new, highly qualified, full-time,
"roll up your sleeves" Chief Executive committed to the
turnaround of the Company's businesses, who will reside in the
Wilmington area and whose compensation will be designed to
closely align his or her interests with those of Hercules
shareholders. By making the right selection and establishing
comprehensive goals and objectives, we intend to avoid the
extraordinarily harmful turnover of Chief Executives at Hercules
over the last six years.
(2) Rebuild management ranks which have been allowed to atrophy under
the current Chief Executive and his predecessors. This will
include the election of a first rate Chief Financial Officer, a
position which Joyce and the Board have inexplicably refused to
fill during his two-year term at the Company despite Hercules'
myriad financial challenges.(18)
(3) Eliminate excessive compensation and bonuses as have been enjoyed
by Joyce and other Company executives and make certain that in
the future compensation arrangements at Hercules provide that
executive salaries, bonuses, and benefits be closely related to
overall corporate, individual, and stock performance. In this
regard, it is our view that an effective belt-tightening program
must start at the top, and that the kind of compensation enjoyed
by Joyce is not only unwarranted in and of itself, but serves
also to stiffen the resistance of others at Hercules to the kinds
of cost-cutting measures which may be necessary.
---------
(18) Parenthetically, of what we believe to be the Company's failures under
Joyce's management, a number of them have come in areas normally the
responsibility of a Company's Chief Financial Officer. In addition to the
pension fiasco referred to earlier and the fact that the Company has failed to
file its periodic, public financial reports (including its certification last
August under the Sarbanes-Oxley Act of 2002) in a timely fashion on four
separate occasions since January 2001, Hercules has paid, in 2001 and 2002, what
we believe to be an astounding $19 million and $21 million, respectively, in
fees to the Company's auditors. The sum paid by Hercules last year, for example,
was nearly 8 times the average expense for the eight companies in the S&P MidCap
Specialty Chemicals Index. In fact, we believe that the only chemicals company
that paid more to its auditors than Hercules last year was DuPont, which is more
than ten times the size of Hercules.
18
(4) As Hercules Board members for the last two years, the minority
directors have identified significant, additional cost reductions
involving the elimination alone of excessive audit, insurance,
legal, Board, corporate headquarters, perks, bonus, and benefit
expenses, which we estimate will save the Company more than $50
million per annum(19). In addition, while Joyce's cost reduction
efforts have largely been limited to the administrative area, we
would focus additional efforts on the largely untapped
manufacturing area.
(5) Despite the axiom that businesses cannot "cost cut their way to
prosperity" and that successful turnaround strategies can never
rely on cost-reduction alone, management's overriding
preoccupation, as acknowledged by Joyce, has unfortunately been
on cost reduction alone. But dynamic leadership isn't just about
cutting costs or staying afloat. In addition to cost-reduction,
we would focus Hercules on new products, acquisitions, expanded
field technical services, new alliances with other manufacturers
to add complementary products, and a rational pricing strategy
which places a high priority on profitability rather than on
small market share gains.
(6) We believe that incumbent management has neither the
qualifications nor the expertise to address the Company's two
principal non-operating issues - the minimization of its pension
and asbestos exposures. While current management in our view has
given these critical issues short shrift, we would focus the
attention of senior management, assisted by the best outside
professionals, on these areas.
* * * * * * * * * *
Since the Hercules Shareholders' Committee for NEW Management prepared
the enclosed letter and Proxy Statement, you may have received Joyce's May 19th
letter, which is filled with personal invective and baseless, unsubstantiated ad
hominem attacks. Given what we believe to be Joyce's disastrous performance at
Hercules over the last two years, it is not surprising that he would seek to
divert shareholders' attention from the real issues at hand. Our focus will
instead continue to be on the future direction of our Company and the FACTS
concerning Joyce's stewardship at Hercules, which are fully documented in this
letter and enclosed Proxy Statement.
* * * * * * * * * *
In your own best interest, we ask you to support our nominees for
election as directors of Hercules. If you agree with us that NOW IS THE TIME FOR
A CHANGE AT HERCULES - please sign, date and mail the Committee's WHITE Proxy
Card - today.
---------
(19) With regard to benefit programs, the directors are in agreement that the
Company's pension obligations to retirees and pension benefits for actives must
be preserved and safeguarded. The Company's directors have unanimously approved,
however, cost reductions in health and medical programs in keeping with what
hundreds of other companies in Corporate America have already done.
19
Thank you for your support, and we look forward to further
communications (hopefully shorter!) with you concerning our Hercules
investments.
Sincerely,
THE HERCULES SHAREHOLDERS' COMMITTEE FOR NEW MANAGEMENT
/s/ Samuel J. Heyman /s/ Harry Fields /s/ Anthony T. Kronman /s/ Sunil Kumar
-------------------- ----------------- ---------------------- -------------------
Samuel J. Heyman Harry Fields Anthony T. Kronman Sunil Kumar
/s/ Gloria Schaffer /s/ Vincent Tese /s/ Raymond S. Troubh /s/ Gerald Tsai, Jr.
------------------- ---------------- ---------------------- --------------------
Gloria Schaffer Vincent Tese Raymond S. Troubh Gerald Tsai, Jr.
If you have questions or need assistance in voting
your shares, please call:
[GEORGESON SHAREHOLDER LOGO OMITTED]
17 State Street, 10th Floor
New York, NY 10004
(866) 288-2990 (Toll Free)
Banks and Brokerage Firms please call:
(212) 440-9800
20