Investors' revolt sets the stage for sale of AAI

Dissident captures seat on parent firm's board

Kassan is Lichtenstein ally

Battle at United Industrial now appears to be over

October 05, 2002|By Robert Little | Robert Little,SUN STAFF

NEW YORK - Disgruntled shareholders revolted against the management of United Industrial Corp. yesterday, electing an outside dissident to its board of directors and seeming to assure that the company and its main subsidiary, AAI Corp. in Hunt Valley, will be sold within the next year.

At United Industrial's annual meeting, delayed for months as investor Warren G. Lichtenstein fought to force a sale of the company, shareholders elected Glen Kassan, a partner of Lichtenstein's, to the company's six-seat board. Lichtenstein already holds a seat, which he won last year.

While Lichtenstein still has a minority voice on the board, other directors said the vote was a clear message that investors are displeased with management and are demanding that the small defense contractor quickly auction itself off to its competitors.

"I think the shareholders told us, very clearly, that they want the company sold, and they put a lot of pressure on the board to get it done," said Richard R. Erkeneff, chief executive officer of United Industrial. Erkeneff retained his board seat, which also was open for election yesterday.

"You've got to listen to the shareholders, even when you don't agree with them entirely," Erkeneff said.

A final tally of the votes won't be released until next week, but the mood inside the gold, glass and crystal ballroom of the Park Lane hotel here suggested that shareholders had little patience for the company's long battle to keep Lichtenstein from gaining more influence. While company managers say that they, too, are planning to sell the company, several shareholders were suspicious of the timing, doubting that the decision would have been made without pressure from Lichtenstein.

The company's opposition to Lichtenstein had been pointed at times, and included letters to shareholders that accused him of securities-law violations and detailed what it called a "checkered history" with small public companies. Lichtenstein manages an investment fund called Steel Partners II, which has a long record of proxy fights, forced sales, lawsuits and other activist investment strategies.

The meeting yesterday was brief and the public debate slight, but most comments from shareholders were critical of the company, on topics ranging from executive bonuses to conflicts of interest to the money spent battling Lichtenstein. One shareholder said he traveled from Wisconsin simply to voice his displeasure with management.

"The way this proxy battle has been fought absolutely disgusts me," said Bob Chernow, an investment officer with a firm in Milwaukee. "They had an opportunity to present their case in a fair and reasonable way, and instead they chose to take the low road. I've never traveled to an annual meeting before, but I had to come here to tell them that."

That United Industrial is for sale has never been in dispute. AAI, which is responsible for nearly 90 percent of the company's revenue, enjoys a prominent role in the development and manufacturing of unmanned aerial vehicles for the military, a growing young market. The company announced this year that it had hired Wachovia Corp. to seek potential buyers, at a time when defense companies are fetching large premiums because of increased government spending for fighting terrorism.

While profitable, the company is in other businesses besides defense that are viewed as impediments to a sale. Rejecting Lichtenstein's suggestion that the company is moving slowly in seeking a buyer, Erkeneff said he is merely being deliberate. And one of the main barriers to a sale - contracts to overhaul municipal transportation equipment - was divested in July, later than expected.

"Some potential buyers said they would not be interested even in opening discussions with us until the transportation overhaul contracts were sold," Erkeneff said. Since then, he added, the company has become "actively involved in discussions with prospective buyers."

But with yesterday's shareholder vote, the process is expected to accelerate. Kassan and Erkeneff were elected to terms that will expire in 2005, but the new board seemed determined to sell the company long before then. Lichtenstein has called for a prompt auction of the company to the highest bidder, and said he hopes to have it sold, in whole or in parts, before the next annual meeting in 2003.

"If there are any obstacles, we plan to overcome them," said Lichtenstein. "Hopefully, we won't be back here next year."

The potential impact for AAI, which employs about 900 people in Maryland, is difficult to determine, though it is unquestionably the jewel of the company and analysts doubt that a potential buyer would want to restructure or break it apart.

Defeated in yesterday's election was board member Paul J. Hoeper, a former assistant secretary of the Army who became a director of the AAI subsidiary last year. At a board meeting after the vote, director Susan Fein Zawel resigned from her seat so that Hoeper can remain. Lichtenstein frequently argued that the board had too many directors who were officers of the company. The balance changes with the resignation of Zawel, who is United Industrial's vice president and associate general counsel.

Shares of United Industrial closed yesterday at $20.12, up 12 cents.

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