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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14A-101)
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [X]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement [ ] CONFIDENTIAL, FOR USE OF
[ ] Definitive Additional Materials THE COMMISSION ONLY (AS
[ ] Soliciting Material Pursuant to PERMITTED BY RULE 14a-6(e)(2))
Rule 14a-11(c) or Rule 14a-12
ALLIED RESEARCH CORPORATION
(Name of Registrant as Specified In Its Charter)
ZILKHA CAPITAL PARTNERS, L.P.
LT. GENERAL WILLIAM M. KEYS, USMC (RET.)
JOHN P. RIGAS
JEAN-CLAUDE ROCH
JOHN R. TORELL III
DONALD E. ZILKHA
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No Fee Required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total Fee Paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
PROXY STATEMENT
OF ZILKHA CAPITAL PARTNERS, L.P.
IN CONNECTION WITH THE
1999 ANNUAL MEETING OF STOCKHOLDERS
OF ALLIED RESEARCH CORPORATION
DATED MAY 21, 1999
This Proxy Statement is being furnished to stockholders of Allied Research
Corporation (the "Company" or "ARC") in connection with a solicitation by Zilkha
Capital Partners, L.P. ("ZCP" or "we") and the other participants described
below under "Certain Information Concerning ZCP and the Other Participants in
the Solicitation." ZCP and the other participants collectively own 4.31% of the
Company's outstanding shares of common stock, par value $.01 per share ("Common
Stock"). This Proxy Statement is being furnished for use at the 1999 Annual
Meeting of Stockholders of the Company and at any adjournments thereof (the
"1999 Annual Meeting").
WE ARE SOLICITING PROXIES TO ELECT A NEW SLATE OF DIRECTORS TO REPLACE THE
COMPANY'S BOARD. WE URGE YOU TO SIGN, DATE AND RETURN THE GOLD PROXY CARD (THE
"GOLD PROXY") IN FAVOR OF THE NOMINEES PROPOSED BY ZCP.
PROPOSAL FOR ELECTION OF DIRECTORS
ZCP is soliciting the proxies of stockholders in connection with the 1999
Annual Meeting for the election of Lt. General William M. Keys, USMC (Ret.),
John P. Rigas, Jean-Claude Roch, John R. Torell III and Donald E. Zilkha
(collectively, the "New Nominees"), as directors of the Company, to serve until
their successors are duly elected and qualified (the "Election of Directors
Proposal").
SUMMARY OF REASONS FOR NOMINATION OF THE NEW NOMINEES
We are asking you to elect the New Nominees instead of the directors
nominated by the Company. We believe it is in your best interests as a
stockholder to do so because we believe that the current Board of Directors (the
"Board") has been inadequate as demonstrated in the following areas:
- Over the past five years the return on the Company's Common Stock
has significantly underperformed the Company's major competitors and
the primary market indices. See "Reasons for Nomination of the New
Nominees -- Diminution of Stockholder Value."
- The Company's weak financial performance for 1998 and the first
quarter of 1999 and its dwindling backlog create significant concern
over the Company's future economic prospects. See "Reasons for
Nomination of the New Nominees -- Weak Financial Performance."
- Through a long-standing, inefficient capital structure, we believe
the Board has continuously failed to effectively utilize and deploy
the Company's large cash resources. See "Reasons for Nomination of
the New Nominees -- Inefficient Capital Structure."
- The Board has failed to implement a strategic plan to reduce its
customer concentration, diversify its businesses, develop new
products or enhance synergies between its businesses. See "Reasons
for Nomination of the New Nominees -- Lack of Strategic Direction."
<PAGE> 3
- The Board has appointed a senior management team that is dislocated
from the base of the Company's primary operations and whose
interests are not sufficiently aligned with those of the Company's
stockholders. See "Reasons for Nomination of the New Nominees --
Weak Operating and Management Structure."
If elected, the New Nominees intend to improve the Company's performance
and enhance stockholder value in the short- and long-term through the following
steps:
- Drawing on its experience with and knowledge of the defense
industry, undertake a strategic review of the Company and each of
its businesses, including assessing the Company's need for
additional capital and exploring all available financing sources. If
the New Nominees determine after their review that the Company
requires additional capital, they will evaluate all of the Company's
options, including an investment by ZCP or one of its affiliates in
the Company. Prior to any decision regarding such an investment, the
New Nominees will obtain the opinion of an independent financial
advisor as to the fairness of the investment, and any necessary
stockholder approvals.
- Reorganize the capital structure of the Company with a view toward
better utilizing the Company's cash resources and improving its
financing arrangements.
- Strengthen the Company's management team by providing senior
management with increased board and stock participation, relocating
managers to the location of the businesses for which they are
responsible and hiring new, and if necessary removing existing,
executive officers.
- Attempt to unlock hidden stockholder value by implementing the
initiatives described above and by refocusing the Company's
corporate assets so that the marketplace can more easily appreciate
their underlying value.
- Build long-term stockholder value by developing a comprehensive
business plan that will seek to expand and diversify the Company's
business and product lines and customer base through internal growth
and strategic acquisitions. The New Nominees will move aggressively
to divest the Company of those businesses that do not provide a
suitable strategic fit with the Company's long-term business plan or
which do not generate an acceptable return on assets and to acquire
businesses that offer synergistic advantages or provide the Company
with attractive growth and returns.
For more information, see "Reasons for Nomination of the New Nominees --
Objectives of New Nominees."
THE NEW NOMINEES
Each of the New Nominees has consented to serve as a director if elected.
There are no arrangements or understandings between any such nominee and any
other person pursuant to which he was selected as a New Nominee. There are also
no arrangements or understandings between any New Nominees or associates of the
New Nominees and any other person with respect to any future employment with the
Company or its affiliates or any future transactions with the Company or its
affiliates. The information below concerning age, principal occupation,
directorships and beneficial ownership of Common Stock has been furnished by the
respective New Nominees.
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<TABLE>
<CAPTION>
PRESENT PRINCIPAL
OCCUPATION AND PRINCIPAL NUMBER OF
OCCUPATIONS DURING SHARES OF PERCENT
NAME, BUSINESS, LAST FIVE (5) YEARS; COMMON OF COMMON
ADDRESS AND AGE DIRECTORSHIPS STOCK OWNED STOCK
--------------- ------------- ----------- -----
<S> <C> <C> <C>
Lt. General William M. Chairman of Keys & 1,000 (1)
Keys, USMC (Ret.) Associates (a business
c/o Value Properties consulting partnership)
300 East 42nd Street since 1995; President of
New York, New York 10017 Value Properties (a real
Age 62. estate development and
management company) since
1995; Chairman and member
of the Board of Directors
of the Marine Military
Academy since 1988;
Consultant to General
Motors Defense, Ltd. since
1996. Lt. General Keys has
held many military
leadership positions,
including Commander U.S.
Marine Corps Forces
Atlantic. Lt. General Keys
is also a member of the
U.S. Congressional
Commission on Military
Training and Gender Related
Issues; a member of the
Board of Directors of
Mooney Aircraft Corporation
and a member of the Board
of Directors of several of
Zilkha & Company's
privately held portfolio
companies.
John P. Rigas Co-Founder and, through 206,200(2) 4.27%
c/o Zilkha Capital ZCP's general partner,
Partners L.P. Managing Partner of ZCP and
767 Fifth Avenue Zilkha Guernsey Capital
New York, New York 10153 Partners, L.P.; Principal
Age 35. of Zilkha & Company since
1988. Mr. Rigas also serves
as either the Chairman or
a Director of each of Zilkha
& Company's privately
held portfolio companies.
Jean-Claude Roch Vice Chairman of the Board -- --
Av. de Florimont 3 of Directors of Aeroleasing
CH-1006 Lausanne Holding SA (a private
Switzerland airline company) since
Age 51. January 1, 1995; member of
the Board of Directors of
Banque Cantonale Vaudoise
(a Swiss banking company)
since June 30, 1993. Mr.
Roch was the Chief
Financial Officer and
member of the Board of
Directors of SICPA Holding
SA (an ink company) from
September 1, 1984 until
June 30, 1998.
</TABLE>
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<TABLE>
<CAPTION>
PRESENT PRINCIPAL
OCCUPATION AND PRINCIPAL NUMBER OF
OCCUPATIONS DURING SHARES OF PERCENT
NAME, BUSINESS, LAST FIVE (5) YEARS; COMMON OF COMMON
ADDRESS AND AGE DIRECTORSHIPS STOCK OWNED STOCK
--------------- ------------- ----------- -----
<S> <C> <C> <C>
John R. Torell III Chairman and Chief 1,000 (1)
c/o Torell Management, Inc. Executive Officer of Torell
767 Fifth Avenue Management, Inc. (an
New York, New York 10153 investment company
Age 59. specializing in principal
acquisitions) since 1990.
Mr. Torell was the
President of Manufacturers
Hanover Corp. from 1982 to
1988, Chairman and Chief
Executive Officer of
California Federal Bank
from 1988 to 1989 and
Chairman and Chief
Executive Officer of
Fortune Bancorp Inc. from
1990 to 1994. Mr. Torell
is also currently a
Director of American Home
Products Corporation,
Heartland Technology, Inc.,
The PaineWebber Group and
Volt Information Sciences
and several of Zilkha &
Company's privately held
portfolio companies.
Donald E. Zilkha Co-Founder and, through 206,200(2) 4.27%
c/o Zilkha Capital ZCP's general partner,
Partners L.P. Managing Partner of ZCP and
767 Fifth Avenue Zilkha Guernsey Capital
New York, New York 10153 Partners, L.P.; Principal
Age 47. of Zilkha & Company since
1986. Mr. Zilkha also serves
as either the Chairman or a
Director of each of Zilkha
& Company's privately
held portfolio companies.
</TABLE>
- ----------
(1) Represents beneficial ownership of less than 1%.
(2) Represents beneficial ownership of shares of Common Stock owned by ZCP.
On May 19, 1999, ZCP caused written notice to be provided to the Company
of its intent to nominate the New Nominees for election to the Board. Such
notice was provided pursuant to Section 1(b) of Article IV of the Company's
By-laws (the "By-laws") which sets forth certain requirements for stockholders
intending to nominate candidates for election to the Board, including, in
general, the requirement that a notice containing specified information be
submitted to the Company not less than 14 days nor more than 50 days prior to
any meeting of stockholders called for the purpose of electing directors.
In accordance with the Company's Certificate of Incorporation and By-laws
and the Delaware General Business Corporation Law, the Company's Board is to
consist of not less than three nor more than 15 directors, as may be determined
by resolution adopted by the Board. At each annual meeting of
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<PAGE> 6
stockholders, the directors are elected by a plurality vote to serve until the
next annual stockholder meeting and until their successors are duly elected and
qualified or until their death, resignation or removal. Based on information
contained in reports filed by the Company with the Securities and Exchange
Commission ("SEC"), the Board is currently comprised of five directors.
If the New Nominees are elected and take office as directors, they intend
to discharge their duties as directors of the Company in compliance with all
applicable legal requirements, including the general fiduciary obligations
imposed upon corporate directors.
On May 7, 1999, Lt. General Keys purchased 1,000 shares of the Company's
common stock. On May 7, 1999, Mr. Torell purchased 1,000 shares of the Company's
common stock. Other than Lt. General Keys and Mr. Torell, none of the New
Nominees have engaged in transactions in securities of the Company during the
past two years.
REASONS FOR NOMINATION OF THE NEW NOMINEES
BENEFITS OF ZCP AS A STRATEGIC INVESTOR. ZCP is a private equity fund
established by Zilkha & Company, a merchant banking and financial advisory firm,
with the objective of realizing above-average returns through the long-term
capital appreciation of its equity, equity related and debt investments. ZCP and
its affiliates have had extensive experience in successfully managing companies
in the defense industry, including Colt's Manufacturing Company, Inc. and Saco
Defense, Inc. As of the date hereof, ZCP owns 206,200 shares of Common Stock of
ARC constituting 4.27% of the outstanding Common Stock based on the number of
outstanding shares of Common Stock reported in the Company's definitive proxy
statement, dated April 29, 1999 (the "Company's Proxy Statement"). Our ownership
of 206,200 shares of Common Stock makes us one of the Company's largest
stockholders.
Long prior to our first purchasing shares of the Company's Common Stock,
however, we took an active interest in the Company. Representatives of ZCP met
with W. Glenn Yarborough, Jr., the Company's President and Chief Operating
Officer, on several occasions beginning in August of 1998 in order to discuss
our interest in the Company and to explore strategic alternatives for an
investment by ZCP in the Company. Despite successive attempts to include him,
J.R. Sculley, the Company's Chairman and Chief Executive Officer, was either
unable or unwilling to attend any of our meetings with Mr. Yarborough. On March
30, 1999 we again met with Mr. Yarborough to briefly present a proposal for
structuring an investment by ZCP in the Company and once more to seek an
opportunity to discuss our thoughts with members of the Company's Board. Unable
to arrange such a meeting, we presented the Board with a formal proposal in a
letter dated April 12, 1999 (the "Proposal"). A copy of the Proposal is attached
to this Proxy Statement as Appendix A.
Through the Proposal, which by its terms expired on April 20, 1999, ZCP
offered to provide the Company with a $9 million capital infusion (in the form
of a note convertible into Common Stock of the Company at a conversion price
representing a premium in excess of 20% to its then-current market price) and
with strategic guidance through the addition of three directors nominated by ZCP
to the Company's Board. We also once again requested that the Board meet with us
to allow ZCP to make a presentation with regard to our past business activities
and our ideas for assisting the Company under its current circumstances. The
Board did not grant us this request and by letter dated April 19, 1999, Dr.
Sculley formally rejected ZCP's offer to invest in the Company.
AT NO POINT SINCE AUGUST 1998 HAS DR. SCULLEY OR THE COMPANY'S BOARD BEEN
WILLING TO MEET AND DISCUSS ZCP'S IDEAS FOR INVESTING IN THE COMPANY AND
ENHANCING STOCKHOLDER VALUE, NOR HAVE THEY PROVIDED THE COMPANY'S STOCKHOLDERS
WITH AN OPPORTUNITY TO CONSIDER ZCP'S PROPOSALS. ZCP MADE ITS PROPOSALS TO THE
COMPANY WITH A VIEW TOWARD APPLYING ITS EXPERIENCE IN AND KNOWLEDGE OF
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THE DEFENSE INDUSTRY TO THE BUSINESS OF THE COMPANY. CURRENT MANAGEMENT OF THE
COMPANY HAS NOT SEEN FIT TO TAKE ADVANTAGE OR INVESTIGATE THE MERITS OF ZCP'S
OFFER.
ALTHOUGH WE CONTINUE TO BELIEVE THAT THERE IS UNREALIZED VALUE IN THE
COMPANY, WE ARE GROWING CONCERNED ABOUT THE INABILITY OF THE COMPANY'S BOARD AND
MANAGEMENT TO HAVE SUCH VALUE REFLECTED IN THE STOCK MARKET PRICE AND ITS
UNWILLINGNESS TO CONSIDER ZCP'S STRATEGIC ASSISTANCE. WE BELIEVE THE CURRENT
MANAGEMENT AND BOARD OF DIRECTORS OF THE COMPANY HAVE FAILED TO EFFECTIVELY
MANAGE THE COMPANY AND TO MAXIMIZE STOCKHOLDER VALUE AND PROFITABILITY WHICH IS
EVIDENT IN THE FOLLOWING AREAS:
DIMINUTION OF STOCKHOLDER VALUE. Over the past five years the return on
the Company's Common Stock has significantly underperformed each of the S&P
Smallcap Aerospace/Defense Index, the Dow Jones Industrial Average and the S&P
500 Index. Set forth below is a table comparing the returns of the Company's
Common Stock to these indices.
<TABLE>
<CAPTION>
Name 5/3/94 5/3/99 % Change
- ---- ------ ------ --------
<S> <C> <C> <C>
Allied Research Corporation $ 6.625 $ 6.50 -1.89%
S&P Smallcap Aerospace/Defense 107.89(1) 147.45 36.67%
Dow Jones Industrial Average 3,714.41 11,014.69 196.54%
S&P 500 453.03 1,354.63 199.02%
</TABLE>
- ----------
(1) Index level on 7/1/96, the date on which Standard & Poor's started pricing
the index.
The return on the Company's Common Stock has also underperformed Primex
Technologies Inc. and Alliant Techsystems Inc., two of the major munitions
competitors of MECAR S.A. ("MECAR"), the Company's principal business unit, as
shown in the table below.
<TABLE>
<CAPTION>
Name 5/3/94 5/3/99 % Change
- ---- ------ ------ --------
<S> <C> <C> <C>
Allied Research Corporation $ 6.625 $ 6.50 -1.89%
Primex Technologies Inc. $10(1) $21.375 113.75%
Alliant Techsystems Inc. $23.375 $ 82.50 252.94%
</TABLE>
- ----------
(1) Closing price on 12/20/96, the date Primex Technologies Inc. was spun-off
from Olin Corp.
A closing price of $6.50 per share on May 6, 1999, the day preceding the
filing by ZCP of a preliminary copy of this Proxy Statement (the "Preliminary
Proxy Statement") with the SEC, means that as of that date shares of the
Company's Common Stock have lost over 20% of their value in 1999 and over 50% of
their value from their 52 week high of $13.0625. Subsequent to ZCP's filing of
the
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Preliminary Proxy Statement, the price of the Company's Common Stock has climbed
over 11%, closing at $7.25 on May 18, 1999. Indeed, the Board itself discloses
in the Company's Proxy Statement that the cumulative total return on the
Company's Common Stock over a five-year period is significantly lower than the
S&P 500 and a company peer group selected by the Board. Assuming an initial
investment of $100 and the reinvestment of dividends, the Company's cumulative
return is shown to be $98.51 as compared with $293.91 and $216.90 for the S&P
500 and the company peer group, respectively. In addition, the Company's balance
sheet as of March 31, 1998 (included in ARC's report on Form 10-Q for the
quarter then ended filed with the SEC on April 27, 1999 (the "Company's 10-Q"))
reflects the fact that the Company had $6.24 per share in cash as compared to
the $6.50 closing price per share of the Company's Common Stock as of May 3,
1999. It would appear, therefore, that the market price of the Common Stock
accords little, if any, value to the Company's existing businesses or its
current management.
WE BELIEVE THE COMPANY'S DEPRESSED STOCK PRICE AND THE VALUATION OF THE
COMPANY'S COMMON STOCK AT A PRICE APPROXIMATELY EQUAL TO ITS CASH PER SHARE
REFLECT THE COMPANY'S WEAK FINANCIAL PERFORMANCE, POOR ASSET DEPLOYMENT AND
UTILIZATION, LACK OF STRATEGIC PLANNING AND INATTENTIVE MANAGEMENT.
WEAK FINANCIAL PERFORMANCE. According to the Company's report on Form 10-K
for the year ended December 31, 1998 filed with the SEC on March 16, 1999 (the
"Company's 10-K"), revenues increased a modest 6.76% from 1997 to 1998, and
earnings per share an even less impressive 2.13%. MECAR's pre-tax profits for
1998 decreased by 20% from 1997 levels notwithstanding that 1997 pre-tax profits
were adversely affected by a $.98/per share restructuring cost due to a work
force reduction. The Company's performance during the first quarter of 1999 was
even more disappointing. According to the Company's 10-Q, revenues, net earnings
and net earnings per share for the first quarter of 1999 dropped by 23.1%,
43.91% and 44.90%, respectively, compared with the same period in 1998. In the
past, the Company has survived on its large backlog, but according to the
Company's 10-K, that backlog has dwindled over 48.3% from $92.8 million at the
beginning of 1998 to $48.0 million at the beginning of 1999, while MECAR's
backlog has fallen over 66% from $65.8 million to $22.0 million during the same
period. As of March 31, 1999, the Company had a backlog of $26 million and MECAR
had a backlog of $6 million (less than one-third of MECAR's revenues for the
first quarter).
WITH THIS ECONOMIC BACKDROP, WE BELIEVE THE COMPANY IS POISED TO FACE SOME
VERY DIFFICULT TIMES AHEAD AND THIS UNCERTAINTY IS REFLECTED IN THE LOW MARKET
PRICE OF THE COMPANY'S COMMON STOCK.
INEFFICIENT CAPITAL STRUCTURE. We believe the Company's return on assets
has been diminished by its underutilization of its large cash resources. As of
December 31, 1998, the Company had cash of approximately $31 million,
approximately $21 million of which is restricted by the Company's lenders in
connection with letters of credit, performance bonds and other bank guarantees,
according to the Company's 10-K. According to the Company's 10-Q, the Company's
total cash was over $29.5 million as of March 31, 1999. Given these cash
resources, we fail to understand why management has found it necessary to
finance its operations with what we believe to be unfavorable bank loans.
Despite the Company's large cash position, as a result of its large borrowing
expenses and low returns on cash, the Company's interest expense for the year
ended December 31, 1998 and the quarter ended March 31, 1999 materially exceeded
its interest income in such periods. Furthermore, ARC's large cash position
appears to be a historical problem rather than a recent phenomenon. According to
the Company's financial statements as reported on Form 10-K, as of the end of
each year since 1994 the Company has held cash (including restricted cash and
deposits) in excess of $22 million, indicating that the Board has consistently
failed to effectively deploy one of the Company's largest assets.
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In addition to bearing substantial interest and fee expenses, the Company
is further disadvantaged by the large cash collateralization levels of its bank
guarantees and letters of credit. Based on our experience in the defense
industry, letters of credit and other bank guarantees supporting the performance
by suppliers of their customer orders generally require collateralization of up
to approximately 10% of the order and as collateral, suppliers may generally use
letters of credit received under the contract, cash, accounts receivable,
inventory and property, plant and equipment. Given this background and the fact,
as disclosed in the Company's 10-Q, that $32 million of MECAR's noncash assets
are used as collateral, it seems extraordinary to us that the Company must
further pledge over $18 million of its cash assets.
WE BELIEVE THAT THE ONEROUS RESTRICTIONS THE BOARD AND MANAGEMENT HAVE
ALLOWED TO BE PLACED ON THE COMPANY'S CASH ASSETS HAVE LIMITED THE COMPANY'S
ABILITY TO UTILIZE ITS CASH MORE EFFECTIVELY IN ORDER TO DIVERSIFY BY ACQUIRING
NEW BUSINESSES OR DEVELOPING NEW PRODUCTS AND CUSTOMERS. THIS INEFFECTIVE USE OF
THE COMPANY'S LARGE CASH POSITION, WE BELIEVE, HAS DIMINISHED THE RETURN ON THE
COMPANY'S ASSETS AND THEREBY DEPRESSED THE PRICE OF THE COMPANY'S COMMON STOCK.
LACK OF STRATEGIC DIRECTION. According to the Company's report on 10-K for
the year ended December 31, 1994, management first embarked on a strategic
course of growing the Company's revenue base to mitigate the impact of its
volatile overseas military operations in 1995. The Company has failed to
implement this strategy. As of December 31, 1998, approximately 86% of the
Company's assets were held in its military subsidiaries, MECAR and Barnes &
Reinecke, Inc., and approximately 85% of its revenues for 1998 were attributable
to sales from those military businesses (according to the Company's 10-K). As a
result of the Board's and management's failure to grow ARC's commercial business
and create a greater balance in the mix of the Company's assets, the Company has
remained primarily reliant on its MECAR ammunition unit which itself, according
to the Company's 10-K, is largely reliant on two government agency customers,
both of which are in Saudi Arabia and neither of which have placed an order with
the Company since March 1998. The Company has not initiated any strategic
solutions with respect to reducing this concentrated business risk or even, to
our knowledge, articulated any strategic plan for addressing it.
The Company's lack of strategic direction is also demonstrated in the
incongruity of the Company's assets. The Company manufactures and sells
ammunitions, develops, manufactures, sells and services industrial security
products, and provides engineering and technical support services for military
vehicles. We believe the resulting mix of businesses creates a lack of synergy
amongst the Company's assets, preventing the Company from taking advantage of
the cost savings, shared research and development and other operational leverage
afforded by complimentary business and product lines. The other businesses the
Company has attempted to launch also appear to have been devoid of any
synergies. The Company's U.K. subsidiary, Allied Research Corporation Limited,
which is now inactive, was engaged in the marketing of military hardware and, in
1993, the Company made a failed attempt to enter the environmental services
business through the now defunct ARC Services, Inc.
WE BELIEVE THAT UNDER ITS PRESENT ECONOMIC CIRCUMSTANCES, THE COMPANY CAN
ILL-AFFORD THIS RUDDERLESS DRIFT FROM BUSINESS TO BUSINESS, WHICH WE BELIEVE HAS
DEPRESSED FURTHER THE PRICE OF THE COMPANY'S COMMON STOCK.
WEAK OPERATING AND MANAGEMENT STRUCTURE. We believe the Board has failed
to implement an effective management and operating structure in the Company for
a variety of reasons. The executive management team currently consists solely of
Dr. Sculley and Mr. Yarborough. In fact, according to the Company's 10-Q, Dr.
Sculley retains the position of Chairman, Chief Executive Officer and Chief
Financial Officer. Dr. Sculley and Mr. Yarborough both reside in the United
States, while over 83% of the Company's assets are based in Belgium, creating an
alarming incongruity between the location of the
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<PAGE> 10
Company's assets and the location of its senior management team. In addition,
the Company does not effectively use stock ownership as a means of providing
incentive for its management and aligning their interests with the interests of
the Company's other stockholders. According to the Company's 10-K, the Company's
management team (consisting of Dr. Sculley and Mr. Yarborough) beneficially
owns, in the aggregate, only 3.4% of the Company's Common Stock (excluding
options).
WE BELIEVE THAT THE COMPANY NEEDS SENIOR MANAGEMENT TO BE CLOSER TO ITS
ASSET BASE IN ORDER TO BETTER MONITOR DAILY OPERATIONS WITH A VIEW TOWARD
IMPROVING OPERATING PERFORMANCE AND THE REQUIRED RELATIONSHIPS WITH LENDERS,
SUPPLIERS AND CUSTOMERS. ZCP FURTHER BELIEVES STOCK OWNERSHIP AND STOCK OPTIONS
TO BE THE MOST EFFECTIVE WAY OF INCENTIVISING MANAGEMENT AND ALIGNING
MANAGEMENT'S INTERESTS WITH THOSE OF THE COMPANY'S STOCKHOLDERS.
* * * * *
OBJECTIVES OF NEW NOMINEES. If elected, the New Nominees intend to improve
the Company's performance and enhance stockholder value in the short- and
long-term by implementing the following initiatives:
- UNDERTAKE A STRATEGIC REVIEW OF THE COMPANY AND EACH OF ITS
BUSINESSES. Using its experience with and knowledge of the defense
industry, through this review the New Nominees will determine which
of the Company's businesses are capable of generating an acceptable
return on assets, where the opportunities for greater synergy and
expansion lie, and what the potential needs and sources for
additional capital may be. If the New Nominees determine after their
review that the Company requires additional capital, they will
evaluate all of the Company's options, including an investment by
ZCP or one of its affiliates in the Company. Prior to any decision
regarding such an investment, the New Nominees will obtain the
opinion of an independent financial advisor as to the fairness of
the investment, and any necessary stockholder approvals.
- REORGANIZE THE COMPANY'S CAPITAL STRUCTURE. The New Nominees will
attempt to immediately improve the financial management of the
Company through the restructuring of the Company's lending
arrangements with a view toward freeing the Company's cash for more
effective utilization and creating more efficient financing
arrangements.
- STRENGTHEN THE COMPANY'S MANAGEMENT TEAM. The New Nominees will
undertake a serious review of the Company's existing management with
the objective of supplementing or replacing the Company's senior
management tier with a qualified chief financial officer and
experienced operating managers and relocating ARC's management
resources on a basis that is consistent with the geographical
location, strategic imperatives and customer needs of the Company's
businesses. The New Nominees also intend to provide senior
management with increased stock incentives and Board participation
to better align their interests with the stockholders and the
Company.
- ATTEMPT TO UNLOCK HIDDEN STOCKHOLDER VALUE. The New Nominees will
seek to better reflect the value of the Company's businesses in its
stock price by implementing the initiatives described above and by
refocusing the Company's corporate assets so that the marketplace
can more easily appreciate their underlying value.
- BUILD LONG-TERM STOCKHOLDER VALUE. The New Nominees will develop a
comprehensive business plan that will seek to expand and diversify
the Company's business and product lines and customer base through
internal growth and strategic acquisitions. The New Nominees
9
<PAGE> 11
will move aggressively to divest the Company of those businesses
that do not provide a suitable strategic fit with the Company's
long-term business plan or which do not generate an acceptable
return on assets and to acquire businesses that offer synergistic
advantages or provide the Company with attractive growth and
returns.
BY RUNNING OUR OWN SLATE OF NOMINEES, WE BELIEVE WE ARE GIVING STOCKHOLDERS A
CHOICE. IF YOU ARE SATISFIED WITH THE PERFORMANCE OF THE COMPANY AND ITS STOCK
PRICE, NO DOUBT, YOU WILL RE-ELECT THE COMPANY'S NOMINEES. IF, LIKE US, YOU ARE
NOT SATISFIED AND BELIEVE THE COMPANY WOULD BENEFIT BY HAVING A NEW SLATE OF
DIRECTORS WITH THE QUALIFICATIONS DESCRIBED HEREIN AND WHO HAVE BEEN SELECTED BY
ONE OF THE COMPANY'S LARGEST SHAREHOLDERS, WE URGE YOU TO SUPPORT THE NEW
NOMINEES.
1999 ANNUAL MEETING
TIME AND PLACE OF MEETING
According to Section 2 of Article III of the By-laws an annual meeting of
stockholders shall be held on the fourth Tuesday in May of each year, unless
such Tuesday is a legal holiday, then on the next business day following such
Tuesday, or any other date in May as may be determined by the Company's Board of
Directors. The Company has announced that the 1999 Annual Meeting will be held
on June 9, 1999 at the Tower Club, 17th Floor, 8000 Towers Crescent Drive,
Vienna, Virginia 22182. The record date for the 1999 Annual Meeting has been set
by the Board as April 14, 1999. Only stockholders of record at the close of
business on the record date will be entitled to notice of and to vote at the
1999 Annual Meeting. This Proxy Statement is first being sent or given to one or
more stockholders on or about May 21, 1999.
PROPOSAL CONCERNING INDEPENDENT AUDITORS
The Company's Proxy Statement for the 1999 Annual Meeting sets forth
information concerning and a proposal regarding the ratification of the
accounting firm of Grant Thornton LLP as the Company's independent auditors (the
"Proposal Concerning Independent Auditors"). The Gold Proxy included with this
Proxy Statement may be used to cast your vote in connection with the Proposal
Concerning Independent Auditors.
VOTE REQUIRED
The Election of Directors Proposal requires the affirmative vote of a
plurality of the stock of the Company having voting power present in person or
represented by proxy and entitled to vote thereon at the 1999 Annual Meeting.
Votes that are withheld for director nominees and broker non-votes will be
disregarded and will not affect the outcome of the election. The Proposal
Concerning Independent Auditors requires the affirmative vote of a majority of
the shares of Common Stock having voting power present in person or represented
by proxy and entitled to vote thereon at the 1999 Annual Meeting. A proxy which
abstains from a vote on the Proposal Concerning Independent Auditors will have
the effect of a vote against such proposal and broker non-votes will not affect
the vote on the Proposal Concerning Independent Auditors.
Any stockholder who executes and delivers a Gold Proxy will have the right
to revoke it at any time before it is exercised, by filing with ZCP at 767 Fifth
Avenue, New York, New York 10153 or with the Secretary of the Company at its
principal executive offices at 8000 Towers Crescent Drive, Suite 750,
10
<PAGE> 12
Vienna, Virginia 22182, an instrument revoking it or a duly executed proxy
bearing a later date, or, by appearing in person and voting at the 1999 Annual
Meeting.
According to the Company's Proxy Statement for the 1999 Annual Meeting,
there were 4,831,032 shares of Common Stock outstanding on April 14, 1999 and,
unless otherwise indicated, references herein to the percentage of outstanding
shares of Common Stock owned by any person were computed based upon such number
of outstanding shares. Each share of Common Stock is entitled to one vote.
CERTAIN INFORMATION CONCERNING ZCP
AND THE OTHER PARTICIPANTS IN THE SOLICITATION
Information is being given herein for (i) ZCP, (ii) John P. Rigas
("Rigas"), a natural person and nominee for the Board of Directors of the
Company, (iii) Jean-Claude Roch ("Roch"), a natural person and nominee for the
Board of Directors of the Company, (iv) Lt. General William M. Keys, USMC (Ret.)
("Keys"), a natural person and nominee for the Board of Directors of the
Company, (v) John R. Torell III ("Torell"), a natural person and nominee for the
Board of Directors of the Company, (vi) Donald E. Zilkha ("Zilkha"), a natural
person and nominee for the Board of Directors of the Company, and (vii) Zilkha
Guernsey Capital Partners, L.P. ("ZGCP"), a private equity fund established by
Zilkha & Company, who are each a "participant in a solicitation" as defined
under the proxy rules promulgated by the SEC under the Securities Exchange Act
of 1934, as amended (collectively, the "Participants").
ZCP is a Delaware limited partnership and is principally engaged in the
business of making and managing investments. The principal occupation of each of
Rigas and Zilkha is being the Co-Managing Partners of ZCP, through the general
partner of ZCP. The principal occupation of Roch is serving on the Board of
Directors of Aeroleasing Holding SA and Banque Cantonale Vaudoise. The principal
occupation of Keys is Chairman of Keys & Associates. The principal occupation of
Torell is Chairman of Torell Management, Inc. ZGCP is a limited partnership
formed under the laws of the Bailwick of Guernsey and is principally engaged in
the business of making and managing investments.
The business address of each of ZCP, Rigas and Zilkha is 767 Fifth Avenue,
New York, New York 10153. The business address of ZGCP is Sydney Vane House, Rue
De Commerce, St. Peter Port, Guernsey. The business address for Zilkha & Company
is 767 Fifth Avenue, New York, New York 10153. The business address of Keys is
c/o Value Properties, 300 East 42nd Street, New York, New York 10017. The
business address of Roch is Av. de Florimont 3, CH-1006 Lausanne, Switzerland.
The business address of Torell is c/o Torell Management, Inc., 767 Fifth Avenue,
New York, New York 10153.
11
<PAGE> 13
The Participants and their associates may be deemed to have direct
beneficial ownership of the Company's Common Stock ("Shares") as follows:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ---- ----------------
<S> <C>
Keys 1,000
Rigas 206,200(1)
Torell 1,000
ZCP 206,200
ZGCP 206,200(2)
Zilkha 206,200(1)
</TABLE>
- ----------
(1) Represents beneficial ownership of shares of Common Stock owned by ZCP.
(2) Represents potential beneficial ownership of a portion of the shares of
Common Stock owned by ZCP. See "Certain Interests in the Proposals and
With Respect to Securities of the Issuer."
The following is a summary of all transactions in Company securities
by the Participants over the last two years:
<TABLE>
<CAPTION>
DATE OF NUMBER OF
TRANSACTION NATURE OF TRANSACTION SHARES
----------- --------------------- ------
<S> <C> <C>
March 30, 1999 Purchase of ARC Common Stock by ZCP. 200,000
May 7, 1999 Purchase of ARC Common Stock by Keys. 1,000
May 7, 1999 Purchase of ARC Common Stock by Torell. 1,000
May 7, 1999 Purchase of ARC Common Stock by ZCP. 6,200
</TABLE>
ZCP intends to vote the Shares in accordance with the recommendations of
ZCP set forth herein.
CERTAIN INTERESTS IN THE PROPOSALS AND
WITH RESPECT TO SECURITIES OF THE ISSUER
Except as listed below, to the knowledge of ZCP, there are no contracts,
arrangements, understandings or relationships (legal or otherwise) among ZCP,
any other Participants or their respective associates or controlling persons or
between ZCP or any of the foregoing persons with respect to any securities of
the Company. The partnership agreement of ZCP contains provisions whereby its
general partner (which is indirectly controlled by John P. Rigas and Donald E.
Zilkha) will receive a certain percentage of realized and unrealized profits, if
any, derived from the partnership's investments. In addition, ZCP intends to
distribute a certain amount of the Shares, the exact number of which has yet to
be determined, to its affiliated investment partnership Zilkha Guernsey Capital
Partners, L.P.
12
<PAGE> 14
SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT
The following table presents, as of April 1, 1999 and based solely on
information contained in the Company's Proxy Statement for the 1999 Annual
Meeting, the Common Stock beneficially owned (as that term is defined by the
SEC) by all directors, nominees and named executive officers of the Company, and
the directors, nominees and executive officers of the Company as a group. This
beneficially owned Common Stock includes shares of Common Stock which they had a
right to acquire within 60 days of such date by the exercise of options granted
under the Company's stock option plans.
Except as otherwise noted in a footnote below, each director, nominee and
executive officer has sole voting and investment power with respect to the
number of shares of Common Stock set forth opposite his or her name in the
table.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS(2)
- ------------------------ ----------------------- -------------------
<S> <C> <C>
Harry H. Warner 11,000 *
Owned directly
Earl P. Smith 6,110 *
Owned directly
Clifford C. Christ 26,000 *
Owned directly
Robert W. Hebel 8,625 *
Owned directly
J. R. Sculley 145,100 2.9%
Owned directly
W. Glenn Yarborough 88,160 1.8%
Owned directly
All executive officers and 284,995 5.7%
directors as a group (6) Owned directly
</TABLE>
- ----------
* Less than 1%
(1) Includes 14,000 shares which may be acquired by Mr. Yarborough and 53,700
shares which may be acquired by Mr. Sculley within 60 days pursuant to
outstanding stock options.
(2) Based upon 4,831,032 shares of Common Stock outstanding plus 111,950
shares which may be acquired within 60 days pursuant to outstanding stock
options.
13
<PAGE> 15
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of April 1, 1999 and based solely,
except as otherwise described herein, on information contained in the Company's
Proxy Statement for the 1999 Annual Meeting, the number and percentage of
outstanding shares of Common Stock beneficially owned by each person known to
ZCP as of such date to be the beneficial owner of more than five percent of the
outstanding shares of Common Stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENTAGE
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS (1)
------------------- -------------------- ------------
<S> <C> <C>
Fidelity Low-Priced Stock Fund/ 473,000 9.6%
Fidelity Management & Research Company Owned directly
82 Devonshire Street
Boston, MA 02109
Dimensional Fund Advisors, Inc.(2) 278,000 5.6%
1299 Ocean Avenue Owned directly
11th Floor
Santa Monica, CA 90401
</TABLE>
- ----------
(1) Based upon 4,831,032 shares of common stock outstanding plus 111,950
shares which may be acquired within 60 days pursuant to outstanding stock
options.
(2) Dimensional Fund Advisors, Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 278,000 shares, all of
which shares are owned by advisory clients of Dimensional. Dimensional
disclaims beneficial ownership of all such shares.
14
<PAGE> 16
PROXY SOLICITATION; EXPENSES
Proxies may be solicited by ZCP, partners and employees of ZCP, and the
other Participants by mail, telephone, telecopier, the Internet and personal
solicitation. Regular employees of ZCP and its affiliates may be used to solicit
proxies and, if used, will not receive additional compensation for such efforts.
Banks, brokerage houses and other custodians, nominees and fiduciaries will be
requested to forward the solicitation material of ZCP to their customers for
whom they hold shares, and ZCP will reimburse them for their reasonable
out-of-pocket expenses.
In addition, we have retained MacKenzie Partners, Inc. as our information
agent and to solicit proxies in connection with the 1999 Annual Meeting. We have
agreed to reimburse MacKenzie Partners, Inc. for its reasonable expenses and to
pay MacKenzie Partners, Inc. fees not to exceed $50,000. MacKenzie Partners,
Inc. will employ approximately 30 people in its efforts. Costs incidental to
this solicitation include expenditures for printing, postage, legal and related
expenses and are expected to be approximately $75,000.
The entire expense of preparing, assembling, printing and mailing this
Proxy Statement and related materials, and the cost of soliciting proxies for
the proposals endorsed by ZCP, will be borne by ZCP. ZCP estimates such expenses
to be $125,000 (including professional fees and expenses, but excluding any
costs represented by salaries and wages of regular employees of ZCP and its
affiliates). The total expenditures to date have been approximately $60,000. ZCP
intends to seek reimbursement from the Company for ZCP's expenses related to
this proxy solicitation and such reimbursement shall not be submitted to a vote
of the Company's Stockholders.
15
<PAGE> 17
STOCKHOLDERS' PROPOSALS IN COMPANY'S PROXY STATEMENT
Pursuant to Rule 14a-8(e)(2) under the Exchange Act, any proposal by a
stockholder at the Annual Meeting to be included in the Company's Proxy
Statement must be received in writing at the Company's principal executive
offices not less than 120 calendar days in advance of the date of the Company's
proxy statement released to security holders in connection with its 2000 Annual
Meeting of stockholders. Accordingly, any such stockholder proposal should have
been so received by the Company no later than December 28, 1999.
Dated: May 21, 1999
Sincerely,
Your Fellow Stockholder,
ZILKHA CAPITAL PARTNERS, L.P.
16
<PAGE> 18
APPENDIX A
April 12, 1999
Dr. J.R. Sculley
Chairman and Chief Executive Officer
Board of Directors
Allied Research Corporation
8000 Towers Crest Drive, Suite 750
Vienna, VA 22182
Dear Dr. Sculley and Members of the Board:
On behalf of Zilkha Capital Partners, L.P. ("ZCP"), we are pleased
to submit a proposal regarding an investment by ZCP in Allied Research
Corporation ("ALR" or the "Company"). We are submitting this proposal in
response to W. Glenn Yarborough, Jr.'s suggestion for a written proposal to
ALR's Board of Directors (the "ALR Board") following our meeting with Mr.
Yarborough on March 30, 1999 at which we briefly discussed certain aspects of
the proposal described below.
As background to your consideration of the proposal, we would like
to bring to your attention the following. ZCP is currently a substantial
shareholder of the Company and is interested in making a further long-term
capital investment in ALR to support ALR in the refocusing of its corporate
assets, through the oncoming downturn at MECAR S.A., and to fund external growth
through strategic acquisitions. In addition to committed capital, the resources
available to ZCP include operational expertise in the defense and commercial
sectors and a broad array of international contacts that would be made available
to the Company. ZCP and its affiliates have a long history of building and
improving companies in a variety of industries.
As you may know, one of our group's investments was the acquisition
of the historic Colt's Manufacturing Company, Inc. ("Colt") pursuant to a
bankruptcy reorganization plan in late 1994. At the time of the acquisition,
Colt was a significantly under-performing Company, devoid of capital investment,
employee training, and expenditure in research and new product development. In
addition, Colt had a history of poor labor relations and had lost its important
United States Department of Defense markets. Today, after four years under our
direction, Colt has re-established a leading position in the U.S. and
international small arms defense sector with the proprietary M4 carbine and the
M-16 rifle, and through the acquisition of Saco Defense, Inc., with the MK-19
and the newly introduced proprietary ALGL multiple grenade launcher. Colt enjoys
harmonious labor relations, has invested heavily in capital equipment and
product development, and in fact, leads by a wide margin all other handgun
manufacturers in the development of the "smart gun" as has been widely reported
in the national press.
We believe that ALR is in need and would benefit substantially from
a strategic redirection of its corporate assets, with a view toward creating
synergy between those assets, more efficient financial management in the context
of an improved capital structure, and an enhanced operating and management
resource base that is congruent with the geographical location, strategic
imperatives and customer needs of the Company's three operating divisions.
Operating and strategic plans for the three divisions need to be developed in
light of changes currently occurring in their respective industry sectors. These
plans should focus on the strong need for new product development consistent
with customer requirements, expansion and diversification of each division's
customer base, improved return on capital
A-1
<PAGE> 19
employed in the face of shrinking defense budgets and attendant pressures on
operating margins, and an aggressive route toward increasing stockholder value.
ZCP believes it is uniquely positioned to assist ALR in achieving the above
objectives and is willing to substantiate its belief with an immediate and
significant capital investment and further investments in the future. As the
Company prepares to face the challenges that lie ahead, we further believe that
ALR's existing shareholders would welcome the capital and strategic support that
ZCP is offering ALR through this proposal.
We kindly request that ZCP is provided with the opportunity to meet
with the ALR Board in the near future and make a presentation with regard to our
past business activities and our ideas as to how we may able to assist ALR under
its current circumstances.
The terms and conditions of our proposal are as follows:
1. Investment Structure. There are two principal components to the
investment ZCP hereby proposes (the "Investment Proposal"):
(a) Convertible Note: ZCP will acquire from ALR and ALR will issue
to ZCP, a $9 million principal amount convertible note bearing interest at
a rate of 8% per annum, payable quarterly (the "Note"). The Note will
mature on the third anniversary of the date of issuance, whereupon all
principal shall become due and payable. The Note will be convertible at
any time prior to maturity at ZCP's election into 1.125 million shares of
registered common stock of ALR, which represents a conversion price of $8
per share (approximately a 20% premium to its weighted average trading
price over the past 20 trading days and a 23% premium to its closing
trading price on Friday, April 9, 1999). The Note would contain customary
anti-dilution provisions and other investor protections.
(b) Board Participation: As a condition to ZCP's acquisition of the
Note, the ALR Board will be expanded from five to nine members. Three of
the added board directors will be appointed by ZCP and the remaining seat
will be filled by Glenn Yarborough.
2. Definitive Agreement; Conditions. If the Investment Proposal is
acceptable to you, we will proceed promptly with the Company to negotiate a
binding, definitive agreement (the "Agreement") providing for the Investment
Proposal. As is customary in transactions of this kind, execution of the
Agreement would be subject to the satisfactory completion of a due diligence
investigation. Consummation of the transactions contemplated by the Agreement
would be subject to the approval of the Agreement by the Company's Board of
Directors, the obtaining of necessary consents and the satisfaction of any
applicable federal or state regulatory requirements. The Agreement would also
contain representations, warranties, covenants, indemnifications and other
conditions customary for transactions of this kind.
3. Investigation. Promptly following your execution and delivery of this
letter in the manner provided below and until July 31, 1999 (the "Termination
Date"), the Company will provide ZCP and its employees, agents, counsel,
accountants, financial advisors, consultants and other representatives (together
"Representatives") with full access, upon reasonable prior notice, to all
officers, employees and accountants of the Company and its subsidiaries and to
their assets, properties, contracts, books, records and all such other
information and data concerning the business and operations of the Company and
its subsidiaries as ZCP reasonably may request in connection with such
investigation. ZCP will, and will use its best efforts to cause its
Representatives to, hold in strict confidence, unless compelled to disclose by
judicial or administrative process or by other requirements of law, and to
refrain from using for any purpose other than determining the desirability of
the Investment Proposal all documents and information concerning the Company and
its subsidiaries made available pursuant to this letter in connection with such
due diligence investigation, except to the extent that such documents or
information can be shown to
A-2
<PAGE> 20
have been or become available to ZCP, or its Representatives on a
non-confidential basis without violation of this letter. At any time after the
Termination Date, upon your request, ZCP will, and will use its best efforts to
cause its Representatives to, promptly redeliver or cause to be redelivered to
the Company all copies of such documents and information furnished pursuant to
this letter and destroy or cause to be destroyed all notes, memoranda,
summaries, analyses, compilations and other writings relating thereto or based
thereon prepared by such parties.
4. Exclusivity. In consideration of the substantial expenditure of time,
effort and expense to be undertaken by ZCP, you hereby undertake and agree (and
will undertake and agree in the Agreement) that, for the period from the date
hereof until the consummation of the Investment Proposal, or if the Agreement is
not executed and delivered on or prior to the Termination Date, until the
Termination Date, the Company will not, nor will the Company permit any of its
subsidiaries or affiliates (or authorize or permit any of their respective
Representatives) to, take, directly or indirectly, any action to initiate,
assist, solicit, receive, negotiate, encourage or accept any offer or inquiry
from any person (a) to engage in any Business Combination (as defined below),
(b) to reach any agreement or understanding (whether or not such agreement or
understanding is absolute, revocable, contingent or conditional) for, or
otherwise attempt to consummate, any Business Combination or (c) to furnish or
cause to be furnished any information with respect to the Company or any of its
subsidiaries to any person (other than as contemplated by this letter) who the
Company or any such subsidiary, affiliate or Representative knows or has reason
to believe is in the process of considering any Business Combination; provided,
however, that, following its receipt of any proposal from a third party for a
Business Combination, (i) the Company may furnish or cause to be furnished to
such party information concerning the Company and its business, properties or
assets and the Company may engage in discussions or negotiations with such third
party and (ii) the Company may take and disclose to its shareholders a position
contemplated by Rule 14e-2 or Rule 14d-9 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or otherwise make a disclosure to the
Company's shareholders, but in each case referred to in the foregoing clauses
(i) and (ii), only to the extent that the Board of Directors of the Company
shall determine on the basis of written advice from outside counsel that such
action is necessary in order for the Board of Directors to act in a manner
consistent with its fiduciary obligations under applicable law. If the Company
or any such subsidiary, affiliate or Representative receives from any person any
offer, inquiry, proposal or informational request referred to above, the Company
will promptly advise such person, by written notice, of the terms of this
Paragraph and will promptly, orally and in writing, advise ZCP of such offer,
inquiry, proposal or request and deliver a copy of the foregoing notice to ZCP.
For purposes hereof, "Business Combination" means any merger, consolidation or
combination to which the Company or any of its subsidiaries is a party, any
sale, dividend, split or other disposition of capital stock or other equity
interest of the Company or any of its subsidiaries or any sale, dividend or
other disposition of all or substantially all of the assets and properties of
the Company or any of its subsidiaries.
5. Publicity. Following ALR's acceptance of this letter, without the prior
written consent of the other party, neither the Company nor ZCP will, and the
Company and ZCP will cause their Representatives not to, make any release to the
press or other public disclosure or make any statement to any other person with
respect to either the fact that discussions or negotiations are taking place
concerning the Investment Proposal or the existence or contents of this letter,
except for such public disclosure as may be necessary, in the written opinion of
counsel, for the party proposing to make the disclosure not to be in violation
of or default under any applicable law, regulation or governmental order. If
either party proposes to make any disclosure based upon such an opinion, that
party will deliver a copy of such opinion to the other party, together with the
text of the proposed disclosure, as far in advance of its disclosure as is
practicable, and will in good faith consult with and consider the suggestions of
the other party concerning the nature and scope of the information it proposes
to disclose.
A-3
<PAGE> 21
6. Termination Fee. If at any time prior to termination of this letter the
Company shall make any release to the press or other public disclosure, or make
any statement to any other person, with respect to either the fact that
discussions or negotiations are taking place concerning the Investment Proposal
or the existence or content of this letter and a Trigger Event (as defined
below) shall occur at any time prior to the first anniversary of the Termination
Date, the Company shall, within one business day after a receipt of a request
from ZCP, pay to ZCP in cash a termination fee of $250,000, plus an amount equal
to its out-of-pocket expenses in connection with the transactions contemplated
by this letter and the financing thereof. For purposes hereof, a "Trigger Event"
shall have occurred if (i) the Company shall have engaged in any Business
Combination, (ii) the Company shall have entered into any agreement or
understanding (whether or not such agreement or understanding is absolute,
revocable, contingent or conditional) for or relating to any Business
Combination, (iii) any person or group of persons acquires securities
representing beneficial ownership (within the meaning of Rule 13d-3 under the
Exchange Act) of one-third or more, or commences a tender or exchange offer
following which the offeror and its affiliates would beneficially own securities
representing one-third or more, of the common stock of the Company.
7. Binding Effect. It is understood that this letter is a letter of intent
which represents our understanding with respect to the Investment, and that the
parties intend to proceed promptly and in good faith, subject to the terms of
this letter and the Agreement, to consummate the Investment Proposal, but that a
binding agreement with respect to the Investment Proposal will result only from
execution of the Agreement. Notwithstanding the foregoing, the provisions of the
Paragraphs 2, 3, 4, 5, 6, and this Paragraph 7 shall be binding on the parties
hereto. This letter may be terminated by either the Company or ZCP if the
Agreement is not entered into on or before the Termination Date. In addition,
the Company may terminate this letter prior to the Termination Date if the ALR
Board shall have approved or recommended to the Company's shareholders a
Business Combination with a third party after determining, upon the basis of
written advice from outside counsel, that such approval or recommendation is
necessary in the exercise of its fiduciary obligations under applicable law.
Notwithstanding the foregoing, (i) the provisions of Paragraphs 2 (as to the
obligations to keep certain information confidential only), 3, 5, and 6 shall
survive such termination and (ii) no such termination shall relieve either party
from liability for a breach of this letter which occurs prior to such
termination.
8. Governing Law. This letter shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to the
conflicts of laws principles thereof.
We, of course, reserve the right to withdraw the Investment Proposal
at any time prior to its acceptance in the manner provided below. In addition,
the Investment Proposal shall be deemed to be automatically withdrawn if the
Company or any of its Representatives communicates the terms of this letter to
any other person at any time prior to its acceptance in the manner provided
below. If the foregoing is agreeable to you, please so confirm by signing and
returning to us a duplicate of this letter. This letter shall not be effective
against either party unless executed by ALR and returned to ZCP on or prior to
April 20, 1999.
Sincerely,
ZILKHA CAPITAL PARTNERS, L.P.
By: /s/ John P. Rigas
-------------------------------
Name: John P. Rigas
Title: Managing Partner
A-4
<PAGE> 22
Agreed to and accepted
as of the ____ day of April, 1999:
ALLIED RESEARCH CORPORATION
By: __________________________________
Name: J.R. Sculley
Title: Chairman and Chief Executive Officer
A-5
<PAGE> 23
PROXY
APPENDIX B
GOLD PROXY
ALLIED RESEARCH CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF ZILKHA CAPITAL PARTNERS, L.P.
The undersigned hereby appoints John P. Rigas and Donald E. Zilkha, or any one
or more of them, as Proxies, each with the power to appoint his substitute, and
hereby authorizes each of them to represent and to vote as designated below all
the shares of Common Stock of Allied Research Corporation, held of record by the
undersigned on April 14, 1999, at the 1999 Annual Meeting of Stockholders to be
held on June 9, 1999, or any adjournment thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. APPROVAL OF EACH OF THE PERSONS LISTED IN ITEM 1
AND OF ITEM 2 IS NOT CONDITIONED UPON APPROVAL OF ANY OTHER SUCH ITEM. IF NO
DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR EACH PERSON LISTED IN ITEM 1 AND
FOR ITEM 2.
(continued on reverse side)
<PAGE> 24
ALLIED RESEARCH CORPORATION
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.
Item 1. ELECTION OF DIRECTORS: Lt. General William M. Keys, USMC (Ret.), John P.
Rigas, Jean-Claude Roch, John R. Torell III, Donald E. Zilkha
[ ] FOR ALL [ ] WITHHOLD AUTHORITY FOR ALL
[ ] FOR ALL EXCEPT THE FOLLOWING NOMINEE(S):
___________________________________________________________________
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL(S), CHECK
THE BOX AT LEFT AND WRITE THAT INDIVIDUAL'S NAME IN THE SPACE PROVIDED.
Item 2. APPROVAL OF THE SELECTION OF GRANT THORNTON LLP AS ALLIED RESEARCH
CORPORATION'S INDEPENDENT AUDITOR
[ ] FOR [ ] AGAINST [ ] ABSTAIN
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
Date:_______________________________________
____________________________________________
Signature
____________________________________________
Signature if Held Jointly
____________________________________________
Title
Please sign exactly as name appears. When
shares are held by joint tenants, both
should sign. When signing as attorney,
executor, administrator, trustee or
guardian, please give full title as such. If
a corporation, please sign in the full
corporate name by President or other
authorized officer. If a partnership, please
sign in partnership name by authorized
person.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
