SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Rule 14a-12
UNITED INDUSTRIAL CORPORATION
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(Name of Registrant as Specified In Its Charter)
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October 1, 2002
Dear Institutional Shareholder:
United Industrial strongly disagrees with the conclusion reached by
Institutional Shareholder Services ("ISS") that United Industrial shareholders
should vote for Steel Partners' employee to replace either Richard R. Erkeneff,
the Company's President and CEO, or Paul J. Hoeper, former Assistant Secretary
of the Army and Deputy Under Secretary of Defense, on the Board of Directors.
ISS' ANALYSIS, WE BELIEVE, FAILS TO PROPERLY CONSIDER A NUMBER OF IMPORTANT
FACTS AND CIRCUMSTANCES, REACHING CONCLUSIONS THAT ARE BOTH FLAWED AND NAIVE. WE
WANTED TO TAKE THIS OPPORTUNITY TO SET THE RECORD STRAIGHT.
We take particular issue with:
o ISS' characterization of our process to sell the Company as
"substandard." Although there can be no assurance the process will
be successful, THE FACTS WILL SHOW WHY WE BELIEVE THE SALES PROCESS
UNDERWAY IS THE RIGHT ONE TO MAXIMIZE SHAREHOLDER VALUE.
o ISS' suggestion that having another Steel Partners' employee on the
Board will hasten the sales process. STEEL PARTNERS HAS ADVOCATED
REDOING THE SALES PROCESS WITH NEW PROCEDURES AT A TIME WHEN WE ARE
ALREADY WELL DOWN THE ROAD TO A POTENTIAL SALE. MEANWHILE, AS WE
EXPLAIN BELOW, STEEL PARTNERS' STRONG PRESENCE AT ECC INTERNATIONAL
HAS NOT APPEARED TO HELP THAT COMPANY EXECUTE ALTERNATIVES TO
ENHANCE SHAREHOLDER VALUE.
o ISS' implicit questioning of the United Industrial Board's
commitment to creating shareholder value and its corporate
governance practices. THE FACTS SHOW THAT UNITED INDUSTRIAL'S BOARD
HAS CREATED SUBSTANTIAL SHAREHOLDER VALUE AND, IRONICALLY, ISS' OWN
STATISTICS BEAR THIS OUT. FURTHERMORE, BY ISS' OWN CORPORATE
GOVERNANCE METRICS (ITS "CORPORATE GOVERNANCE QUOTIENT"), UNITED
INDUSTRIAL "OUTPERFORMED 86.6% OF THE COMPANIES IN THE RUSSELL 3000
AND 75.1% OF THE COMPANIES IN THE CAPITAL GOODS GROUP."
o ISS' implicit questioning of United Industrial's leadership, when
United Industrial has produced very substantial returns for its
investors at a time when leading market indices have posted major
losses. IN THE LAST YEAR ALONE, UNITED INDUSTRIAL'S STOCK PRICE HAS
CLIMBED FROM $14.70 ON SEPTEMBER 28, 2001 TO $20.10 ON SEPTEMBER 27,
2002, AN INCREASE OF 37% (NOT INCLUDING THE PAYMENT OF DIVIDENDS).
1. UNITED INDUSTRIAL'S SALES PROCESS NOW UNDERWAY
o RIGOROUS, FOCUSED ON CREDIBLE BUYERS AND DESIGNED TO DELIVER MAXIMUM
VALUE TO SHAREHOLDERS AS EXPEDITIOUSLY AS POSSIBLE
o VETTED BY WACHOVIA SECURITIES, A LEADING INVESTMENT BANKER FOR
MIDDLE MARKET DEFENSE COMPANIES
o APPROPRIATE AND LOGICAL
BACKGROUND
United Industrial's sales process has been developed by the Special
Committee of the Board, the full Board and Wachovia Securities, a leading
investment banker for middle market defense companies. And, it has
followed an appropriate and logical path. Here are the facts:
1. Wachovia was retained by the Board in spring 2001 to explore all
alternatives to maximize shareholder value.
2. The Board concluded, based on Wachovia's analysis, that a sale of
the Company was the best avenue to maximize shareholder value, and
the Board directed Wachovia to develop and oversee a sales process
designed to deliver maximum value to shareholders as expeditiously
as possible.
3. Potential buyers for the Company made it clear in the summer of 2001
that they would not consider buying United Industrial until its
transportation overhaul contracts were sold. The Company's bankers
advised that these same potential buyers were among the most
credible and most likely to pay the highest price for the Company,
and that discussions with other potential buyers prior to the sale
of the transportation contracts would likely result in inferior
offers, if any.
4. In March 2002, the Board reached an agreement to sell its
transportation overhaul contracts to Alstom Transportation Inc.,
under which Alstom assumed all liabilities related to the underlying
contracts. The Board insisted that the sale of the transportation
contracts eliminate such liabilities in order to ensure the smooth
sale of the rest of the business at the best possible price.
5. United Industrial closed on the Alstom sale on July 26, 2002, as
soon as Alstom received the necessary surety bonds to consummate the
transaction. Alstom was delayed in obtaining the bonds largely due
to the tremendous turmoil in those markets caused by the events of
September 11.
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6. THE BOARD FORMALLY RESUMED THE ACTIVE AND AGGRESSIVE SALE OF THE
ENTIRE BUSINESS IN AUGUST, after updating necessary financial and
other information to include the sale of the transportation overhaul
contracts. Led by Wachovia, this process is rigorous, focused on
credible buyers and is designed to deliver maximum value to
shareholders as quickly as possible, though there can no assurance
of its success.
7. WE ARE NOW ACTIVELY ENGAGED IN DISCUSSIONS AND DUE DILIGENCE
SESSIONS WITH PROSPECTIVE BUYERS. We are leveraging the knowledge,
experience and skills of Wachovia and of our Board and management
team with the goal of concluding a potential sale at the best price
as quickly as possible.
WE BELIEVE UNITED INDUSTRIAL SHAREHOLDERS CAN BE BEST SERVED BY ALLOWING
THIS LOGICAL PROCESS TO CONTINUE MOVING FORWARD WITHOUT DISRUPTION. AND,
WE BELIEVE ISS SHOULD EXPLAIN TO ITS SUBSCRIBERS WHY UNITED INDUSTRIAL
SHOULD IGNORE THE ADVICE OF ITS EXPERIENCED INVESTMENT BANKERS AND INSTEAD
RELY ON STEEL PARTNERS' ADVICE.
Let us make a few other observations about our sales process:
o ISS' ANALYSIS DOES NOT APPEAR TO CONSIDER THE COMPLEXITIES OF
DEALMAKING IN THE DEFENSE INDUSTRY, where experience and contacts
matter and where strategic considerations dominate among a limited
number of players. ALTHOUGH UNITED INDUSTRIAL DISCUSSED THESE ISSUES
AT LENGTH WITH ISS, THEY ARE NOT ADDRESSED IN ISS' REPORT.
o CONTRARY TO ISS' ANALYSIS, IT IS USUAL AND ENTIRELY APPROPRIATE THAT
THE CEO SERVE ON THE SPECIAL COMMITTEE in order to ensure that the
sales process will result in the best possible deal for the
shareholders. While some committees should consist entirely of
independent outside directors(1), it is simple common sense that a
Special Committee to sell the company is not one of them. Our
Special Committee consists of three independent outside Directors
and our CEO, who we believe is uniquely qualified to evaluate
potential business combinations and bids.
o CONTRARY TO ISS' ANALYSIS AND STEEL PARTNERS' ALLEGATIONS, THE
SPECIAL COMMITTEE HAS A VERY CLEAR MANDATE: SELL THE COMPANY AT THE
BEST POSSIBLE PRICE AS EXPEDITIOUSLY AS POSSIBLE. The Committee has
worked very closely with Wachovia and relied on its experience to
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(1) United Industrial's Audit and Compensation Committees, for example, consist
entirely of independent Directors, as defined by ISS' own guidelines. The
Directors intend to reconstitute the Nominating Committee to consist entirely of
independent directors at the first Board meeting following the Annual Meeting of
Shareholders.
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ensure that mandate is achieved, although there can be no assurance.
The process is proceeding at an expeditious pace.
o CONTRARY TO ISS' ANALYSIS AND STEEL PARTNERS' ALLEGATIONS, MR.
LICHTENSTEIN HAS BEEN FULLY INFORMED OF THE PROGRESS OF THE SALES
PROCESS. Full Board meetings at which the sales process is reported
upon and discussed are held at least monthly. IN THE INTERIM, MR.
LICHTENSTEIN HAS HAD NUMEROUS ORAL DISCUSSIONS WITH THE CHAIRMAN
REGARDING THE SALES PROCESS. Mr. Lichtenstein has full access to
Wachovia and has had discussions with the investment bankers
supervising the sales process. Similarly, he has received oral
responses to his inquiries from the Company's CFO on topics of
particular interest to him, including the sales process.
o CONTRARY TO ISS' ANALYSIS AND STEEL PARTNERS' ALLEGATIONS, IT WAS
ENTIRELY APPROPRIATE TO EXCLUDE MR. LICHTENSTEIN FROM THE SPECIAL
COMMITTEE. Prior to the Special Committee being formed, he had in
fact discussed a possible transaction between United Industrial and
ECC International, a defense company in which Steel Partners owns
approximately 30% of the stock and has had two Board seats since
1999. ECC is a direct competitor of United Industrial in the
simulation and training market, including on the C-17 contract -one
of United Industrial's key defense contracts.
2. WHY WE DON'T BELIEVE STEEL PARTNERS CAN HASTEN A SALE
o STEEL PARTNERS HAS ADVOCATED REDOING THE SALES PROCESS WITH NEW
PROCEDURES
o IT DOES NOT APPEAR THAT STEEL PARTNERS HAS BEEN ABLE TO SUCCESSFULLY
ASSIST ECC INTERNATIONAL IN EXECUTING ON ITS DECISION TO EXPLORE
STRATEGIC ALTERNATIVES
United Industrial has invested substantial resources and time into the current
sales process, led by Wachovia Securities. And, good progress is being made. We
think that Steel Partners' advice that we redo the sales process with new
procedures would put the value of our shareholders' investment at risk by
potentially interrupting current discussions with prospective buyers. It also
shows, we believe, a naive understanding of the dealmaking process and disregard
for the resources already invested by the Company in the sales effort.
WE ALSO DISPUTE ISS' SUGGESTION THAT THE INVOLVEMENT OF STEEL PARTNERS' EMPLOYEE
COULD HASTEN THE SALES PROCESS, PARTICULARLY IN LIGHT OF EVENTS AT ECC
INTERNATIONAL. Steel Partners owns approximately 30% of ECC's outstanding stock
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and has controlled two Board seats since 1999. In addition, a Steel Partners
employee has been Interim CEO and President since June 2002.
On JANUARY 25, 2001, ECC announced the formation of a Strategic Planning
Committee to evaluate various strategic alternatives for increasing stockholder
value, including a sale of the company. MORE THAN 20 MONTHS HAVE NOW PASSED, AND
THERE HAVE BEEN NO ANNOUNCEMENTS INDICATING THAT ECC IS EXECUTING ANY STRATEGIC
ALTERNATIVES, INCLUDING A SALE. SINCE JANUARY 25, 2001, ECC's stock price has
fallen from $3.50 to $2.70 on September 27, 2002, a decrease of 23% for ECC
shareholders.
In its report, ISS characterizes Steel Partners' nominee as a "dealmaker," but
does not cite any examples.
3. THE BOARD'S RECORD ON CREATING SHAREHOLDER VALUE
o THE UNITED INDUSTRIAL BOARD'S COMMITMENT TO ENHANCING SHAREHOLDER
VALUE IS DEMONSTRATED BY ISS' OWN STATISTICS
The ISS analysis implicitly casts doubt on the incumbent Board's commitment to
enhancing shareholder value. Perhaps they should have looked at their own
statistics before coming to that conclusion.
Consider UIC's Performance Summary(2) contained in the ISS report:
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PERFORMANCE SUMMARY
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1-YEAR 3-YEAR 5-YEAR
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ANNUALIZED SHAREHOLDER RETURNS, COMPANY 45.65% 32.40% 22.33%
ANNUALIZED SHAREHOLDER RETURNS, INDEX -15.44% -1.57% -0.22%
ANNUALIZED SHAREHOLDER RETURNS, PEER GROUP -18.05% 1.49% -0.90%
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Source: Bloomberg Business News
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(2) United Industrial has not sought permission to reproduce this chart. United
Industrial has not independently verified the numbers contained in the chart.
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4. THE BOARD'S RECORD ON CORPORATE GOVERNANCE
o UNITED INDUSTRIAL BOARD'S COMMITMENT TO OUTSTANDING CORPORATE
GOVERNANCE PRACTICES IS DEMONSTRATED BY ISS' OWN STATISTICS
Similarly, the ISS analysis implicitly and explicitly condemns the incumbent
Board's commitment to good corporate governance practices. Perhaps ISS should
have considered its own "Corporate Governance Quotient" ("CGQ") contained in the
ISS Report.
The cover page of the Report shows that according to ISS's own corporate
governance metrics, United Industrial "OUTPERFORMED 86.6% of the companies in
the Russell 3,000 AND 75.1% of the companies in the Capital Goods group."
(emphasis added)
We strongly urge you to vote FOR the Board's nominees on the WHITE proxy card.
Sincerely,
/s/ Harold S. Gelb /s/ Susan Fein Zawel /s/ Joseph S. Schneider
Harold S. Gelb Susan Fein Zawel Joseph S. Schneider
/s/ Richard R. Erkeneff /s/ Paul J. Hoeper
Richard R. Erkeneff Paul J. Hoeper
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