Exhibit  10.1
May 12, 2005
John J. Marcello
Managing Director
MECAR, S.A.
Rue Grinfaux, 50
B-7181 Petit-Roeulx-lez-Nivelles
Belgium
Dear John:
     On behalf of the Board of Directors (the “Board”) of The Allied Defense
Group, Inc. (the “Company”), I am very pleased to offer you the position of
President and Chief Executive Officer of the Company. This letter agreement
clarifies and confirms the terms of your employment with the Company.
1. POSITIONS; START DATE
     As President and Chief Executive Officer of the Company, you shall have the
duties and responsibilities customarily associated with such position and such
duties as may be assigned to you by the Board. Your office will be at the
Company’s headquarters, located at 8000 Towers Crescent Drive, Suite 260,
Vienna, Virginia 22182. You agree not to actively engage in any other
employment, occupation or consulting activity that conflicts with the interests
of the Company. Unless we mutually agree otherwise, you will assume the office
of President and Chief Executive Officer on June 17, 2005 immediately following
the annual shareholders meeting (the “Start Date”).
2. SALARY
     Your salary will be $24,583.33 per month ($295,000 annualized), payable
monthly in accordance with the Company’s standard payroll practice and subject
to applicable withholding taxes. Because your position is exempt from overtime
pay, your salary will compensate you for all hours worked. Your salary will be
reviewed and effective annually by the Compensation Committee and any
adjustments will be effective as of the date determined by the Compensation
Committee.
3. STOCK AWARD
     As a one-time “signing bonus”, you will be granted a restricted stock award
of 16,000 shares of Company common stock as of the Start Date. As will be set
forth in a separate stock award agreement, the shares will vest ratably over a
four (4) year period. In view of this restriction, the certificate evidencing
the shares of Allied stock will be held in escrow by the Company pending release
as the shares vest.

 

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4. BONUS
     In addition to your salary, you will be eligible to earn an annual bonus of
up to 50% of your base salary if you meet or exceed certain performance
standards which will be mutually determined by you and the Chairman of the Board
and approved by the Compensation Committee. The performance standards for 2005
will be mutually determined and approved within thirty (30) days of commencement
of employment and prior to the beginning of each subsequent calendar year. You
will be eligible for an annual bonus for any calendar year only if you remain
employed with the Company as of December 31 of such calendar year. The bonus
will be payable within ten (10) days of the public release by the Company of its
financial results for the relevant calendar year.
5. BENEFITS
     You will also be entitled, during the term of your employment, to such
employee benefits as the Company may offer from time to time, subject to
applicable eligibility requirements. In addition, the Company shall pay or
reimburse you up to $4,000 annually for premiums on additional life insurance as
long as you are employed by the Company. You shall be entitled to designate the
beneficiary of the policy.
6. TERMINATION OF EMPLOYMENT
     Your employment may be terminated at any time by you or by the Company with
or without Cause without prior written notice. This at-will employment
relationship cannot be changed except in a writing signed by the Chairman of the
Compensation Committee. The following matters will provide the Company with
justification to terminate your employment with “Cause”:
     (a) your conviction of any act by you of fraud or embezzlement;
     (b) your conviction of any felony involving an act of dishonesty, moral
turpitude, deceit or fraud;
     (c) your conviction of any act of dishonesty or misconduct (whether in
connection with your responsibilities as an employee of the Company or
otherwise) that either materially impairs the Company’s business, goodwill or
reputation or materially compromises your ability to represent the Company with
the public; or
     (d) your material failure to perform your lawful duties to the Company
after receiving written notice from the Board describing such failure in
reasonable detail.
7. PAYMENTS UPON TERMINATION OF EMPLOYMENT
     The payments you will be entitled to receive from the Company upon
termination of your employment will be as follows:

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     (a) If you terminate your employment, or if the Company terminates your
employment with or without Cause, the Company will pay you any accrued and
unpaid compensation (subject to normal withholding and other deductions) to the
effective date of termination of your employment.
     (b) In addition, if your employment is terminated by the Company without
Cause or if you terminate your employment following (i) a material adverse
alteration or diminution in the nature or status of your authority, duties or
responsibilities from those in effect immediately prior to such change, (ii) a
reduction in your title of President and Chief Executive Officer or (iii) a
reduction in your base salary:
     (A) you will be entitled to aggregate severance payments equal to the sum
of (x) your annual salary immediately prior to the termination and (y) the
average annual bonus earned by you for the two (2) most recent annual periods;
and
     (B) you will be entitled to receive medical, dental, vision, long-term
care, life and long-term disability insurance coverage and your 401(k)
entitlement for one (1) year following the termination at levels comparable to
that provided immediately prior to your termination (all at the cost of the
Company except for any contributions paid by you prior to the termination).
     (c) The aggregate severance payments set forth in paragraph 7(b)(A) above
shall be payable in equal monthly installments over the one (1) year period;
provided, however, that if such termination occurs within twelve (12) months
following a Change of Control (as herein defined), the entire sum shall be
payable, at your election, either in a lump sum within thirty (30) days of the
date of employment termination or in periodic payments over a period not to
exceed three (3) years.
     (d) You shall not be obligated to seek other employment or take any other
action by way of mitigation of the amounts payable to you under any provisions
of this paragraph 7.
     (e) For purposes hereof, the term “Change of Control” means
     (A) the acquisition (other than by the Company) by any person, entity or
“group” within the meaning of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934 (the “Exchange Act”) (excluding, for this purpose, the Company or
its subsidiaries or any employee benefit plan of the Company or its subsidiaries
which acquires beneficial ownership of voting securities of the Company) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act), of 50% or more of either the then outstanding shares of common
stock or the combined voting power of the Company’s then outstanding capital
stock entitled to vote generally in the election of directors; or
     (B) individuals who, as of the date hereof, constitute the Board (as of the
date hereof the “Incumbent Board”) cease for any reason to constitute at least a
majority of the Board, provided that any person becoming a director subsequent
to the date hereof whose

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election, or nomination for election by the Company’s shareholders, was approved
by a vote of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such person were a member of the Incumbent
Board; or
     (C) approval by the shareholders of the Company of (x) a reorganization,
merger, consolidation or share exchange, in each case, with respect to which
persons who were the shareholders of the Company immediately prior to such
reorganization, merger, consolidation or share exchange do not, immediately
thereafter, own more than 50% of the combined voting power entitled to vote
generally in the election of directors of the reorganized, merged, consolidated
or other surviving company’s then outstanding voting securities, (y) a
liquidation or dissolution of the Company or (iii) the sale of all or
substantially all of the assets of the Company.
     (f) If your employment with the Company is terminated by the Company
without Cause or if you terminate your employment with the Company following
(i) a material adverse alteration or diminution in the nature or status of your
authority, duties or responsibilities from those in effect immediately prior to
such change, (ii) a reduction in your title of President and Chief Executive
Officer or (iii) a reduction in your base salary, any non-vested stock or stock
option which is scheduled to vest within the next twelve (12) months will vest
as of the date of the termination of your employment in an amount equal to the
amount scheduled to vest as of said future date multiplied by a fraction, the
numerator of which shall be the number of days of the then current period up to
and including the date of termination and the denominator of which will be 365.
8. NON-COMPETITION
     For a one (1) year period from and after termination of your employment for
any reason (except if such termination occurs within twelve (12) months
following a Change of Control), you shall not engage, directly or indirectly,
either on your own behalf or on behalf of any other person, firm, corporation or
other entity, in any business competitive with any business of the Company (or
any of its subsidiaries), in the geographic area or areas in which Company (or
any of its subsidiaries) is conducting business at the time of termination of
your employment, or own more than 5% of any such firm, corporation or other
entity. Upon any violation of the foregoing sentence, you will forfeit any
remaining amounts payable to you hereunder in addition to any other remedies
available to the Company as a result of the violation.
9. CONFIDENTIALITY
     With your employment comes the responsibility that you will honor any
confidentiality agreements you have signed with other entities. If you have any
confidential information or trade secrets, written, or otherwise known by you,
you agree not to bring them to the Company, and you agree not to use them in any
way. You attest that you have not signed a “non-competition” agreement or any
other agreement that would prohibit you from working here.

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10. TRANSITION
     It is understood and agreed that you will need to spend substantial amounts
of time during the balance of 2005 at our Belgian defense subsidiary, MECAR
S.A., pending engagement of a replacement Managing Director. You will work
cooperatively with the Company’s Chief Operating Officer during this period to
insure that all necessary Chief Executive Officer functions are appropriately
handled in your absence.
     The Company will honor and comply with its remaining tax gross-up and
relocation obligations to you arising from your current employment agreement
dated November 8, 2002, as amended. Also, the Company will work with you as you
negotiate an early termination of the lease of your Belgian residence. For all
other purposes, said agreement is terminated and replaced by this letter
agreement.
11. ADDITIONAL PROVISIONS
     The terms described in this letter agreement will be the terms of your
employment, and this letter supersedes any previous discussions or offers. Any
additions or modifications of these terms would have to be in writing and signed
by you and the Chairman of the Compensation Commission.
     The validity, interpretation, construction and performance of this letter
agreement shall be governed by the laws of the State of Delaware (except their
provisions governing the choice of law).
     If you agree that this letter agreement evidences our agreement concerning
your employment with the Company, please indicate so by signing both copies of
this letter retaining one for your files.
     We are very excited about you joining us. I look forward to a productive
and mutually beneficial working relationship. Please let me know if I can answer
any questions for you about any of the matters outlined in this letter
agreement.
Sincerely,
J.H. Binford Peay, III,
Chairman of the Board
ACCEPTANCE
I accept employment with The Allied Defense Group, Inc. under the terms set
forth in this letter agreement:

       
John J. Marcello
     
Allied/Peay ltr to Marcello 05-12-05
   

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