-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SgLRJnxXYD561ePwjM0yf5KYwjJuHAf5XCu2XrQBul1eUZUuQ+Gn7ddon0mwd7h7 ABNvH897uf30jM01ZwCSXg== 0000909518-97-000189.txt : 19970329 0000909518-97-000189.hdr.sgml : 19970329 ACCESSION NUMBER: 0000909518-97-000189 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED INDUSTRIAL CORP /DE/ CENTRAL INDEX KEY: 0000101271 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 952081809 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04252 FILM NUMBER: 97565914 BUSINESS ADDRESS: STREET 1: 18 E 48TH ST CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2127528787 MAIL ADDRESS: STREET 1: 18 E 48TH STREET CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: TOPP INDUSTRIES CORP DATE OF NAME CHANGE: 19710510 FORMER COMPANY: FORMER CONFORMED NAME: HAYES MANUFACTURING CORP DATE OF NAME CHANGE: 19660911 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996. or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from ___________ to ___________ Commission file number: 1-4252 UNITED INDUSTRIAL CORPORATION - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) DELAWARE 95-2081809 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 18 EAST 48TH STREET NEW YORK, NEW YORK 10017 (212) 752-8787 - -------------------------------------------------------------------------------- (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- ------------------- COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [_]. Aggregate market value of the voting stock (which consists solely of shares of Common Stock) held by non-affiliates of the registrant as of March 26, 1997, computed by reference to the closing sale price of the registrant's Common Stock on the New York Stock Exchange Stock Exchange on such date: $73,086,734. On March 26, 1997, the registrant had outstanding 12,175,543 shares of Common Stock, par value $1.00 per share, which is the registrant's only class of common stock. DOCUMENTS INCORPORATED BY REFERENCE: 1. Certain portions of the registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1996 are incorporated by reference into Parts I and II of this report. 2. Certain portions of the registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, in connection with the Annual Meeting of Stockholders of the registrant to be held on May 13, 1997 are incorporated by reference into Part III of this report. ================================================================================ PART I ITEM 1. BUSINESS United Industrial Corporation ("United" or the "Company") was incorporated under the laws of the State of Delaware on September 14, 1959 under the name Topp Industries Corporation. On December 31, 1959, the name of the corporation was changed to United Industrial Corporation. The operations of United consist of three principal industry segments: defense, energy systems and plastic products, conducted through four wholly-owned subsidiaries. Defense AAI Corporation AAI Corporation ("AAI") is engaged in research, development and manufacture in the following major areas: (1) training and simulation systems; (2) automatic test equipment for electronic systems and components; (3) ordnance systems; (4) mechanical support systems for industrial, military, and marine applications; (5) unmanned air vehicle systems; (6) automated weather monitoring systems; and (7) transportation systems. Since its inception, AAI's business has been primarily in support of the U.S. Department of Defense ("DOD"). Since 1990, the Company has emphasized diversification into other markets to reduce its dependence on the DOD. The United States defense budget has been significantly reduced in recent years and this trend is expected to continue. In 1996 approximately 62% of the sales volume of AAI consisted of research, development and production of military items under defense contracts compared to 64% in 1995. Certain of the contracts currently being worked on by AAI involve testing systems for U.S. Navy aircraft, training equipment for the U.S. Air Force and U.S. Navy, and weapons handling systems for the U.S. Army. The balance of AAI's business consists of work performed in the non-Department of Defense markets. These areas include hydraulic test equipment, transportation equipment and weather systems. AAI was awarded a contract for 1,096 weather systems to be installed in certain government airports throughout the country. This contract was recently restructured and extended through 1997. New orders were received in 1996 for 159 additional systems. In 1996, 142 weather systems were installed bringing total systems installed since inception of the contract to 819. Because of the variety of its activities, it is not possible to state precisely the competitive position of AAI with respect to each of its product lines. In the area of training and simulation systems, AAI is one of approximately ten leading organizations developing equipment for the U.S. Government. AAI's ability to obtain orders for training and simulation systems is dependent principally on the ability, expertise and training of its 2 employees and the level of funding by the DOD and foreign military users. A number of large and small companies produce automatic test equipment that compete with AAI for market share. In the area of weapons and munitions, AAI ranks among approximately ten leading companies engaged in development work. However, AAI's production activity in this field is less significant. AAI began development in the Unmanned Air Vehicle business in 1986. The Company produced the highly successful Pioneer Unmanned Air Vehicle employed by the United States during Operation Desert Storm, and presently is pursuing contracts with foreign countries. AAI is one of several large and small competitors in this field. AAI's administrative offices and the major part of its manufacturing and engineering facilities are located in Hunt Valley, Maryland. Symtron Systems, Inc. On January 18, 1994, the Company acquired all of the outstanding shares of Symtron Systems, Inc. ("Symtron"), a producer of firefighter training simulators for the government, military and commercial markets. The purchase price consisted of initial cash payments of $2,000,000, assumption of certain liabilities of approximately $5,900,000 and a contingent payment, not to exceed $1,000,000, based on the profits on contracts existing at the acquisition date. Additionally, contingent amounts are payable if certain pretax profits, as defined in the purchase agreement, are earned for each of the years in the three year period ending December 31, 1998. In 1996 and 1995, the Company made contingent payments of $254,000 and $1,000,000, respectively, which were classified as selling and administrative expense in the 1996 and 1995 financial statements. Funds generated from operations and an existing line of credit were utilized to finance the purchase of Symtron. Symtron's 1996 sales consisted of production for the Navy and commercial customers. The main office and plant of Symtron are located in Fair Lawn, New Jersey. In January 1997 Symtron and its principal direct competitor agreed to settle litigation regarding the use of Symtron tectechnology, which included the competitor's withdrawal from the firefighter training marketplace for at least five years. This agreement, however, is currently under review by the United States District Court for the State of New Jersey. Other competitors are small foreign firms who Symtron believes have not yet delivered a computer control system for live firefighter training to the United States market. Energy Systems Detroit Stoker Company Detroit Stoker Company ("Detroit Stoker") is engaged in the design, manufacture and sale of industrial stokers, gas/oil burners, municipal solid waste combustion systems for waste to energy plants, rotary seal feeders for the metering of granular materials, replacement parts and aftermarket services. Its products are used for the generation of process steam and electric power in a wide range of industrial and municipal applications. Principal customers include public utilities, industrial manufacturing plants, universities, pulp and paper mills, sugar mills and independent power producers (non-utility generators). Its waste to energy 3 technology is used extensively in both public and private plants which generate steam and power from municipal waste. Its solid fuel combustion technologies are particularly well suited to the burning of biomass fuels. The primary raw materials used by Detroit Stoker are iron and steel which are available from many sources. The main office and plant of Detroit Stoker are located in Monroe, Michigan. The products of Detroit Stoker compete with those of several other manufacturers. Detroit Stoker is presently marketing a liquid and gaseous fuel burning product line with low emissions for the power industry, primarily for boiler applications. Potential customers for these products consist of original boiler manufacturers as well as all major industrial and institutional energy consumers. Competition is based on several factors including price, features and performance. Midwest Metallurgical Laboratory, Inc. ("Midwest"), a subsidiary of Detroit Stoker, is a foundry engaged in the manufacture of grey and ductile iron, stainless steel and special alloy iron castings. All of the sales of Midwest are to Detroit Stoker. Midwest's plant and offices are located in Marshall, Michigan. Plastic Products Neo Products Co. Neo Products Co. ("Neo") engineers and fabricates thermoplastic products to the specifications submitted by its customers. Neo also manufactures items for point of purchase display advertising and consumer products related primarily to infants, food service equipment for a major airline and fuel tank reservoirs for the auto industry. Sales to customers of items for point of purchase display advertising represented approximately 24% of sales in 1996. These sales principally consisted of display racks and trays. Sales of consumer end use items represented 63% of sales in 1996. These sales primarily included carrier cradles, chairs and waste baskets. Sales to the auto industry represented approximately 6% of sales in 1996. The largest customer of Neo accounted for approximately 63% of sales in 1996 compared to 54% and 39% in 1995 and 1994, respectively. Neo's main office and plant are located in Chicago, Illinois. Neo is engaged in the highly competitive field of thermoplastic fabrication. Neo's operations are in potential and actual competition with fabrication facilities of some of its own customers as well as other thermoplastic fabricators. Neo has improved its competitive position by increasing the size of its larger injection molding presses to accommodate larger size molded parts. Although it is not possible to estimate the position of Neo among competitors in this field, it is believed to hold less than 1% market share. The primary raw material used by Neo is plastic resin, which is available from many sources. 4 For additional information concerning United's subsidiaries reference is made to information set forth in the Letter to Shareholders contained in United's 1996 Annual Report to Shareholders (the "Annual Report"), which letter is incorporated herein by reference. General Employees As of March 1, 1997 United and its subsidiaries had approximately 1,900 employees. Approximately 200 of these employees are represented by several unions under contracts expiring between July 1997 and March 1999. United considers its employee relationships to be satisfactory. Patents United and its subsidiaries own more than 100 United States patents relating to various products, including stokers, marine equipment, ordnance and electronic equipment, and firefighter trainers. In addition, United has numerous pending applications for patents. There is no assurance as to how many patents will be issued pursuant to these pending applications. The applications relate to a wide variety of fields, including automation control systems, ordnance devices, and electronic developments. No patent is considered to be of material importance to United. Research and Development During 1996, 1995 and 1994 the subsidiaries of United (exclusive of AAI) expended approximately $639,000, $194,000 and $98,031, respectively, on the development of new products and the improvement of existing products. All of the programs and the funds to support such programs are sponsored by the subsidiary involved. In addition to the above amount, AAI is engaged in research and development primarily for the U.S. Government. Backlog The backlog of orders by industry segment at December 31, 1996 and 1995 was as follows: 1996 1995 ---- ---- Defense 150,888,000 $198,788,000 Energy Systems 6,871,000 5,070,000 Plastic Products 941,000 2,349,000 The defense contract backlog decrease more than offsets the increase in commercial backlog of the defense segment. The increase in backlog for energy systems was due to the increased 5 level of new contracts being awarded. Except for approximately $23,000,000 of research and development backlog, substantially all of the backlog orders at December 31, 1996 are expected to be filled in 1997. Government Contracts No single customer other than the U.S. Government, principally the Department of Defense, accounted for 10% or more of net sales during the year. Sales to the Government normally carry a lesser margin of profit than commercial sales and may be subject to price redetermination under certain circumstances. Contracts for such sales can be terminated for the convenience of the Government. Financial Information Relating to Industry Segments For financial information with respect to industry segments of United, reference is made to the information set forth in Note 12 of the Notes to Financial Statements included in Item 8 of this Report, which Note is incorporated herein by reference. Foreign Operations and Export Sales United and its subsidiaries have no significant foreign operations. During 1996 export sales by United and its subsidiaries amounted to approximately $26,491,000. Export sales in 1995 and 1994 amounted to less than 10% of net sales for these years. ITEM 2. PROPERTIES United maintains executive and administrative offices at leased premises at 18 East 48th Street, New York, N.Y., which lease expires in December 1997. The following is a tabulation of the principal properties owned or leased by United's subsidiaries as at March 3, 1997. 6
Approximate Area Owned Location Principal Use in Square Feet or Leased - -------- ------------- -------------- --------- 1510 East First Street Machine shop, steel 194,910 floor Owned in fee Monroe, MI fabrication, engineering and space on 14.4 sales facilities of Detroit acres of land Stoker (East Building) 1426 East First Street Assembly, shipping and 101,000 floor Owned in fee Monroe, MI administrative facilities of space on 2.2 Detroit Stoker acres of land (West Building) 15290 Fifteen Mile Road Foundry, 59,386 floor Owned in fee Marshall, MI Midwest Metallurgical space on 28.4 acres of land Industry Lane Manufacturing, engineering 740,208 floor Owned in fee Cockeysville, MD and administrative space on 87 facilities of AAI acres of land 1701 Pollitt Drive Administrative, engineering 30,000 Leased to June Fair Lawn, NJ and manufacturing facilities 30, 2001 of Symtron 1505 East Warner Avenue Manufacturing, engineering 103,200 Leased to Santa Ana, CA and administrative facilities Sept. 30, 1999 of ACL Technologies 1035 Semoran Boulevard Sales office 900 Leased to Winter Park, FL for Symtron April 30, 1997 5400 S. Kilbourn Avenue Manufacturing and 45,000 Owned in fee Chicago, IL administrative facilities of Neo
For information with respect to obligations for lease rentals, see Note 8 of the Notes to Financial Statements in the Annual Report, which Note is incorporated herein by reference. United considers its properties to be suitable and adequate for its present needs. The properties are being substantially utilized. ITEM 3. LEGAL PROCEEDINGS The Company, along with numerous other parties, has been named in five tort actions relating to environmental matters based on allegations partially related to a predecessor's operation of a small facility at a site in the State of Arizona that manufactured semiconductors between 1959 and 1960. All such operations of the Company were sold by 1961. 7 These tort actions seek recovery for personal injury and property damage among other damages. One tort claim is a certified property and medical class action. On February 11, 1992 a complaint was filed against the Company and ten other named and ten unnamed entities in the Maricopa County Superior Court of Arizona by seven individuals seeking to represent a class. A class in excess of 10,000 was originally alleged. The plaintiffs have amended their complaint to separate the larger property damage and medical monitoring classes into smaller subclasses based on geographic location and alleged exposure to solvents. In the process of amendment, the overall sizes of the respective classes have been significantly reduced. This suit alleges that the members of the class have been exposed to contaminated groundwater in the Phoenix/Scottsdale, Arizona area and suffer increased risk of disease and other physical effects. They also assert property damages under various theories; seek to have certain scientific studies performed concerning health risks, preventative measures and long-term effects; and seek incidental and consequential damages, punitive damages and an injunction against actions causing further exposures. The property and medical classes recently were certified. The Company has joined with the other defendants and appealed the class certification issue to the Arizona Supreme Court. The Company intends to vigorously contest these actions and believes that the resolution of these actions will not be material to the Company. Four additional lawsuits were filed on April 7, 1993, December 20, 1993, June 10, 1994 and July 18, 1995 in the Maricopa County Superior Court of Arizona. These matters allege personal injury and wrongful death by multiple plaintiffs arising from the alleged contamination in the Phoenix/Scottsdale, Arizona area. The Company intends to aggressively defend against these claims; however, at this time, no estimate can be made as to the amount or range of potential loss, if any, to the Company with respect to these matters. In comparison to the other defendants, the operations of the Company were very limited in time and size. Detroit Stoker was notified in March 1992 by the Michigan Department of Natural Resources (MDNR) that it is a potentially responsible party in connection with the clean-up of a former industrial landfill located in Port of Monroe, Michigan. MDNR is treating the Port of Monroe landfill site as a contaminated facility within the meaning of the Michigan Environmental Response Act (MERA), MCLA ss. 299.601 et seq. Under MERA, if a release or a potential release of a discarded hazardous substance is or may be injurious to the environment or to the public health, safety, or welfare, MDNR is empowered to undertake or compel investigation and response activities in order to alleviate any contamination threat. Detroit Stoker intends to aggressively defend these claims, however, at this time, no estimate can be made as to the amount or range of potential loss, if any, to Detroit Stoker with respect to this action. On or about November 15, 1996, AAI Systems Management, Inc. (the "subsidiary"), an indirect subsidiary of the Company, signed a settlement agreement with the U.S. Navy (the "customer"), concluding a dispute with the customer over a contract to deliver helicopter 8 simulator training devices. The agreement provided for an orderly conclusion of the contract and a limitation on the Company's liability, precluding the possibility of additional losses for the subsidiary under the contract. Settlement of the dispute and the abbreviated completion of the contract required an additional charge of $2.2 million ($1.4 million net of taxes) against earnings for the third quarter. The Company is involved in various other lawsuits and claims, including certain other environmental matters, arising out of the normal course of its business. In the opinion of management, the ultimate amount of liability, if any, under pending litigation, including claims described above, will not have a materially adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT Annual elections are held in May to elect officers for the ensuing year. Interim elections are held as required. Except as otherwise indicated, each executive officer has held his current position for the past five years. 9
Age at Name Position, Office December 31, 1996 ---- ---------------- ----------------- Richard R. Erkeneff* -- President of the Company (since October 1995) 61 and AAI (since November 1993); Senior Vice President of the Aerospace Group at McDonnell Douglas Corporation, an aerospace firm (October 1992 to November 1993); and President (March 1992 to October 1992) and Executive Vice President (1988 to 1992) of McDonnell Douglas Electronics Systems Company. Robert Worthing -- Vice President and General Counsel of the 51 Company (since July 18, 1995); General Counsel of AAI (since April, 1992); and Vice President and Senior Counsel of TRW's Space and Defense Sector (October 1979-January 1992). Susan Fein Zawel* -- Vice President, Corporate Communications and 42 Associate General Counsel (since June 1995), Secretary (since May 1994) and Counsel (1992 to 1995) of the Company. James H. Perry -- Chief Financial Officer (since October 25, 35 1995) and Treasurer (since December 1994) of the Company; and Senior Manager (October 1992-November 1994) and Manager (1988- September 1992) at Ernst & Young LLP. James M. Ballentine, Jr. -- Acting President of Detroit Stoker (since April 63 1995); President of Saddle River Partners, a consulting and investment company (since August 1992); and President of Hydrotherm, Inc., a multiplant manufacturer of boilers and air conditioning equipment (1979 to August 1992). John J. Henning -- President of Symtron (since 1988). 55 Michael A. Schillaci -- President of Neo (since 1987). 49
- -------------------- * Member of the Company's Board of Directors 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Reference is made to the information set forth in Note 14 of the Notes to Financial Statements included in Item 8 of this Report concerning dividends, stock prices, stock listing and record holders, which information is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Reference is made to the information set forth in the sections entitled "Five-Year Financial Data" on page 38 of the Annual Report, which section is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to the information set forth in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" commencing on page 17 of the Annual Report, which section is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The report of independent auditors and consolidated financial statements included on pages 20 through 37 of the Annual Report are incorporated herein by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 11 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to the information to be set forth in the section entitled "Election of Directors" in the definitive proxy statement involving the election of directors in connection with the Annual Meeting of Stockholders of United to be held on May 13, 1997 (the "Proxy Statement"), which section (other than the Compensation Committee Report and Performance Graph) is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1996, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. The information required with respect to executive officers is set forth in Part I of this report under the heading "Executive Officers of the Registrant," pursuant to instruction 3 to paragraph (b) of Item 401 of Regulation S-K. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the information to be set forth in the section entitled "Election of Directors" in the Proxy Statement, which section (other than the Compensation Committee Report and Performance Graph) is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to the information to be set forth in the section entitled "Voting Rights" and "Security Ownership of Management" in the Proxy Statement, which sections are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the information to be set forth in the section entitled "Election of Directors" in the Proxy Statement, which section (other than the Compensation Committee Report and Performance Graph) is incorporated herein by reference. 12 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) and (2) - The response to this portion of Item 14 is submitted as a separate section of this report entitled "List of Financial Statements and Financial Statement Schedules". (3) Exhibits: (3)(a)- Restated Certificate of Incorporation of United (1). (3)(b)- Amended and Restated By-Laws of United (2). (10)(a)- United Industrial Corporation 1994 Stock Option Plan, as amended (3). (10)(b)- Purchase Agreement, dated January 18, 1994, between United and Symtron Systems, Inc. (1). (10)(c)- Credit Agreement dated as of October 13, 1994 among AAI, the Lenders parties thereto and First Fidelity Bank, National Association, as Agent (the "Agent") and Issuing Bank (4). (10)(d)- Pledge and Security Agreement dated as of October 13, 1994 by AAI in favor of the Agent (4). (10)(e)- Pledge and Security Agreement dated as of October 13, 1994 by the Company in favor of the Agent (4). (10)(f)- Security Agreement dated as of October 13, 1994 between AAI and the Agent (4). (10)(g)- Security Agreement dated as of October 13, 1994 between each subsidiary of AAI, certain subsidiaries of the Company and the Agent (4). (10)(h)- Guaranty dated as of October 13, 1994 by the Company and certain of its subsidiaries and by each subsidiary of AAI in favor of the Agent (4). (10)(i)- First Amendment made as of October 18, 1995 to Credit Agreement dated October 13, 1994 between First Union Commercial Corporation (as successor to the Agent) and AAI, and AAI Subsidiaries, UIC-DEL Corporation, Symtron and United as guarantors. (10)(j)- Second Amendment made as of September 20, 1996 to Credit Agreement dated October 13, 1994 between First Union Commercial Corporation and AAI and AAI subsidiaries, UIC-DEL Corporation, Symtron and United as guarantors (5). 13 (10)(k)- Third Amendment made as of January 17, 1997 to Credit Agreement dated October 13, 1994 between First Union Commercial Corporation and AAI and AAI subsidiaries, UIC-DEL Corporation, Symtron and United as guarantors. (10)(l)- Employment Agreement dated March 26, 1996, between United and Richard R. Erkeneff (2). (10)(m)- Employment Agreement, dated January 8, 1996, between United and Susan Fein Zawel (2). (10)(n)- Employment Agreement, dated February 9, 1996, between United and James H. Perry (2). (10)(o)- Amendment dated as of September 29, 1996, by and between United and James H. Perry to the Employment Agreement dated February 29, 1996 between United and James H. Perry (5). (11)- Computation of Earnings Per Share. (13)- United's 1996 Annual Report to Shareholders. (21)- Subsidiaries of United. (23)- Consent of Independent Auditors. (27)- Financial Data Schedule. - -------------------- (1) Incorporated by reference to United's Annual Report on Form 10-K for the year ended December 31, 1993. (2) Incorporated by reference to United's Annual Report on Form 10-K for the year ended December 31, 1995. (3) Incorporated by reference to United's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on January 10, 1997. (4) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. (5) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. (b) - Reports on Form 8-K - United did not file any reports on Form 8-K during the quarter ended December 31, 1996. 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNITED INDUSTRIAL CORPORATION (Registrant) By: /s/ Richard R. Erkeneff ----------------------------- Richard R. Erkeneff, President Date: March 26, 1997 --------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Name Date ---- ---- /s/Harold S. Gelb - ------------------------------- Harold S. Gelb, Chairman of the Board and Director March 26, 1997 /s/Howard M. Bloch - ------------------------------- Howard M. Bloch, Vice-Chairman of the Board and Director March 26, 1997 /s/Richard R. Erkeneff - ------------------------------- Richard R. Erkeneff, President and Chief Executive Officer and Director March 26, 1997 /s/Edward C. Aldridge, Jr. - ------------------------------- Edward C. Aldridge, Jr., Director March 26, 1997 /s/E. Donald Shapiro - ------------------------------- E. Donald Shapiro, Director March 26, 1997 /s/Susan Fein Zawel - ------------------------------- Susan Fein Zawel, Vice President and Director March 26, 1997 /s/James H. Perry - ------------------------------- James H. Perry, Treasurer (Principal Financial and Accounting Officer) March 26, 1997 15 Annual Report on Form 10-K Item 14(a)(1) and (2), (c) and (d) List of Financial Statements and Financial Statement Schedules Certain Exhibits Financial Statement Schedules Year ended December 31, 1996 United Industrial Corporation New York, New York Form 10-K--Item 14(a) (1) and (2) UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES List of Financial Statements and Financial Statement Schedules The following consolidated financial statements of United Industrial Corporation and subsidiaries, included in the annual report of the registrant to its shareholders for the year ended December 31, 1996, are incorporated by reference in Item 8: Consolidated Balance Sheets--December 31, 1996 and 1995 Consolidated Statements of Operations-- Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows Years Ended December 31, 1996, 1995 and 1994 Notes to Financial Statements The following consolidated financial statement schedules of United Industrial Corporation and subsidiaries are included in Item 14(d): Schedule I Condensed Financial Information of Registrant Schedule II Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. 2 Report of Independent Auditors BOARD OF DIRECTORS AND SHAREHOLDERS UNITED INDUSTRIAL CORPORATION We have audited the accompanying consolidated balance sheets of United Industrial Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Industrial Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP ERNST & YOUNG LLP New York, New York February 26, 1997 3
Schedule I - Condensed Financial Information of Registrant United Industrial Corporation Condensed Balance Sheets (Dollars in thousands) DECEMBER 31 1996 1995 ------ ----- ASSETS Current Assets: Cash and cash equivalents $ 447 $ 4,453 Prepaid expenses and other current assets 326 205 Deferred income taxes 6,131 6,487 ------ ------ Total current assets 6,904 11,145 Equipment 356 342 Less allowances for depreciation (251) (235) -------- -------- 105 107 Other assets (principally investments in and amounts due from wholly-owned subsidiaries) 173,930 163,552 -------- -------- $180,939 $174,804 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities $ 3,211 $ 7,220 Income taxes 963 - ------- ----- Total current liabilities 4,174 7,220 Deferred income taxes 9,662 9,820 Other liabilities (principally amounts due to wholly-owned subsidiaries) 76,958 71,604 Shareholders' equity: Common stock 14,374 14,374 Other shareholders' equity 75,771 71,786 ------- -------- 90,145 86,160 -------- -------- $180,939 $174,804 ======== ========
See notes to condensed financial statements of registrant. 4
Schedule I - Condensed Financial Information of Registrant United Industrial Corporation Condensed Statements of Operations YEAR ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1996 1995 1994 ------ ------ ------ Management fees from wholly-owned subsidiaries $ 2,251 $ 2,310 $2,064 Other (expense) revenue - net (20) (15) 150 -------- ------- ------ 2,231 2,295 2,214 Other (income) and expenses: Administrative expenses 4,688 5,558 3,247 Interest income (1,997) (2,277) (1,292) Interest expense 7,025 7,174 4,708 ------- ------- ------ 9,716 10,455 6,663 ------- ------- ------ Loss before income taxes and equity in net income of subsidiaries (7,485) (8,160) (4,449) Income tax benefit 2,542 2,526 1,639 ------ ------- ----- Loss before equity in net income of subsidiaries (4,943) (5,634) (2,810) Equity in net income of subsidiaries 11,347 6,522 8,022 -------- ------- ------ Net income $6,404 $ 888 $5,212 ------ ------- ------ Dividends paid by subsidiaries to Parent $ 1,000 $ 1,000 $ - ======= ======= ====
See notes to condensed financial statements of registrant. 5
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT UNITED INDUSTRIAL CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31 1996 1995 1994 ------ ------ ------ Operating activities: Net income $6,404 $ 888 $5,212 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 16 17 9 Deferred income taxes 356 (126) (441) Undistributed earnings of subsidiaries (10,347) (5,522) (8,022) Changes in operating assets and liabilities: Income taxes 963 (3,333) 6,951 Prepaid expenses and other current assets (121) 3 732 Current liabilities (1,009) 321 (616) Accounts with wholly-owned subsidiaries 5,165 9,785 3,037 ----- ------- ----- Net cash provided by operating activities: 1,427 2,033 6,862 ----- ----- ----- Investing activities: Purchase of property and equipment (14) (39) (69) Decrease (increase) in intercompany receivables due to transfer of deferred taxes from wholly-owned subsidiaries 158 2,600 (3,523) (Decrease) increase in deferred taxes resulting from transfer from wholly owned subsidiaries (158) (2,600) 3,523 Other, net 7 (27) (53) ------ ------ -------- Net cash used in investing activities $ (7) $ (66) $ (122) ------- ------ -------
(Condensed Statements of Cash Flows - continued on next page) 6
Schedule I - Condensed Financial Information of Registrant United Industrial Corporation Condensed Statements of Cash Flows (continued) (DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31 1996 1995 1994 ------ ------ ------ Financing activities: Proceeds from borrowings $ 9,000 $9,000 $12,000 Payments on borrowings (12,000) (9,000) (12,000) Dividends paid (2,434) (3,165) (2,571) Purchase of treasury shares - - (475) Proceeds from exercise of stock options 8 16 - ------- ------ ------ Net cash used in financing activities (5,426) (3,149) (3,046) ------- ------ ------- (Decrease) increase in cash and cash equivalents (4006) (1,182) 3,694 Cash and cash equivalents at beginning of year 4,453 5,635 1,941 --------- ------ ------- Cash and cash equivalents at end of year $ 447 $4,453 $ 5,635 ======= ====== =======
See notes to condensed financial statements of registrant. 7 Schedule I - Notes to Condensed Financial Statements of Registrant A. ACCOUNTING POLICIES BASIS OF PRESENTATION In the parent-company-only financial statements, the Company's investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since the date of acquisition. The Company's share of the net income of its unconsolidated subsidiaries is reflected using the equity method. Parent-company-only financial statements should be read in conjunction with the Company's consolidated financial statements. 8
Schedule II - Valuation and Qualifying Accounts United Industrial Corporation and Subsidiaries December 31, 1996 Col. A Col. B Col. C Col. D Col. E (1) (2) Charged to Charged to Balance at Balance at Beginning Costs and Other Accounts Deductions End of Description of Period Expenses (Describe) (Describe) Period ----------- --------- -------- ---------- ---------- ------ Year ended December 31, 1996: Deducted from asset accounts: Allowance for doubtful accounts $ 310,000 $ 65,000 (A) $ 245,000 ========= ============ ========= Product warranty liability $ 650,000 $ 71,000 (B) $ 579,000 ========= ============ ========= YEAR ENDED DECEMBER 31, 1995: Deducted from asset account: Allowance for doubtful accounts $ 368,000 $ 43,000 $ 101,000 (A) $ 310,000 ========= ========= ============= ========= Product warranty liability $ 525,000 $ 125,000 $ 650,000 ========= ========= ========= Year ended December 31, 1994: Deducted from asset account: Allowance for doubtful account $ 418,000 $ 50,000 (B) $ 368,000 ========= ============ ========= Product warranty liability $ 800,000 $ 275,000 (B) $ 525,000 ========= ============= ========= (A) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF, NET OF RECOVERIES. (B) REDUCTION OF VALUATION ACCOUNT.
EXHIBIT INDEX EXHIBIT NO. PAGE (3)(a)- Restated Certificate of Incorporation of United (1). (3)(b)- Amended and Restated By-Laws of United (2). (10)(a)- United Industrial Corporation 1994 Stock Option Plan, as amended (3). (10)(b)- Purchase Agreement, dated January 18, 1994, between United and Symtron Systems, Inc. (1). (10)(c)- Credit Agreement dated as of October 13, 1994 among AAI, the Lenders parties thereto and First Fidelity Bank, National Association, as Agent (the "Agent") and Issuing Bank (4). (10)(d)- Pledge and Security Agreement dated as of October 13, 1994 by AAI in favor of the Agent (4). (10)(e)- Pledge and Security Agreement dated as of October 13, 1994 by the Company in favor of the Agent (4). (10)(f)- Security Agreement dated as of October 13, 1994 between AAI and the Agent (4). (10)(g)- Security Agreement dated as of October 13, 1994 between each subsidiary of AAI, certain subsidiaries of the Company and the Agent (4). (10)(h)- Guaranty dated as of October 13, 1994 by the Company and certain of its subsidiaries and by each subsidiary of AAI in favor of the Agent (4). (10)(i)- First Amendment made as of October 18, 1995 to Credit Agreement dated October 13, 1994 between First Union Commercial Corporation (as successor to the Agent) and AAI, and AAI subsidiaries, UIC-DEL Corporation, Symtron and United as guarantors. (10)(j)- Second Amendment made as of September 20, 1996 to Credit Agreement dated October 13, 1994 between First Union Commercial Corporation and AAI and AAI subsidiaries, UIC-DEL Corporation, Symtron and United as guarantors (5). (10)(k)- Third Amendment made as of January 17, 1997 to Credit Agreement dated October 13, 1994 between First Union Commercial Corporation and AAI and AAI subsidiaries, UIC-DEL Corporation, Symtron and United as guarantors. (10)(l)- Employment Agreement dated March 26, 1996, between United and Richard R. Erkeneff (2). (10)(m)- Employment Agreement, dated January 8, 1996, between United and Susan Fein Zawel (2). (10)(n)- Employment Agreement, dated February 9, 1996, between United and James H. Perry (2). (10)(o)- Amendment dated as of September 29, 1996, by and between United and James H. Perry to the Employment Agreement dated February 29, 1996 between United and James H. Perry (5). (11)- Computation of Earnings Per Share. (13)- United's 1996 Annual Report to Shareholders. (21)- Subsidiaries of United. (23)- Consent of Independent Auditors. (27)- Financial Data Schedule. ____________________ (1) INCORPORATED BY REFERENCE TO UNITED'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1993. (2) INCORPORATED BY REFERENCE TO UNITED'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995. (3) INCORPORATED BY REFERENCE TO UNITED'S REGISTRATION STATEMENT ON FORM S-8, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 10, 1997. (4) INCORPORATED BY REFERENCE TO UNITED'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1994. (5) INCORPORATED BY REFERENCE TO UNITED'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996. NYFS11...:\95\78495\0001\6678\FRM3067U.00C EX-10.(I) 2 FIRST AMENDMENT TO CREDIT AGREEMENT FIRST AMENDMENT AND ADDITIONAL CREDIT AGREEMENT THIS AGREEMENT is made as of the 18th day of October, 1995, by and among AAI CORPORATION, a Maryland corporation ("Borrower"), AAI SYSTEMS MANAGEMENT, INC., a Maryland corporation ("Systems"), AAI/ACL TECHNOLOGIES, INC., a Maryland corporation ("Technologies"), AAI ENGINEERING SUPPORT INC., a Maryland corporation ("Engineering"), AAI CALIFORNIA CARSHELL, INC., a Maryland corporation ("Carshell"), AAI MEDICAL CORPORATION, a Maryland corporation ("Medical"), UIC - DEL. CORPORATION, a Delaware corporation ("UIC-DEL"), AAI INTERNATIONAL, INC., a Delaware corporation ("International"), AAI MICROFLITE SIMULATION INTERNATIONAL CORPORATION, a Maryland corporation ("Microflite"), SETI, INC., a Pennsylvania corporation ("Seti"), SYMTRON SYSTEMS, INC., a New Jersey corporation ("Symtron"), UNITED INDUSTRIAL CORPORATION, a Delaware corporation ("UIC") (Systems, Technologies, Engineering, Carshell, Medical, UIC-DEL, International, Microflite, Seti, Symtron and UIC being hereinafter collectively referred to as "Guarantors"), and FIRST FIDELITY BANK, NATIONAL ASSOCIATION, as Lender (in such capacity, "Lender"), as Issuing Bank (in such capacity, "Issuing Bank"), and as Agent (in such capacity, "Agent"), and as under the Credit Agreement (as hereinafter defined). RECITALS R.1 Lender and Issuing Bank have previously extended credit to Borrower pursuant to a certain Credit Agreement dated October 13, 1995 (the "Credit Agreement"), among Borrower, Lender, Issuing Bank, Agent and another financial institution which subsequently merged into Lender, resulting in Lender holding one hundred percent (100%) of the Revolving Credit Commitments and the Notes. R.2 Borrower has requested that Lender, Issuing Bank and Agent amend the Credit Agreement in certain respects and provide for possible future additional credit to Borrower, and Lender, Issuing Bank and Agent have agreed to do so upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of this Agreement, the parties hereto agree as follows. 1. Defined Terms. All capitalized terms used in this Agreement without definition shall have the meanings assigned to such terms in the Credit Agreement, giving effect to the amendments of the Credit Agreement contained in Section 2 of this Agreement. 2. Amendment of the Credit Agreement. The Credit Agreement is hereby amended as follows: (a) Amendment of Section 1. By amending Section 1 as follows: (i) By inserting the following new definition, immediately following the definition of "Applicable Margin," as follows: "APPLICABLE SECURITIES CREDIT PERCENTAGE": one hundred percent (100%) in the case of Eligible Securities consisting of certificates of deposit issued by First Fidelity or savings accounts at First Fidelity; ninety percent (90%) in the case of Eligible Securities consisting of certificates of deposit issued by financial institutions other than First Fidelity or savings accounts at financial institutions other than First Fidelity, U.S. treasury bills or bonds issued by agencies of the United States of America; eighty-five percent (85%) in the case of Eligible Securities consisting of U.S. treasury notes or U.S. treasury bonds; seventy percent (70%) in the case of Eligible Securities consisting of municipal bonds; fifty percent (50%) in the case of Eligible Securities consisting of corporate bonds, mutual funds, stock traded on recognized exchanges in the United States of America or any other security which would constitute "margin stock" (within the meaning of such term under Regulation U of the Board of Governors of the Federal Reserve System) if a Revolving Credit Loan were for the purpose of buying or carrying such security; and such percentage as may be established by Issuing Bank in the case of Eligible Securities other than those securities described above. Notwithstanding the foregoing provisions of this definition, in the case of any Eligible Securities, the Issuing Bank may, in its discretion exercised in good faith, establish a lesser percentage as the "Applicable Securities Credit Percentage." Such lesser percentages may be based upon evaluations of risk by the - 2 - Issuing Bank or any other factors deemed relevant by the Issuing Bank, whether or not such factors have theretofor been used, contemplated or foreseen as a basis for adjusting the Applicable Securities Credit Percentage. (ii) By amending the definition of "Borrowing Base" to read, in its entirety, as follows: "BORROWING BASE": at a particular time, the sum of (a) the product of (i) Eligible Accounts as at such time, and (ii) the Accounts Credit Percentage, and (b) the L/C Securities Base as at such time, but only to the extent of the Standby L/C Exposure as at such time. (iii) By inserting the following new definition, immediately following the definition of "Eligible Borrower Subsidiary," as follows: "ELIGIBLE SECURITIES": at a particular time, marketable securities consisting of certificates of deposit, savings accounts, U.S. treasury bills, U.S. treasury notes, U.S. treasury bonds, bonds issued by agencies of the United States of America, municipal bonds, corporate bonds, stock traded on recognized exchanges in the United States of America, mutual funds and other securities which are owned by the Borrower, which as of such time are acceptable to the Agent and the Issuing Bank, in their discretion exercised in good faith, as a basis for issuance of standby Letters of Credit under this Agreement and in which the Agent as of such time has a first priority perfected security interest pursuant to the Borrower Security Agreement as security for the Secured Obligations (as defined in the Borrower Security Agreement). The Agent and the Issuing Bank may determine from time to time in their discretion exercised in good faith and notwithstanding any previous contrary determinations made by them, to exclude from or include in Eligible Securities specific securities or categories or types of securities. Such determinations may be based upon evaluations of risk by the Agent and the Issuing Bank or any other factors deemed relevant by the Agent and the Issuing Bank, whether or not such factors have theretofor - 3 - been used, contemplated or foreseen as a basis for limiting Eligible Securities. (iv) By amending the definition of "L/C Maximum Exposure" to read, in its entirety, as follows: "L/C MAXIMUM EXPOSURE": Twenty Million Dollars ($20,000,000.00). (v) By inserting the following new definition, immediately following the definition of "L/C Reimbursement Obligations," as follows: "L/C SECURITIES BASE": at a particular time, the product of (a) the current market value of Eligible Securities as at such time, as determined by the Agent and the Issuing Bank in their discretion exercised in good faith, and (b) the Applicable Securities Credit Percentage. (vi) By amending the definition of "Standby L/C Commission Rate" by inserting, immediately following the last occurrence in such definition of the word "zero," the following: ; provided that, notwithstanding the foregoing provisions of this definition, in the case of any standby Letter of Credit in connection with which, pursuant to Subsection 3.1, the Borrower has granted to the Agent a first priority perfected security interest in Eligible Securities having a current market value, as determined by the Agent and the Issuing Bank in their discretion exercised in good faith, which, when multiplied by the Applicable Securities Credit Percentage, is equal to or greater than the face amount of such Letter of Credit, the "Standby L/C Commission Rate" shall mean one-half of one percent (.5%). (vii) By amending the definition of "Standby L/C Maximum Exposure" to read, in its entirety, as follows: "STANDBY L/C MAXIMUM EXPOSURE": Twenty Million Dollars ($20,000,000.00). (b) Amendment of Section 2. By amending Section 2 as follows: - 4 - (i) By amending Subsection 2.4(a) by deleting the language "one-half of one percent (.5%)" and replacing such language with the language "three-eighths of one percent (3/8%)." (ii) By amending Subsection 2.7 to read, in its entirety, as follows: 2.7 Mandatory Prepayments. In the event that, at any time, the Aggregate Borrowing Base Charge shall exceed the Borrowing Base, the Borrower shall immediately eliminate such excess by prepaying Revolving Credit Loans or, to the extent that the Standby L/C Exposure then exceeds the L/C Securities Base, by increasing the amount of Eligible Securities comprising the L/C Securities Base. (c) Amendment of Section 6. By amending Section 6 as follows: (i) By amending Subsection 6.1(a) to read, in its entirety, as follows: (a) not later than Monday of each week, a Borrowing Base Certificate as of the close of business on the preceding Business Day (except that, during any period that the Borrowing Base exceeds the Aggregate Borrowing Base Charge by Three Million Dollars ($3,000,000.00) or more, the Borrower shall furnish to the Agent, each Lender and the Issuing Bank in writing, not later than the fifth (5th) Business Day after the end of each calendar month, a Borrowing Base Certificate as at the end of such calendar month); (ii) By amending Subsection 6.10 by deleting the language "Fifty Thousand Dollars ($50,000.00)" and replacing such language with the language "Thirty-Five Thousand Dollars ($35,000.00)." (d) Amendment of Section 7. By amending Subsection 7.1(d) by deleting the language "Three Million Dollars ($3,000,000.00)" and replacing such language with the language "Three Million Five Hundred Thousand Dollars ($3,500,000.00)." - 5 - (e) Amendment of Section 8. By deleting Subsection 8.1(r) in its entirety. 3. Equipment Financing. Borrower is authorized by Lender to request loans from Lender from time to time in an aggregate amount not exceeding Two Million Dollars ($2,000,000.00) to finance equipment of Borrower. Lender may, IN ITS SOLE DISCRETION, BUT SHALL NOT BE OBLIGATED TO, make any such loans requested by Borrower upon such terms and conditions as may be agreed between Lender and Borrower, provided that the term of any such loan shall not exceed forty-eight (48) months. 4. Representations and Warranties of Borrower. In order to induce Lender, Issuing Bank and Agent to enter into this Agreement, Borrower represents and warrants to Lender, Issuing Bank and Agent that: (a) Each of Borrower and Guarantors has the power and authority to execute, deliver and perform this Agreement and the other Credit Documents executed or to be executed by it in connection with this Agreement (the "Related Documents"). Each of Borrower and Guarantors has taken all necessary action (including, without limitation, obtaining any required approval of its Board of Directors or stockholders) to authorize its execution, delivery and performance of this Agreement and the Related Documents. No consent, approval or authorization of, or filing with, any Governmental Authority, and no consent of any other Person, is required in connection with the execution, delivery and performance of this Agreement and the Related Documents by each of Borrower and Guarantors, except for those already duly obtained. (b) This Agreement and the Related Documents have been duly executed and delivered by each of Borrower and Guarantors, and constitute the legal, valid and binding obligations of each of Borrower and Guarantors, enforceable against Borrower and Guarantors in accordance with their terms without defense, setoff or counterclaim. The execution, delivery and performance of this Agreement and the Related Documents by each of Borrower and Guarantors do not and will not conflict with, or constitute a violation or breach of, or constitute a default under, or result in the creation or imposition of any Lien upon any property of Borrower, any Subsidiary of Borrower or any Guarantor by reason of the terms of (a) any mortgage, lease, agreement, instrument or Contractual Obligation to which Borrower, any Subsidiary of Borrower or any Guarantor is a party or which is binding upon it, or (b) any Requirement of Law. - 6 - (c) Each of the representations and warranties of Borrower and Guarantors contained in the Credit Agreement and the other Credit Documents are correct and complete in all material respects as of the date hereof. (d) There has not occurred any material adverse change in the business, operations, assets or financial or other condition of Borrower or UIC from those indicated in the last financial statements delivered to Agent pursuant to Subsection 6.1 of the Credit Agreement. (e) There exists no Default or Event of Default as of the date hereof. 5. Conditions to Effectiveness of Amendments. The amendments of the Credit Agreement contained in Section 2 of this Agreement and the provisions of Section 3 of this Agreement shall be conditioned upon, and shall not be effective until, each of the following conditions precedent shall have been satisfied as determined by Agent: (a) There shall have been delivered to Agent, appropriately completed and duly executed (when applicable), and in form and substance satisfactory to Agent and its counsel, such documents, agreements, instruments and certificates as Agent, Lender or Issuing Bank may request in good faith in connection with the transactions contemplated by this Agreement. (b) Agent shall have received true and complete copies of all documents and instruments, including all consents, authorizations and filings, required under any Requirement of Law or by any Contractual Obligation of Borrower or any Guarantor in connection with the execution, delivery, performance, validity and enforceability of this Agreement or in connection with any of the transactions contemplated by or referred to in this Agreement, and all such consents, authorizations and filings shall be satisfactory in form and substance to Agent and in full force and effect. (c) No suit, action, investigation, inquiry or other proceeding (including, without limitation, the enactment or promulgation of a statute or rule) by or before any arbitrator or any Governmental Authority shall be pending and no preliminary or permanent injunction or order by any Governmental Authority shall have been entered (i) relating in any way to this Agreement or any of the transactions contemplated by or referred to in this Agreement, or (ii) which, in the reasonable judgment of Agent, would have a material adverse effect upon any of the transactions contemplated by the Credit Agreement or contemplated by or referred to in this Agreement or upon the business, operations, properties, condition (financial or otherwise) or prospects of Borrower or UIC. - 7 - (d) As of the date hereof and after giving effect to the amendments of the Credit Agreement contained in Section 2 of this Agreement, all representations and warranties of Borrower and Guarantors contained in the Credit Agreement, this Agreement, the Related Documents and the other Credit Documents shall be correct and complete in all material respects, and no Default or Event of Default shall have occurred and be continuing. 6. No Defenses or Claims; Release. In order to induce Lender, Issuing Bank and Agent to enter into this Agreement, each of Borrower and Guarantors acknowledges and represents to Lender, Issuing Bank and Agent that it has no defense, setoff, cause of action or claim of any kind against Lender, Issuing Bank or Agent on account of actions heretofore taken or not taken by Lender, Issuing Bank or Agent or otherwise, which can be asserted as a basis to seek affirmative relief or damages from Lender, Issuing Bank or Agent or to reduce or eliminate any obligations of Borrower or such Guarantor to Lender, Issuing Bank or Agent. Each of Borrower and Guarantors, on behalf of itself and its successors and assigns, hereby forever and irrevocably releases Lender, Issuing Bank and Agent, and each of their employees, officers, agents, attorneys, successors and assigns, from any and all claims, demands, damages, liabilities, obligations, penalties, suits and causes of action of any kind relating to, resulting from or arising out of any fact, matter or occurrence known to Borrower or any of Guarantors existing as of, or occurring prior to, the date of this Agreement directly or indirectly relating to, resulting from or arising out of any Revolving Credit Loans or Letters of Credit, any of the Credit Documents or any obligations of Borrower or such Guarantor to Lender, Issuing Bank or Agent. 7. Consents of Guarantors. Each of Guarantors hereby consents to the amendments of the Credit Agreement provided for in this Agreement. 8. No Novation or Waiver. Borrower, Guarantors, Lender, Issuing Bank and Agent intend that the execution and delivery of this Agreement shall not constitute or be construed to operate as a novation of the Credit Agreement, the Notes, the Deed of Trust, the Guaranty, the Borrower Security Agreement, the Borrower Pledge Agreement, the Intellectual Property Assignments, the Guarantor Security Agreement, the UIC Pledge Agreement, the UIC Subordination Agreement, the UIC-DEL Subordination Agreement, the L/C Agreements or any other of the Credit Documents or any obligations of Borrower or Guarantors evidenced by any of the Credit Documents or as a novation of any security interests or other Liens directly or indirectly securing any of such obligations. Nothing contained in this Agreement or in any prior oral or written communications from or on behalf of Lender, Issuing Bank or Agent to Borrower or any of Guarantors shall constitute or be construed to operate as a waiver by Lender, Issuing Bank or Agent - 8 - of any Defaults or Events of Default which have occurred. Nor shall anything contained in this Agreement or in any prior oral or written communications from or on behalf of Lender, Issuing Bank or Agent to Borrower or any of Guarantors constitute or be construed to operate as a waiver by Lender, Issuing Bank or Agent of any rights or remedies heretofore or hereafter accruing to Lender, Issuing Bank or Agent on account of any such Default or Event of Default or any other Default or Event of Default. 9. Expenses. Whether or not the transactions contemplated hereby are consummated, Borrower shall pay to Agent on demand all out-of-pocket costs and expenses that Agent has paid or incurred or subsequently pays or incurs in connection with the negotiation, preparation, consummation and administration of this Agreement and the Related Documents, all as further provided in Subsection 10.6 of the Credit Agreement. 10. Ratification of Documents and Obligations. Borrower, Guarantors, Lender, Issuing Bank and Agent hereby ratify and confirm the Credit Agreement (as amended pursuant hereto), the Notes, the Deed of Trust, the Borrower Security Agreement, the Borrower Pledge Agreement, the Guaranty, the Intellectual Property Assignments, the Guarantor Security Agreement, the UIC Pledge Agreement, the UIC Subordination Agreement, the UIC-DEL Subordination Agreement, the L/C Agreements and the other Credit Documents, and agree that the same, and all obligations of the parties thereunder, shall remain in full force and effect. 11. Binding Nature, Merger, Counterparts and Choice of Law. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, and each reference in this Agreement to any of the parties hereto shall be deemed to include the successors and assigns of such party. This Agreement contains the entire agreement of the parties with respect to the matters covered and the transactions contemplated hereby and thereby, and no agreement, statement or promise made by any party, or by any employee, officer, agent or attorney of any party, which is not contained herein or therein, shall be valid or binding. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one and the same agreement. This Agreement, and the rights and obligations of the parties hereunder, shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of Maryland, exclusive of principles of conflicts of laws. - 9 - IN WITNESS WHEREOF, the parties hereto have executed or caused to be executed this Agreement under seal as of the date first above written. ATTEST/WITNESS: AAI CORPORATION AAI SYSTEMS MANAGEMENT, INC. AAI/ACL TECHNOLOGIES, INC. AAI ENGINEERING SUPPORT INC. AAI CALIFORNIA CARSHELL, INC. AAI MEDICAL CORPORATION _______________________________ By:_______________________________(SEAL) Paul J. Michaud Vice President of each of the foregoing corporations UIC - DEL. CORPORATION AAI INTERNATIONAL, INC. AAI MICROFLITE SIMULATION INTERNATIONAL CORPORATION SETI, INC. ________________________________ By:_______________________________(SEAL) Paul J. Michaud President of each of the foregoing corporations SYMTRON SYSTEMS, INC. ________________________________ By:_______________________________(SEAL) P. David Botsch Chief Executive Officer [SIGNATURES CONTINUED] - 11 - [SIGNATURES CONTINUED] UNITED INDUSTRIAL CORPORATION _______________________________ By:_______________________________(SEAL) P. David Botsch President FIRST FIDELITY BANK, NATIONAL ASSOCIATION, as Lender, Issuing Bank and Agent _______________________________ By:_______________________________(SEAL) Name: Michael Coiley Title: Vice President - 12 - STATE OF , , SS: I HEREBY CERTIFY that on this ________ day of __________________, 1995, before me, the undersigned, a Notary Public of said State, personally appeared Paul J. Michaud, who acknowledged himself to be the Vice President of each of AAI Corporation, AAI Systems Management, Inc., AAI/ACL Technologies, Inc., AAI Engineering Support Inc., AAI California Carshell, Inc., and AAI Medical Corporation, and the President of each of UIC - DEL. Corporation, AAI International, Inc., AAI Microflite Simulation International Corporation and Seti, Inc., and that he, as such, being authorized so to do, executed the foregoing instrument for the purposes therein contained. WITNESS my hand and Notarial Seal. ---------------------------- Notary Public My Commission Expires: ______________ STATE OF , , SS: I HEREBY CERTIFY that on this ________ day of __________________, 1995, before me, the undersigned, a Notary Public of said State, personally appeared P. David Botsch, who acknowledged himself to be the Chief Executive Officer of Symtron Systems, Inc., and the President of United Industrial Corporation, and that he, as such, being authorized so to do, executed the foregoing instrument for the purposes therein contained. WITNESS my hand and Notarial Seal. ---------------------------- Notary Public My Commission Expires: ______________ - 13 - STATE OF , , SS: I HEREBY CERTIFY that on this ________ day of __________________, 1995, before me, the undersigned, a Notary Public of said State, personally appeared ______________________________, who acknowledged himself to be the _________________________ of First Fidelity Bank, National Association, and that he, as such, being authorized so to do, executed the foregoing instrument for the purposes therein contained. WITNESS my hand and Notarial Seal. ---------------------------- Notary Public My Commission Expires: ______________ - 14 - EX-10.(K) 3 THIRD AMENDMENT TO CREDIT AGREEMENT THIRD AMENDMENT TO CREDIT AGREEMENT THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made effective as of the 17th day of January, 1997, by and among AAI CORPORATION, a Maryland corporation ("Borrower"), AAI SYSTEMS MANAGEMENT, INC., a Maryland corporation ("Systems"), AAI/ACL TECHNOLOGIES, INC., a Maryland corporation ("Technologies"), AAI ENGINEERING SUPPORT, INC., a Maryland corporation ("Engineering"), AAI CALIFORNIA CARSHELL, INC., a Maryland corporation ("Carshell"), AAI MEDICAL CORPORATION, a Maryland corporation ("Medical"), UIC-DEL. CORPORATION, a Delaware corporation ("UIC-DEL"), AAI INTERNATIONAL, INC., a Delaware corporation ("International"), AAI MICROFLITE SIMULATION INTERNATIONAL CORPORATION, a Maryland corporation ("Microflite"), SETI, INC., a Pennsylvania corporation ("Seti"), SYMTRON SYSTEMS, INC., a New Jersey corporation ("Symtron"), UNITED INDUSTRIAL CORPORATION, a Delaware corporation ("UIC") (Systems, Technologies, Engineering, Carshell, Medical, UIC-DEL, International, Microflite, Seti, Symtron and UIC being hereinafter collectively referred to as "Guarantors"), and FIRST UNION COMMERCIAL CORPORATION, as Lender (in such capacity, "Lender"), as Issuing Bank (in such capacity, "Issuing Bank"), and as Agent (in such capacity, "Agent"), under the Credit Agreement (as hereinafter defined). RECITALS R-1. Lender is the successor to First Fidelity Bank, National Association ("FFB") under that certain Credit Agreement dated October 13, 1995, as modified by First Amendment and Additional Credit Agreement dated October 18, 1995 and the Second Amendment to Credit Agreement dated September 20, 1996 (collectively, the "Credit Agreement"), among Borrower, FFB, and another financial institution which subsequently merged into FFB, as a consequence of which Lender now holds one hundred percent (100%) of the Revolving Credit Commitments and the Notes, and one hundred percent (100%) of the L/C Commitment. R-2. Borrower has requested that Lender, Issuing Bank and Agent amend the Credit Agreement, and Lender, Issuing Bank and Agent have agreed to do so upon the terms and conditions set forth in this Amendment. NOW, THEREFORE, in consideration of the premises stated, and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties hereto agree as follows: 1. Defined Terms. All capitalized terms used in this Amendment without other express definitions being assigned herein, shall have the meanings assigned to such terms in the Credit Agreement, giving effect to the modification of the Credit Agreement contained in Section 2 of this Amendment. 2. Amendment of the Credit Agreement. The Credit Agreement is hereby amended by amending the definition of "Termination Date" contained in Section 1 to read in its entirety as follows: "TERMINATION DATE": the earlier of (a) March 18, 1997, or (b) the date which is one hundred fifty (150) days after the date on which the Agent shall have given written notice to the Borrower, at the direction of the Required Lenders and whether or not an Event of Default shall have occurred, that the Obligations shall be due in full on such date. 3. Representations and Warranties of Borrower. In order to induce Lender, Issuing Bank and Agent to enter into this Amendment, Borrower represents and warrants to Lender, Issuing Bank and Agent that: (a) Each of Borrower and Guarantors has the power and authority to execute, deliver and perform this Amendment. Each of Borrower and Guarantors has taken all necessary action (including, without limitation, obtaining any required approval of its Board of Directors or stockholders) to authorize its execution, delivery and performance of this Amendment. No consent, approval or authorization of, or filing with, any Governmental Authority, and no consent of any other Person, is required in connection with the execution, delivery and performance of this Amendment by each of Borrower and Guarantors, except for those already duly obtained. (b) This Amendment has been duly executed and delivered by each of Borrower and Guarantors, and constitutes the legal, valid and binding obligation of each of Borrower and Guarantors, enforceable against Borrower and Guarantors in accordance with its terms without defense, setoff or counterclaim. The execution, delivery and performance of this Amendment by each of Borrower and Guarantors does not and will not conflict with, or constitute a violation or breach of, or constitute a default under, or result in the creation or imposition of any Lien upon any property of Borrower, any Subsidiary of Borrower or any Guarantor by reason of the terms of (a) any mortgage, lease, agreement, instrument or Contractual Obligation to which Borrower, any Subsidiary of Borrower or any Guarantor is a party or which is binding upon it, or (b) any Requirement of Law. (c) Each of the representations and warranties of Borrower and Guarantors contained in the Credit Agreement and the other Credit Documents are correct and complete in all material respects as of the date hereof. -2- (d) There has not occurred any material adverse change in the business, operations, assets or financial or other condition of Borrower or UIC from those indicated in the last financial statements delivered to Agent pursuant to Subsection 6.1 of the Credit Agreement. (e) There exists no Default or Event of Default as of the date hereof. 4. Condition to Effectiveness of Amendment. The modification of the Credit Agreement contained in Section 2 of this Amendment shall be conditioned upon, and shall not be effective until, the following condition precedent shall have been satisfied as determined by Agent: As of the date hereof, all representations and warranties of Borrower and Guarantors contained in the Credit Agreement, this Amendment and the other Credit Documents shall be correct and complete in all material respects, and no Default or Event of Default shall have occurred and be continuing. 5. No Defenses or Claims: Release. In order to induce Lender, Issuing Bank and Agent to enter into this Amendment, each of Borrower and Guarantors acknowledges and represents to Lender, Issuing Bank and Agent that it has no defense, setoff, cause of action or claim of any kind against Lender, Issuing Bank or Agent on account of actions heretofore taken or not taken by Lender, Issuing Bank or Agent or otherwise, which can be asserted as a basis to seek affirmative relief or damages from Lender, Issuing Bank or Agent or to reduce or eliminate any obligations of Borrower or such Guarantor to Lender, Issuing Bank or Agent. Each of Borrower and Guarantors, on behalf of itself and its successors and assigns, hereby forever and irrevocably releases Lender, Issuing Bank and Agent, and each of their employees, officers, agents, attorneys, successors and assigns, from any and all claims, demands, damages, liabilities, obligations, penalties, suits and causes of action of any kind relating to, resulting from or arising out of any fact, matter or occurrence known to Borrower or any of Guarantors existing as of, or occurring prior to, the date of this Amendment directly or indirectly relating to, resulting from or arising out of any Revolving Credit Loans or Letters of Credit, any of the Credit Documents or any obligations of Borrower or such Guarantor to Lender, Issuing Bank or Agent. 6. Consents of Guarantors. Each of Guarantors hereby consents to the modification of the Credit Agreement provided for in this Amendment. 7. No Novation or Waiver. Borrower, Guarantors, Lender, Issuing Bank and Agent intend that the execution and delivery of this Amendment shall not constitute or be construed to operate as -3- a novation of the Credit Agreement, the Notes, the Deed of Trust, the Guaranty, the Borrower Security Agreement, the Borrower Pledge Agreement, the Intellectual Property Assignments, the Guarantor Security Agreement, the UIC Pledge Agreement, the UIC Subordination Agreement, the UIC-DEL Subordination Agreement, the L/C Agreements or any other of the Credit Documents or any obligations of Borrower or Guarantors evidenced by any of the Credit Documents or as a novation of any security interests or other Liens directly or indirectly securing any of such obligations. Nothing contained in this Amendment or in any prior oral or written communications from or on behalf of Lender, Issuing Bank or Agent to Borrower or any of Guarantors shall constitute or be construed to operate as a waiver by Lender, Issuing Bank or Agent of any Defaults or Events of Default which have occurred. Nor shall anything contained in this Amendment or in any prior oral or written communications from or on behalf of Lender, Issuing Bank or Agent to Borrower or any of Guarantors constitute or be construed to operate as a waiver by Lender, Issuing Bank or Agent of any rights or remedies heretofore or hereafter accruing to Lender, Issuing Bank or Agent on account of any such Default or Event of Default or any other Default or Event of Default. 8. Expenses. Whether or not the transactions contemplated hereby are consummated, Borrower shall pay to Agent on demand all out-of-pocket costs and expenses that Agent has paid or incurred or subsequently pays or incurs in connection with the negotiation, preparation, consummation and administration of this Amendment, all as further provided in Subsection 10.6 of the Credit Agreement. 9. Ratification of Documents and Obligations. Borrower, Guarantors, Lender, Issuing Bank and Agent hereby ratify and confirm the Credit Agreement (as amended pursuant hereto), the Notes, the Deed of Trust, the Borrower Security Agreement, the Borrower Pledge Agreement, the Guaranty, the Intellectual Property Assignments, the Guarantor Security Agreement, the UIC Pledge Agreement, the UIC Subordination Agreement, the UIC-DEL Subordination Agreement, the L/C Agreements and the other Credit Documents, and agree that the same, and all obligations of the parties thereunder, shall remain in full force and effect. 10. Binding Nature, Merger, Counterparts and Choice of Law. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, and each reference in this Amendment to any of the parties hereto shall be deemed to include the successors and assigns of such party. This Amendment contains the entire agreement of the parties with respect to the matters covered and the transactions contemplated hereby and thereby, and no agreement, statement or promise made by any party, or by any employee, officer, agent or attorney of any party, which is not contained herein or therein, shall be valid or -4- binding. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one and the same agreement. This Amendment, and the rights and obligations of the parties hereunder, shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of Maryland, exclusive of principles of conflicts of laws. IN WITNESS WHEREOF, the parties hereto have executed or caused to be executed this Amendment under seal as of the date first above written. ATTEST/WITNESS: AAI CORPORATION AAI SYSTEMS MANAGEMENT, INC. AAI/ACL TECHNOLOGIES, INC. AAI ENGINEERING SUPPORT INC. AAI CALIFORNIA CARSHELL, INC. AAI MEDICAL CORPORATION ______________________ By:_________________________(SEAL) Richard R. Erkeneff President of each of the foregoing corporations UIC - DEL. CORPORATION AAI INTERNATIONAL, INC. AAI MICROFLITE SIMULATION INTERNATIONAL CORPORATION SETI, INC. ______________________ By:_________________________(SEAL) Richard R. Erkeneff Title: SYMTRON SYSTEMS, INC. _____________________ By:_________________________(SEAL) Richard R. Erkeneff -5- Signatures continued: UNITED INDUSTRIAL CORPORATION _____________________ By:_________________________(SEAL) Richard R. Erkeneff President FIRST UNION COMMERCIAL CORPORATION, successor to First Fidelity Bank, National Association, as Lender, Issuing Bank and Agent _____________________ By:_________________________(SEAL) Name:_______________________ Title:______________________ STATE OF ___________________, COUNTY OF ___________________, SS: I HEREBY CERTIFY that on this ____ day of January, 1997, before me, the undersigned, a Notary Public of said State, personally appeared Richard R. Erkeneff, who acknowledged himself to be the President of each of AAI CORPORATION, AAI SYSTEMS MANAGEMENT, INC., AAI/ACL TECHNOLOGIES, INC., AAI ENGINEERING SUPPORT INC., AAI CALIFORNIA CARSHELL, INC., and AAI MEDICAL CORPORATION, and the _______________________ of each of UIC -DEL. CORPORATION, AAI INTERNATIONAL, INC., AAI MICROFLITE SIMULATION INTERNATIONAL CORPORATION, and SETI, INC., and that he, as such, being authorized so to do, executed the foregoing instrument for the purposes therein contained. WITNESS my hand and Notarial Seal. ---------------------------- Notary Public My Commission Expires: ______________ STATE OF ___________________, COUNTY OF ___________________, SS: -6- I HEREBY CERTIFY that on this ____ day of January, 1997, before me, the undersigned, a Notary Public of said State, personally appeared P. David Bocksch, who acknowledged himself to be the Vice President of SYMTRON SYSTEMS, INC., and the President of UNITED INDUSTRIAL CORPORATION, and that he, as such, being authorized so to do, executed the foregoing instrument for the purposes therein contained. WITNESS my hand and Notarial Seal. ---------------------------- Notary Public My Commission Expires: ______________ STATE OF ___________________, COUNTY OF ___________________, SS: I HEREBY CERTIFY that on this ____ day of January, 1997, before me, the undersigned, a Notary Public of said State, personally appeared ________________________, who acknowledged himself/herself to be the ________________________ of FIRST UNION COMMERCIAL CORPORATION, and that he/she, as such, being authorized so to do, executed the foregoing instrument for the purposes therein contained. WITNESS my hand and Notarial Seal. ---------------------------- Notary Public My Commission Expires: ______________ -7- EX-11 4 COMPUTATION OF EARNINGS PER SHARE
EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES Year ended December 31 1996 1995 1994 ---- ---- ---- Primary: Weighted average shares outstanding 12,172,943 12,169,408 12,237,468 Equivalent shares--dilutive stock options--based on treasury stock method using average market price 38,376 23,771 4,035 ------------- ---------- ---------- 12,211,319 12,193,179 12,241,503 =========== =========== =========== Net income $ 6,404,000 $ 888,000 $ 5,212,000 ========== =========== =========== Earnings per share $ .52 $ .07 $ .43 ============ =========== ===========
EX-13 5 ANNUAL REPORT United Industrial Corporation Annual Report 1996 United Industrial Corporation is an international high technology company focused on the design and production of defense, training, transportation, and energy systems. Its products include unmanned air vehicles, training and simulation systems, automated aircraft test and maintenance equipment, and combat vehicles and ordnance systems. It also manufactures ground transportation components, automated weather reporting systems, combustion equipment for biomass and refuse fuels, and specialized firefighter training installations. Table of Contents - -------------------------------------------------------------------------------- Financial Highlights page 1 Letter to Shareholders page 2 Management's Discussion page 17 Consolidated Financial Statements page 20 Corporate Organization page 39 Corporate and Shareholder Information page 40 Financial Highlights - --------------------------------------------------------------------------------
==================================================================================================== (Dollars in thousands, except per share data) 1996 1995 - ---------------------------------------------------------------------------------------------------- Net sales $ 220,822 $ 227,398 Net income $ 6,404 $ 888 Earnings per share $ .52 $ .07 Dividends paid per share $ .20 $ .26 Shareholders' equity $ 90,145 $ 86,160 Shareholders' equity per share $ 7.40 $ 7.08 Sales backlog as of year end $ 159,000 $ 206,000 Shares outstanding 12,174,000 12,171,000 ====================================================================================================
RETURN ON SHAREHOLDERS' EQUITY For the Year Ended December 31 (Percent) 1994 6.0% 1995 1.0% 1996 7.1% INTERNATIONAL SALES For the Year Ended December 31 (Percent of Total Sales) 1994 2.8% 1995 7.4% 1996 12% DEBT TO EQUITY As at December 31 (Percent) 1994 113.5% 1995 112.5% 1996 99.6% To Our Shareholders: We are happy to report that 1996 was a year of substantial change at United Industrial Corporation. Under new leadership, the Company has taken dramatic and necessary steps to reshape its business and position itself for long-term growth and success. New Leadership and Strategic Direction - -------------------------------------- One of the catalysts for change was the election of new members to the Board of Directors at the close of 1995 and during the first half of 1996, including Harold Gelb as Chairman of the Board, Richard Erkeneff, Edward C. "Pete" Aldridge, and Donald Shapiro. An equally significant change was the election of Richard Erkeneff as President and CEO of the Company. Over the course of the year, this new Board worked closely with management at the corporate level and at each of our operating subsidiaries to formulate a long-range strategic plan and identify specific actions for meeting growth and profitability objectives. WE PLAN TO BUILD ON OUR CORE COMPETENCIES IN TECHNOLOGY NEW STRATEGIC DIRECTION - -------------------------------------------------------------------------------- As part of this effort, we realigned the management responsibilities at AAI, our largest subsidiary, and brought in George Kersels, an industry veteran with 30 years of experience, to head our Defense Systems business. Maurice Ranc, who formerly led that division, assumed responsibility for our Engineering and Maintenance Services business. We also named Jack Bell, who has 33 years of experience in the transportation industry, as head of our Transportation Systems business. After careful analysis, we developed a strategic plan to provide for United Industrial's long-term growth and increased value for its shareholders. This plan calls for us to build on our core competencies and to target the most promising parts of our business for future expansion. As a result of our technological capabilities, we enjoy important competitive advantages Left: Harold S. Gelb, Chairman of the Board. Right: Richard R. Erkeneff, [PHOTOGRAPHS OMITTED] President and Chief Executive Officer. in the defense industry and related areas. We believe it is imperative that we refocus our resources and attention to capitalize on these strengths to take advantage of new opportunities. Over the long term, we plan to divest non-core operations and will consider selected acquisitions that enhance our core businesses. In addition, we will more aggressively pursue promising opportunities in overseas markets. Among the specific businesses on which we will focus are: [ ] Unmanned Air Vehicles (UAVs) [ ] Simulation and Test Systems [ ] Engineering and Maintenance Services [ ] Defense-related advanced technology programs [ ] Transportation Systems Each of these areas is discussed in greater detail in the pages that follow. UNITED INDUSTRIAL'S IMPROVED PERFORMANCE REFLECTS STRONG RESULTS IN OUR CORE BUSINESSES - -------------------------------------------------------------------------------- United Industrial's Financial and Other Accomplishments in 1996 - --------------------------------------------------------------- In addition to developing a long-range strategic plan, a key priority of the Board was to achieve improved financial results. We have taken a number of steps to increase operating efficiency and stimulate growth, and we began to see the effects of these actions in 1996. Net income increased to $6,404,000, or 52 cents per share, on revenues of $220,822,000, up from net income of $888,000 or 7 cents per share, on revenues of $227,398,000, in 1995. Net income in 1996 included the recognition of $2,673,000 in after tax charges related to certain long-term contracts and inventory write-downs. The bulk of the charges reflected an agreement with the U.S. Navy that concluded a long and arduous dispute over the SH-60 Helicopter Simulator Visual Upgrade program. With it now behind us, we can complete the contract without the possibility of incurring further losses and focus our attention on more productive programs. United Industrial's improved performance reflects strong results in our core defense and technology businesses as well as greater internal efficiencies. We have implemented a variety of cost-cutting measures, including the consolidation of facilities to lower occupancy costs and the streamlining of operations, and we have selectively sold parcels of underutilized land adjacent to AAI's Maryland headquarters. In addition, the attainment of ISO 9001 Certification by AAI last year has significantly lowered operating costs and enhanced our competitive position in the industry. United Industrial continues to benefit from its solid financial position. Our balance sheet is very strong and at December 31, 1996, our borrowings were at $13,750,000, down from $23,000,000 a year ago. As a result of the improved earnings, the strength of the balance sheet, and our confidence in United Industrial's new strategy, the Board approved, in early 1997, an increase in the quarterly common stock dividend to 7 cents per share from 5 cents per share. Heightened Focus on Opportunities in Technology Businesses - ---------------------------------------------------------- Under its new strategic plan, United Industrial will leverage its core competencies in the defense industry and related technology businesses by refocusing resources on areas where its expertise can bring real value-added. Our objective is to achieve profitable growth and build shareholder value over the long term. We see significant potential for expansion in the following areas. WE ENJOY IMPORTANT COMPETITIVE ADVANTAGES IN THE DEFENSE INDUSTRY FOCUS ON CORE TECHNOLOGIES - -------------------------------------------------------------------------------- Unmanned Air Vehicles United Industrial has distinguished itself in the production of UAVs. We are the only U.S. company producing a significant number of UAVs and, as such, we enjoy important competitive advantages. Moreover, this market is growing both domestically and abroad. Independent industry sources are currently projecting the UAV market to grow approximately 300 percent in the next five years. This expansion will provide numerous opportunities for United Industrial to showcase its capabilities and win new contracts. Rapid market growth is being fueled by U.S. and international recognition of the value and role of UAVs as demonstrated by the Pioneer UAV (a joint venture product of AAI and Israel Aircraft Industries) in Desert Storm. International growth is further stimulated by territorial disputes and insurgent activities facing numerous countries and by the need for timely surveillance and reconnaissance to deal with these situations. In addition, anticipated participation in future U.N. peacekeeping operations has awakened interest in UAVs in countries that in the past did not need UAV capability. Final assembly and test of Pioneer unmanned air vehicles. The Pioneer [PHOTOGRAPH OMITTED] program has been among the Company's most successful. The Simulator for Electronic Combat Training (SECT), pictured at right, enables the U.S. Air Force to train [PHOTOGRAPH OMITTED] its students by creating a variety of battle environments using glass panel technology. The Pioneer program has enjoyed a high level of success over the past 10 years, and has recently been extended by the U.S. government through the year 2003. In addition, we have seen growing interest in our Shadow 200/600, designed by AAI for the international market. The Shadow 200 and 600 UAVs are attractive to international customers because they provide affordable, off-the-shelf capability. Furthermore, our 10 years of operational and production experience with Pioneer offers our customers a lower-risk solution plus valuable field-proven operation, maintenance, and support--know-how that is not available from our competitors. Simulation and Test Systems - --------------------------- United Industrial produces a variety of simulation and test equipment for the U.S. military, foreign and domestic municipalities, and commercial airlines worldwide. Our advanced capabilities in signal generation and hydraulic and software technology provide us with a clear competitive advantage in winning this business. We have many successful programs under way, and we believe there are more opportunities to increase our penetration of these markets. Under AAI's Joint Surveillance Target Attack Radar System (JointSTARS) program, we delivered the first of four maintenance trainers to the U.S. Air Force in September 1996, and began conducting training sessions. JointSTARS planes were used successfully in Desert Storm and Bosnia to track enemy troop movement on the ground. In the product area of Moving Target Simulators (MTS), during the year we completed the delivery, including the training requirement, of an MTS to the Kasuga Military Base in Japan and an improved MTS to the North Dakota National Guard. We also delivered to the U.S. Air Force the Simulator for Electronic Combat Training (SECT), a computer-based training system that generates a synthetic electronic combat environment. The market for simulation products is experiencing steady growth, and we see increasing sales opportunities abroad. - -------------------------------------------------------------------------------- We are the only U.S. company producing a significant number of UAVs - -------------------------------------------------------------------------------- United Industrial Corporation is a customer-driven organization committed to enhancing shareholder value by delivering high quality products, systems, and services to selected defense and industrial markets. We value responsiveness to customers, careful stewardship of corporate assets, teamwork, and innovation, and we reward excellence in achieving these goals. Innovation - ---------- Experienced welders integrate sections of a light rail car shell under [PHOTOGRAPH OMITTED] production for AAI customer, ADtranz. Skilled technicians calibrate sensors for AAI's Next [PHOTOGRAPH OMITTED] Generation Weather Observing System. Firefighters train using Symtron's FireTrainer(R) A-3000 Mobile Aircraft Rescue and [PHOTOGRAPH OMITTED] Fire Fighting Trainer, which features the latest in fire simulation technology. International - ------------- Flight crew makes final adjustments prior to demonstrating Shadow [PHOTOGRAPH OMITTED] 200 to prospective international customer. Customer-Driven - --------------- AAI welder refurbishing trucks- the assembly to which train axles [PHOTOGRAPH OMITTED] and wheels are attached-for Maryland's light rail system. The largest bagasse/biomass plant in the United States, pictured here, features three Detroit Hydrograte(R) [PHOTOGRAPH OMITTED] stokers that burn renewable fuels to produce power. Automated Surface Observing System (ASOS) weather monitoring units, in [PHOTOGRAPH OMITTED] various stages of assembly, receive quality craftsmanship at AAI before installation at our nation's airports. Expertise - --------- U.S.Air Force maintenance trainees learn how to perform the daily [PHOTOGRAPH OMITTED] operational readiness test on the JointSTARS student workstation. Quality - ------- Simulated JointSTARS radar patterns, pictured here, are used to teach U.S. [PHOTOGRAPH OMITTED] Air Force technicians how to analyze the radar's operational characteristics. Engineers make final inspections on the Shadow 200 (top) and [PHOTOGRAPH OMITTED] Shadow 600 (bottom) prior to conducting flight demonstrations. An instructor uses the Improved Moving Target Simulator to [PHOTOGRAPH OMITTED] set up scenarios to train air defense gunners. Here, the scenario is projected against an Arctic background, one of 18 possible battlefield terrains. Work is proceeding on AAI's $11.8 million U.S. Air Force contract to develop and manufacture the Joint Service Electronic Combat Systems Tester (JSECST). A joint U.S. Navy and Air Force procurement, the program will produce portable electronic combat test and diagnostic equipment. JSECST will be used on the flight line and carrier deck to ensure mission readiness of the electronic combat gear on military aircraft. With future production options, the value of the total program is expected to exceed $100 million and could expand beyond that amount. In the commercial marketplace, AAI has been successful in capitalizing on its hydraulic test capabilities in winning contracts to service the Boeing 777 for new key customers, including United Airlines, British Airways, and Teijin Seiki in Japan. The successful completion of these programs is expected to lead to other similar opportunities throughout the world. In firefighting simulation, our Symtron Systems subsidiary has performed very well. We delivered the Aircraft Rescue Fire Fighter Trainer (ARFFT) to key customers, including the Chicago O'Hare and Helena, Montana, Airports. The U.S. Department of Energy purchased our Structural Fire Fighter Trainers for several of its sites, and the U.S. government accepted four Military Fire Fighter Trainers, including three aircraft trainers and one submarine trainer. Two more are in production. [PHOTOGRAPH OMITTED] The Objective Individual Combat Weapon, pictured above, will revolutionize tactical infantry combat. AAI is leading a team of major defense companies in the development of this weapon. INCREASED OUTSOURCING IS FUELING GROWTH IN ENGINEERING AND MAINTENANCE NEW OPPORTUNITIES FOR GROWTH SERVICES - -------------------------------------------------------------------------------- Engineering and Maintenance Services - ------------------------------------ United Industrial benefitted during the year from increased outsourcing by the U.S. government and commercial customers for engineering and maintenance services. Engineering Support, Inc. (ESI), our service business unit, posted an 11 percent increase in sales from the prior year. Our core competencies-- including hydraulic component testing, UAV design and system integration, firefighter and combat simulation, and the production of specialized test equipment for the military--put us in a strong position to win these service contracts. We will devote increased resources to expanding this business in order to capitalize on the considerable opportunities for United Industrial in this growth market. Significant programs already under way include SIMNET and Gunnery Maintenance Trainer contracts, under which ESI is providing support Our expertise can bring real value- added - -------------------------------------------------------------------------------- for training equipment for the U.S. Army, and the Navy Trenton relocation program, our first success in a new initiative to win business in supporting the relocation of large-scale government facilities. Under the relocation program, we will study, plan, and execute the move of the U.S. Navy's Trenton, New Jersey, Propulsion Laboratory to Naval Air Station Patuxant River, Maryland. Advanced Technology - ------------------- United Industrial's advanced technology capabilities offer new opportunities for growth. We are currently working on two exciting programs: Phase III of the Objective Individual Combat Weapon (OICW) for the Department of Defense and the development of Advanced Boresight Equipment (ABE), a patented state-of-the-art coupling of computer, laser, and gyroscope technology that could transform the costly process for precision alignment of parts. Under the OICW program, AAI will demonstrate a full prototype of this advanced dual-barreled weapon. After completion of Phase III, in early 1998, the U.S. Army is expected to select one of two contractors to continue into an Advanced Technology Demonstration follow-on phase. In the ABE program, we have successfully demonstrated a prototype to McDonnell Douglas' Helicopter Systems and C-17 programs as well as Eurocopter and Eurofighter. Transportation Systems - ---------------------- An area of growing importance for United Industrial is the U.S. transportation marketplace. We are applying our manufacturing and integration capabilities to take advantage of opportunities in the production and overhaul of mass transportation vehicles and systems. We have made excellent progress in pursuing this strategy and have won several key contracts. Through Electric Transit, Inc. (ETI), a joint venture between AAI and the Czech Republic firm Skoda, we delivered the first three of 57 electric trolley buses to Dayton, Ohio. These trolley buses were the first complete transportation vehicles produced by United Industrial and one was showcased at the American Public Transportation Expo in Anaheim, California, in 1996. ETI has also submitted a bid to the San Francisco Municipal Railway for the production of 250 electric trolley coaches, and we expect a contractor to be selected in the second quarter of 1997. ETI personnel inspect and test the wiring panel and other features [PHOTOGRAPH OMITTED] on an electric trolly bus, preparing it for delivery on schedule. In addition, we have begun delivery of car shells and trucks for the Maryland Mass Transit Administration's Central Light Rail System under contract to ADtranz. This is the first rail transit vehicle manufactured by a U.S. owned company since the early 1980s. We also completed production planning for the fabrication of heavy rail vehicle trucks for new cars on the Southeastern Pennsylvania Transportation Authority (SEPTA) lines in Philadelphia, and qualified as a contractor for a heavy rail vehicle overhaul project for the Chicago Transit Authority. INTERNATIONAL EXPANSION WILL PLAY A SIGNIFICANT ROLE BUILD SHAREHOLDER VALUE - -------------------------------------------------------------------------------- Expansion in International Markets - ---------------------------------- We expect international expansion to play a significant role in United Industrial's growth strategy. There are substantial opportunities overseas in many of our core businesses, which we plan to pursue both through partnerships with foreign companies and through relationships with independent agents. Our efforts will center on expansion in the Pacific Rim and Europe. In UAVs, for example, the international market is quite active, and we have experienced strong interest in our products. Seven European and Asian nations are actively soliciting bids for UAVs. Our Shadow 200 and 600 fit well with their requirements, and we are currently responding to these solicitations. Regarding our Moving Target Simulators (MTS), we recently completed a project in Japan at the Kasuga Military Base, and see growing demand for MTS products abroad. Four European nations are planning to acquire MTS systems within the next year. We have also identified international opportunities for the sale of simulation and test products related to the Navy's P-3 Orion Aircraft and JointSTARS, as well as a market for fluid test systems in support of military and commercial aircraft, such as the F-16 and the Boeing 777. Symtron Systems has made considerable progress in expanding its international presence. During 1996, it installed its third firefighting system in Europe and made its first foray into the Australian market with the installation of a training system in Melbourne. The European, Asian, and Pacific Rim markets offer significant growth potential. Our energy business, Detroit Stoker, continued to sell combustion equipment in both the European and Asian markets. Designed to satisfy diverse customers needs, Detroit's stokers burn such renewable fuels as poultry litter, sunflower hulls, bagasse, and wood waste to produce energy. A plant operator inspects this Detroit Hydrograte(R) stoker at a cogeneration plant in South Florida. [PHOTOGRAPH OMITTED] The plant's biomass fuel supply is bagasse, a sugar cane residue, and wood waste, both of which are renewable energy sources Solid Results in Energy and Weather Systems Businesses - ------------------------------------------------------ We achieved solid results in our energy and Weather Systems businesses in 1996, reflecting our pursuit of new growth opportunities. Our energy business, Detroit Stoker, had a good year in 1996, with its performance benefitting from expansion in the U.S. and overseas and from cost-saving initiatives. Detroit's versatile product offerings meet the needs of customers with a variety of fuel requirements while adhering to enviromental standards. Domestically, we achieved new contracts for stokers in Alabama and South Carolina, and increased sales of aftermarket stoker replacement parts, retrofits, and natural gas and oil burners. Internationally, biomass fuels are finding increasing favor, and this year we won new high-margin contracts in Germany, New Zealand, and the United Kingdom. In early 1997, we won a significant contract valued at nearly $9 million to supply stokers for a waste-to-energy plant in Portugal. This performance was further enhanced by improved operating efficiency at Detroit Stoker's foundry, Midwest Metallurgical Laboratories, Inc., and other cost-cutting measures. We will continue to pursue opportunities to achieve near-term profit improvements in this business. In Weather Systems, our Automated Surface Observing System (ASOS) product line surpassed $200 million in bookings and is now installed in 800 airports supporting both the Federal Aviation Administration (FAA) and National Weather Service. The FAA is scheduled to purchase an additional 55 systems, while the U.S. Air Force is scheduled to purchase another 30, setting the stage for continued sales, upgrades and support into the 21st century. Our Next Generation Weather Observing System (NEXWOS) continues to build market share, both domestically and abroad. With its increasing market presence and strong international appeal, this product line holds great potential for future growth. It provides the same high level of service as our ASOS system, but at a lower cost, thereby providing cost-effective solutions for secondary airports and heliports. During 1996, we completed key sales to Saudi Arabia and Latvia. The Joint Service Electronic Combat Systems Tester (JSECST) program will produce rugged electronic [PHOTOGRAPH OMITTED] combat test and diagnostic equipment to ensure mission readiness of military aircraft. UNITED INDUSTRIAL STRIVES TO EXCEED CUSTOMER EXPECTATIONS - -------------------------------------------------------------------------------- A Clear Focus on Customer Satisfaction - -------------------------------------- United Industrial strives to exceed customer expectations and deliver products at the forefront of the industry. We adhere to high standards and strict requirements in all of our work, and we are pleased to report that our success on measurements of quality, safety, and productivity has been recognized consistently. AAI has earned the International Standards Organization's highest level of certification, ISO 9001, a true testament to our superior production and service standards. As mentioned earlier, the ISO 9001 Certification has had a positive impact on our profitability by reducing operating costs. We were also honored with a 1996 U.S. Senate Productivity Award for our accomplishments. These achievements do not come without hard work. We have a dedicated team of employees committed to providing world-class customer satisfaction. As a result of their dedication, we delivered 98 percent of our products on time for the second consecutive year and achieved a 300 percent increase in software productivity, earning a Level II rating from the Software Engineering Institute. WE ARE POSITIONING THE COMPANY FOR LONG TERM GROWTH AND PROFITABILITY - -------------------------------------------------------------------------------- A Bright and Exciting Future - ---------------------------- We are very optimistic about United Industrial's future. We are changing--taking specific steps to reposition the Company for long-term growth and profitability - --and are confident we are headed in the right direction. We are committed to improving profits and revenue growth in defense-related work, while expanding our engineering and maintenance services and transportation businesses. Our long-range plans call for the divestiture of non-core operations so we can better focus our attention and resources on meeting these objectives. We have already taken actions to optimize our corporate facilities through the effective management of space and assets, and will continue to seek ways to improve upon this. At the same time, we will consider selected acquisitions to increase our capabilities in core businesses. Most important, we are committed to enhancing the value of our organization for our shareholders, employees, and customers. We look forward to reporting on our progress and thank you for your continued support. Sincerely, /s/ Harold S. Gelb /s/ Richard Erkeneff Harold S. Gelb Richard R. Erkeneff Chairman of the Board President and Chief Executive Officer The Board of Directors: Seated left to right: Harold S. Gelb, Chairman of the Board, Richard R. Erkeneff, [PHOTOGRAPH OMITTED] President and CEO. Standing left to right: Edward C. "Pete" Aldridge, Susan Fein Zawel, E. Donald Shapiro, Howard M. Bloch. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS - --------------------- YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995 Net sales of $220,822,000 in 1996 trailed those in 1995 by $6,576,000 or 3%. All business segments contributed to this decline. In the Company's defense segment, net sales were $2,632,000 or 1% lower than the prior year. Although sales in this segment decreased slightly, the mix of business shifted to the niche markets that the Company will focus on in the future. The defense segment's business is heavily influenced by changes in the budgetary plans and procurement policies of the U.S. Government. Reductions in defense spending and program cancellations in recent years have adversely affected operating results. Further, government contracts are subject to price redetermination under certain circumstances and may be terminated for the convenience of the government. The Company intends to maintain a strong focus on Department of Defense opportunities and believes it is well positioned over the long term to benefit from the demand for advanced technological systems by the U.S. and foreign governments. Sales to agencies of the U.S. Government, primarily by the defense segment, were $144,749,000 in 1996 and $154,346,000 in 1995. Export sales by the defense segment were $22,400,000 in 1996 and $13,117,000 in 1995, an increase of $9,283,000 or 71%. Net sales in the energy segment were down $2,537,000 or nearly 8% in 1996 compared to 1995, primarily due to lower Hydrograte and Rotograte stoker deliveries during the current year. Significant stoker orders were received late in 1996, and sales regarding these orders will be recorded in 1997. Gross profit and margin increased to $52,507,000 and 23.8% in 1996 from $45,259,000 and 19.9% in 1995. These increases during 1996 compared to 1995 represent improved profit performance by the defense and energy segments. During 1996, the defense segment's gross margin increased 4.5% to 23.1% due essentially to the Company's efforts to control costs on its long-term contracts. During 1995, the defense segment's gross profit was reduced by the recognition of a $6,600,000 loss on the SH-60 Helicopter Simulator Visual Upgrade Program and a charge of $2,000,000 related to the reduction of the estimated net realizable value of certain non-contract inventories. During 1996, the Company incurred an additional loss of $3,300,000 on the SH-60 program. However, in November 1996 the Company signed a settlement agreement with the U.S. Navy providing for an orderly conclusion of the contract precluding the possibility of additional losses to the Company. The agreement also provided for the payment of approximately $8,500,000 to the Company which was received in January 1997. During 1996 the Company increased its reserve for the non-contract inventory noted above by $900,000. Gross margin in the Company's energy segment improved 1.9% to 30.5%. Higher sales of aftermarket stoker replacement parts, and natural gas and oil burners as well as cost-saving initiatives and greater operating efficiencies were generally responsible for this increase. Selling and administrative expenses as a percentage of sales were 18.5% in 1996 and 18.1% in 1995. The increase was due to lower sales volume in the current year. Actual selling and administrative expenses decreased $399,000 or 1% in 1996 as compared to 1995. Interest expense was $1,997,000 in 1996 and $2,360,000 in 1995. This decrease was due to lower borrowings which were partially offset by higher interest rates during 1996. Interest income decreased $168,000 in 1996 from 1995 due to the payment of the note receivable of $8,540,000 in February 1995. Other expense was $1,190,000 in 1996 compared to other income of $127,000 in 1995 or a net increase in expense of $1,317,000. The increase in expense was primarily due to losses in 1996 by a joint venture which had profits in 1995. In 1996, net income of $6,404,000 increased $5,516,000 or 621% from $888,000 in 1995. Both the defense and energy segments contributed to this favorable result. At the defense segment, the increased profitability was due principally to improved performance on most long-term contracts. As described earlier, in 1995 income was reduced by the recognition of $8,600,000 of pretax charges regarding certain long-term contracts and inventory write-downs as compared to $4,200,000 of such charges in 1996. In the energy segment, higher margins and the elimination of certain selling and administrative costs were the source of improved earnings. YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994 Net sales of $227,398,000 in 1995 rose by 8% from 1994. The increase was attributable to all segments. In the defense segment, which recorded a 7% increase, the Company's diversification into transportation systems resulted in initial program sales, and the recovery of the commercial airline industry boosted sales of hydraulic test equipment. The synergies achieved through the combination of Symtron's engineering capabilities and AAI's manufacturing and installation capabilities contributed to a better than twofold increase in sales of firefighter systems. Sales to agencies of the U.S. Government, primarily by the defense segment, were $154,346,000 in 1995 and $159,766,000 in 1994. Export sales by the defense segment were $13,117,000 in 1995 and $4,413,000 in 1994, an increase of $8,704,000 or 197%. The Company's energy segment recorded a 17% increase in sales in 1995 as compared to 1994, primarily due to increased volume of sales of Hydrograte stokers. Gross profit and margin amounted to $45,259,000 and 19.9% in 1995, and $46,951,000 and 22.4% in 1994. In 1995, the lower gross profit in the defense segment resulted primarily from the recognition of approximately $10,200,000 of losses on contracts compared to $5,600,000 of losses in 1994. In 1995, these losses primarily pertained to reserves taken on one contract: the SH-60 program that eroded pretax earnings by about $6,600,000, of which approximately $5,100,000 was recorded in December 1995. Also in the fourth quarter of 1995, the Company recorded a $2,000,000 charge to reflect certain finished goods and work in progress inventories related to a particular program at net realizable value. Partially offsetting these charges was the increased profitability of the Company's hydraulic test equipment business and growth in sales of certain highly profitable operational and maintenance training simulators. The increased gross profit in the energy segment was essentially due to the increased volume and profit margins on sales of Hydrograte stokers. Selling and administrative expenses as a percentage of sales were 18.1% in 1995 and 19.1% in 1994. The decrease in 1995 reflects the elimination of certain expenses resulting from the Company's organizational changes in 1994 and 1993, partially offset by a $1,000,000 charge related to the 1994 acquisition of Symtron. Interest income was $1,201,000 in 1995 and $1,840,000 in 1994. The decrease in interest income was principally due to the reduced note receivable balance resulting from the installment payments on such note receivable which had a 14% interest rate. Interest expense was $2,360,000 in 1995 and $3,202,000 in 1994. Decreased borrowings in 1995 resulted in lower interest expense. In 1994, decreased average borrowings were offset by higher interest rates. In 1995, net income of $888,000 decreased $4,324,000 from $5,212,000 in 1994. The reduction of net income in 1995 resulted primarily from the recognition of losses of approximately $12,200,000 by the defense segment on certain long-term contracts and inventory write-downs mentioned earlier. In the Company's energy segment, increased sales volume and improved profit margins were the primary reasons behind its improved results. Net income in 1994 included a net pension curtailment gain of $928,000 (see Note 10). LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents amounted to $13,427,000 at the end of 1996 and $11,915,000 at the end of 1995. The Company's principal uses of capital during the past several years related to acquisitions, new projects and the repayment of long-term debt and bank borrowings. In January 1994, the Company acquired Symtron Systems, Inc., a business engaged in the development and production of patented computer-controlled firefighter trainers (see Note 16). Symtron serves both government and commercial markets. Net advances of $12,191,000 have been made to Symtron since its acquisition. The Company made contingent payments of $254,000 and $1,000,000 in 1996 and 1995, respectively, to the previous shareholders of Symtron in accordance with the purchase agreement. Additionally, contingent amounts are payable if certain pretax profits, as defined in the purchase agreement, are earned for each of the years in the three-year period ending December 31, 1998. The Company expects to meet its cash requirements for 1997, including amounts necessary to fund new business ventures from operations and borrowings under its existing line of credit. During 1996 the Company's AAI subsidiary had a revolving credit arrangement and note agreement that contained restrictive covenants with respect to payment of dividends or advances and loans to the Company. These restrictions did not affect the Company's ability to meet its cash requirements. Factors relating to the amounts of cash from operating, financing and investing activities are explained in detail in the Consolidated Statements of Cash Flows. The Company paid cash dividends of $.20 per share in 1996, $.26 per share in 1995, and $.28 per share in 1994, amounted to aggregate payments of $2,434,000 in 1996, $3,165,000 in 1995, and $3,425,000 in 1994. In February 1997 the first quarterly dividend was increased to $.07 per share. The ratio of current assets to current liabilities was 1.8 at the end of 1996 and 2.1 at the end of 1995. The current ratio decreased in 1996 principally due to the increase in the current portion of long-term debt which was repaid in January 1997 as described below. Capital expenditures were $6,299,000 in 1996. There are no material commitments for acquisition of capital assets as of December 31, 1996. On October 13, 1994, AAI entered into a two-year revolving credit agreement with two banks for $20,000,000, including a commitment for up to $10,000,000 for commercial letters of credit. The revolving credit is limited to a percentage of the eligible accounts receivable, as defined. Immediately prior to entering into this credit facility, AAI prepaid $5,000,000 of the $25,000,000 note payable with certain insurance companies, thereby reducing the outstanding principal balance to an aggregate of $20,000,000 (see Note 6 for further information concerning these agreements). During 1996, the Company repaid the scheduled $6,250,000 of this note and in January 1997 prepaid the balance of $13,750,000. At December 31, 1996 and 1995, AAI's net assets of approximately $70,800,000 and $68,400,000, respectively, were restricted under the debt agreement's capital base covenant. The line-of-credit agreement was extended to March 18, 1997, and a commitment letter has been received from the bank for a replacement credit arrangement. On December 31, 1996, the Company repaid $3,000,000 outstanding under an additional line-of-credit. Long-term debt less the current portion amounted to $13,750,000 and $20,000,000 at December 31, 1995 and 1994, respectively. The debt amounted to 13.8% and 18.4% of total capitalization in 1995 and 1994, respectively. The Company had no long-term debt at December 31, 1996. Earnings per share has been computed using the weighted average number of the common and common equivalent shares outstanding and the assumed exercise of all stock options having exercise prices less than the average market price of the common stock using the treasury stock method. ENVIRONMENTAL AND OTHER LITIGATION The Company, along with numerous other parties, has been named in five tort actions relating to environmental matters based on allegations partially related to a predecessor's operations. These tort actions seek recovery for personal injury and property damage among other damages. One tort claim is a certified property and medical class action. In comparison to the other defendants, the operations of the Company were very limited in time and size. The Company intends to vigorously contest these actions and believes that the resolution of these actions will not be material to the Company (see Note 15). In November 1996, the Company signed a settlement agreement with the U.S. Navy concerning the SH-60 Helicopter Simulator Visual Upgrade Program. The agreement provides for an orderly conclusion of the contract, precluding the possibility of additional losses. Consolidated Balance Sheets United Industrial Corporation ================================================================================ (DOLLARS IN THOUSANDS) December 31 1996 1995 - -------------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 13,427 $ 11,915 Trade receivables U.S. Government 25,781 20,650 Other 14,353 12,261 - -------------------------------------------------------------------------------- 40,134 32,911 Inventories 39,507 47,922 Prepaid expenses and other current assets 1,217 1,761 Deferred income taxes 6,131 6,487 - -------------------------------------------------------------------------------- Total Current Assets 100,416 100,996 - -------------------------------------------------------------------------------- Other Assets 38,018 39,524 Property and Equipment Land 1,880 1,886 Buildings and improvements 49,761 48,106 Machinery and equipment 74,046 73,978 Furniture and fixtures 5,103 5,253 - -------------------------------------------------------------------------------- 130,790 129,223 Less allowances for depreciation and amortization 89,256 86,637 - -------------------------------------------------------------------------------- 41,534 42,586 - -------------------------------------------------------------------------------- $179,968 $183,106 ================================================================================ ================================================================================ (DOLLARS IN THOUSANDS) December 31 1996 1995 - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term borrowings $ -- $ 3,000 Accounts payable 10,135 10,132 Accrued employee compensation and taxes 7,690 6,536 Customer advances 5,873 6,384 Provision for contract losses 9,166 10,751 Federal income taxes 963 -- Current portion of long-term debt 13,750 6,250 Other liabilities 8,105 4,472 - -------------------------------------------------------------------------------- Total Current Liabilities 55,682 47,525 - -------------------------------------------------------------------------------- Long-Term Debt, Less Current Portion -- 13,750 Postretirement Benefits Other Than Pensions 21,825 21,322 Other Liabilities 2,654 4,529 Deferred Income Taxes 9,662 9,820 Shareholders' Equity Common stock--par value $1.00 per share Authorized shares--15,000,000 Outstanding shares: 1996--12,173,743; 1995--12,170,793 14,374 14,374 Additional capital 90,196 91,421 Retained earnings (deficit) 2,876 (2,311) Cost of shares in treasury: 1996 -- 2,200,405 shares; 1995 -- 2,203,355 shares (17,301) (17,324) - -------------------------------------------------------------------------------- Total Shareholders' Equity 90,145 86,160 - -------------------------------------------------------------------------------- $ 179,968 $ 183,106 ================================================================================ See notes to financial statements Consolidated Statements of Operations United Industrial Corporation ================================================================================ (Dollars in thousands, except per share data) Year ended December 31 1996 1995 1994 - -------------------------------------------------------------------------------- Net Sales $ 220,822 $ 227,398 $ 209,727 Operating costs and expenses: Cost of sales 168,315 182,139 162,776 Selling and administrative 40,847 41,246 39,990 Pension plan curtailment income--net -- -- (928) (Gain) loss on sale of assets--net (1,135) 336 (1,166) Other expense (income)--net 1,190 (127) (734) Interest income (1,033) (1,201) (1,840) Interest expense 1,997 2,360 3,202 - -------------------------------------------------------------------------------- Total Operating Costs and Expenses 210,181 224,753 201,300 - -------------------------------------------------------------------------------- Income Before Income Taxes 10,641 2,645 8,427 Provision (credit) for income taxes Federal Current 3,192 4,139 2,232 Deferred 198 (2,726) 522 State 847 344 461 - -------------------------------------------------------------------------------- Income Taxes 4,237 1,757 3,215 - -------------------------------------------------------------------------------- Net Income $ 6,404 $ 888 $ 5,212 - -------------------------------------------------------------------------------- Earnings Per Share $ .52 $ .07 $ .43 ================================================================================ See Notes to Financial Statements
Consolidated Statements of Cash Flows United Industrial Corporation ============================================================================================== (DOLLARS IN THOUSANDS) Year ended December 31 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Operating Activities Net income $ 6,404 $ 888 $ 5,212 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,306 8,300 8,291 Deferred income taxes 198 (2,726) 1,223 (Gain) loss on sale of property and equipment (1,135) 336 (1,166) Changes in operating assets and liabilities--net Increase (decrease) in current income taxes 1,024 (3,333) 6,951 (Increase) decrease in trade receivables (7,223) 653 12,611 Decrease (increase) in inventories 8,415 5,564 (6,218) Decrease (increase) in prepaid expenses and other current assets 544 (94) 1,019 Increase (decrease) in accounts payable, accruals, advances and other current liabilities 2,218 (139) (6,081) Other--net (1,514) (3,175) (7,495) - ---------------------------------------------------------------------------------------------- Net Cash Provided By Operating Activities 17,237 6,274 14,347 - ---------------------------------------------------------------------------------------------- Investing Activities - ---------------------------------------------------------------------------------------------- Purchase of property and equipment (6,299) (5,705) (4,146) Acquisition of business--net of cash received -- -- (2,291) Net proceeds from disposals of property and equipment 2,250 370 7,264 Other--net -- -- 590 Decrease in note receivable -- 8,540 8,540 - ---------------------------------------------------------------------------------------------- Net Cash (Used) Provided By Investing Activities (4,049) 3,205 9,957 - ---------------------------------------------------------------------------------------------- Financing Activities - ---------------------------------------------------------------------------------------------- Increase in long-term liabilities -- 653 2,468 Proceeds from borrowings 9,000 9,000 12,000 Payments on long-term debt and borrowings (18,250) (10,200) (33,500) Dividends (2,434) (3,165) (2,571) Purchase of treasury shares -- -- (475) Proceeds from exercise of stock options 8 16 -- - ---------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (11,676) (3,696) (22,078) - ---------------------------------------------------------------------------------------------- Increase in Cash and Cash Equivalents 1,512 5,783 2,226 - ---------------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of Year 11,915 6,132 3,906 - ---------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 13,427 $ 11,915 $ 6,132 ==============================================================================================
See notes to financial statements Notes to Financial Statements United Industrial Corporation NOTE 1 NATURE OF OPERATIONS - -------------------------------------------------------------------------------- United Industrial Corporation is a high technology company applying the majority of its resources to the research, development and production of military electronics and aerospace systems and components under defense contracts. Other products include weather monitoring systems, transportation systems, firefighter training systems, energy systems for industry and utilities, and plastic products. The principal lines of business are defense and related products, energy generating systems and plastic products. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in prior years have been reclassified to conform to the current year's classifications. The Company includes in income its proportionate share of the net earnings or losses of unconsolidated investees, when the Company's ownership interest is between 20% and 50%. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amount of these investments reported in the balance sheet approximates their fair value. INVENTORIES Inventories are stated at the lower of cost or market. At December 31, 1996 and 1995, approximately 10% and 7% respectively, of total inventory was priced by the last-in, first-out (LIFO) method with the remainder priced at actual, average, or standard cost. If the first-in, first-out (FIFO) method of inventory pricing had been used, inventories would have been approximately $4,090,000 higher than reported on December 31, 1996 and $4,177,000 higher than reported on December 31, 1995. Inventories include amounts principally related to long-term contracts of the Company's defense segment, as determined by the percentage-of-completion method of accounting. Sales and gross profit are principally recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Alternatively, certain contracts provide for the production of various units throughout the contract period and these contracts are accounted for based on the units delivered. See Note 4. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. The policy of the Company is to provide for depreciation on the straight-line, sum-of-the-years digits, and declining-balance methods, by annual charges to operations calculated to amortize the cost over the estimated useful lives of the various classes of property and equipment. EARNINGS PER SHARE Earnings per share has been computed using the weighted average number of the common and common equivalent shares outstanding, and assuming exercise of all stock options having exercise prices less than the average market price of the common stock using the treasury stock method. The weighted average number of shares outstanding were: 12,211,319 in 1996, 12,193,179 in 1995 and 12,241,503 in 1994. STOCK BASED COMPENSATION The Company has elected to continue to account for its stock-based compensation plan in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), whereby compensation cost for stock options is recognized in income based on the excess, if any, of the quoted market price of the stock at the grant date of the award or other measurement date over the amount an employee must pay to acquire the stock. See Note 7. NEW ACCOUNTING PRONOUNCEMENTS During 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Adoption of this standard did not have a significant impact on the Company. NOTE 3 TRADE RECEIVABLES - -------------------------------------------------------------------------------- Amounts due from the U.S. Government primarily related to long-term contracts of the Company's defense segment were as follows: ================================================================================ (DOLLARS IN THOUSANDS) December 31 1996 1995 - -------------------------------------------------------------------------------- Amounts billed $22,282 $13,882 Unbilled recoverable costs and earned fees 3,251 6,521 Retainage per contract provisions 248 247 - -------------------------------------------------------------------------------- $25,781 $20,650 ================================================================================ Billed and unbilled amounts above include $2,283,000 and $4,405,000 at December 31, 1996 and 1995, respectively, related to contracts for which a subsidiary of the Company is a subcontractor to other government contractors. Unbilled recoverable costs and earned fees substantially represent amounts that will be collected within one year. Retainage amounts will generally be billed over the next twelve months. NOTE 4 INVENTORIES - --------------------------------------------------------------------------------
=========================================================================================== (DOLLARS IN THOUSANDS) December 31 1996 1995 - ------------------------------------------------------------------------------------------- Finished goods and work in progress $11,320 $ 11,469 - ------------------------------------------------------------------------------------------- Costs and earnings relating to long-term contracts 43,557 64,079 Deduct progress payments related to long-term contracts (19,454) (32,363) - ------------------------------------------------------------------------------------------- Costs and earnings in excess of billings 24,103 31,716 - ------------------------------------------------------------------------------------------- Total finished goods and work in progress 35,423 43,185 Materials and supplies 4,084 4,737 - ------------------------------------------------------------------------------------------- $39,507 $ 47,922 ===========================================================================================
The inventoried costs associated with long-term contracts include costs and earnings ($24,103,000 in 1996 and $31,716,000 in 1995) of incomplete contracts not yet billable to the customer. These amounts represent the difference between the percentage-of-completion method of accounting for long-term contracts used to record operating results by the Company's defense subsidiary and the amounts billable to the customer under the terms of the specific contracts. Estimates of final contract costs and earnings (including earnings subject to future determination through negotiation or other procedures) are reviewed and revised periodically throughout the lives of the contracts. Adjustments of earnings resulting from the revisions are recorded on a current basis. The Company recognized losses of $6,997,000 ($4,443,000 net of tax benefit, or $.36 per share) during 1996 and $10,200,000 ($6,059,000 net of tax benefit, or $.50 per share) during 1995, resulting primarily from revision of cost estimates on certain major long-term contracts. Included in 1996 and 1995 costs and earnings in excess of billings was $1,400,000 and $12,000,000, respectively, on certain government contracts in excess of negotiated contract value which are or will be the subject of formal claims if not resolved by negotiation. The Company has estimated $6,800,000 and $7,700,000 as the net realizable value of certain non-contract related finished goods and work in progress inventory in 1996 and 1995, respectively. The Company has identified a number of potential buyers for a substantial portion of the inventory. However, the Company faces significant competition from other producers of similar products. It is reasonably possible that the Company may not be able to finalize an agreement for the sale of this inventory due to competition. If this occurs, the net realizable value of this inventory could be reduced in the near term. Inventories do not include any significant amounts of unamortized tooling, learning curve, and other deferred costs, claims, or other similar items whose recovery is uncertain. NOTE 5 OTHER ASSETS - -------------------------------------------------------------------------------- ================================================================================ (DOLLARS IN THOUSANDS) December 31 1996 1995 - -------------------------------------------------------------------------------- Net pension asset $27,896 $25,534 Patents and other intangible assets 8,140 9,771 Other 1,982 4,219 - -------------------------------------------------------------------------------- $38,018 $39,524 ================================================================================ Patents and other intangible assets represent assets acquired in connection with purchased businesses and are being amortized primarily on a straight-line basis over 5 to 15 years. Amortization expense amounted to $1,704,000 in 1996, $1,694,000 in 1995, and $1,683,000 in 1994. Accumulated amortization amounted to $6,707,000 and $5,003,000 at December 31, 1996 and 1995, respectively. NOTE 6 LONG-TERM DEBT AND CREDIT ARRANGEMENTS - -------------------------------------------------------------------------------- In 1992, AAI Corporation (a wholly owned subsidiary) entered into a note purchase agreement with certain insurance companies for $25,000,000, which was subsequently reduced to $20,000,000. The proceeds of the note were principally used to repay the then outstanding borrowings of AAI. Interest at the rate of 8.65% was payable semi-annually. In July 1996, the Company made a scheduled installment payment of $6,250,000 on this note. The remaining principal of $13,750,000 was prepaid in January 1997. The Company was a guarantor of the agreement and together with AAI was subject to certain covenants including, but not limited to, provisions related to dividends, indebtedness, working capital, net worth, interest coverage and debt to equity ratios. AAI is a party to a revolving credit agreement with a bank for $20,000,000, including a commitment for up to $10,000,000 of commercial letters of credit. The revolving credit is limited to a percentage of the eligible accounts receivable, as defined. The agreement provides that AAI may select among several interest rate options. The agreement provides for restrictive covenants among which are the maintenance of a certain capital base, as defined; leverage and cash flow coverage ratios; limitations on indebtedness; and limitations on transfers of funds and use of such funds by the Company or its wholly owned subsidiaries. Borrowings under the credit agreement and the outstanding notes with the insurance companies are collateralized by the capital stock and assets of AAI and its wholly owned subsidiaries and certain wholly owned subsidiaries of the Company. Such borrowings are guaranteed by the Company, certain of its wholly owned subsidiaries and all AAI wholly owned subsidiaries. There were no borrowings outstanding under the credit agreement at December 31, 1996 and 1995. The credit agreement has been extended to March 18, 1997 and a commitment letter was received from the bank for a replacement credit agreement. At December 31, 1996 and 1995, AAI's net tangible assets of approximately $70,800,000 and $68,400,000, respectively, were restricted under the debt agreement's capital base covenant. Under an additional line-of-credit agreement with a bank, the Company may have borrowed up to $9,000,000 including a commitment for up to $4,000,000 of commercial letters of credit. Detroit Stoker Company, a wholly owned subsidiary was also a party to the agreement. At December 31, 1996, this credit line was cancelled and the borrowings were paid. The credit agreement required commitment fees which were not material. The carrying amounts of the Company's borrowings under its short-term revolving credit agreements and long-term debt arrangement approximate their fair value. Interest expense was $1,997,000 in 1996, $2,360,000 in 1995, and $3,202,000 in 1994. Interest paid was $2,122,000 in 1996, $2,270,000 in 1995, and $3,323,000 in 1994. The weighted average interest rate on short-term borrowings outstanding at December 31, 1995 was 7.14%. NOTE 7 STOCK OPTIONS - -------------------------------------------------------------------------------- In May 1994, the shareholders approved the 1994 Stock Option Plan (the "Plan"), which provides for the granting of options with respect to the purchase of an aggregate of up to 600,000 (increased in May 1996 to 1,200,000) shares of common stock of the Company from time to time to key employees of the Company and its subsidiaries. Options granted may be either "incentive stock options," within the meaning of Section 422A of the Internal Revenue Code, or non-qualified options. The options are granted at not less than market value at the date of grant and in accordance with APB 25 and related interpretations, no compensation cost has been recognized for grants made under the Plan. Options are exercisable over a period determined by the Board of Directors, but no longer than ten years after the date they are granted. Options vest one-third each year after a one year waiting period. Had compensation cost been determined consistent with the fair value method set forth under FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), for all awards during 1995 and 1996 under the Plan, net income and net income per common share would have decreased to the pro forma amounts indicated below: ================================================================================ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Year ended December 31 1996 1995 ================================================================================ Net income: As reported $6,404 $888 Pro forma $6,248 $887 Net income per common share: As reported $ .52 $.07 Pro forma $ .51 $.07 ================================================================================ FAS 123 is applicable only to stock options granted subsequent to December 31, 1994. Accordingly, since compensation expense associated with such grants would generally be recognized over a three-year vesting period, the initial impact of applying FAS 123 on pro forma net income is not representative of the potential impact on pro forma net income in future years, when the pro forma effect would be fully reflected. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: dividend yields of 4.0% and 3.6%; expected volatility of 37% and 36%; and risk-free interest rates of 6% in both periods; and expected lives of five years in both periods. The weighted-average fair value of an option granted was $1.51 and $1.59 for the years ended December 31, 1996 and 1995, respectively. A summary of stock option activity under the Plan is as follows: ================================================================================ Weighted- Average Exercise (SHARES IN THOUSANDS) Number of shares Price - -------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1994 -- -- Granted 94 $ 4.75 Exercised -- -- Cancelled -- -- - -------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 94 4.75 - -------------------------------------------------------------------------------- Granted 139 5.55 Exercised (3) 4.75 Cancelled (116) 5.53 - -------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 114 4.94 - -------------------------------------------------------------------------------- Granted 368 5.30 Exercised (2) 4.75 Cancelled (13) 4.75 - -------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 467 $5.23 ================================================================================ ============================================================================== (SHARES IN THOUSANDS) December 31 1996 1995 1994 - ------------------------------------------------------------------------------ Exercisable 57 25 0 Available for future grants 728 483 506 ============================================================================== Exercise prices for options outstanding as of December 31, 1996 ranged from $4.50 to $6.38. The weighted-average remaining life of these options is 8.9 years. NOTE 8 LEASES - -------------------------------------------------------------------------------- Total rental expense for all operating leases amounted to $2,391,000 in 1996, $2,632,000 in 1995, and $2,714,000 in 1994. Contingent rental payments were not significant. The future minimum rental commitments as of December 31, 1996, for all noncancelable leases were $1,336,000 in 1997; $1,103,000 in 1998; $844,000 in 1999; $389,000 in 2000; and $159,000 in 2001. NOTE 9 CHANGES IN SHAREHOLDERS' EQUITY - --------------------------------------------------------------------------------
============================================================================================================================== Minimum Retained Pension Share- Common Additional Earnings Treasury Liability holders' (DOLLARS IN THOUSANDS) Stock Capital (Deficit) Stock Adjustment Equity - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1993 $ 14,374 $ 97,167 $ (8,411) $(16,875) $(901) $ 85,354 Net income -- -- 5,212 -- -- 5,212 Cash dividends declared ($.21 per share) -- (2,571) -- -- -- (2,571) Purchase of 91,200 shares -- -- -- (475) -- (475) Adjustment for minimum pension liability -- -- -- -- 901 901 - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1994 14,374 94,596 (3,199) (17,350) -- 88,421 Net income -- -- 888 -- -- 888 Cash dividends declared ($.26 per share) -- (3,165) -- -- -- (3,165) Stock options -- (10) -- 26 -- 16 - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1995 14,374 91,421 (2,311) (17,324) -- 86,160 Net income -- -- 6,404 -- -- 6,404 Cash dividends declared ($.20 per share) -- (1,217) (1,217) -- -- (2,434) Stock options -- (8) -- 23 -- 15 - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1996 $14,374 $90,196 $2,876 $(17,301) -- $90,145 ==============================================================================================================================
NOTE 10 PENSION ARRANGEMENTS AND SPECIAL TERMINATION BENEFITS - -------------------------------------------------------------------------------- The Company and its subsidiaries have a number of noncontributory defined benefit pension plans covering substantially all employees. Plans covering salaried and management employees previously provided pension benefits that were based on the employee's average compensation for the highest five consecutive years before retirement and years of service. Plans covering hourly employees and union members generally provide benefits of stated amounts for each year of service. The Company's funding policy for the plans is to make the minimum annual contributions required by applicable regulations. A summary of the components of net periodic pension (income) cost for the plans is as follows:
============================================================================================================================== (DOLLARS IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Service cost--benefits earned during the period $ 903 $ 682 $ 3,238 Interest cost on projected benefit obligation 11,133 10,689 10,507 Actual return on plan assets (23,191) (29,770) (1,891) Net amortization and deferral 8,194 19,075 (8,898) Curtailment gain -- -- (928) - ------------------------------------------------------------------------------------------------------------------------------ Total Pension (Income) Costs $ (2,961) $ 676 $ 2,028 ==============================================================================================================================
ASSUMPTIONS PRIMARILY USED IN THE ACCOUNTING FOR THE PLANS WERE:
============================================================================================================================== 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Weighted-average discount rates 7.5% 7.3% 8.5% Rates of increase in compensation levels 4% 4% 4% Expected long-term rate of return on assets 8.5% 8.5% 8.5% ==============================================================================================================================
The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheets at December 31, 1996 and 1995, for the Company's pension plans:
=========================================================================================================== PLANS WITH ASSETS IN EXCESS OF ACCUMULATED BENEFIT OBLIGATION: (DOLLARS IN THOUSANDS) 1996 1995 - ----------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $143,480 $146,015 - ----------------------------------------------------------------------------------------------------------- Accumulated benefit obligation $145,795 $147,838 - ----------------------------------------------------------------------------------------------------------- Projected benefit obligation $145,892 $148,024 Plan assets at fair value 169,004 158,663 - ----------------------------------------------------------------------------------------------------------- Projected benefit obligation less than plan assets 23,112 10,639 Unrecognized net loss including prior service cost 5,314 15,427 Unrecognized net asset at beginning of year, net of amortization (530) (532) - ----------------------------------------------------------------------------------------------------------- Net Pension Asset Recognized in the Consolidated Balance Sheets $ 27,896 $ 25,534 ===========================================================================================================
The plans' assets are invested in listed stocks and bonds and interest-bearing cash equivalents. On November 30, 1994, the energy systems segment suspended future benefit accruals by freezing the non-union employees' defined benefit plan. This resulted in a pension curtailment gain of $1,092,000 ($675,000 net of taxes or $.06 per share). The Company replaced the defined benefit plan with a defined contribution benefit plan. Employee and employer matching contributions are based on specified for mulas. In addition, a curtailment loss of $164,000 ($101,000 net of tax benefit or $.01 per share) was recognized for another plan due to reductions of staffing levels at the Company's defense segment. On December 31, 1994, the defense segment merged its two defined benefit plans, and in 1995 converted them into a single cash balance plan. In accordance with the Cash Balance Plan, a participant's benefit includes the actuarial equivalent of the participant's accrued benefit under the applicable predecessor plan, annual allocations based upon a percentage of salary, and interest earned on such participant's account. In 1996 the Company combined the deferred benefit plans of the defense and energy segments. Under the combined plan, a participant's benefits under the applicable predecessor plans remain unchanged. The Company's contribution to the 401(k) plan was $1,208,000 in 1996 and $1,158,000 in 1995. NOTE 11 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS - -------------------------------------------------------------------------------- In addition to the Company's defined benefit pension plans, a subsidiary of the Company sponsors a defined benefit health care plan that provides postretirement medical benefits to full-time employees who have worked 10 years and attained age 62 or 30 years of service with the Company. The plan is non-contributory for retirees and contributory for spouses. The retiree spousal contributions are adjusted annually. Both the retiree and spousal plan contain cost-sharing features such as deductibles and coinsurance. The accounting for the plan anticipates future cost-sharing changes to the written plan that are consistent with the Company's expressed intent to increase the spousal contribution to the point that the entire cost for spouses will be contributory at the end of 7 years commencing from January 1, 1996, and limit the amount it will contribute for retiree insurance costs, as well as each active employee who later becomes a retiree, to no more than double the amount which the Company paid for coverage on January 1, 1993. The actuarial and recorded liabilities for these benefits have not been funded. The accumulated benefit obligation was determined using the unit credit method and an assumed discount rate of 7.5% in 1996 and 1995 and 8.5% in 1994. The assumed health care cost trend rate used was 11.25% for medical, decreasing to 6%, in the year 2005. An increase of 1% in the health care trend rate would not materially increase the cost or accumulated postretirement benefit due to the limit of the Company not being obligated to pay more than double the amount which the Company was paying for coverage on January 1, 1993. Another subsidiary also sponsors a defined benefit health care plan that provides postretirement medical and dental benefits to full-time employees who have worked 10 years and attained age 60. Dental benefits cease for both retiree and spouse once the retiree reaches age 65. Surviving spouses are eligible for preretirement death benefits. Employees age 55, but less than 60, with at least 20 years of service receive only medical benefits commencing when the retiree reaches age 65. No dental benefit is provided. The accumulated benefit obligation was determined using the unit credit method and an assumed discount rate of 7.5% in 1996, 7.25% in 1995 and 8.5% in 1994. The assumed health care cost trend rate was 9.5% decreasing to 5.25% in 10 years. The health care cost trend rate assumption has a significant effect on the amounts reported. A 1% increase in the health care trend rate would increase the accumulated postretirement benefit obligation at December 31, 1996 by $1,029,105. The effect of a 1% increase in the health care trend rate would not materially increase the net periodic cost. The costs of certain health care provided by the Company for eligible retired employees were $1,586,000 in 1996, $1,694,000 in 1995, and $1,719,000 in 1994. The following table shows the two plans' combined funded status reconciled with the amounts recognized in the Company's statements of financial position:
=================================================================================================== (DOLLARS IN THOUSANDS) December 31 1996 1995 - --------------------------------------------------------------------------------------------------- ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION: Retirees $13,221 $15,184 Fully eligible active plan participants 1,289 1,378 Other active plan participants 7,465 9,083 - --------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation 21,975 25,645 Unrecognized net loss (150) (4,323) - --------------------------------------------------------------------------------------------------- Accrued postretirement benefit obligation $21,825 $21,322 ===================================================================================================
NET PERIODIC POSTRETIREMENT BENEFIT COST INCLUDED THE FOLLOWING COMPONENTS:
===================================================================================================== (DOLLARS IN THOUSANDS) Year ended December 31 1996 1995 1994 - ----------------------------------------------------------------------------------------------------- Service cost $ 538 $ 548 $ 516 Interest cost 1,540 1,824 1,615 - ----------------------------------------------------------------------------------------------------- Net periodic postretirement benefit cost $2,078 $2,372 $2,131 =====================================================================================================
NOTE 12 INDUSTRY SEGMENTS DATA - -------------------------------------------------------------------------------- The Company is engaged in the design, development, manufacture, and sale of products in three principal industries: electronics, aerospace, firefighter training, and ordnance systems for defense and other government and non-government entities in the United States and abroad; energy systems for industries and utilities; and specialty plastic products. Sales to agencies of the United States Government, primarily by the defense segment, were $144,749,000 in 1996, $154,346,000 in 1995, and $159,766,000 in 1994. No single customer, other than the United States Government, accounted for 10% or more of net sales in any year. Export sales in 1996 were $26,491,000 and in 1995 and 1994 amounted to less than 10% of net sales in those years. ================================================================================ (DOLLARS IN THOUSANDS) 1996 1995 1994 - -------------------------------------------------------------------------------- NET SALES Defense $ 185,479 $ 188,111 $ 175,535 Energy Systems 30,012 32,549 27,835 Plastic Products 5,331 6,738 6,357 - -------------------------------------------------------------------------------- Total Net Sales $ 220,822 $ 227,398 $ 209,727 ================================================================================ OPERATING INCOME (LOSS) Defense $ 12,497 $ 6,436 $ 10,831 Energy Systems 3,892 2,598 1,884 Plastic Products (51) 389 219 Corporate (5,697) (6,778) (4,507) - -------------------------------------------------------------------------------- Total Operating Income $ 10,641 $ 2,645 $ 8,427 ================================================================================ IDENTIFIABLE ASSETS Defense $ 149,037 $ 150,507 $ 151,202 Energy Systems 25,588 23,103 21,313 Plastic Products 2,978 2,943 2,899 Corporate 2,365 6,553 13,380 - -------------------------------------------------------------------------------- Total Identifiable Assets $ 179,968 $ 183,106 $ 188,794 ================================================================================ CAPITAL EXPENDITURES Defense $ 4,833 $ 4,572 $ 3,304(a)(b) Energy Systems 959 805 624 Plastic Products 494 289 149 Corporate 13 39 69 - -------------------------------------------------------------------------------- Total Capital Expenditures $ 6,299 $ 5,705 $ 4,146(a)(b) ================================================================================
========================================================================================== (DOLLARS IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------ DEPRECIATION EXPENSE Defense $5,401 $5,616 $5,470 Energy Systems 805 839 917 Plastic Products 198 134 101 Corporate 16 17 8 - ------------------------------------------------------------------------------------------ Total Depreciation Expense $6,420 $6,606 $6,496 ==========================================================================================
(A) EXCLUDES ASSETS ACQUIRED IN THE SYMTRON ACQUISITION OF $8,761,000 IN 1994. (B) EXCLUDES $1,322,000 OF ASSETS TRANSFERRED FROM INVENTORY. Operating income for each segment is total revenue less operating expenses, excluding interest and corporate management fees. Research and development costs included in costs and expenses amounted to $2,641,000 in 1996, $2,270,000 in 1995, and $1,839,000 in 1994. Corporate loss includes net interest expense of $964,000 in 1996, $1,159,000 in 1995, and $1,362,000 in 1994. Corporate assets consist primarily of cash and cash equivalents. NOTE 13 INCOME TAXES - -------------------------------------------------------------------------------- The liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. In addition, the effect on deferred taxes of a change in tax rates is recognized in the period that includes the enactment date. Following is a reconciliation of the difference between total tax expense and the amount computed by applying the federal statutory income tax rate (34%) to income from operations before income taxes:
=============================================================================================================================== (DOLLARS IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- Federal income taxes at statutory rate $3,618 $ 899 $2,865 State income taxes, net of federal income tax benefit 480 227 304 Provision for nondeductible expenses (including $86 and $340 related to contingent payments in 1996 and 1995 on the Symtron acquisition) 119 460 -- Other--net 20 171 46 - ------------------------------------------------------------------------------------------------------------------------------- Income Taxes $4,237 $1,757 $3,215 ===============================================================================================================================
Income tax payments were $2,000,000 in 1996, $7,400,000 in 1995, and a refund of $2,879,000 in 1994. Deferred income tax balances: ================================================================================ (DOLLARS IN THOUSANDS) December 31 1996 1995 - -------------------------------------------------------------------------------- DEFERRED TAX ASSET Losses on long-term contracts not currently deductible $ 2,826 $ 4,145 Postretirement benefits other than pensions and other employee benefits 9,802 9,562 Product warranty and other provisions 1,868 1,504 Vacation pay accruals 974 539 Basis differences for asset sales 2,188 1,803 Other 110 64 - -------------------------------------------------------------------------------- Total Deferred Tax Asset 17,768 17,617 ================================================================================ DEFERRED TAX LIABILITY Pension plans and other employee benefits (11,765) (11,487) Excess tax depreciation (7,837) (7,681) Patent amortization (1,520) (1,594) Other (177) (188) - -------------------------------------------------------------------------------- Total Deferred Tax Liability (21,299) (20,950) - -------------------------------------------------------------------------------- NET DEFERRED TAX LIABILITY $ (3,531) $ (3,333) ================================================================================ THE NET DEFERRED TAX LIABILITY IS CLASSIFIED AS FOLLOWS: Net current deferred income tax asset $ 6,131 $ 6,487 - -------------------------------------------------------------------------------- Net non-current deferred income tax liability $ (9,662) $ (9,820) - -------------------------------------------------------------------------------- NOTE 14 SELECTED QUARTERLY DATA (UNAUDITED) - --------------------------------------------------------------------------------
=================================================================================================================================== (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 1996 1995 AND STOCK PRICES) FOURTH THIRD SECOND FIRST Fourth Third Second First - ----------------------------------------------------------------------------------------------------------------------------------- Net sales $56,897 $54,159 $55,265 $54,501 $64,308 $53,568 $57,869 $51,653 Gross profit 17,234 8,826 12,695 13,752 9,059(a) 10,735 12,692 12,773 Net income (loss) 3,352 163 1,458 1,431 (1,999)(a) 423 1,324 1,140 =================================================================================================================================== Earnings (loss) per share $ .27 $ .01 $ .12 $ .12 $ (.16)(a) $ .04 $ .11 $ .09 =================================================================================================================================== Dividends declared per share $ .05 $ .05 $ .05 $ .05 $ .05 $ -- $ .14 $ .07 - ----------------------------------------------------------------------------------------------------------------------------------- Stock prices: High $ 6 1\4 $ 6 1\2 $ 6 3\8 $ 6 3\4 $ 6 1\8 $ 7 1\8 $ 7 1\4 $ 5 3\4 Low $ 5 1\8 $ 5 1\2 $ 5 1\8 $ 4 3\4 $ 4 3\8 $ 5 5\8 $ 5 1\4 $ 4 7\8 ===================================================================================================================================
(A) THE COMPANY RECORDED CHARGES OF $6,261,000 FOR THE REVISION OF CONTRACT LOSS ESTIMATES AND $2,000,000 TO WRITE DOWN CERTAIN NON-CONTRACTUAL WORK IN PROGRESS AND FINISHED GOODS INVENTORY TO NET REALIZABLE VALUE IN THE FOURTH QUARTER OF 1995. The Company's common stock is listed on the New York Stock Exchange. The approximate number of shareholders of record as of February 25, 1997, was 2,800. The debt covenants recited in Note 6 have certain restrictions on the payment of dividends. NOTE 15 LITIGATION - -------------------------------------------------------------------------------- The Company, along with numerous other parties, has been named in five tort actions relating to environmental matters based on allegations partially related to a predecessor's operation of a small facility at a site in the State of Arizona that manufactured semiconductors between 1959 and 1960. All such operations of the Company were sold by 1961. These tort actions seek recovery for personal injury and property damage among other damages. One tort claim is a certified property and medical class action. On February 11, 1992 a complaint was filed against the Company and ten other named and ten unnamed entities in the Maricopa County Superior Court of Arizona by seven individuals seeking to represent a class. A class in excess of 10,000 was originally alleged. The plaintiffs have amended their complaint to separate the larger property damage and medical monitoring classes into smaller subclasses based on geographic location and alleged exposure to solvents. In the process of amendment, the overall sizes of the respective classes have been significantly reduced. This suit alleges that the members of the class have been exposed to contaminated groundwater in the Phoenix/Scottsdale, Arizona area and suffer increased risk of disease and other physical effects. They also assert property damages under various theories; seek to have certain scientific studies performed concerning health risks, preventative measures and long-term effects; and seek incidental and consequential damages, punitive damages and an injunction against actions causing further exposures. The property and medical classes have been certified. The Company has joined with the other defendants and appealed the class certification issue to the Arizona Supreme Court. The Company intends to vigorously contest these actions and believes that the resolution of these actions will not be material to the Company. Four additional lawsuits were filed on April 7, 1993, December 20, 1993, June 10, 1994 and July 18, 1995 in the Maricopa County Superior Court of Arizona. These matters allege personal injury and wrongful death by multiple plaintiffs arising from the alleged contamination in the Phoenix/Scottsdale, Arizona area. The Company intends to aggressively defend against these claims; however, at this time, no estimate can be made as to the amount or range of potential loss, if any, to the Company with respect to these matters. In comparison to the other defendants, the operations of the Company were very limited in time and size. Detroit Stoker was notified in March 1992 by the Michigan Department of Natural Resources (MDNR) that it is a potentially responsible party in connection with the clean-up of a former industrial landfill located in Port of Monroe, Michigan. MDNR is treating the Port of Monroe landfill site as a contaminated facility within the meaning of the Michigan Environmental Response Act (MERA). Under MERA, if a release or a potential release of a discarded hazardous substance is or may be injurious to the environment or to the public health, safety, or welfare, MDNR is empowered to undertake or compel investigation and response activities in order to alleviate any contamination threat. Detroit Stoker intends to aggressively defend against these claims. At this time, no estimate can be made as to the amount or range of potential loss, if any, to Detroit Stoker with respect to this action. On November 15, 1996, AAI Systems Management, Inc. (the "subsidiary"), an indirect subsidiary of the Company, signed a settlement agreement with the U.S. Navy (the "customer"), concluding a dispute with the customer over a contract to deliver helicopter simulator training devices. The agreement provided for an orderly conclusion of the contract precluding the possibility of additional losses for the subsidiary under the contract. Settlement of the dispute and the abbreviated comple- tion of the contract required a charge of $2.2 million ($1.4 million net of taxes) against earnings for the third quarter. The Company is involved in various other lawsuits and claims, including certain other environmental matters, arising out of the normal course of its business. In the opinion of management, the ultimate amount of liability, if any, under pending litigation, including claims described above, will not have a materially adverse effect on the Company. NOTE 16 ACQUISITIONS - -------------------------------------------------------------------------------- On January 18, 1994, the Company purchased all the outstanding shares of Symtron Systems, Inc. (Symtron), a producer of firefighter training simulators for government and commercial markets. The purchase price consisted of cash payments of $2,000,000, assumption of certain liabilities of approximately $5,900,000, and a contingent payment of up to $1,000,000, based on profits on contracts existing at the acquisition date. In 1995, the Company made the contingent payment of $1,000,000, which was classified as selling and administrative expenses in the 1995 financial statements. Additionally, contingent amounts are payable if certain pretax profits, as defined in the purchase agreement, are earned in each of the years in the five year period ending December 31, 1998. In 1996, $254,000 was paid which was classified as selling and administrative expenses in the financial statements. Funds generated from operations and an existing line of credit were utilized to finance the purchase of Symtron. Report of Independent Auditors Board of Directors and Shareholders United Industrial Corporation New York, New York We have audited the accompanying consolidated balance sheets of United Industrial Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Industrial Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP New York, New York February 26, 1997 Five-Year Financial Data United Industrial Corporation
======================================================================================================= (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------- Operating Data - ------------------------------------------------------------------------------------------------------- Net Sales $ 220,822 $ 227,398 $ 209,727 $ 252,993 $ 251,315 Operating costs 209,162 223,385 202,766 252,919 242,304 Interest expense (income)--net 964 1,159 1,362 (639) (686) Income (loss) before income taxes 10,641 2,645 8,427 (20,151)(a) 10,071(b) Income taxes (credit) 4,237 1,757 3,215 (8,134) 3,678 Income (loss) from continuing operations before cumulative effect of accounting changes 6,404 888 5,212 (12,017)(a) 6,393(b) Cumulative effect of accounting changes -- -- -- 994 -- Income (loss) from continuing operations 6,404 888 5,212 (11,023)(a) 6,393(b) Earnings (loss) per share: Income (loss) before cumulative effect of accounting changes .52 .07 .43 (.98)(a) .52(b) Cumulative effect of accounting changes -- -- -- .08 -- Earnings (loss) .52 .07 .43 (.90)(a) .52(b) Cash dividends paid on common stock 2,434 3,165 3,425 5,381 7,845 Cash dividends declared per common share .20 .26 .21 .35 .64 Shares outstanding as of year end (in thousands) 12,174 12,171 12,167 12,259 12,259 - ------------------------------------------------------------------------------------------------------- Financial Position - ------------------------------------------------------------------------------------------------------- Total assets $ 179,968 $ 183,106 $ 188,794 $ 202,653 $ 226,958 Property and equipment 41,534 42,586 45,214 46,635 57,074 Long-term debt -- 13,750 20,000 25,000 25,880 Shareholders' equity 90,145 86,160 88,421 85,354 101,568 Shareholders' equity per share 7.40 7.08 7.27 6.96 8.29 - ------------------------------------------------------------------------------------------------------- Financial Ratios - ------------------------------------------------------------------------------------------------------- Return on shareholders' equity 7.1% 1.0% 6.0% -- 6.3% Net income as a percent of sales 2.9 .4 2.5 -- 2.5 Long-term debt as a percent of total capitalization -- 13.8 18.4 22.6 20.3 - ------------------------------------------------------------------------------------------------------- Statistical Data - ------------------------------------------------------------------------------------------------------- Sales backlog as of year end $ 159,000 $ 206,000 $ 218,000 $ 208,000 $ 239,000 Capital expenditures 6,299 5,705 4,146 5,931 5,547 Depreciation and amortization 8,306 8,300 8,291 7,430 9,200 Number of employees 1,900 2,000 1,900 2,300 2,600 =======================================================================================================
(A) INCLUDES RESTRUCTURING CHARGE OF $22,500,000 ($14,400,000 OR $1.17 PER SHARE NET OF INCOME TAX BENEFIT) (B) INCLUDES SPECIAL TERMINATION BENEFITS COST OF $1,191,000 ($786,000 OR $.06 PER SHARE NET OF INCOME TAX BENEFIT) Corporate Organization United Industrial Corporation BOARD OF DIRECTORS - -------------------------------------------------------------------------------- Harold S. Gelb CHAIRMAN OF THE BOARD Howard M. Bloch VICE CHAIRMAN OF THE BOARD Edward C. Aldridge, Jr. PRESIDENT AND CHIEF EXECUTIVE OFFICER THE AEROSPACE CORPORATION Richard R. Erkeneff PRESIDENT AND CHIEF EXECUTIVE OFFICER OF THE COMPANY AND AAI CORPORATION E. Donald Shapiro PROFESSOR OF LAW NEW YORK LAW SCHOOL Susan Fein Zawel VICE PRESIDENT CORPORATE COMMUNICATIONS, ASSOCIATE GENERAL COUNSEL AND SECRETARY OF THE COMPANY Honorary Director (nonvoting) Bernard Fein CHAIRMAN EMERITUS RETIRED CHAIRMAN OF THE BOARD AND PRESIDENT OF THE COMPANY CORPORATE OFFICERS - -------------------------------------------------------------------------------- Richard R. Erkeneff PRESIDENT AND CHIEF EXECUTIVE OFFICER Robert W. Worthing VICE PRESIDENT AND GENERAL COUNSEL James H. Perry CHIEF FINANCIAL OFFICER AND TREASURER Susan Fein Zawel VICE PRESIDENT CORPORATE COMMUNICATIONS, ASSOCIATE GENERAL COUNSEL AND SECRETARY Edward A. Smolinski ASSISTANT TREASURER AND ASSISTANT SECRETARY MANAGEMENT - -------------------------------------------------------------------------------- AAI CORPORATION Richard R. Erkeneff PRESIDENT AND CHIEF EXECUTIVE OFFICER Paul J. Michaud VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER Robert W. Worthing VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY George J. Kersels VICE PRESIDENT AND GENERAL MANAGER DEFENSE SYSTEMS Maurice P. Ranc VICE PRESIDENT AND GENERAL MANAGER ENGINEERING AND MAINTENANCE SERVICES G. Russell Zink VICE PRESIDENT AND GENERAL MANAGER WEATHER SYSTEMS Thomas E. Wurzel VICE PRESIDENT AND GENERAL MANAGER FLUID TEST SYSTEMS Jackson R. Bell VICE PRESIDENT AND GENERAL MANAGER TRANSPORTATION SYSTEMS Joseph F. Burger VICE PRESIDENT AND GENERAL MANAGER HUNT VALLEY OPERATIONS DETROIT STOKER COMPANY James M. Ballentine PRESIDENT AND CHIEF EXECUTIVE OFFICER Mark A. Eleniewski EXECUTIVE VICE PRESIDENT Gary K. Ludwig VICE PRESIDENT, FINANCE NEO PRODUCTS COMPANY Michael A. Schillaci PRESIDENT AND CHIEF EXECUTIVE OFFICER Leonard M. Peznowski CONTROLLER SYMTRON SYSTEMS, INC. John J. Henning PRESIDENT AND CHIEF EXECUTIVE OFFICER James W. Hanson VICE PRESIDENT AND GENERAL MANAGER, OPERATIONS Hy Luft VICE PRESIDENT, PROGRAMS Richard A. Brandt TREASURER Corporate and Shareholder Information United Industrial Corporation CORPORATE HEADQUARTERS 18 East 48th Street New York, New York 10017 (212) 752-8787 SUBSIDIARIES AAI CORPORATION P.O. Box 126 Hunt Valley, Maryland 21030 (410) 666-1400 DETROIT STOKER COMPANY 1510 East First Street Monroe, Michigan 48161 (313) 241-9500 NEO PRODUCTS COMPANY 5400 South Kilbourn Avenue Chicago, Illinois 60632 (773) 585-2500 SYMTRON SYSTEMS, INC. 17-01 Pollitt Drive Fair Lawn, New Jersey 07410 (201) 794-0200 TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT Shareholders may obtain information relating to their share position, dividends, transfer requirements, lost certificates and other related matters by telephone or by writing to: American Stock Transfer and Trust Company 40 Wall Street New York, New York 10005 (718) 921-8200 SHAREHOLDER RELATIONS Security analysts, investment professionals and shareholders should direct their inquiries to: Shareholder Relations United Industrial Corporation INDEPENDENT AUDITORS Ernst & Young LLP 787 Seventh Avenue New York, New York 10019 ANNUAL MEETING The Annual Meeting of Shareholders will be held at 10:00 a.m. on Tuesday, May 13, 1997, at: The Park Lane Hotel 36 Central Park South New York, New York CORPORATE COUNSEL Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 FORM 10-K REPORT A copy of the United Industrial Corporation Annual Report on Form 10-K as filed with the Securities and Exchange Commission may be obtained without cost by writing to: Shareholder Relations United Industrial Corporation STOCK LISTING United Industrial Corporation common stock is traded on the New York Stock Exchange (Symbol: UIC) EX-21 6 SUBSIDIARIES LIST EXHIBIT 21 SUBSIDIARIES OF UNITED INDUSTRIAL CORPORATION March 3, 1997
Approximate State Percentage of (or jurisdiction) Voting Securities in which Owned by Name Incorporated Immediate Parent - ------------------------------------------------------------------------------------------------- AAI Corporation Maryland 100% (a) A.A.I. Engineering Support, Inc. Maryland 100 (b) A.A.I. International, Inc. Delaware 100 (b) Seti, Inc. Pennsylvania 100 (b) AAI Systems Management, Inc. Maryland 100 (b) AAI Medical, Inc. Maryland 100 (b) AAI MICROFLITE Simulation International Corporation Maryland 100 (b) AAI/ACL Technologies, Inc. Maryland 100 (b) AAI California Carshells, Inc. Maryland 100 (b) Detroit Stoker Company Michigan 100 (a) Midwest Metallurgical Laboratory, Inc. Michigan 100 (c) Neo Products Co. Illinois 100 (a) Symtron Systems, Inc. New Jersey 100 (a) U.I.C.-Del. Corporation Delaware 100 (a) U.I.C. International, Ltd. Barbados 100 (a) - ----------------------- (a) Percentage owned by United Industrial Corporation ("United). (b) Percentage owned by AAI Corporation. (c) Percentage owned by Detroit Stoker Company.
All of the subsidiaries listed above are included in the consolidated financial statements of United. EX-23 7 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8, No. 33-57065) pertaining to the United Industrial Corporation 401(k) Retirement Savings Plan, and in the Registration Statements (Form S-8, Nos. 333-19517 and 33-53911) pertaining to the United Industrial Corporation 1994 Stock Option Plan, of our report dated February 26, 1997, with respect to the consolidated financial statements and schedules of United Industrial Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1996. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP March 26, 1997 EX-27 8 FINANCIAL DATA SCHEDULE
5 This Schedule contains summary financial information extracted from the financial statements contained in the body of the accompanying Form 10-K and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1996 DEC-31-1996 13,427 0 40,134 0 39,507 100,416 130,790 89,256 179,968 55,682 2,654 0 0 14,374 75,771 179,968 220,822 220,822 168,315 209,162 1,190 0 964 10,641 4,237 6,404 0 0 0 6,404 .52 .52
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