-----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, TXNBpNcU/+MdbGxqQY1ND5pmW7cLhh6t8HM1GTeKNoPojhUJeGeeEfRuU+UyunwJ H4c/JssPiPPQxG/2vKGklQ== 0000909518-98-000209.txt : 19980401 0000909518-98-000209.hdr.sgml : 19980401 ACCESSION NUMBER: 0000909518-98-000209 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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-K405 SEC ACT: SEC FILE NUMBER: 001-04252 FILM NUMBER: 98580315 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-K405 1 ================================================================================ 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, 1997. 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 (I.R.S. Employer Identification No.) of Incorporation or Organization) 570 LEXINGTON AVENUE NEW YORK, NEW YORK 10022 (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 [x]. [Cover page 1 of 2 pages] NYFS11...:\95\78495\0001\1708\FRM3208N.37B 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 24, 1998, computed by reference to the closing sale price of the registrant's Common Stock on the New York Stock Exchange on such date: $137,246,395. On March 24, 1998, the registrant had outstanding 12,257,759 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, 1997 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 12, 1998 are incorporated by reference into Part III of this report. [Cover page 2 of 2 pages] 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. At December 31, 1997, the operations of United consist of two principal industry segments: defense and energy systems, conducted through three wholly-owned subsidiaries. Through September 1997, the Company also operated a plastics segment operated through a wholly owned subsidiary of which substantially all of the operating assets were sold during 1997 (see Recent Developments below). Forward Looking Information - --------------------------- This Annual Report contains "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements are based on management's expectations, estimates, projections and assumptions. Words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," and variations of such words and similar expressions are intended to identify such forward looking statements which include, but are not limited to, projections of revenues, earnings, segment performance, cash flows and contract awards. These forward looking statements are subject to risks and uncertainties which could cause the Company's actual results or performance to differ materially from those expressed or implied in such statements. These risks and uncertainties include, but are not limited to, the following: the Company's successful execution of internal performance plans; performance issues with key suppliers, subcontractors and business partners; legal proceedings; product demand and market acceptance risks; the effect of economic conditions; the impact of competitive products and pricing; product development, commercialization and technological difficulties; capacity and supply constraints or difficulties; legislative or regulatory actions impacting the Company's energy segment and transportation business; changing priorities or reductions in the U.S. government defense budget; contract continuation and future contract awards; and U.S. and international military budget constraints and determinations. Recent Developments - ------------------- On August 28, 1997, the Company consummated the sale of substantially all of the assets, subject to liabilities, of its Neo Products Co. ("Neo") subsidiary to a group of private investors. The purchase price was approximately $587,000 in cash, $853,000 in notes and a contingent price based on Neo's earnings over the next five years. Excluded from the sale was Neo's cash and a portion of its real estate. Neo was engaged in the plastic products business. 2 On October 3, 1997, the Company completed the sale of all of the capital stock of AAI Systems Management, Inc. ("SMI"), an indirect wholly-owned subsidiary of the Company, to All Weather, Inc. (the "Purchaser"), a holding company formed by Ridge Capital, Northstar Capital and the management team of SMI. SMI was directly owned by the Company's AAI Corporation subsidiary. The purchase price was $18.5 million in cash and a five-year subordinated note in the principal amount of $2.375 million. SMI was primarily engaged in the automated weather and environmental reporting systems business. Defense - ------- AAI Corporation AAI Corporation ("AAI") is engaged in engineering, development and manufacture in the following major areas: (1) training and simulation systems; (2) automatic test equipment for electronic systems and components; (3) unmanned air vehicle systems; (4) ordnance systems; (5) mechanical support systems for industrial, military, and marine applications; and (6) 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 1997 approximately 57% of the sales volume of AAI consisted of research, development and production of military items under domestic defense contracts compared to 62% in 1996. 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. International defense contracts accounted for 15% of sales in 1997 as compared to 10% in 1996. These contracts generally related to unmanned air vehicle systems and weapon training systems for foreign governments. The balance of AAI's business consists of work performed in the non-defense markets. These areas include hydraulic test equipment and transportation equipment. 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 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 ("UAV") business in 1986. The Company produces the highly successful Pioneer Unmanned Air Vehicle employed by the United States during Operation Desert Storm, and in conflicts in Somalia and Bosnia. In addition, AAI has other UAV systems and products which it markets internationally. AAI is one of several large and small competitors in this field. 3 AAI's administrative offices and its principal manufacturing and engineering facilities are located in Hunt Valley, Maryland. Symtron Systems, Inc. Symtron Systems, Inc. ("Symtron") is a world leader in the development and sale of advanced, computer controlled, gas fueled, live fire, firefighter training systems for public and private industry. Symtron started development of its computer controlled, live fire, firefighter training systems under an initial contract with the U.S. Army in 1978. It was purchased by United in 1994. Contingent purchase price amounts are payable if certain pretax profits, as defined in the purchase agreement, are earned for each of the years in the five year period ending December 31, 1998. Included in general and administrative expenses in 1997 and 1996 are such contingent payments totaling $680,000 and 254,000, respectively. Furthermore, in 1995 the Company recorded a $1,000,000 contingent payment based on profits on contracts existing at the acquisition date and the net worth of Symtron at specified dates which was likewise classified as general and administrative expense. Symtron's 1997 sales consisted of production primarily for commercial customers. The main office and plant of Symtron are located in Fair Lawn, New Jersey. The recent withdrawal of Symtron's principal direct competitor from the marketplace as a result of Symtron's successful defense of its intellectual property rights, has fortified its position in that marketplace. In the international markets, Symtron is faced with significant competition from several small firms. 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 fuel to fluidized bed combustors and handling of granular materials, replacement parts, construction services 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 pulp and paper mills, public utilities, independent power producers (non-utility generators), industrial manufacturing plants, universities and sugar mills. Its waste to energy 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 4 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. The majority of the sales of Midwest are to Detroit Stoker. Midwest's plant and offices are located in Marshall, Michigan. For additional information concerning United's subsidiaries reference is made to information set forth in the Letter to Shareholders contained in United's 1997 Annual Report to Shareholders (the "Annual Report"), which letter is incorporated herein by reference. General - ------- Employees As of March 1, 1998 United and its subsidiaries had approximately 1,800 employees. Approximately 150 of these employees are represented by several unions under contracts expiring between July 2000 and January 2001. 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 1997, 1996 and 1995 the subsidiaries of United (exclusive of AAI) expended approximately $144,000, $639,000 and $194,000, 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. 5 Backlog The backlog of orders by industry segment at December 31, 1997 and 1996 was as follows: 1997 1996 ---- ---- Defense $179,200,000 $150,888,000 Energy Systems 9,016,000 6,871,000 Plastic Products -0- 941,000 The increase in backlog for the defense segment was generally due to a new contract to support the delivery of 250 electric trolley buses to the City and County of San Francisco partially offset by a decrease related to the sale of SMI (see Recent Developments above). The increase in backlog for energy systems was due to the increased level of new contracts being awarded. Except for approximately $55,000,000, substantially all of the backlog orders at December 31, 1997 are expected to be filled in 1998. The Company exited the plastic products business during 1997 (see Recent Developments above). 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 U.S. 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 U.S. 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 13 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 1997 and 1996 export sales by United and its subsidiaries amounted to approximately $40,322,000 and $26,491,000, respectively. Export sales in 1995 amounted to less than 10% of net sales. 6 ITEM 2. PROPERTIES On or about April 27, 1998, upon termination of its current lease, United will relocate its executive and administrative offices from 18 East 48th Street, New York, N.Y., to leased premises at 570 Lexington Avenue, New York, N.Y., which lease expires in August 2008. The following is a tabulation of the principal properties owned or leased by United's subsidiaries as at March 25, 1998.
Approximate Area Owned Location Principal Use in Square Feet or Leased - -------- ------------- -------------- --------- 1510 East First Street Machine shop, steel fabrication, 194,910 floor space Owned in fee Monroe, MI engineering and sales facilities of on 14.4 acres of Detroit Stoker land (East Building) 1426 East First Street Assembly, shipping and administrative 101,000 floor space Owned in fee Monroe, MI facilities of Detroit Stoker on 2.2 acres of land (West Building) 15290 Fifteen Mile Road Foundry, 59,386 floor space Owned in fee Marshall, MI Midwest Metallurgical on 28.4 acres of land Industry Lane Manufacturing, engineering 740,208 floor space Owned in fee Cockeysville, MD and administrative on 87 acres of land facilities of AAI 1701 Pollitt Drive Administrative, engineering and 30,000 Leased to June 30, 2001 Fair Lawn, NJ manufacturing facilities of Symtron 1505 East Warner Avenue Manufacturing, engineering and 103,200 Leased to Sept. 30, 1999 Santa Ana, CA administrative facilities of ACL Technologies 1035 Semoran Boulevard Sublet 900 Leased to April 30, 1999 Winter Park, FL
For information with respect to obligations for lease rentals, see Note 9 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. 7 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 semi-conductors 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. 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 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. 8 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, 1997 ---- ---------------- ----------------- Richard R. Erkeneff* -- President of the Company (since October 1995) and AAI 62 (since November 1993); Senior Vice President of the Aerospace Group at McDonnell Douglas Corporation, an aerospace firm (October 1992 to November 1993). Robert Worthing -- Vice President and General Counsel of the Company (since 52 July, 1995); General Counsel of AAI (since April, 1992). Susan Fein Zawel* -- Vice President, Corporate Communications and Associate 43 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, 1995) and 36 Treasurer (since December 1994) of the Company; and Senior Manager (October 1992 to November 1994) at Ernst & Young LLP, an accounting firm.
- -------------------- * 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 15 of the Notes to Financial Statements included in Item 8 of this Report concerning dividends, stock prices, stock listing and number of 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 46 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 23 of the Annual Report, which section is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The report of independent auditors and consolidated financial statements included on pages 27 through 45 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 12, 1998 (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, 1997, 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)- United Industrial Corporation 1996 Stock Option Plan for Nonemployee Directors (4). (10)(c)- Purchase Agreement, dated January 18, 1994, between United and Symtron Systems, Inc. (1). (10)(d)- Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement dated as of June 11, 1997 (amending and restating Credit Agreement dated as of October 13, 1994) by and among First Union Commercial Corporation and the Company, AAI Corporation, AAI Engineering Support, Inc., AAI Systems Management, Inc., AAI/ACL Technologies, Inc., Detroit Stoker Company, Midwest Metallurgical Laboratory, Inc., Neo Products Co., Symtron Systems, Inc., UIC-Del. Corporation and AAI MICROFLITE Simulation International Corporation (5). (10)(e)- Pledge and Security Agreement dated as of October 13, 1994 by AAI in favor of the Agent (6). (10)(f)- Pledge and Security Agreement dated as of October 13, 1994 by the Company in favor of the Agent (6). (10)(g)- Security Agreement dated as of October 13, 1994 between AAI and the Agent (6). (10)(h)- Security Agreement dated as of October 13, 1994 between each subsidiary of AAI, certain subsidiaries of the Company and the Agent (6). (10)(i)- 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 (6). (10)(j)- Employment Agreement dated March 26, 1996, between United and Richard R. Erkeneff (2). 13 (10)(k)- Employment Agreement, dated January 8, 1996, between United and Susan Fein Zawel (2). (10)(l)- Employment Agreement, dated February 9, 1996, between United and James H. Perry (the "Perry Employment Agreement") (2). (10)(m)- Amendment dated as of September 29, 1996, between United and James H. Perry to the Perry Employment Agreement (7). (10)(n)- Stock Purchase Agreement between All Weather, Inc. and AAI Corporation dated September 30, 1997 (8). (11)- Computation of Earnings Per Share. (13)- United's 1997 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 Registration Statement on Form S-8 filed with the Securities and Exchange Commission on June 26, 1997. (5) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (6) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. (7) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. (8) Incorporated by reference to United's Current Report on Form 8-K filed on October 17, 1997. (b) - Reports on Form 8-K - United did not file any reports on Form 8-K during the quarter ended December 31, 1997, except for one relating to the sale of the AAI Systems Management, Inc. filed on October 17, 1997. 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 27, 1998 ------------------------------- 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 March 27, 1998 - ------------------------------------------- Harold S. Gelb, Chairman of the Board and Director /s/ Howard M. Bloch March 27, 1998 - ------------------------------------------- Howard M. Bloch, Vice-Chairman of the Board and Director /s/ Richard R. Erkeneff March 27, 1998 - ------------------------------------------- Richard R. Erkeneff, President and Chief Executive Officer and Director /s/ Edward C. Aldridge, Jr. March 27, 1998 - ------------------------------------------- Edward C. Aldridge, Jr., Director /s/ E. Donald Shapiro March 27, 1998 - ------------------------------------------- E. Donald Shapiro, Director /s/ Susan Fein Zawel March 27, 1998 - ------------------------------------------- Susan Fein Zawel, Vice President and Director /s/ James H. Perry March 27, 1998 - ------------------------------------------- James H. Perry, Treasurer (Principal Financial and Accounting Officer) 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, 1997 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, 1997, are incorporated by reference in Item 8: Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Operations - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows Years Ended December 31, 1997, 1996 and 1995 Notes to Financial Statements The following consolidated financial statement schedule of United Industrial Corporation and subsidiaries is included in Item 14(d): 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. F-2 REPORT OF INDEPENDENT AUDITORS We have audited the consolidated financial statements of United Industrial Corporation and subsidiaries as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated February 24, 1998. Our audits also included the financial statement schedule listed in item 14(a). This schedule is the responsibility of the Company=s management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP New York, New York February 24, 1998 F-3 Schedule II - Valuation and Qualifying Accounts United Industrial Corporation and Subsidiaries December 31, 1997
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, 1997: Deducted from asset account: Allowance for doubtful account $ 245,000 $ 5,000(B) $ 240,000 ========= ========== ========= Product warranty liability $ 579,000 $ 493,000 $1,072,000 ========= ========= ========== 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 ========= ========= =========
(A) Uncollectible accounts written off, net of recoveries. (B) Reduction of valuation account. F-4 EXHIBIT INDEX ------------- Exhibit No. ----------- (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)- United Industrial Corporation 1996 Stock Option Plan for Nonemployee Directors (4). (10)(c)- Purchase Agreement, dated January 18, 1994, between United and Symtron Systems, Inc. (1). (10)(d)- Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement dated as of June 11, 1997 (amending and restating Credit Agreement dated as of October 13, 1994) by and among First Union Commercial Corporation and the Company, AAI Corporation, AAI Engineering Support, Inc., AAI Systems Management, Inc., AAI/ACL Technologies, Inc., Detroit Stoker Company, Midwest Metallurgical Laboratory, Inc., Neo Products Co., Symtron Systems, Inc., UIC-Del. Corporation and AAI MICROFLITE Simulation International Corporation (5). (10)(e)- Pledge and Security Agreement dated as of October 13, 1994 by AAI in favor of the Agent (6). (10)(f)- Pledge and Security Agreement dated as of October 13, 1994 by the Company in favor of the Agent (6). (10)(g)- Security Agreement dated as of October 13, 1994 between AAI and the Agent (6). (10)(h)- Security Agreement dated as of October 13, 1994 between each subsidiary of AAI, certain subsidiaries of the Company and the Agent (6). (10)(i)- 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 (6). (10)(j)- Employment Agreement dated March 26, 1996, between United and Richard R. Erkeneff (2). (10)(k)- Employment Agreement, dated January 8, 1996, between United and Susan Fein Zawel (2). (10)(l)- Employment Agreement, dated February 9, 1996, between United and James H. Perry (the "Perry Employment Agreement") (2). (10)(m)- Amendment dated as of September 29, 1996, between United and James H. Perry to the Perry Employment Agreement (7). (10)(n)- Stock Purchase Agreement between All Weather, Inc. and AAI Corporation dated September 30, 1997 (8). (11)- Computation of Earnings Per Share. (13)- United's 1997 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 Registration Statement on Form S-8 filed with the Securities and Exchange Commission on June 26, 1997. (5) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (6) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. (7) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. (8) Incorporated by reference to United's Current Report on Form 8-K filed on October 17, 1997. EX-11 2 EXHIBIT 11 EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES
Year ended December 31, 1997 1996 1995 ---- ---- ---- Net income $ 14,825,000 $ 6,404,000 $ 888,000 ============ ============= ============ Basic: Weighted average shares 12,194,885 12,172,697 12,169,196 Dilutive stock options-based on treasury stock method using average market price 225,236 38,376 23,771 ------------ ------------- ------------ Dilutive potential Common Shares 12,420,121 12,211,073 12,192,967 ============ ============= ============ Earnings per share: Basic $ 1.22 $ .53 $ .07 ============== =============== ============== Diluted $ 1.19 $ .52 $ .07 ============== =============== ==============
EX-13 3 EXHIBIT 13 UNITED INDUSTRIAL CORPORATION ANNUAL REPORT 1997 United Industrial Corporation is a 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, combustion equipment for biomass and refuse fuels, and specialized firefighter training installations.
Financial Highlights - ----------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 1997 1996 NET SALES $ 235,183 $ 220,822 NET INCOME 14,825 6,404 EARNINGS PER SHARE BASIC 1.22 .53 DILUTED 1.19 .52 DIVIDENDS PAID PER SHARE .29 .20 SHAREHOLDERS' EQUITY 102,024 90,145 SHAREHOLDERS' EQUITY PER SHARE 8.33 7.40 SALES BACKLOG AS OF YEAR END $ 188,000 $ 159,000 SHARES OUTSTANDING 12,249,000 12,174,000 - -----------------------------------------------------------------------------------------------------
RETURN ON SHAREHOLDERS' EQUITY For the Year Ending December 31 Percent 1995 1.0% 1996 7.1% 1997 14.5% INTERNATIONAL SALES For the Year Ending December 31 Percent of Total Sales 1995 7.4% 1996 12% 1997 17.1% DEBT TO EQUITY As of December 31 Percent 1995 23.2% 1996 15.3% 1997 5.6% 1 To Our Shareholders: We are delighted to report on United Industrial's achievements in 1997 and, in particular, on the excellent progress we have made in implementing the Strategic Program announced in December 1996. We are accomplishing what we set out to do, and that is translating into enhanced financial performance and greater value for our shareholders. SOLID FINANCIAL AND DIVIDEND GROWTH For 1997, net income, including special items, increased to $14.8 million, or $1.19 per diluted share, from $6.4 million, or $0.52 per diluted share, in 1996. Excluding special items and income from operations that were divested in Fall 1997, net income for 1997 was $6.9 million, or $0.56 per diluted share, up 19.3% from $5.8 million, or $0.48 per diluted share in 1996. Sales for 1997 reached $235.2 million, an increase of 7% from $220.8 million in 1996. These gains were driven by the strong results of our core defense-related businesses, as well asour success in capitalizing on new opportunities in other areas, such as engineering and maintenance services, firefighter training, and energy systems. Our bottom line also benefitted from a wide range of cost reduction initiatives and greater operating efficiencies. Moreover, we have every reason to believe the Company's strong performance will continue, with 1997 backlog up 18% from a year ago to $188 million. The Company's financial position remains very sound, with little debt at year-end. As a result of the strength of our balance sheet and the improved financial performance, the Board of Directors has raised the quarterly dividend significantly over the last year, from 5 cents per share in February 1997 to a current rate of 10 cents per share, approved in February 1998. This increase is a clear testament to the Board's confidence in the Company's continued growth prospects. We are also pleased to report that, in addition to the higher dividend rate, the total return on a share of UIC stock was 85% in 1997. The total return on a share of UIC stock was 85% in 1997 2 STRATEGIC OBJECTIVES MET The comprehensive Strategic Program we announced in December 1996, developed under the leadership of a newly revamped management team, was designed to reposition United Industrial for long-term profitable growth by refocusing on the Company's core businesses and strengths. These included our defense and technology-related businesses as well as transportation systems. Our strategy was to capitalize on our core competencies and competitive advantages to aggressively pursue new opportunities for growth. As part of our plan, we also decided to divest certain non-core operations to concentrate our attention and resources on our core businesses. Since that time, our entire organization has been one-hundred percent focused on achieving the objectives we laid out for ourselves. We have targeted our energies on building our businesses in five distinct areas: o Unmanned Air Vehicles (UAVs) o Simulation & Test Systems o Engineering & Maintenance Services o Defense-Related Advanced Technology Programs o Transportation Systems The progress we have made in expanding each of these businesses is discussed in the pages that follow. Two key highlights include a $20 million contract from the Romanian Ministry of Defense for a UAV System and Moving Target Simulator and a $35 million contract to upgrade Maintenance Training Devices for the C-17 aircraft for the U.S. Air Force. We also completed the divestiture of two non-core businesses in Fall 1997; these included Neo Products Co., a plastics producer, and Systems Management, Inc., a weather systems business. The proceeds from these sales, which totaled $19.1 million, were used to retire debt with the balance to be reinvested in growing our core businesses. An important component of our strategy to build our core businesses was to aggressively pursue international opportunities, and we have dramatically increased our presence overseas. International contracts accounted for 17% of our new business in 1997, We have refocused on the Company's core businesses and strengths 3 compared to 12% in 1996. Among the key contracts won were the $20 million defense systems contract from the Government of Romania; an $8 million contract from British Airways for a pneumatic test cell center and hydraulic test equipment for its new facility in the United Kingdom; and a $3.85 million contract for firefighting training systems for the new Royal Netherlands Air Force Training Facility. Detroit Stoker, our energy systems subsidiary, also turned in an excellent performance for the year. Substantial gains in sales and earnings were fueled by strong product demand in the U.S. and abroad as well as increased operating efficiencies. We believe the future for Detroit Stoker is very bright, and, in October 1997, we appointed Michael DiMonte as President of this business. Michael has 23 years of experience in the power generation industry and expertise serving customers around the world. His leadership will be invaluable as Detroit Stoker continues to build its business. CONTINUED COMMITMENT TO EXCELLENCE Providing our customers with the highest quality products and superior service has long been a hallmark of United Industrial. This relentless commitment to excellence continued to serve us well in the past year as we sought to expand the scope of our business and exceed the expectations of new customers. We take pride in our accomplishments and thank all of our employees for a job extremely well done. Our efforts were recognized in 1997 when the International Standards Organization gave our Engineering and Maintenance Services (ESI) division its highest level of certification, ISO 9001. This award makes ESI one of the few U.S. service organizations to hold this internationally recognized quality certification. Moreover, this award follows the ISO 9001 certification, in 1996, of our defense systems subsidiary AAI Corporation. AAI Corporation was also honored in 1997 with the Maryland Award for International Business Leadership and the Regional Manufacturing Institute's Manufacturers' Cup. As we look ahead, we are excited about the opportunities for further growth. Our new strategy is working and there is great potential in our core businesses for expansion. We have laid a solid foundation for the future, and our management team is committed to building on our strengths to generate long-term growth and greater shareholder value. We provide customers with the highest quality products and superior service 4 [Photograph of Richard R. Erkeneff, President and Chief Executive Officer, Harold S. Gelb, Chairman of the Board] To left Richard R. Erkeneff, President and Chief Executive Officer, Harold S. Gelb, Chairman of the Board We would like to thank Howard M. Bloch, who is retiring from our Board of Directors in May, for his 23 years of outstanding service and wise counsel. At the same time, we are fortunate to be able to attract Joseph S. Schneider, who will be joining our Board in May. Mr. Schneider is President of JSA Partners, Inc., a consulting firm in the aerospace and defense industry, and the Chairman and Co-Founder of JSA Research, Inc., an independent aerospace and defense research firm serving institutional investors. We also thank our shareholders and customers for their continued support and our employees, again, for their hard work and dedication. We look forward to reporting on the Company's continued achievements in 1998 and the years ahead. Sincerely, /s/ Richard R. Erkeneff /s/ Harold S. Gelb President and Chief Executive Officer Chairman of the Board 5 UAVs UNMANNED AIR VEHICLES The production of Unmanned Air Vehicles (UAVs) is an important -- and growing -- area of strength for United Industrial's AAI subsidiary. We are the only U.S. company that manufactures UAVs in significant volumes and that provides us with key competitive advantages. Our Pioneer UAV program for the U.S. government has established an excellent record of success over the past twelve years, and we continue to see increased demand for the Pioneer and AAI's newer Shadow 200/600 UAVs. This greater demand for UAV products has been fueled by both domestic and international customers. Domestically, the U.S. military has recognized the valuable role UAVs can play in combat, as demonstrated by the Pioneer's success during Desert Storm and later, the conflicts in Somalia and Bosnia. As a result, the government is investing greater resources in developing state-of-the-art UAV systems, and AAI has played a key role in these efforts. At the same time, there has been growing interest abroad. Numerous countries are now seeking UAV capability as a means of timely surveillance and reconnaissance, particularly in light of territorial disputes and insurgent activities in many parts of the world. Reflecting these and other factors, independent industry sources currently project the UAV market to grow approximately 300% in the next five years. AAI's multi-million dollar award from the Romanian Ministry of Defense, in May 1997, for a Shadow 600 unmanned air vehicle system highlights the growth of the international UAV marketplace -- as well as our ability to serve this customer base. Our Shadow 200 and 600 UAVs provide affordable, off-the-shelf capability, and are, thus, very attractive to new international customers seeking a proven product at a cost effective price. Recognizing our strong competitive position in this market, we plan to aggressively pursue emerging opportunities for international UAV sales. We also made significant strides in building our domestic UAV business during 1997. Our Pioneer program with the U.S. government has continued, and we recently completed the final delivery of 30 air vehicles under the Pioneer FY94 Procurement Program. We also started deliveries under the FY96 Spare Parts Procurement Program, a $7.6 million contract. The Pioneer program has been extended by the government through the year 2003, and we anticipate a number of new contracts in the near term, including an order for 15 additional air vehicles. We continue to see increased demand for UAV products {Photo opposite page] right page AAI's Shadow 600 UAVs are inspected prior to shipment to Romania. Under a $20 million contract, AAI is providing Romania with a UAV System and a Moving Target Simulator air defense training system. 6 A key highlight of the Pioneer program during 1997 was the integration, test and delivery of a modified Pioneer air vehicle incorporating the first Modular Integrated Avionics Group (MIAG). The MIAG, which is a state-of-the-art avionics unit that replaces the original flight computer, enhances reliability of the UAV, improves its overall performance and lowers operating costs. A MIAG upgrade of the entire Pioneer fleet is anticipated in 1998/1999. In addition, under a $1.77 million contract award, we have been installing an advanced automated landing system, Common Automatic Recovery System (CARS), in the entire Pioneer fleet. The initial testing was very successful, hav-ing thus far completed fully autonomous runway landings of the Pioneer as well as at-sea shipboard recoveries, using the CARS system. We have also moved ahead on a $1.9 million contract for repair of Pioneer Unmanned Air Vehicles and associated Line Replaceable Units and a $1.38 million contract for a Portable Control Station Autotrack & Azimuth Indicator for the Pioneer. Simulation and Test Systems SIMULATION AND TEST The production of simulation and test systems has long been the core of our business. We count among our customers the U.S. military as well as foreign and domestic governments, and have, in recent years, been successful in expanding into the commercial marketplace. With our advanced capabilities in signal generation, hydraulics and software technology, we are able to leverage our skills across a wide range of applications - from advanced combat training systems to aircraft test equipment to firefighter training systems. As a result, we believe there will be significant opportunities to continue to build our simulation and test businesses in both defense-related and other sectors. We operate in the simulation and test systems market primarily through our AAI subsidiary, which has a strong history of serving the U.S. government. A key program underway is the production of maintenance training systems for the gov-ernment's Joint Surveillance Target Attack Radar System (JointSTARS). Shortly after the close of the year, we delivered JointSTARS maintenance training equipment to Keesler Air Force Base in Biloxi, Mississippi. This system incorporates state-of-the-art technology and is now being utilized for lesson development, with training classes to begin later in 1998. Currently, We continue to build our simulation and test businesses 8 [PHOTO OMITTED] right page AAI's state-of-the-art simulators are used to teach Air Force personnel to operate and maintain JointSTARS Prime Mission Equipment. Here, technicians work on an AAI training simulator at Keesler Air Force Base. 9 we are completing a state-of-the-art simulator for the JointSTARS Prime Mission Equipment Maintenance Training System for Robins Air Force Base in Warner-Robins, Georgia. AAI has been selected by the U.S. Air Force's Aeronautical Systems Center (ASC) at Wright-Patterson Air Force Base in Dayton, Ohio to develop and produce two Surveillance Radar Training Sets that provide the U.S. Air Force with maintenance training for the radar systems aboard the E-3 Airborne Warning and Control System (AWACS). AAI and ASC are currently in negotiations, and contract award is expected in April 1998. The Joint Service Electronic Combat Systems Tester is another important program in place for the U.S. government. Our Critical Design Review for the complex system is planned for March of 1998. We recently negotiated a $9.1 million increase in contract value for additional work and cost growth, including the incorporation of new capabilities for the F-15C aircraft. We have also begun design work on the Carry On Combat Systems Trainer (COCST) for the U.S. Navy. The COCST will use existing shipboard interfaces to develop a portable Combat Systems Trainer. This program is expected to grow significantly in the next two years. Overseas expansion is a key element of our strategy 10 A key element of our strategy has been to build our simulation and test business overseas as well. In May 1997, we received a significant contract for a Moving Target Simulator (MTS) from the Romanian Ministry of Defense in conjunction with its contract to purchase a Shadow 600 UAV. This MTS is a state-of-the-art visual simulation device used to train military short-range air defense gunners. It provides tactical training through simulation of targets, geographical and meteorological environments and countermeasures, which represent changing world conditions and support new air defense training requirements. We also continued work on our Japanese MTS program, with the completion of an M87E system at Chitose Air Base on the island of Hokkaido. This system was our fourth completed in Japan. The Japanese Defense Agency has been very pleased with the results of these training systems, which are being used to train operators of two types of shoulder-fired anti-aircraft missiles and two types of a radar-equipped anti-aircraft gun system. We are at work on our fifth MTS system, to be delivered to the Misawa Air Base, and expect completion by November 1998. During 1997, we also completed the upgrade of the MTS system at the Hyakuri Air Base in Ibaraki, which was the first MTS system we installed in Japan. Based on our strong track record, we are confident there will be continued contract opportunities in Japan in the years ahead. [Photo top of page] top of page An engineer makes an adjustment on an AAI/ACL high-flow test stand, which is used by Hamilton Standard, one of the world's leading engine controls manufacturers, to test production fuel controls for aircraft engines. 11 [PHOTO OMITTED] [Photograph left page] left page Local firefighters train at the Bucks County, Pennsylvania Emergency Services Training Center. Symtron Systems is currently producing similar equipment for the U.S. Army. 12 A particularly exciting recent win for AAI was the Generic Navy Stimulator/Simulator program(GNSS), valued at approximately $12.7 million with additional production options. The GNSS system simulates a threat situation via stimulation of a warship's onboard radar to provide training for shipboard operators. The system allows single ships or entire battle groups to be integrated into a training scenario. At the heart of the GSNN system is a revolutionary AAI-developed technology called a "Programmable Pulse Compression Wave-form Generator." The Waveform Generator is a major breakthrough in the radar stimulation field with numerous applications for training and testing. We are optimistic this award will lead to significant additional opportunities in domestic and foreign sales. Outside of the defense industry, AAI's ACL Technologies division has focused on leveraging its capabilities in hydraulics to expand in the commercial marketplace, particularly through new contracts from major airlines and aircraft producers worldwide. Reflecting its efforts, new orders increased 79% from last year, coming in significantly ahead of plan. This performance was highlighted by an $8 million contract award from British Airways to provide all pneumatic test equipment for its new facility at London's Heathrow Airport. We are optimistic this program may lead to a longer-term partnership with British Airways. In addition, ACL received new contracts from customers in Singapore, China, Turkey, United Kingdom, Mexico, Egypt, Israel and Korea, with international orders accounting for 65% of new business. Symtron Systems, our firefighting simulation subsidiary, had a record year for bookings in 1997, winning a number of significant new contracts. We were awarded a multi-million dollar contract by the U.S. Army's Simulation, Training and Instrumentation Command (STRICOM) for fire training systems, with options for approximately $15 million in future business. Symtron received awards for Aircraft Rescue Fire Fighter Trainers (ARFFT) from government authorities in Kenai, Alaska; Monroe County, New York; and Lexington, Kentucky. We also completed delivery of ARFFT trainers for airports in Salt Lake City, Utah and Washington, D.C. Internationally, Symtron received a $3.85 million contract from Krantz-TKT for the Netherlands Air Force firefighter training system. This system, based on its current design, will be the largest fire training system of its kind in the world. Symtron also won contracts for structural firefighter trainers from the cities of Dresden, Germany and Yokohama, Japan. Our hydraulics capabilities have led to contracts from major airlines worldwide 13 Engineering and Maintenance Services ENGINEERING AND MAINTENANCE AAI achieved excellent results in 1997 in building its business in engineering and maintenance ser-vices, with our Engineering Support Incorporated (ESI) subsidiary generating an increase of 90% in new business bookings from 1996 levels. This strong performance has been attributable to continued growth in outsourcing of engineering and maintenance services by the U.S. government and commercial customers, as well as a more aggressive approach we have instituted to capitalize on these new opportunities. We recognized the increasing demand for high quality outsourcing partners with special technical expertise such as ours, and we made it a priority to make sure we had the right management team and infrastructure in place to win these contracts. As a result, an increasing number of customers ESI's new business bookings increased 90% in 1997 are now counting on us for support services as they focus on their core operations. We have found our advanced capabilities in a range of areas -- such as hydraulic component testing, UAV design and system integration, firefighter and combat simulation and the manufacture of military test equipment -- to be not only an important competitive advantage but also enable us to provide a wide array of logistics support services to customers. One of ESI's most significant contract awards during 1997 was the C-17 Maintenance Training System program, under which we will upgrade Maintenance Training Devices for the C-17 Aircraft for the U.S. [Photograph bottom of page] bottom of page Air Force maintenance technicians sharpen their skills on the C-17 Aircraft Engine Trainer, one of eleven training devices designed to provide realistic hands-on experience while the actual aircraft remains in service. Growth in outsourcing provides new opportunities Air Force and provide logistics support for a five-year period. This contract has an initial value of $22 million with projected growth over the next five years to $75 million. Work is underway on our program, initial-ly valued at $7 million, to relocate the U.S. Navy's Naval Propulsion Test Facility in Trenton, New Jersey to Patuxent River, Maryland, and we began construction on a Fire Trainer Academy, to be located in Kenai, Alaska, where we will provide maintenance and training services. The academy will be operational in mid-1998. In addition, ESI has partnered with the Maryland Fire Rescue Institute to provide Mobile Fire Training Services to airport and municipal fire departments. During 1997, ESI also achieved initial cer-tification for ISO 9001, which makes ESI one of the few U.S. service organizations to hold this internationally recognized quality certification. Defense-Related Programs ADVANCED TECHNOLOGY United Industrial has two key advanced techno-logy programs underway: the Objective Individual Combat Weapon (OICW) and Advanced Boresight Equipment (ABE). Under the OICW program, we have teamed up with a number of industry leaders to develop an advanced dual-barreled weapon. We recently completed Phase III of this program, including systems demonstrations. We expect the U.S. Army to select a single contracting team in mid-1998 to continue on Phase IV. The ABE program consists of the development of a state-of-the-art technology, including computer, laser and gyroscope components, for precision alignment of parts. Our new prototypes have met system test requirements, and we are working with the Army, Navy and Air Force to harness the benefits of this exciting new technology. In addition, we have submitted proposals to Boeing for the incorporation of ABE technology in support of C-17 aircraft production and are at work on a proposal for Daimler Benz in Germany to supply ABE for the Eurofighter. As part of our growth strategy, we plan to increasingly leverage our strengths in advanced technologies to expand into new areas. We expect there will be a growing number of opportunities and believe we are well-positioned to compete in this marketplace. We are well-positioned in the advanced technology marketplace 16 [PHOTO OMITTED] [Photograph right page] right page Two Army maintenance technicians use AAI's Advanced Boresight Equipment (ABE) on an Apache Attack Helicopter. AAI's ABE equipment represents a major revolution in boresighting technology. 17 Transportation Systems TRANSPORTATION Our entrance into the U.S. electric trolley bus market three years ago, through Electric Transit Inc. (ETI), AAI's jointly-owned company with Czech Republic-based SKODA, has provided new opportunities for growth. Within a short period of time, ETI has established itself in the marketplace and won key contracts. A major award received last year was from the City and County of San Francisco to manufacture 250 new electric trolley coaches, with the possibility of an additional 40 units to replace existing San Francisco MUNI coaches. This contract is valued at $168 million and, with options, could reach up to $193 million. Approximately $53 million of the total value will go to AAI. We have found that our core competencies in systems engineering, manufacturing and integration serve us well in producing mass transportation vehicles and systems. During 1997, AAI Transportation Systems completed a number of significant projects. We produced a total of 36 carshells and 54 trucks for the Baltimore Central Light Rail System as a subcontractor to Adtranz and, as a subcontractor to ETI, manufactured nine of the electric trolley buses for the Miami Valley Regional Transit Authority in Dayton, Ohio. In addition, we completed the conversion of two people mover vehicles for the O'Hare Airport Transit System in Chicago, Illinois, and received a follow-on contract, valued at $3.7 million, for the comprehensive overhaul of the entire fleet. Our core competencies serve us well in producing mass transit systems 18 [PHOTO OMITTED] [Photograph right page] right page Technicians begin integrating the traction system into electric trolley buses for Dayton, Ohio. More than three miles of wires and cables are installed on each bus. 19 Energy Systems ENERGY SYSTEMS In 1998, Detroit Stoker Company, our energy systems subsidiary, celebrates its 100th year in operation, and has continued to demonstrate leadership performance in the combustion industry, recording substantial gains in sales and earnings in 1997. Shipments increased 26.4% from 1996, while pre-tax earnings more than doubled. The excellent results were driven by higher market share of aftermarket products and services, improved operating efficiencies and the delivery of Hydrograte(R) stokers for the combustion of biomass and refuse fuels. In addition, Detroit Stoker has been successful in its efforts to expand its business on a global level. International sales included a multi-million dollar contract from Foster Wheeler Energia, S.A. to supply three stokers for the Valorsul municipal waste-to-energy plant to be constructed near Lisbon, Portugal. The contract includes the supply of three Detroit Reciprograte(R) stokers consisting of 27 modules and necessary auxiliaries including more than 200 tons of stainless steel alloy grate castings. The project was initiated in 1997 and is expected to be completed in 1998. When completed, the facility will be capable of treating 2,016 metric tons of refuse per day and will generate 43.3 megawatts of electric power that will be sold to Electricidade de Portugal on a long-term basis. Domestically, we have seen continued opportunities in the area of renewable biomass fuels, where our Hydrograte(R) stoker won new contracts in Arkansas and Georgia to re-power existing boilers. In addition, aftermarket sales of stoker replacement parts and retrofits increased 4.2% last year, making a significant bottom-line impact. We have also experienced steady demand for our newer line of low nitrous oxide burner products, which incorporate a more environmen-tally advanced burner technology. We received contracts from NASA and the state of Indiana to retrofit existing boilers with this new technology, and we expect demand for these products to continue to grow, particularly in an environment of increased regulatory scrutiny. In addition, during 1997, one of our products featuring this more advanced burner technology, our new Methane de-Nox system, was honored by R&D Magazine as one of the "100 Most Technologically Significant New Products of the Year." The award was presented to Detroit Stoker and the Institute of Gas Technology for the development of the new system, which significantly reduces the emission of nitrous oxides from stoker fired boilers. Energy systems continues to demonstrate leadership performance 20 [PHOTO OMITTED] [Photograph right page] right page Plant personnel inspect grate castings from one of the Detroit Reciprogate(R) stoker modules being assembled for the waste-to-energy plant under construction near Lisbon, Portugal. 21 BOARD OF DIRECTORS Susan Fein Zawel Vice President Corporate Communications, Associate General Counsel and Secretary of United Industrial Corporation. Director since 1995. Richard R. Erkeneff President and CEO President of United Industrial Corporation and AAI Corporation. Former Senior Vice President of the Aerospace Group at McDonnell Douglas Corporation and President of McDonnell Douglas Electronics Systems Company. Director since 1995. Howard M. Bloch Vice Chairman of the Board and retired Vice President of the Company. Director since 1975 and retiring from the Board in May, 1998. Edward C. Aldridge, Jr. President and Chief Executive Officer of the Aerospace Corporation. Former President of McDonnell Douglas Electronic Systems Company and Secretary and Under Secretary of the U.S. Air Force. Director since 1995. Joseph S. Schneider President of JSA Partners, Inc. and Chairman and Co-Founder of JSA Research, Inc. Former President of JSA International, Inc. and EDS/JSA International, Inc. Mr. Schneider also serves on the Board of Signal Technology Corporation. Nominee for director in May, 1998. Harold S. Gelb Chairman of the Board Chairman of the Board of United Industrial Corporation. Former senior partner of Ernst & Young LLP. Director since 1995. E. Donald Shapiro The Joseph Solomon Distinguished Professor of Law and former Dean/ Professor of Law of New York Law School. Mr. Shapiro also serves on the Boards of Loral Space and Communications, Ltd., Bank Leumi Trust Co., and several other corporations. Director since 1996. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Year Ended December 31, 1997 Compared With Year Ended December 31, 1996. Net sales of $235,183,000 in 1997 rose by 7% from $220,822,000 in 1996. The 1997 sales included $29,838,000 of sales from the Neo Products company, the operating assets of which were sold in August 1997 and the Weather Systems Business (together the "Disposed Businesses") sold in September 1997. In 1996 the sales from the Disposed Businesses amounted to $42,331,000. Excluding the sales from the Disposed Businesses, net sales increased $26,854,000 or 15% from 1996 to 1997. Excluding the disposed Weather Systems business, the net sales in the defense segment increased 13% or $18,939,000 to $167,418,000 in 1997 from $148,479,000 in 1996. The growth was attributable to a general increase in sales including a major contract to deliver an Unmanned Air Vehicle System and an Air Defense Training System to the Government of Romania. 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 $129,933,000 in 1997 and $144,749,000 in 1996. Included in these figures are Weather Systems Business sales of $25,233,000 in 1997 and $37,000,000 in 1996. Export sales by the defense segment were $31,515,000 in 1997 and $22,400,000 in 1996, an increase of $9,115,000 or 41%. Net sales in the energy segment increased 26% or $7,915,000 to $37,927,000 in 1997 from $30,012,000 in 1996, due primarily to installations of stoker equipment. Gross profit and margin increased to $58,791,000 and 25% in 1997 from $54,966,000 and 24.9% in 1996. Excluding the Disposed Businesses the gross profit and margin were $52,859,000 and 25.7% in 1997 and $47,225,000 and 26.5% in 1996. The 7.8% increase in the gross profit percentage in the energy segment to 38.3% in 1997 from 30.5% in 1996 was generally attributable to an improved pricing structure, product mix and improved operating efficiencies. In the defense segment the gross profit percentage decreased to 22.7% in 1997 from 24.5% in 1996. Excluding the Disposed Business from the defense segment the gross profit percentage decreased to 22.9% in 1997 from 26% in 1996. A fluctuation in the mix of contracts from a "fixed price production" to "cost plus development" in part caused a decrease in the gross profit percentage. However, the current contract mix includes lower financial risk programs that offer opportunities for follow-on higher-margin, long-term, sole source production awards. Also contributing to the lower margins was a lower than expected backlog in certain product areas at the end of 1996 and the early part of 1997. Selling and administrative expenses as a percentage of net sales were 18.4% in 1997 and 19.6% in 1996. Excluding the Disposed Businesses the selling and administrative expenses as a percentage of net sales were 19.4% in 1997 and 21.8% in 1996. Selling and administrative expenses decreased $136,000 in 1997 compared to 1996. Excluding the Disposed Businesses the selling and administrative expenses increased $856,000 or 2.2%. The increase was generally attributable to expenses relating to increased sales in the energy segment. Interest expense was $915,000 in 1997 and $1,997,000 in 1996. The decrease was due to reduced borrowings. 23 Other income-net, increased $2,340,000 to $1,150,000 in 1997 from a net expense of $1,190,000 in 1996. The increase was primarily due to a favorable litigation settlement of approximately $3,000,000, net of legal expenses, ($1,779,000 net of taxes or $.14 per diluted share), partially offset by an increase in a charge related to a contingent payment to the sellers of a subsidiary. Interest income increased $411,000 or 40% due to increased investments. In 1997, net income increased $8,421,000 or 131.5% to $14,825,000 or $1.19 per diluted share from $6,404,000 or $.52 per diluted share in 1996. Included in the 1997 net income was the above mentioned favorable litigation settlement and a net gain on the sales of Disposed Businesses of $8,470,000 net of taxes or $.68 per diluted share, partially offset by a reserve recorded in the third quarter related to a local tax matter. The year ended December 31, 1996 results included charges of approximately $2,100,000 net of taxes, or $.17 per diluted share, related to a contract dispute that was settled during 1996 and approximately $573,000 net of taxes, or $.05 per diluted share, regarding non-contract inventory reserves, partially offset by favorable contract adjustments totaling approximately $1,400,000 net of taxes, or $.11 per diluted share. For 1997, operating income, net of taxes, related to Disposed Businesses totaled $1,595,000 or $.13 per diluted share, compared to $1,827,000 or $.15 per diluted share in 1996. Excluding the above special items and the operating results from the Disposed Businesses in both years, net income for 1997 increased 19.3% to $6,981,000, or $.56 per diluted share, from $5,850,000 or $.48 per diluted share, in 1996. 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. 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 1996. Significant stoker orders were received late in 1996, and sales regarding these orders were recorded in 1997. Gross profit and margin increased to $54,966,000 and 24.9% in 1996 from $47,309,000 and 20.8% 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 4.8% to 24.5% 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. 24 Gross margin in the Company's energy segment improved 1.9% to 30.5%. Higher sales of aftermarket stoker replacement parts and of 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 19.6% in 1996 and 19% in 1995. The increase was due to lower sales volume in 1996. Actual selling and administrative expenses were at the same level 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. Liquidity and Capital Resources Cash and cash equivalents amounted to $23,098,000 at the end of 1997 and $13,427,000 at the end of 1996. In 1997, the Company invested $6,102,000 in marketable securities. The primary reasons for the increase were the cash received from the sale of the Disposed Businesses and cash received from borrowings under the Agreement referred to below. The Company's principal uses of capital during the past several years related to new projects and the repayment of long-term debt and bank borrowings. The Company expects to meet its cash requirements for 1998, including amounts necessary to fund new business ventures, from current cash, operations and borrowings under its existing line of credit. Factors relating to the amounts of cash from operating, financing and investing activities are presented in detail in the Consolidated Statements of Cash Flows. The Company paid cash dividends of $.29 per share in 1997, $.20 per share in 1996 and $.26 per share in 1995. Aggregate payments amounted to $3,536,000 in 1997, $2,434,000 in 1996 and $3,165,000 in 1995. The ratio of current assets to current liabilities was 3.0 at the end of 1997, and 1.8 at the end of 1996. The increase in 1997 was principally due to the increase in cash from the sale of Disposed Businesses and reduced borrowings. Capital expenditures were $6,926,000 in 1997 and $6,299,000 in 1996. There were no material commitments for acquisition of capital assets as of December 31, 1997. On June 11, 1997, the Company and its subsidiaries entered into a Revolving Line of a Credit Agreement, Term Loan Agreement and Security Agreement ("Agreement") (amending and restating a credit agreement, dated as of October 13, 1994) with an institutional lender. In July 1997, the Company borrowed $6,250,000 under the Term Loan Agreement, at LIBOR plus a fluctuating margin. The principal is payable in sixty consecutive monthly installments. At December 31, 1997 the outstanding borrowings were $5,729,000, none of which were revolving credit borrowings. The amount available under the Revolving Line of Credit Agreement is $17,500,000 with various interest rate options, and is reduced by the letter of credit obligations, which may not exceed $12,500,000. The 25 Agreement provides for restrictive covenants among which are debt service coverage ratio, quick ratio, senior debt ratio and a tangible net worth requirement, all as defined. All assets now owned or hereafter acquired by the Company and its subsidiaries are pledged as collateral under the Agreement. 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. 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 16). Year 2000 The Company has developed a plan to modify its information technology to be ready for the year 2000 and has begun converting critical data processing systems. The Company currently expects the project to be substantially complete by early 1999. The Company does not expect this project to have a material effect on its operations or financial condition. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (Statement 131), which is effective for years beginning after December 15, 1997. Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company will adopt the new requirements retroactively in 1998. Management has not completed its review of Statement 131. The adoption of this statement will not affect results of operations or financial position but may affect certain disclosures. Forward Looking Information This Annual Report contains "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements are based on management's expectations, estimates, projections and assumptions. Words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," and variations of such words and similar expressions are intended to identify such forward looking statements which include, but are not limited to, projections of revenues, earnings, segment performance, cash flows and contract awards. These forward looking statements are subject to risks and uncertainties which could cause the Company's actual results or performance to differ materially from those expressed or implied in such statements. These risks and uncertainties include, but are not limited to, the following: the Company's successful execution of internal performance plans; performance issues with key suppliers, subcontractors and business partners; legal proceedings; product demand and market acceptance risks; the effect of economic conditions; the impact of competitive products and pricing; product development, commercialization and technological difficulties; capacity and supply constraints or difficulties; legislative or regulatory actions impacting the Company's energy segment and transportation business; changing priorities or reductions in the U.S. Government defense budget; contract continuation and future contracting awards; and U.S. and international military budget constraints and determinations. 26 Consolidated Statements of Operations United Industrial Corporation
- ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) Year ended December 31 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- NET SALES $235,183 $220,822 $227,398 OPERATING COSTS AND EXPENSES: COST OF SALES 176,392 165,856 180,089 SELLING AND ADMINISTRATIVE 43,170 43,306 43,296 (GAIN) LOSS ON SALE OF ASSETS-- NET (13,306) (1,135) 336 OTHER (INCOME) EXPENSE-- NET (1,150) 1,190 (127) INTEREST INCOME (1,444) (1,033) (1,201) INTEREST EXPENSE 915 1,997 2,360 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING COSTS AND EXPENSES 204,577 210,181 224,753 INCOME BEFORE INCOME TAXES 30,606 10,641 2,645 PROVISION (CREDIT) FOR INCOME TAXES FEDERAL CURRENT 6,802 3,192 4,139 DEFERRED 1,176 198 (2,726) STATE 7,803 847 344 - ---------------------------------------------------------------------------------------------------------------------------------- INCOME TAXES 15,781 4,237 1,757 - ---------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 14,825 $ 6,404 $ 888 EARNINGS PER SHARE BASIC $ 1.22 $ .53 $ .07 DILUTED $ 1.19 $ .52 $ .07 - ----------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements 27 Consolidated Balance Sheets United Industrial Corporation
- ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) December 31 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS CASH AND CASH EQUIVALENTS $ 23,098 $ 13,427 MARKETABLE SECURITIES 6,102 -- TRADE RECEIVABLES U.S. GOVERNMENT 11,238 25,781 OTHER 16,581 14,353 - ---------------------------------------------------------------------------------------------------------------------------------- 27,819 40,134 INVENTORIES 31,790 39,507 PREPAID EXPENSES AND OTHER CURRENT ASSETS 11,282 1,217 DEFERRED INCOME TAXES 4,982 6,131 ASSETS HELD FOR SALE 12,516 -- - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 117,589 100,416 - ---------------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS 40,126 38,018 PROPERTY AND EQUIPMENT LAND 631 1,880 BUILDINGS AND IMPROVEMENTS 28,404 49,761 MACHINERY AND EQUIPMENT 69,064 74,046 FURNITURE AND FIXTURES 4,784 5,103 - ---------------------------------------------------------------------------------------------------------------------------------- 102,883 130,790 LESS ALLOWANCES FOR DEPRECIATION AND AMORTIZATION 77,307 89,256 - ---------------------------------------------------------------------------------------------------------------------------------- 25,576 41,534 $183,291 $179,968 - ----------------------------------------------------------------------------------------------------------------------------------
28
- ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) December 31 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES ACCOUNTS PAYABLE $ 7,604 $ 10,135 ACCRUED EMPLOYEE COMPENSATION AND TAXES 7,777 7,690 CUSTOMER ADVANCES 3,542 5,873 PROVISION FOR CONTRACT LOSSES 5,776 9,166 FEDERAL INCOME TAXES 630 963 CURRENT PORTION OF LONG-TERM DEBT 1,250 13,750 OTHER LIABILITIES 13,134 8,105 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 39,713 55,682 LONG-TERM DEBT, LESS CURRENT PORTION 4,479 -- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 22,356 21,825 OTHER LIABILITIES 5,029 2,654 DEFERRED INCOME TAXES 9,690 9,662 SHAREHOLDERS' EQUITY COMMON STOCK -- PAR VALUE $1.00 PER SHARE AUTHORIZED SHARES -- 15,000,000 OUTSTANDING SHARES: 1997-- 12,249,309; 1996-- 12,173,743 14,374 14,374 ADDITIONAL CAPITAL 89,929 90,196 RETAINED EARNINGS 14,165 2,876 COST OF SHARES IN TREASURY: 1997-- 2,124,839 SHARES; 1996 - 2,200,405 SHARES (16,444) (17,301) - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 102,024 90,145 - ---------------------------------------------------------------------------------------------------------------------------------- $183,291 $179,968 - ----------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements 29 Consolidated Statements of Cash Flows United Industrial Corporation
- ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Year ended December 31 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 14,825 $ 6,404 $ 888 ADJUSTMENT TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: DEPRECIATION AND AMORTIZATION 9,559 8,306 8,300 DEFERRED INCOME TAXES 1,176 198 (2,726) (GAIN) LOSS ON SALE OF ASSETS (13,306) (1,135) 336 CHANGES IN OPERATING ASSETS AND LIABILITIES -- NET (DECREASE) INCREASE IN CURRENT INCOME TAXES (333) 1,024 (3,333) DECREASE (INCREASE) IN TRADE RECEIVABLES 7,855 (7,223) 653 DECREASE IN INVENTORIES 5,839 8,415 5,564 (INCREASE) DECREASE IN PREPAID EXPENSES AND OTHER CURRENT ASSETS(10,133) 544 (94) (DECREASE) INCREASE IN ACCOUNTS PAYABLE, ACCRUALS, ADVANCES AND OTHER CURRENT LIABILITIES (890) 2,218 (139) OTHER-- NET (96) (1,514) (3,175) - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 14,496 17,237 6,274 INVESTING ACTIVITIES - ----------------------------------------------------------------------------------------------------------------------------------- PURCHASE OF MARKETABLE SECURITIES (6,102) -- -- PURCHASE OF PROPERTY AND EQUIPMENT (6,926) (6,299) (5,705) NET PROCEEDS FROM SALE OF ASSETS 19,183 2,250 370 DECREASE IN NOTE RECEIVABLE -- -- 8,540 - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 6,155 (4,049) 3,205 FINANCING ACTIVITIES - ----------------------------------------------------------------------------------------------------------------------------------- INCREASE IN LONG-TERM LIABILITIES -- -- 653 PROCEEDS FROM BORROWINGS 6,250 9,000 9,000 PAYMENTS ON LONG-TERM DEBT AND BORROWINGS (14,271) (18,250) (10,200) DIVIDENDS (3,536) (2,434) (3,165) PROCEEDS FROM EXERCISE OF STOCK OPTIONS 577 8 16 - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (10,980) (11,676) (3,696) INCREASE IN CASH AND CASH EQUIVALENTS 9,671 1,512 5,783 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,427 11,915 6,132 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 23,098 $ 13,427 $ 11,915 - -----------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements 30 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 transportation systems, firefighter training systems, and energy systems for industry and utilities. The principal lines of business are defense and related products, and energy generating systems. - -------------------------------------------------------------------------------- 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, and 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 and Marketable Securities The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Marketable securities consist primarily of investment grade bonds, commercial paper and other short-term investment funds. Inventories Inventories are stated at the lower of cost or market. At December 31, 1997 and 1996, approximately 9% and 10%, 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 $3,863,000 higher than reported on December 31, 1997 and $4,090,000 higher than reported on December 31, 1996. 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 sales and gross profit on these contracts are accounted for based on the units delivered. See Note 5. 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 In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share." Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes dilutive effects of options, warrants and convertible securities. 31 Notes to Financial Statements (continued) United Industrial Corporation Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. 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 8. 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 MARKETABLE SECURITIES At December 31, 1997, the Company's short-term investments consist of debt securities, whose carrying amount of $6,102,000 approximates market value and are classified as held-to-maturity securities. In accordance with Financial Accounting Statement No. 115, management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. - -------------------------------------------------------------------------------- NOTE 4 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 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- AMOUNTS BILLED $ 9,221 $22,282 UNBILLED RECOVERABLE COSTS AND EARNED FEES 1,704 3,251 RETAINAGE PER CONTRACT PROVISIONS 313 248 $11,238 $25,781 - ----------------------------------------------------------------------------------------------------------------------------------
Billed and unbilled amounts above include $2,176,000 and $2,283,000 at December 31, 1997 and 1996, respectively, related to contracts for which a subsidiary of the Company is a subcontractor to other government contractors. Unbilled recoverable costs and earned fees represent amounts that will be substantially collected within one year. Retainage amounts will generally be billed over the next twelve months. 32 NOTE 5 INVENTORIES
- ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) December 31 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- FINISHED GOODS AND WORK IN PROGRESS $ 4,023 $ 11,320 - ---------------------------------------------------------------------------------------------------------------------------------- COSTS AND EARNINGS RELATING TO LONG-TERM CONTRACTS 45,537 43,557 DEDUCT PROGRESS PAYMENTS RELATED TO LONG-TERM CONTRACTS (21,009) (19,454) COSTS AND EARNINGS IN EXCESS OF BILLINGS 24,528 24,103 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL FINISHED GOODS AND WORK IN PROGRESS 28,551 35,423 MATERIALS AND SUPPLIES 3,239 4,084 $ 31,790 $ 39,507 - ----------------------------------------------------------------------------------------------------------------------------------
The inventoried costs associated with long-term contracts include costs and earnings ($24,528,000 in 1997 and $24,103,000 in 1996) 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 segment 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 $6,009,000 ($3,745,000 net of tax benefit, or $.30 per diluted share) and $6,997,000 ($4,443,000 net of tax benefit, or $.36 per diluted share) during 1997 and 1996, respectively, resulting primarily from revision of cost estimates on certain major long-term contracts. Included in the 1997 and 1996 costs and earnings in excess of billings were $1,700,000 and $1,400,000, 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. In connection with certain of its contracts, the Company commits to certain performance guarantees. The ability of the Company to perform under these guarantees may, in part, be dependent on the performance of other parties, including partners and subcontractors. The Company monitors the progress of its partners and subcontractors and does not believe that their performance will adversely affect these contracts as of December 31, 1997. 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 6 OTHER ASSETS - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) December 31 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- NET PENSION ASSET $ 31,070 $ 27,896 PATENTS AND OTHER INTANGIBLE ASSETS 6,256 8,140 OTHER 2,800 1,982 $ 40,126 $ 38,018 - ----------------------------------------------------------------------------------------------------------------------------------
33 Notes to Financial Statements (continued) United Industrial Corporation 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 10 years. Amortiza-tion expense amounted to $1,543,000 in 1997, $1,704,000 in 1996, and $1,694,000 in 1995. Accumulated amortization amounted to $7,559,000 and $6,707,000 at December 31, 1997 and 1996, respectively. Intangible assets were decreased by $342,000 (net of accumulated amortization of $690,000) in connection with the disposal of businesses. See Note 17. - -------------------------------------------------------------------------------- NOTE 7 LONG-TERM DEBT AND CREDIT ARRANGEMENTS On June 11, 1997, the Company and its subsidiaries entered into a Revolving Line of Credit Agreement, Term Loan Agreement and Security Agreement ("Agreement") (amending and restating a credit agreement, dated as of October 13, 1994) with an institutional lender. In July 1997, the Company borrowed $6,250,000 under the Term Loan Agreement, at LIBOR plus a fluctuating margin. The principal is payable in sixty consecutive monthly installments. At December 31, 1997 the outstanding borrowings were $5,729,000, none of which were revolving credit borrowings. The amount available under the Revolving Line of Credit Agreement is $17,500,000 with various interest rate options, and is reduced by the letter of credit obligations which may not exceed $12,500,000. The letter of credit obligations outstanding at December 31, 1997 were $7,700,000. The Agreement provides for restrictive covenants among which are debt service coverage ratio, quick ratio, senior debt ratio and a tangible net worth requirement, all as defined. All assets now owned or hereafter acquired are pledged as collateral under the Agreement. The carrying amounts of the Company's borrowings under its long-term debt arrangement approximate the fair value. Interest expense was $915,000 in 1997, $1,997,000 in 1996 and $2,360,000 in 1995. Interest paid was $1,290,000 in 1997, $2,122,000 in 1996, and $2,270,000 in 1995. - -------------------------------------------------------------------------------- NOTE 8 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. In May 1997, the shareholders approved the 1996 Stock Option Plan for Non-employee Directors, which provides for the granting of options with respect to the purchase of an aggregate of up to 300,000 shares of common stock of the Company. Options may be exercised up to one-third as of the date of grant of an option and up to an additional one-third may be be exercised as of the date of each subsequent annual meeting of shareholders, but no longer than ten years after the date they are granted. The options are granted at not less than market value at the date of grant. 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 34 awards during 1997, 1996 and 1995 under the plans, net income and net income per common share would have decreased to the pro forma amounts indicated below:
- ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts)Year ended December 31 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME: AS REPORTED $14,825 $6,404 $888 PRO FORMA $14,536 $6,248 $887 NET INCOME PER COMMON SHARE: AS REPORTED: BASIC $1.22 $.53 $.07 DILUTED $1.19 $.52 $.07 PRO FORMA: BASIC $1.19 $.52 $.07 DILUTED $1.17 $.52 $.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 1997, 1996 and 1995, respectively: dividend yields of 3.7%, 4% and 3.6%; expected volatility of 36%, 37% and 36%; risk-free interest rates of 6.2%, 6% and 6%; and expected lives of five years in all periods. The weighted-average fair value of an option granted was $2.19, $1.51, and $1.59 for the years ended December 31, 1997, 1996, and 1995, respectively. A summary of stock option activity under all plans is as follows:
- ----------------------------------------------------------------------------------------------------------------------------------- Weighted Average Exercise (Shares in thousands) Number of shares Price - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1995 94 $4.75 GRANTED 139 5.55 EXERCISED (3) 4.75 CANCELED (116) 5.53 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 114 4.94 GRANTED 368 5.30 EXERCISED (2) 4.75 CANCELED (13) 4.75 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 467 5.23 GRANTED 483 7.35 EXERCISED (109) 5.31 CANCELED (1) 4.75 BALANCE AT DECEMBER 31, 1997 840 $6.44 - -----------------------------------------------------------------------------------------------------------------------------------
35 Notes to Financial Statements (continued) United Industrial Corporation
- ----------------------------------------------------------------------------------------------------------------------------------- (In thousands) December 31 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- EXERCISABLE 155 57 25 AVAILABLE FOR FUTURE GRANTS 546 728 483 - -----------------------------------------------------------------------------------------------------------------------------------
Exercise prices for options outstanding as of December 31, 1997, ranged from $4.50 to $10.25. The weighted-average remaining life of these options is 8.6 years. - -------------------------------------------------------------------------------- NOTE 9 LEASES Total rental expense for all operating leases amounted to $1,543,000 in 1997, $2,391,000 in 1996, and $2,632,000 in 1995. Contingent rental payments were not significant. - -------------------------------------------------------------------------------- The future minimum rental commitments as of December 31, 1997, for all noncancel-able leases are $2,157,000 in 1998; $1,866,000 in 1999; $1,263,000 in 2000; $691,000 in 2001; and $474,000 in 2002. - -------------------------------------------------------------------------------- NOTE 10 CHANGES IN SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------- Retained Share- Common Additional Earnings Treasury holders' (Dollars in thousands) Stock Capital (Deficit) Stock Equity - ---------------------------------------------------------------------------------------------------------------------------------- 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 NET INCOME -- -- 14,825 -- 14,825 CASH DIVIDENDS DECLARED ($.29 PER SHARE) -- -- (3,536) -- (3,536) STOCK OPTIONS -- (267) -- 857 590 BALANCE, DECEMBER 31, 1997 $14,374 $89,929 $14,165 $(16,444) $102,024 - ----------------------------------------------------------------------------------------------------------------------------------
36 - -------------------------------------------------------------------------------- NOTE 11 PENSION ARRANGEMENTS AND SPECIAL TERMINATION BENEFITS The Company and its subsidiaries have a number of noncontributory defined benefit pension plans covering substantially all employees. In prior years the Company converted the defined benefit plans 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. 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) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- SERVICE COST-- BENEFITS EARNED DURING THE PERIOD $ 913 $ 903 $ 682 INTEREST COST ON PROJECTED BENEFIT OBLIGATION 10,404 11,133 10,689 ACTUAL RETURN ON PLAN ASSETS (28,869) (23,191) (29,770) NET AMORTIZATION AND DEFERRAL 14,350 8,194 19,075 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL PENSION (INCOME) COSTS $ (3,202) $ (2,961) $ 676 ASSUMPTIONS PRIMARILY USED IN THE ACCOUNTING FOR THE PLANS WERE: - ---------------------------------------------------------------------------------------------------------------------------------- December 31 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- WEIGHTED-AVERAGE DISCOUNT RATES 7.5% 7.5% 7.3% 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, 1997 and 1996, for the Company's pension plans: PLANS WITH ASSETS IN EXCESS OF ACCUMULATED BENEFIT OBLIGATION:
- ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS: VESTED BENEFIT OBLIGATION $141,658 $143,480 - ---------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED BENEFIT OBLIGATION $144,085 $145,795 PROJECTED BENEFIT OBLIGATION $144,370 $145,892 PLAN ASSETS AT FAIR VALUE 184,120 169,004 - ---------------------------------------------------------------------------------------------------------------------------------- PROJECTED BENEFIT OBLIGATION LESS THAN PLAN ASSETS 39,750 23,112 UNRECOGNIZED NET (GAIN) LOSS INCLUDING PRIOR SERVICE COST (8,235) 5,314 UNRECOGNIZED NET ASSET AT BEGINNING OF YEAR, NET OF AMORTIZATION (445) (530) NET PENSION ASSET RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS $ 31,070 $ 27,896 - ----------------------------------------------------------------------------------------------------------------------------------
37 Notes to Financial Statements (continued) United Industrial Corporation The plans' assets are invested in listed stocks and bonds and interest-bearing cash equivalents. The Company sponsors a 401(k) plan with employee and employer matching contributions based on specified formulas. The Company's contribution to the 401(k) plan was $1,304,000 in 1997, $1,208,000 in 1996, and $1,158,000 in 1995. - -------------------------------------------------------------------------------- NOTE 12 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 5 years commencing from January 1, 1998, 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 1997, 1996 and 1995. The assumed health care cost trend rate used was 8.65% for medical, decreasing to 5.25% 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 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 7.0% in 1997, 7.5% in 1996, and 7.25% in 1995. The assumed health care cost trend rate was 10.1% decreasing to 5.5% in the year 2005. The effect of a 1% increase in the health care trend rate would not materially increase the net periodic cost or the accumulated postretirement benefit obligation at December 31, 1997. The costs of certain health care provided by the Company for eligible retired employees were $1,635,000 in 1997, $1,586,000 in 1996, and $1,694,000 in 1995. 38 The following table shows the two plans' combined funded status reconciled with the amounts recognized in the Company's consolidated balance sheets:
- ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) December 31 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION: RETIREES $12,490 $13,221 FULLY ELIGIBLE ACTIVE PLAN PARTICIPANTS 1,724 1,289 OTHER ACTIVE PLAN PARTICIPANTS 8,262 7,465 - ---------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION 22,476 21,975 UNRECOGNIZED NET LOSS (120) (150) - ---------------------------------------------------------------------------------------------------------------------------------- ACCRUED POSTRETIREMENT BENEFIT OBLIGATION $22,356 $21,825 NET PERIODIC POSTRETIREMENT BENEFIT COST INCLUDED THE FOLLOWING COMPONENTS: - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Year ended December 31 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- SERVICE COST $ 598 $ 538 $ 548 INTEREST COST 1,568 1,540 1,824 - ---------------------------------------------------------------------------------------------------------------------------------- NET PERIODIC POSTRETIREMENT BENEFIT COST $2,166 $2,078 $2,372 - ----------------------------------------------------------------------------------------------------------------------------------
NOTE 13 INDUSTRY SEGMENTS DATA The Company is engaged in the design, development, manufacture, and sale of products and services in three principal industries: simulation and test equipment, unmanned air vehicles, ordnance systems, transportation systems, and weather reporting systems, which line of business was sold in September 1997, 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, substantially all of the operating assets of which were sold in August 1997. Sales to agencies of the United States Government, primarily by the defense segment, were $129,933,000 in 1997, $144,749,000 in 1996, and $154,346,000 in 1995. No single customer, other than the United States Government, accounted for 10 percent or more of net sales in any year. Export sales were $40,322,000 in 1997, $26,491,000 in 1996 and amounted to less than 10% of net sales in 1995. 39 Notes to Financial Statements (continued) United Industrial Corporation
- ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- NET SALES DEFENSE $192,651 $185,479 $ 188,111 ENERGY SYSTEMS 37,927 30,012 32,549 PLASTIC PRODUCTS 4,605 5,331 6,738 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL NET SALES $235,183 $220,822 $227,398 OPERATING INCOME (LOSS) DEFENSE $ 28,485 $ 12,497 $ 6,436 ENERGY SYSTEMS 7,894 3,892 2,598 PLASTIC PRODUCTS (942) (51) 389 CORPORATE (4,831) (5,697) (6,778) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING INCOME $ 30,606 $ 10,641 $ 2,645 IDENTIFIABLE ASSETS DEFENSE $149,643 $149,037 $150,507 ENERGY SYSTEMS 30,174 25,588 23,103 PLASTIC PRODUCTS 1,014 2,978 2,943 CORPORATE 2,460 2,365 6,553 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL IDENTIFIABLE ASSETS $183,291 $179,968 $183,106 CAPITAL EXPENDITURES DEFENSE $ 6,414 $ 4,833 $ 4,572 ENERGY SYSTEMS 486 959 805 PLASTIC PRODUCTS 26 494 289 CORPORATE -- 13 39 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITAL EXPENDITURES $ 6,926 $ 6,299 $ 5,705 DEPRECIATION EXPENSE DEFENSE $ 7,018 $ 5,401 $ 5,616 ENERGY SYSTEMS 815 805 839 PLASTIC PRODUCTS 157 198 134 CORPORATE 26 16 17 TOTAL DEPRECIATION EXPENSE $ 8,016 $ 6,420 $ 6,606 - -----------------------------------------------------------------------------------------------------------------------------------
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 $2,067,000 in 1997, $2,641,000 in 1996, and $2,270,000 in 1995. Corporate loss includes net interest income of $529,000 in 1997, and net interest expense of $964,000 in 1996 and $1,159,000 in 1995. Corporate assets consist primarily of cash and cash equivalents. - -------------------------------------------------------------------------------- NOTE 14 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. 40 Following is a reconciliation of the difference between total tax expense and the amount computed by applying the federal statutory income tax rate to income from operations before income taxes:
- ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- FEDERAL INCOME TAXES AT STATUTORY RATE $10,712 $3,618 $ 899 STATE AND LOCAL INCOME TAXES, NET OF FEDERAL INCOME TAX BENEFIT (INCLUDING $4,000 RELATING TO A TAX CONTINGENCY) 5,072 480 227 PROVISION FOR NONDEDUCTIBLE EXPENSES (INCLUDING $238, $86 AND $340 RELATED TO CONTINGENT PAYMENTS IN 1997, 1996 AND 1995 ON AN ACQUISITION) 537 119 460 NON-TAXABLE INCOME (632) -- -- OTHER-- NET 92 20 171 INCOME TAXES $15,781 $4,237 $1,757 - ----------------------------------------------------------------------------------------------------------------------------------
Income tax payments were $6,875,000 in 1997, $2,000,000 in 1996, and $7,400,000 in 1995. Deferred income tax balances:
- --------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) December 31 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- DEFERRED TAX ASSET LOSSES ON LONG-TERM CONTRACTS NOT CURRENTLY DEDUCTIBLE $ 2,257 $ 2,826 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS AND OTHER EMPLOYEE BENEFITS 9,945 9,802 PRODUCT WARRANTY AND OTHER PROVISIONS 2,107 1,868 VACATION PAY ACCRUALS 730 974 BASIS DIFFERENCES FOR ASSET SALES 2,092 2,188 OTHER 42 110 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL DEFERRED TAX ASSET 17,173 17,768 - --------------------------------------------------------------------------------------------------------------------------------- DEFERRED TAX LIABILITY PENSION PLANS AND OTHER EMPLOYEE BENEFITS (12,902) (11,765) EXCESS TAX DEPRECIATION (7,314) (7,837) PATENT AMORTIZATION (1,349) (1,520) OTHER (316) (177) - --------------------------------------------------------------------------------------------------------------------------------- TOTAL DEFERRED TAX LIABILITY (21,881) (21,299) NET DEFERRED TAX LIABILITY $ (4,708) $ (3,531) - --------------------------------------------------------------------------------------------------------------------------------- The net deferred tax liability is classified as follows: NET CURRENT DEFERRED INCOME TAX ASSET $ 4,982 $ 6,131 NET NON-CURRENT DEFERRED INCOME TAX LIABILITY $ (9,690) $ (9,662) - ---------------------------------------------------------------------------------------------------------------------------------
41 Notes to Financial Statements (continued) United Industrial Corporation
- ----------------------------------------------------------------------------------------------------------------------------------- NOTE 15 SELECTED QUARTERLY DATA (UNAUDITED) (Dollars in thousands, except per share data 1997 1996 and stock prices) FOURTH THIRD SECOND FIRST Fourth Third Second First - ----------------------------------------------------------------------------------------------------------------------------------- NET SALES $ 69,001 $ 52,089 $ 55,649 $ 58,444 $ 56,897 $ 54,159 $ 55,265 $ 54,501 GROSS PROFIT 19,569 12,251 10,795 16,176 17,993 9,345 13,218 14,410 NET INCOME 4,714(C) 6,678(B) 1,670 1,763 3,352 163 1,458 1,431 - ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE BASIC(a) $.38 $.55 $.14 $.14 $.28 $.01 $.12 $.12 DILUTED $.37 $.54 $.14 $.14 $.27 $.01 $.12 $.12 - ----------------------------------------------------------------------------------------------------------------------------------- DIVIDENDS DECLARED PER SHARE $.08 $.07 $.07 $.07 $.05 $.05 $.05 $.05 STOCK PRICES: HIGH $113/8 $915/16 $91/8 $8 $61/4 $61/2 $63/8 $63/4 LOW $ 93/4 $85/16 $67/8 $57/8 $51/8 $51/2 $51/8 $43/4 - -----------------------------------------------------------------------------------------------------------------------------------
(a) For each of the quarters in 1996 and the first three quarters of 1997 earnings per share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128 "Earnings per Share." (b) Includes net gain on sale of assets of $13,306,000 ($8,470,000 net of taxes) (c) Includes income from a favorable litigation settlement of $3,000,000 ($1,779,000 net of taxes) The Company's common stock is listed on the New York Stock Exchange. The approximate number of shareholders of record as of February 25, 1998, was 2,500. - -------------------------------------------------------------------------------- NOTE 16 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 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. 42 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. 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. 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. 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. 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. In August 1997, the Company sold substantially all the operating assets of Neo Products Company for $587,000 of cash and promissory notes of $853,000 secured by a mortgage on all fixed assets sold. The contract contains an "earn out" provision based on net income earned through August 2002. The sale resulted in a loss of $340,000, after taxes. In September 1997, the Company sold all the capital stock of AAI Systems Management, Inc., its Weather Systems Business, for $18,500,000 of cash and a promissory note of $2,375,000, which was recorded at no value. The sale resulted in a gain of $14,169,000 ($8,810,000 net of taxes or $.68 per diluted share.) The Consolidated Statements of Income include the combined net sales of the two companies of $29,838,000, $42,331,000 and $43,156,000; and the combined net income of $1,595,000 ($.13 per diluted share), $1,827,000 ($.15 per diluted share) and $3,239,000 ($.27 per diluted share) for the years ended December 31, 1997, 1996 and 1995, respectively. - -------------------------------------------------------------------------------- NOTE 17 SALES OF ASSETS In August 1997, the Company sold substantially all the operating assets of Neo Products Co. for $587,000 of cash and promissory notes of $853,000 secured by a mortgage on all fixed assets sold. The contract contains an "earn out" provision based on net income earned through August 2002. The sale resulted in a loss of $340,000, after taxes. In September 1997, the Company sold all the capital stock of AAI Systems Management, Inc., its Weather Systems Business, for $18,500,000 of cash and a promissory note of $2,375,000. The sale resulted in a realized gain of $14,169,000 ($8,810,000 net of taxes or $.71 per diluted share.) The Consolidated Statements of Operations include the combined net sales of the two companies of $29,838,000, $42,331,000 and $43,156,000; and the combined net income of $1,595,000 ($.13 per diluted share), $1,827,000 ($.15 per diluted share) and $3,239,000 ($.27 per diluted share) for the years ended December 31, 1997, 1996 and 1995, respectively. The Company is currently negotiating the sale of certain of its properties of its AAI subsidiary. The Company believes the net proceeds from the sale of these asstes will exceed their carrying value. 43 Notes to Financial Statements (continued) United Industrial Corporation - -------------------------------------------------------------------------------- NOTE 18 EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
- ----------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $14,825,000 $ 6,404,000 $ 888,000 BASIC EARNINGS PER SHARE- WEIGHTED-AVERAGE SHARES 12,195,000 12,173,000 12,169,000 EFFECT OF DILUTIVE SECURITIES: EMPLOYEE STOCK OPTIONS 225,000 38,000 24,000 - ----------------------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER-SHARE- ADJUSTED WEIGHTED-AVERAGE AND ASSUMED CONVERSIONS 12,420,000 12,211,000 12,193,000 BASIC EARNINGS PER SHARE $1.22 $.53 $.07 DILUTED EARNINGS PER SHARE $1.19 $.52 $.07
44 Report of Independent Auditors United Industrial Corporation 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, 1997 and 1996, and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP New York, New York February 24, 1998 45 Consolidated Statements of Operation Five-Year Financial Data United Industrial Corporation
- ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) Year ended December 31 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING DATA - ----------------------------------------------------------------------------------------------------------------------------------- NET SALES $ 235,183 $ 220,822 $ 227,398 $ 209,727 $ 252,993 OPERATING COSTS 219,562 209,162 223,385 202,766 252,919 INTEREST (INCOME) EXPENSE-- NET (529) 964 1,159 1,362 (639) INCOME (LOSS) BEFORE INCOME TAXES 30,606 10,641 2,645 8,427 (20,151)(a) INCOME TAX (CREDIT) 15,781 4,237 1,757 3,215 (8,134) INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 14,825 6,404 888 5,212 (12,017)(a) CUMULATIVE EFFECT OF ACCOUNTING CHANGES -- -- -- -- 994 INCOME (LOSS) FROM CONTINUING OPERATIONS 14,825 6,404 888 5,212 (11,023)(a) EARNINGS (LOSS) PER SHARE:(b) INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES BASIC 1.22 .53 .07 .43 (.98)(a) DILUTED 1.19 .52 .07 .43 (.98) CUMULATIVE EFFECT OF ACCOUNTING CHANGES -- -- -- -- .08 EARNINGS (LOSS) BASIC 1.22 .53 .07 .43 (.90)(a) DILUTED 1.19 .52 .07 .43 (.90) CASH DIVIDENDS PAID ON COMMON STOCK 3,536 2,434 3,165 3,425 5,381 CASH DIVIDENDS DECLARED PER COMMON SHARE .29 .20 .26 .21 .35 SHARES OUTSTANDING AS OF YEAR END (IN THOUSANDS) 12,249 12,174 12,171 12,167 12,259 - ----------------------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 183,291 $ 179,968 $ 183,106 $ 188,794 $ 202,653 PROPERTY AND EQUIPMENT 25,576 41,534 42,586 45,214 46,635 LONG-TERM DEBT 4,479 -- 13,750 20,000 25,000 SHAREHOLDERS' EQUITY 102,024 90,145 86,160 88,421 85,354 SHAREHOLDERS' EQUITY PER SHARE 8.33 7.40 7.08 7.27 6.96 - ----------------------------------------------------------------------------------------------------------------------------------- FINANCIAL RATIOS - ----------------------------------------------------------------------------------------------------------------------------------- RETURN ON SHAREHOLDERS' EQUITY 14.5% 7.1% 1.0% 6.0% -- NET INCOME AS A PERCENT OF SALES 6.3 2.9 .4 2.5 -- LONG-TERM DEBT AS A PERCENT OF TOTAL CAPITALIZATION 4.2 -- 13.8 18.4 22.6 - ----------------------------------------------------------------------------------------------------------------------------------- STATISTICAL DATA - ----------------------------------------------------------------------------------------------------------------------------------- SALES BACKLOG AS OF YEAR END $ 188,000 $ 159,000 $ 206,000 $ 218,000 $ 208,000 CAPITAL EXPENDITURES 6,926 6,299 5,705 4,146 5,931 DEPRECIATION AND AMORTIZATION 9,559 8,306 8,300 8,291 7,430 NUMBER OF EMPLOYEES 1,800 1,900 2,000 1,900 2,300 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Includes restructuring charge of $22,500,000 ($14,400,000 or $1.17 per share net of income tax benefit) (b) The 1993 through 1996 earnings per share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128 "Earnings per Share." 46 Corporate Organization United Industrial Corporation
- --------------------------------------------------------------------------------------------------------- BOARD OF DIRECTORS Harold S. Gelb Richard R. Erkeneff Honorary Director (nonvoting), Chairman of the Board President and Chief Executive Bernard Fein Officer of the Company and Chairman Emeritus Howard M. Bloch AAI Corporation Retired Chairman and Vice Chairman of the Board President of the Company E. Donald Shapiro Edward C. Aldridge, Jr. Professor of Law President and Chief New York Law School Executive Officer The Aerospace Corporation Susan Fein Zawel Vice President Corporate Communications, Associate General Counsel and Secretary of the Company CORPORATE OFFICERS - --------------------------------------------------------------------------------------------------------- Richard R. Erkeneff James H. Perry Edward A. Smolinski President and Chief Financial Officer Assistant Treasurer and Chief Executive Officer and Treasurer Assistant Secretary Robert W. Worthing Susan Fein Zawel Vice President and Vice President Corporate General Counsel Communications, Associate General Counsel and Secretary SENIOR MANAGEMENT - --------------------------------------------------------------------------------------------------------- AAI CORPORATION Jackson R. Bell SYMTRON SYSTEMS, INC. Richard R. Erkeneff Vice President and John J. Henning President and General Manager, President and Chief Chief Executive Officer Transportation Systems Executive Officer Paul J. Michaud Joseph F. Burger, James W. Hanson Vice President, Chief Financial Vice President and General Vice President and Officer and Treasurer Manager, Hunt Valley General Manager Operations Robert W. Worthing Richard A. Brandt Vice President, General Counsel G. Russell Zink Treasurer and Secretary Vice President, Business Development George J. Kersels Vice President and General DETROIT STOKER COMPANY Manager, Defense Systems Michael J. DiMonte President and Maurice P. Ranc Chief Executive Officer Vice President and General Manager, Engineering and Mark A. Eleniewski Maintenance Services Executive Vice President Thomas E. Wurzel Gary K. Ludwig President Vice President, Finance AAI/ACL Technologies, Inc. - ---------------------------------------------------------------------------------------------------------
Corporate and Shareholder Information United Industrial Corporation CORPORATE HEADQUARTERS United Industrial Corporation 570 Lexington Avenue New York, New York 10022 (212) 752-8787 SUBSIDIARIES AAICORPORATION P.O. Box 126 Hunt Valley, Maryland 21030 (410) 666-1400 DETROIT STOKER COMPANY 1510 East First Street Monroe, Michigan 48161 (313) 241-9500 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 contacting: American Stock Transfer and Trust Company 40 Wall Street New York, New York 10005 (800) 937-5449 For information about the Company's Dividend Reinvestment and Share Purchase Plan, contact: American Stock Transfer and Trust Company (800) 278-4353 SHAREHOLDER RELATIONS Security analysts, investment professionals and shareholders should direct their inquiries to: Investor Relations United Industrial Corporation 570 Lexington Avenue New York, New York 10022 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 12, 1998, 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: Susan Fein Zawel, Secretary United Industrial Corporation 570 Lexington Avenue New York, New York 10022 STOCK LISTING United Industrial Corporation common stock is traded on the New York Stock Exchange (Ticker Symbol: UIC) INTERNET ADDRESS http://www.unitedindustrial.com 48 DESIGNED AND PRODUCED BY TAYLOR & IVES, INC., NYC PHOTOGRAPHY: TED HOROWITZ, KAY CHERNUSH EX-21 4 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF UNITED INDUSTRIAL CORPORATION March 3, 1998
State Approximate Percentage of (or jurisdiction) Voting Securities Owned by Name in which 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 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) UIC 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 5 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of United Industrial Corporation and in the Registration Statement (Form S-8, No. 33-57065) pertaining to the United Industrial Corporation 401(k) Retirement Savings Plan, in the Registration Statements (Form S-8, Nos. 33-53911 and 333-19517) pertaining to the United Industrial Corporation 1994 Stock Option Plan, and in the Registration Statement (Form S-8, No. 333-30103) pertaining to the United Industrial Corporation 1996 Stock Option Plan for Nonemployee Directors, of our reports dated February 24, 1998, with respect to the consolidated financial statements of United Industrial Corporation included in the Annual Report To Shareholders of United Industrial Corporation for the fiscal year ended December 31, 1997, and with respect to the financial statement schedule included in this Annual Report (Form 10-K). ERNST & YOUNG LLP New York, New York March 27, 1998 EX-27 6 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 12-MOS DEC-31-1997 DEC-31-1997 23,098 6,102 27,819 0 31,790 117,589 102,883 77,307 183,291 39,713 9,508 0 0 14,374 87,650 183,291 235,183 251,083 176,392 219,562 0 0 915 30,606 15,781 14,825 0 0 0 14,825 1.22 1.19
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