-----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, T8ucwT0/rd4NMJIqGUTJt1CALzA+ZeXrPG7aXcoIRBpi0FQ7D2/w2z80qSuQI2gj ziuv5OwkYw2WNgHVycrQkA== 0000912057-00-015161.txt : 20000331 0000912057-00-015161.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-015161 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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: 588529 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 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1999.
or / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO
Commission file number: 1-4252 UNITED INDUSTRIAL CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 95-2081809 (State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.) 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/. 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 6, 2000, computed by reference to the closing sale price of the registrant's Common Stock on the New York Stock Exchange on such date: $93,047,518. On March 6, 2000, the registrant had outstanding 12,373,638 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, 1999 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 Shareholders of the registrant to be held on May 9, 2000 are incorporated by reference into Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I 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. ITEM 1. BUSINESS At December 31, 1999, the operations of United consist of three principal business segments: defense, transportation and energy systems, principally conducted through three wholly-owned subsidiaries. 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 aerial vehicle systems; (4) ordnance systems; and (5) mechanical support systems for industrial, military, and marine applications. 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 1999 approximately 79% of the sales volume of AAI consisted of research, development and production of military items under domestic defense contracts compared to 70% in 1998. 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 5.6% of sales in 1999 as compared to 14% in 1998. These contracts generally related to unmanned aerial vehicle systems and weapon training systems for foreign governments. The balance of AAI's non-transportation business consists of work performed in the non-defense markets, principally hydraulic test 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 2 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 Aerial Vehicle ("UAV") business in 1986. The Company produces the highly successful Pioneer Unmanned Aerial Vehicle employed by the United States during Operation Desert Storm and in the 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. 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 these systems under an initial contract with the U.S. Army in 1978. Contingent purchase price amounts were payable if certain pretax profits, as defined in the purchase agreement, were earned for each of the years in the five year period ended December 31, 1998. Included in general and administrative expenses in 1998 and 1997 are such contingent payments totaling $265,000 and $723,000, respectively. The 1999 general and administrative expense includes $107,000 as an adjustment of 1998 contingent payments. Symtron's 1999 sales consisted of production for military and commercial customers. The main office and plant of Symtron are located in Fair Lawn, New Jersey. 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 a leading supplier of stokers and related combustion equipment for the production of steam used in heating, industrial processing and electric power generation around the world. Detroit Stoker offers a full line of stokers for burning bituminous and lignite coals as well as biomass, municipal solid waste and industrial by-products. Detroit Stoker also provides auxiliary equipment and services including fuel feed and ash removal systems, gas/oil burners and complete aftermarket services for its products. Principal markets include Pulp and Paper, Public Utilities, Independent Power Producers, Industrial manufacturing, Institutional and Cogeneration facilities. The products of Detroit Stoker compete with those of several other manufacturers. Competition is based on several factors including price, features and performance. Detroit Stoker's waste to energy technology is used extensively in both public and private plants that generate steam and power from municipal waste. Its solid fuel combustion technologies are particularly well suited for biomass fuels that generate power from waste products such as bark, sugar cane, sawdust, sunflower hulls, and poultry litter. The combustion of biomass fuels is gaining worldwide popularity, as it does not contribute to global warming. Detroit Stoker exports its products to Europe, Asia, South America and Australia, and is a market leader in North America. Detroit Stoker's globalization strategy is to further expand both its customer and supplier base in each of these regions. Detroit Stoker's administrative offices and its principal manufacturing operations are located in Monroe, Michigan. Detroit Stoker also operates a foundry through a subsidiary (Midwest Metallurgical Laboratory, Inc.) in Marshall, Michigan. The foundry is engaged in the manufacture of grey and ductile iron, stainless steel and special alloy iron castings that are principally used in Detroit Stoker's products. 3 TRANSPORTATION AAI Transportation Systems, a division of AAI, is engaged in the manufacturing and integration of transit systems primarily for municipal customers within the United States. Its products and services are focused in overhaul, fabrication, assembly and systems integration. Electric Transit, Inc. (ETI), a corporation owned 35% by AAI and 65% by Skoda, a Czech Republic firm, has become one of the domestic market leaders in manufacturing electric trolley buses. It has won contracts in both Dayton, Ohio for the Miami Valley Regional Transit Authority and the city and county of San Francisco, the only such contracts awarded in the United States since 1994. ETI is an unconsolidated affiliate of AAI and accordingly, AAI records its equity share of income or loss in ETI. Under these contracts which are valued at $32 million and $174 million, respectively, AAI has received subcontracts of $9.4 million and $54.4 million, respectively. In addition to its electric trolley bus business, AAI performs overhaul and remanufacturing work for a variety of transit customers and produces an assortment of transit equipment including fabricated trucks for both heavy and light railcars. The products and services of Transportation Systems compete with those of several other larger as well as smaller manufacturers. The main office and operating facilities are located in Hunt Valley, Maryland. For additional information concerning United's subsidiaries reference is made to information set forth in the Letter to Shareholders contained in United's 1999 Annual Report to Shareholders (the "Annual Report"), which letter is incorporated herein by reference. Reference is also made to the information set forth in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report, which section is incorporated herein by reference. GENERAL EMPLOYEES As of March 1, 2000 United and its subsidiaries had approximately 1,600 employees. Approximately 113 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 1999, 1998 and 1997, the subsidiaries of United (exclusive of AAI) expended approximately $117,000, $201,000 and $144,000, 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. 4 BACKLOG The backlog of orders by industry segment at December 31, 1999 and 1998 was as follows:
1999 1998 ------------ ------------ Defense.......................................... $153,048,000 $146,634,000 Energy Systems................................... 4,750,000 9,334,000 Transportation................................... 135,018,000 53,860,000
Except for approximately $93,000,000, substantially all of the backlog orders at December 31, 1999 are expected to be filled in 2000. 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 12 of the Notes to Financial Statements included in Item 8 of this Report, which Note is incorporated herein by reference. FOREIGN OPERATIONS AND EXPORT SALES United and its subsidiaries have no significant foreign operations. During 1999, 1998 and 1997, export sales by United and its subsidiaries amounted to approximately $42,120,000, $40,994,000 and $41,832,000, respectively. 5 ITEM 2. PROPERTIES United maintains executive and administrative offices at 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 24, 2000.
APPROXIMATE AREA OWNED LOCATION PRINCIPAL USE IN SQUARE FEET OR LEASED - -------- ------------- -------------- --------- 1510 East First Street Machine shop, steel 194,910 floor Owned in fee Monroe, MI fabrication, engineering and space on 14.4 sales facilities of Detroit acres of land Stoker (East Building) 1426 East First Street Assembly, shipping and 101,000 floor Owned in fee Monroe, MI administrative facilities of space on 2.2 Detroit Stoker acres of land (West Building) 15290 Fifteen Mile Road Foundry, Midwest 59,386 floor Owned in fee Marshall, MI Metallurgical space on 28.4 acres of land 2735 W Fifth Assembly and Administrative 59,000 Leased to North Street Facility of AAI November 30, 2002 Summerville, SC 21945 Three Noch Road Office Space of AAI 1,100 Leased to Lexington Park, MD May 31, 2000 562 A&B North Dixie Blvd. Office Space of AAI 6,000 Leased to Radcliffe, KY July 31, 2000 Industry Lane Manufacturing, engineering 429,750 floor Owned in fee Hunt Valley, MD and administrative space on 64 facilities of AAI acres of land Clubhouse Road Manufacturing, engineering Leased to: Hunt Valley, MD and administrative 153,727 10/31/2003 facilities of AAI 29,600 4/30/2005 48,090 4/30/2005 55,987 2/29/2005 1701 Pollitt Drive Administrative, engineering 30,000 Leased to Fair Lawn, NJ and manufacturing facilities June 30, 2001 of Symtron 3200 Enterprise Street Manufacturing, engineering 131,544 Leased to Brea, CA and administrative April 2009 facilities of ACL Technologies 1213 Jefferson Davis Highway Office Space 2,200 Leased to Arlington, VA 22202 February 28, 2001
6 For information with respect to obligations for lease rentals, see Note 9 to the Financial Statements in the Annual Report, which Note is incorporated herein by reference. United considers its properties to be suitable and adequate for its present needs. The properties are being substantially utilized. ITEM 3. LEGAL PROCEEDINGS The Company, along with numerous other parties, has been named in five tort actions in Maricopa County Superior Court 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 based on exposure to solvents allegedly released at the site. These suits allege that the plaintiffs 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 Company reached an agreement to settle all of these matters with the plaintiffs for, among other items, a cash payment of $4,250,000. The Superior Court of Maricopa County has scheduled a hearing for final approval of the settlement for March 14, 2000. 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. 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. 7 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.
AGE AT DECEMBER NAME POSITION, OFFICE 31, 1999 - ---- --------------------------------------------------------------- -------------- Richard R. Erkeneff* -- President of the Company (since October 1995) and 64 AAI (since November 1993). Robert Worthing -- Vice President and General Counsel of the Company 54 (since July, 1995); General Counsel of AAI (since April, 1992). Susan Fein Zawel* -- Vice President, Corporate Communications and 45 Associate General Counsel (since June 1995), Secretary (since May 1994) and Counsel (1992 to 1995) of the Company. James H. Perry -- Vice President (since May 1998), Chief Financial 38 Officer (since October, 1995) and Treasurer (since December 1994) of the Company.
- ------------------------ * Member of the Company's Board of Directors 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Reference is made to the information set forth in Note 14 to the 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" in 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" in the Annual Report, which section is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to the information regarding Quantitative and Qualitative Disclosures About Market Risk contained in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report, which section is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The report of independent auditors and consolidated financial statements included in the Annual Report are incorporated herein by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 9 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 Shareholders of United to be held on May 9, 2000 (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, 1999, 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. 10 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 (3). (10)(a)- United Industrial Corporation 1994 Stock Option Plan, as amended (4). (10)(b) United Industrial Corporation 1996 Stock Option Plan for Nonemployee Directors (5). (10)(c)- Purchase Agreement, dated January 18, 1994, between United and Symtron Systems, Inc. (2). (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 (6). (10)(e)- Pledge and Security Agreement dated as of October 13, 1994 by AAI in favor of the Agent (7). (10)(f)- Pledge and Security Agreement dated as of October 13, 1994 by the Company in favor of the Agent (7). (10)(g)- Security Agreement dated as of October 13, 1994 between AAI and the Agent (7). (10)(h)- Security Agreement dated as of October 13, 1994 between each subsidiary of AAI, certain subsidiaries of the Company and the Agent (7). (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 (7). (10)(j)- Employment Agreement, dated December 8, 1998, between United and Richard R. Erkeneff (1). (10)(k)- Employment Agreement, dated March 3, 2000, between United and Susan Fein Zawel. (10)(l)- Employment Agreement, dated March 3, 2000, between United and Robert Worthing. (10)(m)- Employment Agreement, dated March 3, 2000, between United and James H. Perry. (13)- United's 1999 Annual Report to Shareholders. (21)- Subsidiaries of United. (23)- Consent of Independent Auditors. (27)- Financial Data Schedule.
11 - ------------------------ (1) Incorporated by reference to United's Annual Report on Form 10-K for the year ended December 31, 1998. (2) Incorporated by reference to United's Annual Report on Form 10-K for the year ended December 31, 1993, filed with the Securities and Exchange Commission on March 31, 1994, File No. 1-4252. (3) Incorporated by reference to United's Annual Report on Form 10-K for the year ended December 31, 1995. (4) Incorporated by reference to United's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on January 10, 1997. (5) Incorporated by reference to United's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on June 26, 1997. (6) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (7) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. (b) - Reports on Form 8-K--United did not file any reports on Form 8-K during the quarter ended December 31, 1999. 12 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 29, 2000
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 ---- /s/ HAROLD S. GELB ------------------------------------------------ Harold S. Gelb March 29, 2000 Chairman of the Board and Director /s/ JOSEPH S. SCHNEIDER ------------------------------------------------ Joseph S. Schneider March 29, 2000 Director /s/ RICHARD R. ERKENEFF ------------------------------------------------ Richard R. Erkeneff March 29, 2000 President and Chief Executive Officer and Director /s/ EDWARD C. ALDRIDGE, JR. ------------------------------------------------ Edward C. Aldridge, Jr. March 29, 2000 Director /s/ E. DONALD SHAPIRO ------------------------------------------------ E. Donald Shapiro March 29, 2000 Director /s/ SUSAN FEIN ZAWEL ------------------------------------------------ Susan Fein Zawel March 29, 2000 Vice President and Director /s/ JAMES H. PERRY ------------------------------------------------ James H. Perry Vice President, Treasurer and March 29, 2000 Chief Financial Officer (Principal Financial and Accounting Officer)
13 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, 1999 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, 1999, are incorporated by reference in Item 8: Consolidated Balance Sheets--December 31, 1999 and 1998 Consolidated Statements of Operations--Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows--Years Ended December 31, 1999, 1998 and 1997 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, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, and have issued our report thereon dated February 29, 2000. Our audits also included the financial statement schedule listed in Item 14(d) of this Annual Report (Form 10-K). 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 29, 2000 F-3 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES DECEMBER 31, 1999
COL. A COL. B COL. C COL. D COL. E - ------------------------------- ---------- --------------------------- ----------- ---------- (1) (2) BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END OF DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) PERIOD - ------------------------------- ---------- ---------- -------------- ----------- ---------- Year ended December 31, 1999: Deducted from asset accounts: Allowance for doubtful accounts..................... $ 235,000 $ 235,000 ========== ========== Product warranty liability..... $ 640,000 $5,000,000 $ 40,000 (A) $5,600,000 ========== ========== =========== ========== Year ended December 31, 1998: Deducted from asset account: Allowance for doubtful accounts..................... $ 240,000 $ 5,000 (A) $ 235,000 ========== =========== ========== Product warranty liability..... $1,072,000 $432,000 (A) $ 640,000 ========== =========== ========== Year ended December 31, 1997: Deducted from asset account: Allowance for doubtful accounts..................... $ 245,000 $ 5,000(A) $ 240,000 ========== =========== ========== Product warranty liability..... $ 579,000 $ 493,000 $1,072,000 ========== ========== ==========
- ------------------------ (A) Reduction of valuation account. EXHIBIT INDEX
EXHIBIT NO. PAGE - ----------- -------- (3)(a) -- Restated Certificate of Incorporation of United (1). (3)(b) -- Amended and Restated By-Laws of United (3). (10)(a) -- United Industrial Corporation 1994 Stock Option Plan, as amended (4). (10)(b) -- United Industrial Corporation 1996 Stock Option Plan for Nonemployee Directors (5). (10)(c) -- Purchase Agreement, dated January 18, 1994, between United and Symtron Systems, Inc. (2). (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 (6). (10)(e) -- Pledge and Security Agreement dated as of October 13, 1994 by AAI in favor of the Agent (7). (10)(f) -- Pledge and Security Agreement dated as of October 13, 1994 by the Company in favor of the Agent (7). (10)(g) -- Security Agreement dated as of October 13, 1994 between AAI and the Agent (7). (10)(h) -- Security Agreement dated as of October 13, 1994 between each subsidiary of AAI, certain subsidiaries of the Company and the Agent (7). (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 (7). (10)(j) -- Employment Agreement dated December 8, 1998, between United and Richard R. Erkeneff (1). (10)(k) -- Employment Agreement, dated March 3, 2000, between United and Susan Fein Zawel. (10)(l) -- Employment Agreement, dated March 3, 2000, between United and Robert Worthing. (10)(m) -- Employment Agreement, dated March 3, 2000, between United and James H. Perry. (13) -- United's 1999 Annual Report to Shareholders. (21) -- Subsidiaries of United. (23) -- Consent of Independent Auditors. (27) -- Financial Data Schedule.
EXHIBIT INDEX - ------------------------ (1) Incorporated by reference to United's Annual Report on Form 10-K for the year ended December 31, 1998. (2) Incorporated by reference to United's Annual Report on Form 10-K for the year ended December 31, 1993, filed with the Securities and Exchange Commission on March 31, 1994, File No. 1-4252. (3) Incorporated by reference to United's Annual Report on Form 10-K for the year ended December 31, 1995. (4) Incorporated by reference to United's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on January 10, 1997. (5) Incorporated by reference to United's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on June 26, 1997. (6) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (7) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. EX-10.(K) 2 EXHIBIT 10(K) EXHIBIT 10(K) UNITED INDUSTRIAL CORPORATION EMPLOYMENT AGREEMENT S. FEIN ZAWEL AGREEMENT made this 3rd day of March 2000, by and between UNITED INDUSTRIAL CORPORATION, a Delaware corporation having an address 570 Lexington Avenue, New York, New York 10022 (hereinafter called "Employer"), and SUSAN FEIN ZAWEL, having an address at 31 Harrows Lane, Purchase, NY 10577 (hereinafter called "Employee"). W I T N E S S E T H: In consideration of the mutual covenants hereinafter contained, the parties hereto agree as follows: 1. EMPLOYMENT. Employer agrees to employ Employee and Employee agrees to serve Employer upon the terms and conditions hereinafter set forth. 2. TERM. The term of this Agreement shall commence January 3, 2000, (the "Effective Date") and subject to the provisions of Sections 3,4, and 10 hereof, terminate as of the close of business at the date three (3) years after the Effective Date (the "Termination Date"). The period from the Effective Date through the Termination Date is referred to as the term of this Agreement. 3. DUTIES AND EXTENT OF SERVICES. Employee agrees to serve Employer and its subsidiary companies faithfully and to the best of her ability under the direction of the Board of Directors and President of Employer, devoting her entire business time, energy and skill to her duties hereunder. The principal place of employment of Employee shall be at the offices of Employer currently located at 570 Lexington Avenue, New York, New York. Employee understands and agrees, however, that in connection with her employment hereunder, she may be required from time to time to travel on behalf of Employer. If the principal place of employment of the Employee shall change prior to the Termination Date because of a change in Employer's offices to a location which is more than 50 miles from the office presently located at 570 Lexington Avenue, New York, New York, the Employee shall have the option within 30 days after such change to terminate this Agreement by sending written notice of termination to Employer, and thereupon her employment pursuant to this Agreement shall terminate and Employee shall be entitled to no further payments hereunder, other than (i) for any compensation due pursuant to Sections 4 and (ii) the reimbursements pursuant to Section 9 hereof, of any expenses incurred prior to the date of such termination. The principal duties of Employee shall be to serve as Vice President, Corporate Communications, Associate General Counsel, and Secretary and, in such capacity, to render such managerial, administrative and other services to Employer and its subsidiaries as normally are associated with and incident to such positions as Employer from time to time may require of her. If, during the term of this Agreement, the Board of Directors of Employer so determines, in its absolute discretion, to elect Employee to any additional office of Employer or its subsidiary companies consistent with her position, or a director of its subsidiary companies, Employee agrees to accept and serve in such office or capacity for no additional compensation or remuneration. 4. COMPENSATION. (a) CASH COMPENSATION. Employer agrees to pay to Employee, as compensation for all of the services to be rendered by Employee under or pursuant to this Agreement, compensation as follows. (i) Employee shall receive as compensation for her services hereunder an annual salary ("Base Compensation") of $170,512.00, which sum shall be payable in accordance with the normal payroll practices of Employer. Employee shall be reviewed annually and shall be entitled to such increases in her Base Compensation as the Board of Directors may determine, considering the recommendation of the President and Chief Executive Officer. (ii) Employee shall also be entitled to participate in Employer's Performance Sharing Plan ("PSP"; or such other similar bonus or incentive plan approved by Employer's Board of Directors and its Compensation Committee), that will afford Employee an opportunity to earn incentive compensation equivalent to a sum derived using at least the same target incentive percentage (40%) as used under the 1999 plan). The plan shall be based upon meeting certain goals and benchmarks. In its discretion, the Board of Directors may award Employee such greater sum as it may determine. (iii) Such salary and incentive shall be subject to annual review by Employer's Board of Directors and, at the discretion of the Board, may be increased, but not decreased below such amount and the incentive shall be not less than the sum resulting under the PSP process. (iv) If Employee's employment terminates due to any reason other than "for cause," including Employee's voluntary termination, prior to the end of the Compensation Year, Employee shall be entitled to an incentive compensation award at least equal to the sum calculated for her base salary in accordance with the PSP, but pro rata to the number of days employed 2 during the Compensation Year. If Employee's employment is terminated "for cause" prior to the time that the Earned Incentive Compensation is approved by the Employer's Board of Directors for employees of Employer generally, Employee shall not be entitled to any incentive compensation. (v) If during the term of this Agreement, or if this Agreement is not renewed or superceded, after the term of this Agreement, Employee's employment ceases for any reason other than "for cause," death, or Employee's voluntary departure (other than for "Good Reason" as defined below), the Employee shall be entitled, in addition to the compensation provided for above, to a sum equivalent to not less than her "Base Severance Compensation" that is a sum equal to one hundred fifty percent (150%) of Employee's annualized salary plus an Incentive Compensation Award equal to thirty-four percent (34%) of the 150% annualized salary, payable in accordance with the normal payroll practices of Employer over a period of eighteen months following cessation of employment. If the date employment ceases is prior to the last eighteen (18) months of the term of this Agreement, the Employee shall be compensated for the remainder of this Agreement at her annualized salary plus an Incentive Compensation Award equal to the sum calculated for her base salary in accordance with the PSP or, if more, the amount provided for under the "Base Severance Compensation." Under the circumstances above, any and all stock options awarded to Employee that have not expired by the terms of each grant shall fully vest for purposes of each such grant. For purposes hereof, "Good Reason" shall mean any of the following, unless consented to by Employee in writing: (a) a termination by Employee pursuant to Section 3 hereof; (b) the assignment to Employee of any duties materially inconsistent with Employee's position as set forth in Section 3 hereof, Employee's removal from such position or a substantial diminution in such position, duties or responsibilities, which is not remedied by Employer within ten days after receipt of written notice thereof from Employee; (c) a reduction in Employer's compensation pursuant to Sections 4(a) (i) and (ii) hereof as in effect on the date hereof or as increased from time to time; or (d) a failure of Employer to continue to provide Employee with benefits substantially as contemplated by Section 4(b) hereof. 3 (b) EMPLOYEE BENEFIT PLANS. During the term of this Agreement, Employee shall be eligible to participate in any life insurance, medical, retirement, pension or profit-sharing, disability or other benefit plans or arrangements now or hereafter generally made available by Employer to executive employees of Employer to the extent Employee qualifies under the provisions of any such plans. Subject to the foregoing, Employer shall have the right to change insurance companies and modify insurance policies covering employees of Employer. In addition, notwithstanding any provision herein to the contrary, Employee shall be entitled to continuation of the same or equivalent benefits during the months following cessation of employment so long as Employee is entitled to payments pursuant to Sections 4 hereof. (c) AUTOMOBILE ALLOWANCE. Employer shall pay to Employee an automobile allowance of ten thousand dollars ($10,000) per annum, commencing as of the Effective Date, payable in accordance with Employer's normal payroll practices. (d) VACATION. Employee shall be entitled to four (4) weeks vacation with pay per year. (e) TAXES. Employee understands that any and all payments described in this Agreement will be subject to such tax treatment as applies thereto, and to such withholding as may be required under applicable tax laws. 5. NO COMPETITION. Employee agrees that during the term of this Agreement she will not, within the continental United States, directly or indirectly, engage or participate or make any financial investments in or become employed by or render advisory or other services to or for any person, firm or corporation, or in connection with any business activity, other than that of Employer and its subsidiary companies, directly or indirectly in competition with any of the business operations or activities of Employer and its subsidiary companies. Nothing herein contained, however, shall restrict Employee from making any investments in any company whose stock is listed on a national securities exchange or actively traded in the over-the-counter market, so long as such investment does not give her the right to control or influence the policy decisions of any such business or enterprise which is or might be directly or indirectly in competition with any of such business operations or activities of Employer or any of its subsidiary companies. 4 6. CONFIDENTIALITY; ETC. (a) Employee will not divulge, furnish or make accessible to anyone (other than in the regular course of business of Employer or any of its subsidiary companies) any knowledge or information with respect to confidential or secret methods, processes, plans or materials of Employer or any of its subsidiary companies, or with respect to any other confidential or secret aspects of the business of Employer or any of its subsidiary companies. (b) Employee agrees to communicate and to make known to Employer all knowledge possessed by her relating to any methods, developments, inventions and/or improvements, whether patented, patentable or unpatentable which concerns in any way the business of Employer or any of its subsidiary companies or the general industry of which they are a part, from the time of entering upon employment until the termination thereof, and whether acquired by Employee before or during the term of his employment; PROVIDED, HOWEVER, that nothing herein shall be construed as requiring any such communication where the method, development, invention and/or improvement is lawfully protected from disclosure as the trade secret of a third party, including, without limitation, any former employer of Employee or by any other lawful bar to such communication. (c) Any methods, developments, inventions and/or improvements, whether patentable or unpatentable, along the lines of the business of Employer or any of its subsidiary companies, which Employee may conceive of or make while in the employ of Employer, shall be and remain the property of Employer. Employee agrees promptly to communicate and disclose all such methods, developments, inventions and/or improvements to Employer and to execute and deliver to Employer any instruments deemed necessary by Employer to effect disclosure and assignment thereof to it. Employee further agrees, on request of Employer, to execute patent applications based on such methods, developments, inventions and/or improvements, including any other instruments deemed necessary by Employer for the prosecution of such patent applications or the acquisition of Letters Patent in the United States and/or any foreign countries. (d) Employee agrees that for a period of two (2) years from and after the termination or expiration of his employment by Employer, whether pursuant to the terms of this Agreement or otherwise, she will not: (i) directly or indirectly solicit, raid, entice or induce any employee of Employer or of any of its subsidiary companies to be employed 5 by any person, firm or corporation which is, directly or indirectly, in competition with the business or activities of Employer or any of its subsidiary companies; or (ii) directly or indirectly approach any such employee for these purposes; or (iii) authorize or knowingly approve the taking of such actions by other persons on behalf of any such person, firm or corporation, or assist any such person, firm or corporation in taking such action; or (iv) directly or indirectly solicit, raid, entice or induce any person, firm or corporation (other than the U.S. Government or its agencies) who or which on the date hereof is, or at any time during the period of employment hereunder shall be, a customer of Employer or of any of its subsidiary companies to become a customer for the same or similar products which it purchased from Employer or any of its subsidiary companies, of any other person, firm or corporation, and Employee shall not approach any such customer for such purpose or authorize or knowingly approve the taking of such actions by any other person. (e) Employee agrees that during the term of her employment by Employer, whether under this Agreement or otherwise, she will not at any time enter into, on behalf of Employer or any of its subsidiary companies, or cause Employer or any of its subsidiary companies to enter into, directly or indirectly, any transactions with any business organization in which she or any member of her immediate family may be interested as a partner, trustee, director, officer, employee, shareholder, lender of money or guarantor. 7. INJUNCTIVE RELIEF. Employee acknowledges that the services to be rendered by her hereunder are of a special, unique and extraordinary character and that it would be very difficult or impossible to replace such services and further that irreparable injury would be sustained by Employer and its subsidiary companies in the event of a violation by Employee of any of the provisions of this Agreement, and by reason thereof Employee consents and agrees that if she violates any of the provisions of this Agreement, Employer shall be entitled to an injunction to be issued by any court of competent jurisdiction restraining her from committing or continuing any violation of this Agreement. 8. SURVIVAL OF PROVISIONS. The provisions of Sections 4, 5, 6, 7, and 10 hereof shall survive the termination or expiration of this Agreement, irrespective of the reason therefor. 6 9. EXPENSES. Employer shall reimburse Employee for all reasonable expenses incurred by her on behalf of Employer in the performance of her duties hereunder, provided that proper vouchers are submitted to Employer by Employee evidencing such expenses and the purposes for which the same were incurred. 10. DISABILITY. If Employee shall be incapacitated by reason of mental or physical disability or otherwise during the term of this Agreement so that she is prevented from performing her principal duties and services hereunder for a period of three (3) consecutive months or one or more periods aggregating three (3) months during any twelve (12) month period, Employer shall have the right to terminate this Agreement by sending written notice of termination to Employee, and thereupon her employment pursuant to this Agreement shall terminate and Employee shall be entitled to no further payments hereunder, other than (i) for any compensation due pursuant to Section 4 (a)(i),(iv) and (v) hereof, and (ii) the reimbursement, pursuant to Section 9 hereof, of any expenses incurred prior to the date of such termination. For purposes of this Section 10, amounts payable under subsection (i) hereof shall be inclusive of amounts paid to Employee in lieu of normal cash compensation under Employer sponsored Short Term and Long Term Disability Insurance policies during the eighteen months following cessation of employment. In other words, Employer will pay only that amount in excess of the insurance payments made each month that is necessary to provide Employee with cash compensation equal to what would have been paid pursuant to Section 4 but for the insurance payments. 11. DEATH. In the event of the death of Employee during the term hereof, this Agreement shall automatically terminate and Employer shall have no further obligations hereunder, other than to pay to Employee's estate any compensation due pursuant to Section 4 (a)(i) and (iv) hereof through the date of such termination and to reimburse, pursuant to Section 9 hereof, any expenses incurred by Employee through the date of such termination. 12. TERMINATION BY EMPLOYER FOR CAUSE. Employer shall have the right to terminate the employment of Employee under this Agreement as well as any and all payments to be made hereunder, other than for any compensation due pursuant to Section 4 (a)(i) hereof through the date of such termination and any reimbursement, pursuant to Section 9 hereof, of expenses incurred by Employee through the date of such termination, if Employee shall commit any of the following acts of default: (a) Employee shall have committed any material breach of any of the provisions or covenants set forth herein; or 7 (b) Employee shall have committed any act of gross negligence in the performance of his duties or obligations hereunder; or (c) Employee shall have committed any material act of dishonesty or breach of trust against Employer or any of its subsidiary companies; or (d) Employee's conviction of, or plea of NOLO CONTENDERE to, a felony. If Employer elects to terminate this Agreement as set forth above, Employer shall send written notice to Employee terminating this Agreement and describing the action of Employee constituting the act of default, and thereupon no further payments of any type shall be made or shall be payable to Employee hereunder notwithstanding any other provisions of this Agreement, except as set forth in the first sentence of this Section 12. 13. NO CONFLICTING AGREEMENTS. Employee represents and warrants that she is not a party to any agreement, contract or understanding, whether employment or otherwise, which would in any way restrict or prohibit her from undertaking or performing employment in accordance with the terms and conditions of this Agreement. 14. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, and no statement, representation, warranty or covenant has been made by either party except as expressly set forth herein. This Agreement shall not be changed or terminated orally. This Agreement supersedes and cancels all prior agreements between the parties, or any subsidiary of Employer whether written or oral, relating to the employment of Employee. 15. APPLICABLE LAW. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of New York, without regard to its conflict of laws principles. 16. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered, telecopied or mailed, first class, postage prepaid, certified mail, return receipt requested, to each of the parties at its or her address above written or as set forth beneath their signatures below or at such other address or telecopy number as either of the parties may designate in conformity with the foregoing. 8 17. SECTION HEADINGS. The Section headings set forth in this Agreement are for convenience only and shall not be considered as part of this Agreement in any respect nor shall they in any way affect the substance of any provisions contained in this Agreement. 18. SUCCESSORS AND ASSIGNS. This Agreement shall not be assignable by Employee. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs and personal representatives of Employee and the successors and assigns of Employer. 19. SEVERABILITY. If, at any time subsequent to the date hereof, any provision of this Agreement shall be held by any court of competent jurisdiction to be illegal, void or unenforceable, such provision shall be of no force and effect, but the illegality or unenforceability of such provision shall have no effect upon and shall not impair the enforceability of any other provisions of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. UNITED INDUSTRIAL CORPORATION EMPLOYEE By: /s/ Richard R. Erkeneff /s/ Susan Fein Zawel ----------------------- -------------------- Richard R. Erkeneff Susan Fein Zawel President & CEO Fax: (914) 684-1084 Fax No.: (212) 838-4629 9 EX-10.(L) 3 EXHIBIT 10(L) EXHIBIT 10(L) UNITED INDUSTRIAL CORPORATION EMPLOYMENT AGREEMENT R. W. WORTHING AGREEMENT made this 3rd day of March 2000, by and between UNITED INDUSTRIAL CORPORATION, a Delaware corporation having an address 570 Lexington Avenue, New York, New York 10022 (hereinafter called "Employer"), and ROBERT W. WORTHING, having an address at 16326 Matthews Road, Monkton, Maryland 21111 (hereinafter called "Employee"). W I T N E S S E T H: In consideration of the mutual covenants hereinafter contained, the parties hereto agree as follows: 1. EMPLOYMENT. Employer agrees to employ Employee and Employee agrees to serve Employer upon the terms and conditions hereinafter set forth. 2. TERM. The term of this Agreement shall commence January 3, 2000, (the "Effective Date") and subject to the provisions of Sections 3,4, and 10, hereof, terminate as of the close of business at the date three (3) years after the Effective Date (the "Termination Date"). The period from the Effective Date through the Termination Date is referred to as the term of this Agreement. 3. DUTIES AND EXTENT OF SERVICES. Employee agrees to serve Employer and its subsidiary companies faithfully and to the best of his ability under the direction of the Board of Directors and President of Employer, devoting his entire business time, energy and skill to his duties hereunder. The principal place of employment of Employee shall be at the offices of Employer currently located at Industry Lane in Hunt Valley, Maryland. Employee understands and agrees, however, that in connection with his employment hereunder, he may be required from time to time to travel on behalf of Employer. If the principal place of employment of the Employee shall change prior to the Termination Date because of a change in Employer's or AAI Corporation's offices to a location which is more than 50 miles from the offices presently located at Industry Lane, the Employee shall have the option within 30 days after such change to terminate this Agreement by sending written notice of termination to Employer, and thereupon his employment pursuant to this Agreement shall terminate and Employee shall be entitled to no further payments hereunder, other than (i) for any compensation due pursuant to Section 4 and (ii) the reimbursements pursuant to Section 9 hereof, of any expenses incurred prior to the date of such termination. The principal duties of Employee shall be to serve as Vice President and General Counsel of Employer and, in such capacity, to render such managerial, administrative and other services to Employer and its subsidiaries as normally are associated with and incident to such positions as Employer from time to time may require of him. If, during the term of this Agreement, the Board of Directors of Employer so determines, in its absolute discretion, to elect Employee to any additional office of Employer or its subsidiary companies consistent with his position, or a director of its subsidiary companies, Employee agrees to accept and serve in such office or capacity for no additional compensation or remuneration. 4. COMPENSATION. (a) CASH COMPENSATION. Employer agrees to pay to Employee, as compensation for all of the services to be rendered by Employee under or pursuant to this Agreement, compensation as follows. (i) Employee shall receive as compensation for his services hereunder an annual salary ("Base Compensation") of $220,043.00, which sum shall be payable in accordance with the normal payroll practices of Employer. Employee shall be reviewed annually and shall be entitled to such increases in his Base Compensation as the Board of Directors may determine, considering the recommendation of the President and Chief Executive Officer. (ii) Employee shall also be entitled to participate in Employer's Performance Sharing Plan ("PSP"; or such other similar bonus or incentive plan approved by Employer's Board of Directors and its Compensation Committee), that will afford Employee an opportunity to earn incentive compensation equivalent to a sum derived using at least the same target incentive percentage (40%) as used under the 1999 plan. The plan shall be based upon meeting certain goals and benchmarks. In its discretion, the Board of Directors may award Employee such greater sum as it may determine. (iii) Such salary and incentive shall be subject to annual review by Employer's Board of Directors and, at the discretion of the Board, may be increased, but not decreased below such amount and the incentive shall be not less than the sum resulting under the PSP process. (iv) If Employee's employment terminates due to any reason other than "for cause," including Employee's voluntary termination, prior to the end of the Compensation Year, Employee shall be entitled to an incentive compensation award at least equal to the sum calculated for his base salary in accordance with the PSP, but pro rata to the number of days employed 2 during the Compensation Year. If Employee's employment is terminated "for cause" prior to the time that the Earned Incentive Compensation is approved by the Employer's Board of Directors for employees of Employer generally, Employee shall not be entitled to any incentive compensation. (v) If during the term of this Agreement, or if this Agreement is not renewed or superceded, after the term of this Agreement, Employee's employment ceases for any reason other than "for cause," death, or Employee's voluntary departure (other than for "Good Reason" as defined below), the Employee shall be entitled, in addition to the compensation provided for above, to a sum equivalent to not less than his "Base Severance Compensation" that is a sum equal to one hundred fifty percent (150%) of Employee's annualized salary plus an Incentive Compensation Award equal to forty-two percent (42%) of the 150% annualized salary, payable in accordance with the normal payroll practices of Employer over a period of eighteen months following cessation of employment. If the date employment ceases is prior to the last eighteen (18) months of the term of this Agreement, the Employee shall be compensated for the remainder of this Agreement at his annualized salary plus an Incentive Compensation Award equal to the sum calculated for his base salary in accordance with the PSP or, if more, the amount provided for under the "Base Severance Compensation." Under the circumstances above, any and all stock options awarded to Employee that have not expired by the terms of each grant shall fully vest for purposes of each such grant. For purposes hereof, "Good Reason" shall mean any of the following, unless consented to by Employee in writing: (a) a termination by Employee pursuant to Section 3 hereof; (b) the assignment to Employee of any duties materially inconsistent with Employee's position as set forth in Section 3 hereof, Employee's removal from such position or a substantial diminution in such position, duties or responsibilities, which is not remedied by Employer within ten days after receipt of written notice thereof from Employee; (c) a reduction in Employer's compensation pursuant to Sections 4(a) (i) and (ii) hereof as in effect on the date hereof or as increased from time to time; or (d) a failure of Employer to continue to provide Employee with benefits substantially as contemplated by Section 4(b) hereof. 3 (b) EMPLOYEE BENEFIT PLANS. During the term of this Agreement, Employee shall be eligible to participate in any life insurance, medical, retirement, pension or profit-sharing, disability or other benefit plans or arrangements now or hereafter generally made available by Employer to executive employees of Employer to the extent Employee qualifies under the provisions of any such plans. Subject to the foregoing, Employer shall have the right to change insurance companies and modify insurance policies covering employees of Employer. In addition, notwithstanding any provision herein to the contrary, Employee shall be entitled to continuation of the same or equivalent benefits during the months following cessation of employment so long as Employee is entitled to payments pursuant to Section 4 hereof. (c) AUTOMOBILE ALLOWANCE. Employer shall pay to Employee an automobile allowance of ten thousand dollars ($10,000) per annum, commencing as of the Effective Date, payable in accordance with Employer's normal payroll practices. (d) VACATION. Employee shall be entitled to four (4) weeks vacation with pay per year. (e) TAXES. Employee understands that any and all payments described in this Agreement will be subject to such tax treatment as applies thereto, and to such withholding as may be required under applicable tax laws. 5. NO COMPETITION. Employee agrees that during the term of this Agreement he will not, within the continental United States, directly or indirectly, engage or participate or make any financial investments in or become employed by or render advisory or other services to or for any person, firm or corporation, or in connection with any business activity, other than that of Employer and its subsidiary companies, directly or indirectly in competition with any of the business operations or activities of Employer and its subsidiary companies. Nothing herein contained, however, shall restrict Employee from making any investments in any company whose stock is listed on a national securities exchange or actively traded in the over-the-counter market, so long as such investment does not give him the right to control or influence the policy decisions of any such business or enterprise which is or might be directly or indirectly in competition with any of such business operations or activities of Employer or any of its subsidiary companies. 4 6. CONFIDENTIALITY; ETC. (a) Employee will not divulge, furnish or make accessible to anyone (other than in the regular course of business of Employer or any of its subsidiary companies) any knowledge or information with respect to confidential or secret methods, processes, plans or materials of Employer or any of its subsidiary companies, or with respect to any other confidential or secret aspects of the business of Employer or any of its subsidiary companies. (b) Employee agrees to communicate and to make known to Employer all knowledge possessed by him relating to any methods, developments, inventions and/or improvements, whether patented, patentable or unpatentable which concerns in any way the business of Employer or any of its subsidiary companies or the general industry of which they are a part, from the time of entering upon employment until the termination thereof, and whether acquired by Employee before or during the term of his employment; PROVIDED, HOWEVER, that nothing herein shall be construed as requiring any such communication where the method, development, invention and/or improvement is lawfully protected from disclosure as the trade secret of a third party, including, without limitation, any former employer of Employee or by any other lawful bar to such communication. (c) Any methods, developments, inventions and/or improvements, whether patentable or unpatentable, along the lines of the business of Employer or any of its subsidiary companies, which Employee may conceive of or make while in the employ of Employer, shall be and remain the property of Employer. Employee agrees promptly to communicate and disclose all such methods, developments, inventions and/or improvements to Employer and to execute and deliver to Employer any instruments deemed necessary by Employer to effect disclosure and assignment thereof to it. Employee further agrees, on request of Employer, to execute patent applications based on such methods, developments, inventions and/or improvements, including any other instruments deemed necessary by Employer for the prosecution of such patent applications or the acquisition of Letters Patent in the United States and/or any foreign countries. (d) Employee agrees that for a period of two (2) years from and after the termination or expiration of his employment by Employer, whether pursuant to the terms of this Agreement or otherwise, he will not: (i) directly or indirectly solicit, raid, entice or induce any employee of Employer or of any of its subsidiary companies to be employed 5 by any person, firm or corporation which is, directly or indirectly, in competition with the business or activities of Employer or any of its subsidiary companies; or (ii) directly or indirectly approach any such employee for these purposes; or (iii) authorize or knowingly approve the taking of such actions by other persons on behalf of any such person, firm or corporation, or assist any such person, firm or corporation in taking such action; or (iv) directly or indirectly solicit, raid, entice or induce any person, firm or corporation (other than the U.S. Government or its agencies) who or which on the date hereof is, or at any time during the period of employment hereunder shall be, a customer of Employer or of any of its subsidiary companies to become a customer for the same or similar products which it purchased from Employer or any of its subsidiary companies, of any other person, firm or corporation, and Employee shall, not approach any such customer for such purpose or authorize or knowingly approve the taking of such actions by any other person. (e) Employee agrees that during the term of his employment by Employer, whether under this Agreement or otherwise, he will not at any time enter into, on behalf of Employer or any of its subsidiary companies, or cause Employer or any of its subsidiary companies to enter into, directly or indirectly, any transactions with any business organization in which he or any member of his immediate family may be interested as a partner, trustee, director, officer, employee, shareholder, lender of money or guarantor. 7. INJUNCTIVE RELIEF. Employee acknowledges that the services to be rendered by him hereunder are of a special, unique and extraordinary character and that it would be very difficult or impossible to replace such services and further that irreparable injury would be sustained by Employer and its subsidiary companies in the event of a violation by Employee of any of the provisions of this Agreement, and by reason thereof Employee consents and agrees that if he violates any of the provisions of this Agreement, Employer shall be entitled to an injunction to be issued by any court of competent jurisdiction restraining him from committing or continuing any violation of this Agreement. 8. SURVIVAL OF PROVISIONS. The provisions of Sections 4, 5, 6, 7, and 10 hereof shall survive the termination or expiration of this Agreement, irrespective of the reason therefor. 6 9. EXPENSES. Employer shall reimburse Employee for all reasonable expenses incurred by him on behalf of Employer in the performance of his duties hereunder, provided that proper vouchers are submitted to Employer by Employee evidencing such expenses and the purposes for which the same were incurred. 10. DISABILITY. If Employee shall be incapacitated by reason of mental or physical disability or otherwise during the term of this Agreement so that he is prevented from performing his principal duties and services hereunder for a period of three (3) consecutive months or one or more periods aggregating three (3) months during any twelve (12) month period, Employer shall have the right to terminate this Agreement by sending written notice of termination to Employee, and thereupon his employment pursuant to this Agreement shall terminate and Employee shall be entitled to no further payments hereunder, other than (i) for any compensation due pursuant to Section 4 (a)(i),(iv) and (v) hereof, and (ii) the reimbursement, pursuant to Section 9 hereof, of any expenses incurred prior to the date of such termination. For purposes of this Section 10, amounts payable under subsection (i) hereof shall be inclusive of amounts paid to Employee in lieu of normal cash compensation under Employer sponsored Short Term and Long Term Disability Insurance policies during the eighteen months following cessation of employment. In other words, Employer will pay only that amount in excess of the insurance payments made each month that is necessary to provide Employee with cash compensation equal to what would have been paid pursuant to Section 4 but for the insurance payments. 11. DEATH. In the event of the death of Employee during the term hereof, this Agreement shall automatically terminate and Employer shall have no further obligations hereunder, other than to pay to Employee's estate any compensation due pursuant to Section 4 (a)(i) and (iv) hereof through the date of such termination and to reimburse, pursuant to Section 9 hereof, any expenses incurred by Employee through the date of such termination. 12. TERMINATION BY EMPLOYER FOR CAUSE. Employer shall have the right to terminate the employment of Employee under this Agreement as well as any and all payments to be made hereunder, other than for any compensation due pursuant to Section 4 (a)(i) hereof through the date of such termination and any reimbursement, pursuant to Section 9 hereof, of expenses incurred by Employee through the date of such termination, if Employee shall commit any of the following acts of default: (a) Employee shall have committed any material breach of any of the provisions or covenants set forth herein; or 7 (b) Employee shall have committed any act of gross negligence in the performance of his duties or obligations hereunder; or (c) Employee shall have committed any material act of dishonesty or breach of trust against Employer or any of its subsidiary companies; or (d) Employee's conviction of, or plea of NOLO CONTENDERE to, a felony. If Employer elects to terminate this Agreement as set forth above, Employer shall send written notice to Employee terminating this Agreement and describing the action of Employee constituting the act of default, and thereupon no further payments of any type shall be made or shall be payable to Employee hereunder notwithstanding any other provisions of this Agreement, except as set forth in the first sentence of this Section 12. 13. NO CONFLICTING AGREEMENTS. Employee represents and warrants that he is not a party to any agreement, contract or understanding, whether employment or otherwise, which would in any way restrict or prohibit him from undertaking or performing employment in accordance with the terms and conditions of this Agreement. 14. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, and no statement, representation, warranty or covenant has been made by either party except as expressly set forth herein. This Agreement shall not be changed or terminated orally. This Agreement supersedes and cancels all prior agreements between the parties, or any subsidiary of Employer whether written or oral, relating to the employment of Employee. 15. APPLICABLE LAW. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of New York, without regard to its conflict of laws principles. 16. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered, telecopied or mailed, first class, postage prepaid, certified mail, return receipt requested, to each of the parties at its or his address above written or as set forth beneath their signatures below or at such other address or telecopy number as either of the parties may designate in conformity with the foregoing. 8 17. SECTION HEADINGS. The Section headings set forth in this Agreement are for convenience only and shall not be considered as part of this Agreement in any respect nor shall they in any way affect the substance of any provisions contained in this Agreement. 18. SUCCESSORS AND ASSIGNS. This Agreement shall not be assignable by Employee. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs and personal representatives of Employee and the successors and assigns of Employer. 19. SEVERABILITY. If, at any time subsequent to the date hereof, any provision of this Agreement shall be held by any court of competent jurisdiction to be illegal, void or unenforceable, such provision shall be of no force and effect, but the illegality or unenforceability of such provision shall have no effect upon and shall not impair the enforceability of any other provisions of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. UNITED INDUSTRIAL CORPORATION EMPLOYEE By: /s/ Richard R. Erkeneff /s/ Robert W. Worthing ----------------------- ---------------------- Richard R. Erkeneff Robert W. Worthing President & CEO Fax: (410) 472-0851 Fax No.: (212) 838-4629 9 EX-10.(M) 4 EXHIBIT 10(M) EXHIBIT 10(M) UNITED INDUSTRIAL CORPORATION EMPLOYMENT AGREEMENT J. H. PERRY AGREEMENT made this 3rd day of March, 2000, by and between UNITED INDUSTRIAL CORPORATION, a Delaware corporation having an address 570 Lexington Avenue, New York, New York 10022 (hereinafter called "Employer"), and JAMES H. PERRY, having an address at 8 Carolyn Court, Owings Mills, Maryland 21117 (hereinafter called "Employee"). W I T N E S S E T H: In consideration of the mutual covenants hereinafter contained, the parties hereto agree as follows: 1. EMPLOYMENT. Employer agrees to employ Employee and Employee agrees to serve Employer upon the terms and conditions hereinafter set forth. 2. TERM. The term of this Agreement shall commence January 3, 2000 (the "Effective Date") and subject to the provisions of Sections 3,4,and 10 hereof, terminate as of the close of business at the date three (3) years after the Effective Date (the "Termination Date"). The period from the Effective Date through the Termination Date is referred to as the term of this Agreement. 3. DUTIES AND EXTENT OF SERVICES. Employee agrees to serve Employer and its subsidiary companies faithfully and to the best of his ability under the direction of the Board of Directors and President of Employer, devoting his entire business time, energy and skill to his duties hereunder. The principal place of employment of Employee shall be at the offices of Employer currently located at Industry Lane in Hunt Valley, Maryland. Employee understands and agrees, however, that in connection with his employment hereunder, he may be required from time to time to travel on behalf of Employer. If the principal place of employment of the Employee shall change prior to the Termination Date because of a change in Employer's or AAI Corporation's offices to a location which is more than 50 miles from the offices presently located at Industry Lane, the Employee shall have the option within 30 days after such change to terminate this Agreement by sending written notice of termination to Employer, and thereupon his employment pursuant to this Agreement shall terminate and Employee shall be entitled to no further payments hereunder, other than (i) for any compensation due pursuant to Section 4 and (ii) the reimbursements pursuant to Section 9 hereof, of any expenses incurred prior to the date of such termination. The principal duties of Employee shall be to serve as Vice President and Chief Financial Officer of Employer and, in such capacity, to render such managerial, administrative and other services to Employer and its subsidiaries as normally are associated with and incident to such positions as Employer from time to time may require of him. If, during the term of this Agreement, the Board of Directors of Employer so determines, in its absolute discretion, to elect Employee to any additional office of Employer or its subsidiary companies consistent with his position, or a director of its subsidiary companies, Employee agrees to accept and serve in such office or capacity for no additional compensation or remuneration. 4. COMPENSATION. (a) CASH COMPENSATION. Employer agrees to pay to Employee, as compensation for all of the services to be rendered by Employee under or pursuant to this Agreement, compensation as follows. (i) Employee shall receive as compensation for his services hereunder an annual salary ("Base Compensation") of $200,720.00, which sum shall be payable in accordance with the normal payroll practices of Employer. Employee shall be reviewed annually and shall be entitled to such increases in his Base Compensation as the Board of Directors may determine, considering the recommendation of the President and Chief Executive Officer. (ii) Employee shall also be entitled to participate in Employer's Performance Sharing Plan ("PSP"; or such other similar bonus or incentive plan approved by Employer's Board of Directors and its Compensation Committee), that will afford Employee an opportunity to earn incentive compensation equivalent to a sum derived using at least the same target incentive percentage (40%) as used under the 1999 plan). The plan shall be based upon meeting certain goals and benchmarks. In its discretion, the Board of Directors may award Employee such greater sum as it may determine. (iii) Such salary and incentive shall be subject to annual review by Employer's Board of Directors and, at the discretion of the Board, may be increased, but not decreased below such amount and the incentive shall be not less than the sum resulting under the PSP process. (iv) If Employee's employment terminates due to any reason other than "for cause," including Employee's voluntary termination, prior to the end of the Compensation Year, Employee shall be entitled to an incentive compensation award at least equal to the sum calculated for his base salary in accordance with the PSP, but pro rata to the number of days employed 2 during the Compensation Year. If Employee's employment is terminated "for cause" prior to the time that the Earned Incentive Compensation is approved by the Employer's Board of Directors for employees of Employer generally, Employee shall not be entitled to any incentive compensation. (v) If during the term of this Agreement, or if this Agreement is not renewed or superceded, after the term of this Agreement, Employee's employment ceases for any reason other than "for cause," death, or Employee's voluntary departure (other than for "Good Reason" as defined below), the Employee shall be entitled, in addition to the compensation provided for above, to a sum equivalent to not less than his "Base Severance Compensation" that is a sum equal to one hundred fifty percent (150%) of Employee's annualized salary plus an Incentive Compensation Award equal to thirty-five percent (35%) of the 150% annualized salary, payable in accordance with the normal payroll practices of Employer over a period of eighteen months following cessation of employment. If the date employment ceases is prior to the last eighteen (18) months of the term of this Agreement, the Employee shall be compensated for the remainder of this Agreement at his annualized salary plus an Incentive Compensation Award equal to the sum calculated for his base salary in accordance with the PSP or, if more, the amount provided for under the "Base Severance Compensation." Under the circumstances above, any and all stock options awarded to Employee that have not expired by the terms of each grant shall fully vest for purposes of each such grant. For purposes hereof, "Good Reason" shall mean any of the following, unless consented to by Employee in writing: (a) a termination by Employee pursuant to Section 3 hereof; (b) the assignment to Employee of any duties materially inconsistent with Employee's position as set forth in Section 3 hereof, Employee's removal from such position or a substantial diminution in such position, duties or responsibilities, which is not remedied by Employer within ten days after receipt of written notice thereof from Employee; (c) a reduction in Employer's compensation pursuant to Sections 4(a) (i) and (ii) hereof as in effect on the date hereof or as increased from time to time; or (d) a failure of Employer to continue to provide Employee with benefits substantially as contemplated by Section 4(b) hereof. 3 (b) EMPLOYEE BENEFIT PLANS. During the term of this Agreement, Employee shall be eligible to participate in any life insurance, medical, retirement, pension or profit-sharing, disability or other benefit plans or arrangements now or hereafter generally made available by Employer to executive employees of Employer to the extent Employee qualifies under the provisions of any such plans. Subject to the foregoing, Employer shall have the right to change insurance companies and modify insurance policies covering employees of Employer. In addition, notwithstanding any provision herein to the contrary, Employee shall be entitled to continuation of the same or equivalent benefits during the months following cessation of employment so long as Employee is entitled to payments pursuant to Section 4 hereof. (c) AUTOMOBILE ALLOWANCE. Employer shall pay to Employee an automobile allowance of ten thousand dollars ($10,000) per annum, commencing as of the Effective Date, payable in accordance with Employer's normal payroll practices. (d) VACATION. Employee shall be entitled to four (4) weeks vacation with pay per year. (e) TAXES. Employee understands that any and all payments described in this Agreement will be subject to such tax treatment as applies thereto, and to such withholding as may be required under applicable tax laws. 5. NO COMPETITION. Employee agrees that during the term of this Agreement he will not, within the continental United States, directly or indirectly, engage or participate or make any financial investments in or become employed by or render advisory or other services to or for any person, firm or corporation, or in connection with any business activity, other than that of Employer and its subsidiary companies, directly or indirectly in competition with any of the business operations or activities of Employer and its subsidiary companies. Nothing herein contained, however, shall restrict Employee from making any investments in any company whose stock is listed on a national securities exchange or actively traded in the over-the-counter market, so long as such investment does not give him the right to control or influence the policy decisions of any such business or enterprise which is or might be directly or indirectly in competition with any of such business operations or activities of Employer or any of its subsidiary companies. 4 6. CONFIDENTIALITY; ETC. (a) Employee will not divulge, furnish or make accessible to anyone (other than in the regular course of business of Employer or any of its subsidiary companies) any knowledge or information with respect to confidential or secret methods, processes, plans or materials of Employer or any of its subsidiary companies, or with respect to any other confidential or secret aspects of the business of Employer or any of its subsidiary companies. (b) Employee agrees to communicate and to make known to Employer all knowledge possessed by him relating to any methods, developments, inventions and/or improvements, whether patented, patentable or unpatentable which concerns in any way the business of Employer or any of its subsidiary companies or the general industry of which they are a part, from the time of entering upon employment until the termination thereof, and whether acquired by Employee before or during the term of his employment; PROVIDED, HOWEVER, that nothing herein shall be construed as requiring any such communication where the method, development, invention and/or improvement is lawfully protected from disclosure as the trade secret of a third party, including, without limitation, any former employer of Employee or by any other lawful bar to such communication. (c) Any methods, developments, inventions and/or improvements, whether patentable or unpatentable, along the lines of the business of Employer or any of its subsidiary companies, which Employee may conceive of or make while in the employ of Employer, shall be and remain the property of Employer. Employee agrees promptly to communicate and disclose all such methods, developments, inventions and/or improvements to Employer and to execute and deliver to Employer any instruments deemed necessary by Employer to effect disclosure and assignment thereof to it. Employee further agrees, on request of Employer, to execute patent applications based on such methods, developments, inventions and/or improvements, including any other instruments deemed necessary by Employer for the prosecution of such patent applications or the acquisition of Letters Patent in the United States and/or any foreign countries. (d) Employee agrees that for a period of two (2) years from and after the termination or expiration of his employment by Employer, whether pursuant to the terms of this Agreement or otherwise, he will not: (i) directly or indirectly solicit, raid, entice or induce any employee of Employer or of any of its subsidiary companies to be employed 5 by any person, firm or corporation which is, directly or indirectly, in competition with the business or activities of Employer or any of its subsidiary companies; or (ii) directly or indirectly approach any such employee for these purposes; or (iii) authorize or knowingly approve the taking of such actions by other persons on behalf of any such person, firm or corporation, or assist any such person, firm or corporation in taking such action; or (iv) directly or indirectly solicit, raid, entice or induce any person, firm or corporation (other than the U.S. Government or its agencies) who or which on the date hereof is, or at any time during the period of employment hereunder shall be, a customer of Employer or of any of its subsidiary companies to become a customer for the same or similar products which it purchased from Employer or any of its subsidiary companies, of any other person, firm or corporation, and Employee shall, not approach any such customer for such purpose or authorize or knowingly approve the taking of such actions by any other person. (e) Employee agrees that during the term of his employment by Employer, whether under this Agreement or otherwise, he will not at any time enter into, on behalf of Employer or any of its subsidiary companies, or cause Employer or any of its subsidiary companies to enter into, directly or indirectly, any transactions with any business organization in which he or any member of his immediate family may be interested as a partner, trustee, director, officer, employee, shareholder, lender of money or guarantor. 7. INJUNCTIVE RELIEF. Employee acknowledges that the services to be rendered by him hereunder are of a special, unique and extraordinary character and that it would be very difficult or impossible to replace such services and further that irreparable injury would be sustained by Employer and its subsidiary companies in the event of a violation by Employee of any of the provisions of this Agreement, and by reason thereof Employee consents and agrees that if he violates any of the provisions of this Agreement, Employer shall be entitled to an injunction to be issued by any court of competent jurisdiction restraining him from committing or continuing any violation of this Agreement. 8. SURVIVAL OF PROVISIONS. The provisions of Sections 4, 5, 6, 7, and 10 hereof shall survive the termination or expiration of this Agreement, irrespective of the reason therefor. 6 9. EXPENSES. Employer shall reimburse Employee for all reasonable expenses incurred by him on behalf of Employer in the performance of his duties hereunder, provided that proper vouchers are submitted to Employer by Employee evidencing such expenses and the purposes for which the same were incurred. 10. DISABILITY. If Employee shall be incapacitated by reason of mental or physical disability or otherwise during the term of this Agreement so that he is prevented from performing his principal duties and services hereunder for a period of three (3) consecutive months or one or more periods aggregating three (3) months during any twelve (12) month period, Employer shall have the right to terminate this Agreement by sending written notice of termination to Employee, and thereupon his employment pursuant to this Agreement shall terminate and Employee shall be entitled to no further payments hereunder, other than (i) for any compensation due pursuant to Section 4 (a)(i),(iv) and (v) hereof, and (ii) the reimbursement, pursuant to Section 9 hereof, of any expenses incurred prior to the date of such termination. For purposes of this Section 10, amounts payable under subsection (i) hereof shall be inclusive of amounts paid to Employee in lieu of normal cash compensation under Employer sponsored Short Term and Long Term Disability Insurance policies during the eighteen months following cessation of employment. In other words, Employer will pay only that amount in excess of the insurance payments made each month that is necessary to provide Employee with cash compensation equal to what would have been paid pursuant to Section 4 but for the insurance payments. 11. DEATH. In the event of the death of Employee during the term hereof, this Agreement shall automatically terminate and Employer shall have no further obligations hereunder, other than to pay to Employee's estate any compensation due pursuant to Section 4 (a)(i) and (iv) hereof through the date of such termination and to reimburse, pursuant to Section 9 hereof, any expenses incurred by Employee through the date of such termination. 12. TERMINATION BY EMPLOYER FOR CAUSE. Employer shall have the right to terminate the employment of Employee under this Agreement as well as any and all payments to be made hereunder, other than for any compensation due pursuant to Section 4 (a)(i) hereof through the date of such termination and any reimbursement, pursuant to Section 9 hereof, of expenses incurred by Employee through the date of such termination, if Employee shall commit any of the following acts of default: (a) Employee shall have committed any material breach of any of the provisions or covenants set forth herein; or 7 (b) Employee shall have committed any act of gross negligence in the performance of his duties or obligations hereunder; or (c) Employee shall have committed any material act of dishonesty or breach of trust against Employer or any of its subsidiary companies; or (d) Employee's conviction of, or plea of NOLO CONTENDERE to, a felony. If Employer elects to terminate this Agreement as set forth above, Employer shall send written notice to Employee terminating this Agreement and describing the action of Employee constituting the act of default, and thereupon no further payments of any type shall be made or shall be payable to Employee hereunder notwithstanding any other provisions of this Agreement, except as set forth in the first sentence of this Section 12. 13. NO CONFLICTING AGREEMENTS. Employee represents and warrants that he is not a party to any agreement, contract or understanding, whether employment or otherwise, which would in any way restrict or prohibit him from undertaking or performing employment in accordance with the terms and conditions of this Agreement. 14. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, and no statement, representation, warranty or covenant has been made by either party except as expressly set forth herein. This Agreement shall not be changed or terminated orally. This Agreement supersedes and cancels all prior agreements between the parties, or any subsidiary of Employer whether written or oral, relating to the employment of Employee. 15. APPLICABLE LAW. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of New York, without regard to its conflict of laws principles. 16. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered, telecopied or mailed, first class, postage prepaid, certified mail, return receipt requested, to each of the parties at its or his address above written or as set forth beneath their signatures below or at such other address or telecopy number as either of the parties may designate in conformity with the foregoing. 8 17. SECTION HEADINGS. The Section headings set forth in this Agreement are for convenience only and shall not be considered as part of this Agreement in any respect nor shall they in any way affect the substance of any provisions contained in this Agreement. 18. SUCCESSORS AND ASSIGNS. This Agreement shall not be assignable by Employee. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs and personal representatives of Employee and the successors and assigns of Employer. 19. SEVERABILITY. If, at any time subsequent to the date hereof, any provision of this Agreement shall be held by any court of competent jurisdiction to be illegal, void or unenforceable, such provision shall be of no force and effect, but the illegality or unenforceability of such provision shall have no effect upon and shall not impair the enforceability of any other provisions of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. UNITED INDUSTRIAL CORPORATION EMPLOYEE By: /s/ Richard R. Erkeneff /s/ James H. Perry ----------------------- ----------------------- Richard R. Erkeneff James H. Perry President & CEO Fax: (410) 654-1813 Fax No.: (212) 838-4629 9 9 EX-13 5 EX-13 Exhibit 13 ANNUAL REPORT 1999 UNITED INDUSTRIAL CORPORATION [GRAPHIC OMITTED] UNITED INDUSTRIAL CORPORATION IS CONTENTS 3 Financial Highlights 4 Letter to Shareholders 8 Letters of Appreciation from our Customers 10 Unmanned Aerial Vehicles 12 Simulation and Test Systems 18 Engineering and Maintenance Services 20 Transportation Systems 22 Energy Systems 24 Board of Directors 25 Management's Discussion 31 Consolidated Financial Statements 35 Notes to Financial Statements 50 Report of Independent Auditors 51 Five-Year Financial Data 52 Corporate Organization a high technology company focused on the design and production of defense, training, transportation, and energy systems. Its products include unmanned aerial vehicles, training and simulation systems, automated aircraft test and maintenance equipment, and ordnance systems. It also manufactures ground transportation components, combustion equipment for biomass and refuse fuels, and specialized firefighter training installations. United Industrial Corporation 1 United Industrial Corporation is a customer-driven organization committed to enhancing shareholder value by delivering high quality products, systems, and services to selected defense and industrial markets. We value responsiveness to customers, careful stewardship of corporate assets, teamwork, and innovation, and we reward excellence in achieving these goals. 2 Mission Statement FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31 - --------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 1999 1998 1997 - --------------------------------------------------------------------------------------- Net sales $ 216,979 $ 204,305 $ 235,183 Net income 6,277 13,011 14,825 Earnings per share basic .51 1.06 1.22 diluted .50 1.03 1.19 Earnings before special items(a) 6,277 10,343 6,981 Dividends paid per share .40 .40 .29 Shareholders' equity 111,055 109,441 102,024 Shareholders' equity per share 9.03 8.93 8.33 Sales backlog as of year end $ 293,000 $ 210,000 $ 188,000 Shares outstanding 12,294,000 12,250,000 12,249,000 ---------------------------------------
(a) Excludes the effect of special items and income from divested businesses. See pages 25-28 for further information. United Industrial Corporation 3 TO OUR SHAREHOLDERS [PHOTO OMITTED] In many respects, 1999 was an excellent year for United Industrial. We achieved important new contracts that have expanded the scope and scale of our operations and pave the way for future growth. We reinforced our leadership position in key market niches and we continued to build our presence overseas. We introduced innovative new products that have been well-received by customers, and we saw the benefits of investments we have made to enhance our capabilities. All of these are important elements of United Industrial's long-term strategy, and we are excited about our accomplishments in each of these areas. In spite of these successes, the Company's overall performance in 1999 was disappointing. Difficulties in our transportation operations resulted in earnings for the year that were below last year's level. Net income was $6.3 million, or $0.50 per diluted share, including $13.1 million ($8.2 million after taxes) in transportation-related losses, compared to net income before special items of $10.3 million, or $0.82 per diluted share, in 1998. As discussed below, we have taken steps to address the issues in the transportation business, and we expect these operations to achieve profitable results in the second half of 2000. Net sales in 1999 reached $217.0 million, up from $204.3 million last year. With several new programs underway and additional contract awards scheduled for 2000, we expect to begin to see accelerated revenue growth in the quarters ahead. Backlog at year-end increased substantially to $293.0 million, up 40% from $210.0 million at year-end in 1998, and our balance sheet remains very strong. 4 Letter to Shareholders KEY PRIORITIES IN 2000 As we look ahead, our energies are firmly focused on generating greater value for our shareholders. United Industrial common stock, like many other small-cap value stocks, has not enjoyed the appreciation in value that other stocks have achieved in today's market. As a result, we are now taking a careful look at our business to identify additional ways in which we can build increased value for our shareholders. At the same time, we are continuing to implement the strategies that have served us well in the past. With our specialized technical expertise in areas such as unmanned aerial vehicles, simulation and test systems, and engineering and maintenance services, we possess real competitive advantages that differentiate our products and services in the marketplace. We will continue to leverage these capabilities to capitalize on new opportunities to grow our business. In particular, we are focusing in the near term on the following key priorities: DEVELOPING INNOVATIVE NEW PRODUCTS. Our engineers and technicians are at the forefront of technological change in our markets, and we are constantly incorporating innovative new features into our products to better serve our customers' needs. We view our research and development capabilities as a key factor in our ongoing ability to deliver superior value to our customers, and the investments we have made in recent years are yielding tremendous results. Our new products are experiencing outstanding customer acceptance and have enabled us to capture additional contracts throughout the world, as we continue to solidify our position as a leading defense contractor in our niche markets. A prime example of this strategy at its best was our December 1999 win of a $41.8 million contract to develop the Tactical Unmanned Aerial Vehicle (TUAV) for the U.S. Army. The TUAV is the first in a new generation of UAVs that will play a critical role in future combat operations. Our success in winning this program was a direct result of the rigorous development program we have implemented for our Shadow UAVs. Since their introduction in 1992, we have continuously updated the design and features of the Shadow unmanned aircraft, so that the Army now has the benefit of our many years of experience with this product line and its related Pioneer UAV. For us, this contract award represents a spectacular, high-level endorsement of our capabilities in the UAV market and positions us to play a meaningful role in the U.S. military's UAV programs for some time. In simulation and test systems, our state-of-the-art technologies in on-board training systems have allowed us to become a leader in this specialized market. We are currently executing two Left: Richard R. Erkeneff, President and Chief Executive Officer Right: Harold S. Gelb, Chairman of the Board United Industrial Corporation 5 key programs for the U.S. Navy, the Generic Navy Stimulator/Simulator (GNSS) and the Carry-on-Combat Systems Trainer (COCST). Moreover, based on our work, we are now being called upon by foreign customers in search of on-board training expertise, including the Royal Australian Navy. In addition, our introduction of new advanced boresighting equipment (ABE) is attracting a range of new customers. Utilizing computer and laser gyroscope components, we have developed a new technology for the precision alignment of parts. This technology has now been embraced by the U.S. Navy and U.S. Air Force, as well as by the Eurofighter Industry Consortium, which has selected AAI to provide four ABE systems to support the Eurofighter 2000 Typhoon Aircraft. Our first international ABE award, the Eurofighter contract should lead to additional opportunities in Europe and elsewhere around the world. EXPANDING IN THE HIGH-GROWTH SERVICES MARKET. Some time ago, we recognized the fast-growing demand for engineering- and maintenance-related services, both in the defense industry as well as in markets such as commercial aviation. We saw this trend accelerating, in large part, by customers' increased use of outsourcing to meet their specialized needs, and, with our core competencies, we began concentrating our attention on winning this new business. In particular, our Engineering Support Inc. (ESI) and our AAI/ACL Technologies subsidiaries have done an outstanding job of capitalizing on these new opportunities. One of ESI's most successful programs has been a C-17 Aircraft contract for the U.S. Air Force, which has grown in value to over $101 million since the initial contract award in 1997. At AAI/ACL, major wins have included a $28 million program for the construction of an F-16 Maintenance Depot in Egypt and a $5.4 million contract to perform maintenance services at British Airways' new facility outside London. BUILDING OUR PRESENCE OVERSEAS. A key element of our strategy has been to enter new international markets, and we have been strengthening our presence overseas. Foreign contracts represented approximately 20% of our sales in both 1999 and 1998, up significantly from prior years' levels. Moreover, new orders booked during 1999 consisted of 17% of international bookings, up from 14% in the prior year. Importantly, this backlog of work spans many of our subsidiaries, so that our continued international growth is not tied to any single business area. [GRAPHIC OMITTED] During 1999, United Industrial continued to strengthen its presence in international markets, winning new contracts in the foreign countries highlighted below. 6 Letter to Shareholder Key highlights in our overseas expansion in 1999 include the Egyptian F-16 Depot project, the on-board training systems program for the Royal Australian Navy and the ABE Eurofighter contract, all discussed above, as well as UAV programs in Romania and Asia. Outside of the defense industry, our Symtron Systems firefighter training systems business is implementing programs in Europe and Asia and our Detroit Stoker subsidiary has expanded its business in Germany, Canada and New Zealand. ACHIEVING PROFITABILITY OF TRANSPORTATION SEGMENT. We are committed to producing profitable results in our transportation business. Our performance in this segment in 1999 was negatively impacted by a number of factors, including a warranty reserve related to certain transportation work completed prior to 1999 and, very significantly, the difficulties of our Czech joint venture partner, Skoda, a.s., in receiving financing for its portion of our joint contracts. Together, through Electric Transit, Inc. (ETI), Skoda and United Industrial have succeeded in winning two of the most significant electric trolley bus programs in the nation in recent years, including a $174 million program for the San Francisco Municipal Railway (of which United Industrial's portion is $54 million). Skoda's financing difficulties, due in part to an economic downturn in the Czech Republic, resulted in additional costs for ETI's programs in 1999. We worked closely with Skoda over the course of the year to obtain financing, and, in February 2000, we finalized Skoda and ETI's financing arrangements. With the San Francisco program underway, we now expect the performance of the transportation segment to achieve profitability in the second half of 2000. As we move ahead, we will continue to evaluate the role of our transportation operations within our overall portfolio of businesses. Independently from ETI, we are pursuing opportunities in the rail vehicle overhaul segment of the marketplace, where we have identified significant potential for growth. In fact, we are now implementing a major $71 million program for the New Jersey Transit Authority and a $15 million emergency rail rehabilitation program for the Washington Metro Area Transit Authority, while actively considering other attractive prospects in this sector. CONFIDENCE IN THE FUTURE. With these initiatives in place and our continued focus on delivering exceptional quality and attentive service for our customers, we are confident in United Industrial's long-term growth and success. We have a talented and dedicated management team, an excellent financial position, and unique capabilities that distinguish us in our markets. Moreover, we are determined to leverage these strengths through new avenues to deliver greater value for our shareholders. We would like to thank all of our 1,600 associates for their hard work in 1999. The Company's many achievements last year are directly attributable to their outstanding efforts. We would also like to acknowledge our customers for their ongoing support. To you, our shareholders, we thank you for your continued interest in United Industrial, and we pledge to you that we are devoting our full attention and resources to increasing the value of your investment in 2000 and in the new millennium. Sincerely, /s/ Richard R. Erkeneff Richard R. Erkeneff President and Chief Executive Officer /s/ Harold S. Gelb Harold S. Gelb Chairman of the Board [GRAPHIC OMITTED] United Industrial Corporation 7 LETTERS OF APPRECIATION FROM OUR CUSTOMERS "Pioneer has proven invaluable to the peacekeeping missions in Bosnia as well as to the current NATO military actions in Kosovo..." "You have been instrumental in the development of the software design that will be implemented into COCST. Your attention to detail, work ethic, technical abilities and communication skills are the major reasons for the success of these efforts to date." "Your support of the ICBM program is to be commended. Support by your upper management, in establishing a schedule and continually striving to meet that schedule, is commendable." "In Bosnia the Pioneer Team coordinated and efficiently dispatched a Tiger Team to return to service, repair, and establish a spares package which provided 90% mission readiness under extreme hostile conditions in remote areas..." [GRAPHIC OMITTED] 8 Letters of Appreciation from our Customers "The AAI Shadow 600 Unmanned Aerial Vehicle System provides an excellent observation and reconnaissance platform for the Armed Forces of Romania...AAICORPORATION has provided training and technical assistance to the Romanian Air Force during the past 18 months in an outstanding manner." "The ABE system has proven to be exceptionally fast, accurate, easy to use, and has enabled us to dramatically reduce the time required to align the C-17." "ABE is a revolutionary system, and we are implementing the use of ABE throughout The Boeing Airlift & Transport Division, as well as field support equipment for the C-17 aircraft." "Your Engineering Team was certainly 'customer' focused...They have exceeded our expectations...Through their efforts, the Navy will be getting a 'first class' facility when the relocation is complete for conducting propulsion system RDT&E." [GRAPHIC OMITTED] United Industrial Corporation 9 UNMANNED AERIAL VEHICLES Our AAI subsidiary capped off the year with a spectacular win in its Unmanned Aerial Vehicle (UAV) business. Reinforcing its leadership position in the development, production and support of UAV systems, AAI led a team that was awarded a contract in December to provide the U.S. Army's new Tactical Unmanned Aerial Vehicle (TUAV) system. The first in a new generation of UAVs, the TUAV will serve as the primary source of real-time combat reconnaissance, surveillance, and targeting information. The initial contract, valued at $41.8 million, calls for the manufacture and support of four low-rate production TUAV systems, which will be tested operationally by the Army. The Army will have options to then purchase six to ten full-rate production systems, and, over the longer term, plans to have a total inventory of 44 TUAVs, representing a total contract value to AAI of more than $300 million over the next five years. The Army's selection of the AAI-led team followed an intense review and competition that included a 3-week system capability demonstration. Our successful prototype was based on our Shadow family of UAVs, first flown in 1992, and which has benefited from a continuous development program and our experience producing technically mature UAVs, including both the Pioneer UAV system and the Shadow. In addition to winning this important TUAV contract, we implemented a number of UAV programs for customers over the course of 1999. Highlights included the completion of ground and flight testing for our UAV Common Automatic Recovery System (UCARS) for the U.S. Navy and Marine Corps; [GRAPHIC OMITTED] 10 Unmanned Aerial Vehicles [GRAPHIC OMITTED] [PHOTO OMITTED] JOSEPH G. THOMAS VICE PRESIDENT AND DEPUTY GENERAL MANAGER, UAV SYSTEMS completion of training and certification for the Romanian UAV program; and completion of all training activities for a UAV program for a Southeast Asian customer. Based on our strong performance, both the Romanian Ministry of Defense and the Southeast Asian customer have plans to utilize AAI for additional UAV work in the near future. In looking ahead, we expect our work on the TUAV program to play a valuable role in enabling us to continue to increase our share of both the domestic and international UAV markets. We have enjoyed a successful 14-year history producing UAV systems that have been fielded by customers worldwide, and we know there is excellent potential for us to continue to grow this business. "The U.S. Army's selection of AAI to develop its new tactical UAV solidifies our position as the premier supplier of tactical UAVs worldwide. The contract draws upon our proven capabilities with the Shadow UAV system, and, since the Army intends to field significant numbers of TUAV systems, will provide us with an exciting new revenue stream in our UAV business." AAI technicians check the mounting of a Shadow 200 Tactical UAV on a hydraulic launcher. The compact size and efficient mobility of the Shadow 200 system, coupled with its performance test results, were key factors in the Army's selection of AAI as the TUAV system contractor. United Industrial Corporation 11 SIMULATION AND TEST SYSTEMS Among United Industrial's core strengths is our unparalleled capability in the production and support of simulation and test systems. Our technical expertise and our experience with a wide range of applications have distinguished us within our industry and continue to provide our AAI subsidiary with exciting opportunities. During 1999, we built on our strengths to expand many existing programs underway, while winning important new contracts that position us for future growth. These include programs for various branches of the U.S. military, as well as for commercial customers and foreign governments. One key area in which AAI has excelled has been in the production of shipboard training systems. Our work has included two important programs for the U.S. Navy: the Generic Navy Stimulator/Simulator (GNSS), a contract now valued at $16 million, and the Carry-on-Combat Systems Trainer (COCST), now valued at $9.3 million. Both systems help to train shipboard radar operators by creating a realistic combat environment. Under the GNSS contract, we have successfully completed acceptance testing of the first units ordered by the Navy, and we have received orders for approximately 180 more. The COCST, now in development, calls for us to incorporate the state-of-the-art features of the GNSS in a more transportable design. Production is slated to begin in early 2000. Based on our leadership in this market, we were awarded, in June 1999, a $19 million program to develop six On-Board Training systems and two land-based Software Support Centers to be used in upgrading six guided missile frigates for the Royal Australian Navy - our first international On-Board Training program. We plan to continue to extend our presence in this segment of the international marketplace. In a related area, work has proceeded very well on our Surveillance Radar Training Set (SRTS), which will be used to train technicians in the maintenance of sophisticated radar equipment for the "The JSECST program takes advantage of AAI's leadership in the production of simulation and test systems for major defense systems. Our technologies and skills in this specialized area provide us with a solid business base as well as ongoing opportunities to develop new products for new customers." [PHOTO OMITTED] MICHAEL F. BROWNE DIRECTOR, TEST AND ELECTRONIC WARFARE SYSTEMS 12 Simulation and Test Systems [GRAPHIC OMITTED] The JSECST stimulates electronic warfare radar detection devices to assure mission readiness. At left, members of the Eglin Air Force Base's 33rd Fighter Wing work with AAI on testing the JSECST system for the F-15C/D Air Superiority Aircraft. Above, the JSECST display system provides all instructions for the aircraft test. United Industrial Corporation 13 [PHOTO OMITTED] CHERYL A. BITNER PROGRAM DIRECTOR, SIMULATIONS SYSTEMS AWACS E-3 aircraft. During 1999, we completed the first of three incremental deliveries to the U.S. Air Force, under this $21.7 million contract, with the second two deliveries scheduled in the summer and fall of 2000. The Joint Service Electronic Combat Systems Tester (JSECST), valued at $27.8 million, continues to be a key program for AAI. We expect the U.S. Government to begin independent operational testing of the system in mid-2000, with production to commence in 2001. This program, which is currently supported by the U.S. Air Force, U.S. Navy and the Australian Government for various applications, offers significant potential for further expansion. We were awarded two key Advanced Boresight Equipment (ABE) programs in 1999. The U.S. Navy ordered a total of eight ABE systems, at a contract value of $4.4 million, four of which the Navy will use to boresight aircraft weapons and equipment and four of which the Air Force will use in support of its C-17 Globemaster aircraft program. Under the second contract, valued at $4.2 million, the Eurofighter Industry Consortium selected AAI to provide four ABE systems to support the Eurofighter 2000 Typhoon Aircraft. This award represented the first international sale of our new advanced boresighting technology. Other key contract awards during 1999 included a $3.5 million contract from Raytheon Company to produce 17 computer control kits and simulated ammunition sets in support of the Fire Support Combined Arms Tactical Trainer; a $3.1 million contract to upgrade 14 MHU-204/M Munitions Handling Units; and a $6.6 million contract to design and deliver a new Control Center Computer System for O-Hare International Airport in Chicago, Illinois. We also received additional funding on our Projectile Detection and Cueing program for the U.S. Army and our Novel Penetrator Fuze contract for GRC International. SYMTRON SYSTEMS Our Symtron Systems subsidiary, which produces simulation systems for use in training firefighters, turned in a The USS Porter, shown here, features AAI's new Generic Navy Stimulator/Simulator as part of the ship's Battle [GRAPHIC Forces Tactical Training System. In a typical training OMITTED] exercise, sailors perform detection, controlling and engagement procedures, while operating combat systems controls and tactical displays. 14 Simulation and Test Systems [GRAPHIC OMITTED] solid performance last year. Our core competencies in this very specialized market provide us distinct competitive advantages in winning new business. In 1999, we leveraged these strengths successfully to attract a range of new customers around the world. Within the United States, we received contracts for firefighter training systems from a number of state and local municipalities, including Eugene, Oregon; Suffolk County, New York; the State of Tennessee; Byron, Illinois; Bellevue, Nebraska; and Allentown, Pennsylvania. We also continue to implement programs for various branches of the U.S. Armed Forces. Internationally, we have forged partnerships with Kawasaki Heavy Industries in Asia and Krantz-TKT in Europe, which have led to opportunities in those markets. Our efforts in 1999 were highlighted by accomplishments on two key programs. In October 1999, we completed our work for one of the largest firefighter training complex systems in the world, located at Monroe County, New York. Our state-of-the-art equipment serves as the backbone of this facility, and we are optimistic our work on this project will position us as a preferred provider for similar contracts in the future. Second, we completed 22 of 26 deliveries of various mobile and structural training systems to U.S. Army facilities around the world, under the Army's Simulation, Training and Instrumentation Command, reinforcing our relationship with this important area of the U.S. Armed Services. AAI/ACL TECHNOLOGIES AAI/ACL Technologies (ACL), which specializes in equipment for hydraulic, fuel and pneumatic testing, achieved a record year in 1999 by expanding its business in both foreign and domestic markets. ACL's total sales rose by more than 69% and new orders increased by more than 38%, providing this subsidiary with its largest backlog in its history. United Industrial Corporation 15 [GRAPHIC OMITTED] 16 Simulation and Test Systems [GRAPHIC OMITTED] "1999 was AAI/ACL Technologies' best year ever. We experienced substantial growth in all aspects of our business and secured important new contracts that will provide for future success. Key highlights included our completion of the British Airways Component Engineering Facility near London and our installation of an F-16 Pneumatic Test Facility for the Government of Taiwan." [PHOTO OMITTED] THOMAS E. WURZEL PRESIDENT, AAI/ACL TECHNOLOGIES A technician adjusts a pneumatic actuator on ACL [GRAPHIC equipment used to test F-16 fuel components at far left, OMITTED] while two technicians assemble pneumatic test stands in support of ACL's growing space launch vehicle business. One of the most exciting developments of the year was ACL's award of a $28 million program for the construction of an F-16 Maintenance Depot in Egypt. ACL will serve as the Integration Contractor and will purchase and manufacture much of the required test equipment and tooling. This contract represents a major milestone in ACL's growth and follows its successful record of serving the F-16 depot programs. In addition, ACL has pursued new avenues for expansion in the "space business." We are currently providing pneumatic panels for the launch pad for Lockheed Martin's Atlas 5 program, and we are working with Boeing to provide servocomponent panels for its Delta IV EELV Program as well as other support equipment for its new launch vehicle manufacturing facility in Alabama, under a $6 million contract. The commercial airline industry continues to be an important market for us. Over the course of the year, we extended our relationship with British Airways, entering a ten-year $5.4 million maintenance contract, and we were awarded a new $1 million contract from United Airlines. Outside of the commercial sector, ACL completed testing of a five-cell pneumatic test facility for the Republic of China Air Force, under a $2.3 million contract. This year also marked the completion of our relocation of the McClellan Air Force Base in Sacramento, California to Hill Air Force Base in Ogden, Utah, under a $10 million contract. Working together with our sister company Engineering Support Inc., we earned an evaluation of "excellent" by the U.S. Air Force following completion of this project. United Industrial Corporation 17 ENGINEERING AND MAINTENANCE SERVICES [GRAPHIC OMITTED] Engineering Support, Inc. (ESI), our Engineering & Maintenance Services subsidiary, achieved its third consecutive year of record sales, bookings and profits in 1999. Sales increased 45% for the year, while new bookings rose 80% and profits jumped by 38%. With steady growth expected again in 2000, we are well on our way to establishing ESI as a market leader with a substantial revenue base. A key highlight of the year was the continuing expansion of our contract with the U.S. Air Force to upgrade Maintenance Training Systems for the C-17 Aircraft. During 1999, we received an additional $28 million in funding for this program, bringing the total contract value to over $101 million. We completed our first deliveries of the modified training equipment to McChord Air Force Base in Washington and Charleston Air Force Base in South Carolina two months ahead of schedule. Moreover, in further recognition of our contributions on this important program, Boeing selected ESI to be its provider of maintenance training equipment services for future C-17 international and commercial sales. Another key contract we have successfully grown is our $44 million program to upgrade Gunnery Maintenance Trainers for the U.S. Army's Simulation, Training and Instrumentation Command. As part of this program, we received an additional $3.5 million award to provide in-country technical support for all U.S. Army training devices in Bosnia. This contract is being extended through 2000 and will now also incorporate a component to provide support for the Army's C4I programs. As a complement to our engineering services business, we have developed valuable expertise in logistics support, including major relocation projects. During the year, we successfully completed a relocation program, valued at $10.3 million, for the U.S. Navy, which entailed relocating the Navy's Trenton, New Jersey Engine Test Facility to Patuxent River, Maryland. We are now assisting with installation work at the new facility, under an extended contract. Members of this team also worked together with United Industrial's AAI/ACL Technologies subsidiary to successfully move the hydraulics and electrical accessories shops of McClellan Air Force Base in California to Hill Air Force Base in Utah. 18 Engineering and Maintenance Services [GRAPHIC OMITTED] We recognize there are further opportunities for ESI to support the activities of other United Industrial subsidiaries. As a result, we have expanded our Logistics Support staff and capabilities, and we are already pursuing a number of new programs. These include providing Logistics Support and Field Support Teams for AAI's Tactical Unmanned Aerial Vehicles (TUAV) contract and developing logistics products such as training and technical publications for the Transportation Systems business. [PHOTO OMITTED] MAURICE P. RANC VICE PRESIDENT AND GENERAL MANAGER, DEFENSE SYSTEMS AND ENGINEERING AND MAINTENANCE SERVICES "Drawing upon our engineering strengths, ESI has worked closely with the U.S. Air Force in integrated product [GRAPHIC teams to introduce high fidelity maintenance training OMITTED] solutions for the C-17 aircraft. Together, we have developed a superior trainer at a significantly lower cost to the Air Force." Improvements to the trainer's cockpit displays, instruments and controls at far left, support more realistic, high fidelity training, while the use of an actual C-17 engine in the Aircraft Engine Cowling Trainer, being checked here by ESI technicians, further enhances the training experience. United Industrial Corporation 19 TRANSPORTATION SYSTEMS [GRAPHIC OMITTED] 20 Transportation Systems "The New Jersey Transit contract, the largest rail car project to be undertaken by AAI to date, accelerates our expansion into rail vehicle overhaul services. This is a high-potential growth market where we can apply our technical skills." [PHOTO OMITTED] JOHN T. MERRY VICE PRESIDENT AND GENERAL MANAGER, TRANSPORTATION SYSTEMS AAI technicians are shown here modifying the structure [GRAPHIC of New Jersey Comet II cars to incorporate new doors OMITTED] that will enable entry from either ground or platform levels. As part of our growth strategy, we are actively expanding our presence in the rail vehicle overhaul segment of the transportation industry. This is a market with great potential where we believe we can leverage United Industrial's resources and capabilities to become a significant competitor. A major milestone in this strategy was our receipt of a substantial overhaul contract for the New Jersey Transit Authority in February 1999. Under this $71 million program, we are now upgrading 116 Comet II commuter railroad cars. This project is scheduled for completion in May 2001. In addition, we are pursuing opportunities for similar overhaul programs for the Baltimore Metropolitan Transit Authority and the Washington Metropolitan Area Transit Authority. Our joint venture with Czech firm Skoda, Electric Transit Inc. (ETI), moved forward on two key electric trolley bus programs during the year. In July 1999, we delivered the last of 54 electric trolley buses to the Miami Valley Regional Transit Authority in Ohio, successfully completing this $32.5 million contract. In addition, work on our program for the San Francisco Municipal Railway is underway. We have delivered two standard prototype buses for testing, the first of which has successfully completed its 9,000 mile acceptance test. Based on our customer's enthusiastic response to the prototypes, we are moving ahead on production and expect to deliver the first buses in late 2000. United Industrial's portion of this contract is valued at approximately $54 million. United Industrial Corporation 21 ENERGY SYSTEMS Detroit Stoker, our energy systems subsidiary, made significant strides last year in expanding its business overseas, while taking advantage of opportunities in the U.S. market, where deregulation and the robust economy have bolstered demand for alternative energy sources. In addition, our strong service focus and our experience in customizing solutions to meet customers' diverse energy needs have enhanced our ability to win new business. SIGNIFICANT POTENTIAL FOR OVERSEAS EXPANSION Overseas markets offer the greatest potential for expansion, and our team has worked diligently to take advantage of emerging opportunities. Currently, more than one-third of Detroit Stoker's new contract orders originate from overseas customers. Demand in markets such as Germany, New Zealand and Canada continues to be buoyed by increasing interest in environmentally friendly biomass fuels. In Germany, for example, customers are utilizing Detroit Stoker technology to produce electricity and generate process steam from biomass waste streams, such as bark, wood waste and shavings. Our ability to help customers to harness resources such as these to meet their energy needs is a powerful competitive advantage, and we plan to continue to leverage this core competency to gain entry into new markets. 22 Energy Systems [GRAPHIC OMITTED] "The installation of Detroit Stoker's advanced stoker technology has enabled our customers worldwide to improve operating performance and efficiencies while lowering fuel consumption, resulting in higher overall returns." The 17 MWE Independent Power Renewable Biomass Energy Plant, pictured here, utilizes virgin forest wood, community brush, recycled wood pallets and landfill gas for fuel production. The plant was recently retrofitted with Detroit Stoker products, leading to improved results. [PHOTO OMITTED] MICHAEL J. DIMONTE PRESIDENT, DETROIT STOKER NEW GROWTH OPPORTUNITIES IN THE U.S. Deregulation of the energy industry in the U.S., coupled with rising demand for electricity, has provided an environment in which independent power producers (IPP) have flourished. These IPPs have looked to us to help them manage greater demand through plant refurbishments and upgrades, which have enhanced plant efficiency and lowered operating costs. At the same time, we have enabled coal-based producers to better compete against their gaseous fuel counterparts through the design of advanced technologies that improve performance and emissions without sacrificing combustion efficiency. In fact, customer demand for enhanced operating performance and lower emissions continues to boost sales of our Hydrograte(R) stoker technology in the U.S. The Hydrograte efficiently burns high-moisture content fuels, such as wood waste, to produce electricity and process steam. We are seeing greater interest in the U.S. in this type of system and completed two significant projects in the States of Massachusetts and Virginia in 1999. ENHANCING OUR VALUE TO OUR CUSTOMERS As part of our ongoing customer service focus, we launched a number of initiatives in 1999 to further improve Detroit Stoker's products and services for customers. From introducing new standardized equipment to reducing production cycles, these steps are enabling us to achieve new heights in meeting and exceeding our customers' expectations. We fully intend to build on this success and our market leadership position in the future, through continued innovation and our relentless commitment to excellence. United Industrial Corporation 23 Vice President Corporate Communications, Associate General Counsel and Secretary of United Industrial Corporation. Director since 1995. President and Chief Executive Officer of the Aerospace Corporation. Director since 1995. The Joseph Solomon Distinguished Professor of Law and former Dean/Professor of Law of New York Law School. Director since 1996. President of JSA Partners, Inc. and Chairman and Co-Founder of JSA Research, Inc. Director since 1998. Chairman of the Board of United Industrial Corporation. Director since 1995. President and CEO of United Industrial Corporation and AAI Corporation. Director since 1995. BOARD OF DIRECTORS Susan Fein Zawel Edward C. Aldridge, Jr. [GRAPHIC E. Donald Shapiro OMITTED] Joseph S. Schneider Harold S. Gelb Chairman of the Board Richard R. Erkeneff President and CEO 24 Board of Directors MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Year Ended December 31, 1999 Compared With Year Ended December 31, 1998. Net sales of $216,979,000 in 1999 increased 6% from $204,305,000 in 1998. This increase was attributable to an expansion in the Company's defense segment, partially offset by lower sales volume in the energy and transportation segments. The defense segment experienced sales growth of $22,292,000 or 15% to $175,493,000 in 1999 from $153,201,000 in 1998 due to a general increase in volume. Sales in 1998 were negatively affected by the delayed commencement of certain programs caused by procurement deferments. Backlog in the defense segment increased $6,414,000 or 4.4% to $153,048,000 at December 31, 1999 from $146,634,000 at December 31, 1998. Sales to agencies of the U.S. Government, primarily by the defense segment, were $133,328,000 in 1999 and $106,763,000 in 1998. Export sales by the defense segment were $34,182,000 in 1999 and $31,117,000 in 1998, an increase of $3,065,000 or 9.8%. The defense segment's business is heavily influenced by changes in the budgetary plans and procurement policies of the U.S. Government. Reduction 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. Net sales in the energy segment were $32,190,000 in 1999, a decrease of $2,264,000 or 7.0% from $34,454,000 in 1998. Backlog in the energy segment decreased $4,584,000 or 49% to $4,750,000 at December 31, 1999 compared to $9,334,000 at December 31, 1998. These decreases were due to a reduction in customer capital spending. In February 2000, the energy segment received a contract valued at $6,400,000. Net sales in the transportation segment were $9,296,000 in 1999, a decrease of $7,354,000 from $16,650,000 in 1998. The sales volume decreased during 1999 primarily because production on the San Francisco ("MUNI") electric trolley bus ("ETB") contract had not commenced. The transportation segment was hindered in performing its subcontract effort on the MUNI ETB contract due to financing difficulties, at Skoda a.s., a Czech Republic firm and certain of its subsidiaries that are major subcontractors of Electric Transit, Inc. ("ETI"). These difficulties were alleviated in early 2000 through successful negotiations for MUNI program related credit facilities. ETI is owned 65% by Skoda a.s. and 35% by the Company. Transportation's backlog increased to $135,018,000 at December 31, 1999 from $53,860,000 at December 31, 1998 generally due to a contract award to overhaul railcars for New Jersey Transit. Gross profit increased to $55,425,000 in 1999 from $52,271,000 in 1998. The gross margin percentage was 25.6% in 1999 and 1998. The defense segment gross margin percentage increased to 28.2% in 1999 from 26.2% in 1998 due to improved profitability on certain contracts. The energy segment had a 2.5% decrease in gross margin percentage from the same period last year generally attributable to competitive market conditions. The loss in the transportation segment gross margin was caused primarily by delays at ETI which resulted in inadequate production volume for the levels of overhead expenses as well as a reserve for anticipated warranty work on a previously completed program. In early February 2000, the Company discovered that a program completed during 1998 will likely require a significant warranty effort. Consequently, the Company recorded a $5 million reserve for this effort in the fourth quarter of 1999. Selling and administrative expenses as a percentage of net sales were 21.1% in 1999 and 20.6% in 1998. Selling and administrative expenses increased 9% in 1999. The increase was generally attributable to increased research and development and marketing efforts in the defense segment. However, another factor contributing to this increase was due diligence costs of $700,000 related to the Company's United Industrial Corporation 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (continued) proposal in May 1999 to purchase Skoda's electric trolley bus manufacturing subsidiary and its interest in the ETI joint venture, which was later withdrawn. Other expense -- net amounted to a net expense of $2,246,000 in 1999 compared to a net expense of $2,783,000 in 1998. These losses include $3,362,000 ($2,108,000, net of taxes or $.17 per diluted share) and $3,060,000 ($1,919,000 net of taxes or $.15 per diluted share) related to the Company's interest in ETI during 1999 and 1998, respectively. ETI's Dayton electric trolley bus program experienced cost growth that resulted in a $2,853,000 loss ($1,789,000, net of taxes) during 1999. All the trolley buses for Dayton have been delivered to and accepted by the customer and the program has now been substantially completed. Although ETI is owned 35% by AAI Corporation and 65% by Skoda a.s., during 1999 the transportation segment has recorded 100% of the ETI loss because of Skoda's inability to meet its financial obligations under ETI's shareholder agreement. During 1999, Skoda had difficulty in obtaining sufficient capital to finance its equity share of ETI's working capital as well as its MUNI subcontract from ETI. The Company had been working with ETI and Skoda to obtain the financing for the contract. The Czech Export Bank executed credit facility documents with ETI and two Skoda subsidiaries in February 2000. As a result, all the financial arrangements have been completed, and it is expected that there will now be sufficient working capital for ETI to perform the MUNI contract. With the completion of new financing arrangements for ETI in February 2000 and the warranty matter noted above accounted for, the Company expects its transportation business to achieve profitability in the second half of 2000. At the same time, the Company continues to explore strategic alternatives for the transportation business. Interest expense decreased to $160,000 in 1999 from $170,000 in 1998. Interest income decreased to $1,908,000 in 1999 from $3,675,000 in 1998 due to reduced investments. In 1999, net income decreased $6,734,000 or 52% to $6,277,000 or $.50 per diluted share from $13,011,000 or $1.03 per diluted share, in 1998. The Company's transportation segment recorded a loss of $13,112,000 ($8,221,000, net of taxes or $.66 per diluted share) in 1999 and $5,807,000 ($3,640,000, net of taxes or $.29 per diluted share) in 1998. The 1998 net income included gains on sales of real estate of $4,332,000 ($2,696,000, net of taxes, or $.22 per diluted share), a tax contingency reduction of $4,458,000 ($2,920,000, net of taxes, or $.23 per diluted share) partially offset by a litigation settlement expense of $4,500,000 ($2,948,000, net of taxes, or $.24 per diluted share). Year Ended December 31, 1998 Compared With Year Ended December 31, 1997. Net sales of $204,305,000 in 1998 decreased 13% from $235,183,000 in 1997. The 1997 sales included $29,838,000 of sales from the Neo Products Co., the operating assets of which were sold in August 1997 and the Weather Systems business (together the "Disposed Businesses") sold in September 1997. Excluding the sales from the Disposed Businesses, net sales decreased $1,040,000 or less than 1% from 1997 to 1998. Excluding the disposed Weather Systems business, the net sales in the defense segment increased 2% or $2,770,000 to $153,201,000 in 1998 from $150,431,000 in 1997. Sales in 1998 were negatively affected by the delayed commencement of certain programs caused by procurement deferments. However, these delays had a positive effect on the Company's 1998 backlog. Backlog in the defense segment at December 31, 1998 was $146,634,000, which was an increase of $24,743,000 or 20.3% from $121,891,000 at December 31, 1997. Sales to agencies of the U.S. Government, primarily by the defense segment, were $106,763,000 in 1998 and $128,423,000 in 1997. Included in these figures are Weather Systems business sales of $25,233,000 in 1997. Export sales by the defense segment were $31,117,000 in 1998 and $33,025,000 in 1997, a decrease of $1,908,000, or 5.8%. This decrease reflected a $6,800,000 reduction of shipments on an export contract of $1,600,000 in 1998 as compared to $8,400,000 in 1997. 26 Financials Net sales in the energy segment decreased 9%, or $3,473,000 to $34,454,000 in 1998 from $37,927,000 in 1997, due primarily to the reduction of replacement parts sales. Backlog in the energy segment was $9,334,000 at December 31, 1998, representing an increase of $318,000 or 3.5%, greater than the backlog of $9,016,000 at the 1997 year-end. Net sales in the transportation segment were $16,650,000 during 1998 as compared to $16,987,000 during 1997. In addition, transportation's backlog decreased by $3,449,000, or 6.0% to $53,860,000 at year-end 1998 from $57,309,000 at year-end 1997. Gross profit decreased to $52,271,000 in 1998 from $58,628,000 in 1997. The gross margin percentage increased to 25.6% in 1998 from 24.9% in 1997. Excluding the Disposed Businesses, the gross profit was $52,697,000 in 1997. The gross margin percentage decreased from 25.7% to 25.6%. In the defense segment, the gross margin percentage decreased to 26.2% in 1998 from 26.9% in 1997. Excluding the Weather Systems business from the defense segment, the gross margin percentage decreased to 26.2% in 1998 from 27.7% in 1997. This reduction in gross margin was primarily due to significant profitability recorded during 1997 regarding major contracts to deliver an unmanned air vehicle system and an air defense training system. The 2.3% decrease in the gross margin percentage in the energy segment to 36% in 1998 from 38.3% in 1997 was generally attributable to decreased sales and competitive market conditions. The transportation segment experienced negative gross margins of $347,000 in 1998 and $3,568,000 in 1997. The transportation segment experienced high initial costs to establish itself in the marketplace. Selling and administrative expenses as a percentage of net sales were 20.6% in 1998 and 18.3% in 1997. Excluding the Disposed Businesses, the selling and administrative expenses as a percentage of net sales were 19.3% in 1997. Selling and administrative expenses decreased $976,000 in 1998 compared to 1997. Excluding the Disposed Businesses, the selling and administrative expenses increased $2,394,000, or 6%. The increase was generally attributable to litigation expenses, partially offset by various operating efficiencies. Interest expense was $170,000 in 1998 and $915,000 in 1997. The decrease was due to reduced borrowings. Other expense (income) -- net amounted to a net expense of $2,783,000 in 1998 compared to income of $1,150,000 in 1997. The increase in net expenses of $3,933,000 was due to an increase in the equity in the loss of investees of $2,577,000 in 1998 and $764,000 in 1997. The Company's interest in Electric Transit, Inc. ("ETI"), a company owned 35% by AAI and 65% by Skoda, a Czech Republic firm, has resulted in losses of $3,060,000 and $1,020,000 recorded by AAI during 1998 and 1997, respectively. The losses incurred by ETI were caused by costs necessary to establish itself in the industry, cost growth on ETI's scope of work regarding its contract to deliver electric trolley buses to the Miami Valley Regional Transit Authority as well as increased selling, general and administrative expenses. Also, 1997 other income included the proceeds from a favorable litigation settlement, net of related legal expenses of approximately $3,000,000, partially offset by an increase in a charge related to a contingent payment of $664,000 to the sellers of an acquired subsidiary. In 1998, the contingent payment was $268,000. Interest income increased $2,231,000 due to increased investments. In 1998, net income decreased $1,814,000, or 12.2%, to $13,011,000, or $1.03 per diluted share, from $14,825,000, or $1.19 per diluted share, in 1997. The 1998 net income includes gains on sales of several buildings and related land of $4,332,000 ($2,696,000, net of taxes, or $.22 per diluted share), a tax contingency reduction of $4,458,000 ($2,920,000, net of taxes, or $.23 per diluted share) partially offset by a litigation settlement expense of $4,500,000 ($2,948,000, net of taxes, or $.24 per diluted share). Included in the 1997 net income was income from a favorable litigation settlement, a net gain on the sales of the Disposed Businesses of $8,470,000, net of taxes, or $.68 per diluted share, partially offset by a reserve United Industrial Corporation 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (continued) recorded in the third quarter related to a local tax matter. For 1997, income, net of taxes, related to the Disposed Businesses totaled $1,595,000, or $.13 per diluted share. Excluding the above special items and income from divested businesses, net income increased to $10,343,000, or $.82 per diluted share, for the year ended 1998 from $6,981,000, or $.56 per diluted share, for 1997. Liquidity and Capital Resources Cash and cash equivalents amounted to $13,092,000 at the end of 1999 and $21,126,000 at the end of 1998. At December 31, 1998, the Company had invested $4,702,000 in marketable securities. The Company expects to meet its cash requirements for 2000, including amounts necessary to fund business ventures, from current cash, operations and borrowings available under its existing line of credit. The Company is currently negotiating a replacement line of credit and expects such negotiation to be successful. 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 $.40 per share in 1999, $.40 per share in 1998 and $.29 per share in 1997. Aggregate payments amounted to $4,910,000 in 1999, $4,927,000 in 1998 and $3,536,000 in 1997. The ratio of current assets to current liabilities was 1.9 at the end of 1999 and 2.3 at the end of 1998. During 1998, the Company repurchased 148,300 shares of stock in the open market at a cost of $1,475,000. Capital expenditures were $12,530,000 in 1999 and $14,032,000 in 1998. There were no material commitments for acquisition of capital assets as of December 31, 1999. On June 11, 1997, the Company and its subsidiaries entered into a Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement ("Agreements") (amending and restating a credit agreement, dated as of October 13, 1994) with an institutional lender. At December 31, 1999, the Company had no outstanding borrowings under the Agreements. 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 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. In March 2000, the Agreements were amended to extend the expiration date to January 11, 2001, increase the sublimit on letter of credit obligations to $16,500,000 and to limit the aggregate amount of advances to be made to a borrowing base, as defined. 28 Financials Qualitative and Quantitative Disclosures about Market Risk A portion of the Company's operations consists of manufacturing and sales activities in foreign jurisdictions, and some of these transactions are denominated in foreign currencies. As a result, the Company's financial results could be affected by changes in foreign exchange rates. To mitigate the effect of changes in these rates, the Company has entered into two foreign exchange forward contracts. The following table presents firmly committed sales exposures and related derivative contracts.
- ------------------------------------------------------------------------------------------------------------------------------------ FAIR MARKET VALUE (In thousands, except average contract rate) 2000 2001 2002 2003 2004 THEREAFTER TOTAL DECEMBER 31, 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Firmly committed sales contracts Spanish Pesetas $ 773 $ -- $ -- $ -- $ -- $ -- $ 773 Australian Dollars -- -- -- 501 380 190 1,071 Related forward contracts to sell currencies for U.S. dollars Spanish Pesetas Notional amount (USD) $ 505 -- -- -- -- -- $ 505 Average contract rate (ESP/USD) 153.9 -- -- -- -- -- -- $ (33) Australian Dollars Notional amount (USD) $ -- $ -- $ -- $ 502 $ 462 $ -- $ 964 Average contract rate (AUD/USD) -- -- -- .6429 .6429 -- -- $ (107) ====================================================================================================================================
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 reached a written settlement of all these matters with the plaintiffs for, among other items, a cash payment of $4,250,000. The Superior Court of Maricopa County has scheduled a hearing for final approval of the settlement for March 14, 2000. See Note 15. Impact of Year 2000 In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company expensed United Industrial Corporation 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (continued) approximately $210,000 during 1999 in connection with remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 2000. Management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. 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. 30 Financials CONSOLIDATED STATEMENTS OF OPERATIONS UNITED INDUSTRIAL CORPORATION YEAR ENDED DECEMBER 31 ---------------------------------- (Dollars in thousands, except per share data) 1999 1998 1997 - ------------------------------------------------------------------------------- Net Sales $ 216,979 $ 204,305 $ 235,183 Operating costs and expenses: Cost of sales 161,554 152,034 176,555 Selling and administrative 45,829 42,031 43,007 Gains on sale of assets -- net -- (4,918) (13,306) Other expense (income) -- net 2,246 2,783 (1,150) Interest income (1,908) (3,675) (1,444) Interest expense 160 170 915 ---------------------------------- Total Operating Costs and Expenses 207,881 188,425 204,577 - ------------------------------------------------------------------------------- Income Before Income Taxes 9,098 15,880 30,606 Provision (credit) for income taxes Federal Current 3,181 8,950 6,802 Deferred (1,165) (3,109) 1,176 State 805 (2,972) 7,803 - ------------------------------------------------------------------------------- Income Taxes 2,821 2,869 15,781 ---------------------------------- Net Income $ 6,277 $ 13,011 $ 14,825 - ------------------------------------------------------------------------------- Earnings Per Share Basic $ .51 $ 1.06 $ 1.22 ---------------------------------- Diluted $ .50 $ 1.03 $ 1.19 - ------------------------------------------------------------------------------- See notes to financial statements United Industrial Corporation 31 CONSOLIDATED BALANCE SHEETS UNITED INDUSTRIAL CORPORATION DECEMBER 31 ------------------- (Dollars in thousands) 1999 1998 - -------------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 13,092 $ 21,126 Marketable securities -- 4,702 Trade receivables U.S. Government 21,763 13,294 Other 26,632 27,250 ------------------- 48,395 40,544 Inventories 42,187 23,569 Prepaid expenses and other current assets 3,239 2,067 Deferred income taxes 3,041 1,526 ------------------- Total Current Assets 109,954 93,534 - -------------------------------------------------------------------------------- Other Assets 56,005 56,421 Property and Equipment Land 501 501 Buildings and improvements 40,065 36,277 Machinery and equipment 76,256 71,449 Furniture and fixtures 5,259 4,982 ------------------- 122,081 113,209 Less allowances for depreciation and amortization 86,248 82,643 - -------------------------------------------------------------------------------- 35,833 30,566 - -------------------------------------------------------------------------------- $201,792 $180,521 - -------------------------------------------------------------------------------- 32 Financials DECEMBER 31 ---------------------- (Dollars in thousands) 1999 1998 - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 9,837 $ 12,235 Accrued employee compensation and taxes 7,710 8,320 Customer advances 25,705 4,303 Provision for contract losses 7,026 4,558 Federal income taxes 636 2,973 Other liabilities 7,847 8,255 ---------------------- Total Current Liabilities 58,761 40,644 - -------------------------------------------------------------------------------- Postretirement Benefits Other Than Pensions 24,614 23,136 Other Liabilities 3,887 4,175 Deferred Income Taxes 3,475 3,125 Shareholders' Equity Common stock -- par value $1.00 per share Authorized shares -- 30,000,000 Outstanding shares: 1999 -- 12,294,138; 1998 -- 12,250,063 14,374 14,374 Additional capital 89,483 89,583 Retained earnings 23,616 22,249 Cost of shares in treasury: 1999 -- 2,080,010 shares; 1998 -- 2,124,085 shares (16,418) (16,765) ---------------------- Total Shareholders' Equity 111,055 109,441 ---------------------- $ 201,792 $ 180,521 - -------------------------------------------------------------------------------- See notes to financial statements United Industrial Corporation 33 CONSOLIDATED STATEMENTS OF CASH FLOWS UNITED INDUSTRIAL CORPORATION
YEAR ENDED DECEMBER 31 -------------------------------- (Dollars in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 6,277 $ 13,011 $ 14,825 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,682 7,816 9,559 Deferred income taxes (1,165) (3,109) 1,176 Gains on sale of assets -- (4,918) (13,306) Changes in operating assets and liabilities -- net (Decrease) increase in current income taxes (2,337) 2,343 (333) (Increase) decrease in trade receivables (7,851) (12,725) 7,855 (Increase) decrease in inventories (18,618) 8,221 5,839 Increase in prepaid expenses and other current assets (1,172) (425) (494) Increase (decrease) in customer advances 21,402 761 (2,331) (Decrease) increase in accounts payable, accruals, advances and other current liabilities (948) 5,305 1,441 Other -- net (2,498) (1,412) (96) -------------------------------- Net Cash Provided By Operating Activities 772 14,868 24,135 INVESTING ACTIVITIES - -------------------------------------------------------------------------------------- Decrease (increase) in advances to investee 3,703 (12,735) (9,639) Sale (purchase) of marketable securities 4,702 1,400 (6,102) Purchase of property and equipment (12,530) (14,032) (6,926) Net proceeds from sale of assets -- 19,850 19,183 -------------------------------- Net Cash Used For Investing Activities (4,125) (5,517) (3,484) FINANCING ACTIVITIES - -------------------------------------------------------------------------------------- Proceeds from borrowings -- -- 6,250 Payments on long-term debt and borrowings -- (5,729) (14,271) Dividends (4,910) (4,927) (3,536) Purchase of treasury shares -- (1,475) -- Proceeds from exercise of stock options 229 808 577 - -------------------------------------------------------------------------------------- Net Cash Used for Financing Activities (4,681) (11,323) (10,980) - -------------------------------------------------------------------------------------- (Decrease) Increase in Cash and Cash Equivalents (8,034) (1,972) 9,671 - -------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of Year 21,126 23,098 13,427 -------------------------------- Cash and Cash Equivalents at End of Year $ 13,092 $ 21,126 $ 23,098 - --------------------------------------------------------------------------------------
See notes to financial statements 34 Financials NOTES TO FINANCIAL STATEMENTS NOTE 1 NATURE OF OPERATIONS United Industrial Corporation is a high technology company applying its resources to the research, development, and production of military electronics and aerospace systems and components under defense contracts. Resources are also applied to other products including transportation systems, firefighter training systems, and energy systems for industry and utilities. The principal business segments are defense and related products, ground transportation systems 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%. See Note 18. 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, which generally mature within one year, 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, 1999 and 1998, approximately 6% and 9%, 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 $3,691,000 higher than reported on December 31, 1999 and $3,851,000 higher than reported on December 31, 1998. 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. United Industrial Corporation 35 NOTES TO FINANCIAL STATEMENTS -- (continued) Earnings per Share Basic earnings per share is based on the weighted-average-number of common shares outstanding. Diluted earnings per share gives effect to the assumed exercise of dilutive options, warrants and convertible securities using, where appropriate, the treasury stock method. 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. Foreign Currency Contracts The Company enters into forward exchange contracts to manage its exposure against foreign currency fluctuations on sales transactions denominated in foreign currencies. The contract obligates the Company to exchange predetermined amounts of the foreign currency at certain dates, or to make an equivalent U.S dollar payment equal to the value of such exchanges. The Company does not hold or issue financial instruments for trading purposes. At December 31, 1999 the Company had entered into foreign currency forward contracts with a large financial institution for Spanish pesetas and Australian dollars with an aggregate notional value of $1,469,000, and an aggregate loss of $140,000 based on fair market value. The Company accounts for these contracts under the accrual method. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 2000. Management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. NOTE 3 MARKETABLE SECURITIES At December 31, 1999, the Company had no short-term investments. At December 31, 1998, the Company's short-term investments consisted of debt securities, whose carrying amount was $4,702,000, which approximated market value and were classified as held-to-maturity securities. 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. 36 Financials 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: DECEMBER 31 --------------------- (Dollars in thousands) 1999 1998 - -------------------------------------------------------------------------------- Amounts billed $16,592 $ 8,589 Unbilled recoverable costs and earned fees 4,979 4,413 Retainage per contract provisions 192 292 --------------------- $21,763 $13,294 --------------------- Billed and unbilled amounts above include $3,727,000 and $1,738,000 at December 31, 1999 and 1998, 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. NOTE 5 INVENTORIES DECEMBER 31 -------------------- (Dollars in thousands) 1999 1998 - -------------------------------------------------------------------------------- Finished goods and work in progress $ 6,448 $ 5,173 -------------------- Costs and earnings relating to long-term contracts 43,642 29,094 Deduct progress payments related to long-term contracts (11,188) (14,116) -------------------- Costs and earnings in excess of billings 32,454 14,978 -------------------- Total finished goods and work in progress 38,902 20,151 Materials and supplies 3,285 3,418 -------------------- $ 42,187 $ 23,569 -------------------- The inventoried costs associated with long-term contracts include costs and earnings of $32,454,000 in 1999 and $14,978,000 in 1998 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 $7,680,000 ($4,815,000 net of tax benefit) and $1,999,000 ($1,236,000 net of tax benefit) during 1999 and 1998, respectively, resulting primarily from revision of cost estimates on certain major long-term contracts. Included in the 1999 and 1998 costs and earnings in excess of billings were $2,284,000 and $2,150,000, respectively, on certain government contracts in excess of the negotiated contract values which are, or will be, the subject of formal claims if not resolved by negotiation. 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. United Industrial Corporation 37 NOTES TO FINANCIAL STATEMENTS -- (continued) NOTE 6 OTHER ASSETS DECEMBER 31 --------------------- (Dollars in thousands) 1999 1998 - -------------------------------------------------------------------------------- Net pension asset $39,262 $34,799 Advances to investee 12,444 16,147 Patents and other intangible assets, net 3,855 4,730 Other 444 745 --------------------- $56,005 $56,421 --------------------- 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. Amortization expense amounted to $885,000 in 1999, $1,526,000 in 1998, and $1,543,000 in 1997. Accumulated amortization amounted to $9,970,000 and $9,085,000 at December 31, 1999 and 1998, respectively. Receivables from investees under subcontracts of $5,821,000 and $6,228,000 are classified as accounts receivable at December 31, 1999 and 1998, respectively. NOTE 7 LONG-TERM DEBT AND CREDIT ARRANGEMENTS On June 11, 1997, the Company and its subsidiaries entered into a Revolving Line of Credit Loan 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 was payable in sixty consecutive monthly installments. At December 31, 1999, there were no borrowings under the Agreement. The amount available under the Revolving Line of Credit Loan 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 Revolving Line of Credit Loan Agreement expires June 11, 2000. The Company is currently negotiating a replacement line of credit and expects such negotiation to be successful. The letter of credit obligations outstanding at December 31, 1999 and 1998 under the Agreement were $9,779,000 and $7,129,000, respectively. 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. Interest expense was $160,000 in 1999, $170,000 in 1998 and $915,000 in 1997. Interest paid was $166,000 in 1999, $494,000 in 1998 and $1,290,000 in 1997. 38 Financials NOTE 8 STOCK OPTIONS In May 1994, the shareholders approved the 1994 Stock Option Plan ("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, May 1998 to 1,800,000 and May 1999 to 2,400,000) 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 generally 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 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 awards during 1999, 1998 and 1997 under the plans, net income and net income per common share would have decreased to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31 ------------------------------------ (Dollars in thousands, except per share amounts) 1999 1998 1997 - --------------------------------------------------------------------------------------- Net Income: As reported $ 6,277 $ 13,011 $ 14,825 Pro forma 5,566 12,406 14,536 Net income per common share: As reported: Basic .51 1.06 1.22 Diluted .50 1.03 1.19 Pro forma: Basic .45 1.01 1.19 Diluted .44 .98 1.17 ------------------------------------
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 1999, 1998 and 1997, respectively: dividend yields of 3.9%, 3.5% and 3.7%; expected volatility of 39%, 31% and 37%; risk-free interest rates of 4.7%, 5% and 6.2%; and expected lives of three to five years in 1999 and five years in 1998 and 1997. The weighted-average fair value of an option granted was $2.64, $2.78 and $2.19 for the years ended December 31, 1999, 1998 and 1997, respectively. United Industrial Corporation 39 NOTES TO FINANCIAL STATEMENTS -- (continued) A summary of stock option activity under all plans is as follows: WEIGHTED- NUMBER AVERAGE OF EXERCISE (Shares in thousands) SHARES PRICE - -------------------------------------------------------------------------------- Balance at January 1, 1997 467 $ 5.23 Granted 483 7.35 Exercised (109) 5.31 Canceled (1) 4.75 - -------------------------------------------------------------------------------- Balance at December 31, 1997 840 6.44 - -------------------------------------------------------------------------------- Granted 538 12.01 Exercised (148) 5.38 Canceled (4) 7.50 - -------------------------------------------------------------------------------- Balance at December 31, 1998 1,226 9.01 - -------------------------------------------------------------------------------- Granted 489 9.36 Exercised (42) 5.47 - -------------------------------------------------------------------------------- Balance at December 31, 1999 1,673 9.20 - -------------------------------------------------------------------------------- DECEMBER 31 - -------------------------------------------------------------------------------- (In thousands) 1999 1998 1997 - -------------------------------------------------------------------------------- Exercisable 833 411 155 Available for future grants 727 615 546 - -------------------------------------------------------------------------------- The weighted-average remaining life for options outstanding as of December 31, 1999, is 6.8 years. The following table summarizes information about stock options outstanding at December 31, 1999: SHARES (in thousands) - -------------------------------------------------------------------------------- RANGE OF EXERCISE PRICES EXERCISABLE OUTSTANDING - -------------------------------------------------------------------------------- $4.50 to $7.00 301 326 $7.50 to $9.50 260 719 $10.25 to $13.00 272 628 - -------------------------------------------------------------------------------- 833 1,673 - -------------------------------------------------------------------------------- NOTE 9 LEASES Total rental expense for all operating leases amounted to $2,883,000 in 1999, $2,178,000 in 1998 and $1,543,000 in 1997. Contingent rental payments were not significant. The future minimum rental commitments as of December 31, 1999, for all noncancellable leases are $3,351,000 in 2000; $2,757,000 in 2001; $2,493,000 in 2002; $1,936,000 in 2003, and $975,000 in 2004. 40 Financials NOTE 10 CHANGES IN SHAREHOLDERS' EQUITY
COMMON SHARE- SHARES COMMON ADDITIONAL RETAINED TREASURY HOLDERS' (In thousands) OUTSTANDING STOCK CAPITAL EARNINGS STOCK EQUITY - ------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1997 12,174 $ 14,374 $ 90,196 $ 2,876 $ (17,301) $ 90,145 Net income -- -- -- 14,825 -- 14,825 Cash dividends declared ($.29 per share) -- -- -- (3,536) -- (3,536) Stock options 109 -- (267) -- 857 590 Employee awards 1 -- -- -- -- -- Exchange of shares* (35) -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 12,249 14,374 89,929 14,165 (16,444) 102,024 Net income -- -- -- 13,011 -- 13,011 Cash dividends declared ($.40 per share) -- -- -- (4,927) -- (4,927) Shares repurchased (148) -- -- -- (1,475) (1,475) Stock options 148 -- (346) -- 1,154 808 Employee awards 1 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 12,250 14,374 89,583 22,249 (16,765) 109,441 Net Income -- -- -- 6,277 -- 6,277 Cash dividends declared ($.40 per share) -- -- -- (4,910) -- (4,910) Stock options 42 -- (102) -- 331 229 Employee awards 2 -- 2 -- 16 18 - ------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 12,294 $ 14,374 $ 89,483 $ 23,616 $ (16,418) $ 111,055 - -------------------------------------------------------------------------------------------------------------------
*Shareholder surrendered 565,444 common shares in exchange for 530,444 shares. This transaction affected treasury shares. NOTE 11 PENSIONS AND OTHER POSTRETIREMENT BENEFITS The Company sponsors several qualified and non-qualified pension plans and other postretirement benefit plans for its employees. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the two-year period ending December 31, 1999, and a statement of the funded status as of December 31 of both years. United Industrial Corporation 41 NOTES TO FINANCIAL STATEMENTS -- (continued)
PENSION BENEFITS OTHER BENEFITS - ------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------- Change in Benefit Obligation Benefit obligation at beginning of year $ 155,899 $ 144,370 $ 25,072 $ 22,476 Service cost 1,608 1,377 590 612 Interest cost 10,370 10,618 1,595 1,662 Amendments -- 1,008 -- -- Curtailments 2,134 -- 1,328 -- Actuarial loss (gain) (14,379) 11,897 (3,515) 1,846 Administrative expenses (30) (38) -- -- Settlements (14,674) -- -- -- Benefits paid (14,054) (13,333) (1,520) (1,524) Special termination benefits 2,960 -- -- -- - ------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 129,834 $ 155,899 $ 23,550 $ 25,072 - ------------------------------------------------------------------------------------------------------- Change in Plan Assets Fair value of plan assets at beginning of year $ 193,724 $ 184,120 Actual return on plan assets 26,850 22,975 Administrative expenses (30) (38) Settlements (14,674) -- Benefits paid (14,054) (13,333) - ------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 191,816 $ 193,724 - ------------------------------------------------------------------------------------------------------- Funded (underfunded) status of the plan $ 61,982 $ 37,825 $ (23,550) $ (25,072) Unrecognized net transition (asset) obligation (269) (357) (549) -- Unrecognized net actuarial (gain) loss (20,343) 559 (822) 1,455 Unrecognized prior service cost (2,108) (3,228) 307 481 - ------------------------------------------------------------------------------------------------------- Prepaid benefit (accrued cost) $ 39,262 $ 34,799 $ (24,614) $ (23,136) - ------------------------------------------------------------------------------------------------------- Weighted-average Assumptions Discount rate 8% 7% 8% 6.75% Expected return on plan assets 8.5% 8.5% Rate of compensation increase 4% 4% - -------------------------------------------------------------------------------------------------------
For measurement purposes, a 7 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 5.25 percent in 2001 and remain at that level thereafter. 42 Financials
PENSION BENEFITS OTHER BENEFITS ------------------------------------------------------------------ (Dollars in thousands) 1999 1998 1997 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Components of Net Periodic Benefit Cost Service cost $ 1,608 $ 1,377 $ 912 $ 590 $ 612 $ 555 Interest cost 10,370 10,618 10,388 1,595 1,662 1,568 Expected return on plan assets (16,003) (15,250) (13,928) -- -- -- Amortization of prior service cost (413) (413) (497) 44 46 43 Amortization of unrecognized transition assets (88) (88) (88) -- -- -- Settlement-- curtailment 25 -- -- 760 -- -- Recognized net actuarial loss -- (3) (5) -- -- -- - ---------------------------------------------------------------------------------------------------------------- Benefit (income) cost $ (4,501) $ (3,759) $ (3,218) $ 2,989 $ 2,320 $ 2,166 - ----------------------------------------------------------------------------------------------------------------
During 1999, in order to induce a workforce reduction at the Company's AAI Corporation subsidiary, additional benefits were offered to eligible employees under an Early Retirement Program. Those employees electing early retirement were paid benefits in lump sums. The Early Retirement Program increased the pension plan's Projected Benefit Obligation, however, this was completely offset by an accumulated actuarial gain as of December 31, 1999. Accordingly, there was no impact on plan expense for 1999. The enhanced benefits offered under the Early Retirement Program regarding post-retirement medical benefits resulted in an increase in that liability and such cost was recognized in 1999. Two subsidiaries of the Company sponsor non-funded defined benefit health care plans. Both plans are non-contributory for retirees and one is contributory for spouses whose contributions increase periodically so that the entire cost for spouses will be covered by January 2003. The assumed health care cost trend rate has a significant effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following effects: 1-PERCENTAGE 1-PERCENTAGE POINT POINT (Dollars in thousands) INCREASE DECREASE - -------------------------------------------------------------------------------- Effect on total of service and interest cost components in 1999 $ 108 $ (104) Effect on postretirement benefit obligation as of December 31, 1999 $1,029 $(1,019) - -------------------------------------------------------------------------------- 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 $1,303,000 in 1999, $1,309,000 in 1998, and $1,304,000 in 1997. NOTE 12 INDUSTRY SEGMENT DATA The Company has three reportable segments: defense, transportation and energy systems. Other includes the corporate office and dormant corporations. The defense segment's products include unmanned aerial vehicles, training and simulation systems, automated aircraft test and maintenance equipment, specialized firefighter training installations, and combat vehicles and ordnance systems. The transportation segment manufactures and overhauls transit systems and components. The energy segment manufactures combustion equipment for biomass and refuse fuels. The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are recorded at the Company's cost; there is no intercompany profit or loss in intersegment sales or transfers. The Company's reportable segments are business units that offer different products. The reportable segments are each managed separately because they manufacture and distribute products with different production processes. Sales to agencies of the United States Government, primarily by the defense segment, were $133,328,000 in 1999, $106,763,000 in 1998 and $128,423,000 in 1997. No single customer, other than the United States Government, accounted for 10 percent or more of net sales in any year. Export sales were $42,120,000 in 1999, $40,994,000 in 1998 and $41,832,000 in 1997. United Industrial Corporation 43 NOTES TO FINANCIAL STATEMENTS -- (continued)
(Dollars in thousands) DEFENSE TRANSPORTATION ENERGY OTHER RECONCILIATIONS TOTALS - ---------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1999 - ---------------------------------------------------------------------------------------------------------------------------------- Revenues from external customers $ 175,493 $ 9,296 $ 32,190 $ -- $ -- $ 216,979 Intersegment revenues 2,103 -- -- -- (2,103) -- Equity profit (loss) in ventures 483 (3,362) -- -- -- (2,879) Interest income 3,129 -- 263 4,900 (6,384) 1,908 Interest expense 730 155 1 5,658 (6,384) 160 Depreciation and amortization expense 5,951 902 760 69 -- 7,682 Segment profit (loss) 19,278 (13,112) 4,586 (1,654) -- 9,098 Segment assets 152,917 33,755 35,083 129,976 (149,939) 201,792 Capital expenditures 9,922 1,623 971 14 -- 12,530 - ---------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Revenues from external customers $ 153,201 $ 16,650 $ 34,454 $ -- $ -- $ 204,305 Intersegment revenues 3,759 -- -- -- (3,759) -- Equity profit (loss) in ventures 483 (3,060) -- -- -- (2,577) Interest income 4,637 -- 374 10,958 (12,294) 3,675 Interest expense 1,195 257 4 11,008 (12,294) 170 Depreciation and amortization expense 6,530 498 751 37 -- 7,816 Gain on sale of assets 4,332 -- -- 586 -- 4,918 Segment profit (loss) 23,239 (5,807) 6,160 (7,712) -- 15,880 Segment assets 136,164 27,285 33,399 218,779 (235,106) 180,521 Capital expenditures 11,593 928 1,075 436 -- 14,032 - ---------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Revenues from external customers $ 175,664 $ 16,987 $ 37,927 $ 4,605 $ -- $ 235,183 Intersegment revenues 1,402 -- -- -- (1,402) -- Equity profit (loss) in ventures 256 (1,020) -- -- -- (764) Interest income 3,207 -- 166 9,668 (11,597) 1,444 Interest expense 2,876 180 20 9,436 (11,597) 915 Depreciation and amortization expense 8,018 526 815 200 -- 9,559 Gain (loss) on sale of assets 14,169 -- -- (863) -- 13,306 Segment profit (loss) 33,592 (6,767) 7,661 (3,880) -- 30,606 Segment assets 150,507 16,793 32,435 200,215 (218,751) 181,199 Capital expenditures 5,405 1,009 486 26 -- 6,926 - ----------------------------------------------------------------------------------------------------------------------------------
44 Financials ---------------------------------- (Dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------- Revenues Total external revenues for reportable segments $ 216,979 $ 204,305 $ 235,183 Intersegment revenues for reportable segments 2,103 3,759 1,402 Elimination of intersegment revenues (2,103) (3,759) (1,402) - ------------------------------------------------------------------------------- Total Consolidated Revenues $ 216,979 $ 204,305 $ 235,183 - ------------------------------------------------------------------------------- Profit or Loss Income before income taxes for reportable segments $ 9,098 $ 15,880 $ 30,606 - ------------------------------------------------------------------------------- Assets Total assets for reportable segments $ 351,731 $ 415,627 $ 399,950 Elimination of intercompany receivables (7,886) (29,957) (35,103) Elimination of investment in consolidated subsidiaries (125,345) (189,174) (170,901) Reclassification of deferred tax liabilities (16,708) (15,975) (12,747) - ------------------------------------------------------------------------------- Total Consolidated Assets $ 201,792 $ 180,521 $ 181,199 - ------------------------------------------------------------------------------- Other significant items Elimination of intercompany interest $ 6,384 $ 12,294 $ 11,597 ------------------------------------- Segment profit (loss) includes research and development costs amounting to $2,630,000 in 1999, $989,000 in 1998 and $2,067,000 in 1997, principally in the defense segment. NOTE 13 INCOME TAXES The liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. In addition, the effect on deferred taxes of a change in tax rates is recognized in the period that includes the enactment date. Following is a reconciliation of the difference between total tax expense and the amount computed by applying the federal statutory income tax rate to income from operations before income taxes: (Dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------- Federal income taxes at statutory rate $ 3,094 $ 5,481 $ 10,712 State and local income taxes, net of federal income tax benefit (including a reduction of $2,920 in 1998 of a $4,000 tax contingency established in 1997) 531 (1,961) 5,072 Provision for nondeductible expenses (including $94 and $238 related to contingent payments in 1998 and 1997 on an acquisition) 296 378 537 Non-taxable income (548) (651) (632) Other--net (552) (378) 92 - ------------------------------------------------------------------------------- Income Taxes $ 2,821 $ 2,869 $ 15,781 -------------------------------- Income tax payments were $4,600,000 in 1999, $6,000,000 in 1998 and $6,875,000 in 1997. United Industrial Corporation 45 NOTES TO FINANCIAL STATEMENTS -- (continued) Deferred Income Tax Balances: DECEMBER 31 -------------------- (Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------- Deferred Tax Assets Losses on long-term contracts not currently deductible $ 4,330 $ 1,571 Postretirement benefits other than pensions and other employee benefits 10,307 9,989 Product warranty and other provisions 3,827 4,550 Vacation pay accruals 733 739 Other 99 75 - ------------------------------------------------------------------------------- Total Deferred Tax Assets 19,296 16,924 -------------------- Deferred Tax Liability Pension plans and other employee benefits (15,852) (14,246) Excess tax depreciation (2,349) (2,763) Patent amortization (938) (1,156) Other (591) (358) - ------------------------------------------------------------------------------- Total Deferred Tax Liability (19,730) (18,523) - -------------------------------------------------------------------------------- Net Deferred Tax Liability $ (434) $ (1,599) -------------------- The net deferred tax liability is classified as follows: Net current deferred income tax assets $ 3,041 $ 1,526 - ------------------------------------------------------------------------------- Net non-current deferred income tax liability $ (3,475) $ (3,125) -------------------- 46 Financials 14 SELECTED QUARTERLY DATA (UNAUDITED)
1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands, except per share data and stock prices) FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $ 63,783 $ 52,094 $ 54,032 $ 47,070 $ 57,159 $ 49,979 $ 49,940 $ 47,227 Gross profit 11,693 14,572 14,105 15,055 15,229 11,634 12,006 13,402 Net income 443 2,096 1,424 2,314 6,029(a) 2,361 2,298 2,323 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings per share Basic $ .03 $ .17 $ .12 $ .19 $ .49 $ .19 $ .19 $ .19 Diluted $ .03 $ .17 $ .11 $ .19 $ .48 $ .19 $ .18 $ .18 - ------------------------------------------------------------------------------------------------------------------------------------ Dividends declared per share$ .10 $ .10 $ .10 $ .10 $ .10 $ .10 $ .10 $ .10 - ------------------------------------------------------------------------------------------------------------------------------------ Stock prices: High $9 3/4 $11 3/8 $12 1/2 $11 7/8 $11 3/4 $13 1/2 $13 15/16 $13 9/16 Low $7 15/16 $7 3/8 $9 11/16 $8 9/16 $8 7/16 $9 10/16 $1 11/16 $9 1/4 - ------------------------------------------------------------------------------------------------------------------------------------
a) Includes net gain on sale of assets of $4,332,000 ($2,696,000 net of taxes), a tax contingency reduction of $4,458,000 ($2,920,000 net of taxes) and a litigation settlement expense of $4,500,000 ($2,948,000 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 29, 2000 was 2,300. NOTE 15 COMMITMENTS AND CONTINGENCIES The Company, along with numerous other parties, has been named in five tort actions in Maricopa County Superior Court 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 based on exposure to solvents allegedly released at the site. These suits allege that the plaintiffs 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 Company reached an agreement to settle all of these matters with the plaintiffs for, among other items, a cash payment of $4,250,000. The Superior Court of Maricopa County has scheduled a hearing for final approval of the settlement for March 14, 2000. 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 United Industrial Corporation 47 NOTES TO FINANCIAL STATEMENTS -- (continued) 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 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. If the Company is unable to meet these performance obligations, the performance guarantees could have a material adverse effect on product margins and the Company's results of operations, liquidity or financial position. 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, 1999. NOTE 16 DISPOSED BUSINESSES In August 1997, the Company sold substantially all the operating assets of Neo Products Co. for $587,000 in 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 in 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). The Consolidated Statements of Operations include the combined net sales of the two divested companies, totaling $29,838,000 and the combined net income totaling $1,595,000 for the year ended December 31, 1997. NOTE 17 EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: (Dollars in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------- Net income $ 6,277,000 $13,011,000 $14,825,000 Basic earnings per share-- weighted-average shares 12,275,000 12,307,000 12,195,000 Effect of dilutive securities: employee stock options 234,000 302,000 225,000 - -------------------------------------------------------------------------------- Diluted earnings per share-- adjusted weighted-average and assumed conversions 12,509,000 12,609,000 12,420,000 - -------------------------------------------------------------------------------- Basic earnings per share $ .51 $ 1.06 $ 1.22 - -------------------------------------------------------------------------------- Diluted earnings per share $ .50 $ 1.03 $ 1.19 ----------------------------------------- 48 Financials NOTE 18 INVESTMENT IN UNCONSOLIDATED INVESTEES In 1993, AAI Corporation, a wholly owned subsidiary of the Company ("AAI"), organized a new subsidiary Electric Transit, Inc., to manufacture electric trolley buses for the U.S. market. In 1994 and again in 1995, ETI conveyed equity interests (in ETI) to Skoda, a Czech Republic firm. Consequently, ETI is owned 35% by AAI, and 65% by Skoda. ETI has won contracts in both Dayton, Ohio for the Miami Valley Regional Transit Authority and the city and county of San Francisco, California (MUNI). Under these contracts, which are valued at $32,000,000 and $174,000,000, respectively, AAI has received subcontracts of $9,350,000 and $54,358,000 respectively. In connection with these contracts, AAI has guaranteed attainment of certain performance criteria. The ability of ETI to perform under these contracts may, in part, be dependent on the performance of other parties, including AAI, Skoda and other subcontractors. Thus, the ability to timely deliver such equipment may be outside AAI's control. If ETI is unable to meet its performance obligations, these performance guarantees could have a material adverse effect on product margins and the Company's results of operations, liquidity or financial condition. AAI monitors the progress of Skoda and ETI's other subcontractors. In February 2000 the Czech Export Bank (CEB) approved credit facilities to finance the MUNIproject partially guaranteed by the Czech government's Export Guarantee and Insurance Corporation (EGAP), to ETI and two Skoda subsidiaries. In conjunction with the ETI credit facility, the Company has agreed to assume the responsibility of new supplemental funding, if necessary, to ensure contract performance as well as assume joint and several liability on progress payment bonds. The Company has agreed to indemnify the MUNIproject's surety in full for its liability under these bonds, if any, which will increase from approximately $31 million at December 31, 1999 to $45 million before diminishing and ultimately being eliminated as deliveries are accepted by the MUNIcustomer. Although the Company has accepted full responsibility under these progress payment bonds, Skoda retains its 65% obligation that is partially guaranteed by EGAP. In addition, a previously existing bond that guarantees performance under the MUNIcontract obligates the Company to indemnify the surety, if necessary for up to approximately $15 million. In February 2000, all financial arrangements had been completed, and it is expected that there will be sufficient working capital to complete the MUNI program. Due to Skoda's inability to fund ETI during 1999 as required by ETI's shareholder agreement, AAI had assumed that responsibility in its entirety. While Skoda still had the obligation to provide funding, during 1999 AAI recorded 100% of ETI's loss totaling $3,362,000 ($2,108,000, net of taxes). These losses were primarily generated by cost growth on the Dayton program. All the trolley buses for Dayton have been delivered to and accepted by the customer and the program has now been substantially completed. At December 31, 1999, AAI had advanced, net of its investment and cumulative losses in ETI, $6,797,000 to ETI. In addition, AAI has accounts receivable from ETI for work performed on both the Dayton and San Francisco projects of $2,152,000. These amounts totaling $8,949,000 are recoverable out of proceeds from the Dayton and San Francisco customers. In 1999 the Company recorded $2,185,000 ($1,370,000, net of taxes) that represents the loss in excess of AAI's 35% equity interest in ETI. Summary financial information of the Electric Transit, Inc. entity is as follows: (Dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------- Current assets $ 33,984 $ 23,123 $ 27,672 Plant, property and equipment and other assets 4,819 4,643 216 Current liabilities 54,550 40,058 35,200 Net sales 18,615 20,922 1,655 Gross profit (loss) (2,853) (7,357) (1,800) Net loss (3,362) (7,981) (3,415) ------------------------------------ United Industrial Corporation 49 REPORT OF INDEPENDENT AUDITORS UNITED INDUSTRIAL CORPORATION 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, 1999 and 1998, and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP New York, New York February 29, 2000 50 Financials FIVE-YEAR FINANCIAL DATA UNITED INDUSTRIAL CORPORATION
YEAR ENDED DECEMBER 31 - -------------------------------------------------------------------------------------------------------------------------- (Dollars in thousand, except per share data) 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------- Operating Data Net Sales $ 216,979 $ 204,305 $ 235,183 $ 220,822 $ 227,398 Operating costs 207,383 194,065 219,562 209,162 223,385 Interest (income) expense - net (1,748) (3,505) (529) 964 1,159 Income before income taxes 9,098 15,880 30,606 10,641 2,645 Income taxes 2,821 2,869 15,781 4,237 1,757 Net income 6,277 13,011 14,825 6,404 888 Earnings per Share: Basic .51 1.06 1.22 .53 .07 Diluted .50 1.03 1.19 .52 .07 Cash dividends paid on common stock 4,910 4,927 3,536 2,434 3,165 Cash dividends declared per common share .40 .40 .29 .20 .26 Shares outstanding as of year end (in thousands) 12,294 12,250 12,249 12,174 12,171 ---------------------------------------------------------------- FINANCIAL POSITION - -------------------------------------------------------------------------------------------------------------------------- Total assets $ 201,792 $ 180,521 $ 181,199 $ 177,780 $ 181,303 Property and equipment 35,833 30,566 25,576 41,534 42,586 Long-term debt -- -- 4,479 -- 13,750 Shareholders' equity 111,055 109,441 102,024 90,145 86,160 Shareholders' equity per share 9.03 8.93 8.33 7.40 7.08 ---------------------------------------------------------------- FINANCIAL RATIOS - -------------------------------------------------------------------------------------------------------------------------- Return on shareholders' equity 5.7% 11.9% 14.5% 7.1% 1.0% Net income as a percent of sales 2.9 6.4 6.3 2.9 .4 Long-term debt as a percent of total capitalization -- -- 4.2 -- 13.8 ---------------------------------------------------------------- STATISTICAL DATA - -------------------------------------------------------------------------------------------------------------------------- Sales backlog as of year end $ 293,000 $ 210,000 $ 188,000 $ 159,000 $ 206,000 Capital expenditures 12,530 14,032 6,926 6,299 5,705 Depreciation and amortization 7,682 7,816 9,559 8,306 8,300 Number of employees 1,600 1,800 1,800 1,900 2,000 ----------------------------------------------------------------
United Industrial Corporation 51 CORPORATE ORGANIZATION BOARD OF DIRECTORS Harold S. Gelb Chairman of the Board Richard R. Erkeneff President and Chief Executive Officer of the Company and AAI Corporation Edward C. Aldridge, Jr. President and Chief Executive Officer The Aerospace Corporation Joseph S. Schneider President JSA Partners, Inc. E. Donald Shapiro Professor of Law New York Law School Susan Fein Zawel Vice President Corporate Communications, Associate General Counsel and Secretary of the Company Honorary Director (nonvoting) Bernard Fein Chairman Emeritus Retired Chairman and Chief Executive Officer CORPORATE OFFICERS Richard R. Erkeneff President and Chief Executive Officer Robert W. Worthing Vice President and General Counsel James H. Perry Vice President, Chief Financial Officer and Treasurer Susan Fein Zawel Vice President Corporate Communications, Associate General Counsel and Secretary Edward A. Smolinski Assistant Treasurer and Assistant Secretary SENIOR MANAGEMENT AAI Corporation Richard R. Erkeneff President and Chief Executive Officer Paul J. Michaud Vice President, Chief Financial Officer and Treasurer Robert W. Worthing Vice President, General Counsel and Secretary Maurice P. Ranc Vice President and General Manager, Defense Systems and Engineering and Maintenance Services Joseph G. Thomas Vice President and Deputy General Manager, UAV Systems Thomas E. Wurzel President AAI/ACL Technologies, Inc. John T. Merry Vice President and General Manager, Transportation Systems DETROIT STOKER COMPANY Michael J. DiMonte President and Chief Executive Officer Mark A. Eleniewski Executive Vice President Gary K. Ludwig Vice President Finance SYMTRON SYSTEMS, INC. John J. Henning President and Chief Executive Officer James W. Hanson Vice President and General Manager Richard A. Brandt Treasurer 52 Corporate Organization ANNUAL REPORT 1999 UNITED INDUSTRIAL CORPORATION 570 Lexington Avenue New York, NY 10022 212.752.8787 212.838.4629 fax www.unitedindustrial.com [GRAPHIC OMITTED] UNITED INDUSTRIAL C O R P O R A T I O N CORPORATE AND SHAREHOLDER INFORMATION CORPORATE HEADQUARTERS 570 Lexington Avenue New York, New York 10022 212.752.8787 SUBSIDIARIES AAI Corporation P.O. Box 126 Hunt Valley, Maryland 21030 410.666.1400 www.aaicorp.com DETROIT STOKER COMPANY 1510 East First Street Monroe, Michigan 48161 734.241.9500 www.detroitstoker.com 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 www.amstock.com For information about the Company's Dividend Reinvestment and Share Purchase Plan, contact: American Stock Transfer and Trust Company 800.278.4353 www.amstock.com 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 9, 2000, 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 [GRAPHIC OMITTED] United Industrial Corporation common stock is traded on the New York Stock Exchange (Ticker Symbol: UIC) INTERNET ADDRESS http://www.unitedindustrial.com EX-21 6 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF UNITED INDUSTRIAL CORPORATION March 3, 2000
State Approximate (or jurisdiction) Percentage of Voting in which Securities Owned by Name Incorporated Immediate Parent - --------------------------------------------------------------------------------------------------- AAI Corporation Maryland 100% (a) A.A.I. Engineering Support, Inc. Maryland 100 (b) A.A.I. International, Inc. Delaware 100 (b) Seti, Inc. Pennsylvania 100 (b) AAI Medical, Inc. Maryland 100 (b) AAI MICROFLITE Simulation International Corporation Maryland 100 (b) AAI/ACL Technologies, Inc. Maryland 100 (b) AAI/ACL Technologies Europe Limited Britain 100 (c) AAI California Carshells, Inc. Maryland 100 (b) AAI Aerospace Services Corp. Maryland 100 (b) AAI Romania Technologies, S.R.L. Romania 100 (b) Detroit Stoker Company Michigan 100 (a) Midwest Metallurgical Laboratory, Inc. Michigan 100 (d) UIC Products Co. Illinois 100 (a) Symtron Systems, Inc. New Jersey 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 AAI/ACL Technologies, Inc. (d) Percentage owned by Detroit Stoker Company. All of the subsidiaries listed above are included in the consolidated financial statements of United. EX-23 7 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, 333-19517 and 333-59487) 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 29, 2000, 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, 1999, and with respect to the financial statement schedule included in this Annual Report (Form 10-K). ERNST & YOUNG LLP New York, New York March 29, 2000 EX-27 8 EXHIBIT 27
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-31-1999 DEC-31-1999 13,092 0 48,395 0 42,187 109,954 122,081 86,248 201,792 58,761 3,887 0 0 14,374 96,681 201,792 216,979 218,887 161,554 207,383 2,246 0 160 9,098 2,821 6,277 0 0 0 6,277 .51 .50
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