-----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, J5pzVhXo6Tg5N0YMAjk4Emz+tKMtGzDutpZ6MjvJz6gsibMsgK/sPK4rFXSdSxu/ ywKEt483PWmyvQopVDzGXg== 0001005477-01-002503.txt : 20010409 0001005477-01-002503.hdr.sgml : 20010409 ACCESSION NUMBER: 0001005477-01-002503 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED INDUSTRIAL CORP /DE/ CENTRAL INDEX KEY: 0000101271 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 952081809 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04252 FILM NUMBER: 1590391 BUSINESS ADDRESS: STREET 1: 570 LEXINGTON AVENUE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2127528787 MAIL ADDRESS: STREET 1: 570 LEXINGTON AVENUE CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: TOPP INDUSTRIES CORP DATE OF NAME CHANGE: 19710510 FORMER COMPANY: FORMER CONFORMED NAME: HAYES MANUFACTURING CORP DATE OF NAME CHANGE: 19660911 10-K 1 0001.txt FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000. 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 (I.R.S. Employer Identification No.) Incorporation or Organization) 570 Lexington Avenue New York, New York 10022 (212) 752-8787 - -------------------------------------------------------------------------------- (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - ----------------------------------------- -------------------------------- Common Stock, $1.00 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in a definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K |_|. [Cover page 1 of 2 pages] 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 9, 2001, computed by reference to the closing sale price of the registrant's Common Stock on the New York Stock Exchange on such date: $162,272,289. On March 9, 2001, the registrant had outstanding 12,444,638 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, 2000 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 8, 2001 are incorporated by reference into Part III of this report. [Cover page 2 of 2 pages] 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; the ability to negotiate financing arrangements with lenders; 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, 2000, the operations of United Industrial Corporation ("United") consist of three principal business segments: defense, transportation and energy systems, principally conducted through two wholly-owned subsidiaries. Defense AAI Corporation AAI Corporation ("AAI") is engaged in engineering, development and manufacturing in the following major areas: (1) unmanned aerial vehicle systems; (2) automatic test equipment for electronic systems and components; (3) training and simulation systems; (4) ordnance systems; and (5) mechanical support systems for industrial, military, and marine applications. AAI also provides engineering and maintenance services. 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. In 2000 approximately 73% of the sales volume of AAI consisted of research, development and production of military items under domestic defense contracts compared to 79% in 1999. Certain of the contracts currently being worked on by AAI involve unmanned aerial vehicles for the U.S. Army, testing systems for U.S. military aircraft and training equipment for the U.S. Air Force and U.S. Navy. International defense contracts including foreign military sales through the U.S. government, accounted for 20.0% of Company sales in 2000 as compared to 15.8% in 1999. 2 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 fluid 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 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. In 1999 the Company was awarded a contract to provide the next generation of tactical UAV's to the U.S. Army. The Company also 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. On September 29, 2000, the Company sold all of the capital stock of Symtron Systems, Inc. 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 husks, sawdust, sunflower hulls, and poultry litter. The combustion of biomass fuels 3 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. 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. 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 $187 million, respectively, AAI has received subcontracts of $9.4 million and $63.6 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 2000 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, 2001 United and its subsidiaries had approximately 1,700 employees. Approximately 107 of these employees are represented by two unions under contracts expiring 4 between July 2003 and January 2004. 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 electronic, ordnance and marine equipment and stokers. In addition, United has 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 ordnance devices, ground support equipment and electronic developments. No patent is considered to be of material importance to United. Research and Development During 2000, 1999 and 1998, the subsidiaries of United (exclusive of AAI) expended approximately $166,000, $117,000 and $201,000, 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. Backlog The backlog of orders by industry segment at December 31, 2000 and 1999 was as follows: 2000 1999 ---- ---- Defense $190,161,000 $153,048,000 Energy Systems 4,633,000 4,750,000 Transportation 219,176,000 135,018,000 Except for approximately $155,000,000, substantially all of the backlog orders at December 31, 2000 are expected to be filled in 2001. 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. 5 Foreign Operations and Export Sales United and its subsidiaries have no significant foreign operations. During 2000, 1999 and 1998 export sales by United and its subsidiaries amounted to approximately $57,110.00, $42,120,000 and $40,994,000, respectively. 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 23, 2001.
Approximate Area Owned Location Principal Use in Square Feet or Leased - -------- ------------- -------------- --------- 1510 East First Street Machine shop, steel fabrication, 194,910 floor space Owned in fee Monroe, MI engineering and sales facilities of on 14.4 acres of land Detroit Stoker (East Building) 1426 East First Street Assembly, shipping and administrative 101,000 floor space Owned in fee Monroe, MI facilities of Detroit Stoker on 2.2 acres of land (West Building) 15290 Fifteen Mile Road Foundry, 59,386 floor space Owned in fee Marshall, MI Midwest Metallurgical on 28.4 acres of land 2735 W Fifth Assembly and Administrative Facility 59,000 Leased to North Street of AAI November 30, 2002 Summerville, SC 21945 Three Noch Road Office Space of AAI 1,100 Leased to November Lexington Park, MD 30, 2001 Industry Lane Manufacturing, engineering and 429,750 floor space Owned in fee Hunt Valley, MD administrative facilities of AAI on 64 acres of land Clubhouse Road Manufacturing, engineering and Leased to: Hunt Valley, MD administrative facilities of AAI 317,831 October 31, 2003 22,410 November 30, 2003 3200 Enterprise Street Manufacturing, engineering and 131,544 Leased to April Brea, CA administrative facilities 2009 of ACL Technologies 1213 Jefferson Davis Highway Office Space 2,200 Leased to February Arlington, VA 22202 28, 2006
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 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's financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT Annual elections are held in May to elect officers for the ensuing year. Interim elections are held as required. Except as otherwise indicated, each executive officer has held his current position for the past five years. 7
Age at Name Position, Office December 31, 2000 ---- ---------------- ----------------- Richard R. Erkeneff* -- President of the Company (since October 1995) and AAI 65 (since November 1993). Robert Worthing -- Vice President and General Counsel of the Company (since 55 July 1995); General Counsel of AAI (since April 1992). Susan Fein Zawel* -- Vice President, Corporate Communications and Associate 46 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 Officer 39 (since October 1995) and Treasurer (since December 1994) of the Company; Vice President, Chief Financial Officer and Treasurer of AAI (since July 2000).
- -------------------- * 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 15 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 section 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 8, 2001 (the "Proxy Statement"), which section (other than the Compensation Committee Report, Audit 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, 2000, 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, Audit 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, Audit 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 (2). (10)(a)- United Industrial Corporation 1994 Stock Option Plan, as amended (3). (10)(b) United Industrial Corporation 1996 Stock Option Plan for Nonemployee Directors (4). (10)(c)- 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) (the "Loan Agreement") by and among First Union Commercial Corporation and the Company, AAI Corporation, AAI Engineering Support, Inc., AAI/ACL Technologies, Inc., Detroit Stoker Company, Midwest Metallurgical Laboratory, Inc., and AAI MICROFLITE Simulation International Corporation (5). (10)(c)(1)- First Amendment to Loan Agreement. (10)(c)(2)- Second Amendment to Loan Agreement. (10)(c)(3)- Third Amendment to Loan Agreement (8). (10)(c)(4)- Fourth Amendment to Loan Agreement (9). (10)(c)(5)- Fifth Amendment to Loan Agreement. (10)(c)(6)- Sixth Amendment to Loan Agreement. (10)(d)- Revolving Note dated as of June 11, 1997 made payable to the order of First Union Commercial Corporation (the "Revolving Note"). (10)(d)(1)- First Amendment to Revolving Note (8). (10)(d)(2)- Second Amendment to Revolving Note. (10)(d)(3)- Third Amendment to Revolving Note. (10)(e)- Pledge and Security Agreement dated as of October 13, 1994 by AAI in favor of the Agent (6). (10)(f)- Pledge and Security Agreement dated as of October 13, 1994 by the Company in favor of the Agent (6). (10)(g)- Security Agreement dated as of October 13, 1994 between AAI and the Agent (6). 11 (10)(h)- Security Agreement dated as of October 13, 1994 between each subsidiary of AAI, certain subsidiaries of the Company and the Agent (6). (10)(i)- Guaranty dated as of October 13, 1994 by the Company and certain of its subsidiaries and by each subsidiary of AAI in favor of the Agent (6). (10)(j)- Employment Agreement, dated December 8, 1998, between United and Richard R. Erkeneff (1). (10)(k)- Employment Agreement, dated March 3, 2000, between United and Susan Fein Zawel (7). (10)(l)- Employment Agreement, dated March 3, 2000, between United and Robert Worthing (7). (10)(m)- Employment Agreement, dated March 3, 2000, between United and James H. Perry (7). (13)- United's 2000 Annual Report to Shareholders. (21)- Subsidiaries of United. (23)- Consent of Independent Auditors. (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, 1995. (3) Incorporated by reference to United's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on January 10, 1997. (4) Incorporated by reference to United's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on June 26, 1997. (5) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (6) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. (7) Incorporated by reference to United's Annual Report on Form 10-K for the year ended December 31, 1999. (8) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000. (9) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. (b) Reports on Form 8-K - United filed one Current Report on Form 8-K during the quarter ended December 31, 2000, relating to the sale of Symtron Systems, Inc., dated September 29, 2000. 12 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, 2000 United Industrial Corporation New York, New York F-1 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, 2000, are incorporated by reference in Item 8: Consolidated Balance Sheets--December 31, 2000 and 1999 Consolidated Statements of Operations-- Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows Years Ended December 31, 2000, 1999 and 1998 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, 2000 and 1999, and for each of the three years in the period ended December 31, 2000, and have issued our report thereon dated February 28, 2001. 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. /s/ ERNST & YOUNG LLP New York, New York February 28, 2001 F-3 Schedule II -- Valuation and Qualifying Accounts United Industrial Corporation and Subsidiaries December 31, 2000
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, 2000: Deducted from asset account: Allowance for doubtful accounts $ 235,000 $ 235,000 ========== ========== Product warranty liability $5,600,000 $1,300,000(B) $1,746,000(C) $5,154,000 ========== ========== ========== ========== 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(B) $ 40,000(C) $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(C) $ 640,000 ========== ========== ==========
(A) Write-off of uncollectible amounts. (B) In February 2000, the Company was informed of a warranty issue by one of its customers. Based upon this information, the Company recorded a $5 million provision for the estimate of the future warranty costs to be incurred. This amount was recorded in the fourth quarter of 1999. In 2000 this provision was increased by $1.3 million. (C) Product warranty expenditures. F-4 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 22, 2001 ----------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Name Date ---- ---- /s/ Harold S. Gelb March 22, 2001 - -------------------------------------------- Harold S. Gelb, Chairman of the Board and Director /s/ Joseph S. Schneider March 22, 2001 - -------------------------------------------- Joseph S. Schneider, Director /s/ Richard R. Erkeneff March 22, 2001 - -------------------------------------------- Richard R. Erkeneff, President and Chief Executive Officer and Director /s/ Edward C. Aldridge, Jr. March 22, 2001 - -------------------------------------------- Edward C. Aldridge, Jr., Director /s/ E. Donald Shapiro March 22, 2001 - -------------------------------------------- E. Donald Shapiro, Director /s/ Susan Fein Zawel March 22, 2001 - -------------------------------------------- Susan Fein Zawel, Vice President and Director /s/ James H. Perry March 22, 2001 - -------------------------------------------- James H. Perry, Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) EXHIBIT INDEX Exhibit No. (3)(a)- Restated Certificate of Incorporation of United (1). (3)(b)- Amended and Restated By-Laws of United (2). (10)(a)- United Industrial Corporation 1994 Stock Option Plan, as amended (3). (10)(b) United Industrial Corporation 1996 Stock Option Plan for Nonemployee Directors (4). (10)(c)- 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) (the "Loan Agreement") by and among First Union Commercial Corporation and the Company, AAI Corporation, AAI Engineering Support, Inc., AAI/ACL Technologies, Inc., Detroit Stoker Company, Midwest Metallurgical Laboratory, Inc., and AAI MICROFLITE Simulation International Corporation (5). (10)(c)(1)- First Amendment to Loan Agreement. (10)(c)(2)- Second Amendment to Loan Agreement. (10)(c)(3)- Third Amendment to Loan Agreement (8). (10)(c)(4)- Fourth Amendment to Loan Agreement (9). (10)(c)(5)- Fifth Amendment to Loan Agreement. (10)(c)(6)- Sixth Amendment to Loan Agreement. (10)(d)- Revolving Note dated as of June 11, 1997 made payable to the order of First Union Commercial Corporation (the "Revolving Note"). (10)(d)(1)- First Amendment to Revolving Note (8). (10)(d)(2)- Second Amendment to Revolving Note. (10)(d)(3)- Third Amendment to Revolving Note. (10)(e)- Pledge and Security Agreement dated as of October 13, 1994 by AAI in favor of the Agent (6). (10)(f)- Pledge and Security Agreement dated as of October 13, 1994 by the Company in favor of the Agent (6). (10)(g)- Security Agreement dated as of October 13, 1994 between AAI and the Agent (6). (10)(h)- Security Agreement dated as of October 13, 1994 between each subsidiary of AAI, certain subsidiaries of the Company and the Agent (6). (10)(i)- Guaranty dated as of October 13, 1994 by the Company and certain of its subsidiaries and by each subsidiary of AAI in favor of the Agent (6). (10)(j)- Employment Agreement, dated December 8, 1998, between United and Richard R. Erkeneff (1). (10)(k)- Employment Agreement, dated March 3, 2000, between United and Susan Fein Zawel (7). (10)(l)- Employment Agreement, dated March 3, 2000, between United and Robert Worthing (7). (10)(m)- Employment Agreement, dated March 3, 2000, between United and James H. Perry (7). (13)- United's 2000 Annual Report to Shareholders. (21)- Subsidiaries of United. (23)- Consent of Independent Auditors. (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, 1995. (3) Incorporated by reference to United's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on January 10, 1997. (4) Incorporated by reference to United's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on June 26, 1997. (5) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (6) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. (7) Incorporated by reference to United's Annual Report on Form 10-K for the year ended December 31, 1999. (8) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000. (9) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. EX-10.C.1 2 0002.txt FIRST AMENDMENT TO LOAN AGREEMENT FIRST AMENDMENT TO REVOLVING LINE OF CREDIT LOAN AGREEMENT, TERM LOAN AGREEMENT AND SECURITY AGREEMENT THIS FIRST AMENDMENT TO REVOLVING LINE OF CREDIT LOAN AGREEMENT, TERM LOAN AGREEMENT AND SECURITY AGREEMENT (the "First Amendment") is made as of October 1, 1998, by and between United Industrial Corporation, a Delaware corporation, having an address of 18 E. 48th Street, New York, New York 10017, and the other Persons signing below as the Borrower (collectively, the "Borrower"), and FIRST UNION COMMERCIAL CORPORATION, a North Carolina corporation, having an address of 1970 Chain Bridge Road, McLean, Virginia 22101 ("Lender"). RECITALS A. The Borrower and the Lender are parties to a Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement, dated as of June 11, 1997 (the "Loan Agreement"), whereby Lender is providing certain credit facilities to the Borrower. B. The Borrower has requested that the Lender agree to amend two of the covenants contained in the Loan Agreement, and the Lender has agreed to the Borrower's request. AGREEMENTS NOW, THEREFORE, in consideration of the premises, the mutual agreements herein contained, and other good and valuable consid eration, the receipt and sufficiency of which are hereby acknowl edged, the Borrower and the Lender hereby agree as follows: 1. Paragraph d of Section 6.14 of the Loan Agreement is amended by revising the Tangible Net Worth requirements for the quarters ending September 30, 1998 and thereafter as follows: Borrower shall maintain a minimum Tangible Net Worth of Eighty Million Dollars ($80,000,000.00) as of September 30, 1998; provided, that the required minimum Tangible Net Worth shall increase by One Million, Five Hundred Thousand Dollars ($1,500,000.00) on the last day of each calendar quarter commencing December 31, 1998 and continuing on the last day of each subsequent calendar quarter to and including March 31, 2000. 2. Clause (i) of the second sentence of Section 7.7 of the Loan Agreement is deleted in its entirety and replace with the following: Borrower may make investments in or loans to ETI, provided that the aggregate amount of all of Borrower's loans to or investments in ETI shall at no time exceed the sum of Fifteen Million Dollars ($15,000,000.00) and provided, further, that any guaranty of an indebtedness of ETI or other contingent contractual obligations arising out of an obligation of ETI shall be considered an investment in ETI for purposes of the foregoing limitation, but contingent liabilities incurred under indemnity agreements given to induce a surety to issue a performance or payment bond required of ETI in connection with a contract to provide goods or services to one of ETI's customers shall not be considered an investment in ETI for purposes of the foregoing limitation; 3. The Borrower covenants to take all actions necessary to assure that the Borrower's computer based systems are able to operate and effectively process data including dates for after January 1, 2000. At the request of Bank, Borrower shall provide Bank assurance acceptable to Bank of Borrower's Year 2000 compatibility. 4. The Borrower warrants and represents to the Lender that: a. Borrower has the power and authority to enter into this First Amendment, to perform its obligations hereunder, to execute all documents being executed and delivered in connection herewith, and to incur the obligations provided for herein, all of which have been duly authorized and approved in accordance with the Borrower's organizational documents; b. This First Amendment, together with all documents executed in connection herewith or pursuant hereto, shall constitute when executed the valid and legally binding obligations of the Borrower in accordance with their respective terms; c. The Borrower's obligations under the Loan Documents remain valid and enforceable obligations, and the execution and delivery of this First Amendment and the other documents executed in connection herewith shall not be construed as a novation of the Loan Agreement or the other Loan Documents. 5. Except as modified by this First Amendment, the Loan Agreement remains in full force and effect and unmodified. Borrower warrant and represent that it has no offsets or defenses to its obligations under the Loan Documents, as so modified. 2 IN WITNESS WHEREOF, the undersigned have duly executed this First Amendment, or have caused this First Amendment to be duly executed on their behalf, as of the day and year first hereinabove set forth. UNITED INDUSTRIAL CORPORATION By: /s/ James Perry --------------------------------- James Perry, Treasurer & Chief Financial Officer AAI CORPORATION By: /s/ Paul J. Michaud ---------------------------- Paul J. Michaud, Vice President, Chief Financial Officer & Treasurer AAI ENGINEERING SUPPORT, INC. By: /s/ Paul J. Michaud --------------------------- Paul J. Michaud, Vice President, Chief Financial Officer & Treasurer AAI SYSTEMS MANAGEMENT, INC. By: /s/ Paul J. Michaud --------------------------- Paul J. Michaud, Vice President, Chief Financial Officer & Treasurer AAI/ACL TECHNOLOGIES, INC. By: /s/ Paul J. Michaud --------------------------- Paul J. Michaud, Vice President & Chief Financial Officer 3 DETROIT STOKER COMPANY By: /s/ James Perry --------------------------- James Perry Vice President MIDWEST METALLURGICAL LABORATORY, INC. By: /s/ James Perry --------------------------- James Perry Vice President NEO PRODUCTS CO. By: /s/ James Perry --------------------------- James Perry Vice President SYMTRON SYSTEMS, INC. By: /s/ James Perry --------------------------- James Perry, Chief Financial Officer, Asst. Treasurer & Asst. Secretary UIC-Del. CORPORATION By: /s/ Paul J. Michaud --------------------------- Paul J. Michaud President & Treasurer 4 AAI MICROFLITE Simulation International Corporation By: /s/ Paul J. Michaud --------------------------- Paul J. Michaud President FIRST UNION COMMERCIAL CORPORATION By: /s/ Michael Landini --------------------------- Michael Landini Vice President 5 EX-10.C.2 3 0003.txt SECOND AMENDMENT TO LOAN AGREEMENT SECOND AMENDMENT TO REVOLVING LINE OF CREDIT LOAN AGREEMENT, TERM LOAN AGREEMENT AND SECURITY AGREEMENT THIS SECOND AMENDMENT TO REVOLVING LINE OF CREDIT LOAN AGREEMENT, TERM LOAN AGREEMENT AND SECURITY AGREEMENT (the "Second Amendment") is made as of December 31, 1998, by and between United Industrial Corporation, a Delaware corporation, having an address of 18 E. 48th Street, New York, New York 10017, and the other Persons signing below as the Borrower (collectively, the "Borrower"), and FIRST UNION COMMERCIAL CORPORATION, a North Carolina corporation, having an address of 1970 Chain Bridge Road, McLean, Virginia 22101 ("Lender"). RECITALS A. The Borrower and the Lender are parties to a Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement, dated as of June 11, 1997 (the "Loan Agreement"), as amended by First Amendment to Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement (the "First Amendment") made as of October 1, 1998 (said agreement, as so amended, being hereinafter called the "Loan Agreement"). B. The Borrower has requested that the Lender agree to amend certain of the covenants contained in the Loan Agreement, and the Lender has agreed to the Borrower's request. AGREEMENTS NOW, THEREFORE, in consideration of the premises, the mutual agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower and the Lender hereby agree as follows: 1. Paragraph d of Section 6.14 of the Loan Agreement is amended by revising the Tangible Net Worth requirements for the quarters ending December 31, 1998 and thereafter as follows: Borrower shall maintain a minimum Tangible Net Worth of Seventy Million Dollars ($70,000,000.00) as of December 31, 1998; provided, that the required minimum Tangible Net Worth shall increase by One Million, Five Hundred Thousand Dollars ($1,500,000.00) on the last day of each calendar quarter commencing March 31, 1999 and continuing on the last day of each subsequent calendar quarter to and including March 31, 2000. 2. The second sentence of Section 7.5 of the Loan Agreement is deleted in its entirety and replaced with the following: Notwithstanding the foregoing: (i) Borrower may make investments in or loans to ETI, provided that the aggregate amount of all of Borrower's loans to or investments in ETI shall at no time exceed the sum of Seventeen Million Dollars ($17,000,000.00) and provided, further, that any guaranty of an indebtedness of ETI or other contingent contractual obligations arising out of an obligation of ETI shall be considered an investment in ETI for purposes of the foregoing limitation, but contingent liabilities incurred under indemnity agreements given to induce a surety to issue a performance or payment bond required of ETI in connection with a contract to provide goods or services to one of ETI's customers shall not be considered an investment in ETI for purposes of the foregoing limitation; (ii) Borrower may make investments in or loans to PUI, provided that the aggregate amount of all of Borrower's loans to or investments in PUI shall at no time exceed the sum of Five Million Dollars ($5,000,000.00) and provided, further, that any guaranty of an indebtedness of PUI or other contingent contractual obligations arising out of an obligation of PUI shall be considered an investment in PUI for purposes of the foregoing limitation; (iii) Borrower may make investments in repurchase obligations with a term of not more than seven days entered into with First Union Commercial Corporation or with any commercial bank chartered in the United States and having its deposits insured by the Federal Deposit Insurance Corporation; and (iv) Borrower may make investments in marketable securities regularly traded on a national stock exchange or on NASDAQ. 3. For the quarters ending December 31, 1998, through September 30, 1999, clause (i) of the definition of Debt Service Coverage Ratio contained in Section 1.1 of the Loan Agreement shall read as follows: (i) the sum of EBIT plus non-cash expenses (i.e., depreciation and amortization), less cash dividends, less Ten Million Dollars ($10,000,000.00) and less cash taxes, however, the foregoing amendment to the definition of Debt Service Coverage Ratio shall not apply to any quarter prior to the quarter ending December 31, 1998 or after the quarter ending September 30, 1999. For calendar quarters ending December 31, 1999, and thereafter, the definition of Debt Service Coverage Ratio shall remain as stated initially in the Loan Agreement. 4. The Borrower warrants and represents to the Lender that: a. Borrower has the power and authority to enter into this Second Amendment, to perform its obligations hereunder, to execute all documents being executed and delivered in connection herewith, and to incur the obligations provided for herein, all of which have been duly authorized and approved in accordance with the Borrower's organizational documents; b. This Second Amendment, together with all documents executed in connection herewith or pursuant hereto, constitute the valid and legally binding obligations of 2 the Borrower in accordance with their respective terms; c. The Borrower's obligations under the Loan Documents remain valid and enforceable obligations, and the execution and delivery of this Second Amendment and the other documents executed in connection herewith shall not be construed as a novation of the Loan Agreement or the other Loan Documents. 5. Except as modified by this Second Amendment, the Loan Agreement remains in full force and effect and unmodified. Borrower warrant and represent that it has no offsets or defenses to its obligations under the Loan Documents, as so modified. IN WITNESS WHEREOF, the undersigned have duly executed this Second Amendment, or have caused this Second Amendment to be duly executed on their behalf, as of the day and year first hereinabove written. UNITED INDUSTRIAL CORPORATION By: /s/ James Perry --------------------------------- James Perry, Treasurer & Chief Financial Officer AAI CORPORATION By: /s/ Paul J. Michaud --------------------------------- Paul J. Michaud, Vice President, Chief Financial Officer & Treasurer AAI ENGINEERING SUPPORT, INC. By: /s/ Paul J. Michaud --------------------------------- Paul J. Michaud, Vice President, Chief Financial Officer & Treasurer 3 AAI SYSTEMS MANAGEMENT, INC. By: /s/ Paul J. Michaud --------------------------------- Paul J. Michaud, Vice President, Chief Financial Officer & Treasurer AAI/ACL TECHNOLOGIES, INC. By: /s/ Paul J. Michaud --------------------------------- Paul J. Michaud, Vice President & Chief Financial Officer DETROIT STOKER COMPANY By: /s/ James Perry --------------------------------- James Perry Vice President MIDWEST METALLURGICAL LABORATORY, INC. By: /s/ James Perry --------------------------------- James Perry Vice President NEO PRODUCTS CO. By: /s/ James Perry --------------------------------- James Perry Vice President 4 SYMTRON SYSTEMS, INC. By: /s/ James Perry --------------------------------- James Perry, Chief Financial Officer, Asst. Treasurer & Asst. Secretary UIC-Del. CORPORATION By: /s/ Paul J. Michaud --------------------------------- Paul J. Michaud President & Treasurer AAI MICROFLITE Simulation International Corporation By: /s/ Paul J. Michaud --------------------------------- Paul J. Michaud President AGREED TO BY LENDER: FIRST UNION COMMERCIAL CORPORATION By: /s/ Michael J. Landini --------------------------------- Michael J. Landini Vice President 5 EX-10.C.5 4 0004.txt FIFTH AMENDMENT TO LOAN AGREEMENT FIFTH AMENDMENT TO REVOLVING LINE OF CREDIT LOAN AGREEMENT, TERM LOAN AGREEMENT AND SECURITY AGREEMENT THIS FIFTH AMENDMENT TO REVOLVING LINE OF CREDIT LOAN AGREEMENT, TERM LOAN AGREEMENT AND SECURITY AGREEMENT (the "Fifth Amendment") is made as of November 14, 2000, by and among United Industrial Corporation, a Delaware corporation, having an address of 570 Lexington Avenue, New York, New York 10022, and AAI Corporation, AAI Engineering Support, Inc., AAI/ACL Technologies, Inc., AAI/ACL Technologies Europe Limited, Detroit Stoker Company, Midwest Metallurgical Laboratory, Inc., UIC Products Co., and AAI MICROFLITE Simulation International Corporation (collectively, the "Borrowers"), and First Union Commercial Corporation, a North Carolina corporation, having an address of 1970 Chain Bridge Road, McLean, Virginia 22101 ("Lender"). RECITALS A. United Industrial Corporation and certain of its subsidiaries and the Lender are parties to a Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement, dated as of June 11, 1997 (the "Loan Agreement"), as amended by First Amendment to Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement (the "First Amendment") made as of October 1, 1998, by Second Amendment to Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement (the "Second Amendment") made as of December 31, 1998, by Third Amendment to Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement (the "Third Amendment") made as of March 31, 2000, and by Fourth Amendment to Revolving Line of Credit Loan Agreement and Security Agreement, dated as of September 21, 2000 (the "Fourth Amendment") (said agreement, as so amended, being hereinafter called the "Loan Agreement"). B. The Borrowers' obligations to repay advances under the Loan Agreement is evidenced by a Revolving Note, dated as of July 11, 1997, as amended by a First Amendment to Revolving Note, made as of March 31, 2000, and by a Second Amendment of Revolving Note, of even date herewith (said Revolving Note, as so amended, being hereinafter called the "Note"). C. The parties desire further to amend the Loan Agreement to extend the Ending Date (as defined in the Loan Agreement) to June 30, 2001. AGREEMENTS NOW, THEREFORE, in consideration of the premises, the mutual agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrowers and the Lender hereby agree as follows: 1. The recitals are incorporated herein by reference. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Loan Agreement. 2. Section 1.1 of the Loan Agreement is amended by deleting the definition of "Ending Date" in its entirety and replacing it with the following: "Ending Date" means June 30, 2001. 3. To induce the Lender to enter into this Fifth Amendment, the Borrower warrants and represents to the Lender that: a. The Borrower's books and record properly reflect the Borrower's financial condition, and no material adverse change in the Borrower's financial condition has occurred since the last date that the Borrower provided financial reports to the Lender; and b. No litigation is pending or, to the Borrower's knowledge, threatened against the Borrower which could materially adversely affect the Borrower or which involves a claim against the Borrower in an amount equal to or greater than $500,000 of which the Borrower has not informed the Lender in writing; and c. The Borrower is in compliance with all provisions of the Loan Agreement and is in compliance in all material respects with all applicable laws and regulations; and d. Borrower has the power and authority to enter into this Fifth Amendment, to perform its obligations hereunder, to execute all documents being executed and delivered in connection herewith, and to incur the obligations provided for herein, all of which have been duly authorized and approved in accordance with the Borrower's organizational documents; and e. This Fifth Amendment, together with all documents executed in connection herewith or pursuant hereto, constitute the valid and legally binding obligations of the Borrower in accordance with their respective terms; and f. The Borrower's obligations under the Loan Documents remain valid and enforceable obligations, and the execution and delivery of this Fifth Amendment and the other documents executed in connection herewith shall not be construed as a novation of the Loan Agreement or the other Loan Documents. 4. The Borrower promises to pay, upon execution of this Fifth Amendment, all costs (including attorneys fees) incurred by the Lender in connection with the preparation of this Fifth Amendment. The Borrower authorizes the Lender to advance funds to itself or to third parties to pay the fees and costs mentioned in this paragraph, which shall be deemed to be Advances to the Borrower under the Loan Agreement and which shall be repayable in accordance with the Note. 5. ARBITRATION. UPON DEMAND OF ANY PARTY HERETO, WHETHER MADE 2 BEFORE OR AFTER INSTITUTION OF ANY JUDICIAL PROCEEDING, ANY CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THE LOAN DOCUMENTS BETWEEN PARTIES HERETO (A "DISPUTE") SHALL BE RESOLVED BY BINDING ARBITRATION CONDUCTED UNDER AND GOVERNED BY THE COMMERCIAL FINANCIAL DISPUTES ARBITRATION RULES (THE "ARBITRATION RULES") OF THE AMERICAN ARBITRATION ASSOCIATION ("AAA") AND THE FEDERAL ARBITRATION ACT. DISPUTES MAY INCLUDE, WITHOUT LIMITATION, TORT CLAIMS, COUNTERCLAIMS, A DISPUTE AS TO WHETHER A MATTER IS SUBJECT TO ARBITRATION, CLAIMS BROUGHT AS CLASS ACTIONS, OR CLAIMS ARISING FROM DOCUMENTS EXECUTED IN THE FUTURE. A JUDGMENT UPON THE AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. NOTWITHSTANDING THE FOREGOING, THIS ARBITRATION PROVISION DOES NOT APPLY TO DISPUTES UNDER OR RELATED TO SWAP AGREEMENTS. ALL ARBITRATION HEARINGS SHALL BE CONDUCTED IN THE CITY OR COUNTY WHERE THE LENDER'S OFFICE, AS FIRST STATED ABOVE, IS LOCATED, OR AT SUCH OTHER PLACE AS THE PARTIES MAY IN WRITING AGREE. A HEARING SHALL BEGIN WITHIN 90 DAYS OF DEMAND FOR ARBITRATION AND ALL HEARINGS SHALL CONCLUDE WITHIN 120 DAYS OF DEMAND FOR ARBITRATION. THESE TIME LIMITS MAY NOT BE EXTENDED UNLESS A PARTY SHOWS CAUSE FOR EXTENSION AND THEN FOR NO MORE THAN A TOTAL OF 60 DAYS. THE EXPEDITED PROCEDURES SET FORTH IN RULE 51, ET SEQ., OF THE ARBITRATION RULES SHALL APPLY TO DISPUTES IN WHICH THE CLAIM IS LESS THAN $1,000,000.00. ARBITRATORS SHALL BE LICENSED ATTORNEYS SELECTED FROM THE COMMERCIAL FINANCIAL DISPUTE ARBITRATION PANEL OF THE AAA. THE PARTIES DO NOT WAIVE APPLICABLE FEDERAL OR STATE SUBSTANTIVE LAW EXCEPT AS PROVIDED HEREIN. NOTWITHSTANDING THE PRECEDING BINDING ARBITRATION PROVISIONS, THE PARTIES AGREE TO PRESERVE WITHOUT DIMINUTION, CERTAIN REMEDIES THAT ANY PARTY MAY EXERCISE BEFORE OR AFTER AN ARBITRATION PROCEEDING IS BROUGHT. THE PARTIES SHALL HAVE THE RIGHT TO PROCEED IN ANY COURT OF PROPER JURISDICTION OR BY SELF HELP TO EXERCISE OR PROSECUTE THE FOLLOWING REMEDIES, AS APPLICABLE: (1) ALL RIGHTS TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY OR OTHER SECURITY BY EXERCISING A POWER OF SALE OR UNDER APPLICABLE LAW BY JUDICIAL FORECLOSURE INCLUDING A PROCEEDING TO CONFIRM THE SALE; (2) ALL RIGHTS OF SELF HELP, INCLUDING WITHOUT LIMITATION, PEACEFUL OCCUPATION OF REAL PROPERTY AND COLLECTION OF RENTS, SETOFF, AND PEACEFUL POSSESSION OF PERSONAL PROPERTY; (3) OBTAINING PROVISIONAL OR ANCILLARY REMEDIES INCLUDING INJUNCTIVE RELIEF, SEQUESTRATION, GARNISHMENT, ATTACHMENT, APPOINTMENT OF RECEIVER AND FILING AN INVOLUNTARY BANKRUPTCY PROCEEDING; AND (4) WHEN APPLICABLE, A JUDGMENT BY CONFESSION OF JUDGMENT. ANY CLAIM OR CONTROVERSY WITH REGARD TO ANY PARTY'S ENTITLEMENT TO SUCH REMEDIES IS A DISPUTE. THE PARTIES AGREE THAT THEY SHALL NOT HAVE A REMEDY OF PUNITIVE OR EXEMPLARY DAMAGES AGAINST OTHER PARTIES IN 3 ANY DISPUTE, AND THEY HEREBY WAIVE ANY RIGHT OR CLAIM TO PUNITIVE OR EXEMPLARY DAMAGES THEY MAY NOW HAVE OR WHICH MAY ARISE IN THE FUTURE IN CONNECTION WITH ANY DISPUTE WHETHER THE DISPUTE IS RESOLVED BY ARBITRATION OR JUDICIALLY. 6. Except as modified by this Fifth Amendment, the Loan Agreement remains in full force and effect and unmodified. Borrower warrants and represents that it has no offsets or defenses to its obligations under the Loan Documents, as so modified. The Borrower hereby releases and waives any and all claims of any kind that it may have against the lender as of the date of this Fifth Amendment arising out of or relating to the Revolving Note or the Loan Agreement, as amended by this Fifth Amendment. 7. This Fifth Amendment may be signed in several counterparts which, when executed, shall constitute a single agreement. A counterpart containing a facsimile signature shall be effective to the same extent as if it were a counterpart containing an original signature, but shall be confirmed promptly with a counterpart containing an original signature. IN WITNESS WHEREOF, the undersigned have duly executed this Fifth Amendment, or have caused this Fifth Amendment to be duly executed on their behalf, as of the day and year first hereinabove written. UNITED INDUSTRIAL CORPORATION By: /s/ James Perry -------------------------------- James Perry, Vice President AAI CORPORATION By: /s/ James Perry -------------------------------- James Perry, Vice President AAI ENGINEERING SUPPORT, INC. By: /s/ Richard Erkeneff -------------------------------- Richard Erkeneff, President 4 AAI/ACL TECHNOLOGIES, INC. By: /s/ Thomas E. Wurzel -------------------------------- Thomas E. Wurzel, President AAI/ACL TECHNOLOGIES EUROPE LIMITED By: /s/ Thomas E. Wurzel -------------------------------- Thomas E. Wurzel, President DETROIT STOKER COMPANY By: /s/ James Perry -------------------------------- James Perry, Vice President MIDWEST METALLURGICAL LABORATORY, INC. By: /s/ James Perry -------------------------------- James Perry, Vice President UIC PRODUCTS CO. By: /s/ James Perry -------------------------------- James Perry, Vice President 5 AAI MICROFLITE Simulation International Corporation By: /s/ Stanley J. Mecinski, Jr. -------------------------------- Stanley J. Mecinski, Jr. Assistant Secretary and Assistant Treasurer FIRST UNION COMMERCIAL CORPORATION By: /s/ Scott Santa Cruz -------------------------------- Scott Santa Cruz, Vice President 6 EX-10.C.6 5 0005.txt SIXTH AMENDMENT TO LOAN AGREEMENT SIXTH AMENDMENT TO REVOLVING LINE OF CREDIT LOAN AGREEMENT, TERM LOAN AGREEMENT AND SECURITY AGREEMENT THIS SIXTH AMENDMENT TO REVOLVING LINE OF CREDIT LOAN AGREEMENT, TERM LOAN AGREEMENT AND SECURITY AGREEMENT (the "Sixth Amendment") is made as of January 24, 2001, by and among United Industrial Corporation, a Delaware corporation, having an address of 570 Lexington Avenue, New York, New York 10022, and AAI Corporation, AAI Engineering Support, Inc., AAI/ACL Technologies, Inc., AAI/ACL Technologies Europe Limited, Detroit Stoker Company, Midwest Metallurgical Laboratory, Inc., and AAI MICROFLITE Simulation International Corporation (jointly and severally, the "Borrowers"), and First Union Commercial Corporation, a North Carolina corporation, having an address of 1970 Chain Bridge Road, McLean, Virginia 22101 ("Lender"). RECITALS A. United Industrial Corporation and certain of its subsidiaries and the Lender are parties to a Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement, dated as of June 11, 1997 (the "Loan Agreement"), as amended by that certain First Amendment to Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement (the "First Amendment") made as of October 1, 1998, by that certain Second Amendment to Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement (the "Second Amendment") made as of December 31, 1998, by that certain Third Amendment to Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement (the "Third Amendment") made as of March 31, 2000, by that certain Fourth Amendment to Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement, dated as of September 21, 2000 (the "Fourth Amendment"), and by that certain Fifth Amendment to Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement dated as of November 14, 2000 (the "Fifth Amendment")(said agreement, as so amended, being hereinafter called the "Loan Agreement"). B. The Borrowers' obligations to repay advances under the Loan Agreement is evidenced by a Revolving Note, dated as of July 11, 1997, as amended by a First Amendment to Revolving Note, made as of March 31, 2000, and by a Second Amendment of Revolving Note, made as of November 14, 2000 (said Revolving Note, as so amended, being hereinafter called the "Note"). C. In accordance with the application of AAI Corporation ("AAI") evidenced by that certain Application and Agreement for Letter of Credit executed by United Industrial Corporation and AAI Corporation dated September 25, 2000 (the "LOC Agreement"), a certain irrevocable standby letter of credit was issued for the benefit of the Office of Deputy CNO for Intelligence and Operations, Republic of Korea Navy Headquarters, Bunamri, Dumamyun, Nonsan City, Chungchongnamdo, Republic of Korea (hereafter, the "Beneficiary"), number SM414053C, in the original amount of Six Million Six Hundred Thousand and 00/100 Dollars ($6,600,000.00), as thereafter amended (the "Korean Navy LOC"). The Korean Navy LOC was issued in accordance with and subject to the terms, provisions and conditions of the LOC Agreement and the Loan Agreement. D. The Borrowers have requested an increase in the amount of the Korean Navy LOC, such that the maximum amount of the Korean Navy LOC will be Fifteen Million Eight Hundred Fourteen Thousand Two Hundred Thirty Eight and 00/100 Dollars ($15,814,238.00), comprised of a principal component of Thirteen Million Two Hundred Thousand and 00/100 Dollars ($13,200,000.00) and an interest component of Two Million Six Hundred Fourteen Thousand Two Hundred Thirty Eight and 00/100 Dollars ($2,614,238.00). The increase in the Korean Navy LOC to $15,814,238.00 would cause, among other things, (1) the aggregate amount of the LOC Obligations to exceed the sublimit maximum of Sixteen Million Five Hundred Thousand and 00/100 Dollars ($16,500,000.00) for letters of credit issued under the Loan Agreement, and (2) the maximum outstanding aggregate principal amount of the Advances to exceed the Maximum Revolving Commitment Amount, less the amount of LOC Obligations, and (3) the principal amount outstanding under the Revolving Note to exceed the Allowed Amount of Advances; therefore, Borrowers have also requested that the Loan Agreement be modified to allow for the amendment to and increase in the Korean Navy LOC requested by Borrowers. E. Lender has agreed to modify the Korean Navy LOC to increase the maximum amount of the Korean Navy LOC to Fifteen Million Eight Hundred Fourteen Thousand Two Hundred Thirty Eight and 00/100 Dollars ($15,814,238.00), subject to the terms and provisions of the Amendment Dated 26DEC00 to Irrevocable Standby Letter of Credit, a copy of which is attached hereto (the "LOC Amendment"), and to modify the Loan Agreement to accommodate the increase in the Korean Navy LOC, subject to the provisions and agreements hereinafter set forth, including without limitation, the Borrowers' deposit of cash (U.S. Dollars) as and when paid by the Beneficiary under the Korean Navy LOC, into an account established by Borrowers with Lender, to secure the amount of the increase in the Korean Navy LOC. F. Contemporaneously herewith, the Note is being modified pursuant to that certain Third Amendment to Revolving Note of even date herewith (the "Note Modification") to reflect a one-time increase in the maximum principal amount of the Revolving Loan from Seventeen Million Five Hundred Thousand and 00/100 Dollars ($17,500,000.00) to Twenty Five Million Three Hundred Forty Two Thousand and 00/100 Dollars ($25,342,000.00) , payable by Borrowers to Lender, and to accommodate the increase in the principal amount of the Korean Navy LOC. AGREEMENTS NOW, THEREFORE, in consideration of the premises, the mutual agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrowers and the Lender hereby agree as follows: 1. Recitals. The recitals are incorporated herein by reference. Capitalized terms used but 2 not defined herein shall have the meanings ascribed to them in the Loan Agreement. 2. Modification of Korean Navy LOC. The Korean Navy LOC shall be modified in accordance with the LOC Amendment, such LOC Amendment to remain inoperative and ineffective until the conditions of the LOC Amendment and this Sixth Amendment are fully complied with and performed, including without limitation, the delivery by Borrowers to Lender of the sum of Six Million Six Hundred Thousand and 00/100 Dollars ($6,600,000.00), in cash (the "Cash Deposit"), for deposit into an account established with Lender (the "Account") as security for the Korean Navy LOC. The Cash Deposit and all amounts in the Account shall constitute Collateral as defined under the Loan Agreement, and shall be subject to the security interests, terms and provisions of the Security Agreement. 3. LOC Obligations Under the Loan Agreement. Subject to the terms and provisions of the LOC Amendment and the Loan Agreement as modified hereby, Lender agrees to increase the Korean Navy LOC by the amount of Seven Million Eight Hundred Forty One Thousand Five Hundred Eighty One and 00/100 Dollars ($7,841,581.00)(the "Korean Navy LOC Increase"), the result of which will be that the total amount of the Korean Navy LOC will be Fifteen Million Eight Hundred Fourteen Thousand Two Hundred Thirty Eight and 00/100 Dollars ($15,814,238.00). Lender's consent is a one-time waiver of Borrowers' compliance with the requirements of the Loan Agreement that (a) the amount of the LOC Obligations not at any time exceed Sixteen Million Five Hundred Thousand and 00/100 Dollars ($16,500,000.00) and (b) the maximum outstanding aggregate principal amount of the Advances not at any time exceed the Maximum Revolving Commitment Amount, less the amount of the LOC Obligations. In addition, the one-time waiver of Lender set forth above shall not extend the Ending Date under the Loan Agreement, nor shall such waiver extend Borrowers' obligation to deliver full and timely payment of all amounts owing on the Revolving Loan, and under the Revolving Note, the Loan Agreement as modified by this Sixth Amendment and the other Loan Documents. Clause (i) of Section 2.1, paragraph (d) of the Loan Agreement is hereby modified to provide that the aggregate amount of LOC Obligations, less the Korean Navy LOC Increase, plus the Korean Navy LOC Shortfall (as defined in paragraph 5 of this Sixth Amendment) shall at no time exceed Sixteen Million Five Hundred Thousand and 00/100 Dollars ($16,500,000.00). Any reduction in the amount of the Korean Navy LOC shall be treated as a reduction in that portion of the Korean Navy LOC other than the Korean Navy LOC Increase, until such time as only that portion of the Korean Navy LOC consisting of the Korean Navy LOC Increase remains. 4. Security Agreement and Financing Statements. Contemporaneous with the execution and delivery of this Sixth Amendment, Borrowers shall execute and deliver to Lender a Security Agreement, in form and substance satisfactory to Lender (the "Security Agreement"), thereby, among other things, granting to Lender a perfected security interest in all sums now or hereafter on deposit in the Account or in any other account with or possessed by Lender. In addition, Borrowers shall, upon request of Lender, execute and deliver to Lender, such financing statements, continuation statements and other documents with respect to the amounts on deposit in the Account or in any other account with or possessed by Lender pursuant to the Uniform 3 Commercial Code or otherwise, in form and substance satisfactory to Lender, and Borrowers will pay the costs, taxes, fees and charges incurred as a result of the filing of such financing statements and other documents in all public offices wherever the Lender deems filing to be necessary or desirable. Borrowers grant the Lender the right, at the Lender's option, to file any or all such financing statements, continuation statements and other documents pursuant to the Uniform Commercial Code and otherwise, without Borrowers' signature, and irrevocably appoints the Lender as Borrowers' attorney-in-fact to execute any such statements and documents in Borrowers' name and to perform all other acts which the Lender deems appropriate to perfect and to continue the security interests conferred by the Loan Agreement, as modified by this Sixth Agreement, and/or the Security Agreement. 5. Additional Cash Security. In addition to the Cash Deposit, Borrowers shall deliver to Lender, contemporaneous with the execution of this Sixth Amendment, an additional cash deposit in the sum of Three Hundred Thousand and 00/100 Dollars ($300,000.00), for deposit into the Account, as additional security for the Korean Navy LOC and other obligations of Borrowers under the Loan Agreement as modified by this Sixth Amendment (the "Additional Cash Deposit"). The Additional Cash Deposit shall constitute Collateral as defined under the Loan Agreement, and shall be subject to the security interests, terms and provisions of the Security Agreement. Furthermore, in the event that the amount on deposit in the Account is at any time less than the total amount which may be drawn under or owing in connection with the Korean Navy LOC Increase (as a contingent obligation or otherwise), or which may be owing under the LOC Agreement with respect to the Korean Navy LOC Increase (the "Korean Navy LOC Shortfall"), Borrowers shall immediately deliver to Lender, upon demand of Lender, payment in immediately available funds, in United States dollars, in an amount equal to the Korean Navy LOC Shortfall. 6. Definition of Revolving Note. The definition of Revolving Note under the Loan Agreement shall be modified to mean the Borrowers' promissory note, dated as of July 11, 1997, as amended by a First Amendment to Revolving Note, made as of March 31, 2000, and by a Second Amendment of Revolving Note, made as of November 14, 2000, and as modified by a Third Amendment of Revolving Note of even date herewith, in the amount of Twenty Five Million Three Hundred Forty Two Thousand and 00/100 Dollars ($25,342,000.00), payable to the order of Lender, and evidencing Borrowers' obligation to repay the Revolving Loan. Upon the expiration and termination of the Korean Navy LOC, and there being no amounts owing by Borrowers to Lender in conjunction with the Korean Navy LOC and it no longer being an LOC Obligation, the principal amount of the Revolving Note shall be immediately modified and reduced to Seventeen Million Five Hundred Thousand and 00/100 Dollars ($17,500,000.00), at Borrowers' sole expense. 7. Definition of Maximum Revolving Commitment Amount. The definition of Maximum Revolving Commitment Amount shall be modified to mean Twenty Five Million Three Hundred Forty Two Thousand and 00/100 Dollars ($25,342,000.00), or such lesser amount as Borrowers may request and as may be allowed for advance under the Loan Agreement as modified by this Sixth Amendment; provided, that the Maximum Revolving Commitment Amount shall be 4 reduced by the amount of any portion of the Korean Navy LOC that expires and terminates, and that no longer constitutes an LOC Obligation, effective on the date that such portion of the Korean Navy LOC expires and terminates and no longer constitutes an LOC Obligation, until the Maximum Revolving Commitment Amount shall be reduced to Seventeen Million Five Hundred Thousand and 00/100 Dollars ($17,500,000.00), at which point, Maximum Revolving Commitment Amount shall mean Seventeen Million Five Hundred Thousand and 00/100 Dollars ($17,500,000.00), or such lesser amount as Borrowers may request and as may be allowed for advance under the Loan Agreement as modified by this Sixth Amendment. 8. Definition of Allowed Amount of Advances. The definition of Allowed Amount of Advances is hereby modified to mean that the aggregate principal amount of Advances outstanding under the Revolving Note at any time shall not exceed the lesser of: i. the difference between the Maximum Revolving Commitment Amount (as determined in accordance with paragraph 7 of this Sixth Amendment), and the LOC Obligations; or ii. the amount equal to (i) the Borrowing Base, less (ii) the LOC Obligations, plus (iii) the amount of the Korean Navy LOC Increase, less (iv) the amount of any Korean Navy LOC Shortfall. 9. Mandatory Payment. Should the maximum aggregate principal amount of all Advances under the Revolving Loan at any time exceed the amount of Advances to which Borrowers are entitled under the Loan Agreement as modified by this Sixth Amendment, Borrowers shall immediately deliver to Lender a mandatory principal payment in an amount sufficient to reduce the outstanding principal balance to the amount permitted under the Loan Agreement as modified by this Sixth Amendment. 10. Representations and Warranties. To induce the Lender to enter into this Sixth Amendment, the Borrowers warrant and represent to the Lender that: a. The Borrowers' books and records properly reflect the Borrowers' financial condition, and no material adverse change in the Borrowers' financial condition has occurred since the last date that the Borrowers provided financial reports to the Lender; and b. No litigation is pending or, to the Borrowers' knowledge, threatened against the Borrowers' which could materially adversely affect the Borrowers or which involves a claim against the Borrowers in an amount equal to or greater than Five Hundred Thousand and 00/100 Dollars ($500,000.00) of which the Borrowers have not informed the Lender in writing; and c. The Borrowers are in compliance with all provisions of the Loan Agreement and are in compliance in all material respects with all applicable laws and regulations; 5 and d. Borrowers have the power and authority to enter into this Sixth Amendment, to perform their obligations hereunder, to execute all documents being executed and delivered in connection herewith, and to incur the obligations provided for herein, all of which have been duly authorized and approved in accordance with the Borrowers' organizational documents; and e. This Sixth Amendment, together with all documents executed in connection herewith or pursuant hereto, constitute the valid and legally binding obligations of the Borrowers in accordance with their respective terms; and f. The Borrowers' obligations under the Loan Documents remain valid and enforceable obligations, and the execution and delivery of this Sixth Amendment and the other documents executed in connection herewith shall not be construed as a novation of the Loan Agreement or the other Loan Documents. 11. Lender's Fees and Costs. The Borrowers promise to pay, upon execution of this Sixth Amendment, all costs (including attorneys fees) incurred by the Lender in connection with the preparation of this Sixth Amendment and any other documents related thereto, and a loan fee (in addition to all other fees and costs owing under the Loan Agreement as modified by this Sixth Amendment) in the amount of Ten Thousand and 00/100 Dollars ($10,000.00). The Borrowers authorize the Lender to advance funds to itself or to third parties to pay the fees and costs mentioned in this paragraph, which shall be deemed to be Advances to the Borrowers under the Loan Agreement and which shall be repayable in accordance with the Notes. 12. ARBITRATION. UPON DEMAND OF ANY PARTY HERETO, WHETHER MADE BEFORE OR AFTER INSTITUTION OF ANY JUDICIAL PROCEEDING, ANY CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THE LOAN DOCUMENTS BETWEEN PARTIES HERETO (A "DISPUTE") SHALL BE RESOLVED BY BINDING ARBITRATION CONDUCTED UNDER AND GOVERNED BY THE COMMERCIAL FINANCIAL DISPUTES ARBITRATION RULES (THE "ARBITRATION RULES") OF THE AMERICAN ARBITRATION ASSOCIATION ("AAA") AND THE FEDERAL ARBITRATION ACT. DISPUTES MAY INCLUDE, WITHOUT LIMITATION, TORT CLAIMS, COUNTERCLAIMS, A DISPUTE AS TO WHETHER A MATTER IS SUBJECT TO ARBITRATION, CLAIMS BROUGHT AS CLASS ACTIONS, OR CLAIMS ARISING FROM DOCUMENTS EXECUTED IN THE FUTURE. A JUDGMENT UPON THE AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. NOTWITHSTANDING THE FOREGOING, THIS ARBITRATION PROVISION DOES NOT APPLY TO DISPUTES UNDER OR RELATED TO SWAP AGREEMENTS. ALL ARBITRATION HEARINGS SHALL BE CONDUCTED IN THE CITY OR COUNTY WHERE THE LENDER'S OFFICE, AS FIRST STATED ABOVE, IS LOCATED, OR AT SUCH OTHER PLACE AS THE PARTIES MAY IN WRITING AGREE. A HEARING SHALL BEGIN WITHIN 90 DAYS OF DEMAND FOR ARBITRATION AND ALL 6 HEARINGS SHALL CONCLUDE WITHIN 120 DAYS OF DEMAND FOR ARBITRATION. THESE TIME LIMITS MAY NOT BE EXTENDED UNLESS A PARTY SHOWS CAUSE FOR EXTENSION AND THEN FOR NO MORE THAN A TOTAL OF 60 DAYS. THE EXPEDITED PROCEDURES SET FORTH IN RULE 51, ET SEQ., OF THE ARBITRATION RULES SHALL APPLY TO DISPUTES IN WHICH THE CLAIM IS LESS THAN $1,000,000.00. BE LICENSED ATTORNEYS SELECTED FROM THE COMMERCIAL FINANCIAL DISPUTE ARBITRATION PANEL OF THE AAA. THE PARTIES DO NOT WAIVE APPLICABLE FEDERAL OR STATE SUBSTANTIVE LAW EXCEPT AS PROVIDED HEREIN. NOTWITHSTANDING THE PRECEDING BINDING ARBITRATION PROVISIONS, THE PARTIES AGREE TO PRESERVE WITHOUT DIMINUTION, CERTAIN REMEDIES THAT ANY PARTY MAY EXERCISE BEFORE OR AFTER AN ARBITRATION PROCEEDING IS BROUGHT. THE PARTIES SHALL HAVE THE RIGHT TO PROCEED IN ANY COURT OF PROPER JURISDICTION OR BY SELF HELP TO EXERCISE OR PROSECUTE THE FOLLOWING REMEDIES, AS APPLICABLE: (1) ALL RIGHTS TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY OR OTHER SECURITY BY EXERCISING A POWER OF SALE OR UNDER APPLICABLE LAW BY JUDICIAL FORECLOSURE INCLUDING A PROCEEDING TO CONFIRM THE SALE; (2) ALL RIGHTS OF SELF HELP, INCLUDING WITHOUT LIMITATION, PEACEFUL OCCUPATION OF REAL PROPERTY AND COLLECTION OF RENTS, SETOFF, AND PEACEFUL POSSESSION OF PERSONAL PROPERTY; (3) OBTAINING PROVISIONAL OR ANCILLARY REMEDIES INCLUDING INJUNCTIVE RELIEF, SEQUESTRATION, GARNISHMENT, ATTACHMENT, APPOINTMENT OF RECEIVER AND FILING AN INVOLUNTARY BANKRUPTCY PROCEEDING; AND (4) WHEN APPLICABLE, A JUDGMENT BY CONFESSION OF JUDGMENT. ANY CLAIM OR CONTROVERSY WITH REGARD TO ANY PARTY'S ENTITLEMENT TO SUCH REMEDIES IS A DISPUTE. THE PARTIES AGREE THAT THEY SHALL NOT HAVE A REMEDY OF PUNITIVE OR EXEMPLARY DAMAGES AGAINST OTHER PARTIES IN ANY DISPUTE, AND THEY HEREBY WAIVE ANY RIGHT OR CLAIM TO PUNITIVE OR EXEMPLARY DAMAGES THEY MAY NOW HAVE OR WHICH MAY ARISE IN THE FUTURE IN CONNECTION WITH ANY DISPUTE WHETHER THE DISPUTE IS RESOLVED BY ARBITRATION OR JUDICIALLY. 13. No Offsets or Defenses; Release of Claims. Except as modified by this Sixth Amendment, the Loan Agreement remains in full force and effect and unmodified. Borrowers warrant and represent that they have no offsets or defenses to their obligations under the Loan Documents, as so modified. The Borrowers hereby release and waive any and all claims of any kind that they may have against the Lender as of the date of this Sixth Amendment arising out of or relating to the Note, as modified by the Note Modification, or the Loan Agreement, as amended by this Sixth Amendment. 14. Execution in Counterparts. This Sixth Amendment may be signed in several counterparts which, when executed, shall constitute a single agreement. A counterpart containing a facsimile signature shall be effective to the same extent as if it were a counterpart containing an original signature, but shall be confirmed promptly with a counterpart containing an original signature. 7 IN WITNESS WHEREOF, the undersigned have duly executed this Sixth Amendment, or have caused this Sixth Amendment to be duly executed on their behalf, as of the day and year first hereinabove written. UNITED INDUSTRIAL CORPORATION By /s/ James Perry -------------------------------- James Perry, Vice President AAI CORPORATION By: /s/ James Perry -------------------------------- James Perry, Vice President AAI ENGINEERING SUPPORT, INC. By: /s/ Richard Erkeneff -------------------------------- Richard Erkeneff, President AAI/ACL TECHNOLOGIES, INC. By: /s/ Thomas E. Wurzel -------------------------------- Thomas E. Wurzel, President AAI/ACL TECHNOLOGIES EUROPE LIMITED By: /s/ Thomas E. Wurzel -------------------------------- Thomas E. Wurzel, President 8 DETROIT STOKER COMPANY By: /s/ James Perry -------------------------------- James Perry, Vice President MIDWEST METALLURGICAL LABORATORY, INC. By: /s/ James Perry -------------------------------- James Perry, Vice President AAI MICROFLITE Simulation International Corporation By: /s/ Stanley J. Mecinski, Jr. -------------------------------- Stanley J. Mecinski, Jr. Assistant Secretary and Assistant Treasurer FIRST UNION COMMERCIAL CORPORATION By: /s/ Barbara Van Meerten -------------------------------- Barbara Van Meerten, Vice President STATE OF MARYLAND ) COUNTY/CITY OF HARTFORD )To Wit: I Diane Richardson, a Notary Public in and for the jurisdiction aforesaid, do certify that James Perry, whose name is signed to the writing above, bearing date as of January 26, 2001, as Vice President of United Industrial Corporation, Vice President of AAI Corporation, Vice President of Detroit Stoker Company, and Vice President of Midwest Metallurgical Laboratory, Inc., has acknowledged the same before me in my jurisdiction aforesaid. Given under my hand and seal this 26th day of January, 2001. /s/ Diane Richardson -------------------- Notary Public My Commission Expires: September 28, 2004 9 STATE OF MARYLAND ) COUNTY/CITY OF HARTFORD )To Wit: I Diane Richardson, a Notary Public in and for the jurisdiction aforesaid, do certify that Richard Erkeneff, whose name is signed to the writing above, bearing date as of January 26, 2001, as President of AAI Engineering Support, Inc., has acknowledged the same before me in my jurisdiction aforesaid. Given under my hand and seal this 26th day of January, 2001. /s/ Diane Richardson -------------------- Notary Public My Commission Expires: September 28, 2004 STATE OF MARYLAND ) COUNTY/CITY OF HARTFORD )To Wit. I Diane Richardson, a Notary Public in and for the jurisdiction aforesaid, do certify that Thomas E. Wurzel, whose name is signed to the writing above, bearing date as of January 26, 2001, as President of AAI/ACL Technologies, Inc., and President of AAI/ACL Technologies Europe Limited has acknowledged the same before me in my jurisdiction aforesaid. Given under my hand and seal this 26th day of January, 2001. /s/ Diane Richardson -------------------- Notary Public My Commission Expires: September 28, 2004 STATE OF MARYLAND ) COUNTY/CITY OF HARTFORD )To Wit I Diane Richardson, a Notary Public in and for the jurisdiction aforesaid, do certify that Stanley J. Mecinski, Jr., whose name is signed to the writing above, bearing date as of January 26, 2001, as Assistant Secretary and Assistant Treasurer of AAI MICROFLITE Simulation International Corporation has acknowledged the same before me in my jurisdiction aforesaid. Given under my hand and seal this 26th day of January, 2001. /s/ Diane Richardson -------------------- Notary Public My Commission Expires: September 28, 2004 10 EX-10.D 6 0006.txt REVOLVING NOTE REVOLVING NOTE $17,500,000.00 McLean, Virginia June 11, 1997 FOR VALUE RECEIVED, United Industrial Corporation, 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., AAI MICROFLITE Simulation International Corporation and UIC- Del. Corporation (collectively, the "Borrower"), having an address at c/o United Industrial Corporation, 18 E. 48th Street, New York, N.Y. 10017, promises to pay to the order of First Union Commercial Corporation, a North Carolina corporation (the "Lender"), the principal sum of Seventeen Million, Five Hundred Thousand Dollars ($17,500,000.00) (the "Principal Sum"), or so much thereof as has been or may be advanced or readvanced to or for the account of the Borrower pursuant to the terms and conditions of the Credit Agreement (as hereinafter defined), together with interest thereon at the rate or rates hereinafter provided, in accordance with the following terms: 1. Interest. Commencing as of the date hereof and continuing until repayment in full of all sums due hereunder, the unpaid Principal Sum shall bear interest at a fluctuating rate, determined as follows: (a) Prime Rate Option. The initial interest rate hereunder shall be the Lender's "Prime Rate", being that rate announced by the Lender from time to time as being its Prime Rate, in its sole discretion. Changes in the Prime Rate will be effective, without prior notice, as of the date any change is announced. The Prime Rate is a reference rate only; it is not necessarily the most favorable rate of interest that the Lender charges to any borrower or class of borrowers. However, if the ratio of the Borrower's Senior Debt (hereinafter defined) to EBITDA (hereinafter defined) equals or exceeds 1.25 to 1.00 as of any "Determination Date" (hereafter defined), the interest rate under the Prime Rate Option shall, from the day after that Determination Date through the next Determination Date, be equal to the sum of (i) the Prime Rate in effect from time to time; plus (ii) one quarter of one percent (0.25%). (b) LIBOR Rate Option. The Borrower may elect to have interest accrue at the LIBOR-Based Rate (hereinafter defined). The LIBOR-Based Rate shall be the sum of: (i) the "LIBOR Rate" (hereinafter defined), plus (ii) the applicable LIBOR Margin (hereinafter defined). The LIBOR Rate is the annual percentage rate of interest equal to the London Interbank Offered Rate for corresponding deposits of United States dollars for "Interest Periods" of one (1), two (2), three (3) or six (6) months. Absent manifest error, the Lender's certificate to the Borrower stating the LIBOR Rate for each Interest Period shall be conclusive. The LIBOR Margin shall be: (a) 1.50%, if the ratio of the Borrower's Senior Debt to EBITDA does not exceed 0.75 to 1.00 as of most recent Determination Date (hereinafter defined); (b) 1.65%, if the ratio of the Borrower's Senior Debt to EBITDA equals or exceeds 0.75 to 1.00 but is less than or equal to 1.25 to 1.00 as of the most recent Determination Date; and (c) 2.00%, if the ratio of the Borrower's Senior Debt to EBITDA exceeds 1.25 to 1.00 as of the most recent Determination Date. The LIBOR Margin will adjust on the first day after each Determination Date. The Borrower shall have the right to select the LIBOR Rate Option and the Interest Period by written notice to the Lender three days prior to the commencement of the proposed Interest Period; in the absence of an election by the Borrower of the LIBOR Rate Option, the Prime Rate Option shall apply. The LIBOR-Based Rate may be elected only for increments of principal in integral multiples of $100,000.00. Subject to the conditions and terms set forth herein, Borrower may elect to have the LIBOR-Based Rate apply to a portion of the outstanding principal balance and the Prime Rate apply to the remaining unpaid principal balance. The LIBOR-Based Rate election need not be made on a Determination Date. The Borrower may have no more than three LIBOR-Based Rate elections in effect at any time. For purposes of determining any adjustment in the interest rate, the "Determination Date" is the last day of each calendar quarter. Senior Debt and EBITDA shall have the meanings ascribed to them in the Credit Agreement (hereinafter defined). All interest payable under the terms of this Note shall be calculated on the basis of a per diem rate, calculated on a 360-day year, applied to the actual number of days elapsed. 2. Payments and Maturity. The unpaid Principal Sum, together with interest thereon at the rate or rates provided above, shall be payable as follows: (a) With respect to interest accruing at the Prime Rate, interest only shall be due and payable quarterly, commencing on the first day of the first calendar quarter after the date of this Note, and on the first day of each succeeding calendar quarter. (b) With respect to interest accruing at the LIBOR Rate, interest only shall be due and payable on the earlier of (i) the first day following the end of each Interest Period, or (ii) the first day following the end of each calendar quarter. (c) Unless sooner paid, the unpaid Principal Sum, together with all interest accrued and unpaid thereon, and all other amounts owing under this Note shall be due and payable in full on June 11, 2000 (the "Maturity Date"). If the Credit Agreement provides for the Borrower to make additional payments on account of the Principal Sum 2 from time to time, Borrower promises to make those payments at the time and in the manner specified in the Credit Agreement. This Note secures advances and readvances under the Credit Agreement. This Note will continue in full force and effect and will evidence Borrower's obligation to repay such advances and readvances notwithstanding that the principal amount outstanding under the Credit Agreement and evidenced by this Note may be reduced to zero from time to time. 3. Default Interest. Upon the occurrence of an Event of Default (as hereinafter defined), the unpaid Principal Sum shall bear interest thereafter, until the Event of Default is cured, at a rate of two percent (2.0%) per annum in excess of the rate or rates of interest that would otherwise be in effect under this Note. 4. Late Charges. If the Borrower fails to make any payment under the terms of this Note within ten (10) days after the date such payment is due, the Borrower shall pay to the Lender on demand a late charge equal to five percent (5.0%) of such payment. 5. Application and Place of Payments. All payments, made on account of this Note shall be applied first to the payment of accrued and unpaid interest then due hereunder, second to the unpaid principal sum and the remainder, if any, shall be applied to any other amounts which may remain owing hereunder. All payments on account of this Note shall be paid in lawful money of the United States of America in immediately available funds during regular business hours of the Lender at its office at 1970 Chain Bridge Road, McLean, Virginia 22102, or at such other times and places as the Lender may at any time and from time to time designate in writing to the Borrower. 6. Credit Agreement. This Note is the "Revolving Note" described in a Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement of even date herewith by and between the Borrower and the Lender (the "Credit Agreement"). The indebtedness evidenced by this Note is included within the meaning of the term "Debt" as defined in the Credit Agreement. The term "Loan Documents" as used in this Note shall have the meaning ascribed to that term in the Credit Agreement. Capitalized terms used in this Note but not defined herein have the meanings ascribed to them in the Credit Agreement. 7. Security. This Note is secured by the Collateral, the Real Estate Collateral and certain other collateral described in the Credit Agreement. 8. Events of Default. The occurrence of any one or more of the following events shall constitute an event of default (individually, an "Event of Default" and collectively, the "Events of Default") under this Note: (a) The failure of the Borrower to pay to the Lender when due any 3 amount payable by the Borrower to the Lender under the terms of this Note; or (b) The occurrence of an event of default under any of the other Loan Documents. 9. Remedies. Upon the occurrence of an Event of Default, at the option of the Lender, all principal, accrued interest and other sums payable by the Borrower to the Lender under the terms of this Note shall become immediately due and payable, and the Lender shall have all of the rights, powers, and remedies available under the terms of this Note, any of the other Loan Documents and all applicable laws. The Borrower and all endorsers hereby jointly and severally waive presentment, protest and demand, notice of protest, notice of demand and of dishonor and non-payment of this Note and expressly agree that this Note or any payment hereunder may be extended from time to time without in any way affecting the liability of the Borrower or any endorsers. 10. Expenses. The Borrower promises to pay to the Lender on demand by the Lender all costs and expenses incurred by the Lender in connection with the collection and enforcement of this Note, including, without limitation, all attorneys' fees and expenses and all court costs. 11. Notices. Any notice, request, or demand to or upon the Borrower or the Lender shall be deemed to have been properly given or made when delivered in accordance with the Credit Agreement. 12. Miscellaneous. Each right, power, and remedy of the Lender as provided for in this Note or any of the other Loan Documents, or now or hereafter existing under any applicable law or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power, or remedy provided for in this Note or any of the other Loan Documents or now or hereafter existing under any applicable law, and the exercise or beginning of the exercise by the Lender of any one or more of such rights, powers, or remedies shall not preclude the simultaneous or later exercise by the Lender of any or all such other rights, powers, or remedies. No failure or delay by the Lender to insist upon the strict performance of any term, condition, covenant, or agreement of this Note or any of the other Loan Documents, or to exercise any right, power, or remedy consequent upon a breach thereof, shall constitute a waiver of any such term, condition, covenant, or agreement or of any such breach, or preclude the Lender from exercising any such right, power, or remedy at a later time or times. By accepting payment after the due date of any amount payable under the terms of this Note, the Lender shall not be deemed to waive the right either to require prompt payment when due of all other amounts payable under the terms of this Note or to declare an Event of Default for the failure to effect such prompt payment of any such other amount. No course of dealing or conduct shall be effective to amend, modify, waive, release, or change any provisions of this Note. 4 13. Partial Invalidity. If any term or provision of this Note or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Note and the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Note shall be valid and be enforceable to the fullest extent permitted by law. 14. Captions. The captions herein set forth are for convenience only and shall not be deemed to define, limit, or describe the scope or intent of this Note. 15. Governing Law. The provisions of this Note shall be construed, interpreted and enforced in accordance with the laws of the Commonwealth of Virginia (excluding Virginia's choice of law rules). 16. Consent to Jurisdiction. Provisions of the Credit Agreement concerning the Borrower's consent to the jurisdiction of state and federal courts sitting in the Commonwealth of Virginia are incorporated into this Note by reference and shall have the same force and effect as if fully set forth in this Note. 17. Waiver of Trial by Jury. Provisions of the Credit Agreement concerning the Borrower's and Lender's mutual waiver of trial by jury in disputes between the Borrower and the Lender are incorporated into this Note by reference and shall have the same force and effect as if fully set forth in this Note. 18. Arbitration. Provisions of the Credit Agreement specifying that certain disputes between the Borrower and the Lender shall be resolved by binding arbitration are incorporated into this Note by reference and shall have the same force and effect as if fully set forth in this Note. 19. Joint and Several Liability; Notices to Borrower. The liability under this Note of the persons comprised by the term Borrower shall be joint and several. References in this Note to the Borrower shall refer to each such person or to all of them as the context may require. Any notice that the Lender provides to United Industrial Corporation in accordance with the Credit Agreement shall be deemed to have been given to all of the persons comprised by the term Borrower. 5 IN WITNESS WHEREOF, the Borrower has caused this instrument to be executed by duly authorized officer or officers as of the date first written above. UNITED INDUSTRIAL CORPORATION By: /s/ James H. Perry --------------------------------- James H. Perry Treasurer and Chief Financial Officer AAI CORPORATION By: /s/ Paul J. Michaud --------------------------------- Paul J. Michaud Vice President, Chief Financial Officer and Treasurer AAI ENGINEERING SUPPORT, INC. By: /s/ Paul J. Michaud --------------------------------- Paul J. Michaud Vice President, Chief Financial Officer and Treasurer 6 AAI SYSTEMS MANAGEMENT, INC. By: /s/ Paul J. Michaud --------------------------------- Paul J. Michaud Vice President, Chief Financial Officer and Treasurer AAI/ACL TECHNOLOGIES, INC. By: /s/ Paul J. Michaud --------------------------------- Paul J. Michaud Vice President, Chief Financial Officer DETROIT STOKER COMPANY By: /s/ James H. Perry --------------------------------- James H. Perry Vice President MIDWEST METALLURGICAL LABORATORY, INC. By: /s/ James H. Perry --------------------------------- James H. Perry Vice President NEO PRODUCTS CO. By: /s/ James H. Perry --------------------------------- James H. Perry Vice President 7 SYMTRON SYSTEMS, INC. By: /s/ James Perry --------------------------------- James Perry Chief Financial Officer UIC-Del. CORPORATION By: /s/ Paul J. Michaud --------------------------------- Paul J. Michaud President AAI MICROFLITE SIMULATION INTERNATIONAL CORPORATION By: /s/ Paul J. Michaud --------------------------- Paul J. Michaud President 8 EX-10.D.2 7 0007.txt SECOND AMENDMENT TO REVOLVING NOTE SECOND AMENDMENT TO REVOLVING NOTE THIS SECOND AMENDMENT TO REVOLVING NOTE ("Second Amendment"), made as of November 14, 2000, by and among United Industrial Corporation, a Delaware corporation, having an address of 570 Lexington Avenue, New York, New York 10022, and AAI Corporation, AAI Engineering Support, Inc., AAI/ACL Technologies, Inc., AAI/ACL Technologies Europe Limited, Detroit Stoker Company, Midwest Metallurgical Laboratory, Inc., UIC Products Co., and AAI MICROFLITE Simulation International Corporation (collectively, the "Borrower"), and First Union Commercial Corporation, a North Carolina Corporation (the "Lender"). RECITALS A. United Industrial Corporation and certain of its subsidiaries entered into a Revolving Note, dated as of June 11, 1997, in the maximum principal amount of Seventeen Million, Five Hundred Thousand Dollars ($17,500,000.00) made payable to the order of First Union Commercial Corporation, as amended by First Amendment to Revolving Note, dated March 31, 2000 (the "Revolving Note"). B. The Revolving Note evidences Borrower's obligations to repay advances of principal made by the Lender under a Revolving Line of Credit Loan Agreement And Security Agreement, dated June 11, 1997, as amended by First Amendment to Revolving Line of Credit Loan Agreement and Security Agreement dated as of October 1, 1998, by Second Amendment to Revolving Line of Credit Loan Agreement and Security Agreement dated as of December 31, 1998, by Third Amendment to Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement, made as of March 31, 2000, by Fourth Amendment to Revolving Line of Credit Loan Agreement and Security Agreement, dated as of September 21, 2000, and by Fifth Amendment to Revolving Line of Credit Loan Agreement and Security Agreement, of even date herewith (the "Loan Agreement"). The Revolving Note is governed, in part, by certain provisions of the Loan Agreement. C. The Borrower and the Lender desire to amend the Revolving Note for the purpose of extending the Maturity Date (as defined in the Revolving Note) to June 30, 2001, for the purpose of changing the definition of "Borrower" to the definition set forth above and for certain other purposes hereinafter set forth. AGREEMENTS NOW, THEREFORE, in consideration of the premises, the mutual agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower and the Lender hereby agree as follows: 1. Capitalized terms used in this First Amendment but not defined herein have the meanings ascribed to them in the Revolving Note. The term "Borrower" shall henceforth refer to the Persons encompassed by the term "Borrower" as defined above. 2. The Maturity Date is extended to and including June 30, 2001. 3. Except as modified by this Second Amendment, the Revolving Note remains in full force and effect and unmodified. Borrower warrants and represents that it has no offsets or defenses to its obligations under the Revolving Note, as modified by this Second Amendment. 4. In consideration of Lender's agreement to this Second Amendment, the Borrower hereby releases and waives any and all claims of any kind that it may have against the Lender as of the date of this First Amendment arising out of or relating to the Loan Agreement or the Revolving Note, as amended by this Second Amendment. 5. ARBITRATION. UPON DEMAND OF ANY PARTY HERETO, WHETHER MADE BEFORE OR AFTER INSTITUTION OF ANY JUDICIAL PROCEEDING, ANY CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THE LOAN DOCUMENTS BETWEEN PARTIES HERETO (A "DISPUTE") SHALL BE RESOLVED BY BINDING ARBITRATION CONDUCTED UNDER AND GOVERNED BY THE COMMERCIAL FINANCIAL DISPUTES ARBITRATION RULES (THE "ARBITRATION RULES") OF THE AMERICAN ARBITRATION ASSOCIATION ("AAA") AND THE FEDERAL ARBITRATION ACT. DISPUTES MAY INCLUDE, WITHOUT LIMITATION, TORT CLAIMS, COUNTERCLAIMS, A DISPUTE AS TO WHETHER A MATTER IS SUBJECT TO ARBITRATION, CLAIMS BROUGHT AS CLASS ACTIONS, OR CLAIMS ARISING FROM DOCUMENTS EXECUTED IN THE FUTURE. A JUDGMENT UPON THE AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. NOTWITHSTANDING THE FOREGOING, THIS ARBITRATION PROVISION DOES NOT APPLY TO DISPUTES UNDER OR RELATED TO SWAP AGREEMENTS. ALL ARBITRATION HEARINGS SHALL BE CONDUCTED IN THE CITY OR COUNTY WHERE THE LENDER'S OFFICE, AS FIRST STATED ABOVE, IS LOCATED, OR AT SUCH OTHER PLACE AS THE PARTIES MAY IN WRITING AGREE. A HEARING SHALL BEGIN WITHIN 90 DAYS OF DEMAND FOR ARBITRATION AND ALL HEARINGS SHALL CONCLUDE WITHIN 120 DAYS OF DEMAND FOR ARBITRATION. THESE TIME LIMITS MAY NOT BE EXTENDED UNLESS A PARTY SHOWS CAUSE FOR EXTENSION AND THEN FOR NO MORE THAN A TOTAL OF 60 DAYS. THE EXPEDITED PROCEDURES SET FORTH IN RULE 51, ET SEQ., OF THE ARBITRATION RULES SHALL APPLY TO DISPUTES ------- IN WHICH THE CLAIM IS LESS THAN $1,000,000.00. ARBITRATORS SHALL BE LICENSED ATTORNEYS SELECTED FROM THE COMMERCIAL FINANCIAL DISPUTE ARBITRATION PANEL OF THE AAA. THE PARTIES DO NOT WAIVE 2 APPLICABLE FEDERAL OR STATE SUBSTANTIVE LAW EXCEPT AS PROVIDED HEREIN. NOTWITHSTANDING THE PRECEDING BINDING ARBITRATION PROVISIONS, THE PARTIES AGREE TO PRESERVE WITHOUT DIMINUTION, CERTAIN REMEDIES THAT ANY PARTY MAY EXERCISE BEFORE OR AFTER AN ARBITRATION PROCEEDING IS BROUGHT. THE PARTIES SHALL HAVE THE RIGHT TO PROCEED IN ANY COURT OF PROPER JURISDICTION OR BY SELF HELP TO EXERCISE OR PROSECUTE THE FOLLOWING REMEDIES, AS APPLICABLE: (1) ALL RIGHTS TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY OR OTHER SECURITY BY EXERCISING A POWER OF SALE OR UNDER APPLICABLE LAW BY JUDICIAL FORECLOSURE INCLUDING A PROCEEDING TO CONFIRM THE SALE; (2) ALL RIGHTS OF SELF HELP, INCLUDING WITHOUT LIMITATION, PEACEFUL OCCUPATION OF REAL PROPERTY AND COLLECTION OF RENTS, SETOFF, AND PEACEFUL POSSESSION OF PERSONAL PROPERTY; (3) OBTAINING PROVISIONAL OR ANCILLARY REMEDIES INCLUDING INJUNCTIVE RELIEF, SEQUESTRATION, GARNISHMENT, ATTACHMENT, APPOINTMENT OF RECEIVER AND FILING AN INVOLUNTARY BANKRUPTCY PROCEEDING; AND (4) WHEN APPLICABLE, A JUDGMENT BY CONFESSION OF JUDGMENT. ANY CLAIM OR CONTROVERSY WITH REGARD TO ANY PARTY'S ENTITLEMENT TO SUCH REMEDIES IS A DISPUTE. THE PARTIES AGREE THAT THEY SHALL NOT HAVE A REMEDY OF PUNITIVE OR EXEMPLARY DAMAGES AGAINST OTHER PARTIES IN ANY DISPUTE, AND THEY HEREBY WAIVE ANY RIGHT OR CLAIM TO PUNITIVE OR EXEMPLARY DAMAGES THEY MAY NOW HAVE OR WHICH MAY ARISE IN THE FUTURE IN CONNECTION WITH ANY DISPUTE WHETHER THE DISPUTE IS RESOLVED BY ARBITRATION OR JUDICIALLY. 6. Lender has executed this Second Amendment for the sole purpose of evidencing its consent hereto, and not for the purpose of becoming liable on the Revolving Note as a co- maker, endorser or guarantor. 7. This Second Amendment may be signed in several counterparts which, when executed, shall constitute a single agreement. A counterpart containing a facsimile signature shall be effective to the same extent as if it were a counterpart containing an original signature, but shall be confirmed promptly with a counterpart containing an original signature. BORROWER: UNITED INDUSTRIAL CORPORATION By /s/ James Perry -------------------------------- James Perry, Vice President 3 AAI CORPORATION By: /s/ James Perry -------------------------------- James Perry, Vice President AAI ENGINEERING SUPPORT, INC. By: /s/ Richard Erkeneff -------------------------------- Richard Erkeneff, President AAI/ACL TECHNOLOGIES, INC. By: /s/ Thomas E. Wurzel -------------------------------- Thomas E. Wurzel, President AAI/ACL TECHNOLOGIES EUROPE LIMITED By: /s/ Thomas E. Wurzel -------------------------------- Thomas E. Wurzel, President DETROIT STOKER COMPANY By: /s/ James Perry -------------------------------- James Perry, Vice President MIDWEST METALLURGICAL LABORATORY, INC. By: /s/ James Perry -------------------------------- James Perry, Vice President 4 UIC PRODUCTS CO. By: /s/ James Perry -------------------------------- James Perry, Vice President AAI MICROFLITE Simulation International Corporation By: Stanley J. Mecinski, Jr. -------------------------------- Stanley J. Mecinski, Jr. Assistant Secretary and Assistant Treasurer CONSENTED TO: FIRST UNION COMMERCIAL CORPORATION By: /s/ Scott Santa Cruz -------------------------------- Scott Santa Cruz, Vice President STATE OF MARYLAND ) COUNTY/CITY OF BALTIMORE ) To Wit: I Nancy K. Yates-Miller, a Notary Public in and for the jurisdiction aforesaid, do certify that James Perry, whose name is signed to the writing above, bearing date as of November 13, 2000, has acknowledged the same before me in my jurisdiction aforesaid. Given under my hand and seal this 13th day of November, 2000. /s/ Nancy K. Yates-Miller ------------------------- Notary Public My Commission Expires: October 31, 2001 5 STATE OF MARYLAND ) COUNTY/CITY OF BALTIMORE ) To Wit: I Nancy K. Yates-Miller, a Notary Public in and for the jurisdiction aforesaid, do certify that Richard Erkeneff, whose name is signed to the writing above, bearing date as of November 13, 2000 has acknowledged the same before me in my jurisdiction aforesaid. Given under my hand and seal this 13th day of November, 2000. /s/ Nancy K. Yates-Miller ------------------------- Notary Public My Commission Expires: October 31, 2001 STATE OF MARYLAND ) COUNTY/CITY OF BALTIMORE ) To Wit. I Nancy K. Yates-Miller, a Notary Public in and for the jurisdiction aforesaid, do certify that Thomas E. Wurzel, President, whose name is signed to the writing above, bearing date as of November 13, 2000, has acknowledged the same before me in my jurisdiction aforesaid. Given under my hand and seal this 13th day of November, 2000. /s/ Nancy K. Yates-Miller ------------------------- Notary Public My Commission Expires: October 31, 2001 STATE OF MARYLAND ) COUNTY/CITY OF BALTIMORE ) To Wit I Nancy K. Yates-Miller, a Notary Public in and for the jurisdiction aforesaid, do certify that Stanley J. Mecinski, Jr., whose name is signed to the writing above, bearing date as of November 13, 2000 has acknowledged the same before me in my jurisdiction aforesaid. Given under my hand and seal this 13th day of November, 2000. /s/ Nancy K. Yates-Miller ------------------------- Notary Public My Commission Expires: October 31, 2001 6 EX-10.D.3 8 0008.txt THIRD AMENDMENT TO REVOLVING NOTE THIRD AMENDMENT TO REVOLVING NOTE THIS THIRD AMENDMENT TO REVOLVING NOTE ("Third Amendment"), made as of January 24, 2001, by and among United Industrial Corporation, a Delaware corporation, having an address of 570 Lexington Avenue, New York, New York 10022, and AAI Corporation, AAI Engineering Support, Inc., AAI/ACL Technologies, Inc., AAI/ACL Technologies Europe Limited, Detroit Stoker Company, Midwest Metallurgical Laboratory, Inc., and AAI MICROFLITE Simulation International Corporation (collectively, the "Borrower"), and First Union Commercial Corporation, a North Carolina Corporation (the "Lender"). RECITALS A. United Industrial Corporation and certain of its subsidiaries entered into a Revolving Note, dated as of June 11, 1997, in the maximum principal amount of Seventeen Million, Five Hundred Thousand Dollars ($17,500,000.00) made payable to the order of First Union Commercial Corporation, as amended by First Amendment to Revolving Note, dated as of March 31, 2000 and as further amended by a Second Amendment to Revolving Note, dated as of November 14, 2000 (the "Revolving Note"). B. The Revolving Note evidences Borrower's obligations to repay advances of principal made by the Lender under a Revolving Line of Credit Loan Agreement Term Loan Agreement and Security Agreement, dated June 11, 1997, as amended by that certain First Amendment to Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement dated as of October 1, 1998, and by that certain Second Amendment to Revolving Line of Credit Loan Agreement Term Loan Agreement and Security Agreement dated as of December 31, 1998, and by that certain Third Amendment to Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement, made as of March 31, 2000, and by that certain Fourth Amendment to Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement, dated as of September 21, 2000, and by that certain Fifth Amendment to Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement, dated as of November 14, 2000, and by that certain Sixth Amendment to Revolving Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement, of even date herewith (the "Loan Agreement"). The Revolving Note is governed, in part, by certain provisions of the Loan Agreement. C. The Borrower and the Lender desire to amend the Revolving Note for the purpose of increasing the principal amount of the Revolving Note and for certain other purposes hereinafter set forth. AGREEMENTS NOW, THEREFORE, in consideration of the premises, the mutual agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower and the Lender hereby agree as follows: 1. Capitalized terms used in this Third Amendment but not defined herein have the meanings ascribed to them in the Revolving Note. 2. The maximum principal sum owing under the Revolving Note is hereby modified and increased from Seventeen Million, Five Hundred Thousand Dollars ($17,500,000.00) to Twenty Five Million Three Hundred Forty Two Thousand and 00/100 Dollars ($25,342,000.00) (the "Principal Sum"), or so much thereof as has been or may be advanced or readvanced to or for the account of the Borrower pursuant to the terms and conditions of the Loan Agreement, together with interest thereon at the rate or rates set forth in the Revolving Note. 3. Except as modified by this Third Amendment, the Revolving Note remains in full force and effect and unmodified. Borrower warrants and represents that it has no offsets or defenses to its obligations under the Revolving Note, as modified by this Third Amendment. 4. In consideration of Lender's agreement to this Third Amendment, the Borrower hereby releases and waives any and all claims of any kind that it may have against the Lender as of the date of this Third Amendment arising out of or relating to the Loan Agreement or the Revolving Note, as amended by this Third Amendment. 5. ARBITRATION. UPON DEMAND OF ANY PARTY HERETO, WHETHER MADE BEFORE OR AFTER INSTITUTION OF ANY JUDICIAL PROCEEDING, ANY CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THE LOAN DOCUMENTS BETWEEN PARTIES HERETO (A "DISPUTE") SHALL BE RESOLVED BY BINDING ARBITRATION CONDUCTED UNDER AND GOVERNED BY THE COMMERCIAL FINANCIAL DISPUTES ARBITRATION RULES (THE "ARBITRATION RULES") OF THE AMERICAN ARBITRATION ASSOCIATION ("AAA") AND THE FEDERAL ARBITRATION ACT. DISPUTES MAY INCLUDE, WITHOUT LIMITATION, TORT CLAIMS, COUNTERCLAIMS, A DISPUTE AS TO WHETHER A MATTER IS SUBJECT TO ARBITRATION, CLAIMS BROUGHT AS CLASS ACTIONS, OR CLAIMS ARISING FROM DOCUMENTS EXECUTED IN THE FUTURE. A JUDGMENT UPON THE AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. NOTWITHSTANDING THE FOREGOING, THIS ARBITRATION PROVISION DOES NOT APPLY TO DISPUTES UNDER OR RELATED TO SWAP AGREEMENTS. ALL ARBITRATION HEARINGS SHALL BE CONDUCTED IN THE CITY OR COUNTY WHERE THE LENDER'S OFFICE, AS FIRST STATED ABOVE, IS 2 LOCATED, OR AT SUCH OTHER PLACE AS THE PARTIES MAY IN WRITING AGREE. A HEARING SHALL BEGIN WITHIN 90 DAYS OF DEMAND FOR ARBITRATION AND ALL HEARINGS SHALL CONCLUDE WITHIN 120 DAYS OF DEMAND FOR ARBITRATION. THESE TIME LIMITS MAY NOT BE EXTENDED UNLESS A PARTY SHOWS CAUSE FOR EXTENSION AND THEN FOR NO MORE THAN A TOTAL OF 60 DAYS. THE EXPEDITED PROCEDURES SET FORTH IN RULE 51, ET SEQ., OF THE ARBITRATION RULES SHALL APPLY TO DISPUTES IN WHICH THE CLAIM IS LESS THAN $1,000,000.00. ARBITRATORS SHALL BE LICENSED ATTORNEYS SELECTED FROM THE COMMERCIAL FINANCIAL DISPUTE ARBITRATION PANEL OF THE AAA. THE PARTIES DO NOT WAIVE APPLICABLE FEDERAL OR STATE SUBSTANTIVE LAW EXCEPT AS PROVIDED HEREIN. NOTWITHSTANDING THE PRECEDING BINDING ARBITRATION PROVISIONS, THE PARTIES AGREE TO PRESERVE WITHOUT DIMINUTION, CERTAIN REMEDIES THAT ANY PARTY MAY EXERCISE BEFORE OR AFTER AN ARBITRATION PROCEEDING IS BROUGHT. THE PARTIES SHALL HAVE THE RIGHT TO PROCEED IN ANY COURT OF PROPER JURISDICTION OR BY SELF HELP TO EXERCISE OR PROSECUTE THE FOLLOWING REMEDIES, AS APPLICABLE: (1) ALL RIGHTS TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY OR OTHER SECURITY BY EXERCISING A POWER OF SALE OR UNDER APPLICABLE LAW BY JUDICIAL FORECLOSURE INCLUDING A PROCEEDING TO CONFIRM THE SALE; (2) ALL RIGHTS OF SELF HELP, INCLUDING WITHOUT LIMITATION, PEACEFUL OCCUPATION OF REAL PROPERTY AND COLLECTION OF RENTS, SETOFF, AND PEACEFUL POSSESSION OF PERSONAL PROPERTY; (3) OBTAINING PROVISIONAL OR ANCILLARY REMEDIES INCLUDING INJUNCTIVE RELIEF, SEQUESTRATION, GARNISHMENT, ATTACHMENT, APPOINTMENT OF RECEIVER AND FILING AN INVOLUNTARY BANKRUPTCY PROCEEDING; AND (4) WHEN APPLICABLE, A JUDGMENT BY CONFESSION OF JUDGMENT. ANY CLAIM OR CONTROVERSY WITH REGARD TO ANY PARTY'S ENTITLEMENT TO SUCH REMEDIES IS A DISPUTE. THE PARTIES AGREE THAT THEY SHALL NOT HAVE A REMEDY OF PUNITIVE OR EXEMPLARY DAMAGES AGAINST OTHER PARTIES IN ANY DISPUTE, AND THEY HEREBY WAIVE ANY RIGHT OR CLAIM TO PUNITIVE OR EXEMPLARY DAMAGES THEY MAY NOW HAVE OR WHICH MAY ARISE IN THE FUTURE IN CONNECTION WITH ANY DISPUTE WHETHER THE DISPUTE IS RESOLVED BY ARBITRATION OR JUDICIALLY. 6. Lender has executed this Third Amendment for the sole purpose of evidencing its consent hereto, and not for the purpose of becoming liable on the Revolving Note as a co-maker, endorser or guarantor. 7. This Third Amendment may be signed in several counterparts which, when executed, shall constitute a single agreement. A counterpart containing a facsimile signature shall be effective to the same extent as if it were a counterpart containing an original signature, 3 but shall be confirmed promptly with a counterpart containing an original signature. BORROWER: UNITED INDUSTRIAL CORPORATION By /s/ James Perry --------------------------------- James Perry, Vice President AAI CORPORATION By /s/ James Perry --------------------------------- James Perry, Vice President AAI ENGINEERING SUPPORT, INC. By: /s/ Richard Erkeneff --------------------------------- Richard Erkeneff, President AAI/ACL TECHNOLOGIES, INC. By: /s/ Thomas E. Wurzel --------------------------------- Thomas E. Wurzel, President AAI/ACL TECHNOLOGIES EUROPE LIMITED By: /s/ Thomas E. Wurzel --------------------------------- Thomas E. Wurzel, President DETROIT STOKER COMPANY By /s/ James Perry --------------------------------- James Perry, Vice President 4 MIDWEST METALLURGICAL LABORATORY, INC. By: /s/ James Perry --------------------------------- James Perry, Vice President AAI MICROFLITE Simulation International Corporation By: /s/ Stanley J. Mecinski, Jr. --------------------------------- Stanley J. Mecinski, Jr. Assistant Secretary and Assistant Treasurer CONSENTED TO: FIRST UNION COMMERCIAL CORPORATION By: /s/ Barbara Van Meerten ---------------------------------------- Barbara Van Meerten, Vice President STATE OF MARYLAND ) COUNTY/CITY OF HARTFORD )To Wit: I Diane Richardson, a Notary Public in and for the jurisdiction aforesaid, do certify that James Perry, whose name is signed to the writing above, bearing date as of January 26, 2001, as Vice President of United Industrial Corporation, Vice President of AAI Corporation, Vice President of Detroit Stoker Company, and Vice President of Midwest Metallurgical Laboratory, Inc., has acknowledged the same before me in my jurisdiction aforesaid. Given under my hand and seal this 26th day of January, 2001. /s/ Diane Richardson -------------------- Notary Public My Commission Expires: September 28, 2004 5 STATE OF MARYLAND ) COUNTY/CITY OF HARTFORD )To Wit: I Diane Richardson, a Notary Public in and for the jurisdiction aforesaid, do certify that Richard Erkeneff, whose name is signed to the writing above, bearing date as of January 26, 2001, as President of AAI Engineering Support, Inc., has acknowledged the same before me in my jurisdiction aforesaid. Given under my hand and seal this 26th day of January, 2001. /s/ Diane Richardson -------------------- Notary Public My Commission Expires: September 28, 2004 STATE OF MARYLAND ) COUNTY/CITY OF HARTFORD )To Wit: I Diane Richardson, a Notary Public in and for the jurisdiction aforesaid, do certify that Thomas E. Wurzel, whose name is signed to the writing above, bearing date as of January 26, 2001, as President of AAI/ACL Technologies, Inc., and President of AAI/ACL Technologies Europe Limited has acknowledged the same before me in my jurisdiction aforesaid. Given under my hand and seal this 26th day of January, 2001. /s/ Diane Richardson -------------------- Notary Public My Commission Expires: September 28, 2004 STATE OF MARYLAND ) COUNTY/CITY OF HARTFORD )To Wit: I Diane Richardson, a Notary Public in and for the jurisdiction aforesaid, do certify that Stanley J. Mecinski, Jr., whose name is signed to the writing above, bearing date as of January 26, 2001, as Assistant Secretary and Assistant Treasurer of AAI MICROFLITE Simulation International Corporation has acknowledged the same before me in my jurisdiction aforesaid. Given under my hand and seal this 26th day of January, 2001. /s/ Diane Richardson -------------------- Notary Public My Commission Expires: September 28, 2004 6 EX-13 9 0009.txt ANNUAL REPORT UNITED INDUSTRIAL 2000 Annual Report CORPORATION [COVER GRAPHIC] United Industrial Corporation is a 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 ground transportation components. The Company also offers logistical/engineering services for government-owned equipment and manufactures combustion equipment for biomass and refuse fuels. 1 Financial Highlights 2 To Our Shareholders 8 Unmanned Aerial Vehicles 12 Simulation and Test Systems 18 Engineering and Maintenance Services 22 Board of Directors 23 Management's Discussion 29 Consolidated Statements of Operations 30 Consolidated Balance Sheets 32 Consolidated Statements of Cash Flows 33 Notes to Financial Statements 51 Report of Independent Auditors 52 Five-Year Financial Data 53 Corporate Organization 54 Corporate and Shareholder Information Financial Highlights
YEAR ENDED DECEMBER 31 -------------------------------------- (Dollars in thousands, except per share data) 2000 1999 1998 ======================================================================================= Net sales $256,358 $216,979 $204,305 - --------------------------------------------------------------------------------------- Net income 7,779 6,277 13,011 - --------------------------------------------------------------------------------------- Earnings per share basic .63 .51 1.06 diluted .62 .50 1.03 - --------------------------------------------------------------------------------------- Dividends paid per share .40 .40 .40 - --------------------------------------------------------------------------------------- Shareholders' equity 114,893 111,055 109,441 - --------------------------------------------------------------------------------------- Shareholders' equity per share 9.24 9.03 8.93 - --------------------------------------------------------------------------------------- Sales backlog as of year end $414,000 $293,000 $210,000 - --------------------------------------------------------------------------------------- Shares outstanding 12,435,000 12,294,000 12,250,000 =======================================================================================
To Our Shareholders Several years ago we outlined a strategy to leverage and build upon the competitive strengths of our core defense businesses, in order to position United Industrial for long-term growth and create greater value for our shareholders. During 2000, we again made significant strides in implementing this strategy, furthering our transformation from a diversified industrial conglomerate to a more highly focused defense and aerospace company. Our efforts translated into a banner year for our defense-related businesses, with revenues increasing 14%, operating income up 12%, and backlog advancing 24%. We solidified our role as a leader in our core markets, and we seized new opportunities that will allow us to continue this strong performance. These achievements - and the terrific progress we are making in executing our strategy - have made the recent difficulties in our transportation segment that much more disappointing. We experienced higher than anticipated costs in our transportation business this year, costs that were primarily related to design and prototype development work. Now that these costs are behind us, and with production underway, we expect results going forward to be more in line with our expectations. Above all, we are committed to alleviating the negative impact the transportation segment has had on our overall returns, and we continue to take steps to turn this business around. We have restructured this segment's operations, instituted new cost and oversight programs in order to keep a closer eye on expenses, and, in February 2001, recruited an experienced transportation executive to lead this business. We expect these actions to make an impact beginning in the first quarter of 2001. At the same time, we continue to actively evaluate strategic alternatives for our transportation operations, and are hopeful that we will soon reach a resolution that is in the best interests of the Company and its stakeholders, so that we can concentrate our full attention on capitalizing on the potential of our core businesses. For the Company as a whole, net revenues for 2000 reached $256.4 million, an increase of 18.1% from $217.0 million in 1999. Our results include the divestiture of our non-core Symtron Systems firefighter training systems business, which generated a net gain of $3.9 million, or $0.31 per diluted share, a transportation loss of $13.4 million, or $1.07 per diluted share, and an insurance recovery of $2.3 million, or $0.18 per diluted share. [SIDEBAR] Our efforts translated into a banner year for our defense-related businesses, with revenues increasing 14%, operating income up 12%, and backlog advancing 24%. [END SIDEBAR] 02 To Our Shareholders [PHOTO] left Richard R. Erkeneff, President and Chief Executive Officer right Harold S. Gelb, Chairman of the Board Including these items, net income for the year rose 24% to $7.8 million, or $0.62 per diluted share. In 1999, the Company reported net income of $6.3 million, or $0.50 per diluted share, including a transportation loss of $8.2 million, or $0.66 per diluted share. The Company achieved a return to shareholders, including dividends, of 25.44% for the year, outperforming our peers. In comparison, the Russell 2000 Value Index generated a return of 22.83% in 2000. We view return to investors as a key benchmark of our progress, and our team continues to strive to create maximum value for our shareholders through the execution of our long-term strategy. Driving Growth in Our Core Businesses. This strategy has focused on driving growth in our core operations through key initiatives including: o Strengthening and further developing our capabilities in our chosen markets to better differentiate our products and services from our competitors'; o Pursuing opportunities in new, but related, markets where we can apply our technological expertise and technical skills; o Expanding into foreign markets. United Industrial Corporation 03 To Our Shareholders Our team's ability to deliver on these strategic initiatives has been critical to our success. Constant innovation and product development have enabled us to enhance the value we bring to customers and capture exciting new contracts. Our expansion into promising areas such as engineering and logistics support has provided us with new revenue streams within growing sectors, while increased penetration of foreign markets has further accelerated our momentum. Our $63 million program to develop the U.S Army's next generation of Tactical Unmanned Aerial Vehicles (TUAV) is a clear example of our strategy at work. Our participation in this vital program, brought about by our rigorous UAV development program, has further reinforced our leadership role in the UAV industry. It is generating heightened visibility for our capabilities and has led to increased interest from international customers. Based on our continued involvement in the program and strong international prospects, we expect our UAV business to be a major driver of United Industrial's growth going forward. Within simulation and test systems, we have taken advantage of our unparalleled experience to enhance our value to the U.S. Government on some of its most important military programs, including the Joint Service Electronic Combat Systems Tester (JSECST). During 2000, our efforts on this $37.7 million program earned us the Department of Defense Standardization Program Award. With the JSECST entering its production stage in 2001, this program will continue to be a significant contributor to our results. Furthermore, by showcasing our simulation and test capabilities through a state-of-the art, high-profile platform, the JSECST program should serve as a catalyst for further growth. ACL Technologies, our hydraulic, fuel and pneumatic testing business, had a phenomenal year in 2000, driven in part by its highly successful F-16 military depot work and a growing base of military and commercial airline customers. Moreover, ACL's prospects remain excellent. In the international arena, United Industrial continues to make vital inroads in key regions, with the percentage of international defense revenues increasing from 19.5% to 25.5% of our total defense sales in 2000. Among the highlights are our Australian Navy contract, which was expanded to $22 million last year, and $31 million in new international UAV bookings. In addition, we have generated increased sales of our advanced boresighting equipment in Europe, where we are building upon the work we are doing on the Eurofighter. These and other global contracts have expanded our geographic [SIDEBAR] Our $63 million program to develop the U.S. Army's next generation of Tactical Unmanned Aerial Vehicles is a clear example of our strategy at work. [END SIDEBAR] 04 To Our Shareholders [SIDEBAR] The actions we have taken to focus our resources on our core businesses are bearing fruit and offer the promise of continued growth. [END SIDEBAR] reach within our core markets and lay the foundation for continued international growth. Solid Results at Detroit Stoker. The excellent results at our core defense and aerospace businesses were complemented by a solid performance at Detroit Stoker, our energy systems subsidiary. A growing international business, including significant new contracts in Australia, New Zealand, Canada and Spain, as well as steady demand for our products in the U.S., contributed to revenue and earnings gains for the year. With increasing interest in alternative energy sources, spurred by rising fuel prices and the threat of power shortages, the landscape remains favorable for Detroit Stoker's continued success. We have demonstrated our ability to deliver innovative energy solutions, and we believe our flexible approach and superior customer service will continue to distinguish us in the marketplace and provide new opportunities. Strong Outlook. As we look to the future, we are excited about United Industrial's potential, as an increasing force in the defense/aerospace industry and as an investment for our shareholders. The actions we have taken over the past several years to focus our resources on our core businesses are bearing fruit and offer the promise of continued growth in the years to come. At the same time, we recognize there is work still to be done, including resolving the issues in our transportation segment and assuring our progress continues even as the economy slows. To complement our top-line growth initiatives, we have launched a significant cost-cutting program to improve profitability, and we plan to take full advantage of positive trends in military spending and investment. United Industrial's success in 2000 was once again attributable to the hard work and dedication of our 1,700 associates. We thank you for your contributions. We also appreciate the loyal support of our customers. To you, our shareholders, we value your investment in the Company and remain resolute in our objective to maximize your return. We look forward to reporting on our future progress. Sincerely, /s/ Richard R. Erkeneff Richard R. Erkeneff, President and Chief Executive Officer /s/ Harold S. Gelb Harold S. Gelb, Chairman of the Board United Industrial Corporation 05 [PHOTO] [PHOTO] Unmanned Aerial Vehicles Simulation and Test Systems [PHOTO] Engineering and Maintenance Services Unmanned Aerial Vehicles [PHOTO] Joseph G. Thomas Vice President and Deputy General Manager, UAV Systems "From a seasoned team with a proven track record for outstanding performance, to the latest in technologies and quality control, AAI over the past 16 years has built the finest Tactical UAV business in the country, with all of the elements necessary for success, a distinguished record of accomplishments, and enormous potential for further achievement." - -------------------------------------------------------------------------------- 2000 was a spectacular year for our AAI subsidiary's Unmanned Aerial Vehicle (UAV) business. Driven by the ongoing success of a major Tactical UAV program (TUAV) for the U.S. Army and strong prospects in the international market, this business has performed very well, further reinforcing our leadership position in the industry. Moreover, based on continued customer interest in our UAV offerings and increasing recognition of our capabilities in this area, we expect our momentum to continue in 2001. Key Milestones Met on Major TUAV Program. Under the TUAV contract, first awarded to AAI in December 1999, we are fielding a new generation of Shadow Tactical UAV Systems for the U.S. Army. Our system will give Army Brigade Commanders unprecedented capability to conduct reconnaissance missions at long ranges for hours at a time, day or night, without putting a single soldier in harm's way. Moreover, the Army leadership designated the TUAV System as one of eight systems identified as critical to the Army's Transformation Modernization Program. Over the course of the year, we successfully completed a flight demonstration program at the Army's Aberdeen Proving Grounds, Maryland, and delivered our first TUAV [SIDEBAR] We are fielding a new generation of Shadow Tactical UAV Systems for the U.S. Army. [END SIDEBAR] 08 Unmanned Aerial Vehicles [PHOTO] AAI technicians assembling new Shadow 200 Tactical UAVs for the U.S. Army. System to the Electronic Proving Grounds, Arizona, for flight-testing and soldier training on schedule. As a result, the Army intends to accelerate the TUAV Systems production program and has increased our current program value to $63 million. The Army has also announced plans to award a contract for four additional Systems early in 2001, in addition to the full rate production contract award planned for the fall of 2001. The total contract value for production of 44 TUAV Systems, the Army's current inventory objective, is expected to exceed $400 million. Clearly, we are excited about the potential of this major program for AAI. Furthermore, we are gratified by the Army's decision to accelerate the program's timetable, as a tacit recognition of our success in meeting or exceeding the Army's expectations to date. We look forward to our ongoing role as prime contractor on this project, as we continue to put our years of UAV experience to work for the Army. Further Penetration of International Markets. In addition to the solid growth in our domestic UAV business, we achieved strong results in international United Industrial Corporation 09 Unmanned Aerial Vehicles markets in 2000. In fact, we have found our involvement in the TUAV program has helped to underscore our unparalleled capabilities in the production and maintenance of UAVs and fuelled interest from potential overseas customers. Among the key international contracts we won last year were a new $22 million program for a Shadow 400 UAV system and a $7.1 million program for a Shadow 600 system. We intend to continue to build on this momentum to further expand UAV sales to additional markets. Contributing to our success has been our commitment to constantly upgrade and develop the technology and systems behind our UAV offerings. This commitment has already yielded considerable results. For example, the Shadow 400, now among our most advanced UAV systems, is a direct product of our rigorous and ongoing development program for our Shadow family of UAVs. In addition, we have also succeeded in the continued [SIDEBAR] The TUAV program has helped to underscore our unparalleled capabilities in the production and maintenance of UAVs. [END SIDEBAR] [PHOTO] U.S. Army soldiers prepare for a Shadow 200 Tactical UAV training flight at Ft. Huachuca, Arizona. 10 Unmanned Aerial Vehicles [PHOTO] Shadow 200 Tactical UAV in flight over the Farmville, Virginia test flight facility. evolution of our Pioneer product, including our recent introduction of a new "B" model Pioneer, featuring more advanced flight equipment and an improved payload. Building on our Industry Leadership. Our leadership position within the UAV industry has earned the respect and recognition of the aviation industry. We are particularly gratified that, in October 2000, the Pioneer UAV was inducted into the Smithsonian Institute's National Air and Space Museum, in recognition of our aircraft's historic role as the first UAV adopted by the U.S. military for use in both combat and peacekeeping missions sixteen years ago. Going forward, we see our UAV business as a key vehicle for growth and an important component of United Industrial's revenues and earnings. Demand for UAVs continues to increase, and we continue to extend our successful track record as an innovator in this market. With key U.S. military programs underway, such as the TUAV, as well as exciting prospects in international markets, we are well positioned to continue to build our share of the robust and dynamic UAV market. [PHOTO] U.S. Army operators ready a Shadow 200 Tactical UAV for a mission launch. United Industrial Corporation 11 Simulation and Test Systems [PHOTO] Michael F. Browne Director, Test and Electronic Warfare Systems "Constant innovation and a commitment to excellence are the two defining attributes that explain our successful track record in applying high technology solutions to satisfy complex military needs. Our culture of innovation and excellence has spawned an entire new generation of cutting-edge products that both reflects the tremendous value-added that we offer customers and generates vast opportunities in marketplaces throughout the world." - -------------------------------------------------------------------------------- During 2000, our AAI subsidiary again demonstrated its ability to successfully leverage and build upon its outstanding capabilities in the production and support of simulation and test systems. Through a strategy that has focused on reinforcing our leadership in core markets while pursuing new opportunities, particularly in the international arena, our simulation and test operations generated another strong performance with solid increases [SIDEBAR] Our performance and commitment to excellence on the JSECST program earned official recognition from the U.S. Government. [END SIDEBAR] [PHOTO] Our Advanced Boresighting Equipment aligns the Army's AH-64 Apache's mission control weapons systems to exacting standards. 12 Simulation and Test Systems [PHOTO] Members of the 33rd Fighter Wing at Eglin Air Force Base work with AAI to test the JSECST system for the F-15C Air Superiority Aircraft. in sales, profits and new bookings. Among our most significant contracts now underway is the Joint Service Electronic Combat Systems Tester (JSECST). Under this $37.7 million program, we are partnering with the U.S. Navy and the U.S. Air Force on the development of a state-of-the-art test system that verifies the operation of electronic warfare receivers and jammers to assure mission readiness. Following successful operational trials in 2000, we are now entering the production phase of this program. Our performance and commitment to excellence on the JSECST program earned official recognition from the U.S. Government, when the AAI/Government Team received the Department of Defense Standardization Program Award for 2000 for creating a common support equipment solution serving multiple ends. The development of shipboard training systems also continues to be an important business for AAI. This is an area in which we have established a clear market leadership position and which continues to offer considerable growth potential. Domestically, we have achieved great success with our Generic Navy Simulator/Stimulator (GNSS) and Carry-on-Combat Systems Trainer (COCST) programs, both for the U.S. Navy. Under these contracts, valued at United Industrial Corporation 13 Simulation and Test Systems $24 million and $13 million, respectively, we have developed new high-technology systems to train shipboard radar operators by simulating a combat environment. We are also at work on 11 Navigation Stimulators for the Navy's Battle Force Tactical Training program, under a $1 million contract. Our Navigation Stimulators will constitute an integral part of the Navy's program to allow shipboard radar operators to train at sea. With our new equipment, the Battle Force Tactical Training program will be able to support more than 18 different radars, including those used for fire control, search, navigation and traffic control. Our experience in shipboard training systems has provided us with exciting opportunities in overseas markets as well. During 2000, we initiated work on a new contract to assist in developing the United Kingdom's Future Command Team Trainer, a system similar to the U.S. Navy's Battle Force Tactical Trainer. In addition, we have made excellent progress on our $22 million program to provide six On-Board Training Systems and two land-based Software Support Centers for the Royal Australian Navy. Going forward, we expect international sales to represent an increasing component of AAI's business mix. Other major highlights of the year included a new $2 million contract from L-3 Communications Link Simulation and Training for computer control kits and simulated ammunition sets for the Fire Support Combined Arms Tactical Trainer as well as new bookings of $5.8 million for software systems for the O'Hare Airport Transit Control System. In addition, we completed deliveries ahead of schedule of two Surveillance Radar [PHOTO] AAI's new Generic Navy Stimulator/ Simulator provides a realistic combat environment for training at sea. [PHOTO] The U.S.S. Porter, an Aegis guided missile destroyer, features AAI's on-board training products. Maintenance Training Sets (SRTS) in support of the U.S. Air Force's E-3A Airborne Warning and Control Systems (AWACS) aircraft, under a $21 million contract, and delivered our PDCueTM (Projectile Detection and Cuing) system to the U.S. Army Research Laboratory (ARL) in Adelphia, Maryland, under a $2.3 million contract. Awards continued on our AN/USM-499 Automatic Test Equipment Program which supports the U.S. Navy's P-3 Orion aircraft. The system is used in our customer's intermediate and depot maintenance facilities to repair the avionics on the P-3s. New orders totaling $8.4 million were received in 2000 bringing total awards on this long standing program to over $360 million. Our new orders will extend the life of the system through at least 2015. Advanced Boresighting Equipment. We also continue to be very pleased with the reception of our Advanced Boresighting Equipment (ABE), featuring state-of-the-art technology for the precision alignment of parts. During 2000, we made great strides in broadening our business base and increasing our penetration of this marketplace, both domestically and abroad. Significant contracts won in this area last year include a $1 million program to provide ABE harmonization equipment for GKN Westland's production of the Apache helicopter for the British Army Air Corps and a $1.4 million project for a United Kingdom aircraft program. With these contracts, we have expanded beyond our current work on the Eurofighter 2000 Typhoon Aircraft. [SIDEBAR] Our experience in shipboard training systems has provided us with exciting opportunities in overseas markets. [END SIDEBAR] United Industrial Corporation 15 Simulation and Test Systems [PHOTO] Thomas E. Wurzel President, AAI/ACL Technologies "Our record-level orders and earnings, our growing portfolio of customers around the world, and the success that we have achieved on the Egyptian F-16 Depot program, all clearly demonstrate how our consistent commitment to service and product quality continue to propel ACL Technologies to new heights while simultaneously opening new doors of opportunity." - -------------------------------------------------------------------------------- Our ACL Technologies subsidiary achieved a banner year in 2000, posting record results. Specializing in equipment for hydraulic, fuel and pneumatic testing, this business continues to reach new heights, serving a growing portfolio of defense and aerospace industry customers around the globe. At the core of this business is our work as an F-16 Depot Integration and Training Contractor for the U.S. Air Force. We are currently engaged in a major program to develop an F-16 Maintenance Depot in Egypt, under a $30 million contract. ACL is manufacturing and purchasing much of the required test equipment and tooling, and we will be responsible for the full installation and integration of all necessary systems. In addition, under a separate $6.7 million contract, we will provide on-site training. Our expertise with the F-16 was further recognized when we were awarded, in February 2000, a contract from an Asian customer for F-16 Depot Test Equipment, Fixtures and Training. Valued at $6.1 million, this contract leverages our hands-on experience to expand in a key geographic market. Going forward, we willto seek out opportunities to apply our military depot expertise to drive further growth. [SIDEBAR] Our ACL Technologies subsidiary achieved a banner year in 2000. [END SIDEBAR] 16 Simulation and Test Systems [PHOTO] ACL engineers evaluate aircraft components for British Airways' pneumatic test cell center in the United Kingdom. Other key defense-related contracts underway include a $2.6 million program for the U.S. Air Force for the next generation of Intermediate Level Aircraft Electrical Generator Test Stand, called the MC-2000. ACL will install this test stand in many Air Force bases in the continental U.S., Europe and the Pacific Rim. In addition, under a separate $2.7 million contract, we installed the first four in a series of Intermediate Level Electro-Mechanical Stands used to test utility actuators on cargo and transport aircraft and are under contract to fulfill component technical orders for this new test stand. In addition to the military, the commercial airline industry remains an important market for us. We now count among our customers many of the world's largest airlines, including British Airways, American Airlines, United Airlines, Iberia, Lan Chile, Varig and El Al. Orders from these customers, including automated and manual test systems for hydraulics, engine mounted fuel and pneumatic components, represented a growing segment of ACL's business last year. In addition, our expansion into the "space business," initiated last year, is proceeding on plan. Our $1 million contract to provide launch pad support equipment for Lockheed Martin's Atlas V program is underway, and, during 2000, we received additional bookings of $1.2 million on this contract. Our work with Boeing to provide support equipment for its Delta IV EELB program is also progressing, under a $1.2 million contract. Looking ahead, ACL enjoys exceptional prospects for further growth. Our military depot related experience, our expanding presence within the commercial airline industry and emerging opportunities in overseas markets are all expected to contribute to another strong year in 2001. [PHOTO] A technician adjusts a pneumatic actuator on ACL equipment used to test F-16 fuel components. United Industrial Corporation 17 Engineering and Maintenance Services [PHOTO] Maurice P. Ranc Vice President and General Manager, Defense Systems and Engineering and Maintenance Services "Whether we're developing superior maintenance trainers at lower costs, or logistically supporting major base relocations from start to finish, the broad range of specialized engineering and logistics services that we offer has served to generate strong business for us with major customers such as the U.S. Air Force and the British Royal Air Force, and position us for many further opportunities at home and abroad." - -------------------------------------------------------------------------------- Engineering Support Inc. (ESI), our engineering and maintenance services business, has carved out a successful niche providing a range of specialized engineering and logistics support services for our defense and aerospace industry customers. This business turned in a solid performance in 2000, winning significant new contracts, building its base of customers, and establishing itself as a market leader. Our U.S. Air Force contract to upgrade Maintenance Training Systems for the C-17 Aircraft, now valued at $143 million, continues to be an outstanding program for ESI. Since the inception of this contract in 1997, we have consistently demonstrated our value and commitment to this important program. Last year, we again expanded the scope of our work on this project, with a $22 million award, and we believe we are well positioned for further opportunities in 2001. Our work for the U.S. Air Force on this program has also led to opportunities serving other customers with similar needs. For example, during 2000, we commenced a $4 million C-17 aircraft maintenance trainer contract with the United Kingdom Royal Air Force. This program has extended our reach into the European market, and we are hopeful that our international bookings will continue to grow as overseas customers become increasingly aware of the in-depth expertise that ESI can bring to meeting their engineering and maintenance needs. [SIDEBAR] Our U.S. Air Force contract to upgrade Maintenance Trainers for the C-17 Aircraft is now valued at $143 million. [END SIDEBAR] 18 Engineering and Maintenance Services [PHOTO] ESI maintenance trainers for the C-17 aircraft engine, shown here, provide Air Force technicians with realistic, hands-on experience. We have also received initial funding of $14 million to develop, install and support a C-17 Maintenance Training Facility in Jackson, Mississippi to support the acquisition of the C-17 Aircraft by the Mississippi National Guard. This program is expected to grow to $40 million in 2001 with further growth in future years. We also continue to build our partnership serving the U.S. Army's Simulation, Training and Instrumentation Command. Following our execution of a $44 million contract to upgrade Gunnery Maintenance Trainers for this customer, ESI was awarded a new $4.9 million contract to develop additional test kits for use with these trainers. We expect that there will be additional follow-on opportunities in the future. Growing Logistic Support Business. Among the fastest-growing segments of ESI's business has been logistics support. Designed as a complement to our core engineering and maintenance capabilities, this business has generated a strong response from customers seeking to outsource a greater amount of their logistics-related work. We have experienced steady interest in our services United Industrial Corporation 19 Engineering and Maintenance Services [PHOTO] 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. and believe there is great potential for us in this market. Among the key projects we have underway are a $5.4 million contract to maintain the T-25 Simulator for Electronic Combat Training equipment at Randolph Air Force Base and a significant relocation program involving the transport of a C-17 Training Evaluation Performance Training Set from Charleston Air Force Base in South Carolina to McChord Air Force Base in Washington. In addition, during 2000, we successfully completed the expansion of the Kenai, Alaska Fire Training Facility which provides realistic outdoor fire-fighting training, as well as Aircraft Fire Rescue Training. Primary users of the facility are the oil/gas pipeline workers in Alaska, Western Canada and Russia. From engineering and maintenance to logistics services, and from U.S. to foreign customers, ESI continues to actively develop and seek out new avenues to expand its presence in this growing defense market segment. [SIDEBAR] Among the fastest growing segments of ESI's business has been logistics support. [END SIDEBAR] [PHOTO] ESI's maintenance trainer contract supports the C-17 Aircraft shown in flight here. 20 Engineering and Maintenance Services [PHOTO] - -------------------------------------------------------------------------------- Board of Directors Joseph S. Schneider - --------------------------------- President of JSA Partners, Inc. and Chairman and Co-Founder of JSA Research, Inc. Director since 1998. Susan Fein Zawel - --------------------------------- Vice President Corporate Communications, Associate General Counsel and Secretary of United Industrial Corporation. Director since 1995. Edward C. Aldridge, Jr. - --------------------------------- President and Chief Executive Officer of The Aerospace Corporation. Director since 1995. Richard R. Erkeneff President and CEO - --------------------------------- President of United Industrial Corporation and AAI Corporation. Director since 1995. Harold S. Gelb Chairman of the Board - --------------------------------- Chairman of the Board of United Industrial Corporation. Director since 1995. E. Donald Shapiro - --------------------------------- The Joseph Solomon Distinguished Professor of Law and former Dean/ Professor of Law of New York Law School. Director since 1996. 22 Board of Directors Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- Results of Operations - -------------------------------------------------------------------------------- Year Ended December 31, 2000 Compared With Year Ended December 31, 1999. On September 29, 2000 the Company sold Symtron Systems, Inc. ("Symtron"), a wholly owned subsidiary included in the defense segment. The operations of Symtron for the nine months in the year 2000 and the twelve months in the years 1999 and 1998 are included in the results of operations for the respective periods. Net sales of $256,358,000 in 2000 increased $39,379,000 or 18% from $216,979,000 in 1999. In all segments a general increase in volume caused the increase in sales. Excluding Symtron's operations for the two years, sales would have increased $47,933,000 or 24%. The defense segment increased sales $25,250,000 or 14% to $200,743,000 in 2000 from $175,493,000 in 1999. Excluding Symtron's operations for the two years from the defense segment, sales would have increased $33,805,000 or 21%. Sales to agencies of the U.S. Government, by the defense segment, were $132,930,000 in 2000 and $133,328,000 in 1999. Export sales by the defense segment were $51,161,000 in 2000 and $34,182,000 in 1999, an increase of $16,979,000 or 50%. The defense segment's business is heavily influenced by changes in the budgetary plans and procurement policies of the U.S. and foreign governments. 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 $35,540,000 in 2000, an increase of $3,350,000 or 10% from $32,190,000 in 1999. Net sales in the transportation segment were $20,075,000 in 2000, an increase of $10,779,000 or 116% from $9,296,000 in 1999. The increased volume was due to deliveries under an overhaul contract. Gross profit decreased $13,393,000 to $42,032,000 in 2000 from $55,425,000 in 1999. The gross margin percentage was 16.4% in 2000 and 25.6% in 1999. Excluding Symtron's operations for the two years the gross profit would have decreased $10,602,000 and the gross margin percentage would have been 16% in 2000 and 25.1% in 1999. The defense segment gross margin percentage decreased to 24.7% in 2000 from 28.2% in 1999 due to low gross profits on a large competitive program. Excluding Symtron's operations for the two years from the defense segment, the gross margin percentage would have decreased to 24.5% in 2000 from 27.9% in 1999. The transportation segment gross margin loss was $18,857,000 in 2000 and $4,802,000 in 1999. The year 2000 gross margin loss in the transportation segment included a charge of $19,700,000 to establish a reserve for increased contract costs on several programs. The higher anticipated costs on certain contracts are primarily related to design and prototype development activities that are now completed. The 1999 gross margin loss included a charge of $5,000,000 for anticipated warranty work on a previously completed program. Selling and administrative expenses decreased $2,341,000 or 5.1% to $43,488,000 in 2000 from $45,829,000 in 1999. Excluding Symtron's operations for the two years, selling and administrative expenses would have been $2,007,000 or 4.8% lower than in 1999. Selling and administrative expenses as a percentage of net sales were 17% in 2000 and 21.1% in 1999. Excluding Symtron's operations for the two years, selling United Industrial Corporation 23 Management's Discussion and Analysis of Financial Condition and Results of Operations -- (continued) - -------------------------------------------------------------------------------- and administrative expenses as a percentage of net sales would have been 16.1% in 2000 and 21% in 1999. The defense segment experienced a decrease in expenses of 5.2% or $1,655,000 primarily due to higher research and development and bid and proposal costs during 1999 resulting in the receipt of a particular contract. Excluding Symtron's operations for the two years from the defense segment the decrease in expenses would have been 4.7% or $1,322,000. The energy segment experienced an increase in expenses of 14.1% or $1,111,000, primarily due to international sales efforts, increased research and development and insurance expenses. Equity in net income of joint ventures includes income of $999,000 ($626,000, net of taxes or $.05 per diluted share) and a loss of $3,362,000 ($2,108,000, net of taxes or $.17 per diluted share) related to the Company's interest in Electric Transit, Inc. ("ETI") during 2000 and 1999, respectively. Although ETI is owned 35% by AAI Corporation ("AAI"), a wholly owned subsidiary of the Company, and 65% by Skoda a.s. ("Skoda"), during 1999 the transportation segment recorded 100% of the ETI loss because of Skoda's inability to meet its financial obligations under ETI's shareholder agreement. In April 2000, the Company facilitated a credit arrangement between the Czech Export Bank ("CEB"), Skoda, and ETI. This arrangement is expected to provide Skoda the financial capability to satisfy its obligations to ETI and the Company, and the Company has returned to recording its equity share of ETI's earnings or losses at 35%. During 2000 Skoda repaid to AAI $3,605,000 that was previously advanced to ETI by AAI on behalf of Skoda. Consequently, the transportation segment reversed $1,334,000 of the $2,185,000 of losses in excess of 35% recorded during 1999. In order to fund previously recorded losses in ETI, the Company subordinated $3,000,000 and $2,275,000 of accounts receivable from ETI during 2000 and 1999, respectively, and thereby increased its investment in ETI by such amounts. Other income, net in 2000 includes income of $2,126,000 in the energy segment generated by the Company's pension plan and $3,483,000 in the other segment from an insurance recovery related to a previously settled matter. In 1999, other income included pension plan income for the energy segment of $1,754,000. Interest expense decreased to $28,000 in 2000 from $160,000 in 1999. Interest income decreased to $1,497,000 in 2000 from $1,908,000 in 1999 due to reduced investments. The Company's defense segment recorded pretax income of $20,628,000 in 2000 ($13,094,000, net of taxes or $1.04 per diluted share) in 2000 and $19,278,000 ($12,718,000, net of taxes or $1.02 per diluted share) in 1999. The Company's transportation segment recorded a loss of $21,442,000 in 2000 ($13,444,000, net of taxes or $1.07 per diluted share) in 2000 and $13,112,000 ($8,221,000, net of taxes or $.66 per diluted share) in 1999. In 2000, net income increased $1,502,000 or 24% to $7,779,000 or $.62 per diluted share from $6,277,000 or $.50 per diluted share in 1999. Included in the other segment during 2000 is a net gain on the sale of Symtron of $3,878,000 or $.31 per diluted share. Income from an insurance recovery increased net income by $2,299,000 or $.18 per diluted share. The Company's backlog was $413,970,000 at December 31, 2000 compared to $292,816,000 at December 31, 1999. Backlog in the defense segment increased $37,113,000 or 24% to $190,161,000 at December 31, 2000 from $153,048,000 at December 31, 1999 generally due to the overall increase in the volume of business. Excluding Symtron, the defense segment backlog increased 26%. 24 United Industrial Corporation - -------------------------------------------------------------------------------- Backlog in the energy segment decreased $117,000 or 2.5% to $4,633,000 at December 31, 2000 compared to $4,750,000 at December 31, 1999. Backlog in the transportation segment increased to $219,176,000 or 62% at December 31, 2000 from $135,018,000 at December 31, 1999 primarily resulting from a contract award to overhaul railcars for the Maryland Metropolitan Transit Authority. 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. 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%. 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. 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 ETI. These difficulties were alleviated in early 2000 through successful negotiations for MUNI program related credit facilities. 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 in the previous 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 required a significant warranty effort. Consequently, the Company recorded a $5,000,000 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 proposal in May 1999 to purchase Skoda's electric trolley bus manufacturing subsidiary and its interests in the ETI joint venture, which was later withdrawn. Equity in net loss of joint ventures 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 United Industrial Corporation 25 Management's Discussion and Analysis of Financial Condition and Results of Operations -- (continued) - -------------------------------------------------------------------------------- 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 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 it is expected that there will now be sufficient working capital for ETI to perform the MUNI contract. With the completion of these financing arrangements the Company continued to explore strategic alternatives for the transportation business. Other operating expenses, net decreased $1,032,000. In 1999, the amortization expense of intangibles decreased $637,000 and the contingent payout to sellers decreased $265,000. 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). 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. 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. Backlog in the transportation segment increased to $135,018,000 at December 31, 1999 from $53,860,000 at December 31, 1998 generally due to a contract award to over haul railcars for New Jersey Transit. Liquidity and Capital Resources Cash and cash equivalents decreased $1,707,000 to $11,385,000 at the end of 2000 from $13,092,000 at the end of 1999. Trade receivables increased $12,946,000 at December 31, 2000 from December 31, 1999. The increase resulted from increased sales in the fourth quarter of 2000 compared to the fourth quarter of 1999 in the defense and transportation segments. Included in trade receivables are U.S. Government receivables which increased $8,114,000. Inventories were $37,055,000 higher at December 31, 2000 than at December 31, 1999. The inventory increase was primarily in the transportation segment and results from the procurement of significant amounts of material necessary to commence production on two major programs. Accounts payable increased $7,347,000 due to increased procurement volume in the transportation segment and 26 United Industrial Corporation - -------------------------------------------------------------------------------- for a large contract in the defense segment. Customer advances increased $19,068,000 at December 31, 2000 from December 31, 1999, in accordance with the contractual terms of certain transportation and defense contracts. The Company paid cash dividends of $.40 per share in 2000, 1999 and 1998. Aggregate payments amounted to $4,954,000 in 2000, $4,910,000 in 1999 and $4,927,000 in 1998. The ratio of current assets to current liabilities was 1.7 at the end of 2000 and 1.9 at the end of 1999. Capital expenditures were $7,108,000 in 2000 and $12,530,000 in 1999. There were no material commitments for the acquisition of capital assets as of December 31, 2000. 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, 2000, 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 $16,500,000. The letter of credit obligations outstanding at December 31, 2000 and 1999 under the Agreement were $16,113,000 and $9,779,000, 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 by the Company and its subsidiaries are pledged as collateral under the Agreement. The Company expects to meet its cash requirements for 2001, including amounts necessary to fund business ventures, from current cash, operations and borrowings available under its existing line of credit, which expires on June 30, 2001, and believes that during the next twelve months it will have adequate funding to meet its obligations as they come due. The Company is currently negotiating a replacement line of credit or extension agreement 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. Environmental and Other Litigation Detroit Stoker Company, a wholly owned subsidiary of the Company, was notified in March 1992 by the Michigan Department of Natural Resources that it is a potentially responsible party in connection with the clean-up of a former industrial landfill located in Port of Monroe, Michigan. The Company is involved in other environmental matters. See Note 15. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which the Company is required to adopt effective January 1, 2001. The adoption of the new Statement will not have a significant effect on earnings or the financial position of the Company. 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 foreign exchange forward contracts. United Industrial Corporation 27 Management's Discussion and Analysis of Financial Condition and Results of Operations -- (continued) - -------------------------------------------------------------------------------- The following table presents firmly committed sales exposures and related derivative contracts.
- ---------------------------------------------------------------------------------------------------------------------------------- Fair Market Value (In thousands, except December 31, average contract rate) 2001 2002 2003 2004 2005 Total 2000 - ---------------------------------------------------------------------------------------------------------------------------------- Firmly committed sales contracts Australian Dollars $ -- $ -- $ 501 $ 380 $ 190 $1,071 Related forward contracts to sell currencies for U.S. dollars Australian Dollars Notional amount (USD) $ -- $ -- $ 502 $ 462 $ -- $ 964 Average contract rate (AUD/USD) -- -- .6429 .6429 -- -- $ (121) ==================================================================================================================================
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; the ability to negotiate financing arrangements with lenders; 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. 28 United Industrial Corporation Consolidated Statements of Operations United Industrial Corporation
Year Ended December 31 - -------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 2000 1999 1998 - -------------------------------------------------------------------------------------------- Net sales $256,358 $216,979 $204,305 Cost of sales 214,326 161,554 152,034 ============================================================================================ Gross Profit 42,032 55,425 52,271 Selling and administrative expenses 43,488 45,829 42,031 Other operating expenses-- net 669 1,011 2,043 ============================================================================================ Total Operating (Loss) Income (2,125) 8,585 8,197 - -------------------------------------------------------------------------------------------- Non-operating Income and (Expenses) Interest income 1,497 1,908 3,675 Gains on sale of assets-- net 5,511 -- 4,918 Other income 5,853 2,068 1,899 Interest expense (28) (160) (170) Equity in net income (loss) of joint ventures 1,471 (2,879) (2,577) Other expenses (701) (424) (62) ============================================================================================ 13,603 513 7,683 Income Before Income Taxes 11,478 9,098 15,880 Provision (credit) for income taxes Federal Current 3,401 3,181 8,950 Deferred 82 (1,165) (3,109) State 216 805 (2,972) ============================================================================================ Income Taxes 3,699 2,821 2,869 - -------------------------------------------------------------------------------------------- Net Income $ 7,779 $ 6,277 $ 13,011 ============================================================================================ Basic Earnings Per Common Share $ .63 $ .51 $ 1.06 Diluted Earnings Per Common Share $ .62 $ .50 $ 1.03 ============================================================================================
See notes to financial statements United Industrial Corporation 29 Consolidated Balance Sheets United Industrial Corporation December 31 - -------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 - -------------------------------------------------------------------------------- Assets Current Assets Cash and cash equivalents $ 11,385 $ 13,092 Trade receivables U.S. Government 29,877 21,763 Other 31,464 26,632 ================================================================================ 61,341 48,395 Inventories 79,242 42,187 Prepaid expenses and other current assets 3,030 3,239 Deferred income taxes 9,587 3,041 ================================================================================ Total Current Assets 164,585 109,954 - -------------------------------------------------------------------------------- Other Assets 50,799 56,005 Property and Equipment Land 501 501 Buildings and improvements 40,403 40,065 Machinery and equipment 78,531 76,256 Furniture and fixtures 5,148 5,259 ================================================================================ 124,583 122,081 Less allowances for depreciation and amortization 91,582 86,248 - -------------------------------------------------------------------------------- 33,001 35,833 - -------------------------------------------------------------------------------- $248,385 $201,792 ================================================================================ 30 United Industrial Corporation December 31 - ------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 - ------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current Liabilities Accounts payable $ 17,184 $ 9,837 Accrued employee compensation and taxes 8,891 7,710 Customer advances 44,773 25,705 Provision for contract losses 17,485 7,026 Federal income taxes -- 636 Other liabilities 7,345 7,847 =============================================================================== Total Current Liabilities 95,678 58,761 - ------------------------------------------------------------------------------- Postretirement Benefits Other Than Pensions 24,953 24,614 Other Liabilities 3,679 3,887 Deferred Income Taxes 9,182 3,475 Shareholders' Equity Common stock -- par value $1.00 per share Authorized shares -- 30,000,000 Outstanding shares: 2000 -- 12,435,038; 1999 -- 12,294,138 14,374 14,374 Additional capital 89,384 89,483 Retained earnings 26,441 23,616 Cost of shares in treasury: 2000 -- 1,939,110 shares; 1999 -- 2,080,010 shares (15,306) (16,418) =============================================================================== Total Shareholders' Equity 114,893 111,055 - ------------------------------------------------------------------------------- $248,385 $201,792 =============================================================================== See notes to financial statements United Industrial Corporation 31 Consolidated Statements of Cash Flows United Industrial Corporation
Year Ended December 31 - ---------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 7,779 $ 6,277 $ 13,011 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,357 7,682 7,816 Deferred income taxes 82 (1,165) (3,109) Gains on sale of assets (5,511) -- (4,918) Equity in income (loss) of investee companies 1,471 (2,879) (2,577) Changes in operating assets and liabilities -- net (Decrease) increase in current income taxes (636) (2,337) 2,343 Increase in trade receivables (12,946) (7,851) (6,497) (Increase) decrease in inventories (37,055) (18,618) 8,221 Decrease (increase) in prepaid expenses and other current assets 209 (1,172) (425) Increase in customer advances 19,068 21,402 761 Increase (decrease) in accounts payable, accruals and other current liabilities 18,485 (948) (923) Other -- net (4,659) 381 1,165 ============================================================================================================================ Net Cash (Used For) Provided By Operating Activities (4,356) 772 14,868 - ---------------------------------------------------------------------------------------------------------------------------- Investing Activities Advances to investees (4,544) (7,131) (17,169) Repayment of advances by investees 12,978 10,834 4,434 Purchase of marketable securities -- (2,200) (5,693) Sale of marketable securities -- 6,902 7,093 Purchase of property and equipment (7,108) (12,530) (14,032) Net proceeds from sale of assets 5,277 -- 19,850 ============================================================================================================================ Net Cash Provided By (Used For) Investing Activities 6,603 (4,125) (5,517) - ---------------------------------------------------------------------------------------------------------------------------- Financing Activities Payments on long-term debt and borrowings (2,300) (12,943) (5,729) Proceeds from borrowings 2,300 12,943 -- Dividends (4,954) (4,910) (4,927) Purchase of treasury shares -- -- (1,475) Proceeds from exercise of stock options 1,000 229 808 ============================================================================================================================ Net Cash Used for Financing Activities (3,954) (4,681) (11,323) - ---------------------------------------------------------------------------------------------------------------------------- Decrease in Cash and Cash Equivalents (1,707) (8,034) (1,972) Cash and Cash Equivalents at Beginning of Year 13,092 21,126 23,098 ============================================================================================================================ Cash and Cash Equivalents at End of Year $ 11,385 $ 13,092 $ 21,126 ============================================================================================================================
See notes to financial statements 32 United Industrial Corporation 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 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 accounting principles generally accepted in the United States 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 short-term investment funds. Inventories Inventories are stated at the lower of cost or market. At December 31, 2000 and 1999, approximately 4% and 6%, respectively, of total inventory was priced by the last-in, first-out (LIFO) method with the remainder priced at actual or average cost. If the first-in, first-out (FIFO) method of inventory pricing had been used, inventories would have been approximately $3,572,000 higher than reported on December 31, 2000 and $3,691,000 higher than reported on December 31, 1999. Revenue and Gross Profit Recognition The Company generally follows the percentage-of-completion method of accounting for its long-term contracts. Sales and gross profit are principally recognized as work is performed based on the relationship between actual costs incurred and total estimated costs, including warranties, at completion. Amounts representing contract change orders, claims or other items are included in sales only when they can be reliably estimated and realization is probable. Incentives or penalties, estimated warranty costs and awards applicable to performance on contracts are considered in estimating sales and profit rates, and are recorded when there is sufficient information to assess anticipated contract performance. When adjustments in contract value or estimated costs are determined, any changes from prior estimates are reflected United Industrial Corporation 33 Notes to Financial Statements -- (continued) - -------------------------------------------------------------------------------- in earnings in the current period. Anticipated losses on contracts or programs in progress are charged to earnings when identified. 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 4. Noncontract revenue is recorded when the product is shipped or when the services are provided. Property and Equipment Property and equipment are stated at cost. The policy of the Company is to provide for depreciation on the straight-line and declining-balance methods, by annual charges to operations calculated to amortize the cost over the estimated useful lives of the various classes of property and equipment. Earnings per Share 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 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 7. 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 purpose of the Company's foreign exchange currency hedging activities is to protect the Company from the risk that the eventual U.S. dollar cash flows resulting from the sale of products to international customers will be adversely affected by changes in exchange rates. Deferred gains and losses are included in other assets and liabilities and recognized in earnings when the future sales occur. At December 31, 2000 the Company has foreign currency forward contracts with a large financial institution for Australian dollars having maturities of four years to hedge contract payments scheduled to be received within four years. The aggregate notional value of these contracts was $964,000, with an aggregate loss of $121,000 based on fair market value. The Company is exposed to credit loss in the event of nonperformance by counterparties on foreign exchange contracts. The amount of such exposure is generally the unrealized gain or loss on such contracts. The Company does not hold or issue financial instruments for trading purposes. 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 on January 1, 2001. The adoption of the new Statement will not have a significant effect on earnings or the financial position of the Company. 34 United Industrial Corporation - -------------------------------------------------------------------------------- Note 3 Trade Receivables - -------------------------------------------------------------------------------- Amounts due from the U.S. Government primarily related to long-term contracts of the Company's defense segment were as follows: December 31 - -------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 - -------------------------------------------------------------------------------- Amounts billed $25,773 $16,592 Unbilled recoverable costs and earned fees 2,650 4,979 Retainage per contract provisions 1,454 192 ================================================================================ $29,877 $21,763 ================================================================================ Billed and unbilled amounts include $2,979,000 and $3,727,000 at December 31, 2000 and 1999, 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 4 Inventories - -------------------------------------------------------------------------------- December 31 - ------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 - ------------------------------------------------------------------------------- Finished goods and work in progress $ 4,194 $ 6,448 - ------------------------------------------------------------------------------- Costs and earnings relating to long-term contracts 108,396 43,642 Deduct progress payments related to long-term contracts (35,682) (11,188) - ------------------------------------------------------------------------------- Costs and earnings in excess of billings 72,714 32,454 - ------------------------------------------------------------------------------- Total finished goods and work in progress 76,908 38,902 Materials and supplies 2,334 3,285 =============================================================================== $ 79,242 $ 42,187 =============================================================================== The inventoried costs associated with long-term contracts include costs and earnings of $72,714,000 in 2000 and $32,454,000 in 1999 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 and transportation segments 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 United Industrial Corporation 35 Notes to Financial Statements -- (continued) - -------------------------------------------------------------------------------- throughout the lives of the contracts. Adjustments of earnings resulting from the revisions are recorded on a current basis. The Company recognized losses of $21,333,000 ($13,376,000 net of tax benefit) and $7,680,000 ($4,815,000 net of tax benefit) during 2000 and 1999, respectively, resulting primarily from revision of cost estimates on certain major long-term transportation contracts. Included in the costs and earnings in excess of billings for 1999 was $2,284,000 on certain government contracts of the subsidiary sold in 2000. Inventories do not include any significant amounts of unamortized tooling, learning curve, and other deferred costs, claims, or other similar items whose recovery is uncertain. - -------------------------------------------------------------------------------- Note 5 Other Assets - -------------------------------------------------------------------------------- December 31 - -------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 - -------------------------------------------------------------------------------- Net pension asset $44,516 $39,262 Advances to investee 1,010 12,444 Patents and other intangible assets, net 1,484 3,855 Other 3,789 444 ================================================================================ $50,799 $56,005 ================================================================================ 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 $715,000 in 2000, $885,000 in 1999 and $1,526,000 in 1998. Accumulated amortization amounted to $4,122,000 and $9,970,000 at December 31, 2000 and 1999, respectively. The sale of Symtron Systems, Inc. reduced the December 31, 1999 intangible assets by $2,038,000. Other includes the investment in Electric Transit, Inc. ("ETI") which was increased $3,999,000 during 2000. The increase was due to the Company's recovery of $1,334,000 of losses recorded during 1999 in excess of its 35% equity interest and the capitalization of $3,000,000 of certain accounts receivable from ETI to fund previously recorded losses by the venture, less its equity share of losses during 2000 totaling $335,000. Receivables of $4,603,000 and $7,701,000 from investees under subcontracts were classified as accounts receivable at December 31, 2000 and 1999, respectively. - -------------------------------------------------------------------------------- Note 6 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. At December 31, 2000 and 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 $16,500,000. The Revolving Line of Credit Loan Agreement expires June 30, 2001. The Company is currently negotiating a 36 United Industrial Corporation - -------------------------------------------------------------------------------- replacement line of credit or extension agreement and expects such negotiation to be successful. The letter of credit obligations outstanding at December 31, 2000 and 1999 under the Agreement were $16,113,000 and $9,779,000, 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 $28,000 in 2000, $160,000 in 1999 and $170,000 in 1998. Interest paid was $64,000 in 2000, $166,000 in 1999 and $494,000 in 1998. - -------------------------------------------------------------------------------- Note 7 Stock Options - -------------------------------------------------------------------------------- In May 1994, the shareholders approved the 1994 Stock Option Plan (the "Plan"), which provides for the granting of options with respect to the purchase of an aggregate of up to 600,000 (increased in May 1996 to 1,200,000, 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 2000, 1999 and 1998 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) 2000 1999 1998 - -------------------------------------------------------------------------------- Net Income: As reported $ 7,779 $ 6,277 $13,011 Pro forma 7,023 5,566 12,406 Net income per common share: As reported: Basic .63 .51 1.06 Diluted .62 .50 1.03 Pro forma: Basic .57 .45 1.01 Diluted .56 .44 .98 ================================================================================ United Industrial Corporation 37 Notes to Financial Statements -- (continued) - -------------------------------------------------------------------------------- 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 2000, 1999 and 1998, respectively: dividend yields of 4.7%, 3.9% and 3.5%; expected volatility of 46%, 39% and 31%; risk-free interest rates of 6.4%, 4.7% and 5%; and expected lives of eight years in 2000, three to five years in 1999 and five years in 1998. The weighted-average fair value of an option granted was $2.97, $2.64 and $2.78 for the years ended December 31, 2000, 1999 and 1998, respectively. 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, 1998 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 - -------------------------------------------------------------------------------- Granted 320 8.56 Exercised (139) 7.17 Canceled (90) 10.65 - -------------------------------------------------------------------------------- Balance at December 31, 2000 1,764 9.17 - -------------------------------------------------------------------------------- December 31 - -------------------------------------------------------------------------------- (Shares in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------- Exercisable 1,125 833 411 Available for future grants 496 727 615 ================================================================================ The weighted-average remaining life for options outstanding as of December 31, 2000, is 7 years. The following table summarizes information about stock options outstanding at December 31, 2000: - -------------------------------------------------------------------------------- (Shares in thousands) Shares - -------------------------------------------------------------------------------- Range of Exercise Prices Exercisable Outstanding - -------------------------------------------------------------------------------- $4.50 to $7.00 274 274 $7.50 to $9.81 484 1,009 $10.25 to $13.00 367 481 - -------------------------------------------------------------------------------- 1,125 1,764 ================================================================================ 38 United Industrial Corporation - -------------------------------------------------------------------------------- Note 8 Leases - -------------------------------------------------------------------------------- Total rental expense for all operating leases amounted to $3,612,000 in 2000, $2,883,000 in 1999 and $2,178,000 in 1998. Contingent rental payments were not significant. The future minimum rental commitments as of December 31, 2000, for all noncancellable leases are $3,762,000 in 2001; $3,487,000 in 2002; $2,695,000 in 2003; $1,095,000 in 2004; $961,000 in 2005; and $3,027,000 thereafter. - -------------------------------------------------------------------------------- Note 9 Changes in Shareholders' Equity - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- Common Share- Shares Common Additional Retained Treasury holders' (In thousands) Outstanding Stock Capital Earnings Stock Equity - ---------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1998 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 ($.40 per share) -- -- (4,910) -- (4,910) Stock options 42 -- (102) -- 331 229 Employee awards 2 -- 2 -- 16 18 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 12,294 14,374 89,483 23,616 (16,418) 111,055 Net income -- -- 7,779 -- 7,779 Cash dividends declared ($.40 per share) -- -- (4,954) -- (4,954) Stock options 139 -- (100) -- 1,100 1,000 Employee awards 2 -- 1 -- 12 13 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 12,435 $ 14,374 $ 89,384 $ 26,441 $(15,306) $114,893 ==================================================================================================================================
United Industrial Corporation 39 Notes to Financial Statements -- (continued) - -------------------------------------------------------------------------------- Note 10 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, 2000, and a statement of the funded status as of December 31 of both years.
- ------------------------------------------------------------------------------------------------------------------------- Pension Benefits Other Postretirement Benefits - ------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------- Change in Benefit Obligation Benefit obligation at beginning of year $129,834 $155,899 $ 23,550 $ 25,072 Service cost 1,229 1,608 550 590 Interest cost 9,988 10,370 1,915 1,595 Amendments 6,129 -- 549 -- Curtailments -- 2,134 -- 1,328 Actuarial loss (gain) 9,160 (14,379) 1,747 (3,515) Administrative expenses (26) (30) -- -- Settlements -- (14,674) -- -- Benefits paid (12,290) (14,054) (2,216) (1,520) Special termination benefits -- 2,960 -- -- - ------------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $144,024 $129,834 $ 26,095 $ 23,550 - ------------------------------------------------------------------------------------------------------------------------- Change in Plan Assets Fair value of plan assets at beginning of year $191,816 $193,724 Actual return on plan assets (2,353) 26,850 Administrative expenses (26) (30) Settlements -- (14,674) Benefits paid (12,290) (14,054) - ------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $177,147 $191,816 - ------------------------------------------------------------------------------------------------------------------------- Funded (underfunded) status of the plan $ 33,123 $ 61,982 $(26,095) $(23,550) Unrecognized net transition asset (181) (269) -- (549) Unrecognized net actuarial (gain) loss 13,326 (20,343) 360 (822) Unrecognized prior service cost (1,752) (2,108) 782 307 - ------------------------------------------------------------------------------------------------------------------------- Prepaid benefit (accrued cost) $ 44,516 $ 39,262 $(24,953) $(24,614) - ------------------------------------------------------------------------------------------------------------------------- Weighted-average Assumptions Discount rate 7.5% 8% 7.5% 8% Expected return on plan assets 8.5% 8.5% -- -- Rate of compensation increase 4% 4% -- -- =========================================================================================================================
40 United Industrial Corporation - -------------------------------------------------------------------------------- For the purpose of measuring the other postretirement obligations a 6.8 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease to 5.5 percent in 2005 and remain at that level thereafter.
- ---------------------------------------------------------------------------------------------------------------------------- Pension Benefits Other Postretirement Benefits - ---------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Components of Net Periodic Benefit Cost Service cost $ 1,229 $ 1,608 $ 1,377 $ 550 $ 590 $ 612 Interest cost 9,988 10,370 10,618 1,915 1,595 1,662 Expected return on plan assets (16,029) (16,003) (15,250) -- -- -- Amortization of prior service cost (357) (413) (413) 76 44 46 Amortization of unrecognized transition assets (88) (88) (88) -- -- -- Settlement-- curtailment -- 25 -- -- 760 -- Recognized net actuarial loss (31) -- (3) -- -- -- - ---------------------------------------------------------------------------------------------------------------------------- Benefit (income) cost $ (5,288) $ (4,501) $ (3,759) $2,541 $2,989 $2,320 ============================================================================================================================
Net periodic benefit costs for the defense segment are considered contract costs and are included in Cost of sales in the Statements of Operations. Net periodic benefit costs for other segments are classified as other income. During 2000 the Pension Plan was amended to provide improvements in the accrual rates and interest-crediting rate. 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. One of these plans was amended effective January 1, 2000 to provide benefits to employees not previously covered. 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: United Industrial Corporation 41 Notes to Financial Statements -- (continued)
- ------------------------------------------------------------------------------------------------- 1-Percentage 1-Percentage Point Point (Dollars in thousands) Increase Decrease - ------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components in 2000 $ 128 $ (121) Effect on postretirement benefit obligation as of December 31, 2000 $1,152 $(1,106) =================================================================================================
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 $1,377,000 in 2000, $1,303,000 in 1999 and $1,309,000 in 1998. - -------------------------------------------------------------------------------- Note 11 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, and combat vehicles and ordnance systems. The defense segment also included specialized firefighting training installations until the sale of Symtron Systems, Inc. in September 2000. See Note 16. 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 $132,975,000 in 2000, $133,328,000 in 1999 and $106,763,000 in 1998. No single customer, other than the United States Government, accounted for 10 percent or more of net sales in any year. Export sales were $57,110,000 in 2000, $42,120,000 in 1999 and $40,994,000 in 1998. 42 United Industrial Corporation
- -------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Defense Transportation Energy Other Reconciliations Totals - -------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2000 - -------------------------------------------------------------------------------------------------------------------------- Revenues from external customers $200,743 $ 20,075 $35,540 $ -- $ -- $256,358 Intersegment revenues 1,291 -- -- -- (1,291) -- Equity profit in ventures 472 999 -- -- -- 1,471 Interest income 2,504 -- 354 193 (1,554) 1,497 Interest expense 458 59 11 1,054 (1,554) 28 Depreciation and amortization expense 7,270 1,271 746 70 -- 9,357 Gain (loss) on sale of assets -- -- (28) 5,539 -- 5,511 Segment profit (loss) 20,628 (21,442) 4,718 7,574 -- 11,478 Segment assets 145,894 70,867 36,247 136,286 (140,909) 248,385 Capital expenditures 4,369 2,055 673 11 -- 7,108 - -------------------------------------------------------------------------------------------------------------------------- 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 ==========================================================================================================================
United Industrial Corporation 43 Notes to Financial Statements -- (continued)
- ------------------------------------------------------------------------------------ (Dollars in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------ Revenues Total external revenues for reportable segments $ 256,358 $ 216,979 $ 204,305 Intersegment revenues for reportable segments 1,291 2,103 3,759 Elimination of intersegment revenues (1,291) (2,103) (3,759) - ------------------------------------------------------------------------------------ Total Consolidated Revenues $ 256,358 $ 216,979 $ 204,305 - ------------------------------------------------------------------------------------ Profit or Loss Income before income taxes for reportable segments $ 11,478 $ 9,098 $ 15,880 - ------------------------------------------------------------------------------------ Assets Total assets for reportable segments $ 389,294 $ 351,731 $ 415,627 Elimination of intercompany receivables -- (7,886) (29,957) Elimination of investment in consolidated subsidiaries (127,822) (125,345) (189,174) Reclassification of deferred tax liabilities (13,087) (16,708) (15,975) - ------------------------------------------------------------------------------------ Total Consolidated Assets $ 248,385 $ 201,792 $ 180,521 - ------------------------------------------------------------------------------------ Other Significant Items Elimination of intercompany interest $ 1,554 $ 6,384 $ 12,294 ====================================================================================
Segment profit (loss) includes research and development costs amounting to $2,661,000 in 2000, $2,630,000 in 1999 and $989,000 in 1998, principally in the defense segment. 44 United Industrial Corporation - -------------------------------------------------------------------------------- Note 12 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) 2000 1999 1998 - ------------------------------------------------------------------------------- Federal income taxes at statutory rate $3,902 $3,094 $5,481 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) 48 531 (1,961) Provision for nondeductible expenses (including $94 related to contingent payments in 1998 on an acquisition) -- 296 378 Non-taxable income (576) (548) (651) Other -- net 325 (552) (378) - ------------------------------------------------------------------------------- Income Taxes $3,699 $2,821 $2,869 ================================================================================ Income tax payments were $4,000,000 in 2000, $4,600,000 in 1999 and $6,000,000 in 1998. Deferred income tax balances: December 31 - -------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 - -------------------------------------------------------------------------------- Deferred Tax Assets Losses on long-term contracts not currently deductible $ 7,767 $ 4,330 Postretirement benefits other than pensions and other employee benefits 10,549 10,307 Product warranty and other provisions 2,480 3,827 Vacation pay accruals 745 733 Other 129 99 - -------------------------------------------------------------------------------- Total Deferred Tax Assets 21,670 19,296 ================================================================================ Deferred Tax Liability Pension plans and other employee benefits (17,747) (15,852) Excess tax depreciation (1,995) (2,349) Insurance recovery (861) -- Patent amortization -- (938) Other (662) (591) - -------------------------------------------------------------------------------- Total Deferred Tax Liability (21,265) (19,730) - -------------------------------------------------------------------------------- Net Deferred Tax Asset (Liability) $ 405 $ (434) ================================================================================ The net deferred tax liability is classified as follows: Net current deferred income tax assets $ 9,587 $ 3,041 - -------------------------------------------------------------------------------- Net non-current deferred income tax liability $ (9,182) $ (3,475) ================================================================================ The deferred tax liability was reduced by $921,000 in connection with the disposed business. See Note 16. United Industrial Corporation 45 Notes to Financial Statements -- (continued) - -------------------------------------------------------------------------------- Note 13 Other Operating Expenses, Net, Other Income, Net, and Other Expenses - -------------------------------------------------------------------------------- Year ended December 31 - -------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------- Other Operating Expenses, Net Reduction of deferred compensation liability $ (208) $ (288) $ -- Amortization of intangibles 715 874 1,511 Write off of receivable 162 -- -- Write off of assets -- 425 267 Contingent payout to sellers of acquired business -- -- 265 - -------------------------------------------------------------------------------- Total other operating expenses, net $ 669 $1,011 $2,043 ================================================================================ Other Income, Net Pension income $2,126 $1,754 $1,565 Settlements of lawsuits-- net 3,183 -- -- Royalties and commissions 408 314 64 Insurance refund 68 -- -- Government contract refund -- -- 270 Other 68 -- -- - -------------------------------------------------------------------------------- Total other income $5,853 $2,068 $1,899 ================================================================================ Other Expenses Professional fees-- potential disposition $ 271 $ -- $ -- Miscellaneous items, none of which are material 430 424 62 - -------------------------------------------------------------------------------- Total other expenses $ 701 $ 424 $ 62 ================================================================================ 46 United Industrial Corporation - -------------------------------------------------------------------------------- Note 14 Selected Quarterly Data (Unaudited) - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data 2000 1999 and stock prices) Fourth Third Second First Fourth Third Second First - ----------------------------------------------------------------------------------------------------------------------------------- Net sales $ 79,700 $ 65,797 $60,925 $ 49,936 $ 63,783 $52,094 $ 54,032 $47,070 Gross profit 8,707 5,827 14,522 12,976 11,693 14,572 14,105 15,055 Net income 838 2,146 2,566 2,229 443 2,096 1,424 2,314 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings per share Basic $ .07 $ .17 $ .21 $ .18 $ .03 $ .17 $ .12 $ .19 Diluted $ .07 $ .17 $ .20 $ .18 $ .03 $ .17 $ .11 $ .19 =================================================================================================================================== Dividends declared per share $ .10 $ .10 $ .10 $ .10 $ .10 $ .10 $ .10 $ .10 - ----------------------------------------------------------------------------------------------------------------------------------- Stock prices: High $11 9/16 $11 10/16 $ 10 $10 5/16 $ 9 3/4 $11 3/8 $ 12 1/2 $11 7/8 Low $ 10 $ 8 15/16 $8 3/16 $ 8 2/16 $7 15/16 $ 7 3/8 $9 11/16 $8 9/16 ===================================================================================================================================
The Company's common stock is listed on the New York Stock Exchange. The approximate number of shareholders of record as of February 15, 2001 was 2,200. - -------------------------------------------------------------------------------- Note 15 Commitments and Contingencies - -------------------------------------------------------------------------------- In prior years, the Company, along with numerous other parties, was named in five tort actions in Maricopa County Superior Court relating to certain environmental matters. 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, which was paid in May 1999. This amount was accrued for as of and for the year ended December 31, 1998. The Superior Court of Maricopa County approved the settlement during 2000. In addition, during 2000 the Company reached an agreement with two insurance carriers for recovery of certain of its costs related to these environmental matters. The settlement has been included in Other income in the accompanying Consolidated Statements of Operations. Detroit Stoker, a wholly owned subsidiary of the Company, 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 United Industrial Corporation 47 Notes to Financial Statements -- (continued) - -------------------------------------------------------------------------------- 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's financial position, results of operations or cash flows. 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, 2000. In connection with the contractual obligations of ETI, a company owned 35% by AAI Corporation ("AAI"), a wholly owned subsidiary of the Company, and 65% by Skoda a.s., a Czech Republic firm, AAI has guaranteed 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. In February 2000, the Czech Export Bank ("CEB") approved credit facilities to ETI and two Skoda subsidiaries in order to finance the design and manufacture of electric trolley buses for the city and county of San Francisco ("MUNI"). These credit facilities are partially guaranteed by the Czech government's Export Guarantee and Insurance Corporation ("EGAP"). In addition, the Company has agreed to assume joint and several liability on progress payment bonds totaling approximately $47,000,000 at December 31, 2000. These progress payment bonds are expected to be eliminated when the MUNI customer accepts certain deliveries. 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 MUNI contract obligates the Company to indemnify the surety, if necessary, for up to approximately $16,000,000. It is expected that there will be sufficient working capital to complete the MUNI program. In February 2000, the Company was informed of a warranty issue by one of its customers. Based upon this information, in the fourth quarter of 1999, the Company recorded a $5,000,000 provision for the estimate of the future warranty costs to be incurred. In 2000 the provision was increased by $1,300,000. 48 United Industrial Corporation - -------------------------------------------------------------------------------- Note 16 Disposed Business - -------------------------------------------------------------------------------- On September 29, 2000, the Company sold all its capital stock of Symtron Systems, Inc. ("Symtron"). The sale resulted in a gain of $5,539,000. The Consolidated Statements of Operations include Symtron's net sales of $7,663,000, $16,217,000 and $16,842,000 in 2000, 1999 and 1998, respectively. Symtron had a net loss of $950,000 in 2000 and net profits of $712,000 and $159,000 in 1999 and 1998, respectively. - -------------------------------------------------------------------------------- Note 17 Earnings per Share - -------------------------------------------------------------------------------- The following table sets forth the computation of basic and diluted earnings per share:
- ------------------------------------------------------------------------------------------------------------------------------ 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Net income $ 7,779,000 $ 6,277,000 $13,011,000 Basic earnings per share -- weighted-average shares 12,384,000 12,275,000 12,307,000 Effect of dilutive securities: employee and non-employee director stock options 225,000 234,000 302,000 - ------------------------------------------------------------------------------------------------------------------------------ Diluted earnings per share -- adjusted weighted-average and assumed conversions 12,609,000 12,509,000 12,609,000 - ------------------------------------------------------------------------------------------------------------------------------ Basic earnings per share $.63 $.51 $1.06 - ------------------------------------------------------------------------------------------------------------------------------ Diluted earnings per share $.62 $.50 $1.03 ==============================================================================================================================
- -------------------------------------------------------------------------------- Note 18 Investment in Unconsolidated Investees - -------------------------------------------------------------------------------- In 1993, 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. Presently, 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 $32,444,000 and $187,568,000, respectively, AAI has received subcontracts of $9,350,000 and $63,617,000, respectively. United Industrial Corporation 49 Notes to Financial Statements -- (continued) - -------------------------------------------------------------------------------- During the years ended December 31, 2000, 1999 and 1998, the sales, cost of sales and gross profit recognized by AAI on subcontracts with ETI are as follows: - ------------------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 - ------------------------------------------------------------------- Sales $ 2,360 $1,728 $6,286 Cost of sales 4,082 1,852 5,951 - ------------------------------------------------------------------- Gross (loss) profit $(1,722) $ (124) $ 335 =================================================================== Due to Skoda's inability to fund ETI during 1999 as required by ETI's shareholder agreement, AAI assumed that responsibility in its entirety. While Skoda still had the obligation to provide funding, during 1999, AAI recorded 100% of ETI's loss which totalled $3,362,000 ($2,108,000, net of taxes). The loss in excess of AAI's 35% equity interest in ETI totalled $2,185,000 ($1,370,000, net of taxes). During 2000 ETI repaid to AAI $3,605,000 that was previously advanced to ETI by AAI on behalf of Skoda. The transportation segment included in income $1,334,000 ($836,000, net of taxes) of the losses in excess of 35% recorded during 1999. Excluding the adjustment to reduce previously recorded losses, the Company recorded a loss of $335,000 related to its equity interest in the net loss of ETI during 2000. The losses during 2000 and 1999 were primarily caused by warranty cost growth on the Dayton program. All the trolley buses for Dayton were delivered to and accepted by the customer and the program is substantially completed. In 2000, the Dayton electric trolley buses were removed from service for repairs. Such costs are expected to be funded by Skoda's warranty under its subcontract with ETI. At December 31, 2000, AAI's advances to ETI were $539,000 less than its investment and cumulative losses in ETI. At December 31, 1999, AAI advanced to ETI, net of its investment and cumulative losses in ETI, $6,797,000. In addition, AAI has accounts receivable from ETI for work performed on both its Dayton and San Francisco contracts of $1,314,000 and $2,152,000 at December 31, 2000 and 1999, respectively. Summary financial information of the Electric Transit, Inc. entity is as follows: - ------------------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 - ------------------------------------------------------------------- Current assets $43,008 $33,984 23,123 Plant, property and equipment and other assets 8,118 4,819 4,643 Current liabilities 68,015 54,550 40,058 Net sales 4,673 18,615 20,922 Gross profit (loss) (637) (2,853) (7,357) Net loss (956) (3,362) (7,981) =================================================================== 50 United Industrial Corporation Report of Independent Auditors - -------------------------------------------------------------------------------- Board of Directors and Shareholders United Industrial Corporation New York, New York We have audited the accompanying consolidated balance sheets of United Industrial Corporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP New York, New York February 28, 2001 United Industrial Corporation 51 Five-Year Financial Data United Industrial Corporation
- ----------------------------------------------------------------------------------------------------------------------------- Year ended December 31 - ----------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Operating Data Net Sales $ 256,358 $ 216,979 $ 204,305 $ 235,183 $ 220,822 Operating costs 258,483 208,394 196,108 221,978 211,120 Interest (income) expense -- net (1,469) (1,748) (3,505) (529) 964 Income before income taxes 11,478 9,098 15,880 30,606 10,641 Income taxes 3,699 2,821 2,869 15,781 4,237 Net income 7,779 6,277 13,011 14,825 6,404 Earnings per Share:(a) Basic .63 .51 1.06 1.22 .53 Diluted .62 .50 1.03 1.19 .52 Cash dividends paid on common stock 4,954 4,910 4,927 3,536 2,434 Cash dividends declared per common share .40 .40 .40 .29 20 Shares outstanding as of year end (in thousands) 12,435 12,294 12,250 12,249 12,174 Financial Position - ----------------------------------------------------------------------------------------------------------------------------- Total assets $ 248,385 $ 201,792 $ 180,521 $ 181,199 $ 177,780 Property and equipment 33,001 35,833 30,566 25,576 41,534 Long-term debt -- -- -- 4,479 -- Shareholders' equity 114,893 111,055 109,441 102,024 90,145 Shareholders' equity per share 9.24 9.03 8.93 8.33 7.40 Financial Ratios - ----------------------------------------------------------------------------------------------------------------------------- Return on shareholders' equity 6.8% 5.7% 11.9% 14.5% 7.1% Net income as a percent of sales 3.0 2.9 6.4 6.3 2.9 Long-term debt as a percent of total capitalization -- -- -- 4.2 -- Statistical Data - ----------------------------------------------------------------------------------------------------------------------------- Sales backlog as of year end $ 414,000 $ 293,000 $ 210,000 $ 188,000 $ 159,000 Capital expenditures 7,108 12,530 14,032 6,926 6,299 Depreciation and amortization 9,357 7,682 7,816 9,559 8,306 Number of employees 1,700 1,600 1,800 1,800 1,900 =============================================================================================================================
(a) The 1996 earnings per share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128 "Earnings per Share." 52 United Industrial Corporation Corporate Organization - -------------------------------------------------------------------------------- BOARD OF DIRECTORS Harold S. Gelb Chairman of the Board Edward C. Aldridge, Jr. President and Chief Executive Officer The Aerospace Corporation Richard R. Erkeneff President and Chief Executive Officer of the Company and AAI Corporation 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 Honorary Director (nonvoting) Bernard Fein Chairman Emeritus Retired Chairman and Chief Executive Officer CORPORATE OFFICERS Richard R. Erkeneff President and Chief Executive Officer James H. Perry Vice President, Chief Financial Officer and Treasurer Robert W. Worthing Vice President and General Counsel 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 James H. Perry 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. David A. Gray 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 United Industrial Corporation 53 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 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 59 Maiden Lane New York, New York 10007 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, NY 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 8, 2001, at: The Park Lane Hotel 36 Central Park South New York, New York 10019 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, NY 10022 Or by e-mail to: invest@unitedindustrial.com STOCK LISTING United Industrial Corporation common stock is traded on [UIC Logo] the New York Stock Exchange (Ticker Symbol: UIC) INTERNET ADDRESS http://www.unitedindustrial.com 54 United Industrial Corporation DESIGNED AND PRODUCED BY TAYLOR & IVES, INC., NYC PHOTOGRAPHY: TED HOROWITZ United Industrial Corporation 570 Lexington Avenue New York, NY 10022 212.752.8787 www.unitedindustrial.com [PHOTO] EX-21 10 0010.txt SUBSIDIARIES OF UNITED INDUSTRIAL CORPORATION EXHIBIT 21 SUBSIDIARIES OF UNITED INDUSTRIAL CORPORATION March 3, 2001 Approximate Percentage of State Voting (or jurisdiction) Securities Owned in which 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) 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 11 0011.txt CONSENT OF INDEPENDENT AUDITORS 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, 333-59487 and 333-85819) 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 report dated February 28, 2001, 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, 2000, and with respect to the financial statement schedule included in this Annual Report (Form 10-K). /s/ ERNST & YOUNG LLP New York, New York March 28, 2001 -----END PRIVACY-ENHANCED MESSAGE-----